Yes, Larry Summers Is Saying Central Bank Policy Encourages Bubbles (Which He Thinks Is a Second-Best Solution Because of Secular Stagnation)
OK it took me a bit to understand the point that Keshav (and then Ken B.) were making in response to my Summers/Krugman commentary on bubbles. They (and maybe others, sorry if I’m leaving people out) were saying that yes Summers/Krugman were warning that we would have a string of bubbles, but that no they weren’t saying it was due to countercyclical (or “pedal to the metal” as Krugman put it) monetary policy. The bubbles were going to happen either way, it’s just that in conjunction with ultra-accommodative central bank policy–which is necessary because the natural rate of interest is negative, and has been for a while now–it will look like the inflation hawks are right. But actually (so say Keshav and Ken B.), Krugman/Summers were denying this connection; it wasn’t monetary policy causing the bubbles at all.
Although there are isolated passages from Krugman’s commentary that are consistent with the above interpretation, I don’t think it works. First, we have the infamous Krugman quote from 2002 saying that Bernanke Greenspan needs to replace the dot-com bubble with a housing bubble. Here’s Krugman himself in 2010 discussing that piece:
So did I call for a bubble? The quote comes from this 2002 piece, in which I was pessimistic about the Fed’s ability to generate a sustained economy. If you read it in context, you’ll see that I wasn’t calling for a bubble — I was talking about the limits to the Fed’s powers, saying that the only way Greenspan could achieve recovery would be if he were able to create a new bubble, which is NOT the same thing as saying that this was a good idea…
But did I call for low interest rates? Yes. In my view, that’s not what the Fed did wrong. We needed better regulation to curb the bubble — not a policy that sacrificed output and employment in order to limit irrational exuberance. You can disagree if you like, but that doesn’t make me someone who deliberately sought a bubble.
OK, so it’s crystal clear that Krugman thought (at least from 2002 through 2010) that, at least in principle, the Fed can create bubbles. Now from the above, it’s not totally clear whether Krugman thinks interest rates are the mechanism, but for sure Krugman thinks central banks have the power to make and break bubbles. (To clarify what I’m saying: Krugman says that better regulation could have curbed the housing bubble without the need to raise interest rates. But that still means it could have been low interest rates that set the bubble in motion; surely when Krugman said “Greenspan needs to replace…” he wasn’t suggesting that Greenspan needed to weaken oversight of the financial sector. No, Krugman meant Greenspan needed to engage in looser monetary policy.)
Now, turn to Summers’ IMF speech, which started all of this. In the excerpts below, it is pretty clear that Summers is saying that absent major reforms, the central bank will be left fighting high unemployment with tools that will promote bubbles. Those bubbles are the unavoidable consequence of not doing the major reforms, but–if those reforms are off the table–then it’s better to accept the bubbles as a necessary evil. However, if we could get the major reforms, then the central bank wouldn’t have to engage in such loose policy, and we would not get as many bubbles.
I hope no one will deny that if Summers is in fact saying what I’m claiming, then my original point in all this is vindicated: Krugman/Summers are finally saying what hard-money types have been claiming for years: Namely, that the ZIRP/QE policies have promoted asset bubbles, even though price inflation hasn’t gone through the roof and unemployment remains high.
OK on to the Summers quotes from his IMF speech, to bolster my interpretation given above:
If you go back and study the economy prior to the crisis, there is something a little bit odd. Many people believe that monetary policy was too easy. Everybody agrees that there was a vast amount of imprudent lending going on. Almost everybody agrees that wealth, as it was experienced by households, was in excess of its reality. Too easy money, too much borrowing, too much wealth. Was there a great boom? Capacity utilisation wasn’t under any great pressure; unemployment wasn’t under any remarkably low level; inflation was entirely quiescent, so somehow even a great bubble wasn’t enough to produce any excess in aggregate demand.
