Thanks for restating your questions.
Sieben:You're not really criticizing ABCT in itself then are you. You just think that its unlikely for ABCT to continue indefinitely on the market, which makes the Austrian kneejerk responce to blame interest rates null (eventually). So then would you agree with a formulation of ABCT that said artificial manipulation of interest rates causes *problems*, which may or may not result in a bust? I think this would actually be more consistent with Austrianism, since we let go of our vague claim to some future bust. Conceivably the bust could be averted by some actions taken by entrepreneurs but the market fundementals are still problemmatic.
I will say this much: unpredictable fluctations in the interest rate can create enough uncertainty to disrupt market processes. Of course, I believe interest rate changes are fairly open and predictable. If Bernanke spiked it to 5% then 0.3% then 4% then 7% within the span of a month, I would expect problems.
Sieben:So? If an entrepreneur knows that not all the projects can be completed because of extra easy credit, he can still take the credit and hope that his venture won't fail right?
I don't think entrepreneurs just irrationally "hope" for success during some times but are more careful and prudent during others. It's like when people say "greed" is what caused the financial crisis; libertarians, usually, point out that human nature hasn't changed. I don't believe ventures taken by entrepreneurs at any given time are more irrational than any other time; I believe excessive optimism is about just as likely as excessive pessimism.
Sieben:And I would argue that the status quo is consistent with the market improving over time. Previous inflationary measures by the fed pale in comparison to their current course of action. One interpretation of the status quo is that the market has gotten so good at fighting these inflationary bubbles that the fed has to take more and more drastic measures each time to get the results they want.
Are prices rising in a [hyper]inflationary way? Why or why not?
"I'm not a fan of Murray Rothbard." -- David D. Friedman
nirgrahamUK, no, I wasn't. The entirety of my post, including the link, explains that.
well then you concede that business leaders took a punch in the face in order to avoid being slaughtered, even though without hoover, they could have had a tender slap.
what was your point?
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
My point is that even bad outcomes can be more efficient than alternatives; I believe recessions are efficient, for instance, and that they are due to a shock in total factor productivity. I don't believe a whole bunch of people are making unusually stupid decisions at once.
Neoclassical: I don't believe a whole bunch of people are making unusually stupid decisions at once.
I don't believe a whole bunch of people are making unusually stupid decisions at once.
Read pp 421-424 here:http://mises.org/books/desoto.pdf
It addresses your objections.
Let me just boil down my argument to two points:
I don't believe people will be fooled by "animal spirits" during "speculative booms," but I do believe there can be endogenous shocks to the economy that create fluctuations in productivity. You know, something like President Bush stating on national television that he "abandoned free market principles to save the free market system" can create regime uncertainty (as Higgs named it).
>>I don't believe people will be fooled by "animal spirits" during "speculative booms,"
I struggle to take you seriously, you argue against Austrians as if they were keynesians.
yet you are the keynesian with your denial of the notion of a structure of production, and some kind of fantasist if you don't appreciate that the efficacy of entrepeneurialism is directly impacted by Government interventionism. yes, the entrepeneurs will do they best they can with what they got. yes, they will make less bad errors than a central planning board... but they will still be decoupled from serving consumer sovereignty by interventionism
"Let me just boil down my argument to two points:"
1. It is impossible, even by your own reasoning, to have economic "booms" that precede your "endogenous shocks" absent of an increase in the money supply and specifically in the loan markets. This is not even a matter of accepting or realizing Austrian capital theory. An increase in the money supply (in the broader sense) must always be present for a boom to occur in the presence of a general rise in commodity prices. Do you understand this point?
2. Again, your rational expectation theory in this context is in serious conflict with the entrepreneurship spirit.
Neoclassical:I will say this much: unpredictable fluctations in the interest rate can create enough uncertainty to disrupt market processes. Of course, I believe interest rate changes are fairly open and predictable. If Bernanke spiked it to 5% then 0.3% then 4% then 7% within the span of a month, I would expect problems.
