I want to see if I have this straight. To be a “higher-order” good is only to be perceived as such within the eye of the beholder (i.e., the order of a good is subjectively determined by the owner). For some reason, these entirely subjective judgments cluster together during a bubble.
Is that right?
Neoclassical,
Why don’t you read just the first chapter in :http://mises.org/books/mespm.pdf
and see if you still can’t grasp the concept of higher-order good.
What would be your objection to some of these fundamentals?
What point are you trying to make? That there is no distinction between a higher and lower order good?
This is why using a mechanistic approach to understanding the economy you remove yourself from the actual point of studying economics in the first place.
I want to see if I have this straight. To be a “higher-order” good is only to be perceived as such within the eye of the beholder (i.e., the order of a good is subjectively determined by the owner). For some reason, these entirely subjective judgments cluster together during a bubble.
Is that right?
Oh god! Either you just expressed your self poorly, or the whole “I was an austrian I read everything bla bla” just came crumbling down.
edward_1313, I assume rationality from microfoundations. I’d almost prefer Austrian verbal logic: profits accrue to those that correct for predictable errors.
Thats the point that everyone is trying to make to you. That because of CB action profits DO NOT accrue to those that correct for predictable errors.
Every time you post something I lose litte bit more respect for you as an independent thinker.
I’ve already stated what you’ve posted. That Friedman, Becker, Sargent, Lucas, etc. argue that although people don’t actually solve optimization problems int their head they behave as if they do. And that although the economy is a giant complex adaptive system composed of individuals with only small fragments of knowledge and computational ability, we can model that economy as if it is one single machine optimized and in perfect harmony.
And the rationalization for this assumption, that is, the assumption of perfect rationality, information, and so forth (all the prerequisites for equilibrium) is that the economy really does approach that sort of harmony. That is, producers are generally pretty good at making what consumers want; we experience this on an everyday basis. And the reason they’re pretty good at making what consumers want, despite the fact that none of these individuals posseses much computational power, foresight, or intellignece, at least in the sense of RE and neoclassical models, is that the guys that make what people want simply get more money than the guys that don’t. That is, greater profits accrue to the guys who happen to hit it right. That’s why we can assume that, on average, entrepreneurs are rational in the sense of RE. There is no other reason that that assumption can be justified. It can only be justified purely on the basis of the profit and loss system working properly.
You seem to acknowledge this, and I think up to this point you are in perfect agreement. But at this point you fail to realize the most fundamental implication of the fact that profits accrue to the good entrepreneurs and not to the bad. And that implication is that greater profits accrue to a producer by means of money from the consumers. That is, the assumption that greater profits go to the guys that make what customers want, assumes that the money received was actually from a consumer at some point. If it was not from the consumer, then profits will not accrue to the guys that make what consumers want. And if profits do not accrue to those that make what consumers want, we are no longer able to make the assumption of hyper-rationality on behalf of producers! As mentioned before we are only allowed to assume RE so long as the profit and loss system is working properly. If this system breaks down, we can no longer assume rationality on behalf of entrepreneurs. The profit and loss system precedes the rationality of entrepreneurs.
Thus, you cannot argue that entrepreneurs will beat the system by means of foresight, precisely because we can only assume that entrepreneurs act as if they possess such foresight only if the profit and loss system is working properly. That is, only if the money which they receive was the product of the consumer.
I know to many this may seem like commen sense, but somewhere along the way neoclassical is losing the logic that is smacking him in the face. So to recap. Profit and loss precedes rationality and proper foresight. That breaks down, then so does the assumption of the latter.
edward_1313, a nice and simple explanation. I was hoping this would have become obvious after your ant pheromone analogy, and many other great posts from others. It boggles the mind that someone could persist in confusing the emergent “intelligence” of a complex adaptive system with the intelligence of the agents that comprise it.
z1235, I specifically differentiated constructivist rationality from ecological rationality. If you read what I had shared, then you would know that rational expectations does not depend upon all individual market participants acting rationally.
edward_1313, ABCT demands that entrepeneurs invest in enterprises that are systematically and probabilistically inclined to increase loss. The profit and loss is still present: these costs are not being externalized en masse (except for some bailouts, which we can argue were either predictable or not).
