Paul Krugman's:
http://www.slate.com/id/9593
John Quiggin:http://johnquiggin.com/index.php/archives/2009/05/03/austrian-business-cycle-theory/
Bryan Caplan:
http://econfaculty.gmu.edu/bcaplan/whyaust.htm ( VERY long article, section 3.4.2. is the relevant bit).
My friend forwarded these to me, I never heard of their refutes.. and quite frankly I don't have time to read long boring crap like that. So if someone wants to take a look at these, then go on ahead. I want to see if ABCT really HAS been refuted and debunked .. or not.
Krugman's "refutation" isn't a refutation at all. His argument is that ABCT states that the recession is a moral punishment for bad investments in the boom.
is abct even real??? is it a refutation of something that isnt true anyway??
is it a shortened term for theories actually posited by people from the early 20th century???
someone called menger??
cret: is abct even real??? is it a refutation of something that isn't true anyway?? is it a shortened term for theories actually posited by people from the early 20th century??? someone called menger??
is abct even real??? is it a refutation of something that isn't true anyway??
.... I smell troll on you....
What I'd really like to hear for a refutation is why a central bank setting the interest rate by its own whims would not cause misallocations in the structure of production.
The Late Andrew Ryan: cret: is abct even real??? is it a refutation of something that isn't true anyway?? is it a shortened term for theories actually posited by people from the early 20th century??? someone called menger?? .... I smell troll on you.... What I'd really like to hear for a refutation is why a central bank setting the interest rate by its own whims would not cause misallocations in the structure of production.
The Bryan Caplan one is just that, however its very long.
Novus Zarathustra: I don't have time to read long boring crap like that.
Agreed, its a waste of time. Long winded usually == wrong.
Robert Murphy - Correcting Quiggin on ABCT
http://mises.org/daily/3466
Replies to Caplan
"Economic Science and Neoclassicism", by Jörg Guido Hülsmann
"Austrian Theorizing: Recalling the Foundations", and the errata, by Walter Block
"Kaldor-Hicks Efficiency and the Problem of Central Planning", by Edward Stringham
"Probability, Common Sense, and Realism: A Reply to Hülsmann and Block", by Bryan Caplan
"Realism: Austrian vs. Neoclassical Economics, Reply to Caplan", by Walter Block
"Probability and the Synthetic A Priori: A Reply to Block", by Bryan Caplan
Replies to Krugman
"Contra Krugman", by Roger Garrison
"Epstein Responds", by Gene Epstein
"The Hangover Theory?", by John P. Cochran
"Keynesian Confusions", by David Gordon
"Rejoinder to Caplan on Bayesian Economics", by Walter Block
Novus Zarathustra: The Bryan Caplan one is just that, however its very long.
This is a quote taken from the article:
"The objection is simple: Given that interest rates are artificially and unsustainably low, why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely? No, what would happen is that entrepreneurs would realize that interest rates are only temporarily low, and take this into account."
Thomas E Woods provides an answer to this object in his book Meltdown. He says the following:
"A reasonable objection to the Austrian explanation runs as follows: why can't businessmen simply learn to distinguish between low interest rates that reflect an increase in genuine savings, and low interest rates that reflect nothing more than Fed manipulation?....The answer is that it is not so easy. (First of all even most economists are unaware of Austrian business cycle theory, and it is a rare business school in which the subject is taught.) Even businessmen who do know the Austrian theory and who know with absolute certainty that the Fed is keeping interest rates artificially low may still find it in their interest to borrow and launch new projects, hoping their project will be one of the lucky ones and that they can get out well before the bust hits. If they sit back and do nothing, and do not react to the lower rates, their competition surely will, and might be able to gain market share at their expense." pg75-76
mber: Novus Zarathustra: The Bryan Caplan one is just that, however its very long. This is a quote taken from the article: "The objection is simple: Given that interest rates are artificially and unsustainably low, why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely? No, what would happen is that entrepreneurs would realize that interest rates are only temporarily low, and take this into account."
