I just came across a letter from a mainstream economics journal from 2003 rejecting my paper “Skyscrapers and Business Cycles.” It reads in part that “this journal focuses upon specification and testing of formal macro and monetary models and does not publish papers like yours in which the theorizing and testing is more casual-descriptive than formal-econometric.”
“Skyscrapers and Business Cycles” was published in the Spring 2005 issue of the Quarterly Journal of Austrian Economics.
As far as I know “Skyscrapers and Business Cycles” is the only model in print in an academic journal that correctly predicted this global economic crisis. The model generated a signal of economic crisis in July of 2007 and the first signs of trouble emerged in November and December of 2007.
I wonder how all those “formal-econometric” models published between 2003 and 2007 did in predicting the crisis.
{ 48 comments }
Mark, GMU economists would tell you that this just means that you aren’t producing genuine, state of the art, “market tested”, and “Republic of Science” certified sound economic science.
Or maybe, just maybe, there is something deeply wrong with GMU philosophy / political economy of science / academia …
Nah, that couldn’t be.
Lots of people are talking about August, 2007 as the key indicator of trouble in the financial system ..
Education and Ethics
Wednesday, July 15, 2009
What Is The Meaning Of Mainstream?
The irony is in the term ‘mainstream.’ Mainstream media has its criteria designed to protect the unConstitutional coup. Mainstream economic literature has its criteria that serve the interventionism of the ego-driven, ultimately tracing its origin to the economic terrorism of the unConstitutional coup.
So what exactly is the definition, in real terms, of mainstream? I am interested in hearing what others think about ‘mainstream.’
Mainstream, to me, is the economic ignorance characteristic of this Dark Age of economics.
Resubmit! See if they accept it now.
in the words of the late great Jacob Cohen (aka Rodney Dangerfield) :
I don’t get no respect!
What is so mainstream about an academic journal full of jargon that nobody reads?
“…yours in which the theorizing and testing is more casual-descriptive than formal-econometric.”
casual, a. & n. Accidental; irregular; undesigned; unmethodical; careless; unconcerned, uninterested;…(The Concise Oxford Dictionary).
Casual or Causal, either way, some serious attitude problem there, I’d say.
Mostly People interested in the crisis of August 2007 Financial issue but your article cannot discuss in the topics.Please discuss it.
Thanks
I remember noticing that article back then… and found it read very much like a (just) prophecy. I had to think about it often since I discovered later Rand’s work “The Fountainhead” which gives flesh to the whole principle of Skyscraper building, with the crisis of the 30ies as actual background …
Her explanations which is not incompatible with that of the paper insisted on that contradiction, in a more romantic way:
Rand brilliantly illustrates how – earnestly, not in the Maddof way – when there’s building of skyscrapers, though it rises from the need of capitalist provocation against a world gone crazy with its social redistribution schemes… corruption is never far away.
Hello Mark Thornton,
This is a response, not just to this most recent entry, but to your article from May about “Austrian Recipe vs. Keynesian Fantasy”. It might seem kinda odd to post a reaction this much later. But, I just want to put this perspective out there, for your consideration. And, it is relevant to the title of “reaching out to the mainstream”, but not to your skycraper article, which I haven’t read. Back when you wrote the “Keynesian Fantasy vs. Austrian Recipe” article, I wanted to respond (very angrily) to it right away, but I had work that needed to be done urgently.
That article is one of the best examples one could find to illustrate both why Mises Institute has so much difficulty being taken seriously (even more difficulty than other think tanks and libertarian organizations, even more than others that also popularize Austrian Economics), and why it can have such a negative effect in the cases where it actually is taken seriously.
Your columns are read by many young, impressionable people. You have a Ph.D. in economics, and have had it for about 20 years. Because of this, your statements are taken even more seriously than those of some of the others whose opinions are posted on mises.org.
Since you posted that article, I’ve encountered a number of cases where a young, impressionable person repeated what was in it, appearing to actually believe what they were saying.
