No, I’m not. You need to be careful when criticizing schools of thought you are unfamiliar with.
To be clear, I do believe unexpected interventions can create fluctuations; my point is that rational agents cannot be systemically fooled using the same trick over and over again (e.g., lowering interest rates does not lead entrepreneurs to create “malinvestments”).
They aren’t tricked over and over again. Eventually the error is discovered, this is called the bust. You as well need to be careful of critiquing schools of thought you’ve done minimal amounts of research on. 
We need a new thread: the myth of exogenous “shocks”.
The same trick (e.g., lowering short-term interest rates) is being used to fool people into creating roundabout projects that are entrepreneurially unsound (i.e., alleged “malinvestments”).
It still makes no sense to me, or any rational expectationist of any degree, why entrepreneurs would always funnel money into enterprises that were doomed to fail. If Austrians know this “truth,” then incentivized actors would also.
Jon Irenicus, I presume even Austrians would believe in exogenously-created fluctuations; there’s no dispute there.
And I’d assume neoclassicals would understand the influence of repeated distortions of a price signal for which no useful substitutes exist, but it appeas I am wrong.
I am well aware of what constitutes an exogenous shock. It’s quite clear that you missed the main point of my post. In a RE model a shock simply involves some realization of an error term, which in turn affects the realization of the endogenous variables. If it’s transitory it won’t involve a shift in the eq-m choice variables. If it’s permant it usually will, depending on the specifications. It should of been clear though that is type of shock is wholly different from the type of process I described above. I described a gradual divergence and then necessary convergence to what had been the path converging towards a changing eq-m. This is very different from the simple type of shock you’re describing.
I’ve worked with and solved more DSGE models than I can count. In doing so I’ve thought a lot about their nature and limitations. My impression is that you actually lack the deep understanding that your comments would indicate. If you were to really understand these models you’d be able to recognize their limitations. And in recognizing their limitations you’d be able to realize that they don’t rule out fluctuations of the kind that plague our economy. They simply rule out such fluctuations for processes that run precisely according to the model. Are you ready to argue that a DSGE model captures all of the salient futures of a complex system like our economy?
Oh boy. The main problem here is that your fixed on the idea that a DSGE model is an accurate portrayal of a complex system inter-mediated by a pricing system. In a DSGE model there is no possibility for the type of process I described with the ants! Nor is there the possibility of agents to be tricked by the sort of signal mimicry I described. I concede that in a standard model, an expected change in one of the variables, say the money supply, simply shifts the agent from one optimal path to the next, given that we have endowed the agent with RE. But the point I’ve been trying to make, and the point you seem not able to grasp, is that assuming on behalf of the agent within the system that they are endowed with the ability to comprehend the information that underlies incoming price signals (i.e., incoming money payments), necessitates assuming that the individual intelligence of the agent exceeds his own capability. It is tantamount to claiming that the post-synaptic neuron is capable of deciphering whether an incoming neuro-transmitter emanates from a drug or from natural processes. If this were the case drugs would have no effect!
So you see, in these models it doesn’t even make sense to talk of price signals and the information they communicate. It’s simply a mathematical optimization problem subject to a variety of constraints. It may be difficult to solve, but the process it’s describing is relatively simple. If you’re stuck in this world then I can see you why you’re not grasping my argument. But it should be quite obvious that in a complex system not described by a simple optimization problem there can exist phenomena which may be categorized as being ‘expected’ (not in the precise sense of the DSGE model) yet not capable of being deciphered.
I find it surprising actually. I’ve gotten the impression that you think of yourself as cutting edge scientific. Yet much of the standard neoclassical doctrine, which is really just a branch of decision theory, is becoming kind of archaic. These methods were resorted to partly because computers weren’t powerful enough and partly because they had become the staple of physics. But modern physics has steadily shifted it’s attention to more complex problems, and since not much can be gained by looking at basic systems of PDE’s and ODE’s, many have resorted to the power of computer simulation.
Not at all. The Austrians do not propose that fluctuations operate according to a precise mathematical model. They simply formulate the ‘principal’ of the phenomena. These two are very distinct things. In the former, it would indeed be accurate to say that if the actor had access to model they should not be duped by expected changes. But once again, we’re dealing with very complex phenomena not amenable to description by a simple model. There are too many variables and inter-dependencies. Hence the actor only has the ‘principle’ at his disposal. And the ‘principal’ does not mean that he can decipher the nature of incoming price signals, and hence the optimal decision that he should take.
