“For what it’s worth, I think Hayek has a more useful set of ideas on the business cycle than Mises anyway. Keynes even made basically the point in Ch. 16 of the [General Theory] that Hayek does in Prices and Production – that a lower interest rate will make production processes longer (and also more capital intensive – but the elongation is the main point). Hayek’s business cycle theory hinges on the fixed [and specific] nature of those investments in longer production processes. That guarantees that adjustment is not costless. I’m not that familiar with Mises, but I don’t think he has that mechanism that Hayek does.It also well worth reading the comments on that post.
My concern with all the Austrian work is that while it may be a very interesting description of what happens to what they call the ‘time structure of production’ in response to the interest rate, there’s no obvious reason to tie that to the business cycle. Their story is ‘during the boom interest rates are artificially low, and during the bust they go back to their natural rate’. In a loanable funds world, that makes sense. But in a liquidity preference world, the story is ‘interest rates are too high for full employment’. In a liquidity preference world where those interest rates are kept too high by a zero lower bound, you of course have even more trouble.
So the whole Hayekian story is predicated on the assumption that we move below Wicksell’s natural rate during the boom, and return to it in the bust. Our best understanding of macroeconomics (from Hicks et al.) says that we’re at Wicksell’s natural rate during periods of full employment, and are above it during the bust.
In other words, the Hayekian mechanism should produce a capital structure that is just right during the boom and too short during the bust – exactly the opposite of their normal story.
So while all the fluctuations of the ‘temporal structure of capital’ are quite interesting to me, I don’t think they offer much in the way of a business cycle theory.’”
Daniel Kuehn, “A Comment I Left on Brad DeLong’s Post which may be of Interest...,” November 16, 2011.
Some quick comments:
BIBLIOGRAPHY
(1) I think Daniel concedes too much when he says:“Their story is ‘during the boom interest rates are artificially low, and during the bust they go back to their natural rate’. In a loanable funds world, that makes sense.”It is better to say: if the natural rate of interest actually existed and loans were made in natura.
(2) This reminds me of Nicholas Kaldor’s different critique of Hayek’s ABCT. In 1942, Kaldor published “Professor Hayek and the Concertina-Effect” (Economica n.s. 9.36 (1942): 359–382), which was an attack on Hayek’s new version of his trade cycle theory in Profits, Interest and Investment (London, 1939). Kaldor focussed on Hayek’s Ricardo effect (or what Kaldor preferred to call the “Concertina-Effect,” since Ricardo had the examined the relative prices of labour and capital), and argued that in fact Hayek’s postulated mechanism to explain a decrease in capital goods investment when an increase in demand for consumer goods occurred during a period of full employment was not credible (for a short analysis, see Kyun 1988: 37–38 and Kaldor 1996: 156–157). Hayek argued that rising demand for consumer goods during full employment raises the prices of consumer goods and reduces real wages. Capitalists increase investment, but use less “capitalistic methods of production” (Kyun 1988: 37) by more labour intensive methods and less capital goods. The decrease in investment in capital goods overwhelms the use of labour and an overall decrease in investment results. Kaldor debunked this “Concertina Effect,” arguing instead that an increase in consumer goods demand increases overall investment.
Hayek, F. A. von, 1939. Profits, Interest and Investment, Routledge and Kegan Paul, London.
Hayek, F. A. von, 1942. “Professor Hayek and the Concertina-Effect: A Comment,” Economica n.s. 9.36: 383–385.
Kaldor, N. 1939. “Capital Intensity and the Trade Cycle,” Economica n.s. 6.21: 40–66.
Kaldor, N. 1940. “The Trade Cycle and Capital Intensity: A Reply,” Economica n.s. 7.25: 16–22.
Kaldor, N. 1942. “Professor Hayek and the Concertina-Effect,” Economica n.s. 9.36: 359–382.
Kaldor, N. 1996. Causes of Growth and Stagnation in the World Economy, Cambridge University Press, Cambridge.
Kyun, K. 1988. Equilibrium Business Cycle Theory in Historical Perspective, Cambridge University Press, Cambridge.
Ya - the comments are good. I should emphasize I really don't know Mises. Perhaps he is right there with Hayek as some in the comments suggest.
ReplyDeleteI've also thought some about what I've said about Wicksell, and I'm not sure if I actually think this.
The real point isn't that we're at a natural rate during periods of growth, it's that whatever the level of investment is it's consistent with full employment. And unless we're in a liquidity trap, presumably recessionary interest rates are at the natural rate too - it's just that the investment level at that rate is not a full employment investment rate.
