One Last One on Sumner vs. Murphy
I am really going to drop it after this, partly because we have devolved into metal chair bashing, and partly because I plan on doing some technical papers while at Texas Tech, and Scott may be one of the few bloggers who appreciates them…
Anyway, in this post Scott first lectures me on how the EMH is falsifiable. Right, I know the academic EMH in the journal articles was falsifiable. What I claimed in my post is that in practice it is non-falsifiable.
What do I mean? Check out this screenshot, showing the comments under Scott’s post:
THAT is what I mean when I say in practice, the EMH is non-falsifiable. We could have the stock market drop 40% in a year, have major investment banks fail, and enter the worst world economy since the Great Depression…and still Scott would be high-fiving his audience when they say, in a Joe Pesci voice, “What? Where’s the problem? Minga, you Austrians act like the market did something.”
(And actually, why does the Great Depression get such a bad rap? I mean, humans went to the moon afterwards. How bad could it have been?)
If you want to believe in the EMH, I’m fine with that. But don’t think it keeps passing empirical tests with flying colors, if you’re using it the way most people on the internet are (including Fama).
Do you think we’ll go back to 1980 numbers?
I love how believing in EMH gives one free license to simply make up things and accuse people who disagree with you of saying it.
Here’s literally what EMH proponents who attack Austrians demand Austrians prove: That prices are irrationally high and will fall, permanently, and never rise again.
These people have this bizarre mental model of what the Austrian Business Cycle Theory says, and no matter how many times you explain to them the thing they are imagining in their head bears no resemblance to your actual theory, all they do is insist their description of your theory is more accurate to what you are “really saying” and that to dispute that your theory makes such outlandish predictions when according to them, who don’t understand it, it clearly does, is to alter your theory so as to be able to explain anything.
That’s OK… next week they will accuse us of predicting hyperinflation where prices will rise, permanently, and never fall again.
Excellent comment Andrew, that was bang on.
Does ABCT even apply (directly) to the stock market? A stock market bubble and malinvestment in the real economy are not the same thing. What is the connection between the two concepts?
Aby-There is no necessary connection. However, injection of new money into the economy at various points unrelated to any increase in the recipients’ desired real cash balances must sow confusion in many markets as to what the correct prices of many different things are-not only physical assets but financial assets as well, if that is what the new money happens to be spent on.
Ok thanks
What you are describing are cantillion effects and not ABCT though, right?
Austrian Business Cycle Theory incorporates Cantillon effects into its explanation of the business cycle. It just starts with the assumption that the injection point is usually into loan markets.
The absurd thing here is that Austrian theory and the ABCT do NOT focus on stock market bubbles as the means by which an economy is destabilised: e.g., in the ABCT it is real unsustainable higher-order capital investment that is supposed to wreck the economy. You are falsely claiming that Austrian theory is some kind of prescient theory explaining these stock market gyrations or asset bubbles.
You mean “real unsustainable higher-order capital investment” just like Solyndra right?
Let me just check how those guys are doing… whoopse! Seems like their share price has fallen, permanently, never to rise again. Must have been some kind of issue there.
Well, ABCT certainly claims that artificially lowered interest rates will cause some classes of capital goods to increase in value, and as stock market indices are really doing no more than capturing the value of the assets of the companies listed it really seems implicit in ABCT that there will be a run up in stock prices during the boom cycle, and these high valuations will become unsustainable as the bust approaches.
Note: I don’t think this is what is actually happening in the the recent market corrections but I don’t think it is in a violation of ABCT for Austrians to claim it.
LK, capital distortions and corrections are not unrelated to stock market distortions and corrections.
When Austrians point to the relatively large stock market dips, in the absence of natural disasters and invasions, that is to say large dips that seem to “just happen”, they are not using those dips as direct evidence of ABCT. They are thinking in their minds the cause of it was the Fed, just like ABCT explains. Anyone who thinks of the large dips will have SOME thoughts and opinions on the cause, and so do Austrians. You are making it out as if Austrians have to pretend they don’t have any opinions on the cause. That because they are Austrians, they have to cease and desist arguing that the cause was the Fed.
How ridiculous is your position! Wow!
