Would you care to explain
I was hoping that Neo-classical would explain it. He has read so many books.
Again, interest rates are "high" if they are elevated above the natural rate, and they are "low" when they are suppressed below the natural rate. A 3% rate of interest may be "too high," and 25% interest rate may be "too low."
No one ever responds to this point....
"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."
Neoclassical, I'll again have to repost a reasoning you didn't refute. How does RE counter this:
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
* Rule (b) was you saying rational entrepreneurs would refrain from investment which would be profitable only with the lower interest rates provided by monetary policy.
f interest rates are market phenomena, and human actors can never accurately predict market phenomena, how can interest rates ever be set to a "natural" price?
<Edited out a link that was no longer deemed relevant>
In States a fresh law is looked upon as a remedy for evil. Instead of themselves altering what is bad, people begin by demanding a law to alter it. ... In short, a law everywhere and for everything!
~Peter Kropotkin
https://mises.org/Community/forums/p/7263/115963.aspxI f interest rates are market phenomena, and human actors can never accurately predict market phenomena, how can interest rates ever be set to a "natural" price?
https://mises.org/Community/forums/p/7263/115963.aspxI
They can't.
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 * Rule (b) was you saying rational entrepreneurs would refrain from investment which would be profitable only with the lower interest rates provided by monetary policy.
How about the fact that the vast majority of individuals know nothing about economics/trade cycle theory? Let's ignore everything else for a moment.
Epicurus Ibn Kalhoun:f interest rates are market phenomena, and human actors can never accurately predict market phenomena, how can interest rates ever be set to a "natural" price?
The very function of manually setting a market rate of interest is to fool entrepreneurs(IE alter their behavior). The whole premise is to alter market behavior away from what it would have otherwise done if left alone. If businessmen immediately accounted for the incorrect alteration of interest and adjusted their activities it would undermine the whole point that the central bank is trying to accomplish. The Central bank wants people to continue in ignorance of any natural rate of interest.
Now eventually business's and banks do account for the incorrect rate of interest and peg a premium on their credit in anticipation of inflation. When this occurs the market begins to correct itself. IE, the market in general becomes aware that the time structure of production now may be in direct conflict with consumers interests. if the central bank wants to keep manipulating the market in their favor and avoid the correction they must take even more drastic measures to keep the market operating in the way that they want. That means making credit even more available, and pushing interest rates down even farther. If the pattern continues you end up with more business cycles or a crack-up boom(Hyper-inflation). The latter is far less common.
Furthermore even if entrepreneurs did not tap into the cheap credit made available by low interest rates, they do so at the risk of losing their competitive edge during the boom phase. In order to remain competitive most firms must participate by leveraging themselves on the newly issued money which has been made available.
Back to your point however, humans can no more predict the market rate of interest then it can predict the "market" rate of apples. Interest is really the price of time, and is decided subjectively across countless individuals via the market process. The price is done by a method of discovery. The market rate of interest is discovered, not set.
Eugene von Bohm-Bawerk will expand on the knowledge of interest. It's not just simply a market phenomena, it's also arguably a time phenomena that even individuals, in the absence of markets, experience. For example Robinson Crusoe experiences it on his island when he saves his berries so that he can spend a day building a catch-net.
You can read up on the PTPT as a baseline, and Austrian's then build from that.
Natural in this context means with no govt involvement, but rather decided by the voluntary interactions of people seeking to maximize their profits.
In other words, to put it simply, when the Fed doesnt exist, and someone applies for a loan, and he winds up signing a paper that he will pay 5% interest [or whatever number], then 5% is, by definition, the natural rate at that moment for that transaction.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Esuric, how can we discuss "rational expectations" and than say "people don't know about lowered interest"?
If people know about lowered interest, as they should according to rational expectations, the two points I stated logically proof that the structure of production is affected and thus can not be ignored.
Unless neoclassical has an answer of course.
1. Can someone prove to me that businesspeople pay attentiont to short-term interest rates rather than long-term interest rates?
