Hayek’s assumption of a real world full employment equilibrium state is confirmed in a letter that Hayek wrote to John Hicks in 1967, regarding the assumptions of his theory, where Hayek confirms that his theory required equilibrium and full employment as the initial stage at the beginning of the process leading to the trade cycle:
Hicks to Hayek, November 27, 1967“... We have (a) full employment, (b) static expectations, (c) ‘equilibrium’ at every stage, so that demand = supply in every market, prices being determined by current demand and supply. Add to these the Wicksell assumption, of a pure credit economy and we clearly find that if there were no lags, the market rate of interest cannot be reduced below the natural rate in an equilibrium position; ....Moreover, Hayek, on pages 265–266 of Prices and Production, explicitly tells us his purpose in the book:
Hayek to Hicks, December 2, 1967
I accept assumption (a), full employment. I am not sure that I quite know what (b) ‘static expectations’ means, but if it means that at each stage of the process everybody acts in the expectation that future prices will be the same as present prices, I accept that too – though we shall see that these expectations must be disappointed.
Of (c) I can accept that at each stage in every separate market demand = supply in the sense that at the ruling price all buyers and sellers buy and sell as much as they want to buy at that market, but not in the sense that any change in the supply which a change in price will bring about in the course of time has already taken place or that prices correspond to the marginal costs at which producers now begin to produce.
Nor need there [be] at any but the initial stage an overall equilibrium between the different markets, because a change of price necessary to secure equality between demand and supply in any one market will make at the next stage a change of other prices inevitable as a result of the changed receipts in the first market being spent.
Let us now start with a system in full stationary equilibrium: constant prices and no net saving or investment and no changes in the supply of factors or tastes and a constant flow of money (which may be a token or partly credit money) ... (Hayek 1999: 100–102).
“My present task is to fill in the details of that rough sketch and to show what happens in the interval before a new equilibrium is attained.” (Hayek 2008: 265–266).If Hayek thought at this stage in his career that equilibrium states can never occur in the real world, then what was point of his trade cycle theory?
BIBLIOGRAPHY
Hayek, F. A. von, 1999. Collected Works of F.A. Hayek, Volume 6: Good Money, Part II: The Standard, Routledge, London.
Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala.
The issue was not whether Hayek utilized the mental tool of equilibrium as an epistemological "starting point" in understanding the real world economy of dynamic change, but rather whether Hayek held that equilibrium could in fact be attained, and whether Hayek used the equilibrium model as a characterization of the market. In the latter two cases the answer is a definitive NO.
ReplyDeleteThis latest desperate attempt at accusing Hayek of believing that equilibrium is in fact reached in a free market is just sad.
But in his early 1930s work on trade cycle theory he clearly assumed a state of equilibrium as a real world initial position in an economy subject to an Austrian trade cycle.
False. Hayek did not hold equilibrium as a "real world" phenomena. He held it as a mental tool, to characterize where the real world tended, but never reach, over time.
Hicks to Hayek, November 27, 1967
“... We have (a) full employment, (b) static expectations, (c) ‘equilibrium’ at every stage, so that demand = supply in every market, prices being determined by current demand and supply. Add to these the Wicksell assumption, of a pure credit economy and we clearly find that if there were in lags, the market rate of interest cannot be reduced below the natural rate in an equilibrium position; ....
Hayek to Hicks, December 2, 1967
Nor need there [be] at any but the initial stage an overall equilibrium between the different markets, because a change of price necessary to secure equality between demand and supply in any one market will make at the next stage a change of other prices inevitable as a result of the changed receipts in the first market being spent.
Again, MENTAL TOOL OF COGNITION ONLY. The entire set of passages you quoted CLEARLY shows Hayek to be setting up a series of assumptions to be used as mental tools to understand the real world market that diverges from them. He is not arguing that this is what the real world market is. He is starting with those assumptions, so that he can understand the real world market that is in contradistinction to them.
Let us now start with a system in full stationary equilibrium: constant prices and no net saving or investment and no changes in the supply of factors or tastes and a constant flow of money (which may be a token or partly credit money) ... (Hayek 1999: 100–102).
AS A MENTAL TOOL OF COGNITION ONLY. Again, he assumes as a starting point a "system" (which right away should have tipped you off that he is proposing a thought experiment) of full stationary equilibrium, with no changes in prices, no changes in supply of factors, no changes in tastes, and no changes in the flows of money. That is TEXTBOOK Misesian "ERE", which is a mental tool of understanding, not a characterization of the real world market economy. Are you seriously suggesting that Hayek believed a free market would have no changes in prices, no changes in supply factors, no changes in tastes, no changes in money? Don't be a fool, LK. The concept of "no changes" is, and has always been for Hayek, a mental tool only.
Just give up while you're still only massively refuted. If you keep this up, you'll end up looking intellectually dishonest.
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ReplyDeleteIf Hayek thought at this stage in his career that equilibrium states can never occur in the real world, then what was point of his trade cycle theory?
The point of his trade cycle theory, if you understood economic calculation, was to explain how a market can deviate away from the path of tendency to equilibrium for prolonged periods of time. Remember, Hayek and Mises were the pioneers of modern business cycle theory, and so they wanted to explain why over the course of time, an economy should boom and then bust, then boom, then bust, in a general sense, not the isolated sector or industry sense. They wanted to explain why it is that seemingly disparate and independent industries, say car making and textiles, should both suffer losses at the same time, as well as most other industries, when before everything was more or less humming long (with of course some unemployment and some idle resources, etc).
The answer Hayek came up with, which was based on Mises' discovery, was that interest rates MEAN SOMETHING in the economic structure. To many at the time, interest was viewed as more of a hindrance, a subtle form of exploitation, the lowering of which had only positive economic effects. The thinking went that with cheaper money, there would be more borrowing and investment, and with more borrowing and investment, there would be more employment, and with more employment, more production, etc.
Hayek and Mises sought to explain business cycles by centering them around the concepts of inter-temporal coordination, and economic calculation, both of which you are literally devoid of understanding for some reason.
Interest rates are not just a nuisance in the Hayekian-Misesian ABCT. They perform the vital function of coordinating investment over time so that it matches consumption patterns.
Now, in order to know how markets can deviate from the path towards equilibrium for prolonged periods, as Hayek stressed, one must first understand how markets can be on a "healthy" path towards equilibrium, that is, one must first understand how markets can work before one can understand how they can go wrong.
cont'd...
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ReplyDeleteIn a free market, interest rates regulate the production structure of the economy so that the whole system is more or less sustainable. It's not perfect of course, because nothing human controlled is perfect, but in general, interest rates tell investors the time preferences of people. With higher interest rates, savings are more scarce, and people prefer more current production and consumption as opposed to more future production and consumption. With lower interest rates, savings are more plentiful, and people prefer less current production and consumption and more future production and consumption.
Thus, should the central banking system generate interest rates on its own, by creating money out of nothing, unbacked by prior savings, then this MISLEADS investors into making investment choices that do not match the consumer's time preferences. Consumers do not have lower time preferences, even though investors see lower interest rates as if they do.
In addition, as for economic calculation, if any sector should "get out of whack" with the rest of the economy in terms of how it fits, then profitability in that sector will be relatively lower and the profitability in other sectors will be relatively higher. Perhaps not in absolute terms but definitely in relative terms. And this is more than just consumer tastes for specific goods. It is also tastes for goods over specific time horizons.
If people's preferences should change, then the only way for others to learn of these changes is through the price system, which means economic calculation is the only way that anyone can even know whether the economy is deviating too far away from the path towards equilibrium, or if the current trajectory is close to the path towards equilibrium. This path towards equilibrium is the path that is paved by the preferences of individual economic actors, which are constantly changing, never to exactly repeat, and where all individuals must resort to the price system in order to rationally plan their actions vis a vis the actions of others.
In a free market, it is not the case that the economy simply cannot go off on a tangent. But the free market does have inherent stabilizers that are CONSTANTLY putting pressure on individuals to change their plans if they deviate too much away from what is sustainable. Just like an individual consuming and borrowing too much will eventually put market pressures on them to change, so too does the price system do that for firms, sectors, whole industries, and yes, even the whole economy. After all, the whole economy is all of us individuals!
The Post Keynesian worldview contains not a scintilla of understanding of either the function of interest rates, or economic calculation, or even the Austrian theory of the business cycle, and yet, "irrational, obstinate and ridiculous fervour of "internet" Austrians, attempting to deny basic facts" constantly muddy the internet waters.
Hahaha, epic fail. I meant to write:
ReplyDelete"The Post Keynesian worldview contains not a scintilla of understanding of either the function of interest rates, or economic calculation, or even the Austrian theory of the business cycle, and yet, "irrational, obstinate and ridiculous fervour of "internet" Keynesians, attempting to deny basic facts" constantly muddy the internet waters."
I copied and pasted it, planning to change the school, then checked my email, got distracted, and forgot to change it. It was NOT a "Freudian slip" by the way, LOL.
