A “Kleinian” Version of Austrian Business Cycle Theory

by Gene Callahan

The next phase in my (now our, as I’ve taken on a colleague) project of thinking through Dan Klein’s Knowledge and Coordination is to see how his ideas might be used to help describe business cycle theories and demonstrate commonalities they share. Note: the point of the present exercise is simply to try to describe an existing business cycle theory in Kleinian terms, not to improve upon it or argue for its accuracy.

We will begin with the Austrian Theory of the Business Cycle:

As we have seen, concatenate coordination need not be coordination from the perspective of “Joy,” Klein’s impartial observer. Others may have more partial notions of concatenate coordination, which they may strive to achieve.

For instance, “the  bankers” (of course, we don’t mean to posit a monolithic group, but we can envision common interests) might have a vision of concatenate coordination that includes a regime of easy money, low interest rates, and central backing for banks so that they can’t go bust. Banks envision an eternal boom.

But this easy money regime disrupts the attempts of savers and investors to achieve mutual coordination: savers will be willing to save less than investors are willing to invest at the artificially low interest rate. Thus, the bankers attempt to achieve their preferred concatenate coordination has produced poor mutual coordination among others.

The investors adjust to this disruption by lengthening the capital structure, while savers save less and consume more. This produces a capital structure being stretched at both ends and growing holes in its middle like pulled taffy, a la Garrison’s description.

This failure to achieve mutual coordination is finally revealed in the bust, when the fact that many ongoing capital projects will not be completed can no longer be disguised. This situation generally strikes everyone as failing to achieve concatenate coordination.

In response to this obvious failure, many, remembering the good times of the boom, believe the remedy is easy money and low interest rates. Thus we return to step one, and have a true cycle theory.

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