Glasner and Austrian Unsustainability

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    I am trying to understand David Glasner’s two problems with ABCT in this post:

    The first has to do with Mises’ “Theory of Money and Credit.” Glasner says that within the book,

    “one finds that the effective cause of the contraction of credit is not a physical constraint on the availability of resources with which to complete the investments and support lengthened production processes, but the willingness of the central bank to tolerate a decline in its gold holdings. It is quite a stretch to equate the demand of the central bank for a certain level of gold reserves with a barrier that renders the completion of investment projects and the operation of lengthened production processes impossible, which is how Austrian writers, fond of telling stories about what happens when someone tries to build a house without having the materials required for its completion, try to explain what “unsustainability” means.”

    Is this an accurate rendering of ABCT? Does ABCT argue that the physical resources don’t exist to complete projects or that those projects are unprofitable, regardless of the physical resources’ existence? Glasner also says that Mises’ argument was specific to a historical gold standard and that absence such a constraint, monetary expansion is not unsustainable.

    The second problem is this:

    “The whole idea of unsustainability involves a paradox. The paradox is that unsustainability results from some physical constraint on the completion of investment projects or the viability of newly adopted production processes, because the consumer demand is driving up the costs of resources to levels making it unprofitable to complete the investment projects or operate new production processes. But this argument presumes that all the incomplete investment projects and all the new production processes become unprofitable more or less simultaneously, leading to their rapid abandonment. But the consequence is that all the incomplete investment projects and all the newly adopted production processes are scuttled, producing massive unemployment and redundant resources. But why doesn’t that drop in resource prices restore the profitability of all the investment projects and production processes just abandoned?”

    So if I understand this second problem correctly, he is saying that in industries where resources were misallocated, prices should drop and the unprofitable projects should become profitable again, following the premises of ABCT. But I don’t see why this should be the case. If we take housing as an example, where credit expansion caused people to borrow more and the prices of houses to increase, I don’t see why production of houses that was profitable at their artificially high price would be still be profitable once the prices of the resources building the houses (as well as the houses themselves) dropped. Or am I confusing things?


    Here is Bob Murphy’s reply to Glasner:

    On the second point, you’re correct. Glasner doesn’t account for the fact that prices of capital goods move disproportionately, depending on their degree of specificity, in response to a change in output prices. Those that fall the most, will not be profitable to produce once the downturn starts.

    He doesn’t seem to acknowledge that unsustainability refers to inter-temporal malinvestments. The capital structure has been built up during the boom in a manner that does not satisfy people’s time preferences. (Any production process that doesn’t satisfy people’s preferences is unsustainable.) Once this fact is manifest in the financial crisis, there are profits to be earned by reconfiguring the capital structure in the way that best does satisfy people’s preferences.

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