"He is not arguing that this is what the real world market is. He is starting with those assumptions, so that he can understand the real world market that is in contradistinction to them."
ReplyDeleteIf he really believed that at this stage in his career, then his whole trade cycle theory is irrelevant to the real world.
He really believed that at this stage in his career, then his whole trade cycle theory is irrelevant to the real world.
ReplyDeleteHow does that follow?
How does using a mental tool to understand where the market tends but never reaches, and then introducing a new mental tool, one that is closer to the actual market process, how does the introduction of "spontaneous order" make the trade cycle theory "irrelevant"?
You seem to be wanting to make ABCT "irrelevant" as your goal, and you're committing gross errors in judging other people's writings in order to get to that goal.
You have to travel in the other direction. You have to start with first principle, and then move forward from there to wherever logic/science takes you.
These hilarious sweeping claims that ABCT is "irrelevant", in the face of not understanding economic calculation, in the face of not understanding inter-temporal coordination, makes it absolutely clear that you are not even going to touch on these issues because you are deathly afraid they will make YOUR worldview irrelevant.
Why do you continue to evade the concepts of economic calculation and inter-temporal coordination?
"How does using a mental tool to understand where the market tends but never reaches, and then introducing a new mental tool, one that is closer to the actual market process, how does the introduction of 'spontaneous order' make the trade cycle theory 'irrelevant'?"
ReplyDeleteThe answer to that has been known for a long time:
“Hayek’s changing assessment of the importance of equilibrium theory has some consequences for our story. The most telling of these concerns Hayek’s trade cycle theory, a paradigmatic example of equilibrium theory, one that Witt (1997, 48) describes as ‘an impressive example of allied price theoretical reasoning that may even delight a Chicago equilibrium economist.’ But, as Witt goes on to observe, if one rejects the usefulness of equilibrium analysis, then Hayek’s step-by-set story of how the cycle unfolds, one in which ‘each single stage necessarily had to be followed by the next one’ (46), can no longer be maintained. Witt concludes that Hayek’s cycle theory may well be incompatible with his later theory of spontaneous orders, a concern that others have voiced” (Caldwell 2004: 228).
See U. Witt, 1997. “The Hayekian Puzzle: Spontaneous Order and the Business Cycle,” Scottish Journal of Political Economy 44: 44–58.
ReplyDeleteHayek's use of general equilibrium theory in his early trade cycle research and his later "spontaneous order" concept are incompatible research programs.
“Hayek’s changing assessment of the importance of equilibrium theory has some consequences for our story. The most telling of these concerns Hayek’s trade cycle theory, a paradigmatic example of equilibrium theory, one that Witt (1997, 48) describes as ‘an impressive example of allied price theoretical reasoning that may even delight a Chicago equilibrium economist.’ But, as Witt goes on to observe, if one rejects the usefulness of equilibrium analysis, then Hayek’s step-by-set story of how the cycle unfolds, one in which ‘each single stage necessarily had to be followed by the next one’ (46), can no longer be maintained. Witt concludes that Hayek’s cycle theory may well be incompatible with his later theory of spontaneous orders, a concern that others have voiced” (Caldwell 2004: 228).
ReplyDeleteHayek did not "reject the usefulness of equilibrium analysis." He just introduced his own mental tool of "spontaneous order," while never rejecting equilibrium analysis as a useful tool to understand the real world market of change. He might have used it less, or not at all, post 1940, but that doesn't at all mean that he outright rejected the usefulness of it. He was still saying by 1967 that equilibrium is where the market tends but never reaches. He didn't say "I don't consider it useful anymore."
Remeber, Hayek started as an economist, but then later focused more on sociology and other areas of study, so it should not be surprising to see him use a different set of tools compared to what he used prior.
Caldwell does not show how ABCT is itself undermined, so it matters not what Hayek himself voiced post 1940 versus pre 1940.
Hayek's use of general equilibrium theory in his early trade cycle research and his later "spontaneous order" concept are incompatible research programs.
That may be, but it's irrelevant to the validity or invalidity of ABCT. ABCT was originally borne out of the mental tool of equilibrium to explain business cycles in the economy, but that does not mean that ABCT can ONLY be borne of out the mental tool of equilibrium.
Spontaneous order is more of a social theory of organization in general. It is not as "economic" as his earlier work. Hayek began as an economist, but ended up as a political philosopher.
"Hayek did not "reject the usefulness of equilibrium analysis." He just introduced his own mental tool of "spontaneous order," while never rejecting equilibrium analysis as a useful tool to understand the real world market of change. "
ReplyDeleteYou are still confused about Hayek's attitude to equilibrium.
In the early 1930s Hayek adheres to the belief in the tendency to equilibrium:
“it is my conviction that if we want to explain economic phenomena at all, we have no means available but to build on the foundations given by the concept of a tendency toward an equilibrium. For it is this concept alone which permits us to explain fundamental phenomena like the determination of prices or incomes, an understanding of which is essential to any explanation of fluctuation of production. If we are to proceed systematically, therefore, we must start with a situation which is already sufficiently explained by the general body of economic theory. And the only situation which satisfies this criterion is the situation in which all available resources are employed.” (Hayek, Prices and Production in Hayek 2008: 225).
By the time of his paper "Economics and Knowledge" (1937), he formulates his own, new definition of equilibrium: plan co-ordination.
But even here he starts to see that a tendency to even this "plan co-ordination" equilibrium requires that the expectations of agents in relation to other relevant agents must become more and more accurate over time.
Hayek cannot explain why there should be any such tendency: he hits up against Keynesian uncertainty.
He comes close even in 1937 to abadoning the whole concept of equilibrium:
"I must now turn to the question of what the concrete hypotheses are concerning the conditions under which people are supposed to acquire the relevant knowledge and the process by which they are supposed to acquire it. .... But I am afraid I am now getting to a stage where it becomes exceedingly difficult to say what exactly are the assumptions on the basis of which we asert that there will be a tendency towards equilibrium, and to claim that our analysis has an application to the real world. I cannot pretend that I have as yet got much further on this point. Consequently all I can do is to ask a number of questions to which we shall have to find an answer if we want to be clear about the significance of our argument." ("Economics and Knowledge", 1937, p. 47).
In his latter years, Hayek is developing "spontaneous order" as a replacement for equilibrium theory.
ReplyDeleteYou can't even get the meaning of the Hayek quote you keep citing earlier:
HAYEK: ... Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it. I’m now trying to formulate some concept of economics as a stream instead of an equilibrating force, as we ought, quite literally, to think in terms of the factors that determine the movement of the flow of water in a very irregular bed.”
Note the pluperfect and past tense:
"I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it."
But then he says "I’m now trying to formulate some concept of economics as a stream instead of an equilibrating force". that is, he is replacing it with
"stream" analogy.
After the 1960s when he became interested in evolution, he abandoned equilibrium theory altogether.
http://books.google.com.au/books?id=i6sPmMbzCuIC&pg=PA410&dq=hayek+%22equilibrium%22+abandoned&hl=en&ei=-E96TpXtCan8mAWfla3CAQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDMQ6AEwAA#v=onepage&q=hayek%20%22equilibrium%22%20abandoned&f=false
"He was still saying by 1967 that equilibrium is where the market tends but never reaches. He didn't say "I don't consider it useful anymore."
ReplyDeleteAnd you ignore what happened after the 1960s, and the doubts he had even in 1937. See above.
"Caldwell does not show how ABCT is itself undermined, so it matters not what Hayek himself voiced post 1940 versus pre 1940."
ReplyDeleteAnd have you even bothered to read Caldwell's work?
Of course ABCT is underminded in the form that Hayek presents it in the early 1930s.
(1) There is no tendency to general equilibrium / full employment equilibrium in modern economies.
(2) Hayek's ABCT with its Wicksellian monetary equilibrium analysis requires an equilibrating unique natural rate of interest to prevnet the cyclical effects. There is no such thing. This is another of fiction of equilibrium theorists, with their flawed real/barter-like analysis of modern monetary economies and belief in self-equilibrating markets.
(3) As already pointed out by Caldwell, all the alleged logical cyclical effects of Hayek's theory are deduced from the framework of his equilibrium theory and the tendency to equilibrium. There is no such tendency.
"Hayek did not "reject the usefulness of equilibrium analysis." He just introduced his own mental tool of "spontaneous order," while never rejecting equilibrium analysis as a useful tool to understand the real world market of change."
ReplyDeleteYou are still confused about Hayek's attitude to equilibrium.
No, it is quite clear that it is you who is confused. You have already been shown to be confused regarding Hayek's position regarding equilibrium. You fallaciously claimed he held it to be a characteristic of the real world economy, which has been corrected. Then you retreated to claiming that it was all about him using equilibrium as a "starting point," which is also not an implicit or explicit claim that it is a real world market phenomenon that is ever reached.
You have been thoroughly refuted on this point, so it makes no sense for you to laughably claim that the person who refuted you is "confused."
