Jonathan, if I have things so muddled, clarify the confusion I am presenting.
You, on one hand, claim that government-financed projects use inflation to reallocate real savings, but then seem silent on the issue of whether or not inflationary booms in productive enterprises are reallocating real savings, too.
What purpose would that serve? And define good? Keeping in mind that the adjective will be biased based on opinion.
Lol, so now your going to try and weasel out of your statement, ok. You are correct, but that wasn’t the point you were making. You were making it sound like the ABCT was all but abandoned, legacy, and no longer payed attention to, even amongst the Austrian inner-circle. It was a bold claim at best. Your statement implied that no contributions had been made to the theory, and that it was legacy.
Look don’t try and weasel out of what you said. And don’t try to spin your way back to the OT. The statement had nothing to do with whether or not ABCT was true or not, and you know it. It was a low blow attack at it’s legitimacy due to it’s age. As if only new theory’s were more correct then old.
When more people are purchasing the same amount of fixed materials and resources, does their price go up or down?
FYI We are not silent on the issue. Your question has been directly answer more then once, by more then one person. Whether new money is enterring the market by the hands of the Us Gov, or by the direction of banks it makes little difference the theory of ABCT.
The same way Russian communism tried to play market by using world prices for steel etc? Given that the debt is growing, the money supply has increased twofold, what do prices mean? Donno.
Again, even if you can somehow guess the “true market price”, you won’t be able to operate profitably if the hampered market price is something different.
So what do you think happens when firms have access to fiat credit? Don’t they bid up certain prices? What do prices mean in an asymmetrically inflating environment? How are firms guided?
Entrepreneurs are great forecasters, but without information, you can’t forecast. Prices = information.
Ironic, since you were the one who claimed to “know the theory”. Are you less confident now? By the way, I still repeat that we did clarify this part of the debate. You just seem unwilling to engage it.
The burden of teaching you does not lie on me, it lies on yourself. You were the one who approached us, believing yourself to be all-knowing. I hope that if anything this debate has shown to you that you do not know as much as you think you know. I am not interested in explaining to you the basics, because I know (and I would do the same thing) that by having someone teach you there is a greater chance of you disqualifying these concepts out of hand. A far better approach is to teach yourself by reading (this is, in fact, how I came to accept some tenets of the free banking school, which I had previously rejected out of hand).
I keep repeating that your mistake lies on your belief that inflation is mechanical. If you do not understand what I mean by this then it’s clear that you don’t know some of the foundations of Austrian theory. I clarify, to an elementary degree, these foundations here: A Primer on Austrian Economics. I also suggest looking through the footnotes, as the sources given there will help better understand Austrian theory.
Jonathan, I’m more confident than ever, especially now that you’ve admitted that government expenditures use inflation to steal real savings.
Jonathan, I’m more confident than ever, especially now that you’ve admitted that government expenditures use inflation to steal real savings.
You continue to avoid the issue at hand, and focus on some irrelevant tangential portion of this debate.
You didn’t even mention the heterogeneity and complementarily of capital goods. You missed the key aspect of modern Austrian capital theory.
Inflation doesn’t just reallocate resources from one group to another; that is a secondary effect. Inflation is only able to do this because it deceives economic actors by elevating prices and distorting market signals. The problem here is that you are conflating two different effects of inflation, that are connected but not identical: Inflation (a) arbitrarily redistributes wealth from those who receive the newly created sums later to those who receive it earlier, and (b) it alters relative prices as it permeates amongst the economic system and therefore distorts the allocation of scarce resources. You’re completely ignoring the effects of (b).
When the government suppresses market rates it makes investment in longer-term projects and durable goods more feasible, but only in the short run. If individuals do not actually differ consumption, then such investments cannot be completed (a) on time, (b) at all, or (c) will be completed at the expense of other, more warranted economic activities. Individuals are forced to save if they wish to complete those investments which began because of artificially lowered interest rates. If they do not save, then the capital structure must be liquidated. But because capital is not the homogeneous blob represented in your well-behaved production functions, but rather a structure comprised of heterogeneous capital goods with varying degrees of complementarity, then this liquidation and reallocation process becomes extremely problematic; a portion of the resources will be lost forever.
This makes absolutely no sense. Please elaborate. How does inflation elevate real savings, i.e., the differed consumption of real resources?
This is an unsubstantiated assertion that ignores the function of the price mechanism as the coordinator of economic activity and the conveyer of tacit and idiosyncratic information. Furthermore, you’re going to have to explain why entrepreneurs continuously invested in real-estate, which proved to be unprofitable in the long run (house-flipping, building entire communities in the desert, skyscrapers that could not be completed, et al.). And finally, why are the prices of lower order consumer goods and commodities skyrocketing all over the world (sugar, rice, oil, gold, et al.)?
You ignore (a) empirical facts and (b) our theoretical explanations.
Tullock is presupposing the validity of Keynesian positions. He makes this claim because he adheres to the Keynesian fiction that savings must always equal investment, by definition. He must show that this is true before he presupposes its validity. Also, money =/= real savings. Factories are not made of little green pieces of paper.
