Seeing as it has remained obscure to me for some time now, what are the main differences between the Austrian and Behavioral Economics? Or, more specifically, between Praxeology and its correspondent in the enemy camp (i.e. behavioral school).
mickanomics: nirgrahamUK:so clearly he prefered the state of affairs he thought would follow from his buying the ticket to what he thought would follow from not buying the ticket. Lets do an imaginary interview with a guy who has just bought a lottery ticket but before the result is known... Q: "Do you expect to win the lottery?" A: "No. Obviously its possible... but I don't expect to win" Q: "What will be the consequence of you not winning the lottery?" A: "I will have lost the cost of the ticket" Q: "How will your 'state of affairs' be after finding out you've not won, compared to how you were before buying the ticket?". A: "I will be less happy". Q: "Let me get this straight, you have taken an action for which you forecast that your state of affairs after the action is less good than before your action?" A: "Yes." BTW, this interview was conducted with a "desperate man" who is not getting any thrill from the gambling process.
nirgrahamUK:so clearly he prefered the state of affairs he thought would follow from his buying the ticket to what he thought would follow from not buying the ticket.
Lets do an imaginary interview with a guy who has just bought a lottery ticket but before the result is known...
Q: "Do you expect to win the lottery?"
A: "No. Obviously its possible... but I don't expect to win"
Q: "What will be the consequence of you not winning the lottery?"
A: "I will have lost the cost of the ticket"
Q: "How will your 'state of affairs' be after finding out you've not won, compared to how you were before buying the ticket?".
A: "I will be less happy".
Q: "Let me get this straight, you have taken an action for which you forecast that your state of affairs after the action is less good than before your action?"
A: "Yes."
BTW, this interview was conducted with a "desperate man" who is not getting any thrill from the gambling process.
The whole interview is mute and irrelevant. Your first question should have been.
Q: Why did you buy the lottery ticket?
A: Because I wanted to.
End of discussion. Valuation is subjective. Your trying to pass judgement on another mans subjective valuation process. Unless your intentions are to make everyone think and value things as you do you cannot do this without you yourself sounding irrational. It's like making everyone only like/eat chocolate and everyone's favorite color only being red.
Statism is a religion.
mickanomics: filc: Do you think the same volume of people would have purchased homes had interest rates been at 7%? Credit has to be available before anything you described can occur. Otherwise the costs to purchasing said assets would be too high. I have no idea how you can be asking those questions in the light of all the explanations I have already given.
filc: Do you think the same volume of people would have purchased homes had interest rates been at 7%? Credit has to be available before anything you described can occur. Otherwise the costs to purchasing said assets would be too high.
Do you think the same volume of people would have purchased homes had interest rates been at 7%?
Credit has to be available before anything you described can occur. Otherwise the costs to purchasing said assets would be too high.
I have no idea how you can be asking those questions in the light of all the explanations I have already given.
You havn't technically given any explanation. You have just told people to read your blog, avoided questions, and gone around in rhetorical circles.
I guess I stand corrected though, You must truly believe that rational exuberance can occur irregardless of the cost. Your basically saying that an arbitrary bubble could occur and poor folks would buy 3 million dollar homes, whether the credit was available or not. Somehow they would just buy it but you cannot explain how they would financially afford it. You just argue that it would happen just because.
You also seem to fail to understand that credit acts as a commodity like anything else. It also follows the rules of supply and demand and it's price reflects that unless altered by men. So not only would your bubble encompass an asset it would have to encompass credit as well.
In addition you have arbitrarily changed the definition of a bubble to a fad. It's like equating Iphone popularity to a bubble.
it's not the Job of the economist to determine what consumer goods are going to be popular or even what consumer goods are considered "efficient". Thats up to the consumer to decide.
You seriously need to separate investment knowledge from economists. Sometimes economists can make a descent investment decision perhaps by knowing that gold will go up due to loose money. That does not mean economists are experts in speculating investments. Your also trying to find a model which will explain and
mickanomics:A bubble is an investment area which gets valued at a price sunstantially out of proportion with its true value or its true potential returns.
