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Source link: http://archive.mises.org/10367/correcting-thomas-sowell-on-the-boom-bust/

Correcting Thomas Sowell on the Boom-Bust

July 29, 2009 by

Despite all his worthwhile contributions, and despite being a self-proclaimed supply-side economist, Dr. Sowell fails to convincingly explain the cluster of errors which led to the housing boom. FULL ARTICLE

{ 39 comments }

DD July 29, 2009 at 8:12 am

I don’t understand people like Sowell. They offer no valid counter argument against Austrian Business Cycle theory, but choose to simply ignore it, or worst to resort all of a sudden to the worst economic fallacies to explain the Great Depression.

I simply don’t get it!

Marcus July 29, 2009 at 8:37 am

I think that´s simply the not invented here syndrom.

YN July 29, 2009 at 9:30 am

“The only theory which can accurately and completely explain each phenomenon taking place in the nationwide market is the Misesian-Hayekian theory of the business cycle.”
A bold statement!
I haven’t read “Meltdown” but it seems from the article that what is suggested is the standard ABC theory. I.e. during the boom malinvestment occurs in the higher stages of production (more capital intensive processes) and during the bust phase these investments are liquidated.
Applied as it is, it follows that now the lower stages of production ( transportation, retailing,etc.) must be thriving since resourses are being reallocated to them. It seems to me that this is not the case in USA at present.
As I said, too bold a statement.

ET July 29, 2009 at 9:34 am

The author writes,

“it is impossible from a practical point of view for the entrepreneur to tell which products are rising in price as a result of fundamental consumer demands, and which are made falsely profitable by the infusion of government funds, as we now know housing was.”

Then how do we explain entrepreneurs like Peter Schiff and others who predicted the meltdown?

I recall reading somewhere (probably in Rothbard) that while some can see the inflation and understand that the demand is higher because of the money inflation, that the explanation of why they still expanded was that they needed to do so because their competitors were doing so and would drain away resources such as employees.

DD July 29, 2009 at 10:04 am

YN,

“Applied as it is, it follows that now the lower stages of production ( transportation, retailing,etc.) must be thriving since resourses are being reallocated to them. It seems to me that this is not the case in USA at present.”

You make the great mistake of simply ignoring the reaction of the government and monetary policy to the crisis.
If left alone, the market would reallocate the resources to lower stages of production. But this correction process is not occuring efficiently due to the futile attempts to bailout this nonviable economy. What else do you think is meant by: The recession is actually the correction process. This process takes time, but also requires for the government to stay out!

Marc July 29, 2009 at 10:12 am

YN,
If the economy was allowed to adjust through the lowering of prices, which to some extent it is doing, then this would happen. You also have to keep in mind that ABCT is a model based on an evenly rotating economy. When you have a government that is infusing fresh money into the system, all sorts of other dislocations occur. While economic forces might be putting pressure on resources to move in to the lower stages of production, countervailing forces are also at play. The FED and the government in general see falling prices as the cause of the problem and to the extent that they try to fight this the main mechanism for balancing the economy will be rendered inert. To look at empiricle evidence to refute the ABCT is futile. Empiricle evidence can’t refute an economic theory only another theory can do that. It is very important to not forget about ceteris paribus, because without that assumption there would be no possible way of understanding what was going on.

Justin P July 29, 2009 at 10:18 am

I’m a big fan of Sowell, so I feel I need to defend him…

Perhaps this interview will help…

TS: The extremely low interest rates set by the Federal Reserve system in the early years of the 21st century facilitated home purchases by making the monthly mortgage payments lower than they would have been otherwise. Among the “creative” ways of arranging financing to take maximum advantage of these low interest rates were adjustable-rate mortgages with payment only for interest during the first two years. This made the initial payments much lower than on a conventional 30-year loan. But it also meant that the payment would rise over time—first if the interest rate rose from its unusually low levels and secondly when time came to begin repaying the principal on the loan. Because many such mortgages were made to lower-income people with no previous experience in buying a house, and often with less education, it is by no means clear whether they understood that their initial mortgage payments could rise very substantially. The Federal Reserve’s low interest rates were intended to deal with conditions in the economy as a whole, but it had a disproportionate effect in the housing market. Moreover, although Federal Reserve chairman Alan Greenspan warned Congress of the dangers of having Fannie Mae and Freddie Mac buying so many risky mortgages, by his own later admission he did not foresee the full magnitude of the dangers in the housing markets as a whole until very late.

