Austrian Business Cycle Theory Surprisingly Useful Even Among Its Critics
The theory of business cycles advanced by Ludwig von Mises (and refined by Friedrich Hayek, who won the Nobel partially for this work) explains the typical recession as the inevitable result from a preceding, and unsustainable, boom period. The cause of the boom is artificially low interest rates, which in turn are caused by the expansion of bank credit made possible by “fractional reserve banking.” When the banks cease (or at least slow down) their credit expansion and interest rates rise, businesses realize their operations are no longer profitable and the bust ensues. (For more on Austrian business cycle theory, and specifically how it relates to the recent housing boom-bust, see my article here.)
Naturally, most respectable economists do not endorse the Misesian theory. Yet two recent episodes show that it is still quite relevant for an understanding of the modern economy:
==> In a post entitled “Austrian business cycle theory refuses to die,” Tyler Cowen (a sharp critic of the internal logic of ABCT) relates the preliminary findings of a new paper by Princeton economists:
This paper examines financial instability associated with bank credit expansion in a set of 23 developed countries over the years 1920-2012. We find that credit expansion, measured by the three-year change in bank credit to GDP ratio, predicts a significantly increased crash risk in the returns of the bank equity index and equity market index in the subsequent one to eight quarters. Despite the increased crash risk, credit expansion predicts both lower mean and median returns of these indices in the subsequent quarters, even after controlling for a host of variables known to predict the equity premium.
==> A recent Bloomberg article relates the concern among Fed officials that slowing asset purchases will cause a crash:
Federal Reserve Governor Jeremy Stein endorsed a warning by economists that raising the main interest rate may cause a financial-market convulsion similar to the “tantrum” that occurred last year after the Fed said it was considering trimming its bond purchase program.
“Whenever the decision to tighten policy is made, then the instability seen in summer of 2013 is likely to reappear,” economists including Michael Feroli, the chief U.S. economist for JPMorgan Chase & Co. in New York and a former Fed economist, said in a paper released today. “Risks of instability have not been eliminated.”
Stein lined up behind Feroli’s argument in comments on the paper during a conference in New York, saying “monetary policy makers cannot wash their hands of what happens” in financial markets when they begin withdrawing stimulus.
Of course, few mainstream economists are going to say, “Maybe that Ron Paul guy was on to something?” but we are seeing the familiar playing out of unintended consequences that free-marketeers admit occur in most other areas of government “helping.” Why central planners should suddenly have an advantage in the production of money and setting of interest rates has never been adequately explained.
I don’t see anyone calling for the elimination of fractional reserve banking. So until that happens. they are not endorsing anything said by Mises or Ron Paul. Ron Paul’s position on monetary policy is very extreme. He wants essentially a fixed amount of money in the economy. No more borrowing short term, holding onto a portion and lending the remainder.
The Princeton study defines credit expansion as credit growth outpacing GDP growth. That is not Mises definition. Mises is opposed to any kind of credit expansion. If credit expands 2% and GDP expands 3% the Princeton study would call that a credit contraction and Mises would call it a credit expansion.
The Bloomberg text refers to a market response to an announcement, not an actual change of policy. That has nothing to do with Austrian economics. Higher interest rates mean lower stock prices since bonds compete with stocks.
“So until that happens. they are not endorsing anything said by Mises or Ron Paul.”
Well, l that is a trivially false statement.
“Mises is opposed to any kind of credit expansion”
Mises doesn’t believe in credit? That is interesting.
“That has nothing to do with Austrian economics.”
So, now you are going to tell Tyler Cowen he’s wrong about what has to do with Austrian economics? Interesting.
Your problem, Joe, is that now that I’ve seen you be wrong about everything, I don’t try to look for any hidden correctness in your comments.
For example: “Higher interest rates mean lower stock prices since bonds compete with stocks.”
That sounds almost truthy enough to pass, but of course an artificially manipulated interest rate that then arbitrarily changes causing a shift from stocks to bonds would qualify for an Austrian charge of malinvestment.
Will this particular change cause a business cycle? I don’t know, but it was mostly Austrians and Post-Keynesians who thought the housing bubble might.
joe,
Right: these mainstream economics aren’t necessarily endorsing ABCT or Austrian theories when they start to pay attention to credit cycles or the role of banking.
Most of this empirical work is more compatible with aspects of Keynesian theory that emphasize the importance of money, banking and financial stability (e.g., form Keynes, Minsky and Davidson).
Maybe, or what Minsky offered could be viewed as a subset of ABCT.
i.e., the people who ignore ABCT also ignored Minsky et.al. until their models were proven wrong.
Then they cast about for adjustments to their models and adopt what they like and reject what they don’t like and rebrand it with their preferred political labels.
So, AGAIN…sigh…to blame 100 year old versions of Austrian theory for being a flawed model is…tiresome.
Minsky’s theory isn’t based on the idea of a ‘natural’ interest rate. As such it’s difficult to see how it could be viewed as a subset of the austrian theory.
Minsky-ite “theory” not a “subset” of Austrian theory. The Minsky-ites look at certain phenomenon which occur as the result of previous interest rate and price distortiions induced by government FRB and fiat money, they explain what happened by omitting and ignoring the essential role played by government in the ensuing mess and they call the process “capitalism”. They omit and never engage or address all the points made pursuant to Austrian analysis.
http://consultingbyrpm.com/blog/2014/04/austrian-business-cycle-theory-surprisingly-useful-even-among-its-critics.html#comment-434464
fractional reserve banking is part of ‘capitalism’. So is government-issued currency, in fact, unless you claim that capitalism has never actually existed anywhere.
