Ok, I wanted to make sure I understood ABCT and I figured this is the place to find out. It basically goes like this, artifically low interest rates cause entrepeneurs to take out too long term of capital projects (we have to use austrian capital theory to understand this), because they think consumers have a long time preference then they do (because of government manipulation). Thus, we see a bubble in higher order capital goods, which can only be solved with rapid devaluations, as the economy shifts back to consumer's preferences. The reason we have to devalue is there isn't enough savings to fund both those long term projects, and the consumption that consumers wish to do. Right?
Also I have one more question (this is kind of a side note), when we consider hayekian knowledge, shouldn't we conclude that a labor managed firm (through worker democracy) should be superior to a capital managed firm, as it is more decentralized? Why do you think this doesn't happen?
Worker democracy?
Division of labor. Some people have more skill at adapting to market fluctuations and managing large amounts of capital or whatever. Some people can't cut it to sort widgets at a necessary speed.
Democracy means the opportunity to be everyone's slave.—Karl Kraus.
Always erroneous: when we consider hayekian knowledge, shouldn't we conclude that a labor managed firm (through worker democracy) should be superior to a capital managed firm, as it is more decentralized?
Welcome to the forum!
"Labor managed" and "capital managed" make no sense to me. There is private property. The owner of this private property chooses to "manage" the enterprise in the way he sees most fit to achieve his ends. Labor is hired, including managers to oversee and direct the labor. There is no dichotomy of "labor managed" vs. "capital managed".
"Labor managed" implies no private property; if everyone owns something (ie, if the employees, the labor, owns the "capital"), then no one owns it, ie, nobody has the right to it. The market structure falls apart under such a scheme. Capital will be misdirected and squandered for the very reason that there is no private ownership.
Always erroneous:"Why do you think this [labor managed firm] doesn't happen?"
It has happened; it is called socialism.
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
Always erroneous:I wanted to make sure I understood ABCT and I figured this is the place to find out.
You bet this is the place to find out about ABCT. I would say you laid out a good summary. You can find books and articles here that provide details, but I think you've got the gist of it.
Keep asking questions!
when we consider hayekian knowledge, shouldn't we conclude that a labor managed firm (through worker democracy) should be superior to a capital managed firm, as it is more decentralized?
1. Are the workers going to lose money if the company does? Will they be told "Profits are down this quarter, guys. So your paychecks will be lower. In fact, a lot lower. Oh well. Guess you made a stupid decision somewhere along the line, and now you have to pay for it."
If they will be, then they are capital management. If they won't be, then all their decisions are not life and death for them. Which is a huge disadvantage, and why they will not be good management.
2. The guy who knows how to build a house does not always know about the housing market. It's a different kind of knowledge.
Source for these ideas is Human Action [available as a free pdf file here] Pages 672, and 703-706,
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It's easy to refute an argument if you first misrepresent it. William Keizer
A couple of things.
1. If my understanding of ABCT is correct, then the problem is that entrepreneurs are taking out too long term of projects due to government interference. Then if that credit is loaned to consumers, shouldn't the problem be mute? Or am I missing something here.
2. I don't understand the "there is still private property responses." Are you guys forgetting that a single business owner (or board of directors) faces hayekian information problems? This makes sense because firms are planning replacing the market (a board of directors is nothing more then a planning board). It is however, voluntary, and does have a couple of advantages over government planning (profit loss, can still harness some hayekian knowledge, etc.).
However, a labor managed firm will better be able to harness hayekian knowledge. Also I don't mean to imply there couldn't be division of labor, I see no reason why laborers wouldn't elect people to fill the hierarchy. It's still got a profit and loss system to keep it going etc. Also, I there is such a thing as capital managed firms. We have it via stock controlling firms. Stock markets are capital markets afterall.
good q's indeed.
1. When Mises wrote his book, nobody lent to consumers. It's a very modern phenomenom. Because it's stupid. How are they going to be able to pay it back, if lent on a massive scale? So it will create a bubble when they borrow and spend the money, and a burst when they cannot pay it back. Exactly what happened in the housing bubble.
2. This Hayekian knowledge thing is way beyond my Smiling Dave knowledge. I assumed from your q that it meant knowledge that a laborer in a factory would have that others would not. And responded based on that. And quoted bits of HA that address that kind of knowledge and how it isn't worth much.
So if I got it all wrong, then I too await a better answer.
Well I don't necessarily disagree with your explanation but I like to think of it more this way:
an expansion of credit causes entrepreneurial decisions that use credit to be more profitable than they normally would be thus people tend to make decisions that they wouldn't normally make and since you haven't changed the status quo of the availability of factors of production and other resources this causes entrepreneurial errors. Also a firm might become dependent on credit to a point where they can't survive without it. As far as I can tell it doesn't necessarily say anything about prices well at least it doesn't predict that prices of X goods will go up... The prediction goes as follows: Expansion of credit-> Cluster of entrepreneurial error when credit expansion stops
The problem with consumer credit is that the value of consumer goods tend to depreciate very rapidly so people end up not having anything to show for their debt. If it happens on too large of a scale you might start to run into people defaulting. Also it has the effect of artificially increasing consumption, consuming more resources.
The reason resource availability is effected is because the people in the economy haven't cut back on consumption and thus the producers of current consumer goods haven't cut back on production.
I don't think entrepreneurs actually think about wether or not consumers time preferences have changed or not. I thinks its more down to what is and is not profitable at certain interest rates, and the fact that longer term projects are more interest rate sensitive. So I wouldn't use time preference in explaining why the errors were made, I would use it in showing why the decisions of the entrepreneurs will end up being in error.
Money, Bank Credit, & Economic Cycles
The knowledge problem exists in the context of the assertions of general equilibrium theory. Proponents of Socialist planning pointed out that the economy when conceived as a set of simultaneous equations could be ‘solved’. Concluding that in (neoclassical) theory that central economic planning was possible. (as opposed to Mises claim of rational impossibility). Hayek responded by pointing out that all the knowledge needed to exist for this to happen did not exist in a form that could be collected by any mind or groups of minds. That knowledge was of a tacit kind, as opposed to rational or expert knowledge. A knowledge in effect that could only come to be generated through the spontaneous actions of individuals, and expressed as a single unit in money prices. Which act as a universal abstract ‘Signal’ for this knowledge.
It does not seem that workers own firms will solve this problem for socialist planning. But that is probably not what you meant. What you seem to be getting at is the idea that all organisations fall prey to a micro knowledge problem within itself. Which is true. However as long as it exists as only one organisation within the spontaneous order of the market then there is no sense that it can not get the information it needs. It just has to utilise the market prices that exist all around it. If by some unlikely set of circumstances an organisation got so big and horizontally integrated across industries(& only supplied itself), that the knowledge problem started to become a problem in the same sense as the socialist state then there is no reason why worker management or ownership will help. Elections can never substitute for the price system.
Now it may be the case that worker owned firms, have good qualities in terms of how a firm is managed & run. But that does not really have anything to do with the ‘knowledge’ or ‘calculation’ problem. It is just a question how best to run a firm, and in the end the ultimate test is the market test.