http://www.american.com/archive/2009/july/crisis-of-a-house-inflated

YN July 29, 2009 at 10:44 am

To ET:
I think you are right, I also read the same stuff. If follows that the author is not right! Good point!
To DD:
You are right that it takes time and the government stays in the way of the correction process. However retailing,etc. do not lack workforce, on the contrary they fire people. If there was any need it would show itself.
To Marc:
“When you have a government that is infusing fresh money into the system, all sorts of other dislocations occur. While economic forces might be putting pressure on resources to move in to the lower stages of production, countervailing forces are also at play.”
Yes, that is correct. For instance malinvestment in the lower stages of production (at the same time!). Actually, there are authors writing for mises.org who extend the theory and claim that what happens in the USA today is exactly malinvestment in the lower stages fueled by the consumer credit. Basically, this view does not refute the ABC theory but extends it. What they say is that what is important where the credit is injected. Suppose it is injected in two different places at the same time.

“To look at empiricle evidence to refute the ABCT is futile.”. First, as I said I do not try to refute it, I just state that it is not complete as stated by Mises and Hayek.
Second, one must be able to draw conclusions from some theory, otherwise it is useless. Peter Schiff was able to do exactly that. Note: In the ABC theory it is just a plain statement that the malinvestment occur in the higher stages. This was true only in the past (long time ago).

DD July 29, 2009 at 10:46 am

Justin,

It is my personal (subjective) opinion that Thomas Sowell, like Milton Friedman, did everything they possibly could NOT to associate themselves with Austrian economics not on the grounds of logical theory, but on grounds of self-pride.

Please point me to any positive reference to Ludwig Von Mises made by Sowell or Friedman.

What, the Calculation problem of Socialism could not make it into “Free to Choose”? Or perhaps crediting Mises was too strong a medicine.

I am convinced that if the Mises-Hayek Capital theory and business cycle was not “Mises-Hayek”, people like Milton Friedman and Thomas Sowell would have had a different take on monetary policy.

Greg M July 29, 2009 at 10:54 am

ET says:
“I recall reading somewhere (probably in Rothbard) that while some can see the inflation and understand that the demand is higher because of the money inflation, that the explanation of why they still expanded was that they needed to do so because their competitors were doing so and would drain away resources such as employees.”

The need to expand is only a perceived need. I recall seeing a story recently about a banker who shrank his business over the past several years during the “boom”. He saw all the loans being made as “stupid loans” and thus shrank his company from several hundred employees to just a few dozen. Once the house of cards fell, he was in a very good position and had the capital to buy up a lot of these failed banks who had greatly expanded during the boom.

The “everyone else is doing it so we must do it just to keep up” mentality is flawed thinking.

DD July 29, 2009 at 10:54 am

YN,
It is obvious that you have not studied Austrian business cycle theory in depth because the points you are making are certainly not original.

I am tempted to answer back, but your style of reasoning and presumptuous conclusions show you are intellectually lazy. Go do some work!

Toby July 29, 2009 at 11:12 am

I think that Mises, Hayek, et al. should have had a greater emphasis on OVERinvestment than on MALinvestment.
Many people (like Kruggy) think that ABCT means that resources are taken away from consumption goods during the boom so the consumer industry has to prosper when the bubble bursts. Instead, we have a bubble in the whole economy with the greatest boom in the capital goods industry. When the bubble bursts, all industries are affected but the worst damage lies in the capital goods industry.

Another improvement of ABCT might be a redefinition of the term “capital goods”. Houses, e.g. should not be treated as consumption goods but as “consumer-capital goods” with the act of living in them as consumption.
This is why the housing market acts much more like a typical capital goods market than a consumption goods market.

Justin P July 29, 2009 at 11:25 am

DD – So what are you going to attack John Taylor as well, since he isn’t an explicit Austrian but his new book Getting of Track lays out a very Austrian case?

Attacking Sowell because he isn’t Austrian is the same kind of crap the Keynesians have done, that most Austrians hate.

Instead, Austrians should be congratulating Sowell, and Taylor for coming to the same conclusions Hayek and Mises came to years ago.

Sowell is the number one reason why I consider myself an Austrian (pseudo-economist, I’m a chemist). So I give him a lot of credit, yes I’m biased. He was trained at Chicago so of course he will take a monetarist view but as long as he comes to the same conclusions as in this case, then what’s wrong with that? Look at Russ Roberts, he was trained in Chicago too and is slowly coming Austrian…it takes a long time but sooner or later people will come around to see the wisdom of Hayek and Mises, attacking them is not a good way to speed up the process.

