The Myth of Economic Bubbles

[Catalan]

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.

Ultimately, neoclassical has been unable to objectively address our rebuttal to his criticism (basically that even if RE is true, it cannot account for the distortions caused by interest rate manipulation). This thread pretty much died when neoclassical “agreed to disagree”, but apparently people want to keep the flame going (as if anything is going to change).

[z1235]

I found the rebuttals to be educational and elucidating, so the thread was not a complete waste, from my perspective.

[EDIT: Didn’t learn much from Neoclassical, though]

[razerfish]

I know a little about Marxism and a little about Keynesianism, don’t proclaim to be more than a layman. Happened upon AS fairly recently, and learning at a fairly steady clip. From reading this thread, I think I can make a similar accusation about you: you really don’t know much about AS and your opinions are null and void. You regurgitate quotes and duck serious questions. When cornered you just state: I don’t believe entrepreneurs/businessmen can make systemic errors without making a case why. When presented with examples how systemic errors could happen and still be based on rational choices made by entrepreneurs, you ignore or duck. You also ducked answering the question about the ant pheromones situation, either because you were cornered and didn’t want to give in, or the point of that example flew right over your head. Admit it, you’re no expert on RE or AS. You’re a laymen like me. No shame in admitting you’re out of your depth. Better than faking like you’re not.

[EconomistInTraining]

But they’ll never be able to model, say the Stock Market, as anything other than psuedo physical phenomena

Ermm, hello? Random walk model?

But maybe it is enough for you to perceive the world mechanistically?

That’s entirely besides the point. The rationality assumption is not an attempt to capture reality, it’s an assumption made for theoretical rigour. Which is why mainstream economics subject theory to scrutiny as to how well it captures what really happens in the economy. Almost always the answer will be the same, to some extent it captures reality, but how much better can we do without sacrificing internal consistency?

[EconomistInTraining]

I can’t believe you that you can’t believe. Open up, http://mises.org/books/desoto.pdf

Do a search for “accounting profit”. Use a little common sense before you embarrass yourself =p.

I just read the book this week, and sure enough, as I expected he makes the exact point I was going to make. Entrepreneurs are foward looking, if you truly believe that market actors make rational calculations about business decisions and that production is a process in time (which, you do), then you should understand that it’s impossible to compare costs that occur at different stages in time. So guess what? When projection profits and costs entrepreneurs calculate the NPV, which sure enough makes use of the interest rate.

As de Soto says it, when the CB works to lower the interest rate, the result is that the NPV of more future oriented projects rises more relative to the NPV of those projects that are less far in the future. How on earth is this not an example of entrepreneurs making use of the interest rate in their production decisions?

It’s funny that you hold both the following views:

• Entrepreneurs use prices for rational economic calculation.
• The interest rate is (more or less) the price of time.

And yet for some reason the interest rate isn’t used in production decisions by entrepreneurs.

Now, the question remains, what interest rate? Or is this just another example of a simplifying assumption the Austrians can make for tractability? (You know, the ones that are “physics envy” when it’s the mainstream doing it).

[Snowflake]

@EconomistInTraining

Ermm, hello? Random walk model?

Like I said: Pseudo Physical Phenomena.

@EconomistInTraining

That’s entirely besides the point. The rationality assumption is not an attempt to capture reality, it’s an assumption made for theoretical rigour. Which is why mainstream economics subject theory to scrutiny as to how well it captures what really happens in the economy. Almost always the answer will be the same, to some extent it captures reality, but how much better can we do without sacrificing internal consistency?

There’s a difference between good empirical rules of thumb and economic laws. Human beings act is axiomatic. Rational expectations is a rule you will have to test. It won’t ever be apodictic.

[Esuric]

As de Soto says it, when the CB works to lower the interest rate, the result is that the NPV of more future oriented projects rises more relative to the NPV of those projects that are less far in the future. How on earth is this not an example of entrepreneurs making use of the interest rate in their production decisions?

It’s funny that you hold both the following views:

• Entrepreneurs use prices for rational economic calculation.
• The interest rate is (more or less) the price of time.

And yet for some reason the interest rate isn’t used in production decisions by entrepreneurs.

Excuse me, but, saying that entrepreneurs speculate about future economic conditions does not mean that their expectations are, in the aggregate, systematically inline with some illusory general equilibrium. The interest rate is used in production decisions, but so are factor prices, the potential profitiability of certain employments that are arbitrarily altered by monetary expansion, ect ect.

[filc]

Does the RE camp place too much emphasis on the ERE concept?

[EconomistInTraining]

The interest rate is used in production decisions, but so are factor prices, the potential profitiability of certain employments that are arbitrarily altered by monetary expansion, ect ect.

filc denied just that, and is now ignoring me.

So which interest is it, by the way?

[filc]

I did? And I am?

