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Addendum to Robert Murphy's Lecture (My 2 Cents)

Addendum to Robert Murphy's Lecture (My 2 Cents)
by Alex Merced

This is just some comments to add my two cents to Robert Murphys Responses to Critics of Austrian Economics.

Critic: How come unemployment wasn't the worst in the states that had the worst housing busts if it's a mal-investment problem?

RPM: The data actually is more in line with the Austrian Theory if you widen the time frame for calculation from the peak of bubble.

My Response: Just cause unemployment doesn't follow the size of the local busts means nothing, the mal-investment is only the seed who's roots implant itself all over the economy in different ways. Since wages increases due to the bubble, industries grow in areas not related to the bubble industries cause all industries suffer a mini bubble from the consumption boom from the high wages that originate in the bubble industry and spread elsewhere (how I'll explain in my response to the next critic). Another factor for differing state data is state and local legislation and culture which might magnify or dampen the effect of the bust.

Critic: If Mal-Investment is the problem during the bust why do consumption and investment move together during the bust and boom, why isn't their unemployment during the boom?

RPM: Murphy does a great refute explaining how people who take on these new higher wage jobs in the bubble sector don't realize it's bubble sector so they consume with the assumption that they'll make those wages forever. He also makes an amazing point that you don't have unemployment during a boom cause no one is losing their jobs but instead leaving their jobs for "seemingly" better ones, while during the bust people are losing their jobs and try to find another at a similar level so it takes time before they adjust their expectations. (I elaborated a little on RPMs response, listen to the lecture itself, it's really good)

My Response: The Only thing I would add it that when people leave their jobs for higher wage jobs in the bubble sector, to attract replacement labor all other sectors will raise their wages making it seem like the economy as a whole is doing well. Although, these wage rises are not cause of productivity gains, but because labor supply issues so this puts more pressure on the price inflation seen on the bubble as businesses charge more for their goods and services to pay these higher wages. So this wage competition aspect of the bubble is what helps systematize the bubble and dig it's root into the rest of the economy, cause now all jobs are paying unsustainable wages to compete with the bubble sectors wages.

Critic: Can the ABCT occur absent of central bank, and during a 100 percent Gold Reserve system?

RPM: Murphy Wrote an article which I read, which he brings back up here during the lecture. Basically he doesn't come down on either side of the question but instead makes Rothbardian arguments for both sides. Read the article to see both his arguments.

My Response: What I want to say that the Austrian business cycle as it's commonly thought about can't happen in a 100% reserve gold standard system cause of one crucial element... expectations. One thing that drives bust from low rates is the expectation of those rates persisting or the money supply continuing to increase. In Murphys example, someone comes upon a huge cache of gold, but this is a one time injection of money and yes there will be price adjustments to all goods from the increased money supply, but I doubt mal-investment will occur because the expectation that he'd continually find huge deposits regularly isn't a logical expectation. Under our current system, it's very logical to conclude the fed will continue to prime the pump, so these expectations drive the bubble behavior. In the end, with 100% reserve banking there is no way to expect a predictable trend of money supply growth to allow the bubble expectations/speculations to be held long enough for a large systematic collapse.

Posted Aug 02 2010, 09:32 PM by Alex Merced