Paul Krugman is despairing of late, because a growing number of mainstream economists are adopting (versions of) Austrian business-cycle theory. The most recent convert is Minneapolis Fed president Narayana Kocherlakota. FULL ARTICLE by Robert P. Murphy
Source link: http://archive.mises.org/14283/putting-austrian-business-cycle-theory-to-the-test/
Putting Austrian Business-Cycle Theory to the Test
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If you told Krugman he had a bunch of crumbs in his beard, his solution would be to eat a box of crackers.
Is that the smell of napalm?
No, it’s just the smell of Paul Krugman’s arguments burning.
I love that smell.
Refuting Krugman’s “facts,” and debunking his theory tales (viz., fairy tales dressed up in Keynesian mythology to look like economic theories, sort of.), is a full time job. Keep it up Mr. Murphy; I don’t envy you. It probably won’t be long now before LORD KEYNES or some other Krugman devotee shows up to vilify you for having the impudence to challenge this Nobel laureate. I wonder if Professor Krugman assigns his econ-101 students the task of responding to his critics?
How’s that offer of a debate with Krugman going? Too bad we don’t have some way of placing a full page ad in the WSJ or USA today calling for a nationally televised debate.
I recall that private full page ad in USA today calling for Ron Paul as president. I don’t know if it had any impact, but if I recall, it was only some $50-100k. Peanuts for some. Maybe someone could start a money bomb to raise enough bernanke’s to pay for it.
CALL FOR DEBATE:
I (….austrian…) call out the mealy mouthed drunk shooting hangover hating forked tongue Paul (the not noble) Krugman at high noon in the middle of wall street.
Maybe a t.v. ad would have Frankie Lane singing the theme to high noon…. Oh don’t forsake me…
Or maybe I should wake up and stop dreaming
Great work! your articles are illuminating and they are delightful to read.
Interesting reference to Kocherlakota. If you want to study (neo-classical) macro, come to Minnesota.
“Austrian economists are correctly wary of aping the methods of the natural sciences…Even so, a true theory will be consistent with the empirical evidence.”
Dr. Murphy has nicely stated the relation of a true theory with the empirical evidence. Let those who deny ‘falsifiability’ when it comes to their theories take note.
Yes, that is, the logical soundness of the theory takes precedence over empirical methods where your beloved “falsifiability” means rejecting a hypothesis based on some arbitrary alpha level. If you read his that paragraph carefully, you will see he defends the precedence of praxeology over empirical methods; the very exact opposite of your view.
I shall first restate what I wrote on another blog.
Jordan Viray, commenting on “Our views on the world are falsifiable, while yours are not”, responds ‘Nope. Mises’ view that “humans act” is not falsifiable.’
However “humans act” is not inherently an empirical statement about the world, but a metaphysical orientation. Note that there are people who operate instinctively as when recoiling from a fire, rather than those who have reasoned in terms of intentions. How we determine the form of behavior of an individual can only be determined by reality, i.e., by what is falsifiable. The point is ‘falsification’ does not apply to metaphysical concepts, and the outlook of falsification is not in itself falsifiable. Conversely, when von Mises writes about the world, whether it is about its economic operations or about anarchy, his statements are falsifiable.
[Other metaphysical outlooks that are not falsifiable are determinism, probability, and free choice. Surely, some things are determined, some have a probability of occurring, and people do choose, but there can be no falsification of those outlooks, only whether or not happenings in the world are of those forms. Similarly, as the Einstein quote stated “As far as the laws of mathematics...are certain, they do not refer to reality”, meaning they are not falsifiable.]
What Popper brought out was not that every belief was ‘falsifiable’, but rather those beliefs that render statements about how the world is. He exemplified this by statements made by Marxists, Psychologists and others, who purport to say what occurs in the world, whereas their methods could only show that their own theories were correct, because no evidence could in principle refute them. For example, a Marxist would argue that capitalism was going to create depressions; then when they did not occur it was because capitalism by avoiding a depression was going to create a worse disaster. Some psychologists would say that everyone acted to further power; then when someone relinquished power it was interpreted to be an indirect way of furthering power.
Popper would agree with Viray that anarchism is not falsifiable, because no evidence in principle could be accepted for its refutation. He might add, that once people believe that no falsification is required, they are in no position to criticize statements about the world by others because there is evidence to the contrary.
Is sum, praxeology holds over empirical methods, but its statements about the world remain falsifiable as are the conclusions drawn by Robert Murphy.
“Note that there are people who operate instinctively as when recoiling from a fire, rather than those who have reasoned in terms of intentions.”
Is this meant to inform us? “Human Action” covers such cases in the section entitled “On the Serviceableness of Instincts”
“How we determine the form of behavior of an individual can only be determined by reality, i.e., by what is falsifiable. ”
So here you say reality is what is falsifiable, something I called you out for before. It was wrong then and it is still wrong now.
“However “humans act” is not inherently an empirical statement about the world, but a metaphysical orientation.”
Nope. It’s not either or but rather both. As Mises stated “Economics does not follow the procedure of logic and mathematics. It does not present an integrated system of pure aprioristic ratiocination severed from any reference to reality.”
“He might add, that once people believe that no falsification is required, they are in no position to criticize statements about the world by others because there is evidence to the contrary.”
Nope. Just because Austrians proceed praxeologically does not somehow take away our ability to criticize statements made by others using contrary evidence.
“Is sum, praxeology holds over empirical methods, but its statements about the world remain falsifiable”
Nope. Praxeology is not divorced from reality which is necessarily observed and so a statement about the world that humans act is not falsifiable. There are some distinctions you should be drawing but I’ll leave that up to you. (Looks like Inquisitor has given you a bit of help below -)
Dr. Murphy asks “In contrast to the Austrian story, what does the Keynesian view predict?” He then says “Let’s construct a more accurate test.”
This is precisely what falsifiability means, allowing the reality to determine whether a theory is correct or wrong. Praxeology is superior to empirical methods, but that does not deny its falsifiability. The denial of falsifiability would state that no matter how the test turns out, a given conclusion must hold.
And I’ll post verbatim my reply in the other thread to this cut and paste statement:
“That is precisely what falsifiability means, where reality determines the outcome, rather than one’s outlook that ensures how reality must be.”
No one is saying that an outlook “ensures how reality must be”. Rather, there are some facts of reality for which we conform our minds which then ensure how some other aspect of reality must be.
Jordan Viray, do you then test your theories in part by reality, or are your theories unable to be tested by reality?
Neither. There is no need to test Austrian theory because its theories are already implied by the axiom of Human Action which is itself based on reality. The theory follows necessarily. Testing is absolutely unnecessary since testing will inevitably confirm Austrian theory, i.e., unless the axiom that humans act is wrong.
Dr. Murphy is not looking to test Austrian theory as if there was a possibility reality will not confirm praxeology but merely to provide empirical support of the theory.
[Jordan, I was not able to reply to your comment below, so I am placing it above.]
*Can you make a single statement ABOUT REALITY that cannot be falsified?*
This is not a matter of being untrue because it will be confirmed. Proven statements in physics such as the speed of a falling rock will be confirmed, but they are nonetheless tested, i.e., meeting the criteria of falsification.
Similarly, the axiom that humans act, cannot apply unless one shows that a human being exists. Even given a human being, if he recoils from a fire that is not “acting” unless he has made a choice. As I mentioned before, many concepts cannot be falsified, so at issue are precisely statements about what exists in reality.
“*Can you make a single statement ABOUT REALITY that cannot be falsified?*
Easy. Humans act.
“This is not a matter of being untrue because it will be confirmed. Proven statements in physics such as the speed of a falling rock will be confirmed, but they are nonetheless tested, i.e., meeting the criteria [sic] of falsification.”
