Austrian Theory of the Trade Cycle | Roger W. Garrison

[@Questfortruth86]

@treddas851 "What have Mises-Hayek done?" Mises incorporated monetary theory into marginal utility theory, something that all other neoclassical economists were simply incapable of doing (this was seen, at the time, as a major problem with subjective theories of value). He also explained, in great detail, how money emerges, the nature of inflation (it's not a uniform and/or measurable variable), and built upon Bohm-Bawerk's capital theory. (I purposely ignored business cycles for the moment)

[@mario1337]

Keep it up. I'm stunnend. I wish that my economic classes would be more like this.

[@gigo318]

Great to see that the economics class that I took in college took more of its ideas from the Austrian perspective. Its been three years since I took that class and I am glad I was not force-fed the Keynesian garbage.

[@EdgeRetro]

This video was really awesome. I have done some reading, but this condensed, simplified, intuitive version was extremely helpful. Thanks!!

[@morganwellsmusic]

Wow. That was awesome. Really appreciate the Mises Institute posting this. It helped me a lot to have a visual component in my understanding of the ATBC.

[@frailtruths]

You sir are an excellent teacher! Loved the lecture. I have actually watched is several times just to try to absorb all of it well. Thanks for a really great class!

[@EraserFS]

I've functionalized the Hayekian Triangle in my Thesis into an intratemporal model that readily explains housing bubbles. If you are interested and capable of understanding German, search for "Hayekian Relational Model" on academia.edu.

[@tomghzel]

I've got a question. Early stages of production: the example of development is given. Tom Woods has an example of 'bricks to build a house'. Do the earliest stages of production include mining natural recourses? Or am I taking the later example too literally? I try to understand the trade cycle looking at the production process from steel to a washing machine. And I wonder if decreased consumption will, if in a sound economy interest rates drop, result into more steel getting produced.

[@DesecrateConformity]

@adulby Yeah, I've always though that it's a bit strange that the Austrians' most well-known theory is the one that reaches its conclusions through the workings of an equilibrating model - something that the Austrians are famous rejecting. What I was getting at with pointing out that these crises are perhaps structural and not cyclical is that the ever-increasing levels of debt and credit (FIRE economy) may be proof that there perhaps is overproduction in the economy

[@zsylvana]

@Questfortruth86 13) "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’,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” (Bruce Caldwell-An Intellectual Biography of F.A. Hayek,2004 )

[@zsylvana]

@Questfortruth86 12) “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 ” (Bruce Caldwell, 2004: 228).

[@zsylvana]

@Questfortruth86 11) Hayek needed to free himself from the stationary equilibrium approach and construct a dynamic approach suitable for his trade cycle theory (Donzelli 1993: 5) others like Myrdal, Ohlin, Lindahl, and Hicks also freed themselves from the stationary equilibrium approach in the 1930s, and rediscovered the Walrasian instantaneous equilibrium approach.) Hayek had revived his “intertemporal equilibrium” idea,“a temporary equilibrium notion with perfect foresight”

[@zsylvana]

@Questfortruth86 10) In fact, Hayek delivered a lecture called “Price Expectations, Monetary Disturbances and Malinvestments” on December 7, 1933 in Copenhagen (first published in German in 1935; English trans. Hayek 1939) where he responded to Myrdal’s criticisms. Here he began to modify his ideas on the equilibrium interest rate and the concept of equilibrium more fully developed in his paper “Economics and Knowledge” (Hayek 1937).

[@zsylvana]

@Questfortruth86 9)Gunnar Myrdal had already levelled this criticism against Hayek in a paper in 1933 and Hayek’s famous paper “Economics and Knowledge”(1937) can be seen as the beginning of his attempt to answer these criticisms.Lachmann heard of the work of the Stockholm school from Rosenstein-Rodan:the Stockholm school at this time was being influenced by Myrdal’s incorporation of Knightian uncertainty into economic theory and Lachmann came to examine the role of expectations

[@zsylvana]

@Questfortruth86 8) Hayek’s assumptions go much further than the idea of a starting equilibrium state.They also assume:(1) The flexibility of prices and perfect or near perfect adjustments in prices in response to demand and supply(2) frictionless markets,and perfect price information on the part of agents.But prices are not perfectly flexible,and in reality agents ex ante expectations can be severely disappointed ex post,and Knightian uncertainty causes subjective expectations

[@zsylvana]

@Questfortruth86 6) "It is an irony that the perfectionist endeavour turned out to run into troubles which, it is claimed here, developed into a crisis of the whole program.In Mises’s understanding (general) equilibrium is a fictitious, imaginary construction useful as a logical basis of comparative statics.Though often arguing similarly in this respect,Hayek takes a different position.While Mises’s did not require empirical hypotheses it is quite clear,from Hayek" Witt,U.1997

[@zsylvana]

@Questfortruth86 5) An equilibrium state is the starting point of a real world economy allegedly subject to Hayek’s Austrian trade cycle (Loasby 1997: 54: “Hayek began ... with a monetary expansion ... impinging on a perfectly co-ordinated economy”). Hayek explicitly stated that he had assumed full employment equilibrium in Prices and Production (1931). U. Witt has identified the severe problem running through Hayek’s reliance on general equilibrium for his trade cycle theory.

