19 Jul 2014

Continuing My Chats With Noah Smith

Austrian School, Noah Smith, Shameless Self-Promotion 88 Comments

Since some of you asked, I deliver. An excerpt:

Now in all seriousness, Noah is actually a really sharp guy. The problem is that he’s JUST SO SURE the Austrian contribution to recent debates is so absurd, that he doesn’t even try to understand where we’re coming from. He’s like the patronizing police psychologistSilberman interviewing Kyle Reese in the first Terminator movie: “This is great stuff. I could make a career out of this guy! You see how clever his part is? How it doesn’t require a shred of proof? Most paranoid delusions are intricate, but this is brilliant!” Needless to say, with an attitude like that, Noah is just as oblivious to the dangers facing us, even though he (just like Dr. Silberman) no doubt thinks he’s being very scientific in his handling of my unorthodox claims.

88 Responses to “Continuing My Chats With Noah Smith”

  1. Dan says:

    I wasn’t one who thought Noah’s blog post needed a response considering I thought it made him sound like a tool, but it was definitely worth it in the end.

    “That’s really astonishing if you stare at it a few moments. In case it’s not hitting you, let me change the context. Suppose we were arguing about US foreign policy, and Noah had said, “The invasion of Iraq wasn’t as bad as the critics warned, because only about 4,500 US military died. That’s bad, of course, but nowhere near the numbers some of the harshest critics predicted.” Then I say, “Well, I bet the US government is downplaying the ‘official’ numbers of American fatalities, and anyway the downside of the invasion isn’t just US military deaths. Hundreds of thousands of Iraqi civilians died because of Bush’s reckless decision to invade.” Then Noah replies, “These two objections cancel each other out and prove Murphy knows how weak they are. If Murphy is arguing that US soldiers are really the same thing as Iraqi civilians, who cares if more troops died than the official statistics suggest?”

    I submit that in a foreign policy debate, if someone made the analog of Noah’s argument, we could all agree to do something better with our time than continuing to read his blog. But fans of economists are a strange bunch, so we’ll continue.”

    Hahaha

    “Everyone got that? If Austrians are warning about huge asset bubbles, they’re still a bunch of clowns, because it’s the subsequent crash that’s bad–not the preceding boom. (Picture Noah on the deck of the Titanic. A passenger points dead ahead and screams, “We’re heading straight for that iceberg!” Noah smirks and asks, “What’s your point?”)”

    Hahaha

  2. Josiah says:

    Here’s a question: suppose that the Fed successfully unwinds its current balance sheet, interest rates return to normal, and there is neither an economic downturn nor runaway inflation. Further suppose that, after this, there is never a recession or high inflation again for the next however many million of years until the sun goes supernova.

    Would this scenario be inconsistent with Austrian theory?

    • Bob Murphy says:

      Josiah, let me answer you with a question of my own: Is there anything that could happen, even in principle, that would disprove the subjective marginal utility explanation of prices? Or if you’re not sure, what about the explanation of prices using Supply and Demand?

      • Josiah says:

        Josiah, let me answer you with a question of my own

        No, I want you to answer my question with an answer. Would that scenario be inconsistent with Austrian theory?

        • guest says:

          … suppose that the Fed successfully unwinds its current balance sheet …

          The only way this could happen is if the Fed destroys the money it receives, thereby shrinking the money supply such that the correction happens squarely with the Fed instead of later users of the newly printed money.

          Newly printed money that is never spent does no harm.

          I think that’s what you’re looking for.

          • Tel says:

            The Fed owns US government bonds so they could (in theory) wait for those bonds to mature, then just destroy the money that gets paid when the bonds mature.

            It could happen, but first the US government would need to start running a regular surplus. This would require more tax and less spending.

            • Peter says:

              Let’s just stick with “less spending”, thanks. 60% taxes (fed, state, city , RE and sales tax) is enough for me.

          • Cosmo Kramer says:

            The Fed will sell the treasuries back to the banks, and debit their reserves.

            • Tel says:

              The Fed would probably make a loss on that, so the loss would represent a money injection they could no longer reverse.

              • Cosmo Kramer says:

                Maybe.

                Consider the interest given to the treasury.

                http://www.frbsf.org/economic-research/files/2014-08-2.png

                At the given tax rate, the deficit would have been larger……..requiring more issued treasuries.

                Operationally a reversal, even with losses, doesn’t seem to be much of an issue at all. Although it would keep Peter Schiff up at night and give him lots to talk about.

              • Tel says:

                Operationally a reversal, even with losses, doesn’t seem to be much of an issue at all.

                Well yeah, if losses are tolerable then a lot of things become possible. Then we sit and argue about the consequence of Fed losses. As you say, it isn’t like anyone can call them out. One would presume that something happens?? Right?

              • Cosmo Kramer says:

                I don’t think the market would lose much sleep.

