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.
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.
The most damning arguments against the modern fractional reserve bankers are your own arguments. You're not the official spokesman for them, but honestly, their top scholars don't provide much better responses either.
Lee Kelly: 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.
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.
I think this misrepresents the free banking argument. Lawrence White and George Selgin do distinguish between a change in demand for bank-issued notes and a change in demand for base money. An increase in bank-issued notes over an increase in base money would be an increase in fiduciary media; an unrestricted increase in fiduciary media does cause a business cycle. One of the key parts of meeting an increase in demand for bank-notes is receiving gold in return.
Lee Kelly:Are liabilities backed by gold a better type of money than gold coins? I think so
The liabilities are NOT backed by gold. That would be a 100% reserve bank. The liabilities are backed by assets, which by definition, have a longer term maturity then that of its corresponding liabilities. Fractional reserve banks engage in maturity mismatching - borrowing short and lending long. This is considered to be unsound financial management by any financial standard that can think of. No business except FRB [systematically] engages in such financial practice except for Madoff type scams and of course, government debts.
To think that people would willingly exchange such liabilities as money (perfect liquidity) is mind-boggling. I'm sorry, but it is simply not to understand what money is.
Lee Kelly: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.
You don't say. You know what will happen in a free banking system? Where did you encounter one, because I will go buy the plane ticket today!
Jonathan, point taken. I was just trying out a new way of thinking about the issue.
DD5, nevermind.
Back on the matter raised by the original post. One should be careful to distinguish between a refutation of ATBC, and a refutation of a particular application of ATBC. For example, if Caplan could show empirically that, during a period of history, entrepreneurs anticipated higher interests and adjusted action accordingly, then any bust could not be explained by ATBC. That doesn't mean that ATBC is not a very good description of some (or perhaps most) booms and busts, but merely that not all booms and busts must follow the ATBC story.
ATBC is a theoretical construct that describes how the world might be given particular conditions. If those conditions do not hold, then ATBC will not hold either. Arguing that the conditions do not hold in a particular instance is different to arguing that they can never hold at all. To properly critique ATBC it would be necessary to claim that such conditions (and the consequences that follow) are logically impossible or inconsistent with basic economic law.
Lee Kelly:For example, if Caplan could show empirically that, during a period of history, entrepreneurs anticipated higher interests and adjusted action accordingly, then any bust could not be explained by ATBC.
Yes, but this could never happen. Interest rates are "high" when they are above the natural rate of interest, and "low" when they are below the natural rate of interest. Terms such as "high interest rates" or "low interest rates" are purely relative in nature; that is, a 4% market rate of interest may be too high, and a 15% market rate of interest may be too low. If individuals could just guess the "correct price" then markets don't need to exist. We can just put those individuals who have some mystical connection to the market economy in power and they could set commodity prices, input prices, interest rates, ect.
Now, individuals may guess that a 2% interest rate is too low, but they don't know where it should be (they don't know the equilibrium position). If the equilibrium position (the natural rate) is at 30%, then they may think, and probably will think, that a 20% interest rate is "unreasonably" high. Rational expectations is absurd.
"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."
Huh?
Caplan is dismissing the ABCT because it predicts that entrepreneurs systematically make the same mistake over and over again. This is an affront to our commitment to the free market (conceived as entrepreneurial participants in an economy allocating resources according to the price mechanism, utilizing Hayekian knowledge).
Caplan is not assuming ABCT is true and then detailing counterintuitive consequences; he is saying even if it is true, it would already have been cured by the self-correcting mechanism of the market (much like investment strategies quickly become obsolete due to information dissemination among keen entrepreneurs).
To quote Caplan at length,
In short, the Austrians are assuming that entrepreneurs have strange irrational expectations. Rothbard states this fairly explicitly: "[E]ntrepreneurs are trained to estimate changes and avoid error. They can handle irregular fluctuations, and certainly they should be able to cope with the results of an inflow of gold, results which are roughly predictable. They could not forecast the results of a credit expansion, because the credit expansion tampered with all their moorings, distorted interest rates and calculations of capital."[48] Elsewhere, he informs us that: "[S]uccessful entrepreneurs on the market will be precisely those, over the years, who are best equipped to make correct forecasts and use good judgment in analyzing market conditions. Under these conditions, it is absurd to suppose that the entire mass of entrepreneurs will make such errors, unless objective facts of the market are distorted over a considerable period of time. Such distortion will hobble the objective 'signals' of the market and mislead the great bulk of entrepreneurs."[49]
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. Moreover, even if most businesspeople don't understand that low interest rates are only temporary, the long-term interest rate will still be a good forecast so long as the professional interest rate speculators don't make the same mistake.
