Rational action is any action taken towards an end. It is acting with purpose. Acting without purpose, is irrational. Thus, man is a rational actor, because he does not act arbitrarily or involuntarily.
So to say something is rational, like exuberance, is like saying (the act of) exuberance caused the bubble. And we’re back to square one. It’s the same thing when people say “greed” caused the bubble. We’re always greedy. What material conditions changed, to allow greed (assuming that thesis is correct) to manifest itself in a bubble?
You’re adopting a Keynesian analysis, basically “animal spirits” cause market phenomenon. The notion being, if we could all just be exuberant all the time, or happy, or drunk or my favourite CONFIDENT, then the market will continue to thrive.
Have you read any of Doug’s work yet?
Bubbles are not mystical, magical, mythological or emotional. It is physically impossible to have a sustained asset bubble without corresponding busts in other industries, if the supply of money and credit is stable.
I haven’t. Can you point me to the most consise explanation.
But from what you’ve said so far, it does not sound like he’s going to have said anything that contradicts my theory. After all I 100% agree that monetary phenomena can exacerbate bubbles. My point is that my proposed phenomena can be occurring in parallel.
I read through and it’s wide open for a lengthy critique but I won’t be the one doing it as I don’t take your site very seriously. I’ve read some of your material in the past and have never left with the feeling that you are economically literate.
Not to sound condescending but what I mean is, you often make up new terms and theory’s on things that aged old economists have already concluded apon.
In this article specifically your trying to create a theory which explains a rational decision making process during a bubble.
When you use terms like “true price” it makes me cringe.
I have to ask, what major economic works have you actually read and comprehended?
In short though your entire essay can be rebuked simply by pointing out that you conveniently remove the price system from your equation. You pretend that prices can only exacerbate but arn’t related to the cause.
The truth is these things hav ea causual relationship. If you remove prices from your equation the only conclusion you can come to is some cockamainy nonesense which you have written up. Thats like trying to rationalize why someone would get b urned for sticking their hand in the fire, but immediately dismissing the fire itself.
If you understood the Business Cycle theory you would get that it is fairly methodical. Things happen in an orderly fashion. The monetary error occurs first before the asset purchasing error. People would never be making irrational purchasing decisions had the monetary unit been stable, regardless of what cultural beliefs are being espoused at the time.
So long as you routinely ignore that prices, your thesis is in error. Sure fads and cultural aspects come and go but they do not create major economic booms. The popular tickle-me-elmo fad/boom doesn’t steer an entire globe into the direction of mis-allocated resources. We cannot measure or understand each individual industries booms and busts while ignoring the relevance of prices.
I think it’s the stance of people here that monetary policy doesn’t just exacerbate bubbles…it CAUSES them. Only other thing i could think of that would cause it would be a large subsidy. Of course, people couldn’t possibly buy up stuff to cause that bubble if there’s a constant supply of money or even just a small increase because the rising price of that would mean less money to buy other things with and people would eventually have to stop buying in order to keep buying things that affect their lives like food, energy, clothing and so on. Seems to me you would still need a money/credit expansion for a bubble to occur.
I just cannot come to terms with how stupid the idea of “animal spirits” is. It’s as if emotions can change economic reality. If we could just put everyone on anti-depressants than maybe our economy would be in a permanent boom period!
However, I think it’s important to distinguish animal spirits from genuine mispricing. Lachmann did well to point out how dispersed knowledge is in society. It’s possible that a certain financial asset or even a whole class of financial assets are mispriced because price signals are erroneous and not all knowledge has been revealed. That is not the same as “irrational exuberance,” “animal spirits,” or similar quack theories.
I never claimed to be an economist. I do not have a degree in economics. I do not know all the jargon. However I know enough about economics to know that it its a very poor quality science (say, compared to physics) and there are mountains of bullshit published out there which I haven’t the time or inclination to read. I considered it likely that if I were to truly understand the economics of the real world (as opposed to economics as published in books) then I would be better off working things out for myself, in combination with some very selected reading.
Economics is largely about modeling human behavior and I already consider myself expert in that field (PhD in neural networks, 20 years as an AI programmer).
There is of course a risk that I will reinvent a few wheels along the way, and a risk that I will accidentally invent my own jargon that nobody else uses. But, heck, worse things have happened.
There are some things (perhaps not many) in life which people buy, expecting to sell the item before its use expires. Cars and houses spring to mind. The price you are willing to pay for these things is clearly, partially determined by your estimate of what it may sell for when you’ve finished with it. So, for these things, there must be two separate values for the price you are willing to pay. You’d be willing to pay one price, X, under normal circumstances, but If a new law had just been passed that you were not allowed to keep profits from the re-sale of any goods then you would only be willing to pay a lower price Y. I made up the term “true” price to describe Y. If there is a better word to describe the price Y then please tell me and I will edit my blog.