Falsifiability is indeed important in the hard sciences because, unlike the science of Human Action, we are not privy to the axioms governing the physical world in the same way we are privy to the axiom of Human Action. Bad comparison but a common one.
“Similarly, the axiom that humans act, cannot apply unless one shows that a human being exists.”
But anyone considering that axiom already exists, and further more, they act by that very consideration.
“Even given a human being, if he recoils from a fire that is not “acting” unless he has made a choice.”
Already covered by Mises. Don’t want to beat a dead horse but I mentioned that Mises already anticipated such an objection in a book called … wait for it … Human Action.
Only people clueless of the Austrian method deny it, critics and proponents alike. We never denied that it is logically falsifiable or that its subsidiary axioms cannot come under scrutiny and/or found insufficient (people would do well to read Geoffrey Alan Plauche on the Austrian method and Aristotle, which gets to the bottom of what Mises was doing; equally with Long’s book on Wittgenstein and Mises.) This does NOT mean we subscribe to the spectre known as Popperian falsificationism or indeed any such thing.
Inquisitor, I do not deny but rather affirm Austrian economics, such as I affirm the findings of physics and chemistry. Yet in each of these cases, statements about reality are tested, i.e., they meet the criteria of falsification.
Can you mention any statement about reality which cannot be falsified?
For those unfamiliar with the notion of ‘falsification’, permit me to clarify it with an example from Euclidean geometry. An equilateral triangle has three equal angles of 60 degrees. This is absolutely true, but to quote Einstein it says nothing about reality. In reality, there are no points of zero size or lines that are perfectly straight. So once we make a statement about a real triangle, there can be discrepancies, such as bends and the influence of gravity. Even if these measurements are so accurate that it makes virtually no difference in measurement, it is different from the mathematical triangle. In addition, scientists say that our universe is non-Euclidean so a triangle in space can have somewhat different features. The point is, when we speak of a ‘triangle’ in reality it is falsifiable, even if each of our predictions are shown to be true.
The above was not intended to deny the validity of Euclidean geometry in practice, but to show that a statement as to what occurs in reality is falsifiable, even though a theoretical triangle cannot be falsified empirically.
Jordan Viray says that a statement ABOUT REALITY that cannot be falsified is that “Humans act.”
That is clearly not a statement ABOUT REALITY, as I have repeatedly noted, no more than a theorem of geometry is a statement ABOUT REALITY. Again and again he misrepresents ‘falsifiability’ by pretending it means that it relates to whether something is false, whereas it actually relates to something that has empirical content.
It is evident that the statement “Humans act” is true even if our planet were destroyed, and there were no human beings, just as it is true that the base angles of an isosceles triangle are equal, even if the universe went out of existence. Surely that is not the same as addressing a particular human being, or a particular triangle that is composed of matter.
So let me phrase the question differently. *When a view is applied to real entities, such as to a physical human being or a physical triangle, can any statement about THOSE ENTITIES not be falsified, i.e., not be able to be tested empirically?*
Let us note the context of this discussion, was that of Dr. Murphy testing the difference between an Austrian and a Keynesian view IN REALITY, rather than in theory.
Karl Popper was quite clear as a philosopher of science that falsification applied to REALITY, noting that if a statement could not be falsified it had no EMPIRICAL content. (He was addressing the problem of demarcation, where he differentiated between what related to reality and what did not.) So Jordan thinks he is refuting Popper by misinterpreting Popper’s claims about falsification, by taking the statement “Humans act” which has no empirical content (unless it refers to an actual person whereupon it has empirical content). By that token, Jordan believes that he can refute Popper by such a priori statements as ‘given a drop and adding another drop yields two drops’ which cannot be falsified, although in reality one of those drops could be composed of anti-matter, or where the chemistry of those drops could result in the formation of a single drop or many drops.
Austrian economics begins with truths that an individual knows from within, and logically derives true conclusions. Yet when one applies a conclusion to a concrete entity it can be properly applied or not, but in any event can then be tested, i.e., falsified.
“”Humans Act” is clearly not a statement ABOUT REALITY, as I have repeatedly noted,”
Actually “Humans Act” is a statement about reality which makes you repeatedly wrong.
“no more than a theorem of geometry is a statement ABOUT REALITY.”
No one is implying that. Geometry, when it is related to reality, is related through abstraction. There is nothing necessary about geometry and any subsequent correspondence to reality. Correspondence to reality, however, is necessarily intrinsic to the science of human action.
“Again and again he misrepresents ‘falsifiability’ by pretending it means that it relates to whether something is false, whereas it actually relates to something that has empirical content.”
Nope. Firstly, I never stated “falsifiability” has to do with “whether something is false”. Secondly, “falsifiability” does relate to “whether something is false” in that it is the ability to show “whether something is false”. You can’t even knock down your own strawmen.
Now the fact that falsifiability relates to something that has empirical content is no news to me. As I said in the other thread: “[falsifiability is] a great tool for empirical sciences”
“It is evident that the statement “Humans act” is true even if our planet were destroyed, and there were no human beings, just as it is true that the base angles of an isosceles triangle are equal, even if the universe went out of existence.”
Evident to whom exactly?
“So let me phrase the question differently. *When a view is applied to real entities, such as to a physical human being or a physical triangle, can any statement about THOSE ENTITIES not be falsified, i.e., not be able to be tested empirically?*”
Humans and triangular shaped objects admit of different methodologies for their study. But I can give you a statement about physical humans which cannot be falsified although I’m afraid you aren’t going to like it. Humans act.
“Let us note the context of this discussion, was that of Dr. Murphy testing the difference between an Austrian and a Keynesian view IN REALITY, rather than in theory.”
Let us note what Mises said: “Economics does not follow the procedure of logic and mathematics. It does not present an integrated system of pure aprioristic ratiocination severed from any reference to reality.”
There is no “reality, rather than in theory” in Austrian economics.
“So Jordan thinks he is refuting Popper by misinterpreting Popper’s claims about falsification, by taking the statement “Humans act” which has no empirical content (unless it refers to an actual person whereupon it has empirical content).”
Non sequitur. Such simple lapses of logic make your attempts at philosophy risible.
“By that token, Jordan believes that he can refute Popper by such a priori statements as ‘given a drop and adding another drop yields two drops’ which cannot be falsified, although in reality one of those drops could be composed of anti-matter, or where the chemistry of those drops could result in the formation of a single drop or many drops.”
Considering I never said that, it’s funny to see you launch into a tangent of water drops and antimatter in an attempt to knock down another strawman.
“Austrian economics begins with truths that an individual knows from within, and logically derives true conclusions.
Yet when one applies a conclusion to a concrete entity it can be properly applied or not, but in any event can then be tested, i.e., falsified.”
If a conclusion is derived logically from truths, falsification is utterly unimportant even if it is nice (although absolutely no way necessary) to see evidence support our theory.
Fallibility is not the same as falsificationism. Austrian theory can be incorrect about reality to the extent that a) its subsidiary postulates (e.g. disutility of labour) or b) its deductions are flawed. I won’t say anything of its logical axioms for they are unfalsifiable without lapsing into contradiction, ergo they are axioms in the truest sense of the word. Austrians of all shapes, be they Aristotelian, Kantian, whatever, argue against the hypothetico-deductive method in Economics. Even people like Rafe Champion only try to show how Austrianism fits the Popperian mould but by showing how terms in it correspond to those in the Popperian schema, not by substituting it. Austrian core axioms are true of reality; its postulates describe the conditions under which they are operant. To the extent that Austrians make empirical arguments, it is to determine if the conditions of their theories are operant, or perhaps (and rarely) if any postulates/axioms need to be added to the core theories. They do not function in the way positivists pretend science does. Nor do they need to. Regarding Euclidean geometry, it possessed axioms that were suspect from the beginning and needed logical revision. What you mention, though, is not “falsification” of the theory but its inapplicability to reality. Yet you’d need to show Austrian axioms/postulates are not true of reality for this to be the case with them and no one has done so to any great degree. Certainly not hacks like Lord Keynes.