…
So what’s an explanation that would fit both of these explanations? Suppose that the short-term real interest rate that was consistent with full employment had fallen to -2% or -3% sometime in the middle of the last decade. Then what would happen? That even with artificial stimulus to demand coming from all this financial imprudence you wouldn’t see any excess demand. And even with a relative resumption of normal credit conditions you’d have a lot of difficulty getting back to full employment.Yes, it has been demonstrated absolutely conclusively, that panics are terrible and that monetary policy can contain them when the interest rate is zero. It has been demonstrated, less conclusively but presumptively, that when short-term interest rates are zero, monetary policy can affect a constellation of other asset prices in ways that support demand, even when the short-term interest rate can’t be lowered. Just how large that impact is on demand is less clear but it is there.
But imagine a situation where natural and equilibrium interest rates have fallen significantly below zero. Then conventional macroeconomic thinking leaves us in a very serious problem, because while we all seem to agree that whereas you can keep the federal funds rate at a low level forever, it is much harder to do extraordinary measures beyond that forever, but the underlying problem may be there forever.
Why does Summers say, at the very end, you can’t do extraordinary measures (which means things like QE) beyond that forever? He doesn’t give his answer, but in the context of his (short) speech, I think he’s saying because it will blow up asset prices too much and policymakers will back off.
And now, to me, the smoking gun. Here’s what Summers is worried that policymakers will do, who misread the situation (not realizing we have secular stagnation) and tighten:
One has to be concerned about a policy agenda that is doing less with monetary policy than has been done before, doing less with fiscal policy than has been done before and taking steps whose basic purpose is to cause there to be less lending, borrowing and inflated asset prices than there was before.
OK, so earlier we have Summers saying that even when interest rates are at zero, central banks have demonstrated their ability to increase asset prices through unconventional measures. (I put that part in bold in the second last block quotation.) And then here, in the final block quotation, he says that he’s worried policymakers will stop trying to inflate asset prices.
In conclusion, it seems clear to me that both Krugman and Summers believe the central bank has the power to create asset bubbles, and that the looser monetary policy is, the more likely bubbles are to occur. I am surprised I have had to post three separate times to establish this point, but hey, the critics in the comments keep me honest.
I don’t recall talking about summers. I recall talking about Krugman. Perhaps I was just being a comment methodological individualist.
I don’t recall talking about summers. I recall talking about Krugman.
Ken, this is really ridiculous, even for you. I had “Summers” in the title of the posts all along, and one of the key sentences from Krugman you’ve been putting under the microscope is:
But here’s the thing: if we really are in the Summers/Krugman/Hansen world of secular stagnation, things like this are going to happen all the time…
I mean seriously Ken, the whole point of all this is that Krugman is broadcasting to the world the new thesis from Summers.
And to top it off, you’re sarcastic too (“Perhaps I was just being a comment methodological individualist.”). So no Ken, it’s not my fault you have had no idea what this whole conversation has been about. As usual, you focus on a turn of phrase here or there, and blow it up to the thesis of the debate.
Bob, all my arguments were about the Krugman quote and its wording. Look back and find a comment on that thread where I addressed any issue but what Krugman actually meant. I even characterized it alliteratively as a Murphy Misreading.
Yet here you write “But actually (so say Keshav and Ken B.), Krugman/Summers were denying this connection”. That misrepresents what I said. In a discussion about how to understand what somebody wrote!
And I believe I was being sardonic not sarcastic.
Ken B, I hope you can realize that by “the” debate, we weren’t referring to what you said in the face of what everyone else (Krugman, Summer, Murphy, etc) are saying in response to that.
You are a passenger, not a driver, on this one. Act like it.
I guess Bob didn’t address that comment to me, or name me in the post, more than once, whilst falsesly attributing claims to me.
To put it in praxelogical terms, I wish accurcay were an incentive in these things.
There were many comments. If you didn’t post anything, the same argument Murphy is making would remain.
That should tell you something…
Yet here you write “But actually (so say Keshav and Ken B.), Krugman/Summers were denying this connection”. That misrepresents what I said.
Whoa wait a second…you thought I was referring to you? No, when I wrote “Ken B.” in my post, I was referring to legendary documentary filmmaker, Ken Burns.
Please stop misrepresenting what I wrote. It confuses people.
