26
Aug
2015
Mises and the Market
My article at The Daily Caller explains how the Austrian perspective prepared many analysts for the recent market volatility.
My article at The Daily Caller explains how the Austrian perspective prepared many analysts for the recent market volatility.
Why non-austrians hate you so much, Bob?
David Henderson is not impressed.
And then Roger Koppl destroyed his Friedmanite “argument.”
Here’s an interesting paper related to this discussion:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2229570
I’m not sure he “destroyed” it so much as he answered a different question than the one David posed (while suggesting that the answer to the posed question is “no”, although I’m not 100% sure of that).
He pointed out that the question makes little sense. ABCT isn’t a series of hypotheses that can be tested. That may make it “worthless” treating it with Friedmanite philosophy of science doesn’t help anyone.
But it’s Roger that’s bringing in philosophy of science. David just asked a very reasonable question about what would convince Bob that it’s wrong. That is absolutely not the same as asking for some kind of falsificationist demonstration.
We make calls about what we think is right and wrong all the time without that kind of falsification – I think Roger (and by extension you I guess) are wrong to bring that into the discussion.
“That is absolutely not the same as asking for some kind of falsificationist demonstration.”
That’s the only way to answer the question; with a testable hypothesis that could falsify the theory.
Nonsense – we make right and wrong judgements all the time without falsification.
Which implies that prediction is not even close to the only standard of a good theory. We have to determine when prediction is a relevant test of a theory, which seemed to me to be Koppl’s point.
The bottom line is, a falsifiable hypothesis was the only way to answer David’s question.
Comment saved.
Of course prediction is often a horrible standard.
When you say a falsifiable hypothesis is the only way to answer his question you realize you’re the one sounding like a positivist right?
Daniel,
If Henderson’s post was literally JUST a question directly to Bob about what would convince him ABCT is wrong, if that’s all he was going for, he would have just e-mailed Bob.
Since he didn’t, it’s clear he’s asking for some kind of test that can be scrutinized by others.
That’s fine, but don’t pretend it was only a personal question to Bob. Personal questions don’t end up in blog posts, by definition.
Anyone who understands ABCT understands that it takes the form of an if-then statement. It’s obvious, then, that the only way it can be wrong is for the “if” to happen and the “then” to not happen. If Henderson understood that, then his question would never be asked.
A better question for Bob (because I think his article was totally premature and shouldn’t have been written the way it was) would have been: What makes you think this particular market correction fits the ABCT framework?
I don’t think it’s just a personal question to Bob, I think it ought to be scrutinizable and even an adoptable standard of evidence for others. I just don’t see why that has to mean strict falsificationism.
This is a very hard thing to operationalize: “It’s obvious, then, that the only way it can be wrong is for the “if” to happen and the “then” to not happen. If Henderson understood that, then his question would never be asked.”
Which is precisely why the question is an interesting one.
It’s not difficult to operationalize.
Can we agree that when an economist talks about evidence, with no other commentary, s/he’s probably talking about falsifiable evidence? The fact that Henderson’s response to Koppl was anything other than “Yeah, I know all that, Roger, I’m just trying to figure out exactly what would reduce Bob’s confidence about ABCT’s application to this episode.”
I know you’re relentless in comments sections, Daniel, so I’ll let this be my last post. It’s clear Henderson hasn’t read much at all on ABCT and I did my best to give him a long list of papers to look at that do, in fact, operationalize one or more aspects of the theory. I hope he finds his answer, whatever his question actually is, because I seriously doubt Bob will be forthcoming. I don’t want any of my comments to be read as a defense of Bob’s piece.
Daniel,
I know you’re absolutely relentless in comments threads, so I’ll let this be my last response.
Most economists, when asking for evidence, are asking about testable hypotheses. That’s how the bulk of the profession operates. If this WEREN’T what David was asking for, he would have read Koppl’s comment and said something like “Of course, Roger, I’m just wondering why Bob thinks ABCT applies in this situation.”
If an economist is asking for evidence, s/he is asking for a testable hypothesis. The fact that you mention operationalizing the theory speaks to this. The only reason we need to operationalize it is to test it!
I gave David a whole slew of articles to look at, many of which actually attempt to provide empirical evidence of the theory. From his comments, I get the feeling that his understanding is limited to Garrison’s purely theoretical contributions.
I’m not being any more relentless than you are here, but maybe I’m being unclear. Yes testable hypotheses are I think the idea here (though since it was two blog posts I’m not sure he was looking for anything that formal).
I am saying that doesn’t really amount to positivist falsification.
ABCT has a couple moving parts so let’s think of something simpler: the employment effect of the minimum wage. One hypothesis test is a statistically significant positive effect (and we’re assuming any size is economically significant if it’s positive). We have these. Has the claim “an increase in the minimum wage” been “falsified” because this evidence exists? Well not really, no. But it’s on the basis of this sort of sketchy and disputable evidence that’s pretty divorced from falsification that we make these right/wrong judgements (and I think we’re perfectly warranted in making those judgements).
To clarify, I’ll just say that testable hypotheses aren’t limited to econometric significance tests. Perhaps we’re talking past each other.
The existence of a legal Minimum Wage implies that employers would rather pay their employees less.
Er go, they will make hedging decisions based on their increased costs.
Which means that some would-be employees must be passed over that wouldn’t have otherwise been.
That follows logically, no matter how many new positions get filled; Employment would have been higher *absent* the Minimum Wage.
Evidence can exemplify a theory, and then *that theory* can disprove another theory.
But evidence, by itself, cannot disprove theory.
guest – but that’s largely my point. We make lots of legitimate right/wrong calls that are not proof or falsification calls.
Levi – Yep, not the only option.
David Henderson said:
“But it falls to a level well above the level it was at when you made your warning. How useful, then, was your warning?”
If he was allowing for a theory, he wouldn’t have made such a stink about nominal prices and the length of time.
Maybe some innovation resulted in a new market for that thing the price of which would have fallen farther, had other things been equal.
