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Wednesday, June 29, 2011

Vaughn on Mises’s Trade Cycle Theory

Karen I. Vaughn’s book Austrian Economics in America: The Migration of a Tradition (Cambridge and New York, 1994) is invaluable, and a passage I have recently read is worth quoting:
“Mises never discusses the possibility of systematic speculative error except in the context of his trade cycle theory, in which speculators-investors are misled by improper monetary signals emanating from a fractional reserve banking. Yet if the future cannot be predicted, or as Shackle would say, if the future is created out of the actions of the past, why is it not least conceivably possible for speculative activity to be on net incorrect at least some of the time? Certainly, we have the empirical evidence of speculative bubbles that are endogenous to markets as an example of market instability. One would think that the extent and potential limiting factors that affect such endogenous instabilities would be of great importance for fully understanding market orders, yet it is an issue surprisingly missing in the Austrian literature. Hence, although, we can appreciate the force of Mises’ argument as far as it goes, it seems that a crucial part of the case for the effective functioning of a market economy is missing.” (Vaughn. 1994: 87–88).
Vaughn is entirely correct: the Austrians’ trade cycle theory is flawed by failing to take into account Keynesian uncertainty, subjective expectations and a severe failure to deal with the instabilities caused by asset bubbles and debt deflation.

BIBLIOGRAPHY

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

25 comments:

  1. Of course ignorant humans can make mistakes beyond those which are the result of distortions induced by funny money. The problem you ignore is explaining how the folks running the SWAT teams have better knowledge and insight than average folks in the voluntary sector.

    And you are still left with the obvious problem of fundamentally ignorant humans beings being further confused by the distortions of funny money and/or the lack of market pricing.

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  2. I've tried to find a link on this blog to contact you besides commenting on a post. I would like to ask you a few questions appropriate for private message.

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  3. Dr. Fumbles,

    If you want to ask questions that you dont want published, just leave a comment as usual and I wont publish it.

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  4. "The problem you ignore is explaining how the folks running the SWAT teams have better knowledge and insight than average folks in the voluntary sector"

    Why would decentralised decision making by millions of agents under uncertianty and diverging subjective expecttaions overcome the knowledge problem?

    The answer: they don't, and there is no tendency to general equilibrium or even the plan/pattern coordination, argued by Lachmann:

    "Because of his focus on uncertainty, Lachmann came to doubt that, in a laissez-faire society, entrepreneurs would be able to achieve any consistent meshing of their plans. The economy, instead of possessing a tendency toward equilibrium, wa sinstead likely to careen out of control at nay time. Lachmann thought that the govenment had arole ot play in stabilizing the economic system an dincraesing the cooridnation of entrepreneurial plans. We call his position "intervention for stability"
    Gene Callahan, Economics for real people: an introduction to the Austrian school, p. 293

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  5. "The answer: they don't, and there is no tendency to general equilibrium or even the plan/pattern coordination, argued by Lachmann:"

    The answer is the profit-loss mechanism which punishes bad decision makers and rewards good ones. Capital moves from the hands of poor decision makers and into the hands of the good decision makers. This is a constant culling out that happens in the market day in and day out. All government intervention achieves is to prevent this culling out from happening through myriad interventions.

    Absent the interventions, the profit-loss mechanism (together with arbitrage) is sufficient to drive the market towards equilibrium (but not necessarily to attain equilibrium).

    "Lachmann said this" is no argument.

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  6. "Certainly, we have the empirical evidence of speculative bubbles that are endogenous to markets as an example of market instability. "

    Oh please!! Lay it out for us. What are those 'endogenous-in-origin' speculative bubbles?

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  7. "The answer is the profit-loss mechanism which punishes bad decision makers and rewards good ones. "

    The "profit-loss mechanism" does indeed provide a degree of coordination, but it is simply insufficent to cause actual equilibrium, as you say.

    And subjective expectations and uncertainty can, and do, cause severe discoordination, which the "profit-loss mechanism", and other characteristics of markets, will not reliably overcome.

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  8. "And subjective expectations and uncertainty can, and do, cause severe discoordination"

    While this may be true and subjective expectations may be a perpetual disequilibriating force on the market, this

    "which the "profit-loss mechanism", and other characteristics of markets, will not reliably overcome"

    requires a theoretical explanation. As it stands, it is a claim. Just asserting it does not make it valid. And providing empirical data and anecdotes will not suffice.