Neoclassical:I don't think entrepreneurs just irrationally "hope" for success during some times but are more careful and prudent during others. It's like when people say "greed" is what caused the financial crisis; libertarians, usually, point out that human nature hasn't changed. I don't believe ventures taken by entrepreneurs at any given time are more irrational than any other time; I believe excessive optimism is about just as likely as excessive pessimism.
Neoclassical:Are prices rising in a [hyper]inflationary way? Why or why not?
This is beside the point, which was that the fed is taking unprecedented action. Growing the monetary base far more than it ever has in the past. ABCT is consistent here because we do not say the market was fooled by the same thing twice, but in fact may have gotten so good at fighting fed policy that bernake really has to pull out all the stops.
Its conceivable that in the future business cycles could be averted entirely if the market got really good at fighting the fed. I don't think it is likely, because of Greenspan puts and the collective action problem I've been mentioning. But it is in principle possible. I am optimistic about free-rider problems, as per my current thread.
Sieben, congrats on a strong post
Thanks for the link, DD5.
Let me repeat a quote from Caplan, [I]t is readily conceded that (a) expansionary monetary policy reduces interest rates, and (b) lower interest rates stimulate investment in more round-about projects. Where then does the disagreement emerge? What I deny is that the artificially stimulated investments have any tendency to become malinvestments. Supposedly, since the central bank's inflation cannot continue indefinitely, it is eventually necessary to let interest rates rise back to the natural rate, which then reveals the underlying unprofitability of the artificially stimulated investments. 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.
In short, the Austrians are assuming that entrepreneurs have strange irrational expectations.
Once again, even if reduced interest rates stimulate more long-term projects, it would be irrational (despite what de Soto claims) to expect that interest rates will remain permanently low.
He adds, Why does Rothbard think businessmen are so incompetent at forecasting government policy? He credits them with entrepreneurial foresight about all market-generated conditions, but curiously finds them unable to forecast government policy, or even to avoid falling prey to simple accounting illusions generated by inflation and deflation. Even if simple businessmen just use current market interest rates in a completely robotic way, why doesn't arbitrage by the credit-market insiders make long-term interest rates a reasonable prediction of actual policies? The problem is supposed to be that businessmen just look at current interest rates, figure out the PDV of possible investments, and due to artificially low interest rates (which can't persist forever) they wind up making malinvestments. But why couldn't they just use the credit market's long-term interest rates for forecasting profitability instead of stupidly looking at current short-term rates? Particularly in interventionist economies, it would seem that natural selection would weed out businesspeople with such a gigantic blind spot.
Once again, Rothbard (and the ABCT) expect entrepreneurs to fall prey to "simple accounting illusions generated by inflation and deflation." And, once again, "arbitrage by the credit-market insiders" would make prediction practicable.
>>why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely?
strawman much?
Big strawman!
Neoclassical,
you read the link. Where does it say that? You seem to either be misunderstanding what de Soto is claiming, or you are ignoring it. What is your objection in the following quote from de Soto:
DD5:Let me give you another real life personal example: I am very much aware of the Austrian Business Cycle and I am well aware that interest rates are currently artificially low. I am right now in the process of refinancing my mortgage. According to you I am irrational. I should stay with my 5.6% and not refinance to 4.7%? Which would be the more rational thing to do under these circumstances? Please answer. I am dying to get your answer for this.
Everyone, your attention please!
Here is our argument distilled to its essence:
It should be noted that other Austrians, particularly Roger Garrison, attempt to handle the expectational objection. Garrison astutely notes that "[M]acroeconomic irrationality does not imply individual irrationality. An individual can rationally choose to initiate or perpetuate a chain letter... Similarly, it is possible for the individual to profit by his participation in a market process that is - and is known by that individual to be - an ill-fated process."[50] This is definitely a possible scenario. But does it make sense in this particular case? It does not. Naturally, entrepreneurs will not turn down lower interest rates. Rather, the rational response to artificially low interest rates is to (a) make investments which will be profitable even though interest rates will later rise, and (b) refrain from making investments which would be profitable only on the assumption that interest rates will not later rise. If entrepreneurs followed this rule, then there would be no tendency for policy reversals to produce malinvestments.
