Maybe we should have a thread where all the critiques of AE are posted? Anyway, I’m posting this intellectual fodder here in case anyone feels like rebutting this critique.
“[T]he ABCT is inconsistent with current institutional realities and modern macroeconomic theory and evidence. There is only a very loose relationship between official interest rates and growth in broad money and credit aggregates under current central bank operating procedures. The ABCT is a fundamental explanation for ‘bubbles’ because Austrians have an axiomatic theory of the relationship between monetary policy and asset prices. However, the ABCT implicitly assumes some investor irrationality, namely, that investors fail to learn from previous cycles. Proponents of the ABCT argue that this is due to the failure of economic agents to understand or accept their theory — in other words, the theory holds only because most people reject it.”
By the way, this is from a “free-market” think-tank!
Obviously investors fail to learn from past cycles… [:P]
The thing is, when asset prices start running up, it’s very hard to stay out. I’ve seen stock market gaining 30-40% in a year in my country, for few years. Index effectivly quadrupled in 3 years, you could gain 10x your investment in some stocks. It’s high reward that makes people to take risk. Everybone thinks they’ll get out on time.
General public is unaware of cycles, lot of business owners and managers also. Grand cycles are very long, they span 2-3 generations (think 1929-2008). That’s not coincidence. Additional bonus for mainstream economists beeing tought only keynesian economics and politics + media screaming.
I felt something was wrong before I found out about Austrian economics… Basically, when you think about stock market gaining 30-40% per year… It’s strange, it must be pricing error on the grand scale.
There is an article on this site that specifically addresses the criticism that ABCT relies on investors not learning from previous cycles. It may even be a direct rebuttle of that article.
Unfortunately my internet is going very slowly and I will not be able to find it now. I know it was posted within the past month or two.
This is a ridiculous claim. The reason that investors err according to the ABCT is that it is impossible to differentiate between true savings, and inflation that masquerades as savings.
How so? Huge profits can be made during the “boom” part of the cycle provided that the investor gets out soon enough, in fact, any investor who refuses to accept the fudiciary media would be left behind by his competitors.
The thing is, even if we can assume that individuals knew that credit expansion was going on (which is very possible), and even if they knew what the real interest rate was (impossible) they’d still accept the money (unless, contrary to one of the first principles of Austrian economics they knew everything that would happen and when, in which case they would not act) because there’d still be the possibility of making money if they got out of the cycle in time.