Student - "The new money pours forth on the loan market and lowers the loan rate of interest. It looks as if the supply of saved funds for investment has increased, for the effect is the same: the supply of funds for investment apparently increases, and the interest rate is lowered. Businessmen, in short, are misled by the bank inflation into believing that the supply of saved funds is greater than it really is. Now, when saved funds increase, businessmen invest in “longer processes of production,” i.e., the capital structure is lengthened, especially in the “higher orders” most remote from the consumer."
**Student - “**under rothbard’s theory the mechanisms behind the recession are less clear. investment rises first as lower interest rates direct resources to earlier stages of produces. but, later, as the income of the original factors of production grows and this signals to businsesses that the investments they had made in more round about methods of production were unjustified.”
It seems to me that these two quotes ( Bold text added for emphasis) contradict each other.
EDIT: Unless, as the interest rate is lowered and as a result businesses invest in higher order production as a means to supply interpreted demand for lower order goods. No?
I really don’t understand the objection that Student as introduced.
Investment and consumption simultaneously rise during the boom, it is true, but the malinvestments cannot be completed on time, at all, or will be completed only at the expense of other, more warranted productions, precisely because of scarcity (the economy operates off of the PPF only in the short run). The restructuring and liquidation process (the bust) occurs, again, because of scarcity, because there aren’t enough real resources in the economy to sustain the simultaneous elevation of consumption and investment. Inter-temporal disequilibrium, brought about by an arbitrary credit-expansion (i.e., a reduced market rate of interest below the natural rate), makes it so that investment is not a function of savings in the short-run.
For example, assume that M1 (malinvestment one) begins in period t1 and is completed in period t5. M1 requires a steady flow of real capital (intermediary goods) during periods t1, t2, t3, t4, and t5. But because not enough resources exist, and because society consumes the required resources in order to complete M1, the process will end before period t5. In other words, before the final period (t5), the investment project will be revealed as a malinvestment and must therefore be scrapped.
This is also why forced savings is required in order to complete some of the malinvestments and ease the restructuring/liquidation process (the recession). Now, some malinvestments will be completed during the expansionary and unsustainable boom, but, again, only at the expenseof other, more warranted productions*.* So I fail to see how comovement is a “problem” for the Austrian theory of cycles (the ABCT explains why the comovement exists, but why it must inevitably come to an end), and the concept of malinvestment only makes sense precisely because of scarcity.
Krugman didn’t understand Mises’ Business Cycle Theory because he doesn’t understand Cantillon Effects nor Say’s argument against possibility of general overproduction. Keynes discusses physically productivity throughout his book instead of marginal productivity (utility-based), and confuses investing/saving with hoarding, saying Mises is wrong because people hoard but do not get interest, so interest rate is not time preference but monetary (lol).
How can anyone discuss anything with him beyond those points?
Keynesians ceaselessly pine for “empirical work” and then ceaselessly fight over the meaning of useless facts that are gathered. Whereas with the simpler approach you could avoid the confusion.
I am not sure how your comments relate to what I was saying earlier.
When I was talking about comovements I was talking about comovements between consumption and investment (it isn’t clear what you mean by “comovement” in your post). And I never said that it was a “problem” for ABCT in general. I said that Roger Garrison predicts that investment and consumption will increase together during the boom. Rothbard does not. Instead, he says that investment will rise first and that it is the subsequent rise in consumption that actually triggers the bust. Then I provided lengthly quotes from both (from multiple sources) to support this interpretation.
There is really nothing controvertial about what I am saying (and again it isn’t a criticism in itself, just a fact). Peter Boettke has also recently commented that Roger Garrison’s prediction of comovement between investment and consumption is a departure from the traditional, textbook expostions of ABCT.
Roger Garrison has tried to explain the possibility of comovement [in investment and consumption] due to the artificial nature of the boom which appears to violate the scarcity constraint…And keep in mind that in the standard textbook presentation of the Mises-Hayek story we do not see comovement, but the distortion of the structure of production, which is then corrected during the bust phase. http://www.coordinationproblem.org/2011/01/call-all-economists-lets-answer-a-serious-question.html
But look, I know you came in late to the discussion so I don’t blame you for not reading every post in the thread. And I know don’t you have any specific love of Rothbard so none of this should shock your sensabilities. As of August of last year you said in a PM i still have you had never read Rothbard, so you might even have learned something new!
Also, don’t feel slighted when I say this is my last post in this thread. I know how much you, Caley, and flic love talking to me. But as I said before, this conversation is wearing me out. It is also a little annoying that I am apparently one of the few people on the board to have read both Garrison and Rothbard closely at all. So I hope you have a great morning and happy trails!
PS* If you’re wondering how this came up, I had to lay out these differences between Rothbard and Garrison because Krazy Kaju was having a hard time appreciating Paul Krugman’s and Tyler Cowen’s criticisms of ABCT because he was confusing Rothbard’s presentaiton of ABCT with Garrison’s (which was the one cowen and krugman are addressing). They are not the same and not realizing that can lead to great confusion.
Indeed they will. I’m only responding because there’s been some talk lately about the ABCT somehow ignoring scarcity. This isn’t true, and I believe I explained why. Also, this comment was not directed at you, and stop being so paranoid.