Nobody can know when a crash is going to occur, because no one can know an individual’s threshhold for loss, or when an individual will gain access to new opportunities.
That prices have been distorted / moved away from that which conform to consumer preferences logically means that consumers are suffering losses in real (subjective) terms.
Logically, that’s not sustainable for the consumer. They aren’t going to be willing to continue suffering losses forever.
Which means, all other things equal, there’s going to be a bust.
Forget falsification entirely – it’s always a nice question to pose. It provides empirical research fodder and it’s a good metric of credulity without even getting into philosophy of science.
Although I think David makes a good point (and Roger does too if you read all his comments), I’m not completely down on Bob. He is actually in a position that I’m often in when he brings up the Romer-Bernstein graph. I regularly point out that business cycle theories are not forecasting models and that poor predictive abilities does not mean it’s a bad theory. A lot of people in this discussion are complaining about ABCT’s forecasting abilities, which is not something I hold against Bob and not a valid criticism of ABCT.
If you toss a rock in the air and as it continues on its upward course, is someone wrong if he notes that the rock is going to eventually fall down? No matter how long the rock continues to elevate, we know that the person is right that the rock must come falling down. Such is the same when as when an advocate of the ABCT warns that the economy must eventually come down from artificially low interest rates, no matter have long it takes. Just as the very act of tossing the rock into the air ensures that it will inevitably fall, artificially lowering rates is the very act that ensures malinvestments will be exposed leading to the economic downturn. “Is there any evidence conceivable that, if you believed it, would convince you that your theory is wrong?” That question could only be answered if all central planning was removed from the role of money. Such a concept has never been tried in America’s brief history.
“Is there any evidence conceivable that, if you believed it, would convince you that your theory is wrong?”
But then, that question contains its own theories, doesn’t it?
It presumes that the laws of physics are responsible for economic activity, such that “evidence” contains economic answers.
Economics being all about human valuation of the means for ends satisfaction, economic answers must come from an understanding of the nature of human preferences, the physical sciences becoming relevant to economics only insofar as they relate to those preferences.
Unless “evidence” can show that human preferences are the source of their purposeful actions, then the answer to his question is no.
“No matter how long the rock continues to elevate, we know that the person is right that the rock must come falling down.”
If I throw it hard enough it does not come down.
I can’t comment at econlog till October ’cause I said heck one too many times but I think David has fundamentally misunderstood what ABCT is saying.
It’s not a “nominal prices are irrationally wrong by a specific amount right now” theory. One needs to stop and think what predictions he is imputing to Austrian theory:
David imagines ABCT as saying “stock prices are too high, here’s what they should be” and according to his EMH beliefs merely saying this, if true, should cause prices to drop instantly . This is the belief he says has been wrong for years: the prices will drop tomorrow.
What Austrian theory actually says is that the information on the correct level of prices is destroyed by monetary expansion and must be rediscovered by acting human beings. According to which, the very thing David says Austrian theory has wrongly predicted, is impossible.
Henderson’s analysis is too brief.
RPM’s analysis is too much of a stretch, as Henderson alludes to.
Austrians would say that the gov’t/Fed pumped up a stock bubble. This bubble must pop for true price discovery to come back into play. The market corrected a lot, but it is still at very high valuations. Still, it would have made sense to ignore the years of warnings by Austrian economists and invest heavily in the market. Of course, further market misery is predicted by many. Despite that, the long term trend of this bull market has not yet been destroyed.
Further, is it any surprise that the S&P rallied hard from the March, 2009 lows? I think too much emphasis is being placed on the correlation between the Fed’s balance sheet and the stock market. What will RPM say IF/WHEN the market maintains its valuation when QE is unwound? Others?
Bob’s linked-to post shows a chart of the S&P500 soaring over the past 7 or 8 years (with a small dip in the last 2 weeks.) He adds a second line to his chart showing that fed assets have increased somewhat in parallel with the S&P rise. In his view the increase in S&P500 has been driven by the fed assets purchases.
He then says: ‘Most subscribers to the Austrian School have been warning that “printing money out of thin air” doesn’t make Americans richer’.
But his chart shows that the fed has very successfully made lots of Americans (those that invested in the stocks of S&P500 companies) much richer. At least it does if his causality (from fed assets purchases to S&P500 increasing is correct). How does that square with the Austrian view?
BTW: Is Bob’s chart showing the S&P and fed balance sheet increases in tandem totally legit ? Wouldn’t you expect a stock market index and the fed balance sheet to both increase over time ? And if 2 things are both increasing over time, couldn’t you always draw a chart showing them increasing at the same rate, just by plotting them on different axes ?
The Austiran position isn’t that nobody benefits from Fed printing. It’s that the people who get the money first benefit at the expense of those that get it last or not at all. Plus you have all the consequences from the artificial boom once it inevitably turns to bust. I can’t think of a single Austrian publication tht doesn’t discuss the transfer of wealth from Fed money printing.
How are investors in S&P500 companies getting fed money first ?
I suppose some are investing money they got from selling assets to the fed, but most are just investing out of income or from savings they previously held somewhere else.
Transformer, the second recipients generally also benefit at the expense of the second to last recipients. There is no set number of times after which a new dollar being spent by someone and increasing the recipient’s nominal income fails to cause the recipient’s real income to rise. That depends upon many different factors.
The first dozen rounds of recipients might benefit at the expense of the last dozen.
That would sort of make sense if the increase in the money supply was going to generate inflation – the earlier recipients of new money get to buy things cheaper – but when fed asset purchases don’t generate much inflation I’m struggling to see how that applies.
If the fed’s asset buying helps to address a monetary disequilibrium then the benefits of this should offset any distortionary effects on pricing caused by the asset buying (though these will be more pronounced when the fed does weird things like buying MBS, that seemed geared to help the banks recover from bad decision they made in the past)
I don’t get Bob’s claim that the feds asset buying programs “have simply sabotaged the market’s normal mechanisms”. Surely these normal mechanism will work better in an environment where there is not an excess demand for money?