I think the portion you highlighted still holds, though. During a recession, a full employment level of investment requires a lower interest rate. That means that during a recession, the capital structure is shorter than we want it to be. Austrians usually say the opposite - that during periods of growth the the capital structure is longer than we want it to be.
So I might revise the Wicksell point a little, but the thrust of the comment still holds I think.
Interesting critique of ABCT on its own terms.
ReplyDeleteFor a more rigorous critique of ABCT (and RBCT) that uses the tools of econophysics, see this link!
http://www.sciencedirect.com/science/article/pii/S0378437110001305
My concern with all the Austrian work is that while it may be a very interesting description of what happens to what they call the ‘time structure of production’ in response to the interest rate, there’s no obvious reason to tie that to the business cycle. Their story is ‘during the boom interest rates are artificially low, and during the bust they go back to their natural rate’. In a loanable funds world, that makes sense. But in a liquidity preference world, the story is ‘interest rates are too high for full employment’. In a liquidity preference world where those interest rates are kept too high by a zero lower bound, you of course have even more trouble.
ReplyDeleteLiquidity preference is not a causal determination in level of employment. Employment is determined by the demand for labor, divided by the prevailing price of labor, not interest rates or liquidity preference. Interest rates determine where, in the structure of production, investment and hence demand for labor will be greater and where it will be smaller. Liquidity preference and interest rates do not determine the overall level of employment.
If there is high unemployment, and the Fed is holding the fed funds rate down, in the hopes of spurring investment and employment, then the solution to unemployment is a fall in wage rates. If wage rates do not fall, and high unemployment persists, then we must ask what it is that is sustaining unemployed workers that gives them the ability to not work and yet sustain themselves, and thus generate "sticky wages."
If long term unemployment benefits (welfare, unemployment insurance, food stamps, etc) were abolished, if minimum wage were abolished, then prevailing wage rates would fall, and they would continue to fall until the demand for labor was able to buy up available labor so that unemployment is reduced.
The reason why you cannot see an "obvious reason to tie that to the business cycle", is because your mindset is stuck in the Keynesian worldview where aggregate demand is somehow the determinant of labor. Now, you can continue to hold onto that doctrine, but you can't say that ABCT is lacking on this score, because Austrians reject the notion that aggregate demand determines employment. Austrians hold that employment, as all other factors in production, is determined by the demand for those factors divided by the prices. If prices are too high, then a surplus will accumulate, and it will be to the self-interest of both sellers and buyers to reduce prices. If price are too low, then a shortage will accumulate, and again it will be to the self-interest of both buyers and sellers to raise prices.
Interest rates have absolutely nothing to do with this process of aggregate employment.
If you simply refuse to consider falling wage rates and prices as capable of eliminating mass unemployment, then of course you will search for other explanations that simply deny the premises of ABCT. Is this ABCT's fault? No.
So the whole Hayekian story is predicated on the assumption that we move below Wicksell’s natural rate during the boom, and return to it in the bust. Our best understanding of macroeconomics (from Hicks et al.) says that we’re at Wicksell’s natural rate during periods of full employment, and are above it during the bust.
No, that is not true. The market is not at natural interest rates as long as the Federal Reserve System is manipulating them through open market operations of inflation. Whether or not employment is full or not, is irrelevant. There can be full employment, or there can be widespread unemployment, and interest rates still can be far away from their natural rates, due to the Fed.
In other words, the Hayekian mechanism should produce a capital structure that is just right during the boom and too short during the bust – exactly the opposite of their normal story.
Since this conclusion follows from your confusions above, it can be rejected as flawed.
"If you simply refuse to consider falling wage rates and prices as capable of eliminating mass unemployment, then of course you will search for other explanations that simply deny the premises of ABCT."
ReplyDeleteThe belief that flexible prices and wages would eliminate unemployment is itself an absurd view that ignores:
(1) fundamental uncertainty affecting investment
(2) subjective expectations in the investment decision
(3) the rises and falls in liquidity preference and the diversion of money into purchases of financial assets or into idle states.
"If you simply refuse to consider falling wage rates and prices as capable of eliminating mass unemployment, then of course you will search for other explanations that simply deny the premises of ABCT."
ReplyDeleteThe belief that flexible prices and wages would eliminate unemployment is itself an absurd view that ignores:
(1) fundamental uncertainty affecting investment
(2) subjective expectations in the investment decision
(3) the rises and falls in liquidity preference and the diversion of money into purchases of financial assets or into idle states.
False on all counts.