This has to assume to the entrepreneurs would know what the real market interest rate is.
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
mber:"The objection is simple: Given that interest rates are artificially and unsustainably low, why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely? No, what would happen is that entrepreneurs would realize that interest rates are only temporarily low, and take this into account."
Maybe I'm being dense... but if his argument in favor of a central bank's manipulation of interest rates is that businessmen will eventually learn to ignore the artificially low rates, then what does he think is the point of lowering the rates in the first place?
Isn't this what we're seeing now? The Fed has held the rate below 1% for an extended period and still no one's biting, because they are aware of the looming bust.
Doesn't his argument imply that a disproportionate amount of available credit will go towards businessmen who ignore or don't realize that the interest rate is artificially low? Also that businessmen who are keen enough to understand that the interest rate is artificially low will be systematically less likely to expand their businesses? Wouldn't this dynamic, where credit is going to the irresponsible at the expense of the responsible, only fuel the bubble?
I could maybe see the argument that some businessmen's hesitancy to capitalize on artificially low rates could have a temporary dampening effect on unsustainable credit growth, but certainly not enough to level-out the cycle.
Of course, when government bails out the losers and pays their gambling debt anyway, he has no argument whatsoever, because then there's absolutely no incentive not to gamble with that cheap credit.
Daniel Muffinburg: mber: Novus Zarathustra: The Bryan Caplan one is just that, however its very long. This is a quote taken from the article: "The objection is simple: Given that interest rates are artificially and unsustainably low, why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely? No, what would happen is that entrepreneurs would realize that interest rates are only temporarily low, and take this into account." This has to assume to the entrepreneurs would know what the real market interest rate is.
Actually, eventually they do take it into account, which is why the inflation rate must accelerate at an ever faster pace.
Caplan's criticism of the ABCT has always been trivially stupid. Besides everything that's already been said, it would only apply if ABCT were accepted as true. But, it's not. So everything he wrote is irrelevant.
Because ABCT isn't accepted as true, he can't say that businessmen will take low interest rates into account. Why should they!? People like Caplan are telling them NOT to take it into account.
Caplan CANNOT simultaneously:
1) Say that ABCT is not true because businessmen take it into account
2) Say that businessmen don't need to take it into account (<--- this is what saying ABCT is not true entails) because it's not true.
As we see, if businessmen followed Caplan's own advice, it would make Caplan's statements about ABCT incorrect!
Caplan may counter by saying, well, if businessmen generally take it into account, then you don't get a business cycle, and if they don't take it into account, then yes, you may get instability. But, again, they most definitely are not taking it into account because ABCT simply isn't well known, and secondly, people like Caplan are telling them that ABCT doesn't exist *in practice*.
And yes, the other commenters are correct in pointing out that businessmen wouldn't know what the market rate of interest should be... basically they have no way of calculating because they don't know how much of their business surroundings are real and how much is artificial.
NewLiberty: Caplan's criticism of the ABCT has always been trivially stupid. Besides everything that's already been said, it would only apply if ABCT were accepted as true. But, it's not. So everything he wrote is irrelevant.
Caplan's criticism would not apply even if the Austrian business cycle theory was widely accepted. Entrepreneurship is innate within the human spirit, and while humans cannot calculate the natural rate of interest and cannot calculate for what length of time the inflation will accelerate they will continue to borrow accumulated capital and invest it.
ABCT could also be renamed "central bank business cycle theory" or CBBCT.
The most unknown part of economics is "money". Since we are still defining what money is.....................and .because money is the "nature" of ABCT, it is understandable how MANY could think trash of it.
Corporatism is using state means to enhance market share and profitability of a few favored firms, at the expense of the citizen.
wolfman: ABCT could also be renamed "central bank business cycle theory" or CBBCT.
The ABCT has different names, including the credit theory of the business cycle.
wolfman: ABCT could also be renamed "central bank business cycle theory" or CBBCT. The most unknown part of economics is "money". Since we are still defining what money is.....................and .because money is the "nature" of ABCT, it is understandable how MANY could think trash of it.