In the early 1930s Hayek adheres to the belief in the tendency to equilibrium:
A TENDENCY of a market is not a characteristic that the free market actually reaches.
By the time of his paper "Economics and Knowledge" (1937), he formulates his own, new definition of equilibrium: plan co-ordination.
But even here he starts to see that a tendency to even this "plan co-ordination" equilibrium requires that the expectations of agents in relation to other relevant agents must become more and more accurate over time.
No, it does not require expectations to be "more and more accurate over time". That is only if the assumption of equilibrium is presumed. If economic changes keep taking place, then there is no historical progression of accuracy improvement. There is accuracy improvement over given isolated affairs given a set of information, but because the information itself changes, there is no progression of accuracy over time, just a tendency towards accuracy improvement.
Hayek cannot explain why there should be any such tendency: he hits up against Keynesian uncertainty.
Uncertainty is not "Keynesian." Uncertainty is ubiquitous in all economics schools. Hayek does explain why there should be a tendency. The tendency is due to the learning process of economic agents in the sphere of economic calculation, which is a concept you clearly don't understand.
In his latter years, Hayek is developing "spontaneous order" as a replacement for equilibrium theory.
ReplyDeleteNot as a replacement, but as an addition, in another area of inquiry.
You can't even get the meaning of the Hayek quote you keep citing earlier:
HAYEK: ... Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it. I’m now trying to formulate some concept of economics as a stream instead of an equilibrating force, as we ought, quite literally, to think in terms of the factors that determine the movement of the flow of water in a very irregular bed.”
The significance of that quote is obviously lost on you. It shows that Hayek held equilibrium to be a useful mental tool of understanding, and that it is not a characteristic of actual market economies.
Note the pluperfect and past tense:
"I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it."
But then he says "I’m now trying to formulate some concept of economics as a stream instead of an equilibrating force".
that is, he is replacing it with
"stream" analogy.
He is using a stream as more of an analogy of the market, instead of some counter-factual to where the market tends. He thought it is an improvement because it's one thing to know where a market tends. It's another to know where the market actually is.
After the 1960s when he became interested in evolution, he abandoned equilibrium theory altogether.
Right, because he became more of a sociologist by that point.
"He was still saying by 1967 that equilibrium is where the market tends but never reaches. He didn't say "I don't consider it useful anymore."
ReplyDeleteAnd you ignore what happened after the 1960s, and the doubts he had even in 1937. See above.
No, I am not ignoring what happened after the 1960s. I only said 1967 because even 27 years after he originally introduced his spontaneous order conception, he still held equilibrium to be a useful mental tool.
"Caldwell does not show how ABCT is itself undermined, so it matters not what Hayek himself voiced post 1940 versus pre 1940."
ReplyDeleteOf course ABCT is underminded in the form that Hayek presents it in the early 1930s.
(1) There is no tendency to general equilibrium / full employment equilibrium in modern economies.
Ex cathedra nonsense. Yes, there is a tendency towards equilibrium in modern economies. Market forces are real phenomena. Economic calculation is real phenomena.
The concept of economic calculation and inter-temporal coordination refutes that conjecture.
(2) Hayek's ABCT with its Wicksellian monetary equilibrium analysis requires an equilibrating unique natural rate of interest to prevnet the cyclical effects. There is no such thing. This is another of fiction of equilibrium theorists, with their flawed real/barter-like analysis of modern monetary economies and belief in self-equilibrating markets.
You have already been refuted on this point as well. ABCT does not require a single natural interest rate in order to be valid. That Mises and Hayek presumed it in their original exposition of the theory does not mean that the theory is invalidated by adding an "s" to every place there is the word "rate."
Neither you, nor any actual economist, has ever shown that the presence of multiple natural interest rates invalidates ABCT.
You keep claiming Sraffa showed how, but he didn't show how. He just said that it is wrong to assume there is a single natural interest rate. OK, so how does that invalidate ABCT's core principle of inter-temporal discoordination?
(3) As already pointed out by Caldwell, all the alleged logical cyclical effects of Hayek's theory are deduced from the framework of his equilibrium theory and the tendency to equilibrium. There is no such tendency.
There is such a tendency. Economic calculation is not a make believe concept. Profit and loss are not make believe concepts. Inter-temporal coordination is not a make believe concept.
You claim ex cathedra that there is no such tendency, but you have not shown any foundation for that claim.
(1) Don't expect your repetitive spamming comments to be published on previous threads. You have already said thesame thing numerous times. They add nothing to the discussion there.
ReplyDelete(2) "There is no tendency to general equilibrium / full employment equilibrium in modern economies.
Ex cathedra nonsense. Yes, there is a tendency towards equilibrium in modern economies. Market forces are real phenomena. Economic calculation is real phenomena."
First, there is no necessary tendency or convergence to the neoclassical concept of equilibrium or Hayek's plan co-ordination.
Profit and loss on its own does not any such tendency.
Say's law is invalid. There is no equilibrium rate of interest. Prices, while they do communicate information on scarcity, are often a highly imperfect system of doing so.
Wage and prices rigidities occur in the real world.
Secondly, you say I have "not shown any foundation for that claim".
I've done so repeatedly on this blog. If you were remotely serious, you'd also know/acknowledge this view is held even by one important group of Austrian economists: the Lachmann wing.
Ludwig Lachmann and the radical subjectivists hold that there is no tendency toward equilibrium in the market for long-term capital assets. See "From Mises to Shackle: an essay on Austrian economics and the kaleidic society."
See also:
"In Lachmann's view, only institutions can stabilize expectations so as to limit the volatility of price movements in such markets. This implies that Hayekian processes of market co-ordination, in which prices disseminate local knowledge, apply with full force only to non-durable goods.
In a market process with subjective knowledge and subjective expectations, there is no tendency towards general equilibrium in the sense of overall market co-ordination. The market is instead 'a continuous process without beginning or end, propelled by the interaction between the forces of quilibrium and the forces of change.'"
David E. Andersson, Property rights, consumption and the market process, p. 4.
"You keep claiming Sraffa showed how, but he didn't show how. He just said that it is wrong to assume there is a single natural interest rate. OK, so how does that invalidate ABCT's core principle of inter-temporal discoordination?"
ReplyDeleteExplain how multiple natural rates that are "own rates" in a barter world can be matched in a monetary economy by a rate. Magic?
This is point of Sraffa's riposte at teh end of his exhange with Hayek:
“Dr. Hayek now acknowledges the multiplicity of the ‘natural’ rates, but he has nothing more to say on this specific point than that they ‘all would be equilibrium rates’. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates” (Sraffa 1932b).
"You keep claiming Sraffa showed how, but he didn't show how. He just said that it is wrong to assume there is a single natural interest rate. OK, so how does that invalidate ABCT's core principle of inter-temporal discoordination?"
ReplyDeleteExplain how multiple natural rates that are "own rates" in a barter world can be matched in a monetary economy by (1) a bank rate or even (2) a bank rate and rate on, say, long term govenrment bonds (often a benchmark in modern economies). Magic? Unless you assume an economy with commodities, there is no way.
This is point of Sraffa's riposte at the end of his exhange with Hayek:
“Dr. Hayek now acknowledges the multiplicity of the ‘natural’ rates, but he has nothing more to say on this specific point than that they ‘all would be equilibrium rates’. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates” (Sraffa 1932b).
Anyway, once money is introduced into an economy and it has monetary interest rates that is a fundamental disconnect between interest rates and real goods. Monetary interest rates don't communciate information about the scarcity of capital goods or any other real goods. You are borrowing money, not real goods. The only way there is to ensure that loans in natura (in real terms) don't excede supply in natura is to abolish money and return to a barter economy.
Correction:
ReplyDeleteUnless you assume an economy with 2 commodities, there is no way.
You also contradict yourself:
ReplyDeleteYour statement 1:
"It shows that Hayek held equilibrium to be a useful mental tool of understanding,...
Your statement 2
"> After the 1960s when he became
> interested in evolution, he abandoned
> equilibrium theory altogether.
Right, because he became more of a sociologist by that point. "
Which is it?
"Uncertainty is ubiquitous in all economics schools. Hayek does explain why there should be a tendency. The tendency is due to the learning process of economic agents in the sphere of economic calculation, which is a concept you clearly don't understand. "
ReplyDeleteTry reading Hayek:
"I must now turn to the question of what the concrete hypotheses are concerning the conditions under which people are supposed to acquire the relevant knowledge and the process by which they are supposed to acquire it. .... But I am afraid I am now getting to a stage where it becomes exceedingly difficult to say what exactly are the assumptions on the basis of which we asert that there will be a tendency towards equilibrium, and to claim that our analysis has an application to the real world. I cannot pretend that I have as yet got much further on this point. Consequently all I can do is to ask a number of questions to which we shall have to find an answer if we want to be clear about the significance of our argument." ("Economics and Knowledge", 1937, p. 47).
You can't have a plainer exmaple of Hayek's directly saying something, then you just ignore this and deny what he has said.