Additionally, he states,
Thus, it 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.
Here's what it boils down to: entrepreneurs are notoriously specialized for forecasting market trends; obviously, this is imperfect, since ours is a system of profit and loss. However, why would errors be aggravated due to lower interest rates? Entrepreneurs are expected to consider consumer preferences, trade routes, hard-to-predict natural phenomena, and innumerable other factors that impact production--why, on Bob's green earth, would lowered interest rates create outlandishly irrational beliefs that systemically create "malinvestments"? It destroys any intelligent nimbleness we attribute to entrepreneurs over bureaucrats.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
Quoting gocrew, 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).
Exactly why everyone is misunderstanding Caplan.
What if sweaters were lowered to a price where you decided to buy more? Is that a malinvesment? Why?
There is no sound reason that increased consumption, simply due to lowered costs, creates malinvestments. If you bought more sweaters, then I cannot challenge that preference; I bet that it maximized your utility.
there are many things that can be said against this, for now I will just go with this one....
consider a generic example of price fixing. not in the market for loanable funds, but in the market for steel say
lets suppose a department for controlling steel prices, draws up a schedule for the next year, of how it will push prices this way and then that way, and in case this happens with supply they do this, and if that happens with supply they will do that. and then they proceed.
would entrepreneurs be able to avoid 'error' by their skill at forecasting under such a regime?, or is it uncontreversial enough to admit that under political manipulations which intervene upon the market in a dynamic way, attempts of rationally allocating resources to meet the highest ends are thwarted. That such errors are in large part simply a function of the political will for errors to occur.
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
Neoclassical: Quoting gocrew, 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). Exactly why everyone is misunderstanding Caplan. What if sweaters were lowered to a price where you decided to buy more? Is that a malinvesment? Why? There is no sound reason that increased consumption, simply due to lowered costs, creates malinvestments. If you bought more sweaters, then I cannot challenge that preference; I bet that it maximized your utility.
This response completely ignores the fact that there are market prices, and there are things that are not market prices, but politically established prices. they still determine what is to be exchanged in order to get the other thing (in theory at least). yet they completely eviscerate the market process annihilating it, incentivizing black market activity to plug the gap, since the legit market are wiped out.
cap the sales price of sweaters, and even though i might , in theory, buy double at this lower 'price' if only i could, there likely will soon not be sweaters to buy... eventually i will have to bribe people to get any sweaters of quality at all, severely impacting my income.
There is if the costs are artificially lowered.
Freedom of markets is positively correlated with the degree of evolution in any society...
What if sweaters were lowered to a price where you decided to buy more? Is that a malinvesment? Why? There is no sound reason that increased consumption, simply due to lowered costs, creates malinvestments. If you bought more sweaters, then I cannot challenge that preference; I bet that it maximized your utility.
I think there is a difference between sweaters and money.
Sweaters can be used for something. You wear them. So if their price goes down, you got a bargain.
Money can't be worn, or eaten, or used for anything but buying things. If the price of money goes down [=low interest rates] then you take it and start buying other things. Now if the interest rate was low because people were saving their money [which increases the amount of money in the banks, thus lowering interest rates], that means they were consuming less. After all, more savings means less consumption.
Which means resources are not going to be used so much to feed the consumers. They are not that hungry. So that the demand for resources is less, so that they are cheap. Meaning one can buy themn cheaply for building factories and other long range plans.
But if consumers are still spending, and the money in the banks is from newly printed money [the other possible reason for low interest rates, like nowadays], then resources are not more available in reality. What is more available is money. Meaning prices of resources will go up.
Now Mises originally wrote that business people will be fooled, and think there are more resources for long range projects than are really available. So they will start up new projects, and then find out that actually they can't afford to complete them.
Caplan is not challenging any of this. He is asking something else, mainly, that don't people know [eventually, after being fooled a few times] that interest rates are an unreliable guide? How do they get fooled over and over?