2. Do workers in consumption goods enjoy a "boom" during a depression?
3. Why would entrepreneurs make stupid investments? It's so crazy! Even having more credit doesn't mean they need to run and make long-term investments.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
Again, interest rates are "high" if they are elevated above the natural rate, and they are "low" when they are suppressed below the natural rate. A 3% rate of interest may be "too high," and 25% interest rate may be "too low." No one ever responds to this point....
That's because it's true. How does one counter this?
Why would entrepreneurs make stupid investments?
Because they didn't know any better/couldn't know any better. :p
Isn't it stupid to spend money on being unprofitable? Yet there are still firms which are unprofitable and go under.
Neoclassical, it's rational to go along with the fake boom, as you know all that fake money has to end up somewhere. Also, consumer good employees simply take less of a hit if interest rise again to natural levels, but of course investments in that area also slow down.
Neoclassical:1. Can someone prove to me that businesspeople pay attentiont to short-term interest rates rather than long-term interest rates?
It's not necessary. Both short and long term interest rates are set by the same factors. The only variable difference between the two is time.
It would be beneficial for you to spend some time in researching on what Austrian's consider interest to be and how it relates to the accounting profit of various stages of production in the economy. It doesn't necessarily have anything directly to do with loans and lending.
NeoClassical:2. Do workers in consumption goods enjoy a "boom" during a depression?
As was stated in my other threads, during the boom all stages of production expand laterally, that includes stages closest to consumption. IE workers in consumption goods enjoy a boom most, during the boom, not during the bust.
Neoclassical:3. Why would entrepreneurs make stupid investments? It's so crazy! Even having more credit doesn't mean they need to run and make long-term investments.
It's not about stupidity, it's about being told wrong information regarding market materials. The investments at the time may have very well been sound. Halfway through the projects completion however new calculations and business analytics show, based on a new price structure of raw materials, that their original forecast of cost was incorrect.
Everyone is drawing from the same resource pool at once, your going to have a general rise in prices regarding objects in that resource pool.
So again it's not a matter of stupidity.
Both short and long term interest rates are set by the same factors.
I heard Peter Schiff saying that long term interest rates are set by people's expectations of inflation. But I guess they think inflation is not that much of an issue short term.
Smiling Dave, almost every serious mainstream economist believes that money is neutral in the long-term (due to rational expectations).
Some, like me, have a suspicion that it is neutral in the short-term, but others disagree (monetarists, New-Keynesians, etc.).
Smiling Dave: I heard Peter Schiff saying that long term interest rates are set by people's expectations of inflation. But I guess they think inflation is not that much of an issue short term.
Expectations regarding inflation (or deflation) affect the premium that is set above or below the originary rate of interest (natural rate). But only time preference sets the natural/originary rate.
do you have arguments for dismissing cantillon effects?
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
"Smiling Dave, almost every serious mainstream economist believes that money is neutral in the long-term (due to rational expectations).
Some, like me, have a suspicion that it is neutral in the short-term, but others disagree (monetarists, New-Keynesians, etc.)."
Milton Friedman's explanation of the inflation tax and transfer of wealth associated with this tax was explained how exactly? By the neutrality of money? You gotta be kidding me. Do you need to watch the "Free To Choose" episode where he explicitly explains how the first beneficiaries gain at the expense of the last?
So even Friedman and most subsequent economists recognize that money in the short term is not neutral. That they disregard this short term effect in monetary theorizing is the Austrians's greatest criticism of monetarism.
DD5, I explicitly stated that monetarists believe money is non-neutral in the short-term.
Upon re-reading, you make even less sense to me now.
DD5:So even Friedman and most subsequent economists recognize that money in the short term is not neutral. That they disregard this short term effect in monetary theorizing is the Austrians's greatest criticism of monetarism.
Your first quoted sentence says that Friedman acknowledges that "money in the short term is not neutral," but in the second sentence you say "they disregard this." How can both be true?
Austrian's do not regard money as neutral. The very concept makes no coherent sense whatsoever.
"Your first quoted sentence says that Friedman acknowledges that "money in the short term is not neutral," but in the second sentence you say "they disregard this." How can both be true?"