Do you think that economic crises wouldn’t happen in an economy using scarce metals as currency? If so, how do you explain historical economic crises in periods where scarce metals were used as currency?
Philippe:
The extent of fractional reserve banking that takes place today is not capitalism.
Also, if you study history, in all the major cases where it is claimed crises took place with metal money, you should be able to learn that they all had deviations away from pure metalism brought about by governmental interference.
It isn’t so much the physicality of the money that is the problem, it is the coercion from the government that does it.
depends on how you define capitalism. I wouldn’t define capitalism as an economic system without a state or government.
“you should be able to learn that they all had deviations away from pure metalism brought about by governmental interference.”
What do you mean by pure metalism? A money system in which the only monetary financial asset is metal coin? If that’s what you mean then I don’t think any period in US history qualifies.
“it is the coercion from the government that does it.”
Metallic money was issued by states and demanded in payment of taxes too.
Philippe:
Define capitalism any way you want. The important thing is whatbwe are referring to.
If you want examples of government interventions that caused depressions, Rothbard’s “History of Money and Banking” is a good start.
Metallic money was not “issued”, i.e. produced, by the state. The state taxes those who do.
Solidus.
… how do you explain historical economic crises in periods where scarce metals were used as currency?
The Truth About Tulipmania
http://mises.org/daily/2564
By 1636, a formal futures market had developed for the tulip market. Trading took place in taverns in groups, known as “colleges” where rules governed bidding and fees (Garber 2000, p. 44). As Garber (2000, p. 45) explains:
Neither party intended a delivery on the settlement date; only a payment of the difference between the contract and settlement price was expected. So, as a bet on the price of bulbs on the settlement date, this market was not different in function from currently operating futures markets.
…
But what made this episode unique was that the government policy did not expand the supply of money through fractional reserve banking which is the modern tool. Actually, it was quite the opposite. As kings throughout Europe debased their currencies, through clipping, sweating or by decree, the Dutch provided a sound money policy, which called for money to be backed one hundred per cent by specie. This policy, combined with the occasional seizure of bullion and coin from Spanish ships on the high seas, served to attract coin and bullion from throughout the world.
The end result was a large increase in the supply of coin and bullion in 1630s Amsterdam. Free coinage laws then served to create more money from this increased supply of coin and bullion, than what the market demanded. This acute increase in the supply of money served to foster an atmosphere that was ripe for speculation and malinvestment, which manifested itself in the intense trading of tulips.
“If you want examples of government interventions that caused depressions, Rothbard’s “History of Money and Banking” is a good start.”
That’s funny.
“Metallic money was not “issued”, i.e. produced, by the state.”
The most popular coin in the US before the dollar, I believe, was the Spanish Milled dollar. This was issued by the Spanish Empire. What they did is they sailed across to South America, killed loads and loads of people, and took the place over. Then they got the local population to dig up loads and loads of silver and gold. They minted it into coins and took it back to Spain, where the coins were issued and spent into circulation. Some of them ended up in the American colonies.
(a simplified account)
I will have a look at Rothbard’s history of money and banking.
I will have a look at Rothbard’s history of money and banking.
It has been narrated and put on a YouTube playlist:
Murray N. Rothbard: A History of Money & Banking in the U.S.
http://www.youtube.com/view_play_list?p=6D09BB9900764D5F
I have only listened to a little bit.
Joe,
Mises wrpte aboit a lot more than frb, which means one can indeed “endorse” something he said without also endorsing an end to frb.
Paul does not want “an essentially fixed amount of money”. He wants a free market in money.
Regarding announcements, such announcements only have an effect because the actual action has an effect. It is just reacting to something before it actually happens, using talk as evidence of what is to come. To separate talk from action completely, in your extreme manner, is silly.
“He wants a free market in money”
Paul wants to repeal legal tender laws, abolish all taxes on metal coins and make it legal for anyone to mint coins, as far as I’m aware.
What ever you think of that plan, it’s not really a free market in money plan, it’s a special tax privileges for owners of gold and silver plan.
Taxation is a special privilege.
“Paul wants to repeal legal tender laws, abolish all taxes on metal coins and make it legal for anyone to mint coins, as far as I’m aware.”
He is also not in favor of using force to ban bitcoins. He is in favor of monetary competition. One step towards that is allowing gold to compete, for better or worse.
“What ever you think of that plan, it’s not really a free market in money plan, it’s a special tax privileges for owners of gold and silver plan.”
If you asked him, he would say the same thing for Bitcoins, as he does for gold. He doesn’t want privilege. He wants more freedom of competition.
I happen to like Apple stock, so I will try to pass a law which abolishes all taxes on Apple stock. Because of ‘competition’ and stuff like that.
“Tax credits” aren’t privileges.
The term “tax credit” implies that the government owns your money, and it allows you to keep some.
No, if you work for something, it belongs to you, and a “tax credit” is actually money the government chooses not to attempt to steal from you, today.
you’re arguing that all taxation is wrong. Ok, I know you believe that.
However we have a social/economic system with taxation. Paul’s plan is like me trying to abolish taxes on Apple stock because I personally happen to like Apple stock and own a lot of Apple stock.
You of course can back that up with a reference… something Ron Paul did actually say, rather than something you just made up?
(1) Except alternative Post Keynesian theories elucidate the manner in which business cycles are driven by credit cycles too, without all the errors of ABCT.