Transformer-do you believe the increase in the base is temporary or that the money multiplier will stay low forever? If you don’t then an increase in the base must eventually lead to an increase in prices relative to what they would otherwise be.
With regard to money demand: what you say would be true if the new money were supplied directly to those whose demand for real money balances had increased. I believe we discussed this before: how do you envision a central bank knowing who those people are?
No, I think that when the “money multiplier” increases the amount of base money should be reduced to maintain monetary equilibrium.
I think perfectly good market process exists right now to ensure that new money flows to those who want to hold it.
I didn’t ask you what should happen, I asked you what will happen.
And the “market process” you’re talking about doesn’t exist when where new money goes is centrally planned.
The key phrase is “in the long run.”
Bob omitted it, but Fed balance sheet expansion doesn’t enrich Americans (overall) in the long run. It’s a wealth transfer for sure though.
It is so easy to underappreciate the critical constraint that relative production and allocations of real capital presents.
When we live among central bankers who have found themselves in control of institutions that have a monopoly power to create almost unlimited quantities of new money, for themselves and special interest groups, any large dips in prices or spending, which brings about an uneasy, albeit temporary, adjustment and recalculation process, are easily perceived as problems that more money and spending can solve. The temptation to print money is given apologies and intellectual defenses by those who do not wish to tolerate the adjustments and/or do not understand the real coordination that is required to actually solve what is wrong.
Overall coordination is more important than prices or spending or any other monetary variable. There is no possibility of finding a rigid rule that can avoid the business cycle caused by non-market money.
Monetarists, when they see a big monetary change, always abstract that change into an isolated concept stripped from real production and exchange. Yet it is vain to believe that real coordination is possible as possible as long as the authorities fix money printing to a non-market rule like NGDPLT.
There is the argument being made by the moderates that NGDPLT would be “close” or “similar” to free market banking. On what basis? The abstracted numerical value of NGDP growth. This is missing the forest for the trees! The aggregate growth alone is not what is important. It is the coordination between money production and real goods production. The fact that a free market may have relatively stable aggregate spending does not imply that a socialist money rule of targeting aggregate spending come high or hell water is “close” to a free market.
If governments took over all radio, newspaper, magazine, telephone, and written communications the world over, and then issued a monopolized stream of communications with an abstract aggregated frequency and quantity that this statistic was “close” to what would have otherwise taken place in a free society, who in their right mind would defend this and apologize for it by saying the overall frequency and quantity of communications is “similar” to what would happen in a free market?
Just like the overall frequency and quantity of communications is not the key variable that enables individuals to coordinate their actions, so too is it with money. Money is a property that without central planning brings about a form of communication that is needed to coordinate.
It is not the overall quantity or volume of spending that matters, it is the allocation of money spending across different projects planned and acted upon by different groups of people who ONLY communicate with the entire population of individuals through the price system. What Marx disparaged as the “money nexus” is in a free society perhaps the most important coordinating tool we have available.
I side with Milton Friedman’s argument that money is much too important to be controlled by central bankers. It must not be controlled by any one person by law. It it should open to everyone, without threats of violence being made by anyone against anyone else should they wish to opt out of any particular medium of exchange offering.
Eventually the sun will go supernova, bringing the Fed’s house of cards to its knees.
Eventually the sun will go supernova, bringing the Fed’s house of cards to its knees.
Josiah the Merciless eats S&P futures trading halts for breakfast. Where other men short, he longs.
By then Market Monetarism will have thrown off the shackles of planetary constraints and the fed will be targeting universe-wide NGDP.
And Bob’s descendants will still be telling us that periodic market correction of 15% (or so) prove that Mises is right (and that the end is nigh).
I seem to recall Scott denying there was such a thing as global aggregate demand.
But as for me I hope the Federal Reserve dies a well deserved death long before everything else does.
Ceterum censeo Subsidium Foederati esse delendam.
“Ceterum censeo Subsidium Foederati esse delendam”
Spero ita . Ad reponi per liberum banking.
Sic fiat.
True story: my first reaction to the market tumble was to make a contribution to my IRA.
But that’s because you’re a vampire Josiah and have a very long time horizon.
Even if I were immortal, wouldn’t it make sense for me to get out of the stock market if the Austrian view of things is true?
So Mark Spitznagel could never have made a dime off of Austrian theory, right Josiah?
Sometimes following an Austrian inspired investment strategy will make money; sometimes it won’t. That’s also true for just about every other investment strategy known to man.
“That’s also true for just about every other investment strategy known to man.”
Well, gosh…. empirical prediction must not be much of a standard for a “good” theory versus a bad one, then.
I’m trying to be nicer on the Internet, so I’ll just say that doesn’t follow.
No theory is a perfect predictor.
What matters is whether one’s theory is right.
Saying that “sometimes right and sometimes wrong” applies to both Austrianism and other theories, shows you really haven’t yet grasped the fact that Austrian theory is not predictive. It is either always right or always wrong.
He said sometimes make money and sometimes not. Not that it was sometimes right.
However, there are a vast number of strategies that would never make money, I would think. Buy expensive and sell cheap may be one.
Ok, this is a group of random unconnected thoughts.
QE pumps money into the financial sector for the most part. I think that even if you make an argument that monetary policy is tight or that the money supply is tight, I think it is common sense that certain assets would increase in price – those that are directly or closely tied to the finance industry where the money is getting pumped into. The people who argue this is not the case would not question that pumping money into student loans would raise college tuition.
Personally, I am of the belief that broad money is more important to inflation than M1. I expect inflation when and if loans rapidly increase and keep my eye on TCMDO. I could be way off base because I’m sure most commenters on here understand money better than I do. However, a high rate of CPI increase is not necessary to create malinvestment and unsustainable trends.
China has been complaining about the Fed exporting inflation since QE1. Easy money chasing higher returns.