Is it so hard to believe that a human being can be inconsistent? Or that he can err and make a set of correct assumptions for one particular problem, which he believes (falsely) can be eliminated or disregarded in another?
Look at what you wrote in the original statement. You had Monetarists in the parentheses as part of those that don't agree with you.
Quoting Brian Snowdon and Howard R. Vane, The well-establiushed positive association between money and aggregate output may simply indicate that the money supply is responding to economic activity rather than the reverse. In such a situation money is endogenous and the money-to-output correlations that we observe are evidence of reverse causation; that is, expectations of future output expansion lead to current increases in the money supply. According to real business cycle theories, the demand for money expands during business expansions and elicits an accommodating response from the money supply, especially if the monetary authorities are targeting interest rates. The impetus to downgrade the causal role of money was also given support from the evidence emerging from vector autoregression analysis which indicated that, once interest rates were included among the variables in the estimated system, money ceased to have strong predictive power.
DD5, yeah, what's your point?
I stated, "Some, like me, have a suspicion that it is neutral in the short-term, but others disagree (monetarists, New-Keynesians, etc.)."
That means, unlike my (very weak, but working assumption) that money is neutral in the short-term, monetarists disagree and believe money is non-neutral in the short-term, just like Austrians.
Neo, on a personal note, having read all those Austrian books, what led you to dump them and believe the mainstream stuff?
Like many here perhaps, I was a libertarian first, probably for moralistic reasons, and then started dabbling in the economics. You immediately get pulled into the wealth of libertarian literature produced by Austrian thinkers (e.g., Hoppe, Rothbard, Rockwell, etc.)--and, let's face it, the LvMI produces so much free material that it's hard not to get a strong Austrian impression of economics.
But I, philosophically, always had strong empirico-verificationist leanings. That had, for many years, been the epistemological outcome of serious philosophical inquiry. I could never stomach the Austrian methodology; I mean, I can mathematically formalize natural selection from a concept of "replicator," but that doesn't mean I consider evolutionary science a priori.
Eventually, I started reading price theory from a neoclassical perspective, and I knew I had discovered a more reasonable methodology with much better, much more vast, results. Plus, these thinkers tend to conform to my other beliefs, as well, like consequentialism (e.g., I can't believe anyone seriously believes in "natural rights" like Rothbard).
First of all: Hoppe nor Rockwell are really (new) Austrian thinkers in any sense of the word. Hoppe is a philosopher first, who also writes on economics. Rockwell does awesome work with the Mises Institute, but it's not like Rockwell (nor Hoppe for that matter) really get published in academic journals, or making any 'new' contributions in Austrian economics. If you want to know the 'new' stuff: Garrison, Salerno, Boettke, White, Hulsmann, Herbener, ...
Second of all: 'verificiation' is useless without a theory; a theory that has to make sense. Roderick Long's paper on Mises versus Friedman on method is really good on that part.
'Natural rights' and 'consequentialism' are mutually reinforcing; but you can't have one without the other. Without natural rights, you really can't give a critique on government without the concept of morality incorporated. Again: Roderik Long is the man you need.
The state is not the enemy. The idea of the state is.
Hey Neoclassical,
Do you by any chance know about the problems of horizontal summation and the shape of the market demand curve?
Neoclassical:Like many here perhaps, I was a libertarian first, probably for moralistic reasons, and then started dabbling in the economics. You immediately get pulled into the wealth of libertarian literature produced by Austrian thinkers (e.g., Hoppe, Rothbard, Rockwell, etc.)--and, let's face it, the LvMI produces so much free material that it's hard not to get a strong Austrian impression of economics.
Yet you somehow missed the Austrian Capital Theory.
Neoclassical:always had strong empirico-verificationist leanings.
So if I flipped a coin 10 times, and received heads 7 times. You would believe that I would always get heads 70% of the time?
Neoclassical:(e.g., I can't believe anyone seriously believes in "natural rights" like Rothbard).
The Austrian school of thought does not ask you to believe in natural rights.
This may be the time to say that in the heat of the argument, I may get carried away and state my position in a way some would consider hostile.
