Speculative bubbles in the free market

[filc]

@Tobbog

You’ve got me there. I haven’t read “Human Action” but the original “Nationalökonomie”, that’s why I’ve used the wrong terms here. What I wanted to say was that, ex post, we regret many actions that we have commited.

NP, they are fun reads though.

@Tobbog

If you think that I’m wrong, please disprove me. Which magic market mechanism will tell people ex ante that their investment decisions will turn out to be wrong??? There is none, unfortunately. And, becauses of that, if many people take a similar investment decision at the same time, which happens quite often, and that decision turns out to be wrong, there will be a good old boom-bust cycle.

I think there is a methodological mis-communication or confusion in terminology between us here. Industry’s grow and dwindle. The horse and buggy industry at one point in time consumed much in the way of global resources, it has since shrunk and died out. It cannot be said that it was a boom/bust cycle. Since no metric exists to measure whether someone is being rational or not it can only really be assumed that in a stable market industry’s that boom do so because of consumer demand. If they boom because they are providing consumers with what they want there is nothing wrong with them. If they die because of new technology that is not an economic error but a natural progression of a dynamic economy. In such cases effects on the economy will be isolated and limited in scale. You can choose to call them booms and busts but doing so could be mis-leading.

Could it be argued that Tickle-me-Elmo was an isolated boom/bust example? I would say no as the process of an industry or company growing and shrinking is not what a business cycle is. Such isolated examples of a supposed boom may have been entirely necessary from a consumer standpoint, it could be part of the natural technological and economic progression humans need. It is hard for us to judge the subjective valuation of man.

Perhaps Mises said it best.

There is no room left in the field of economics for a scale of needs different from the scale of values as reflected in man’s actual behavior. Economics deals with real man, weak and subject to error as he is, not with ideal beings, omniscient and perfect as only goods could be.

OR

Ethical doctrines are intent upon establishing scales of value according to which man should act but does not necessarily always act. They claim for themselves the vocation of telling right from wrong and of advising man concerning what he should aim at as the supreme good. They are normative and disciplines aiming at the cognition of what ought to be. They are not neutral with regard to facts; they judge them from the point of view of freely adopted standards.

This is not the attitude of praxeology and economics. They are fully aware of the fact that the ultimate ends of human action are not open to examination from any absolute standard. Ultimate ends are ultimately given, they are purely subjective, they differ with various people and with the same people at various moments in their lives.

-Human Action

The point is by your folks’s definition. When a supposed Boom/Bust happens you have no way of discerning whether it’s some kind of error or simply a change in consumer demand. Making judgments as to whether or not an industry boomed in error is passing judgement against individual human action. In other words, we are making judgments against people’s subjective valuation right?

That would not be the viewpoint of AE to my understanding. Economics is not an omniscience created at predicting the future of business activities successes and failures. Nor is it’s purpose suppose to identify the best way of doing business. Austrian Economics says that consumers will make such a decision. It simply studies the action of man after it has happened and points out the economic effects which can occur or may have already occured due to political or economic policies imposed by society.

Falling into the trap that we can pass judgement on individual decisions and find man to be irrational is akin to the planners and socialists. They arbitrarily perceive things in their own way and wish to project their point of view on the masses, calling human action an error. Or by accusing man of being irrational.

I hope some other Austrian Economists will defend my viewpoint, I don’t think I am missing the boat by any means. Thanks Tobbog.

[mickanomics]

@Tobbog

which happens quite often, and that decision turns out to be wrong, there will be a good old boom-bust cycle.

To Tobbog and filc. You are both right. Tobbog’s description of a boom can and does happen… but too-low interest rates can/will make the bubble much bigger because the process of borrowing to invest inflates the money supply. Its perfectly possible to have more than one reason for any phenomina.

[liberty_student]

@mickanomics

but too-low interest rates can/will make the bubble much bigger because the process of borrowing to invest inflates the money supply.

This is incorrect. Interest rates only get lower through monetary inflation, they do not cause inflation themselves. When the FED targets a rate, it hits that rate by manipulating the money supply. The rate is only a price, and is subject to supply and demand.

[mickanomics]

@liberty student

This is incorrect. Interest rates only get lower through monetary inflation, they do not cause inflation themselves. When the FED targets a rate, it hits that rate by manipulating the money supply. The rate is only a price, and is subject to supply and demand.

Agreed. But the gist of my previous posing is still correct. I shall modify it slightly-

To Tobbog and filc. You are both right. Tobbog’s description of a boom can and does happen… but the FED’s targeting of too-low interest rates can/will make the bubble much bigger because the process of borrowing to invest (which has now been made cheaper) inflates the money supply__*__. Its perfectly possible to have more than one reason for any phenomina.

* The “money supply” that counts is the total money that has been lent out. If the FED creates new money by decree, its effects on prices are not felt until the money gets lent out in to the real world. I.e. the fed could create 100 trillion dollars tomorrow, but if it just sat there not doing anything then there would be no effect on inflation.

Is that better?

[filc]

@mickanomics

To Tobbog and filc. You are both right.

Lets be clear Mick that this is your viewpoint and not a viewpoint shared with Austrian Economists. Austrian’s don’t consider standard fluctuations in the market as being bubbles.

[filc]

Mises on Speculative action

@LVM

However one twists things, one will never succeed in formulating the notion of “irrational” action whose “irrationality” is not founded upon an arbitrary judgement of value. Let us suppose that somebody has chosen to act inconstantly for no other purpose than for the sake of refuting the praxeological assertion that there is no irrational action. What happens here is that a man aims at a peculiar goal, viz, the refutation of a praxeological theorem, and that he accordingly acts differently from what he would have done otherwise. He has chosen an unsuitable means for the refutation of praxeology, that is all.

Human Action -LVM

[mickanomics]

@filc

Austrian’s don’t consider standard fluctuations in the market as being bubbles.

I know (from other debates) that you define a bubble as being “the thing that Austrians would like to call a bubble” in which case I can, by definition, never describe an alternative phenomena that you would accept as a bubble however bubble-like it appears to the rest of us.

[liberty_student]

@mickanomics

I know (from other debates) that you define a bubble as being “the thing that Austrians would like to call a bubble” in which case I can, by definition, never describe an alternative phenomena that you would accept as a bubble however bubble-like it appears to the rest of us.

No. It’s not what Austrians would call a bubble. It is what a bubble is. Even neo-classicals would agree a bubble is a bubble, not a market fluctuation.

You aren’t describing an alternative phenomena. You are trying to redefine existing terms under Mickanomics, into any ad hoc thing you want it to be.

The issue here is the limit of your knowledge about economics, not some dishonest debate technique or Austrian eccentricity.

You should really need to read this (the whole thing),

Economics for Real People | Mises Institute

to understand economics the way Peter Schiff, Marc Faber and Jim Rogers understand economics.