How do you know what the true price should be? If a bubble occurred outside of monetary causes is it not just something in response to consumer demand? Is meeting the desires of consumers bad? In the presence of sound money what measurement do we have to know if something is "irrational exhuberance" or simply meeting appropriate consumer demand.
According to your model a bubble would be the explosion of the Personal Computer industry. However can it be argued that personal computers are a bubble and a huge mis-allocation of wealth? No, personal computer has if anything made lives more efficient across the globe. In the presence of sound money your so called bubbles are nothing more then business's attempting to meet consumer demand with the given resource pool.
mickanomics:By the way, if you agree that the rational exuberance theory for small bubbles (bublets?) in a fixed money supply economy and you believe ABCT causes big bubbles then it is quite natural that in many instances both effects can be happening at the same time to some degree or other.
I believe that such 'bublets' as you coin them could not in any practical sense be determined to be so. the field will be ripe for disagreement. there would be no grounds for deciding which disputant is right... is it the one who says priced just right for now? priced too low for now? overpriced right now?
such passing and trivial 'bublets' will be beyond our capacity for reliable knowledge that they are such. people have to content themselves with merely buying or selling in line with their own estimation of such subjective opinions.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
In the presence of sound money on a true free-market it cannot be called Rational Exuberance. It is simply meeting consumer demand. You cannot judge what a mis-allocation of resources is. You cannot judge what an irrational decision is short of reading people's minds. No man has this foresight. This reveals your lack of understanding in Praxeology.
You asked me what chapters to read in Human Action. It sounds like to me you need to read the first 3 sections, though I would more readily tell you to simply read the whole thing.
I can not (and will not) continue on this thread until someone answers my two questions.
1. Do you agree that someone purchasing an antique toy may pay one price if he thought it would increase in value and another price if he thought its value wouldn't change?
2. Do you agree that, after observing a long period of price rises (for whatever reason), people have a tendency to believe that those prices will continue to rise even if they don't understand (or even profess to understand) the reason for the price rise?
mickanomics:1. Do you agree that someone purchasing an antique toy may pay one price if he thought it would increase in value and another price if he thought its value wouldn't change?
What does a rational expectation have to do with ABCT? But to answer this meaningless question, yes.
mickanomics:2. Do you agree that, after observing a long period of price rises (for whatever reason), people have a tendency to believe that those prices will continue to rise even if they don't understand (or even profess to understand) the reason for the price rise?
The prices rise for long periods of time because of inflation, and the desire to acquire wealth (not irrational); they don't rise "for whatever reason." They believe the prices will rise because they are rational actors, acting upon misunderstood causal chains and history. Stop conflating irrationality with ignorance. Again, read a little, come back, and then ask questions.
I answered these I'll do so again.
I don't presume to know what collectors, investors, speculators mind set is at during purchasing. Speculators use everything from trend timing mathematical models to superstitions. It's beyond the scope of economics.
No we do not agree.
A) You don't explain why prices rised, we do.
B) If prices continue to rise than as you stated earlier those goods will become rationed and purchased in less quantity. Demand will be stifled. You even stated so yourself.
mickanomics: filc:Even if it's rising, how do people afford to continue to participate in the bubble despite the rising costs?If the bubble was in gold for example they could just buy smaller quantities. Or with antique toys they could just buy smaller toys.
filc:Even if it's rising, how do people afford to continue to participate in the bubble despite the rising costs?
Buying smaller or fewer toys is not akin to a bubble. IF they purchase fewer or smaller items than the prices are rationing off those goods as intended. Since resources are now being rationed via prices the bubble never occurs.
So you contradict yourself apparently. You even admit that in the presence of a stable monetary system people would be unable to afford to participate in said bubble if the price continued to rise. As prices rise less people participate and the resources get rationed out.
True value is based off the labour theory of value, which Carl Menger, one of the earliest Austrians debunked over 100 years ago. "True value" is meaningless in an economic context.
mickanomics:If the size of the market sector is only a small fraction of the total economy then the bubble within that sector can be both long lasting and large (with respect to the degree of over-pricing) even in a fixed money supply economy.
It's not a bubble. People are deferring consumption in other areas to spend more on a particular industry. That increased demand, and higher prices, forces a re-allocation of capital to the bubble [sic], which brings prices back down again with increased competition and investment.
