Economics Questions

Re: 2 Questions on ABCT

mnrchst — Fri, 14 Sep 2012 01:39:58 GMT

I posted about this on the Austrian School talk page (wikipedia). Here's one reply:

Say's Law and Austrian theory would say that a GENERAL (AGGREGATE) decline in economic activity in a "stable money" market generally would not occur. Loose language is a big problem here. There are - of course! - booms and busts in lots of sub-markets all the time (that's life) but that doesn't result in 40% youth unemployment because young people move around from bust in one part to boom in another part of the economy. There could be "frictional" unemployment but in the absence of a tsunami, nuclear war, terrorist attack etc mass unemployment shouldn't EVER occur. However, if you add in a complication like FRB that CONSISTENTLY messes with the economic calculation/price signalling that is so essential for economic coordination to work, that's when you can get aggregate booms and busts. And that can really only be caused by something systemic in the price mechanism, messing with everyone's calculations at the same time. And that is caused by FRB ''exclusively'' (if supported by a central bank). See [http://mises.org/daily/6100/ here] and [http://mises.org/daily/3466 here]. Also read Rothbard (America's Great Depression - the first theory section). In the absence of systemic mispricing of investment capital AGGREGATE booms and busts shouldn't ever occur, but mini booms and busts in segments of the economy will - of course - occur all the time. But these wouldn't ever result in 30% or 40% youth unemployment in the EU or the US under a sound money system. That must be caused by something (1) systemic and (2) distorting. And that "something" is exclusively FRB. QED. Your confusion lies in not appreciating the full implications of Say's Law.

Re: 2 Questions on ABCT

Smiling Dave — Thu, 13 Sep 2012 17:26:21 GMT

...the theory known as ABCT...

Anything written in these forums automatically becomes part of the canon

Re: 2 Questions on ABCT

mnrchst — Thu, 13 Sep 2012 17:18:31 GMT

Okay, so it sounds like you guys are saying boom-bust can occur without FRB. That makes sense.

But that doesn't answer my question of whether or not *the theory known as ABCT* says it can *only* occur with FRB. In other words, even if we all agree boom-bust can occur without FRB, does *ABCT* say boom-bust occurs because of FRB and may or may not be able to occur without FRB or that boom-bust only occurs with FRB?

I've read a couple sources which say that's the case. Is there general consensus among Austrian economists on this matter?

As far as the specifics of boom-bust without FRB go, it sounds like you guys are generally agreeing:

(a) Sure, boom-bust can occur with a huge influx of gold *if* people get fooled, which is likely

and

(b) No, it's unlikely boom-bust will occur just if there's a huge increase in loans.

Yes?

Re: 2 Questions on ABCT

xahrx — Thu, 13 Sep 2012 16:01:14 GMT

1) A similar style boom bust cycle can occur in any circumstance where there's a disconnect between resources available for use now vs later. with money, spending now comes at the expense of spending later, and vice versa. So, basically any circumstance which can fool people into thinking they can spend more money without it coming at the expense of their savings, which it would have to, can lead to a boom bust. If large scale counterfeiting were being done by some nongovernmental agency for example, you could get a boom bust cycle.

2) Sure. FRB is the historic mechanism by which it has happened, but that's specific to our history and evolution. There's no telling really how many possible scenarios might be possible which could lead to a similar boom bust cycle on various spacial or temporal scales.

Re: 2 Questions on ABCT

Bogart — Thu, 13 Sep 2012 15:35:43 GMT

The Business Cycle occurs when new money is introduced into the economy not backed by savings. This new money is seen by entrepreneurs as excess real savings. So you could still see business cycle type effects from something like the Spanish in the 1500s when they acquired at cheap price (stole) gold from the Incas and Aztecs. Now this is a rare example in history when the theft of something so massive that it caused some business cycle effects, but these effects would have been much less acute had the Spaniards not used FRB. Furthermore, absent FRB, outside of any distortions from the original inflation the economy would have made one adjustment and then continued. So to produce ABCT effects in an economy as large as any Western Country absent FRB, somebody would have to have access to several hundred million ounces, thousands of tons, of gold. And would still have trouble introducing this gold into the economy all at once so the mechanics of such an event would mute the effects even further.
Please do not confuse dislocations from Creative Destruction in an economy with ABCT effects. There will always be dislocations and poverty created due to technical progress as there will be excess production. But these dislocations will be local to specific institutions and industries and will not involve the economy at large. Again it is the effect of FRB that amplifies even these dislocations by giving organizations the ability to hold massive debt loads relative to their equity.

Re: 2 Questions on ABCT

grant.w.underwood — Thu, 13 Sep 2012 14:45:15 GMT

douglas french writes in "Early Speculative Bubbles and increases in the Supply of money" about how increases in the money supply causes burst, tulipmania, even in the absence of a FRB, Bank of Amsterdam was a 100% reserve bank at the time.

Re: 2 Questions on ABCT

Smiling Dave — Thu, 13 Sep 2012 10:41:27 GMT

One way to look at a business cycle is that people are fooled into thinking plenty of resources are available for business expansion, when they really are not. So they malinvest and waste resources, causing a bust.

Now what fools people? Quite simply, their thinking that the amount of money is proportional to the amount of resources. For simplicity, let's assume there is one dollar of money for every dollar of resources. Then a dollar in the bank means a dollar's worth of resources nobody wants to consume at the moment, [or for the next ten years, if someone is willing to lend that dollar for ten years]. So that ordinarily, the amount of money available to a businessman to borrow does indeed reflect the amount of resources available to him.

Now say there is an influx of gold into the country, which is turned into more coins, and put into banks. Unless the person grasps that the ratio of dollars to resources has changed, he will think that there are plenty of resources available, as above. He will be fooled.

We see from this analysis that any way the money supply is increaased, be it FRB or money printing or an influx of gold, will do the trick.

In the loans case, since no new money was introduced into the economy, and all loans are from existing money, the ratio of cash to resources is unchanged, and thus will not fool anyone into a mistake.

Finally, if the market was so flooded with gold that it lost popularity as currency, I confess I don't know.

2 Questions on ABCT

mnrchst — Thu, 13 Sep 2012 06:21:35 GMT

1) Does ABCT only apply to fractional reserve banking, or could it occur otherwise?

2) Regardless of whether FRB is a part of the ABCT definition, do you think it's possible that a boom-bust could occur along broadly ABCT lines without FRB?

For example, the following scenario occurs in a free market society without any FRB: there's a great increase in either the money supply (some guy finds a bunch of gold, which, at the time, was already by far the most popular currency) and/or there's a great increase in loans from banks that are not FRB (and then the lines of production shift and there's initially not enough capital goods/material/etc to satisfy all the new demand, or, there at least won't be enough consumers who will want to buy the stuff once it's made).

Does that lead to boom bust in either case?

In the case of gold, would it just lead to a boom because it's flooding the market might cause another thing to become a more popular currency?

In the loans case, is it the case that as long as the banks do not employ FRB, there's no boom-bust, because the loans are backed in genuine savings?