This is my critique of Rational Expectations. If you have something to add, or If I’ve made some kind of mistake, please let me know. This thread is extremely lengthy.
The most vocal criticism of the Austrian theory of cycles comes from the rational expectations crowd. They assert that individuals simply do not systematically err in the aggregate, and are therefore immune to arbitrary alterations and manipulations in the price mechanism, especially lowered interest rates. Let’s ignore, for the moment, that this argument entirely ignores the function of the price mechanism, the fact that market interest rates are only “high” and “low” depending on their positions relative to the natural rate[1], and the interrelated microeconomic effects of inflation. Rather, I think it would be more productive if we first actually focused on the theory of rational expectations itself, and its extensions, namely the efficient market hypothesis, both the weak and strong versions.
Rational Expectations:
Prior to the rational expectations “revolution” of the 70s economists regularly employed a one-dimensional theory of expectations solely based on past historical data (adaptive expectations). So, for example, if past inflation rates averaged 5%, expectations of future inflation would be 5% as well. If, on the other hand, inflation rose to a rate of 7%, then inflation expectations would gradually rise to 7%. Clearly, this is problematic. Individuals don’t solely rely on past historical averages when forming their expectations and calculations; they attempt to incorporate as many relevant variables as possible. So, for example, if the Federal Reserve announces that it will triple the supply of high-powered money, and if individuals have some basic understanding of economic theory, then they should expect inflation rates to exceed past historical averages, and they will factor this into their calculations. They will do this because failing to incorporate all relevant variables is very costly (bond holders, for example, will get crushed if they don’t understand inflation).
This is all well and good, and I doubt that many would seriously contest this line of reasoning. But John Muth, the father of rational expectations, went one step further, he asserts: expectations will be identical to optimal forecasts using all available information[2]. There are two major implications from this conclusion:
It is important to note that rational expectations does not assert, as many claim, that individuals have perfect information; that is, it admits that some information is simply unavailable, and it actually claims that some individuals may choose to ignore relevant variables because it may require too much effort to identify (too costly). Thus, Rational Expectations admits much of its theoretical deficiencies, and this already casts doubt on its theoretical tenability and usefulness. The truth of this concession is most evident within the political sphere, where individuals (a) are unaware of the true intensions of politicians, and (b) where they simply refuse to educate themselves politically (purposely ignore relevant variables when they make political decisions/vote).
It’s true, though, that the market is unlike the political sphere in many ways. For example, individuals actually have power in the market, and the intensions of market actors are immaterial; only results and performance matter (assuming that the system is free from arbitrary advantages and disturbances). But in the market there is a substantial difference between what individuals attempt to do and what actually happens (the inevitable result of extreme complexity and uncertainty). Individuals may attempt to use all of the relevant information, the same way that the entrepreneur attempts to engage in profitable productions, but distinguishing between relevant information and irrelevant information is an extremely difficult endeavor (much more so than in the political realm), especially when the relevant information is contained within prices (expressed by the price mechanism).
The entrepreneur, for example, needs to understand much more than his own personal preferences and the preferences of one or two actors; he needs to understand the marginal technical rates of substitution amongst various heterogeneous goods with varying degrees of complementarity; he needs to understand the subjective desires of billions of individuals, which are in continuous flux; he needs to understand the ramifications of government intrusion into various markets, ect ect.
The degree of competency required to obtain such information without a functional and accurate price mechanism is beyond the scope of human cognitive abilities. In other words, prices (not intuition) guide production. Hayek explains,
They overlook the fact that, in the exchange economy, production is governed by prices, independently of any knowledge of the whole process of individual producers, so that it is only when the pricing process is itself disturbed that a misdirection of production may occur (Monetary Theory and the Trade Cycle, pp. 41).
Let’s quickly reexamine the first implication of rational expectations, since there are many assumption already built into it:
The absurdity of such a position is obvious. Thus, rational expectations, within the realm of economics, are entirely contingent upon a price mechanism that is not continuously manipulated by external authorities. And since prices are in fact continuously altered, we must therefore dismiss rational expectations as a valid critique of the ABCT.
The Efficient Market Hypothesis:
I mention this extension only because I wish to elucidate the point that simple theoretical mistakes have a tendency to turn into unforgivable abominations. The weak version of the EMH merely incorporates RE within the field of finance (current prices in a financial market will be set so that the optimal forecasts of a security’s return using all available information equals the security’s equilibrium return[3]). But it’s the strong version that is truly remarkable: an efficient market prices securities so that they reflect the “true intrinsic” value of the securities. Thus, prices always reflect market fundamentals, so that any investment is just as good as any other investment. And thus we have returned to the classical framework, where value and prices are identical.
