The Writings of F.A. Harper volume 1 and volume 2
The Triumph of Gold, by Charles Rist
Profits, Interest, and Investment, by F.A. Hayek
The Theory of Political Economy, by W. Stanley Jevons
The History of Monetary and Credit Theory, by Charles Rist
Equality and Progress, by George Harris
Individual Liberty, by Benjamin F. Tucker
History of Crises Under the National Banking System, by O.M.W. Sprague
Capital, Expectations, and the Market Process, by Ludwig Lachmann
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Dear Smart Austrian People:
Please explain this to me.
http://michaelduff.livejournal.com/395650.html
Feel free to reply there if you don’t want to clutter this thread.
Rude of me to make people link off-site.
I would like someone educated in economics to explain the passage below. This is the heart of the comical rant linked above.
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The Rudebusch version of the rule is:
Target fed funds rate = 2.07 + 1.28 x inflation – 1.95 x excess unemployment
where inflation is measured by the four-quarter change in the core PCE deflator, and excess unemployment is the difference between the actual unemployment rate and the CBO estimate of the NAIRU, which is currently 4.8 percent. This rule describes past Fed policy quite well.
Applied to current data, the rule says that the Fed funds rate should be — drum roll — minus 5.6 percent. You can’t do that, of course, so we’re very hard up against the zero lower bound.
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The probability of getting an austrian explanation for that formula is -35%
I’d venture to say the author is being sardonic
The actual explanation to that is: economics is not a natural science, like physics, it is a formal science.
To study economics like a natural science is just as abhorrent as studying physics as a formal science, in which case physical phenomena would have teleological explanations for their ocurrences
In conclusion, there is no equation for human action (and there never will be)
@ Michael Duff: an educated commentary on negative interest rates can be found here http://mises.org/daily/3432
Mises.org is fantastic! There is nowhere that literature like this and so much more can be found. The amount of on line wisdome here at Mises.org is astounding. If you haven’t browsed the on line media you need to do it. It is a treasure.
Ultimately the equation is obtained by fitting a curve to past data (namely some recent 20 years). As such, it is past data. It has as much applicability as any past data has to the present. For example, if there were time invariant (or slowly varying) laws in economics, this data would be useful. It can also be doubted on this principle alone.
I suspect that the equation has a linear character (c+a*x+b*y) because the regression which fit the curve supposed apriori a model with as few free parameters as possible, namely a linear one. The equation would only be applicable if we were still at roughly the same equilibrium point to which the model was fit. If the model gives unrealistic outputs, this is evidence that we are not at the same point. One might also doubt that we were at the same equilibrium point for 20 years as well, undermining the definitions of the coefficients in the first place.
If you still find the equation valid, in order for an equation to be a source of decisions, it the variable one attempts to manipulate must be causally prior to the variables one wishes to effect. Is the equation saying that setting the funds rate and inflation rate leads to some employment level or is the equation reflecting how Fed policy is affected by the observed inflation and employment rates? Or an inflation rate the result of an employment rate and a funds rate? If my happiness has a proportionate relation to my wealth, can I conclude that I will be wealthier if I succeed in being happier?
When we see an equation like the ideal gas law PV=nRT, the content is “the gas will always adjust to maintain this.” Hence, you may set V and T and P will adjust, or V and P with T adjusting, and you cannot see gas with P,V,T simultaneously in violation of the gas law (in fact, such violations indicate the non-idealness of the gas, putting the theory on unassailable footing). Mainstream economics is full of statistically derived wannabe gas-laws based on scanty statistical regressions, but they are mainly hot air.
Thank you all very much, particularly Arend for helping me track down the literature I was looking for.
I know enough about Austrian economics to know you guys have a fundamental philosophical reason for distrusting economic formulas, but I wanted to see that applied to a single concrete example.
Thanks for the detailed replies to my random question, and for taking me seriously.
I’ll hit the forum again after I digest all this.
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