I think I just pointed out that your confusing what interest is, where it comes from, and what , under normal conditions, determine’s it’s price.

[EconomistInTraining]

Entrepreneurs do not spend their time looking at loan interest rates to decide if it’s more profitable to open a record/CD music store, as opposed to a McDonalds.

…

Entrepreneurs don’t use any form of aggregate “interest” rate to direct their business activities

…

You need to stop thinking of it as “Interest”, like credit & interest,

Yeah, you did.

[StrangeLoop]

Even though, for some reason, I am bashed for using quotes, I wanted to share some wisdom from Thomas Sargent: “[W]hy not optimize over expectations too? . . . When you impose rational expectations, you do not accept that systematically manipulating forecast errors is feasible.”

And, just to irk you quote-haters even more, here is one from Todd Knoop: rational expectations “does not mean perfect information because some information may not be publicly available and some information may be prohibitively costly to obtain (i.e., the marginal cost of such information is greater than its marginal benefit). . . . What if some segments of the public are not rational and do not use all available information when setting expectations? Rational expectations are not invalidated. Those who are rational will take advantage of the profit opportunities created by those who are consistently making predictable mistakes. . . . The notion–that individuals learn and do what is in their own best interest–is at the heart of the discipline of economics. To assert that individuals do not act rationally is to assert that most of our economics is wrong.”

[filc]

@EconomistInTraining

filc denied just that

I said

@Filc

Entrepreneurs don’t use any form of aggregate “interest” rate to direct their business activities

I was agreeing with everyone that aggregates are oftentimes non-sense. An entrepreneur calls his bank and asks how much a loan costs. he doesnt’t call the Fed and ask them what they’re FFR is. So how does my statement conflict with Esuric’s?

@Esuric

The interest rate is used in production decisions,

I was also trying to explain the following

@Filc

I think I just pointed out that your confusing what interest is, where it comes from, and what , under normal conditions, determine’s it’s price.

I was simply trying to explain that the loan market simply mirrors industry’s accounting profits overtime. I probably just did a poor job of explaining that.

No offense EconomistInTraining but your nitpicking over petty details and technicalities of terminology, or differences in points of view. Do you have an actual criticism or have you run out of idea’s so your just desperately looking for flaws in our posts?

What exactly is your goal here EconomistInTraining?

[EconomistInTraining]

Look, as far as I can tell, I asked you an important question “what interest rate do entrepreneurs use in calculating NPV and why do they use that one?”. Of course, there are all sorts of corollary questions such as “what are the effects of monetary intervention on different interest rates” and “what are the implications for entrepreneurs of diverging interest rates”.

These are important questions for advocates of ABCT such as yourself, unless you can answer such questions and justify your answers then the ABCT is of little empirical relevance… the devil is in the details. Now, banks have different interest rates, and these interest rates differ from the FFR. For a lot of Austrian empirical research the latter is used as being indicative of interest rates.

My goal here is for productive debate. Thing is, I find Austrian economics interest, just not academically relevant and I’d love to be convinced of the latter. No offense is taken, but it does lower my overall perception of you that you make a technically mistake and accuse me of not having any “actually criticism” and go on to imply that I’m trolling.

[EconomistInTraining]

There’s a difference between good empirical rules of thumb and economic laws. Human beings act is axiomatic. Rational expectations is a rule you will have to test. It won’t ever be apodictic.

It’s axiomatic because it’s a tautology. Rational expectations is an assumption that whether true or false, is at least in principle testable.

[Snowflake]

@EconomistInTraining

It’s axiomatic because it’s a tautology

Complex differential equations are also tautological. You can still learn something by solving them.

@EconomistInTraining

Rational expectations is an assumption that whether true or false, is at least in principle testable

I never said anything to the contrary.

[EconomistInTraining]

Hayek’s P&P comes straight out of Bohm-Bawerk’s PTOC, specifically pages 114-117. Bohm-Bawerk provided the framework, which was modified (never replaced) by subsequent Austrian economists (Mises, Hayek, Lachmann, et al.). So, essentially, you exposed yourself as a fraud who is entirely unfamiliar with Austrian capital theory, but who pretends to be an authority. Austrian capital theory is by far the most advanced treatment of capital; in fact, the Austrian school is the only school that actually deals with capital at all.

I’ve been browsing these forums for some time now and have generally concluded that people here are civil to one another, please don’t make me revise this opinion on the community. Everything I’ve said so far has been in good faith, to some extent or another I’ve been reading a lot of Austrian work this past week, but when I say I haven’t picked up anything Austrian in about 3 years, I mean it. If that’s I’m somehow posing as an authority on the subject, then so be it. I’m sorry for anything I’ve said that may have mislead the helpful onlookers into thinking that I’m about to get tenure at Mises University. I’ve extended an inviting for honest discussion with you and I’d much appreciate it if you could do the same.

