AN INTERVIEW WITH ROGER W. GARRISON
 

How important do you think it is for macroeconomic models to have choice-theoretic roots?

Choice-theoretic roots are necessary but not sufficient. Explaining economic phenomena in terms of the choices and actions of individuals is�or should be�the primary business of economics. Nowadays this proposition is almost as widely accepted among macroeconomists as among microeconomists. It is simply no longer respectable to "let the data speak for themselves" or to posit specific relationships among macroeconomic magnitudes while remaining agnostic about the "transmission mechanism."
        But having choice-theoretic roots does not, by itself, confer respectability on a macroeconomic theory. A number of modern constructions�I'm thinking of some of the New Classical theories and so-called real business cycle theories�involve highly artificial, or deliberately fictitious, environments in which agents make choices. These theories, sometimes apologetically called "parables," are defended on the basis of their involving choice in a mathematically tractable setting. All too often, though, such virtues come at too heavy a cost�losing sight of the economic phenomena to be explained. The trunk and branches have been traded for roots. It isn't clear to me, for instance, that a one-good choice-theoretic model can shed any light on the problems of inflation and business cycles. In their more candid moments, the leading architects of this general class of models admit that the link between the characteristics of such models and the actual performance of real-world economies involves a large element of faith. 

What are the key features of Austrian methodology which you would endorse?

The Austrians' methodological individualism�choice-theoretic roots, as you say�is among the most important. Choices of individuals made in the context of perceived opportunities and constraints are the basic building blocks of the theory. Austrian subjectivism, which emphasizes the word "perceived" in the previous sentence, is important too but can be pushed too far. Shackle and Lachmann, who use the term "radical subjectivism," all but deny the existence of any underlying economic realities. It seems to me that many aspects of Austrian theory involve a play-off of perceptions against realities.
        I might add that most Austrian writers have a healthy attitude about mathematical economics. If I were in the business of issuing methodological taboos, I would say "Don't let the applicability of mathematics define the scope of economics." This sounds like a fairly mild imperative, but a survey of macroeconomic literature over the last several years reveals that it is violated with increasing frequency. 

What do you consider to be the key papers/books which have had a major impact on the development of your ideas?

The one book that stands out is F. A. Hayek's Prices and Production (1935)�although I should say that by the time I first read it, I had already read a lot of Mises and Rothbard and was ready for Hayek's triangles. Austrian macroeconomics features the economy's capital structure and particularly the time dimension of capital. Lengthening one leg of a Hayekian triangle at the expense of the other represents a fundamental intertemporal trade-off in which the creation of capital goods in temporally remote stages of production requires a sacrifice of consumer goods in the current period. This capital-theoretic analysis of the intertemporal allocation of resources impressed me early on�especially in comparison to the conventional macroeconomic constructions I was exposed to in my early graduate courses. There is just too much going on within the economy's investment sector to be captured by a single aggregate.
        By giving play to the time element, Hayek's triangles greatly enriched the theoretical possibilities. Shifting resources among the temporally defined stages of production changes the intertemporal pattern of final output. If a shift from, say, near-final to more remote stages is the market's reaction to a change in intertemporal consumption preferences, then the economy experiences sustainable growth; if instead a similar shift is spurred by central-bank policy in the absence of any preference change, then the economy experiences an unsustainable boom. This critical distinction between preference-induced growth and policy-induced booms, so prominent in Austrian theorizing, seemed to be aggregated out of existence in the more conventional macroeconomic formulation. The theoretical possibilities that flow from disaggregating the investment sector intertemporally underlie much of my own writing. 

How healthy is the current state of macroeconomics given the level of controversy? Do you see any signs of an emerging consensus in macroeconomics and, if so, what form will it take?