This is the key right here. While the Keynesians don’t find such a condition to be problematic at all (the acceleration principle), the Austrians believe that the economy cannot operate off of the PPF forever, and as such, there must be a correction.
Robert Barro states,
Crying “bubble” is empty unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row. Krugman rightly praises Robert Shiller for his warnings over many years that house prices might fall. But advice that we should listen to Shiller, because he got the last one right, is no more useful than previous advice from many quarters to listen to Greenspan because he got several ones right. Following the last mystic oracle until he gets one wrong, then casting him to the wolves, is not a good long-term strategy for identifying bubbles. Krugman likes Shiller because he advocates behavioral ideas, but that’s no help either. People who call themselves behavioral have just as wide a divergence of opinion as those who don’t. Are markets irrationally exuberant or irrationally depressed today? It’s hard to tell.
This difficulty is no surprise. It’s the central prediction of free-market economics, as crystallized by Hayek, that no academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what “fundamental” value is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism and central planning would have worked.
It seems fairly apparent that your not really interested in addressing the discussion head on here. Your last post, like many other, misses entirely the whole Austrian argument. 
Quoting a recent article by Bob Murphy, “This is what happens during an unsustainable boom, such as the recent housing bubble.”
Sorry but is there a point?
Monseignor used to always say to me, “you don’t believe it cuz you don’t thoroughly understand it.” I am still not a christian. Go figure…
One of the things I’ve noticed in page 10 of this thread is that it seems that Neoclassical is conflating the reallocation of real savings through inflation with an increase in real savings. That or Neoclassical’s confusion of ABCT led him to only consider an increase in real savings of investors/entreprenuers, rather than a general increase in real savings of consumers (the whole economy).
It looks like this thread isn’t going anymore but I can’t help but chime in. This is primarily to neoclassical. It’s a bit long but I think it’s worth reading for anyone interested in these issues.
Since you seem to regard yourself as purely scientific (which is contrasted with the supposedly “barbaric” theories of the Austrians), maybe by casting the ABCT in a more ‘scientific’ manner, you will be more open to it’s content.
I claim that the ABCT is a specific example of a more general phenomena, fluctuations, that characterize all complex adaptive systems. A network of neurons, a colony of ants, or an economy are all susceptible to what can be called an Adaptive Complex System Fluctuation (ACSF). I will define precisely what this is after giving an example.
Take a colony of ants. They compose a complex adaptive system (see Wikipedia for a precise definition). What is critical to know for understanding a fluctuation is the means by which the elements of complex adaptive system communicate. In the case of ants it is by pheromones. There are a variety of pheromones that communicate a variety of information. A primary activity of ants is to forage for food. Once an ant finds food it returns to the colony. Along the way it leaves a trail of pheromones that direct other foraging ants to the location of the food. Those ants that come into contact with the trail follow it to the location. If they find food, they return with it and also reinforce the trail with their own pheromones, strengthening it and thereby drawing other foraging ants. This is a remarkably efficient system, not only for locating food but also for establishing the shortest possible path to the location. In fact, their behavior has been simulated in order to arrive at near solutions to various instances of the Traveling Salesman Problem.
So how does this relate to a fluctuation? Imagine we got our hands on some of the pheromone that’s created by ants when they find food. Or better yet, imagine there is a chemical that mimics it, and thereby deceives an ant into thinking it’s the correct chemical. In either case, what we could, and what has been done, is we could lay down a pheromone trail artificially, one that wouldn’t even lead to food. This would direct foraging ants to the location. Now, since there would be no food, that trail would eventually diminish as no new ants would reinforce the trail. In order to draw greater and greater numbers of ants we would have to continually reinforce that trail. Of course, in so doing the ant colony will be completely diverted from all productive activity, even though in some sense they’ve been given the impression that food is on the way. In any case, the misdirected ants would eventually return to an un-systematically misdirected process of foraging. Of course, in the mean time they would experience a significant drop in output, resulting in the shrinking of the colony.
So this is a general example of a fluctuation. There are similarities between it and an economic fluctuation. The essence of the feedback processes are the same, but the specific content and communication mechanism are very different. In any case, this motivates a precise definition for your Mr. Fama.
A CASF is the culmination of a diversion and then reversion of a CAS’s agents directed productive behavior on the basis of it’s communicative mechanism being artificially produced and mimicked and then entered at specific and fixed point into the system. I could probably make this definition better; in fact, it could probably defined in precise mathematical terms, but I think this covers all relevant aspects.
Now, the obvious question that needs to be answered is, how do this stand up to RE? First of all, I think a lot of people, even it’s most ardent supporters, mis-understand the content and therefore power of RE. In fact, I would say that, on the one hand, RE does not rule out true cycles in the sense described above, and that, on the other hand, for those who do think it does, they have invoked a type of RE that is far too strong, and in fact is logically inconsistent.
