Wow. That was awesome. Really appreciate the Mises Institute posting this. It helped me a lot to have a visual component in my understanding of the ATBC.
You sir are an excellent teacher! Loved the lecture. I have actually watched is several times just to try to absorb all of it well. Thanks for a really great class!
Great to see that the economics class that I took in college took more of its ideas from the Austrian perspective. Its been three years since I took that class and I am glad I was not force-fed the Keynesian garbage.
I'm not going to get into the jibber jabber of the conversation below, but instead I'm just going to say how awesome this video is...here it comes...this video is awesome because all I've learned in school is Keynesianism and Monetarism and this is refreshing to see economics in a different way. MISES ROCKS!
@treddas851 "What have Mises-Hayek done?" Mises incorporated monetary theory into marginal utility theory, something that all other neoclassical economists were simply incapable of doing (this was seen, at the time, as a major problem with subjective theories of value). He also explained, in great detail, how money emerges, the nature of inflation (it's not a uniform and/or measurable variable), and built upon Bohm-Bawerk's capital theory. (I purposely ignored business cycles for the moment)
@BachGuitar3 He's referring to his 2001 book "Time and Money: The Macroeconomics of Capital Structure". It's mentioned on a slide that's shown at the very beginning (in the background where they show the classroom) and at the very end.
@Nintendomanwill I meant why there is a hump shaped response to output under a monetary shock.. lol mixed them up... sorry :P. Why the lag and eventual neutrality in the long run?
I've got a question. Early stages of production: the example of development is given. Tom Woods has an example of 'bricks to build a house'. Do the earliest stages of production include mining natural recourses? Or am I taking the later example too literally? I try to understand the trade cycle looking at the production process from steel to a washing machine. And I wonder if decreased consumption will, if in a sound economy interest rates drop, result into more steel getting produced.
The material things we daily use are almost always products of mind: pen, shaver, plate, shirt, etc. Man is a mind/body unity. Emotions are responses to values. Values are the product of the reasoning one has done or evaded. Romantic love is your sense-of-life response to the sense-of-life of another person in a sexual context. Sense-of-life, one's subconscious response to existence as a whole, is basically (not wholly) a product of the extent to one's mind guides one's daily choices.
The part where financial deregulation really started to get out of hand was in the 1980s with Ronald Reagan. When investment banks were allowed to be public companies rather than limited partnerships, that really screwed up the incentives along with the removal of Glass-Steagall and the financial innovations of securitization and the development of OTC derivatives. What we need isn't more rules, we need skin in the game.
@Questfortruth86 2) The second phase from 1937 to the 1940s involved Hayek’s attempt to redefine equilibrium as plan co-ordination, which occurred in his important paper “Economics and Knowledge” (Hayek 1937)From the 1940s, there was a third phase where Hayek broke with equilibrium analysis and created a new concept of “spontaneous order” as a method for studying coordination processes in market economies.
Apart from things you can product in your yard, what can we sell to each other that we didn't have to first buy from someone else, or at least buy the materials from someone else?
It doesn't matter if there's another outside country using different currency. The price for the apple is $1 in this currency. Exchange rates change based on the demand one currency over another. But there's no change in demand for either currency here.
@Nintendomanwill Of course, we operate under different definitions of inflation. Anyway... there are questions that I must ask you. Why is there a hump shaped response to output under a monetary shock? Why is there seemingly non-neutrality of money in the short run and neutrality in the long run (within the bounds of randomness)?
>The downturn in the economy is not a result of consumer desires not being satisfied, Yes, my demand for a mansion, a yacht, a string of polo ponies and a mink-wearing mistress has not been satisfied. As the economic consultants, the Rolling Stones, sang, "I can't get no satisfaction." Your economic wisdom is appreciated. As Bogie said of Edward G. Robinson in "Key Largo," "What does he want? He wants more!" I bet that youre a university graduate. Wow!
@Nintendomanwill Before I refute your points, I have a question for you. How is it that agents can be hyper-rational about the extremely complex macro-economy but fail in a prolonged systematic manner at comprehending a simple mean reversion in the interest rate?