But it doesn't make sense for people to follow rule (b) for 2 reasons:
- They might have a lower investment horizon than the expected duration of the low interest
- They might be able to lock in the low interest rates using options for all investments regardless of interest expectations
So you are saying there are malinvestments and hence the importance of the structure of production?
Neoclassical: I am not saying anyone is irrational! That's been exactly my point!
I am not saying anyone is irrational! That's been exactly my point!
Once again (emphasis mine):
Therefore the entrepreneurial
Neoclassical: You should refinance if the benefits exceed the costs! Once again, according to ABCT, you are being irrational since, somehow, your choice will lead to a bust, a loss, a collapsed bubble, or some other weird dilemma you can predict.
Its still a collective action problem / market failure among entrepreneurs... see my post above.
DD5, your haranguing of Caplan (misspelled by you as Kaplan) is mistaken: he is a well-trained economist who nitpicks the ABCT in great detail. He was Rothbardian, for goodness sake! Did you actually read his criticisms?
If anything, your name-calling shows your lack of exposure to Caplan, not Caplan's ignorance of the ABCT.
Furthermore, de Soto calling it rational doesn't make it so! Caplan's critique of Garrison shows that.
Sieben, can you explain the collective action problem differently? I'm not getting it. Thanks!
>>Furthermore, de Soto calling it rational doesn't make it so! Caplan's critique of Garrison shows that.
what standard of rationality are you using? be specific... remember you are talking about an entrepreneur.
The austrian position is that entrepreneurs act as rationally as any human. but when faced with monetary intervention of a massive dynamic type, they are misled, for a while.... that is all.
you would have it so that entrepreneurs are never misled even for a short time? even for a peco-second? can you see that there is actually a continuum between the keynesian, austrian and neoclassical views on this issue of 'duration of effective misleading'
keynesians - > entrepreneurs could be always misled and should be ! permanent boom and prosperity is a mere printing press away
austrians -> entrepreneurs can be misled for a while . boom and bust
neoclassical -> entrepreneurs cannot be misled. there is no such thing as boom and bust. there are shocks. like when bush shoots himself in the foot for no reason by deciding to incur peoples wrath and instigating a recession, when he could have done otherwise and the economy could have proceeded on healthily. (actually this kinda looks like keynesian with a different perspective...interesting...)
I disagree with your Keynesian twist: "animal spirits" overtake investors leading to irrationally optimistic "malinvestments" in particular sectors.
Could you quote where you read something about "animal spirits" in AE? Somehow I concluded that "animal spirits" is the anti-thesis of ABCT whilst you concluded that is the essence of it.
Neoclassical:Sieben, can you explain the collective action problem differently? I'm not getting it. Thanks!
So lets pretend the economy is nice. Then the central bank decides to offer entrepreneurs new money hot off the printing press. When entrepreneurs spend the new money on new projects, they bid capital away from competitors. There are now firms in the market operating at a higher cost than before. For firms to stay in business, they have to get in on the new money too. It becomes a game of whoever gets the most new money stays in business.
So, every firm wants the new money to stay out of the market. But firms benefit individually if they get new money before everyone else. Since firms are roughly autonomous, they cannot come to a stable boycott of the new funds. There would be a huge incentive to cheat on it. Large gains for the individual; small loss for the market. But if every firm picks this option, the individual advantage firms are hoping to get dissapears, you wreck the market in the process by screwing up the price of capital.
The best every firm can do is break even by borrowing exactly the same amounts, and in the process, they deaf and blind without market prices. If firms don't have real interest rates and real prices, they are like soviet central planners. They would have to use crude methods of estimating consumption patterns... and when consumers did spend, they have no way of knowing if they can charge high enough prices to cover their inflated costs.