Sean W. Malone July 29, 2009 at 11:41 am

Hey all,

I have a ton of respect for Dr. Sowell, as I’m sure many here do, so I feel compelled to defend him slightly on this point.

He is clearly making an incomplete argument without talking about where the money for all the mal-investment came from.

However – The important point that he does address is the reason that said money went to the industries that it did. ABCT, imo, rather elegantly explains why there was a boom & a bust entirely, but Sowell’s analysis is more of an explanation as to why that boom originated in the housing industry as opposed to say, railroads or airlines. The Austrians have a tendency to gloss over the specifics like that to some extent when talking about this stuff.

As for Dr. Sowell ignoring ABCT, I don’t really get that either. I doubt it has anything to do with Hayek, because most of Sowell’s (and Friedman’s) books mirror the ideas expressed by Hayek. Read Sowell’s “The Vision of the Annointed” for example. But it’s true that instead of being refuted at all, they both just sort of ignored the Austrian viewpoint entirely. I got interested in Economics because of Milton Friedman & Thomas Sowell… And their explanations for a lot of things struck me as being dead-on, but there was a missing piece of the puzzle whenever I’d listen to Friedman talk about the Great Depression. As Sowell would say, Friedman started the story in the middle… When he’d talk about the monetary contraction by the NY Fed in 1929 that precipitated the collapse of several banks, he’d avoid explaining how those banks got to be in such a precarious position to begin with. How did they get to be over-leveraged and why did the market turn against them?

Anyway, Sowell make’s the same “mistake” now. But I don’t think it’s wise to dismiss Sowell’s position, because it is probably exactly right in terms of explaining the government’s hand in creating a bubble *in Housing*. Then we can leave it to Tom Woods and other Austrian school types to explain how governments are capable of creating bubbles generally.

Nick July 29, 2009 at 12:11 pm

DD,

I very much appreciated YN’s line of questioning and would enjoy your response to it.

dewind July 29, 2009 at 12:26 pm

ET,

Effectively, if every entrepreneur could foresee a speculative bubble and ignore it then we would have no booms or busts. In fact, the federal reserve’s interest rates would serve no other purpose other than a credit indicator that everyone would ignore.

In reality a lot of entrepreneur’s do what they do best: take advantage of easy short term profits. Those that saw it as a bubble could simply take advantage of the situation before the bubble reached its peak; or when the Fed lowered their interest rates.

Admittedly, I would be hard pressed not to take advantage of illusory profits so long as I can get out before its too late.

DD July 29, 2009 at 12:42 pm

YN: “You are right that it takes time and the government stays in the way of the correction process. However retailing,etc. do not lack workforce, on the contrary they fire people. If there was any need it would show itself.”

1. The boom phase is characterized by over-consumption as well as mal-investment. Both Mises and Hayek made this point very clear. The structure of production is distorted from both ends: investment and consumption.

2. It is expected that during the recession, the process of readjustment would not be a smooth transition, but would entail a psychological overreaction due to consumer uncertainty that would curtail consumption much further then it should before consumer confidence is gradually reestablished. The deflationary process if allowed to occur would help to reestablish that confidence.

billwald July 29, 2009 at 12:45 pm

>Then how do we explain entrepreneurs like Peter Schiff and others who predicted the meltdown?

EASY. The human population has an economic bell curve of winners and losers. Winners win and losers lose. (I’m probably on just the high side of the median value. )

The Libertarian/Republican losers are the ones who complain that if only the government would get out of their way, stop making rules and collecting taxes from them, why they could become rich. Not so!

First, the US since WW2 has been the best place and time for the working class since Adam got kicked out of the Garden. Except for very rare cases of exceptional runs of bad luck, an adult, say over 30, who is a loser this year in this country would be a loser, any time, any place.

Second, in the same way, every economic system has a pecking order because that is human nature. Most of the people who
are on the top of the food chain here and now would also be on the top under Stalin, Hitler, or whomever.

The Austrian error is thinking that it is helpful to note that every person acts in his own best interest. Austrians never admit that half the population is either stupid and/or evil.

The one demonstrable truth of Christian dogma is that the human race is screwed up, call it original sin, DNA error, whatever.

Our Founding Fathers were familiar with that dogma and seem to have given us a government that was/is best adapted for controlling a population that is mentally screwed up. It allows the rich to get richer but at the same time keeps the lowest class out of the historical gutter.

C July 29, 2009 at 12:45 pm

Like Justin P, I am also a fan of Sowell, and think we need to look a bit further at his thoughts than the single NRO interview (which is actually 5 parts on the referenced website, and I have not had the time to view it all, since i am not supposed to be streaming at work ;-) … ).

