Sure I can, and I have in a distant past, but the point is that in todays world buying the market is praxeologically instable (because some major actors in the economy can distort incentives with other people’s money and against their will).
Edit: I’m currently in gold and silver indeed, and if Belgian farm land law wasn’t so corrupted in favor of the farmers, I’d buy some farm land too. My general strategy nowadays is “keep counterparty risk as low as possible”.
Exactly! This is exactly where our two perspectives differ: I don’t believe investors can be irrationally and repeatedly mistaken if the same trick is being used to interfere in the marketplace.
Let me quote from my insentient god, Wikipedia, Beyond the normal utility maximizing agents, the efficient-market hypothesis requires that agents have rational expectations; that on average the population is correct (even if no one person is) and whenever new relevant information appears, the agents update their expectations appropriately. Note that it is not required that the agents be rational. EMH allows that when faced with new information, some investors may overreact and some may underreact. All that is required by the EMH is that investors’ reactions be random and follow a normal distribution pattern so that the net effect on market prices cannot be reliably exploited to make an abnormal profit, especially when considering transaction costs (including commissions and spreads). Thus, any one person can be wrong about the market—indeed, everyone can be—but the market as a whole is always right.
Neoclassical, yes that qoute makes sense, but even so the market will react to market distortions again and again as a portion of the capital has a lower time horizon than the expected period of distortion. So even neoclassicals, based on RE based on an unsound methodology, should come to the conclusion that ABCT is right and that the structure of production is key in economic theory.
There’s an old economics joke, perhaps you’ve heard it, about an economist strolling down the street with a companion when they come upon a $100 bill lying on the ground. As the companion reaches down to pick it up, the economist says “Don’t bother — if it were a real $100 bill, someone would have already picked it up.”
I believe that all exploitable opportunities for profit will be exploited. Thus, I believe in the random walk hypothesis.
BTW, why do you laugh at the advice to buy gold?
And guys, when the debate begins, please provide a link or something so we can follow it.
I don’t really. I wish I had more money to buy bullions!
P.S. The fact that the price of gold rises as the money supply is debauched is a strong defense that even Austrianism is already well-reflected in the market!
And why is it important to know when a bubble has emerged?
Do you assert that central bank policy has no affect on the structure of production (the essence of ABCT)?
Yes neoclassical, please respond Chloe’s question, it’s the essence of it all. See my post a bit higher on this page for the reasoning why even RE should lead one to conclude structure of production is key.
Thanks! Good read!
Real business cycle theorists see the pattern of expansion and contraction present in economic data as the economy’s response to exogenous productivity shocks.16 These “modern theories of business cycles attribute cyclical fluctuations to cumulative shocks and disturbances that continuously buffet the economy. In other words, without shocks there are no cycles” (Chatterjee 2000, 1). Money and central bank policy is largely irrelevant with respect to economic expansions and downturns. But, while policy errors do not cause downturns, counter-cyclical policies are counterproductive, they entail costs in excess of benefits (Prescott 1986, 21 and Chatterjee 1999, 18).
Austrian business cycle theory and real business cycle theory may be somewhat complementary.
Neoclassical,
Um…you took the quote from John Cochran’s paper out of context. What about the rest of it?
@Neoclassical,
Your reading list is extensive. Why do avoid our questions directed toward the structure of production?
Clearly, you could say “the structure of production is a fiction that does not assist in understanding economic phenomenon. Therefore, describing how central bank policy affects the structure of production is irrelevant”.
That would be an answer and we could move on. But you are silent. Why?
You people sure do seem to praise those with such prophetic powers (e.g., Peter Schiff). Once again, I claim that this requires an omniscience that Hayek explicitly denies. People are right, sure, in hindsight–but a regular doomsayer like Schiff is bound to be right from time to time.
The structure of production? That’s make-believe.
Any quote is out of context. I do not find the quote to have a misleading message. Ultimately, I simply wanted to present a concise definition of RBCT.
Neoclassical,
Of course external shocks can lead to local and temporary “bubbles”. This does not logically exclude ABCT nor did you explain how you can believe RE and NOT admit structure of production is key.
The structure of production? That’s make-belief
Ok, than show me the logical inconsistency in my reasoning from a few posts earlier:
Neoclassical, yes that (RE) qoute makes sense, but even so the market will react to market distortions again and again as a portion of the capital has a lower time horizon than the expected period of distortion. So even neoclassicals, based on RE based on an unsound methodology, should come to the conclusion that ABCT is right and that the structure of production is key in economic theory.
NOW WE ARE GETTING SOMEWHERE! Thank you.
Your replies now make perfect sense given that you reject the reality of the structure of production. We contend the essence of ABCT is the distortion of the structure of production, but you deny the existence of said structure.
No wonder we are talking past each other.
That’s a less than artful dodge amigo. People like Schiff are not right because they are prophetic, but because they understand the structure of production (which you call make believe) and they understand business cycle theory.
When one denies the foundation of another’s understanding, then of course it will all seem like prophecy. It’s your lack of understanding that elevates Schiff to the supernatural.
Only in hindsight can we spot bubbles. That doesn’t make them any less real. Analysis is not contingent on prescience.
Neoclassical, it’s indeed true that RE says that all info will be taken into account (efficient market hypothesis).
It comes in degrees of strength. Weaker forms include publicly known information whereas the strongest will require insider information to be accounted for as well.
The structure of production? That’s make-believe.
How so?