(2) “The cause of the boom is artificially low interest rates, which in turn are caused by the expansion of bank credit made possible by “fractional reserve banking.”
Artificial in what sense? With respect to a non-existent Wicksellian natural rate of interest, which even you admit does not exist?
Artificial when judged by a false loanable funds and pure time preference theory of interest?
The dynamic nature of modern capitalist production has always been backed up by endogenous money systems and FR banking.
The desire to abolish FR banking is the product of an ignorant and bizarre anti-capitalist mentality, which demonstrates only how Rothbardianism is profoundly anti-capitalist.
If there was ever a time someone had to explain an artificial interest rate, this would be NOT it.
For the 451st time, the problem is with notes that should be brightly labeled as a form of credit instead masquerading as warehouse receipts. There is nothing wrong with “credit”. You are being your typically dishonest self, LK.
Further, as Hayek explained, the “natural” rate of interest or those “equiibrium prices” are what would occur absent violent intervention. It refers to the road not taken. As such, that alternate road does not and will not exist and it is not presently somewhere out there only waiting to be discovered via “flexible prices” as you have stated.
(1) Private banknotes or negotiable cheques do not masquerade as “warehouse receipts”. E.g., how many people seriously do not understand the dangers of accepting cheques as a form of payment?
(2) “that alternate road does not and will not exist and it is not presently somewhere out there only waiting to be discovered via “flexible prices” as you have stated.”
Kirzner:
“As Austrian economist F. A. Hayek emphasized, the market process we have been describing in entrepreneurial terms can also usefully be understood in terms of learning. The process through which the market tends to generate the ‘right’ quantity of a commodity, and the ‘right’ price for it, can be seen as a series of steps during which market participants gradually tend to discover the gaps or errors in the information on which they had previously been basing their erroneous production and/or buying decisions. Buyers who had overestimated the willingness of producers to produce and sell the commodity had been ‘incorrectly’ refusing to offer higher prices (that they would indeed have been prepared to pay); those who had underestimated that willingness were ‘incorrectly’ offering higher prices than were in fact needed to inspire sellers to produce. Sellers who had overestimated the willingness of buyers to buy were ‘incorrectly’ asking higher prices (and were producing more units of the commodity than it was ‘really worthwhile’ to produce), and so on. The market process is one in which, driven by the entrepreneurial sense for grasping at pure profit opportunities (and for avoiding entrepreneurial losses), market participants, learning more accurate assessments of the attitudes of other market participants, tend toward the market-clearing price-quantity combination.”
Kirzner, Israel M. 2000. “Entrepreneurial Discovery and the Law of Supply and Demand,” February 1, 2000
http://www.fee.org/the_freeman/detail/entrepreneurial-discovery-and-the-law-of-supply-and-demand#axzz2rJCWXRKy
———————–
There is no reason to take seriously the ramblings of a man who cannot even say whether flexible prices moved by human action towards their market clearing levels is a fundamental part of Austrian theory or not.
As Hayek explained on Page 7, paragraph 4 (the quote you’ve distorted over and over and over for years) states the obvious, that the road not taken cannot be statistically measured BECAUSE IT NEVER OCCURRED OR OCCURS.
https://www.flickr.com/photos/bob_roddis/7534880182/sizes/o/
This has gone beyond pointless.
“As Hayek explained … the road not taken cannot be statistically measured BECAUSE IT NEVER OCCURRED OR OCCURS. “
Holy bejesus, so market clearing prices never occur in the real world?
Is that correct?
One can only marvel at a man who shoots himself in the foot over and over again.
As I’ve said before 387 times, MARKET CLEARING PRICES EXIST ALL THROUGHOUT THE UNSUSTAINABLE BOOM until that moment when the bust begins. That is one reason why I’m not a big fan of the term “market clearing prices” as I’ve explained 134 times before.
Roddis:
“As I’ve said before 387 times, MARKET CLEARING PRICES EXIST ALL THROUGHOUT THE UNSUSTAINABLE BOOM until that moment when the bust begins. That is one reason why I’m not a big fan of the term “market clearing prices” as I’ve explained 134 times before.”
A statement which proves only how stupid you are.
A market clearing price is a price at which the quantity demanded of a good exactly equals the quantity supplied.
If you think that market clearing prices existed throughout the boom, then you are saying that there was NEVER excess demand for any goods like houses and NEVER any excess supply of any goods like houses, and there was some kind of stationary supply and demand equilibrium in all markets (including the housing market) for years on end — an utterly stark, raving mad idea.
Your statement proves only that you do not now and probably have NEVER understood what a market clearing price even is.
LK,
You are the premier sophist.
‘excess supply’ or ‘excess demand’ are only relative to what the supply or demand WOULD HAVE BEEN ABSENT INTERVENTION.
You know you are using the term ‘market clearing price’ for two different things at the same time. You don’t use it consistently, you only use it when it suits your particular argument.
LK,
Again with the ad hominem.
You are trying to use something that 100 year old Austrianism was an attempt to correct as a weapon against Austrianism in general.
Are you not aware of bid-ask spreads? What you are trying to gotcha is meaningless.
And the likes of Krugman and Minsky get away easy because they never go out on a limb.
If market clearing is a concept only used in “100 year old Austrianism” then one wonders why Bob Murphy described it here:
http://consultingbyrpm.com/blog/2014/02/supply-demand.html
Market clearing prices happen everywhere, every day, every second.