BTW, you can question whether a particular interlocutor is acting purposefully, i.e. whether they are a purposeful agent. But the consequence of this is -not- that the theory is false, but that it is inapplicable to them. Again, this is a matter of determining theoretical applicability rather than the theory’s being “testable” in the usual way the term conveys. They’re not testable. But they might be inapplicable. Kinsella had an interesting blogpost recently called “Keep it interesting”. It conveys the idea behind this via quotes from Mises and Hoppe very lucidly. I think both positivist/empiricist critics and defenders (frequently Kantian) of Austrianism both err in properly appreciating its methodological basis. I don’t blame them because it is very complicated and requires a lot of scholarship to be understood. It’s also the soundest methodological framework I’ve yet to see put forth for economic (and social) theory in general and it anticipates and answers many of the problems I saw with the “mainstream” way of doing economics, e.g. “perfect competition”, the Gini coefficient and so on.
Jordan, what I mean by REALITY is not what you mean by it. So you are well able to dismiss my requirement to be subject to the evidence of REALITY, by claiming that “man acts” constitutes REALITY. Consequently, we agree the views you present are not falsifiable, and cannot be refuted no matter what material evidence is provided. It is such views that led Popper to develop his notion of falsification, to demark them from those that can be tested by evidence.
Inquisitor, do you acknowledge the difference between what Austrian theory says about monopolies, and how it applies to an existent monopoly? That is, do you acknowledge that behavior of an actual monopoly might not be in perfect line with what is expected about a monopoly in theory? Or do you maintain that a discussion of the theory of monopoly suffices to answer any question about the actual monopoly, with no need to address any empirical evidence?
“Jordan, what I mean by REALITY is not what you mean by it. So you are well able to dismiss my requirement to be subject to the evidence of REALITY, by claiming that “man acts” constitutes REALITY.”
Nope, I never claimed that human action constitutes reality. Or even “REALITY” as you like to put it. You are building quite the army of strawmen.
“Consequently, we agree the views you present are not falsifiable, and cannot be refuted no matter what material evidence is provided. It is such views that led Popper to develop his notion of falsification, to demark them from those that can be tested by evidence.”
And what exactly is the impetus behind Popper’s demarcation? You’ll see why it is problematic.
An excellent exposition of the Austrian business cycle view. The only thing I would add is to express my disappointment that Ben Bernanke seems to have unreservedly bought into the Krugmanite anti-structuralist line on unemployment. In his Friday speech, where he uses very diplomatic and noncommittal language with regard to every other topic, his comments on unemployment are very outspoken: “Overall, my assessment is that the bulk of the increase in unemployment since the recession began is attributable to the sharp contraction in economic activity that occurred in the wake of the financial crisis and the continuing shortfall of aggregate demand since then, rather than to structural factors.”
Keep on fighting the good fight! I agree with the others; great article.
It is easy to enjoy the spirit of Dr. Murphy’s responses to Paul Krugman’s ceaseless inanity and frequent deception, and today’s example is no exception. But while we may say that the structural employment data from the past few years are consistent with the Austrian model, we should be clear that it is far from any kind of proof. A full analysis of employment level changes among the production stages during the business cycle would be complicated by the need to make many assumptions that fall well outside the ABCT.
The theory itself would simply say, for example, that the growth rate in total income of the earliest production stage during the boom phase will have a greater percentage growth rate than that of the second earliest stage. Similarly this growth rate will be more negative than the penultimate stage during the bust phase. But how can this statement be related to the percentage change in employment level between these stages?
The first step would be the mapping of the actual producers into their appropriate production stage. This step is complicated by the fact that each actual producer incorporates many theoretical stages. Defining the stage boundaries and sorting out the income contributions to each would be a Herculean task in itself. The second step would be to separate the total income of each stage into three components:
1) Income that is reinvested in the earlier stage.
2) Income produced by land factors.
3) Income produced by labor factors.
This breakdown is simplified for the earliest stage since the reinvested income component is zero. In any event the percentage rates of change of each of these factors would be summed (on a weighted basis) to obtain the total percentage income change.
With regard to the employment level it is the labor factor income that most relevant. To compare the percentage grow rates in labor incomes between two stages the other income components would need to be backed out. After this there remains the question of how a change in the labor income will affect the employment level. Specifically, how much of a labor income decline is absorbed by reducing the number of laborers as opposed to a reduction in the average labor wage, and how would this balance depend on the stage in question?
These considerations should convey the wide gulf that separates data from theory in the economic realm.
“But while we may say that the structural employment data from the past few years are consistent with the Austrian model, we should be clear that it is far from any kind of proof. ”
Certainly, but the standard praxeological understanding of ABCT (or even just plain Humean skepticism) shows that no amount of supporting empirical evidence can constitute any kind of proof. Now it’s often dangerous to rely on aggregates for various reasons as Dr. Murphy is most aware but the student of Austrian economics realizes, unlike mainstream economists, that aggregates aren’t enough.
Still, as you point out, the connections between orders of production and their apparent counterparts in statistical data aren’t exact, e.g. bricks (durable) are lower on the stage of production than pharmaceuticals (non-durable) even though non-durable goods are typically produced on a lower stage of production than durable goods.
In general though, a look at the sort of goods measured in the non-durable/durable/construction industry indexes does generally support Dr. Murphy’s assignment of them according to the Austrian orders/stages of production.
I have a basic question that I would like Austrians (hopefully even Prof. Murphy) to answer. If I am a home-flipper buying homes riding on an asset-price bubble and I own 3 homes, one of which I also live in, and all of which I have purchased on loans obtained from banks, are these homes consumers’ goods or producers’ goods for me?
For you seems to be clear that it is an investment.
For others buying them it depends: we could count it as producer good (we need a house to live and be able to produce), but if it is for a second home (week-end, etc.), we could say that it is a durable consumer good., either way it is not a nondurable good.
Thanks for answering.
I do understand it is an investment and a durable consumer good. My doubt is if I am a home flipper, i.e., in the business of buying up homes with the sole purpose of selling them at an opportune moment, are the 3 houses (apart from the rented house I live in) in my inventory producers’ goods or consumers’ goods? I am looking for a technical answer.
I am looking for the Austrian answer because I am engaged in an argument over this issue.
You’re holding them speculatively to resell them. I’d therefore say you’re acting as an entrepreneur, investing, rightly or wrongly.
So would you say that the houses I possess are higher order goods and not consumers’ goods?
From your perspective, yes.
I think the house you live in would be a consumer good i.e., first order (at least if it directly satisfied your want for shelter and other desires related to household amenities) which is reasonable to assume.
However, if you were away from your house and had to walk home, the house would temporarily not be first order until you were able got home and were directly able to satisfy your want after you had finished laboring i.e. walking.
Do the other two homes satisfy your wants directly? Could be, but if you are a home-flipper, the satisfaction of your wants regarding these two homes probably comes indirectly since the MO of a home-flipper involves using the profits made from the sale (which requires the labor of a real estate agent at least) of those other homes to satisfy some want in some eventual first order good. So they would, using Mises’ terminology, be “producer’s goods” although I’d recommend using his alternative terminology of “higher order goods”.
I’ve got a feeling, based on some of the rather involved IP discussions I’ve seen you get into, that there’s going to be a difficult question coming up so I’ll probably have to defer to the experts. But there’s my take for what it’s worth.
Thanks. I too was of the opinion that the houses that I do not occupy are producers’ goods or taking your suggestion, “higher order goods”.
