Game of Theories: The Austrians
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- เผยแพร่เมื่อ 30 มิ.ย. 2024
- Austrian business cycle theorists argue that the central bank could be distorting market signals for entrepreneurs. How does this contribute to booms and busts?
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The Austrians explain the last two "criticisms" quite well. Malinvestments needs labor to be produced in first place. If these malinvestments collaps, companies go bankrupts (unemployment) or they have to reduce their costs to be able to survive (unemployment). Also consumption does rise in data because they measure actual inflated prices, not real consumption.
Well put Christopher. It seems he didn't look very hard to answer those questions haha
Yes, exactly.
And even a real rise in Consumption is fully compatible. After all, the theory states that *more* capital intense investments are being made *relative to* a scenario in which the higher market interest rate would've been allowed to prevail. So a simultaneous rise of consumption and investment during the boom and a simultaneous contraction of both of them (with a *relative shift* to less capital intense investments) is completely plausible.
5:40 the answer is the capital structure. It takes time to fix the interlocking capital structure after massive malinvestment. In modern times it takes so darn long because the government keeps making it worse thinking they’re helping.
This comment aged like the finest wine 🍷. More than doubling the amount of dollars in circulation is going to be looked at as one of the dumbest decisions ever
I felt physical pain when you have tried to map on Keynesian graph Austrian theory.
In my opinion this is the best approach to a healthy economy.
cafeta your opinion is a good one my friend
Yes.
Tucson Jim any more books recommendations focused towards economics?
@Tucson Jim Divide your sentences into paragraphs. Jesus Christ!
@Tucson Jim You are an indoctrinated statist incapable of independent thought. What do you think is going to happen when the fed hemrages a quarter trillion dollars into the system every few months and increases that rate as time goes on? I got one word for you. Venezuela. And I think that you, sir, hate america. You proudly defend the globalist kabal of bankers that Woodrow Wilson actually apologized for selling the country to in 1913. And I think you're mean and egotistical and actually have no idea how money actually works let alone the economy. Your degrees only prove that you received extensive amounts of propaganda and probably enslaved yourself in the process by taking on a ridiculous amount of debt. Oh and btw. Central banking is a tenant of communism. You know... That thing you hate so much?
6:00 this is framed in an aggregate almost Keynesian way. You’ve got to disaggregate into different stages of production to see ABCT.
The only reason empirical data shows investments and consumptions moving together is because we look at it through the lens of final market value and gdp, like when a coffee costs 10 dollars, it needed a lot more spending starting from planting coffee beans to the final stage in coffee bags, this is captured in GDE, which is thrice the value of GDP, the structure of production by mark skousen is a great book that deals with these complexities
really great video, I am really enjoying this series, thanks a lot for the quality content!
6:30 Strawman. That is what would happen under normal conditions, in other words if investment increase then less resources are avaible to produce consumers' goods(so there's the trade-off represented by the PPF).
When there's the artificial credit expension the economy is fooled to believe that there are more resources avaible than there actually are. This boosts both consumption and investment at the same time(the economy wants to push itself out of the PPF). Of course this is impossible with our current level of resources so investment and consumption fight for the same resources and this conflict eventually causes the bust.
*EXAMPLE*
With current level of x resouces and y technological development we can produce 500 units of capital goods and 100 units of consumers' goods, and if we want to produce more of one we have to reduce the production of the other( *assuming full employement* ).
With artificial low interest rates, the economy is fooled to believe that we can produce more of borh at the same time without the trade-off(ex: 600 units of capital goods and 200 units of consumers's goods).
This is impossible so eventually it will collapse.
I hope this clears up a lot of misconceptions with ABCT
Maybe they can increase at the same time if the decrease in interest rates reduces unemployment. People doing nothing vs people working should increase production. However its true that there is no way to make sure that new money goes into the hands of the investments that are truly valuable and worthwhile. Bad investments will inevitably happen, and they should be allowed to fail, so that's when the bust comes. Is there an alternative way to quickly end unemployment and recessions without increasing the money supply or velocity? Maybe that would prevent the wasteful investments from happening in the first place, preventing the busts.
