tag:blogger.com,1999:blog-2197051945822486684.post7711108964301074429..comments2024-03-19T03:01:28.295+11:00Comments on Thinking Out Aloud: Against Austrian business cycle theoryLorenzohttp://www.blogger.com/profile/00305933404442191098noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-2197051945822486684.post-35645744712473917222016-02-08T14:58:02.995+11:002016-02-08T14:58:02.995+11:00Which is a pity, as whatever you are trying to lin...Which is a pity, as whatever you are trying to link to sounds interesting.Lorenzohttps://www.blogger.com/profile/00305933404442191098noreply@blogger.comtag:blogger.com,1999:blog-2197051945822486684.post-40578942260489701542016-02-08T14:56:47.826+11:002016-02-08T14:56:47.826+11:00Tom, the link doesn't work.Tom, the link doesn't work.Lorenzohttps://www.blogger.com/profile/00305933404442191098noreply@blogger.comtag:blogger.com,1999:blog-2197051945822486684.post-17088967566823007932016-02-08T14:55:09.646+11:002016-02-08T14:55:09.646+11:00Thanks Kevin :)Thanks Kevin :)Lorenzohttps://www.blogger.com/profile/00305933404442191098noreply@blogger.comtag:blogger.com,1999:blog-2197051945822486684.post-51172686967500296582016-02-08T14:54:50.100+11:002016-02-08T14:54:50.100+11:00It is a case of being bad at editing yourself (you...It is a case of being bad at editing yourself (you know what you mean, without noticing what you actually wrote). I have fixed it.Lorenzohttps://www.blogger.com/profile/00305933404442191098noreply@blogger.comtag:blogger.com,1999:blog-2197051945822486684.post-43911838288495519042016-01-12T02:10:48.270+11:002016-01-12T02:10:48.270+11:00I think the empirical evidence you offer up agains...I think the empirical evidence you offer up against the Austrian theory is stronger than the theoretical evidence.<br /><br />You say: "How can there be a key single, natural or otherwise, rate which can distort the entire structure of investment?"<br /><br />Most Austrians accept the pure time preference theory of interest which holds that there is an underlying rate of interest that equilibrates the demand for present goods over future goods. This rate will be the anchor for all actual market rates on monetary interest, which will vary depending upon risk of any particular loan, price-change expectations, expected productivity growth etc. Austrians believe that an "unhampered" free market would allow these rates to emerge naturally. When the banking system increases the money supply at faster then the expected rate then market interest rates will drop below the equilibrating rates and it will become more attractive to produce goods where interest makes up a a higher than average part of the price. This will be as true for particular as for the general.<br /><br />You say: "What is more plausible--that there is enormously-important-for-future-income information lying around being ignored by everyone except by clever Austrian school folk or that economies are shocked off their growth path"<br /><br />I do not think that the theory assumes any special knowledge by Austrians on what actual interest rate should be - its a theory about the effects of a particular kind of market distortions that creates a kind of supply shcok that knowck economies off their growth path.<br /><br />You say "What is more plausible--that the Reserve Bank of Australia (RBA) got its policy interest rate essentially correct for 23 years straight, so that Australian entrepreneurs got their capital projects (on balance) continually right? Or that the RBA sufficiently anchored inflation and income expectations that the Australian economy has not been shocked enough off its growth path since RBA introduced its policy of aiming for a 2-3%pa inflation rate on average over the business cycle ?"<br /><br />I think a fuller understanding of the subtleties of ABCT means there is not such a big divergence between these two statements as you think. When a CB targets inflation (or NGDP growth) it is committing itself to a policy that will make it harder to (deliberately or accidentally) instigate a period of lower than natural interest rates and cause an ABCT episode. In theory at least the interest rate that will correspond to successfully hitting the target will also be the (inflation adjusted) natural rate that avoids the ABC.Transformernoreply@blogger.comtag:blogger.com,1999:blog-2197051945822486684.post-72063512651945517492016-01-11T17:15:53.992+11:002016-01-11T17:15:53.992+11:00Lorenzo, here's an alternative view on the plu...Lorenzo, <a href="" rel="nofollow">here's an alternative view on the plucking theory.</a><br /><br />Basically it's that downturns off trend correspond (with overwhelming probability) to market coordination (group think and panics). Trend growth corresponds to times of essentially random activity (or so complex, it appears random): when information transfer from source (demand) to destination (supply) is ideal.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2197051945822486684.post-65459290989670953982016-01-11T17:10:47.794+11:002016-01-11T17:10:47.794+11:00"And 2008 wasn't in C20"
That was g..."And 2008 wasn't in C20"<br /><br />That was going to be my question to Lorenzo (when he wrote this: "A business cycle theory that is so dramatically wrong about the two worst economic downturns of the C20th").<br /><br />Did you really mean two, and if so, what was were they?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-2197051945822486684.post-22323517788877143582016-01-10T07:32:00.211+11:002016-01-10T07:32:00.211+11:00No, it's not.No, it's not.pithomhttps://www.blogger.com/profile/13997094225496018110noreply@blogger.comtag:blogger.com,1999:blog-2197051945822486684.post-39057786290594050042016-01-09T18:54:09.183+11:002016-01-09T18:54:09.183+11:00"What is more plausible--that the Reserve Ban..."What is more plausible--that the Reserve Bank of Australia (RBA) got its policy interest rate essentially correct for 23 years straight, so that Australian entrepreneurs got their capital projects (on balance) continually right?"<br /><br />-Or Australia's really closely linked to a major economy growing at 6-12% per year every year since the 1990s. That's the obvious explanation. Lots of countries had inflation targets. Australia is an outlier in several ways. It had the same NGDP shock in 2008 it had in the early 1980s, but had a much smaller RGDP and employment shock in 2008 than in the early 1980s. I attribute this to China's rapid growth in 2008.<br /><br /><br />"So, I do not agree with the Austrian School business cycle theory. In particular, I am very unsurprised that an Austrian economist lost by betting against the key market indicator."<br /><br />-He would have won had he bet against the market on Greek bonds in 2009. And really, Lorenzo, really? That inflation prediction had nothing to do with Austrian Business Cycle Theory. It was just a failure to understand the significance of the Zero Lower Bound.<br /><br />"What is more plausible--that there is enormously-important-for-future-income information lying around being ignored by everyone except by clever Austrian school folk or that economies are shocked off their growth path: an economic shock being an unanticipated change?"<br /><br />Austrian Business Cycle Theory requires one of two things to make it work: imperfect information or rational bubbles. It could work with either alone, or with both.<br /><br />And the boom doesn't have to be one of over-investment; just of mal-investment. Think of the Communist countries. None of them were booming in the 1980s. The U.S. economy wasn't super-strong in 2005. <br /><br />"Again, this conforms far better with the economy being shocked off its growth path before returning to it."<br /><br />-This could work in Austrian theory as well. In the former Communist countries, the capital re-allocation of the 2000s followed the capital disallocation of the 1990s, leading to the fastest growth in their history. Most of them did little more than return to Communist-era trend.<br /><br />"Even when there are supply shocks, (1) monetary policy can counter-balance the effects and (2) such shocks are generally a specific shock to the economy, not rolling capital project failures."<br /><br />-1973-5 was the second-greatest recession in American history since the Great Depression. It also had the most stable NGDP growth. I suspect you saw a lot of rolling capital project failures in that recession, though I haven't studied it much.<br /><br />And 2008 wasn't in C20.pithomhttps://www.blogger.com/profile/13997094225496018110noreply@blogger.com