Fixing Austrian Business Cycle Theory

Bolded = Emphasis Mine

There are two problems with the ABCT:

  • It’s incomplete
  • It puts too much emphasis on the central bank

Let’s start with the first one.

Most of you have probably heard how the theory goes since Austrians tend to recite it non-stop. Essentially it goes like this.

  • The Central Bank artificially lowers the interest rate below it’s natural rate causing a boom
  • The structure of production is distorted as the excess credit is put towards investment which doesn’t reflect present time consumer demand
  • The boom comes to an end once the investments fail to make their returns
  • The economy contracts as capital goods have to be liquidated and as the structure of production adjusts itself.

But just to nuance this a bit more, Roger Garrison explains it like this:

The Austrian theory of the business cycle is a theory of the unsustainable boom. Its logic is firmly anchored in the notion that the price system is a communications network. A miscommunication in the form of an interest rate held below its market, or “natural,” level by central-bank policy sets the economy off on a growth path that is inherently unsustainable. Given actual consumer preferences and resource availabilities, such a policy-induced boom contains the seeds of its own undoing. The temporal pattern of resource allocation is inconsistent with the preferred pattern of consumption. In time this inconsistency precipitates a bust. 

It is too often forgotten that the ABCT only really describes the boom. Garrison never explains how exactly the bust will play out and neither does he posit that the ABCT can. As far as we know, the bust is caused when malinvest from the boom period turn unprofitable. Steve Horwitz explains:

It shows that if a boom is set in motion by overly expansionary monetary policy, then the apparent growth taking place during that boom will not be sustainable. The artificial boom contains the seeds of its own bust, and the illusory growth will soon be revealed as such… it tells us nothing about exactly when the boom will break or the precise factors that will cause it. The theory claims that eventually costs will rise and make it clear that the longer-term production processes falsely induced by the boom will not be profitable, leading to their abandonment. But it says nothing about which projects will be undertaken in which markets and which costs (other than perhaps the loan rate of interest) will rise, and it tells us nothing about the timing of those events. We know they have to happen, but the where and when are unique to each business cycle.

Once the cycle reaches its turning point, ABCT tells us little to nothing about how the bust will play out. The theory gives us good reason to think that further inflation and interventionist attempts to prevent the necessary reallocation of resources will make matters worse, but that’s about it. The ABCT is not a theory of the causes of the length and depth of recessions or depressions but a theory of the unsustainable boomIt is a theory of why we are in a recession in the first place, not a theory of how long or how deep a particular recession will be.

If the ABCT is a theory of an unsustainable boom generated by an excess supply of money, then a recession caused by other factors — for example, a monetary deflation — would not invalidate the ABCT. Put differently, the ABCT is a sufficient explanation for a recession, but it is not a necessary one. Not every recession requires the ABCT as an explanation, nor can the ABCT explain everything about any particular recession.

The last sentence is particulary important since the ABCT can’t be a true theory of business cycles if it can only explain one kind, unsustainable booms. Even then, it only explains half of the cycle. A business cycle theory must describe the boom and the bust.

But advancements in the Austrian theory have been hindered by zealous hatred of central banking. Too often Austrians (wrongly) put the principal instigator of the ABCT as the central bank. While they can (and very often do) play an important part of it, we’ll have to bring in other factors to center of attention to gain a more comprehensive view of economic fluctations.

To do this, we must look to other theories that complement and supplement the ABCT. Namely; Monetary Disequilibrium Theory, Patterns of Sustainable Specialization and Trade, and Financial Instability Hypothesis.

Yeager and the Austrians

Monetary disequilibrium theorists have probably enjoyed the most fruitful dialogue with Austrians out of this list. Virginian Political Economists like George Selgin, Steve Horwitz, and many more have formulated a theory of free banking by conjoining monetarist and austrian ideas. Mutual amity is further bolstered by the fact that Leland Yeager, the most famous Disequilibrium theorist, was recognized as a Distinguished Professor at the Mises Institute and is now a emeritus professor for them.

MDT is a monetarist theory that states that recessions are caused by “an excess demand for money, in the sense that people want to hold more money than exists” (The Fluttering Veil pg 3). For a more detailed analysis, read my Cash Balance Theory post.

Chart 1

In this example, the central bank increases the money supply (MS) when there’s no increase in the demand for money (MD). Equilibrium (E) first shifts to disequilibrium (E*). People now hold more money than they would rather have. Eventually people will use their excess cash to consume and invest, thereby increasing their prices towards a new equilibrium (E’). Note that as the nominal interest rate for money (i) falls the price level increases.

A recession would just work in the opposite direction. MS would shift to the left and now people want more cash. So they’ll cut their spending and investment to do so, thus increasing the nominal interest rate. On an aggregate supply/demand graph, this will reflect a negative AD shock and a lower price level.

The similarity between MDT and ABCT couldn’t be clearer. Both give an account of inflationary booms caused by expansion of the money supply from the central bank. Even better, MDT shows us what the economy looks like during a bust. However Garrison believes there are significant differences between the two.

Axel Leijonhufvud has made headway toward our understanding of macromaladies and of competing theories about them by creating a useful taxonomy. Basic categories are defined in terms of (1) the nature of the disturbance and (2) the nature of the failure of the economy to adjust to the disturbance. The two “natures” are then categorized as “n” (for nominal) or “r” (for real).

This approach gives rise to a two-way taxonomy, which can be symbolized as n/n, n/r, r/n, and r/r. To illustrate, suppose that there is a general, but unanticipated, shift of preferences on the part of wealth holders to a higher level of real cash balances. This is a real disturbance. Suppose further that there is some difficulty in the pricing mechanism for both inputs and outputs, which impedes the necessary decrease in the general price level. This is a nominal failure. Until the pricing difficulty is overcome, there will be excess supplies of commodities and factors of production on an economywide basis. This macromalady belongs to the r/n category…

Leland Yeager draws attention to a particular sort of disturbance followed by adjustment failure which, in his judgment, is especially relevant for understanding depressions and hence for devising institutional reform aimed at avoiding them. A decrease in the money supply in the face of an unchanged money demand causes the prices of all commodities and factors of production to be above their market-clearing levels. While the market can eventually bring prices into line with the smaller money supply, it cannot achieve a new monetary equilibrium quickly or painlessly. The theory of “monetary disequilibrium”—a term with which Yeager ties his own ideas to those of Clark Warburton —focuses on the difficulties of achieving economywide price adjustments made necessary by a monetary contraction. Clearly, this focus puts monetary disequilibrium theory in the n/n category of Leijonhufvud’s taxonomy…

In [econo-rhythms] business cycles are an inherent part of the market process; in [monetary disequilibria], they are disruptions of the market process. That is, both the lower turning point (the upturn) and the upper turning point (the downturn) are endogenous for those who conceive of business cycles as econo-rhythms and exogenous for those who think in terms of monetary disequilibrium. Contrasting econo-rhythms and monetary disequilibria in this way suggests another, more conventional taxonomy, in which business-cycle theories are categorized on the basis of the exogeneity (X) or endogeneity (N) of the lower and upper turning points [Hansen, 1951, p. 411ff]. The four categories can be symbolized as X/X, X/N, N/X, and N/N, where X/X is monetary disequilibrium theory and N/N is econo-rhythm theory. It is difficult to identify any simple relationship between this taxonomy and the one devised by Leijonhufvud. However insightful his treatment of market adjustments to monetary disturbances, Leijonhufvud never explains how—or suggests that—a boom engenders a bust or vice versa.