      • LK says:

        “Is there anything that could happen, even in principle, that would disprove the subjective marginal utility explanation of prices?”

        What? Are you claiming that all prices must necessarily be set in the way Austrian theory prescribes?

        The subjective marginal utility that agents derive from consuming each additional unit of any one good x does not prove that goods prices are all set in a flexible manner by mutual haggling or in auction-like markets where the prices have a tendency to move to market clearing levels.

        The reality is that most prices are set by sellers or producers with mark-up pricing.

        • Richie says:

          Beating a long-dead horse. Go away.

        • Major.Freedom says:

          LK

          Markup pricing of certain goods is a result, a consequence, an effect, of the law of diminishing (subjective) marginal utility.

          For cases in which cost of production is the direct, immediate determinant of price, marginal utility is still the ultimate determinant, because it determines the value of the means of production, which value constitutes cost.

          See Bohm-Bawerk’s discussion on the 5 sacks of grain.

          See also Reisman:

          https://mises.org/pdf/asc/2002/ASC8-Reisman.pdf

          “No product (consumers’ good) has economic value whose producers’ good (or whose producers’ goods) would be valueless—objects (forces or materials) useless and present in superabundance. Thus the value of the producers’ good appears as the cause of the value of the product.”

          And pg 64 on locomotive analogy.

          See also

          http://archive.mises.org/7220/the-cost-price-doctrine-on-bohm-bawerk-and-reisman/

          “I think in this instance a key point to stress is Boehm-Bawerk’s identification that the cases in which cost of production is the direct, immediate determinant of price, marginal utility is still the ultimate determinant, because it determines the value of the means of production, which value constitutes cost.

          “An illustration I like to use, and to which everyone is more than welcome, is that of a modification in Boehm-Bawerk’s example of the pioneer with five sacks of grain. As I’m sure readers will remember, Boehm-Bawerk’s example is that the first sack is necessary to keep the pioneer alive through the winter. The utility directly dependent on it is as great as the man’s life itself. But the pioneer has five sacks of grain, not just one. And the most important use to which a fifth sack can be put is merely that of feeding a pet parrot.

          “As Boehm-Bawerk explains matters, it is clear that if rats or other vermin should destroy the first sack, which we can distinguish from all the others by virtue of its carrying a tag labeled “sack for survival,” the actual loss that will be experienced is not that of the man’s life, but the loss merely of the parrot. Indeed, this is the essence of the marginal utility principle: the value of all units of a supply is governed by that of the least important among them, i.e., by the value of the marginal unit.

          “Now for the modification of the example. Suppose that the pioneer has used the contents of the first sack to of grain to make flour, from which he makes a supply of biscuits. These are “biscuits for survival.” For if he had had only one sack of grain, he would have used it to make these biscuits and it would be through them, that his life had depended on the one and only sack.

          “Imagine now that rats destroy his supply of biscuits, labeled “biscuits for survival.” Is the man’s life threatened? No. Because he started with five sacks of grain and still has four of them left. He can replace the biscuits by withdrawing once again the sack of grain originally destined for feeding the parrot and using it to produce a fresh supply of biscuits. The value of the biscuits is being governed by the value of the marginal product of the grain, namely, the value of the parrot. It’s still a matter of marginal utility.

          “But here’s the critical link that Boehm-Bawerk (and Wieser too, incidentally) recognized. Namely, what communicates the far lower, marginal value of the parrot to the value of the biscuits and reduces it from its extremely high direct utility to the much lower, marginal utility of the parrots, is the value of the grain. The value of the grain is the communicating link for the transmission of marginal utility.

          “The chain of causation of value is that the value the biscuits is being governed in the first instance by the much lower value of the grain, which in turn is governed by the value of the marginal product of the grain, namely, that of the parrot.

          “What needs to be stressed here is that when we say that the value of the biscuits is being governed by the value of the grain, we are saying that in this case the value of a product is being governed by its by cost of production. For the value of the grain is the cost of producing the biscuits. This is what Boehm-Bawerk and Wieser recognized and which has since been forgotten.

          “But, of course, the full context is that the value of the means of production is in turn governed by the value of the marginal product. Determination of price by cost, according to Boehm-Bawerk and Wieser, is determination of the value of supra-marginal products by the lower value of the marginal products. Determination of price by cost is merely an aspect, a very important aspect, of determination of price by marginal utility.”

          • LK says:

            Saying that a good with a price people are willing to pay is subjectively valued by such people does not necessarily tell how the price is actually being set.

            • Major.Freedom says:

              Not the immediate, proximate determinant, no. Still tells us the ultimate determine though.

              While a change in nominal demand does not directly affect the price of a good whose price is immediately and proximately determined by costs (plus a going rate of profit), it is still the case that such changes ultimately determine the exchange value of the means of production and hence the exchange value of goods determined by costs (plus profit).

              The exchange value of means of production can and does change in response to, and in expectation of, changed nominal demand. The value of means of production are not set in stone.