I remember reading Mises saying that, yes it is theoretically possible that eventually people will wise up.
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It's easy to refute an argument if you first misrepresent it. William Keizer
nirgrahamUK:cap the sales price of sweaters, and even though i might , in theory, buy double at this lower 'price' if only i could, there likely will soon not be sweaters to buy... eventually i will have to bribe people to get any sweaters of quality at all, severely impacting my income.
Yes, in goods, you would expect a shortage if a price was artificially lowered (Mercedes-Benz vehicles being legislated at $1,000/car would cause a shortage, for instance).
But, clearly, you are not telling me that lowered interest rates create a shortage in credit, right? So, obviously, your example is idiotic.
Enterpreneurs compensating for interest rate interventionism is impossible, even if they knew the ABCT, due to the socialist calculation problem. Someone like Caplan would not resort to taking that into account because he also refuses to accept the socialist calculation theory. He has a whole pillar of mistakes stacked up.
my example is primarily meant to demonstrate that prices are meaningful and only perform their function for calculation when they are set by the market.
I don't understand how the example of price fixing can be idiotic when its a perfect example of a problem that occurs with price fixing. I didnt claim it was perfectly analgous. the market for loanable funds is important for determining the structure of production . you will actually find that with investment having been diverted from lower stages to higher, and also resources plain malinvested, investments that would have been made in the counterfactual world without distorted interest rates havent occured in this world which had distorted interest rates and so at least as far as they are concerned, they have had a loss of investment. The boom and bust, is itself a deadweight loss wherein resources are squandered, this is another way of saying that things are yet more scarce than they would have been (production possibilites frontier has shrunk).
Was the example really so idiotic?
Caley McKibbin:Enterpreneurs compensating for interest rate interventionism is impossible, even if they knew the ABCT, due to the socialist calculation problem. Someone like Caplan would not resort to taking that into account because he also refuses to accept the socialist calculation theory. He has a whole pillar of mistakes stacked up.
Caplan does not refuse to accept the economic calculation problem; he simply awaits empirical proof that it was the most crucial factor in the collapse of 20th-century centralized economies. He blames poor incentives.
Quoting Caplan, Ever since Mises, Austrians have overused the economic calculation argument. In the absence of detailed empirical evidence showing that this particular problem is the most important one, it is just another argument out of hundreds on the list of arguments against socialism. How do we know that the problem of work effort, or innovation, or the underground economy, or any number of other problems were not more important than the calculation problem?
No one has answered why bad investments would necessarily be made. Why, according to the Austrians, does "speculative" irrationality increase? Why don't entrepreneurs have the same chance of profit-or-loss?
Yet he never seems to reach any conclusion that would require it...
>>work effort
without economic calculation one cannot allocate labour rationally (which includes allocating resources with which to incentivise and purchase the labour etc)
<<innovation
without economic calculation one cannot rationally allocate resources towards 'innovating' nor can one set about rationally utilizing possible gains from innovation.
>>underground economy
you mean the bit where the market fought back?
No one has answered by bad investments would necessarily be made.
What do you think I just did? You are the same as Caplan. You just say that an answer is not an answer.
Neoclassical:No one has answered why bad investments would necessarily be made. Why, according to the Austrians, does "speculative" irrationality increase? Why don't entrepreneurs have the same chance of profit-or-loss?
first of all, will you admit that prices (in general) are useful in guiding entrepeneurial decision making? and that conversely political price distortions interfere with that decision making, making it harder to do well, making the process yet more error-prone, speculative etc. ?
Tyler Cown explains it all (better than Clarissa!), An alternative theory is that markets are bubble-prone and that easy monetary policy was simply a trigger that set off an irrational speculative excess. The Austrian story is that "the government distorted price signals to the market." Are those two accounts really so different? Do we need metaphysics to resolve that question? Take the classic "thin skull" case in the law. Austrians won't describe it this way, but they are postulating a very thin skull for markets and then blaming government for the disaster which results from government's glancing blow to that skull.
Keep in mind that no entrepreneur looks at price signals exclusively, rather they interpret prices in the context of the real economy and other bits of knowledge Was it so hard for investors to say to themselves?: "I see that one price (short-term rates) has changed in favor of greater housing investment. But other parts of my brain tell me that real estate prices won't go up forever, levered positions are dangerous, and that I should be cautious."