What is widely seen within the economics profession as the cutting edge of macroeconomics is becoming increasingly divorced from economic reality and policy relevance. Building models of the economy has come to be treated as an end in itself. Insistence on mathematical methods and attention to technique has virtually crowded out concern for whether or not the models are actually "of the economy." The so-called Fully Articulated Artificial Economies are all too often treated as vehicles for displaying some new modeling technique.
        Not long ago I listened to a visiting scholar present a paper immodestly entitled "Six Macroeconomic Models." Common to all six models was the assumption of rational expectations. Although the modeler himself claimed not to know which, if any, of his half-dozen offerings reflected economic reality, he was willing to proceed on the assumption that the "agents" populating each model did know�or behaved as if they knew�that the model in question was correct. In my attempt to point up the irony or incongruity of this manner of theorizing, I asked "What if model #2 captures the underlying structure of the economy while agents form expectations in accordance with model #5?" Our visiting scholar took the question not as a criticism of his approach but as a suggestion for expanding his research agenda. He now had 36 macroeconomic models! The emphasis on technique and the general lack of concern about relevance is not conducive to consensus. 

How do you view the rational-expectations revolution? Did it make a significant and meaningful contribution? Did it owe any debt to the Austrians?

The most significant positive effect of the rational-expectations revolution has been to require macroeconomic theorists to make explicit their assumptions about expectations. Before the revolution, all too many theoretical results hinged on some critical but unstated assumption of systematic expectational error. Sometimes simply articulating an assumption, for instance, that workers take the cost of living to be constant when in fact it is steadily increasing, reveals its implausibility. But if the word rational is stipulated to mean consistent with�or, at least, not systematically inconsistent with�the underlying structure of the economy, then the rationality of expectations does not guarantee or even imply plausibility. How do agents know�or behave as if they know�the structure of the economy? Adam Smith has taught us that markets can work despite the fact that agents have little or no appreciation of theoretical economics. All I'm suggesting here is that replacing know-nothing agents with know-it-all agents is not always an improvement. We need to theorize in terms of know-all-they-can-plausibly-know agents.
        The rational-expectations revolution does owe a debt to the Austrians. Lucas makes regular payments on that debt by acknowledging Hayek's early contributions in the area of economics and knowledge. But the clearest antecedent is in the 1953 addendum to The Theory of Money and Credit (1912), where Mises captures the kernel of truth in the rational-expectations hypothesis in his critical analysis of inflationary finance. Mises offered his own insightful treatment of expectations as an application of Lincoln's Law: "You can't fool all of the people all of the time."

How would you classify the Austrian approach to expectations? If it is neither rational nor adaptive, then how is it best classified?

The Austrian treatment of expectations is guided by considerations about what kind of knowledge market participants can plausibly have. Hayek often makes use of the distinction between two kinds of knowledge. Theoretical knowledge, or knowledge of the structure of the economy, is contrasted with entrepreneurial knowledge, or the knowledge of the particular circumstances of time and place. Economists have some of the first kind of knowledge but not much of the second; market participants have some of the second kind of knowledge but not much of the first. There is a certain formal parallel, here, with the two kinds of knowledge (global and local) in typical island parables as told by New Classicists. The difference between the two constructions reflects a more general contrast between Austrian real-worldliness and New Classical other-worldliness.
        Beyond the constraint imposed by considerations of plausibility, the Austrians, starting with Menger, have tried to give free play to expectation so as not be second-guessing the entrepreneur. There are, however, some implicit assumptions underlying it all that some market participants have greater entrepreneurial foresight than others, that the market systematically rewards superior entrepreneurship, and that reality eventually asserts itself.
        It's worth pointing out that the Hayekian distinction between theoretical and entrepreneurial knowledge helps identify the limits of both rational planning and rational expectations. Trying to push beyond the limits reflects erroneous views about who can plausibly have what kind of knowledge: Advocates of rational planning believe that planners or their economists can have as much�if not more�of the second kind of knowledge as can market participants. Proponents of the more extreme versions of rational expectations assume that market participants have, or behave as if they have, as much of the first kind of knowledge as do economists.

In your contribution to the Spadaro volume New Directions in Austrian Economics (1978) you provide a diagrammatical exposition of Austrian macroeconomics. What impact did this have within Austrian economics and did it lead to an improved dialogue with the Keynesians?