David Henderson asked in a recent post on Econlog “What changed?” Well, it was Tuesday then it was Wednesday… Friday… Stock prices had been level for a while, while Chinese stocks had crashed. I think a good analogy is a heart attack. We often ask “What caused it?” but we rarely ask “What changed?” Surely something triggered it. Maybe working in the cold, sudden increase in triglycerides, a week or two of inactivity… But the cause was likely something long term that was building and the precipitating event is often UNSEEN.
Dear me:
“According to Mises and his disciples, interest rates serve a vital function in a free-market economy. The legitimate market rate of interest signals the relative scarcity of savings versus investment opportunities.”
One wonders why anyone would take this defence of the classical ABCT by you seriously when you say that you agree with Sraffa that a natural rate in Mises’ sense cannot even be defined.
Explain to us why this Austrian business cycle theory doesn’t collapse to its foundations when we read and accept your “Multiple Interest Rates and Austrian Business Cycle Theory” paper? Isn’t this massive hypocrisy on your part?
A challenge I bet will never be answered:
http://socialdemocracy21stcentury.blogspot.com/2015/08/robert-murphy-defends-abct-even-though.html
Most likely because the challenge is either deliberately dishonest or lacks understanding of Murphy’s stance on interest rates and the ABCT.
Answering it would be therefore a waste of time.
In short, no sign that you have read Murphy’s paper or his PhD — or that you can explain the severe contradiction here.
Murphy agrees with Sraffa that the unique natural Wicksellian rate of interest cannot even be defined. Do you dispute that?
Rather, a sign that I have read Murphy’s paper and that I’m not being deliberately dishonest.
“Murphy agrees with Sraffa that the unique natural Wicksellian rate of interest cannot even be defined. Do you dispute that?”
Yes, Sraffa seems to say that any ‘Wicksellian’ style natural interest rate would be arbitrarily defined, not that it can’t be defined.
LK,
As mentioned repeatedly, if the singular phrasing of “interest rate” bugs you so much, then just add an “s” to every instance.
Nothing fundamentally changes. ABCT does not “collapse on its foundations” by adding a letter to each instance of a phrase.
The fact that Mises utilized the Wicksellian shorthand for the set of natural interest rates that prevail in a market, does not obligate anyone to either reject the entire theory as is, or accept it as is.
You did not do so with Keynesianism. It is why you call yourself POST Keynesian.
Well, consider every Austrian today who adds an “s” to interest rate, a POST Austrian.
ABCT still explains why we have the business cycle.
I still don’t get it, MF. In a monetary economy, don’t these “multiple interest rates” collapse into one interest rate in terms of the money commodity? Would you really have multiple interest rates in money terms?
The multiple rates refer to the rates that prevail on different loan contracts and projects.
The multiple rates are in money.
I think if you take a look at history, in all monetary economies there are multiple interest rates in money.
There is a way to refer to all these rates as a singular rate, by let’s say all money paid back divided by all money lent. That will get you one rate in money terms.
But what Sfraffa was getting at was that moving from a barter economy where the rates are categorically different, to a monetary economy where rates are all in terms of money, doesn’t actually allow one natural interest rate. There would still be different rates depending on the real goods and services.
From the article:
“Entrepreneurs still get the green light to start longer term investment projects, but the economy lacks the real savings necessary to bring them to fruition.
Such has been the condition of the U.S. and other major economics since the extraordinary interventions by central banks after the 2008 financial crisis.“
hahaha… our economies have been subject to massive “malinvestment” leading to lack of real resources???
What world are you living in? You actually think there has not been massive idle resources, massive unemployment and massive unused capacity since 2008?
It is especially laughable because right after this quote you remark that money from QE has gone into asset speculation, NOT into massive real investment driving alleged malinvestment by industrial firms or in real capital projects.
“What world are you living in? You actually think there has not been massive idle resources, massive unemployment and massive unused capacity since 2008?”
Couple of problems with this:
First, resources, capacity and workers are not homogenous.
Second, even if we were to treat them as homogenous, and even if we were to accept it as true that there are ‘massive idle resources, unemployment and unused capacity”, it does nothing to address the original argument. Ie, that these resources are not enough to bring these bring present projects to fruition.
The fact that capital goods and types of labour are heterogeneous — which Post Keynesians already know perfectly well — does not vindicate the ABCT or Bob Murphy’s absurd article.
For one thing, you need to provide empirical evidence that there is a general crisis caused by lack of real, physical factor inputs.
Neither you nor Bob — no doubt — will provide any such evidence because there isn’t any. Your theory is pure fantasy.
Show me your evidence.
“The fact that capital goods and types of labour are heterogeneous — which Post Keynesians already know perfectly well”
-LK, you might think you know it- but you don’t.
The fact inflation has been positive since 2009 is proof enough that there is a general crisis caused by lack of real, physical inputs. Plus, the fact that the EZ CPI only began to fall behind the American when the Euro crisis ended.
“The fact inflation has been positive since 2009 is proof enough that there is a general crisis caused by lack of real, physical inputs.”
lol…. So in every period in modern capitalist history, you think the mere presence of positive inflation rates is **proof** that “there is a general crisis caused by lack of real, physical inputs”?
So even in most post-WWII recessions (which were nearly all inflationary), according to you this must be “proof enough that there is a general crisis caused by lack of real, physical inputs”? hahaha.
Also, some historical US inflation rates:
Year | Inflation rate
1934 | 3.1%
1935 | 2.2%
1936 | 1.5%
1937 | 3.6%
http://www.usinflationcalculator.com/inflation/historical-inflation-rates/
According to you America from 1933-1937 must have had been in a “general crisis caused by lack of real, physical inputs” because inflation rates were positive?
I will be first to admit that the Great Depression, for the most part, did not have real causes (it was pretty much almost a pure aggregate demand shock), but it did have real effects, and that these effects had caused a decent amount of scarcity of real, physical inputs by 1933 due to their unuse, leading to the recovery to have positive inflation. So, yes, I stand by my former remark.