Conclusion:
If individuals truly had some mystical connection to some general equilibrium, where their expectations were identical to equilibrium results, then the price mechanism, i.e., the explicit expression of opportunity costs, would be entirely superfluous. We would merely need to find the most intuitive individuals and have them centrally plan our economic system. Recessions and endogenous price rigidities simply could not exist under such circumstances (which is why some proponents of rational expectations deny the existence of bubbles contrary to all empirical and theoretical evidence). But this is merely a utopian fantasy that ignores reality.
Furthermore, Rational Expectations, and its extensions, have been an expedient tool for all those who oppose the free market system and free market economics. Liberal professors continuously refute these straw men while ignoring the indubitable arguments put forth by the likes of Bastiat, Say, Mises, Rothbard, ect.
[1] In other words, a 4% market interest rate may be “too high” and a 15% market rate of interest may be “too low.”
[2] John Muth, “Rational Expectations and the Theory of Price Movements,” Econometrica 29 (1961): 315-335.
[3] Mishkin, Frederick S., Money, Banking & Financial Markets, 9th edition. (2009): 157-158
"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."
Yes, it does. That's what rational expectations is built on. Your example of rational expecatations and actual rational expectations are two different things.
I really don't have time for amateur drivel. One component (or one assumption) of RE is the assumption of maximizing behavior. I fully assume this in my example.
RE is mathematically built on much more than simply "people maximize their utility". It says that their expectations are on average the same as the true value. The whole point of this debate is to ask whether that sort of assumption is applicable to a dynamic economy in which the individuals 1.)do not have a model of the economy and 2.) do not have complete information. And the whole point of my example is to illustrate that we may only assume RE when prices accurately convey the underlying data. If this breaks down (prices diverge from the underlying data) than incomplete information, limited compuational ability, etc. DO HAVE IMPLICATIONS FOR THE VALIDITY OF RE. And this is despite the fact that we still may assume individuals behave so as to maximize their utility.
edward_1313:And the whole point of my example is to illustrate that we may only assume RE when prices accurately convey the underlying data. If this breaks down (prices diverge from the underlying data) than incomplete information, limited compuational ability, etc. DO HAVE IMPLICATIONS FOR THE VALIDITY OF RE.
Can you provide examples of this being the case?
"I'm not a fan of Murray Rothbard." -- David D. Friedman
edward_1313:I realize that you may be dis-inclined to read the thing, but having to work with concrete examples sheds light on what's really going on behind concepts. Just repeatedly regurgitating the arguments of others leads me to think you haven't meticulously thought through what those arguments mean in various contexts. If you've read Muth's paper than you'd know that he's always working within some model that is already in Eq-m. And he's assuming that 1.) that model is an accurate representation of some phenomena and 2.) that a given person has access to that model. He never makes an effort to justify why such strong assumptions would hold in a real-world economy. And then you have followers who blithely justify Muth's assumptions on the basis of profit and loss (e.g. Knoop). But they do so without thinking deeply about whether profit and loss necessarily conveys the true underlying data. This is not a given.
I read your analogy (repeatedly, actually), but I was unsure of what point you were making; thank you for clarifying. However, I'm not sure anyone is suggesting that profit and loss are the only signals being used to form expectations.
To reiterate a question (not a challenge of any sort), does Hayek's support of the price mechanism imply that prices do accurately convey "true values"? Doesn't your criticism lead to distrust of the price mechanism?
In John Muth's own words, "[T]he hypothesis asserts that the economy generally does not waste information." Doesn't a rejection of rational expectations indicate that a free market would "waste information"?
P.S. Thanks for the debate. You're obviously an intelligent person, and I enjoy your counterarguments--they're helping me think through these issues more.
If we assume that market interaction generates the most accurate prices, then could expectations be anything other than rational?
It generates the most accurate prices insofar as prices are not continuously and arbitrarily manipulated by external authorities. Such manipulations, in turn, influence the expectations of rational economic actors (especially entrepreneurs when monetary expansion takes the form of producer credits). Due to the complexity and the inherent interconnectedness of economic phenomena, the expectations will change and manifest themselves in different ways. Inflation does not, in itself, lead to malinvestment (bubbles); it requires human action (manipulated expectations).
