I will say this much: unpredictable fluctations in the interest rate can create enough uncertainty to disrupt market processes. Of course, I believe interest rate changes are fairly open and predictable. If Bernanke spiked it to 5% then 0.3% then 4% then 7% within the span of a month, I would expect problems.
I don’t think entrepreneurs just irrationally “hope” for success during some times but are more careful and prudent during others. It’s like when people say “greed” is what caused the financial crisis; libertarians, usually, point out that human nature hasn’t changed. I don’t believe ventures taken by entrepreneurs at any given time are more irrational than any other time; I believe excessive optimism is about just as likely as excessive pessimism.
Are prices rising in a [hyper]inflationary way? Why or why not?
well then you concede that business leaders took a punch in the face in order to avoid being slaughtered, even though without hoover, they could have had a tender slap.
My point is that even bad outcomes can be more efficient than alternatives; I believe recessions are efficient, for instance, and that they are due to a shock in total factor productivity. I don’t believe a whole bunch of people are making unusually stupid decisions at once.
Because there are costs associated with making a wrong forecast, it is not rational to overlook information.
If expectations are not rational, there are likely to be unexploited profit opportunities–most economists believe such opportunities are rare and short-lived.
I don’t believe people will be fooled by “animal spirits” during “speculative booms,” but I do believe there can be endogenous shocks to the economy that create fluctuations in productivity. You know, something like President Bush stating on national television that he “abandoned free market principles to save the free market system” can create regime uncertainty (as Higgs named it).
I don’t believe people will be fooled by “animal spirits” during “speculative booms,”
I struggle to take you seriously, you argue against Austrians as if they were keynesians.
yet you are the keynesian with your denial of the notion of a structure of production, and some kind of fantasist if you don’t appreciate that the efficacy of entrepeneurialism is directly impacted by Government interventionism. yes, the entrepeneurs will do they best they can with what they got. yes, they will make less bad errors than a central planning board… but they will still be decoupled from serving consumer sovereignty by interventionism
“Let me just boil down my argument to two points:”
It is impossible, even by your own reasoning, to have economic “booms” that precede your “endogenous shocks” absent of an increase in the money supply and specifically in the loan markets. This is not even a matter of accepting or realizing Austrian capital theory. An increase in the money supply (in the broader sense) must always be present for a boom to occur in the presence of a general rise in commodity prices. Do you understand this point?
Again, your rational expectation theory in this context is in serious conflict with the entrepreneurship spirit.
I’m saying that any tinkering with the interest rate causes problems. Whether the market can iron them out before capital structures get seriously effected is a different issue… I believe it falls under a collective action problem whereby if every actor in the market ignored the easy credit, we’d be great. But there’s an incentive for firms to cheat on the boycott of fed money, because they cause only a little problem in the economy by spending the new money, but gain a great deal personally. A lot of firms take the option. Many (maybe not the same) lose.
Of course not. I think that if a firm were aware of the growing bubble caused by firms taking the cheap credit, it would probably not invest in places where the bubble is likely to pop. So if I borrow a bunch of money on the cheap and invest it in gold, that could work out really well. But what this does is simply spread the bubble around, and you’re playing hot potato with who runs out of purchasing power first.
The Austrian view of inflation is an increase in the monetary base. Prices may or may not increase, but it will be strange if they do not in the long run. Goldman Sachs estimated that the fed would need to bring an extra 11 trillion dollars into circulation to pay off all the toxic assets they bought up…
This is beside the point, which was that the fed is taking unprecedented action. Growing the monetary base far more than it ever has in the past. ABCT is consistent here because we do not say the market was fooled by the same thing twice, but in fact may have gotten so good at fighting fed policy that bernake really has to pull out all the stops.
Its conceivable that in the future business cycles could be averted entirely if the market got really good at fighting the fed. I don’t think it is likely, because of Greenspan puts and the collective action problem I’ve been mentioning. But it is in principle possible. I am optimistic about free-rider problems, as per my current thread.
Let me repeat a quote from Caplan, [I]t is readily conceded that (a) expansionary monetary policy reduces interest rates, and (b) lower interest rates stimulate investment in more round-about projects. Where then does the disagreement emerge? What I deny is that the artificially stimulated investments have any tendency to become malinvestments. Supposedly, since the central bank’s inflation cannot continue indefinitely, it is eventually necessary to let interest rates rise back to the natural rate, which then reveals the underlying unprofitability of the artificially stimulated investments. The objection is simple: Given that interest rates are artificially and unsustainably low, why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely? No, what would happen is that entrepreneurs would realize that interest rates are only temporarily low, and take this into account.
In short, the Austrians are assuming that entrepreneurs have strange irrational expectations.
Once again, even if reduced interest rates stimulate more long-term projects, it would be irrational (despite what de Soto claims) to expect that interest rates will remain permanently low.
He adds, Why does Rothbard think businessmen are so incompetent at forecasting government policy? He credits them with entrepreneurial foresight about all market-generated conditions, but curiously finds them unable to forecast government policy, or even to avoid falling prey to simple accounting illusions generated by inflation and deflation. Even if simple businessmen just use current market interest rates in a completely robotic way, why doesn’t arbitrage by the credit-market insiders make long-term interest rates a reasonable prediction of actual policies? The problem is supposed to be that businessmen just look at current interest rates, figure out the PDV of possible investments, and due to artificially low interest rates (which can’t persist forever) they wind up making malinvestments. But why couldn’t they just use the credit market’s long-term interest rates for forecasting profitability instead of stupidly looking at current short-term rates? Particularly in interventionist economies, it would seem that natural selection would weed out businesspeople with such a gigantic blind spot.