To repeat: in your view America in 1933-1937 was in a “general crisis caused by lack of real, physical inputs”?
That is so bizarrely and blatantly opposed to the empirical evidence, it is unhinged.
How? I don’t see it as unhinged. Why else would there be positive inflation?
No, he said since 2009.
“For one thing, you need to provide empirical evidence that there is a general crisis caused by lack of real, physical factor inputs.”
The evidence is the exact same evicence you have collected.
You are not actually asking for different evidence, you are asking for a different theory to understand the evidence.
“Neither you nor Bob — no doubt — will provide any such evidence because there isn’t any. Your theory is pure fantasy.”
There see? You just said it is the theory you have a problem with, not the data which we all can agree on.
We can all agree on unemployment numbers, GDP numbers, money supply numbers, price numbers, but that is not what you are asking to be shown.
All you’re doing is disagreeing with the theory, and pretending that the evidence out there somehow does not belong to Austrians. Well that is true, I don’t own any historical evidence. But then neither do you. All of history is unowned, and I think that upsets you and makes you anxious, and so you try to make yourself and others believe that the historical data from 1913 to the present, somehow cannot be referred to by any Austrian.
You don’t own history. All that historical data is all the data you are literally asking for. You keep claiming to not having been given this historical data. Yet you have had it all along. Why do you want the same data again? What good will it do? How many times do you need to be given historical data of booms and busts?
The truth is that you are not offering anyone an opportunity to convince you by way of being shown the same data over and over. You are only saying to everyone you are not convinced of the theory, which is quite different from history.
Ah ha… so you can’t provide any empirical evidence…. just a bizarre rant about your opponents being angry because they don’t .. “own history”?? hahaha
“For one thing, you need to provide empirical evidence that there is a general crisis caused by lack of real, physical factor inputs.”
This isn’t necessary, since our claim follows logically from the fact that all economic activity begins with individuals employing means to satisfy a preference.
In other words, when producers don’t produce what consumers want, the resources they invested in were malinvested.
That’s just logical.
Malinvested resources are also going to become idle because it will not be profitable for the producer to continue producing something for which consumers will not be willing to pay.
That analysis requires no data.
And here’s where it ties into business cycles:
If you have to manufacture “aggregate demand” by printing money, that means that consumers aren’t otherwise willing to engage in the economic activity you think they ought to be doing.
This implies that the activity that is instigated by money-printing does not conform to consumer demand. It’s unnatural.
It’s not what consumers are looking for.
There’s no such thing as a lack of “aggregate demand” because it is the producers’ job to *pursue* consumer demand. That’s what economics is really about.
Consumers will look at what is available to them in any kind of scarcity environment, and if they think they can make a profit, they will choose to employ some means to do so.
Consumer profit is determined on their subjective valuations of the means that happen to be available.
Producer profit is determined by their ability to provide the means which consumers have, themselves, already placed a value on, and are already pursuing.
(Or producers can try and guess at what consumers might value, based on observations of consumer purchases.)
It’s not the job of consumers to make it profitable for producers to employ idle resources.
It’s the job of producers to not invest in things the employment of which consumer demand hasn’t, or won’t, make profitable.
An alternative theory for the business cycle. Every few years, aliens beam down a ray that persuades people not to work hard. Their preference then is to sit around doing nothing, and the economy takes a dip. When the aliens turn off the beam, everyone’s preference changes back to hard work for future rewards, so the economy returns to growth.
It has been discovered that the Govt printing money to solve the problem causes the aliens so much hilarity that they switch off the beam early so they can watch it again next time.
Lol, the empirical evidence has already been made available.
You have the evidence yourself, you just don’t have the right theory to understand it.
“We can all agree on unemployment numbers, GDP numbers, money supply numbers, price numbers…” I wouldn’t be so sure. I reckon you an LK could disagree on just about anything.
What I mean is that we could in principle come to agree on the historical facts, despite disagreeing on the relationships and causations.
“The fact that capital goods and types of labour are heterogeneous — which Post Keynesians already know perfectly well — does not vindicate the ABCT or Bob Murphy’s absurd article.”
It vindicates his article from your absurd objection, which is all it set out to do.
Any attempt by you to attack Murphy’s position based on the absurd canard of ‘idle resources’ is nothing more than a contradiction with your claim that you recognize that resources are heterogeneous.
Unless, of course, you can provide some empirical evidence that such resources and capacity as were idle were somehow suitable to those areas of the economy that required or will require a sudden input of resources or greater capacity.
Show me your evidence.
LK, do you deny that there was massive unused capacity in the former USSR in the 1990s? Do you also deny there was massive malinvestment there during the Soviet era leading to a lack of real resources?
The Soviet Union in its last years did not have “massive unused capacity”: it had shortages, excess military investment and like most of its history capital and consumer goods scarcity.
Are you saying that all of the excess military investment was using up all of the capacity; i.e., they did not have “massive unused capacity” because of the excess military investment? The way you phrased it makes it unclear to me.
No, the USSR had both unused capacity and shortages, depending on the objects in question.
Exactly.
So you’re denying the tons upon tons of abandoned plants, machinery, etc., in the 1990s, when the former Soviet countries were even more supply-poor?
“What world are you living in? You actually think there has not been massive idle resources, massive unemployment and massive unused capacity since 2008?”
What do you think all the other economists mean when they talk about “the Great Stagnation?”
So there is a “great stagnation” (with huge issues of idle resources) but at the same time a general crisis caused by massive malinvestment where Western economies are being hit by lack of real capital goods and shortages?
And what, pray, is your evidence for this bizarre and unhinged theory? Because ol’ Bob said so? lol
Hey, LK, please tone it down a notch.