While he is not really a fundamental Austrian, Sowell has very cogent observations to make about the government’s responsibility for causing economic chaos.

Sowell elsewhere has said the Fed does deserve some of the blame, although he sees it as one cog in the larger governmental engine for diverting wealth:

from http://article.nationalreview.com/?q=Njc2ZmZhNWM1NjI3MWQyMGM4NmZkNGIwYWVlOGMxZGU=

Unlike other countries, the United States had gotten along for generations without a central government bank. But President Woodrow Wilson thought that the monetary system of the country was too important to let private bankers play such a large role as J. P. Morgan had played in 1907.

Describing the Federal Reserve System created during his administration, Woodrow Wilson said: “It provides a currency which expands as it is needed and contracts when it is not needed.”

The power to expand and contract the currency was “put into the hands of a public board of disinterested officers of the Government itself.”

Their task was to prevent financial panics, bank failures, and a catastrophic contraction of demand. It sounded wonderful — and such sounds count for a lot in politics.

In reality, however, the biggest financial panic in American history occurred under the Federal Reserve System in 1929, followed by thousands of bank failures and an unprecedented contraction of the money supply by one-third during the Great Depression of the 1930s.

And from http://www.reason.com/news/show/133593.html

reason: How much weight do you place on the notion that Federal Reserve expansionary money and credit policies primed the bubble, and bust, in housing?

Sowell: I find it hard to accept. I’m sure if the interest rates had been at 8 percent the boom would not have gone as far and the bust would not have been as big. I’m not saying monetary policy had no effect. But I am struck by the fact that Federal Reserve policy is nationwide, and in places like Dallas the increase in housing prices was in single digits and the decrease has been in single digits. So while Fed policy undoubtedly aggravated circumstances, it can’t be the fundamental cause because the defaults were so heavily concentrated. 60 percent of all defaults nationwide were in five states, and I suspect if you broke down the data even more you’d find specific regions in those five states very heavily implicated in defaults.

He acknowledges that monetary policy plays a role, but legitimately points out that there are other factors that exacerbate the monetary manipulations to cause serious economic consequences. We should not only blame the Fed, but we should also blame the “Broken Windshield” effects that have been a frequent topic on this site of late.

Justin P July 29, 2009 at 1:28 pm

It’s Keynesianism that is the real threat, not monetarists.
Once Keynes is gone and the Fed is shown to be a shame, then the monetarist will all become Austrians.

fundamentalist July 29, 2009 at 1:34 pm

YN: “it follows that now the lower stages of production ( transportation, retailing,etc.) must be thriving since resourses are being reallocated to them.”

Not quite.The lower stages of production boom along with, or soon after the higher stages, because increased employment in the higher stages causes greater demand for consumer goods. But the boom is greater in the higher stages at first.

Then, when the higher stages collapse, the lower stages suffer as well, just not to the same degree, due to the loss of employment in the higher stages. Prices, and hence profits, fall in the lower stages.

The re-allocation of resources begins to take place just before the bust. The higher and lower stages of production are competing for scarce resources. Raw material prices rise dramatically because they can be used in all stages of production (oil, for example). As Garrison explains, the economy is producing beyond its frontier.

Two things hit higher stage companies: 1) Because of the rise in raw material prices and labor costs, due to excess demand in all stages, businesses in higher stages go bust, or scale back production. 2) Profits are higher in consumer goods industries so they switch to using more labor and less equipment from the higher stages (Hayek’s Ricardo Effect), so demand collapses.

The failure of businesses in the higher stages releases (reallocates) resources to be used in the lower stages. Lower stage industries do well longer than higher stage ones. That’s why investments in retail stocks and consumer goods companies (Proctor and Gamble, eg) are considered a good defensive move by most investment advisors. But they eventually hit the skids as demand collapses due to higher unemployment in higher stages. By the end of the cycle, no one is doing well except WalMart.

buz July 29, 2009 at 1:34 pm

This article calls Sowell “a self-proclaimed supply-side economist”. I’ve read over a half dozen of his books and many of his columns, and I have never seen him proclaim this. I don’t think he’s adopted any label, and he doesn’t strike me as someone whose purpose in life is to win the prefix wars.