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  9. "but it is simply insufficent to cause actual equilibrium, as you say"

    Further, the point is not whether it will 'cause' equilibrium because the disequilibriating tendencies in the market economy may never go away. Before the equilibriating forces can move the market towards equilibrium, the next disequilibriating force sets in. What this will create is a constant 'tendency' towards equilibrium with repeated pushes away from equilibrium. So, it appears that the real problem is with your obsession with "causing" equilibrium.

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  10. "What this will create is a constant 'tendency' towards equilibrium with repeated pushes away from equilibrium."

    There is not even any constant 'tendency' towards equilibrium.

    Free market systems can become mired in long term "unemployment disequilibrium" states (as the Post Walrasians would say). Keynes called it a "unemployment/underemployment equilibrium", but here used "equilibrium" in a sense contrary to its normal meaning.

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  11. "Free market systems can become mired in long term "unemployment disequilibrium" states"

    And what theory do you base this claim on? If it's empirical evidence or anecdotes, just forget it. However, do remember that the strength of your claim rests on the strength of the underlying theory.

    Further, being 'mired in' disequilibrium states does not imply the absence of a tendency towards equilibrium.

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  12. Ahhh!!!!! Noted one more point.

    "Free market systems can become mired in long term "unemployment disequilibrium" states"

    Please define what you mean by 'free market systems' first. No discussion can make any headway if our definitions do not coincide or are not made clear.

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  13. "Please define what you mean by 'free market systems' first"

    All versions that have no government interventions that can overcome market failures.

    This would apply to

    (1) the fantasy Rothbardian world of 100% reserve banking.

    (2) gold standard capitalism in the 19th century with fractional reserve banking, with or without a central bank

    (3) 1920s capitalism with the gold exchange standard

    (4) post-1979 neoliberal capitalism after the abandonment of full employemnt/stimulative fiscal policy.

    Under all of them, the investment decision is subject to subjective expectations and if there was a severe shock to expectations, investment could easily fall, causing long periods of high unemployment, even if there was positive growth.

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  14. Good. Right there we see that there is major and complete disagreement on fundamental terms. To me, your 'definitions' come across as nonsensical. That means that we will only ending talking past each other if we discuss this point any further.

    Since I am dismissing your definitions right away, the only option left is that you understand my definition and decide to accept or reject it. If the former, we can talk. Otherwise, let's drop it right here.

    I'm stepping out for a while. Will return with my definition. Let's take it forward from there.

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  15. OK. Here's my definition of the concept 'free market'. The term 'market' first of all represents the set of all the relationships that exist among people who engage in exchange, whether autistic or interpersonal. Within this broad category called the 'market', the free market represents the particular category of relationships based on voluntary exchange. This categorisation is important because there are broadly 2 types of exchange - violent and voluntary. The free market is, in other words, defined as the set of all relationships that exist among people who engage in voluntary exchange to the complete exclusion of violent exchange.

    By this definition, in fact, there is no such thing as a free market in the real world as we know it today but the concept helps us engage in economic theorising. It helps us study what would happen when violence were removed from interpersonal exchange and then superimpose violent exchange on top of this and study its effects.

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  16. "Free market systems"

    By my definition, this very phrase is nonsensical. So, the statement

    "Free market systems can become mired in long term "unemployment disequilibrium" states"

    is even more nonsense. Simply put, it reflects a complete lack of understanding of what the concept 'free market' stands for. There is only THE 'free market' and no 'free markets'. And this is NOT semantic quibbling.

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  17. "The free market is, in other words, defined as the set of all relationships that exist among people who engage in voluntary exchange to the complete exclusion of violent exchange."

    There are a vast number of "voluntary" exchanges in all the capitalist systems I describe above. Therefore there are free markets, even under your definition.

    Also, the concept of autistic exchange as conceived by Mises and Rothbard - as an action performed by an individual without any reference to cooperation with other individuals - seems inappropriate in a definition of capitalism or free markets.
    It is producing commodities with exchange value. A system of actions involving
    only autistic exchange would be personal autarky, not capitalism.

    The historical essense of capitalism is not individuals merely performing action solely for personal benefit. It is:

    (1) private production;
    (2) private ownership of capital goods and property;
    (3) private decisions on investment and production;
    (4) private consumption of the produced commodities in interpersonal exchange to satisfy utility on a market
    (5) flow of money from sales back to (1), (2) etc.

    There is of course more that can be said. Real world capitalism, however, has always had government intervention, to varying degrees. Far from distoring or preventing
    interpersonal exchange many governemnt interventions aid it: police to stop crime or theft, the law to enforce contract, the militray to stop theft of property during trade by pirates or other individuals, and the list goes on.

