Refutations of The Austrian Business Cycle/Austrian Economics

Economics Economics Questions
101

I don’t see the connection, Neoclassical.

Here’s the Wiki you linked to:

Rational expectations is a hypothesis in economics which states that agents’ predictions of the future value of economically relevant variables, is not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in that the agents inside the model assume the model’s predictions are valid.[citation needed] The rational expectations assumption is used in many contemporary macroeconomic models, game theory and other applications of rational choice theory.

Since most macroeconomic models today study decisions over many periods, the expectations of workers, consumers, and firms about future economic conditions are an essential part of the model. How to model these expectations has long been controversial, and it is well known that the macroeconomic predictions of the model may differ depending on the assumptions made about expectations (see Cobweb model). To assume rational expectations is to assume that agents’ expectations may be individually wrong, but are correct on average. In other words, although the future is not fully predictable, agents’ expectations are assumed not to be systematically biased and use all relevant information in forming expectations of economic variables.

To put it in a nutshell [as I understand it]. we are to assume that, on the average, people have the ability to know the future of economically relevant variables! I mean really! So if we take poll of what people think the stock market will look like in the future, they will get it right, if we consider the average opinion. Every single day of every single year, from here to eternity.

C’mon, is there any greater madness than such an assumption?

We are against social security because people should be in charge of their own lives. Of course, if someone VOLUNTARILY wants to hand over his hard earned cash to a govt Ponzi scheme, good for him. But to take it from us all at gunpoint is another story.

Also, just because we assume people do not know EVERYTHING about the future, it does not mean we assume they know NOTHING about it. Many people know there is a good chance they will grow old and weak, or just plain reluctant to work, later in life.

102

Please forgive what may be a show of my ignorance on the topic; if my following understanding is wrong kindly correct in 3rd grade language, if possible.

I thought the main issue with artificially low interest rates is that it entices entrepreneurs / businesses to take on debt for an unsustainable business model – and the expansion, or new products, would not be “wanted” by consumers if their ( the consumers) credit was not also artificially easy or low.

How can it be about knowing future interest rates – The business must assume that rates will either go down, stay the same, or rise- this is true in a free market or a fed regulated environment.

I sense that I am missing something very basic – please help.

103

Sieben, I totally agree.

And I also think this is a very fruitful discussion, with intellectual honesty on both sides. In contrast to, say, some revleft threads.

104

In fact, one reason to favor the free market is because it coordinates information and expertise. Capital held by irrational actors is bid away by entrepreneurs better able to use the resources. People who are unfit as entrepreneurs can still rent their capital and resources to firms, who use them more efficiently and pay competitive return… the argument that people are “stupid” is actually one of the best reasons to have free markets.

105

No, no, no. No one claims perfect forecasting.

Quoting Thomas Sargent’s entry in The Concise Encyclopedia of Economics, The concept of rational expectations asserts that outcomes do not differ systematically (i.e., regularly or predictably) from what people expected them to be. The concept is motivated by the same thinking that led Abraham Lincoln to assert, “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.” From the viewpoint of the rational expectations doctrine, Lincoln’s statement gets things right. It does not deny that people often make forecasting errors, but it does suggest that errors will not persistently occur on one side or the other.

Economists who believe in rational expectations base their belief on the standard economic assumption that people behave in ways that maximize their utility (their enjoyment of life) or profits. Economists have used the concept of rational expectations to understand a variety of situations in which speculation about the future is a crucial factor in determining current action. Rational expectations is a building block for the “random walk” or “efficient markets” theory of securities prices, the theory of the dynamics of hyperinflations, the “permanent income” and “life-cycle” theories of consumption, and the design of economic stabilization policies.

In essence, you cannot fool investors over and over again using the exact same trick. That’s what I’m saying, and that’s what rational expectations–as an assumption–would predict.

P.S. I hate to back up my argument with anything that Abraham Lincoln said.

106

Exactly! The repercussion of loss (enfeebled now by bailouts, etc.) is a feedback mechanism that resources were not being used in a manner that increased social welfare; this is a reliable consequence to inaccurate information or even outright stupidity.