Let me now complicate the matter further. Suppose I am a sub-prime borrower who has absolutely no means to pay for the $300,000 house that I can buy and who buys because
1. right now, teaser rates enable me to hold the house with small equated monthly instalment
2. I am quite sure that the house price will go up in 6-12 months time at which point in time I could offload it in the market, square off my loans and still have a handsome sum of money on hand
3. I could even refinance my home mortgage until such time as the price reaches a level I am comfortable selling at
4. I could live in it in the meantime because my income does not permit me to rent a comparable house in any case
In this case, is it a consumers’ good or a higher order good? Thanks in advance.
Hmm … I’m assuming that in this situation, the sub-prime borrower is now buying a single home to live in.
If my understanding is correct, any good which directly satisfies a want is, by definition, a consumer good. As long as the borrower’s want for shelter is satisfied by using that house, that house would be a consumer good.
Now the house in this new proposed situation cannot be a higher order good while he is using it because a higher order good can only satisfy wants indirectly. It is at this point only potentially a higher order good. It moves from being potentially to actually a higher order good only when he sells it (and I suppose satisfies some other want with the proceeds) and is no longer living there.
I understand that this might the analysis ex-post. What about the analysis ex-ante? Does it not leave the entire situation quite murky? What was the borrower borrowing for? Holding as inventory or using as a house? At the time of making the “buy” decision, would you say it was treated as a consumption good or as a higher order good? So, was the buyer’s demand for a consumers’ good or for a higher order good? And in general, isn’t the ex-ante analysis more important from a catallactic point of view?
In other words, I am trying to understand how do we deduce what the “want” was at the time of purchase? Does that have any impact on the analysis of the problem?
Ok, I’ll try the ex-ante angle here:
“What was the borrower borrowing for?”
I presume the borrower was living somewhere else and is deciding to flip the house.
“Holding as inventory or using as a house?”
That house would be inventory only as long as he doesn’t use it. It would serve both functions if he were to move into it and intend to flip it.
“At the time of making the “buy” decision, would you say it was treated as a consumption good or as a higher order good?”
Assuming the buyer was already living somewhere and bought the house primarily to flip it, it would be a higher order good.
“So, was the buyer’s demand for a consumers’ good or for a higher order good?”
The demand is for a higher order good. If that demand includes living in the house, then the demand is for a consumer good though that house remains potentially a higher order good.
“And in general, isn’t the ex-ante analysis more important from a catallactic point of view?”
In general, that seems to be the case.
NB for “Lord Keynes”
Bala has pointed out that you used the phrase “consumption good” instead of “consumer good” which I had overlooked since the discussion had consisted entirely of “consumer/first order goods” and “producers’/higher order goods”.
“Consumption good” is indeed incorrect.
A house bought by an owner occupier from a subprime loan is a durable consumer good, yes.
It is also an asset and he can speculate on its price.
The house is used to produce no commodity – it is not a capital good.
Even the person who flips it is selling an asset on a secondary market.
If the house was bought to rent out to other people, it is a capital good.
But as you can see perfectly well in Figure 3 of this book (Brookings Papers on Economic Activity: Fall 2008, p. 81 and also p. 83), loans to non-owner-occupiers did not significantly rise in 2000s housing bubble and in fact stayed flat.
It was owner-occupiers who took the majority of sub-prime loans.
These people are the ones who started to default causing the subprime meltdown and crisi in the value of mortgage backed securities.
And they were not using the houses are capital goods.
“The house is used to produce no commodity – it is not a capital good.”
Wrong. The house can be used to produce a commodity (according to your definition of commodity). Here’s an example of the process: Let’s say I bought a house with the intention of living in it and flipping it in six month’s time and no less. You come up to me after three months and offer to buy it. I say no.
Is the house a commodity? Well it is a good but because it is not for sale it does not meet the requirement in your definition “what it can be sold for”. So no, at that point it is not a commodity.
But three months later I put it up for sale. Is the house a commodity then? It’s a good and it’s salable so yes. Therefore, according to your own definition, it is a capital good.
Calling a house an asset and describing a transaction as taking place on the secondary market takes away nothing from the fact that a good is being sold and that the salable good is a commodity.
Bala,
a house is a consumer good as Jordan Viray explained. When you buy a house for investment purposes, you are acting in the capacity of an investor who is directing resources to high order goods (such as construction materials, construction labor, etc). Nevertheless a house per se is a finished product used for consumption.
So for you, as an investor, the house is simply an asset. You can call it a consumers’ good if you like, but the whole intertemporal analysis is more relevant to the construction process of the house, not the finished good itself.
I still have a doubt that stems from what Rothbard says in MESPM, pp 15, footnote 15. He says addressing a common objection to the universal nature of time preference
“Thus, a common type of objection to the assertion of universal time preference is that, in the wintertime, a man will prefer the delivery of ice the next summer (future) to delivery of ice in the present. This, however, confuses the concept “good” with the material properties of a thing, whereas it actually refers to subjective satisfactions. Since ice-in-the-summer provides different (and greater) satisfactions than ice-in-the-winter, they are not the same, but different goods.”
Could I say the same thing with respect to a house? Could I say that when I buy a house for investment and when I buy a house for living in, I am buying different goods? Since a house bought for investment primarily provides the subjective satisfaction that comes from appreciation in its capital value, a sum that could be obtained by selling the house later, could I say that sub-prime borrowers, NINJA loan takers, home-flippers,etc., who bought houses as an investment or even a source of cash in the near to medium-term future were treating houses as though they were higher order goods at the time of buying the house (ex-ante)? Would I be right in saying that the subjective satisfaction for them being a future good (money in hand after sale at some point in the future), it would be incorrect to treat this as demand for houses as a consumers’ good even though they may live in the house in the interregnum?
Therefore, for the purpose of economic analysis, may I treat this demand as demand for higher order goods?
Or am I misinterpreting Rothbard? If so in what way?
Perhaps the lesson here is, that once a consumer good starts to look like a higher order good, then we know we’re in the midst of an asset price bubble
The home-flipping phenomenon you are referring to is, after all, a case of massive amounts of speculators chasing after the same assets.
I like to use the example of buying an oven for your bakery compared to buying an oven for your personal use. In the first case the oven is one step more of a high order good than in the second. The distinction here is that you’re are buying an oven to produce something to sell, whereas you don’t buy a house to produce something but to speculate on its future price.
” Perhaps the lesson here is, that once a consumer good starts to look like a higher order good, then we know we’re in the midst of an asset price bubble ”
I agree. That’s what I am trying to figure out. Your answer makes me surer of my answer than I was before.
Actually, the reason I asked this question is this
http://socialdemocracy21stcentury.blogspot.com/2010/10/austrian-business-cycle-theory-its.html
This guy was focusing on one particular statement of Rothbard
“To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” – MESPM, 2004, pp 995-996
to claim that since houses are consumers’ goods, the housing bubble was not the typical malinvestment predicted by ABCT and hence that Austrians can’t take credit for predicting it. As I was debating him, it struck me that the reality could be that while a house, to a person in his right mind, is a consumption good, in the face of a massive wave of money creation as happened after the dot.com bust and the concomitant wave of credit expansion, it is possible that people actually started treating a house as a higher order good or a producers’ good.
If I am right, this guy’s argument is gutted. Any more help would be welcome.
i agree. To a large extent houses were treated as high order goods.
We must also not forget the whole construction industry, which quite clearly counts as high order investments
Thanks. And I agree about the construction industry part. That, however, was not sufficient for this idiot who insisted on nitpicking. I had to figure out a proper answer. Just “feeling” that I am right was not sufficient.
To a house flipper, of course, homes are his business (and thus typically high order) even if he got a loan as a “consumer”.
He might live in a home which means it is by definition a first order “consumer” good because some want is indubitably being satisfied by his living in it. But nothing prevents goods which are not destroyed in their consumption from potentially serving as higher order goods e.g. expensive watches bought for use/investment.