I have a question. What if the economy is not at full employment level (unlike Austrian assumptions) like during recessions? In such a case, wouldn't an easy Monetary policy prompt greater investment and result in use of spare capacity?
Of course, my problem against Keynesian Economics (and why I'm more of an Austrian) is precisely that we might not know when we aren't outside the full employment level. Since the PPC cant be explicitly observed, it's easy to mistake whether full capacity is being utilized, especially considering that prices are already inflated (due to past and present Central Bank and Fiscal policy effects) and provides misleading signals pretty often.
Anirudh Pisharam That is a good question that I thought a lot about and I've come up with some points. 1) lower interest rates stimulate AD but thanks to says law we know that a general glut so to speak is impossible.
2) the original Austrian business cycle theory was formulated pre fed and looked at fractional reserve banking, banks would lower there reserve ratio during the boom so the expansion would be in the book
3) even if we ignore point 1 then the central bank would have no way of knowing if what they were doing would push the economy beyond the PPC.
Well its not impossible. What allows it to continue in the short run is the consumption of capital. This takes a long time to manifest itself in a complex economy and will eventually lead to the bust.
Correct - Ludwig von Mises: "the malinvestment and the overconsumption of the boom period." (Human Action)
You guys are fantastic! Keep up the good work. You have too few subscribers for the quality of videos you produce.
Part of this was very good. Though I think it would be a lot better if you had an Austrian economist review it because I’m quite sure you’re not understanding their position. Cheers!
Yay, Austrian school! :)
Good video, but the problems with are easily solved:
1. Well, it may be true that individual psychological factors may play a role in chosing an investment, it would be foolish for anyone to invest in anything they think will yield less than their bank interest. And most entrepreneurs have to ask themselves how much they really think they could make before going in.
2. For this theory doesn't matter if they raise in tandem so long as one moves more than the other.
I got to say this is the only economic theory that makes sense and is predictive. I’ve made quite a bit investing with the Austrian theories in mind.
Real impressed by your content. Clearly presented and easy to digest. Thanks a bunch!
5:10 If the government interferes with the price of a good, we don't expect entrepreneurs to be able to divine the "natural" price and ignore the government's distorted signals, do we? So why should we expect them to be able to do this when government distorts the price of money itself (i.e. interest rates)?
Seriously, that was an absurd criticism. First of all this assumes that the average entrepreneur is well versed with Austrian business cycle. Secondly the entrepreneur has no way to know whether the Fed has increased/decreased interest rates in line with what they would be in the free market or not. Since the Fed always controls the interest rate, the implication is that the entrepreneur should either have the knowledge of the real interest rate that the even the Fed doesn't, or that the entrepreneur should never act at all!
awesome. keep it up!
Austrians are correct because they correctly identify economics as a social science reliant upon synthetic a priori knowledge. You can't extrapolate economic theory into real world praxis because "ceteris paribus" (all else being the same) never applies to human action. To understand Austrain economics, you have to have a thorough understanding of Praxeology. This is why most economists don't folow the Aistrian school.
1. It would put economists out of a job. The logically necessary conclusions of the Austrian school based on praxeological principles conclude that the essential role of an economist is NOT related to governmnet - by whom nearly all economists are presently employed as professors, advisors, or even just pawns to manipulate the citizens into believing that government is necessary to solve certain problems = to convinve that their unjust use of force if in fact a necessary evil. Austrian economics disproves this so there is an incentive to discard the findings even though they produce aomw of the most accurate predictions without the need for mathematical modeling (something which every other school of economics fails to do). In fact, it is a logically necessary conclusion of Austrian economics that economista must fear it as they do, further strengthening the case for it given its current status as an outlier philosophy of economy.