See this:
http://www.capmag.com/article.asp?ID=4183
In that column, Sowell uses the term “supply-side economics” to refer to an idea about taxes. He doesn’t use it for a whole version of economics or approach to economics. That idea about taxes that Sowell associates with “supply side economics” is one that, I suspect, many who are labeled “Austrian” agree. I bet you could find self-proclaimed “Austrians”, and people of many other prefixes, who think there are cases, perhaps 1964, where a tax cut increased tax revenue.

One of the things that I find odd about many Austrian Economics devotees is their excessive concern with classification schemes for economics and ideas. This is usually done without a precise, accurate and good enough definition of terms like “Austrian”, “Chicago” or “supply side”.

When the idea of “supply side economics” comes up, I ask for a definition of “supply side”. For the most common answers to that question, I have concluded that pretty much every professional economist qualifies as both a “supply side” and “demand side” economist, including those who are often called “Austrian”, and that this is as it should be.

As for the main content here, I have no opinion. I’m not that firmly attached to any business cycle theory. It won’t happen soon, but I might read Garrison’s “Time and Money” book in the upcoming years. Then I’ll have a clearer idea about the Mises-Hayek theory.

YN July 29, 2009 at 1:57 pm

To DD:
“It is obvious that you have not studied Austrian business cycle theory in depth because the points you are making are certainly not original. ”
You are right partially. I do not have enough time about it.

“I am tempted to answer back, but your style of reasoning and presumptuous conclusions show you are intellectually lazy. Go do some work!”
Had I been lazy I would not have discussed this point here. You are the one that avoids discussion. A forum like this is to discuss things and probably find new ideas.

“1. The boom phase is characterized by over-consumption as well as mal-investment. Both Mises and Hayek made this point very clear. The structure of production is distorted from both ends: investment and consumption.”
OK with me. So both high and low stages are expanded or I do not understand you well?

“2. It is expected that during the recession, the process of readjustment would not be a smooth transition, but would entail a psychological overreaction due to consumer uncertainty that would curtail consumption much further then it should before consumer confidence is gradually reestablished. The deflationary process if allowed to occur would help to reestablish that confidence.”
So basically, what you state is that after the crisis has ended everybody will consume just as much as before and therefore the lower stages are not expanded at all but just right. Please, consult the following link:
http://mises.org/daily/2100
especially [iii]
article:The hidden dangers of Trade Deficits

You can check also the Peter Schiff’s book ” How to profit…”. There he explicitly makes the point that overconsumption leads to a reduction of the productive capacity (as now in the USA). He is not a scholar as such but an acute observer of the situation in the USA.
Note: I live in Europe and I believe that I am a realtively impartial observer of what happens in the world. I tried to make sense of what happens globally and that is why I turned to the Austrian view of the economics.

Joshua Park July 29, 2009 at 1:57 pm

Thanks for making the point about over-consumption, DD. Too many times, people focus on the malinvestment effect in the higher orders of production. YY, for example, made the assumption that over-spending could have been caused by an injection of credit into a consumer credit market. That is, that there could have been injections of credit into both the higher and lower stages of production.

The key here is the loanable-funds market and how manipulation from the central bank affects not only the PPF, but the structure of production. Investors are lead to believe that more capital is available than there is (mal-investment). Consumers are lead to believe that money is so cheap that is just not worth saving (over-consumption).

http://www.auburn.edu/~garriro/cbm2006.ppt

Lay-economists (not pros, like myself) ought to review the above powerpoint to get a grasp of why we should always say “malinvestment and overconsumption,” not leaving out one or the other.

Joshua Park July 29, 2009 at 2:00 pm

Thanks for making the point about over-consumption, DD. Too many times, people focus on the malinvestment effect in the higher orders of production. YN, for example, made the assumption that over-spending could have been caused by an injection of credit into a consumer credit market. That is, that there could have been injections of credit into both the higher and lower stages of production.

The key here is the loanable-funds market and how manipulation from the central bank affects not only the PPF, but the structure of production. Investors are lead to believe that more capital is available than there is (mal-investment). Consumers are lead to believe that money is so cheap that is just not worth saving (over-consumption).

http://www.auburn.edu/~garriro/cbm2006.ppt

Lay-economists (not pros, like myself) ought to review the above powerpoint to get a grasp of why we should always say “malinvestment and overconsumption,” not leaving out one or the other.

Justin P July 29, 2009 at 2:40 pm

It’s Keynesianism that is the real threat, not monetarists.
Once Keynes is gone and the Fed is shown to be a shame, then the monetarist will all become Austrians.

