From: Technotranscendence (neptune@mars.superlink.net)
Date: Fri Aug 02 2002 - 04:58:02 MDT
A Classic Hayekian Hangover
By Roger Garrison and Gene Callahan
Are investment booms followed by busts like drinking binges are
followed by hangovers? Dubbing the idea "The Hangover Theory" (Slate,
12/3/98), Paul Krugman has attempted to denigrate the business-cycle
theory introduced early last century by Austrian economist Ludwig von
Mises and developed most notably by Nobelist F. A. Hayek.
Yet, proponents of the Austrian theory have themselves embraced
this apt metaphor. And if investment is the intoxicant, then the
interest rate is the minimum drinking age. Set the interest rate too
low, and there is bound to be trouble ahead.
The metaphorical drinking age is set by-and periodically changed
by-the Federal Reserve. In our Fed-centric mixed economy, the
understanding that "the Fed sets interest rates" has become widely
accepted as a simple institutional fact. But unlike an actual drinking
age, which has an inherent degree of arbitrariness about it, the
interest rate cannot simply be "set" by some extra-market authority.
With market forces in play, it has a life of its own.
For the rest of this article, see
http://www.auburn.edu/~garriro/hangover.htm
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