Let's say that the government subsidized the price of bananas, you bought so many bananas, put them on your roof, and then the roof collapsed. Is that government failure or market failure? The price was distorted, but I still say this is mostly market failure. No one made you put so many bananas on your roof.
wait a second. Are you convinced/impressed by the 'banannas on the roof' story?
Ever since Mises, Austrians have overused the economic calculation argument. In the absence of detailed empirical evidence showing that this particular problem is the most important one, it is just another argument out of hundreds on the list of arguments against socialism. How do we know that the problem of work effort, or innovation, or the underground economy, or any number of other problems were not more important than the calculation problem?
I never grasped what Caplan wanted here. Mises did not say the calc problem would be the one to destroy a socialist country FIRST. He agreed that there MAY be other problems that will bring the country to its knees before the calculation problem will do the job.
What he did say was something totally different. In his day, all the problems associated with socialism seemed to be [possibly] solvable, at least theoretically. Work effort may be solvable by educating and brainwashing. Innovation may happen even in a socialist country. Maybe an underground economy can be ruthlessly crushed. And so on. All the problems had solutions offered for them that seemed worth a try, at the least.
What Mises claimed was that EVEN IF YOU SOLVE EVERY OTHER PROBLEM, the calculation problem CANNOT POSSIBLY BE SOLVED.
That is the big difference. Other problems may be solvable somehow or other. There is no proof that they cannot be surmounted. But Mises showed that that there is one problem that can NEVER be solved, no matter what, in any socialist economy. The calculation problem.
This is pointless because everything neo-classicals come up with against ABCT is going to be based on everything neo-classical, which just takes us to an everything debate.
Caley McKibbin:This is pointless because everything neo-classicals come up with against ABCT is going to be based on everything neo-classical, which just takes us to an everything debate.
Chicago school rules, Austrian school drools.
Great point, Smiling Dave.
nirgrahamUK:wait a second. Are you convinced/impressed by the 'banannas on the roof' story?
Pretty much. Almost all ABCT-loving Austrian economists sound like they could have written Irrational Exuberance, outright decrying the speculative dim-wittedness of entrepreneurs. Just read Bob Murphy's Politically Incorrect Guide to the Great Depression, for an example. If human psychology is this weak, if entrepreneurs are this blind to external factors, then how can they even be so libertarian?
There is a redeeming trait in Chicago. Not all are Keynesian.
Hi, Neoclassical. Nice to have you on the forum. I'm glad you aren't freaking out and yelling at people. I really like that bit. :)
Have you heard/read the one response to Caplan's objection that describes the scenario in terms of game theory? The gist of it is, businesses take loans while the market is humming along fine and credit is cheap. The reason they take the cheap credit and expand is because if they don't, their competitors will, and they will be beaten out. With the new credit, the competitors may then try to drive out the companies who did not expand in the meantime with the "relatively cheap" credit.
Thanks, Giant_Joe. Well, remember, we're pretty much all libertarians here, so I still think you Austrians are 95% more right than most other people.
Your example, as far as I can interpret, gives a competitive edge to businesses that do expand production using cheap credit. Right? But then what happened to malinvestment?
The weather is even more unpredictable than our central bank. This will be my first assumption. Discredit it, if you need.
But assuming that, we see successful entrepreneurs (e.g., farmers, shippers, etc.) building correct forecasts to generate profit even with the unpredictable weather being a factor. Why isn't there persistent booms-and-busts? Why don't other forms of uncertainty lead to widespread, systemic irrationality, "speculation," and malinvestment?
Do all Austrians simply disbelieve in rational expectations (http://en.wikipedia.org/wiki/Rational_expectations)?
Neoclassical:Austrians won't describe it this way, but they are postulating a very thin skull for markets and then blaming government for the disaster which results from government's glancing blow to that skull.
Conservative Home Builder says, "yes, interest rates are low, but I'm not going to fall into the trap of buying that 3000 acre plot of land in Arizona, this is a bubble forming".
Conservative Banker also believes that interest rates are "too low" (we can't know what that means, but let's accept it for the example). He does not want to risk the bank's capital in some sort of silly "housing bubble".
Competitor Builder says, "So what, a bubble is forming. We'll make a killing before it pops."
