|Peter Boettke|

I admit to many intellectual blind-spots, and I am constantly working on being less wedded to certain ideas and open to alternative explanations. But the logic of price theory has always been what attracted me to certain arguments, and dissuaded me from others. Whatever the problem, I think in terms of 3 P's and 3 I's --- property, prices, profit/loss, and the relationship to incentives, information, and innovation. There is a hard logic of price theory --- the relationship between the underlying facts of tastes, technology and resource availability and the induced manifestations in relative prices and profit and loss statements. The market guides and the market weeds out. And there is a soft logic of price theory --- the multiplicity of margins on which competition takes place, and the dynamics adjustment processes guided by relative prices and the entrepreneurial pursuit of profit. The market guides and the market weeds out.

The introduction of money only aids the market process of guiding and weeding, and the recognition of the time structure of production complicates but doesn't change the basic logic of the market. Economics is about choice within constraints; economics is about market theory and the price system; economics is about system wide effects. All of that disciplined study of the social phenomena that is the modern economy is made possible by the starting point of purposive human action.

There is nothing uniquely "Austrian" about this, except that the economists schooled in Vienna were the most persistent and consistent followers of this approach to early neoclassical economics in the 1900-1950 period. But Wicksell in the late 19th and early 20th century pursued this approach, as had Wicksteed. So to me the further development of this price theoretic perspective to the area of industrial fluctuations was again nothing exotic, just the neoclassical theory of the consequences of the manipulation of money and credit. The Austrian Theory of the Business Cycle as developed by Mises and Hayek is nothing more, or less, than that, and thus its rejection by various stripes of economists has always been a major puzzle to me --- unless you buy Keynes's argument that once we introduce money into the analysis, the entire logic of economics must be transformed. (see Keynes 1933 "A Monetary Theory of Production") But the early neoclassicals, I would argue, while holding steadfast to the spirit of the classical dichotomy, had modified their understanding so that (to use Garrison's language) money was neither a tight joint nor a broken joint. Money, instead, is a loose joint, that introduces slack into the price theoretic processes that relates the underlying facts to the induced manifestations. The market guides and weeds, but not instantaneously; on the other hand, money enables the guiding and weeding to take place on a far greater extent and over a range of more complex economic relationships than would otherwise be possible. In my mind, as I believe in Mises and Hayek's minds, the issue of economic calculation was never just an issue related to the problems of socialist economic planning. What the socialist system cannot do, is what the market economy does everyday. The ABCT is the unfolding story of how the manipulation of money and credit distorts the process of economic calculation for a time, but as the market system pierces through the fog caused by the distortion, a recalculation must take place. This explains the boom/bust cycle. It is not a "macroeconomic" theory per se, it is instead a price theoretic story of a macroeconomic phenomena (industrial fluctuations and the corresponding problems of inflation/deflation, unemployment, and volitility).

So with this rudimentary understanding in the back of my mind from my early 20s, I have been puzzled for over 30 years as to why this particular approach to macroeconomics doesn't dominate the economics profession -- presumably a group of individuals all of whom have absorbed the logic of basic economics and the body of theory that constitutes our understanding of market theory and the price system. I had no doubt that more sophisticated work needed to be done, but that work would all need to trace back to 3 P's, 3 I's; the price system as guiding and weeding; and economic calculation and recalculation in the process of exchange and production. But as hard I have looked, it is rare to see this sort of approach followed in the vast majority of discussions of business cycles that are published in the AER, JPE, or QJE. I am no less puzzled today, than I was in 1984. The "Austrian" school with its analytical starting point being the individual choosing within constraints and the emphasis on property, prices and profit/loss is the true descendants of the classical and early neoclassical economists, and the Keynesian and subsequent neo-classical synthesis is the true break from this intellectual heritage of basic economic reasoning. Frank Knight warned that Keynes was dragging up back to an intellectual dark age in his 1951 presidental address to the AEA, sadly (from my perspective) his warning was not heeded. As a result, we need our own economic enlightenment to wrest us from this intellectual fate.

It is, therefore, with great excitement that I read papers by leading figures in the profession that seem to recognize the power of the ABCT as developed by Mises and Hayek. Guillermo Calvo has just produced such a paper, and it should move to the top of your reading list. Calvo sees as one of the great strengths of ABCT that it is able to explain the financial distrubances without recourse to irrationality. The source instead lies in the manipulation of money and credit which distorts the guiding and weeding functions of the price system for the time being, but the market eventually pierces that distortionary fog and a process of recalculation ensues. It is again the very basic price theoretic explanation of the boom and bust cycle that Calvo believes can provide the missing gap in modern macroeconomics.