[@zsylvana]

@Questfortruth86 4) In Prices and Production, an initial stationary state moves to disequilibrium and then moves via boom and bust into a new stationary state. This might be viewed as an application of Hayek’s intertemporal equilibrium theory of 1928 where perfect foresight is needed as an assumption. Hayek’s definition of monetary stability is a state where voluntary savings equal voluntary investment.The unique natural rate of interest is taken over from Wicksell.

[@zsylvana]

@Questfortruth86 3) While Hayek developed an intertemporal equilibrium theory in 1928 in his paper “Intertemporal Price Equilibrium and Movement in the Value of Money” (Hayek 1984 [1928]),he did not use this in Prices and Production (1931). Instead, he reverted to the stationary equilibrium approach, by adopting the simple stationary-equilibrium model put forward by Wicksell in Interest and Money as the starting point for his analysis.

[@zsylvana]

@Questfortruth86 2) The second phase from 1937 to the 1940s involved Hayek’s attempt to redefine equilibrium as plan co-ordination, which occurred in his important paper “Economics and Knowledge” (Hayek 1937)From the 1940s, there was a third phase where Hayek broke with equilibrium analysis and created a new concept of “spontaneous order” as a method for studying coordination processes in market economies.

[@zsylvana]

@Questfortruth86 1)It is well known that Hayek abandoned general equilibrium theory after the 1940s for the concept of a “spontaneously emerging market order.”But Hayek’s views on equilibrium also evolved over time,and some scholars feel it is necessary to divide Hayek’s career into 3 phases in his views on equilibrium - In the first phase down to 1937,Hayek thought that “all legitimate economic explanations should be based upon an analysis of equilibrium” (Gloria-Palermo 1999)

[@zsylvana]

@Questfortruth86 6.) In his popular pamphlet Economic Depressions: Their Cause and Cure written in 1969, Rothbard sets out a form of ABCT which seems typical of the general form of it. He points to malinvestments in capital goods by businesses as the fundamental cause of recessions.“And there is a third universal fact that a theory of the cycle must account for.Invariably,the booms and busts are much more intense and severe in the “capital goods industries”Rothbard 2009 (1969)

[@zsylvana]

@Questfortruth86 4)However,both Lachmann and Schumpeter did not think that Hayek’s business cycle theory could be used to explain all business cycles (Batemarco 1998).More importantly, I.Kirzner has also made the following remarks on Hayek’s theory: KIRZNER: I've never felt that the Hayekian business cycle theory was essentially Austrian.In fact,Mises,who was the originator of this whole idea in 1912,didn't see it as particularly Austrian either.It goes back to Knut Wicksell"

[@zsylvana]

@Questfortruth86 3) Here are some of the major works by Austrians where different forms of the ABCT are expounded: (1)The version of Mises in Human Action: A Treatise on Economics 1998. . (2)Hayek’s first version of ABCT in Prices and Production (London, 1931).After Nicholas Kaldor’s attack on it in “Capital Intensity and the Trade Cycle” (Economica n.s. 6.21 (1939):)Hayek had to re-write his theory in: (3)Hayek’s second version of ABCT in Profits,Interest and Investment.1939

[@zsylvana]

@Questfortruth86 1) The Austrian business cycle theory (ABCT) is a credit-based explanation of the business cycle used by Austrian economists. ABCT has, however, come in different forms and was developed over many years by Mises, Hayek, Rothbard and more recently by modern Austrians like Roger Garrison. It is not monolithic,and some Austrians like Israel M. Kirzner have even criticised Hayek’s development of ABCT as not entirely consistent with Mises’ exposition in 1912.

[@zsylvana]

5) ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree.In the housing bubble, loans were made to people who clearly were unlikely to pay them back. Debt was used bid up asset prices in property, allowing yet more debt (via refinancing) for purchasing of commodities (whether durable or non-durable). ABCT in the form examined above does not explain this process.