LK’s M.O. is to take broad statements by Austrian masters and set them in stone so that BASIC Austrian concepts are not allowed to be applied to new situations. He refuses to accept that while the “classic” ABCT is the main type of phenomenon resulting from the artificial creation of money and credit under a quasi-specie standard, other phenomena such as asset bubbles also may result. Under our current totally politicized fiat money regime, there are additional complex monetary phenomena that one must study empirically to follow and understand and to which Austrian concepts and analysis may be applied. But according to LK, only the set-in-stone classic ABCT can be associated with Austrians. Austrian concepts and analysis are completely forbidden for use in analyzing bubbles and/or the more recent funny money phenomena such as the often true empirical statements of the MMTers.
Recall also that LK denies that Steve Keen’s “debt deflation” is simply Austrian analysis with the economic miscalculation part of the analysis ripped out and suppressed. We are stuck with Classic ABCT and that’s the end of it.
http://socialdemocracy21stcentury.blogspot.com/2015/08/where-in-abct-are-stock-market-bubbles.html
Did I mention that he acts up like this because he still does not understand economic calculation/miscalculation? But we’ve played that oldie too many times already.
“Did I mention that he acts up like this because he still does not understand economic calculation/miscalculation?”
Ah, yes, says the man who claims that flexible wages and prices tending to market clearing is not a fundamental Austrian theory. lol
I have recently noted that another of your claims to fame is that evidence of production cuts instead of price cuts in bad times disproves Austrian analysis which depends SOLELY only FLEXIBLE PRICES. Then there’s your “miscalculation under Keynesianism has nothing to do with the socialist calculation debate” mantra. Go for it.
But we’ve been there, done that too.
You mean this entire time we had no idea that Mises and Hayek were absolutely convinced that everything that was produced in a hampered market during an unsustainable boom is exactly what otherwise would have been produced in an unhampered market such that a correction would ONLY require falling prices?
LK is so out to lunch. It is as if he wants himself to believe that an unsustainable boom has nothing to do with real capital and everything to do with rising prices.
The only theory that would consist of what LK is presuming, namely, that a correction would consist solely of falling prices, is one that would define a boom as nothing but rising prices. For if the solution is falling prices only, then the theorized problem must have been rising prices only.
But that isn’t what ABCT is about. Neither Mises nor Hayek argued that the only problem of booms is prices rising. How on Earth can anyone possibly interpret the ABCT solution as only falling prices?
“How on Earth can anyone possibly interpret the ABCT solution as only falling prices?”
In some sectors, a recovery requires price gouging because the government had disincentivized production, and now people realize there’s a shortage.
Here’s the comment I left on Sumner’s blog:
“The EMH is most certainly “falsifiable.” It’s been tested in many ways. Some people even claim that it has been falsified, although I’m not convinced. In the tests that I think are the most relevant the EMH comes out ahead. (Stocks respond immediately to news, stocks follow roughly a random walk, indexed funds outperformed managed funds, excess returns are not serially correlated, or not enough to profit from, etc., etc.)”
Yes, EMH is falsifiable. It’s also a perfect example of the “blackboard theory” Buchanan warned about. ABCT suggests that sometimes markets don’t accurately incorporate information from credit markets, which are themselves distorted by CB policy. Part of the distortion in asset markets is due to the difficulty in determining whether a change in the interest rate reflects credit market fundamentals or CB distortions. That’s all ABCT really says about asset markets, IMO.
“BTW, is ABCT refutable? If so, how? (I don’t regard refutability as the most important test of a theory–usefulness and coherence are better tests in many fields.)”
If you’d read Roger Koppl’s comment on David Henderson’s post, you wouldn’t have had to ask this.
http://econlog.econlib.org/archives/2015/08/robert_p_murphy_1.html#346547
Ultimately I’m not defending Bob’s piece. I think it was a misapplication of the theory. That makes me even more frustrated to see the flurry of posts telling everyone how absurd ABCT is based on Bob’s article.
How is it is a “misapplication”? All he said was that EMH in practise is not falsifiable.
I meant his original piece on the recent volatility in the stock market.
OK, how was that a misapplication?
Capital is related to stock prices since stocks are ownership claims on capital.
ABCT, while it is not a theory that directly relates to stock markets, is still the best theory for why we observe the “inexplicable” stock market volatility. If the cause is distortions to economic calculation brought about by credit expansion which is itself brought about by central banks, then that is ABCT bread and butter.
Remember, Mises called his own theory the “credit circulation theory” of business cycles.