This is basic stuff Mick.
If you find something evil that wobbles, push it. - Gary North
mickanomics:I can not (and will not) continue on this thread until someone answers my two questions.
Threats won't get you far. You're the one who needs this discussion the most.
wow, this thread had a lot of replies since my last post. I was gonna make another response to mickanomics but other folks have already throroughly refuted the arguments
:-)
Esuric:But to answer this meaningless question, yes.
We're off to a great start
Esuric:The prices rise for long periods of time because of inflation
I see you are avoiding the question... obviously the price of any individual class of goods can rise for a very wide variety of reasons other than money supply growth. Here's a few:
A. Its a natural resource that is starting to run out (like oil)
B. It is an item that is going out of fashion and so the economy of scale is reducing (like black and white photographic film).
C. Its a resource that comes from only one location and there is increasing political unrest in that location.
D. Its a commodity that used in a product that is becoming more and more fashionable.
E. its a resource that has to be shared by more and more people through population growth (like land).
F. Its a good that is harder to grow due to some sort of climate change (man made or otherwise).
G. Its a product that becomes more expensive with increasing government regulation around the world - like more anti-pollution regulations.
I could go on and on....
Given that there are so many disperate potential reasons for a price rise in a sector, and given that the population in general would have a hard time distinguishing between these factors, I shall ask my question again:
mickanomics: Given that there are so many disperate potential reasons for a price rise in a sector, and given that the population in general would have a hard time distinguishing between these factors, I shall ask my question again: 2. Do you agree that, after observing a long period of price rises (for whatever reason), people have a tendency to believe that those prices will continue to rise even if they don't understand (or even profess to understand) the reason for the price rise?
filc: mickanomics:2. Do you agree that, after observing a long period of price rises (for whatever reason), people have a tendency to believe that those prices will continue to rise even if they don't understand (or even profess to understand) the reason for the price rise? No we do not agree. A) You don't explain why prices rised, we do. B) If prices continue to rise than as you stated earlier those goods will become rationed and purchased in less quantity. Demand will be stifled. You even stated so yourself. mickanomics: filc:Even if it's rising, how do people afford to continue to participate in the bubble despite the rising costs?If the bubble was in gold for example they could just buy smaller quantities. Or with antique toys they could just buy smaller toys. Buying smaller or fewer toys is not akin to a bubble. IF they purchase fewer or smaller items than the prices are rationing off those goods as intended. Since resources are now being rationed via prices the bubble never occurs. So you contradict yourself apparently. You even admit that in the presence of a stable monetary system people would be unable to afford to participate in said bubble if the price continued to rise. As prices rise less people participate and the resources get rationed out.
mickanomics:I see you are avoiding the question... obviously the price of any individual class of goods can rise for a very wide variety of reasons other than money supply growth. Here's a few:
No, bubbles are caused by inflation. Sector specific changes are caused by technological progress, expectations, income/substitute effects, changes in preferences, ect, ect. A bubble is when prices in one sector rise without a proportional and corresponding decrease in prices in another sector (can only happen through inflation).
Answered this question already.
The supply of oil could continuously decline without prices rising, or without increased production. You ignore so many factors and misunderstand so many concepts.
mickanomics:I see you are avoiding the question... obviously the price of any individual class of goods can rise for a very wide variety of reasons other than money supply growth.
No it can't. You're mixing paradigms here. If money is stable, a good can only rise if others fall. That is not a bubble, and it is not a reflection of what has gone on now, which you have based your rational exuberance post on. Your rational exuberance post is analyzing a period where the money supply was not stable, and so, we know that when the money supply inflates, bubbles form due to a mis-allocation of capital.
mickanomics:I could go on and on....
But why bother? You've been refuted over and over again.
Esuric:No, bubbles are caused by inflation. Sector specific changes are caused by technological progress, expectations, income/substitute effects, changes in preferences, ect, ect. A bubble is when the prices in one sector rises without a proportional and corresponding decrease in another sector (can only happen through inflation).
My question made no mention of the word bubble.
liberty student:If money is stable, a good can only rise if others fall.
Agreed. Although the rise can be an a narrow area while the fall is in "everything else".
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