That piece had a very limited audience. Readers who were comfortable with the interlocking graphs didn't know enough about Austrian capital theory and Austrian monetary theory to make sense of them, and readers with a strong Austrian background were unwilling to cope with�and even were offended by�the graphs. I seem to remember getting some hate mail from people who thought that any attempt to express Austrian ideas graphically was a sacrilege to Mises. But there were a few people�mostly graduate students�who were receptive to both Austrian ideas and graphical analysis. For them, my exposition served its purpose. It demonstrated that all the individual pieces drawn from the Austrian literature fit together in an analytically consistent way. The market for loanable funds, the intertemporal structure of capital, and the inverse relationship between the rate of interest and the degree of roundaboutness all come together as key elements in the Austrian vision of the macroeconomy. These elements set the stage for demonstrating that monetary injections through credit markets lead to systematic but unsustainable distortions in the market process that governs the intertemporal allocation of resources. 

Do you think that one can adequately model the Austrian approach given the emphasis upon uncertainty, historical time, and non-neutral money?

Well, my diagrammatical exposition was the best I could do. And admittedly, diagrams by their very nature tend to conceal the features that you mention. I can't imagine an Austrian model in the sense of a set of structural relationships that yield determinate values for current output, investment, production time, future output, etc. or in the sense of a Fully Articulated Artificial Economy. I think of a worthwhile model, though, as one that provides a stylized representation of the Austrian vision of the macroeconomy. It is not a substitute for verbal argument but rather a framework for formulating and presenting the argument. 

Given your emphasis on the role of capital, what are the major significant contributions of Austrian economics in this area? Why do you think the work of both Hayek and Lachmann on capital and its structure have been generally neglected by both orthodox and not-so-orthodox (Neo-Ricardian/Sraffian) economists?

Two of the most fruitful contributions in the area of capital theory were Hayek's Prices and Production (1935), which treated in the simplest and most abstract form the notion that the economy's capital structure has both a time and a value dimension, and Lachmann's Capital and Its Structure (1956), which emphasized the extreme heterogeneity of capital goods and the complex latticework of relationships among them.
        Hayek and Lachmann have been ignored by mainstream macroeconomists precisely because of their attention to pattern or structure as opposed to some aggregate quantity of capital or of investment. The success of the Keynesian Revolution is partly attributable, I think, to its liberating effect in this respect. After Keynes, it became respectable to press on with macroeconomics without having to think about capital theory. Unfortunately, the Monetarist Counter-Revolution didn't challenge this aspect of Keynesianism. Both schools continue to ignore capital but for opposite reasons. For the Keynesians, capital markets are so ill-behaved that nothing much can be said about them; for the Monetarists, capital markets are so well-behaved that nothing much need be said about them. I have argued that the Austrians occupy a comfortable middle ground here. Capital markets work but are particularly vulnerable to monetary disturbances and thus should be a major focus of macroeconomic analysis.
        The Neo-Ricardian/Sraffian economists, as you call them, were unreceptive from the beginning to Austrian capital theory as evidenced by Sraffa's ill-tempered attack on Hayek's Prices and Production. Although the Neo-Ricardians clearly incorporate a certain intertemporal trade-off in their distinguishing between corn-for-eating and corn-for-planting, their capital has no structure. It's all corn�as generalized in Sraffa's Production of Commodities by Means of Commodities (1960). I think Lachmann used to call this book "Capital Theory without Capital."
        In more recent years, the Post Keynesians, who combine Ricardian production theory with Keynesian theory of demand deficiencies, differ with the Austrians in terms of questions asked as much as answers offered. The Post Keynesians seem to be concerned largely�if not exclusively�with the functional and personal distribution of income rather than with the intertemporal allocation of resources. 

What are the major strengths and weaknesses of the Austrian approach to macroeconomics?