1. Uncertainty about the future of human choice is ubiquitous. But that does not mean that we can't know that investors chase profits and avoid losses, prefer more labor relative to less labor for the same costs, and are able to bargain wage rates up or down according to the supply and demand for labor. If uncertainty precludes labor markets from clearing, then uncertainty must also precludes governments from solving it, because governments are made up of humans as well, and the are faced with an uncertain future no less than market participants.
2. Subjective expectations are another ubiquitous phenomena, applicable to all humans. But again, that doesn't mean we can't know that when the demand for labor generates persistent surpluses of labor or persistent shortages of labor, given prices, that prices somehow cannot adjust up or down. The very Keynesian program of printing money and boosting spending, which is for the purpose of boosting prices, relies on the ability of prices to change. The Federal Reserve's open market operations relies on the premise that interest rates can change up and down in the market. To say that subjective expectations precludes the ability of prices to rise and fall is like saying gravity precludes the market, but not governments, from flying with their flapping arms.
3. Liquidity preference simply does not constitute a grounds for widespread unemployment. When liquidity preference rises, it means spending falls. Without any government safeguard, prices for labor will fall, thus eliminating unemployment. The same reason why the government increases liquidity hoping that doing so will raise prices in the market, so too will increased preference for liquidity lower prices in the market. If higher liquidity preference can't lead to lower prices in the market, then it must be the case that inflation cannot increase prices.
Clearly you're imposing a double standard. You're saying that the government can succeed in getting market prices to rise, but for some reason the market isn't capable of reducing prices. Apparently electronics isn't a real industry. LOL
Liquidity preference, subjective expectations, and uncertainty, simply do not preclude the market's inability to raise and lower prices, for they are always present, and yet inflation is succeeding in raising prices.
Try again.
"The belief that flexible prices and wages would eliminate unemployment is itself an absurd view that ignores:
ReplyDelete(1) fundamental uncertainty affecting investment
(2) subjective expectations in the investment decision
(3) the rises and falls in liquidity preference and the diversion of money into purchases of financial assets or into idle states. "
1)/2)Austrians embrace the fact that the economy is always in a state of disequilibria, markets are always priced in a world such that QS does not equal QD, and that the world is uncertain and there exists entrepreneurs (people who have to estimate the uncertainty of the future by allocating resources). What Austrians stress is that through entrepreneurial forecasting of profits and losses, shortages and surpluses, prices will tend to equilibrium. But this is always constantly upset by changing human conditions. Given a free market with no restrictions on price freedom (e.g antitrust) and wage freedom (unemployment benefits etc), prices adjustments will not be "perfectly flexible" (Never in a world with uncertainty and nonneutral money) but with a given set of data will always tend to their optimal level, ceteris paribus.
3)Again, diverting money into financial assets or "idle states" (hoarding) does not present an argument. The only result of a greater amount of money being spent on financial assets or into hoards (increase in money demand) is that prices fall even further.
G-d, both of you, Lord Keynes and David are wrong.
ReplyDeleteLord Keynes, What David said about fundamental uncertainty, subjective expectations, and liquidity preference is correct. Your conclusions do not flow from these premises. In THE LONG RUN, and only in the long run, MONEY IS NEUTRAL. (I'm not some idiot New Classical or Rothbardian.) And there is no such thing as nonreproducible assets, the very concept is absurd. (If your're talking about money... hello.. printing press?. If youre talking about rare commodities, well there are always synthetic substitutes, and human imagination and ingenuity in creating new goods and services. If youre talking about secondary financial markets, i concede you have a minimal point only in the barest of short runs, but money that goes into stocks even on the sec. markets does not disappear into a black hole. People have to eat, and retirees in this day and age can liquidate their holdings with the click of a mouse, take the cash and use it to buy stuff at the supermarket. I actually in real life have a Charles Schwab account whichcan use it to buy and sell stocks, or have my debit card that i can use at my local grocery.
David- what youre wrong about is the ease of deflation. Wages and Prices both are enormously sticky. That is the real, far more simple and prosaic explanation to unemployment than "liquidity preference" "distortions in the capital structure" (As if the capital structure were important for its own sake, and not solely for the end product. I dont accept the premise that lower interest rates lead to a longer capital structure by the way, its all in the demand for the real final product) Yes deflation can restore us back to full employment, but only after a horrendous amount of suffering. The reason being is because if there is partial deflation without full deflation, if Nominal Wages are cut by say10% but all other prices remian the same, existing debt burdens are enormously aggravated, and workes demand for products will fall. Since both workers and businessmen suffer from the money illusion nominal shocks can have very real effects.
"and are able to bargain wage rates up or down according to the supply and demand for labor."
ReplyDeleteLabour is not a box of widgets. They are real people. They don't vanish when there isn't the demand for them.