When you grab something off the shelf and pay for it, you just paid the market clearing price. Sometimes they give you a coupon to take product out of the store.
The price may have been markup and profit for retailer and manufacture or both of them. The price may have been profit for manufacture and huge loss for retailer or vise versa.
Deal with it.
Learn to deal with the real world of scarcity, profit, loss, demand, supply and most of all, fickle customers.
“When you grab something off the shelf and pay for it, you just paid the market clearing price”
No, the ‘market clearing price’ is a theoretical equilibrium price at which the total quantity supplied is equal to the total quantity demanded, so that everything is sold.
the ‘market clearing price’ is a THEORETICAL “equilibrium” price
the idea is, if you’re in a fruit market for example, and the sellers want to sell everything they have, they reduce the price until every last fruit is sold. i.e. the market clears.
The price at which that happens is called the market clearing price.
If instead they decide to keep the price fixed and keep unsold fruit to sell the next day, then the market doesn’t clear on that occasion and the price is not the market clearing price. Market clearing prices are flexible prices.
So fixprice markets don’t clear? LK?
Philippe,
Selling goods is an ONGOING activity. With the exception of liquidation sales and things of that nature, supply offered will never equal supply demanded. It would be devestating to people’s lives if markets actually cleared. For it would mean the end of being able to buy anything in the next moment after.
yeah I know, but certain markets might temporarily clear in reality.
No Philippe. Your definition is actually not well founded. Any lower price, including a negative price, would cause that last piece of fruit to sell. So your definition cannot be right. You are missing the essential symmetry of the notion. It is the price at which the amount demanded is equal to the amount supplied. It is a theoretical fiction to simplify discussions, like pressure and temperature of a room. But like temperature and pressure, and pace the austrians, it is a useful simplification.
yes you’re right. My example is sloppy. In my fruit market example, if the sellers want to sell everything they have, and the buyers do not want to buy everything at the current price, the sellers can lower the price to a level at which the buyers will buy everything. It’s not that the last fruit sells for a lower price than the rest, but that the price of all the fruit goes down to a level at which everything is bought.
Yours is a trivial and stupid definition of market clearing distinct from the well established one used by Austrians: the price at which the quantity demanded of a good exactly equals the quantity supplied.
LK,
that’s the definition I wrote above:
“the ‘market clearing price’ is a theoretical equilibrium price at which the total quantity supplied is equal to the total quantity demanded”
I just gave a simple example, which backfired twice I see
Apologies, Philippe, my comment was directed at “Gamble”, not you.
Gamble’s comment:
“Market clearing prices happen everywhere, every day, every second.
When you grab something off the shelf and pay for it, you just paid the market clearing price. “
http://consultingbyrpm.com/blog/2014/04/austrian-business-cycle-theory-surprisingly-useful-even-among-its-critics.html#comment-434562
Joe wrote(LK):”No, the ‘market clearing price’ is a theoretical equilibrium price at which the total quantity supplied is equal to the total quantity demanded, so that everything is sold.”
Yes but you guys are wrong thinking to believe production will cease at the moment of clearing. You falsely equate clearing with end of production. Somebody else or maybe even the same business is already making more of the same.
Markets clear all the time even though production does not halt.
I understand dynamics are freighting to the statist but this is reality.
I suppose in an iron fisted command and control economy, production could cease but come on now, do we really want bread lines?
Is this what you guys are advocating?
Clear the markets, rejoice bread lines?
LK:
“There is no reason to take seriously the ramblings of a man who cannot even say whether flexible prices moved by human action towards their market clearing levels is a fundamental part of Austrian theory or not.”
There is no reason to take seriously the ramblings of a person who cannot even understand that it is fruitless to argue over whether a particular statement or statements of a theory are “fundamental” or otherwise to that theory.
Ok, let’s say you both agree it’s “fundamental”. Or, let’s sy you both agree that it is not “fundamental”.
So what? A, you haven’t even addressed whether it’s true or false, which is what you should be thinking about, and B, even if you disagree, you still would not have shown anything worth talking about, and C, you haven’t explained why the question of its “fundamentality” is worth quibbling about.
The question whether it is a true theory is precisely what is at issue.
But roddis is incapable of answering that too.
So thanks for pointing out another reason why he’s so absurd.
LK,
‘Market clearing price’ is not a theory.
It is a concept.
LK:
“The question whether it is a true theory is precisely what is at issue.”
BS. If that were true, you would not keep harping on the issue of whether it is “fundamental” to Austrian theory or not. You would only be addressing, engaging, and analyzing whether it is true.
(1) It is not just checks LK. Even debit payments are actually credit instruments. Most people do not understand this. You have access to studies that show around 70% of the population believe they are the owners of the money they deposit into their bank demand deposit account. Whether or not they should understand better is different from whether or not they do understand, amd this distinction is important because business cycles take place on the basis of what people know and don’t know, not what they should and should not know.
you seem to be implying that business cycles are caused by bank runs. I don’t think that’s the ABCT.
No Philippe, I am not implying that business cycles are caused by bank runs. I hold that they are caused by government intervention in money.
That issue of people not understanding is distinct from whether FR banking is fraud.
Some people do not understand nor bother to read properly the terms of their insurance agreements: it does not follow that all insurance per se is fraud.
LK:
“That issue of people not understanding is distinct from whether FR banking is fraud.”
The issue of frb being fraud or not is distinct from whether frb causes the business cycle due to people not understanding it fully.
do people think that banks keep their money for free, or pay interest to keep their money, because they are charities?