Ooooooh. No wonder you’re so snippy. That guy is annoying.
Ken B: “Krugman didn’t say X”
Bob: “Ken B denied Summers said X. Here’s a quote where summers says back. Ha ha Ken B, gotcha!”
Ken B: “I never said that. I keep my Keynesians separate, not touching on the plate. ”
Bob: “Wow this is obtuse and sarcastic even for you Ken B.”
You forgot a few lines in your dialogue;
Ken B: “And just because Krugman has been writing about Summers speech and how important his insights are given current economic conditions, he doesn’t endorse Summers position that there is any connection to monetary stimulus and bubbles even when aggregate demand is low. To suggest otherwise would imply Krugman and Summers share a brain.”
Bob, on the basis of what Krugman SAID reached a conclusion. You assume it above. Absent Bob’s misreading you cannot attribute to Krugman what Summers said. Nor ever to me somehting I never said about Summers.
Bob attributed to me something I did not say. Sloppiness is the kindest explanation.
“Bob, on the basis of what Krugman SAID reached a conclusion.”
Not quite – a conclusion given Krugman’s words AND endorsement of Summers position – the Summers/Krugman/Hanson secular stagnation.
You think Bob wrote you were defending a quote made by Summers? Where?
Sorry, *Hansen
I have already quoted it. Here is the full quote, and then I parse it for you
“But actually (so say Keshav and Ken B.), Krugman/Summers were denying this connection;”
“But actually (so say[s]… Ken B … Summers [was]denying this connection”
Everything in that post is applicable, except what comes after “Ken B”, and mentions of Ken B.
Incidentally I’m not convinced in the section you quote Krugman that you have a smoking gun. He talked about the bubble using the definite article. Curbing the bubble not converting it. That could mean ia pre existent bubble (now covered by Obamacare plans ) and from the contacts quoted probably does. So he may believe that the fit is capable of creating bubbles at least in theory but just from the bet you quoted it’s not clear that your inference is correct. I’m not saying you’re wrong I’m just saying it’s not quite so clear.
Averting not converting.
Perhaps if the bubble did convert Bob would like it more
🙂
“In conclusion, it seems clear to me that both Krugman and Summers believe the central bank has the power to create asset bubbles, and that the looser monetary policy is, the more likely bubbles are to occur.”
Your argument seems to be that when the central bank lowers the overnight rate or prints money the market mechanically and mindlessly reacts by creating a bubble. Whereas Krugman argues that bubbles can happen when people have “implausible or inconsistent views about the future”.
Krugman’s view sees humans as being capable of independent thought and also as being capable of getting carried away, whereas you seem to see humans as just mechanically and mindlessly doing whatever the central bank makes them do.
You seem to define a bubble as just unusually high asset prices. Krugman’s definition is different:
“What is a bubble, anyway? Surprisingly, there’s no standard definition. But I’d define it as a situation in which asset prices appear to be based on implausible or inconsistent views about the future. Dot-com prices in 1999 made sense only if you believed that many companies would all turn out to be a Microsoft; housing prices in 2006 only made sense if you believed that home prices could keep rising much faster than buyers’ incomes for years to come.”
http://www.nytimes.com/2013/05/10/opinion/krugman-bernanke-blower-of-bubbles.html?_r=0
So you’re saying that if individuals have “implausible or inconsistent views about the future, such that asset prices are unduly low, then Krugman would consider that a “bubble”?
Isn’t a low price for X a high price for non-X?
So even if he meant that it wouldn’t be different in logic, just odd linguistically.
Anyway if you read the article it’s clear that he means bubbles involve overpriced assets. Another attempted gotcha gone awry.
“Isn’t a low price for X a high price for non-X?”
Would Philippe consider a low price for X to imply a bubble in X?
“Anyway if you read the article it’s clear that he means bubbles involve overpriced assets.”
Duh. That was my point to Philippe, who claimed that:
“You seem to define a bubble as just unusually high asset prices. Krugman’s definition is different”.
“Another attempted gotcha gone awry.”
Doesn’t that imply that you showed a first attempted gotcha going awry? Where did you ever do that?