            • Bob Roddis says:

              This is a new quote I found the other day looking for other things so it’s not the “same old same old”. Firms and people “set” their prices generally with an eye towards maximizing their PSYCHIC profit. This may or may not involve maximizing their money profit. Thus, there is no preordained Austrian method of “setting” prices. Further, since the quote is Rothbard 1956, that should qualify it as “AUTHENTIC AUSTRIAN THEORY”.

              http://consultingbyrpm.com/blog/2014/07/such-clever-young-boys.html#comment-728116:

            • Major.Freedom says:

              LK:

              If you want to know the Austrian theory of the relationship between value, cost and marginal utility, as well as prices, “the” author for that is Bohm-Bawerk.

              If you have not read his works, then you really can’t claim to have seriously challenged Austrian theory of value and prices. Bohm-Bawerk is the go to source.

            • Major.Freedom says:

              LK:

              “Saying that a good with a price people are willing to pay is subjectively valued by such people does not necessarily tell how the price is actually being set.”

              Reisman explains:

              “The simplified or exoteric version of the Austrian doctrine on the relationship between value, cost, and marginal utility is that the value of each and every product is determined by its marginal utility, which, in turn, reflects the demand for and supply of the product concerned. In no case do costs of production determine the value of products. Rather, costs of production, which represent the value of the means of production, are themselves determined by the marginal utility of the products they produce. The only way in which costs of production can possibly influence the value of products, if they do so at all, is, according to the exoteric version of Austrian economics, indirectly, by way of changes in supply.

              “Thus, for example, if the value of a product exceeds its cost of production by more than the going rate of return on capital, the supply of the product will be increased and its price will fall, bringing it closer to its cost of production, and its rate of return closer to the going rate. If, on the other hand, the value of a product does not exceed its cost of production, or does so only by an amount insufficient to yield the going rate of return on capital, then its supply will be decreased and its price will rise, until it equals its cost of production plus enough net return to yield the going rate of return. At all times, however, the immediate, direct determinant of the price of the product is its marginal utility, which is always determined by the demand for and supply of the product concerned.

              “This, I say, is the exoteric version of Austrian economics—the popular version, if you will, though, of course, not any kind of version of the masses, who have never even heard of Austrian economics. Now let me turn to the more elaborate, more complicated—esoteric—version presented by Böhm-Bawerk and, incidentally, also by Wieser, who in the relevant respects agrees with Böhm-Bawerk….”

              https://mises.org/pdf/asc/2002/ASC8-Reisman.pdf

              Pgs vi-vii

          • Bob Roddis says:

            This link works I believe:

            http://tinyurl.com/kdcj2bt

        • Tel says:

          Curiously enough, the only thing that went through the mind of the bowl of petunias as it fell was Oh no, not again. Many people have speculated that if we knew exactly why the bowl of petunias had thought that we would know a lot more about the nature of the universe than we do now.

          • Harold says:

            We did eventually find out. Not sure it was that revealing about the nature of the universe.

    • Dan says:

      Not necessarily. As you are fully aware, Austrian economics is not a science based on empiricism. But, if your scenario were to come to pass, I think a lot of Austrians would question the deductions they had believed were true. In fact, Dr. Murphy spelled out what would make him question the validity of Austrian theories a few years ago on this site. I’m pretty sure you were one of the people he was responding to on that post.

    • Major.Freedom says:

      “Would this scenario be inconsistent with Austrian theory?”

      If central banking continues to exist, yes.

      Now if you please…Murphy’s question.

    • Rick Hull says:

      Most practicioners, I venture, would regard such a scenario as extremely unlikely and inconsistent with what we know about human preferences and action.

      • Josiah says:

        Most practicioners, I venture, would regard such a scenario as extremely unlikely and inconsistent with what we know about human preferences and action.

        It doesn’t matter how unlikely the scenario is. If Austrian theory is purely a matter of a priori reasoning, then no scenario, however improbable, would give reason to doubt it.

        • Bob Roddis says:

          Only the “human action” part is “a priori”. The goals and activities in which people actually engage are completely empirical. Whether economic calculation is empirical or “a priori” is an interesting question. For now, we cannot read each other’s minds so we require prices and terms of trade from other’s transaction to supply essential information. The process appears to me to be “a priori” in that it is universal. The content of the action is purely empirical. If in the future we learn how to read other people’s minds, that all might be different.

          The particular activities in which people engage will give clues as to whether they are on an unsustainable course or not. The fact that a nation employing violent intervention survives without a disaster for a long time does not invalidate basic Austrian concepts or analysis.

    • Tel says:

      Please provide a repeatable definition for: “neither an economic downturn nor runaway inflation”

      I would argue that the USA is already in an economic downturn, and that inflation is happening but “runaway” is pooly defined so I cannot measure it.

      If you are asking whether people in 10 years will have completely abandoned the US dollar, I think not.