(1) Don't expect your repetitive spamming comments to be published on previous threads. You have already said thesame thing numerous times. They add nothing to the discussion there.
ReplyDeleteBullshit. You have said the same thing numerous times, which of course requires the same responses numerous times. You have not shown that Sraffa invalidated ABCT by the introduction of natural interest rates as opposed to natural interest rate.
You're now censoring posts because you know you're losing. Sad.
(2) "There is no tendency to general equilibrium / full employment equilibrium in modern economies.
Ex cathedra nonsense. Yes, there is a tendency towards equilibrium in modern economies. Market forces are real phenomena. Economic calculation is real phenomena."
First, there is no necessary tendency or convergence to the neoclassical concept of equilibrium or Hayek's plan co-ordination.
First, the original argument was whether there is a tendency to equilibrium, not neoclassical equilibrium specifically, and not plan-coordination specifically. Second, you have not shown that there is no tendency to equilibrium, which means there is a tendency to chaos in a free market.
Profit and loss on its own does not any such tendency.
Yes, it does. The uniformity of profit principle regulates the sizes of each firm and industry relative to other firms and industries, and it is based on the law of marginal utility.
Say's law is invalid.
No, Say's Law is valid, if you properly understood it. Keynes' "refutation" of Say's Law was refuted by Henry Hazlitt. Hazlitt showed that Keynes did not understand Say's Law.
There is no equilibrium rate of interest.
There doesn't have to be in order for ABCT to be valid. You have not shown how the introduction of multiple natural rates of interest invalidated ABCT.
Prices, while they do communicate information on scarcity, are often a highly imperfect system of doing so.
No free market advocate ever claimed it was perfect. Nothing human is perfect. The government is not perfect. To say "highly" imperfect does not make it any more meaningful.
Wage and prices rigidities occur in the real world.
By what standard? If you say they are rigid relative to the pure and perfect standard, then that is a flawed argument because the pure and perfect competition standard is itself not real world.
One cannot use a non-real world standard to judge the performance of the real world.
Secondly, you say I have "not shown any foundation for that claim".
I've done so repeatedly on this blog. If you were remotely serious, you'd also know/acknowledge this view is held even by one important group of Austrian economists: the Lachmann wing.
First off, no you have not shown it repeatedly on this blog. You have repeatedly failed to show it. Second, Lachmann was a fringe Austrian. No Austrian today considers himself Lachmannian.
Ludwig Lachmann and the radical subjectivists hold that there is no tendency toward equilibrium in the market for long-term capital assets.
Lachmann was wrong.
"In Lachmann's view, only institutions can stabilize expectations so as to limit the volatility of price movements in such markets.
ReplyDeleteLachmann did not base his understanding of the market on individual action. He was a hermeneutic institutionalist. His epistemology is unsound.
This implies that Hayekian processes of market co-ordination, in which prices disseminate local knowledge, apply with full force only to non-durable goods.
No, the price system applies to ALL goods everywhere they are sold.
In a market process with subjective knowledge and subjective expectations, there is no tendency towards general equilibrium in the sense of overall market co-ordination.
False. There is a tendency towards equilibrium in the sense of overall market coordination because of the uniformity of profit principle, interest rates, and the price system in general.
The market is instead 'a continuous process without beginning or end, propelled by the interaction between the forces of quilibrium and the forces of change.'"
The forces of change in the economy proper are individual action and choice. The economic choices that entrepreneurs make are judged by others through the profit and loss system.
"You keep claiming Sraffa showed how, but he didn't show how. He just said that it is wrong to assume there is a single natural interest rate. OK, so how does that invalidate ABCT's core principle of inter-temporal discoordination?"
Explain how multiple natural rates that are "own rates" in a barter world can be matched in a monetary economy by a rate. Magic?
That doesn't answer my question. I asked:
How exactly does the introduction of multiple natural interest rates invalidate ABCT?
This is point of Sraffa's riposte at teh end of his exhange with Hayek:
But it doesn't answer my question to you.
"You keep claiming Sraffa showed how, but he didn't show how. He just said that it is wrong to assume there is a single natural interest rate. OK, so how does that invalidate ABCT's core principle of inter-temporal discoordination?"
Explain how multiple natural rates that are "own rates" in a barter world can be matched in a monetary economy by (1) a bank rate or even (2) a bank rate and rate on, say, long term govenrment bonds (often a benchmark in modern economies). Magic?
That doesn't answer my question. I asked:
How exactly does the introduction of multiple natural interest rates invalidate ABCT?
This is point of Sraffa's riposte at the end of his exhange with Hayek:
But it doesn't answer my question to you.
Anyway, once money is introduced into an economy and it has monetary interest rates that is a fundamental disconnect between interest rates and real goods.
ReplyDeleteNo, there arises a fundamental connection between interest rates and goods. Interest rates tell us the time preferences of people in their consumption patterns over time. Higher interest rates means that people value less consumer goods now and more consumers goods sooner, and lower interest rates means that people value less consumer goods sooner and more consumer goods later. Which consumer goods will depend on individual marginal utility.
Monetary interest rates don't communciate information about the scarcity of capital goods or any other real goods.
Yes, they do. The communicate the relative abundances of capital goods versus consumer goods.
When people abstain from consuming, and spend more money on capital goods and labor, that will increase the economy's aggregate costs relative to aggregate revenues, which will then lower aggregate economic profits. With lower economic profits, interest rates decline as well.
Similarly, when people consume more, and spend less money on capital goods and labor, that will decrease the economy's aggregate costs relative to aggregate revenues, which will then increase aggregate economic profits. With higher economic profits, interest rates rise as well.
Because interest rates are determined by profit, and because profit is determined by time preference, it is the same thing as saying that time preference determines the rate of interest.
With higher or lower interest rates, that communicates how much people are saving versus how much they are consuming. It thus enables economic coordination among market actors.
You are borrowing money, not real goods. The only way there is to ensure that loans in natura (in real terms) don't excede supply in natura is to abolish money and return to a barter economy.
Non sequitur and red herring to boot. Kudos.
In a free market, where loans can only be financed through voluntary savings, it is necessarily the case that the supply of loans cannot ever exceed the supply of savings.
Correction:
ReplyDeleteUnless you assume an economy with 2 commodities, there is no way.
It works for 2 commodities and it works for 2 million commodities.
You also contradict yourself:
Oh this ought to be good, after being shown all your contradictions.
Your statement 1:
"It shows that Hayek held equilibrium to be a useful mental tool of understanding,...
Your statement 2
"> After the 1960s when he became
> interested in evolution, he abandoned
> equilibrium theory altogether.
Those two statements do not contradict each other AT ALL. Equilibrium is useful for economics. Spontaneous order is useful for sociology and politics. To say that he abandoned equilibrium when he became more of a sociologist is not a statement that equilibrium is not useful.
Equilibrium is useful, provided it is used in the specific context it is designed to be used, namely, economics and the business cycle.
Right, because he became more of a sociologist by that point. "
Which is it?
BOTH.
"Uncertainty is ubiquitous in all economics schools. Hayek does explain why there should be a tendency. The tendency is due to the learning process of economic agents in the sphere of economic calculation, which is a concept you clearly don't understand. "
Try reading Hayek:
"I must now turn to the question of what the concrete hypotheses are concerning the conditions under which people are supposed to acquire the relevant knowledge and the process by which they are supposed to acquire it. .... But I am afraid I am now getting to a stage where it becomes exceedingly difficult to say what exactly are the assumptions on the basis of which we asert that there will be a tendency towards equilibrium, and to claim that our analysis has an application to the real world. I cannot pretend that I have as yet got much further on this point.
You already posted that quote. It's already been addressed. Just because Hayek thought it was becoming more and more difficult for him to use to equilibrium mental tool to FULLY understand more of the market process, that does not at all mean that Hayek held no ideas at all on why and how equilibrium tendency would arise.
You can't have a plainer exmaple of Hayek's directly saying something, then you just ignore this and deny what he has said.
ReplyDeleteNot even close. You are not intellectually honest. You are not trying to understand what Hayek meant, but rather you have an agenda, and are trying to find in Hayek's words that agenda and then claim that this agenda is what he meant all along. You can't do that.
That quote you just cited just shows that Hayek found limitations in equilibrium analysis FOR HIS PURPOSES, which was more and more leaving the realm of economics, and more and more entering the realm of sociology and politics.
It doesn't mean that equilibrium theory is useless, it doesn't mean it is flawed, it doesn't mean that Hayek rejected its usefulness.
You are just trying to find an excuse to reject equilibrium tendency by straw manning Hayek into being someone who believes the same thing as you, which is to completely reject it. You want people to believe that your rejection of it has precedence in Hayek, so as to co-opt his status and his ideas as somehow backstopping your own nonsense. How utterly pathetic.
The fact that you do not understand the concept of economic calculation, indeed, since you have admitted that you believe that the price system does not coordinate individual economic actions at all, proves that you don't understand ABCT, or Austrian economics in general.
