I’m downvoting this quote. Read at a basic level, it supports a particular economic theory rather than a larger point of rationality.
For the record, the Austrian Business Cycle Theory is not generally accepted by mainstream economists. This isn’t the place to discuss why, and it isn’t the place to give ABCT the illusion of a “rational” stamp of approval.
Read at a basic level, it supports a particular economic theory rather than a larger point of rationality.
I read it as an extension of Gendlin; the damage comes from living in the untrue world, not from the realization that the untruth is untrue, even if the second is much more visible.
Ditto, and downvoting b1shop’s response since the quote did not mention any particular economic theory. Busts caused by widespread bad investments aren’t necessarily the problem, the widespread bad investments are the problem. Blaming the bust in these cases may be shooting the messenger.
Thats not to say all busts are largely caused by widespread bad investments, or anything about why these bad investments happen. It is however very clear in hindsight that many boom-phase investments are crazy.
I’m not downvoting Eugine, because Vaniver’s interpretation is interesting. But I am upvoting b1shop, because the quotation does sound like Austrianism on a bumper sticker. So it applause-lights a false fringe theory associated with an anti-empirical intellectual community, in addition to plausibly generating specific false beliefs about economics and/or ethics if taken on its face. (Busts, or more generally human misery, are the reason ‘distortions’ and ‘not making sense’ are a bad thing in the first place; economies aren’t primarily maps.) It’s interesting and revealing in subtle ways, but misleading in banal and obvious ways.
I’m not downvoting Eugine, because Vaniver’s interpretation is interesting. But I am upvoting b1shop, because the quotation does sound like Austrianism on a bumper sticker.
I’m not downvoting Eugine, because Vaniver’s interpretation matches mine. I am upvoting Grant and downvoting b1shop because he claims that there is no rationality message despite the rather obvious cognitive biases that it relates to.
I will refrain from actively supporting the quote because it uses “the real harm”, which makes it a strong statement about relative harms of various activities when that constitutes at best a controversial claim and one that is open to rather a lot of interpretation. (I would endorse an “also” claim or even a “and the most interesting” claim.)
Ditto, and downvoting b1shop’s response since the quote did not mention any particular economic theory.
I wouldn’t recommend downvoting b1shop’s response (I didn’t), because they are correct that the basic reading of the quote relies on particular economic assumptions. There are economic theories that put the fault in the bust- if things were intelligently managed, you could keep the bubble inflated at just the right amount to prevent it from popping or inflating further, and never have to deal with the bust.
For example, look at this graph that Krugman posted in 2010. The “projected real GDP” is from Mark Thoma, another economist, but where you choose to draw that line says a lot about your assumptions. The Austrian would basically draw it from trough to trough, claiming that all the reported GDP above that line was activity that could be recorded but didn’t actually generate lasting wealth. In that view, the bubbles are clearly harmful; in Krugman’s view, the busts are harmful. It’s the difference between a trillion dollars that we can never get back, and a trillion dollars that was never there.
if things were intelligently managed, you could keep the bubble inflated at just the right amount to prevent it from popping or inflating further, and never have to deal with the bust.
Two things. First, a bubble that never deflates or pops is not a bubble, it’s sustainable growth.
Second, there is a LOT of empirical evidence that “intelligent management” of economy—which has been practiced since the first half of the XX century to various degrees in many countries—vastly underperforms its promises.
It does assume that asset bubbles are made up of bad investments which are costly to undo. While this insight may have been originally Austrian, I didn’t think it was at all contentious. The dot-com bubble is a clearer example, as the housing bubble was both an asset bubble and banking failure (and many of the dot-com investments were just off-the-wall crazy).
As Vernon Smith showed, asset bubbles happen even with derivatives who’s value is objective (and without central banks). Its hard for me to see the bust as the problem in those cases.
Would a Keynesian say that any economic downturn can be averted in the face of any and all bad investments?
Would a Keynesian say that any economic downturn can be averted in the face of any and all bad investments?
Doubtful. (I should make clear that I’m not a professional economist, and I couldn’t talk math with a Keynesian without doing serious reading first.) To go off the same graph, it does identify the tech bubble in ~2000 as being above the projected line.
My impression of the difference is that in the terms of a crude analogy, the Austrian prefers to rip the band-aid off, and the Keynesian prefers to slowly peel it back.
All true, but there are many booms which seem to produce crazy investments; the dot-com boom is the most obvious recent example. You don’t need to accept ABCT to accept this, and I’d guess most people who do notice this don’t accept ABCT.