On this issue of supply, demand, market clearing surplus and shortage (from an empirical point of view of course). Let’s take a practical example: consider the oil market in 1972, what was the measure of “supply” and “demand”? Did a surplus exist in that market or a shortage?
Please compare with 1974, show how you calculate surplus or shortage.
How many unsold barrels of oil were in Saudi Arabia in 1972, and how many in 1974?
TEL, they will not answer you because they cannot answer you.
Only in an iron fisted command and control state are your question remotely close to being answered.
Come on people, this global economy makes 4TRILLION decisions per second. Not even the Great Obama can think this fast…
With or without a teleprompter?
Look, if we can’t answer basic questions about whether a surplus exists or a shortage exists then where are we? I don’t even need a specific answer in terms of historic references, even an answer that describes how to go about figuring out where the surplus or shortage is would be a start.
As a computer programmer I have good reason to believe that programmers are underpaid and the market is vastly in oversupply. I’m sure plumbers think the same thing about plumbing. Every guy is out there thinking he has an excellent answer to the economic wellbeing of society (by which it generally means economic wellbeing of himself).
lKwrote:There is no reason to take seriously the ramblings of a man who cannot even say whether flexible prices moved by human action towards their market clearing levels is a fundamental part of Austrian theory or not.”
Hey buddy you just described reality, deal with it.
lk wrote:”Lord Keynes
at
Yours is a trivial and stupid definition of market clearing distinct from the well established one used by Austrians: the price at which the quantity demanded of a good exactly equals the quantity supplied”
I disagree with your assertion “Austrian economics” have a government that published 1 official set of definitions.
Market clearing is a general term that attempts to summarize a larger phenomenon, mainly supply and demand.
It appears to me Lord Keynes that at a core level, you do not believe supply and demand is real, ultimately justifying massive intervention. I think your thinking is purely political.
Here is a good article that attempts to place “market clearing prices” into context.
The Basic Proposition
The basic insight underlying the law of supply and demand is that at any given moment a price that is “too high” will leave disappointed would-be sellers with unsold goods, while a price that is “too low” will leave disappointed would-be buyers without the goods they wish to buy. There exists a “right” price, at which all those who wish to buy can find sellers willing to sell and all those who wish to sell can find buyers willing to buy. This “right” price is therefore often called the “market-clearing price.”http://www.fee.org/the_freeman/detail/the-law-of-supply-and-demand/
So all this, just to agree with what I said.
Impressive.
Yeah sure, we agree.
We agree market clearing prices are real. IS this what we are agreeing upon?
Great, sign the contract.
Apart from:
“I disagree with your assertion “Austrian economics” have a government that published 1 official set of definitions.”
Which is just some garbage you made up.
Well you try to cherry pick what some guy said such as Bob Murphy and make it an official position.
I have read all of these guys, old and new, and none of them completely agree. They have come to a general consensus that state intervention is anti freedom, but other than that, there are no one set of officially published Austrian definitions.
Personally I prefer Mises to any before or after. I think Mises really understood and respected other humans, ultimately human action…
What stupidity! If we aren’t for “modern” systems then we are anti-capitalist.
Rather, we understand that you don’t need FR for trade to exist. If a private sector money was to be FR, that is completely okay with me. (I don HAVE to use/osn it). Modern systems are born out of the childish fear of declining prices. Declining prices are anti-capitalist!!??!
Under true capitalism (Rothbardian), banks would have to compete and ya know…. Be wise with money. The system LK endorses SUBSIDIZES and ensures, (and insures) reckless behavior.
Rape has always existed in modern societies. Lets not abolish rape…. It would be Inhumane.
LK:
You’ve already been advised “in what sense”. The “sense” is the set of interest rates that would otherwise prevail in a free market, which Hayek just so happened to have modeled as a “natural interest rate”.
Whether or not this model treats natural interest rates as singular or plural is irrelevant to whether or not ABCT is correct about the effects of central banks lowering interest rates on the temporal capital structure of the economy.
Central banks do in fact lower interest rates. Not even the Fed would deny that it does. Indeed, the Fed announces, and then brings about a purposeful lowering of rates. Most investors understand that the Fed can do this.
To the extent that the Fed lowets rates, and thus makes free market rates unobservable, that is the source of misinformation that causes the business cycle.
You have not even grasped this phenomena, let alone scrounged together an attempt at an informed critique of it. You keep harping on whether or not interest rate should be plural or singular, borrowed from Sraffa’s rather empty analysis that doesn’t actually go anywhere with it when it comes to exactly how it disproves ABCT, and you believe that you yourself don’t have to show how it disproves ABCT either. As if merely pointing out that there is more than one interest rate in the market, which Mises was of course well aware because only an idiot would believe that two trading partners on separate sides of a free market world would necessarily agree to the same exact interest rate, somehow totally demolishes ABCT.
Like what has been explained to you umpteen times already, the natural interest rate is the rate that refers to the unobservable free market rates. It is a placeholder. A label. A name given to what we cannot observe because of the existence of central banks. Hayek did not believe that all interest rates would converge to a single rate in a free market. Mises did not believe that either. At most, like everything else derived from Misesean theory, there would only be a tendency of interest rates to converge, but we will always observe different rates at any given time.
The pure time preference theory of interest is not required for ABCT to be true. Reisman’s net consumption/net investment theory of interest for example modifies the pure time preference theory, but still retains the core principle of differences in valuation between present and future goods, and his theory is also one that ABCT can accommodate without wholesale rejection.