The deeper we go into your absurdity, the more and more clear it becomes that you are an anti-rational epistemological nihilist, which means you necessarily hold physical force to be the ultimate foundation in human life, who is thus attracted to Keynesian economics because it serves as a vehicle for you to manifest that worldview, as Keynesian economics is based on physical force from the state. It all makes sense now.
You just deny the rational foundations of praxeology and economic calculation, because they stand in the way of your desire to reject all rationalism.
"First, the original argument was whether there is a tendency to equilibrium, not neoclassical equilibrium specifically ... "
ReplyDeleteAll notions of equilibrium are essentially neoclassical ideas, and that was precisely what we have been discussing. The very concept of equilibrium IS a neoclassical invention. It was invented by neoclassical economists in the late 19th century. The Austrians of the interwar years took over the neoclassical idea of equilibrium and developed it in their own ways, sometimes changing it as Hayek did. That is why some modern Austrians complain that certain earlier interwar Austrians were "lost" to the neoclassical
school:
http://socialdemocracy21stcentury.blogspot.com/2011/06/neoclassical-wing-of-austrian-school.html
, and not plan-coordination specifically.
Yes, that is exactly what we've been talking about.
"Second, you have not shown that there is no tendency to equilibrium, which means there is a tendency to chaos in a free market."
ReplyDeleteThat is a perfect example of the false dilemma fallacy.
http://en.wikipedia.org/wiki/False_dilemma
Though there is no tendency to equilibrium, that does NOT require a tendency to chaos in a free market.
The free market has no necessary tendency to equilibrium. As Keynes argued, free markets probably move through various disequilibrium states where there is high unemployment. That isn't "chaos".
Second, Lachmann was a fringe Austrian. No Austrian today considers himself Lachmannian
ReplyDeleteDon Lavoie, Peter Boettke, Steve Horwitz, and David L. Prychitko are radical subjectivists and followers of Lachmann. Lachmannian/radical subjectivists are the same thing. Though Lavoie is dead, the others, as far as I am aware, are very much alive.
David L. Prychitko, in particular, springs to mind as a modern Lachmannian.
Your statement that "no Austrian today considers himself Lachmannian" is risible, ignorant and false.
"You are just trying to find an excuse to reject equilibrium tendency by straw manning Hayek into being someone who believes the same thing as you ... "
ReplyDeleteNowhere do I say any such thing, nor do I appeal to Hayek to justify my rejection of equilibrium theory. This is itself a straw man argument.
"Interest rates tell us the time preferences of people in their consumption patterns over time. "
ReplyDeleteThat requires a pure time preference theory of interest rates - a false and invalid theory.
Interest rates are a monetary phenomenon, not a real phenomenon.
You might like to revisit your debate with Robert Murphy where he ran rings around you:
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html
In the real world, a rate of interest is the reward for parting with liquidity. Precisely how interest rates are set depends on the structure of your banking/financial system.
"That doesn't answer my question. I asked:
ReplyDeleteHow exactly does the introduction of multiple natural interest rates invalidate ABCT?"
With no unique natural rate, there is no rate the bank rate can match to prevent the cycle effects. That is whole basis of Hayek's
theory.
Just to add to the "there are no followers of Lachmann" line of discussion, the Austrian School blogger over at Increasing Marginal Utility identifies strongly with Lachmann (as well as Kirzner and Hayek).
ReplyDeleteAnonymous,
ReplyDeleteThanks for the link.
I suspect "Pete" has in mind actual scholars/academics who have made contributions to Austrian economics in their journals. Or when confronted with the evidence that plenty of self-styled "Austrians" - bloggers, followers of Austrian theory etc. - follow Lachmann, he would retreat to that view. But, as I have shown above, even that view would be wrong.
All notions of equilibrium are essentially neoclassical ideas, and that was precisely what we have been discussing.
ReplyDeleteFalse. It is not true that all notions of equilibrium are neoclassical. You even admitted that Hayek replaced one equilibrium for a different one over the course of his career.
The very concept of equilibrium IS a neoclassical invention.
Sure, but not all equilibrium mental tools are neoclassical.
and not plan-coordination specifically.
Yes, that is exactly what we've been talking about.
No, it's what you introduced after being refuted on Hayek allegedly claiming that equilibrium is a actual characteristic of the market, instead of what it is, which is that it is a mental tool only.
"Second, you have not shown that there is no tendency to equilibrium, which means there is a tendency to chaos in a free market."
That is a perfect example of the false dilemma fallacy.
No, it is a request for you to prove your argument that there is a tendency towards disequilibrium, i.e. chaos, in the market. Although I worded it somewhat misleadingly, I was actually asking you to prove that the free market has a tendency to lead to chaos. That's why I included a positive argument after "which means". If all I did was ask you to prove that something does not exist, then yes, that would be a false dilemma fallacy. But I am asking you to prove your claim that the free market has a tendency towards disequilibrium/chaos.
So prove that claim.
Though there is no tendency to equilibrium, that does NOT require a tendency to chaos in a free market.
The free market has no necessary tendency to equilibrium.
Yes, it does. It has a tendency towards equilibrium by systematically punishing entrepreneurial errors and systematically rewarding entrepreneurial correct judgments. It does this through the price system of profit and loss. If you buy resources and produce, and sell your production for more dollars, then you created economic value, because things that are worth more carry a higher price, all else equal. If you buy resources and produce and sell your production for fewer dollars, then you did not create economic value, because things that are worth less money carry a lower price, all else equal.
This is a rough sketch, but the concept of economic calculation not only provides people with information about what others are doing, it also provides information about what others plan to do in the future as well.
As Keynes argued, free markets probably move through various disequilibrium states where there is high unemployment.
"Probably" is not a sound argument, and that there are periods of "higher" unemployment does not mean that the market isn't still tending towards "lower" unemployment.
With a surplus of labor, it is in the self-interests of both laborers and employers to trade labor at lower money prices. That is the mechanism by which labor is hired in the first place, and the last time I checked, people are perpetually self-interested due to the fact that they act as individuals.
Keynes did not understand that massive unemployment he observed during the Great Depression was caused by government, not the free market. He did not blame the government because his purpose was to JUSTIFY what the government was already doing, which is deficit spending and inflation, the two most important reasons why unemployment rose in the first place in 1929.
That isn't "chaos".
ReplyDeleteThat isn't "not tending towards equilibrium."
Market forces to not cease acting just because there are periods of high unemployment. To say that there can be periods of "disequilibrium" is to actually tacitly presume the concept of equilibrium is valid. You are claiming that the economy can go through PERIODS, i.e. STAGES, where high unemployment PERSISTS. These are all equilibrium concepts.
If you claim that the economy is capable of settling IN ANY WAY, including "high unemployment" you are implicitly claiming that the concept of equilibrium is a valid mental tool to describe the real world economy.
Ouch!
Second, Lachmann was a fringe Austrian. No Austrian today considers himself Lachmannian
Don Lavoie, Peter Boettke, Steve Horwitz, and David L. Prychitko are radical subjectivists and followers of Lachmann.
Lachmannian/radical subjectivists are the same thing. Though Lavoie is dead, the others, as far as I am aware, are very much alive.
Ah well, if you say "radical subjectivist", then sure. There's definitely a number of Lachmannian economists today, and they all hang out at the coordination problem blog.
"You are just trying to find an excuse to reject equilibrium tendency by straw manning Hayek into being someone who believes the same thing as you ... "
Nowhere do I say any such thing, nor do I appeal to Hayek to justify my rejection of equilibrium theory.
You don't have to explicitly say it. The gig would be up if you did.
And yes, you do appeal to Hayek to reject equilibrium theory, because you are minimizing his explicitly stated acceptance of its usefulness despite decades of him explicitly arguing it is useful. You are only posting quotes from him that seem to give credence to his rejection of equilibrium theory, and every time you were shown quotes to the contrary, you say things like "you're trying to make it seem like he was consistent" while ignoring his acceptance of its usefulness.
"Interest rates tell us the time preferences of people in their consumption patterns over time. "
ReplyDeleteThat requires a pure time preference theory of interest rates - a false and invalid theory.
No, it is not a false and invalid theory. Time preference is literally undeniable. It is built into the nature of action and human choice.
Interest rates are a monetary phenomenon, not a real phenomenon.
No, interest rates are a real phenomenon, which is calculated in money in monetary economies.
You might like to revisit your debate with Robert Murphy where he ran rings around you:
Bob was refuted. How could he have ran rings around those who adhere to time preference?
He refused to consider my main criticisms here:
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html#comment-19994
He refused to even answer it.
In the real world, a rate of interest is the reward for parting with liquidity.
No, the liquidity preference theory of interest is utterly fallacious. Rothbard and countless others have thoroughly debunked it.
It is most easily seen as bogus when one considers conditions of rapid, but not "hyper", inflation. With rapid inflation, the desire to hold money falls, and yet interest rates become very high. Once inflation slows down, the demand for money increases, and yet interest rates come back down.
There are many other refutations of the absurd liquidity preference theory, this is just the easiest.
