I was talking to this economist friend of mine recently and we were discussing the recession and the role of monetary policy in it. Austrian Economics of course has the Business Cycle Theory that holds that because of central banks inflating the money supply malinvestment takes place (in higher-order goods) so that at some point there will not be enough money to finish those projects and they have to be abandoned, which results in a recession.

anyhoo, I was thinking out loud 'but even if there were no central banks and we were on a gold standard but still had gov't intervention in the rest of the economy, recessions could still take place, no?' and this lead to an interesting discussions.

in general the economy would perform suboptimally when there is gov't intervention, but for a recession to take place, for entrepreneurs to en masse invest their resources in projects that then later cannot be finished mere government intervention is not enough. What is essential is relatively sudden change in policy, so that the situation changes so much that projects once deemed viable no longer are (if tax rates or legislation on some industries change). And this meant that the Business Cycle is but one instance of a more general theory about recessions being caused by (relatively sudden) policy changes. I was pretty much thinking about this out loud and when I got to that last step I thought 'heyt, this is a pretty deep and important insight'. So I asked my friend 'has anything been written on this?' and he said Guido Hulsmann had written an article 'Toward a General Theory of Error Cycles' about this exact topic, and that it had been well received but that other than him nobody had really written about it.

So I was very happy that I came up with the insight and then mildly pissed off that I just missed out on being the first to do so or to write about it

Congrats on the insight! Even though it was previously written, you did think of it on your own (kind of a "reinvention of the wheel" thing).

And it is interesting. Do you think that sudden policy change about anything could cause a recession? Wouldn't the policy change have to affect a certain percent of the population? Or of an economy or an industry? And if it's true, then would a sudden "policy" change by a private company (or companies) also cause a recession?

Well,yeah, the American economy suffered depressions before 1913. Although, the depression of 1893 was considered a pretty serious one, but wound itself out before a year was up, IIRC.

good example, so the interesting question is what caused the 1893 depression.

this is Rothbard's book about it

and this the wikipedia-entry

from the first look on it, it seems that fractional reserve banking was crucial in it, and so it was inflation after all that played a significant role

also railroad overbuilding played a role, but i don't have the info whether it was the gov't-sponsored railroad companies or the private ones who were responsible. i do of course have a suspicion, but yeah, that factor would be an element of non-monetary policy cause of recessions

Cool!
But it appears that I should wiki BEFORE I post, since I didn't actually remember correctly. The 1893 depression lasted 5 or 6 years. I must've been confusing it with 1921(?)

With such a review, I can't resist. I'll read it tonight. Thanks.

the second part of the paper, upon closer reading, is somewhat disappointing though, does not really fulfil the promise of the first part and seems more, i don't know, 'conversational'

By the way, "monetary policy" is just NewSpeak for theft and fraud. If I want to engage in a transaction with you I don't need to involve "monetary policy" unless I am trying to fuck you in the process.

"Monetary Policy" is stealing wealth from those who were foolish enough to trust you with their stored assets. Nothing more.

- NonE

I finally read this article, and it is indeed interesting. It is mostly in lay-speak (thankfully!), but there were economics terms and ideas that floated a little above my head. I think I got the gist of the paper, though.

I especially like the last sentence, which sums up his position:

Quote:

It is not money but government intervention that accounts for the business cycle.

More specifically, this paper is about clarifying that the typical Austrian Business Cycle is not based on an accurate foundation, and he tries to do so. Pretty convincingly, too, for someone like me - I can understand what he's saying, and it makes sense, but I have no knowledge or ability to counter his arguments (if they are indeed counter-able). I did question few things in the article, but again, I have no background to challenge his ideas. If I was in a class under him, I'd ask him.

One thing he says is that the typical Austrian Business Cycle is founded on basing error on preceding events, whereas his theory is that error is innate. "Error" in this paper is the making of an economic choice based on facts and/or predictions that are incorrect. He says that since humans are fallible, error will always happen sooner or later, so a theory of Business Cycles based on error should not be based on a specific cause of the error but on the fact that error will simply occur (and the Austrian Business Cycle is based on the error of artificially inflating the money supply, whereas his theory is based on any government involvement at all). Or something like that. I'm not sure I understand it, but what I do understand about the foundation of his theory doesn't sound quite right.

The rest of what he says makes good sense to me.

and he adds that the government is an institution (yes, they are just a bunch of people. i know i know) founded on error and that because the government tends to persist despite its being responsible for error and because it has significant errors the government is responsible for clusters of error to continuously recur.

Yes, and his arguments makes a lot of sense. Government is pure error, and it enforces itself with force, hidden from "view" via illusion (i.e., more error), so it persists and continually causes and compiles the error cycle (i.e., the business cycle).

it's just 'wow! I am so glad I'm reading this' that's the great thing about Austrian Economics, it's just downright beautiful.

The great thing about logic is that it just makes sense.
Hulsman's comment on the implications of equilibrium treatments of the business cycle is hilarious.