http://www.adamsmith.org/blog/tax-and-economy/causes-of-the-current-crisis--200905153519/#comments
I only had 350 words. Do you think I fully explained it well enough?
The difference between libertarianism and socialism is that libertarians will tolerate the existence of a socialist community, but socialists can't tolerate a libertarian community.
Well, I disagree with this:
Thedesolateone: Factor (1)’s effects are obvious; these effects naturally cause and exaggerate cycles. People are optimistic on the way “up” (a boom) and pessimistic on the way “down” (a bust). This by itself, however, is insufficient to cause a boom of the type we have seen. Prices in general can only increase with either an injection of money into the market, or a decrease in the demand for money. If no money were created, a price boom in one market would coincide necessarily with falling prices elsewhere. This would lead to a natural and speedy reasserting of real preferences if some products were undervalued and others overvalued.
Factor (1)’s effects are obvious; these effects naturally cause and exaggerate cycles. People are optimistic on the way “up” (a boom) and pessimistic on the way “down” (a bust). This by itself, however, is insufficient to cause a boom of the type we have seen. Prices in general can only increase with either an injection of money into the market, or a decrease in the demand for money. If no money were created, a price boom in one market would coincide necessarily with falling prices elsewhere. This would lead to a natural and speedy reasserting of real preferences if some products were undervalued and others overvalued.
The whole point of the ABCT is that otherwise competent and "rational" (in the neoclassic sense) entrepreneurs can be led to make such large errors in their investment choices. This is what distinguishes it from a speculative bubble.
Cutting that out would have also given you more time to focus on cause two, which is the big one.
Cause three, whilst an aggravating factor, is not essential to the argument. It might also have been useful to consider what Hayek called the secondary depression caused by factors such as the rigidity of the labour market and other such institutional arrangements.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
To be completely fair, I am now wondering why I included that. If I was summing up ABCT on here, I would have said something a bit different.
In fact, I think that the tendency to over-optimism and over-pessimism works against the cycle to some extent - people save more in the bust period, and this is exactly what's needed to return to good times.
GilesStratton:Cause three, whilst an aggravating factor, is not essential to the argument.
Well yeah, it's essentially cause (2), just again.
Thedesolateone:To be completely fair, I am now wondering why I included that. If I was summing up ABCT on here, I would have said something a bit different.
Yeah, it seemed odd. I mean, Keynes argued that such irrational behaviour ("animal spirits) was the cause of busts. This doesn't square too well with the conventional view off economic man who is "rational" in a far stricter sense than Misesian rationality. Garrison has argued that expectations are essentially Keyne's wildcard, he threw it in there whenever he needed to make the theory work.
This is one area of clear superiority of the Austrian view actually. Entrepreneurs are action rationally in the sense that they're doing exactly what the market "signals" are "telling" them to do. It's just that the market signals aren't a reflection of the underlying economic reality. Furthermore entrepreneurs who are acting in a rational way turn the boom into bust, by once again following the price signals (e.g. when huge profits begin to appear in the market for higher order goods, investors begin to liquidate their more time consuming investments and turn to the areas of the industry closer to consumption).
Thedesolateone:In fact, I think that the tendency to over-optimism and over-pessimism works against the cycle to some extent - people save more in the bust period, and this is exactly what's needed to return to good times.
On a somewhat related note, some of the biggest fortunes have been made in the bust section of the cycle. A fact which is in complete accordance to the Austrian theory. Thinking about I don't know how other theories can accomodate this. Keynesian theory that somewhat revolves around the expectations of entrepreneurs seem to have difficulty with this fact.
As for point 3. It's related to the current boom, sure. But it's often overplayed by the political right who aren't too keen at pointing to the Fed as the cause. Unfortunately some Austrians also stress this too much. Granted, various government agencies may account for the particular shape of the bust and may make it worse, but it's not the case that the boom and consequent bust wouldn't have occured without them.
A more important point is that of the secondary depression (Harbeler stressed this). The initial bust may well subside rapidly were it not for various institutions such as unions that keep the market wage above equilibrium and therefore hamper the reallocation of labour in accordance with consumers desires. Over the long run wages would be the same (ignoring those jobs for which certain skills are required in which case we can say that the learning of these skills is human capital and therefore part of the capital structure). In the short run, however, wages need to be bid up in the later stages and bid down in the earlier stages.
No, I think it is a separate point. It's merely not important, but still worth bringing up as you did. (2) is what does all the work. Regarding (1) it does I think point to the fact that mere "irrationality" or "herd psychology" &c. alone do not suffice to explain the credit crisis, even if they are present. Austrians usually bolster the argument, as Giles mentioned, by saying even "rational" economic agents cannot prevent the crisis's eventuation. At least you do use "were" in conjunction with "if" conditionals as opposed to "was". A good start.
Freedom of markets is positively correlated with the degree of evolution in any society...
GilesStratton:The initial bust may well subside rapidly were it not for various institutions such as unions that keep the market wage above equilibrium and therefore hamper the reallocation of labour in accordance with consumers desires.
We're talking legally powerful unions right?
So another government intervention which makes the crisis worse [rather than causing it per se].
But I get the idea that it causes the crisis in itself, seeing as there would not necessarily be an employment bust if wages adjusted well.
Thanks for helping in the comments btw
No problem. It's important to defend the theory against misunderstandings.