BIS Working Paper is Favorable to Austrian Insights

Martin Wolf, associate editor and chief economics commentator at the Financial Times, is always worth reading. Although today’s article is behind subscription, the good news is that Wolf writes about a recent working paper from the Bank for International Settlements that is freely available at their website.

Those sympathetic to Austrian capital theory and business cycle theory will find much of interest in William R. White's paper,"Is Price Stability Enough?" He discusses F. A. Hayek's contributions at some length and cites both Hayek (on the economics of full employment) and George A. Selgin (on the case for a falling price level in a growing economy). Go here for the abstract and here for the paper itself (pdf file). White's paper is non-mathematical and accessible to a reader who is familiar with key concepts in macroeconomics.

White's abstract reads thus:

"No one in the industrial countries should now question the substantial economic benefits associated with reducing inflation from earlier, high levels. At the same time, history also teaches that the stability of consumer prices might not be sufficient to ensure macroeconomic stability. Past experience is replete with examples of major economic and financial crises that were not preceded by inflationary pressures. Conversely, history shows that many periods of deflation, based on rising productivity, were simultaneously characterised by rapid growth. Recent structural changes in the global economy imply that this history might have more contemporaneous relevance than is commonly thought. If so, the implication is that policies directed to the pursuit of price stability might have to be applied more flexibly and with a longer-run focus than has recently been the case."

White's explanation of booms and subsequent busts owes much to the business cycle theory of Mises and Hayek:

"Buoyed by justified optimism about some particular development, credit is extended which drives up related asset prices. This both encourages fixed investment . . . and increases collateral values, which supports still more credit expansion. With time, and underpinned by an associated increase in output growth, this process leads to increasing willingness to take risks ('irrational exuberance'), which gives further impetus to the credit cycle . . . Subsequently, as exaggerated expectations concerning both risk and return are eventually disappointed, the whole process goes into reverse."

Do yourself a favor and read the entire paper.