makes sense to me filc
I’ll be honest with you: I made most of this up myself. I would be surprised if nobody had ever mentioned it before, but I don’t know of any sources off the top of my head. I too would be very interested to read any.
However, I can at least point you to the article where I read about Schelling’s example.
I would argue otherwise: the people trying to get the water bottles to drink are going to be competing against the people trying to get them to use as money. Hence their price (in terms of other goods) will be higher than if they weren’t being used as money.
Bubbles. They don’t exist. I know, Austrians, I know. You’ve built recent fame on diagnosing the “housing bubble.” What would you do if bubbles were exposed as fictions, CNBC make-believe, cognitive illusions? I hope you recover ably.
Firstly, “bubble” doesn’t even possess a satisfactory definition. To quote Eugene Fama, People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.
As he later states, It’s easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.
To be able to diagnose a bubble, we need to have three different abilities:
- We can know the fundamental prices of assets.
- We can know when asset prices move away from their fundamental value.
- We can predict those prices will move back toward their fundamental values.
Many magazines, pundits, bloggers, economicts, etc. believe they have all three powers, and many have made cable news fame by predicting bubbles or declaring current ones. But if stocks, for instance, are in a bubble, and you know it, then you have a very strong incentive: you can make a lot of money by either shorting or going long on it.
Furthermore, if certain resources (e.g., The Economist) can truly identify bubbles, then a mutual fund could be established that would make lots of money, more than index funds. If you have a god-like ability to spot fundamental values, you can predict where asset prices are going,
Ultimately, there is no “fundamental value.” There are only market prices, determined by countless participants. The price will continue to fluctuate, and I have no idea which way. As Hayek said, it is an omniscience we do not have to know “correct” prices. Upswings are always, eventually, followed by a downturn. Looking back, people will claim a “bubble.”
Let’s remember what efficient markets look like: erratic. They have hills and valleys. Looking at them suggests bubbles, but that is a cognitive illusion.
you are wrong, counter-factual analysis tells us that an economy with a manipulated credit supply will have some kind of ‘boom’ for some duration. to say ‘we are experiencing a boom right now’ requires thymology and other stuff.
First, it is important to point out that general/relative price inflation is solely a function of monetary growth (in the broader sense); that is, in a perfect theoretical economy (where there is monetary and inter-temporal equilibrium), an elevation in the price of a single economic good must, ipso facto, lead to a corresponding and proportionate diminution in the price of another economic good.
Thus, a bubble is defined as the rapid acceleration in the price of an economic good that is not offset by a corresponding diminution in the price of another good. They are asymmetric alterations in the price mechanism which lead to structural imbalances, i.e., a misallocation of resources, (land, labor, durable capital, circulating capital, et al.) towards unwarranted and unsustainable productions. Bubbles are the inevitable result of asymmetric information and monetary expansion.
Bubbles vary in degree and in severity, and you can have many bubbles simultaneously. They cannot be predicted before the fact; that is, you cannot know, a priori, where the inflation will flow or how it will manifest. I’m afraid that Eugene Fama is simply incorrect (blatantly obvious at this point). Rational pricing is severely hampered by arbitrary and continuous alterations in the supply of money by a central monetary authority.
A n00b reading this thread would fall under the spell of illusion that an Austrian coined the term “bubble”.
Assertion, and a waste time of writing. Also waste our time to read. (No offense) 
This isn’t a definition. Was it your intent to write one? Your first comment is about the poor definition. Yes there are various definitions for various schools of thought but your citing an economist from the Chicago School of economics. They tend to lack a coherent capital theory, so obviously our definition and opinion on what a bubble is will be entirely different.
None of these are pertinent to identifying a bubble when following the Austrian Method. These points are not really relevant at all. We don’t necessarily need to track prices and we don’t predict bubbles(We can’t see into the future sorry). There is no such thing as a “fundamental price” of assets. The concept is entirely fictitious and not necessary at all for diagnosing a bubble in the Austrian sense.
No offense but nothing in this paragraph is relevant. Please stay on point. You may enjoy reading your own writing but we don’t come here to read you. I mean that in best regards!
