On what grounds–it would have to be deductive, I presume–does the Austrian theory lead us to believe that lower interest rates necessarily lead to unprofitable investments?
That is, if we concede that some roundabout production increased by the lower interest rate will not qualify as “malinvestment,” then is it possible that all could prove to have been sound investments? If we simply dismiss this as unlikely, then hasn’t the Austrian theory degenerated into probabilistic thinking? (Rather than the relying on anti-positivistic deductive reasoning.)
I imagine Austrians have a rebuttal to this, but I don’t know what it is.
If you define a strawman as a critique, then yes, it was a new critique.
Klein did that. In fantastic form too.
Belief is not necessary for understanding in economics. Again, Klein addressed it. Anyone with a passing familiarity with Austrianism could see his argument as completely missing the point.
I did think it was funny you rah-rah’d his comments.
When creationists hear Darwinian thinkers speak, they too believe they can “spot gaping holes in [the] argument.” Of course, it’s hard to take their boasts seriously.
I think the ‘exactly’ is a response to me, but maybe I’m wrong. Anyway, what you say here is not what I understood you to mean before, so one of us is not clear on what the ‘exactly’ means. On your third paragraph here: I do not concede that some roundabout production increased by the lower interest rate is not malinvestment. I don’t concede that at all. If, using my previous example, the God’s-eye market rate is 5%, and the Fed brings it to 4% (setting aside the usual concerns about price levels) then any project that looks feasible at 4% but not at 5% is by definition malinvestment if done. What I said before was that (and this is what I had understood you to mean) there might simply be no such projects under consideration. That is, lowering the interest rate might not cause any new projects at all, hence no malinvestment. There might simply be no projects that anyone has thought of that look feasible at 4% but not at 5%.
Now, leaving that aside, your original point stands: that the ABCT cannot say as an apodictic certainty that lowering the interest rate will produce malinvestments. Indeed, since we don’t have a God’s-eye view, we can’t even say of a particular moment “there is malinvestment going on” although we can believe quite strongly that there is, and we can find out later - if a recession/depression/need for reinflation hits, then there was malinvestment going on. If it does not produce malinvestment, though, it will produce nothing of value at all, other than marginal reduction in savings.
Okay, so let’s agree that ABCT cannot deductively predict that malinvestments will actually occur.
Then, let’s suppose in hindsight, as you claim, we will see where the malinvestments were. Now, to believe in such “malinvestments” as due to the lower interest rate, how do we differentiate economic losses (as generally understood) with malinvestment (as defined by Austrians)?
That is, during an economic recession, how do we know which losses are due to malinvestment? For instance, some losses could have other causes (e.g., widespread change in preferences).
It is possible, although incredibly unlikely, that there are simply are no projects that anyone has thought of that are profitable at 4% but not at 5%. Isn’t it?
This would be a similar idea to the broad notion of the liquidity trap, which despite low rates of interest there are few entrepreneurs willing to invest, therefore the massive monetary expansion that occurred between 2008 and mid-2009 did not lead a clear re-inflation of the bubble. So, it is possible, but the malinvestment theory supposes two general premises in this case:
The rate of interest is artificially low.
Entrepreneurs are borrowing and investing.
StrangeLoop writes,
That is, if we concede that some roundabout production increased by the lower interest rate will not qualify as “malinvestment,” then is it possible that all could prove to have been sound investments?
The difference would be in magnitude. In a dedicated inflationary period the malinvestment in an economy might be rampant, while in an inflationary period with little investment (like the one we found ourselves in 2008-2009) may not lead to a dramatic increase in malinvestment.
Well, what I actually said was that we’d see in hindsight that there were malinvestments, not which investments were malinvestments. Yes, some losses can have other causes, all of which can be summed up as “expectations didn’t match reality.” The thing to be explained in a recession/depression is not why mistakes were made, but why there was a coordination, as it were, of mistakes. If I buy up brocolli and cream, thinking that people will buy brocolli ice cream, and I’m wrong, then in the meantime, since I wasn’t buying chocolate, the price of chocolate fell while the price of brocolli rose. Other ice cream producers, then, are incentivized to make chocolate ice cream. So what’s interesting in a recession is that it turns out that an entire sector made mistakes.
On the question of identifying them, though, while certainty is hard to come by, we do have some heuristics. For instance, a project which did not come to fruition before the recession hit is likely a malinvestment.
Have you considered how inconsistent it is to talk about incentives, and then to reject a theory about incentives like the ABCT?
The point is that manipulating the interest rates creates widespread changes in preferences. Widespread changes based on false information, are by definition, malinvestments, particularly investments where the interest rate communicates that there is a larger capital stock and different demand structure than their really is, and thus projects are started which cannot be finished, and thus those resources must be recovered (that which isn’t wasted outright) results in a squandering of resources which is the OPPOSITE end of entrepreneurship.
How do we know determine which investments are “malinvestments”?
I think all investments which result in loss are malinvestments. Austrian business cycle theory explains why a large number of malinvestments may reveal themselves enmasse.
liberty student, let’s suppose an investor waits until the interest rate is lowered to lengthen his structure of production; if that project can be finished even when interest rates rise, then is it a “malinvestment”?
I really don’t know, so I’m happy to hear what Austrians say.
If I was looking out at the world, how I would I identify a “malinvestment” in the wild?
Jonathan asserted that all bad investments were “malinvestments,” but I thought Austrians used the term in a stricter sense (i.e., if interest rates weren’t artificially lowed, malinvestments would cease to exist).
Why did he wait? It is clear, from basic praxeology, that he didn’t consider it worth doing at the higher rate.
Unless you mean he’s some kind of insider who would have done it anyway, but heard that the rates were going down, and so decided to wait. Then I’d say it’s not a malinvestment.