The Austrian theory of the business cycle falls squarely into the X/N category. The exogeneity of the upturn is a clear recognition that the economy wide disturbance is inflicted on the market process and is not an unavoidable feature of market economies. The endogeneity of the downturn gives a cyclical quality to the movements in prices and quantities and to certain macroeconomic magnitudes. The Austrian business cycle, then, is less of a cycle than the supposed econo-rhythms, but more of a cycle than sluggish-price monetary disequilibria.
Further, if the Leijonhufvud taxonomy is applied to the entire sequence of events from the initial upturn to the subsequent downturn, then the Austrian theory would fall into the n/r category. As summarized by Fritz Machlup, “monetary factors cause the cycle but real phenomena constitute it.” For Yeager and Leijonhufvud monetary mismanagement precipitates a bust; for Mises and Hayek monetary expansion engenders a boom, which eventually leads to a bust.

So let’s summarize the important parts:

  • MDT believes the “nature of disturbances” and that the failure of the economy to adjust to these disturbances are nominal.
  • MDT sees the upturn and downturn of the business cycle as exogenous
  • ABCT on the other hand sees nature of disturbances as nominal but the failure to adjust as real
  • ABCT posits upturns are exogenous and downturns are endogenous

This essay was written back in 1989 and the face of MDT has changed. Today, it’s most prominent representatives are the market monetarists. In formulating a new ABCT, we should look to insights from the likes of Scott Sumner and Lars Christensen; especially since Market Monetarism has many overlaps with the Free Banking school of George Selgin and Larry White.

Another thing to note is that Garrison describes MDT theory as “monetary mismanagement precipitat[ing] a bust” and puts this in contrast to the Austrian theory. But in the aforementioned essay that was written in 2002, he describes the ABCT the same way as MDT. “A miscommunication in the form of an interest rate held below its market, or ‘natural,’ level by central-bank policy sets the economy off on a growth path that is inherently unsustainable…  In time this inconsistency precipitates a bust.” So to reiterate, both basically give the same narrative of inflationary booms.

A third issue has to do with the exogeneity of the ABCT. Garrison, as a Hayekian Austrian, inaccurately states that the upturn is exogenous and that business cycles’ aren’t inherent in the market economy. This may come to a shocker to most since Austrians almost always describe the market as being perfect and that government meddling is the cause of all ills. To a great extent the latter is true, however someone with a good understanding of Hayek knows that the former is not. I’ll nuance this more when we discuss Financial Instability Hypothesis (FIH) as this provides an excellent bridge between the two fluctual accounts.

The Importance of Sustainability and Recalculation

Arnold Kling’s business cycle theory is known as Patterns of Sustainable Specialization and Trade (PSST). Kling rejects almost all modern orthodox thinking. Supply and demand, Walrasian equilibrium, production functions, GDP, etc., all go out the window as Kling see’s nothing useful in describing the economy within the modern macroeconomic framework.

Kling instead goes back to the classical economists, namely Adam Smith and David Ricardo:

An important feature of both the Walrasian system and the Keynesian
macroeconomics that followed is that patterns of sustainable specialization
and trade (PSST) are taken as given. The most efficient division of labour for
producing a particular good or service is understood. Everyone’s comparative
advantage is known.

The PSST approach drops the assumption that production technology is known.
Instead, the Smithian division of labour and Ricardian comparative advantage
are constantly being developed and improved. Entrepreneurs, through a process
of trial and error, figure out how best to configure production. In this process of
ongoing discovery, there can be periods in which workers are unemployed, while
the market mechanism tries to figure out how to utilize them

The gist of it all is that the economy is one complex, evolving organism. Workers and capital goods are traded and specialized for certain patterns of production; and these production process can be disrupted by things such as technological innovation, thus causing some labor and capital to be put obsolete and in need of reallocation.

Each year, tens of thousands of new workers enter the labour force. In addition, each month, millions of workers separate from their current jobs. All of these workers need to find jobs. Otherwise, they will just mill around aimlessly, like the workers at a leaderless construction site.

The organization of these millions of workers is undertaken not by a single
general contractor but by the decentralized decisions of entrepreneurs. As they
develop new businesses and expand existing firms, entrepreneurs create new
forms of specialization and comparative advantage. These in turn provide roles
that employ workers…

Ongoing innovation constantly shifts the patterns of specialization and
comparative advantage. Smith’s pin factory has been subjected to waves of
Schumpeterian creative destruction. Ricardo’s simple pattern of comparative
advantage in wine and cloth has given way to far more complex patterns in
which comparative advantage is subtle and sophisticated.

The PSST invokes Hayek’s theory of spontaneous order. The view here is that the marketplace is an ever changing construct of shifting tastes and preferences made by individuals and can’t possibly be efficiently administered by one central body. The latter is the crux of the knowledge problem. As Hayek states:

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization. But this answers only part of our problem. We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used.

A second Austrian connection can be made when we examine PSST’s description of entrepreneurial decision making:

If entrepreneurs had to start each day from scratch trying to figure out how
to engage in profitable production, the task would be impossible. What makes
business manageable today is the ability to use yesterday’s configuration as a
baseline. Entrepreneurs assume that what worked yesterday will be approximately what works today

Experimenting with new patterns of specialization and trade is relatively easy.
Discovering patterns of sustainable specialization and trade is much harder. Our economic well-being depends on the ability of entrepreneurs to make these

PSST states that the entrepreneurs have no clue what to expect the next day. They only assume that has worked thus far will continue to work in the future. In other words, the future is entirely unknowable and totally uncertain. In other words, economic actors have subjective expectations.

The parallel here is to Ludwig Lachmann’s “radical subjectivism.” Lachmann extends the notion of subjective value to say that the re-emergence of a similar set of conditions in the future doesn’t mean that the the same set of prices will re-emerge the way did as in the past. Therefore there is no deterministic relationship between the past and present. Instead, the future is inherently unknown. In the aftermath of the Cambridge Capital Controversy, Lachmann wrote in Reflections on Hayekian Capital Theory that:

Everybody seems to agree today that the stock of capital cannot be measured outside equilibrium, viz. outside entirely artificial conditions. But there are two reasons for it of which we may call one the ‘Ricardian’ or ‘objectivist’, the other the ‘Austrian’ or ‘subjectivist’ reason. We may also say that the one is ‘backward looking’, the other ‘forward looking’. The former rests on the fact that any change in the mode of income distribution, in rate of profit or wage rate, will affect relative prices and thus deprive us of any solid yardstick. It is particularly germane to any view of capital which links the present value of capital resources to their current cost of reproduction, a ‘backward looking’ view…

The second reason rests on the fact that the purpose of all capital, hence also of the current maintenance of existing capital goods, is to secure a future income stream. But the future is unknowable, though not unimaginable, and men have to use knowledge substitutes in order to evaluate future income streams, viz. expectations. Experience shows that different persons will typically hold different expectations about the future income to be expected from the same resource, and that the same person may hold different expectations about the same future event at different points of time. The inevitably subjective nature of all ‘forward looking’ views renders the measurement of capital impossible

Meanwhile an impious legend has grown up that our inability to measure the stock of capital in the real world was discovered in the Cambridge of the 1950s.