[@zsylvana]

4) In Economic Depressions: Their Cause and Cure written in 1969, Rothbard sets out a form of ABCT which seems typic general form of it.He points to malinvestments in capital goods by businesses as the fundamental cause of recessions: “And there is a third universal fact that a theory of the cycle must account for. Invariably, the booms and busts are much more intense and severe in the “capital goods industries”-the industries making machines and equipment" (Rothbard 1969: 32-33)

[@zsylvana]

" I've never felt that the Hayekian business cycle theory was essentially Austrian. In fact, Mises, who was the originator of this whole idea in 1912, didn't see it as particularly Austrian either. There are passages where he notes that people call it the Austrian theory, but he says it's not really Austrian. It goes back to the Currency School and Knut Wicksell. It's certainly not historically Austrian." Israel M. Kirzner,” Austrian Economics Newsletter, vol. 17.1 1997

[@zsylvana]

@Questfortruth86 Ludwig von Mises and Hayek adapted Wicksell’s cumulative cycle process. Keynes no doubt read and appreciated Wicksell’s approach and then built on it, stressing that cycles were generated by changes in real factors such as investment spending and interest rates and not by monetary changes. The seeds of the Keynesian-monetarist debates that began in the 1960s were planted first in the differences between Fisher and Wicksell.

[@zsylvana]

@Questfortruth86 In Wicksell’s model, the interest rate divergence phenomenon was crucial for understanding the differences between Wicksell’s quantity theory of money and the view held by his rival Irving Fisher.For Fisher,changes in the quantity of money fully explained changes in long-run prices; for Wicksell,the quantity of money was but one aspect of the mechanism that changed prices because the flow of goods and services worked its way through the economy by first changing interest rates

[@zsylvana]

@Questfortruth In Wicksells business cycle theory,a boom emerges when the natural rate of interest is higher than the market rate,which is subject to manipulations by humans using sophisticated financial institutions & credit instruments that drive the market rate below the natural,equilibrium rate.It´s "Wicksell’s Cumulative Process” model of business cycles.When the loan rate of interest is below the natural rate,the demand for loans by entrepreneurs exceeds quantity of savings in the economy

[@zsylvana]

@Questfortruth86 Wicksell made improvements for which he is remembered today.The most important is probably his distinction between the natural and money rates of interest.The Money,or market, rate of interest is the observed rate at which banks carry on credit transactions.The natural rate is a bit more complicated.Wicksell defined it as the rate that is neutral for commodity prices and the rate at which the supply and demand for capital are in equilibrium in an economy not using money at all

[@zsylvana]

@Questfortruth86 Yes it´s true.Wicksell’s work was an attempt at integrating general equilibrium theory earned from Leon Walras,the Austrian theory of capital (but i think he learned more from Eugen von Böhm-Bawerk’s,1884, classic,Capital and Interest,but i am not sure?) and the marginal productivity theory of income distribution from David Ricardo’s 1817 treatise On the Principles of Political Economy and Taxation.He was working on a grand synthesis of these three theoretical approaches.

[@zsylvana]

@Questfortruth86 Mark Blaug,one of the foremost historians of economic thought,proclaim that Knut Wicksell “more or less founded modern macroeconomics”(Blaug 1986,274). Wicksell’s work inspired directly to three major traditions in economic theory: the quantity theory of money and its implications for allowing an analysis of aggregate macro outcomes as well as their appropriate monetary policies; the Austrian theory of business cycles,which uses Wicksell’s concept of a natural rate of interest

[@zsylvana]

@Questfortruth86 Your right.Treedas wrong.There are, two broad lines in macro economics.One "European", comes from Knut Wicksell, another "American" is in the tradition of Irving Fischer.Milton Friedman did not for sure introduced any new equation of exchange in any of his 3 books.Milton Friedman was a follower of Irving Fischers,and his monetarism is a development of Fischers work.Knut Wicksell inspired Austrian,& Stockholm school of economics as well as Keynes early monetary theory.

[@zsylvana]

1) According to the probarly most credited post WW2 economist Paul A Samuelson,at MIT in his famous oscillator model economic trends and cycles works as follows: A- Damped monotonic B - Constant monotonic C- Explosive monotonic D -Explosive oscillations E - Constant oscillations F - Damped oscillations How do his multiplier-accelerator reveal "cycles"? In fact, only parameter ranges (B , C) which are in situation E (constant oscillations) will yield constant cycles.

[@zsylvana]

2) All other parameter constellations will result in something else -- either complete stability or complete instability - (whether monotonic or oscillating).Thus, regular cycles are "structurally unstable" in the sense that they emerge only if there is a precise parameter constellation and any slight movement or displacement of the economy from these parameter values will end the regular cycle dynamics and enter into either explosive or damped oscillations.

