B) Capital investments are heterogeneous, not homogeneous. Mis-allocation of resources and investments cannot be re-allocated on the fly. This is why there is a depression stage on the tail end.
I Asked
You correctly responded with
Without realizing it you refuted your whole thesis. The goods get rationed. Meaning less purchases or smaller quantities. In other words the bubble stops or never occurs in the first place. In a bubble the goods don’t get rationed accordingly, instead their consumption increases when they should be subsiding.
Now how about YOU answer MY questions which I have asked 3 times now.
Good point - but ABCT does not make any predictions about what it is that people will invest in, so presumably if ABCT was the only factor determining the characteristics of the bubble then the goods that were subject to bubble prices could switch from one thing to another at random. There is nothing to stop the selected goods switching on a daily basis. It could be gold one week, tulip bulbs the next, tech stocks the next. What is it the keeps the choice of goods stable for months or years at a time?
Untill you understand what the original source of the boom was you will never understand why large capital goods and realestate where the primary models of investment rather then a banana.
But on a second note as it turns out consumption occurred not just in capital goods but amongst all sorts of goods. The cause of the housing bubble can also be tied back to the reason why we have a predominantly consumer based economy. Retail stores are now the height of our economy, ever wonder why? People are spending their money on garbage rather then saving. Why is this? Answer my questions in the above posts!
well, people consume beyond the bounds of the production possibilities frontier, so there is a sense in which their is a widespread range of goods affected.
the fact that easy money kept flowing through credit markets propping up the boom in yesterdays industry, keeps that boom going, keeps it looking relatively attractive compared to the alternatives. until even throwing easy money at it can’t sustain the illusion and the bubble must collapse. quite right. without credit expansion a bubble in an industry would be hardly noteworthy, it would not build and build, until the whole economy gets thrown into recession when the bubble pops. what keeps people on yesterdays bubble today? the cheap money illusion.
I don’t mean that people sell their houses to buy gold. I mean that people borrow to buy houses for a while inflating the prices of houses. Then, without selling their houses they (or other people) borrow to buy gold inflating the price of gold then after a while they (or other people) borrow to buy tulip bulbs.. and so on.
Yes but the price could have doubled in the process as described so far. This is, in itself, a bubble.
The answer I think you’re looking for is money. But how many times to I have to tell you, I don’t disagree with ABCT. I simply think it needs some additions to more fully explain what is observed.
A bubble in a fixed money supply economy, driven only by rational exuberance, my not be noteworthy with regard its effects on the whole economy, but certaily notworthy for anyone who bought in just before the pop.
Your assuming that the job of speculating and discerning wise business practices of investments assets is the job of economists. Economists are not business men. Economics doesn’t make investment predictions. Thats the job of entrepreneurs and speculators.
Your falling into the same fallacy as the planners who believe that Human Action is something that can be predicted and modeled. This gets into the Economic Calculation debate.
you have no grounds to call it exuberance over any other adverb, you have defined away what a bubble is. for you a bubble is any industry towards which more capital is now directed than was previously the case. i.e. whenever something new is invented and starts to get money invested in it. you have told us that it is always a bubble.
thats just ridiculous. an economy is dynamic. industries will ebb and flow. prices will rise and decline. BOOMS that are worth talking about, have huge, wideranging damaging effects, they are phenomena that are remarkable precisely because they are persistent. The austrian business cycle theory explains how a government could create such a persistant bubble, that would not be expected in a free market, on grounds of probability. ABCT powerfully explains historical booms and busts, that fit its story. this its value. if there are other good cycle theories, that can explain persistant bubbles, that are the standout feature s of a boom bust cycle, then please tell us about them, we will add them to our list. but simply saying that any fleeting increase is a bubble, is not doing anything to advance knowledge. only obfuscate.
A bubble is an investment area which gets valued at a price sunstantially out of proportion with its true value or its true potential returns.
If the size of the market sector is only a small fraction of the total economy then the bubble within that sector can be both long lasting and large (with respect to the degree of over-pricing) even in a fixed money supply economy.
you know what things are overpriced? you would know this even in a free market? you are the greatest entrepreneur the world has ever seen yes? you have evidence of this in all the billions that you now own from investing so wisely?
By the way, if you agree that the rational exuberance theory for small bubbles (bublets?) in a fixed money supply economy and you believe ABCT causes big bubbles then it is quite natural that in many instances both effects can be happening at the same time to some degree or other.
You havn’t technically given any explanation. You have just told people to read your blog, avoided questions, and gone around in rhetorical circles.
I guess I stand corrected though, You must truly believe that rational exuberance can occur irregardless of the cost. Your basically saying that an arbitrary bubble could occur and poor folks would buy 3 million dollar homes, whether the credit was available or not. Somehow they would just buy it but you cannot explain how they would financially afford it. You just argue that it would happen just because.
You also seem to fail to understand that credit acts as a commodity like anything else. It also follows the rules of supply and demand and it’s price reflects that unless altered by men. So not only would your bubble encompass an asset it would have to encompass credit as well.
In addition you have arbitrarily changed the definition of a bubble to a fad. It’s like equating Iphone popularity to a bubble.
it’s not the Job of the economist to determine what consumer goods are going to be popular or even what consumer goods are considered “efficient”. Thats up to the consumer to decide.
You seriously need to separate investment knowledge from economists. Sometimes economists can make a descent investment decision perhaps by knowing that gold will go up due to loose money. That does not mean economists are experts in speculating investments. Your also trying to find a model which will explain and
How do you know what the true price should be? If a bubble occurred outside of monetary causes is it not just something in response to consumer demand? Is meeting the desires of consumers bad? In the presence of sound money what measurement do we have to know if something is “irrational exhuberance” or simply meeting appropriate consumer demand.
According to your model a bubble would be the explosion of the Personal Computer industry. However can it be argued that personal computers are a bubble and a huge mis-allocation of wealth? No, personal computer has if anything made lives more efficient across the globe. In the presence of sound money your so called bubbles are nothing more then business’s attempting to meet consumer demand with the given resource pool.
I believe that such ‘bublets’ as you coin them could not in any practical sense be determined to be so. the field will be ripe for disagreement. there would be no grounds for deciding which disputant is right… is it the one who says priced just right for now? priced too low for now? overpriced right now?
such passing and trivial ‘bublets’ will be beyond our capacity for reliable knowledge that they are such. people have to content themselves with merely buying or selling in line with their own estimation of such subjective opinions.
In the presence of sound money on a true free-market it cannot be called Rational Exuberance. It is simply meeting consumer demand. You cannot judge what a mis-allocation of resources is. You cannot judge what an irrational decision is short of reading people’s minds. No man has this foresight. This reveals your lack of understanding in Praxeology.
You asked me what chapters to read in Human Action. It sounds like to me you need to read the first 3 sections, though I would more readily tell you to simply read the whole thing.
I can not (and will not) continue on this thread until someone answers my two questions.
Do you agree that someone purchasing an antique toy may pay one price if he thought it would increase in value and another price if he thought its value wouldn’t change?
Do you agree that, after observing a long period of price rises (for whatever reason), people have a tendency to believe that those prices will continue to rise even if they don’t understand (or even profess to understand) the reason for the price rise?
What does a rational expectation have to do with ABCT? But to answer this meaningless question, yes.
The prices rise for long periods of time because of inflation, and the desire to acquire wealth (not irrational); they don’t rise “for whatever reason.” They believe the prices will rise because they are rational actors, acting upon misunderstood causal chains and history. Stop conflating irrationality with ignorance. Again, read a little, come back, and then ask questions.