2. Praxeology is actually pretty easy to understand. Comparatively (much like the pre-vulgate Bible) other schools of economics are sacred and protected "magic" that the layman "couldn't hope to understand, so they need an interpreter and an intermediary between them and truth." The economic theory that most supports the elite wins in the game of power. If you have interest in Praxeology (human action laws) and power laws (political science) I'd highly suggest Ludwig Von Mises, Robert Greene, and Nicholo Machiavelli.
To understand reality, you must understand its constituants and their actions, motivations, mental maneuvers, ideologies... to know man you must know power and discomfort. You have to understand man's drives. All nonaustrian schools of economics ignore the moving factors behind all actors in the markets they claum to study but the actors ARE the market in that without them, no market exists. For there to be trade, certain value judgments must exist which differ from persn to person and every other school pf economics just completely ignores the prime movers in all transactions: striving and discomfort, subjective valuations of worthwhile pursuits.
We reduce the utility of economics by boiling things down to mathematical models. Humans exist in a constant state of flux (due to their sentience) and thus no two transactions are ever exactly the same. Pluribus cetivus is bullshit. Nothing else is ever exactly the same
There are too many variables to construct a resolute mathematical model that can be studied emperically.
...no one knows how to make a pencil.
To quote MIT Institute Professor Acemoglu
As the main cause of the financial crisis of 2007-2008, he stated that policy makers were "lured by ideological notions derived from Ayn Rand’s novels rather than economic theory" and opined: "In hindsight, we should not be surprised that unregulated profit-seeking individuals have taken risks from which they benefit and others lose."
I don't know too many economists worth their salt who claim their mathematical models offer a perfect description of reality. After all, they are only models which, given the dynamic nature of our world that you've rightly pointed out, can never fully describe human behavior. However, empirical evidence supports the notion that these models have some explanatory power. Moreover, I'm not convinced that the Austrian school has discovered any synthetic a priori knowledge, let alone any that provides objective insight into economics. Despite your hostility towards other schools of economic thought, I don't see how Austrian economics, in theory, and especially in practice, can genuinely improve the current state of economics. To use a contemporary example, let's assume the policymakers and government officials in a hypothetical country all adhered to Austrian economics. How would their response to the crippling aggregate supply and demand shocks brought about by COVID-19 be better than other governments around the world?
@@acphantom6437 if the government bails you out any time you take a risk, obviously you take risks
There is one incredible flaw in this video which leads to other flaw. Two important aspects of ABCT that are not even mentioned are marginal utility and time preference. All three of these concepts manifested together sufficiently answer any criticisms of ABCT.
Thank you very much, this help me a lot with my students, I will like to contribute with the spanish traslation if you allow me.
Hi Alicia,
Thanks for the offer - we'd love your help translating. We've already got Spanish subtitles in progress for this one (should be live next week) but there are a bunch of others that don't have Spanish yet. Econ Duel comes to mind - you can submit subtitles here: amara.org/en/teams/mruniversity/videos/?project=econ-duel
Thanks again for any assistance!
Best,
Roman
4:19 this isn’t such a great analogy. A Hayekian triangle or some other representation of the capital structure is needed.
Yes, you are right.
Its because we the entrepeneurs like to play the game like everyone else (FOMO), and also we like to think we are smarter than everyone else, therefore we think: "i will take the money out the door before SHTF, cause im smart money".
Consumption and investment going up together is normal during the boom. The problem is a lack of proportion between planned investment and planned saving. Artificially low interest rates cause investments that are called “malinvestment” because they aren’t backed by actual savings. The interest rates face upwards pressure because presently low interest rates incentivise a decrease in savings and this reduces the supply of credit, therefore increasing interest rates and thus rendering many investments unprofitable. What results are bankruptcies, unemployment, and lower incomes.
Why isn't the Austrian solution: de-nationalize the money supply and allow for competitive free banking not included in their solutions?
From what I see - that usually is the preferred solution by the Austrians. The Austrians also tend to be the "End the Fed" types.
@@davidjones1310 Yes, ending the Fed (a banking cartel) would be a great thing.