I’ve encountered young folk who read your writings, who jump to conclusions fitting the following description:
1. They find Keynesian macro theories unconvincing
2. They think #1 is a good enough reason to be against mainstream economists, courses and academic programs
3. They think #1 is a good enough reason not to read economics books that aren’t part of the official “Austrian Economics” movement.
4. They think #1 is a good enough reason not to formally study, or prepare to study, economics at the undergraduate or graduate level
5. they think that #1 means they would have to do so in a confrontational or disengaged way if they did.
#1 is fine and defensible, but the others are not even close to being true, and I wish this website mises.org did more to correct them. Not being a Keynesian is very common, very “mainstream”, among mainstream economists.
People who have been around economics departments for any length of time have often heard current macroeconomics classified into “saltwater” and “freshwater” camps. The “saltwater” has some connection to the old, highly dated Keynesian theories, and the “freshwater” is basically not Keynesian. I think it would be good if the people who read this website saw on it more material about the professional “freshwater” (non-Keynesian) macro work done in universities. By “material”, I don’t mean “hate articles”, or articles arming people with the ammunition they need to humiliate themselves while thinking they are better than guys who’ve been doing academic economics professionally for decades. Just normal, well informed and well written articles that just happen to be about freshwater macro.
Many “devotees” of the 2009 Austrian Economics movement are effectively against the “saltwater” camp, via their anti-Krugman “tourette syndrome” reflexes, which is one thing. But they often don’t even know about the existence of the “freshwater” school, which is much more problematic. There are people who read “Austrian Economics” devoted websites for literally *years* and don’t even know basic things listed in a textbook like Mankiw or Colander, which is learned by lots of kids with far less interest, energy and enthusiasm. They would probably not study or take a course on Mankiw’s textbook because that is “mainstream economics”, and they believe that is wrong. Mankiw and Colander contain things that are the result of mathematical modeling, statistical work, and a varying mixture of realistic, quasi-realistic and unrealistic assumptions. The “devotees” believe that stuff is wrong, so they (very understandably and consistently) don’t learn what is in a basic textbook like Mankiw or Colander. And, they end up sounding like idiots, even in cases where they are highly intelligent people. That is why it is so important to clearly, consistently and unequivocally admit that these things and “mainstream economics” are not wrong. Because, only then will it be sensible, rational and consistent for the “devotees” to actually read and accept, if only partially, such a textbook and overcome the situation.
You have a Ph.D. in economics, and have had it for 20 years. By telling people that you haven’t even noticed yet that there is no Keynesian consensus (a fact which is taught to kids taking high school economics), you make it much easier for people to hold the suspicion that Austrian Economists, such as yourself, just don’t know the mathematics and theory needed to actually understand typical economics journals, so, they instead depend on guesses and assumptions. Honestly, I’ve had that suspicion myself at times. And, I won’t name names, but I’ve heard prominent professional economists say, off the record, that they believe that to be the case. (i.e. I’ve heard them say about self-described Austrian Economists things like, “I think it’s because they don’t know the math, I think that’s why they believe that”). It is a suspicion that people involved with economics, who are somehow associated with the Austrian tradition, should feel a need to disprove very convincingly. In my opinion, such people should go out of their way to learn and practice mathematics even more and better than their competition, so they can really prove that this suspicion isn’t the case any time they are confronted with it.
Some mainstream departments, like U Chicago, U Rochester, Carnegie Mellon, U Minnesota et cetera, are known for having an emphasis on “freshwater” macro, and there are many departments where one might find people sympathetic to, or working on, “freshwater” macro ideas.
Recent Nobel Prizes have been given to people doing non-Keynesian macro, such as Robert Lucas, Ed Prescott, and Finn Kydland. Whenever I hear people speculate about who might get the Nobel Prize next, some of the common names are also guys doing non-Keynesian macro, like Robert Barro or Tom Sargent. Highly prestigious econ departments like Harvard and Chicago have given tenured and endowed chair positions to guys who specialized in macro that is not “Keynesian” a la Krugman.