      If you are asking whether the US dollar in 10 years will buy less material goods than it does now, I think yes.

      • Josiah says:

        If you are asking whether people in 10 years will have completely abandoned the US dollar, I think not.
        If you are asking whether the US dollar in 10 years will buy less material goods than it does now, I think yes.

        Neither of these questions are anywhere close to the question I asked.

        Research suggests that when people face a question that they don’t know how to answer, they substitute an easier question and answer that instead. Perhaps that’s what happened here.

        As for how to define downturn and runaway inflation, if you insist on a precise specification lets say there’s never a quarter of negative growth and inflation never goes over 3% annually.

        • Neil says:

          The answer to your question would be, no, it would not be consistent with Austrian economic theory. Some Austrians have begun to lack conviction. They will no longer even predict how this ZIRP & QE fiasco is going to turn out. The truth is that the Fed has reached the end of the road with monetary policy and they are simply waiting to descend over the cliff. There will either be a massive collapse in equities, banking institutions, bonds, and housing, or a massive collapse in the dollar itself. Those are the only two choices once this ZIRP and QE fuelled equities bull has run its course. I’m guessing we’ll get the dollar collapse if history has taught us anything. Remember, people laughed at Austrians like Schiff when he was predicting the housing collapse. They called him a stopped clock. He was early in his call so people blew him off until, one day, it actually became apparent that what he had been warning about for years was finally occurring. It’s no different this time. He is very early in calling for this collapse. In fact, he was warning in 2008 that what the Fed was doing to stop the carnage in housing and stocks was going to result in even worse problems in the dollar. Well, it’s five years later and the dollar hasn’t collapsed. So, people laugh at the boy who cried wolf once again. That boy Schiff, he’ll eventually be right. After all, a stopped clock is right once a day you know? Ha Ha Ha! Well, if Schiff is eventually right, then I would want to be protecting myself now, because timing is really impossible for these things. All you know is that it’s coming. You don’t know when, but you know that it is coming. Stocks could go up for the next three years, with no consumer price inflation. But then after three years, when the inflation finally came, you wouldn’t be upset that you bought that gold and silver ten or even 15 years prior, because you would then know that you were safe, and everyone in stocks and bonds were now losing everything. The Keynesians who laugh at Austrians are like licentious men who wonder why you are so lame that you aren’t joining in on the orgy. What could go wrong, they say, this feels so good, and nothing has happened to us. You warn them about STD’s and the inevitable emotional destruction that is coming. They laugh. “What a stick in the mud,” they say. You are always a doom and gloomer. You can’t ever have fun and enjoy the fruits of excess. “Just accept it”, they say, “things are different now. It’s the way of the new world. We have to be free of the shackles of our Puritanic past. So join in on the good things in life and stop being in denial. It’s like you have a freakin’ brain worm or something.” Financial excess while having different consequences than sexual excess, is still very destructive all the same. We are to be good stewards of our money. When we aren’t, and the bad financial hangover sets in, we can’t just paper it over by creating currency units and expect everything to return to normal. We want to believe that it will. “It’s all better now, you’ll see,” they say. The do not understand that a day of reckoning is coming for the profligacy of men in high places.
          So buy your stocks. Buy your bonds. But when the currency starts to crumble, remember that it was the men from many years earlier who warned you about it. They warned you it was coming. God be with us all.

        • Tel says:

          Research suggests that when people face a question that they don’t know how to answer, they substitute an easier question and answer that instead. Perhaps that’s what happened here.

          If you read what I said, I asked you to clarify your question, because terms such as “inflation” are notoriously tricky to pin down.

        • Tel says:

          … if you insist on a precise specification lets say there’s never a quarter of negative growth …

          There just was a quarter of negative growth.

          http://m.asia.wsj.com/articles/u-s-gdp-contracted-at-1-pace-in-first-quarter-1401366873

          You must surely have been aware of that, so once again I request that you clarify what you are actually asking here… but I won’t put up a suggestion in case I’m accused of something.

        • Tel says:

          Josiah, are you still there?

    • Maurizio says:

      @ Josiah:

      a theory does not need be disprovable in order for me to stop believing in it.

    • Bob Murphy says:

      Josiah: I wasn’t being cheeky or evasive in my response to you, I really wanted to not “lead the witness” and have you answer my question regarding Supply & Demand. Had you done that, you would’ve seen my answer vis-a-vis ABCT.

      Strictly speaking, the Misesian story is logically correct. However, in practice we don’t know how big a factor it is.

      Let me switch examples: I can use “pure logic” to show that if a minimum wage hike pushes market wage above equilibrium level, then we get involuntary unemployment. We did indeed get a minimum wage hike. But I don’t think the problems with the economy are 99% due to minimum wage hike.

      So in your scenario, I wouldn’t think, “ABCT was just disproven,” but I might say, “This is clearly not useful in helping me interpret reality, so I should find something else.”

