I’ll be giving a lunchtime talk in Wheeling, West Virginia, this Monday sponsored by West Liberty University (formerly West Liberty State College) on the causes of our economic troubles. Details here.
A few days in advance of the talk I made a brief appearance on the Howard Monroe Show, based out of West Virginia. The host is courteous but not inclined to accept a free-market account, and yet by the end he’s clearly giving some thought to our point of view.
I’ll be adding more dates to my schedule in the coming weeks, including a talk in Cincinnati the last weekend in August.
{ 26 comments }
Keep on, keeping on…
I just saw the Mises Media post of one of your Meltdown tour spots. Amazing. You were entertaining and genial while getting your point across with depth and clarity.
Have you received questions on ‘rational expectations and the Fed’, or on anything designed to stump the expert?
Thanks again Dr. Woods.
I’ve received almost no hostile questions, even at Boulder. One person asked about rational expectations, but I think I answered him pretty well.
Have you thought about going on Econtalk?
Dr. Woods,
Come to think of it, it is I who wants to grasp the issue concerning the Fed and rational expectations better (but not to stump the expert).
Is it that Fed manipulations of money supply create asymmetry that necessarily
A. lowers the ability of market actors to discern a realistic interest rate, or
B. makes impossible for market actors to get a realistic interest rate?
If it were law that, say, over the next twenty years the Fed would inflate 3% a year and everyone knew it- would it eliminate the business cycle (but not the hidden taxation and other heinous events)?
Thanks for what you are doing.
Dan Fallon
B. If people could predict the interest rate it’d be ineffective in achieving the goal Keynesians have for it. It – like any other price – must reflect the actual state of savings or it *will* cause malinvestments if the money is borrowed.
Fallon,
Business cycles occur because interest rates effect the profitability of producing capital and durable goods like machinery, factories, housing, vehicles, etc. since lower interest rates mean two things:
1. Capital goods that have a low rate of return can become profitable with lower interest rates. For example, a capital good that has about a 3% rate of return becomes profitable at a 2.5% interest rate vs. 4% interest rate.
2. Consumers and entrepreneurs can borrow more at low interest rates in order to purchase capital and durable goods.
The rational expectations critique of ABCT would only refute ABCT if and only if entrepreneurs and consumers would know the true rate of interest after credit expansion. The fact of the matter is, however, that rational economic agents are not omniscient. Consumers and entrepreneurs cannot determine what the true interest rate should be after credit expansion. There is no way to determine true demand and supply of savings while credit expansion occurs; that is the function of prices, which have been distorted in this case.
Mises.org rocks. Thanks Inquisitor and AJ for the clarification. I am beginning to see the whole picture, from the Fed’s structure, to its mechanisms and effects. It definitely needs to be abolished.
-Dan
I am surprised that anyone thinks that a Central Bank is either necessary or desirable: indeed Hong Kong has never had one, and a Monetary Authority supervises credit creation by credit intermediaries instead.
In fact, there is no need for credit intermediaries aka banks either, since credit could be created directly by Treasuries as required. Indeed, that is (more or less) what Colonel Douglas’ Social Credit was about, and the Alberta Treasury Branches which were a legacy of the flirtation with Social Credit still exist to this day (albeit now indistinguishable from conventional banks).
It would be quite possible to create a system of decentralised Treasury Branches, with credit creation managed by Service-Providers-Formerly-Known-As-Banks, all within parameters set by a Monetary Authority.
Such credit would be interest-free (since credit has no cost at the time of creation) but subject to provisions made by sellers and buyers on credit terms into a default pool, together with a service charge, which combine (plus the monopoly rent extracted by bank shareholders) to give the “cost” of credit we think of as “interest”, and which bears no relation whatever to the arbitrary interest rate imposed by Central Banks.
If one were to go the whole hog, it is possible (indeed trade credit is normal) for sellers to extend credit to buyers directly, subject to a mutual guarantee, and again with provisions made by sellers and buyers into a pool, and managed by service providers.
Such direct “Peer to Peer” credit creation is IMHO a logical consequence of the internet. Credit intermediaries, whether Banks or Treasuries, are obsolete.
Chris,
No offense to you, but your plan is even dumber then the system we have now.
