Thanks again for a thoughtful response, Jonathan.
Here’s my answer: over any length of time or over many independent agents, the errors that result from risk take a pattern that can be summed up in an objective probability distribution. One can insure against such errors.
That is, the accrued risk for long-term projects can be quantified and incorporated into expectations that halt “malinvestments.”
Lol. ‘Insurance against case probability’, yeah, sure.
LOL. Next question. Where does the agent collect the errors from to forecast the future? From the past?
Here’s my answer: over any length of time or over many independent agents, the errors that result from risk take a pattern that can be summed up in an objective probability distribution. One can insure against such errors.
This logic applies to any theory about the business cycle. Could one not accrue and insure against the risk of irrational exuberence? Obviously, all business cycles are caused by some sort of event which triggers the collapse of a certain sector of the economy. These risks, like any other risks, could, according to your logic, be taken into account. But, they’re not.
I could also claim that God can prevent business cycles, but then I would be burdened to prove why. So, you have the same burden to show how an insurer would quantify the risk of malinvestment, without being able to know for sure whether or not an investment is a malinvestment (this is the key point that you keep ignoring). The distortion in the price mechanism effectively makes it very difficult to judge whether a certain investment will turn out to be profitable or not, assuming the entrepreneur and his insurer recognizes the threat of artificially low prices.
But, like I said, to a certain degree there are those who recognize the dangers of malinvestment. There are hundreds, if not thousands, of entrepreneurs who did not invest in the housing sector, or other relevant sectors, during the height of the housing bubble. These entrepreneurs did not stop investing, they just recognized there was greater threat. But, the great majority of entrepreneurs (mostly individuals looking to buy houses) were unaware of the existence of a bubble. Those that may have been aware (large banks, et cetera) had their incentives distorted by government and government-sponsored enterprises.
I don’t know if this has been stated or linked in this thread as I haven’t followed it too closely- I would argue the point that it isn’t that new cash holders are stupid and make wrong forecasts but the incentive structure is skewed such that it makes it financially advantageous, for example, to run reserves lower and if you don’t someone else will damaging your profits, which is, given aggregate view, unsustainable and leads to a crash. All government intervention leads to forms of error cycles since it succumbs to the problems of all monopolys. See Hulsmann for an indepth argument.
Jonathan, since Neoclassical won’t answer me, I’ll ask you.
Do you think that a free market could beat JUST a federal reserve? No other government interference in the market… no bailouts or laws inhibiting alternative currency. Just a central bank manipulating interest rates.
No.
They could just switch curencies.
Sieben,
Do you think that a free market could beat JUST a federal reserve? No other government interference in the market… no bailouts or laws inhibiting alternative currency. Just a central bank manipulating interest rates.
If the government does not have sole ability to print money and if the banking industry is not cartelized under the central bank (meaning, there is competition from other banks), then I think that over the long-run, yes, the market can “defeat” central banking. The assumption is that it would simply push central banking off the market, because other, private, banks would simply offer sounder currency. Historically speaking, there have been types of central banks in free markets. They are just clearing houses meant to lend liquidity to bank branches that might be in need. Those that turned into something greater, or distorted price mechanisms, usually were bankrupted out of the market.
Right. I doubt you were following my previous debates with NC, but I tried to build a bridge: “you at least have to admit that Austrian-Interest-Rate-Problem Theory exists even if there are no cycles”. Would you agree with this?
Right. I doubt you were following my previous debates with NC, but I tried to build a bridge: “you at least have to admit that Austrian-Interest-Rate-Problem Theory exists even if there are no cycles”. Would you agree with this?
What do you mean?
Even if entrepreneurs can somehow iron out the problems of a manipulated interest rate, its still a problem.
Whether or not it gets solved determines whether there are business problems.
Sieben,
Even if entrepreneurs can somehow iron out the problems of a manipulated interest rate, its still a problem.
If interest rates aren’t manipulated, how would a business cycle come about? (Not a depressionary period, but a business cycle.)
Jonathan, busincess cycles can develop by exogenous shocks, not systematic forecasting errors; that is, markets are still efficient and still clear even though there is an “undesired” downturn.
I think Austrians admit that UFOs could cause economic problems.
I think Austrians admit that UFOs could cause economic problems.
I am not talking about “economic problems”. A huge natural disaster can cause economic problems. We’re talking about business cycles.
Neoclassical,
Jonathan, busincess cycles can develop by exogenous shocks, not systematic forecasting errors; that is, markets are still efficient and still clear even though there is an “undesired” downturn.
Instead of turning this thread into a debate over real business cycle theory, let’s stick to the topic at hand. You can discuss real business cycle theory in another thead, if you’d like.
I’m saying that given interest rates are manipulated, they are still a problem whether or not entrepreneurs can iron out the distortions before they come to market.
By the way, I laid out my criticism of Caplan’s rational expectations criticism here: Rational Expectations and Austrian Theory of the Business Cycle. I rather keep straight debate here, since it’s easier to format and whatnot, but that is the basis of my critique of your argument, so that is at least established somewhere concrete.
I’m saying that given interest rates are manipulated, they are still a problem whether or not entrepreneurs can iron out the distortions before they come to market.
The problem is that given manipulated interest rates, it’s highly improbable that entrepreneurs would be able to garner the correct price. The important part to consider is the distortion of the price mechanism. That’s what matters. This is what I’ve been arguing for the past couple of pages, or so.