DD July 29, 2009 at 2:55 pm

YN,

Over-consumption is just a symptom of the same causal element of artificially low interest rates. If we over-consume, then we presumably don’t save enough. That’s basically Schiff’s main mantra. Production requires capital and capital requires savings (or actually is savings).
The artificially lower interest rate is basically a form of price control/manipulation where the price of capital is set below the market value. This increases demand for capital, while restricting supply creating a shortage, but unlike a typical commodity price control, the visible shortage of capital (credit crunch) is delayed by deceptive work of the central bank, fooling investors by inflating the money supply via credit markets.

“So basically, what you state is that after the crisis has ended everybody will consume just as much as before and therefore the lower stages are not expanded at all but just right.”

Everybody will consume not as much as before, but as much as they consume now! The problem is that investment/consumption activity is distorted as a result of State interventionist policy that cannot be sustained. The correction phase corrects the resulting mistakes and realigns the production structure with the unhampered market. The idea is not to return to some interest rate that should have been in the past, but to return to a current interest rates that reflects the true time preference of the market participants.
Of course modern policy never allows the full correction and immediately begins to work on a new distorted path.

Caveman July 29, 2009 at 2:56 pm

@billwald
The Libertarian/Republican losers are the ones who complain that if only the government would get out of their way, stop making rules and collecting taxes from them, why they could become rich. Not so!

Strawman, anyone? I don’t think most of us who post here would identify as Republicans and many of us are outside the libertarian mainstream as well. So, not only is this a strawman argument, it wouldn’t apply to most of us even if it were true.

Our Founding Fathers were familiar with that dogma and seem to have given us a government that was/is best adapted for controlling a population that is mentally screwed up.

The “controlling a population” part is what most of us take issue with. Besides, what’s your point other than “people are idiots/evil, therefore we need a totalitarian state to take care of/punish us?” Seeing as that’s pretty much the world as we know it, you should be content. Austrians have never denied that some persons are stupid/evil. It’s simply that in a truly free-market these persons will probably suffer personally as a result. And suffering as a result of personal error is one of the most effective means of teaching us not to repeat such errors. It’s only when there is a state to enable and absolve such persons that these errors are perpetuated and cause harm to society rather than just individuals.

Kenneth Mathews July 29, 2009 at 3:09 pm

•As a fan of Thomas Sowell…I would like to ask has Mr. Sowell been invited to the Mises Institute to participate in any of its events. Even if he does not agree with austrian economics to one degree or another – it would be an opportunity to showcase austrian theories to an influential intellectual outside of libertarian ranks. The strong and passionate differences between libertarianism and conservatism should not prevent austrians from interacting with conservative intellectuals and others outside of the austro-libertarian tradition/school. I regret that the weaknesses and inconsistancies of Meyer’s argument for fusionism allowed libertarians to defeat it and cast it away to be forgotten. A strong coherent argument for fusionism remains to be made – a fusionism that will be more than a strawman to be torn apart with glee and forgotten. I look forward to the rematch between libertarianism, conservatism and a fusionism based on a more solid and robust foundation.

Russ July 29, 2009 at 8:22 pm

billwald wrote:

“>Then how do we explain entrepreneurs like Peter Schiff and others who predicted the meltdown?

EASY. The human population has an economic bell curve of winners and losers. Winners win and losers lose.”

This, and the rest of your spiel, has absolutely nothing to do with how Schiff predicted the housing crisis.

“(I’m probably on just the high side of the median value.)”

So, you’re proof of the maxim that in America, everybody is equal to everybody else, if not a little better? *grin*

“Except for very rare cases of exceptional runs of bad luck, an adult, say over 30, who is a loser this year in this country would be a loser, any time, any place.”

You are completely out of touch. There are a lot of good, hardworking people who can’t get a decent job because of the government-created mess we’re in right now.

“Our Founding Fathers were familiar with that dogma and seem to have given us a government that was/is best adapted for controlling a population that is mentally screwed up. It allows the rich to get richer but at the same time keeps the lowest class out of the historical gutter.”

There is some truth to the above statement. The Founding Fathers, even ones like Jefferson, were not really democrats, and alway mistrusted pure democracy. The government that they instituted was a constitutionally limited democratic republic. Unfortunately, at least since the time of Jackson, we no longer have that government. Now, we are a socialist democracy.

jc butte July 29, 2009 at 8:36 pm

One of the more disappointing aspects to the liberty community that I’ve observed in my thirty year awareness of it is the tendency of some to “out libertarian” the rest. In my opinion its driven by ego and testosterone. The IP debate is one of it’s arenas.

Sowell is a good man and an ally. Can’t we just let the rest be and embrace him for all the good works he has done?