@@charlessmith4381 and bitcoin will do exactly that ;)
More video about theories please
Does the co-movement of consumption and investment contradicts the predictions from Hayek's triangle? Hayek postulated that people consume less in order to invest more; thus changing the structure of capital. But if there is comovement, does that means that the capital either contracts or expands as a whole?
But isn't consumer savings I.e.dollars dependent on Feds lower rates which would increase the dollars in the economy? Or are consumer savings assumed to be dollars + all other types of assets as well?
the only true theory
*religion
**theory
***false
What causes boom/bust cycles is fractional reserve lending, which allows money to be recursively deposited/lent multiple times before it's done stretching. So $100 cash becomes $1000 credit, creating a boom/inflation and then you have runs on banks which reverse that process and yields bust/deflation a.k.a. liquidity crisis. FDIC is the bandaid which doesn't aim to solve the underlying problem
This is a good video. Austrian economics is just an over-simplication. Blaming interest rates as sole reason for 2008 housing crisis. excessive options and derivatives market, laws allowing financial firms to transfer savings to investment funds to gamble, unethical credit rating system. that is not accounted by original austrian economics.
i don’t think saving and consumption are conflicts, for example, I spend x pounds in the given time so that I saving and let others spend more. Even I do not lend them, it will still spend only x pounds
Your explanation does not take into account lag effects of monetary policy. Lower interest rates, all things being equal, should spur increased business activities, which only LATER translates into increased employment and possibly wage growth, which together should lead to increased household spending and saving.
The consumption increases quite the same as the investing?
How will Austrians deal with external shocks which aren't cased by malinvestments?
I think this postulates that the government is imposing some sort of "will" which I can't agree with. Let's for the sake of argument, propose that this explanation is correct. The next questions, without presupposing any biases or assumptions, you must ask, what causes the change in interest. Then this becomes much more complicated. What it seems you postulate, is that there is a "natural" rate of interest, which is a massive assumption that you MUST justify. There is no axiomatic reason why average conditions of competition, the balance between lender and borrower, should give the lender an interest rate of 3, 4, 5%, etc. Justifications commonly given to me anecdotally have been the same since the 19th and 20th centuries. One such justification is "The cost, in interest, for the use of loanable capital should vary with the supply of such capital," or some variation, but the interest is merely the average/mean rate of competition, which other factors than "The Federal Reserve" have large impact. This is not even commenting on the fact, that the very corporations affected by the "bust" as you call it, create the balloon to begin with from THEIR market manipulations.
Furthermore, I very much disagree with the simplistic nature in which you categorized the economic crisis in Greece. Allow me to explain why, the reason for their crisis was due to a multi-faceted chain of events that rippled through Europe during the 2008 recession that was exasperated by the interconnection of the Union. However, this was an issue throughout the union, Greece does not have it's own currency, cannot control interest rate, and was a victim of the exact economics that is proposed here. It was growth within Greece that peeked interest from lenders, that accelerated it's growth, until it hit the wall that all countries hit in 2008, but a country like the US, that has control of their interest rate, allows them to adjust interest to promote spending to push through the recession (On top of bank rolling trillions to collapsing countries due to 'Quantitative Easing', but that is too much of a diversion). The Germans and the French which have massive influence over the EU, bailed themselves out, and their plan was to allow Greece to default and absorb the damage, this will give them the capital leeway to bailout Germany and France. While this is still simplified it gives a lot more context than "Investors thought lending to Greece was safe, Greece couldn't just randomly borrowed more than they can pay back, and they defaulted".
thanks
very true
I like the Austrians econ
5:03 LOL I suppose Cowen had to say something critical of Austrian theory simply in order to appear unbiased.
Why would interest rates be lower when consumers have saved more?
Supply and demand of money to loan. If consumers save more, that shifts the supply curve of money out.
-Roman
Oh right that makes sense, thank you!
-I’ll take Hayek over mises.
-I believe the a priori is wrong as compared to the Chicago school where documentation is required. But would argue the Austrian school is correct in everything else that I have read about them.
