I’m not claiming omniscience for businesspeople; you can find the real interest rate by subtracting the inflation rate from the nominal interest rate.
Neoclassical,
I’m not claiming omniscience for businesspeople; you can find the real interest rate by subtracting the inflation rate from the nominal interest rate.
Only if you believe that with an increase in the supply of money comes an equally as proportional and simultaneous increase in the prices of all goods. One of the major insights behind Austrian theory is the fact that monetary inflation actually leads to relative price inflation, namely the increase in prices of higher-order capital-goods relative to consumer-goods and lower-order capital-goods (depending on how far the structure of production is lengthened). As such, even discounting the rate of inflation from the nominal interest rate, one would still not get an accurate picture of the distortion caused in the structure of production by a change in the rate of interest.
“I’m not claiming omniscience for businesspeople; you can find the real interest rate by subtracting the inflation rate from the nominal interest rate.”
The drop in interest rate precedes any rise in prices. You must first take out the money and actually begin to spend it. But in order for people to demand the money, the interest rate must drop.
You really should get yourself more familiar with the intertemporal element of the production structure. You’re wasting your time. Go to work already and stop pretending to be some Austrian expert who woke up one morning and saw the light of day.
“I’m not claiming omniscience for businesspeople; you can find the real interest rate by subtracting the inflation rate from the nominal interest rate.”
When you say inflation rate, are you referring to the CPI or the M2 growth or what?
Essentially, the Austrian position is that the price mechanism conveys and facilitates a free flow of idiosyncratic and tacit information to market actors. In other words, prices guide production. When the price mechanism is arbitrarily altered, economic calculations become inept, and when it is eliminated, economic calculation becomes impossible. It seems like your position (rational expectations) assumes that individuals have some mystical connection to some illusory general equilibrium; that the price mechanism, even when it is manipulated, cannot, in anyway, disturb this awesome connection. But if that’s the case, then why have markets and prices at all? Why not choose the most intuitive individuals to centrally plan the economy?
You’re completely ignoring our rebuttals. Again, monetary growth always manipulates the price mechanism, the degree to which depends on the rate of monetary expansion. But this manipulation may not reveal itself in clumsy inflation indices and measurements, that is, it can be concealed by general economic growth/productivitiy gains. Furthermore, inflation indices are inherently flawed. This is because all prices are a ratio of exchange between economic goods, on the one hand, and money on the other. They cannot differentiate between actual changes in demand for any particular good, or changes in its supply, or changes in the demand for money, or changes in the supply of money. And finally, they only measure certain baskets of final consumer goods; they completely ignore the prices of producer goods.
A debate is when two people go back and forth with points and counter-points. This thread is a lesson.
Caley McKibbin, it’s either Austrian or wrong; that’s all you’re saying.
If one of you went to a hypothetical “mainstream economics” board and debated ABCT, someone like you would say, “This isn’t even a debate!”
Quoting an article by Brian Carney (who then quotes Anna Schwartz), How did we get into this mess in the first place? As in the 1920s, the current “disturbance” started with a “mania.” But manias always have a cause. "If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.
“The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.”
I figured you guys would like that.
I’m saying it’s a lesson; that’s all I’m saying. A lesson to someone that has demonstrated no understanding of any component of AE, though claims to have read so much. What is there to say to someone whose posts consist of only 1. quoting random stuff from around the internet and 2. dodging any direct argument? Try a little harder?
My point has been simple and I have found little refutation, actually:
Does Austrian economics contradict the doctrine of rational expectations? If so, how? What arguments against rational expectations are offered?
Ultimately, all that’s happened is that ABCT has been reiterated over and over again with the certainty of “It’s totally true! Screw your neoclassical hypotheses!” When the topic of RE has even been broached, all I could see was gross misinterpretation.
We have a different definition of rational, which is purposeful. By rational you guys mean approaching some standard of optimality. AE neither confirms nor denies… its just empirical.
I think the majority of ABCT presentations are for a lay audience. Like misesmedia’s youtube site. Its unfortunate because I am interested in some of the finer points raised by RE, though, from the ABCT thread I believe Austrian Interest-Rate Problem Theory is still sound.