Its weaknesses as well as its strengths derive from the capital theory on which it is based. It is the focus on capital and interest that gives the Austrian approach a certain directness and real-worldliness that is missing in alternative formulations. For instance, when the central bank initiates a monetary expansion, the new money enters the economy through loan markets and therefore impinges initially on interest rates and in capital markets. It has always struck me as odd that alternative treatments of monetary expansion�I'm thinking here of the dynamics associated with short-run/long-run Phillips curve analysis�so readily skip over this direct effect and deal instead with labor markets and wage rates as affected by asymmetries in perceptions and expectations. Key simplifying assumptions, such as the one that replaces real-world monetary injections through credit markets with the fanciful notion that new money is dispensed by a helicopter, should have served as a red flag: something important has been left out of account. Such fictitious constructions, I think, are designed to postpone�if not avoid altogether�having to deal with the thorny issues of capital and interest. But all too often the other-worldliness thus created is simply accepted uncritically as the appropriate arena for macroeconomic theorizing. Edmund Phelps has recently identified Seven Schools of Macroeconomic Thought (1990) by distinguishing them in terms of the fixity or flexibility of wages and prices and the nature of expectations about wages and prices. I am inclined to lump all these theories together as macroeconomic schools of thought that focus on labor markets and wage rates and contrast them with the Austrian school, which focuses on capital markets and the interest rate.
        The directness and real-worldliness of the Austrian approach, however, comes at the expense of ambiguity and complexity. Unlike labor, which can be reckoned in worker-hours, capital has no physical unit of measure. But the alternative of dealing with capital in value terms makes its "quantity" definitially dependent upon its price. Further, Austrian capital theory disaggregates this "quantity" into stages of production that are related to one another through a pattern of intertemporal complementarities and substitutabilities. Theorizing about capital can easily get out of hand, as is demonstrated by Hayek's Pure Theory of Capital (1941). And producing a direct empirical counterpart to Austrian capital theory and business-cycle theory has proved difficult�although some anecdotal evidence and broad historical accounts of booms and busts are enough, in my judgment, to give plausibility to the Austrian views. 

How close is Austrian economics to fundamentalist Keynesianism? Does the work of Shackle and Lachmann not demonstrate that there is an intellectual bridge between the two schools which may lead to cross fertilisation?

I think of fundamentalist Keynesianism as one of two extreme positions that help to locate the Austrian view as a middle-ground position. Shackle and, following him, Lachmann use the kaleidoscope as their model of asset markets: changes in the pattern of prices in asset markets are no more predictable than changes in the pattern of cut glass in a kaleidoscope. In stark contrast, hard-drawn versions of New Classicism treat the price mechanism as a clockwork rather than a kaleidoscope. The clockwork suggests an equilibrium-always approach; the kaleidoscope suggests an equilibrium-never approach. The Austrian view is somewhere between clockwork and kaleidoscope. Asset markets exhibit equilibrium tendencies but, because of the time element and the critical role of expectations, are particularly subject to disruptions. It is true that, like the Austrians, the fundamentalists emphasize such things as uncertainties, historical time, and the subjectivity of expectations. And these are the very ideas that are needed to jar the New Classicists away from their extreme position. 

Streissler has suggested that Menger anticipated Keynes in emphasising the uniqueness of money among commodities. Would you agree? Would you also not agree that one can comprehend Chapter 17 of the General Theory more easily if one read, as a companion piece, Menger's classic 1892 Economic Journal paper on money?

Menger was concerned with the origins of money and with how money facilitates exchange. Forty-four years later, Keynes was concerned with the perversities of money and with how hoarding money can frustrate exchange. The "story of money" had a happy ending for one and a tragic ending for the other. It is true that both believed money to be unique and that Menger's saleability and Keynes's liquidity can be thought of as synonymous. I think that reading the two stories as companion pieces helps identify just where and how the Keynesian plot turns sour. For Keynes, the alternative to holding money is holding bonds�a view reflecting his belief that the decision about how much to save and the decision about what form the saving will take are made seriatim. The speculative demand for money, then, hinged specifically on speculation about movements in the interest rate. And the interest rate, according to Keynes, is not well anchored in economic reality. This construction led Keynes to psychological explanations of liquidity preference. For Menger, the alternative to holding money is any commodity for which money can be exchanged. Speculative demand�Menger didn't use the term�would have to reflect speculation on the part of the money holder that opportunities for making exchanges might present themselves. Menger, never mentioning the rate of interest even once in the entire article, had no reason to resort to psychological arguments and certainly never suggested anything in the way of a saleability fetish. 

What do you think was Keynes's major legacy to economics?

