Furthermore, de Soto calling it rational doesn’t make it so! Caplan’s critique of Garrison shows that.
what standard of rationality are you using? be specific… remember you are talking about an entrepreneur.
The austrian position is that entrepreneurs act as rationally as any human. but when faced with monetary intervention of a massive dynamic type, they are misled, for a while… that is all.
you would have it so that entrepreneurs are never misled even for a short time? even for a peco-second? can you see that there is actually a continuum between the keynesian, austrian and neoclassical views on this issue of ‘duration of effective misleading’
keynesians - > entrepreneurs could be always misled and should be ! permanent boom and prosperity is a mere printing press away
austrians → entrepreneurs can be misled for a while . boom and bust
neoclassical → entrepreneurs cannot be misled. there is no such thing as boom and bust. there are shocks. like when bush shoots himself in the foot for no reason by deciding to incur peoples wrath and instigating a recession, when he could have done otherwise and the economy could have proceeded on healthily. (actually this kinda looks like keynesian with a different perspective…interesting…)
Could you quote where you read something about “animal spirits” in AE? Somehow I concluded that “animal spirits” is the anti-thesis of ABCT whilst you concluded that is the essence of it.
So lets pretend the economy is nice. Then the central bank decides to offer entrepreneurs new money hot off the printing press. When entrepreneurs spend the new money on new projects, they bid capital away from competitors. There are now firms in the market operating at a higher cost than before. For firms to stay in business, they have to get in on the new money too. It becomes a game of whoever gets the most new money stays in business.
So, every firm wants the new money to stay out of the market. But firms benefit individually if they get new money before everyone else. Since firms are roughly autonomous, they cannot come to a stable boycott of the new funds. There would be a huge incentive to cheat on it. Large gains for the individual; small loss for the market. But if every firm picks this option, the individual advantage firms are hoping to get dissapears, you wreck the market in the process by screwing up the price of capital.
The best every firm can do is break even by borrowing exactly the same amounts, and in the process, they deaf and blind without market prices. If firms don’t have real interest rates and real prices, they are like soviet central planners. They would have to use crude methods of estimating consumption patterns… and when consumers did spend, they have no way of knowing if they can charge high enough prices to cover their inflated costs.
Its almost analogous to what if there were a printing press on every street corner. But do you think people would use those bills as common exchange? No way in hell. There’s a very simple solution to ABCT that firms can opt for, and that is a stable currency. ABCT is absolutely not likely to be a good critique of truly free markets because no human beings have ever been so stupid as to intentionally use inflationary currency over sound money. I think the market does really do a good job of getting to this solution in the status quo through trying to store value in commodities markets, but if everyone has to use USDs for transactions, there are some problems.
You don’t have to end the fed. You just have to get rid of all the laws binding us to dollars. There can be a central bank printing a trillion dollars a second. It won’t matter if no one uses them.
You are refuting ABCT on grounds of rational expectations. You reject the structure of production (which is perfectly fine, I’m merely stating your position as I undertand it)
I ask you and the those participating in this thread: How is it possible to debate and discuss ABCT without reference to the distortion made to the structure of production?
Yes, we can discuss “the interest rate”. We can address Neoclassical’s assertions about entrepreneurs not being “fooled”. But we are ignoring the essence of the theory; the distortion to the structure of production which Neoclassical denies exists.
Yes. Very. The disaster of 2008 was (and continues to be) the result of malinvestment created during the boom being exposed by the Fed’s tightening exactly as I described in the post you ridiculed. Exactly as described by ABCT.
Whether or not ABCT is valid is not a mere academic exercise. Millions of people are paying the price for interventionist experimentation. Yes, I am serious.
Sieben, I think you misunderstand my critique: I don’t believe people should or would avoid cheaper credit; my point is that I don’t believe an usually large amount of wrong investments will be made.
“I don’t believe people should or would avoid cheaper credit; my point is that I don’t believe an usually large amount of wrong investments will be made.”
Now if you understood Capital theory, you would realize the above makes no sense.
I think he already did, in an earlier post. I’ll quote it, since I don’t know how to link to a single post:
Like I said, there’s no hiding this. I’m not sure why several of you are doing so. Let me quote some contemporary, orthodox, respected Austrian economists.
Robert P. Murphy, [M]arkets are capable of periods of mass delusion as it were, in which asset prices get pushed far above any “rational” level justified by the underlying fundamentals.
Jesus Huerta de Soto, Widespread discoordination in the economic system results: the financial bubble (“irrational exuberance”) exerts a harmful effect on the real economy, and sooner or later the process reverses in the form of an economic recession, which marks the beginning of the painful and necessary readjustment. This readjustment invariably requires the reconversion of the entire real productive structure, which inflation has distorted.