"And there is no such thing as nonreproducible assets, the very concept is absurd. (If your're talking about money... hello.. printing press?"
ReplyDeleteYou have clearly failed even to understand the concept of non-reproducible asset.
This means that money and other assets are not produced by business hiring workers in responses to the increases in demand for them.
A surge in demand for financial assets on secondary markets does not lead to unemployment falling as financial assets are "prodcued", in the way that cars are.
"You have clearly failed even to understand the concept of non-reproducible asset."
ReplyDeleteI'm not the one misusing plain english. If you wanted to say that money is not producible by private businesses, well, why didnt you just say so?
A surge in demand for financial assets on secondary markets does not lead to unemployment falling as financial assets are "prodcued", in the way that cars are.
Did you mean to say "not produced" If so then youre right, financial assets are not produced the way cars are, theyre easier to produce. Its a simple operation to split a stock for example.
Also, I never claimed that a surge in demand for financial assets, cet. paribus would lead to unemp. falling. I said that money does not go into a black hole, even on secondary markets, it has to be liquidated eventually
"To say that subjective expectations precludes the ability of prices to rise and fall is like saying gravity precludes the market, but not governments, from flying with their flapping arms."
ReplyDeleteYou can't even address what I said.
Subjective expectations cause fluctuations in the investment decision and overall level of investment. No amount of flexible prices will induce business to invest if their expectations are shocked.
Neil:
ReplyDelete"and are able to bargain wage rates up or down according to the supply and demand for labor."
Labour is not a box of widgets. They are real people. They don't vanish when there isn't the demand for them.
Nobody is claiming labor is a box of widgets. But we can still analyze the economics of labor, and we find that yes, labor is priced in the market. This doesn't mean people are "commodified". It means that different labor has different subjective values associated with it.
This means that money and other assets are not produced by business hiring workers in responses to the increases in demand for them.
ReplyDeleteIn a commodity money standard, production would be increased with increased hiring in response to increased demand for labor.
A surge in demand for financial assets on secondary markets does not lead to unemployment falling as financial assets are "prodcued", in the way that cars are.
Consumption is not what drives employment. Everyone could consume 100% and not save or invest anything, and wages would collapse to zero. No, labor is driven by saving and investment. A fall in the demand for cars and an equivalent increase in demand for financial securities, does not have to result in a one-for-one substitution in the nominal demand for labor, in order for employment not not fall. The demand for cars can result in a fall in saving and investment in cars, and the NOMINAL demand for labor can fall for car making labor, and thus wage rates in car making can fall, with no fall in employment.
"To say that subjective expectations precludes the ability of prices to rise and fall is like saying gravity precludes the market, but not governments, from flying with their flapping arms."
Subjective expectations cause fluctuations in the investment decision and overall level of investment.
That is ubiquitous. Investment is always driven by subjective expectations. Perfect foresight is not required for us to know that the market process will tend to correct past pricing "errors", given the certain demands for consumer goods, capital goods, and labor at specific points in time. Current prices are the ultimate datum for judging past actions. If abnormal profits or losses exist in one company or one industry, then investment will tend to change to accommodate the changing demands. Entrepreneurs are forecasting specialists. They cannot use scientific laws to predict future human choice, but they can and do make subjective expectations that are superior to others, thus bringing the whole of society forward, often messily, towards prosperity over time.
Nobody claimed that this is all perfect and without errors.
No amount of flexible prices will induce business to invest if their expectations are shocked.
False. With a low enough fall in prices for factors, no amount of "expectation shock" can reduce investment and production. The worse the expectation shock, the more prices will adjust. It's reinforcing. It's why during the worst stock market collapses, the stock market doesn't go to zero. Investors are there to buy when the price collapses far enough, which stops the collapse at a lower positive level.
The need to consume is always present, regardless of "shock." If the need to consume is always present, the opportunity to produce is always present.
Deflation myths refuted:
ReplyDeletehttp://mises.org/daily/1254
"In a commodity money standard, production would be increased with increased hiring in response to increased demand for labor."
ReplyDeleteNonsense:
http://socialdemocracy21stcentury.blogspot.com/2011/11/gold-as-commodity-money-and-its.html
"Deflation myths refuted:
ReplyDeletehttp://mises.org/daily/1254 "
Far from debunking the reality of debt deflation, your largely stupid Mises.org article admits the disastrous effects of debt deflation:
"It is true that deflation involves heavy burdens for many individuals. Just consider the fact that today the great majority of U.S. household have incurred considerable liabilities, usually in the form of real estate mortgages. If a contraction of the money supply sets in, household incomes will decline and it will be impossible to pay back these liabilities. It will then be necessary o renegotiate debts, and some individuals will have to file bankruptcy. It is also true that deflation has unequal consequences for the individual citizens. Some will prosper in a deflationary environment more than they would have prospered in the present inflationary regime, and others will fare worse."