I have read very few books on economics (half a dozen?). I prefer watching video lectures or reading websites and blogs to reading books. If you look at the list down the right hand side under “my recommended links” you will see the kinds of things I have learned from. Though it should be noted that I do not necesarily agree with them all. I am particularly interested in the value of money/inflation/deflation/FRB. Overall Peter Schiff is my favorite economist.
I don’t understand your argument.
I think I do.
Not necessarily at all… it could happen either way round… by which I don’t mean it always happens the other way round - I just mean it could be that in some bubbles it starts one way round and in other bubbles it starts the other way round.
I’m not talking about major world-wide bubbles. A bubble can be just a single asset in a single country.
Micka, people don’t buy cars to flip them. They might do that with houses but generally speaking, cars usually depreciate the moment you buy them and keep going down in value after that unless it’s like an old luxury car or something. However back when they were new, i’m sure people weren’t buying them in the hopes of selling them later. As for houses, i think that’s a relatively new phemonenon because of the adjustable rate mortgages and zero downpayment plans that were around at a time when new money was being created in the loanable funds market by the Fed. There is never any way to know for sure where this new money will go, but this time around it went into the housing market. That’s why prices of houses were going up at such a rapid rate. Otherwise, there wouldn’t have been a bubble and it would’ve been impossible.
I think i remember reading an article by George Selgin saying that if the Taylor Rule were followed (and I’m not an economist either, i just like learning in my spare time so I don’t know exactly what the Taylor Rule is other than some method of inflation-targeting) the housing boom would’ve been about 1/3 smaller…and if some money-growth target were implented or Selgin’s preferred method of a productivity norm (prices allowed to fall when productivity increases) then the housing boom would have been even smaller than that.
But there are many people who always like to have new-ish cars. For these people the resale value is important. Some cars are infamous for losing their value much faster than others. So I would maintain that for many people the resale value of their car is importyant and affects the price they are willing to pay in the first place. True, cars are not an investment per-se, they are rarely going to be sold for more than the purtchase price, but they are useful as a means to illustrate the existence of an X and Y price as per my earlier post.
I am not disagreeing. But your point does not contradict my theisis.
Yet you have a blog called Mickanomics where you specifically post theorizations of economics.
Physics is an applied natural science Economics is a social science branched off from Praxeology. Your comparing apples to donuts. Further more if the quality of Economics seems poor to you it certainly cannot be said because not enough original intellectual thought originated from it’s forefathers. The only error is the emphasis on which economists the public has chosen to beleive in.
At any rate if we were to compare to physics it would be akin to denouncing the following physisists as bad scientists.
Galileo Galilei , Sir Isaac Newton, Johannes Kepler, Benjamin Franklin, Michael Faraday, Nikolai Tesla, Niels Bohr and Albert Einstein
And then judging the science itself because people rejected their works for something, say religious. It doesn’t make the science bad or poor, it just means the people have been dooped.
It also does people of power little good to lie about the facts of physics unless they are religious zelouts. On the other hand the State has great intensive to lie about economics. At it’s core a good economist is generally an enemy of the State. They have to fight an uphill battle from the getgo.
One cannot call Economics a science of poor quality without revealing their own ignorance. I could make the claim about physics and you would know doubt question my understanding.
The fact that you would make such a claim is terrifying in and of itself.
Would it really hurt you to just go and read up on the subject your trying to theorize about?
Flipping houses did not become it’s own huge sub-industry until the monetary errors began. Flipping houses was generally un-heard of before the housing bubble. And Flipping cars, not sure thats even worth discussing…
At any rate I’m glad you concede prices are the key factor here. So the point we make is that if price’s are kept stable and there is a clear understanding of how much savings exists such a bubble will not occur in the first place, regardless of whatever animal spirits are terrorizing the people.
Your argument is that irrational decisions occur before considering the price and that regardless of the price they continue to occur. My argument states that bubbles occur methodically. Prices are scewed first, then irrational decisions are made after that. No matter what transpires culturally people always weigh the costs first. People need a clear understanding of what savings exists in the market before they can make decisions.
Even if there was a radical movement for everyone to buy homes (The american dream) a realestate bubble could not economically occur without alterations to the monetary unit to support people’s lust for homes. With a stable monetary unit such radical movements would be short lived as costs would ultimately detir people from forming the bubble in the first place.
Your whole argument is really just a redone of keynesian economics ignoring the implications of a stable price system.
The fact that you said this
Would lead me to think otherwise.