Once again, Rothbard (and the ABCT) expect entrepreneurs to fall prey to “simple accounting illusions generated by inflation and deflation.” And, once again, “arbitrage by the credit-market insiders” would make prediction practicable.
>>why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely?
strawman much?
Big strawman!
Neoclassical,
you read the link. Where does it say that? You seem to either be misunderstanding what de Soto is claiming, or you are ignoring it. What is your objection in the following quote from de Soto:
One might wonder how entrepreneurs can possibly fail to
recognize that the theory of the cycle developed by economists
and presented here pertains to them, and to modify their
behavior by ceasing to accept the loans they receive from the
banking sector and avoiding investment projects which, in
many cases, will bankrupt them. However, entrepreneurs cannot
refrain from participating in the widespread process of
discoordination bank credit expansion sets in motion, even if
they have a perfect theoretical understanding of how the cycle
will develop. This is due to the fact that individual entrepreneurs
do not know whether or not a loan offered them originates
from growth in society’s voluntary saving. In addition
though hypothetically they might suspect the loan to be created
ex nihilo by the bank, they have no reason to refrain from
requesting the loan and using it to expand their investment
projects, if they believe they will be able to withdraw from them
before the onset of the inevitable crisis. In other words the possibility
of earning considerable entrepreneurial profit exists for
those entrepreneurs who, though aware the entire process is
based on an artificial boom, are shrewd enough to withdraw
from it in time and to liquidate their projects and companies
before the crisis hits. (This is, for instance, what Richard Cantillon
did, as we saw in chapter 2.) Therefore the entrepreneurial
spirit itself, and the profit motive on which it rests,
destines entrepreneurs to participate in the cycle even when
they are aware of the theory concerning it. Logically no one
can predict precisely when and where the crisis will erupt,
and a large number of entrepreneurs will undoubtedly be
“surprised” by the event and will encounter serious difficulties.
Nonetheless, in advance, from a theoretical standpoint,
we can never describe as “irrational” those entrepreneurs
who, though familiar with the theory of the cycle, get carried
away by the new money they receive, funds which the banking
system has created from nothing, and which from the start
provide the entrepreneurs with a great additional ability to
pay and the chance to make handsome profits.23
Let me give you another real life personal example:
I am very much aware of the Austrian Business Cycle and I am well aware that interest rates are currently artificially low. I am right now in the process of refinancing my mortgage. According to you I am irrational. I should stay with my 5.6% and not refinance to 4.7%? Which would be the more rational thing to do under these circumstances? Please answer. I am dying to get your answer for this.
I am not saying anyone is irrational! That’s been exactly my point!
You should refinance if the benefits exceed the costs! Once again, according to ABCT, you are being irrational since, somehow, your choice will lead to a bust, a loss, a collapsed bubble, or some other weird dilemma you can predict.
Here’s the crux of the argument: you state that you are “well aware that interest rates are currently artificially low”–if you are, then don’t you think this information is well-dispersed, particularly among people whose specialties depend upon this information? http://en.wikipedia.org/wiki/Federal_funds_rate#Predictions_by_the_market
Plus, people look at long-term interests rates, not short-term! Even if that is off-the-mark, it’s not so drastically off-the-mark as to produce economy-devastating “booms”!
Someone here needs to answer this question: “Why doesn’t arbitrage by the credit-market insiders make long-term interest rates a reasonable prediction of actual policies?”
It should be noted that other Austrians, particularly Roger Garrison, attempt to handle the expectational objection. Garrison astutely notes that “[M]acroeconomic irrationality does not imply individual irrationality. An individual can rationally choose to initiate or perpetuate a chain letter… Similarly, it is possible for the individual to profit by his participation in a market process that is - and is known by that individual to be - an ill-fated process.”[50] This is definitely a possible scenario. But does it make sense in this particular case? It does not. Naturally, entrepreneurs will not turn down lower interest rates. Rather, the rational response to artificially low interest rates is to (a) make investments which will be profitable even though interest rates will later rise, and (b) refrain from making investments which would be profitable only on the assumption that interest rates will not later rise. If entrepreneurs followed this rule, then there would be no tendency for policy reversals to produce malinvestments.
spirit itself, and the profit motive on which it rests,
destines entrepreneurs to participate in the cycle even when
they are aware of the theory concerning it. Logically no one
can predict precisely when and where the crisis will erupt,
and a large number of entrepreneurs will undoubtedly be
“surprised” by the event and will encounter serious difficulties.
Nonetheless, in advance, from a theoretical standpoint, we can never describe as “irrational” those entrepreneurs
who, though familiar with the theory of the cycle, get carried
away by the new money they receive, funds which the banking
system has created from nothing, and which from the start
provide the entrepreneurs with a great additional ability to
pay and the chance to make handsome profits.23
According to ABCT I am being perfectly rational!
You can continue to strawman the theory regardless of the fact that it has explicitly been pointed out to you that you are making false assumptions about what the theory says. Or you can actually try to see if what you are claiming makes any sense with the information that has been provided to you.
Look, like Kaplan you don’t understand ABCT in depth. There are many components that one needs to master in order to fully grasp it beyond the rhetorical outcries made by the Peter Schiffs and Ron Pauls. This is why I said that Kaplan is a Hermit. Even if he had read Mises, Rothbard, Lachman or even Garrison, or whomever… then he has not grasped the most important elements of Austrian theory.
DD5, your haranguing of Caplan (misspelled by you as Kaplan) is mistaken: he is a well-trained economist who nitpicks the ABCT in great detail. He was Rothbardian, for goodness sake! Did you actually read his criticisms?
If anything, your name-calling shows your lack of exposure to Caplan, not Caplan’s ignorance of the ABCT.
Furthermore, de Soto calling it rational doesn’t make it so! Caplan’s critique of Garrison shows that.