If Interest Sprang from Some Feature of Human Choice, Then It Sprang from a Fundamental Value Inequality

Eugen von Böhm-Bawerk’s great achievement was to formulate the problem of interest theory as a value problem. He sought to explain interest as resulting from human choice and exchange, rather than as being caused by some factor outside of human action. The crucial point was that, if interest sprang from some feature of human choice, then it sprang from a fundamental value inequality, because choice involved the preference in action of a more valuable alternative over a less valuable one. Accordingly, observable interest rates manifested an inequality between the value of products and the total value of the corresponding means of production, including “waiting” or the “use” of capital.

--Jörg Guido Hülsmann, “A Theory of Interest,” Quarterly Journal of Austrian Economics 5, no. 4 (Winter 2002): 78.

The Money Creation Process Made Possible by Fractional-Reserve Banking Is Not Financial Intermediation; It Is a Credit Creation Process

Money is a present good. As argued by Cochran and Call (1998),

Money is the medium of exchange and is thus the present good par excellence. The implied household decision tree is: a. Present goods or future goods (save)? b. If present goods, specific consumption goods or money? Saving is the sacrifice of present goods (a claim on present goods is temporarily foregone) for a claim on future goods. Since the holding of cash balances, whether in the form of deposits or currency, does not require the sacrifice of present utility, changes in cash balances financed from current income are not a part of saving, but represent part of the allocation of income to provide present utility.

Thus the proper economic interpretation of a deposit is that of a warehouse receipt. A deposit is a claim instrument, not a credit instrument. A bank deposit (redeemable at par on demand) is not a debt transaction. It is a bailment in its economic impact even if it is treated as a debt by the legal system. The money creation process made possible by fractional-reserve banking is not financial intermediation. It does not facilitate the transfer of savings to investors. Instead fractional-reserve banking and the associated money-creation process is a credit-creation process. 

--John P. Cochran, Steven T. Call, and Fred R. Glahe, "Credit Creation or Financial Intermediation? Fractional-Reserve Banking in a Growing Economy," Quarterly Journal of Austrian Economics 2, no. 3 (Fall 1999): 54-55.

Hayek on Keynes' Fourth Fundamental Error: The Keynesian Philosophy of “In the Long Run, We Are All Dead” Is the Height of Scientific Irresponsibility

The General Theory is a model focused primarily on the short term. Hayek criticized Keynes because, in his opinion, only entrepreneurs have much to say in the short term, and economists do not have much to contribute in this field. In his view, an economist has the privilege and duty to analyze the medium term and long term effects of the economic policies undertaken. For Hayek, the Keynesian philosophy of “in the long run, we are all dead” is the height of scientific irresponsibility, and leads to policies which may give good results in the short term but can be extremely harmful in the long run.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 296.

Hayek on Keynes' Third Fundamental Error: Keynes' Macroeconomic Approach Hides from Economists the Fundamental Mechanisms of Change in the Market

Keynes’ model is clearly macroeconomic. According to Hayek, though, this approach is wrong, as it hides the fundamental mechanisms of change in the market from the economist. In his view, in order to understand the market process, economists need to study the economy from the point of view of the actors involved. Therefore, the relevant things are relative prices and the investment structure, and not concepts such as aggregate investment or the level of wages. Thus, Keynes’ theory would not be enough to explain the market process.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 296.

Hayek on Keynes' Second Fundamental Error: Keynes Considers the Market Exclusively As a Set of Monetary Flows

In Hayek’s opinion, Keynes focuses his analysis mainly on the monetary surface of the market process while he neglects analyzing the underlying real process. Hayek believes that Keynes considers the market exclusively as a set of monetary flows and, therefore, in The General Theory everything is explained through the variation of monetary expenditure. For Hayek, this approach to the economic problem makes it impossible to construct theories to understand the market process.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 295.

Hayek on Keynes' First Fundamental Error: Keynes' General Theory Lacks a Theory of Capital and It Suppresses the Production Structure in the Concept of Aggregate Investment

From Hayek’s point of view, the major deficiency in The General Theory is that it is not based on a theory of capital. According to Hayek, the market is a network of millions of companies that complement and coordinate with each other intertemporally and synchronically, forming an extremely complex production structure. In order to understand how and why this structure is coordinated or discoordinated, we need to apply a theory allowing us to study the way it works. However, Keynes does not study this production structure, but suppresses it in the concept of aggregate investment. This is why Hayek thought that Keynes was not able to understand the causes of and the solutions to economic fluctuations.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 294.

