Tyler Cowen challenges Bob Murphy and ABCT on the grounds of what he considers to be an embarassing co-movement of investment, capital maintenance, and consumption during the boom. Murphy had originally claimed that investment and consumption can move together because capital maintenance is neglected.
A few obvious questions emerge from this explanation from Murphy. The first one that comes to my mind is also mentioned by Cowen - why would monetary expansion encourage investment but not capital maintenance? Wouldn't those same low interest rates that encouraged malinvestments also encourage capital maintenance? It seems to be an awfully convenient thing for Murphy to grab for.
But the whole discussion also reminded me of something that Hayek said in Prices and Production (lecture 2) that has bothered me since I first read it. It solves the co-movement problem without resorting to Murphy's capital maintenance explanation. The problem is, I'm not sure why we should believe this "solution". Hayek writes:
"The raison d'etre of this way of organizing production is, of course, that by lengthening the production process we are able to obtain a greater quantity of consumer' goods out of a given quantity of original means of production. It is not necessary for my present purpose to enter at any length into an explanation of this increase of productivity by roundabout methods of production."
So Hayek says that you don't even need to resort to the neglect of capital maintenance. Investment and consumption move together because the lengthening of the capital structure makes investment more productive.
I wish he had explained it more because I see absolutely no reason to think this is true. He's not talking about technological progress that happens to elongate the capital structure. He's simply talking about increased roundaboutness itself. Why does that - in and of itself - make things more efficient? Does anybody believe this?
This line always bothered me for precisely the reason that I think Murphy's explanation bothers Cowen - it seems like a very convenient solution to the problem that is also conveniently short on details, citations, or empirical support. Take this assumption away and (it seems to me) you still have a theory of the business cycle that makes some sense (unsustainable changes in the capital structure - malinvestments that might need to be liquidated later on), but one that seems less binding theoretically (why can't we just grow into these malinvestments - clearly some roundabout production is necessary, and regular growth rates should allow us to eventually make use of investments that, just a few years ago, where malinvestments) and less convincing empirically (Tyler's co-movement problem reemerges).
UPDATE: Peter Boettke has thoughts here.
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