Competitor Banker says the same thing and approves the loan to Competitive Builder.
Both Competitor Banker and Competitor Builder's stock rises, because the homes are actually selling (see below). Wall Street loves those guys, and hates Conservative Builder and Conservative Banker whose stock lags or falls. The CEO's of the conservative outfits are sacked, and guys who "know how to sell" are put into place. The industry bubbles along quite nicely, assisted by the central bank, exactly in line with the concept of malinvestment (not overinvestment, but malinvestment).
By the way, the homes sell because interest rates are low and the government created an entity that has the implicit, soon to be very real, guarantee by the U.S. taxpayer for bondholders.
In summary: It is not a matter of entrepreneurs being "thin skulled". It is a matter of entrepreneurs being entrepreneurial, taking a risk. And the key to the whole thing is the risk pays off at first. Other entrepreneurs are left behind unless they jump on board.
If you reject Austrian Capital Theory, the Structure of Production, etc, then the above explanation will make no sense.
[EDIT: I see other replies were in process when I was writing mine, ie, Giant Joe's game theory. Nonetheless, I offer my example free of charge]
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
But then what happened to malinvestment?
I usually screw up some details on these things, but here I go:
The story is, this malinvestment is revelaed when the bust starts. As the factors of production for the higher-order stages of production increase in price, and as credit tightens, these large projects (which are more interest rate sensitive) start to suffer/go under.
chloe732: It is a matter of entrepreneurs being entrepreneurial, taking a risk. And the key to the whole thing is the risk pays off at first. Other entrepreneurs are left behind unless they jump on board.
I know when I was reading through some of the books on this most recent crash, especially the one on the Lehman Brothers, the author was saying of how the company was following exactly that policy and not only expanding their derivatives branch, but shrinking the standard ones as they were following the idea it was a bubble and should burst soon.
I see what you are saying.
I guess we could say that these factors from nature and other unpredeictable phenomena can cause "booms" and "busts". The ABCT is more concerned with a general business cycle effecting an economy.
What comes into play in explaining why some of these investments are "malinvestments" requires an explination/understanding of the structure of production and the role that savings plays in an economy.
There are some slides here by Roger Garrison that I think will be helpful in giving a breif overview of what happens according to the Austrians:
http://www.auburn.edu/~garriro/macro.htm
I don't know if I can give a blanket statement and say "Yes, they all do." but there are critisims against it, and I don't think it's used in developing the Austrian theory.
chloe732, what does "a bubble is forming" actually mean. What does that look like.
To quote Eugene Fama, Does a credit bubble mean that people save too much during that period? I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning. . . . It's easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.
In essence, you are agreeing that market participants are "thin skulled," since you actually described the "greater fool theory" (http://en.wikipedia.org/wiki/Greater_fool_theory). And, once again, if this is true, then market participants should be just as irrational during non-bubbles. Clearly, if there is an impending bust, they are taking bad risks, right? Why are they so stupid? There are bad risks to be made all the time.
Encouraged by your praise of my other post, I'll taker a stab at this one:
An alternative theory is that markets are bubble-prone and that easy monetary policy was simply a trigger that set off an irrational speculative excess. The Austrian story is that "the government distorted price signals to the market." Are those two accounts really so different? Do we need metaphysics to resolve that question? Take the classic "thin skull" case in the law. Austrians won't describe it this way, but they are postulating a very thin skull for markets and then blaming government for the disaster which results from government's glancing blow to that skull.
Not exactly. This version is very dangerous [besides being incorrect]. It is saying "People are fools. Any glancing blow can set them off. This time it was the govt, next time it will be some thing else. Obviously, the best thing is to take the money away from the common man, for his own good of course, and let wise benevolent govt planners run the show for him."
What Austrians are saying is that markets do not have a thin skull. They are saying that there is exactly one guy out with a very powerful hammer, the govt.
Sure, people are full of irrational speculative excess, all the time, 24/7. BUT THEY DONT HAVE MONEY. What normally happens in a normal economy is that the guys who don't know any better and also have money lose it very quickly. The combination of a fool and his money is pretty rare, and short lived. There are not enough fools with money to be able to go out there and create a bubble. I mean, we are talking about big bucks here, enough to disrupt a whole country and bring it to recession.