Doug French, People seem to do the craziest things when it comes to money. Whether it’s chasing stock-market bubbles or paying good money after bad on a home that’s hopelessly underwater, the idea of individuals acting as homo economicus seems far-fetched. Only in the ivory-tower world of rational-expectations theory does one find perfectly rational humans making judgments using all available information to satisfy their subjective ends.
[EDIT by Dave: I think the animal spirits only come to life when they smell free money. Keynes held it can happen at any given moment. That’s how I see the diff between Keynes and AE]
Why? If created artificially, it is consequentially equivalent to stealing from all holders of money. Do you think mass stealing has a place in rational markets?
How do you know what the right investments are if you don’t have real prices?
…and they say nothing about those being a part of ABCT, which I know they are not. Perhaps I should have been more specific in my question, though it should have been obvious what I meant…
The quotes seem to, at the very least, lack context (didn’t say “out of context”). It seems to me, in these passages, the authors simply were not being precise.
ABCT does not involve mass delusion, irrational exuberance, bubbles, or people doing crazy things.
According to ABCT, everyone is acting according to their own subjective value scales. They are following the signals being sent. The signals, of course, are distorted. The distortion is upon the relationship between real savings and the lengthened production structure. Nobody needs to know how much real savings are available to support a given production structure. The interest rate automatically reflects this relationship in an unhampered market, providing the signal that coordinates the structure of production with real savings.
My purpose is not to restate the theory, but to explain why the quotes are not inconsistent with ABCT, they are simply imprecise.
“[M]arkets are capable of periods of mass delusion as it were, in which asset prices get pushed far above any “rational” level justified by the underlying fundamentals.” **This is describing the boom part of the business cycle, as we see from here, where Bob Murphy says "**But what if they were familiar with Austrian business-cycle theory, and had read Mark Thornton’s 2004 prediction that the boom in housing was too good to be true?" Read the whole article.
“Widespread discoordination in the economic system results: the financial bubble (“irrational exuberance”) exerts a harmful effect on the real economy, and sooner or later the process reverses in the form of an economic recession, which marks the beginning of the painful and necessary readjustment. This readjustment invariably requires the reconversion of the entire real productive structure, which inflation has distorted.” This too, is very explicitly describing the boom part of a business cycle. It’s from Desoto’s preface to his book, Money, Bank Credits, and Economic Cycles, available for free at this site. Note the title of the book, btw.
“People seem to do the craziest things when it comes to money. Whether it’s chasing stock-market bubbles…” Here too,note the word bubbles. That quote is byDoug French, to whom a bubble is synonomous with first stage of an ABCT, as evidenced here:[ http://mises.org/daily/3616](http:// http://mises.org/daily/3616)
Entrepreneurs don’t have to “predict” real savings. Therefore, they will not make mistakes regarding the availability of real savings. The entrepreneurs follow signals. The signals are distorted as has been stated throughout this thread.
To summarize your position:
You reject the notion of the time structure of production.
You reject the notion of “real savings”, or a “pool of real savings”.
You reject “signals” of the type being discussed, specifically, the interest rate being the signal that coordinates real savings with the “round aboutness” of production.
You reject the idea of “Round aboutness” as a non-scientific term, not suited for the serious study of economics.
Smiling Dave, you don’t seem to be able to distinguish between the theory on one hand and the characterization on the other hand. I take it because he hasn’t said anything contrary that Neo-classical can’t either.
You are entitled to your opinion, chloe, but unless you tell me how and why and what “irrational exuberance, mass delusion, crazy things, bubbles” mean something other than what they always mean, I feel equally entitled to take them at their face value.
Yes, even after reading that there is a difference between theory and characterization, I don’t get it. Would you care to explain in simple non-Esuric English [which will prove your command both of the concepts you are trying to explain and of the English language] what you mean? Make it obvious to the miost primitive mind.
Let me add that Mark Thornton wrote an article, available here in pdf, called “The Economics of Housing Bubbles”, in which he writes explicitly that he is going to lay out the ABCT explanation of the current housing bubble.
He writes that the Chicago school denies the very existence of bubbles, and Keynesians think " bubbles exist because of psychological factors such as those captured by the phrase “irrational exuberance.” The Austrian view, he writes [in two places!] “sees bubbles as consisting of real and psychological changes
caused by manipulations of monetary policy.”
Well! Couldn’t have said it better meself. In fact I did say it, several times, in this thread and others. The modern ABCT adds to Mises 1912 work the additional point, evidenced historically over and over, that free money makes people stupid. Or, as the respected authors quoted a few times here have written, strike people with "“irrational exuberance, mass delusion”, and make them do “crazy things”.