I did not say that I do not use search engines. In fact, I use them quite a lot. I completely agree with you on why they are useful. I was only watching this video, and had a quick question that I wanted an answer too. I mindlessly asked it to the viewers, thinking that they were knowledgeable enough to answer it (and you were). I did not know that that asking a question was so out of the ordinary nor did I know that I would have to continuously explain my word choice.
My experience has been that search engines are very often close to direct or personalized. Theres a lot of people out there with similar interests to a lot of other people. Even when search engines fail, they may provide a pattern, positive or negative, for other search methods. They often provide background info, eg, the history of an idea, useful for querying individuals or specialized groups. Ive occasionally called professors at the local university.
@Questfortruth86 10) In fact, Hayek delivered a lecture called “Price Expectations, Monetary Disturbances and Malinvestments” on December 7, 1933 in Copenhagen (first published in German in 1935; English trans. Hayek 1939) where he responded to Myrdal’s criticisms. Here he began to modify his ideas on the equilibrium interest rate and the concept of equilibrium more fully developed in his paper “Economics and Knowledge” (Hayek 1937).
Regarding paying back deficits. We're talking about maximizing economic output and growth. We can run at full output and still be paying down deficits. They aren't mutually exclusive events. Think of the budget more as financial accounting, as in who pays what and when. Think of the economy as the real output of wealth that get divided up in some form to all people.
1) According to the probarly most credited post WW2 economist Paul A Samuelson,at MIT in his famous oscillator model economic trends and cycles works as follows: A- Damped monotonic B - Constant monotonic C- Explosive monotonic D -Explosive oscillations E - Constant oscillations F - Damped oscillations How do his multiplier-accelerator reveal "cycles"? In fact, only parameter ranges (B , C) which are in situation E (constant oscillations) will yield constant cycles.
2) All other parameter constellations will result in something else -- either complete stability or complete instability - (whether monotonic or oscillating).Thus, regular cycles are "structurally unstable" in the sense that they emerge only if there is a precise parameter constellation and any slight movement or displacement of the economy from these parameter values will end the regular cycle dynamics and enter into either explosive or damped oscillations.
Economic potential is not wasted by holding onto money. The potential for future consumption can be more valuable than present consumption with the same amount of money. This deferral of consumption also helps to ensure that long-term investments will be profitable in the future, because consumers who save (or "hoard") now, will have more money to spend on the future outputs.
I hear a lot of people bashing Keynes about his theories. To be fair, Keynes understood the role of the financial sector in facilitating the role of capital. He also understood that if it didn't do a good job, the country wouldn't end up too well. "When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done"--J.M. Keynes Note: What is commonly interpreted as Keynes is actually what was developed Hicks.
The Austrian response to this question would be that goods are not defined or characterized by their physical properties but rather by how they are employed by individuals in their attempt to satisfy their subjective desires. Sugar can be, and is, both a consumer good in some circumstances, and a producer good in others. Houses are typically considered long-term durable goods, and therefore share many characteristics with capital goods. Sometimes houses are indeed capital goods proper.
@Nintendomanwill I was asking why money supply has a hump shaped response to output. I also asked why there is short run non-neutrality of money but apparent neutrality of money in the long run. Please explain. Also, please explain how otherwise fully rational individuals cannot possibly comprehend mean reversion of interest rates. On one side agents are geniuses but in the other they are mentally deficient. How is it that those inefficient allocators are removed by market forces?
It doesn't really matter if we're getting our own raw materials or buying from someone else. Introducing more participants in the economy just makes it more complex, but doesn't change the fundamentals. Our buying of raw materials from someone else increases their business, encouraging them to expand rather than contract. And in a round-about law-of-averages type way, they'll be spending their increased income in the economy, buying some of our apples with it, etc.
4) In Economic Depressions: Their Cause and Cure written in 1969, Rothbard sets out a form of ABCT which seems typic general form of it.He points to malinvestments in capital goods by businesses as the fundamental cause of recessions: “And there is a third universal fact that a theory of the cycle must account for. Invariably, the booms and busts are much more intense and severe in the “capital goods industries”-the industries making machines and equipment" (Rothbard 1969: 32-33)
How do Austrians distinguish consumption from investment in practical terms ? Is buying a house, for example, categorized as "consumption" or "investment" ?
