Friday, May 21, 2010

To the Austrians...

Oh, I had one more macro issue I wanted to pose to my Austrian readers - how do Austrians generally deal with double-dip recessions? It's not that I think it's impossible for Austrian economics to deal with, but it seems tougher.

Is it that malinvestments build up rapidly (perhaps as a result of an expansionary response to the first dip) and then they bust again? This seems like a much weaker way to address it. Presumably, investors will be far more wary after the first bust, the worst culprits of malinvestment will be out of business and not taking loans, and there probably simply isn't enough time for that many malinvestments to build up. New malinvestments can make sense when it comes to the next business cycle, but they don't seem well positioned to explain a double-dip of the same cycle.

The other option, I suppose, is simply that more malinvestments are unearthed that were missed the first time.

I'm also aware that Hayek discussed the prospect of a double-dip caused by the reaction of velocity to the initial downturn.

Is there any other way of addressing these concerns? These are all fine explanations, but it just seems to me they have their limits and shouldn't be considered entirely satisfactory. I would say the same of a Minsky type model of the business cycle, or of a more Keynesian accelerator-oscillator dynamic for much the same reasons, so I'm not trying to pile on the Austrians. It seems to me any sort of "cycle" based theory should have a very hard time dealing with double-dips (as well as a shock-based theory). It seems to me the sort of theory that is best equipped to deal with these episodes is a theory of under-employment equilibrium.

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