{"id":434,"date":"2017-07-26T17:52:31","date_gmt":"2017-07-26T21:52:31","guid":{"rendered":"http:\/\/admin.patheos.com\/blogs\/pickledpencil\/?p=434"},"modified":"2023-01-10T18:45:34","modified_gmt":"2023-01-10T22:45:34","slug":"business-cycles-environment-drugs-fake-news-hayek-keynes-minimum-wage-mises-u-2017","status":"publish","type":"post","link":"https:\/\/www.patheos.com\/blogs\/pickledpencil\/2017\/07\/business-cycles-environment-drugs-fake-news-hayek-keynes-minimum-wage-mises-u-2017\/","title":{"rendered":"Business Cycles, the Environment, Drugs, Fake News, Hayek and Keynes, and the Minimum Wage – Mises U 2017"},"content":{"rendered":"\n<\/head>

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Lecture 1 \u2013 The Austrian Theory of the Business Cycle by Roger Garrison
\nLecture 2 \u2013\u00a0Environmental and Resource Economics by Tim Terrell
\nLecture 3 \u2013 The Opioid Epidemic by Mark Thornton
\nLecture 4 \u2013 Fake Economic News by Walter Block
\nLecture 5 \u2013 Hayek and Keynes: Head to Head by Roger Garrison
\nLecture 6 \u2013 Minimum Wage by Mark Thornton<\/p>\n

Lecture 1 \u2013 The Austrian Theory of the Business Cycle by Roger Garrison<\/strong><\/span><\/p>\n

Here we go! I\u2019ve seen this lecture in person and it\u2019s one of my favorites. I became interested in economic-history as a young high school student precisely because I didn\u2019t buy the story my textbook gave me about the Great Depression. The Austrian Theory of the Business Cycle, for me, was crucial, and despite all of the ideological and religious changes I\u2019ve been through over the years, this economic point of view has always remained persuasive.\u00a0<\/strong>This lecture is heavily dependent on Garrison\u2019s\u00a0infamous PowerPoint slides, so I\u2019ll do my best to share his big ideas without getting too detailed.<\/p>\n

Garrison calls the broader application of the Austrian Business Cycle Theory \u201ccapital-based macro-economics.\u201d<\/p>\n

\u201cBefore we can ask how things might go wrong we must explain how they could ever go right.\u201d \u2013 F. A. Hayek
\n<\/em>
\nConsumption and investment
\n<\/span>Garrison immediately notes a difference between the Keynesian and the Austrians in that the Austrians separate consumption and investment. There is no C+I. The basic insight here is that in a national economy, as in a household, there is a tradeoff between consumption and investment. When people consume less, they increase their savings. When people consume more, they reduce their savings. This is how things work in a market economy.<\/p>\n

Market for loanable funds and the function of interest rates
\n<\/span>When people save more, that money becomes available in the form of loanable funds, subject to a variety of interest rates, which is borrowed by the business community and put into investment. This is all dependent on consumer time-preference. When people become more future-oriented, they save more, interest rates drop, and entrepreneurs take on longer-term investment projects. When people become more present-oriented, they spend more, interest rates rise, and entrepreneurs take on shorter-term investment projects. This is how interest rates coordinate consumption and production over time. The interest rate is a vital signal for economic coordination.\u00a0The interest rate discriminates against particular kinds of investment projects.<\/strong> This is the Mises-Hayek view. Keynes\u2019s misstep here is the belief that a reduction in consumer spending is a destructive phenomenon, however, lower interest rates can themselves perform a natural stimulating effect in the stages of production further away from present consumption.<\/p>\n

\nThis is a simplified view of the structure of production for automobiles. All consumer goods move through a structure of production. Garrison\u2019s slides are brilliant in demonstrating how the tradeoff between consumption and investment and the increase or reduction in consumer saving\/spending dovetails with the shape\u00a0<\/em>structure of production. High present-consumption\/low savings will via a higher interest rate direct resources away from the early\u00a0stages of production. Low present-consumption\/high savings will via a lower market interest rate direct resources away from later stages of production. After all, people save now to spend later; the interest rate is a signal which guides entrepreneurs and investors in their use of scarce resources, including labor<\/strong>. That\u2019s the economizing function<\/em>. This is how an economy can work without central bank guidance\/manipulation. In my reading, this is a fatal argument to the idea that it\u2019s a lack of consumer spending which causes economy-wide panics and depressions, since it demonstrates the role of market interest rates in coordinating economic activity in just such a case.<\/p>\n

In the picture below, you can see visually what this tug-of-war looks like. Artificial credit expansion pushes the economy is competing directions, re-shaping and stretching the structure of production. If you recall, in the Austrian view, economies face a tradeoff between consumption and investment. Central bank credit expansion papers over this reality, simultaneously expanding the economy in two opposing directions which under normal, free-market circumstances could not be possible. This is the boom, and for a time it looks like real prosperity. When it\u2019s finally understood that there aren\u2019t enough physical resources to go around, an enormous, systemic correction follows \u2013 the bust. The thrust of Austrian theory:<\/strong> the boom-bust business cycle is a result not of the free-market, but of government intervention in the economy via central banking and inflationary credit expansion. This is the theoretical framework of what caused both the Roaring 20s\/Panic of 1929\u00a0and the 2000s Housing Boom\/Financial Panic\u00a0of 2008.<\/strong><\/p>\n

Credit expansion
\n<\/span>What happens when central banks lend money into existence? This new money\u00a0looks like real savings and interest rates will reflect this but in fact consumer preferences and spending patterns have not changed. The availability of real resources\u00a0is not reflected in interest rates pushed down due to credit expansion.\u00a0<\/strong>Entrepreneurs nevertheless take advantage of lower interest rates by taking out longer-term loans and embarking in investment projects a greater distance from final consumption products. This pulls the economy in two opposing directions. Where in a market economy there is a tradeoff between consumption and investment, credit expansion creates overconsumption and malinvestment; people haven\u2019t reduced present consumption, but entrepreneurs mislead by the artificially low interest rate nevertheless behave as though they have and begin investment in long-term projects.<\/strong> In a Greenspan-Bernanke economy, consumers and investors enter into a tug of war over the same resources where in a Mises-Hayek economy the market rate of interest would coordinate their activity.<\/p>\n

These are the broad strokes of the Austrian Theory of the Business Cycle.<\/p>\n