The Supply Side of the Economy Disappeared When John Hicks Introduced IS-LM into Economic Theory

The problem of this approach goes back almost to the beginning of Keynesian macro with John Hicks’ “Mr Keynes and the Classics” (1937). It was this article that introduced IS-LM to economic theory and in which Hicks used the same model of aggregate demand to explain both the classical and Keynesian approach. Yet with the model entirely demand-side, it ought to be obvious that if one were actually to understand what pre-Keynesian economists were attempting to argue, and to do so within their own terms, that it would be impossible to use a model built on variations in demand. With IS-LM the supply side of the economy disappeared.... At no point is there any representation of the supply-side of the economy where decisions to produce are considered. It is demand that will automatically elicit a supply and determines the level of activity.

--Steven Kates, "Why Keynesian Concepts Cannot Be Used to Explain Pre-Keynesian Economic Thought: A Reader's Guide to Classical Economic Theory," Quarterly Journal of Austrian Economics 17, no. 3 (Fall 2014): 320.

Morgan O. Reynolds on Court Intellectual and Fed Insider Frederic S. Mishkin

Another prominent economist is Frederic S. Mishkin, professor at the Columbia Business School and former member of the Board of Governors at the Federal Reserve System, who fiercely defends the effectiveness of monetary policy: “…financial crises of the type we have been experiencing provide a strong argument for even more aggressive monetary policy easing than normal.”  And aggressive “easing” (not “inflating” or printing) we have certainly had, in spades, thanks to court intellectuals such as Mishkin. Recent estimates put the sum of all emergency bailouts at more than $20 trillion. Professor Mishkin, author of 15 books and numerous articles on monetary policy, is a Fed insider. We can therefore expect little (radical) insight from him on financial fundamentals, and he delivers none. No, Mishkin concentrates on policy “refinements” like “inflation targeting.”

--Morgan O. Reynolds, "The Poverty of Modern Macroeconomic Theory and Power of Austrian Business Cycle Theory," Quarterly Journal of Austrian Economics 13, no. 3 (Fall 2010): 21.

The Horizontal and Vertical Expansion of the Hayekian Triangles Represent the Over-Consumption and Mal-Investment of the Credit Expansion Policy

The crucial element of the model is the third tool—the Hayekian Triangles—which simply represents the inter-temporal structure of production. In Figure 2, the horizontal and vertical expansion of the Hayekian Triangles represent the over-consumption and mal-investment which take place as a consequence of the credit expansion policy adopted by the monetary authority. Garrison observes:

In effect, the Hayekian Triangle is being pulled at both ends (by cheap credit and strong consumer demand) at the expense of the middle—a tell tale sign of the boom's unsustainability.

However, these are only the short-run effects. In the long run, the effects are reversed, which is why Garrison calls it “the theory of the unsustainable boom.”

--Adrián O. Ravier, "Rethinking Capital-Based Macroeconomics," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 353-354.

The Essential Fallacy of John Maynard Keynes and His Early Disciples: Paper Money Was a Suitable Means to Alleviate Scarcity

The essential fallacy of John Maynard Keynes and his early disciples was to cultivate the monetary equivalent of alchemy. They believed that paper money was a suitable means to alleviate the fundamental economic problem of scarcity. The printing press was, at any rate under certain plausible conditions of duress, a substitute for hard work and savings and cutting prices.

--Jörg Guido Hülsmann, "New Keynesian Monetary Views: A Comment," Quarterly Journal of Austrian Economics 6, no. 4 (Winter 2003): 73.

Economists Have Routinely Rejected the Postulate That Economic Theory Should Be Realistic

For more than forty years, economists have routinely rejected the postulate that economic theory should be realistic. Ever since Milton Friedman (1953) sketchily outlined a positivistic methodology for economics, most students of our science have come to endorse Friedman’s view and have claimed that the only quality standard of economic reasoning was its predictive power. Good theories yield fairly correct predictions whereas bad theories yield wrong predictions.... One of the few schools of economic thought that has consistently adhered to the postulate of economic realism is the Austrian School.

--Jörg Guido Hülsmann, "Economic Science and Neoclassicism," Quarterly Journal of Austrian Economics 2, no. 4 (Winter 1999): 3.

Milton Friedman’s Plucking Model Has Been Used to Argue Against the Relevance of the Austrian Business Cycle Theory

Milton Friedman’s “Plucking Model” has been used to argue against the relevance of theories of the “boom” preceding economic downturns, such as Austrian Business Cycle Theory (ABCT). According to Friedman, output data show that economies follow a trend, with recessions being temporary setbacks prior to a return to a trend approaching the economy’s maximum feasible output. Economies do not substantially go over trend during a boom; they collapse and then return to trend. Recessions “pluck” output downwards, but booms do not have similar effects in the opposite direction, as shown in Figure 1. Therefore, busts are what is to be explained, not the boom. While defenders of ABCT have objected to this interpretation, it remains an effective rhetorical point among macroeconomists.

--Ryan H. Murphy, "The Plucking Model, the Great Recession, and Austrian Business Cycle Theory," Quarterly Journal of Austrian Economics 18, no. 1 (Spring 2015): 40-41.