Not really, since a central bank isn't necessary.
wolfman:ABCT could also be renamed "central bank business cycle theory" or CBBCT.
ABCT does not necessitate the existence of a central bank.
True...........but it is elemental to my opinion since money or legal tender are issued worldwide by central banks. They are responsible for Credit, money, or monies in circulation.
Daniel Muffinburg: wolfman: ABCT could also be renamed "central bank business cycle theory" or CBBCT. The most unknown part of economics is "money". Since we are still defining what money is.....................and .because money is the "nature" of ABCT, it is understandable how MANY could think trash of it. Not really, since a central bank isn't necessary.
This is a very point. I think Caplan is ignoring how interest rates are manipulated.
The wonder of a decentralized economy is that I don't have to take a survey of how many sweaters are currently for sale and how many people want the sweaters, and how badly. I simply look at the price and decide if I want to purchase at that price. The price itself will make sure there is a sweater available for everyone willing to pay the price (markets clear, in other words).
If the price of sweaters were suddenly to be lowered, even if I knew they had been artificially lowered, it doesn't mean that I know how many sweaters there actually are and whether or not I should get in line (there will be a waiting line now) to get one. Am I one of the ones who would have purchased the sweater at the market price? Hard to know without knowing what the market price is/would be (I only know that it is higher than the current asking price).
The Fed does not directly manipulate the interest rate. They inject (false) liquidity into banks which then respond by lowering the interest rate (markets clear, in other words). If businessmen suddenly, en masse, grew leery of accepting loans because they knew the Fed had injected liquidity, this would simply cause the bank to keep lowering the interest rate until they found takers for their loans (markets clear, in other words). And supposing that businessmen would, en masse, reject loans requires several highly dubious propositions. One, that there are no half finished projects that someone wants to finish, or at least that, being half-way done with a project, a businessman will not take a loan to finish it until the Fed withdraws the excess liquidity. Two, that there are no businesses on the verge of going under who might delay or avoid bankruptcy with a loan with a low rate of interest. Three, that there is no one who thinks they might expand their market share with a cheap loan now and get out before the collapse later.
Caplan fails.
Every decent man is ashamed of the government he lives under - Mencken
DD5: ABCT does not necessitate the existence of a central bank.
I realize that the questions I pose on this blog post are simple, but they were to generate discussion and to clarify a few points. I wonder what your opinions on free banking theory are.
One more point I should bring up is that the collapse will come about independent of any individuals actions. I might decline to take the loan, but that won't stop everyone else, which will lead to the same collapse except that I never had the privilege of cheap credit. It's similar to the communist problem of labor: if my wages are to be divided evenly with everyone based on total production, I can stop working and have hardly any effect on my wages, and if everyone else stops working, I can continue to do so and still get next to nothing for it. The same thing can be said of the entrepreneur when the Fed inflates: the collapse will come and no amount of restraint on an individual's part will stop it. Given that, you might as well get some cheap loans.
Jonathan M. F. Catalán: DD5: ABCT does not necessitate the existence of a central bank. I realize that the questions I pose on this blog post are simple, but they were to generate discussion and to clarify a few points. I wonder what your opinions on free banking theory are.
I regards to Selgin's comment on your post: So he is saying that you are basically buying the paper note when you trade your gold for it? Why would anyone do that? The assumed value of the note is that it is redeemable in gold, but not that is a receipt for a deposit of gold.
I don't see why Rothbard has to be wrong in order for Selgin to be correct. It seems that Selgin is talking about loans, whereas Rothbard is talking about warehousing.
Mises Pieces:Doesn't his argument imply that a disproportionate amount of available credit will go towards businessmen who ignore or don't realize that the interest rate is artificially low? Also that businessmen who are keen enough to understand that the interest rate is artificially low will be systematically less likely to expand their businesses? Wouldn't this dynamic, where credit is going to the irresponsible at the expense of the responsible, only fuel the bubble?
