The Austrian Theory of the Business Cycle

I would like to stress that my opponent did not address the substance of my arguments. We are instead debating what the theory is. Hopefully we can move on from this in the next round. Theory:“Banks within a free market where competing currencies exist do not “artificially lower the interest rate.”...because the customer base will shift to another currency if arbitrary rates are used. “This claim makes the odd assumption that customers of banks will know how their banks have determined the interest rates they charge. For if they do not know this then they surely can not react to it. It further errors in calling a non-natural interest rate arbitrary. It is not. It is determined by the supply and demand for loans. Lastly, it assumes that consumers will uniformly object to participation in fractional reserve banking. Yet we are given no reason to suppose this. My opponent then comments that “The public realization of inflation or lack thereof, has almost nothing to do with the bust except that it exacerbates the situation as it did in the Great Depression. “ This statement suggests that my opponent does not fully understand the theory he is trying to defend. The panic is used in the theory to explain why a bank can not issue artificial credit continuously. Why the bust must happen. As Mises states: “As long as the expansion of credit is continued this will not be noticed, but this extension cannot be pushed indefinitely. For if an attempt were made to prevent the sudden halt of the upward movement (and the collapse of prices which would result) by creating more and more credit, a continuous and even more rapid increase of prices would result. But the inflation and the boom can continue smoothly only as long as the public thinks that the upward movement of prices will stop in the near future. As soon as public opinion becomes aware that there is no reason to expect an end to the inflation, and that prices will continue to rise, panic sets in. No one wants to keep his money, because its possession implies greater and greater losses from one day to the next; everyone rushes to exchange money for goods, people buy things they have no considerable use for without even considering the price, just in order to get rid of the money. “ [1] We thus have a choice between panic induced hyper inflation and a bust. My opponent then offers his own version of the bust. Before I explain its flaws I would like to note that a key feature of the bust is indeed the raising of the interest rates. As the Mises institute reports “Ludwig von Mises stated that the "crisis" (or "credit crunch") arrives when the consumers come to reestablish their desired allocation of saving and consumption at prevailing interest rates. “[2]But on to my opponents expansion. “Since the consumers do not have the savings to use for consumption, there is lower demand for the products. “In what way does a credit expansion stop savings? Why can not consumers take advantage of the same cheap credit expansion in order to consume? (IE credit cards) And why have firms miscalculated demand? My opponent indicates that it may have something to do with the idea that high savings now signals an increase in demand later, but he does not substantiate this view. And, honestly, firms would have to be quite foolish to have not noticed that interest rates have not been determined by savings for over a century. “ Lower prices mean lower profits, “This assumes that the cost of production will not also go down. Yet, should not firms decrease their own demand for inputs? Given such a simple consideration my opponents assumption about profits is revealed as unjustified. Assumptions: “The Austrian business cycle is only applicable and discusses the effects of lending that is actually made and how the results will play out. If you look at any other economic model, they all make the same assumption. “The primary point of the Keynesian revolution was that you can not assume liquidity preferences away. “This is false. Mises wrote, “In the changing economy, there is no uniform rate of originary interest; there only prevails a tendency toward the establishment of such uniformity.” “I am well aware of mises's views on equilibrium. Since you did not respond to my argument all you have done is shown that mises's did not understand the assumptions of his own theory. “The ATBC makes no such assumption. “Again, you have failed to address my argument and simply declared it wrong. Reality:My opponent quotes hayek in such a way that does not help his cause. This isn't a short term view point. This is a sample of 100 years. He then responds to my claim that a theory which posits that recessions are caused by raising interest rates can not explain a recession in which interest rates do not raise by pointing out that the government stopped them from raising. It would there fore seem that my opponent has conflated the proposition “raising interest rates cause recessions” with the proposition” conditions in which interest rates would rise if not for the government cause recessions”. His reply is there fore based on a proposition which I did not state and which does not correspond to the Austrian theory. My opponent then repeats his misunderstanding of the role of panic in the Austrian theory. My opponent then states “Mises and Hayek were and are considered two of the most intellectually honest, skilled and educated economists in history. “ To which I respond: by who? I don't consider either of them particularly honest, skilled, or educated. My opponent lastly states “Insinuating that their personal experiences dictated their positions in economics is an ad homenim attack. “This is absurd. An ad hom is when one infers that an argument is invalid due to some insult [3]. I did not such thing. I simply observed the obvious fact that their personal experiences had shaped their views. This does not entail anything about the truth value of those views. Sources: http://mises.org... http://wiki.mises.org... http://en.wikipedia.org...