This is why I said, in a previous post, that the Austrian theory of cycles and expectations go hand-in-hand. This is also why I reject rational expectations; it ignores too many relevant variables (which is why only its initial premises are almost reasonable while its conclusions are blatantly incorrect). Essentially, Rational Expectations was a slightly more accurate and an extremely expedient way to incorporate expectations into mathematical models. That’s my take, at least.
StrangeLoop:I read your analogy (repeatedly, actually), but I was unsure of what point you were making; thank you for clarifying. However, I'm not sure anyone is suggesting that profit and loss are the only signals being used to form expectations.
There are certainly other means by which individuals form expectations, but profit and loss is the only rational means (even if it becomes disconnected) by which they can judge those expectations; all other factors are more or less guess work.
StrangeLoop:To reiterate a question (not a challenge of any sort), does Hayek's support of the price mechanism imply that prices do accurately convey "true values"? Doesn't your criticism lead to distrust of the price mechanism?
StrangeLoop:In John Muth's own words, "[T]he hypothesis asserts that the economy generally does not waste information." Doesn't a rejection of rational expectations indicate that a free market would "waste information"?
edward_1313:I really don't have time for amateur drivel.
This is a forum full of amateurs. And apparently you did have time, as you then carried on to post a reply.
Statements like that do nothing to enhance your reputation or argument.
haha this is like the 5th time i've seen esuric quote mishkin's textbook since august so i don't think anyone needs to guess which class he is taking this semester. good luck! anyways, i think that you will want to rethink your critique of rational expectations in a week or two when they start to cover the term structure of interest rates.
here are are some problems i have with esurc's defense of abct against rational expectations (ratex)
problem #1. people will have to make forecasts no matter what. i really don't understand esuric's point about needing prices to serve as signals for directing production. not because i disagree with it, but i doubt any proponent of rational expectations would disagree! plus it seems irrelevant to relating ratex to interest rates. as i understand it, even austrians would agree that part of deciding whether to buy a long-term bond is going to depend on what you expect shourt-term rates to be in the future. for example, say you have a 2 year bond with a 4% interest rate. part of how you decide whether to buy that bond is what you expect the return on 2 1-year bonds purchased sequentially will be. for eample, support this year you can purchase a 1 year bond with a 4% interest rate and next year you can purchase a 1 year bond with a 6% interest rates. then the average rate of return for these 2 bonds is 5%. that means you would actually do better to buy 2 1-year bonds than the single 2-year bond (ignoring liquidity preference, inflation risk, etc). so no matter how you slice it, expectations are always going to play a role in determining long-term interest rates. the only question is how those expectations are made (note i could be missing esuric's point here, like i said it wasn't exactly clear).
problem #2. Even if esuric’s criticism were true, they still don’t save ABCT. so esuric brings up several points about why investors might get their forecasts wrong. lets say he's right, is that alone good news for ABCT? no. even if he was right, his argument only supports the notion that investors can be wrong about future interest and/or inflation rates, but they could be wrong in either direction. for example, if the fed starts printing money investors could over estimate future inflation and therefore invest less contrary to abct.
now maybe you want to say “but esuric’s argument still supports the notion that fed intervention makes things harder for investors so they will make more errors, right?” that doesn't strike me as obvious. first, it seems esuric’s argument could just as well be used to justify inflation targeting (it reduces the guess work in forming inflation expectations). second, it isnt clear that inflation or interest rates would be easier to forecast in the absense of the fed. after all it isn’t like the price level is going to stop moving just because the fed gets out of the game (so long as money supply and demand can change so can the price level). if investors can't predict this now, why would we expect them to start if we got rid of the fed?
problem #3. would esuric really want to follow him arguments to their logical conclusion? so lets assume investors actually are really bad at forming expectations about future interest rates and inflation. like i was saying earlier, i don't see any reason to suspect from his argument that investors will suddenly be able to make better forecasts in the absense of the fed. so what does that mean? that investors are not very good at making long-term investments? i just want to see if that is what esuric really meant.
side note: since esuric has citing mishkin quite often, i thought he might be interested with this paper: http://www.nber.org/papers/w0517.pdf
Ambition is a dream with a V8 engine - Elvis Presley
Student:now maybe you want to say “but esuric’s argument still supports the notion that fed intervention makes things harder for investors so they will make more errors, right?” that doesn't strike me as obvious.