Interestingly enough, Lachmann developed his theory of radical subjectivism by applying Keynes’ theory of subjective expectations.

The highwater mark in Keynesian subjectivism came in Keynes’ 1937 article in which he attempted to explain what his 1936 book, The General Theory, actually meant. Keynes explains, in effect, that the demand for money in the present derives from the uncertainty of our knowledge about the future. And the kind of uncertainty that Keynes is referring to is the kind that Lachmann calls radical uncertainty and associates with radical subjectivism. According to Keynes, as quoted by Lachmann, “We simply do not know”

This is why Kling considers himself an “Austro-Keynesian” and he also sees his model as a synthesis of the two:

From the Keynes camp, I accept the view that financial market psychology is variable (animal spirits and all that) and that market economies are unstable.

The Recalculation story can be thought of as an Austro-Keynesian model. It is Austrian in that it emphasizes the role of markets in processing information. During a Recalculation, there is too much information to be processed in too little time. The story is Keynesian in that during the Recalculation there are multiplier effects. Unemployed people cut back on their spending, and that in turn requires further adjustment, including more temporary unemployment.

The Keynesian connection will also be more thoroughly nuanced when we discuss FIH. Turning our attention back to PSST and ABCT, we find a theory that wholly complements each other. Art Carden uses PSST to describe the recalculation process in the Austrian theory:

If the economy is left to its own devices, miscalculations will be corrected and malinvestments will be corrected by a process of recalculation. Firms and households fix their mistakes, and resources are reallocated. Prices that are consistent with the economy’s underlying fundamentals of tastes, technology, and resource availability emerge and guide people toward what Arnold Kling has called “patterns of sustainable specialization and trade.” In other words, physical capital, human capital, and social capital are invested in lines of production that do not compromise a society’s ability to provide for its future wants.

In a blogged debate between Kling and Sumner Austrian economist, Robert Murphy came to Kling’s aid:

Kling calls his own view a “Recalculation Story” explanation of recessions. According to Kling, after an unsustainable boom period, the economy needs to “recalculate” and figure out where the excess workers (from the bloated sectors) need to go so that the economy can resume a stable, sustainable growth. This is very similar to the Misesian view of the “cleansing” role of recessions. Although not an Austrian himself, Kling does acknowledge that his theory is complementary to the Austrian view

Kling (and the Austrians) are arguing that this recession is not simply about a lack of generic “spending” but rather is tied to the preceding housing boom. In particular, during the boom, workers were sucked into construction (and other related occupations). Once the housing bubble collapsed, these excess workers needed to go someplace else. That’s why unemployment started rising, and “the recession” set in.

In terms of government policy, Kling (and the Austrians) argue that this is a real misallocation of resources: too much lumber, glass, and yes, labor went into housing during the boom years. In order for the economy to readjust to the new situation, it takes time for workers to leave the housing sector and to match up their skills with the desires of consumers in a more sustainable pattern.

PSST and ABCT share the same essential elements. Unsustainable patterns of production occur during boom years which lead to an eventual bust that causes production to reorganize itself into a more sustainable pattern. The difference is that PSST doesn’t put monetary expansion as the only cause of these fluctuations. PSST can thus gives Austrian theory a more wider picture of the effects of changes in production due to things like trade and technology.

And Now, a Moment for Minsky

Hyman Minsky was a post-keynesian economist who put forth the Financial Instability Hypothesis which argues that financial crises are inherent in capitalism because periods of economic prosperity encouraged borrowers and lender to be be progressively reckless. This excess optimism creates financial bubbles and the later busts. Therefore, capitalism is prone to move from periods of financial stability to instability. His famous quote is:

The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.

Tejvan Pettinger summarizes the cycle:

  • Traditionally, bank lending is secured against assets. The lending is hedged against default. For example, banks lend mortgages if people can raise a deposit and can maintain mortgage payments to repay both  the capital and interest. Typically banks would also check strict lending criteria to make sure the mortgage is affordable.
  • However, if house prices rise and there is economic growth, both lenders are borrowers become more optimistic and willing to take  on greater risks.
  • Banks insist on smaller deposits and are willing to lend bigger multiples of income.
  • Lending becomes more leveraged.
  • The greater lending itself causes asset prices to rise and this increases confidence even further. People keep expecting rising prices – the past becomes the guide to the future.
  • We could term these sentiments as ‘Irrational exuberance‘ There is a feeling that the crowd can’t be wrong. If everyone expects asset prices to keep rising, it’s easy to jump on the bandwagon.
  • Rather than hedge borrowing (safe secured lending) we see a growth of speculative lending and even ‘ponzi borrowing’. This means banks and financial institutions lend money in the hope that asset prices keep rising to enable repayment. However, the loans of a ponzi nature are unsustainable in the long term.
  • Regulatory capture. Regulators who should be insisting on safe lending levels also get caught up in the irrational exuberance. Credit rating agencies make mistakes in allowing speculative and ponzi borrowing.
  • However, this asset bubble and speculative lending cannot be maintained for ever. It is based on the unreasonable expectation that asset prices keep rising beyond their real value. When asset prices stop rising, borrowers and lenders realise their position has left them short – they don’t have enough cash to meet their repayments.  Everyone tries liquidity their assets to meet their borrowing requirements. This leads to a loss of confidence and credit crunch.

The Minsky moment refers to the point where the financial system moves from stability to instability. It is that point where over-indebted borrowers start to sell off their assets to meet other repayment demands. This causes a fall in asset prices and loss of confidence. It can cause financial institutions to become illiquid – they can’t meet the demand for cash. It may cause a run on the banks as people seek to withdraw their money.  Usually, the Minksy moment comes when lending and debt levels have built up to unsustainable levels. It can lead to a balance sheet recession

Minsky Cycle

Post keynesian economics is often lead to policy conclusions that are relatively far left on the spectrum. Principally due to the fact Post Keynesians see the market as too chaotic and in needed of central control (ironically, the same reason why Austrians don’t support central control). Among the CATO Institute economists however, Minsky has always been viewed with much sympathy.

Tyler Cowen, for instance, had this to say:

I would continue to stress, however, that Austrian approaches still need more Hyman Minsky and should cease putting all of the “blame” — causal, moral, or otherwise — on the monetary expansion of the central bank.

In the aforementioned excerpt where Kling refers himself as an Austro-Keynesian, he went on to say:

I am comfortable with a Minsky-Kindleberger view. Thus, I reject what I see as the common Austrian view that the only source of instability in the economy is central bank money-printing.

From the Austrian camp, I accept the view that there is not much that government can do about downturns. I view a downturn as a sudden, widespread realization that certain patterns of specialization and trade are unsustainable. We just have to wait for entrepreneurs to sort things out.

Critical things to note about FIH is that:

  • The money supply is considered endogenous
  • Economic actors have subjective expectations

The latter point has already been elaborated so we’ll return to it later. The former is the most important reason why I wanted to include Minsky.

First let’s define what an endogenous and an exogenous money supply are for those who don’t know.