  3. Josiah says:

    Dr. Murphy spelled out what would make him question the validity of Austrian theories a few years ago on this site.

    Right. And yet, if a theory is based purely on deductive logic, then there couldn’t be new evidence that would make you question it. Empirical evidence isn’t going to show that 2+2=5, for example.

    If there is some future course of events that could make you call into question the validity of the Austrian theory, then that suggests the theory is not actually just a matter of deductive logic (regardless of what its defenders might claim).

    • Dan says:

      “Right. And yet, if a theory is based purely on deductive logic, then there couldn’t be new evidence that would make you question it.”

      Why not? What if the empirical evidence made me question whether I had a mistaken premise included in my logical deductions? Obviously, the empirical evidence doesn’t prove your logical deductions are wrong, but I don’t see why evidence couldn’t get you to go back and check to make sure you didn’t have mistaken premises.

      • Major.Freedom says:

        Bingo.

        Empirical reality is logically structured. Not only is there no good reason why we have to ignore it entirely as we do our deductions, but in fact is necessary and vital. This is where thymology comes in.

        As Kant wrote:

        “THERE can be no doubt that all our knowledge begins with experience. For how should our faculty of knowledge be awakened into action did not objects affecting our senses partly of themselves produce representations, partly arouse the activity of our understanding to compare these representations, and, by combining or separating them, work up the raw material of the sensible impressions into that knowledge of objects which is entitled experience? In the order of time, therefore, we have no knowledge antecedent to experience, and with experience all our knowledge begins.

        “But though all our knowledge begins with experience, it does not follow that it all arises out of experience. For it may well be that even our empirical knowledge is made up of what we receive through impressions and of what our own faculty of knowledge (sensible impressions serving merely as the occasion) supplies from itself. If our faculty of knowledge makes any such addition, it may be that we are not in a position to distinguish it from the raw material, until with long practice of attention we have become skilled in separating it. This, then, is a question which at least calls for closer examination, and does not allow of any off-hand answer: — whether there is any knowledge that is thus independent of experience and even of all impressions of the senses. Such knowledge is entitled a priori, and distinguished from the empirical, which has its sources a posteriori, that is, in experience.”

        Empirical data “awakens” and “arouses” our mental faculties and through this we can discern the logical structure of our thought and action through self-reflection, which is the ultimate ground for our knowledge.

        • John says:

          Is it correct then to say that the anarcho-capitalist system is a result of the logical insights of Austrian, or maybe Misean or Rothbardian, thinking, and therefore it’s implementation is then analogous to a categorical imperative?

          • Dan says:

            I don’t think so. There are a lot of anarcho-capitalists that aren’t Austrians, and there are a lot of Austrians that aren’t anarcho-capitalists.

          • guest says:

            No. Austrian Economics is value free.

            As Tom Woods has noted, you could be someone who hated mankind and wanted to see people suffer, and still be a solid Austrian Economist.

          • Major.Freedom says:

            Good question.

            I am not informed enough to give you an answer, but I think I can give some clues and related comments.

            1. I’ve been of the opinion for quite some time that there must be an optimal unchanging set of ethical principles for that part of me and every other human that is unchanging. I’m not claiming to know them for certain, but I do know that anarcho-capitalism is hitherto the best.

            2. Is-Ought gap

          • guest says:

            Here’s Bob Murphy on this issue:

            [Time stamped]
            Austrian Economics and the Business Cycle | Robert P. Murphy
            http://www.youtube.com/watch?v=hkDYsRDah3I#t=40m38s

      • Josiah says:

        What if the empirical evidence made me question whether I had a mistaken premise included in my logical deductions?

        What empirical evidence would make you question whether 2+2=4?

        • Dan says:

          I don’t think any empirical evidence will make me question that. Nor do I think any empirical evidence will make me question the law of supply and demand. I don’t think there is any empirical evidence that will make me question ABCT. But that doesn’t mean that there is no possible empirical evidence of anything that wouldn’t make me question whether I might have a mistaken premise included in one of my logical deductions. Why that should be an impossibility in your eyes, I don’t understand.

          • Dan says:

            *would

          • Josiah says:

            I don’t think there is any empirical evidence that will make me question ABCT.

            Okay, so you think ABCT is consistent with the scenario I gave above?

            • Dan says:

              No, you misunderstood me. I meant that I don’t think there will ever be empirical evidence in reality that will make me question ABCT. But there might be some hypothetical scenario you could come up with, that if it actually played out that way in reality, that might make me think one of the premises used in the logical deductions to come up with ABCT could be wrong. I’m not saying the empirical evidence would prove it to be wrong. I’m saying that the evidence might get me to check my premises, though.

  4. Cosmo Kramer says:

    No…..

    offense, not defense.

  5. David R. Henderson says:

    Excellent response, Bob. I, for one, am glad that you replied. This is a first-rate reply.