Your proposal abandons the pricing system which naturally rations the scarcity of credit. Which, by the way, should be treated as a scarce resource when inflation is not added to the equation. I am making a big assumption in hoping I don’t need to explain the consequences of inflation to you.
You have proposed something which encourages crony business where lobbying, inside deals, special interest and other forms of crooked deals would flourish.
Allow me to respond for you since I already imagine what you will say.
“But we will have strict governmental oversite, restrictions, and regulations monitored on all levels!”
Your failure is to recognize that this system, which left on it’s own would fail, would have to be pushed by force via the state. Your using the state to cause a bad program, then using the state to regulate the flaws of the bad program, instead of scrapping the program all together.
Removing the problem of inflation using a 100% FRB system or commodity based standard you return scarcity to the world of credit and all of our credit woes magically disappear over night. Credit’s price will be displayed naturally and justly on the market via interest rates. The price will float with supply and demand. Only those who can afford the interest rates will make the investment, the rest will have to save their money. Which is what they should do any ways. The very idea that everyone is entitled to credit is completely stupid, fiscally irresponsible on a social level, and mechanically broken on a systematic level, and an entire moral hazard in the long run.
Many of these proposed social plans, as you present, by default are designed to fail. Instead of steering clear of them however we implement them by force in government. Than instead of recognizing the plan was stupid from the getgo we just toss more fuel on top of the fire.
It will be nice when you can see objectively that a world without scarcity is a fairy-tail. These socialized programs are the cause of the problems, not the solution. My recomendation to you is to start reading heavily some of the literature on this site. Thanks!
P.S. My post may seem harsh but it is not directed to you as a personal attack or on your integrity. Obviously your a nice guy and your intentions are well meant. I don’t think your stupid by any means either. You just come across as not aware when you make the comments you made on this site, perhaps not fully aware of what Austrian Economists believe. Thanks man.
Justin: that’s a good point about EconTalk. The best way I think would be to bombard Russ Roberts with that request: mail@econtalk.org
Fallon,
There are a number of possible responses.
First, the “old” (conventional) Mises analysis was (basically) your (a). Market actors are “misled” by artificially low interest rates. If it was (b) they may realize they have no way of knowing what the “true” interest rate was and therefore not invest at all. So it has to be (a) for the theory to work.
A more subtle point is that it may not matter. We are talking about a monopoly currency here. So if the central bank is inflating and you are profit driven you “rationally” want to invest where you think the “bubble” is going to develop – and then get out quick. Participation in “bubbles” can therefore be “rational” in a monopoly currency environment because you think to yourself “if I don’t participate in the bubble, then I lose out to inflation. If I do, at least I have a chance of selling my asset (house, dot.com stock, whatever) to the next sucker. It is rational for me to participate when there is no legal escape because gold is no longer legal tender.”
I hope this helps.
Fallon,
Just to add a few comments:
There are a number of possible responses.
First, the “old” (conventional) Mises analysis was (basically) your (a). Market actors are “misled” by artificially low interest rates. If it was (b) they may realize they have no way of knowing what the “true” interest rate was and therefore not invest at all. So it has to be (a) for the theory to work.
A more subtle point is that it may not matter. We are talking about a monopoly currency here. So if the central bank is inflating and you are profit driven you “rationally” want to invest where you think the “bubble” is going to develop – and then get out quick. Participation in “bubbles” can therefore be “rational” in a monopoly currency environment because you think to yourself “if I don’t participate in the bubble, then I lose out to inflation. If I do, at least I have a chance of selling my asset (house, dot.com stock, whatever) to the next sucker. It is rational for me to participate when there is no legal escape because gold is no longer legal tender.”
I hope this helps.
Fallon,
Just to add a few comments:
There are a number of possible responses.
First, the “old” (conventional) Mises analysis was (basically) your (a). Market actors are “misled” by artificially low interest rates. If it was (b) they may realize they have no way of knowing what the “true” interest rate was and therefore not invest at all. So it has to be (a) for the theory to work.
A more subtle point is that it may not matter. We are talking about a monopoly currency here. So if the central bank is inflating and you are profit driven you “rationally” want to invest where you think the “bubble” is going to develop – and then get out quick. Participation in “bubbles” can therefore be “rational” in a monopoly currency environment because you think to yourself “if I don’t participate in the bubble, then I lose out to inflation. If I do, at least I have a chance of selling my asset (house, dot.com stock, whatever) to the next sucker. It is rational for me to participate when there is no legal escape because gold is no longer legal tender.”
