Friday, November 06, 2009

Tom Palmer's Strange Critique Of ABCT

Tom Palmer has a strange critique of Tom Woods' book Meltdown and the Austrian Business Cycle Theory presented there:

"In fact, what we saw was a bubble in housing, which is not a “long-term project” that will “bear fruit only in the distant future,” but a speculative investment in a durable consumer good, with an additional twist: the low refinancing rates and the inducements to refinance led many to treat their homes as ATM machines and withdraw cash to finance, not “long-term projects,” but consumption. But Mises and Hayek explained a previous boom-and-bust cycle in terms of a lengthening of the capital structure, so we must believe — we must, a priori! — that all boom-and-bust cycles must — they must! — follow the same process."

But as I've explained here, housing and other durable consumer goods (such as cars) are partly capital investments- or "long-term projects" if you will. Most houses will last decades, or even centuries in extreme cases, While maintenance will obviously be needed after a while, the fact remains that buying a house is a long term investment (Indeed, many capital equipment purchases by business will last a shorter period of time), and the logic of the Austrian business cycle theory therefore applies.

It is true that in the writings of Mises and Hayek (and Rothbard) ABCT was illustrated almost exclusively with the example of entrepreneurs buying capital equipment, but that doesn't change the fact that the logic of ABCT also applies to housing and other consumer durables. And Palmer's critique looks even more irrational as a critique of Tom Wood's book. While I haven't read the book yet, it seems that he was trying to use a broader range of examples more relevant to this business cycle, by also correctly applying ABCT to housing.