C July 29, 2009 at 11:27 pm

to echo JC Butte,

Why do we need to compete at being pure and righteous?

I have just been enjoying Charley Reese again tonight:

“Why I am not a Libertarian”

He is clearly a libertarian (small L) relative to the mainstream media that his iconoclastic columns challenged. But he, like me and many others who enjoy the exchange of ideas here at Mises, argued for a tempered and humane application of our founding principles, and accept that we do not have perfect answers to every problem, but that honoring the ideas our republic was founded upon is the basis for achieving greater life, liberty and happiness for all.

“Civil comments” and rational discourse will prevail, as it did in 1776 and 1787.

Youliy Ninov July 30, 2009 at 1:57 am

To DD:
There is nothing special in the first part of your statement. Basically, it states that the sky is blue, so OK.

“Everybody will consume not as much as before, but as much as they consume now! The problem is that investment/consumption activity is distorted as a result of State interventionist policy that cannot be sustained. The correction phase corrects the resulting mistakes and realigns the production structure with the unhampered market. The idea is not to return to some interest rate that should have been in the past, but to return to a current interest rates that reflects the true time preference of the market participants.
Of course modern policy never allows the full correction and immediately begins to work on a new distorted path.”
If my understanding of the ABC theory is correct and malinvestments do unwind, then deflation must occur. Basically, this says that the same amount of money can buy more goods. So it follows that after the reallingment people shoud be able to buy more in real terms, that is more activity for Wall Mart. It follows that “Everybody will consume MORE THAN before”.

To Joshua Park :
First, I believe it is OK to be layman economist. At least I am not biased and try to think with my own head.
Second, do not brag about being a pro. Ben Bernanke also thinks that he is pro and guess what, very many people agree. In fact more people would say that he is a pro as oposed to your being a pro. What I mean to say is that bragging in a field which is not as clear-cut as math makes not sense.
Another comments:
“YN, for example, made the assumption that over-spending could have been caused by an injection of credit into a consumer credit market.”
Yes, I did. I think that I read it somewhere (was it Garisson in “Philips curves..”?). It makes sense. Look at it this way:
Consumer credit is injected. Aggregate demand rises, consequently prices rise. Because of the price rise, profits rise. Businessmen attracted by the temporary availability of high profits flock to the particular field (lower levels). Expansion in the lower levels follows (at the expense of the higher ones).
This represents well the situation in the US (the declining or even non-existent manufacturing base in many areas). Check the article I cited in a previous posting.
This does not contradict the fact that there was malinvestment in the housing industry (standard ABC theory). If the ABC theory was entirely correct there should have been investment in all or most of the higher levels of production in all the industries (not only in housing). Was there an expansion in the textile industry? Why is that I never heard about it?
One more comment:
Are you aware that some authors do not agree that during the “capital -time” structure elongation/thinning (healthy growth) the interest rate declines? Check George Reisman in “Capitalism: A treatise of Economics”. When the interest rate declines, profits decline. Therefore it follows that the capitalism will disappear somewhere in the future. Or to put it more correctly the more underdeveloped a society is the more profit it makes.
BR

Bob Roddis July 30, 2009 at 5:53 am

Sowell’s omission is curious because he wrote “Knowledge and Decisions” in 1980 which is expressly based upon elaborating Hayek’s view that market prices are what transmit knowledge in society vs. inherent government ignorance in the absence of prices.

“In a wholly original manner [Sowell] succeeds in translating abstract and theoretical argument into a highly concrete and realistic discussion of the central problems of contemporary economic policy.” –F. A. Hayek “This is a brilliant book. Sowell illuminates how every society operates. In the process he also shows how the performance of our own society can be improved.” –Milton Friedman

http://tinyurl.com/lf7lvm

ettubloge July 30, 2009 at 7:16 am

I recently scanned Sowell’s new book in the bookstore and was dissappointed that there looked to be little mention of the Federal Reserve. However, his mantra is always free market.

The essay herein concludes that Sowell’s book is a contribution to the free market view of how the meltdown occurred. I have read “Meltdown” and I have read every column written by Sowell over the past 9 years (as well as 6 of his books). I have not read his new book on the housing collapse. However, I am sure that taken together, the Sowell and Austrian analysis provides a fully understandable commentary that lay people can easily grasp.

As a layman trying to undo 40 years of liberal claptrap, it was Sowell that hit the mark on real life “unintended consequences” of market intrusions by the know-it-alls.

