Thursday, February 11, 2010

Another Good Thing about Austrian Economics

Bill Woolsey draws attention in the comments to the Austrian emphasis on malinvestment, as opposed to the mainstream preoccupation with aggregate investment levels.

That certainly does seem like an important theoretical contribution (but I am a mere political scientist).

But is it a contribution to understanding the causes of the 2008 financial crisis? I thought the mechanism of malinvestment is supposed to be the low interest rates themselves, not laws that encouraged housing investment, such as those pointed to by Gjerstad and Smith and Wallison.

I'd love to be corrected if I am wrong about that, and also about whether any empirical work has been done to test the ABCT hypothesis regarding what caused the financial crisis.

7 comments:

Admiral said...

Jeffrey, I do see where you're coming from this. You are right that typically the Austrian point about malinvestment has been made regarding the consequences of depressed interest rates.

But the idea itself encompasses any government intervention that interferes with markets. Laws that shape incentives mean the laws distort price signals and of course that will lead to misallocation of resources (malinvestment).

I am not well versed in any empirical Austrian work (insert jokes here), but would love to hear what others have to say on this subject.

Greg said...

In Hayek, e.g. 1931 or 1939, the boom and bust does _not_ have to be the result of central bank low interest rates. The cause of malinvestment is contingent, and the mechanism of the bust is not necessarly interest rate determined.

"I thought the mechanism of malinvestment is supposed to be the low interest rates themselves, not laws that encouraged housing investment, such as those pointed to by Gjerstad and Smith and Wallison."

There are several published empirical confirmation of the stylized facts of the "Austrian" boom and bust.
I'd love to be corrected if I am wrong about that, and also about whether any empirical work has been done to test the ABCT hypothesis regarding what caused the financial crisis.

Greg said...

The "tests" of Hayekian boom-bust theory in the 2003-2008 period were conveniently provided in advance by BIS chief economist William White in a series of annual reports. Use google for more information.

Maurizio said...

You are assuming that the laws are the cause of the housing bubble. The Austrian position is that, without artificially low rates, the bubble could not have been fed, regardlessly of the laws. You might want to read "Meltdown" by Tom Woods.

Maurizio said...

In other words: the bubble was caused by the low interest rates. The laws about housing are just what caused the bubble to form in the housing sector instead of somewhere else. Had the housing laws not been there, the bubble would still have taken place in some other sector. (accordinding to the Austrian view as I understand it.)

wondering said...

Friedman said in the post down below on Austrian economics that a bubble in some other sector would not have decimated the banks, because th ebanks were encouraged by Basel regulations to hold mortgage-backed securities.

QUALITY STOCKS UNDER 5 DOLLARS said...

Now I hear so much lately about austrian economics.