Back when the Obama stimulus package was being discussed, Cato Institute organized their petition against it. That is here:
http://www.cato.org/special/stimulus09/cato_stimulus.pdf
In addition to some self-described Austrians, it includes many people who are definitely mainstream economists, including some Nobel Laureates, and Ed Prescott. And, it would be a huge mistake to assume that 100% of the mainstream economists who opposed the stimulus and/or aren’t Keynesians were willing to put their name on that Cato Institute petition.
In the past year, I took an intermediate mainstream macroeconomics course, based on the fairly common mainstream textbook by Stephen D. Williamson. His textbook is considered “freshwater” leaning. The textbook has a chapter toward the end of the book describing Keynesian theory in a way that is not extremely sympathetic. My professor chose not to assign for reading, or lecture about, that chapter at all. There was literally not a word of Keynesian theory in the course, aside from a few sentences by a T.A. who told his discussion section that he was sympathetic to Keynesian theory, and not to the theory supported in that textbook. Toward the end of the course the professor taught a short introduction to the macro ideas of Edward Prescott, who is definitely not a Keynesian.
When I took an intro to econ course discussing macro, we were told that there was little consensus about macro, and we were told that Keynesian was one of two major schools of thought in macro.
Another thing I find disappointing is that you seem at times to be equating “mainstream economics” with notions that make up at most only a tiny percentage of what is done and thought in the econ departments. Many professors are working on trade theory, industrial organization, taxes, growth, development, history, micro issues, game theory, contract theory, mechanism design, econometrics, labor, and other stuff that has little or nothing to do with any macro school of thought (Keynesian, RBC, freshwater or any other), or with other things I’ve seen you try to equate with “mainstream economics”. Such as, very minor notions about business cycles, macro data, or particular ways of using econometrics, or forecasting notions.
When you made it sound like a single policy idea in Washington D.C., that has nothing to do with what most mainstream economists do for a living, and which many mainstream economists oppose, are neutral, or apathetic about, is a test for “mainstream economics”, it was so astonishing that I honestly wondered whether or not you were serious. I wondered if you were just trying to rally the gullible “devotees” toward some idea, for some reason or maybe just for your own amusement, perhaps to see if they’d believe it.
There are young people who are interested in economics, and got interested in it partly through people whose writings can be found here, like Hazlitt, Mises, Hayek or Rothbard. I could even be counted in that category. Without this website and the AE movement in general, they might end up studying economics formally and in a way that can lead to a professional career involving economics. Because of this website and the AE movement, some of them end up getting steered away from that.
I used to believe that one of the serious goals of Mises Institute was to find people who are sympathetic to ideas discussed here, and help them end up in academia so those ideas will be represented more in academia. Those ideas can include free markets, free trade, libertarianism, economics in general, Austrian tradition ideas, paleo-conservatism or some combination of them et cetera.
Instead, I now see clear, undeniable cases where Mises Institute has a negative effect, relative to that goal. People who would have done undergraduate or graduate degrees in economics are drawn away from that. Typically these are people who already had libertarian or free market leanings without Mises Institute. In those cases, the future pool of graduate students, tenure track professors and tenured professors then becomes just a little bit less free market, less libertarian, less Austrian et cetera compared to what probably would have happened if Mises Institute didn’t exist.
I would urge your organization to think more strategically and systematically about the message you send, the statements you make, and the effect you have on people. The first time I ever heard you give a lecture, I was firmly under the impression that the people in your organization wanted there to be more kids like me in the universities. If that still is a goal of Mises Institute, then I question the vision of whoever is directing the strategy and intellectual direction here.
In particular, the goal some have of doing economics in academia without mathematics, statistics and/or econometrics is one that I think you guys ought to give up on entirely. A large scale shift in this direction among high tier academic departments won’t happen anytime soon. Too much work using mathematics, of real value, has been done and is in the journals and textbooks, entrenched. Sticking your head in the sand and denying that the people who use mathematics have achieved and learned anything has not made it true and never will. I think a full reversal of the mathematization of academic economics might be unachievable, and probably has been unachievable since the 1970′s or earlier. Clinging to that dream is one thing that is crippling your organization’s ability to achieve things that actually are realistic. Such as: being an information resource and archive for the free market, libertarian, paleoconservative and Austrian traditions that is also taken seriously in academia. Other than, of course, in the Austrianism portion of GMU’s econ department and a few other pockets here and there.
