Economics Questions

Re: What are the differences between GMU and LvMI.

Wilmot of Rochester — Wed, 08 Jul 2009 03:38:37 GMT

Jon Irenicus:

Forum =/= Mises Institute, FYI.

Ok. Yes, fair enough

Re: What are the differences between GMU and LvMI.

Jon Irenicus — Wed, 08 Jul 2009 02:03:10 GMT

Forum =/= Mises Institute, FYI.

Re: What are the differences between GMU and LvMI.

Wilmot of Rochester — Wed, 08 Jul 2009 02:00:19 GMT

Juan:
Is Giles well versed in economics ? A week ago he was a staunch opponent of FRB. Now he's in favor of it. That's kinda...weird...for someone who really knows what he's talking about.

So it's wrong to admit when you think you're wrong or when you think someone brings up another point worth looking at? This is my main problem with what seems to be acceptable at the Mises Institute - not searching for the truth, but rather believing you've already found it and shutting yourself off to debates from outside perspectives. I've seen a lot of outsiders come here looking to make some conversation and simply get blown by as though they weren't worth your time.

I don't mean to sound hostile, but I think that's just wrong.

Re: What are the differences between GMU and LvMI.

hayekianxyz — Sun, 05 Jul 2009 21:31:36 GMT

(Third attempt at writing this post).

Esuric:

I don't get it; why should we give up on capital theory?

I suppose you are talking about Leeson's blog post, in which case, let's put things in context.

From what I know of Leeson a lot of his work is aimed at marketing Austrianism to the mainstream. Given this, work on capital theory just is not the way to go. Whilst some understanding of capital is necessary to understand Austrian economics, tackling the thorny issues of capital theory is not going to advance Austrianism hugely. Especially considering the difficulty of the subject at hand, many Austrians have attempted work on capital theory only to give up. This includes such great minds as Hayek, from what I understand the return on investment with work on capital theory is very low.

Now, this said, I disagree with Leeson, but I can see where he's coming from. If anybody is going to attempt work on capital theory, they should be very aware of the difficulties involved.

(As a side note, he makes some superb points in that blog entry.).

Juan:
Is Giles well versed in economics ? A week ago he was a staunch opponent of FRB. Now he's in favor of it. That's kinda...weird...for someone who really knows what he's talking about.

zefreak:
He certainly is well versed, although I'm sure he admits there is still alot to learn and understand. Perhaps he has reevaluated his position regarding FRB. If this is the case, I am interested in his reasoning.

I'd consider myself reasonably knowledgable about economic science, but not particularly so. No more than I could expect to be given that I've only been interested in the subject for a year now.

As regards FRB, I'm certainly not sold on either position. But I do think that a lot of the arguments in favour of free banking have their merits. To clarify, I've been drifting towards the position held by Mises for some time now, I don't think that the arguments against the legitimacy of FRB are very strong. As Selgin has pointed out, the conclusions entailed by legal arguments against fractional reserves would probably preclude such financial instruments such as callable loans. Instruments that are very important in modern economies. I feel a good way to truly understand an argument is to argue in favour of it and see how well it holds up, I've been on the other side of this argument for some time now and I've read a lot of the literature that arguments fractional reserve banking leads to economically inefficient outcomes and/or is illegitimate. It may well be that in a few weeks I'll read a piece that makes me change my opinion again in favour of 100% reserve banking. In the meantime I wish to familiarize myself with the work of Selgin, White and Horwitz on the subject.

zefreak:
I read some of Boettke's articles regarding FRB and he often refers to a "natural rate of interest" that is different than the market rate. As in, in times of increased demand to hold money, the market rate will change relative to the "natural rate" and this is sub-optimal. Perhaps Giles can elaborate, if he is familiar with Boettke's position.

I'm not really familiar with Boettke's position, but I assume it's similar to that of Garrison, Horwitz, Selgin, White et al, if so I'll attempt to give a rough sketch of it. If you wish to know more (as I do), read the authors that I've just mentioned, especially White and Selgin.

The argument is that Rothbard, de Soto and other supporters of 100% reserves ignore the demand side in the market for loanable funds. For example, if there were a sudden rise in the demand for money balances, this would, ceteris paribus, cause the cost of money on the market for loanable funds to increase. From this there would be two results, the first is that this would cause entrepreneurs to revise their provision of goods and services in favour of less roundabout methods of production. IOW, malinvestment would occur. The second result would be that as prices adjusted downwards, due to various rigidities there would be a relative price structure that is out of line with consumer preferences. Meaning that there would be both intertemporal (due to the interest rate) and intratemporal (due to price rigidities) malinvestment.