Keynesian economics doesn't ignore consumption and investment. It adds them to find the total output in the economy. The difference is that Austrian economics seems to assume that a decrease in one necessarily leads to an equal and opposite decrease in the other in a way that maintains full employment. Keynes doesn't make that assumption. If it did happen that way, Keynes wouldn't suggest that a decrease in consumption requires any action, since investment would have increased equally.
5) ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree.In the housing bubble, loans were made to people who clearly were unlikely to pay them back. Debt was used bid up asset prices in property, allowing yet more debt (via refinancing) for purchasing of commodities (whether durable or non-durable). ABCT in the form examined above does not explain this process.
@Questfortruth86 Yes it´s true.Wicksell’s work was an attempt at integrating general equilibrium theory earned from Leon Walras,the Austrian theory of capital (but i think he learned more from Eugen von Böhm-Bawerk’s,1884, classic,Capital and Interest,but i am not sure?) and the marginal productivity theory of income distribution from David Ricardo’s 1817 treatise On the Principles of Political Economy and Taxation.He was working on a grand synthesis of these three theoretical approaches.
When the Fed creates loanable funds, it distorts the coordinating price signal provided by the interest rate. Saving provides the demand for future outputs. It also, lowers the price level, making the investment projects easier to see through to completion.
@zsylvana "the Austrian theory of business cycles,which uses Wicksell’s concept of a natural rate of interest." This is actually a Bohm-Bawerkian conception (he called it "natural interest," and "surplus value"). Wicksell explicitly cites Bohm-Bawerks' "Positive Theory of Capital" (1888) when he first introduces the concept in "Interest and Prices" (1896).
@Nintendomanwill I meant long run real effects. I understand that Say's law is internally consistent if the assumptions hold. Under Say's law, I understand why there is never such a thing as insufficient demand and how monetary policy could lead to massive inflation. Please explain how they have real effects from purely Says argument (no additional Austrian based prolonged systematic irrationality condition).
@Nintendomanwill For all our disagreements on economics, I must say that you are a good debater and very well versed in Austrian economics. If one adds expectation elements to Austrian theory & it is found not to be a factor, the adjusted construct will be no different than the original one. A little augmentation goes a long way if it is a factor/
Another problem is that for new businesses to cause greater demand to match the supply they bring, they would need to offer something that causes people to spend more without spending less on something else. That means a business that competes for people's disposable income without increasing their disposable income does not create greater demand overall. So unless the business caters to wealthy people with a new non-substitute good, you'd only benefit temporarily from extra wages (aka stimulus)
Did you watch the video? Dr. Garrison knows all about mechanical analysis and WHEN TO APPLY IT. He started off as an electrical engineer. He learned math first, then economics. Direct calculations in economics are subjective valuations between individuals exchanging goods and services.
@zsylvana I'm not going to read all of your comments, but the very first sentence in this passage is simply incorrect. Specifically, the assertion that "ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers" is false. Hayek deals with both situations in his work.
@Questfortruth86 3) While Hayek developed an intertemporal equilibrium theory in 1928 in his paper “Intertemporal Price Equilibrium and Movement in the Value of Money” (Hayek 1984 [1928]),he did not use this in Prices and Production (1931). Instead, he reverted to the stationary equilibrium approach, by adopting the simple stationary-equilibrium model put forward by Wicksell in Interest and Money as the starting point for his analysis.
@Questfortruth86 Mark Blaug,one of the foremost historians of economic thought,proclaim that Knut Wicksell “more or less founded modern macroeconomics”(Blaug 1986,274). Wicksell’s work inspired directly to three major traditions in economic theory: the quantity theory of money and its implications for allowing an analysis of aggregate macro outcomes as well as their appropriate monetary policies; the Austrian theory of business cycles,which uses Wicksell’s concept of a natural rate of interest
Why is everyone down-rating my comments? Constructive criticism is important. Offering generalizations of models is conducive to their long run success.
"Feedback loop" is a term taken from engineering and repurposed in economics to create an aura of scientism (see Rothbard's "Mantle of Science"). Basically, it's when buyers/sellers respond to an event in a way which aggravates that event. stock prices fell yesterday, so stock owners sell today to avoid future losses, which further lowers the price, and so on. Keynesians see this as a "market failure" since it's "irrational." I see it as buyers/sellers maximizing their utilities ex ante.