Another easy refutation is this:
If people hold more cash by making consuming less, but spending the same on investment, then aggregate business costs relative to aggregate revenues will rise, which will decrease aggregate profits, and that will decrease market interest rates. But the liquidity preference theory predicts that interest rates should rise on account of "higher liquidity preference."
Precisely how interest rates are set depends on the structure of your banking/financial system.
No, it precisely depends on time preference.
"That doesn't answer my question. I asked:
ReplyDeleteHow exactly does the introduction of multiple natural interest rates invalidate ABCT?"
With no unique natural rate, there is no rate the bank rate can match to prevent the cycle effects.
Ah, no wonder you're utterly confused.
In ABCT, there doesn't have to be a single bank rate set by any central planner or single bank such that there is a single "bank rate."
As long as all banks do not lend out more than what they are loaned to them via savings, then the aggregate rate or rates of profit in the economy will be determined by the difference between the demand for products of business and the demand for factors of production by business. This difference, which can be different for different industries, is determined by the time preferences of individuals. The more they save and invest relative to consumption, the higher business costs will be relative to revenues, and the lower rates of profit will be, and thus the lower interest rates will be.
That is whole basis of Hayek's
theory.
Yes, but it is not necessary to ABCT that there be one bank rate, or one natural interest rate. It is only required that the rates that exist be lower than what would have existed with voluntary savings financed investment only. Credit expansion that is used to finance investment lowers the rates of interest on loans to business, which results in an investment structure that presumes there are more real resources available than actually exist.
When people abstain from consumption voluntarily, the fact that resources are scarce means that more resources become available for the higher order stages of production than would otherwise have been the case. As these resources are released, the available supply for them of course rises for the capital goods producers, and in a free market, since there is more savings available, the capital goods producers can buy those released resources at the same prices that existed before the rise in savings.
Alongside this saving, interest rates will fall for the reasons I laid out above (through the rates of profit). That generates inter-temporal coordination because with lower interest rates, investors invest in longer term, more capital intensive projects that have final output further into the future, exactly what the consumers want by virtue of their abstaining from consumption now and saving for later.
Anonymous:
Just to add to the "there are no followers of Lachmann" line of discussion, the Austrian School blogger over at Increasing Marginal Utility identifies strongly with Lachmann (as well as Kirzner and Hayek).
Lachmann and Hayek are rather far apart. If he adheres to Hayek, then he must adhere to only some aspects of Lachmann, or vice versa. He can't be a follower of Lachmann if he adheres to Hayek, and vice versa. The difference is too great.
(1) disequilibrium does not mean chaos. That is nonsense.
ReplyDelete(2) "He did not blame the government because his purpose was to JUSTIFY what the government was already doing, which is deficit spending and inflation"
Keynesian stimulus was not even tried in Britain, Keynes's home. So you must be referring to the US.
I have dealt with the nonsense that Hoover's deficits could have done much about the depression here:
http://socialdemocracy21stcentury.blogspot.com/2011/05/herbert-hoovers-budget-deficits-drop-in.html
Hoover actually ran a federal budget surplus in the fiscal year 1930, not a deficit. Hoover’s first federal deficit was in fiscal year 1931, when the US economy had already begun contracting severely. He also cut spending in fiscal year 1933, and introduced the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years.
At the total level of local, state, and federal spending, the increases in government spending were feeble. That there was no significant effect on the collapse is entirely unsurprising.
"Ah well, if you say "radical subjectivist", then sure. There's definitely a number of Lachmannian economists today, and they all hang out at the coordination problem blog."
ReplyDeleteSince Lachmman was the founder of the radical subjectivist movement in Austrian economics, either one you reveal (1) gross ignorance or (2) you're deliberating playing "dumb" to try and evade the fact that you were obviously wrong in saying no Austrian are Lachmannians today.
"In ABCT, there doesn't have to be a single bank rate set by any central planner or single bank such that there is a single "bank rate."
ReplyDeleteEven that is a garbled verison of what I said, but, anyway, cite me one Austrian economist in a book or article who does not rely on a unique natural rate/equilibrium rate in an exposition of ABCT.
Your peculiar exposition of ABCT is one you're just made up. Show me where Garrison or Skousen etc. says there can be multiple natural rates.
"That is whole basis of Hayek's
ReplyDeletetheory.
Yes, but it is not necessary to ABCT that there be one bank rate, or one natural interest rate."
According to whom?
While Murphy denies the existence of a unique natural rate, he has yet to produce any work showing how ABCT actually works with its non-existence.
On pp. 19–23 of his discussion of the subject in a very simple model, Murphy provides his attempt to show how an inflationary increase in the money supply can cause “people in earlier periods to consume too much,” but even he admits this is “not really an illustration of the Misesian trade cycle theory,” because his model does not “really exhibit malinvestments in longer production processes.” Murphy leaves the creation of such a model for his future research. He's done no such researach yet. Nor has any otehr Austrian.
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf
With regards to academics, for what it's worth, the fellow I referenced is working on his PhD dissertation right now. Also, according to this he's starting to publish, too.
ReplyDeleteNothing big, yet, but hey, he's just starting out.
Anonymous,
ReplyDeleteThanks for the additional info!
It's good to see more Lachmannian Austrians :).
"Yes, but it is not necessary to ABCT that there be one bank rate, or one natural interest rate. "
ReplyDeleteI repeat: Oh, really?:
http://socialdemocracy21stcentury.blogspot.com/2011/09/abct-without-unique-natural-rate-of.html
Care to tell which actual Austrian says that? Not counting internet Rothbardians.
No, it is not a false and invalid theory. Time preference is literally undeniable. It is built into the nature of action and human choice.
ReplyDeleteHere we go again with the austrian cult nonsense. When backed into a corner, the answer is always "it's that way because I said so!" Where's the evidence?
I don't get how the Austrians can claim that businessmen, investors and entrepreneurs can do just fine in the absence of government intervention or central bank manipulation of interest rates, yet when these institutions step in all of a sudden these very same businessmen, investors and entrepreneurs are seen as idiots who easily get misled into malinvestments.
ReplyDelete(1) disequilibrium does not mean chaos. That is nonsense.
ReplyDeleteIf disequilibrium does not mean chaos, then that is equivalent to saying that disequilibrium is just another equilibrium tendency.
(2) "He did not blame the government because his purpose was to JUSTIFY what the government was already doing, which is deficit spending and inflation"
Keynesian stimulus was not even tried in Britain, Keynes's home. So you must be referring to the US.
Both Britain and the US were deficit spending and inflating.
"Ah well, if you say "radical subjectivist", then sure. There's definitely a number of Lachmannian economists today, and they all hang out at the coordination problem blog."
Since Lachmman was the founder of the radical subjectivist movement in Austrian economics, either one you reveal (1) gross ignorance or (2) you're deliberating playing "dumb" to try and evade the fact that you were obviously wrong in saying no Austrian are Lachmannians today.
You fool. By your crap logic, since Menger was the founder of Austrian economics, every Austrian today should be called a "follower of Menger."
There is a big difference between being a founder and being someone who currently has "followers."
Just like calling oneself "Post-Keynesian" is different from calling oneself "follower of Kalecki" or "follower of Robinson" so too is there a difference between "radical subjectivist" and "follower of Lachmann."
You're either being dishonest in order to salvage irreconcilable claims, or you're just ignorant.
cite me one Austrian economist in a book or article who does not rely on a unique natural rate/equilibrium rate in an exposition of ABCT.
Cite me one economist who has shown that the introduction of multiple natural interest rates invalidates ABCT's core theory of inter-temporal coordination and economic calculation.
Your peculiar exposition of ABCT is one you're just made up.
No, it's been true since the introduction of assuming multiple natural interest rates, which means 70 or 80 years.
Show me where Garrison or Skousen etc. says there can be multiple natural rates.
Rhetorical question.
"That is whole basis of Hayek's
ReplyDeletetheory.
Yes, but it is not necessary to ABCT that there be one bank rate, or one natural interest rate."
According to whom?
Whatever you say, it's according to you. Whatever I say, it's according to me. To ask "according to whom?" is like saying "according to who do you accept what you accept?"
While Murphy denies the existence of a unique natural rate, he has yet to produce any work showing how ABCT actually works with its non-existence.
Nobody has produced any work showing how ABCT is invalidated by the introduction of multiple natural interest rates.
"Yes, but it is not necessary to ABCT that there be one bank rate, or one natural interest rate. "
I repeat: Oh, really?:
Yes, really.
Care to tell which actual Austrian says that? Not counting internet Rothbardians.
Yes, say something, not counting internet Keynesians.
Anonymous:
No, it is not a false and invalid theory. Time preference is literally undeniable. It is built into the nature of action and human choice.
Here we go again with the austrian cult nonsense. When backed into a corner, the answer is always "it's that way because I said so!" Where's the evidence?
Here we go again. Claim time preference theory is false, then explain it as "because I said so!"