The mechanism by which this occurs is roughly as follows: as people demand more money they take loans and stop spending as much on goods. The former would put an upward pressure on the price for money in the loanable funds market, whereas the latter would put a downwards pressure on the same price because banks would have more deposits with which they could create credit. To put it another way, where I spelled out the consequences of an increase in the money supply due to an increase in the demand for money, under the assumption that all things are equal, free banking wishes to ensure that the ceteris aren't paribus.

The paper that changed my mind was this one, give it a read and tell me what you think.

zefreak:
What is the natural rate of interest, how can it be known to differ with the "market" rate, and what are the implications of allowing the market rate to differ from the "natural" rate?

I attempted to spell out the consequences above, but I suppose the short answer to your question is that it is always known that the market rate differs from the natural rate, as a result of Austrian methodology. But, the key issue is the extent to which the natural rate differs from the market rate. The crux of ABCT is that if significantly differs from the natural rate in the downwards direction.

zefreak:

I found this to be an interesting article (found it in one of the comments on his blog)

Refereed Journals: Do They Insure Quality or Enforce Orthodoxy

Thanks for that, I'll give it a read, seems very interesting.

Dondoolee:
I am of the opinion that many peoples anger and frustartion are warrented in today's world, particularly more free market oriented people where the propaganda and political situation is clearly not in their favor.

That seems reasonable. And I'd agree that to some extent frustration on the behalf of Austrians is warranted. Austrians certainly do have an uphill battle in front on them. In spite of this, I feel that it is not so difficult as Austrians make out. Austrians have and do publish in top, mainstream, journals (AER and QJE included). The bigger point is, however, that "angry rhetoric" will get Austrians nowhere. Austrian economics is already labelled as "unscientific" such emotional outbursts will get us nowhere.

Re: What are the differences between GMU and LvMI.

Esuric — Sun, 05 Jul 2009 09:50:54 GMT

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The natural rate of interest: The rate of interest that would be determined by supply and demand if actual capital goods were lent without the mediation of money, meaning without the distorting affects of fluctuations in the purchasing power of money.

The market or money rate of interest: The rate of interest that is demanded and paid for loans in money or money substitutes, or the rate at which the banks lend.

The diversion of the market rate of interest to that of the natural rate is what causes the business cycle, the booms and the busts. When the banks create fiduciary media (know what this means), through credit expansion, they necessarily lower the market rate below the natural rate. Even if the market rate does not change, the natural rate has, it increased (since creating fiduciary media presupposes lowering the market rate below the natural rate). This allows firms to engage in a more lengthening capital accumulation process, and allows investment ventures which are not truly profitable to appear profitable. For example, if your expected rate of return was 4%, but the rate of interest was 5%, you could not open your business, unless you enjoy making losses. But if the market rate was suppressed, arbitrarily so, to 3%, your project now seems profitable. But the people do not really want your business, they have not actually chosen to differ consumption (save) as to warrant the entry of your company onto the market. This diverts labor and capital away from actual sustainable activities into unsustainable ones, and bids labor away from lower order goods to higher order ones (from producing immediate consumption goods to future production goods). This also increases competition for laborers which results into inflated wage prices, which are made rigid through union contracts. When the bust comes (when the market rate returns to the natural rate) those who are unnaturally employed must see a reduction in their wages or unemployment. The market rate must eventually return to the natural rate, no matter what; this process can be delayed but never stopped. We can't know what the natural rate is, or at least right now we can't know.

Re: What are the differences between GMU and LvMI.

Esuric — Sun, 05 Jul 2009 09:39:35 GMT

I don't get it; why should we give up on capital theory?

Re: What are the differences between GMU and LvMI.

zefreak — Sun, 05 Jul 2009 09:33:16 GMT

Juan:
Is Giles well versed in economics ? A week ago he was a staunch opponent of FRB. Now he's in favor of it. That's kinda...weird...for someone who really knows what he's talking about.

He certainly is well versed, although I'm sure he admits there is still alot to learn and understand. Perhaps he has reevaluated his position regarding FRB. If this is the case, I am interested in his reasoning.

I read some of Boettke's articles regarding FRB and he often refers to a "natural rate of interest" that is different than the market rate. As in, in times of increased demand to hold money, the market rate will change relative to the "natural rate" and this is sub-optimal. Perhaps Giles can elaborate, if he is familiar with Boettke's position.