From a practical standpoint, Keynes's legacy is the institutionalization of demand-management policies. According to Marshall, prices adjust to supply and demand conditions; according to Keynes, demand must be adjusted to supply and price conditions. The Full Employment Act of 1946 provided the mandate for government to make the appropriate adjustments. The monetary and fiscal policy levers, as well as the system for collecting the data that tell policymakers which way to pull on the levers, are tailor-made for the Keynesian framework. As a result, the ideological leanings of the policymakers don't count for much. The principle at work here is that those in power tend to pull on the levers they find before them.
        Modern "stimulant packages" are typically gauged in terms of their magnitude�$30 billion dollars worth of stimulus�with little or no regard for specifics. Keynes himself had a decided preference for stimulating investment rather than consumption but was not concerned�as the Austrian theorists would be�about intertemporal allocation within the investment sector. Keynes simply believed that investment demand was chronically weak and prone to fluctuations because of the "dark forces of time and ignorance that envelop our future."
        Where the Austrians had focused their theorizing on the intertemporal allocation of resources (as depicted by Hayek's triangles), Keynes�still under the influence of the Marshallian tradition�simply divided time into the short run and the long run (Chapters 5 and 12, respectively, of the General Theory). In judging the workability of the market system, he saw no problem in the short run and no solution in the long run. His legacy, then, was to leave it to the state, which he supposed was in a position to calculate on the basis of long-run social advantage, to manage demand so as to compensate for the perceived failings of the market. 

Had Keynes still been living in 1969 do you think he would have been awarded the first Nobel prize in economics? Would he have received your vote?

In the second and third years in which the Nobel prize was awarded in economics, the recipients were Simon Kuznuts (1970), who gave us the system of national income accounts and hence added the empirical dimension to the Keynesian research agenda, and Paul Samuelson (1971), whose "Keynesian cross" became the centerpiece of textbook Keynesianism. Many other recipients and even Milton Friedman, whose work on the consumption function was cited by the Nobel committee, have won the prize for their clarifications, extensions, or reformulations of Keynesian theory. It would have been inexplicable, then, not to have awarded the first Nobel prize in economics to Keynes himself. Would Keynes have had my vote? Well, Hayek and Myrdal shared the prize in 1974. Maybe Mises and Keynes should have shared it in 1969. I would relish reading the back-to-back Nobel lectures. (Incidentally, we might want to acknowledge that Tinbergen and Frisch, who actually did receive the prize in 1969, were both very worthy recipients.) 

How important are Cantillon effects to the Austrian examination of the money transmission mechanism?

Austrian writers like to cite Cantillon as having been the first to emphasize�in mid-eighteenth century�that inflation does not affect all prices at once. Prices change in some sequence along with the spending and respending of new money. During the process in which prices are adjusting, relative prices are changing, and hence some quantity adjustments are occurring. How money is injected into the economy, then, may be as important than how much is injected. This is what I mean when I say that the Friedmanian helicopter should serve as a red flag signaling that something important has been left out of account.
        The Austrians embrace wholeheartedly the general idea of Cantillon effects but have gone beyond it to recognize that if money enters the economy through loan markets, then the price and quantity adjustments will exhibit a systematic�not to say determinate�intertemporal pattern. Although possibly softened by the effects of expectations, a low rate of interest attributable to credit expansion raises the prices of long-term capital goods relative to the prices of consumer goods and short-term capital goods and brings about a corresponding reallocation of resources.

Are there any key lags in the Austrian business cycle approach which explain why such cycles occur and recur?