“Would Philippe consider a low price for X to imply a bubble in X?”
er, no.
MF and Bob devote their life to ignoring context in Krugman’s writings, and then shouting “gotcha” because Krugman didn’t explicitly refer to the context. A game you can play endlessly of course.
Right, so it makes no sense for you to claim that Krugman is defining bubbles “differently” from periods of unusually high asset prices. For if you are going to distinguish these two, then it would imply that bubbles can take place on the basis of asset prices being based on implausible or inconsistent views about the future, and something other than unusually high asset prices, for example, unusually low asset prices.
If on the other hand you constrain all bubbles as having a minimum requirement of unusually high asset prices, then you must either attribute that view to Krugman, in which case you were wrong to claim he is holding a different definition, or you don’t attribute that view to Krugman, in which case you would be claiming that Krugman believes bubbles can take place on the basis of unusually low asset prices.
Either way, what you’re saying is problematic.
Ken B:
“MF and Bob devote their life to ignoring context in Krugman’s writings”
On the contrary, it is Bob (and I, to a lesser extent) who are not ignoring the context, for we are showing how you are ignoring the context of his writings, specifically, his other writings.
You have a habit of treating Krugman’s posts as completely separate, their own universes, where you can spin what he says by ignoring the context of his other writings on the subject.
You want to make yourself and others believe that his contradictions are in reality a signal he is “changing his views”. While there is some truth to that, it is not by any means the sole explanation, for it has been shown by Murphy that Krugman flip flops depending on who or what is arguing against and for.
You just don’t seem to want to come to grips with the fact that Krugman is a massively flawed thinker, who makes comments that when compared with each other even a 5 year old can grasp as inconsistent.
I believe that you are having trouble with it because of two main reasons. One, you don’t like what you perceive to be Krugman getting picked on. This is because you need him to advance your own views that might be in line with his. If Krugman is demolished, it puts a huge dent in your agenda. Two, you’re likely thinking that he can’t be as stupid or flawed as Kontradiction posts make him out to be. It can’t be this easy. There has to be a better explanation that is going over the heads of Krugman’s ideological opponents.
Here’s some advice Ken B: JUST ONCE I’d like for you to show a clear example of me “ignoring the context”. The last few blogposts you have failed to do so, as I have posted numerous quotes from Krugman that prove my case and refute yours.
The only reason why you’re saying this to Phillipe is because you want him on your side to advance your agenda. You want him to become an opponent of myself and Murphy, because you smell something about him that you believe is useful. You feel outnumbered so you need to trick others into siding with you on false pretenses. Shame.
“so it makes no sense for you to claim that Krugman is defining bubbles “differently” from periods of unusually high asset prices.”
But a bubble isn’t just a period of unusually high asset prices. Prices could be unusually high for non-bubble reasons.
Just describing any occurrence of high asset prices as a bubble doesn’t make sense really.
People like Eugene Fama and Scott Sumner don’t even believe that asset bubbles exist, or that the term has any meaning.
And no, Krugman doesn’t define bubbles as unusually high asset prices.
During WWII wolfram mines were unusually valuable, as were Swiss bank accounts and Lockheed stock. Bubbles?
When I taught at Hillsdale my direct boss’ name was Wolfram.
(I just thought I would contribute to your guys’ “discussion.”)
could you give us your definition of ‘a bubble’?
Philippe:
“But a bubble isn’t just a period of unusually high asset prices. Prices could be unusually high for non-bubble reasons.”
Who said or implied that only bubbles are periods of unusually high asset prices? I didn’t. I merely pointed out that if you’re going to distinguish between bubbles as implausible expectations, and bubbles as unusually high asset prices, then there must exist bubbles without unusually high asset prices, for example unusually low asset prices.
“Just describing any occurrence of high asset prices as a bubble doesn’t make sense really.”
I agree.
“And no, Krugman doesn’t define bubbles as unusually high asset prices.”
Right, but the point is that distinguishing between the two definitions means there can be bubbles with unusually low asset prices.
