Neoclassical, I have to stop you here and remind you what Kaju said. What did you come here to do? What did you hope to accomplish? Seek some grater truth? Or perhaps enlighten us? Texts, books, links, and academic articles have been provided for you, all of which you have ignored. If your unsure on where to stand then we recommend that you start reading.
You said that your familiar with Austrian theory but you opened the thread(or a similar one) citing an economist of an opposing school of thought, one which lacks a proper capital theory. This leads me to believe you have not yet bothered to read austrian capital theory yet. Go do that. We aren’t going to successfully teach you 300 years worth of Austrian capital theory on a web forum.
On a side note I do have to point out that your arguments and angles have changed numerous times. If your position was so solid, there would have been no need to do that. You have done that on countless other threads as well which leads me to think that your more interested in arguing, and less interested in finding some truth.
Also, if you come here and act pompous, while quoting an economists of an opposing school of thought, your going to be poked fun at you. Sorry =p.Get your facts right first, then proceed.
First, this reasoning seems contradictory to Mises: “Human action is necessarily always rational. The term ‘rational action’ is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man.”
In essence, you are violating the rule set forth by Mises: praxeology cannot comment on the “reasons” provided for seeking some end, hence it is impossible to judge “fundamental” or “speculative” in the same way it is impossible to claim an act is “irrational” rather than rational.
Additionally, you and Murphy seem to be telepathic, understanding the psychological state of buyers. Is that praxeological?
Furthermore, I still contend that buying something just because you “think the price will go up” happens all the time–without busts happening. Anytime you purchase property beliving it will appreciate rather than depreciate, you are using that reasoning.
It’s worthwhile noting that Neoclassical is the odd man out here in terms of most of his views, so he has a lot of defending to do in a limited time. He was also engaged in a formal debate just until now! A possibly valid criticism might be that he is sometimes picking off low-hanging fruit rather than responding to the best rebuttals of his arguments; but to say he has to respond to everything seems unfair.
I’d just like to see him respond to Esuric, as to my economics-layman eyes Esuric’s definition of “bubble” made by far the most sense.
I contend that “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.”
How is this fact denied?
We all agree that monetary growth induces inflation; however, since the monetary growth decreases the purchasing power of the currency, it must create general price inflation. I fail to see how only certain economic goods would, magically, rise without corresponding diminutions in other prices.
Because new money does not enter all sectors evenly, or at the same time. I believe Esuric has already mentioned this(Though I may be wrong) in his previous post. I agree with AJ that you should go back and re-read Esuric’s posts. His contributions are as always valuable.
Monetary Theory and The Trade Cycle, by F.A.Hayek, is a very good read. I highly recommend it.
If the effects of inflation were truly general, that is, if monetary growth altered all prices in the same degree, direction, and if it occurred instantaneously, then it would be completely irrelevant for trade cycle analysis. You would have your shoe leather costs, menu costs, ect, and that’s all. But inflation is actually a microeconomic phenomenon that causes relative price distortions and therefore disturbs the production process and the spatial and temporal (market interest rates) allocation of scarce resources. This is because inflation enters the system at certain points and then permeates amongst the rest of the economy. Some prices may actually fall during the inflationary process and some will rise more than others. It all depends on the actions of individuals, but the key is that inflation (a) causes asymmetry and (b) there’s a lag.
Individuals, in turn, will accumulate and organize capital in those sectors where the inflationary effects are most immediate and dramatic (a bubble). If you understand that prices coordinate production, then it is not difficult to understand the disturbing affects brought about by arbitrary alterations in relative prices due to monetary expansion by a central authority. The bubble occurs precisely because individuals are rational. Additionally, inflation lowers market interest rates which, in turn, spurs investment in heavy industries, in durable goods, and in longer-term projects in general (production is a temporal process). The inflationary distortions can happen even if there is no change in the objective exchange value of money (inflation is often masked by productivity gains).
Apparantly: appeal to authority is oke (‘eugene fama thinks it doesn’t exist!’.
Oke: Robert Murphy says it does!
The problem with Fama is that he’s conclusion follows from EMH; which is dead wrong to begin with. If you assume perfection, you want have imperfection. That is true.
I think that’s my problem in being convinced. I don’t believe holders of new cash can make systemic mistakes, making predictions and forecasts that are stupid. Why wouldn’t the money, for example, be put into investments that were sustainable in the long-term?