Thats the most Austrian thing you’ve said. Well done.
So I am assuming your going to try and dismantel the Austrian theory. You may want to get that theory straight first, rather then quoting from the monetarist school of thought as their theories radically differ from ours.
P.S. Please make a note of reading every post Mr. Esuric provides for us.
OK, time for the summing up:
Evidence in support of Neo’s argument: None.
Appeals to authority: one.
Strawman attacks: one.
Irellevancies: two
Ad hominem attacks: one [why aren’t you rich?]
Bob Murphy’s article about Mr Fama’s words [that the poster invoked as Holy Writ]: here.
There’s no need for the hostility people. Neoclassical is simply unfamiliar with Austrian capital theory.
No need for the moralizing, Esuric.
Familiarity with Austrian capital theory will never be a substitute for adherence to the ancient principles of logic.
Esuric, you sure 'bout that?
You don’t believe someone can both know and reject an Austrian tenet?
Are you satisfied with my definition? Have I answered your question?
How did you not get the point?
If you can spot “bubbles,” you should be fabulously rich. Are you?
I’m glad you agree. Then you must also agree we can never know when asset prices diverge from an alleged “fundamental value”!
First you say this…
Then you say this…
Once again, people crying “bubble” claim that they know when prices deviate from “fundamental” reasons or value, whatever that means. I, for one, don’t believe the “fundamental” reasons exist. To see this, you quote Murphy as stating “they are only buying because they think the price will go up”–well, guess what? All around us right now, we have Austrians doing exactly that with physical gold!
I already posted one!
OK so I’m still somewhat of a noob in economics, so you’ll have to bear with me.
So the Neoclassicals reject the Austrian theory of bubbles being caused by monetary expansion which causes malinvestment. Then what is the Neoclassical explanation for the rapid rise and subsequent decline of real estate and stock market prices over the past 5-10 years?
Mises Pieces, to once again
[quote Fama]
(http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html), What happened is we went through a big recession, people couldn’t make their mortgage payments, and, of course, the ones with the riskiest mortgages were the most likely not to be able to do it. As a consequence, we had a so-called credit crisis. It wasn’t really a credit crisis. It was an economic crisis.
Make that very clear to yourself: an economic recession came first, and then people had to bail on their mortgages.
Now I, like you and many libertarians, believe the government should never subsidize risky mortages (e.g., Fannie Mae, Freddie Mac, etc.), but I believe that the main reason there was so much failed home ownership recently was because there was an economic crisis first.
Now, the big question then is, what the heck caused the economic crisis? Well, let’s consider the list of esteemed theoretical explanations: Keynesian, Monetarist, Real Business Cycle Theory, New Keynesian, Austrian Business Cycle Theory, and a few others.
Which one is right? I tend toward the agnosticism of Fama, That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity.
That idea is stated more plainly by Caplan, My preferred story, in contrast, is just that once in a century, we get a once-in-a-century economic disaster. These disasters are hard for anyone to foresee, no matter how smart he is. The trick is just to keep the rarity of such disasters in perspective, stay calm, and let things get back to normal.
My suspicion lies with RBC theory, though, and I give almost no credence to ABCT.
Cool, thanks for the link to RBC theory.
So according to RBC, would that mean that there were a number of positive productivity shocks from 2002-2007, followed by a series of negative productivity shocks in 2007-2009? Has anyone catalogued what actually caused these exogenous productivity shocks (i.e. techonology or government policies)? Also, is there a reason that the balance swung towards the negative shocks at the end of the decade, or is that simply an artifact of random statistical distribution?
Thanks again!
You know an economic bubble is happening when there is an obvious disconnect between major investments and actual consumer demand for the products/services those investments will yield. i.e. When thousands of houses are being built that no one can actually afford to live in.
No sadly I cannot see into the future, and I am not yet rich. I believed we answered that question though. It’s not relevant to diagnosing a bubble. Some folks however do a better job, like Mr. Schiff. But they are still only forecasting, as was stated no one can see into the future.
I’m sorry Neoclassical but your statement had no point.
Yup. But again that’s not relevant to diagnosing a bubble.
Any other questions?