Nobody is saying that periods of unusually high asset prices has a monopoly over the definition of “bubbles”. My argument is that if you’re going to say that bubbles are not necessarily periods of high asset prices, then that would mean bubbles can take place with other prices, such as unusually low asset prices.
I define bubbles in real terms.
Bubbles can exist in barter economies.
If in a barter economy investors in a division of labor start projects the completions of which require more real resources than what exists, and this temporarily boosts overall output (e.g. “eating the seedcorn”), then I would call this a bubble.
In a monetary economy, bubbles are still encompassed by real factors. They can be brought about by monetary influences.
Don’t be more absurd than necessary MF. “Not just X” does not imply “possibly without X”. A ” foolish comment from MF” is not just a comment from MF, but it must be from MF.
Don’t be more absurd than necessary MF.
As an economist, I do recognize that Ken B. produces absurdity in his remarks only up until the point at which MB = MC.
“My argument is that if you’re going to say that bubbles are not necessarily periods of high asset prices, then that would mean bubbles can take place with other prices, such as unusually low asset prices.”
I didn’t say that bubbles are not necessarily periods of high prices. My point was simply that “unusually high asset prices” is not how Krugman defines a bubble, but appears to be how Murphy defines a bubble. Though I can’t be sure until he gives a definition.
Yes, the phrase more “more likely” clearly implies a mechanical connection. Sort of like when I step on the brakes in my car, the “more likely” it is the wheels will stop turning.
“Your argument seems to be that when the central bank lowers the overnight rate or prints money the market mechanically and mindlessly reacts by creating a bubble. Whereas Krugman argues that bubbles can happen when people have “implausible or inconsistent views about the future”.”
Please explain where you are getting the notion that Murphy believes people are “mindless”.
Also, please explain how in your view people are mindlessly discerning what portion of price changes and interest rate changes are due to non-market monetary factors from central banks, and which are due to changes in marginal utility put into action by market participants.
@ Ken B, Keshav and Philippe:
I know that you are just trying to interpret would Krugman says/thinks, however do you guys believe that it is actually possible for the Fed to create bubbles, and if yes what would the Fed have to do to create/induce bubbles?
*…interpret what Krugman says/thinks…*
I think Krugman believes that it’s possible for the Fed to exacerbate bubbles via low interest rates, and that the Fed has done so in the past, which is not the same as saying that Krugman believes that his preferred monetary policy would necessarily lead to a series of bubbles.
Keshav wrote:
I think Krugman believes that it’s possible for the Fed to exacerbate bubbles via low interest rates, and that the Fed has done so in the past, which is not the same as saying that Krugman believes that his preferred monetary policy would necessarily lead to a series of bubbles.
Keshav, I don’t know if this will shock you, but the above is exactly my view of what Krugman believes, with two additions (which I put in bold):
I think Krugman believes that it’s possible for the Fed to exacerbate bubbles via low interest rates, and that the Fed has done so in the past, that what was true in the past will be true in the future, absent some big reform (like permanently raising the inflation rate or lowering the national saving rate), which is not the same as saying that Krugman believes that his preferred monetary policy would necessarily lead to a series of bubbles in any particular instance.
Those are changes that almost reverse what Keshav said.
“Krugman is admitting that textbook central bank action to fight high unemployment will yield a string of bubbles”
That’s a claim that the described fed action WILL cause bubbles, necessarily. All you are saying in the second emendation is that Krugman disclaims the ability to specify how big the gaps are in a string. In the first emendation you are ignoring Krugman’s pedal to the metal metaphor; he clearly envisions that without any big reform we’re already in a condition where the fed action is very unlikely to cause a bubble (much less necessarily cause a string of them).
No, those changes are almost 100% consistent with what Keshav wrote.
The quote you posted from Murphy is a correct description of what Krugman is saying about the mechanics of central banking. Krugman doesn’t have to say it in those exact words. You can say the same thing more than one way you know.
Not according to Keshav’s reply.
According to what he said, not what he said he said.
Bob, I think Krugman believes that it’s possible for his preferred monetary policy to not lead to any bubbles at all (which is of course different than saying there will be no bubbles under his preferred monetary policy).
