Austrian Cycle Theory is Not a Morality Play

Steven Horwitz
Ben Powell and I had much fun debating a couple of Keynesians at Gettysburg College last night.  In the course of the evening, one of them described Austrian cycle theory as a "morality play" in which the recession is the price we pay (the "penance") for our over-indulgence during the boom.  Thus, he strongly implied, Austrians think "we" somehow "deserve" the punishment of the recession for our "inappropriate" behavior during the boom.  This argument, of course, has also been made by a certain NY Times columnist and his less bright and more obnoxious West Coast lap dog.  Ben gave a really good response last night, but I think there's more to be said and I think it's worth saying "for the record" on the Interwebs.
Perhaps I asked for trouble last night by using the drunk/hangover analogy to get the point across that the boom is when the mistakes are made and the bust is the recovery.  With a room full of students who don't know the theory, I find that to be an effective rhetorical ploy, but it does open me to the "temperance" response.
Of course the Austrian theory is not a morality play.  The recession is not "deserved" in any meaningful sense of the term.  Even given the alcohol analogy, one need not accept the moral dimension that a hangover is the "just deserts" for the prior night's over-indulgence.  Instead, one could just observe that, moral judgment aside, drinking too much simply WILL produce a hangover, regardless of what one's view of alcohol consumption is.
Same with the Austrian theory of the cycle of course.  The theory argues that the boom is generated by some exogenous factor that has caused market interest rates to diverge from the natural rate that accurately reflects the time preferences of consumers and producers.  That exogenous factor is normally thought to be an excess supply of money, which is normally thought to be the product of bad central bank policy or problematic government regulations on the banking system.  Once that bad interest rate signal is in place, intertemporal discoordination will result.  The nature of money and the time-ladenness of production mean that we don't see that discoordination at first, as it is masked by the boom.  The increased activity at both the higher orders of goods and the consumption level looks like growth until the fact that there is insufficient real savings to support the increased (now "mal") investment at the highest orders makes itself known.
This is the endogenous turning point that brings on the bust.  The bust is endogenous to the boom.  Once you have the boom, the bust must happen in some form at some time.  The bust is not moral retribution for the malinvestment of the boom, it is the inevitable result of the underlying microeconomic processes that allocate scarce resources (especially capital goods) through entrepreneurial interaction with the price system. 
The charge that the story is a morality play is, I realized last night, a reflection of the inability or unwillingness of critics of the Austrian theory to grapple with its microfoundations.  Perhaps thinking only in macro aggregates (or perhaps assuming Austrians somehow are conservative moralists) has blinded Keynesians to the idea that the macroeconomic pattern of boom and bust can be the result of these microeconomic market adjustment processes generated by a false price signal. 
The disemployment and reallocation of resources that characterizes the bust is not "penance" or punishment.  It is the microeconomic market process doing what it does.  The Austrian cycle theory really is a microeconomic story at the end of the day, which is perhaps why Keynesians (and others) can't understand it on its own terms and have to resort to the (rather insulting) language of it being a "morality play" to understand our claim that the boom is when the mistakes are made and the bust is when they are corrected. 
There's no morality play, just the same old competition, discovery, and entrepreneurship that characterizes all market processes trying to adjust to the revelation of the real state of the loanable funds market and people's time preferences and figuring out how to salvage value out of the malinvestments of the boom which take the form of specific capital goods (and human capital) with multiple but limited uses.
At the end of the day, one cannot understand the Austrian cycle theory without understanding the microeconomic vision on which it rests, and in particular, the Austrian theory of capital.  Even if one thinks the Austrian view is bad economics, one should at least make an effort to understand it.  But it seems as if calling it a "morality play" has become the last refuge of those who are unable or unwilling to make that intellectual effort.