My guess is that Caplan didn't consider the Carry Trade...
I'd be interested to see upon whom Caplan modeled his omniscient entrepreneur in his example, he's certainly lucky to know him. The collapse of the MBS market proves him wrong anyway. Homeowners failed to consider how they would make payments when rates rose and investors failed to consider how the value of their MBS's would be affected when this happened. Double-whammy.
Come to think of it, the Dubai situation makes a fool of Caplan.
Daniel Muffinburg: I regards to Selgin's comment on your post: So he is saying that you are basically buying the paper note when you trade your gold for it? Why would anyone do that? The assumed value of the note is that it is redeemable in gold, but not that is a receipt for a deposit of gold.
Yea, I'm not sure either. I assume the reason is that money substitutes would be easier to carry and use.
Well, the free bankers believe that the bank now has ownership over the deposit of gold, so they could loan it out. The reserve ratio would be decided through price signals, and I'm guessing that the higher the demand for base money the higher the reserve ratio would be. I'd like to read the other books by Selgin before criticizing his views on fractional reserve banking and distortion of prices, because honestly I don't know his view. But, if Rothbard - and I believe early Hayek, as well - was correct then while meeting the demand for bank-issued money would not be inflationary, the loaning of gold deposits would.
I don't think there is an adequate distinction between deposits made to safeguard one's gold, so that the depositor can instead use the bank notes, and true savings accounts, or time deposits.
gocrew:The Fed does not directly manipulate the interest rate. They inject (false) liquidity into banks which then respond by lowering the interest rate (markets clear, in other words). If businessmen suddenly, en masse, grew leery of accepting loans because they knew the Fed had injected liquidity, this would simply cause the bank to keep lowering the interest rate until they found takers for their loans (markets clear, in other words). And supposing that businessmen would, en masse, reject loans requires several highly dubious propositions. One, that there are no half finished projects that someone wants to finish, or at least that, being half-way done with a project, a businessman will not take a loan to finish it until the Fed withdraws the excess liquidity. Two, that there are no businesses on the verge of going under who might delay or avoid bankruptcy with a loan with a low rate of interest. Three, that there is no one who thinks they might expand their market share with a cheap loan now and get out before the collapse later.
To expand on your idea, building on the mechanics of Fed intervention: What about the temporal nature of debt and contract? The banks will create a contract and lend capital they have now at the current interest rate despite the fact that the project will be completed in the future, do they not? Any interest rate hikes don't affect the ROI on that loan, just the bank's ability to originate loans in the future.
Jonathan M. F. Catalán: Daniel Muffinburg: I regards to Selgin's comment on your post: So he is saying that you are basically buying the paper note when you trade your gold for it? Why would anyone do that? The assumed value of the note is that it is redeemable in gold, but not that is a receipt for a deposit of gold. Yea, I'm not sure either. I assume the reason is that money substitutes would be easier to carry and use. I don't see why Rothbard has to be wrong in order for Selgin to be correct. It seems that Selgin is talking about loans, whereas Rothbard is talking about warehousing. Well, the free bankers believe that the bank now has ownership over the deposit of gold, so they could loan it out.
Well, the free bankers believe that the bank now has ownership over the deposit of gold, so they could loan it out.
Here's m-w.com's definition for "deposit": [T]o place especially for safekeeping or as a pledge.
When I buy a pizza, I am not making a deposit at the pizzeria, that is, I am not giving my money to the pizzeria for safekeeping. Instead, I am exchange ownership titles.
Anyway, I'm going to end here, since I haven't read Selgin's complete argument. These were simply my initial thoughts after reading the comment Selgin left on you post.
No, there are endogenous and exogenous factors which can set off the ABC; today, there is a combination of the two. Recessions and the business cycle are not contingent upon exogenous monetary manipulation, by central banks or whatever. This over-simplification a very common misnomer (it's a straw man). My professor actually echoed it today in class ("the Austrian's blame everything on central banks").