Jack: Prayers cause rain.
Jill: No, prayers do not cause rain. Sometimes it rains and then puritans attribute it to prayer.
Jack : So you’re saying that if I pray it will cause rain I just won’t know which particular prayer was answered.
Jack has messed up the logic. Sometimes rain happens.
Who cares what Krugman thinks? He is an obsessed lunatic at best, delusional by spending, spending, spending, more spending!
You give him way too much respect and attention. Its maybe better to stick to sound (Austrian) economic fundamentals an try to promote it outside libertarian organizations. Ordinary people are desperate for common sense on economic issues. They can sense something is wrong and no longer believe policymakers or Krugman & Co, but they cant see an alternative. You can give it to them with a humorous style.
Skylien
First, thanks for noticing what I am actually saying.
It’s not a subject I have given much thought, but I think the Fed could create bubbles. Not at will, but I do think excessively loose money creation will have effects on prices of things; I don’t see why that couldn’t in some cases be a bubble. I do think EZ Money fuel the housing bubble for example. I think Asset markets are prone to bubbles and if the easing were time wrongly it could certainly exacerbate one.
Thanks both. And I guess you would agree that this is independent of what employment numbers, the CPI or even NGDP is doing, right?
I do not know, never thought about it much. I’d be willing to say that pumping is likely to make bubbles more likely (to turn an elegant phrase) under most conditions, but I don’t know how likely or how much more likely.
I’ll jump in and say of course they’re independent, because the foundation for bubbles is encompassed in the real structure of the economy. Money is a driver of bubbles, but bubbles are not encompassed by prices or spending trends.
It is like saying smoking causes cancer. But smoking itself isn’t a sickness, even though we may see a strong positive correlation between smoking and sickness. Those who focus on money are arguing in a way that would suggest cancer is encompassed as heavy smoking, rather than the real biology of the person.
Interest rates have risen during the QE periods, not fallen.
Over the past 13 years, home prices have generally risen when interest rates have risen and fallen when interest rates have fallen.
http://research.stlouisfed.org/fredgraph.png?g=oXp
“Over the past 13 years, home prices have generally risen when interest rates have risen and fallen when interest rates have fallen.”
The last 10 years maybe, before they did the opposite, at least according to your link.
They didn’t rise once QE “forever” was implemented. I would argue the previous examples are more the case where rates fell in anticipation of a new QE then rose after the new QE started in anticipation of its ending point, which the Fed had already preannounced. This past Spring and Summer, when the Fed hinted that QE “forever” might start ending in September, then rates rose, but fell again when the Fed backed away. This interpretation makes more sense than the causal claim that QE raised rates (not that you are making that claim).
The Fed is starting to hint at taper again the last week, and rates are getting jumpy again.
Interest rates are lower now than they were at the onset of QE:
http://research.stlouisfed.org/fredgraph.png?g=oYy
Bernanke was the Fed chair in 2002.
No he wasn’t Joe. Greenspan was.
ha but you meant was NOT, now I see. I’ll fix it thanks.
Yep.
I love this post for staking out the cross.
If only we could nail the squirmy sucker.
[I]nterest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.
Now the question is what can replace the housing bubble.
Nobody thought the economy could rely forever on home buying and refinancing. But the hope was that by the time the housing boom petered out, it would no longer be needed. [Needed? Needed for what??]
********
By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn’t been quickly replaced with a housing bubble.
So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it’s hard to imagine what that might be. AFTER ALL, THE FED’S ABILITY TO MANAGE THE ECONOMY MAINLY COMES FROM ITS ABILITY TO CREATE BOOMS AND BUSTS IN THE HOUSING MARKET. If housing enters a post-bubble slump, what’s left?
http://www.nytimes.com/2005/05/27/opinion/27krugman.html?_r=0
The writings of pure genius. So reassuring.
Bob Murphy,
I have a question for you.