    • David R. Henderson says:

      And not mainly because you quoted me. 🙂

  6. John says:

    I second that. Thanks for responding, Bob. For those of us trying to untangle these issues, it was very helpful.

  7. Maurizio says:

    I too have a question. If the US stock market keeps growing at a constant rate without the need for a succession of QEs of increasing size (accelerating money), would the Austrian Theory be disproved? I am not sure how to answer this.

    • Maurizio says:

      Better question: replace “would ABCT be disproved?” with “would you stop believing in ABCT?”.

      Please Bob, could you share your position on this?

    • Neil says:

      No. QE may not be needed for further stock market gains. In fact further gains could be made in equity markets even in the face of no QE and a rise in the Fed funds rate. People forget how incredibly inflationary a fed funds rate at zero for six years is going to be in and of itself. When consumer inflation starts to become concerning they will need to raise the funds rate substantially just to quell the inflation, much like Volcker did. If they only raise rates a few basis points here and there, it will likely still be inflationary.

      • Cosmo Kramer says:

        What is the correct rate of interest? What Fed Funds Rate?

        0 is a choice. 3 is a choice. 10 is a choice. 15 is a choice.

        Volcker gets credit. I believe that credit is misplaced.

    • Major.Freedom says:

      “If the US stock market keeps growing at a constant rate without the need for a succession of QEs of increasing size (accelerating money), would the Austrian Theory be disproved?”

      QE is the central bank expanding the money supply via bond buying.

      If we assume no QE, then that means the money supply does not increase (assuming dollars remain money).

      Assuming a constant rate of increase in the stock market is permanent, then what it would disprove is the quantity theory of money. For this scenario would be one where spending keeps increasing ad infinitum, despite a constant supply of money. The stock market can only increase in the long run if savings and investment relative to consumption keeps increasing. But that can’t keep increasing forever. People need to consume.

      • Maurizio says:

        Thanks Major, but I did not say “without QE”. I said “without a series of QEs, each of which is greater than the previous one”.

        You are assuming no QE at all, but let us assume regular QEs, but all of the same size.

        • Major.Freedom says:

          Sorry about that Maurizio.

          If QEs are of the same size, and we assume that means the money supply grows at a constant rate, then the quantity theory says that over the long run, the quantity of money spent is a function of the quantity of money that exists.

          If the money supply keeps increasing, and hence spending over the long run keeps increasing, then a continually increasing stock market is not out of the question when it comes to the quantity theory.

          But for ABCT, if the quantity increasing is entering the loan market, and depressing interest rates from the liquidity effect, then ABCT says that if that happens, then there will have been malinvestment. Malinvestment cannot be solved by money printing, it can only be delayed.

          So if central banking continues, and the money supply grows at a constant rate, but interest rates are deviated away from market, and yet by the proposed scanario you are setting up, the stock market keeps going up, then I would say this wouldn’t necessarily disprove ABCT, because ABCT is a theory of booms in the real sense, not prices per se.

          I think it would be possible for stock prices to keep rising even if real productivity goes through ABCT fluctuations. Unlikely I think.

  8. Jackson says:

    Bob, do you have any theories on why commercial banks haven’t put their excess reserves into other assets? They could make bank exchanging those dollars for precious metals right now, but they are settling for .25% or whatever instead. Do you think that suggests they indeed plan to loan those dolalrs out?

    And this may be getting to close to your day job, but if the banks were to flood those reserves into the market, how high do you think the Fed would have to raise rates in order to quell the inflation?

  9. DesolationJones says:

    While price inflation might not be the most crucial point of Austrian thought, it certainly has been the most crucial marketing gimmick.

    In 2008/2009, what caused the biggest influx of Austrian economics enthusiasts?

    1)The crashing dollar and impeding mass inflation (easily digestible)
    or
    2)The distortion of capital structure (difficult to understand)

    Don’t bullshit me that it was number 2. Number 1 was much sexier.

    So why do people like Noah rag on the inflation-Austrian association so much? Because it’s so annoying.
    “Yeah, we were wrong about inflation/our biggest selling point, but it never really fundamentally mattered to us. Out product is still good”

    Whatever major pretense Austrians have right now owe it to inflation phobia stirred up. The inflation was basically your glowsticks equivalent of this Simpsons clip.

    http://youtu.be/8IDBJi4azuI

    • DesolationJones says:

      major presence*

    • guest says:

      [Time stamped]
      So Where’s the Inflation? Tom Woods Talks to Mark Thornton
      http://www.youtube.com/watch?v=n0RusrwYsRE#t=5m16s

    • Dan says:

      What a crock of manure. The biggest reason Austrian economics had such a big influx in 2008/2009 is because there were numerous Austrians, Ron Paul and Peter Schiff being two of the more well known at the time, that had been warning of the housing collapse well in advance. You want to see what Austrians were marketing back then then just google “Peter Schiff was right”.