So, if you guys would give up on things that aren’t realistic, you would probably be more effective at helping people interested in and sympathetic to some of the ideas supported at LvMI make progress in academia. If you insist on pretty much everything Murray Rothbard believed, then there will continue to be cases where you have a negative effect.
To make a football analogy, your organization, at least its efforts at outreach into academia, strikes me like a football team that insists on throwing the hail mary pass all the time. And, none or almost none of them are caught for touchdowns. Because the team attempts hail mary passes all the time, often the QB gets sacked while dropping back in the pocket, while receivers are making their way downfield. Kids who don’t end up with degrees and publications, but might have if Mises Institute didn’t exist, are like the QB sacks that happen because of the insistence on hail mary passes. If you guys would run the ball or do short passes, you’d get completions and yardage. The idea of trying to getting kids committed, in 2009, to a no-math approach to economics, and then hoping they succeed in universities and the professional world, is like the hail mary pass. Teaching them a modern, mainstream approach to economics that is (perhaps selectively) compatible and consistent with what is currently done in university departments, and then giving them supplementary Austrian tradition, free market, libertarian and paleo-conservative readings on the side, would be like short passes with a high completion percentage. The latter approach would make you like the San Francisco 49ers of the 1980′s, who did well in the playoffs some years with their short pass “west coast offense”. The strict approach reminds me more of the Detroit Lions, or like Ryan Leaf when he was in the NFL. Hopefully that football analogy makes sense.
above we see the fake lord buzungulus, an apostate, and very long-winded, at that.
Buzungulu makes some valid points. But
1. Mathematically-based economics is FATALLY flawed because, however logical the math is, it is still built on false economic axioms. This cannot be emphasised enough. But the proper Austrian defence against the allegation that ‘its because you cant do the math’ is to simply prove it wrong: Make sure you DO understand the math underpinning the theory you are refuting.
Mises, Rothb ard and Hayek were all definitely not mathematical slouches – and it is crystal clear from Hayek’s famous nobel acceptance speech that he keenly understood both the math and its limitations.
2. I object to the term ‘paleoconservative’ as a descriptor of libertarian thought. the ‘paleoconservatives’ of my acquaintance would choke on their cornflakes at the thought of, for example, legalising narcotic drugs or prostitution, both of which prescriptions are in keeping with libertarian ( and Austrian) principles, whatever the individual’s own views of those vices. Come to that, I also object to being classified as ‘right-wing’, which lumps libertarians with their polar opposite, fascism.
I regard Austrolibertarian thought as being further left than communism. Particularly as the original term ‘left’ described the first wave of French ( classical) liberals before they were swiftly supplanted by the original ‘terro(i)rists’.
Finally, and more generally, its worth observing that the term ‘mainstream’ is a very temporally-sensitive one. rewind to the nineteen thirties, and you find that economists rather admired by Austrians ( like JB Say and David Ricardo) were regarded as ‘mainstream’ or ‘orthodox’, and Keynes was the controvertialist.
On economic models: also read this: http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf
Brilliant paper describing two different economic models and which one works and which one doesn’t.
Wow, Buzungulus, all that railing against the LvMI, Dr Thornton and the Misesians here. By my assessment you sound like a bright young kid who just recently (?) realized you made the biggest mistake of your life in having enrolled in one of those mainstream neoclassical/math-intensive/out-of-reality macro econ courses. You are so frustrated/disillusioned but you can’t get out, so you choose the cowardly way out – to try and perpetuate that lie by venting your anger here and arguing (more like pleading) for Austrian sympathy.
Others here will not take to your ranting kindly, as much of what you say is simply not true (math ignorance/incompetence, anti-Keynesian-only arguments, Rothbard worship etc). Yet you have my deepest sympathy, and my advice to you is this: get out before it’s too late. Your seeming intelligence deserves better.