I hope this helps.
Fallon,
Just to add a few comments:
There are a number of possible responses.
First, the “old” (conventional) Mises analysis was (basically) your (a). Market actors are “misled” by artificially low interest rates. If it was (b) they may realize they have no way of knowing what the “true” interest rate was and therefore not invest at all. So it has to be (a) for the theory to work.
A more subtle point is that it may not matter. We are talking about a monopoly currency here. So if the central bank is inflating and you are profit driven you “rationally” want to invest where you think the “bubble” is going to develop – and then get out quick. Participation in “bubbles” can therefore be “rational” in a monopoly currency environment because you think to yourself “if I don’t participate in the bubble, then I lose out to inflation. If I do, at least I have a chance of selling my asset (house, dot.com stock, whatever) to the next sucker. It is rational for me to participate when there is no legal escape because gold is no longer legal tender.”
I hope this helps.
Fallon,
Just to add a few comments:
There are a number of possible responses.
First, the “old” (conventional) Mises analysis was (basically) your (a). Market actors are “misled” by artificially low interest rates. If it was (b) they may realize they have no way of knowing what the “true” interest rate was and therefore not invest at all. So it has to be (a) for the theory to work.
A more subtle point is that it may not matter. We are talking about a monopoly currency here. So if the central bank is inflating and you are profit driven you “rationally” want to invest where you think the “bubble” is going to develop – and then get out quick. Participation in “bubbles” can therefore be “rational” in a monopoly currency environment because you think to yourself “if I don’t participate in the bubble, then I lose out to inflation. If I do, at least I have a chance of selling my asset (house, dot.com stock, whatever) to the next sucker. It is rational for me to participate when there is no legal escape because gold is no longer legal tender.”
I hope this helps.
Tom,
Thank you so much for planning to speak in Cincinnati. I will do my best to round up as many of my friends as possible to attend. I openly carry your book around with me and whenever anyone asks, “what are you reading?”, I loan the book to them to read.
Please do not report me to the IP police for illegally sharing books.
If there is anything I can do to help promote your talk please let me know.
@Fallon
I think there is also an element of the Prisoner’s Dilemma present in the ABCT.
Suppose that everyone did know the correct interest rate, that accurately reflects the supply of savings and demand to borrow it, via rational expectations and chose to make their plans based on the correct interest rate. At the lower, manipulated interest rate they borrow the amount they would have borrowed if the interest rate were its higher, nonmanipulated rate.
Even given the impossible situation where everyone knows the correct interest rate, from an individual perspective it is rational to “defect,” to borrow more and bid resources away from those who are trying to use the nonmanipulated rate. The problem being, as in the Prisoner’s Dilemma, is that since the rational thing to do is defect, everyone will “defect” and borrow more money and make a larger investment. Here we can also point out the advantage gained from “getting the new money first.” In inflation/credit expansion those who are the original recipients of the new funds gain at the expense of those who receive it later after it has changed hands and affected prices.
Fallon: “If it were law that, say, over the next twenty years the Fed would inflate 3% a year and everyone knew it- would it eliminate the business cycle (but not the hidden taxation and other heinous events)?â€
Just to add to what others have written, no it wouldn’t. We saw something similar during the 1920′s and 1990′s. Price inflation was steady at a low rate, but disaster happened both times anyway. The reason was that productivity increases had created so many new goods that prices should have been falling. In other words, productivity increases masked the effects of inflation.
For Hayek’s perspective, an artificial lowering of interest rates changes the nominal prices of goods/services. First it makes capital goods more expensive relative to consumer goods than before, so more investment goes into capital goods.
However, very soon that process causes the prices of consumer goods to soar and hence the profit in their production, which draws investment (and jobs) away from the capital goods sector. This swing from capital goods back to consumer goods is the business cycle.