[@AFRIKTODAY]

@axe863 I do not see the rapport between statistical verification and empirical methodology" Those two system are not necessarily twins! When you trace an equation, you do not at the same time calculate the " statistical probability of correctness"! I mean, that is quite irrelevant! Statistical analysis merely shows a measure by which to display evidence/non evidence of our theory! And it is also used by case scenario, not systematically!

[@AFRIKTODAY]

@axe863 I have never said that empirical elements cannot to be utilized along the process of praxeological analysis; but statistics for example are merely " historical" elements rather than the " foundation" for our methodology. We might use statistics to display a verifiable evidence. The Fed Lower the interest rate at 1%, this led to the real estate bubble. The trade cycle theory doesn't "specify" the "rate" within which the interest rate should be lowered in order to create a bubble!

[@AFRIKTODAY]

@axe863 What do you mean by empirically incorrect? If the axioms are true ( anybody can elaborate axioms), then they must be verifiable as well. The foundation of economics is centered around acting individuals living within the confine of a given society and trying to improve their lot. That's very basic! Look around you and tell me that people do not function in this fashion everyday around you. This is verifiable and you don't need to design a curve to observe this fact.

[@AFRIKTODAY]

@axe863 What do you define as "scientific method"? Praxeological logic is the best method for economic analysis! End of story! Positivism fits very well with physics but not with rational acting individuals. To every science its methodology! Positivism became a cult in the early 20th century and has destroyed countless of social science by it focus on "matter" rather than acting individuals within a define environment. You got to apply to each given science its APPROPRIATE METHODOLOGY!

[@zsylvana]

@Questfortruth86 7) In other words, Hayek came to see that perfect information and foresight were necessary to explain the convergence back to an equilibrium state as the upswing turned to a bust. The existence of subjective expectations in the real world and the non-existence of equilibrium states are severe stumbling blocks to Hayek’s theory.

[@zsylvana]

@Questfortruth86 5) What appears to me to be the most important form of ABCT: the form postulating distortions in the capital goods sector (for a good summary of this form of ABCT, see Garrison 1997: 23-27), and how this simply cannot be invoked as a serious or fundamental explanation of the US housing boom in the 2000s and financial crisis of 2008.

[@zsylvana]

1) As austerity policies roll out across the Western world, markets await the next shock and central bankers’ moves command the headlines, thoughts naturally turn to comparisons with the last great global meltdown. Liaquat Ahamed’s blockbuster, Lords of Finance, is undoubtedly the most engaging narrative of the run-up to the 1929 Crash to have appeared in recent years.

[@zsylvana]

2) As per Milton Friedman’s and Anna Schwartz’s account of the period in their Monetary History of the United States (1963), monetary policy is the crucial determinant: problems of international capitalist production remain distant from the action. And as in Eichengreen, again, the dysfunctional inter-war gold standard plays a central role.

[@zsylvana]

2a) The elements that Ahamed synthesizes here are not especially novel. Like Peter Temin, in Lessons from the Great Depression (1989), and Barry Eichengreen, in Golden Fetters (1992), Ahamed traces the disequilibria of the 1920s and 30s back to the First World War.

[@DesecrateConformity]

The ABCT is nothing more than mysticism, seeing as there never seems to be a mechanical analysis, just observations (and poor observations at that- if it's cyclical, why do the recessions get more severe each cycle?).

[@zsylvana]

3) ABCT in the form examined above with its emphasis on malinvestments in the real capital goods sector is not an even remotely relevant explanation of 2000s boom and bust, and the 2008 global financial crisis.

[@DesecrateConformity]

@adulby (cont.) as the augmentation of debt and credit are suburb ways to make up for demand in order to absorb idle capacity. This gets prgreeively worse each cycle.

[@LestatDK]

As Dr Albert Bartlett says : Sustainable growth is an oxymoron. An exponential function as growth can't be sustained in a finite world with finite resources !

[@daveyg07]

This was by far the best macro class I have ever had. Garrison does a fantastic job explaining how Keynes is wrong and why the Austrians are right.

[@dudeman209]

My justification is that I simply don't know these things. I'm not defining emotions and feelings; I'm saying that I don't agree with your definitions. The whole idea of rationalism really doesn't make sense--it only makes sense if everyone has the exact same view of the future. I, unlike most people, start from what I don't know and work from there. Most of the world can't be understood, it's impossible to know everything and have all the answers. It's very simple when you think about it.