Its almost analogous to what if there were a printing press on every street corner. But do you think people would use those bills as common exchange? No way in hell. There's a very simple solution to ABCT that firms can opt for, and that is a stable currency. ABCT is absolutely not likely to be a good critique of truly free markets because no human beings have ever been so stupid as to intentionally use inflationary currency over sound money. I think the market does really do a good job of getting to this solution in the status quo through trying to store value in commodities markets, but if everyone has to use USDs for transactions, there are some problems. You don't have to end the fed. You just have to get rid of all the laws binding us to dollars. There can be a central bank printing a trillion dollars a second. It won't matter if no one uses them.
Neoclassical:The structure of production? That's make-believe.
Neoclassical:Maybe you (Chloe732) shouldn't speak on theories you're not familiar with?
You are refuting ABCT on grounds of rational expectations. You reject the structure of production (which is perfectly fine, I'm merely stating your position as I undertand it)
I ask you and the those participating in this thread: How is it possible to debate and discuss ABCT without reference to the distortion made to the structure of production?
Yes, we can discuss "the interest rate". We can address Neoclassical's assertions about entrepreneurs not being "fooled". But we are ignoring the essence of the theory; the distortion to the structure of production which Neoclassical denies exists.
Neoclassical:"Malinvestment"? Seriously?
Yes. Very. The disaster of 2008 was (and continues to be) the result of malinvestment created during the boom being exposed by the Fed's tightening exactly as I described in the post you ridiculed. Exactly as described by ABCT.
Whether or not ABCT is valid is not a mere academic exercise. Millions of people are paying the price for interventionist experimentation. Yes, I am serious.
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
bump
Sieben, I think you misunderstand my critique: I don't believe people should or would avoid cheaper credit; my point is that I don't believe an usually large amount of wrong investments will be made.
"I don't believe people should or would avoid cheaper credit; my point is that I don't believe an usually large amount of wrong investments will be made."
Now if you understood Capital theory, you would realize the above makes no sense.
Caley McKibbin: I disagree with your Keynesian twist: "animal spirits" overtake investors leading to irrationally optimistic "malinvestments" in particular sectors. Could you quote where you read something about "animal spirits" in AE? Somehow I concluded that "animal spirits" is the anti-thesis of ABCT whilst you concluded that is the essence of it.
I think he already did, in an earlier post. I'll quote it, since I don't know how to link to a single post:
Like I said, there's no hiding this. I'm not sure why several of you are doing so. Let me quote some contemporary, orthodox, respected Austrian economists.
Robert P. Murphy, [M]arkets are capable of periods of mass delusion as it were, in which asset prices get pushed far above any "rational" level justified by the underlying fundamentals.
Jesus Huerta de Soto, Widespread discoordination in the economic system results: the financial bubble ("irrational exuberance") exerts a harmful effect on the real economy, and sooner or later the process reverses in the form of an economic recession, which marks the beginning of the painful and necessary readjustment. This readjustment invariably requires the reconversion of the entire real productive structure, which inflation has distorted.
Doug French, People seem to do the craziest things when it comes to money. Whether it's chasing stock-market bubbles or paying good money after bad on a home that's hopelessly underwater, the idea of individuals acting as homo economicus seems far-fetched. Only in the ivory-tower world of rational-expectations theory does one find perfectly rational humans making judgments using all available information to satisfy their subjective ends.
[EDIT by Dave: I think the animal spirits only come to life when they smell free money. Keynes held it can happen at any given moment. That's how I see the diff between Keynes and AE]
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
I get it. I just don't believe entrepreneurs will mistakenly predict "real savings," given long-term forecasts available.
I don't see anything in those quotes saying that "animal spirits" have any relation to ABCT.
Neoclassical:I don't believe people should or would avoid cheaper credit;
Neoclassical:my point is that I don't believe an usually large amount of wrong investments will be made.
Caley McKibbin: I don't see anything in those quotes saying that "animal spirits" have any relation to ABCT.
Go not by the words, but by their meanings. The following are all different words for saying the same thing, and each of the quotes uses one of them:
animal spirits= mass delusions= irrational exuberance= seem to do the craziest things.
...and they say nothing about those being a part of ABCT, which I know they are not. Perhaps I should have been more specific in my question, though it should have been obvious what I meant...