  1. Exo- means “external”. When something is exogenous, that means it’s caused by external forces. In the case of the money supply, this would mean that via the money multiplier, the money supply is created by an external monetary institution i.e., the central bank. More specifically, the money supply is a function of the interest set by the central bank, on a graph it is represented as a vertical line just as the one used in the MDT section
  2. An endogenous view of the money supply is the opposite. The central bank cannot directly control the money supply, only short term rates. Instead, control comes from something inside the market, money demand. Therefore the money supply is actually a function of money demand or in other words, money demand creates money supply.
Endogenous (left) vs Exogenous (right)

Minsky takes the latter view. Accordingly, commercial banks are the ones that create money out of thin air (Wray pg. 8; 15):

A commercial bank lends by crediting the borrower with a demand deposit and it invests either by crediting the seller of the security with a demand deposit or by writing a check on itself in favor of the seller of the security. The bank expects that the borrower or the seller of the security credited with a deposit will use their deposit very soon after it is created. This will result in checks being drawn on the initiating bank.

In a banking system with many banks, such as the American Banking System, the expectation is that the checks drawn on any particular bank will be deposited in another bank. The bank upon which the check is drawn must pay the bank in which the check is deposited the face amount of the check. This payment takes place by transferring reserves or banker’s money. In an active trading community offsetting claims for payments arise among the banks. Bankers are sophisticated enough to set up a clearing arrangement so that only the difference between payments from a bank and payments to a bank are made in the form of reserve money. (if a check drawn upon a bank is deposited in the same bank, the entire transaction is internal to the bank: the writer’s account is decreased and the depositor’s account is increased.)

The liquidity obligation of a banker is peculiar. Whereas an ordinary business has dated debts, debts which are not due until a specified date, the essential attribute of a bank is that its liabilities, aside from the owner’s investment, are demand liabilities. The initiative in making a bank’s liabilities current lies with the depositor, the owner of the bank’s liabilities. As a result the banker must always keep sufficient [base money] on hand to meet whatever clearing losses result from depositors’ actions and in case of unexpectedly large clearing losses a banker must be able to replenish his stock of banker’s cash.

The solvency constraint on a banker is more demanding than is true for nonfinancial businesses. A bank has a much greater ratio of assets and hence liabilities to net worth than is true for a nonfinancial business. As the acquisition of most of the banker’s assets is financed by the issuance of the bank’s own debt, demand deposits, a relatively small drop in the value of the bank’s assets will result in the value of the bank’s assets being less than the value of the bank’s demand deposits. This means that banks cannot survive as large a fall in the value of its asset as ordinary business firms can. The only assets a banker will willingly acquire are those that he believes will not fall in market value. A banker’s business makes him conservative. He is willing to give up possible gains from the appreciation of the assets he owns to avoid the losses that would occur if his assets fell in value. As a result banks, a thin equity business, will hold only assets which are believed to be well protected against declines in their value.

The bolded statement shows Minsky clearest statement on money’s endogeneity. He states that banks neither lend their deposits or reserves from the central bank. Instead, new deposits are created as loans and other assets are be acquired. “However, the liquidity of their asset portfolio is substantially less than that of their liabilities—creating a potential liquidity problem—and their leverage ratio is very high because net worth is small relative to assets. In both of these respects, banks are different from other entities that issue liabilities to take positions in assets.”

Recall that Garrison describes the Austrian business cycle as being exogenous/endogenous. This is not the case for Hayek. (Friedrich A. Hayek, Volume 2, pg. 205)

[Robert] Lucas’s monetary business cycle theory contains a refined version of the classical dichotomy. The source of fluctuations is not inherent in his market model, in which money is basically exogenous and neutral. Only erratic changes (shocks) in the money supply have temporary real effects… Hayek, on the other hand, looked for a fully endogenous explanation of the cycle. In his Wicksellian approach, the creation of credit money is a market process that both generates and reverses booms. Endogenous changes in the money supply are a source of impulses to real activity and also a part of the propagation mechanism that annihilates the positive real effects

Allin Cottrell (pg. 4) also states:

Hayek counts his own monetary theory of the cycle as an endogenous theory: the claim is that shifts in expected profitability… inevitable in the development of a capitalist economy, while the money rate of interest necessarily (under the current arrangements) fails to act as an adequate shock absorber in the face of these shifts…

His basic argument is that even in the absence of central bank accommodation,
the private banks will generally be in a position to extend their lending (and hence create deposits) at an unchanged rate of interest, in the face of increased loan demand from optimistic entrepreneurs.

In his words Hayek has the follow to say in his Monetary Theory and the Trade Cycle:

Professor Mises himself… has, in his latest work, afforded ample justification for this view of his theory by attributing the periodic recurrence of the trade cycle to the general tendency of central banks to depress the money rate of interest below the natural rate. Both the protagonists and the opponents of the monetary theory of the trade cycle thus agree in regarding these explanations as falling ultimately within the exogenous and not the endogenous group… It seems to me that this classification of monetary trade cycle theory depends exclusively on the fact that a single especially striking case is treated as the normal, while in fact it is quite unnecessary to adduce interference on the part of the banks in order to bring about a situation of alternating boom and crisis. By disregarding those divergences between the natural and money rate of interest that arise automatically in the course of economic development, and by emphasizing those caused by an artificial lowering of the money rate, the monetary theory of the trade cycle deprives itself of one of its strongest arguments; namely, the fact that the process it describes must always recur under the existing credit organization, and that it thus represents a tendency inherent in the economic system, and is in the fullest sense of the word an endogenous theory.

It is an apparently unimportant difference in exposition that leads one to this view that the monetary theory can lay claim to an endogenous position. The situation in which the money rate of interest is below the natural rate need not, by any means, originate in a deliberate lowering of the rate of interest by the banks. The same effect can be obviously produced by an improvement in the expectations of profit or by a diminution in the rate of saving, which may drive the “natural rate” (at which the demand for and the supply of savings are equal) above its previous level; while the banks refrain from raising their rate of interest to a proportionate extent, but continue to lend at the previous rate, and thus enable a greater demand for loans to be satisfied than would be possible by the exclusive use of the available supply of savings. The decisive significance of the case quoted is not, in my view, due to the fact that it is probably the commonest in practice, but to the fact that it must inevitably recur under the existing credit organization.

It is best to begin our investigation by considering once again the situation of a single bank, and asking how the manager will react when the credit requirements of the customer’s increase in consequence of an all-around improvement in the business situation… Among the factors that determine the volume of loans granted by the bank, only one has changed; whereas previously, at the same rate of interest and with the same security, no new borrowers came forward, now, under the same conditions of borrowing, more loans can be placed. On the other hand, the cash holdings of the bank remain unchanged

While expansion by a single bank will soon confront it with a clearinghouse deficit of practically the same magnitude as the original new credit, a general expansion carried on at about the same rate by all banks will give rise to clearing-house claims which, although larger, mainly compensate one another and so induce only a relatively unimportant cash drain. If a bank does not at first keep pace with the expansion it will, sooner or later, be induced to do so, since it will continue to receive cash at the clearing house as long as it does not adjust itself to the new standard of liquidity…

By creating additional credit in response to an increased demand, and thus opening up new possibilities of improving and extending production, the banks ensure that impulses towards expansion of the productive apparatus shall not be so immediately and insuperably balked by a rise of interest rates as they would be if progress were limited by the slow increase in the flow of savings. But this same policy stultifies the automatic mechanism of adjustment that keeps the various parts of the system in equilibrium and makes possible disproportionate developments that must, sooner or later, bring about a reaction.