Finally, if making ANY changes to a theory justifies wholesale rejection of the entire thing, then you have no business calling yourself a Post Keynesian. By virtue of your rejection of orthodox Keynesianism, you must reject the entire theory. And yet you cling to Keynesianism regardless, and not only that, but in a cult like fashion you name yourself after the eugenicist pederast.
“The “sense” is the set of interest rates that would otherwise prevail in a free market, which Hayek just so happened to have modeled as a “natural interest rate”.”
That’s pretty circular. All you’re doing is asserting that in a world without a central bank there would be no business cycles or crises.
You have to have a theory about why there would be no business cycles or crises. You can’t just assert it.
Au contraire. He can only just assert it.
MF derives some benefit from explicit rejection of empiricism, mind you, at least he remains consistent.
“That’s pretty circular. All you’re doing is asserting that in a world without a central bank there would be no business cycles or crises.”
Where did I claim that?
you argue that business cycles and crises are caused by the central bank setting interest rates below what they would be in a world without a central bank.
No, MF, Hayek used the unique Wicksellian natural rate and began his ABCT from a state of equilibrium.
You, by contrast, are just making things up by means of a vivid imagination.
I expect you think “natural rate” can have any meaning you want just like your stark, raving ,mad attempt to define “immediately” in any way you wanted:
“Other than the misleading word “immediately”, which can be taken to mean any time at all, since the standard for “short” and “long” periods of time is not objective but subjective, how is that statement idiotic?”
http://socialdemocracy21stcentury.blogspot.com/2011/12/say-repudiated-says-law.html?showComment=1322756770135#c6195980368215469925
“immediately” can mean a hundred billion years in the future, or the past, or both at the same time or neither?
Who knew?
I know, Philippe.
MF’s world is one where words can take any meaning he cares to assign to them.
I suspect there are people locked up in psychiatric wards who can still recognise how crazy this is.
You’re just mad because I won’t accept your desired meanings of words. Because you need words as weapons. If I reject the validity of your weapon, you’re disarmed.
Hence the constant protestations that really only reveal your own methodology.
I have no idea what you just wrote as I refuse to accept any conventional meaning for any of the words you just wrote. Also I have no idea what I have just written.
I did! I’ve been down the same road, into the same snake pit, with MF long ago.
I did try to warn you…
Show just one example for just one of our debates that prove the accusation you have made.
Exactly the same one here, you said when I asked that immediately could mean a billion years or more hence.
You are either “consistent” or “perverse” depending on whether one think it reasonable to treat “eventually” and “immediately” as synonyms, or not.
I meant an example of you and I debating, that justified your accusation, which of course implies a *previous* time, “long ago”.
You’re just latching onto this post as if what motivated you to say what you said, took place after you said it.
… both at the same time or neither?
Who knew?
In context, Say was saying that since the purpose of money is to buy goods, when someone accepts money in payment, the price of his goods reflects the value of those goods that he wishes to buy with that money.
He didn’t accept the goods wants to buy, right away, but he DID accept at least the value of those goods, “immediately”.
THAT’S why the word “immediately” is confusing (I don’t find it misleading). He can use the money to buy the goods he wants immediately, or 1 year from now. But he accepts the value of those goods – at least in his estimation – immediately.
(This is also why money has to be a commodity, folks; It has to be something in which someone finds utility.)
Here’s the quote(s) in full, as presented by LK:
http://socialdemocracy21stcentury.blogspot.com/2011/12/say-repudiated-says-law.html?showComment=1322754376385#c4709520194513096899
“For, after all, money is but the agent of the transfer of values. Its whole utility has consisted in conveying to your hands the value of the commodities, which your customer has sold, for the purpose of buying again from you; and the very next purchase you make, it will again convey to a third person the value of the products you may have sold to others” (Say 1832: 133).
Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; for we do not consume money, and it is not sought after in ordinary cases to conceal it: thus, when a producer desires to exchange his product for money, he may be considered as already asking for the merchandise which he proposes to buy with this money. It is thus that the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchandise for their merchandise” (Say 1816: 103–105).
Say, J. B. 1816. Catechism of Political Economy, or, Familiar conversations on the manner in which wealth is produced, distributed, and consumed in society (trans. J. Richter), Sherwood, Neely, and Jones, London.
Say, J. B. 1832. A Treatise on Political Economy; or, The Production, Distribution, and Consumption of Wealth (4th edn; trans. C. R. Princep and C. C. Bibble), Grigg & Elliott, Philadelphia.
“money has to be a commodity, folks; It has to be something in which someone finds utility”
money today is ‘fiat’ or credit and people find utility in it. Money has utiliy as a security, and as a means to discharge debts owed to others.
For example I gain utility from just knowing that I have money in my bank account, even if I never actually spend it.
J. B. Say:
“Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; “
The meaning is straightforward but the text is tortured beyond recognition by guest.
I expect you are right, but the original is in French, which has conjugations for conditionals and subjunctives. Unless we see the original we cannot know if the translation has colored this passage.
Bob and crew do this kind of crap with the bible all the time, but you you know better LK.
“No, MF, Hayek used the unique Wicksellian natural rate and began his ABCT from a state of equilibrium.”
Hayek was adamant that the equilibrium never actually exists. It is a model, a mental tool, used to understand what the world actually is. Hayek never claimed that interest rates would all converge to the same rate in a free society. He never claimed that there is only one interest rate in a free market.
To Hayek, the concept of a natural interest rate was used as a model, simply to distinguish free market interest rates with central bank influenced interest rates.