Re: post by Smiling Dave.
Quotes by Murphy, de Soto, French.
The quotes seem to, at the very least, lack context (didn't say "out of context"). It seems to me, in these passages, the authors simply were not being precise.
ABCT does not involve mass delusion, irrational exuberance, bubbles, or people doing crazy things.
According to ABCT, everyone is acting according to their own subjective value scales. They are following the signals being sent. The signals, of course, are distorted. The distortion is upon the relationship between real savings and the lengthened production structure. Nobody needs to know how much real savings are available to support a given production structure. The interest rate automatically reflects this relationship in an unhampered market, providing the signal that coordinates the structure of production with real savings.
My purpose is not to restate the theory, but to explain why the quotes are not inconsistent with ABCT, they are simply imprecise.
"[M]arkets are capable of periods of mass delusion as it were, in which asset prices get pushed far above any "rational" level justified by the underlying fundamentals." This is describing the boom part of the business cycle, as we see from here, where Bob Murphy says "But what if they were familiar with Austrian business-cycle theory, and had read Mark Thornton's 2004 prediction that the boom in housing was too good to be true?" Read the whole article.
"Widespread discoordination in the economic system results: the financial bubble ("irrational exuberance") exerts a harmful effect on the real economy, and sooner or later the process reverses in the form of an economic recession, which marks the beginning of the painful and necessary readjustment. This readjustment invariably requires the reconversion of the entire real productive structure, which inflation has distorted." This too, is very explicitly describing the boom part of a business cycle. It's from Desoto's preface to his book, Money, Bank Credits, and Economic Cycles, available for free at this site. Note the title of the book, btw.
"People seem to do the craziest things when it comes to money. Whether it's chasing stock-market bubbles..." Here too,note the word bubbles. That quote is by Doug French, to whom a bubble is synonomous with first stage of an ABCT, as evidenced here: http://mises.org/daily/3616
Neoclassical:I get it. I just don't believe entrepreneurs will mistakenly predict "real savings," given long-term forecasts available.
Entrepreneurs don't have to "predict" real savings. Therefore, they will not make mistakes regarding the availability of real savings. The entrepreneurs follow signals. The signals are distorted as has been stated throughout this thread.
To summarize your position:
1) You reject the notion of the time structure of production.
2) You reject the notion of "real savings", or a "pool of real savings".
3) You reject "signals" of the type being discussed, specifically, the interest rate being the signal that coordinates real savings with the "round aboutness" of production.
4) You reject the idea of "Round aboutness" as a non-scientific term, not suited for the serious study of economics.
Does that pretty much sum it up?
Smiling Dave, you don't seem to be able to distinguish between the theory on one hand and the characterization on the other hand. I take it because he hasn't said anything contrary that Neo-classical can't either.
You are entitled to your opinion, chloe, but unless you tell me how and why and what "irrational exuberance, mass delusion, crazy things, bubbles" mean something other than what they always mean, I feel equally entitled to take them at their face value.
Yes, even after reading that there is a difference between theory and characterization, I don't get it. Would you care to explain in simple non-Esuric English [which will prove your command both of the concepts you are trying to explain and of the English language] what you mean? Make it obvious to the miost primitive mind.
Let me add that Mark Thornton wrote an article, available here in pdf, called "The Economics of Housing Bubbles", in which he writes explicitly that he is going to lay out the ABCT explanation of the current housing bubble.
He writes that the Chicago school denies the very existence of bubbles, and Keynesians think " bubbles exist because of psychological factors such as those captured by the phrase “irrational exuberance.” The Austrian view, he writes [in two places!] "sees bubbles as consisting of real and psychological changes caused by manipulations of monetary policy."
Well! Couldn't have said it better meself. In fact I did say it, several times, in this thread and others. The modern ABCT adds to Mises 1912 work the additional point, evidenced historically over and over, that free money makes people stupid. Or, as the respected authors quoted a few times here have written, strike people with ""irrational exuberance, mass delusion", and make them do "crazy things".