Wow, typical mainstream econ dork. Buzungulu spends 18 hours typing his grievances when all he had to say was, “I think Austrians suck”. Kind of like how the government is throwing billions of dollars and massive amounts of legislations at problems that could have been fixed by just leaving them alone.
@buzungulus, what I find most peculiar your note is the attempt to somehow wrap up and sum up the whole message/strategy of the Mises Institute in a few sentences. We’re posting thousands of books from all ages, the complete run of dozens of out of print journals and publications, articles by some 1000 different living authors, and posting papers in working papers and libertarian papers and publishing an astounding number of books from the whole range of Austro-classical-liberal thought, plus hosting a forum that is participated in by 15,000 people. We would have to be amazing central planners to funnel all of this into one single point of view on all matters. And you think you can sum it all up in a few sentences just by asserting it? Nutso.
As for the view that Austrians ought to study and know mainstream thought, ought to attend mainstream programs, etc., this has been a message of Joseph Salerno among many others for years.
Why do you think causality has anything to do with economics? And why do you think economic THEORY has anything to do with economic REALITY?
Economic theory, as far as I understand of the mainstream version, aims only to predict through taking derivatives; there’s nothing causal about it. And any model is based on so many outrageous (and sometimes contradictory) assumptions that it has lost all connection with the real world.
And in that kind of milieu you thought your piece would get published…?
I agree with buzungulus that we need to lose a bit of the negativity and combativeness with thinkers outside of The Austrian School. I do notice that a solid portion of the articles (not most, but a good portion) have a negative or combative voices. I also see that we do try to go for the touchdown on every play, and I think it should be viewed as a goal to work towards rather than an all or nothing. We have a very all or nothing mentality, very fundamentalist and not accepting of people who agree with us 85% because they disagree with the other 15%. In my opinion this is the reason why we have not gained even more traction in the rest of the community. The reasons above are why I take my LvMI with a dose of CATO every day. I think they see the road and we see the goal at the end.
I cannot say I agree with your assumption that skyscrapers cause recessions, however I do believe they are reflective of the economy.
Skyscrapers need capital, for design, architecture and construction. Many of these plans are working for some number of years even before initial ground breaking.
I believe the boom / bust system just matches well with the design/construction aspect. Capital is raised, design is created, approved and a year or two later grounding breaking begins. The tallest structure in the world was built in 5 years… so at a rough estimate, a total of 6-7 years for the design / construction of this building.
Did the skyscraper create the recession ? I don’t think so, but was the lead time to build and construct a skyscraper match up with our current boom/bust, it sure looks like it.
Good Lord. You have got to be kidding “Lord Buzungulus,” hiding behind a ridiculous pseudonym and making such absurd arguments. I went to graduate school precisely to study all schools of economic thought. Take a look at my vita. Take a look at the books I have had reviewed in the QJAE. I regularly post things about mainstream economics, including such things such as NBER working papers. My Kindle has more books on mainstream economics than any other category.
I will point out that never have I received so many positive responses from professional economists to a Mises Daily article as I did to “The Upside Down World of Keynes.” In all but one case, the economists who wrote me were fellow traveler-mainstream economists, not Austrian economists.
It is my hope that you are just a graduate student on drugs and that you will have the time and inclination to grow out of such infantile views.
KP: “I cannot say I agree with your assumption that skyscrapers cause recessions….”
That’s what you took away from Mark’s paper? That he thinks or assumes that skyscrapers “cause” recessions?
I wish to make it known that the Lord Buzungulus who posted (verbosely) above is indeed a fake, and not the original Lord (myself) who tirelessly defended Rothbardian monetary theory here:
http://blog.mises.org/archives/010199.asp
This problem also happened over at the GMU blog, so be forewarned: accept no substitutes!
“we don’t deal with that quantum mechanics mumbo jumbo here sir. please stick to newtonian theories. we don’t care what describes reality best – this is science, not a soapbox.”