It is not obvious that if prices are still to be regarded as signals that convey at least some meaningful economic information, then if some of those prices are tampered with, then there are likely to be more errors? It's not obvious? This should be obvious to anybody who understands the concept of informational signals in general.
Student:second, it isn't clear that inflation or interest rates would be easier to forecast in the absence of the fed. after all it isn’t like the price level is going to stop moving just because the fed gets out of the game (so long as money supply and demand can change so can the price level)
It's not about some hypothetical price level. It never is.
It's about relative prices being distorted. It's price differentials that convey the relevant economic information. Not some aggregate hypothetical price level. It's about some particular prices affected immediately, while others only later, and still others even later.
As for a world absent the Fed, or more accurately, central banking:
So it's not the price level that's important as I've just said. But as for changes in the money supply and demand for it,absent Fed, two points need to be stressed:
1. Changes in the money supply are likely to be very small, theoretically insignificant, where monetary contraction is practically impossible.
2. Changes in demand to hold money can indeed occur, however, this would not cause any systematic problem for two main reasons:
a. Variations in such demand (Or your velocity) is likely to be small, particularly absent the recurring banking crisis now that central banking has been eliminated.
b. Such changes are voluntary in nature. They should not be considered as tampering or distortion for they convey real changes in preferences of individuals. It is nonsensical, and this also applies to what the Monetary Equilibrium folks claim, that such changes are equivalent to government tampering of the money supply. The first is a real change in preference, while the latter is a temporary change that does not match consumer preference. It is unsustainable.
haha this is like the 5th time i've seen esuric quote mishkin's textbook since august so i don't think anyone needs to guess which class he is taking this semester. good luck!
Since you decide to bring up my education, you should know that I've already graduated summa cum laude with a BS in business economics. Also, why do you assume that I read the textbook before the semester started? Weird.
so esuric brings up several points about why investors might get their forecasts wrong. lets say he's right, is that alone good news for ABCT? no.
So, just to be clear, you find my critique of RE somewhat agreeable, but you don't believe that this is good news for the ABCT (you didn't really address my critique of RE at all). Is this correct?
"Problem 1"doesn't even begin to address my argument and is entirely immaterial.
Problem 2: My argument does not solely deal with inflation rates (by inflation rates, I assume you're referring to general price inflation of consumer goods measured by various inherently flawed indices) and/or market interest rates. It has to do with inter-temporal equilibrium/disequilibrium, and relative price distortions that effect the prices of every single good, and every single factor of production, but not to the same degree or even in the same direction. And yes, I assume that suppressing short-term interest rates, which are tied to longer term interest rates, and arbitrarily elevating the short-term profitability of various economic employments (again, not all economic employments), will lead to over-investment in specific sectors (malinvestment). Furthermore, such investments will not be offset by a corresponding diminution of investment in other sectors (economy operating off of the PPF).
Economic actors will continue to use prices as information signals because, well, there's nothing else! Next, inflation and interest rate targeting may reduce uncertainty about government intrusion, but this entirely misses the point. The fact that the government manipulates the supply of money in a uniform way cannot yield inter-temporal equilibrium (the main issue at hand). In other words, government intrusion may be stable, but it persists, and all other economic variables remain in continuous flux. Investors may try to adjust market interest rates but they can never “figure out” the natural rate of interest, which is entirely independent of expectations and which is never stable.
Problem 3: First, there is no possible way to predict the way that monetary expansion will manifest itself; again, inflation is a microeconomic phenomenon (saying this to you for the 6th time now). The effects of monetary expansion extend far beyond money and capital markets; it affects the prices of every single economic good. The economic system must be looked at as a whole; all markets are interconnected. Next, if you don't see how markets may be negatively influenced by arbitrary manipulations in the supply of money (1/2 of all economic phenomena), by a centrally planned authority, then I don’t know what to tell you. Either way, my argument is that rational economic calculation is entirely contingent upon an accurate price mechanism that actually expresses underlying preferences and relative scarcities.
Also, please directly quote the passages you are referring to (for the sake of clarity).
side note:since esuric has citing mishkin quite often, i thought he might be interested with this paper: http://www.nber.org/papers/w0517.pdf
I'm not interested in Mishkin; the man's a lunatic. Half of his textbook is devoted to explaining the magical powers of inflation. I cite him because he's seen as an authority, and the Neoclassicals on this forum seem to appreciate that kind of stuff.
