If you believe in economic bubbles, please define what one is.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
Neoclassical: filc, I know we're running around in cricles. You claim that "it's about making a decision in ignorance because you've been lied to." My point is that businesspeople receiving new money aren't being deceived, unless they're radically unaware of inflation and its consequences to begin with (and I assume they are not).
filc, I know we're running around in cricles.
You claim that "it's about making a decision in ignorance because you've been lied to." My point is that businesspeople receiving new money aren't being deceived, unless they're radically unaware of inflation and its consequences to begin with (and I assume they are not).
Essentially, the Austrian position is that the price mechanism conveys and facilitates a free flow of idiosyncratic and tacit information to market actors. In other words, prices guide production. When the price mechanism is arbitrarily altered, economic calculations become inept, and when it is eliminated, economic calculation becomes impossible. It seems like your position (rational expectations) assumes that individuals have some mystical connection to some illusory general equilibrium; that the price mechanism, even when it is manipulated, cannot, in anyway, disturb this awesome connection. But if that's the case, then why have markets and prices at all? Why not choose the most intuitive individuals to centrally plan the economy?
Neoclassical:I'm not claiming omniscience for businesspeople; you can find the real interest rate by subtracting the inflation rate from the nominal interest rate.
You’re completely ignoring our rebuttals. Again, monetary growth always manipulates the price mechanism, the degree to which depends on the rate of monetary expansion. But this manipulation may not reveal itself in clumsy inflation indices and measurements, that is, it can be concealed by general economic growth/productivitiy gains. Furthermore, inflation indices are inherently flawed. This is because all prices are a ratio of exchange between economic goods, on the one hand, and money on the other. They cannot differentiate between actual changes in demand for any particular good, or changes in its supply, or changes in the demand for money, or changes in the supply of money. And finally, they only measure certain baskets of final consumer goods; they completely ignore the prices of producer goods.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Even though, for some reason, I am bashed for using quotes, I wanted to share some wisdom from Thomas Sargent: "[W]hy not optimize over expectations too? . . . When you impose rational expectations, you do not accept that systematically manipulating forecast errors is feasible."
And, just to irk you quote-haters even more, here is one from Todd Knoop: rational expectations "does not mean perfect information because some information may not be publicly available and some information may be prohibitively costly to obtain (i.e., the marginal cost of such information is greater than its marginal benefit). . . . What if some segments of the public are not rational and do not use all available information when setting expectations? Rational expectations are not invalidated. Those who are rational will take advantage of the profit opportunities created by those who are consistently making predictable mistakes. . . . The notion--that individuals learn and do what is in their own best interest--is at the heart of the discipline of economics. To assert that individuals do not act rationally is to assert that most of our economics is wrong."
When a huge amount of people buy something, not to keep, but to sell to the next guy.
"Most people are in arrested development and cannot use logic". Jacob
It is irrelevant one way or the other.
It's irrelevant to cycle theory what a business cycle is?
when people's actions are guided by incentives that do not reflect the underlying scarcity/availability/flexibility of various resources and dimensions.
You mean when the market is not in equilibrium?
A general, unsustainable, expansion in spending which occurs laterally across all stages of production induced by an expansion of credit or money. The expansion occurs across all stages, from stages closest to production to stages furthest. Resources and labor are bid up as nothing is set aside for savings. IE, various stages of production are not slowing their expansions to make way for various other stages of production. This causes the general rise in prices which can help promote a state of ephoria. IE the 90's, and 2000-2007.
You asked for the boom, so I won't bother explaining the bust.
"You mean when the market is not in equilibrium?"
No more like when the slope of the "market" is tending away from equilibrium, rather than toward it as it should be.
It's a theory of how the price system works. You can make up your own definition of real events and call them bubbles, cycles, unicorns or any other title you fancy. It matters not.
Smiling Dave:When a huge amount of people buy something, not to keep, but to sell to the next guy.
This.
There are consumption goods, and there are production goods. Consumption goods are valued for their own sake, and may be thought of as "0th-order capital." Production goods are valued because they can ultimately be transformed into consumption goods; we refer to them as "higher-order" or "lower-order" depending on how far away they are from consumption goods.
However, there is one good that falls outside this dichotomy: money. Person A values it because they predict that it will be valued by Person B, who does so because they predict that it will be valued by Person C... Unlike with other goods, this search for the source of money's value never ends; money is infinitely far away from any consumption goods.
Of course, the reason why money comes to be valued in the first place is because it serves as an intermediary to get around the double-coincidence-of-wants problem. Eventually, people come to attribute value to money in the same way that two people told to meet in Manhattan on a certain day will head for Grand Central Station at noon (to use Thomas Schelling's example).
Therefore, strictly speaking*, money is an example of an economic bubble. This suggests that economic bubbles (e.g., housing, tech stocks, tulips, beanie-babies) may be thought of as a form of "money": a bubble is what happens when ordinary goods acquire "money-type value" (a.k.a. ∞th-order value, which ultimately derives from the extent to which knowledge of consumers' preferences is not shared). But because money-type value is not anchored to the valuations of consumers, there is nothing to stop it from fluctuating, particularly if the supply of the good is elastic (in which case, for example, you end up with people building a lot of houses that nobody ever lives in, diverting scarce resources from better uses).
*"Bubble" may carry a connotation of short-term instability; I'm going by Smiling Dave's definition.
Thanks for the agreement, Zavoi. Didn't know it was that profound.
Where can I read more about this analysis of money? Keep in mind that the internet has gotten me hooked on easy and short, but if it must be some thick Hayek type book with big words, so be it. In that case page numbers will help.
I think your description of money applies to fiat money, but not to commodity money. Those water bottles being used in some Iraqi towns as money probably won't fit your description.
I do not believe in economic bubbles.
I do, however, adhere to ABCT. The distortion of the structure of production by a credit expansion caused by central bank intervention. But you know about that already from the other thread.
"Structure of production, that's make believe" - Neoclassical.
Honestly, haven't you had enough of this?
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
I know I've had enough of people paraphrasing me, but putting it in quotes! Lame.
Before I begin dismantling the notion of economic bubbles, I would like an answer to the following question:
Can you predict an economic bubble, know it when it's happening, or only identify it after it has burst?
Question: if the recent housing/equities boom/crash was not an economic bubble, then what was it? Animal spirits?
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