    Just because the government intervenes does not make the system non-capitalist.

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  18. "Simply put, it reflects a complete lack of understanding of what the concept 'free market' stands for.

    Rubbish: it is your (or Mises/Rothbard's) idiosyncratic attempt to re-define terms understood in accepted senses by virtually everyone else.

    This is as stupid as objecting to the statement:

    "the sky is blue on a clear day"

    because you personally choose to redefine "blue" to mean "red", and "red" to mean "blue".

    Then you scream: "your sentence and concept o "blue" is WRONG, because I dont accept your definiton and just becasue I say so it means "red"!!"

    There is nothing of substance in your comments.

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  19. "The free market is, in other words, defined s the set of all relationships that exist among people who engage in voluntary exchange to the complete exclusion of violent exchange."

    Under such a definition there has NEVER been any free market in the modern history of real world capitalism, or we would have to search hard in medieval or ancient societies for a society where there was no coercion, war or violence of any type.

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  20. And this definition reduces to the stupid conclusion that there was never any capitalism/free markets in the 19th century, or any other recent period of history.

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  21. "Under such a definition there has NEVER been any free market in the modern history of real world capitalism, or we would have to search hard in medieval or ancient societies for a society where there was no coercion, war or violence of any type."

    Good. This response shows that even you can think.

    "And this definition reduces to the stupid conclusion that there was never any capitalism/free markets in the 19th century, or any other recent period of history."

    More proof that you can think. The only problem is where you claim that the conclusion is stupid.

    I don't think we can have a discussion because it appears that we do not agree on the definitions. So, let's drop it here. According to me, you are an economic ignoramus who can and will never get economics. You will ALWAYS remain an economic chronicler.

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  22. "There are a vast number of "voluntary" exchanges in all the capitalist systems I describe above. Therefore there are free markets, even under your definition."

    Not at all. My definitions are rock solid unlike your fluid ones that can accommodate anything from Stalin's Russia to Chavez's Venezuela under the term 'free market'. The existence of many voluntary exchanges does not make a free market. It is the total absence of violence.

    Just bear in mind that the concept 'free market' is an ABSTRACTION and does not refer to a particular existing economic system.

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  23. "My definitions are rock solid unlike your fluid ones that can accommodate anything from Stalin's Russia "

    Laughable. Stalin's Russian is ap erfect exmaple of a non-capitalist state, precisely because production was mainly done by central planning and by state owned enterprises, not by privately owned institutions.

    The existence of many voluntary exchanges does not make a free market.

    Idiocy. There were minimal voluntary exchanges in the Soviet Union, and that, in addition to the reasons above, is why it was not capitalist.

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  24. "There are a vast number of "voluntary" exchanges in all the capitalist systems I describe above. Therefore there are free markets, even under your definition."

    It is really hilarious to watch you contort yourself to make my definition fit your whims. Hey genius!! I said

    "to the complete exclusion of violent exchange"

    So, the examples you listed DO NOT qualify for the title 'free market' (probably the Rothbardian 100% reserve banking system might fit if the fractional reserve banking were not banned). There is institutionalisation of violence in all your examples and hence they are not examples of the free market.

    "Rubbish: it is your (or Mises/Rothbard's) idiosyncratic attempt to re-define terms understood in accepted senses by virtually everyone else."

    Nonsense. I asked for the DEFINITION. As usual, you do not understand the meaning of the word DEFINITION. It is a very important concept that tells us 'What on earth are we talking of?' and a number of related questions such as 'What are its attributes?'.

    A definition is the distillation of the most important distinguishing characteristics of the concept being defined. The definition includes those attributes of the concept that explain the maximum number of other characteristics.

    For instance, when I say 'A free market is the set of all relationships of voluntary exchange among people to the exclusion of violent exchange', this definition accounts for all other characteristics of the concept 'free market'. For instance, that people recognise the concept 'property' in the 'free market' is implied in the part of the definition that excludes violent exchange.

    Your definition

    "All versions that have no government interventions that can overcome market failures."

    is utter nonsense because it
    1. states no characteristics of the free market
    2. smuggles in the notion of 'market failure' into the definition without understanding whether a truly free market is subject to 'market failure'

    You do not start an analysis by assuming your conclusions. That is the dishonesty/stupidity you are engaging in.

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  25. Karen I. Vaughn is without a doubt my favorite modern day Austrian. More Austrians should seriously read her stuff...

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