I'm getting from Student that Rational Expectations is true, and consequently the fed or any other government agency can not negatively or positively influence the economy through monetary changes. Does this mean that all believersin Rational Expectations think of the Fed as a dead weight loss, which is a fiscal burden whose monetary tinkering is completely anemic,ineffective and that this could not be otherwise ? If Rational Expectations is the mainstream attitude where is the mainstream contempt for the Fed ?
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
esuric,
you're right that my post doesn't directly address your rational expectations critique in the sense I did not try to try to prove it was false. instead, i tried to show that your argument was inadequate for reaching the conclusions you stated (that ratex is false and therefore irrelevant for ABCT). this actually seemed like the best route for discussion because your argument essentially comes down to "i just don't believe people are able to do all the things rational expectations says they can do". your post didn't even try to support that assertion with evidence. you basically just said "isn't it obvious????". how can i argue with logic like that? so i decided to take an easier route.
but your latest post seems to go all over the map and never directly defends your original assertion that ABCT can be preserved against an expectations critique. so i am having a hard time following it. let me just say that to preserve ABCT, you will have to show not only that people make mistakes in forming expectations, they will have to make *systematic* mistakes, such that they monetary expectations will typically lead to over-investment in particular sectors.
anyways, i think the reason your post may be hard for me to understand is because you apparently aren't talking about rational expectations as defined in your stated source. here you say...
my argument is that rational economic calculation is entirely contingent upon an accurate price mechanism that actually expresses underlying preferences and relative scarcities.
and i respond: "then your argument has nothing to do with rational expectations." as i noted in problem #1, i doubt you can find any proponent of rational expectations that would disagree with the coordinating role that prices play in a market economy. and that is because rational expectations is about, well, how people form expectations about the future.
maybe it will be more fruitful to narrow down the discussion. i am particuarly interested in seeing your response on problem #2 so allow me to re-post that problem in a few seconds with a direct quote from the passage I was addressing as you requested.
PS* I don't think I have ever called a prominent austrian economist a lunatic. i am glad you're extending your polite debating style to people you've never met.
esuric, in your initial post you said...
Let’s quickly reexamine the first implication of rational expectations, since there are many assumption already built into it: Each individual is fully aware of the time preferences of all other individuals and knows what the natural rate of interest is. In other words, they are able to see what the normal return on investment would be in a purely theoretical barter economy. They fully understand the effects of a suppressed market rate of interest below the natural rate of interest and choose not to capitalize (for lack of a better term) on potential short-term profits because they can see into the future. Essentially, individuals have some intuitive connection to some illusory general equilibrium; that is, they know where the interest rate “should be” even if the market does not express it. The absurdity of such a position is obvious. Thus, rational expectations, within the realm of economics, are entirely contingent upon a price mechanism that is not continuously manipulated by external authorities. And since prices are in fact continuously altered, we must therefore dismiss rational expectations as a valid critique of the ABCT.
To make sure we are both on the same page, allow me to spell out the rational expectations critique of ABCT. The critique basically says that investors will see the federal reserve printing money today and that they will be smart enough to demand a higher nominal rate of return on long-term investments to perfectly account for future inflation. This means long-term nominal interest rates will rise (not fall, contrary to ABCT) and that over investments in specific sectors will not be made because people are not fooled by price inflation.
The quote above seems to suggest that we have reason to suspect that people will not be able to do this very well and that investors will make lots of mistakes in forming expectation. So lets say that esuric is right. is that alone good news for ABCT? no. even if he was right, his argument only supports the notion that investors can be wrong about future interest and/or inflation rates, but they could be wrong in either direction. for example, if the fed starts printing money investors could over estimate future inflation and therefore invest less contrary to abct.
now maybe you want to say “but esuric’s argument still supports the notion that fed intervention makes things harder for investors so they will make more errors, right?” that doesn't strike me as obvious.
over all, esuric's argument just doesn't accomplish what he hopes.
nirgrahamUK:I'm getting from Student that Rational Expectations is true, and consequently the fed or any other government agency can not negatively or positively influence the economy through monetary changes.
No this is the argument made by the RE crowd. The burden of proof is on them to explain why the intrusions of an institution, like the FED, which centrally plans one-half of the economic system, does not lead to the results I've already mentioned and which you're familiar with. Their argument, in a nut shell, is that it doesn't matter because expectations = equilibrium results.
Student:]this actually seemed like the best route for discussion because your argument essentially comes down to "i just don't believe people are able to do all the things rational expectations says they can do".