Hayek criticizes Mises (and other exogenous theorists) for putting most of the blame on central banking. He further explains that market competition between bankers can lead to inflationary booms. When demand for loans increases because views of economic prospects brighten, banks make more loans — out of thin air. Despite the increased demand, bankers won’t raise their interest rates due to competition with other banks and because of the fact that the supply of loans to borrowers is almost limitless.

Furthermore, Hayek says that a money rate of interest below the natural rate does not have to be due to a deliberate lowering of the interest rate by the banks. The same result can be achieved by an improvement in the expectations of profit or by a diminution in the rate of saving, which may drive the natural rate (at which the demand for and the supply of savings are equal) above its previous level. If the banks refrain from raising their rate of interest to a proportionate extent, this will enable a greater demand for loans, a demand not backed by an available supply of savings. Unlike most Austrian economists (especially Misesian-Rothbardians), Hayek put more emphasis on profits than on interest rates.

And as the blogger, Lord Keynes shared an excerpt from Prices and Production showing that Hayek has been arguing an endogenous theory in his earliest formulation of the ABCT (emphasis his): 

“There can be no doubt that besides the regular types of the circulating medium, such as coin, bank notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, ceteris paribus, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.

In particular, it is necessary to take account of certain forms of credit not connected with banks which help, as is commonly said, to economise money, or to do the work for which, if they did not exist, money in the narrower sense of the word would be required. The criterion by which we may distinguish these circulating credits from other forms of credit which do not act as substitutes for money is that they give to somebody the means of purchasing goods without at the same time diminishing the money spending power of somebody else. This is most obviously the case when the creditor receives a bill of exchange which he may pass on in payment for other goods. It applies also to a number of other forms of commercial credit, as, for example, when book credit is simultaneously introduced in a number of successive stages of production in the place of cash payments, and so on. The characteristic peculiarity of these forms of credit is that they spring up without being subject to any central control, but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided.” (Hayek 2008: 289–290).

And from Hayek’s conceptions of capitalist banking, we reach Minsky’s (1986 pg. 280) conclusion:

In a world with capitalist finance it is simply not true that the pursuit by each unit of its own self-interest will lead an economy to equilibrium. The self-interest of banks, levered investors, and investment producers can lead the economy to inflationary expansion and unemployment creating contractions.

Other Compatibilities

We’ve already noted how some of the theories are similar and complementary with each other but there are two remaining things I would to point out

Starting with MDT, you can already expect that there are still some important differences due to the frequent debates between Kling and Sumner. However in the context of Austrian theory, these squabbles become irrelevant. But first the similarity as explained by Don Boudreaux:

The Austrian theory of the business cycle and the monetary-disequilibrium theory favored by my former teacher Leland Yeager, as well as what EconLog blogger Arnold Kling calls the “recalculation” theory… all look beyond conventional aggregates (such as aggregate demand) and focus instead on the incentives and constraints that confront individuals, households, and firms

The principle issue between PSST (and ABCT) with MDT is, as Garrison stated, the former sees downturns as being real shocks while the latter sees it as being nominal (N/R and N/N respectively). The simple solution here is to view upturns caused by nominal disturbances i.e., an excessive increase in the money supply distorts expenditures on consumption and investment, thus causing an unsustainable pattern of production. Once this unsustainable boom comes to a bust, the recalculation of the economy causes a decrease in money demand. In other words, the increase in money demand is a consequence of real problems and Kling agrees.

However the cause of a secondary downturn, or what Hayek called “a secondary depression,” is the result of the failure of the money supply to re-adjust in order to meet demand in equilibrium. In this way the ABCT can be described as N/R/N in instances of secondary depressions. Zahringrer says that:

Disequilibrium theory can augment Austrian business cycle theory in understanding and explaining secondary depressions, as happened during the Great Depression, brought on by a decrease in the money supply. Second, Horwitz claims that in cases of a change in money demand Austrians should be willing to consider the benefits of a change in the money supply, even without a change in the quantity of the money commodity, as a quicker, less painful adjustment than a change in prices and wages.

A second compatibility I see is with Minsky’s Hypothesis and MDT. Both stress the excess demand for cash in downturns. While Yeager points out that this causes a deficiency in consumption and investment, Minsky puts more emphasis on the fact that people are trying to liquidate financial assets more than what financial institutions can provide. Both these descriptions are in completely consistent with each other.



This was a lot so I’m going to summarize everything we need for a new ABCT into short bullet points:

  • Inflationary booms are caused by an excess supply of money.
  • These inflationary booms cause production to be distorted towards unsustainable patterns of production
  • Money is endogenous. Inflationary booms are caused endogenously by an excessive monetary expansion in which the market rate stands below the natural rate.
  • It is not that the banks raise money supply, and so the rate of interest falls; it is divergence between the market and natural rates that drives changes in bank lending and therefore the money supply
  • Expectations are subjective. People can behave irrationally. As such, causing investors to speculate on unsustainable booms.
  • Eventually the boom leads to a bust causing a painful recalculation of production towards new sustainable patterns
  • This real shock causes an excess demand for money. At the aggregate level, we see a deficiency in demand.

I spent a week trying to figure out how to translate this into a model and I couldn’t. In fact I’m not sure that anyone can but if you think you got an idea, go for it.

Anyways here’s a reading list of relevant articles (Some that have already been linked throughout this post) and videos for you guys to research more.

Competing explanations of the Minsky moment: The financial instability hypothesis in light of Austrian theory by David L. Prychitko. The Review of Austrian Economics.

Monetary disequilibrium theory and Austrian Macroeconomics:  Further thoughts on a synthesis by Steve Horwitz

Hayek and Monetary Stabilization by Tom Cloughtery

Minsky as the Glue of an Austrian-Keynesian Synthesis? by Daniel Khuen

Everything’s endogenous by Scott Sumner

Endogenous Money IS-LM Model Calls for Paradigm Shift  by H. Publius

Monetary Disequilibrium Theory and Business Cycles: An Austrian Critique

Specialization and Trade by Arnold Kling

Boombustology: Spotting Financial Bubbles Before They Burst by Vikram Mansharaman

Money, Banking and Dynamics: Hayek vs Schumpeter by Agnes Festre

Libertarians: Give Up On Politics 

The libertarian movement isn’t going to succeed by having a Ron Paul politician run for president. The problem with this is threefold: 

  1. They are hard to come by
  2. We still need a libertarian congress
  3. He’ll never win anyway

Rand Paul and Gary Johnson have been big dissapointments by purist libertarians (although I’ll explain why this doesnt matrer shortly). Neither of them called for legalizing every illicit drug or privatizing 90% of government functions. Dissapointing, right? 

The pool for libertarians is extremely small. We have about only 3 with any name recognition. Rand, Justin Amash, and Thomas Massie. But the latter two are still practically nobodies outside libertarian circles. 

But hypothetically speaking, even if one of these three somehow won the presidency, there’s not much they can do without congressional support. And that’s almost impossible to get due to, not just to the Democrat vs Republican divide, but also different factions within them as well. 

But this Ron Paul person will never win anyway. It’s all because of this little thing known as the Overton Window. Heres Wikipedia to explain it to you: 

The Overton window, also known as the window of discourse, is the range of ideas the public will accept…

According to Overton’s description, his window includes a range of policies considered politically acceptable in the current climate of public opinion, which a politician can recommend without being considered too extreme to gain or keep public office.

