Hi there, I have a question regarding the following:
In the comment-section of a review of Skedelsky's 'Keynes, Return of the Master' on Amazon.com, some posted the following reply (not to me BTW):
[Austrian theory] implies that these titans of business have the mentality of a two year old when it comes to basing investment decisions on interest rates. Are you in all honesty telling me that these people base the whole of their investment decision on a number flashing before their screen, that this number signifies the large extent of their long term decision making? Do you not think that these people watch the position and decisions of the monetary authorities like hawks and adjust their decisions for margin of error based on artificiality? [...] in the real world [...] there exist myriad strategical and otherwise unrelated decisions that these individuals base their short term - and more importantly long term - investment decisions on. [link]
Ignoring the obnoxious tone of this guy, I do wonder as to what extent it may ben true what he says. It does seem to be a bit foolish to not take into account the fact that interest rates are artificially low when turned down by the Fed. Does it really lead to that much malinvestment in the private sector? Aren't big multinationals smarter than that?
Maybe this has already been discussed at length. In that case a link to a certain topic would be helpfull.
Anyone?
Jan, welcome. A relevant post/thread here.
Thomas E Woods provides an answer to this object in his book Meltdown. He says the following:
"A reasonable objection to the Austrian explanation runs as follows: why can't businessmen simply learn to distinguish between low interest rates that reflect an increase in genuine savings, and low interest rates that reflect nothing more than Fed manipulation?....The answer is that it is not so easy. (First of all even most economists are unaware of Austrian business cycle theory, and it is a rare business school in which the subject is taught.) Even businessmen who do know the Austrian theory and who know with absolute certainty that the Fed is keeping interest rates artificially low may still find it in their interest to borrow and launch new projects, hoping their project will be one of the lucky ones and that they can get out well before the bust hits. If they sit back and do nothing, and do not react to the lower rates, their competition surely will, and might be able to gain market share at their expense." pg75-76
To add on, in Meltdown Woods goes on to illustrate how true this is, providing specific examples throughout the book. Really, just think about it. How in the world could you possibly know how what the real interest rate (i.e. based on available savings) is? The point is that with "malinvestment", projects are undertaken for which the physical resources to complete them, do not exist. But this doesn't mean some resources don't exist...which means some projects can be completed. This is what Tom means by "one of the lucky ones".
Similarly, think about all the people who profited from the bubble (not even including everyone who was bailed out). Think about all the money investors made riding the bubble and getting out (or at least mostly out) before the crash. Even if they lost money on some investments, if you come out with more assets than when you went in, you did well. I know plenty of people (some just average joes) who flipped at least a few houses, made their 6 figures or more, and by the time everything started coming down, they didn't have much invested in the market any more.
For more on ABCT, see here, as well as this link (particularly the "related forum threads" section).