I read an interesting blog post a while back called the Austrian delusion. I think the criticism are, for the most part either without merit altogether, or haphazardly miscast as applicable to any “Austrian”, when the plain fact of the matter is that there are people of many different political creeds that are associated with Austrian economics.

So, in other words, “Austrian” economics is right — no matter what evidence can be presented — because it is based logical deductions from axioms which are, by definition, true. Capitalism is great because 2+2=4

It’s not that vulgar, is it? No, it’s not. If you read things like Jim Davies’ most recent post on STR (Misallocation), you’ll see that what many “Austrians” or near-Austrians mean by “capitalism” or “free markets” is markedly at odds with either the Marxist conception thereof, or the current state of affairs. Without getting into a semantic debate, I think it’s more than fair to ask that people stop relying on intentionally misrepresentative assumptions and/or loaded, emotionally charged definitions.

any problems we face now are due to the state and most definitely not due to the profit seeking activities of business men — unless they are bankers, of course, but even then it is all the fault of the central bank… So, variations on that theme. Also, of course, they will be stressing that the state should do nothing, that wages should be cut (although the impact of that may not be what they hope), that people should be thrown out of their homes if they cannot pay the rent or mortgage, and so on. Once the collapse if finished, then the economy will bounce back better than ever but the pain is good for the economy — and serves you right for not worshipping at the idol of von Mises!

This is not a flaw specific to “Austrians”, it’s a deductive error committed by a great deal of right-libertarians no matter what school of economic thought with which they self-identify. It’s an inadvertent, but obvious error, to paraphrase: the state is the cause of all the problems, but they take for granted (and often apologize for) a great deal of the institutional inequalities that are likely byproducts of the State, assuming that these same institutional arrangements would persist in the absence of a State or neglecting to account for any other possibilities.

As an example, suggesting that people should be “thrown out of their homes if they cannot pay the rent or mortgage” presupposes that the creditor has a superior and morally justifiable claim to the property in question. In many, if not most, if not all circumstances, it is not at all the case, that the creditor has a superior claim based on the no-interest nature of the fiat money loan “contract.”

The key problem with the “Austrian” theory is that it bases the crisis in banks artificially lowering the rate of interest from its equilibrium (“natural”) price. This has three major problems: 1. It is in contradiction with their normal claim that equilibrium is a meaningless concept and unlikely to exist in reality. Except, apparently, in the banking industry (where it can be used to demonise the state for the failings of capitalism) and in the labour market (where it can be used to bash unions and such like).

A “natural” price is not the same as an “equilibrium” price. A “natural” price occurs in the absence of state intervention. An “equilibrium” price does not exist because circumstances are in constant flux.

2. It is in contradiction with their defence of entrepreneurial activity within capitalism. After all, why do banks artificially lower interest rates? To make money by meeting customer demand! It seems hard to blame the government when (as Minsky argues) such activity is a natural part of the entrepreneurial activities of the banks seeking profits.

I respectfully disagree. Banks loan money into existence in order to earn a profit without putting any of their own skin in the game. As long as they continue to loan money, they make a nominal profit which is realized before prices have fully risen as a result of the increased MS. If for some reason they can’t print/loan any more money, they have to call in their loans—a painful process which allows the banks to take title to real assets for which they risked nothing, in the first place. The entrepreneur always has his own skin in the game.

Anything else is rent-seeking. Stop calling it “entrepreneurship”.

Such activity which would be otherwise intolerable, is encouraged by the government. The artificial lowering of interest rates is predicated upon a foundation of fractional reserve banking, which permits(among other things) certain individuals/institutions to create pure debt obligations out of thin air, which the market is forced to accept at par value with legitimate money. Morally flawed, corrupt or corruptible individuals are far more likely to prosper in any system that tolerates or encourages the extraction of unearned rents. The State is such a system.

3. It is also ignores that an interest rate, firstly, does not reflect the time preference of individuals and, secondly, even if it did, it is also the source of income for banks! Hence they have a market interest to act as they do, regardless of whether there is central banking or not.

I do not think you know what “interest” is (especially in regards to originary/natural interest derived as a function of time preference). The interest rate is not the source of profits for banks, rather it is the yield spread between what they pay to borrow money, and what they charge to loan money. This would conceivably be true for an individual capitalist, except he is rarely in a position (on a free market) to borrow low and sell high, pocketing the yield spread. Instead, in order to earn interest, he has to forsake a certain amount of income or property that he has already earned, for a period of time. His “cost of borrowing” is actually a his opportunity cost — that which he might’ve otherwise earned, or that consumption he might’ve otherwise enjoyed.

For further reading, I have a particularly detailed post about the Malinvestment, as a consequence of fiat money inflation, suffice to say that “these same institutional arrangements” would not be long for this world in a truly free market. I’ve also got a lengthy post about Entrepreneurs, the Firm, and the Knowledge Problem, which in my experience is the syndicalist-left’s favorite free market whipping boy.