The focus on time and money and, more specifically, on capital gives the Austrian theory a built-in lag structure. As I like to say it, "capital gives money time to cause trouble." This aphorism summarizes a lot of Austrian insights. Market participants have intertemporal consumption preferences, which we take as given; the structure of capital, as guided by interest rates and factor prices, will yield output in some particular intertemporal pattern. It takes time to discover whether or not the intertemporal pattern of output is consistent with the intertemporal consumption preferences. A systematic mismatch, such as that created by an artificially low rate of interest, will eventually become apparent, but by that time the economy may be faced with the necessity of a major capital restructuring.
        In identifying the nature of the lag, the monetary aspect is important too. Suppose, for instance, that the interest rate were forced downward by decree. The legislature simply installs a cap on the interest rate a point or two below its market-clearing level. What would happen? There would be an obvious and immediate shortage of credit. No lag. Now, compare the effects of a legislated credit cap with the effects of credit expansion initiated by the central bank. Whichever policy is used, the interest rate is artificially low. It is inconsistent with intertemporal consumption preferences. But credit expansion eliminates the obviousness and immediacy by papering over the shortage. As a result, there will be lots of quantity adjustments within the investment sector, lots of capital restructuring, before the intertemporal mismatch reveals itself.
        Although the time-and-money approach gives the theory a built-in lag, it is not a determinate lag. The length of the lag depends upon specific strengths and patterns of intertemporal complementarities and substitutabilities within the capital structure and on the quality of entrepreneurship and, more generally, of expectations of market participants. It depends importantly on the extent to which market participants try to understand the effects of policy and to anticipate policy changes. All of these considerations can affect the length of the lag between boom and bust, but only the most extreme and implausible assumptions about them would completely eliminate the lag. Changes over time in the way market participants form their expectation will virtually insure that each cyclical episode will differ in detail from previous episodes, but there are no grounds in the Austrian formulation for believing, as some critics seem to believe, that a business cycle anticipated is a business cycle avoided. 

You have argued in the Journal of Macroeconomics (1984) that the two universals of macroeconomics are time and money. Apart from the Austrians, which other schools of thought handle these universals in an appropriate way?

We can find other schools that have promising approaches to one or the other�but not both�of these aspects of the macroeconomy. For instance, the time-to-build feature of some New Classical models has yet to be fully exploited. Recognizing that an investment in Period 1 may influence the decision to make some complementary investment in Period 2 brings capital structure�or at least a hint of it�back into macroeconomics. Hayek entitled one of his early articles, "Investment that Raises the Demand for Capital" (1937) to emphasize the essential intertemporal complementarities that characterize the capital structure. Unfortunately, the New Classicists seem to limit the time-to-build concept to intra-firm complementarities, which tends to trivialize it, and have introduced this concept in the context of real rather than monetary distrubances. Note, though, that neither time-to-build nor Hayek's title concept has a home in modern income-expendiutre analysis.
        The money part of time and money is best handled, I think, in the framework of monetary disequilibrium as set out by Clark Warburton and developed most recently by Leland Yeager. The economy has to adjust piecemeal to monetary disturbances. And because of the implied changes in relative prices during the time-consuming process of adjustment, quantities adjust too. Monetary causes, then, have real consequences. But there is little or no allowance in monetary disequilibrium theory for time-to-build or for any other sort of intertemporal capital structure. I suspect that in a world with no significant intertemporal complementarities, money-induced disequilibrium would be relatively mild and adequately explained in the Warburton-Yeager framework.

What are the strengths and significant contributions of non-Austrian macroeconomics since Keynes?

Apart from contributions I have already mentioned, I would say that the application of Public Choice to policy analysis has been significant. But it was Hayek, I think, who first offered a proto-Public-Choice theory of inflation in his Constitution of Liberty (1960). In their Calculus of Consent (1962) Buchanan and Tullock credited Hayek and went on to apply choice-theoretic economics more broadly to political issues. The built-in lags that separate the implementation of a policy and its ultimate (negative) effects make for a natural blending of Austrian macroeconomics and Public Choice.
        Also, I think that a lot of good economics has come out of attempts to make sense of the General Theory. I'm thinking in particular of Leijonhufvud's reconstruction of Keynes. This Swedish-American make-over had Keynes looking more like a cross between Knut Wicksell and William H. Hutt, but it's good economics independent of any connection to the original Keynesian vision. Incidentally, I think that Alan Meltzer's book, Keynes's Monetary Theory: A Different Interpretation (1988) provides the best true-to-Keynes interpretation of the General Theory. 

Did the Austrian approach to business cycles adequately explain the interwar experience?