“The Great Stagnation” is a term coined by, I believe (non-
Austrian) Tyler Cowen, who made it the name of his well-received book.
https://en.wikipedia.org/wiki/The_Great_Stagnation
Writers for the decidedly non-Austrian Huffington Post have applied this concept in print:
http://www.huffingtonpost.com/aaron-pacitti/the-great-stagnation-five_b_5487894.html
Here’s Market Monetarist Scott Sumner discussing the Great Stagnation:
http://econlog.econlib.org/archives/2015/05/more_evidence_f_2.html#
Here’s Keynesian-ish economist Brad DeLong discussing the Great Stagnation:
http://equitablegrowth.org/2015/02/17/morning-must-read-matthew-klein-crush-financial-sector-end-great-stagnation/
I take it the existence of the Great Stagnation is not under dispute by most professional economists, no matter their school of thought.
I bring this up because it contrasts with your view that there are no idle resources. If there are no idle resources, then why do you suppose so many different economists of different stripes are talking about a Great Stagnation? How does that jive?
Scott Sumner understands there’s been a slowdown since 1973, but uses the phrase “Great Stagnation” only for stagnations after 2008.
“I bring this up because it contrasts with your view that there are no idle resources.”
WTF are you talking about?
Oh, I see the problem now. I missed the word “not” in the following statement.:
“You actually think there has not been massive idle resources, massive unemployment and massive unused capacity since 2008?”
My mistake. I misread your comment. All clear now.
“hahaha… our economies have been subject to massive “malinvestment” leading to lack of real resources???
What world are you living in? You actually think there has not been massive idle resources, massive unemployment and massive unused capacity since 2008?”
A lack of sufficient resources does not imply a lack of idle resources.
It is not merely the abstract quantity of stuff that matters. It is the form of it.
“It is especially laughable because right after this quote you remark that money from QE has gone into asset speculation, NOT into massive real investment driving alleged malinvestment by industrial firms or in real capital projects.”
That a pretty laughable statement from you , LK. Do you think that money from QE goes into asset speculation the way that kids pocket money may go into a piggy bank?
(1) first you seem to pre-suppose the naive loanable funds. QE creates excess reserves: those are not “lent out” in the conventional sense but merely used by banks in their final clearing of obligations to other banks, the CB and their customers; and
(2) yes, most spending in capitalist economies is on secondary financial asset market speculation. This utterly dwarfs the amounts spent on real capital investment or consumption:
http://socialdemocracy21stcentury.blogspot.com/2013/02/world-gdp-versus-total-value-of.html
Lots of money gets sucked into this world of secondary asset trading and divorced from spending on real goods and services or real investment.
The only interpretation of your comment is that money from QE can either
1. go into asset speculation
or
2. go into real investment
which is clearly incorrect
The stuff about loanable funds, and the ratio of spending on real capital v market speculation are totally irrelevant. Either you mis-typed , which is fine, or you have a gap in your model of what happens when new money enters the economy (which you should strive to address, not cover up).
Excess reserves from QE is mainly used by banks for clearing with other banks, the CB or their customers. I did not say it can only ever used on asset speculation or real investment. You are wrong and laughable.
And LK has provided no evidence for anything contrary to what Transformer has said here.
“QE creates excess reserves: those are not “lent out” in the conventional sense but merely used by banks in their final clearing of obligations to other banks”
-First two statements here true, third is not. QE money is real money, just like any other money out there. The idea financial speculation is divorced from spending on real goods and services or real investment is just laughable.
I did not say it is *completely* divorced or *totally* unrelated: you’re mouthing straw man nonsense.
No, you said money created by QE is not loaned out. You said that without qualification.
That is very much a “complete” separation between QE and lending.
Correct. QE money is not normally loaned out. It is generally used by banks for clearing obligations with other banks, the CB or their customers. If you don’t know this, then you are grossly ignorant of real world financial system. No surprises there.
LK,
What you say is incorrect – the whole point of QE is to boost AD, and this will be reflected in increased lending and a decrease of excess reserves.
Further: If the reserves are “excess” why are they needed for interbank clearing ?
For someone who throws insults like “grossly ignorant’ around like confetti, you frequently say some things that expose your own lack of knowledge (and unwillingness to try and understand models not you own).
Lol, so now you backtrack by adding the words “normally” and “generally”.
First it was QE is not lent, and now it is ” generally” and “normally” not lent, which is you admitting what you said before was grossly inaccurate.
LK,
You say “It is especially laughable because right after this quote you remark that money from QE has gone into asset speculation, NOT into massive real investment driving alleged malinvestment by industrial firms or in real capital projects.”
The bit about “NOT into massive real investment” is not based on anything Bob wrote (as a supporter of ABCT he clearly thinks there was real mal-investments as well as as asset speculation), and any fair-minded person would conclude that it is your view that if it went into asset speculation it could NOT also have also gone into real mal-investments.
Talking about excess reserves is irrelevant to the meaning of your words. (and as a empirical fact: The data tells us that investment has also gone up considerably since the bottom of the recession).
Seriously, though, is there any time limit on when the “unsustainable boom” is supposed to play out? If 80 years go by without anything bad happening, would Austrians just say that proves the inevitable bust will be that much bigger?
Can you name me an 80 year interval without a recession in a non agrarian economy where the government regulates money and or banking? Anywhere?
Are Austrians supposed to be embarrassed their theory doesn’t predict 100 year long booms or weekly boom-busts?
What the heck is your mental model of what the theory says about the world?
Right. So if we agree 80 years is too long, how long does a boom have to go on before the prediction of imminent doom is refuted? Ten years? Twenty?
So all economists are supposed to be experts at timing the S&P 500? That’s what theory is about?
Why can’t theory be a sound explanation for how things play out, not necessarily when?
I can use an AR1 or VAR model to make predictions. It doesn’t mean I understand the underlying process. Does that make AR1 and VAR the pinnacle of economic theory?
No one is asking you to predict what the market will do next week. But if someone is dismissing economic growth on the grounds it’s part of an unsustainable boom, it’s fair to ask how long the boom would have to last before you’d conced the growth wasn’t just an illusion. And if they won’t answer, I have to conclude that on some level they know what they are saying is BS.
So, again, you’re asking for point predictions from a theory that doesn’t give them.
