I’ve been watching with sympathy as David Beckworth and Scott Sumner discover that their updated monetarism actually puts them on my side of the great ideological divide — cast into the outer darkness along with John Maynard Keynes and Milton Friedman.

But what does the other side believe? Someone, I don’t know who at this point, sent me to this post by Robert Murphy, which is the best exposition I’ve seen yet of the Austrian view that’s sweeping the GOP — and I mean that sincerely, never mind the puerile insults aimed at yours truly. As regular readers know, I’m a stylized-example kind of guy, and Austrians tend to prefer lots of words instead; but in this case Murphy does offer a little story that is, in a way, a counterpart to my story about the baby-sitting coop (although my story was based on an actual real-world example).

So what is the essence of this Austrian story? Basically, it says that what we call an economic boom is actually something like China’s disastrous Great Leap Forward, which led to a temporary surge in consumption but only at the expense of degradation of the country’s underlying productive capacity. And the unemployment that follows is a result of that degradation: there’s simply nothing useful for the unemployed workers to do.

I like this story, and there are probably other cases besides China 1958-1961 to which it applies. But what reason do we have to think that it has anything to do with the business cycles we actually see in market economies?

I’ve already pointed out the problems, both logical and empirical, with the claim that workers are unemployed because they have zero marginal product. But there are many more problems with the notion of a recession as a supply shock.

A short sample: If inflation is a case of too much money chasing too few goods, why aren’t slumps associated with accelerating rather than decelerating inflation, as the supply of goods falls? Why is there such a strong correlation between nominal and real GDP? Why is there overwhelming evidence that when central banks decide to slow the economy, the economy does indeed slow? And on and on.

Oh, and what evidence is there that the economy’s capacity is damaged during booms? Investment rises, not falls, during booms; yes, I know that Austrians take refuge in cosmic talk about the complexity of production and how measured investment may not show what’s really happening, etc., but where’s the positive evidence of what they’re claiming?

The point is that the real world looks a lot like the one Keynes and Friedman envisioned, in which the demand side drives the business cycle. Why should anyone be determined to throw away 75 years of economic thought, to believe that these appearances are deceiving? Why the insistence on taking an intellectual Great Leap Backward?

Well, at that point we’re into talking about the essentially political nature of this thing. Maybe another time.

Update: In case you’re wondering, no, I haven’t changed my view of Austrianism. If I say it’s interesting, well, I’d say the same thing about the phlogiston theory of fire.