In the words of Milton Friedman:

It’s nice to elect the right people, but that isn’t the way you solve things. The way you solve things is by making it politically profitable for the wrong people to do the right things.

Watch full interview here. 

It doesn’t matter how purist of a libertarian a politician is. What does, is how we can get them to enact libertarian policies or at least, not pass any authoritarian ones. 

Sadly, legalizing cocaine is on the unthinkable side of the window. So the real issue for libertarians is “how can we move the window?”

The short answer is: live like a libertarian. If you really want to make the world a freer place, make it yourself.

Protest the Federal Reserve by using Bitcoin. Shove it to the taxi unions and use Uber. Get others to do the same. Better yet, be that entrepreneur who creates the next libertarian product. Our philosophy is about what we as individuals can do to improve society and enrich the world. What really need then is more Elon Musk’s, not Ron Paul’s. 

But what if you’re not into all that ‘techy’ stuff? The humanities and arts is another equally important (and even more disregarded by libertarians) way to advance liberty. 

Ayn Rand and George Orwell (albeit the latter being a ‘libertarian socialist’) were able to influence countless people with rich liberty literature such as Anthem and 1984 respectively. 

I compiled a list of essays and videos to give some direction. Enjoy! 

People Over Politics – Isaac Morehouse

Why Decentralism? An Exit and a Promising Alternative – David S. D’Amato

Politics Is Poison to the Human Spirit – Jeffrey A. Tucker

Politics of Decentralization – Jordan Greenhall

Don’t Waste Your Talents in Government – John Tammy

Practical Radicalism – Max Marty 

Individual Liberty and the Humanities

Liberty and Art: How and Why Libertarians Failed – Paul Rosenberg

Defeating Poverty With Entrepreneurship – Julie Colombino

PS. I know what I said but again, as Uncle Milty said, it would still be nice to have libertarian lawmakers and politicians. We should still be somewhat involved in the political and academia realm. What I’m trying to get at is, if we want to see libertarians government; you need a libertarian electorate. Right now, that’s our biggest obstacle. 

On Tolerance

The mantra of libertarians and supposedly that of the alt-right is freedom of expression; whether verbally, scripturally, or artistically, you have an unfettered right to express your thoughts. 

Many leftists have done a lot to supress speakers on the Right. The Berkley riots show the nasty extremes they’ll go to. But one has to ask, “if they won’t tolerate us why should tolerate them?” 

This is the paradox of tolerance. In order to have a free society, we must have a pluralist system of ideas. But such a system also allows ideas that seek to undermine it to float freely as well. How can the two co-exist? 

They can not. The famous philosopher of science and friend of the Austrian economist Friedriech Hayek; Karl Popper wrote in The Open Society and It’s Enemies that:

Unlimited tolerance must lead to the disappearance of tolerance. If we extend unlimited tolerance even to those who are intolerant, if we are not prepared to defend a tolerant society against the onslaught of the intolerant, then the tolerant will be destroyed, and tolerance with them. — In this formulation, I do not imply, for instance, that we should always suppress the utterance of intolerant philosophies; as long as we can counter them by rational argument and keep them in check by public opinion, suppression would certainly be unwise. But we should claim the right to suppress them if necessary even by force; for it may easily turn out that they are not prepared to meet us on the level of rational argument, but begin by denouncing all argument; they may forbid their followers to listen to rational argument, because it is deceptive, and teach them to answer arguments by the use of their fists or pistols. We should therefore claim, in the name of tolerance, the right not to tolerate the intolerant. We should claim that any movement preaching intolerance places itself outside the law, and we should consider incitement to intolerance and persecution as criminal, in the same way as we should consider incitement to murder, or to kidnapping, or to the revival of the slave trade, as criminal.

Popper correctly anticipated the danger of tolerance gives to the enemies of freedom. Today, the Left acts close-mindedly; insulated to all criticism or opposing ideas. They easily denounce anyone who doesnt think like them as Nazi’s, sexists, racists, etc. 

And it has come to a point where they will resort to violence to subdue us. They may be right when saying that it’s okay to “punch a nazi” (if they become a serious threat to our liberal order) but in the current state of things, it’s certainly acceptable to punch them as well. Violence is warranted against ethese aggresive college leftist.

Tolerance can only exist in a liberal society. A society that protects freedom of exchange, private property, and upholds individualism and merit. The enemies are the economic planners and collectivists. 

Those that deny our individual value and seek to herd us in masses cannot be tolerated. They are our biggest threat.

This includes the Alt-Right. They are no friends of liberty, they are as authoritarian if not more. While they have been somewhat pacifistic in their actions so far, libertarians must continue to defend the liberal tenents of free trade and free markets in rational discourse against these corporatist protectionists. As the talented Yeezus tweeted:

There is no true freedom with economic freedom 

Why We Should Have a Parliamentary Democracy

The hallmark of our liberal republic is the federal congressional presidency established by the Constitution as a replacement to the Articles of Confederation. The Founders did not completely agree over how the new government should have looked like. Although the consensus at the Constitutional Convention was that there ought to be a distinct legislative and executive branch in order to maintain a separation of powers and divided government to prevent “factions” or dominant interest groups and political parties from emerging; they were dead wrong.

Failure at Its Inception

The founders intentions began to fail immediately after the new government was formed. Two main parties emerged, the Federalists and Democrat Republicans; marking the beginning of Americas two party system (aside from the brief one part system in the 1820s).

And it shouldn’t have been unexpected either. The single member district voting method the founders adopted naturally encourages strategic voting leading to a two party system.

The American people are loud and clear when it comes to their view of our two major parties; 57 percent, of those surveyed in Gallup’s annual governance poll say a third major political party should exist. Only 37 percent believe two parties are doing just fine representing Americans.

Party affiliation is also at historic lows with a huge and increasing majority of Americans identifying as independents

Image result for party affiliation poll independents

This duopoly forces voters to choose between lesser of two evils. Their views are many times not accurately represented in congress and the parties have little to no incentive to implement reforms many Americans would like to see but would leave the parties with less power.

Creation of the Patron State

Under the presidency of Andrew Jackson, the founders system took another toll as party elites and servants close to them created a system of a patronage known as the spoils system. Not only were factions controlling our government but they were leeching off taxpayers while doing it.

There were many notorious cases of elected officials handing out jobs in the civil service to party supporters, regardless of qualifications. It took the death of a president, James Garfield, in  1881 by a rejected office seeker in order for much need reform to be enacted.

Even then, the patron-client system has not disappeared; the spoils system was only replaced by the political machine we have now.

The Case Against a Presidency

Many like to argue that the president is necessary to maintain balance and separation of powers in our government. But there’s serious skepticism that that’s the case.

First of all, the president has no choice to bend to the will of congress if he wants to fulfill his mandate. Sitting congressmen enjoy a strong incumbent advantage; 97 percent of Representatives and 87 percent of Senators won their reelection in 2016. Presidents don’t enjoy the same amount of job security, as such they have a lot more to lose.

And to make matters worse; a super-majority of Americans are dissatisfied with congress as only 19% of voters approve of congress. And these low numbers are not surprising (except during times of national crisis), 2014 saw a record low of a 9 percent approval rating.