If the theory said, “A downturn will begin when X happens.” would that satisfy your standard? For theories to be sufficiently general, they can’t give specific time frames.
For theories to be sufficiently general, they can’t give specific time frames.
Here’s a general theory: human beings are mortal. Here’s a prediction based on that theory: you, Levi Russell, will not be alive 200 years from now.
If something is unsustainable, then it can’t be the case that it can go on indefinitely. There has to be some limit. If not, then in what sense is it unsustainable?
Josiah,
Business cycles tend to play out over roughly a decade. If a boom went on for 15 years, it wouldn’t surprise me. If it went on for 30, I’d probably rethink things.
Note that this has nothing at all to do with the theory and everything to do with my own standard of evidence.
The theory is an if-then statement. You can scream at that all day long that it isn’t useful or whatever, but it isn’t going to change. The theory is useful in advancing our understanding of causal mechanisms when it applies. It doesn’t always apply.
Levi,
What’s the if-then statement you think the ABCT represents?
IF central bank manipulation of credit markets results in an artificial decrease in market interest rates
THEN prices will be distorted and consumption and investment will take unsustainable paths which must eventually be corrected.
Levi,
The words “unsustainable” and “eventually” imply some upper limit on the time this must occur. Otherwise the whole if-then statement is meaningless.
Josiah you didn’t answer my question as to what you think the Austrian theory predicts about the time scale of the business cycle that you think is wrong. Fine, whatever, I can’t address your concerns without knowing what you think the theory is saying but whatever.
I’ll have to guess instead what you think the theory is saying, and probably guess wrong. From what you just said it sounds like you think that the theory says no good investment occurs during the boom. Of course not. You can’t leave marginalism out of the analysis. Some of the growth that occurs during the boom years is still real long term growth. The problem isn’t artificially high growth, it is growth which is mismatched with future consumer preferences. But that’s a bit of a bait and switch. Stock market growth and economic growth are not the same thing, and are only loosely and sometimes inconsistently correlated.
With respect to your question, having a specific time threshold beyond which you suddenly completely change your mind if a recession doesn’t happen is not, in fact, a rational approach at all. Rather if one re-evaluates one must do so gradually as the length between recessions becomes unusually long. Your finger wagging makes no sense however, given that it hasn’t even been ten years yet.
So again, why are Austrians supposed to feel contrite about being unable to explain a perpetual expansion that has never actually happened? I could understand your position Josiah if we were 15 or 20 years into a robust economic expansion with no end in sight. As it stands we’re not and you’re lecturing Austrians that they’re wrong in imaginary worlds that don’t exist.
Josiah you didn’t answer my question as to what you think the Austrian theory predicts about the time scale of the business cycle that you think is wrong.
I’ve been commenting on this blog for a long time. Here is an experience I’ve had repeatedly:
Austrian commenter: The End is Nigh! The latest market event shows that the Fed’s scheme is collapsing all around it.
Me: I doubt it.
AC: You’ll see! You’ll see! Just wait a few months and all will be ashes.
[A few months pass]
Me: Hey, what happened to the apocalypse?
AC: It ended up being delayed because [INAUDIBLE]. But this NEW EVENT shows that the unraveling is inevitable before the next snowfall.
Etc.
Lately I’ve noticed that Austrians have got a bit cagier about making time frame predictions. They’ll say the end is soon, but if you ask if that means in the next year they’ll start lecturing you about the absurdity of making point predictions.
BTW, there have been economies that have gone through 15-20 year booms without any recession. So asking about those time frames is not exactly the stuff of imaginary worlds.
One can’t hold a theory responsible for what some people who like it think it says.
Anyway when I said “we” I meant “right now” and “in the United States”
You never did give me an example of an 80 year boom, but I’ll bite, what’s the longest sustained economic expansion you can find in a non agrarian economy in which the government regulates money and banking. Doesn’t have to be 80 years, just tell me what the absolute longest any economy has gone without a recession has been, under those conditions.
Andrew,
When I mentioned 80 years, it wasn’t because I was claimed there were countries where this had happened. It was because I was trying to get someone to commit to a frigging number.
The last recession Australia had was 25 years ago.
But “how long a boom can be sustain” is an empirical question, it’s not a test of a theory which does not get into the specifics of the time frame except to the extent that it is presumably shorter than a human life time.
Australia’s track record recently is impressive, in terms of real gdp growth, no doubt about that. Is it proof that Austrian Business Cycle Theory must be wrong in general because it seems like Australia is capable of sustaining a boom indefinitely? I don’t think so. Again, there is no specific time frame I could see a single economy go without seeing a bust which would suddenly make me change my mind. That’s not how rational thought works.
I need to study Australia more, however, because I don’t think your claim seems quite right. Look at this plot of Australia’s unemployment rate:
https://research.stlouisfed.org/fred2/series/LRUNTTTTAUM156S
Does it really look like they didn’t have a recession recently? There’s some other statistics too, that show fairly sharp but brief disruptions to the Australian economy over the time frame you’re talking about. It looks to me like Australia just has sufficiently high trend growth that it doesn’t get hit hard by recessions. Enough that even when it does get hit, some people think they didn’t happen at all.
Again, I don’t claim to know for sure. Maybe I’m totally wrong. But Australia’s long boom that hasn’t ended yet hasn’t persuaded me that a theory which works well in many other cases has nothing meaningful to say in those cases or in the Australian one.
This passage is a bit sloppy:
“If the community is willing to defer immediate gratification by reducing consumption and saving more, then this frees up real resources. Rather than channeling steel, labor, and lumber into building another shopping center, those resources can be diverted into constructing a deep-sea oil rig.
In this example, the extra savings from the public manifests itself in lower interest rates, which give entrepreneurs the green light to invest in longer projects (such as the oil rig)”
What makes the oil rig a “longer project” versus building a shopping center?
I know Austrian capital theory would say that an oil rig is further from the final consumer than is a shopping center, but how does describing the oil rig as a “longer project” make this point?