      Hopefully, you weren’t around Austrians back then and you are just speaking from ignorance. That would at least give you an excuse for writing that nonsense.

      • DesolationJones says:

        What was Peter Schiff’s main thesis and the main point he emphasized in those early years? Was it the housing bubble and the 07 recession like you say? Lets see what Schiff says himself.

        https://www.youtube.com/watch?v=aRFG4ekXfw8

        >”The reason this book is titled “The Real Crash” is because the economic collapse that I wrote about in my 07 book hasn’t happened yet. In that book I did write about the housing bubble and why I believed it was going to burst. And I wrote about the ensuing financial crisis. So I did forecast the great recession that began in 2007. More important than that is what I believed what would come next, and that hasn’t happened yet. That’s the real crash. Because what was really worrying me was that I was afraid the government would respond to the financial crisis by doing more of the same policies that caused it, which is more deficit spending, more cheap money, more central banking/planning. And as a result I think the US economy is now poised for a much bigger collapse. What I think is a sovereign debt crisis and a currency crisis that will make the crisis of 08 look like the proverbial Sunday school picnic. I think it’s going to be much worse than what Europe is going through.

        In other words, his main point was higher interest rates and hyperinflation. So yes, I still do believe a crashing dollar and impeding mass inflation was his main marketing gimmick.

        • Dan says:

          Seriously? First off, his main thesis was that the housing market was a giant bubble and it was doomed to collapse. Like I said, google Peter Schiff was right. Second off, he wasn’t and isn’t predicting hyperinflation. That’s just something you’ve concocted in your head because you have either are ignorant about Austrians or have no interest in being intellectually honest. And third off, see how you pull up an interview from well after 2008/2009 where he discusses a book that came out in 2012 well after he became famous for predicting the crash? Yeah, that’s because you made a completely bogus argument. I mean, come on. Austrians made their gains back then from correctly predicting the crash. Keep digging in, though, if it makes your disdain for Austrians feel more rational.

          • DesolationJones says:

            >Dan:”First off, his main thesis was that the housing market was a giant bubble and it was doomed to collapse. ”

            Schiff clearly says the “a sovereign debt crisis and a currency crisis ” is “more important than that.”

            > Dan: “And third off, see how you pull up an interview from well after 2008/2009 where he discusses a book that came out in 2012 well after he became famous for predicting the crash?”

            Peter Schiff says,”the economic collapse that I wrote about in my 07 book hasn’t happened yet.” He’s talking about his central thesis from his 07 book. His new book reiterates the same point.

            >Dan:”Second off, he wasn’t and isn’t predicting hyperinflation.”

            Are you kidding me? There must be dozens of quotes where he either directly says it, indirectly says it, or pays lip service to it to stir up that good old fashion fear. Google them. Here’s what he says in chapter one of his 07 book.

            “Our days as the dominant economic power are numbered. The dollar is going to collapse, and Americans are going to experience stagflation on an unprecedented scale in the form of recession and hyperinflation. Those of you who act smartly and quickly by taking measures I outline later in this book not only will avoid loss of wealth but also will have positioned yourselves to prosper while your neighbors suffer a painful period of reconstruction and reform.”

            He’s not gonna sell that gold with bubbles. He’s going to sell gold with hyperinflation.

            • Dan says:

              “Schiff clearly says the “a sovereign debt crisis and a currency crisis ” is “more important than that.”

              Yes, it is more important than that. But let’s not move the goal posts here. You started off by claiming that Austrians saw an influx because they were predicting inflation. That is a totally bogus claim. It doesn’t even make any sense to claim that. Why would Austrians, who virtually nobody in the general public had heard of before Ron Paul, gain a bunch of followers because of predictions of inflation? They saw an influx because people saw they correctly predicted the housing bubble and financial collapse, and wanted to know more about that school of thought. And people were spreading the message “Hey, check these guys out. They saw all this coming years in advance.” “Peter Schiff was right” didn’t go viral because of inflation predictions. It went viral because he laid out how the crisis was about to unfold while all the other commentators were mocking him. So don’t try to act like people started following Austrians because of their predictions on what would happen after the crash because they wouldn’t have even gave them a hearing had they not been right about the housing bubble.

              “Are you kidding me? There must be dozens of quotes where he either directly says it, indirectly says it, or pays lip service to it to stir up that good old fashion fear. Google them. Here’s what he says in chapter one of his 07 book.”

              Well, then I’ll concede he predicted it. I don’t agree with him, and I don’t think other Austrians agree with him on that front, but that doesn’t change the fact that you’re wrong about why people started flocking towards Austrian economics. Heck, if you were right then people would’ve started flocking to it well before the crash. But, no, the big influx happened afterwards.

              Besides, Austrians don’t even have a universal opinion about what is going to happen in regards to price inflation. Some think we’ll see massive inflation, some moderate, and some think we’ll see price deflation. Why the hell would we try to sell our school of thought through discussions of price inflation, when we can sell our calling of the biggest collapse most people have seen in their lifetime? You’d make a terrible salesperson.