Levi Russell wrote:
Ultimately I’m not defending Bob’s piece. I think it was a misapplication of the theory.
What part Levi? Was I wrong in saying analysts who are familiar with the work of Mises were not surprised by the big market drop? Or that Austrians have been warning for years that the Fed’s actions are setting us up for a crash?
Also, apparently Mises told Margit in the late 1920s that he wasn’t taking a job with a major bank, because “A great crash is coming and I don’t want my name associated with it.” Was it OK for him to talk like this?
Bob (& MF too),
There are myriad reasons for the stock market to move quite a bit outside of the Fed’s manipulation of credit markets. There has to be at least one causal factor for the recent volatility, but I don’t know how we can be so sure it’s the Fed.
Couldn’t it be China’s recent devaluation?
If all you’re saying is “When central banks are actively involved in credit markets, asset markets will be, ceteris paribus, more volatile” then I have no problem with your piece at all. But talking about “those versed in the writings of economist Ludwig von Mises have been warning for years that the Federal Reserve was setting us up for another crash” is taking things a little far, IMO. Is this the crash?
“There are myriad reasons for the stock market to move quite a bit outside of the Fed’s manipulation of credit markets.”
So you agree the stock market can “move quite a bit” because of the Fed’s manipulation of credit?
Levi, I really don’t understand your objection to what Murphy wrote. The fact that you just wrote right there that the stock market can move quite a bit because of the Fed, is what Murphy was talking about when he said Austrians are not surprised by the stock market dip because of what the Fed has done in the past!
Austrian theory does not imply that there will be a correction that brings us all back to exactly 1913 standards of living. Where on Earth are you getting the notion that the only correction consistent with Austrian theory is one that erases everything?
What Austrian theory actually implies is that the correction is only necessary to the limited extent that the real growth that has occurred is unsustainable. Not the entire supply of capital.
MF,
“Levi, I really don’t understand your objection to what Murphy wrote. The fact that you just wrote right there that the stock market can move quite a bit because of the Fed”
Nope. Maybe I could have been more clear, but my point was that there are other reasons that markets can move 10 or 20% than just Fed intervention.
“Where on Earth are you getting the notion that the only correction consistent with Austrian theory is one that erases everything?”
Never said anything like that.
“What Austrian theory actually implies is that the correction is only necessary to the limited extent that the real growth that has occurred is unsustainable.”
I agree, but not every intraday movement in the stock market can be directly attributed to ABCT, except in the very broad sense I mentioned above.
I’m not your enemy, MF. Please try to read my posts more carefully before responding.
I never said you were an enemy, please try to read more carefully before making such statements.
Your responses here suggest that you agree it is at least possible for the Fed to be the main cause for the stock market volatility.
“Where on Earth are you getting the notion that the only correction consistent with Austrian theory is one that erases everything?”
” Never said anything like that.”
When you asked “Is this the crash?”, you did so because you wanted to convey the idea that 20% dips cannot really be what ABCT is about. That we need 100% or something close.
“my point was that there are other reasons that markets can move 10 or 20% than just Fed intervention.”
Please explain how the Chinese devaluation had nothing to do with what the Fed has done.
“but I don’t know how we can be so sure it’s the Fed.
Couldn’t it be China’s recent devaluation?”
Levi, “China’s recent devaluation” is also a central bank activity, which Austrians also would be be surprised would cause stock market volatility. And, China’s devaluation is certainly not unrelated to Fed activity. I mean come on.
Also, I hope you realize ABCT is not limited to a critique of the Fed.
Levi Russell wrote:
Is this the crash?
No, of course not. Maybe that’s what’s driving the confusion here.
“I know the academic EMH in the journal articles was falsifiable. What I claimed in my post is that in practice it is non-falsifiable.”
Bingo. The exact same problem is taking place with the theory of positivism versus the practise of positivism.
In theory positivism prohibits people from coming to any certain conclusion in their mind about the outcomes of any positivist “test”.
In practise positivists act like LK does on this blog, never predicting his claims with ” I don’t know this for certain but…” Or “Austrians might be right about this however…”. No, we have to see them contradict their own professed theory over and over and over again, reading them write that Austrian theory is wrong, is false, etc. Of course many of them know they are contradicting themselves when it is pointed out of them, which is why we often see oh so slight changes to what is being written after that. Then we might see “I never really meant to suggest that what I am saying I am apodictically certain about.”