As stated before a radical movement bent on expanding a certain industry will be unable to do so without supporting it financially. There is only X amount of goods available to support that bubble. With a stable monetary unit the price of X good will rise making the bubble short lived as the costs will ration off it’s use. If you lie to people however about the supply of X good it gives the appearance that there is still plenty left for everyone.
Everyone in the US wants diamonds, or a corvette, or a ferrari, or a 2 billion dollar home. That doesn’t mean you will ever see a ferrari bubble. You could however have and support a ferrari bubble if you tricked people into beleiving they had the financial means to ownership. In this situation, just like homes, the price of ferrari’s would perpetually rise as the demand for them also rises. Since prices are rising than the “Car flippers” industry will also arrise. This can only continue as long as the real amount of savings that exists is hidden from public view.
In this situation once people realize that the real price has been altered the bubble will crash. The monetary error has to go first, otherwise there would be no way to feed the bubble in the first place. Also understand that the price system is a reflection of the limited quantity of resources available and where they are being allocated. Changing the quantity of money tricks people into believing that more steel exists out there than really does. Eventually the steel runs out. out.
I am basically explaining to you the Business Cycle theory, the one which you claim to understand. Perhaps you should go back and read it. And yes, I would recommend reading about it over a lecture/video/audio book.
Fads, culturally shifts, and technologically advanced new goods and any object that comes in and out of demand are not bubbles. A bubble is a very large mis-allocation of resources.
In physics, when someone comes up with a new theory, it can be tested. So in general, bad theories do not hang around for long. In Economics however, bad theories can hang around for many decades.
It would take multiple lifetimes to read everything that has been written on economics. How would I decide what to read?
Irrational?.. you’re misquoting me. I said rational. The “insect tracking” phenomena is rational behaviour.
You are very keen to insist that bubbles are always large. But there is no part of the definition of a bubble which states it has to be large. If there was a bubble in the (relatively small) fine art market then there would be no great requirement for an increase in the money supply to fuel it.
I am not against ABCT. Indeed I support it. But I would suggest that my theory can be true at the same time.
In economics we use deductive reasoning, not the scientific method. Without it we would have no direction. Problem is most people don’t understand it that.
So you simply should not do it? If you told us what you have read and helped us out with where you are at I’m sure many people here could make a great recommendation.
Nah, I’m not misquoting. I’m not quoting at all, I am paraphrasing you.
This is why its important to understand the economic methodology. Otherwise we are really just arguing past each other. From an economist standpoint sporadic rises in demand of a certain product is not a bubble. As LS said earlier, the aggregate demand remains the same. A bubble(As economists define) occurs when aggregate demand is artificially increased.
Sure. Your theory may hold true, after the financial means to support your theory exists. IE first the monetary error has to occur.
You failed. If you use the word irrational then you have not read my theory carefully enough.
I see now. If you define a bubble as a thing that occurs only because of money supply growth, then you can set about proving that money supply growth is the only possible cause of a bubble!.. But I dispute your definition of a bubble.
With small bubbles (which I know you deny the existence of) the financial means to support does not need to be any special action of a central bank. It could simply be a minuscule lowering of the price of “everything else”.
There is nothing more to read, You stated that people can make irrational decisions simply due to a cultural shift and that the demand of said object will continue to rise despite price. You use double speech then to call it “rational exuberance”. I mearly re-stated what you said in different words, And completely succeeded.
You beleive a bubble can occur arbitrarily from something like a fad.
I stated that bubbles form methodically and they are a result of a casual relationship from monetary handling. For example, fire causes a burn, but I don’t call fire a burn. I call fire, fire. True mis-allocation of resources cannot occur without lieing about the quantity of said resources via shafty monetary policy.
The fact that I am having to repeat the ABCT fundamentals to you over and over is very disturbing.
Lets explore how much of the Business Cycle theory you really understand.
The price of X commodity was altered which caused the Housing bubble among others. Fill the blank, what is X.
Your paraphrasing is dreadful, you are totally misrepresenting what I said.
I had already - I can’t see anything in the definition which implies a bubble has to be large.
I am very happy with ABCT. I do not dispute it at all. But people can have more than one motivation for doing something. If I am presented with some chocolate I may eat it both because I’m hungry AND because it tastes nice. So I see ABCT as “I’m hungry” and rational exuberance as “it tastes nice”… not the world’s best analogy, but I hope you get my drift.
The point folks are making is that regardless of how people feel, a speculative bubble is pretty much impossible with a tight monetary policy because under a fixed quantity of money, or even one that only very slightly increases, the price signals make it very difficult to engage in a speculative buble. Eventually people won’t have enough money to buy OTHER things…like things they need to live and such.
So just because something tastes nice, doesn’t mean people will be physically able to eat as much of it as they want. Eventually you can’t eat any more.