Not sure if I can or should change, though.
Will give it some thought.
AdrianHealey:First of all: Hoppe nor Rockwell are really (new) Austrian thinkers in any sense of the word. Hoppe is a philosopher first, who also writes on economics. Rockwell does awesome work with the Mises Institute, but it's not like Rockwell (nor Hoppe for that matter) really get published in academic journals, or making any 'new' contributions in Austrian economics. If you want to know the 'new' stuff: Garrison, Salerno, Boettke, White, Hulsmann, Herbener, ...
D'uh. I was giving an autobiographic sketch, offering a list of the thinkers most people are first exposed to. For the record, I like Boudreaux and de Soto best.
AdrianHealey:Second of all: 'verificiation' is useless without a theory; a theory that has to make sense. Roderick Long's paper on Mises versus Friedman on method is really good on that part.
So? Data, to become information, must have a theory imposed upon it. I fail to see what point you were making.
AdrianHealey:Second of all: 'verificiation' is useless without a theory; a theory that has to make sense. Roderick Long's paper on Mises versus Friedman on method is really good on that part. 'Natural rights' and 'consequentialism' are mutually reinforcing; but you can't have one without the other. Without natural rights, you really can't give a critique on government without the concept of morality incorporated. Again: Roderik Long is the man you need.
I critique government without the concept of morality all the time. Give it a try; it's called cost-benefit analysis.
filc: Neoclassical:always had strong empirico-verificationist leanings. So if I flipped a coin 10 times, and received heads 7 times. You would believe that I would always get heads 70% of the time?
No, that would be idiotic--ever heard of probability theory and the law of large numbers?
filc: Neoclassical:(e.g., I can't believe anyone seriously believes in "natural rights" like Rothbard). The Austrian school of thought does not ask you to believe in natural rights.
I never said it did. However, if a thinker is egregiously mistaken in some of his thought, I am more suspicious of the rest.
yessir:Hey Neoclassical, Do you by any chance know about the problems of horizontal summation and the shape of the market demand curve?
What are the "problems"?
The market demand curve is the horizontal sum of individual demand curves.
Neoclassical: yessir:Hey Neoclassical, Do you by any chance know about the problems of horizontal summation and the shape of the market demand curve? What are the "problems"? The market demand curve is the horizontal sum of individual demand curves.
I have read the following:
Additional quotes for consideration:
Shafer & Sonnenschein (Handbook of Mathematical Economics Vol II, 1982: pp. 671-2)
“… market demand functions need not satisfy in any way the classical restrictions which characterize consumer demand functions…
“Unfortunately … the aggregate demand function will in general possess no interesting properties … The neoclassical theory of the consumer places no restrictions on aggregate behaviour in general.” (Varian 1992)
Neoclassical: filc: Neoclassical:(e.g., I can't believe anyone seriously believes in "natural rights" like Rothbard). The Austrian school of thought does not ask you to believe in natural rights. I never said it did. However, if a thinker is egregiously mistaken in some of his thought, I am more suspicious of the rest.
Mises wasn't a proponent of natural rights.
I assume you are equally suspicious of the whole Chicago School because some of its members may be natural rights Theists?
The edifice of Austrian economics is founded much more upon Mises' work than Rothbard's. And liberty student is correct about Mises not being a proponent of natural rights. In fact, he was one of its most eloquent critics. As Rothbard wrote that, "In several chapters on "value", Mises offers a virtually running attack on the concept of natural law..." and of Mises' "consistently harsh hostility to the concept of natural law..."
Straw man: no one claimed Mises was a proponent of natural rights. He was strictly utilitarian, and he didn't hide it.
Neoclassical:Straw man: no one claimed Mises was a proponent of natural rights. He was strictly utilitarian, and he didn't hide it.
Wait didn't you bring this up?
I stated, "I can't believe anyone seriously believes in 'natural rights' like Rothbard."
Yes, but you also said, "...if a thinker is egregiously mistaken in some of his thought, I am more suspicious of the rest."
Which is why I stressed that Austrian economics is more a product of Mises' thought, than Rothbard's.