Adding an “s” to every time the word “interest” is mentioned *does not in any way refute or contradict the effects on the economy that ABCT claims takes place.*
“We find that credit expansion, measured by the three-year change in bank credit to GDP ratio, predicts a significantly increased crash risk in the returns of the bank equity index and equity market index in the subsequent one to eight quarters”
Isn’t this more in line with Minsky than Mises ?
Minsky? Minsky who?
Buster Minsky?
http://en.wikipedia.org/wiki/Hyman_Minsky
I have comment dated March 30, 2014 on the Cowen post that eviscervates the “Minsky” nonsense. The concepts of economic calculation and violent intervention are like Kryptonite to Keynesians who find it necessary to remain 18 miles across the county from those ideas. My comment begins with “Cowen’s point is misleading at best.”
http://marginalrevolution.com/marginalrevolution/2014/03/austrian-business-cycle-theory-refuses-to-die.html
“Assume a debt crisis.”
I’m not sure I agree that Minskyites are the suppressors. They’ve largely been suppressed themselves until they were useful when the mainstream went looking for “anything that isn’t 100% Austrian.”
But I don’ wonder what the counter-argument to miscalculation is…that you can’t affect people with money? That’d be weird.
The Minsky-ites are meticulous in never mentioning the price distortions of the government funny money regime (that they exist, their source and that the Austrians have been explaining them for decades) and they blame the entire resulting mess upon “capitalism”. Our statist opponents are essentially all alike.
Hasn’t Noah Smith made this point already? ABCT’s milkshake has been consumed.
They are damn sure trying, but did you see the end of the third Matrix when Smith tries to assimilate Neo?
No, I can’t say I have. Like Kieran Healy, I’m a sort of anti-Rutger-Hauer: I haven’t seen things you people wouldn’t believe.
“Austrian Business Cycle Theory Surprisingly Useful Even Among Its Critics”
The Minsky “theory” is nothing more than suppressing and ignoring the price distortions of the government funny money regime (that they exist, their source and that the Austrians have been explaining them for decades) and blaming the entire resulting mess upon “capitalism”.
Don’t (some) Austrians believe that you can have a credit-induced business cycle even in a purely free market with fractional-reserve banking?
Yes, but they are short-lived. Government is what makes the cycles systemic. Otherwise, a single bank will go down with another taking its customers.
When governments don’t protect banks from people’s right to take their money out, banks have an incentive to keep high reserves.
Government privileges give banks the legal right to suspend payment when people make bank runs. Because the banks know they will have this privilege (due to the people, themselves, having agitated for some supposed right to have access to credit), they know that they can print that many more IOU’s than is covered by specie.
These videos are helpful:
Answering the Same Old Arguments Against Sound Money | Thomas E. Woods, Jr.
[www]http://www.youtube.com/watch?v=h-PxMzSyujw
The Economics of Fractional Reserve Banking | Joseph T. Salerno
[www]http://www.youtube.com/watch?v=33RXhv0IuPc
(1) Keeping reserves high will not stop runs even in a libertarian world, nor is there any convincing theoretical or empirical evidence that a Rothbardian 100% reserve world would be free of business cycles, which would arise simply because expectations are subjective and investor confidence and capital investment can collapse in a world of uncertainty.
(2) And you are badly wrong in saying that “Government privileges give banks the legal right to suspend payment when people make bank runs.”
This is B.S.
Private “option clauses” (to suspend specie payments temporarily) WERE used freely in private FR banking contacts in Scotland from 1730–1765, Sweden from 1864–1903 and Canada during the 19th century, as Selgin shows.
The banks required no government support or intervention to allow them to suspend specie payment in liquidity crises as specified in their private contracts.
http://socialdemocracy21stcentury.blogspot.com/2012/01/fractional-reserve-banking-option.html
I’m pretty sure even Austrians agree that phenomenon like gold rushes can cause a business cycle. Please correct me if I am wrong. If this is true, then 100% free of business cycles is a stretch LK.
Rothbard’s view about fraud in the form of bank’s expanding credit is more nuanced than people give him credit for. I believe if both parties involved in the banking contracts were informed about the expansionary policies, than Rothbard would have no problem with it. Of course, I may be wrong about this as well.
Freely?
What happened to any patron who attempted to storm the gates?
I will answer for you, government shot them.
I think that’s a little unfair.
Debt is a promise, credit is belief that someone will come good on their promise. So when you have a promise stacked on a promise stacked on belief, it seems like anything is possible. One day it dawns on someone that this just isn’t going to work and the whole lot tumbles like cards.
Minsky was right in describing how (temporarily) you get positive feedback in a debt deflation scenario… each broken promise forces the next guy to readjust expectations. The question of course is how that house of cards got stacked up in the first place, which is quite another issue.
Austrian economics is entirely compatible with debt deflation, indeed you need debt deflation to complete the full boom and bust cycle (which is really a promise-too-much, then deliver-too-little cycle).
The banana analogy is cute, although I think Cowen’s problem is believing people would really do things like put bananas on their roof for no reason.
As often, begin with the assumption “people are stupid. Really, shockingly, breathtakingly stupid.”
Why? I guess because being eggheads it sure seems that way doesn’t it.
That bubbles exist and collapse disproves Cowen and his “cuteness”. Cowen’s nonsensical refutation relies upon an assertion that most people are not misled by the distorted prices. Personally, I cannot understand how it is that people continue to be so misled especially after we explain the ABCT to them. So perhaps people shouldn’t be misled. But they are and continue to be. Further, due to prior violent interventions, an undistorted price structure never actually comes into existence. And, of course, who other than us understand that?