Guido Hülsmann, "Deflation: The Biggest Myths," Mises Daily: Wednesday, June 11, 2003.
All Hülsmann can do is whine that inflation also has some unfair redistribution. That's not an answer to the disaster caused by debt deflation.
So much for your deflation myths "refuted".
Also, you contradict yourself hopelessly:
ReplyDelete(1) Your statement 1:
> This means that money and other assets
> are not produced by business hiring workers
> in responses to the increases in demand for
> them.
In a commodity money standard, production would be increased with increased hiring in response to increased demand for labor.
(2) Your statement 2:
"Consumption is not what drives employment."
Since consumption is just a form of demand, this contradicts statement 1.
Hopeless confusion.
"In a commodity money standard, production would be increased with increased hiring in response to increased demand for labor."
ReplyDeletehttp://socialdemocracy21stcentury.blogspot.com/2011/11/gold-as-commodity-money-and-its.html
Nonsense. You fallaciously stated:
"In a country with no or minimal gold/silver production, such output will not increase in response to an increase in liquidity preference."
In country's with little or no gold/silver production, their economies can attract money by being productive, as do economies today. No matter what quantity of money circulates, it will be enough to buy up everything for sale, provided prices are free to fall and not be interfered with by government.
If liquidity preference increases, then you have to first ask what exactly are people reducing expenditures in? If it's consumer spending, then the long run effect will be to increase productivity, since the ratio of capital goods demand to consumer goods demand will increase, and that will stimulate capital accumulation, which has the long run effect of increasing production.
If the increased demand for money comes at the expense of capital goods, and other investments, then the long run effect will be to reduce future production, and increase current production.
This would be consistent with real consumer preference changes.
"Deflation myths refuted:
http://mises.org/daily/1254"
Far from debunking the reality of debt deflation, your largely stupid Mises.org article admits the disastrous effects of debt deflation:
"It is true that deflation involves heavy burdens for many individuals. Just consider the fact that today the great majority of U.S. household have incurred considerable liabilities, usually in the form of real estate mortgages. If a contraction of the money supply sets in, household incomes will decline and it will be impossible to pay back these liabilities. It will then be necessary o renegotiate debts, and some individuals will have to file bankruptcy. It is also true that deflation has unequal consequences for the individual citizens. Some will prosper in a deflationary environment more than they would have prospered in the present inflationary regime, and others will fare worse."
He admits the disastrous effects for certain INDIVIDUALS, not the entire population.
With inflation, that has disastrous effects for the entire population, as the recent credit expansion induced bust showed.
All Hülsmann can do is whine that inflation also has some unfair redistribution.
All you can do is whine that deflation has fair redistribution.
That's not an answer to the disaster caused by debt deflation.
That isn't the answer he presented.
So much for your "refutation" of deflation myths refuted.
Also, you contradict yourself hopelessly:
ReplyDelete(1) Your statement 1:
"This means that money and other assets are not produced by business hiring workers in responses to the increases in demand for them."
"In a commodity money standard, production would be increased with increased hiring in response to increased demand for labor."
(2) Your statement 2:
"Consumption is not what drives employment."
Since consumption is just a form of demand, this contradicts statement 1.
False. There is no contradiction. The demand in (1) and (2) is demand FOR LABOR. Not demand for just anything. The "them" in (1) is referring to LABORERS.
You're hopelessly looking for straw men to knock down because you can't address the actual arguments being made.
"If it's consumer spending, then the long run effect will be to increase productivity, since the ratio of capital goods demand to consumer goods demand will increase, and that will stimulate capital accumulation, which has the long run effect of increasing production."
ReplyDeleteGarbage. This is all based on total failure to accept what Austrians say they accept: fundamental uncertainty and subjective expectations in the investment decision. This is why you are a clearly intellectually dishonest: you conveniently ignore points you would press into service in any other case, if you thought it helped your argument.
"He admits the disastrous effects for certain INDIVIDUALS, not the entire population.
ReplyDeleteWith inflation, that has disastrous effects for the entire population, as the recent credit expansion induced bust showed."
It doesn't have to be for the "the entire population" - this is just a dishonets red herring.
A debt deflationary collapse has severe effects on a vast number of people, in cases of severe depression on a majority of population, as the economy crashes, unemployment soars, family members of unemployed are effected, incomes fall, production collapses and financial sector failures cause loss of savings. Your commnets are idiocy, plain and simple.