I think it is correct to say that the boom of the 1920s and subsequent bust is the clearest and cleanest illustration of the kind of intertemporal discoordination identified by the Austrians. The newness of the Federal Reserve and the general absence of Fed-watching even in financial circles allowed the monetary expansion to keep interest rates artificially low for an extended period of time. The Austrian theory, then, accounts adequately for the misallocation of resources within the capital structure�the malinvestment�during the upswing and hence for the inevitability of the bust. Other considerations must be added to the story to adequately account for the depth of the downturn and the duration of the depression. What Hayek called the secondary deflation is an income-constrained process in which the economy can spiral downwards far in excess of any needed liquidation. Milton Friedman's insights about the ineptness of the Federal Reserve throughout the 1929-33 period and again in 1937 come into play here. Also, the duration of the depression is to be accounted for largely in terms of the perverse effects of New Deal policies, which were well understood by the Austrians and others, but were not really a part of Austrian business cycle theory. 

Given your work on Austrian business cycle theory, what insights do they offer to explain the behavior of the US and UK economies in recent years?

Let me confine my answer to the US experience. The boom and bust of recent years is similar in form but different in particulars in comparison to the boom and bust of the interwar period. I have made the argument that while in the earlier period, policy-induced resource allocation was inconsistent with underlying time preferences, in the latter period, policy-induced resource allocation was inconsistent with underlying risk preferences. In each instance, the focus is on the corresponding component of interest rates�the basic rate of time discount for the interwar episode, the risk premium for the recent episode. In the earlier episode, investment undertakings were excessively long-term; in the latter episode, excessively speculative. But in both episodes, the boom was artificial and hence the bust inevitable.
        The 1980s boom was financed largely by debt sold abroad. The chronically high budgetary and trade deficits created uncertainties about future market conditions throughout the economy. The success of private businesses depended importantly on the ability of entrepreneurs to forecast exchange rates, interest rates, and inflation rates�all of which can be dramatically affected by the disposition of the deficit. Will our trading partners continue to lend to our government? Will the government begin to borrow more heavily in domestic credit markets? Will the Federal Reserve become more accommodating?
        The mere potential for debt monetization kept the default-risk premium off of Treasury bills while junk bonds and other highly leveraged transactions became ways of betting one way or another about the inflation that actual debt monetization would entail. The uncertainties stemming from deficit finance were compounded by the government's subsidized deposit insurance and other irregularities and perversities in the particular way that financial institutions were deregulated in the early 1980s. By 1990 the policy-induced risktaking began to turn into losses and bankruptcies, which put an end to the boom. The junk bond market collapsed; the financial institutions are in crisis. The federal budget deficit has yet to be dealt with.
        I'm simply suggesting here that there is an Austrian story to be told about the recent behavior of the US economy. Even if not Hayekian in its particulars, the focus on capital markets and the underlying notion of a policy-induced artificial boom qualify it as a variation on a theme. 

What are the key present research agendas of modern Austrian economics?

For several years, now my own research agenda has consisted largely of putting capital theory back into macroeconomics. There is lots of room for development on this front. I think that a well developed capital-based macroeconomics can compare favorably with modern income-expenditure models and with the New Classical parables.
        More recently, I've begun to pay attention to the problem of chronically high deficits. These fiscal excesses should get more attention from Austrian-oriented economists for two reasons. First, as I've already indicated, the boom of the 1980s was deficit financed rather than inflation financed. Understanding the deficit, then, becomes prerequisite to understanding the nature of the boom and subsequent bust. Second, the economics profession seems to be divided between those who (still!) believe that deficits stimulate the economy (the Keynesians) and those who believe that deficits are irrelevant (the New Classicists, Monetarists, and Supply-Siders). More often that not, debate centers on what we mean by deficit, how to measure it, and whether it is high, low, or actually a surplus. The Austrians are in a good position to step in and argue that the deficit is large and disruptive.
        Lastly, I think the Austrian research agenda should include free banking. I have not contributed in this area except by reviewing books by Austrian-oriented economists who have. Although there is controversy within the Austrian school about the economics of free banking, it seems to me that competitive note issue is compatible with many other Austrian views. Thinking in terms of the equation of exchange, Hayek argued early on that macroeconomic stability is best promoted by a constant MV. The implied monetary rule, then, is: Increase M to offset decreases in V, but allow decreases in P to accommodate increases in Q. Central banks lack both the will and the ability to implement such a rule, but in a system of free banking, if I understand it correctly, it is precisely this rule that would get implemented automatically by competitive forces.