In repsonse to the fake Lord, he has half a point that a lot of Austrian criticisms of Keynesianism over the past few years are in some sense reminiscent of old soldiers fighting the previous war. (He also has a point that some mathematical proficiency would be helpful to understand the mainstream positions, and I would also add that it would help illuminate Austrian distinctiveness.) However, he should ask himself: why exactly are critiques of Keynesian policies so prevalent now? It’s precisely because of the absolute failure of mainstream neoclassicism to offer any kind of coherent explanation for how we came to this crisis (to say nothing of having had any foresight of that crisis coming). This failure is exactly what has allowed Keynesian hacks (previously discredited during the 70s and 80s) to regain prominence.
I like the LvMI approach, including the more radical and combative ideas, even if I find I cannot agree with them. It is a “fresh voice” in the politically correct world.
Let freedom reign, even for those which “the mainstream” calls wackos.
Let the ideas clash, and may the best emerge and be heard in the mainstream.
It is problematic when someone cynically takes another’s blog signature and that pseudonyms may offer safety as well as refuge for cowards!
Fake Lord Buzungulus,
regarding Finn Kydland and Edward Prescott…
http://mises.org/daily/1658
Shostak was a math based economist in grad school and became cynical of ivory-tower math use in economics. I can’t blame him. Having looked over Ceccetti, Blinder, Prescott Bernanke et al, I am stunned at the uselessness of their work.
Lord watchamacallit long post is a call to water down the idea of maths-less economic study. The methodological incompatibility of maths and economics and praxeology is a fundamental tenet of Austrian Economics: Mises himself devoted an article on just such a theme. He also explained that economics is a whole : you cannot develop ideas on just “labor economics” because economic laws apply across the whole spectrum of human activities or action. The specialisation seen in universities is the result of the State’s endeavour to make economists dependent and subservient to itself : they are often no more than government policy commentators or specialistsand no real economists, independant of the State. Thus the post is interesting in that it shows the weak mind seduced by the educational-propaganda apparatus of the State. One begins with small concessions here and there, and in a matter of years, it is over with the rigor, the exactness of Austian thought. We should rejoice in seeing the LVMI stay the course in the face of weak minds beguiled by the wretched sirens of polylogic and collectivist thought. Keep the flame alive for present and future generations ! I raise my hat and shout three cheers for M. Thorton, Tucker and Rocwell .
The handle, Lord Buzungulus Bringer of Purple Light, is probably inspired by this post on the Austrian economists blog. In that post, Pete Boettke was giving one of the not so productive exchanges between GMU and LvMI. The name “Lord Buzungulus, Bringer of Purple Light” was brought up as an instance of someone with no credibility commenting and pontificating on AE.
I think the LvMI strategy is a huge success, reflected by the popularity of the website itself, only the magazine “Keynesian Economist” and few government stats sights are more popular than mises.org.
Just the fact that the recent Ron Paul campaing, success of audit the Fed, the number of young people attracted to libertarianism can all be attributed to the movement associated with AE and LvMI ( not cato ).
BTW, I often hope that LvMI, Cato, GMU etc were not antagonistic to each other. I am a minarchist libertarian and in that sense not a born again Rothbardian. However, I am a fan of AE and most of what LvMI does.
the Fake Buzungulus criticism is bogus. Because Joseph Salerno had many posts over the last year, with suggestions for aspiring economists to study mainstream economics at mainstream schools.
I have also been encouraged by the spate of books by Hayek, which proves that you don’t need to be a complete Rothbardian to be considered for publishing @ LvMI. That is great!
S Andrews,
No. I was posting before Pete commented on my name. (As if the
name has anything to with the intellectual content.)
Apolitical Political Commentary!
Thursday, July 16, 2009
Mainstream As A Standard Is Fallacious!
Mainstream is a fallback position as if an average means anything. It is a standard in an age when true standards have been buried by ignorance.
Take for instance today’s reference during the Supreme Court nominee’s questioning; one of the hearing members said that all the nominee’s stances seemed to be ‘mainstream.’