To a house flipper, of course, homes are his business
They are not capital goods, though.
A house flipper (assuming he is not renting the house out) is a speculator on asset prices.
He owns an asset and expects to make money from appreciation. The house is not producing anything.
What “commodity” is his house producing?
“They are not capital goods, though.”
Actually they are since he intends to use various factors of production i.e. the labor of a real estate agent and whatever capital is involved in conjunction with this house to create a product (house that is for sale). That house could be a consumers good if someone decides to live in it or it may also become a capital good if sold to another house flipper.
“A house flipper (assuming he is not renting the house out) is a speculator on asset prices.”
Yes, he’s a speculator as are all investors.
“He owns an asset and expects to make money from appreciation. The house is not producing anything.
What “commodity” is his house producing?”
This is why I prefer to use “higher-order good” instead of “producers’ good” since people often get confused and think a producers’ good needs to to be producing something.
Lord Keynes,
” What “commodity” is his house producing? ”
http://blog.mises.org/14283/putting-austrian-business-cycle-theory-to-the-test/comment-page-1/#comment-732747
http://blog.mises.org/11115/is-housing-a-higher-order-good/
Thanks a ton.
And that article accepts that housing when bought by a person with a mortgage is a consumer durable, not a capital good.
Therefore tortuous arguments trying to prove that houses are capital goods will not fly.
I am trying to go one step beyond the article. Check out this comment of mine just above. I am citing it here for reference.
http://blog.mises.org/14283/putting-austrian-business-cycle-theory-to-the-test/#comment-732548
http://blog.mises.org/14283/putting-austrian-business-cycle-theory-to-the-test/#comment-732530
The main idea of the above posts is that ex-ante analysis is what is relevant from a catallactic point of view. What I use a good for once I buy it is irrelevant to the economic analysis of the buying decision. If I, say, buy a car for use in my car rental business but later on shunt it to my personal use because I shut down my business, the car would, for catallactic purposes, be deemed to have been bought for business purposes and not for personal consumption. It would be considered a higher order good and not a consumers’ good.
To add to this and what I have said in those 2 comments, let me add that the home-flipper is in the business of supplying “used-houses”. New houses and old houses are different economic goods, though they are close substitutes. From an exchange point of view, the main difference between new houses and used houses is that while the used house has undergone some “wear and tear” as compared to the new house, it also sells at a discount compared to the new house.
The extent of the discount would be precisely the rent that the occupier would have paid for the period of the occupation discounted to the present. This comes from the simple point that the capital value of any consumer durable is the discounted present value of the future cash flows that would emanate from it. To quote Rothbard
“At this point, we shall define the “price of the good as whole” as its capital value on the market, even though there is risk of confusion with the concept of “capital good.” The capital value of any good (be it consumers’ or capital good or nature-given factor) is the money price which, as a durable good, it presently sells for on the market. The concept applies to durable goods, embodying future services. The capital value of a consumers’
good will tend to equal the present value of the sum of expected unit rentals.” – MESPM, 2nd edition, pp 292
If the life of a house is fixed (and it is for valuation purposes), the used house is valued for a shorter period than the new house. In fact, the discounting would be high as the valuation would assume use in the first few years and therefore a low discounting factor. So, in effect, ceteris paribus,the buyer of the used house is paying as much as for a new house at the same point in time.
To the home flipper, however, this notional loss is insignificant compared to the appreciation he gets in the form of increased capital value of new houses in general. Even accounting for the loan repayments (interest+principal) made between the two transactions, low interest rates and ballooning schemes make it very profitable for the home flipper. Further, interest only arrangements for the initial period and teaser rates make it all the more attractive for the flipper. Add to this deadly concoction the “no down payment” option. That’s precisely why he enters the business of providing used-houses by buying new houses on very attractive loan terms.
So, it is perfectly legitimate to say that the home-flipper is in the business of buying up new houses and selling them as used houses. He could even buy used houses and sell them as even more used houses. What he produces is a used house or an “even more used” house. To the buyer, the used house may provide the same services as a new house would except that he is making provision for a shorter period. At the same time, coming as it does at a lower capital value than a new house, it may be more affordable to him.
So, the analogy I made on the other site to the wine maker is absolutely legitimate. Just as the wine-maker leaves wine alone to mature, the home flipper leaves the home alone (maybe even using it) to mature into a “used-home” which he could then bring to market as a consumers’ good for he who wishes to use it for living or as a higher order good for another home flipper who wishes to make it an “even more used” house.
Your argument about ABCT not predicting the current crisis by picking on the Rothbard footnote is therefore total rot.
So, it is perfectly legitimate to say that the home-flipper is in the business of buying up new houses and selling them as used houses.
Nope he isn’t. Just like a person buying financial assets on the stock market in order to make money on their expected rising price, he is just a speculator on asset prices. The only people who are actually engaged in a business are the intermediary service industries like stockbrokers and real estate agents.
No matter how you cut it, this is asset speculation – not production of commodities.
See also:
http://www.economicsjunkie.com/austrian-economists-need-to-get-their-business-cycle-theory-straight/
Which part of my argument are you addressing by this pointless assertion?
” Nope he isn’t. Just like a person buying financial assets on the stock market in order to make money on their expected rising price, he is just a speculator on asset prices. ”
I will soon respond by showing the utter stupidity of your repeated claim that he is just a specular on “asset” prices. I have just stepped into my office and it will be evening before I can respond.
All I will say right now is that your objection is completely meaningless.
“Just like a person buying financial assets on the stock market in order to make money on their expected rising price, he is just a speculator on asset prices.”
Yes, and just as much as stocks are producers’ goods i.e. higher order goods because they typically do not satisfy the wants of the owner directly, so are homes not being lived in which were bought for speculation.
“The only people who are actually engaged in a business are the intermediary service industries like stockbrokers and real estate agents.”
Wrong. Just unbelievably wrong. The stock broker cannot do his business without someone holding stock just as the real estate agent cannot do his business without someone owning a home. The owner of the capital who applies the labor of someone else to it is just as much engaged in business as the laborer unless you somehow believe that entrepreneurs are somehow not businessmen.
“No matter how you cut it, this is asset speculation – not production of commodities.”
You’ll have to give a definition for commodity since there are several meanings to the word. But I don’t think anyone here is asserting that flipping homes is “production of commodities” though so it looks a lot like a strawman there.
Is it speculation? Sure, as are all investment activities.
Commodity = good or service produced by factor inputs for its exchange value, what it can be sold for
What thing is the house producing that can be sold on the market?
If you own a capital good, you are producing commodities to sell to people.
” What thing is the house producing that can be sold on the market? ”
Used houses.
” What thing is the house producing that can be sold on the market? ” …
Used houses.
Unfortunately, no.
A house is an asset and a consumer durable to the occupier; it is not “producing” itself in a used form.
It is being sold as an asset on a secondary market, and happens to be a used consumer durable when bought by some one else who then lives in it.
I repeat – there no production of any commodity by the house.
“What thing is the house producing that can be sold on the market?”
The house in combination with the input factor of labor by the owner required to sell the house produces a “house for sale”.
Lord Keynes,
” Just like a person buying financial assets on the stock market in order to make money on their expected rising price, he is just a speculator on asset prices. ”
What the hell is an “asset” if not a good that is potentially for sale? The very reason something is called an “asset” is if it can be converted into present goods when the owner decides to do so.
Secondly, take the very example of stocks that you had taken up. A unit of “stock” is a fractional ownership of the cumulative higher order goods and unsold consumers’ goods owned by the firm. It is the higher order goods that “produce” the consumer goods which are then exchanged for money. So, when I buy stock, I buy ownership. I get rights to present and future income that derives from application of higher order goods towards the manufacture of present goods.