I’m only an econ undergrad, so I’m not a drop-dead expert in economics. However, I work as a business valuator by day, so I like to think I know a thing or two about evaluating the profitability of projects.
There’s a lot of Rothbardian baggage about money I associate with the theory. That may or may not be a separate conversation. Don’t even bother trying to argue against my points here if you believe fractional reserve banking is bad, because we don’t agree on enough to have a productive conversation about this issue. We should instead focus on money and FRB first.
The ABCT story is about excessively low interest rates causing firms to be too farsighted in their planning. If rates increase, then projects that were profitable are no longer profitable, and the economy contracts.
Here’s a few reasons why I don’t like this story:
It requires a massive level of incompetence from entrepreneurs. Arguably the most popular business valuation resource for estimating costs of capital, Duff and Phelps, has a report on adjusting risk free rates for the expected future path. If businesses are unstable because they are not robust to 5% swings in interest rates, then they will likely be unstable due to other shocks as well. ABCT requires them to fall for the same trap over and over again.
It’s drastically asymmetric. ABCT only focuses on distortions caused by too much money being printed. What about the distortions caused by too little money being printed? Modern cases show this is far more damaging. The transmission mechanism isn’t based on interest rates, but it still matters a lot.
The case for expansionary policy causing bubbles is not as strong as many think. NGDP growth during the worst of the housing bubble was only 5%. That’s below average growth over the past few decades, which were a remarkably stable time. Yes, interest rates were low, but that had more to do with an influx of foreign savers than Fed policy. (Aside: Interest rates are a bad indicator of monetary policy. High interest rates during German hyperinflation is a great example.)
As far as the late 90′s go, yes, lots of bad investments were made. I think this was caused not by bad monetary economics but by irrational investor beliefs. I imagine people would still have invested in Pets.com regardless of Fed action or inaction. Monetary policy might explain excessive valuations everywhere, but it doesn’t explain excessive, localized valuations. Additionally, interest rates are mostly irrelevant to the tech sector where financing is usually based on equity rather than debt.
If the ABCT policy is true, we’d expect to see a bust in long-term schemes during recessions and a boom in short-term schemes. Instead, we see a bust in both.
ABCT seems married to the idea that expansionary monetary policy is “unsustainable” and interest rates must return to “natural” levels. This is nonsense. The Fed has been performing QE for years, and it’s been tremendously helpful by most accounts. Fed “inaction” is still action.
I’m downvoting this quote. Read at a basic level, it supports a particular economic theory rather than a larger point of rationality.
For the record, the Austrian Business Cycle Theory is not generally accepted by mainstream economists. This isn’t the place to discuss why, and it isn’t the place to give ABCT the illusion of a “rational” stamp of approval.
I read it as an extension of Gendlin; the damage comes from living in the untrue world, not from the realization that the untruth is untrue, even if the second is much more visible.
Ditto, and downvoting b1shop’s response since the quote did not mention any particular economic theory. Busts caused by widespread bad investments aren’t necessarily the problem, the widespread bad investments are the problem. Blaming the bust in these cases may be shooting the messenger.
Thats not to say all busts are largely caused by widespread bad investments, or anything about why these bad investments happen. It is however very clear in hindsight that many boom-phase investments are crazy.
I’m not downvoting Eugine, because Vaniver’s interpretation is interesting. But I am upvoting b1shop, because the quotation does sound like Austrianism on a bumper sticker. So it applause-lights a false fringe theory associated with an anti-empirical intellectual community, in addition to plausibly generating specific false beliefs about economics and/or ethics if taken on its face. (Busts, or more generally human misery, are the reason ‘distortions’ and ‘not making sense’ are a bad thing in the first place; economies aren’t primarily maps.) It’s interesting and revealing in subtle ways, but misleading in banal and obvious ways.
I’m not downvoting Eugine, because Vaniver’s interpretation matches mine. I am upvoting Grant and downvoting b1shop because he claims that there is no rationality message despite the rather obvious cognitive biases that it relates to.
I will refrain from actively supporting the quote because it uses “the real harm”, which makes it a strong statement about relative harms of various activities when that constitutes at best a controversial claim and one that is open to rather a lot of interpretation. (I would endorse an “also” claim or even a “and the most interesting” claim.)
I wouldn’t recommend downvoting b1shop’s response (I didn’t), because they are correct that the basic reading of the quote relies on particular economic assumptions. There are economic theories that put the fault in the bust- if things were intelligently managed, you could keep the bubble inflated at just the right amount to prevent it from popping or inflating further, and never have to deal with the bust.