              • Major.Freedom says:

                He wants a Manchurian candidate spokesperson to purposefully make a mess of things.

                It is funny how the entire Austrian school is being summed up by Desolation as what Peter Schiff predicted.

                Maybe he reveals too much by defaulting to cult of personality ideology?

              • DesolationJones says:

                Dan, I don’t underestimate the power of selling with fear. Especially because Ron Paul was running for president, a vote for him & his sound Austrian principles would have been a vote for avoiding an apocalyptic collapse of the dollar and runaway inflation. That’s a message that drove millions towards him.

                Freedom, Bob Murphy once said that the main reason he picks on Krugman so much is because he’s so damn influential. Like it or not, the most influential advocate for Austrian economics has been Schiff . Dan says that not all Austrians agrees with him, which is fair enough. That does not change the fact that the Schiff variety of “Austrian brain worm” has had the most influence on the “financial industry, commentator and general public” Just like there’s other New Keynesians like John Taylor and Greg Mankiw that don’t always agree Paul Krugman, the Keynesian brain worm that has most influenced people has been the Krugman variety.

              • Dan says:

                Well we will have to agree to disagree, then. I don’t think people would’ve even flocked to Austrians had they been wrong about the housing bubble.

              • Scott D says:

                I discovered Austrian economics and Mises.org in 2005, while doing research on the money supply. The site’s viewership was growing pretty rapidly back then, as people like me sensed that something was very wrong with the economy. It also conclusively convinced me that Bush’s foreign policy, which I had always felt uneasy about, was truly abhorrent.

                The surge in interest in Austrian economics was primarily due to the internet allowing the proliferation of ideas that are not featured prominently in the mainstream media. I think that, like me, the war in Iraq played a big factor in that, as I detested the Left’s politics of institutionalized victimizing and promoting of state dependency, but was quickly finding the Right to be just as repugnant. I valued liberty in a way that was too radical for both sides.

                I remember quite clearly in mid 2007, when my parents bought a new home, telling my stepfather that the housing market was in a bubble that would probably collapse soon. Seeing that unfold less than a year later solidified my convictions. See, it wasn’t so much a prediction of a boom and bust as it was a coherent explanation of things that were happening in real time, before my eyes.

        • Dan says:

          Here’s the type of video that people were sharing about Austrians back in 2008/2009 for anybody who wasn’t paying attention to this stuff back then. https://m.youtube.com/watch?v=sgRGBNekFIw

        • Dan says:

          http://www.lewrockwell.com/2010/12/walter-e-block/who-predicted-the-housing-bubble/

          “For another, I focus on these predictions in order to promote this school of economics, the last best hope for humanity.”

        • Dan says:

          Now, if you want to argue that after the Austrians gained a large influx of new followers from correctly predicting the housing bubble and huge financial collapse well in advance of it happening, that they started warning that the Fed and the US government were setting up a much bigger collapse in the future, then I’d not argue against that. I think Austrians are correct to believe that the response to 08′ and since then has set up a giant bond bubble and currency crisis for the future. I also think you’ll see another huge influx of followers when people see the Austrians were right, yet again.

          • Cosmo Kramer says:

            Explain what problems you see that are to happen as a result of QE.

            • Dan says:

              I think there is a bond bubble and there will be a currency crisis. How bad will depend on what the Fed and the State do in response to the bubble bursting.

        • Richie says:

          In that passage you quote, please point out where Schiff says anything about “hyperinflation” and/or interest rates.

  10. Maurizio says:

    I wonder: how can stock prices go up without consumer prices eventually going up as well? Stocks release dividends, and dividends get spent, and at least some part of that is spent on things other than stocks. (otherwise what would be the point of buying stocks, if you never consume?) So how can stocks increase without consumer prices increasing as well? SHouldn’t this be impossible?

    • Major.Freedom says:

      I think there is a range where there is no increased demand for consumer goods given a stock market increase.

      What if stock prices go up because of a relative decrease in consumption and relative increase in investment? A very modest and gradual increase in investment with a corresponding very small gradual decrease in consumption can result in a very prolonged period of “rising stock prices” without a corresponding “rise in consumer prices” (assuming spending on consumer goods does not itself rise in nominal terms but decreases over time in a context of fixed total spending, or gradual increase in money and spending that is outpaced by production).

      The consumer spending out of dividends here would not make spending on consumer goods rise relative to before, because the increased dividends are by virtue of lower consumption spending and increased investment. If you imagine a rise in consumer spending in a context of fixed total spending, even if out of dividends, then you are imagining a scenario of a fall in investment (and rise in consumption). That would, ceteris paribus, put downward pressure on stock prices.

      A lot of moving parts…

      • Dan says:

        Plus consumer prices have been rising, even in spite of the worst economy since at least the early 80’s.

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