I wouldn’t necessarily say that responding to a price signal that’s distorted is being misled as a general rule.
I don’t think anyone would, for example, saying that one is “misled” into thinking one is better off taking advantage of an artificially low price than not, if say that low price is caused by a subsidy given out by the state. One is-albeit it at the expense of others forced to pay the difference for you.
Are the actors that make what we perceive to be mistakes because they later need to be reversed, actually having their goals frustrated? Not if the government doesn’t ever let the malinvestments be liquidated. So in what sense are they misled?
Bob, the title of your post is very Cowenesque. Was that intentional?
Murphy, it gets even better.
Lord Keynes for example accepts anarcho-capitalist theory so deeply that he is actually practising that ethic in his life. He talks and talks about other ethics as superior, but he himself behaves in accordance with anarcho-capitalist ethics. I don’t see him taxing anyone, or printing money in his basement, or actually bringing about any Keynesian “policy.” No, he is acting like a Rothbardian through and through.
We’ve won before we knew we were even battling. LOL
By the same stupid logic, I can claim that virtually any Rothbardian is a consequentialist: everyday such a person practises consequential ethics in his life: he does not murder or assault people.
Consequentialist ethics are the class of norms where the consequences of one’s conduct are the ultimate basis for any judgment about the rightness or wrongness of that conduct.
To not murder and not assault people does not necessarily follow from wanting to adhere to consequentialist ethics. In other words, consequentialism does not say “You ought not murder”. It just says that we should judge our actions by the consequences of those actions. For example, we should judge the rightness or wrongness of shooting at people, with the consquences of it, such as making a person dead.
You did not in fact use the same logic that I used above when I said that you act as a Rothbardian.
LK, something has been bothering me here…
What’s your empirical methodology for measuring “want” in these cases?
What choice of physical units do you find most suitable for quantifying “want” by the way? I was mulling over using the “wanton” for this purpose, but thought I better ask your advice first.
Empirical “methodology”?
I doubt you even understand the meaning of the word “methodology”.
Perhaps you mean “:empirical evidence”?
One can go into a store and ask the owner/seller what goods are for sale and how much of their stock they would be willing to sell too.
“What choice of physical units do you find most suitable for quantifying “want” by the way?”
Depends on the whether the goods are discrete units (like fridges) or what we would call mass nouns and thus measured in units like kilos, pounds or other such units (like wheat).
Apparently one has to reinvent the wheel every time one engages with you, tel.
Perhaps next time you’ll scream that I have not sufficiently defined what I mean by “the” or “and”.
Wow, I am surprised you don’t see how weak this is.
It does not matter in the slightest what the owner/seller thinks or estimates their willingness to sell.
Surplus is the actual stuff left over IN REALITY.
According to you, I go to a store and ask how much the owner/seller is willing to sell. I imagine most of them would want to sell all of it. In this case almost all surpluses would be zero!
This is wrong. Economics is about ACTION. Surplus only manifests itself in actual, physical action in the real world. Not in an imagined state of the owner/seller.
This is one of the main problems in your methods LK. You constantly confuse an imagined state with the real world.
Whenever you ask a person a question about a hypothetical situation (even if its not hypothetical and has happened in reality), the person is filled with copious bias. You cannot possibly communicate all economic factors coming into play for the person. These factors can only come into play in the real world.
Right.
ON any given day a purchaser may ask me for everything I have, I say sure, take all of it.
On a different day, a purchaser may ask me for everything I have, I say sure, you do realize todays price is 30% more than yesterdays price.
Hank, I would argue that economics is about both action and also about wants, however action is observable. That is to say, if you are trying to build an empirical theory of economics you are kind of forced to start with actions, because only by looking at actions can you make a concrete measurement. Empiricism without measurement is bullshit.
I would never argue that the want does not exist. The problem is that by working in the world of wants and desires, you effectively abandon empiricism.
It’s kind of telling that you don’t understand the difference between want and demand.
Well either that or it’s telling how sloppy you’re being.
I’m not about to get into a pissing match about who speaks slightly better English, but people write books about empirical methodology, so presumably there’s something in it.
http://books.google.com.au/books?id=hkTjC7SlRTcC
What I’m trying to say, is that you should document your process by which you measure “want” and how you intend to get a repeatable result.
I’m well aware of how to measure goods, but that was not the question asked. Let’s suppose a prepper has a big storeroom of tinned food under the house. We can count the tins, and that’s a measure of the goods, but does to prepper want to sell them? If offered sufficient money, yes the prepper would sell them, but normally no there is no “want” to sell. The goods are the same, but the price offered might change.
On the other hand, a corner store might have an exactly identical storeroom containing exactly the same tinned food, but in this case the “want” is quite different. You can still count the tins but that would be insufficient to describe the situation. You must see that the mindset is different in the two cases. Austrian economists would call it “preferences” but other economists might call it something else. At any rate, measuring only goods misses the point.
I would dispute whether you invented it the first time, but at any rate asking someone to define their terms is not entirely unreasonable. I happen to think that some fundamental problems exist that you have yet to investigate, such as the measurement of “want” which is not an easily identifiable physical quantity.
https://www.handbook.unsw.edu.au/postgraduate/courses/2014/FINS5581.html
People teach courses on Empirical Methodology as well, so how about that?