[@dudeman209]

"Proof w/o examples is a rationalist floating abstraction" No, it's basic logic. There is such thing as disproof by counterexample and proof by contradiction, but proof by example really is just senseless garbage. Proof is just an argument from a hypothesis to a conclusion--that's it, not some garbage about ideas and concretes. Please don't reference me to writers and playwrights(like Ayn Rand). I could reference you to Shakespeare and the Bible. As far as I'm concerned, it's all garbage.

[@TeaParty1776]

You are intellectually lost inside the impossible primacy of consciousness (subjectivism and/or mysticism). Proof w/o examples is a rationalist floating abstraction. Proof logically relates ideas to concretes. Definition identifies logical groups of concretes. Existence is metaphysically primary. Everything is related to everything else, thus everything is measurable. Reason identifies and integrates our perceptions of concretes. See Intro Objectivist Epistemology, Ayn Rand.

[@dudeman209]

You can't really use observations to define things that are immeasurable. Man doesn't choose reason; reason itself is subjective. I don't believe there is such thing as rationality, to talk about people being rational sounds to me like insanity. You're trying to talk about things that can't be defined or even put into words. It just doesn't make any sense to do so. Also, there's no such thing as a proof by example, so examples are irrelevant.

[@TeaParty1776]

My examples are of the theories in my post. Your comment about emotions has no evidence. Man's volitional/conceptual consciousness is the context. Definition is of basic similarities and differences of observations. Interdependence doesnt invalidate definition. My systematic context is the inductions of philosophical psychology and man's volitional/conceptual consciousness, not formal deductive logic. Man chooses to reason or evade and, from that, the rest of psychology.

[@dudeman209]

You're using examples to try and prove your point, but there's no such thing as a proof by example. I don't think emotions are just feelings of what we value. Also, I don't think ideas are only chosen by the reasoning we do/evade. I think there's more than that. I think you're losing sight of the fact that all of these things are interdepenedent on one another, so you can't use each one to define the other; the best way to deal with it is systemically, not the use of formal logic.

[@TeaParty1776]

As a general concept, the liquidity trap is legitimate in the sense that we are currently in a situation in which, despite the extreme provision of liquidity on the part of the Federal Reserve, there has not been a substantial increase in real private investment....the only permanent solution to existing malinvestment is to allow its liquidation and the readaptation of the structure of production. mises.org/daily/4578 Searching for ideas on the web is practical.

[@TeaParty1776]

Your mysticism is noted. Emotions are feelings that you value or disvalue something. Thats possible only if you know & evaluate the thing. Man has free will & no innate ideas. Ideas are chosen by the reasoning you do or evade. Then they are evaluated. You see what you know is a Ferrari. You like sports cars. You feel pleasurable excitement. Mysticism, w/its mind/body split, says ideas are revelations from the supernatural & emotions are bodily w/no value significance & no base in knowledge.

[@TeaParty1776]

The material things we daily use are almost always products of mind: pen, shaver, plate, shirt, etc. Man is a mind/body unity. Emotions are responses to values. Values are the product of the reasoning one has done or evaded. Romantic love is your sense-of-life response to the sense-of-life of another person in a sexual context. Sense-of-life, one's subconscious response to existence as a whole, is basically (not wholly) a product of the extent to one's mind guides one's daily choices.

[@dudeman209]

Almost everything we use is reason? Really? When you fall in love with someone, is that based on reason or is that based on emotion? You can't seriously be saying this. We humans are emotional, not "rational" in any sense. Everyone has different tastes, different goals, and want different things; what's rational to one person is irrational to another. To use rationality as a basis for everything is completely flawed.

[@dudeman209]

There's really no sense in talking about people behaving rationally or having a "rationally systematic thinking". All of that stuff goes out the window when you start dealing with the fact that we make decisions today about our views of the future--which are extremely liable to change. What needs to be done is to create a world that is robust to human error and actually benefits from error, mistakes, unpredictability, and uncertainty. Not to create some sort of a "rational" system.

[@dudeman209]

I'm right there with you that we need a new monetary system; so I don't know why you're bringing up the Fed when I basically agree. I'd also like to see investment banks be limited partnerships again, separating investment banking from retail banking, reducing leverage across the board, maybe even an elimination of fractional reserve banking for commercial banks. Even the institution of full reserve banking would be a regulation on the financial sector.

[@TeaParty1776]

Scholarship is the delight in having caught a worm-Nietzsche Apparently, youre right. My new research contradicts a memory. Ironically, Keynes attacked ideas only implicit in math economics, my main point. Some economists agree. The online views I recently studied say the GT has some math, not, as you claim, no math. Judging often requires reliance on experts since omniscience is impossible. There's always more to know. You evade evidence for my alleged inability to attack ideas.