Instead of taking out their disenchantment against their congressmen, they will 9 out of 10 times re-elect the problem, and instead put most of the blame on the president for not fulfilling their promises even though they have no legislative power whatsoever to whip congress or introduce legislation. The presidency has been nothing but a scapegoat for congress.

Steps for Reform

We’ve identified what the problems are but we should remind ourselves of what the founders got right: A federal bicameral legislature and an independent judiciary. I’m not contending that we should adopt the unitary sovereign parliament of the UK (Technically it is bicameral but the upper house is nothing more than a rubber stamp and has been overridden by the house of commons with a simple majority whenever they have tried to reject legislation). The core principles of American democracy has always been federalism and constitutionalism, and this should not change.

What I propose instead (and get ready because this is a mouthful) a mixed member federal dual executive bicameral parliament. Let’s break it down:

Mixed Member

Instead of our current single member, winner takes all system; the apportionment of legislators to the lower house of parliament would be selected by a Mixed Member Proportional system.

They way it works is that voters elect one candidate to represent their district but also vote on a separate for a party. District winners are given their seats first and thereafter, the party votes are added up and the parties are allocated seats proportional to their share of the vote. This gets rid of strategic voting as the people can now vote for people and parties they feel best represent them.

Here’s a video from New Zealand that helps visually describe the procedure:

Dual Executive

In every government there is a head of state and head of government.  The former is in charge of foreign affairs, head of the armed forces, and appoints major office holders. The head of state is supposed to be the person that is above politics, a statesmen; and is generally unelected or at least indirectly elected by the people. The head of government meanwhile is supposed to represent the commons. They are in charge of enforcing laws, managing the bureaucracy, setting the budget, and working with cabinet officials. Often times, such as in our case, the head of state is also the head of government.

Under an American Dual executive, the President of the Senate (a seat held by the Vice President of the United States) would be the head of state and the leader of the majority or coalition party of the Senate. Likewise the Speaker of the House (maybe rename it to “Chancellor”) would be the head of government.

By having a dual executive, the focus no longer revolves around a single person but everyone who compromises the legislature. And it is also makes voters more attentive to who they elect to congress or parliament as they are the ones who are responsible for selecting their nations leaders and setting the national agenda which leads us to…

Bicameral Parliament

The parliamentary part of the dual executive would make it so that the Chancellor and President are selected by the majority party or coalition of the House and Senate respectively.

Our current legislature somewhat reflects the jobs that heads of government and heads of states are in charge of carrying out. Senators were originally chosen by state legislatures so that there was a balance against the popular will of the people represented by the house of representatives who were elected directly (As an added bonus, we should repeal the 16th amendment as well to restore vertical federalism). The Senate also handles diplomacy and foreign affairs as they are the only ones who can declare war and approve treaties. The House on the other hand gets to privilege of having all bills of revenue originate with them and they take the lead in setting the budget.

In the end of course, both chambers of parliament will need to approve of a bill in order for it to become law but there would be no override vote by either.

I contend that this whole system would be a lot more appealing to small government conservatives and libertarians as well. As proponents of government that does less, this would not only enhance the power struggle between the Senate and the House but also causes friction within the various competing parties within the respective chambers of parliament causing a more divided government unable to pass much legislation. This plurality of interests would thus fulfill Madison’s’ goal of preventing elite factions from exploiting the government.

A Reply to Catholic Criticism

A Reply to Sara’s criticism of Orthodoxy.

It is interesting to note that our Orthodox correspondent is apparently ignorant of the nature of Great Schism, which contrary to popular belief, did not originate at a single point (such as the oft-repeated date of 1054), but rather was a gradual process wherein large numbers of Christians in the East slipped away from Union with Rome.

I was not ignorant of that, I just said that was the date the Eastern Churches was officially no longer in communion with Rome. Obviously the seeds of discontent were sowed much earlier.

Moving past the rather irksome grammatical errors, his claims regarding papal infallibility and council infallibility are contradicted by Eastern Patriarchs, as well as by the Byzantine Emperor.

Sorry was typing fast on my phone. Meant to say, the famous second* ecumenical council.

“she [Rome] has the keys of the orthodox confession and right faith in Him, that she opens the true and exclusive religion to such men as approach with piety, and she shuts up and locks every heretical mouth which speaks against the Most High.” (Saint Maximus, Opuscula theologica et polemica, Migne, Patr. Graec. vol. 90, emphasis [hers].)

This quote is taken extremely out of context! St. Maximus was talking about the monothelitist heresy that was plaguing many of the eastern churches. He was praising the Roman church for not falling it to heresy, thus preserving the orthodoxy (as in its literal definition) of the Church.

Then you quote Letter to Peter. I’m not even going to acknowledge this as an argument since it was very likely a forgery, and if not it’s still incomplete as it only exists extracts. The whole thing was written only in Latin even though Maximus spoke Greek and all his writings were in Greek as well. Now we’re going scroll down a bit through her response and then come back:

It follows logically from the papacy’s supreme authority on matters of faith and morals that it has the authority to correctly (or, dare I say it, “objectively”) interpret Scripture.

I would dare you not because a bishop of Rome was anathematized for preaching heresy about the faith. Roughly four decades before the sixth ecumenical council, Pope Honorius I endorsed the monothelite heresy which resulted in his anathematization at the council.

And this again plays a pivotal part in understanding the context St. Maximus was speaking in

“To which church do you belong? To that of Byzantium, of Rome, Antioch, Alexandria, or Jerusalem? For all these churches, together with the provinces in subjection to them, are in unity. Therefore, if you also belong to the Catholic Church, enter into communion with us at once, lest fashioning for yourself some new and strange pathway, you fall      into that which you do not even expect!”

To this the righteous man [Maximus] wisely replied, “Christ the Lord called that Church the Catholic Church which maintains the true and saving confession of the Faith. It was for this confession that He called Peter blessed, and He declared that He would found His Church upon this confession.

However, I wish to know the contents of your confession, on the basis of which all churches, as you say, have entered into communion. If it is not opposed to the truth, then neither will I be separated from it.”

“But what will you do,” inquired the envoys, “when the Romans are united to the Byzantines? Yesterday, indeed, two delegates arrived from Rome and tomorrow, the Lord’s day, they will communicate the Holy Mysteries with the Patriarch. ”

[After hearing their confession of Faith, and after further discussion, he was asked]

The Saint replied, “Even if the whole universe holds communion with the Patriarch, I will not communicate with him. For I know from the writings of the holy Apostle Paul: the Holy Spirit declares that even the angels would be anathema if they should begin to preach another Gospel, introducing some new teaching.”

The Life of Our Holy Father St. Maximus the Confessor pg. 60-62 (emphasis added)

If St. Maximus believed Rome was infallible, why did he not change his mind when he was told that Rome had accepted the monothelitism?

Yielding honor to the Apostolic See and to Your Holiness, and honoring your Holiness, as one ought to honor a father, we have hastened to subject all the priests of the whole Eastern district, and to unite them to the See of your Holiness, for we do not allow of any point, however manifest and indisputable it be, which relates to the state of the Churches, not being brought to the cognizance of your Holiness, since you are the Head of all the holy Churches. (Emperor Justinian, Epist. ad. Pap. Joan. ii. Cod. Justin. lib. I. tit. 1, emphasis mine.).

