Chris: Further to your useful post, it goes without saying that Austrian methodology is wholly different from the empirical analysis employed in the Lester/Wolff study.
Three points on this:
- Firstly, it is interesting that despite all the data shortcomings, the authors found some empirical validity to ABCT in the industrial production data and in the impact on prices using the fed funds rate. It’s interesting but ultimately not that interesting, since, as you noted, their methodology is oversimplifying and could be misleading, particularly in respect of the monetary aggregates (base money, M1 and M2). So from a theoretical Austrian perspective we must be as sceptical about findings in favour of ABCT as we are about mixed or contradictory findings.
- Secondly, on your technical point about where new money is injected, this is crucial. In a modern money and banking system new money can and is injected in many different stages of the economy. In South Africa of late much of the new bank credit has been injected into consumer and government sectors, which you’d expect would support prices closer to the retail level. Having said that, there has been corporate borrowing as well, and I suspect across a range of corporate sectors. I think the crucial distinction to be made here is between where credit is FIRST injected in a modern money and banking system and what the increase in overall liquidity does to nominal market interest rates which then begins to make long term investment projects relatively more attractive to undertake. In Mises’ formulation of ABCT, banks offer a lower rate of interest on funds by using their ability to produce out of thin air more fiduciary media. Longer term project planners would find this decline in the interest rate relatively more attractive (at the margin) than short term project planners. However, what if the mechanism by which the new fiduciary media reached the long term projects was via consumer loans first, which increased bank deposits and lowered the market rate of interest, enticing industrial borrowers. Empirically we would see complex gyrations in relative prices that could easily give very mixed results without negating the underlying fact that funds were making their way to long term projects.
- Thirdly, there’s another technical/methodological point to be made about “roundabout” and “long term” processes which is an extension of point 1. The point is that a roundabout process input might not be a long term process by itself. ABCT postulates that long term project planners will find a reduction in the interest rate relatively more attractive than short term project planners. But when these long term projects are embarked upon they may draw in inputs from producers a) whose investment horizon might be very short and b) whose products straddle multiple stages of production. For example, a developer expanding his business to build more large housing developments that each take 5 years to complete, would in turn draw in the services of a short term contractor for say 3 months to do initial landscape design. For the landscape designer, the projects are not terribly long term at all and his service might be categorised economically in a fairly middle to lower order sector. He may be raising his prices due to the long term project it is plugging into. The landscape designer is dragged into the ‘net’ so to speak of the property developer. He may then expand his business operations using loans from the banks. From an empirical perspective it is easy to see how the macroeconomic data would struggle to isolate this complexity. Why is a lower order service provider raising his prices and expanding his operations? The answer would be explained by ABCT, yet the data would seem to contradict ABCT. The point I’m making here is that the long term project juggernaut is ’dragging in’ business activity from multiple sectors with multiple investment/payoff horizons, who in turn are dragging in other businesses into the activity net. The long term project is developing a kind of ‘flying V’ of activity behind it which is reallocating scarce capital in the economy across many sectors. This reallocation may occur quite quickly across sectors as buying and ordering activity quickly ripples through the system. Again, it is easy to see how the empirical record of such a process would be inconclusive if all one was looking at was a very rudimentary categorisation of the stages of production.