[@dudeman209]

The part where financial deregulation really started to get out of hand was in the 1980s with Ronald Reagan. When investment banks were allowed to be public companies rather than limited partnerships, that really screwed up the incentives along with the removal of Glass-Steagall and the financial innovations of securitization and the development of OTC derivatives. What we need isn't more rules, we need skin in the game.

[@dudeman209]

Go and read The General Theory for yourself and then tell me how much math is actually in it. Although Keynes was very well versed in mathematics(he did as much work in probability theory as he did in economics), his economic ideas use no math. When you attack someone without reading what they wrote, that's intellectual dishonesty at its worst. Also, there's a way to attack someone's ideas rather than attacking them--which you clearly don't understand.

[@TeaParty1776]

Marx's stupidity about capitalism, inc/comparing it to the Garden of Eden, is alive and well. Most business don't profit in the long run but those few which do made your clothes, food, transportation, medicine, home, communications, etc. Is anything less than quickie nirvana politically correct? It must be demoralizing to surrender independent judgment for social approval & then to meet or learn about people whose livestyle is independence. Its enough to inspire rage against the machine.

[@TeaParty1776]

Youre a sleazily dishonest Pragmatist, dropping the context of the finance industry as the most regulated industry, as if arbitrarily selected, arranged & interpreted & out-of-context concretes is reasoning. You fail in defrauding me to judge business independently of the presence or absence of necessarily destructive govt controls. Mind creates wealth. Force, your god, destroys it. Where is the prosperity in pre-capitalist, statist economies or socialism?

[@TeaParty1776]

I posted quotes from Keynes & a Keynes critic. Did you see both? You previously said K's GT had little math. Now you say it had none. Austrians say it hides previously refuted ideas inside math. "Name calling" is the Pragmatist & empiricist word for theory as distinct from a chaos of concretes, ie, the pre-scientific, primitive mentality. Id rather discuss ideas than play intellectual snob, as amusing as that can be. Either one understands reality or not. There's no 3rd alternative.

[@dudeman209]

That quote wasn't from Keynes, it was someone else's interpretation of Keynes. By the way, I know the paper you're referring to(The End of Laissez-Faire); I've read it along with most other papers. However, you're attacking someone without having read them. Take what you were saying about The General Theory being mathematical, it's completely false. When I pointed this out, you resorted to name calling and personal attacks. Just let that sit in your head for a second.

[@dudeman209]

No, they don't. You act like this is the first time a financial crisis has every occurred. Mortgage originators, the creators of ABS, those involved in many financial transactions, corporate executives, etc are all paid to take on short term risk; they are NOT paid to do their company well. There were people that were purposefully selling pension funds garbage MBSs for their own profit, but it wasn't persecuted as fraud.

[@TeaParty1776]

Mortgage buyers, like all buyers, are motivated to judge purchases, motivating sellers to offer good loans. Govt funded, forced, motivated and defrauded the housing and housing mortgage mkt. This is common knowledge, thus youre a bootlicking fascist liar, an apologist for govt rights-violation. Agency is part of life. You evade the massive prosperity of capitalism, implying it doesnt exist. Youre using a computer, the product of vast, widespread wealth. But its impossible, acc/to statists.

[@TeaParty1776]

...avarice is a vice...usury is a misdemeanour...love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin. KEYNES

[@TeaParty1776]

"Keynes agreed with Marx (and Jesus) that capitalism--necessarily grounded in the desire for money and the competitive workings of self-interest in the market--is a "disgusting" system, characterized by motives unworthy of human beings. Christianity, and later Marxism, were right to believe that "avarice is a vice, that the exaction of usury is a misdemeanor, and the love of money is detestable." [from an online review of Keynes' online, "Economic possibilities for our grandchildren."]

[@dudeman209]

"Keynes was explicit in his hatred of capitalism" This is blatantly not true. Keynes just believed that capitalism had some flaws. That it wouldn't provide full employment(meaning unused resources and below full production), it wouldn't deal with income inequality, and the agency problem(I think the biggest flaw of capitalism). By the way, Keynes actually spends an entire chapter in The General Theroy talking about unintended consequences of government intervention.

[@TeaParty1776]

Keynes wanted social control. See your 2nd sentence. Without govt force, Keynes has nothing. There is no objective justification for state control of production, whether small or large. Your claim that Keynes was a capitalist contradicts your statement that he wanted deficit financing. And Keynes was explicit in his hatred of capitalism and how certain wise people should forcibly run the economy for a non-selfish purpose.

