This year’s Nobel laureates in economics have contributed to further obscuring our understanding of the business cycle, through the introduction of more complex mathematical tools. Once, however, the veil of mathematics is removed one finds very little of substance. The Austrian theory still stands alone at that which is both theoretically rigorous and conforms to real world experience. [Full Article]
Source link: http://archive.mises.org/2634/a-nobel-prize-for-not-much/
A Nobel Prize for Not Much
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Wow. I had read Mises’ explanation of the boom/bust cycle, but this, coming from a slightly different angle, helps to put the whole thing in perspective for me.
I especially like the term “nonproductive consumption”.
“There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth.”
Well, count the Mises Institute among the believers. Even as a layman, I’m shocked at this refutation of common sense, let alone the hard data. Perhaps an economist can enlighten me, is this statement a result of appalling ignorance, willful disregard, or is there actually a theoretical basis (however arrived at) for such a statement?
Actually, an Austrian has done statistical work on the money-cycle. See this blog entry. Specifically: Evidence Regarding the Structure of Production. Sechrest, Larry.
I think Frank Shostak is wrong to say that there is no such thing as a technology shock apart from capital investment. First of all because existing capital stock can be used in a more efficient matter without further capital investment. For example by using the function in MS Excel to copy a function between two variables instead of typing in the function again and again for each time period. Moreover, investment in new technology often yields far higher productitivity increasing result than an increase in the stock of older technology tools. Downloading a e-mail program to your computer will -even if it costs some money- yield a much higher productivity increase then investing in paper letters and stamps. And since it will yield different results investment without technological advances and investment with technological advances can definitely “analytically isolated”.
Interview(Link) with Edward Prescott, circa 1996. Just doesn’t seem that interested with monetary policy arguments vis-a-vis the business cycle. For example, he was asked about the “overwhelming evidence that the Great Depression and many of the major recessions in U.S. history had monetary origins and that monetary factors were very important in determining the depth of the downturns as well as their length.” He replied that he had “not studied it in detail. I don’t know of anybody well-versed in modern dynamic economic theory who has looked at it carefully.”
Note that the “it” in his reply is The Great Depression.
Speaking of mathematically suspicious “curve fitting” in the name of junk science … check out this Global Warming Bombshell which I found via another blog today.
Economic “data” cannot be used to “prove” anything. Give four economists the same data, expect 6 different conclusions. Statistical data is unique to its place in history, a sort of record (often distorted), of the valuations of acting men of that time period. Sechrest is not doing anyone any favors by getting involved in the positivist game. Shostak is a trained econometrician, you will note he did not bring up any statistical nonsense in his article.
As to Mr. Karlsson, how would your trite example of a “technology shock,” explain the fact that business cycle’s are economy wide phenomena? Would everyone forgetting how to copy and paste constitute a negative “technology shock?” While I would except that a “technology shock,” could effect a particular industry, I fail to grasp how such a thing could be felt in all industries.
When I first read in The Economist that the Nobel winners thought that technology shocks caused the boom/bust cycles of the economy, I started to chuckle. It seemed like such a shallow and superficial look at what happens.
I have worked as a technician at Sullivan Park ( the research center for Corning Glass Works) and at General Electric’s Corporate Research and Development. I have never seen a research scientist who was short of ideas. The questions that came up, over and over again were, “Can we get funding?”, and, “How much money is available to fund this project?”
When a successful company is making large profits, it’s able to fund more of the ideas its researchers have. I would imagine that when monetary policy is loose, more companies will have access to more money and be able to fund more ideas, giving the impression that there is a “technological boom.”
For more on “statistics” and their value, Shostak’s article on last year’s nobel winner is a good one. It contains one of my favorite Mises quotes: “As a method of economic analysis econometrics is a childish play with figures that does not contribute anything to the elucidation of the problems of economic reality.”
As I cannot seem to get the link to function properly here is the url of the article: http://mises.org/fullstory.aspx?control=1352
Pete Canning: I think you misinterpreted my comments somewhat. I was not suggesting that technology shocks were the only or even the most important explanation behind fluctuations in growth. I was only arguing against the apparent view of Frank Shostak (It could be that he expressed himself in a way which made me misinterpret him) that technological advances have no effect whatsoever on the economy and that capital investment is the only relevant factor. Clearly aside from input of labor and capital, technology as well as the entrepreneurial function does play a role in explaining both short-term fluctuations and long-term growth.
I think you misunderstood. He’s not saying technological advances are irrelevant, he’s saying technological advances can only be made by employing more capital — you have to do research to develop the new technologies to begin with, buy new machines, rearrange your plant, etc., so there’s no way to separate out the effects of technology from those of capital investment. I.e., A and K are not independent variables.
Kydland and Prescott’s model is an intellectual tour de force. They found a way to make mathematically operable a dynamic Walrasian general equilibrium model.
Eventually the framework initialized by K&P will be able to take account of monetary factors in the business cycle. The problem is a deep one of integrating monetary matters into a Walrasian GE model. K&P are the pioneers of a new research tool which others will advance. Interesting offshoots of the K&P approach include work by Paul Beaudry, who has a paper on Austrian themes of capital mis-allocation as a cause of the cycle.
On the issue of money and the business cycle, there is indeed no correlation of monetary base and the cycle. There is a link between M2 and the cycle.
Another great article by Mr. Shostak. I would make one small change: the bracketed portion in “The only known mechanism that can set in motion a persistent diversion of real resources from productive to non-productive activities is [loose monetary policy of the central bank]” should read “government coercion,” as many other branches of government sustain themselves by squandering resources. Central banks, though, are the only means of producing the boom-bust cycles that we observe in the macroeconomy.
Also, I think one can make a case, although a fairly insignificant one, for “secular” economic growth that does not require modification of the capital structure under the guise of “learning-by-doing.” If, for example, a secretary figures out how to use Excel functions instead of doing math longhand, productivity could increase. This example, however, depends on the secretary already having access to Excel but not knowing how to use it. If he/she doesn’t have Excel and the firm decides to purchase it, this constitutes investment and thus a modification of the capital structure.
Even an exercise like worker training can easily be construed as investment: the subsistence funding for the trainees and instructors during the training interval must come from the pool of real savings, that is, from foregone consumption on the part of consumers or firms. The overwhelming majority of so-called technology shocks will involve a combination of physical capital investment and worker training, both of which draw from the pool of real savings.
The neoclassical technology shock (learning-by-doing) only applies when the productivity shock is absolutely costless in terms of resources. These “bolt-from-the-blue” productivity shocks are probably insignificant from an economy-wide perspective; they can be dismissed out of hand as the trigger of macroeconomic cycle. The absurd “negative technology shocks” that supposedly plunge the economy into recession are yet another stake in the heart of RBC theory.
One more comment:
Downloading a e-mail program to your computer will -even if it costs some money- yield a much higher productivity increase then investing in paper letters and stamps.
I don’t think anyone would dispute this; often the marginal productivity of the addition to the capital structure (the e-mail program) will vastly outweigh its cost. Shostak is simply trying to point out that the neoclassicals want us to believe that there is no addition to the capital structure during a technology shock, i.e. that the technology parameter in the production function can change radically without corresponding changes in I and K. It should be evident that this can’t be the case, especially from a macroeconomic perspective.
This article cited in the
National Business Review.
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