Justinian convened the Fifth Ecumenical Council over Pope Vigilius’ express objections, and when Vigilius refused to attend. Although he was dragged to Constantinople anyway, the Council still convened without him. When he refused to ratify its definition, Justinian and the Council struck him from the diptychs.

The whole letter is kinda ironic really since Justinian practiced Caesorpapism making him probably the most powerful person in the Catholic Church. Regardless Justinian expressly gives Rome’s primacy out of honor. That’s not contradictory to any Orthodox teaching since it is the position we have always held.

Without whom (the Romans presiding in the seventh Council) a doctrine brought forward in the Church could not, even though confirmed by canonical decrees and by ecclesiastical usuage, ever obtain full approval or currency. For it is they (the Popes of Rome) who have had assigned to them the rule in sacred things, and who have received into their hands the dignity of headship among the Apostles. (Saint Nicephorus, Patriarch of Constantinople, Niceph. Cpl. pro. s. imag. c 25 [Mai N. Bibl. pp. ii. 30], emphasis [hers].)

That’s describing the order and regiment in a council. Not a capacity of infallible judgement that Romans claim to have.

Thus we see that the doctrines could not be approved as true without the approval of the pope, and that ecumenical councils require the stamp of approval from the pope in order to be validated.

Again not true: Fifth Ecumenical Council and Pope Vigilius.


[After quoting Matthew 16:18f; John 21:15ff]On him [Peter] He builds the Church, and to him He gives the command to feed the sheep; and although He assigned a like power to all the Apostles, yet he founded a single Chair, and He established by His own authority a source and an intrinsic reason for that unity. Indeed, the others were that also which Peter was; but a primacy is given to Peter, whereby it is made clear that there is but one Church and one Chair. So too, all are shepherds, and the flock is shown to be one, fed by all the Apostles in single-minded accord. If someone does not hold fast to this unity of Peter, can he imagine that he still holds the faith? If he desert the chair of Peter upon whom the Church was built, can he still be confident that he is in the Church?(Cyprian, The Unity of the Catholic Church [first edition] 4, c. AD 251, emphasis added.)

So, contra the interpretation of an Orthodox priest and a former Protestant laymen, we have the words of the saint himself, which in fact completely obliterates their misunderstanding of his teaching.

How is this supposed to refute anything, he is literally repeating what he already said in the last excerpt:

And again to the same He says, after His resurrection, Feed my sheep. And although to all the apostles, after His resurrection, He gives an equal power, and says, As the Father has sent me, even so send I you: Receive the Holy Ghost: Whose soever sins you remit, they shall be remitted unto him; and whose soever sins you retain, they shall be retained; John 20:21 yet, that He might set forth unity, He arranged by His authority the origin of that unity, as beginning from one. Assuredly the rest of the apostles were also the same as was Peter, endowed with a like partnership both of honour and power; but the beginning proceeds from unity.

St. Cyprian just reaffirms the primacy Peter holds but this does not mean he’s above his fellow apostles or else that would completely contradict not what he just said but in other quotation as well:

“No one among us sets himself up as a bishop of bishops, or by tyranny and terror forces his colleagues to compulsory obedience, seeing that every bishop in the freedom of his liberty and power possesses the right to his own mind and can no more be judged by another than he himself can judge another. We must all await the judgment of our Lord Jesus Chirst, who singly and alone has power both to appoint us to the government of his Church and to judge our acts therein’

CSEL 3, 1, 436

‘Even Peter, whom the Lord first chose and upon whom He built His Church, when Paul later disputed with him over circumcision, did not claim insolently any prerogative for himself, nor make any arrogant assumptions nor say that he had the primacy and ought to be obeyed”

Epist. 71, 3

Oh, and as for Pope Saint Gregory the Great, he was condemning the Patriarch of Constantinople’s claim to the title of “Ecumenical Patriarch”, and in other writings completely affirms papal supremacy, referring to the See of Peter as the see “to whom was committed the care and primacy of the whole Church”.

That was the issue of the time but Pope St. Gregory did not just stop there, he protested the idea of any single bishop holding jurisdiction over his fellow patriarchs. Again you falsely equate primacy to power or that we have ever denied Romes primacy (which even in schism, still holds as true).

Cash Balance Theory of the Business Cycle

Conventional macroeconomics teaches us that recessions are caused by deficiencies in aggregate demand for goods and services. Austro-monetarist economist Leland Yeager believes that the real focus of the causes of recessions lie in the supply and demand for money. His thesis is simple: recessions are caused when the market of money is at a disequilibrium due to an excess demand for money. Or in simpler terms, “people want to hold more money than exists” (The Fluttering Veil pg.3)

Many misinterpret the supply and demand graph as a static figure where the supply curve meets the demand curve at some fixed point. But the fact of the matter is the real quantity of money that people would like to hold in equilibrium is constantly shifting. As Dwight Lee explains:

The equilibrium price … is typically presented as the most important feature of demand and supply analysis. But seldom do real-world markets ever get to equilibrium. The world is constantly changing, and demand and supply curves constantly shift. Equilibrium is a moving target.

Now add into the fact the nominal rigidity of prices, or more commonly known as the “stickiness” of prices. This means that it takes time for prices to fix themselves.

Take for instance an economy currently at equilibrium with a fixed quantity of money and “sticky” prices. Subsequently, a significant amount of people now want to increase their cash balances i.e., hold onto more money:

When people don’t have enough money that they would like to have then they will attempt to increase it by the two most common ways possible. Either they decrease their expenditures by spending less or they’ll try get higher wages to increase their income. Since there’s only a fixed quantity of money, if one person decides to hold higher more money than previously, everyone must therefore have to have less money than previously as well. Hence”once man’s spending is another man’s income.” Prices are fixed, so this is also true for the real quantity of money.

When someone reduces their spending they’re also decreasing everyone else’s income. The negative consequence of this is that, unless everyone else wants to have less money than before, they now have less money than they would desire. And because of that they too will try to increase their cash balance holdings back to where it was previously. This causes a self inflicting spiral as less people begin to cut back on their spending resulting in a declining aggregate spending and subsequently incomes. The chaos finally ends when people either reach a point where they’ll no longer reduce their spending to get higher cash balances.

For any ordinary commodity, there is some price at which the amounts demanded and supplied would be equal. And so with money: there is some value of the money unit that would equate the amounts demanded and supplied. But -again as is true of any ordinary commodity- the equilibrium value at one particular time might be a disequilibrium value later. Supply and demand schedules are always shifting.

Since the prices of many goods and services are notoriously “sticky,” the value of money does not adjust readily enough to keep the amounts of money supplied and demanded always equal as schedules shift. The value of money is often “wrong.” Depression is such a disequilibrium: given the existing levels of prices, wages, and interest rates, people are on balance more eager to get money by selling goods and labor than to give up money in buying goods and labor. (ibid pg.7)

Two things determine how long this cycle will ensue. For one, the amount of money that people want to hold is positively correlated to how much they expect to spend, so if they are expecting to reducing their spending then they will have to hold onto less money. And secondly, as spending falls, those decreases become more and more agonizing, and so people will become more reluctant to give up consumption for greater cash balances.

This process reduces the real quantity of market transactions below it’s equilibrium level to a disequilibrium. The market is corrected once people have the higher real cash balances they demand by having prices readjusted to the new equilibrium.