[@dudeman209]

By the way, Keynes never wanted social control over production. His idea was to run surpluses in the boom to finance deficits when you have recessions/depressions. Keynes' ideas were taken way too far to lengths that he never would have liked (both Hayek and Friedman say the same things by the way). Before you criticize what someone said, you really should read what they actually said. Keynes was actually a capitalist and absolutely despised Marxism(wrote a paper about it too).

[@dudeman209]

By the way, I agree with you that we need a new monetary system. I also think we have to seriously consider eliminating fractional reserve banking As for regulation of finance, I'm not in favor of complex regulation; what I want is skin in the game. I want a simple, easy to understand system. Unfortunately, when it comes to an issue like securitization, the only way to really get the desired result of skin in the game is via regulation. I would like to simplify the regulatory code though.

[@TeaParty1776]

>The downturn in the economy is not a result of consumer desires not being satisfied, Yes, my demand for a mansion, a yacht, a string of polo ponies and a mink-wearing mistress has not been satisfied. As the economic consultants, the Rolling Stones, sang, "I can't get no satisfaction." Your economic wisdom is appreciated. As Bogie said of Edward G. Robinson in "Key Largo," "What does he want? He wants more!" I bet that youre a university graduate. Wow!

[@TeaParty1776]

>inflation adjusted minimum wage is as low as it's been in a very long time. Note the evasion of causality for correlation (coincidence). Min wage is theft from employers, necessarily causing unemployment. Concrete reality, including economies, is a chaos of correlations to babies, drug addicts, primitives, the insane & empiricists (who dont know which correlations are important). >explains these economic processes Not w/correlation.

[@dudeman209]

Say's law is complete garbage by the way. There's a very simple way to show this. One direct consequence of Say's Law is that it's never rational for a businessman to hold cash, which makes no sense. For example, if I run a firm that trades illiquid assets, I always want to hold cash because the costs of me becoming liquid is very expensive. Actually, there were various funds and businesses that went bust in 2008 purely because there were runs on the firm due to a lack of cash.

[@dudeman209]

2 doesn't say that at all. Do you know the kinds of stuff that was actually going on in the financial sector? Do you not understand the moral hazard risks of not putting restrictions on securitization of loans? This isn't the first time financial innovation has created problems. By the way, you haven't read a lick of Keynes. Keynes HATED Communism and Marxist Socialism; he despised them. Before you criticize someone, shouldn't you read what they say?

[@Timofmars]

All spending is someone's income. That's includes govt. spending. Cutting taxes in itself does increase demand. But cutting spending to pay for it reduces incomes by the same amount. It's the same as business competing for the same consumer demand. It doesn't create greater overall demand and employment. However, cutting taxes via deficit spending, financed by new Fed money, does create overall greater demand, greater employment, and greater output. That IS increased value.

[@dudeman209]

Not true. Our crisis was created by a credit boom that started in the 1980s. It was primarily fed by 3 factors: 1. Greenspan's easy money 2. Deregulation of financial sector 3. Bailouts of the financial sector going back to the 1980s Keynes hated unnecessary complexity and never supported bailouts; he understood the importance of having a financial system that works. Keynes actually also spoke about investment booms that "carry within them the seeds of their own destruction" too.

[@Timofmars]

Another problem is that for new businesses to cause greater demand to match the supply they bring, they would need to offer something that causes people to spend more without spending less on something else. That means a business that competes for people's disposable income without increasing their disposable income does not create greater demand overall. So unless the business caters to wealthy people with a new non-substitute good, you'd only benefit temporarily from extra wages (aka stimulus)

[@Timofmars]

Regarding regulatory requirements, let's say they are a disincentive. But how much? It's apparently nothing compared to profit potential, since there are a very large amount of businesses opening and failing, or operating at a low profit level. There's another problem with the theory. Businesses are closing because of lack of business, not because they suddenly felt regulations were too cumbersome (and it's global too). And when demand is high, business spring up to capture the demand.

[@Timofmars]

The inflation adjusted minimum wage is as low as it's been in a very long time. There's also high unemployment in many different countries, and there's no correlation between that and their various minimum wage rates or lack thereof. Same for their average wage levels. It's not that I won't entertain conspiracies. It's that I know the perfectly legitimate reasoning that explains these economic processes. But why you must be hyperbolic and adversarial is another question. It's the Austrian way?

[@Timofmars]

The downturn in the economy is not a result of consumer desires not being satisfied, as if businesses just aren't producing the correct goods and services. It's an overall drop in demand. Policies that increase demand will still cause consumers to demand the things they want, not cause them to purchase things they don't desire. Useless investments (things people don't want) still fail just fine.