He is not only an ally to Austrians, he is a leader because his simple lessons are direct and fully compatible. He opens the door to all of the good things.

Dick Fox July 30, 2009 at 7:47 am

To DD and others,

Apparently you read the Mises blog postings only superficially. Did you read Albert Hahn’s paper?

Keynesians Can’t Predict by Albert Hahn

Pre-Keynesian economists would not, incidentally, have been seduced into forecasting and calculating such secondary and further effects of spending. They would have considered a development of multiplier and acceleration theory as unrealistic toying with ideas rather than the scientific achievement it is considered nowadays. For whether increased spending on consumption leads in time to increased investment is dependent on the unascertainable profit expectations of entrepreneurs. The fact that inventories have been used up through increased consumption may or may not improve these expectations. And whether spending on investment leads to a corresponding spending on consumption is dependent on the equally unascertainable presence or absence of buyers’ resistance — as the early New Deal experiences clearly showed. Multiplier and acceleration theories thus do not answer but simply beg the question of what the long-run effects will be of single doses of spending.
http://mises.org/daily/3582

So what you are saying is that Austrians can predict but Keynesians cannot? Based on Hahn’s logic I must ask if low interest rates and excessive money creation created the real estate and credit bubbles, why don’t we still have the bubble, since interest rates and money creation are greater today than when the real estate bubble burst?

The only way to answer that is to understand what Hahn is saying in theory not just in specifics. The ABCT is a useful tool but it is not an econometric mathematically formula that is invariable. If you take that position you are just as bad as the Keynesians.

What makes Mises Austrian economics so powerful is that it considers Human Action as primary not some mathematical formula.

As Justin’s quote proves Sowell recognizes the impact of artificial interest rates and money creation but he is not a slave to a formula. It is the reaction of the economic transactors that makes the difference. Right now as in the Great Depression no amount of money creation and even negative interest rates will not cause people to do things that go against their judgement of their best interest.

I constantly fight against the monetarist econometric Austrians in an attempt to bring them back to the classical model.

Jude Wanniski called it the demand model versus the supply model. Please, please stop all of the monetarist demand side thinking and analysis. It only leads to bad policy recommendations.

Conservative Economics July 30, 2009 at 11:08 am

I have read Dr. Sowell’s book The Housing Boom and Bust and must say it is a solid exposition. While he does not indict the Fed nearly as much as I would like, I think it is a minor complaint in an otherwise very solid piece of work. In fact, Sowell covers a subject that is rarely discussed related to the “smart growth” policies within the areas of the US that were devastated the most by the crisis.

Weingarten July 31, 2009 at 8:13 am

Perhaps the discussion of the cause of economic failures would be aided by differentiating between long-range and short-range causes. The long-range (or underlying cause) of economic failure is that resources are not covered by monetary claims. Thus, in contrast with a barter economy which guarantees that goods are available, our monetary (including credit) manipulations guarantee that the ‘Master Builder’ will not have some of the goods that are needed. On the other hand, the short-range (or proximate) causes of problems, such as Fannie, Freddie, and the Community Reinvestment Act, have a powerful impact on the onset and duration of the disasters.
Note that the long-range causes that beset the alcoholic driver, are not refuted by the short-range causes, such as other mistakes in driving, weather conditions, road signs, other drivers, and a list of other influences that operate.

In other words, the issue may not be the competition between the ABCT and the effect of other government policies, but rather the need to describe the confluence of underlying and proximate causes (as is done in scientific explanations).

Weingarten

Weingarten July 31, 2009 at 10:18 am

After considering the need to differentiate between underlying and proximate causes, I realized that I had not gone far enough with regard to explaining causes. To begin, events have many long-range and short-range causes, and there is no absolute partition between them. The example of a traffic accident (or say a housing bust), can include dozens of factors, of varying duration of long and short-range causes. *Which one’s we address depend upon our intention.* For example: the engineer may focus upon the gripping action of tires; the policeman may focus upon the failure to stop at a stop sign; the insurance company may focus upon the texting of messages while driving, etc., etc. Consequently, whereas it appears that there is an objective cause for an event, that is true only insofar as an intention is presupposed. Just as there are many perspectives for preventing traffic accidents, there are many for preventing economic failures. Abolishing the FED makes one contribution, abolishing Fannie, Freddie, and the CRA makes others. We can of course delineate their relative contribution, but that too relates to our intention. In short, there is an endless list of ways to prevent or reduce economic failures, and many perspectives for evaluating their advantages. I believe that economics is a Wertfrei science, but economic policies depend upon a broader perspective.

Weingarten

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