Jordan Viray is absolutely right when he says
” Yes, and just as much as stocks are producers’ goods i.e. higher order goods because they typically do not satisfy the wants of the owner directly, so are homes not being lived in which were bought for speculation. ”
They represent ownership of producers’ goods that entitle the holder to a claim on future goods, i.e., money in the future.
You seem incapable of seeing the issue ex-ante. Only a perfect economic ignoramus (and you are that) will insist that a house is always and forever for everyone a consumers’ good. The label can only be given only after understanding what drives the purchase.
” No matter how you cut it, this is asset speculation – not production of commodities. ”
Asset speculation is indeed a form of production. It is the time element that asset speculation addresses. The asset speculator makes goods produced and offered for sale at 1 point in time available to another buyer who wishes to buy the same good at a later point in time. They take what is a present good today when you (the original seller in this lengthy transaction) wish to have a different present good (money) in hand and make it available as a present good at a later point in time when I (the ultimate buyer) am looking for the present good.
In this sense, they “transport” goods from one point in time to another. “A house for sale on Jan 1, 2010″ is a good different from “A house for sale on Jan 1, 2011″. The asset speculator does the job of making goods available in the market at the time when the buyer is ready to take ownership and possession.
So, “asset speculation” as you so derisively use it is as much production as anything else. It is a part of the overall economic system and not something that happens outside of it. Therefore, what is, if used directly, present goods, when bought by an asset speculator eager to gain by betting on a better price in the future, AUTOMATICALLY become higher order goods.
If for instance I am betting that wheat prices are going to shoot up in the near future and I stock up on wheat to profit from the price rise, the wheat is indeed a higher order good for me. Are you ready to stick you neck out and insist that wheat is indeed a consumers’ good?
By similar reasoning, if I am betting that house prices will rise in the future and I buy up a house today to profit from the sale, the house is a higher order good for me.
If you insist that it is not so, please give arguments for the same. No smear, intimidation and appeal to authority is a form of argumentation.
Lord Keynes,
Your derision for “asset speculation” and your refusal to accept it as an act of “production” only confirms you as a Keynesian who wants to deny the role played by the factor “time” in economic analysis. Once again, how Keynesian!! Read that as a synonym for “How retarded!!”.
What the hell is an “asset” if not a good that is potentially for sale?
An asset like a house is not being used to produce commodities.
Asset speculation is indeed a form of production.
No, it isn’t. A house was “produced” by the builders and other factor inputs. Once it is built and then owned, it is an asset and is sold as a second hand good and asset on the secondary markets. This is not production.
“No, it isn’t. A house was “produced” by the builders and other factor inputs. Once it is built and then owned, it is an asset and is sold as a second hand good and asset on the secondary markets. This is not production.”
Yes it is.
Assets are not automatically for sale. Someone has to sell them and that input factor of labor “produces” a house for sale. It is, like retailing, production in the strict sense. That the good is second hand and being sold on a secondary market has no bearing on that fact.
Someone has to sell them and that input factor of labor “produces” a house for sale
Yes, and that is the real industry: real estate agents.
The house is not “producing” commodities and the owner is NOT in the business of real estate.
The owner has an asset, he wants to sell it on a secondary market, he uses the services of a real estate agent.
The owner is not in a business, he isn’t engaged in production, the house is not a producers’ good.
Lord Keynes you lowlife,
How about addressing my explanation of why what you call “asset speculation” is actually production? Just spilling your assertions like a rat spilling its cr@p all over the place does not add anything meaningful to the discussion.
” No, it isn’t. A house was “produced” by the builders and other factor inputs. Once it is built and then owned, it is an asset and is sold as a second hand good and asset on the secondary markets. This is not production. ”
You moron. I gave an explanation. Which part of it does this retarded assertion address?
” The owner has an asset, he wants to sell it on a secondary market, he uses the services of a real estate agent. ”
Do you at all understand the concept of ex-ante analysis? Your idiotic and repeated assertions show that you do not.
Thanks for your comments.
So, when I buy stock, I buy ownership
But you do not buy a capital good.
I get rights to present and future income that derives from application of higher order goods towards the manufacture of present goods.
You get an income stream by dividends from the company.
Your financial asset is not a capital good.
That it gives you a share of ownership of the company does NOT mean that financial asset itself is a capital good.
They represent ownership of producers’ goods that entitle the holder to a claim on future goods, i.e., money in the future.
They are not producers’ goods. A house in such circumstances is an asset.
Its sale gives you the money – the house has produced NOTHING.
Only a perfect economic ignoramus (and you are that) will insist that a house is always and forever for everyone a consumers’ good.
A ridiculous straw man. I never said any such thing.
Read my comments above:
If the house was bought to rent out to other people, it is a capital good.
But as you can see perfectly well in Figure 3 of this book (Brookings Papers on Economic Activity: Fall 2008, p. 81 and also p. 83), loans to non-owner-occupiers did not significantly rise in 2000s housing bubble and in fact stayed flat.
Asset speculation is indeed a form of production.
This is truly laughable. Asset speculation is not production, and never will be.
Production requires creation of goods; The asset speculator produces/creates no good or service. He takes an asset from already existing stock of used assets and sells it.
The asset speculator makes goods produced and offered for sale at 1 point in time available to another buyer who wishes to buy the same good at a later point in time
No, he doesn’t. The asset speculator makes/produces NOTHING.
He merely sells an asset he already owns.
The asset speculator does the job of making goods available in the market at the time when the buyer is ready to take ownership and possession.
Nope.
He doesn’t engage in production to offer his house for sale: he uses the services of a real estate agent.
The owner is not in a business, he isn’t engaged in production, the house is not a producers’ good.
“Yes, and that is the real industry: real estate agents.”
Of course your critique is insufficient because homes can be sold by the owner. It doesn’t matter if it is the labor of an owner or the labor employed by the owner. Labor is combined with the house and produces a “house for sale”.
“The owner is not in a business, he isn’t engaged in production, the house is not a producers’ good.”
The owner has combined labor (his or an agent’s) to produce a house for sale. That is production; it is a producers’ good. Too easy.
Even if the home was sold on a secondary market directly between the seller and buyer, the owner has just sold his second hand asset. This is *not* production. A capital good creates some commodity for sale.
Anyone who buys a good, keeps it as an asset without any production whatsoever, and then sells that asset is an asset speculator.
Labor is combined with the house and produces a “house for sale”.
It ‘s only the real estate agent who is in the business of selling houses. He is actually producing a commodity (service). The owner of the house has produced nothing from his house, and is not in the real estate business.
Again, easily disposed of.
Thanks
The house is not used by the
“Even if the home was sold on a secondary market directly between the seller and buyer, the owner has just sold his second hand asset. This is *not* production. A capital good creates some commodity for sale.”
Again, this asset is a good. And when combined with certain labor (the owner or an agent) it creates a commodity for sale. There’s a difference between a house not for sale and one that is. It takes labor to convert it.
“Anyone who buys a good, keeps it as an asset without any production whatsoever, and then sells that asset is an asset speculator.
There is production. A house not for sale is not a product available in the marketplace until someone takes the time and effort to do so. He is still an asset speculator but that is irrelevant.
“It ‘s only the real estate agent who is in the business of selling houses. He is actually producing a commodity (service).”
Nope. A real estate agent needs a house to sell. The agent does provide a service but that service can be provided by the owner.
“The owner of the house has produced nothing from his house, and is not in the real estate business.”
Actually he has as I’ve shown you previously. A salable house. If I buy some especially tasty apples and decide to resell them anticipating a profit, I’m in the apple business. If I buy a house I thinking I can resell it for a profit later, I’m in the real estate business. Pretty basic stuff.