First, I will address the “too strong” type of RE of which I do not think the better of economists, mainstream that is, subscribe too. The strong form of RE says that an agent of a CAS can perceive all properties and underlying reality of the system. It can also be stated slight differently as, a collection of agents do not systematically misconceive the underlying reality or content of their surroundings and the system of which they are a part. Of course, under this form of RE there can be no such thing as a fluctuation since a collection of agents can perceive all objective phenomena that the communicative mechanism is supposed to represent (pheromones, money, electrical signals, etc.). Thus, under this form of RE artificial pheromones systematically entered cannot trick a colony of ants because they do not stray from the objective reality surrounding it (that is, with regard to food). But of course, this notion is absurd! It’s like saying an ant or neuron can perceive a level of intelligence that exceeds its own capability. In fact, if agents were endowed with such intelligence, the communicative mechanism would be completely superfluous. Their presence (the communicative mechanism) is thus obvious evidence of their necessity for the composition of the CAS. As Mises argued, without money an economy cannot rationally allocate resources. This is no different than saying that without pheromones, ants cannot rationally forage for food. These communicative mechanisms co-evolved with the elements to allow for the production of outcomes not possible for the individual element operating alone. And if we suppose, as those who believe in strong RE do, that a system of elements can on average always perceive the underlying reality of what they are directed towards, than we must ask ourselves why do communicative mechanisms like money or pheromones, or any other form, exist in the first place? However, if we understand the nature of CAS, and the role that the communicative mechanism plays in holding it together, then we can at once see that if the individual agents are removed from the mechanism the system would collapse.
Now, the weaker form of RE simply says that, on average, agents do not systematically misjudge prices (in the case of ants, pheromones), that is, they do not systematically misconceive the communicative mechanism. This is a much weaker, although accurate, form of RE. It’s claim has to do with a level removed from the underlying reality. Thus, despite the fact that agents may predict future prices on average correctly, that does not necessitate that the system of which they compose operates according to the underlying reality that prices are supposed to represent. For if prices become disconnected from consumers (or if pheromones become disconnected from foraging ants) than they no longer represent the underlying reality. So, despite the fact that agents do not systematically misconceive prices they may misconceive the underlying reality, in this case the desires of consumers. This only conflicts with the strong form of RE.
One more comment on the strong form of RE. When economists like Fama or Lucas or Sargent claim that an economy is not susceptible to a cycle under RE, they are not being mindful of the nature of a CAS and the intelligence of it’s agents, and the communicative mechanism on which they depend. They presuppose a level of intelligence on behalf of the individual agent that exceeds it’s own capability. And in fact, this has already been proved using computational complexity arguments. Now, they may claim that they are not claiming such intelligence on an individual level but that, as expressed before, agents will on the whole not be off when it comes to the underlying reality. But once again, this ignores the fact that the individual agents must rely on a communicative mechanism, and that that mechanism is once removed from the reality it’s supposed to convey.
I hope my arguments are clear. If you have questions please let me know.
That was an insightful read!
edward_1313, your “ant” intervention is exogenous.
Is this supposed to be a refutation? If the creator of an artificial signal is exogenous does this disagree with your own notion of a fluctuation? Would it change if rather than a human interverner it were some other species that had spontaneously evolved the ability to mimic the scent? There are countless examples of this among different species. The ability to create the artificial signal is what matters. Your knit picking is missing the heart of the matter.
One more point, because I think I see the angle you’re taking with your comment.
Your claim is that if the interverner is endogenous than the agents can perceive the intervention and hence negate it’s effects. I thought my post indirectly addressed this but maybe I should be clearer. First though, I think your conflating “consciousness” with some notion of super intelligence; you need to be careful.
To the point. Let’s suppose the ants had some additional capability to be ‘aware’ that fake signals existed. Not of whether a precise signal was fake or not but that some existed. Would this negate the effects if artificial signals were introduced? Surely not. Could the ants operate slightly differently if this additional degree of freedom were introduced? Certainly, but it wouldn’t mean that fluctuations couldn’t take place. Humans can be aware that artificial signals are being introduced. They can even be aware of the principle by which the system fluctuates, but this does not mean it cannot take place.
You’re trapped in the world where a Dynamic Stochastic General Equilibrium (DSGE) model represents reality. Of course, it is true that in these models we can ‘equip’ the agent with the correct processes for the future variables. But this model is completely void of all of the issues I discussed above. There is no such thing as communicative mechanism, or multiple layers of reality. Prices are parameters that are determined on the basis of equilibrium conditions. They are not the removed layer of reality that conveys to agents the information necessary for the operation of the CAS of which they are a part. The only modern method for modelling this type of process is computer simulation.
Whether or not the variable is exogenous or endogenous is absolutely crucial for the rational expecations hypothesis; that is not nitpicking.
For instance, if Robinson Crusoe was blessed with a sea storm bringing large schools of fish to his shore, then that would be an exogenous productivity shock (i.e., a boom); conversely, if a large tidal wave destroyed vegetation he produced, that would be an exogenously-created “bust.”