My point runs along the same lines: someone might have lost money running a bad business, but I don’t expect them to try that same venture over and over and over again. We expect learning to be part of the self-correction in the market. The ABCT believes people can be fooled in the same way, repeatedly and predictably.

107

Obviously not that predictably or it wouldn’t happen at all.

108

It’s not a predictive science. :wink:

109

That’s exactly the point that Caplan initially raised and that I, too, am advancing. If the ABCT were true, and if it was first developed almost 100 years ago, then economic actors would have incorporated the information into their decision-making.

110

What you don’t seem to grasp is that the intervention of the government upon the structure of production, is dynamic.

i.e. they dynamically vary their tricks in an attempt to consistently thwart entrepreneurs by messing with price signals in different ways.

Government intervention is not a one shot deal. and of course ultimately entrepreneurs do cotton on to the depth of tricky and this leads to a deflationary depression or a hyperinflation crackup boom.(largely depending on political will to have one or the other)

111

That is what we call the “perfect knowledge” assumption, another hobbling feature of neo-classical.

112

Quoting Kevin D. Hooker’s entry in The Encyclopedia of Economics, Most economic decisions are forward looking. To know whether today is a day for work or for leisure, we need to decide whether tomorrow will be more or less productive than today; in short, we must have an expectation of the future. How should economists analyze expectations? The new classicals adopted John Muth’s “rational-expectations hypothesis” (see rational expectations). Muth argued that an economic model in which people’s expectations differ from the outcomes predicted by the model itself is poorly formulated. If the predictions of the model were correct—and therefore people’s expectations were wrong—then they could use the model to correct their own expectations. To fail to do so would result in economic losses and would be irrational. At one level, Muth’s hypothesis is just a technical consistency criterion for models. At another level, it appeals to the economic insight that people will not persist in easily correctable, systematic, and costly errors.

Did you catch that? If you have a model that correctly predicts wrong expectations, then that model could be used to correct expectations!

113

You just keep skating in circles around the bottom line point already made.

114

The Austrian business cycle theory does not pretend to be a model whereby data is fed in about this or that particular possible entrepreneurial endeavour, and then a future prediction is made about whether it would be malinvestment(error prediction). so it is not the kind of model that could be used as an error correcting strategy in quite the way you and Caplan would have it.

I wonder if that wasn’t so obvious that I didnt have to write that…

115

But I think you miss the point, that because of the government interference it sends the wrong signals to entrpreneurs, capitalists etc. It does happen in a similar fashion, only so far as government creates a missalocation of capital goes but it is by no means the same thing every time. Further more, no entrepreneur would be able to predict in such an environment what is being led to by actual demand and that, that is being facilitated by the government missalocation which sends out the wrong signals.

To assume just because we know something is wrong we know at all times where it will be is just fallicious. It assumes a delphic power that no Austrian I am sure whould condone. In fact, from what I have read Austrian come further down against such predictions then many other schools, but what ABCT does say is that there will be a missallocation of capital with government involvement via central banking which distorts individual time preferences etc.

116

Rational expectations theory leads to the conclusion that no deterministic business cycle can persist because it would consistently create arbitrage opportunities. Get that? There would be profitable opportunities that correct the market!

“I’ve always questioned whether there is such a thing, really, as a business cycle.” – Milton Friedman, echoing a quote I had from Eugene Fama earlier.

117

I don’t see you advancing anything that could be called an argument

118

We get that you don’t get it.

119

What you are saying seems to me, to be saying that it is ok if there is misallocation of capital by the state we can just grow our qay out of it. Don’t you think you would run into the problems of capital depletion, regime uncertainty etc. Not only that, it would seem you would surrender to the left liberals as long as you could “grow your way out of it”. How would such a theory deal with decreasing capital because of intereference by the state and its misallocations as well as all of the implecations that go with it? Moreover, in his later years even Milton Friedman said he would abolish the fed, what would be the point in that if actors could just learn to go around it. It seems like a non sequiter.

120

Haha!

What I like most: there’s absolutely no sign that any of you are even remotely familiar with neoclassical economics. Question your dogma much?