For example, look at this graph that Krugman posted in 2010. The “projected real GDP” is from Mark Thoma, another economist, but where you choose to draw that line says a lot about your assumptions. The Austrian would basically draw it from trough to trough, claiming that all the reported GDP above that line was activity that could be recorded but didn’t actually generate lasting wealth. In that view, the bubbles are clearly harmful; in Krugman’s view, the busts are harmful. It’s the difference between a trillion dollars that we can never get back, and a trillion dollars that was never there.
Two things. First, a bubble that never deflates or pops is not a bubble, it’s sustainable growth.
Second, there is a LOT of empirical evidence that “intelligent management” of economy—which has been practiced since the first half of the XX century to various degrees in many countries—vastly underperforms its promises.
Agreed on both points. I’m not endorsing that theory, or related steelmanned versions.
It does assume that asset bubbles are made up of bad investments which are costly to undo. While this insight may have been originally Austrian, I didn’t think it was at all contentious. The dot-com bubble is a clearer example, as the housing bubble was both an asset bubble and banking failure (and many of the dot-com investments were just off-the-wall crazy).
As Vernon Smith showed, asset bubbles happen even with derivatives who’s value is objective (and without central banks). Its hard for me to see the bust as the problem in those cases.
Would a Keynesian say that any economic downturn can be averted in the face of any and all bad investments?
Doubtful. (I should make clear that I’m not a professional economist, and I couldn’t talk math with a Keynesian without doing serious reading first.) To go off the same graph, it does identify the tech bubble in ~2000 as being above the projected line.
My impression of the difference is that in the terms of a crude analogy, the Austrian prefers to rip the band-aid off, and the Keynesian prefers to slowly peel it back.
All true, but there are many booms which seem to produce crazy investments; the dot-com boom is the most obvious recent example. You don’t need to accept ABCT to accept this, and I’d guess most people who do notice this don’t accept ABCT.
Would you mind explaining? You could PM me or toss it in the Open thread if you don’t think it belongs here.
Sorry, haven’t logged in in a while.
I’m only an econ undergrad, so I’m not a drop-dead expert in economics. However, I work as a business valuator by day, so I like to think I know a thing or two about evaluating the profitability of projects.
There’s a lot of Rothbardian baggage about money I associate with the theory. That may or may not be a separate conversation. Don’t even bother trying to argue against my points here if you believe fractional reserve banking is bad, because we don’t agree on enough to have a productive conversation about this issue. We should instead focus on money and FRB first.
The ABCT story is about excessively low interest rates causing firms to be too farsighted in their planning. If rates increase, then projects that were profitable are no longer profitable, and the economy contracts.
Here’s a few reasons why I don’t like this story:
It requires a massive level of incompetence from entrepreneurs. Arguably the most popular business valuation resource for estimating costs of capital, Duff and Phelps, has a report on adjusting risk free rates for the expected future path. If businesses are unstable because they are not robust to 5% swings in interest rates, then they will likely be unstable due to other shocks as well. ABCT requires them to fall for the same trap over and over again.
It’s drastically asymmetric. ABCT only focuses on distortions caused by too much money being printed. What about the distortions caused by too little money being printed? Modern cases show this is far more damaging. The transmission mechanism isn’t based on interest rates, but it still matters a lot.
The case for expansionary policy causing bubbles is not as strong as many think. NGDP growth during the worst of the housing bubble was only 5%. That’s below average growth over the past few decades, which were a remarkably stable time. Yes, interest rates were low, but that had more to do with an influx of foreign savers than Fed policy. (Aside: Interest rates are a bad indicator of monetary policy. High interest rates during German hyperinflation is a great example.)
As far as the late 90′s go, yes, lots of bad investments were made. I think this was caused not by bad monetary economics but by irrational investor beliefs. I imagine people would still have invested in Pets.com regardless of Fed action or inaction. Monetary policy might explain excessive valuations everywhere, but it doesn’t explain excessive, localized valuations. Additionally, interest rates are mostly irrelevant to the tech sector where financing is usually based on equity rather than debt.
If the ABCT policy is true, we’d expect to see a bust in long-term schemes during recessions and a boom in short-term schemes. Instead, we see a bust in both.
ABCT seems married to the idea that expansionary monetary policy is “unsustainable” and interest rates must return to “natural” levels. This is nonsense. The Fed has been performing QE for years, and it’s been tremendously helpful by most accounts. Fed “inaction” is still action.
There’s not much empirical support for the theory.
Edit: Broken link.