Wednesday, February 15, 2012

ABCT links/thoughts

- Great post by Gene. To be honest, I always thought that was kind of a goofy argument. Doesn't Cowen peddle this one too?

- I am having trouble squaring ABCT with this. Can ABCT be squared with it?

- Does anyone know if anyone has worked with producing ABCT-like dynamics from a growth model where consumers hyperbolically discount? I was thinking of this today. It seems like it would have much the same conclusions as liquidity preference would if applied to a temporal capital strucutre: namely, turning the standard ABCT sequence on its head. The idea is current interest rates are higher than they "should be" for time-consistent preferences - something you only discover in the future (as opposed to ABCT, where you're relying on exogenous monkeying around with the interest rate, and you discover in the future that it was previously too low). First - am I thinking about the implications of hyperbolic discounting for the capital structure correctly. Second - anyone ever worked with this?


It's worth reminding everyone that I am something of an ABCT agnostic - I am NOT anti-ABCT. As presented, it makes decent sense. My concerns mainly revolve around the relative lack of empirical evidence (people like Andrew Young are changing this) and the trouble you run into when you incorporate liquidity preference theory (which - for reasons I've stated here previously - would seem to reverse some of the implications of ABCT grounded solely in the loanable funds model).


Back to macro. Isn't this sad? Even when I'm doing stuff for class it makes me think of ABCT/heterodox stuff/other personal interests.


  1. As I’ve said before, and I shall say again, my views on the Austrian Business Cycle Theory and the Austrian Capital Theory are in line with that of Dr. Brady, and to a lesser extent, that of Lord Keynes of Social Democracy for the 21st Century.

    In my opinion, Keynes’s theory of liquidity preference merely provides empirical support against ABCT and ACT, which already has problems mentioned above. Also, speaking of Tyler Cowen and ABCT, one might wish to take a look at Dr. Brady’s review of Tyler Cowen’s Risk and Business Cycles: New and Old Austrian Perspectives on

  2. To those who don't believe in Austrian Capital theory... How does the world work? How are decisions made about inputs that contribute to output years in the future? How come these decisions are always right?

  3. The Austrian conception of dispersed knowledge creates a flaw in ABCT and ACT because knowledge which has yet to be created does not exist. Keynes's conception of uncertainty and Ellsberg's conception of ambiguity make it clear that knowledge which has yet to exist cannot be dispersed...

  4. Blue Aurora,

    You seem to be doing what I'd call "arguing for more problems". You're saying that the problems of coordination are greater than Hayek (for example) believes. There's an argument for that, and there's an argument about how the opinions of Austrian Economists are on that.

    However, what I'm talking about is something more basic. As far as I can see Keynesians always proposes fiscal and monetary stimulus when there is a recession. That indicates to me that Keynesians believe that all recessions are connected with the "monetary" side of the economy as opposed to the "real" side (I know those are troublesome distinctions).

    How is it then that the real side of the economy is always in good shape? How is it that the only thing it's lacking is the right stimulus?

    We can call "potential output" the amount of output Keynesians believe can be achieved at any point with the correct stiumuls. Past production decisions imply a potential level of output in the future. How come these are always done correctly to allow potential output to rise steadily? I can't see how you guys can square that with you "lets argue for more problems" attitude.

  5. No, I'm not saying that "the problems of coordination are greater than Hayek (for example) believes". The economics of Keynes is NOT disequilibrium analysis. Keynes alluded to multiple equilibria in the General Theory.

    Only one equilibrium is a full employment equilibrium. Ellsbergian Ambiguity does cause liquidity traps. I would say that liquidity preference overrides time preference. There is no "natural rate of interest", but multiple optimal ones.

  6. You believe in multiple equilibria, fair enough. I do too if you're talking about short-run equilibria.

    You believe that liquidity preference overrides time preference. I don't agree, but I don't think it's an obviously wrong idea. Let's say for the sake of argument that liquidity preference does override time preference.

    Now, given all that, how is intertemporal production decided? How come the decisions are always correct and potential output is always growing at a steady pace? To put the question another way, in a communist economy the planners must organise for potential output to rise steadily without having gluts of capital (be it "fixed" capital or "circulating" capital) or gluts of final outputs. What is the endogenous force that gaurantees this in market economies?

    If there is no endogenous force then how come Keynesians believe every problem can be solved by stimulus?

  7. Incidentally, I don't understand Daniel's point about debt repayments. I'm sure we'll come back to it another time though.


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