Wednesday, January 21, 2009

Non-Austrian Recognizes Austrian Insight

Nick Rowe at the "Worthwhile Canadian alternative" blog recognize one key insight in the Austrian business cycle theory:

"During the boom, the value of output and income appeared higher than it now appears to have been, because some investment was not as valuable as people thought it would be.

The validity of this Austrian insight does not mean we should follow the rest of the Austrian prescription, and just let the recession take its course. But neither should we ignore it.

We should recognise that it would be unwise to estimate potential output by extrapolating from past actual output. With hindsight, past actual output was less valuable than we thought it was at the time. (This was Stackelberg Follower's point, if I understand him correctly). More importantly in my view (since I am always leery of GDP, and even more leery of estimates of potential GDP), we need to recognise that the natural rate of unemployment will be temporarily higher than it once was as workers reallocate."

The point that was recognized here was then that because much of the production capacity really is just malinvestments, then "potential output" is in fact far lower than Keynesian models would recognize. And that is certainly an important insight.

Yet he insists that this does not imply that we should follow all Austrian ideas.
Of course, it is often the case that even thinkers who are generally clueless can often come up with some good ideas, and that recognizing that shouldn't compel us to also adopt their bad ideas as well.

But that doesn't mean you should ignore the analysis that produced these good ideas. And the reason why these malinvestments arose was because of previous monetary inflation, suggesting that additional monetary inflation will produce more malivestments.

And I do find this last comment curious:

"And Austrians: yes, I realise that the blueprints got magnified because interest rates were too low, but I couldn't make sense of the idea that monetary policy could set (real) interest rates too low in a world of perfectly flexible prices."

What Austrian has assumed that all prices are perfectly flexible? Rowe appears to confuse Austrians with New Classicals......


Anonymous Anonymous said...

Which country practize Austrian economic now ?


8:46 PM  
Blogger Nick Rowe said...

Hi Stefan!

Thanks for your post on my post. (It's Worthwhile Canadian *Initiative*" by the way.)

Here's a question for you:

If Austrian Business Cycle Theory assumes sticky (imperfectly flexible) prices, then is this sentence true:

"Austrian Business Cycle Theory = New Keynesian Macroeconomics + Austrian Capital Theory"

If not, then why not?

Best wishes!

9:25 PM  

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