Austrians claim that EVERY SINGLE TIME you find enough fools with enough money to create a business cycle, there is exactly one reason: More money has entered the system, much more, than there used to be. In other words, inflation [using the word in its classical meaning of money inflation, not price inflation]. In modern times, this has always happened because the govt printed money. Without the govt printing money, the fools would not have enough of it to create a bubble [that will of course burst]. That's what I meant by the govt being the only one with the heavy hammer. Although I guess in theory if there was a successful counterfeiter who managed to forge as many dollars as the govt prints before bubbles happen, it would have the same effect.
The low interest rates fooling wise investors is just one way the drama plays out. It can also involve downright foolishness, like the dot.com bubble. But the element always needed for the drama to take place is printing money. So that if we wish to be rid of bubbles, we can either make everyone smart, or we can stop printing money.
All that is true if you are using your hard earned money. But if you got it for free, which is what inflation does, you won't be as cautious. At least most people won't.
The phrase "market failure" is a brilliant piece of sophistry. It makes it sound like there is some way other than the market that will avoid failures [which is of course a big lie]. And that there is no one at fault but the silly old market [also a lie].
If the govt knows in advance that people will put those bananas on the roof, but goes ahead and subsidizes bananas, is that not govt failure? What defense does the govt have? "We knew you would all destroy your homes, but we decided to do it anyway. We did it for your own good, so you could have bananas." Of course, the real reason the govt did it, by which I mean printing money, is so they would have free money to spend. They don't care what happens to us as a result.
mwalsh:I was reading through some of the books on this most recent crash, especially the one on the Lehman Brothers
Lehman did exactly what entrepreneurs should have done given the "opportunities" presented to them by government intervention (Greenspan's monetary expansion + Fannie Mae = Boom like an H-Bomb).
There are bad risks to be made all the time.
This argument is old as dirt and has been answered innumerable times. Moentary policy gives some coherency to the mistakes.
Neoclassical: A general intro here: It's not uncertainty that causes booms and busts. It's unfounded optimism. When there is uncertainty, people are very cautious and protect themselves as best they can. The weather is even more unpredictable than our central bank. This will be my first assumption. Discredit it, if you need. OK, we'll assume it. But assuming that, we see successful entrepreneurs (e.g., farmers, shippers, etc.) building correct forecasts to generate profit even with the unpredictable weather being a factor. How big an influence does weather have? Are we talking about no crop or bumper crop? I don't think so. I'll take a guess that it's a difference of a few percentage points between good and bad weather. And indeed when there is extreme weather, people lose their shirts. Why isn't there persistent booms-and-busts? Besides what I wrote in the above paragraph, what percent of the economy depends on weather? If you read the stories in the Bible, it seems that when the economy was very dependent on the weather, there were famines and years of plenty. How come we don't have that anymore? Finally, you are just strengthening my case. A boom and bust only exists after huge amounts of money are printed. Why don't other forms of uncertainty lead to widespread, systemic irrationality, "speculation," and malinvestment? Because it's not unceratinty that is the culprit. It's newly printed money, which leads to unfounded optimism. Do all Austrians simply disbelieve in rational expectations (http://en.wikipedia.org/wiki/Rational_expectations)? Oh, absolutely. It's a ridiculous myth, rational expectations.
A general intro here: It's not uncertainty that causes booms and busts. It's unfounded optimism. When there is uncertainty, people are very cautious and protect themselves as best they can.
OK, we'll assume it.
But assuming that, we see successful entrepreneurs (e.g., farmers, shippers, etc.) building correct forecasts to generate profit even with the unpredictable weather being a factor.
How big an influence does weather have? Are we talking about no crop or bumper crop? I don't think so. I'll take a guess that it's a difference of a few percentage points between good and bad weather. And indeed when there is extreme weather, people lose their shirts.
Why isn't there persistent booms-and-busts?
Besides what I wrote in the above paragraph, what percent of the economy depends on weather? If you read the stories in the Bible, it seems that when the economy was very dependent on the weather, there were famines and years of plenty. How come we don't have that anymore?
Finally, you are just strengthening my case. A boom and bust only exists after huge amounts of money are printed.
Why don't other forms of uncertainty lead to widespread, systemic irrationality, "speculation," and malinvestment?
Because it's not unceratinty that is the culprit. It's newly printed money, which leads to unfounded optimism.