And why wouldn’t lower interest rates give the “green light” to the builders of the shopping center too ?
I think what is being said here is that the more savings there are, the more profitable the longer-term projects will be due to the lower interest rates.
Shopping centers are places that sell lots of consumer goods, so that’s why they are considered shorter term, or lower-order, projects
Lower rates give the green light to shopping centers, too, but they do, moreso, to oil rig construction, because its function in its structure of production is farther removed from the consumer, so its profitability is dependent on the profitability of the greater number of lower-order production processes below it (refineries, transportation logistics, car dealers).
so what you’re saying is that business managers aren’t very good at their job. Investors are useless too. The market is basically a bunch of idiots who don’t know what they’re doing. That’s what you’re saying. Hence we need a central bank to calm down the crazies and take a longer view of things.
“so what you’re saying is that business managers aren’t very good at their job. Investors are useless too. The market is basically a bunch of idiots who don’t know what they’re doing.”
Business managers and investors know *what* to do.
But in a context of monetary inflation, the price signals in paper terms do not match the price signals in terms of individuals’ marginal utility for the goods and services that are bought with it.
Inflating the money supply doesn’t directly change the supply of goods and services, but it does change the demand, and therefore the scarcity conditions, for them.
And paper hides the scarcity conditions, so smart investors can be caught off guard because there’s nothing that tells him that scarcity conditions should change unless he understands Cantillon Effects.
They know how to make profits, but the paper prices don’t tell them what they need to know in order to make sustainably profitable investments.
In the absence of a nominal target set by a powerful authority such as the central bank, participants in the market have literally no idea what is going to happen in the future. When the central bank say ‘this is what we are going to do – this is our target – it creates a point of stability which didn’t exist before. Sure, the central bank can create additional confusion by behaving in an erratic manner, but if it tells everyone what it is aiming for then there is a point of stability which other market participants can use in order to better coordinate their activities.
“When the central bank say ‘this is what we are going to do – this is our target – it creates a point of stability which didn’t exist before.”
But since economics is not about the “us”, but the individual, a central target actually causes confusion.
Consumers will always look at what’s available to them to determine whether or not employing some means will make them profitable.
Other individuals see that action and can know, immediately, what kinds of things to produce, and all he has to do is ask the guy if it would be profitable for him if he were supplied at this or that price.
The profitability of all production processes depends, first and foremost, on the individual consumer demand for the product at the end of the process.
All of economics begins with the individuals’ preferences; There are no common economic goals.
Even when individuals desire the same outcome, they do so as individuals.
If you’re inclined, I think the following video helps a lot with this Austrian concept of Methodological Individualism.
In particular, Menger’s Theory of Imputation. Mind blowing, I promise:
The Birth of the Austrian School | Joseph T. Salerno
https://www.youtube.com/watch?v=dZRZKX5zAD4
“since economics is not about the “us”, but the individual, a central target actually causes confusion.”
How does the current central bank target confuse you, exactly?
When they announce a particular target, do you imagine that they are announcing some other target, which only exists in your imagination?
Please explain this confusion experience which you seem to be going through for some reason.
Apparently I’m not allowed to respond to you, due to the libertarian censorship regime which seems to exist on this blog.
Yes, when I said libertarian I was being ironic, in case you missed that.
If you posted multiple links, the comment will require approval.
It just automatically does that. Not because of libertarian censorship.
Would you say the same about bread prices?
Huh?
😀
I think what you might be looking for, is this:
Prices in terms of bread – or any other good that is not a medium of exchange – are the opportunities that individuals are willing to forego in the act of acquiring it.
All prices can be quoted in terms of opportunities foregone.
Money is just supposed to represent the opportunities we’re willing to forego (or have already foregone).
Personally, I think you shouldn’t have used the phrase “years”, might have been smarter to point out that Robert Wenzel, Pater Tenebraum, and David Stockman have all in the last three months pointed out signs of a weakening market, Chinese central planning fails, and largely lateral movement for the past six months and that a sizable correction was seriously imminent followed by people buying the dip->more lateral movement in the market and difficult breaking resistance zones-> followed by recession or rate hike and recession. To me, that’s pretty dang accurate but since ABCT has been gaining popularity in its explanation for bust, no one really cares that we predicted a bear.
I have however heard several Austrian type investors claiming that oil has probably bottomed, or close to it, and that commodities will have a sharp bull run in the next year. Maybe we should judge by the Austrian prediction of a bull instead of a bear? Will that impress people?
To evaluate these predictions, I want to see their prediction histories.
Taking an ignorant standpoint to the aforementioned fellows, it is not unfathomable for any person to have predicted recent happenings in the stock market or oil. Although, no one except Harry Dent predicted the major market tumble (true, but I’m poking fun at Dent)….. but we are a long way off his laughable DOW 3300 prediction.
🙂
Apparently David thinks Austrians have to morph into financial advisers who can time swings in the S&P 500 to convince him.
http://econlog.econlib.org/archives/2015/08/robert_p_murphy_1.html#346637
Methinks that’s a high bar.
Here’s a thought: If I predict every day for years that an earthquake or a hurricane will hit you tomorrow, David would be right to think I’d been wrong for years and I’m a complete charlatan.
Does he think meteorologists are complete charlatans because every year they remind you a hurricane *could* strike, and that it’s a matter of if, not when, the next one hits?
Does he think the same thing about seismologists?
I think he must, because it’s hard to explain otherwise why he draws no distinction between predicting the same thing will happen immediately as inevitably.
The Seismologist who says that earthquakes are inevitable as long as there are moving continental plates is right. The Meteorologist who says that storms are inevitable in an environment where conditions sometimes exist that cause their formation is right. The Economist who says a recessions are inevitable when governments regulate money and banking is right.
Hey, LK? Check it out.
Walter Block recommends your blog at the end of this article:
The Debate: Austrian Economics vs Neoclassical Economics
http://www.economicpolicyjournal.com/2015/08/the-debate-austrian-economics-vs.html