Now, when I mentioned TPToC, I was referring to Hayek’s work. The one that was meant to be followed by a second volume and never was. You know the one that Roger Garrison stays well clear of? And the one full of problems that Lachmann couldn’t later solve.

capital is far too complicated, so rather than actually dealing with it, we’re content to just (a) aggregate and homogenize inherently heterogeneous goods with varying degrees of complementarity

Sure, to one extent or another, that’s true. But nobody here has been able to tell me what order a good is that goes to produce itself, I’m just asking for a conceptual clarification, not a name tag (as one poster erraneously has me saying). That’s been my point all along (somehow the mainstream can’t make assumptions for analytical purposes, but when Austrians do it we’re all just being “too literal” about the whole deal), capital theory is complicated, it’s stumped the smartest minds in economics. If and only if Austrian capital theory and all it’s baggage can bring something to the analysis that would have otherwise been forgetten then perhaps it’s worth it, has anybody done this yet?

Even then, there’s a huge deal in making capital theory so much more complicated than it needs be. Seriously, capital theory and methodology are the Austrian equivalents of mathterbation.

ignore the element of time completely

So the LCH and related work does what then?

Everything. Expectations is at the very core of ABCT (the fact that they’re manipulated).

Right, so one would have (mistakenly) thought there’d be a whole literature on how expectations are formed, how they affect the business cycle etc.

By the way, I don’t mean to single you out here, I’ve had numerous posters telling me that I’m dense, ignorant and trolling. There’s little need for it and I’d like to believe none of it is true.

[Esuric]

I’ve been browsing these forums for some time now and have generally concluded that people here are civil to one another, please don’t make me revise this opinion on the community. Everything I’ve said so far has been in good faith, to some extent or another I’ve been reading a lot of Austrian work this past week, but when I say I haven’t picked up anything Austrian in about 3 years, I mean it. If that’s I’m somehow posing as an authority on the subject, then so be it.

Well, first, you shouldn’t come to an Austrian economics forum and say that “Austrian capital theory has been dead for years.” Clearly, it’s not dead, and if you think it is plagued with theoretical deficiencies, then you should state them and critique it.

Now, when I mentioned TPToC, I was referring to Hayek’s work. The one that was meant to be followed by a second volume and never was. You know the one that Roger Garrison stays well clear of? And the one full of problems that Lachmann couldn’t later solve.

Which problems are you referring to, specifically? Because Hayek said that Lachmann essentially said everything he was trying to say in TPTOC.

But nobody here has been able to tell me what order a good is that goes to produce itself, I’m just asking for a conceptual clarification, not a name tag (as one poster erraneously has me saying).

It has been dealt with. This question is both meaningless and entirely irrelevant.

Even then, there’s a huge deal in making capital theory so much more complicated than it needs be. Seriously, capital theory and methodology are the Austrian equivalents of mathterbation.

Because the implications of neoclassical capital theory are horrific. A homogeneous capital “blob,” that is self-replenishing, leaves absolutely no room for the entrepreneur. It makes him superfluous.

Right, so one would have (mistakenly) thought there’d be a whole literature on how expectations are formed, how they affect the business cycle etc.

Capital and Its Structure, Chapter 2 (“On Expectations”) - Ludwig Lachmann. I haven’t read any of the recent stuff.

By the way, I don’t mean to single you out here

There’s no need to apologize. I’ll try to answer all of your questions and remedy any confusion.

[StrangeLoop]

I want to add that because of this thread, I’ve been reading Lachmann, and he is definitely an underemphasized thinker.

[filc]

@EconomistInTraining

Look, as far as I can tell, I asked you an important question “what interest rate do entrepreneurs use in calculating NPV and why do they use that one?”

Well if it were me I’d probably call my bank. Is that what you were looking for? I don’t see what this is suppose to prove.

@EconomistInTraining

unless you can answer such questions and justify your answers then the ABCT is of little empirical relevance… the devil is in the details. Now, banks have different interest rates, and these interest rates differ from the FFR. For a lot of Austrian empirical research the latter is used as being indicative of interest rates.

I guess I don’t see what the relevance is of answering some of these questions. Lets get one thing straight though, the validity of ABCT does not depend on Filc’s ability to post on a web-forum.

@EconomistInTraining

For a lot of Austrian empirical research the latter is used as being indicative of interest rates.

Are you saying the FFR and the FED does not effect the individual rate prices at various participating banks?

@EconomistInTraining

My goal here is for productive debate.

Oh?

@EconomistInTraining

o offense is taken, but it does lower my overall perception of you that you make a technically mistake and accuse me of not having any “actually criticism” and go on to imply that I’m trolling.

Well fortunately I am not too overly concerned with your perception of me. Furthermore you said you pointed out a technicality, but I asked you explain how my statement conflicts with Esuric’s?

@EconomistInTraining

to imply that I’m trolling.

I am not implying this.