Define "irrational change in comsumption behavior".
If Im understanding it correctly, let me advance you that from an austrian perspective "irrational change in consumption behavior" is not possible because, for austrians, consumers are kings and the objective of an economic system is to produce and supply what the consumer needs and/or wants. So when there is a mismatch between what consumers demand and what the production system is offering the "fault" is always on the production system, that needs to re-organize. What is the point on having a production system that produces stuff people dont need/want?
Good point. Perhaps I should have said "spontaneous change in consumption behavior." The idea that a large number of people will be seized by the urge to hold liquid assets rather than spend or invest them.
Ok, basically what you are asking me is about the keynesian story about people putting their savings in the mattress when there is a crisis, what keynesians call the paradox of thrift. Hayek wrote about it in his article "The 'Paradox' of savings", but I dont think you can find it for free on the Internet.
First, this does not address the situation proposed in the keynesian paradox of thrift but it is worth noting that an increase on the demand for more liquid assets is not necessarely bad. Let me give you a simple example: Imagine there are a bunch of people stranded in an island. They collect, hunt and fish to provide food for themselves. They have specicialized a bit and some people have been able to not work on getting food but on getting other materials and producing stuff like better housing. They keep food for 3 days always stored just in case. Suddenly, they see a big storm coming, and they decide to stop any other activity and get everybody on getting food. They also ration the food and start increasing the amount of food stored. From a macroeconomic point of view, consumption has gone down, investment has gone down, in general economic activity is down, and savings are up. A keynesian would say it is a crisis and you need to stimulate consumption. But the reality is that there is a very valid reason for what people are doing, and increasing consumption would deplete the food storage and could get the people killed if the storm last for long. This simple example is just to explain that there might be valid causes for a temporal shifts in the demand for liquid assets.
But the paradox of thrift is about people increase savings during a crisis, not at any other moment. Keynes argued that it was a paradox because acording to neo-clasical economics the self-interest of individuals would always produce the best overall result. In a crisis, the uncertainty increases and therefore most individuals have an increased taste for more liquid assets and less for risky investments. The result of decreased consumption and increased savings would depress the economy even more, producing more uncertainty, which in turn would make more people look for liquid assets, ... and starting a self-reinforced cycle into depression. To break this cycle it is necessary that an authoritarian institution acts decisevely against what individuals want to do and start increasing consumption to break the cycle. Again, the issue with this story is that it only looks at macroeconomic indicators. The answer I already gave it to you earlier (it is worth noting that, because of its macroeconomic nature, this explanation completely overlooks the problems that caused the crisis in the first place, for example, it overlooks an excess investment in certain sectors like housing during the last bubble):
what type of product? coordination between sectors? why are you looking at that, just look at total production! Its going down, we need to do something!!
When the austrian replies that the reason is because there is a realignement of sectors and therefore the temporal decrease in production is good because its a sign that in the furute the economy will start producing the type of products people need/want and not the old type of products people did not want (excess housing for example), macroeconomic trained economist dont understand. They just dont: why are you looking at different sectors, we only care about total output! And its going down!
So if you do not look at the relation between sectors and how the decrease in agregate production output is a result of a process of shifting the types of production, and only care about keeping an arbitrary amount of growth in the production output, then the keynesian explanation makes sense. The problem is that looking only at macroeconomic aggregates only and therefore arriving to the conclussion that keeping an arbitrary amount of growth in the total output is what the economy should be doing, you miss what it is really happening in the economy and what the economy should be really doing, providing to the people what they need/want.
But what about the unemployed? We let them rot? No, but if we want to help them we need to know how to create employment, and for that we need to understand what really caused the crisis and the real mechanism that will solve it. And answering to your question: So why do economic recession last so long? Is it because everybody starts hiding money under the matress as Keynes said? No, the reality is that people hardly hide money in the matress during crisis, more like are really struggling to get along. The lack of liquidity during the Great Depression or during the years after the 2008 crash is real, but it does not come from people saving more as Keynes argued, it comes mainly from banks having to cut their lending activities due to being completely overextended. And because the banking system is a government created oligopolly around the central bank and its monopollistic currency, competition can not fill the void propperly. Its not coincidence that during the Great Depression there was a big increase in the use of alternative currencies. Banks are broke and the transmission from savings into investment (what banks do) is broken, cutting any opportunity of recovery.
Keynesians argue that the solution should be the central bank saving them, and in extreme cases use the taxpayer directly. Austrians argue that they should go into bankruptcy to liquidate the bad debt and have new management re-build the sector with what can be savaged. You will discover that a lot of keynesian phalacies at the end what acomplish is shift the blame from the banks to the people and the mesures proposed under the excuse of helping the people in reality are geared towards helping the banking system.