If I buy some especially tasty apples and decide to resell them anticipating a profit, I’m in the apple business. If I buy a house I thinking I can resell it for a profit later, I’m in the real estate business.
And that is where it completely falls down.
The apples are not a capital good – which is the central point of the whole argument.
You bought them as a consumer good. You hold them as a commodity. If you sell them, you sell them as a speculator on commodity prices – the holder of apples or houses holds consumer goods/a commodity in the case of apples, and a consumer good/asset in the case of the house.
Commodity speculation is not production.
Neither the apples nor the house is a capital good.
Elementary, my dear Watson.
“And that is where it completely falls down.
The apples are not a capital good – which is the central point of the whole argument.”
False. See previous reply.
“You bought them as a consumer good. You hold them as a commodity.”
True.
“If you sell them, you sell them as a speculator on commodity prices – the holder of apples or houses holds consumer goods/a commodity in the case of apples, and a consumer good/asset in the case of the house.”
Production and speculation are not exclusive. That’s the basic mistake in your thinking.
“Commodity speculation is not production.”
Again, yes it is. See previous arguments.
“Neither the apples nor the house is a capital good.
False.
“Elementary, my dear Watson.”
Yes, I suppose it’s pretty elementary to keep repeating your mistakes instead of thinking things through.
For Lord Keynes,
I found something interesting Rothbard had to say on the issue of production.
“Much error would have been avoided if economists had heeded the words of Arthur Latham Perry:
Every man who puts forth an effort to satisfy the desire of another, with the expectation of a return, is . . . a Producer. The Latin word producere means to expose anything to sale. . . . We must rid ourselves at the outset of the notion . . . that it is only to be applied to forms of matter, that it means . . . to transform something only. . . . The fundamental meaning of the root-word, both in Latin and in English, is effort with reference to a sale. A product is a service ready to be rendered. A producer is any person who gets something ready to sell and sells it.” – MESPM, 2009, pp 646, Footnote 8
So much for your question ‘What commodity is the house producing”.
Just wanted to confirm that you are a moron.
Actually, it is wrong to say “a house is a consumption good”. You can’t even say “toothpaste is a consumption good”. If I were running a hotel and provide toothpaste as a part of my service offering to my customers, toothpaste too is a higher order good. I could say the same thing even for water.
This brings out a fundamental flaw in your approach – you make the mistake of saying that the “good” is the physical thing.
Another point that you are blissfully unaware of is that as an Austrian, you are *not* even fully committed to supporting all of the Mises-Hayek-Garrison ABCT (as Mario Rizzo at Think Markets calls it).
Rizzo:
“The first thing to keep in mind is that while [ABCT] … embodies “Austrian” characteristics it is not an official Austrian theory. What do I mean by that? Eminent Austrian economists have made important criticisms of the bare-bones theory. For example, Israel Kirzner has criticized the theory for not taking entrepreneurship seriously. Where are the alert entrepreneurs either in the boom phase or the recession phase? There are profits to be made from avoiding mistakes. Another eminent Austrian economist, Ludwig M. Lachmann — one of the main contributors of the development of the idea of capital heterogeneity which is an important constituent part of the cycle theory — criticized the ABCT for assuming that agents simply expand their investment whenever interest rates fall. And Ludwig von Mises agreed that we need to take account of what the agents expect about the future course of interest rates. Second, the ABCT is only a partial theory of the cycle — specifically of the upper turning point. We should also not expect it to explain all business cycles — just those which are generated by excessive credit expansion to businesses.”
Mario Rizzo, “Austro-Wicksellian Theory of the Business Cycle: An Informed View,” Thinkmarkets, April 13, 2010
And here is Israel Kirzner on Mises.org:
KIRZNER: I’ve never felt that the Hayekian business cycle theory was essentially Austrian. In fact, Mises, who was the originator of this whole idea in 1912, didn’t see it as particularly Austrian either. There are passages where he notes that people call it the Austrian theory, but he says it’s not really Austrian. It goes back to the Currency School and Knut Wicksell. It’s certainly not historically Austrian. Further, I would claim that, as developed by Hayek, there are many aspects of it that are non-Austrian. I don’t believe that to be an Austrian you have to buy into the Hayekian view of business cycles …. I think the way Hayek developed it was not quite consistent with the way Mises laid it out in 1912
“An Interview with Israel M. Kirzner,” Austrian Economics Newsletter, vol. 17.1, 1997).
In other words, do some reading about the richness and diversity of your own tradition, where there are actually people who aren’t desperately flogging a dead horse.
How does any of this rubbish address any of my points even remotely? Why is it that you seem to know no other means of debating than by appeal to authority (affirmative or negative)?
You are more rotten than I had ever imagined. When your arguments are looking weaker, you resort to appeals to authority. Try argumentation for a change.
How does any of this rubbish address…
Thanks!
You have admitted more about your limited understanding of your tradition than hours of debate could ever show!
Yet another libertarian who doesn’t fall for this ABCTrot:
“Thomas Woods insists, contrary to the evidence, that the artificially induced boom resulted in a lengthening of the capital structure through overinvestment in too many “long-term projects.” [p. 68] In fact, what we saw was a bubble in housing, which is not a “long-term project” that will “bear fruit only in the distant future,” but a speculative investment in a durable consumer good, with an additional twist: the low refinancing rates and the inducements to refinance led many to treat their homes as ATM machines and withdraw cash to finance, not “long-term projects,” but consumption. But Mises and Hayek explained a previous boom-and-bust cycle in terms of a lengthening of the capital structure, so we must believe — we must, a priori! — that all boom-and-bust cycles must — they must! — follow the same process. That’s religion, not analysis.”
Norberg on the Financial Crisis…. GREAT!!by Tom Palmer on November 1, 2009
http://tomgpalmer.com/2009/11/01/norberg-on-the-financial-crisis-great/
Well done, Tom.
Lord Keynes,
Now it is smear!!
” You have admitted more about your limited understanding of your tradition than hours of debate could ever show! ”
If this is not intimidation, I wonder what it is!!
You’re an idiot, but I think you know that. The fact that the ABCT can be improved via further theorising by Austrians… is not disproof of its core tenets. It is proof that it can be expanded further. But you cannot argue. You only rant and appeal to authority to make your points. Nothing you said even pertains to what was being discussed. Seriously, if you can’t make a valid argument, shut up and begone.
The fact that the ABCT can be improved via further theorising by Austrians… is not disproof of its core tenets.
Well done! Now read Rizzo:
“The first thing to keep in mind is that while [ABCT] … embodies “Austrian” characteristics it is not an official Austrian theory.
ABCT is only a partial theory of the cycle — specifically of the upper turning point. We should also not expect it to explain all business cycles — just those which are generated by excessive credit expansion to businesses.
Mario Rizzo, “Austro-Wicksellian Theory of the Business Cycle: An Informed View,” Thinkmarkets, April 13, 2010
In other words, you should not expect ABCT to “explain all business cycles” – the mistake you are making here.
Lord Keynes,
” In other words, you should not expect ABCT to “explain all business cycles” – the mistake you are making here. ”
How do you manage to assume that everyone else is as stupid as you are? Where did anyone at all say that they expect ABCT to explain all cycles. Even if they felt that way, saying that ABCT explains this crisis by no means translates into your statement.
ABCT is an utterly unconvincing explanation of the housing bubble and 2008 financial crisis.
Since you now appear to admit that ABCT is NOT an explanation of every boom/bust, care to give me some examples of recessions where you admit it is not an explanation?
Actually, it is both a consumer good to you and a higher order good to the purveyor. Though I think you acknowledge this. As for Lord Keynes, he is a hack trying to peddle one of the most easily refuted theories in the world.
I agree with your assessment. It is indeed both. It is in the nature of the good that it can be both simultaneously.