The ol’ Motte and Bailey tactic.
Meant to write “prefacing” instead of “predicting”.
All of Murphy’s “technical papers” at the Texas Tech-affiliated “thinktank” will work backwards from the predetermined politically-motivated conclusion: “Government bad, markets good.” That’s not social science; that’s religion.
Since you claim to know the future can you tell me what stocks will go up the most next year?
Show me some articles in professional journals that use this line of argumentation.
All of Gabe’s statements will work backwards from the predetermined politically-motivated conclusion: “Gabe’s ideology good, free markets bad.”. That’s not social science; that’s religion.
The NAP is the default position for ALL of modern society. It is the basis for our common law tradition of private property, self-ownership and freedom and enforcement of contracts. Theft, murder, assault, pollution etc… are all forbidden and should be punished. Certainly all non-criminals in the USA generally live by these rules and concepts. You do not break into your neighbor’s house to assault him/her and steal/destroy his/her property and/or attack his/her person.
The statist has the burden of proof to demonstrate where these rules and institutions under the NAP AS RIGOROUSLY ENFORCED would fail or have failed thus requiring violent intervention, including economic “regulation”, central banking and Keynesian policies. They cannot and will not ever do that. They always obfuscate and start their story in the middle of events (1936 for example).
So yes, there is a bias here for peace and voluntary arrangements as opposed to violent intervention and theft.
“The statist has the burden of proof to demonstrate where these rules and institutions under the NAP AS RIGOROUSLY ENFORCED would fail or have failed…”
I think we had this discussion about radio waves.
I don’t think people understand EMH. Sumner’s claim that EMH implies random walk is wrong. Also, EMH does not imply that stock prices are not predictable or that stock prices do not deviate from their true values (only that the deviation is random).
Ibanks failing, financial crisis, etc. have nothing to do with EMH. EMH is about how information is priced in the markets.
I don’t know much about ABCT, but I don’t see why it needs to be inconsistent with EMH. Fed actions can affect and distort prices in the market, afterall that’s what they are designed to do. Fed actions not being priced would be inconsistent with EMH.
The argument can not be that fed actions affect prices, but that somehow people become more irrational or more stupid when fed plays with rates.
That’s not what the argument is. The argument is that the Fed’s actions cannot be priced into the market because Fed actions destroy the information that allows for prices to properly reflect relative scarcities. In EMH just knowing the Fed has a particular policy and what it is, is sufficient to know the implications that has for the correct level of an given price. That obviously cannot be true. It’s not that people become more stupid, it’s that people are not omniscient, and Fed policy sows confusion by distorting the mechanism by which people coordinate in spite of their ignorance. EMH, at least the version used to attack Austrian Business Cycle Theory, renders the entrepreneur redundant at best. There is no price discovery in the theory, prices just assimilate information that’s just “out there” waiting to be absorbed and understood in a trivially easy manner.
Give this man a cake.
“Fed actions destroy the information that allows for prices to properly reflect relative scarcities.”
I don’t really know what FED destroying information exactly means, but that in itself is not inconsistent with EMH. Lack of information or time-series variation in information do not make EMH invalid. Clearly, some markets or stocks are more transparent or have greater information availability than others. EMH would apply to all markets/stocks.
The argument has to be that, when information becomes scarce, investors start behaving irrationally or start misinterpreting available information.
For instance, if ABCT implies that investors over-react to release of new information, then that would be inconsistent with EMH.
“The argument has to be that, when information becomes scarce, investors start behaving irrationally or start misinterpreting available information.”
Don’t tell me what my argument is.
I literally cannot conceive of the idea that people behave irrationally. Do people suddenly stop acting toward their preferred ends through what they believe are effective means? How does that make any sense? I think by “irrational” you mean they act on erroneous beliefs. That’s not irrationality that’s ignorance.
But let me explain what I mean. The information on which actors in markets must male there decisions are the implied relative scarcities implicit in relative prices, and their own entrepreneurial judgment based on the peculiar circumstances they observe in the world.
The problem is that as new money works it’s way through the economy there are temporary demand side effects on relative prices. How can the entrepreneur tell the difference between those price changes that are products of fed policy and those that reflect real changes in consumer preferences or production costs etc? How much of any given price change is due to what? When interest rates change how much is a change in actual time preference and how much is due to money being injected into loan markets?