-Keynes was a fool.
-boom and bust are a must within a capitalist / democratic nation and that’s still FAR better than a communist/ socialist nation.
-with the large scale institutionalization of electronic banking hasn’t monetarism lost its value as a probable theory?
This sounds a lot like 2021 USA
I love austrian school! :D
I feel like Tyler is being to harsh on the ATBC. Same feeling I had on his videos for learnliberty on the same topic.
Simon Sarevski I don’t think he’s being harsh, it’s just that doesn’t understand ABCT and so to him it seems silly.
Hmm, Austrians seem obsessed with too low interest rates fueling inflation but interest rates keep dropping with every cycle and ignoring the COVID mess inflation was unusually low from 2000-2019. If anything I would expect a different relationship. In a real estate boom investors believe their investment yields 8%, the bank asks for 5% interest. The bubble pops once everyone bought their home and then it turns out the investment only yields 3%. We actually have the opposite problem, interest rates that are too high cause recessions and keynesian inflation (monetary or fiscal stimulus) is simply a response to bring real interest rates down to 3% so that the borrowers are solvent again. Then a new boom starts in which interest rates are raised more and more until there is a recession again. Even if we assume no central bank intervention it would still be possible that borrowers talk with their bank about debt restructuring to reduce the interest rate to something they can actually pay.
Maybe this is the same thing the Austrian economics say but it is far more complex than lower interest rates fuel "malinvestment". "Malinvestment" could simply be the product of overconfidence and therefore can happen at any interest rate whether it is low or high. The problem with insisting that low interest rates cause problems is that if you think you can earn 8% yield then your profit would be even higher with 0% financing. Yet there is barely any inflation to be seen in Japan. It's more likely that 0% is too high.
I recommend reading more about Austrian business cycle theory; you will learn the errors in your thinking and the truth within it as well. I would recommend looking up lectures by Roger Garrison as an introduction.
The Austrian theory is great!
Haha money printer go BRRRRRRRRRR
It's funny how all ppl explaining Austrian economics end up warning people that it is wrong and not mainstream. Why don't they just teach it.
I am not happy with this video, the ABCT was never centred around “interest rates” it is mainly an inflationary credit expansion or fiduciary media which mitigates the unsustainable boom, loose credit just alleviates that (which subsequently becomes more tight as the boom starts to bust). As for the criticism of “rational expectations” rational entrepreneurs who know a boom is underway cannot prevent their more reckless competitors from taking cheap credit and utilizing scarce resources. Entrepreneurs don't need to speculate about a change in consumers’ "rate of time preference", or about the "supply of capital goods". Entrepreneur is concerned only with a small set of market prices, the prices of the inputs she will need for her projects, and the prices for which these products will sell. As for the consumption v investment criticism, The low interest rates of the boom period mislead entrepreneurs into borrowing too much, but they also mislead consumers into borrowing too much and saving too little. This is physically possible because resources that otherwise would have gone into replenishing the capital structure are instead devoted to new projects or additional consumption goods. A last addendum the ABCT Theory is not meant to explain the magnitude of the bust or the phenomenon of how severe the unemployment will be be, The theory claims that eventually costs will rise in such a way that make it clear that the longer-term production processes falsely induced by the boom will not be profitable, leading to their abandonment.
5:23 that is kind of desingenuous comparison, interprenours are in the end just human, without correct prices the chance of correct comsumption is close to 0, just like if government fixes the price of apples at 10$ or 0.1$ at 10$ not a lot of ppl will buy apples possibly killing the market because there is not enough demand to maintain the current apple producers and at 0.1$ maybe that causes shortages of apples because of overcomsumption and the apple producers have to close bc there is not enough profit at that price
and the "pain" isn't that severe either in the beggining the pain is only very small, only the apple producers and are hit by the low price while the consumers can aways buy all the suply of apples and only the apple consumers are affected by the high price but if that is not corrected soon the producers will eventually close their farms and change professions and the consumers will find something else to eat besides apples.