On pp. 133–134 of your Study Guide to Human Action you summarise Mises’ view of prices:
“The modern, subjectivist theory of prices does not assume that people have “perfect knowledge” of the market. On the contrary, catallactics can explain the formation of actual prices in the real world. Indeed, those mainstream economists who study static “equilibrium” outcomes ignore the crucial process in which speculative entrepreneurs drive the market toward equilibrium. By spotting disequilibrium (but real-world) prices and acting to seize the profit opportunities that they entail, it is the entrepreneurs who move the whole system toward the equilibrium state that the mathematical economists take for granted as the starting point of analysis. By buying “underpriced” goods or factors of production, and selling “overpriced” ones, the entrepreneurs push up the former and push down the latter prices, earning profits and equilibrating the economy.”
Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala. p. 133–134.
Does the equilibration of the economy you refer to in the last sentence include (without being limited to) a strong tendency for prices to move towards their market clearing levels in the unhampered market? (even if the economy never reaches an equilibrium state).
It that how you interpret Mises?
LK,
I am curious on how Bob will respond, I hope he does.
Anyway I want to assist in understanding the problem, because I think I know where the confusion lies. I am not sure, but let’s see. In short I think you don’t consider reservation demand.
With that I mean e.g. the following. Say Joe possesses good A five times. His value scale is such that he would sell all 5 for a price of say 200 USD/pc, only 4 for a price of 190USD, 3 for 180USD and so on. What do you think was the market clearing price?
For an Austrian (I guess) all prices would be market clearing prices as long as they were established in a market without coercion. For instance take 180USD/pc. In this case he would be willing to sell 3 pcs to buyers willing to pay that price, his reservation demand would be 2 pcs (whatever the reason), so total demand is 5 (3 pcs demand from willing buyers and 2 pcs reservation demand of Joe), and total supply is 5, therefore demand and supply are equal and market cleared. This counts for every price no matter where the market establishes it.
I guess the only way for an Austrian a market would not clear is if the government would set a price by decree. I am not saying you need to endorse that view, but I think this is how Austrians see it. Can you make an example in which the market doesn’t clear without government intervention?
Here’s an example: what if prices are sticky due to menu costs, i.e. it costs money to change prices, like restaurants having to print new menus if they change their prices? See this paper by Greg Mankiw:
web.archive.org/web/20120118104812/http://www.economics.harvard.edu/files/faculty/40_Small_Menu_Costs.pdf
Here’s an example ripped from the headlines. Insurance premiums. Actuarials are costly. Brochures and contract forms and their distribution and ads are costly. Insurers cannot just spin on a dime to change prices. So prices might lag considerably.
Menu costs are real but their significance is overrated.
All the surveys and studies show this. The most significant reasons for price stickiness are mark-up prices, explicit and implicit contracts, and business good will with customers
Equilibrium is a mental tool. Mises held it as a mental tool.
It is considered as a hypothetical world in which prices are not “tending” towards clearing, but “are” clearing/cleared. No further learning, no further technological or environmental changes, the world becomes fixed in terms of economic statistics. Entrepeneurial profit comes to an end. Time preference driven profit is all that remains.
LK,
I read your comment a few times. I really want to respond in a polite, accurate, meaningful manner. obviously you want Bob to respond directly but you know many of us will take a shot.
Everything you say makes since until the last part when you ask your question. You say, “a strong tendency for prices to move towards their market clearing levels in the unhampered market?”
So I must preference my response by pointing out that I have read every comment between you and Major Freedom regarding market clearing price.
Alls I can say is this. To this day, you have a failure to comprehend and define market clearing price. It is obviously a glitch in your programming. This may be the only glitch in an otherwise genius mind but never the less you have a glitch. Maybe this glitch comes from years and years of living/working/thinking inside of insulated government environments in which the price mechanism, choice and competition, does not exist?
You will have to comprehend and accept the definition of market clearing price before Bob or anybody else can answer your question.
On Edit: preface not preference.So I must preference my response
” To this day, you have a failure to comprehend and define market clearing price.”
You are talking nonsense.
The definition of market clearing price is straightforward and understood in the same essential way by ALL economists: a market clearing price is that price in a given product market where the quantity of the good demanded by buyers equals the quantity offered or sale by sellers.