As an example. Neuro-science has developed a reasonably decent theory on the ‘principle’ of how the brain works. That is, sensory perceptions are the outcome of neurons firing in various patterns in response to stimuli from the outside world. These patterns are plastic since connections can be strengthened at the synapses, thus allowing for learning. In any case, despite our understanding of the principle we do not, and will never be able to, predict the precise reactions of a person to incoming stimuli. The process involved is vastly too complex to predict. Simply look up the P vs NP problem to understand that there are fundamental limitations to the problems that can be solved; not to mention the very basic problem of perfect measurability. I would also suggest reading Hayek’s “Sensory Order”, since you seem to be interested in that type of area.
But wouldn’t you agree that if certain phenomena cannot be described by a precise mathematical model then it would be an error to assume that knowledge of just the principle necessitates that something like a fluctuation is impossible?
That should be obvious IMO. Things like this are why I don’t believe his story. Someone who learned AE first would not assume a fixed model; you wouldn’t think of it.
This is why I’m not convinced you have a good grasp of the limitations of RE. I should think someone who truly understands RE would not be bold enough to equate the precise mathematical statement that it is with the hypothesis that if actors are aware of an impending bust they will not take on any business ventures. ‘Awareness’ outside the context of a DSGE model does not mean the precise probablistic term of expectation that it takes on inside of the model. It’s bad science to interchange these two notions.
Nothing against Mr Neoclassical but he made it very clear on his first few posts on this forum that he was largely un-familiar with Austrian Economics and it’s modern status.
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.
I’d consider Roger Garrison one of the most talented modern Austrians, and as far as I recall he chose to work on Hayek’s P&P not, PToC. In fact, Roger Garrison doesn’t mess around with ill defined concepts like first, second…nth order goods but defines capital goods as those that are more sensitive to interest rate fluctuations. Austrian capital theory has been dead for a long time now, Hayek couldn’t crack it, Lachmann couldn’t crack it and nobody since has been able to.
What order goods are the bricks used to build a brick factory? Which interest rate is relevant in the boom and bust? What role do expectations play in the business cycle? What happens to risk premiums during a business cycle and how do they influence entrepreneurial decisions? How do you define a bust?
That is incorrect. I suspect you have done very little research yourself regarding modern Austrian Critique’s of the PTPT, and your following questions indicate you’ve not bothered to do any research whatsoever regarding the ABCT before asking about it.
Then what was with the gigantic list of books that he ordered from here? What was with the story about learning from this site and then discovering neo-classical later? Key term: “it’s modern status”.
That is incorrect. I suspect you have done very little research yourself regarding modern Austrian Critique’s of the PTPT, and your following questions indicate you’ve not bothered to do any research whatsoever regarding the ABCT before asking about it.
If you’ve got a link to somebody figuring out all the problems Hayek couldn’t solve, then please, show me. I’d love to read it. One economist critiquing pure time preference theory of interest doesn’t quite cut it.
Is this rhetorical or am I suppose to take this seriously? Seems somewhat of a joke. What does answering Hayek’s issues have to do with showing that Austrian Capital theory is not, and has not been dead?
As for Hayek, he made his own problems. Especially when he moved in the directions away from AE. There are lots of outstanding Austrian critique’s of Hayek and his work.
Austrian capital theory has been dead for a long time now, Hayek couldn’t crack it, Lachmann couldn’t crack it and nobody since has been able to.
Capital theory is not dead, there’s just been little development on it. Hayek’s problem was not that he couldn’t “crack it”, but that it was too time-consuming for him to put into words how he saw the dynamic process of capital accumulation and investment (see this). This doesn’t mean that capital theory is dead, or is not useful.
I’m not being flippant, but from my readings of Garrison, Rothbard and even de Soto I’d argue that they all draw their capital theory from Hayek, which is saying something in and of itself. My point is that Hayek didn’t manage to answer a whole lot of his own questions, and as far as I can tell neither has anybody since. This isn’t a critique of Austrian economics, because even mainstream economics haven’t figured this out, they just realise that.
Here (http://www.hayek.ufm.edu/index.php/Arment_Alchian_(Part_II) is Hayek’s saying that capital theory is too difficult a subject, the comment section here (http://www.coordinationproblem.org/2010/05/what-does-this-tell-you-about-the-state-of-modern-economic-theory.html) is also quite instructive about the problems of capital theory.
Edit: he also says that Lachmann agrees that it is very difficult.
Bingo!