similarly during the booms you can feel only a small amount of pain, only savers and lenders get screwed by the low interest rates and only entepreuners that would use the capital in somewhere else feel the pain of not getting money for their they would otherwise have gotten while the borrowers can spend it now and businesses can get going because of that fake demand but when the bust comes the borrowers that bought overpriced goods and business that depended on that fake demand have to go
Each of your three objections to Austrian Business Cycle Theory are very poor. Here is an article addressing each of them in order:
1. mises.org/library/when-anticipation-makes-things-worse
2. & 3. mises.org/library/importance-capital-theory
Very slack that you couldn't seek an Austrian response to these criticisms.
As a professional economist I think Austrian cycle theory is unconvincing, to say the least.
If you want some empirics on the data, here you go, and by the way, from looking up empirical evidence about or relating to ABCT, I found that 11/13 of the studies I found support it. One of them does not support it at all, and the other supports it, but not sure to what magnitude. Here are the 11:
www.researchgate.net/publication225772381_Austrian_business_cycle_theory_Empirical_evidence
www.bis.org/publ/work137.pdf
cdn.mises.org/qjae9_2_4.pdf
www.researchgate.net/publication/271766865_An_Empirical_Illustration_of_the_Austrian_Business_Cycle_Theory_The_case_of_the_United_States_1988-2010
menghublog.wordpress.com/2012/03/11/empirical-evidence-for-the-austrian-business-cycle-theory/
csinvesting.org/wp-content/uploads/2012/12/Evidence-for-ABCT-in-Britain.pdf
papers.ssrn.com/sol3/papers.cfm?abstract_id=1974196
link.springer.com/article/10.1007%2Fs11138-009-0084-6
link.springer.com/content/pdf/10.1007/s11138-009-0084-6.pdf
csinvesting.org/wp-content/uploads/2012/12/Evidence-for-ABCT-in-Britain.pdf
search.proquest.com/openview/ab41de0101a82eebdd8b683b287e32b4/1?pq-origsite=gscholar&cbl=55438
stating something without reason other than feelings, sure sounds like a professional economist.
So many little mistakes in this that add up to an almost complete misunderstanding of the entire idea. I'll address just a couple of them. First, you can't use the models from other theories and force Austrian economics into it somehow. They are incompatible. There is no model in the Austrian sense because it is nonsensical to put a number on how much more one person prefers one good over another or how much one person prefers the same good as another. You can rank order such things, but that's as far as it goes, while the graph you used requires numerical values for these subjective preferences. It's utter nonsense.
One other large criticism I'd make is to the critique at the end about Austrian assumptions about Investments and Consumption and the evidence not supporting it. Can you name a place that exists which is run under the principles Austrians suggest? That's the issue. There isn't one and thus you can't look at a country with a central bank and policies Austrians reject as legitimate and say, "well the outputs of the very system you criticize as introducing distortions, don't produce your expected conclusions". Well, no crap. When Austrians tell you having a central banking system distorts natural market forces and then that system doesn't output the conclusions Austrians would expect out of a non-central banking based system its not a surprise, its actual data that might indicate they are correct. You have to use a system of private banking as Austrians suggest, run the system and then decide whether their expected outcome matches (which it would).
Austrians often don't use marginal utility so you can't use an aggregate demand curve.
bruh Carl Menger dedicated a lot of his time to explain Marginalism?
Fu
Austrians believe that Investment is Consumption lol. They break the Model into Consumption and Savings in the Hayekian Triangle, not Investment and Consumption. So, you just proved them right by not knowing what you are talking about!
The fact that you think Milton Friedman is an Austrian economist shows your ignorance. Wow!!!! Molotov Friedman is from a completely different school of thought. He is form the Chicago school of thought. He’s not an Austrian at all
Youre right technically, but Hayek did visit UofChicago and essentially founded that school of thought, look it up
@Chess Club Man P.S. I thought it was only socialists who asked for free shit at other peoples expense?
“economics”