@Questfortruth86 1) The Austrian business cycle theory (ABCT) is a credit-based explanation of the business cycle used by Austrian economists. ABCT has, however, come in different forms and was developed over many years by Mises, Hayek, Rothbard and more recently by modern Austrians like Roger Garrison. It is not monolithic,and some Austrians like Israel M. Kirzner have even criticised Hayek’s development of ABCT as not entirely consistent with Mises’ exposition in 1912.
@Nintendomanwill When did I state perfection? When is H-D Chaos shocked w/ dynamic heavy tailed fluctuations..perfection? Evolutionary processes function without interventionism. I am not a statist. A CAS breaks down/losses its upside potential in controlled instances.
The downturn in the economy is not a result of consumer desires not being satisfied, as if businesses just aren't producing the correct goods and services. It's an overall drop in demand. Policies that increase demand will still cause consumers to demand the things they want, not cause them to purchase things they don't desire. Useless investments (things people don't want) still fail just fine.
@Questfortruth86 In Wicksell’s model, the interest rate divergence phenomenon was crucial for understanding the differences between Wicksell’s quantity theory of money and the view held by his rival Irving Fisher.For Fisher,changes in the quantity of money fully explained changes in long-run prices; for Wicksell,the quantity of money was but one aspect of the mechanism that changed prices because the flow of goods and services worked its way through the economy by first changing interest rates
@AFRIKTODAY For all our disagreement, I think its great that you support freedom and the free markets. I will also like to state the positives of Austrian economics. The view that the market cannot be simply aggregated is reigning true. The disaggregation of capital and agents (although I believe the dynamics are far more complex than presented in this video) was a step in the right direction.
(Continued from below) The problem is that a decrease in consumption does not lead to an equal increase in investment. It's more complicated than that. There's more to money than just quantity. For example, changes in velocity of money is just like having more or less money, even with a constant money supply. And in laymen terms, it definitely can be the case where consumers decide to consume less, while businesses decide investment opportunities aren't worth it (even with zero interest loans).
@AFRIKTODAY You didnt answer this. "How can you quantify, absent of statistical analysis, if differences are significant enough to warrant the acceptance/rejection of a theoretical model." How can you state that a difference( lets say of slope) warrants a significant linear relationship?
All spending is someone's income. That's includes govt. spending. Cutting taxes in itself does increase demand. But cutting spending to pay for it reduces incomes by the same amount. It's the same as business competing for the same consumer demand. It doesn't create greater overall demand and employment. However, cutting taxes via deficit spending, financed by new Fed money, does create overall greater demand, greater employment, and greater output. That IS increased value.
I's true that Austrians distinguish between business cycles and recessions. Not all recessions are the result of a credit expansion primarily funneled into the "higher order" capital goods sectors which create unsustainable booms and therefore busts. But thats precisely the point. Hayek specifically deals with the situation where the newly created sums take the form of consumer credits in P&P. He claims that it leads to a relatively immediate bust (contracts the structure of production).
@Nintendomanwill I dispute their models which are centered around the Gaussian/stability dynamic. The misuse of these simplifications significantly underestimates extremal risk.
That's because in a modern economy, there are multiple types of cycles. There's the common business cycles that come usually because central banks try to kill price inflation. Then, there's the debt cycle where debt/income ratios get far too out of line and need to correct. That's what's occurring now where all countries have to undergo decreases in standards of living as debts are wiped out(either by liquidation, by some sort of a jubilee, or in real terms by inflation).
Austrians do not assume that decrease in consumption leads to an equal and opposite increase in investment. We do, however, believe that the interest rate, when not tampered with, coordinates consumption and investment to produce sustainable growth. If a recession were answered by allowing interest rates to rise properly, consumption and investment would both decrease, allowing people to rebuild savings, which will eventually bring the interest rate back down properly.
@Questfortruth86 1)It is well known that Hayek abandoned general equilibrium theory after the 1940s for the concept of a “spontaneously emerging market order.”But Hayek’s views on equilibrium also evolved over time,and some scholars feel it is necessary to divide Hayek’s career into 3 phases in his views on equilibrium - In the first phase down to 1937,Hayek thought that “all legitimate economic explanations should be based upon an analysis of equilibrium” (Gloria-Palermo 1999)
I understand why you think it is mysticism, it is in a way. It is mystical because the equilibrium of time preference and credit can never really be reached or what we call the ERE. The cyclical nature is not an Austrian assertion. Most schools of thought use business cycles. We believe the cyclical nature is skewed by monetary expansion. Since there has been a great deal more expansion in the last few decades, it has created deeper and more frequent crises as you stated. Thanks for commenting.