Look how drastically everything would change if instead of a mirage of a standard there was a gold standard. Theft (counterfeiting) would be theft instead of ‘stimulus’ and war criminals (the Presidents and their neocon buddies) would be held accountable instead of invited to throw out ceremonial sports objects during a display of false patriotism.
Mainstream has become a stream of blood and gore and a flood of corruption.
So, I presume that you are the original Lord Buz. If so, you and I are in agreement.
I think FakeBuz is missing the point that LvMI does a lot outside this blog. What they do for aggregating sources and resources is spectacular. I will agree with him on most of what he says in the context of this blog; it is full of negative voice critiques of barely in context comments or events. Lots of sweeping generalizations and “casual-descriptives.” The policy related posts here often smack of economic “hail mary’s.”
I like to read it because it is fun to be rallied, even to an extreme, unrealistic point. They’re probably not going to like it, but I say: LvMI is to Libertarian/Austrian Economists as Rush Limbaugh is to Conservatives/Republicans.
It’s great to see that the Keynesians are this nervous. I couldn’t imagine writing such a belligerent lengthy response on a mainstream economics blog… I guess when your school of thought constantly proves itself worthless, you have to get aggressive!
“the proof of a theory is in its reasoning, not in its sponsorshipâ€- Ludwig von Mises
I studied mainstream economics in Germany. The macroeconomics part seemed plausible until I tried to figure out the causes of the business cycle. The Keynesian IS/LM graphs suggest a fall in aggregate demand. In order to get a better understanding, I had a course on business cycles and policy which was useless. The reason for falling demand seemed to be a fall in demand – but what causes this fall? Obviously, the argument moves in a circle.
So I read Keynes’ General Theory which stated that investment (and not consumption) is essential and that demand falls for psychological reasons (animal spirits). But this was no explanation either.
I read a book on business-cycle theories (Marxian, Keynesian, Monetarist etc.) and only the Austrian explanation seemed to be correct and consistent. So I switched to Austrian Economics.
Mainstream economics isn’t bad. Their basic explanations of microeconomics and macroeconomics are correct. But the conclusions regarding monopolies, externalities and business cycles etc. are wrong (econometrics is problematic because a regression is no causality). So I would say that everyone should be familiar with mainstream economics, supplementing this with libertarian and Austrian insights.
A comparison of salt-water (MIT, Harvard) and fresh-water (Chicago) universities can be found in Burda: “Macroeconomics”. A libertarian textbook which is recommended by CATO is Gwartney: “Economics”.
May the Force be with you
Dear Dr. Thornton,
In the “Skscraper” story at http://mises.org/daily/3038 you write w.r.t. the Cantillon effects following an increase in the money supply until the time of the comleted readjustments in the economy, that:
“A lowering of the interest rate raises the prices of longer-term capital goods relative to shorter-term capital goods.”
Excuse me, I do not get this part. Although I am no doubt incorrect, it seems to me it is the other way around. And hence more resources are devoted to long-term capital goods as you write immediately following this. I do follow the discussion of the 3 separate and reinforcing Cantillon effects later in the article, but am not able to relate to the quoted text above. I’d be grateful if someone were to clarify so I can correct my reasoning.
Many thanks,
Gernot Hassenpflug
In my post above, I think maybe I confused cost of capital with cost of the land (capital good). If that is the case, then my confusion is cleared up.
However, I still have the following issue:
“When the rate of interest is falling, the land best suited for the production of the longer-term, more capital-intensive, and more roundabout methods of production will increase in price relative to land better suited for shorter term, more direct methods of production. As land prices generally rise, the yield from any piece of land that would make ownership of it profitable also rises. Combined with a lower cost of capital brought about by a lower rate of interest, land owners will seek to build more capital-intensive structures…”
What I do not understand is how the yield rises. Is this also related to relative prices somehow?
Regards,
Gernot Hassenpflug
Jedi X’Bones,
The cause of trade cycle fluctuations can be found in an increase in aggregate demand for consumer’s goods relative to producer’s goods, not the other way around.
In the below, is the “forced savings” the deferred (timewise) taxes, further debt, or inflation loss that citizens will have to pay for the government bonds created at the time the new money was printed and pushed to the banks? Or is there some other “forced saving”?