What is the natural rate of interest, how can it be known to differ with the "market" rate, and what are the implications of allowing the market rate to differ from the "natural" rate?

I am far from convinced that FRB and monetary policy can "fix" the market, but I don't want to dismiss it out of hand.

Re: What are the differences between GMU and LvMI.

I. Ryan — Sun, 05 Jul 2009 01:25:59 GMT

Juan:
Is Giles well versed in economics ? A week ago he was a staunch opponent of FRB. Now he's in favor of it. That's kinda...weird...for someone who really knows what he's talking about.

Elaborate.

Re: What are the differences between GMU and LvMI.

Juan — Sun, 05 Jul 2009 01:07:18 GMT

Is Giles well versed in economics ? A week ago he was a staunch opponent of FRB. Now he's in favor of it. That's kinda...weird...for someone who really knows what he's talking about.

Re: What are the differences between GMU and LvMI.

zefreak — Sat, 04 Jul 2009 22:49:27 GMT

I. Ryan:

Why all the hate for Giles?

Dunno. I think he makes alot of good points, and seems very well-versed in economics.

Re: What are the differences between GMU and LvMI.

I. Ryan — Sat, 04 Jul 2009 22:37:05 GMT

Why all the hate for Giles?

Re: What are the differences between GMU and LvMI.

zefreak — Sat, 04 Jul 2009 21:47:29 GMT

I found this to be an interesting article (found it in one of the comments on his blog)

Refereed Journals: Do They Insure Quality or Enforce Orthodoxy

Re: What are the differences between GMU and LvMI.

Juan — Sat, 04 Jul 2009 21:07:20 GMT

Dondoolee:
GilesStratton:

Likewise, especially the following quotations:

Boettke:
there are no great hords of unpublished genius running around to enlighten us on economic issues,

Boettke:
A lot of lay discussion that passes for Austrian economics on the internet and even in some libertarian periodicals and books is intellectually embarrassing and often as poorly written as it is ill-informed on the issues

Boettke:
Bad readings of economic argument combined with angry rhetoric against intellectual opponents does not produce a treatise

By the way guys (AC, Juan, nir, Wilderness, LS) I'm still waiting for some answers, you've not been very forthcoming with them.

Good points. But I think what is important to look at is the root cause of "Bad readings of economic argument combined with angry rhetoric', and why is AE (or economic science in general) all of the sudden passionatly appealing to so many lay people? Personaly, I think it is because of the centralization of science. This tends to happen with science when it vies for public centralization. Why is global warming/environmental science so heated with debate from lay people? I think for the exact same reason. You don't hear too many passionate lay people debate as to what made the dinosaurs go extinct or what caused the late bronze age crash. It is usually only when ones ideas are being forced on another do things tend to go into a fever pitch.

I am of the opinion that many peoples anger and frustartion are warrented in today's world, particularly more free market oriented people where the propaganda and political situation is clearly not in their favor.

LOL. Poor Giles. Two weeks ago he was upset by boettke's arrogance and now he's licking boettke's boots. Sad.

Re: What are the differences between GMU and LvMI.

Dondoolee — Sat, 04 Jul 2009 20:42:30 GMT

GilesStratton:

Likewise, especially the following quotations:

Boettke:
there are no great hords of unpublished genius running around to enlighten us on economic issues,

Boettke:
A lot of lay discussion that passes for Austrian economics on the internet and even in some libertarian periodicals and books is intellectually embarrassing and often as poorly written as it is ill-informed on the issues

Boettke:
Bad readings of economic argument combined with angry rhetoric against intellectual opponents does not produce a treatise

By the way guys (AC, Juan, nir, Wilderness, LS) I'm still waiting for some answers, you've not been very forthcoming with them.

Good points. But I think what is important to look at is the root cause of "Bad readings of economic argument combined with angry rhetoric', and why is AE (or economic science in general) all of the sudden passionatly appealing to so many lay people? Personaly, I think it is because of the centralization of science. This tends to happen with science when it vies for public centralization. Why is global warming/environmental science so heated with debate from lay people? I think for the exact same reason. You don't hear too many passionate lay people debate as to what made the dinosaurs go extinct or what caused the late bronze age crash. It is usually only when ones ideas are being forced on another do things tend to go into a fever pitch.

I am of the opinion that many peoples anger and frustartion are warrented in today's world, particularly more free market oriented people where the propaganda and political situation is clearly not in their favor.

Re: What are the differences between GMU and LvMI.

Juan — Sat, 04 Jul 2009 20:17:51 GMT

Same thing here.