This comes back to the point I made to Grant McDermott a few months ago about “testing” ABCT using the wrong data. Wrote Gene Callahan and Roger Garrison in “DOES AUSTRIAN BUSINESS CYCLE THEORY HELP EXPLAIN THE DOT-COM BOOM AND BUST?” published in the Quarterly Journal of Austrian Economics in the summer of 2003:
A chief query from critics of ABCT is, “Where’s the evidence?” Often, the critics hope to see a prediction of next year’s GDP, or a formal model “demon- strating” that a federal funds rate cut of 0.5 percent will result in, say, a 0.4 percent rise in the CPI. But the evidence by which we judge that a theory is sound can only be the evidence called for by that theory: “Scientific evidence, too, is theory-dependent . . . evidence depends on observations, observations on measurements, and measurements not only on standards of measurement but on theory-determined concepts to be measured” (Nardin 2001, pp. 114–15). In other words, quantum physics should not be judged deficient because it does not predict the outcome of presidential elections.
ABCT is a not a theory of mathematical relationships between economic aggregates. To the best of our knowledge, no advocate of ABCT has ever claimed it could predict GDP or CPI levels. Certainly, it would be a nice bonus if ABCT could predict GDP, CPI, and pick winning stocks for us as well. But as the theory itself does not speak in terms of such macroeconomic aggregates, it is inappropriate to use them as the chief evidence by which to evaluate it. (That is not to say that ABCT has nothing to say about macroeconomic aggregates.)
In employing ABCT as a framework for historical explanation, “our focus is on the point of entry of the new money and the consequent changes in rel- ative prices that govern the allocation of resources over time” (Garrison 2001, p. 67). The ideal type we explore, employing that focus, is that of the central bank credit expansion. The pieces of evidence we marshal to comprehend the subsequent economic events are the systemic effects of a lowering of the interest rate, and the changes in relative prices as new money flows through the economy.
I thought that was pretty well put, and ties right in with what I said back in August. Read the full paper here.