It's called a reductio ad absurdum and is in no way fallacious or an example of poor reasoning. I’m sorry that you’ve never heard of it, but it’s used quite often (most refutations of objective theories of value take this form). I’ve also implied that RE is either a non sequitur or an example of circular reasoning (someone else actually brought this up); I’m sorry that you did not comprehend my argument.
Student:To make sure we are both on the same page, allow me to spell out the rational expectations critique of ABCT. The critique basically says that investors will see the federal reserve printing money today and that they will be smart enough to demand a higher nominal rate of return on long-term investments to perfectly account for future inflation. This means long-term nominal interest rates will rise (not fall, contrary to ABCT) and that over investments in specific sectors will not be made because people are not fooled by price inflation.
This is not the RE critique of the ABCT; this is the monetarist critique of the Keynesian framework (the expected-inflation effect, Mishkin, pp. 115). RE asserts that investors are immune to arbitrary alterations in nominal interest rates because they know where the interest rate "should be" and they will factor it into their calculations.
Student:The quote above seems to suggest that we have reason to suspect that people will not be able to do this very well and that investors will make lots of mistakes in forming expectation. So lets say that esuric is right. is that alone good news for ABCT? no. even if he was right, his argument only supports the notion that investors can be wrong about future interest and/or inflation rates, but they could be wrong in either direction. for example, if the fed starts printing money investors could over estimate future inflation and therefore invest less contrary to abct.
I've already addressed this in my previous post, which you've completely ignored. But let me quickly respond to the highlighted part. If you're saying that it is at least conceivable that artificially lowered interest rates and high inflation may not yield additional investment, then I certainly agree. But this does not question or compromise the validity of the ABCT in anyway whatever. In fact, Mises says that such a condition characterizes the final stage of an economic collapse, namely when the authorities systematically and perpetually expand the supply of money, beyond the demand for cash holdings, in order to prevent the necessary correction. Simply put, the condition you mention is the exception and not the rule. I'm assuming that there's an inverse relationship between total investment and market interest rates during normal economic conditions. Do I have to explain why?
And again, the economic system must be looked at as a whole. The effects of monetary expansion extend far beyond the capital and money markets.
Student:PS* I don't think I have ever called a prominent austrian economist a lunatic. i am glad you're extending your polite debating style to people you've never met.
I think he'll live, but it's nice to know that you're so concerned about his feelings. You’re a very good person Student!
i found the reason you don't seem to be following my argument...
The ABCT does not say that monetary expansion will lower interest rates in the long-run; in fact, it says quite the opposite. Next, this is not the RE critique of the ABCT;
you don't seem to notice the difference between long-term interest rates and "interest rates in the long-run" (this why imagining a world of a single interest-rate can be dangerous when you're trying to distinguish between long-term and short-term investments). long-term interest rates are simply the rate of return recieved for loaning money for extended periods of time (depending on who you ask the exact definition of long-term may vary but we are talking at least 3 years). for example, mortgage rates are considered "long-term interest rates"
and ABCT most certainly does say that monetary expansion will lower long-term interest rates. it has to. because long-term investment decisions are made in part on long-term interest rates. keeping with the mortgage example, the argument goes that expansionary monetary policy might lower long-term interest rates like 30 year mortgages which might lead to a housing bubble like the one we saw 5 years ago (at least thats the story mark thorton tells: http://mises.org/journals/scholar/thornton13.pdf)
now, if i believed in ratex, i would seriously doubt the ABCT as an explaination for most business cycles because i would contend that investors (lenders) would see the government printing money today and understand that in a few years that will mean higher inflation which will erode their real returns and perhaps make their investments profitable. so they will demand higher interest rates to accomodate that inflation risk.
this would imply that the federal reserve has no ability to *systematically* influence long-term investment decisions at all. and i'm sorry, but yes that is a central part of the ABCT. and i don't see how you have adequately addressed that.
If this is not how you see that RE applies to ABCT, maybe you can provide a quote from a non-Austrian economist critiquing AE using RE. I can see how RE could be used in a variety of ways. so it would be interesting to see what you actually have in mind. because based on your argument thus far i can only say the way you use the notion of RE is a lot different than the way that "lunatic" Mishkin uses it (despite having quoted him in your opening post).
ps* i never realized that they called it "reductio ad absurdum" when you make bold assertions without evidence because "they're obvious!!". are you sure that is what it means?
this comment doesn't address my comment. just because the fed keeps printing money to "prevent corrections", doesn't mean people will systematically continue to make the same mistakes over and over again. maybe you can make the connection a bit more explicit for me.