Right I agree with you. I’m just trying to get NC to admit that there is a real systemic problem. Then the debate is just whether the market can get around it somehow.
[edit] I think it can also be analysed as a collective action problem, whereby if one entrepreneur takes the new credit, he personally benefits a lot and is only hurt a little by market price distortions. So each entrepreneur takes this route with predictable consequences. The only solution is to boycott new credit.
In fact it’s impossible. If individuals could “figure out” the “correct price” then we wouldn’t need markets at all. Markets attempt to establish market clearing prices, and the interest rate is a price.
The ironing out of distortions is the recessions/depression–that is when the malinvestments are exposed. You cannot identify malinvestments, with certainty, until they prove to be unprofitable.
The problem is that NC refuses to believe that you can have systemic disequilibria for extended periods of time. RE explicitly says that individual expectations, in the aggregate, are not systematically incorrect, that is, they do not vary from equilibrium results. This is why they cannot explain the systemic errors that are exposed during recessions.
Neoclassical, still waiting. Where does the agent collect the errors from to forecast the future? From the past?
Yeah exactly. And moreover, RE is exactly, and nothing more than, the assumption within an optimization model, that the agent who’s solving it has at his disposable all true and relevant structural information about the model, and that the information is used optimally to arrive at his solution, or choice. Thus, for example, the agent would have at his disposal the precise process that government uses to determine both present and all future debt levels, and would use this information to solve the model appropriately.
This is the extent of RE, nothing more. Many economists, even supposedly the best, assume that in reality this idea translates. That the everyday idea of people using foresight to make decisions is the same thing as having a precise model of the whole economy and all relevent information about it. The absurdity of that idea is obvious. No one has a model of the whole economy at all, much less the precise processes for the variables within it.
Of course, the standard counter is the “as if” argument. That people don’t have models at there disposal, but it’s as if they do. That’s why we’re generally approaching some sort of equilibrium. But this is only true in so far as prices convey accurately the desires of consumers. If this breaks down so does the as if argument.
edward_1313 and Esuric, I would agree with both of your depictions for my viewpoint (that is, market participants cannot be systematically tricked and that there is no sustained disequilibrium–a “boom” is efficient and so is a “bust”).
At this point, I think all we can do is throw our hands in the air and proudly agree, “I still think I am right!”
P.S. I am, more than anything else, cheerful that both of you fully understand the point I am articulating; I am (perhaps feebly) articulating New Classical macroeconomics, and I appreciate that you both have a working familiarity with it.
Translated into every day language: ‘whatever the f*** happens, is efficient’
Something tells me that as a theory, it doesn’t really explains much.
Unlike George Stigler, I don’t believe that all stable features of the social world (including democratic politics) are efficient.
Neoclassical, I still want to follow up on the previous discussion; you seem to be balking at an answer. Just to remind you it’s in reference to this post.
Where are the errors coming from? You seem to be saying that at time t, they’re taken from the past and used to extrapolate a trend (say by means of a regression). Is this what you’re saying?
edward_1313, I assume rationality from microfoundations. I’d almost prefer Austrian verbal logic: profits accrue to those that correct for predictable errors.
Nice dodge. You’re all muddled. I’m not convinced you’ve really thought through any of the claims you hold.
Since no “malinvestments”, “booms”, “busts”, “ABCT”, and such exist for you, what would you (as a hypothetical businessman) have learned that would prevent you from starting a new venture after just going through a failed one – “low” or “high” interest rates notwithstanding? If the answer is “nothing”, wouldn’t you go ahead and make the same “mistake” again? If the answer is “something”, wouldn’t that mean your acceptance of ABCT’s validity?
Wow, the score is now officially: Austrians 6580 Neoclassicists (sp?) 0. The route is on. Neoclassical, admit defeat, maybe take in some valuable information shared with you, and learn and grow. Seems like a great opportunity to learn; I hope you embrace it.
Not that I want to keep this thread going any longer than it has to, but I do have a question regarding the Neoclassical School. Does their whole approach rest on RE or something? And do they spend their time trying to identify these exogenous (sp?) shocks their theory rests upon? Doesn’t that smack of drawing a lot of bulls-eyes around a lot of arrows? Do they even agree amongst themselves what the shocks are? Going back through the last five or ten recessions, do they have a list of agreed upon shocks? Austrian Theory reasoning against the RE theory seems so much more elegant, consistent, and convincing to me. Is this still a serious bone of contention among economists (Austrian vs. Neoclassical)? Does a much larger part of the Neoclassical school rest on RE being correct or something? If so, then the Neoclassical camp would never admit they were wrong about RE. Too much at stake.
Thanks for this thread. I love it when different ideas are debated like this. Next I want to see some monetarists (is RE part of the monetarist school of thought?), Keynesians, and especially Charlatans enter the fray.
If you don’t know whether or not RE is a branch of monetarism, then you clearly have not looked into anything other than Austrianism.
Your opinion? Null and void.
I suppose I can do no better than to quote Bob Lucas himself:
People who live in the desert don’t have any umbrellas. If you were seriously studying the demand for umbrellas as an economist, you’d get rainfall data by cities, and you wouldn’t hesitate for two seconds to assume that everyone living in London knows how much it rains there. That would be assumption number one. And no one would argue with you either. In macroeconomics, people argue about things like that. . . . So we’re not very interested in the dynamics of how someone comes to know whether he’s in a rainy situation or not.
[…]
When you present a demand curve, you suggest that people solve some nonlinear program or find a tangency point. It’s fairly complicated to write an algorithm for actually doing that. It wouldn’t have any resemblance to the way a household makes decisions about anything. When I get the objection on the expectations point, which I often do, I say, “Why didn’t you say that while I was talking about demand?”
z1235, I contend that if ABCT were true, businessmen would not persist in the same mistake.
…thus rendering ABCT false, right? So if ABCT were true, then ABCT is false?
The theory doesn’t even work theoretically; that’s all.
No.
Some do. The official explanation for the 70’s stagflation crisis is the so-called “oil shock.”
Yes.
No, many neoclassical economists, usually leftists, absolutely detest RE. My professor explained it this way: “RE asserts that everyone has it right but the economists.”
Monetarism is not longer relevant really. Most central banks don’t target the money supply anymore (it’s impossible), but rather have implicit nominal anchors. Austrians, of course, entirely reject monetary policy altogether. The New-Keynesian school (mainstream) is a synethesis of many other schools of thought (neo-Keynesian, Monetarist, rational expectations, RBCT, supply-siders, ect).
Um no. Looks to me it’s your logic that doesn’t work, as you’re contending: “If A, then -A.”
He’s using RE to argue against it. But if we reject RE, then there is no argument. If we accept RE, there is still no argument, as information as to what may or may not be a malinvestment is not available.