Neoclassical,
Consider this scenario
Lets say a business decides to expand. They begin a lengthy expansion project that will take several years to complete. They take into consideration the costs of various factors needed to complete the project over time, in comparison to what their expected revenue will be. They also consider certain factors like expected inflation, loan interest rates, ect…
Now lets say halfway through the expansion project, the price of those raw materials and factors that go into the expansion project radically climb to a point much beyond then what was originally expected. The prices climb to a point that continuing the project, mid-way in, would be unfeasible and they would be unable to afford it.
They have two options. Abandon or place the project on hold. Or take out more dept in a desperate attempt to complete the project.
They decide to abandon the project for now, and put everything on hold.
Do you see this as being an un-realistic scenario?
filc, no, I don’t.
I find this unrealistic: making that same mistake again, given preconditions that are systematically similar.
You don’t think it’s possible for factors of production to change outside of the expectation of individuals in business?
Given this how can you defend your claim that you say businessmen are not omniscient, because you continue to imply that they behave as if they are.
I don’t believe in “omniscience,” but I do believe people will optimize on information in order to generate benefits that outweigh costs.
Not systematic change. You can’t use the same trick repeatedly; that’s all.
Basically, people, I agree with Hayek: competition is a discovery process.
Neoclassical, your concept of entrepreneurial behavior is so misguided that I would venture a guess that the most entrepreneurial thing you’ve ever done in your life is perhaps ask someone on a date. What is so hard to understand about the proposition that demand for loans would be higher at 3% interest than at 8% interest?
Without a central printer of fiat currency the loans’ interest rate would simply be decided by the supply of real savings and the entrepreneurial demand for them. Consider the following self-regulating (negative) feedback loop: (1) The higher the savings relative to the entrepreneurial demand, the lower the loans’ interest rate as the glut of savings chase the limited loan demand – the lower rate increasing entrepreneurial demand, and decreasing the incentive to save. (2)The lower the savings, the higher the interest rate as the glut of entrepreneurial demand bids for the limited loan supply – the higher rate limiting entrepreneurial demand, and incentivising saving.
Is it so hard to understand the potential havoc wrought by a central printer of currency with the power to set such important market parameters by fiat? In a world where “savings” are created out of thin air, and rates are set at 1% by decree, do you understand the consequences of not participating in the game and (rationally? prudently?) not borrowing at such a rate? You get run over by the ones that do, as your wealth gets transfered to them.
What does your rationally expectant entrepreneur do when faced with a race to grab one of five chairs to sit on against ten others like him? Stomp with his feet and scream: “Helooo, there’s only five chairs and ten of us! Five of us are bound not to have a seat at the end, rationally speaking! We’re all stupid for doing this!” ? He’d simply be laughed at and left in the dust as the nine others start running toward the chairs.
Z.
What is so hard to understand about the proposition that demand for loans would be higher at 3% interest than at 8% interest?
I don’t think Neoclassical denies that; that can be empirically verified. The problem is that Neoclassical does not realize that the distortion of the price mechanism represens a distortion of the information presented to the individual entrepreneur. So, it is not necessarily irrational to preform malinvestment, because the entrepreneur has little way of knowing whether his investment is a malinvestment or not (and, even if a certain investment turns out to be rotten, the fact is that since investments are oftentimes sold themselves, the original investor can come out winning).
No one has denied that.
Where in my scenario are we referring to systematic errors? Repeated Errors? or multi-organizational errors?
Neoclassical,
edward_1313, ABCT demands that entrepeneurs invest in enterprises that are systematically and probabilistically inclined to increase loss.
No it doesn’t. The probability of profit, at the time of the investment, would be the same whether or not it was malinvestment. You are not taking into consideration the effects of price distortion on the ability for entrepreneurs to calculate.