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Nick Rowe on Why the Austrian Theory of the Business Cycle Is Arrant Nonesense


As Milton Friedman once said, Friedrich von Hayek was a great economist, but his contributions definitely did not lie in business cycle theory.

Nick Rowe:

Worthwhile Canadian Initiative: Money, Barter, and Recalculation: The [economic] calculation problem doesn't solve itself. It takes people to solve it. The price system helps them solve it. Monetary exchange helps them solve it. But it isn't easy to solve.... And if technology, resources, and preferences are changing as well, people have to keep re-solving it. That's what I take to be the [economic] re-calculation problem.

But that re-calculation is happening all the time. What's it got to do with recessions?

The answer, as Nick says very well, is "absolutely nothing":

Sure, sometimes a really big real shock comes... and it takes a lot more re-calculation than it normally does.... [A] financial crisis isn't... a change in the underlying tastes, technology, and resources.... But... it too would require a re-calculation. And maybe output would fall while we are trying to figure out how to re-solve the economic problem. Maybe even employment would fall too:

Hang on guys, don't commit to doing anything quite yet, while I try and figure out where you should best be working now that everything's changed...

But I just can't buy it as a full story of recessions. It's the general glut thing that's missing. Stuff gets easier to buy in a recession, and stuff gets harder to sell.... What makes a recession a recession, and something more than a bad harvest, or a re-calculation, is that most goods, and most labour, gets harder to sell and easier to buy. And I really want to call that an excess demand for money. Because it is money we are selling stuff for, and it is money we are buying stuff with. And... I've also got a theory... which says that an excess demand for money will cause a drop in output and employment, and an excess supply of goods and labour...