Information is destroyed in the sense both that the information previously contained in relative prices is lost and in the sense that new information exists but is not, initially, possessed by anyone as knowledge. It has to be rediscovered.
“The problem is that as new money works it’s way through the economy there are temporary demand side effects on relative prices.”
I just thought of another way to say this that might be helpful for some.
If the liquidity that everyone wants hasn’t been created *by the consumer*, then that liquidity is a misrepresentation of consumer demand, conformity to which is necessary for the profitability of all production processes.
*Takes a bow*
“Don’t tell me what my argument is.”
I should have said for “the argument to make sense…” instead of ‘the argument has to be …”
You are talking about the information environment. As I said before, time series variation in information availability transparency, etc. are not inconsistent with EMH.
The entrepreneur may also not be able to tell whether price changes are due to temporary vs permanent changes in customer preferences (amongst thousands of other factors).
EMH has a specific definition. The most important requirement is that majority of stock investors are rational. If you cannot conceive of the idea that people behave irrationally, you are already 90% there with EMH.
I can very easily conceive of people behaving irrationally that’s why I don’t believe in EMH.
EMH has an impossible to pin down definition. If you object to one form of it, its proponents switch to another form.
“I can very easily conceive of people behaving irrationally that’s why I don’t believe in EMH.”
You probably have a strange definition of what he means to behave rationally.
“You probably have a strange definition of what he means to behave rationally.”
Here are a couple of resources on what Austrians mean when they say that Human Action is always rational:
[Time stamped, Tom Woods]
Critics Say, “You Libertarians Are Soulless Materialists”
https://www.youtube.com/watch?v=eZGtcNcyyTI#t=6m58s
Praxeology – Episode 5 – The Rationality of Action
[www]https://www.youtube.com/watch?v=Nx_Rz0jDo80
Guest, I thought my definition above-That people pursue their preferred ends through the means available to them they believe, based on the information they are able and willing to acquire, best will facilitate achieving those ends-was essentially what Austrians mean. Do you agree?
“Do you agree?”
My response was for Dan’s benefit. I was piggy-backing off of your comment.
🙂
But to answer your question: Yes. Although I thought therer was something left to be desired in addressing the specific issue of “rationality”, as I understood Dan’s confusion.
As Tom Woods says (I paraphrase): In that Acting Man believes his actions will result in the satisfaction of his preferences, the act is rational.
It’s like how an argument can be said to be rational even when it follows from a faulty premise.
It’s logical “from this point forward”.
I understood action to always be rational. I see action a not the same as behaviour.
Action is always rational becasue that is what the person chooses to do. Behaviour is not always rational because the behaviour will not arrive at the desired outcome.
We may make a mistake through insufficient information, or ignorance. That is not the same as irrationality.
Phobias are irrational. The sufferer may know that the actual harm is out of proportion to the fear induced, but cannot do anything about it.
They therefore behave irrationaly, although their “action” in responding to the irrational fear they genuinely experience is itself rational.
This.
Hmmm, not so fast.
I’d say there’s available control strategies the Fed can choose that partially satisfy the information destroying criteria. For starters, the Fed can adopt a stochastic policy, and due to the nature of financial reporting they probably automatically do that to some extent, but they could add as much randomness as they wanted to. This prevents the “Efficient Market” from ever successfully second guessing the Fed, while also allowing that market to be (somewhat) efficient in other aspects.
Another example, using a deadband controller does destroy information, but not all information. Think of it this way: at some point the deadband controller switches modes as the error term shifts out of the deadband, but the Fed typically gets data before you do, so the mode switch happens before you can react to it (unless you are good at guessing). During the mode switch basically all parties are screwed, but some time afterwards they get their act together and go back to business as usual.
My personal preference would be for stochastic dither applied on top of a deadband controller, which could be tuned to destroy information in a measured way, while also being a lot more fun! That said, it’s a bit hard to implement, and the Fed Chair cops a lot of flack already, my design would go against the preconceptions of both the business community and the general public… might get ugly.
I think in that quote he was describing other people’s beliefs, not his own.
Eeyup.
Information destroying takes place even when the mechanism is random.
Typing in extra code that is meant to avoid crashing a sub routine, but still crashes the sub routine anyway, won’t be partially offset or mitigated by typing in extra code in a chaotic, random manner.
If all that people see are the partial completions of the routine and then the crashes, the information will still be buggy.