Greetings, Mr. woods
Keep up the good fight Ive seen you on youtube, heard you on the Alex Jones talk show and now I am proud to say I’ve now seen you here as well. I can’t wait to get a copy of your book meltdown. I am probibly not your average follower because I am a union worker. I am drawn to the life style of the free market, freedom, no taxes and such. problem is the way the american economy has been designed I could never attempt to own a business in this unfriendly atmosphere, we currently are experiencing. Being a working class citizen I have come to the realization that either we have a free market and free the slaves of debt and labor,or we have an economy that favors the rich and powerful oilagarky. Gone is the days when the worker became the owner after he put his time in. between taxes and rising inflation, Mr. Obama is determined to evicerate all hope in the constitution and the american dream, and turn all who dont work to eek out a living being a tattle tail squad leader or something. In closing I would like to thank you for being in the cornner of me and my family and other like us. also for the people who dont understand that voting your self money is highly dangerious. Especialy if interest is compounded with no real economy of exports. I feel its my duty to fight for 2 things to change with this country. One is we need to teach our children at an early age that the constitution is just as important as math or english. Secondly we need to teach our children how a sound ecconomy works from 1st grade to 12th grade and beond. These 2 steps will ensure that our forefathers didnt die in vain.
Re flic
Ever wonder why to rent an apartment you need credit in the last 8-10 years? I know that 600.00 week income wont buy me squat except a place to rent , a used car with liability to get to work and food -n- lights. Ive learned the hard way that 30% apr is totaly unfair to someone who has to have credit just to rent a lousey apartment, that dosent even give any credit score adjustment for payin\g on time like morgages do. Once again the working class schlep gets the short end of the stick in this country. Its unfortunate that this country gives more to foriengers that to its own tax paying people. a good example is my nabor next door he came from saudi arabia to go to dental school here. That whouldnt bother me at all except he gets a 5k stypen to live here with his family while I make 30 k a year with a wife and 2 kids and my wife has to take loans out. This gross abuse of our system turns my stomach and makes me want to take the 6 thousand a yr in taxes and use them to pay for her schooling insted of helping out source our free educational system, and all the street lights left on past 12 am. talk about a top down system. guess we will wait and see if HR 1207 works or just buys the NWO more time b4 revolution happens.
“I’ve received almost no hostile questions, even at Boulder.”
Haha! Yes… EVEN Boulder!
As a resident of Boulder, I enjoyed that. I know exactly what you mean. Try joining the local Marxist study group, you’ll get some hostile questions there.
I joined the group just for kicks, as a nice learning experience. I’ll be recording all the sessions (talks, debates, etc.) cropping the good parts, and putting them on a blog here w/ commentary.
For anyone who has not heard the thoughts and arguments straight from the mouth of a true believer, this shall serve as an elucidating resource of Marxist rhetoric.
So how successful would y’all say ABCT has been at becoming part of the mix of free information (http://tinyurl.com/nd3clu)?
Thanks ABOM,Phil and Fundamentalist. Much education happening here.
It is no wonder why Mises insisted on using the Evenly Rotating Economy as a deductive tool for ascertaining the effects of interventions. A natural interest rate would only be known in that perfect world.
It seems that the existence of the Fed, in fiat currency, alone, is a market displacement that leads to calculation problems, messing up of accounting sheets and distorting the profit/loss compass. Since the Fed has been doing its manipulations for almost a century, building one interest rate illusion on another, can it be properly said that only by praxeological deduction can its injustice be brought out?
Booms and depressions are each unique in their data. The enormous quantity and complexity of phenomena and lack of constants makes mathematical models of historical cause and effect impossible to build.
No wonder why Keynesians and other quacks find it easy to come up with psychological arble garble in their explanations. They are probably well aware that they are engaging in historicism or exploiting the mass of humanity’s predilection for the metaphysical. Maybe they are just plain wrong.
Thanks for the thoughts on Hayek and bidding swings between capital and consumer goods. It reminds one of a funny cartoon where the protaganist is trying to sleep but is short-sheeted. If he covers his upper body, his toes freeze and vice versa.
The Prisoner’s Dilemma is illuminating- no wonder why Dr. Woods said there is an unspoken agreement between politically connected Wall Streeters, Congress and the Fed. Bailouts transfer the dilemma’s risk onto other victims.
Cheers,
Dan
I wanted to get some feedback on a minor but relevant correction to the Austrian Business Cycle Theory that I am proposing in this article:
http://www.economicsjunkie.com/austrian-economists-need-to-get-their-business-cycle-theory-straight/
When is your next talk planned for?
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