Yeah, I have found valuable criticism online (http://www.springerlink.com/index/C9860Q27833T4021.pdf), but I know that no one here has presented me with any such counterarguments. The gloating, the arrogance, the glee at my alleged ingnorance all reveal one thing to me: most of you (Caley in particular) seem to not even understand properly what basis and implications my RE hypothesis has.
To quote Cowen, “The postulated entrepreneurial mistakes in the traditional Austrian theory, which are systematic, violate the rational expectations hypothesis. Entrepreneurs with rational expectations will sometimes chose unprofitable term-lengths for investment, but they will not err systematically toward excessive termlength.”
To quote Wagner, “A cycle theory that depends on the inability of people of people to distinguish, in the aggregate, between an increase in personal saving and an increase in central bank holdings of government debt must rightfully be dismissed on the grounds that it fails to incorporate any reasonable requirement of individual rationality in economic action.”
I mean, you people act as if I’m retarded, but I am essentially reiterating points made my Gordon Tullock, and I doubt you guys would consider him boneheaded: http://mises.org/journals/rae/pdf/rae2_1_4.pdf.
We just get frustrated when you ignore points we make. I still haven’t heard a rebuttal to my analysis of new credit as a collective action problem, or how firms have can get information without prices, and then operate profitably by ignoring those prices.
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People can get information from the prices they have and data available (government debt, money supply growth, etc.).
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New credit poses no collective action problem; I don’t expect anyone to refuse new credit. I also don’t expect them to make mistakes in a systematic, predictable manner.
It just seems to me that you are unable to address the issue at hand, and that is capital theory. Caplan’s explanation for manias is even more elementary than the Austrian’s, if you’re talking about rational expectations. It just seems that Caplan, for all the reading on Austrian economics he did, did not come away with a proper grasp on Austrian capital theory.
Gordon Tullock, Consider another way of stimulating investment. Suppose that the government taxed consumer goods and used the money to subsidize investment. Suppose further that after a while, it stopped the subsidy. This is not good policy, but the net effect would be that production after the end of the subsidy would be higher than if no such subsidy had been offered. Indeed, we have a sort of example in the farm program. Among the many effects of this bit of government mismanagement, there has been an increase in farm capital above what would have occurred without the program. If the program were terminated tomorrow, there would be bankruptcies among farm owners, but both hired labor and consumers would benefit.
Looked at from the standpoint of ordinary employees in a nonproducer goods industry, the Austrian cycle would mean that their living standard was artificially depressed during the boom period, because funds that they would prefer to spend on consumption were being diverted to investment. During the depression however, their living standard would benefit, first, because with more capital goods, the demand for complementary services (mainly labor) is greater than it otherwise would be and, second, because prices for consumer goods are lower. Laborers would be exploiting the capitalists.
By the way, if you want to be absolutely technical, rational expectations finds its roots in the Austrian School.
This would not cause a business cycle, because you are redistributing real resources (there are no changes in the supply of money, ceteris paribus). So, I’m not sure how this is relevant.
During the business cycle, consumption is not diverted to production. That is the entire point.
The problem with Austrian capital theory is that it is stuck in the theoretical past and hasn’t corrected itself despite new research. When Austrians claim, “The entrepreneur is the superior forecaster who, with his/her knowledge of markets, can foresee what can’t be forecasted – the process is more an art than a science – and via his/her drive for profit, forecasts and then satisfies consumers’ needs as quickly and as efficiently as possible,” I agree! I just hold that principle consistently–I don’t believe a “cluster of errors” can be predictably made by entrepreneurs.
Consider the Gordon Tullock I provided minutes ago; how does Austrian capital theory accommodate that?
Neoclassical,
Given Tullock’s writing and your comments, it’s clear that the problem is not necessarily that capital theory is “stuck in the past”, but you have absolutely no knowledge on it. So, I’m sorry, but I’m afraid that I don’t find you qualified to comment on capital theory’s relevance. You still have been unable to grasp the basic tenets of capital theory, and when we finally get into the heart of the issue you just ignore our points.
So, unfortunately, Casey is right. This argument really is getting nowhere.