“It is possible for a central bank or monopoly bank to reduce the market rate of interest by providing banks with additional bank reserves. The lower interest rate will induce a reduced amount of saving and an increase in the amount of borrowing, heavily weighted to investment expenditures. The gap between the increased investment and the decreased savings is filled with resources paid by ‘forced savings.’ ”
Regards, Gernot Hassenpflug
Gernot Hassenpflug,
“In the below, is the “forced savings” the deferred (timewise) taxes, further debt, or inflation loss that citizens will have to pay for the government bonds created at the time the new money was printed and pushed to the banks? Or is there some other “forced saving”?”
No, forced savings implies a condition where the general population are forced, or highly compelled, to increase their savings rate relative to consumption in order to maintain a certain structure of production brought about by inflation. That is, additional credits have been supplied to producers (not backed either entirely or partially by money proper) which served to lengthen the structure of production (more capital intensive, or more “roundaboutâ€), and which now depends on additional inflation or an increased rate of savings. If additional inflation is not possible or socially acceptable, the general population will have to increase their savings or face an economic crises.
“The cause of trade cycle fluctuations can be found in an increase in aggregate demand for consumer’s goods relative to producer’s goods, not the other way around.”
The trade cycle is caused by the central bank’s manipulation of the interest rate, which causes the demand for capital goods to rise. The demand for consumer goods is quite stable. Have a look at Skousen: “The Structure of Production” for statistics or at Mises: “The Theory of Money and Credit” for the theory.
At least Keynes was right in pointing to the importance of investments. (His conclusions were wrong.)
Jedi X’Bones ,
As I understand it, and I believe correctly so, the manipulation of the interest rates, that is, lowering the market rate below the “normal rate” or “natural rate,” creates inflation, which is directed towards producers causing a boom. The bust is brought about when either A) inflation stops or is slowed, or B) when demand rises without a corresponding increase in the savings rate (relative to consumption) or additional inflation. Eliminating inflation would not stop business cycles, and unemployment is solely caused by wage rigidity.
Dear Emil Suric,
“/../ forced savings implies a condition where the general population are forced /../ to increase their savings rate relative to consumption in order to maintain a certain structure of production brought about by inflation. /../”
To clarify (or restate in the way I have seen this explained on Mises.org until now—my readings are only a few months old): owing to the need in this new low interest rate production structure for further (constant) funding, if the credit infusion is once-off only, then “forced saving” has to stand in for the “cut-off credit” needed.
Regards, Gernot Hassenpflug
Credit inflation causes the interest rate to fall (see Mises’s TMC). Therefore the money is spent on investment, which is more interest-sensitive than consumption.
Stopping the inflation may not prevent business cycles. You need to stop manipulating the interest rate. The bust comes if the interest rate rises above the natural rate of interest.
Gernot Hassenpflug,
Yes, I believe so, insofar as continuously inflating is not possible/socially acceptable. There are diminishing returns on the effectiveness of inflation; eventually inflation can’t prolong the correction any further. I would suggest Hayek’s “Prices and Production;” it’s quite technical but explains this condition.
Jedi X’Bones
“Credit inflation causes the interest rate to fall (see Mises’s TMC). Therefore the money is spent on investment, which is more interest-sensitive than consumption.”
Yes, I apologize; the creation of fiduciary media presupposes a fall in the market rate of interest relative to the natural rate, or normal rate. But even if this were not the condition, and the value of money was “neutral” in the sense used by Hayek and not Fisher, there would/could still be contractions in the economy. It would not be cyclical, but recessions would still occur, even without a divergence between the money rate and natural rate. You should read Hayek’s Prices and Production, he takes part 3 in TMC and expands it greatly.
Yes, disinflation causes a recession.
I know that Hayek discusses the ripple effect of inflation (i.e. the Cantillon effect). Inflation is like a wave and distorts the relative prices.
One should bear in mind both effects. Mises concentrates on the interest rate (like Wicksell) and Hayek on relative prices.
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