You are distributing real resources with inflation! You are diverting consumption to production!
Let me quote Tullock’s paper:
Suppose, then, the government forces down the rate of interest:
For business men, seeing the rate of interest fall, react as they always would and must to such a change of market signals: they invest more in capital and producer’s goods. Investments, particularly in lengthy and time consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased.3
This passage deserves a little analysis. First, it should be noted that if the business people are now building more factories than they were before, which is what Rothbard says, then, in fact, savings that are available for building factories must have increased. In fact, they have. What has happened is that the government by inflationary measures is transferring a certain amount of money from the general citizenry into the investment accounts and, hence, the money for building these additional factories is made available.
The inflation part is key, and is something that is not present in Tullock’s scenario. But, even supposing that, during the boom you are actually not diverting resources from consumption to production, and that is one of the major issues why much of the investment done during a boom is malinvestment. Austrians hold that during the boom consumption either remains the same, or even increases, as does investment. As such, when the rate at which money is created begins to deccelerate (money must expand at an exponential pace to maintain the bubble) the intertemporal disequilibrium caused by inflation begins to move back towards equilibrium (or, a proper representation of society’s time preference) and investment is revealed to be malinvestment. This is because the amount of resources capitalists believed to be available, due to a reduction in the price of higher-order capital-goods through a reduction in the rate of interest, was erroneous - capital-goods are much scarcer than originally believed.
This particular point can be modeled through a supply and demand graph for higher-order capital-goods (not entirely accurate, but perhaps it can paint an easier picture to understand). The lower interest-rate effectively lowers the price, and as such there is a shortage of capital-goods available. The only method by which to continue the boom, therefore, is to continuously maintain the price artificially low and continue the illusion, until there is either hyperinflation (as this new money ultimately finds its way to wages) or there is a serious depletion of capital.
Neoclassical, I mean this with the best intentions, but regardless of what you claim, you are only proving that you need to do more serious reading on the Austrian business cycle.
Again, inflation does not occur immediately nor simultaneously*.*
Some points, and I don’t mean to seem like an asshole (but that’s the way it might look):
Can you stop highlighting the quotes, and just use the indent feature? This forum software is not that good, and so it’s difficult to take the highlight off when replying to your post (it maintains the highlight).
If you understand Austrian theory so well, why don’t you yourself critique it, instead of relying on critiques by people who obviously do not have a proper grasp of Austrian theory?
Given your commentary so far, it’s clear that you actually do not know the theory as well as you think you do. I understand if you are no longer willing to read anything Austrian anymore, but you have to also understand that as a result you are not really qualified to critique it. By the way, this goes for Austrians as far as critiquing Keynesian economics goes, as well. Actually, one of the major deficiencies in modern Austrian critiques of opposing schools of thought is a deteriorating understanding of their opponents, and this creates critiques which are much less powerful.
The difference is that authors of academic journal articles use outside sources to support their own arguments. You are not presenting your own argument in your own words. You are presenting those of Caplan and Tullock, so don’t compare yourself to an academic journal now.
That is actually not my point at all. My point is that given the evidence thus far, it’s clear that neither of you understand capital theory. You could be arguing in favor of Austrian economics, for all I care, but you still would not understand capital theory.
But, the fact that you think you are undeniably correct (although unable to actually respond to the issue at the heart of the argument) and the fact that I think you don’t know what you’re talking about should just serve as further evidence that this is a dead-end argument. So, maybe we should just agree to disagree?
This point has been repeated over and over. Inflation does not occur instantaneously nor simultaneously. An increase in the supply of money does not lead to a simultaneous and proportional increase in the price of all goods.
I am using multiple sources to corroberate my point. I consider this a good intellectual practice. I agree with them; they agree with me. What more would you like me to add?
Here are my two points, and we’ll leave it at that:
If we assume money is non-neutral, then increased real savings does take place during inflation, since the purchasing power of dollars is being moved into the holders of new money.
Given additional investment resources, entrepreneurs are not more likely to make mistakes than usual, especially if there is a model that can predict negative outcomes (e.g., ABCT), since that would be incorporated into their practices (i.e., rational expectations).
This is a layman comment, but isn’t the Austrian point actually that the inflation creates no more real goods, not that it creates no more savings?
Also, isn’t the claim that messing with the interest rate interferes with entrepreneurs’ ability to calculate a corollary of Mises’s socialist calculation argument? If total central economic control makes calculation impossible, shouldn’t partial economic control interfere to some necessary degree with all the calculations or those affected (in the case of the interest rate, wouldn’t that be everyone?).
Both. Savings represent the accumulation of real goods, and so given that no real goods are created through monetary inflation is follows that there is no increase in the accumulation of goods.
At this point, here is the criticism I am presenting:
Rothbard states that the “boom” created by inflation is not sustainable because the production isn’t supported by real savings.
Tullock states that, in effect, the “inflation tax” is a reallocation of real savings to those productive enterprises.
That, to me, seems like a swift kick in the butt to Rothbard’s argument. You, also, have agreed that government-backed projects fueled by inflation are a reallocation of real savings; if we switch “government-backed” with “entrepreneur-backed,” then what’s the problem?
I, and others, already have (there were at least four posts you didn’t respond to, all of which said the same thing).
You obviously do not recognize the Austrian division of monetary inflation (which is what Rothbard is reffering to) and price inflation. This only reinforces my view that you do not know Austrian theory as well as you say you do, because this is an elementary foundation of Austrian theory. Everything in the post I am replying to shows that you really do not understand Austrian theory.
Only someone who’s presently ignorant of the modern Austrians movement would make such an absurd statement. A good fraction of our most talented modern economists have placed their life’s work specifically devoted to ABCT or some section of capital theory. Just to name two off the top of my head, Bob Murphy and De Soto.
Bob Murphy alone has made outstanding contributions and updates to the PTPT, he has been one of the PTPT’s greatest critics. Furthermore the ABCT, en light of the last decades events, is probably one of the most written about topic amongst the Austrian inner group. To say they are adhering to legacy beliefs and not making contributions to the theory provides a clear sign of ignorance regarding the modern Austrian Circle.
Shit the Austrian movement all but gave birth to the “End the Fed” movement.
Neoclassical this is the reason people have a hard time taking you seriously. You make outrageous statements that just clearly show you haven’t bothered to do any real research on the topic.