I have already mentioned this once but your thinking about this incorrectly. It’s not about making stupid decisions, it’s about making a decision in ignorance because you’ve been lied to. There is a difference between making a decision in ignorance, which wouldn’t necessarily mean you were stupid. What it means is you were given the wrong set of information, or did not yet have all the information. It’s incorrect to call the decision stupid. Also with the way things are being manipulated your expecting business’s to preemptively know the behavior of the central bank. They cannot do this, and even ones who stay on top of it are not economists.
“Why wouldn’t the money, for example, be put into investments that were sustainable in the long-term?”
There is no way they can invest this new credit so that the boom/bust is not set off in motion even if they had perfect foresight. It is a matter of the banks loaning out to investors credit, for which there is no available capital because no such capital had been previously freed by consumers by their reduction in consumption (increase in savings).
You claim that “it’s about making a decision in ignorance because you’ve been lied to.” My point is that businesspeople receiving new money aren’t being deceived, unless they’re radically unaware of inflation and its consequences to begin with (and I assume they are not).
They are. They are making calculations assuming that there is a higher availability of raw material out there then actually exists. Their purchasing power has been increased, but the supply of goods/services, and more importantly the (re)produced means of production has actually not changed.
They believe there is a drop in the demand for consumption goods, which free’s up resources for production goods. Typically interest rates(business accounting profits) are low when consumer time preference is low(Consumers are more thrifty). This causes retail business’s and business’s closest to consumption to experience accounting profit loss. Investment is then redirected into stages of production that are furthest away from consumption where they still experience a profit, even if much smaller. This is an example of low interest rates set on the market.
And this comes back to the main point. What 40% of the business’s in the US were given this loan you mention. And 60% were not. Are you actually going to argue that the structure of production, prices of raw materials and resources, will go unchanged over the course of the next several years? And that they will not have to re-calculate the costs of their expansions later on?
The point is you’ve increased the purchasing power arbitrarily amongst a random pool of business’s. This new money usually goes out into the capital goods and durable goods markets first, simply due to the nature of those types of businesses. They are given an immediate increased amount of purchasing power but the overall pool of resources and materials have not changed. This causes prices to rise in the long run forcing everyone to re-calculate their expansion projects. If their original calculations did not take into account a radical increase in the costs of the (re)produced means of production then they go belly up.
One other thing your missing is your thinking of interest as something you pay for on a loan. This is not true. Loan interest rates are simply mirroring the market interest rate set by the accounting profits of various stages of production. We use interest rates to gauge the performance factors of various stages of production along a temporal axis. It tells us where profits are currently greatest based on time. Is it more profitable for us to invest in the future(reproduced means of production)? Or invest in the now(consumption goods)? Loan interest rates are simply set from those factors based on market competition. If interest rates in the loan market is disconnected from other markets, like too low for example, that will draw funds away from the loans market and into other investment models.
So to repeat, saying that they made a dumb investment decision is just a short-sighted way of looking at it. It doesn’t in any way address the problem we are raising.
“DD5, if our central bank gave you $1,000,000 in new money, do you believe your investments will eventually go belly up?”
this has 2 responses:
As explained to you before, the entrepreneurial spirit is such that investments can never be halted. There is money to be made from false bubble activity, and therefore it is rational to continue to invest. The entrepreneur (who does embark on the lower interest rate to invest knowing it is arctically low) is precisely the person who believes that he will have the foresight to exit in time while others will not.
Again, as explained to you before, It is not only investment of the new money. There is no way to distinguish the new money from the old money. All market activity relies on investments and so they cannot refrain themselves from getting access to this new and cheap credit. In many situations it will improve their chances to survive after the bust even if they know that one will eventually come. The example I gave you is when a home owner refinances his house at a lower interest rate. Assume the lower interest rate is the result of a temporary expansion of new credit. If the homeowner refrains from getting access to this new money and capitalizing on some of this new money, he is not helping his own situation in any way what so ever because if he doesn’t refinance, somebody else will. After the bust, who will be better off? you do the math.
This debate has run its course. Based on those answers, I still believe businesspeople recognize the consequences of an inflated currency and invest such money taking that into consideration.
Look your the one who said there is no such thing as fundamental value. People simply cannot know what the “true” value is of an object. However now your making a fallacy in assuming that business men have this perfect foresight to know what the real value of interest rates should have been, and to what degree inflation will be felt. IE your arguing that businessmen have perfect foresight over the central banks activities.
I’ll kindly agree to disagree with you. You started this debate with an assertion, and while you have spent a great deal of time scrutinizing our theory, while remaining in ignorance of it’s details mind you, you have not yet been kind enough to offer forward any counter evidence of your own. Any one can come here and shout and scream at a theory they don’t understand, however your shooting from the hip as you have nothing else to offer but that.
At any rate since you’ve no further questions, have a good one.
