The Distributist Review: The Investor's Dilemma

The Distributist Review: The Investor's Dilemma

I asked John Médaille about the business cycle and the explanation offered by the Austrian School.

Here's his answer:

Papabear,

I believe the Austrian "explanation" is a set of closed assumptions that are not "falsifiable"; that is, they can neither be proved nor disproved. The theorist is therefore at liberty to devise clever explanations that fit the ideology rather than the economy, and no one can say him nay. The whole explanation rests on the unknowable "time preference for money." Thus, it is adaptable, rhetorically, to any situation. You can say any particular cycle fits can be explained in the Austrian way because the explanation can be adjusted (after the fact) to fit any cycle. Who needs such explanations?

That doesn't mean the entire explanation is wrong. It means that it is worse than wrong: it is very nearly right. If the banks or the govmint start printing up money, they will inflate both the currency and expectations, expectations that must soon come back to earth. Often with a hard crash.

The real cause, in my opinion, is injustice. When rewards of production are not equitably distributed, you get an imbalance of supply and demand. It's really that simple. Printed money is part of an imbalance (so my explanation can include the Austrian one) because generally the loaned funds go to a limited group.

I believe that in general, when the means of production are widely dispersed throughout society, business cycles are much flatter, because there are so many more decision makers. Disequilibriums tend to be local and short-lived, as it is easier to move capital among a large variety of small enterprises than between large enterprises.

The Investor's Dilemma is a phenomenon that repeats itself with appalling frequency (see Hyman Minsky). There should be no reason for the economy to be in such cycles, and the fact that they do occur is a symptom of a problem with whatever theory or practice is guiding the economy.

I'll have to think about this more and see if I can find another intelligent question to ask...