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
ThreeTrees:Any interest rate hikes don't affect the ROI on that loan, just the bank's ability to originate loans in the future.
Unless it's a variable rate loan, this is true. The interest paid goes according to the agreement when it was made.
Esuric:No, there are endogenous and exogenous factors which can set off the ABC; today, there is a combination of the two
Could you kindly elaborate on this?
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
I left a comment there.
Also, I am 99% sure you are already aware of this, but just in case (perhaps for others here), MES and Mystery of Banking are in no way substitutes. Not even for banking theory. MES is Austrian Economics from A to Z. As far as banking, there is very little in MES, but as far as Capital Theory / Structure of production, I still don't know of any better text then MES. Mystery of Banking has almost no mention of capital theory, although the beginning offers a good intro to Mises' theory on Money and Credit.
It is you who is denying the possibility of the common banking contracts. Whatever kind of deposit is used elsewhere is of little importance for money is different.
scineram:Whatever kind of deposit is used elsewhere is of little importance for money is different.
That Money deposited for safe keeping is different from wheat deposited for safekeeping is just a baseless assertion by you. What is the basis for this distinction other then "historical legal opinions"? They should be identical. For consistency, the argument must be valid for wheat as well.
Smiling Dave: Esuric:No, there are endogenous and exogenous factors which can set off the ABC; today, there is a combination of the two Could you kindly elaborate on this?
There are rigidities and imperfections in the nature of banking itself which can cause relative divergences between the market and natural rates of interest. Banks, rather than elevating the market rate when there's an increased demand for capital, will satiate that demand through the expansion of fiduciary media. So, for example: a new technological innovation emerges which increases the productivity of capital; the natural rate rises. But if the banks merely expand the supply of money, rather than elevating the market rate towards the natural rate, you set off an inflationary induced boom. Thus, the market rate can be suppressed below the natural rate, even if it remains constant, or "stable." You can increase the supply of money as money, but not as capital (this causes the ABC).
Esuric, that one sailed right over my head. I see I need more background.
Do you know of some link that talks about this q in general? How about one that explains money as money and money as capital?
Smiling Dave: Esuric, that one sailed right over my head. I see I need more background. Do you know of some link that talks about this q in general?
Do you know of some link that talks about this q in general?
Well, It's in Hayek's Monetary Theory and the Trade Cycle.
Smiling Dave:How about one that explains money as money and money as capital?
Prices and Production (also by Hayek), lecture 4. Mises talks about it in the Theory of Money and Credit as well.
Essentially the banks, when confronted with an increased demand for investment, decide to lend more money (create additional credit) rather than elevating the market rate of interest towards the natural rate. The business cycle is not the result of fractional reserve banking; it's the result of an arbitrarily reduced market of interest (relative to the natural rate, or equilibrium rate, if you like). Also, when the market rate is above the natural rate, you get economic stagnation.
DD5:That Money deposited for safe keeping is different from wheat deposited for safekeeping is just a baseless assertion by you.
It isn't. In the real world, however, no one deposits money for safekeeping.
scineram: DD5:That Money deposited for safe keeping is different from wheat deposited for safekeeping is just a baseless assertion by you. It isn't. In the real world, however, no one deposits money for safekeeping.
Really? I do. If I show up to my bank today and they tell me my money's gone I'm going to be kind of mad. There are other reasons of course, but safekeeping certainly is one.
Mtn Dew:Really? I do. If I show up to my bank today and they tell me my money's gone I'm going to be kind of mad. There are other reasons of course, but safekeeping certainly is one.
In a free banking system, in a sense, gold ceases to be the primary medium of exchange, and instead becomes a kind of collateral for money, i.e. bank liabilities. Are liabilities backed by gold a better type of money than gold coins? I think so, because changes in the demand for money can more easily be satisfied by the former than the latter, causing less economic disturbances like booms and busts.
The specific notes are gone, but our currency is fungible, therefore I can get essentially the same money back at a later time. I might forfeit the specific notes, but I still have the right to the amount I deposited.