Anonymous:
I don't get how the Austrians can claim that businessmen, investors and entrepreneurs can do just fine in the absence of government intervention or central bank manipulation of interest rates, yet when these institutions step in all of a sudden these very same businessmen, investors and entrepreneurs are seen as idiots who easily get misled into malinvestments.
Businessmen, investors and entrepreneurs cannot be smart about that which they cannot observe (market interest rates) and thus acquire knowledge over. They also cannot read the minds of central bankers who cavalierly inflate more rapidly and then more slowly, who themselves don't even know what the money supply and spending stream will be in response to their actions.
"Whatever you say, it's according to you. Whatever I say, it's according to me."
ReplyDeleteIn other words, your personal rambling interpretation of ABCT (with multiple rates) has no support in actual Austrian specialist literature?
"If disequilibrium does not mean chaos,"
ReplyDeleteOf course it does not mean "choas."
At the simplest level it just means that not all product markets are in equilibrium. The labour market for example, might be out of equilibrium for long periods of time.
Maybe in a given time you might find that quantity x of commodity y supplied in a market just happens to match the demand for it. Maybe a few markets are like that in that time period. Perhaps you can find empirical evidence of it. But that isn't Walrasian general equilibrium.
"Both Britain and the US were deficit spending and inflating."
ReplyDeleteJust because there is a deficit does not mean any fiscal stimulus is being imparted. Ireland had and still has now one of the worst budget deficits in Europe, but that is because their tax revenue has collapsed. They have actually cut government spending.
The same thing happened in the UK during the depression. In 1931 taxes were raised and spending was cut by 70 million pounds. That didn't stop the depression.
"Whatever you say, it's according to you. Whatever I say, it's according to me."
ReplyDeleteIn other words, your personal rambling interpretation of ABCT (with multiple rates) has no support in actual Austrian specialist literature?
It doesn't need "support" in that particular way in order for it to be true. That's fallacy of authority. You might as well say relativity theory was wrong until someone published their own paper on it.
"If disequilibrium does not mean chaos,"
Of course it does not mean "choas."
If disequilibrium does not mean chaos, then that is equivalent to saying that disequilibrium is just another equilibrium tendency.
At the simplest level it just means that not all product markets are in equilibrium.
Equilibrium theory does not argue that all product markets are in equilibrium. Equilibrium theory says that products markets TEND TOWARD, BUT NEVER REACH, equilibrium.
Haven't you grasped the essence of equilibrium theory yet? Both Hayek and Mises held that equilibrium is never reached in the market, but that the market tends toward it.
You keep spewing this straw man that equilibrium theory presumes equilibrium is an actual characteristic of the market and is reached. It is not reached. It is NEVER reached. It is where the market TENDS TOWARDS, BUT NEVER REACHES.
The labour market for example, might be out of equilibrium for long periods of time.
Is that an empirical statement or a theoretical statement?
In equilibrium theory, the labor market is ALWAYS "out of equilibrium." The labor market, in a free unhampered labor market, TENDS TOWARDS, BUT NEVER REACHES, equilibrium.
If your claim above is empirical, then if you claim that a free labor market "might be out of equilibrium for long periods of time" then certainly you must have empirical evidence of a free unhampered market in labor to which you refer that was "out of equilibrium for long periods of time."
And what is "long period of time" anyway? 1 month? 1 year? 2 years? 10 years? Why is the period you choose a "long period of time" but say half that time is not?
Maybe in a given time you might find that quantity x of commodity y supplied in a market just happens to match the demand for it. Maybe a few markets are like that in that time period. Perhaps you can find empirical evidence of it. But that isn't Walrasian general equilibrium.
Austrians don't presume that Walrasian equilibrium is ever reached, and Austrians devote more of their intellectual efforts on the market process, not on states of equilibrium. Equilibrium for Austrians is used as a mental tool only, not as a model of actual market economies.
"Both Britain and the US were deficit spending and inflating."
ReplyDeleteJust because there is a deficit does not mean any fiscal stimulus is being imparted.
Red herring. I didn't say anything about "fiscal stimulus". I said fiscal deficits. I said by the time of Keynes, governments were already deficit spending and they were already inflating. I said that Keynes just provided a series of excuses that allegedly justifies such deficits and inflation as allegedly economically beneficial.
Keynes did not recommend something new that governments weren't already doing at the time. He just gave a seeming explanation of its alleged economic benefits on non-government actors, which is why governments around the world enthusiastically embraced Keynes. Finally they had an intellectual justification for their rotten political violence.
Economists were also relieved, because at the time, there was a rather large vacuum in sound economic thought after the classicals were abandoned. Since the labor theory of value was bupkus, and because classical economics utilized it, unfortunately what happened was that economists at the time just before Keynes totally rejected the entire classical school and all the good things about it that were still valid. One of them was the truth that falling wage rates is the cure for unemployment. Most economists were very uncomfortable with that fact, what with unions and politicians running around saying higher wages are good for the economy.
Since Keynes said wages don't have to fall, economists like I said were relieved. No longer did they have to go against the tide. They could join in and say higher wages is not a problem if the government can spend and inflate more. The rest is history.
Keynes did not recommend something new that governments weren't already doing at the time. He just gave a seeming explanation of its alleged economic benefits on non-government actors, which is why governments around the world enthusiastically embraced Keynes. Finally they had an intellectual justification for their rotten political violence.
ReplyDeleteOh, I see. Keynesian policies were only adopted because these wicked governments wanted "intellectual justification for their rotten political violence". You just "know" that, do you? By telepathy, perhaps?
You can no doubt read the minds of thousands of dead politicians and policy-makers from the 1930s, and you just "know" it was because they were simply looking for "intellectual justification for their rotten political violence".
Meanwhile, in the real world, where we can use empirical evidence, we have the memoirs, public and private writings and thoughts of
politicians and policy-makers from the 1930s.
We find instead that many of them tell us how they actually felt horror seeing their fellow human beings suffering hunger, homelessness and unemployment, or feeling that there was massive waste in depressed economies, with idle plant and idle labour.
It must all have been one massive global conspiracy of thousands of politicians to deceive us, huh??
You live in a fantasy world of pure invention.
Keynes did not recommend something new that governments weren't already doing at the time. He just gave a seeming explanation of its alleged economic benefits on non-government actors, which is why governments around the world enthusiastically embraced Keynes. Finally they had an intellectual justification for their rotten political violence.
ReplyDeleteOh, I see. Keynesian policies were only adopted because these wicked governments wanted "intellectual justification for their rotten political violence". You just "know" that, do you? By telepathy, perhaps?
Hahaha, you have no argument. Yes, I do know that, because I know the nature of the state, you don't.
You can no doubt read the minds of thousands of dead politicians and policy-makers from the 1930s, and you just "know" it was because they were simply looking for "intellectual justification for their rotten political violence".
I don't need to read minds. I can observe their actions.
Meanwhile, in the real world, where we can use empirical evidence, we have the memoirs, public and private writings and thoughts of
politicians and policy-makers from the 1930s.
Meanwhile, politicians lie, cheat, and did I say they lie?
We find instead that many of them tell us how they actually felt horror seeing their fellow human beings suffering hunger, homelessness and unemployment, or feeling that there was massive waste in depressed economies, with idle plant and idle labour.
Hahahaha, yes, they were so concerned with human life, that they were putting American citizens in prison for victimless crimes, murdering innocent people overseas in senseless wars, and all sorts of other violent actions. But we're supposed to ignore all that because some bureaucrat wrote in his memoirs that he cares about people.
Hilter and Stalin also wrote that they care about people. By your logic, we should ignore the evidence of violent actions, and instead go by what they write and say in public.
It must all have been one massive global conspiracy of thousands of politicians to deceive us, huh??
Straw man. There is no world conspiracy needed here, any more than there is no worldwide conspiracy needed to understand that homicidal maniacs are similar from country to country, despite having never met each other.
You live in a fantasy world of pure invention.
Sorry, I am an atheist. YOU live in a fantasy world where governments, entities that have killed more innocent people, tortured more innocent people, imprisoned more innocent people, than any other human institution ever created, are somehow "concerned" with human welfare, instead of the truth, which is that they are self-interested and concerned with their own welfare, which is maintained through legalized violence.
No wonder you're a statist. You actually believe in the myth that the state are like benevolent parents, who only want to look out for what's best for people, without knowing them, without ever having met them, without getting their permission first.
Ironically, the notion that the state knows what's best for others, without asking them, is based on the very concept of mind reading that you accuse me of doing by my observing of the government's actions. Keynesian economics is BASED on believing the government can read individual's minds, and you have the gall to tell me I'm trying to read people's minds? That's hilarious!
"Most economists were very uncomfortable with that fact, what with unions and politicians running around saying higher wages are good for the economy."
ReplyDeleteThat's rubbish. Numerous policy-makes in the 1930s did want falling real wages.
Bruning in Germany. Dollfus the Austro-fascist in Austria did. That didn't restore employment.
"they were so concerned with human life, that they were putting American citizens in prison for victimless crimes, murdering innocent people overseas in senseless wars, and all sorts of other violent actions."