This is exactly how it is defined by Austrians:
“Private business prices its goods and services to ‘clear the market,’ so that supply equals demand, and there are neither shortages nor goods going unsold.” (Rothbard 2006a: 259).
“The market interaction brings about a price at which demand and supply tend to coincide. The number of potential buyers willing to pay the market price is large enough for the whole market supply to be sold. If government lowers the price below that which the unhampered market would set, the same quantity of goods faces a greater number of potential buyers who are willing to pay the lower official price. Supply and demand no longer coincide; demand exceeds supply, and the market mechanism, which tends to bring supply and demand together through changes in price, no longer functions.” (Mises 2011: 101).
“The market process will tend to establish a price that clears the market: all sellers willing to sell at the market price will be able to do so, and all buyers willing to buy at that price will also be able to do so. …. If these dynamics of supply and demand change, the market process will adjust the price to the new realities.” (Callahan 2004: 76).
“If one says that prices tend toward a point at which total demand is equal to total supply, one resorts to another mode of expressing the same concatenation of phenomena. Demand and supply are the outcome of the conduct of those buying and selling. If, other things being equal, supply increases, prices must drop. At the previous price all those ready to pay this price could buy the quantity they wanted to buy. If the supply increases, they must buy larger quantities or other people who did not buy before must become interested in buying. This can only be attained at a lower price.
It is possible to visualize this interaction by drawing two curves, the demand curve and the supply curve, whose intersection shows the price.” (Mises 2008: 329–330).
“The day-to-day tendency in the market is toward the establishment of an equilibrium price for each particular consumer good. Prevailing prices tend toward that price at which quantity supplied and quantity demanded are equal, a movement that attests to the price system’s capacity to coordinate the actions of persons engaged in different activities. The typical depiction of this tendency on a graph shows the equilibrium price at the point at which the market supply-and-demand curves intersect. Any price above or below the equilibrium price cannot persist because such a price will result, respectively, in either frustrated sellers or frustrated buyers. Prices are reduced by sellers if the market price is too high to clear the quantity offered; prices are bid upward by buyers if the price is too low to induce sellers to offer a quantity ample enough to satisfy the buyers’ demand.” (Taylor 1980: 56).
Presumably all these Austrians have never understood nor properly defined the concept of market clearing price!
Let us know when they tell us to buy gold because the dollar is going to collapse (“hyperinflation any day”).
joe wrote:
Let us know when they tell us to buy gold because the dollar is going to collapse (“hyperinflation any day”).
And by putting those three words in quotation marks, joe, you mean to signify, “Three words Bob never said.”
Some people use quotation marks in the opposite way, to signify someone’s actual statement.
Do you have 5 minutes to answer my question above, Bob Murphy?
Lord Keynes, do you Lord Keynes have a point you wanted to make, Lord Keynes?
Freedom and the information provided by free market prices allow for better fulfillment of plans. So people will tend to better anticipate the proper amount of stuff to make and if things go wrong, people will free the change course by cutting prices or production or whatever. No crisis occurs under a regime of freedom that requires government spending and/or funny money to cure it. The statists have the burden of proof to demonstrate such a crisis, which they cannot meet, so they carry on like this as a distraction.
http://www.youtube.com/watch?v=l-ceg763Voc
This debate is so boring. I think I’ll go snake a clogged drain for some fun.
people will BE free TO change course by cutting prices or production or whatever.
What should be becoming abundantly clear is that the people who warned for 5 years that, once started the Fed would never be able to exit these policies, were right all along. Already, with the Summers talk and the Krugman pompoms, the intellectual groundwork is being laid for the continuation of QE forever.
Yep it already looks a bit like post-hoc rationalization.
“the only way Greenspan could achieve recovery would be if he were able to create a new bubble, which is NOT the same thing as saying that this was a good idea”
Recovery is, according to Krugman, a bad thing. Problem solved. Let’s just stay in the bust forever. YAY!
[…] is really funny, to see the Krugman defenders in the comments being reduced to such grasping. (In fairness, at least one of the people involved is motivated not […]