That apart, I I least interested in LK’s theories as it is obvious what drivel they are. I think it always helps your own understanding to tackle an attack than to discuss with like-minded people. I have a serious reason to want to understand his drivel and to call it for what it is.
To be honest, I don’t really think he understands the Keynesian dogma either. He’s repeatedly tripped up in answering questions related to it which are taught even in basic macroeconomics courses. I’m pretty sure he’s just a troll who’s gone to an awful lot of effort, more than anything else. An actual Keynesian would deliver less embarrassing defences of their system.
“To be honest, I don’t really think he understands the Keynesian dogma either. ”
Interesting observation. LK does seem to switch between Post Keynesianism and standard (ie, non-prefixed) Keynesianism as the debate dictates. Not sure if he’s going for some kind of synthesis or if it’s some kind of rhetorical subterfuge (he certainly wouldn’t be the first Keynesian to pull that).
Actually, it is both a consumer good to you and a higher order good to the purveyor.
As a durable consumer good to the owner-occupiers is isn’t a capital good.
The housing bubble involved people refinancing their mortgages too: no new housing being constructed at all.
Lord Keynes you dolt,
” As a durable consumer good to the owner-occupiers is isn’t a capital good. ”
Looks like you can only do ex-post analysis.
To the owner-occupier who has a house in which he lives:
The house is
(1) an ex ante consumer durable and asset before he buys it with the intention of living in it
and
(2) an ex post consumer durable and asset after he have bought it and now lives in it.
Bala,Lork Denes of the post-Lorkian website you linked to (I won’t mention the link again because Lork often visits this site and post something inane–viz., keynesian–with a link to his blog site in order to build traffic there, which otherwise would probably be zero), is not an economist. He’s a post-Lorkian. Lork uses the methodology of his god (JMK), which is best described as indecipherable gibberish to which Lork has added a twist by vaguely citing to innumerable scholarly sources, which will take you gobs of your valuable time to check out, and which in the end, you would discover, do not support the silly theses he propounds in in his blog posts.
Thanks for the heads up. It’s nice to know which posters should be virtually killfiled.
Ned Netterville,
Thanks for the tip. Thankfully, I do not waste my time on checking the links out. I am doing this only to learn. If he represents the Keynesian view fairly, then I believe I have a fair bit to learn by engaging with him. I have no intention of reading through Keynesian poppycock myself. However, for personal and professional reasons, I wold like to understand that poppycock and have a host of arguments of my own to counter its every fallacy at every opportunity. I would also like my arguments to evolve from contemporary issues as those are what I am likely to handle on the professional front.
So it would help if you could tell me whether he represents the Keynesian view fairly and well. Otherwise, it would be a complete waste of my time.
” What thing is the house producing that can be sold on the market? ”
The answer to your question is accomodation. A hotel produces short-term accomodation in the marketplace, whilst a home produces long-term accomodation.
No, they don’t “buy” the service of accommodation from the previous owner – that would be renting it.
They buy the asset and and consumer durable second hand.
No. They buy the service of accommodation for the remainder of the life of the entity. Renting is for specified periods only.
They buy the service of accommodation for the remainder of the life of the entity.
No, they don’t. That would be equivalent to renting the house from someone else (who still owns it) for the remainder of the house’s life – the very opposite of what actually occurs: owning it as a consumer durable and asset.
Wow, I’ve been following this discussion from Lord Keynes’ blog and made it through to here. There seems to be a lot of arguing over a small point. So, Lord Keynes, what would it mean if Bala and Jordan were right about houses being capital goods? Even if they were, it still looks like the Austrian school wasn’t the only one to predict the crisis which someone told me.
For what it’s worth though, their argument that for someone flipping homes a home can be a capital good seems right. But it seems like it doesn’t matter.
“Wow, I’ve been following this discussion from Lord Keynes’ blog and made it through to here. There seems to be a lot of arguing over a small point. So, Lord Keynes, what would it mean if Bala and Jordan were right about houses being capital goods? Even if they were, it still looks like the Austrian school wasn’t the only one to predict the crisis which someone told me.”
For the record, I’m sure other people, e.g. a non-Austrian hedge fund analyst I know, were able to see the crisis coming.
“For what it’s worth though, their argument that for someone flipping homes a home can be a capital good seems right. But it seems like it doesn’t matter.”
Glad our arguments seemed reasonable to you; they do follow pretty quickly and simply from basic definitions. The fact that Lord Keynes is unable to admit the obvious should tell you something about his intentions though.
Now he’s not even arguing but just repeating stuff we’ve already disproved (as if doing that will make it true). If Ned hadn’t mentioned he took himself seriously, I would have judged him a troll. Speculation boogeyman is probably more accurate.
Even if they were, it still looks like the Austrian school wasn’t the only one to predict the crisis which someone told me.
On the issue of who predicted the housing bubble and crisis of 2008, see the discussion here:
http://krugman-in-wonderland.blogspot.com/2010/10/robert-murphy-takes-on-krugmans.html
A pity more Austrians aren’t familiar with Huelsmann’s brilliant rendition of error cycles, which corrects some issues with standard ABCT:
http://mises.org/journals/qjae/pdf/qjae1_4_1.pdf
That articles is indeed superb. I remember reading it when I first thought I understood business cycle theory (although I didn’t really) and it just confused me completely. But now I can understand it – he is brilliant, everything he writes cuts right to the chase.
I totally agree. Huelsmann’s work gives lie to the claim (intitmated even by the GMU wing) that the Austrian school is at best just rehashing what the old masters wrote 50 years ago.
You can even see it in his lectures. He isn’t content to follow the same old ruts but continually advances the scholarship. A truly free mind.
BALA , Sorry I didn’t respond to your query sooner. I’d gone fishing, so to speak. IMHO, Lord Keynes does not fairly represent the Keynesian view. I doubt if anyone any longer does, although Krugman on some issues comes closer than anyone I know. The point is that by the mid 1960s Keynes’ GT had been so thoroughly discredited that only a few true Keynesians remained of the multitude who initially jumped on the Keynesian bandwagon upon publication of the GT. Most of Keynes’ early devotees in academia had been forced by the fact that Keynes’ theories could not be defended to become Neo and Post Keynesians, endeavoring to moderate Keynes’ discredited theories in a desperate effort to salvage the quintessential ingredient of Keynesianism, without which Keynes’ many epigones would be materially poorer. And what was it that Keynes himself prescribed that so many others cannot do without? MONEY!!!$$$!!! Or, rather, OPM, which sounds like opium, is equally addicting, and stands for other peoples’ money. Even more precisely, Keynes’ GT was an elaborate justification laden with some brilliant rhetorical flourishes supported by meaningless-but-imposing mathematical formulations, graphs and charts for spending other people’s money. Of course it achieved instant success among politicians who lusted for ever more power through directing the spending of taxes, and was warmly embraced by every university economist who valued academic position ahead of intellectual integrity.
The best way I can think of to be in a position to refute the arguments of the likes of Lord Keynes is to keep on doing what you’ve been doing, which is to engage them on this site, where you’ll probably get some help, or on other economic forums where you may be on your own, and keep on reading and learning. And when you are proven wrong on something, there is not harm in admitting it. LK would gain some credibility here if he could bring himself to do that.
IMO, the best way to understand what’s wrong about Keynesian economics and its OPM addicted descendants is to read three books, all available on the web: Keynes, GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY, Henry Hazlitt, THE FAILURE OF THE NEW ECONOMICS, and Henry Hazlitt (editor) THE CRITICS OF KEYNESIAN ECONOMICS. The latter is a compilation of articles by some of the world’s leading economists of the Keynes era brilliantly refuting various aspects of Keynes’ GT.
Thanks a ton. I was thinking about reading GT myself. Now that you mention it, I think I definitely will. I will add the 2 books by Hazlitt to my list too. Thanks once again.
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