[@Timofmars]

Profits of the Fed are remitted back to the US government. The Fed isn't benefiting from having more money issued. Also, this isn't any type of "stolen value". Having more people working and creating wealth is an increase in total value. There isn't winners and losers unless you're assuming full employment and full output already, in which more money would actually only cause inflation in the form of more money chasing the same number of goods. But that's not the case by any means now.

[@TeaParty1776]

So you think that govt counterfeiting of money and credit doesnt shift resources away from the most productive investments? Depressions increase because govt countereits more in an absurd attempt to maintain unsustainable investments. ABCT is a valid induction from conceptualized concretes (regardless of Mise's false rationalism). Austrians were the only economists with a systematic prediction of the current depression. Mechanical analysis? Man is not a machine. Man has purposes and choices.

[@dudeman209]

There was too much debt taken out that was used for unproductive purposes and that debt didn't have an income stream to pay it back. Now, it's time for the day of reckoning. The debts have to either be serviced or wiped out. Rather than using debt to finance the creation of capital and the formation of capital assets. Debt was used to finance speculation in financial assets which do not increase the productive capacity of an economy. We are actually poorer.

[@dudeman209]

That's because in a modern economy, there are multiple types of cycles. There's the common business cycles that come usually because central banks try to kill price inflation. Then, there's the debt cycle where debt/income ratios get far too out of line and need to correct. That's what's occurring now where all countries have to undergo decreases in standards of living as debts are wiped out(either by liquidation, by some sort of a jubilee, or in real terms by inflation).

[@dudeman209]

Also, IS/LM was not Keynes's model, it was developed by Hicks and Hicks later admitted that it was a bad interpretation of Keynes. There's a good paper that Keynes wrote called The General Theory of Unemployment. It's about 15 pages long and was written in 1937 after The General Theory. Take a look at that paper and tell me that IS/LM is Keynes's model. If you want a better interpretation of Keynes, a good book to look at is John Maynard Keynes by Hyman Minsky.

[@dudeman209]

I hear a lot of people bashing Keynes about his theories. To be fair, Keynes understood the role of the financial sector in facilitating the role of capital. He also understood that if it didn't do a good job, the country wouldn't end up too well. "When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done"--J.M. Keynes Note: What is commonly interpreted as Keynes is actually what was developed Hicks.

[@adulby]

I understand why you think it is mysticism, it is in a way. It is mystical because the equilibrium of time preference and credit can never really be reached or what we call the ERE. The cyclical nature is not an Austrian assertion. Most schools of thought use business cycles. We believe the cyclical nature is skewed by monetary expansion. Since there has been a great deal more expansion in the last few decades, it has created deeper and more frequent crises as you stated. Thanks for commenting.

[@Timofmars]

Selling a stock that is expected to fall further simple because others are expected to sell it is perfectly rational. Just like taking your money out of a bank is a rational if everyone else is trying to do the same and creating a run on the bank. Just like cutting your spending because you fear for your job security. All rational. But they can also make the fear become a reality. If everyone stops buying because they fear for their jobs, they'll all lose their jobs. It's a market failure.

[@Timofmars]

That's not quite right. Say we have $10 and can produce 10 apples a week. But only 5 are being bought per week because people aren't spending as quickly (low velocity of money, $5 spent per week). We can increase the money supply to promote greater activity and reach 10 apples bought per week. The price is still the same. $10 out of $20 of money supply spent per week is the same as $10 out of $10 being spent per week. Inflation only occurs if spending exceeds the apple production capacity.

[@Timofmars]

We must not be on the same page here. Our buying from each other isn't exchanging favors any more than buying from someone else is. It's just plain old purchasing of goods and services. When I buy your apples, you get my money. It's your income. You can buy from me with it. Now it's my income too. We can work all day exchanging that $5 again and again, and the more we do, the more our daily incomes are increase, as well as our production of wealth. It's the same if we buy from other instead.

[@Timofmars]

The prices of material and equipment are still governed by wages. But I won't go into it, because I doubt this would be the big mechanism by which lower demand results in investments being significantly more attractive. That's be a weak thing to rest your argument on. Regarding people putting money in the bank and how it affect interest rates... I see no argument being made there. Yes, loanable funds and investment demand determine interest rates. Loanable funds from the Fed are no different.

[@Timofmars]

It doesn't really matter if we're getting our own raw materials or buying from someone else. Introducing more participants in the economy just makes it more complex, but doesn't change the fundamentals. Our buying of raw materials from someone else increases their business, encouraging them to expand rather than contract. And in a round-about law-of-averages type way, they'll be spending their increased income in the economy, buying some of our apples with it, etc.