ReplyDeleteThe US was engaged in "senseless wars" in the 1930s and "all sorts of other violent actions"? Where?
"they were so concerned with human life, that they were putting American citizens in prison for victimless crimes, murdering innocent people overseas in senseless wars, and all sorts of other violent actions."
ReplyDeleteThe US was engaged in "senseless wars" in the 1930s and "all sorts of other violent actions"? Where?
And what "victimless crimes" are you talking about?
Sure, congress was "persecuting" Americans by
repealing prohibition 1933 and letting people enjoy a good drink again!
"Most economists were very uncomfortable with that fact, what with unions and politicians running around saying higher wages are good for the economy."
ReplyDeleteThat's rubbish. Numerous policy-makes in the 1930s did want falling real wages.
Most ECONOMISTS. Learn how to read.
"they were so concerned with human life, that they were putting American citizens in prison for victimless crimes, murdering innocent people overseas in senseless wars, and all sorts of other violent actions."
The US was engaged in "senseless wars" in the 1930s and "all sorts of other violent actions"?
Not in the 1930s. The same politicians of the 1930s. "They", not "when".
They were not putting American citizens in prison for victimless crimes? Really?
And what "victimless crimes" are you talking about?
Every single law that is not a protection against physical force to person or property. There were (and are) MANY such laws. Selling goods and services without a government license. Producing money without government permission/sanction. Buying/selling goods without a tariff. Buying/selling "illegal" goods and services. Buying/selling land without government approval. The New Deal made non-New Deal dealings illegal. Buying/selling labor without abiding by the labor laws. Holding physical gold was made illegal by executive order. There were so many victimless crimes created during the 1930s that many consider the 1930s to be when the American free market system finally died.
Bruning in Germany. Dollfus the Austro-fascist in Austria did. That didn't restore employment.
ReplyDeleteIt raised employment from where it otherwise would have been. It doesn't have to absolutely raise employment for us to know lower wage rates raises employment all else equal. It follows from the law of marginal utility.
There is no world conspiracy needed here, any more than there is no worldwide conspiracy needed to understand that homicidal maniacs are similar from country to country,
ReplyDeleteLOL... So now every person in goverment or (perhaps you mean) all major policy makers in government are "homicidal maniacs"? Is that correct?
It's like you're a living, breathing caricature of all the irrational aburdity of libertarianism sent to provide the world with humour.
There is no world conspiracy needed here, any more than there is no worldwide conspiracy needed to understand that homicidal maniacs are similar from country to country,
ReplyDeleteLOL... So now every person in goverment or (perhaps you mean) all major policy makers in government are "homicidal maniacs"? Is that correct?
Straw man. It was an analogy of principle, not a characterization.
But if you want to actually connect homicidal maniacs with government, then I will say that the worst homicidal maniacs to have ever lived, were all politicians. I don't have a list, but I am willing to bet that the top 10,000 homicidal maniacs were in government.
It's like you're a living, breathing caricature of all the irrational aburdity of libertarianism sent to provide the world with humour.
First straw man, now ad hominem. All because your ethical worldview is depraved and evil, and because you can't make an argument. You're just so embarrassed that your immoral and violent worldview requires the actions of immoral and violent people in order to be manifested. That must make you mad when you hear libertarians calling for peaceful cooperation instead.
You're a caricature of internet statists who have to live vicariously through violent people in government, because you lack a grounded philosophy with which to live your own life.
"That must make you mad when you hear libertarians calling for peaceful cooperation instead."
ReplyDeleteMore mindreading, huh.
"That must make you mad when you hear libertarians calling for peaceful cooperation instead."
ReplyDeleteMore mindreading, huh.
No, that follows from your ad hominems against those advocating for peaceful cooperation instead of Keynesianism. No mind reading there either.
You're calling for individuals in the state to read minds when you claim that they can plan people's lives better than the people can plan their own lives in economic freedom. Hayek showed that governments lack the knowledge you Keynesians presume the government must have.
You're calling for individuals in the state to read minds when you claim that they can plan people's lives better than the people can plan their own lives in economic freedom. Hayek showed that governments lack the knowledge you Keynesians presume the government must have.
ReplyDeleteI've been watching this for some time and I don't think I've ever seen him recommend mind reading as a practical solution to anything. I guess if he were, this argument would carry some water, but I'm thinking this might be one of those notorious "straw men." Mischievous things, coming in and changing arguments left and right.
Say, now, THERE's a service the private sector needs to hurry up and provide; straw man extermination. Like the Orkin Man, but for internet arguments.
Anyway, a state has no power to read minds, but fortunately it does not need such a power; if labor is underutilized and people are suffering, simply offering employment will enable people to "plan their own lives in economic freedom," just with one more option for what form said life might take. Since crowding out is not an issue (government and private spending are complements below full employment, and only substitutes BEYOND that point), it's a win-win. The state is not FORCING people to take those jobs, after all; if they're happier waiting for private industry to deign allow them to contribute to society once more, then they're free to do so.
If you think the government would not price those jobs accurately, then I guess this boils down to which potential inefficiency is greater; that of mis-priced infrastructure, or that of increasing poverty and missed opportunities to promote social wealth.
At the VERY least, I'm sure you'll concede that public works employment is in every way superior to unemployment insurance; unlike the latter, those receiving checks under a job guarantee system are actually contributing value to society, engaging with the community, and cultivating a healthier attitude. As someone who spent two solid years after college throwing hundreds of resumes into the vast, unresponsive void that is the current labor market, I can attest that it does not do wonders for one's sense of self-worth.
Finally, it doesn't require mind reading to see that highways are badly damaged. Just a working set of eyes. Or, in the case of the blind, a passenger seat in a car that happens to be traversing one of them.
Anonymous:
ReplyDelete"You're calling for individuals in the state to read minds when you claim that they can plan people's lives better than the people can plan their own lives in economic freedom. Hayek showed that governments lack the knowledge you Keynesians presume the government must have."
I've been watching this for some time and I don't think I've ever seen him recommend mind reading as a practical solution to anything.
You haven't been paying attention. Mind reading is a necessary condition for Keynesianism to do what it says it can do.
I guess if he were, this argument would carry some water, but I'm thinking this might be one of those notorious "straw men."
Which straw men are you talking about?
Mischievous things, coming in and changing arguments left and right.
It's more like you are not able to read between the lines of people's arguments and claims.
Anyway, a state has no power to read minds, but fortunately it does not need such a power; if labor is underutilized and people are suffering, simply offering employment will enable people to "plan their own lives in economic freedom," just with one more option for what form said life might take.
That requires mind reading. It requires the state to know what other people value such that they "react" in the way the state intends.
Since crowding out is not an issue (government and private spending are complements below full employment, and only substitutes BEYOND that point)
False. The law of scarcity and opportunity costs do not vanish just because there is unemployment or idle resources
it's a win-win.
No, it's a win-lose, with everyone losing relative to what could have been had in the free market.
The winners are those who receive the stolen money and the income generating wealth. ("But borrowing is not theft!" Yes, borrowing is not, but the state must steal to pay the debt back, if not sooner, then later)
The losers are those who are stolen from to pay for it.
Anonymous:
ReplyDeleteThe state is not FORCING people to take those jobs, after all;
The state is FORCING people to pay.
You seem to believe that money grows on trees and as long as the state has a printing press, it can abolish all economic laws and exploit nobody while everyone gains. We used to call such attitudes Utopian, but yours goes even deeper. It's Dystopian.
if they're happier waiting for private industry to deign allow them to contribute to society once more, then they're free to do so.
Those who have to pay for it are not free to opt out.
If you think the government would not price those jobs accurately, then I guess this boils down to which potential inefficiency is greater; that of mis-priced infrastructure, or that of increasing poverty and missed opportunities to promote social wealth.
False dichotomy. Government spending increases poverty in the long run, which passed years ago.
At the VERY least, I'm sure you'll concede that public works employment is in every way superior to unemployment insurance; unlike the latter, those receiving checks under a job guarantee system are actually contributing value to society, engaging with the community, and cultivating a healthier attitude.
You can't claim public works adds value to "society" unless you observe individuals voluntarily paying for it. You can't say that it is adding value to those individuals who have to pay for "infrastructure" they don't even use (individuals pay for not only the "infrastructure" they use, but also what they don't use, and would not use or pay for if they had the choice)
As someone who spent two solid years after college throwing hundreds of resumes into the vast, unresponsive void that is the current labor market, I can attest that it does not do wonders for one's sense of self-worth.
You can thank the government for screwing the economy up. The people you are sending your resumes to are themselves victims as well.
I never understood how statists can possibly believe that the working class can be helped by attacking those who hire workers. It's like claiming that hungry people can be helped by attacking food producers.
Finally, it doesn't require mind reading to see that highways are badly damaged.
It requires mind reading to know just where people value another highway, which highways to repair, what price they are willing to pay, and how much they will use them, in the absence of a market.