Also, we are not taking money out of the private sector here. The opposite. We're putting money into the private sector. That's the point of deficit spending. Priming the pump. Solving the inefficiency that is unemployment by giving people the ability to demand what they want, creating employment for them to continue the process, and it's done through deficit spending.
@zsylvana In fact, Wicksell took the concept of natural interest from Bohm-Bawerk, Mises’ professor at Vienna. Bohm-Bawerk referred to the pure rate of interest as the “natural rate.” In other words, Wicksell was employing the Bohm-Bawerkian capital framework though it is true he would later modify it. This is absolutely crucial to understanding WIcksell’s trade cycle theory, and it’s something that Keynes entirely missed (Hayek deeply stressed this in his critique of treatise on money).
"There must be no alternatives to your product either in or outside of your market. The NFL has a virtual monopoly on Professional Football. " Remember there is also the potential for competition. The reason the NFL doesnt raise prices and gives a bad service, its not only because there are substitute products but also the mere threat of new competition coming in.
@Questfortruth86 5) An equilibrium state is the starting point of a real world economy allegedly subject to Hayek’s Austrian trade cycle (Loasby 1997: 54: “Hayek began ... with a monetary expansion ... impinging on a perfectly co-ordinated economy”). Hayek explicitly stated that he had assumed full employment equilibrium in Prices and Production (1931). U. Witt has identified the severe problem running through Hayek’s reliance on general equilibrium for his trade cycle theory.
I'm right there with you that we need a new monetary system; so I don't know why you're bringing up the Fed when I basically agree. I'd also like to see investment banks be limited partnerships again, separating investment banking from retail banking, reducing leverage across the board, maybe even an elimination of fractional reserve banking for commercial banks. Even the institution of full reserve banking would be a regulation on the financial sector.
@Nintendomanwill I said they haven't factored it in (they didnt ....most mathematical models were based on stable gaussian dynamics) ... I didn't say it was impossible to establish complexity based analysis
@Questfortruth86 5) What appears to me to be the most important form of ABCT: the form postulating distortions in the capital goods sector (for a good summary of this form of ABCT, see Garrison 1997: 23-27), and how this simply cannot be invoked as a serious or fundamental explanation of the US housing boom in the 2000s and financial crisis of 2008.
I don't get what you mean with not accounting for production costs and how that means it's exchanging favors without growth. Doing work for each other is definitely the same as any other form of economic growth. Exchanging money has always been like exchanging favors, with money being the IOU. It's still productive, creating wealth.
When speaking of monoplies there are (imo) two important categories. Those over necessary goods and those over goods which can be substitued with other goods. In the case of necessary goods , if a monoply occured on a free market and a price was charged which allowed for exessive profits then other companies would surley join in and compete to get on on the mega profits. On subsituable, selling a product at an outragous rate will kill demand, thus lowering profits. i havent slept in days so
That doesn't account for the production costs of each others' goods and services. If there were no variable costs to account for, we would simply be exchanging favors, which doesn't create any economic growth.
@AFRIKTODAY So let me get this straight... you can construct a theory based on a set of axioms that you assume to hold in all cases. The model which is based on that set of "self evident"axioms is then stated to be correct even if it produces results that are empirically incorrect.
@Questfortruth86 4) In Prices and Production, an initial stationary state moves to disequilibrium and then moves via boom and bust into a new stationary state. This might be viewed as an application of Hayek’s intertemporal equilibrium theory of 1928 where perfect foresight is needed as an assumption. Hayek’s definition of monetary stability is a state where voluntary savings equal voluntary investment.The unique natural rate of interest is taken over from Wicksell.
Also, we're not talking about saved money going to investment either. That would be fine if that's what was happening, since that'd help maintain full employment. Instead, investors are finding there isn't much worth investing in, particularly due to the low demand and expectations for demand. You can buy that "machine" now if you want. There's spare labor to produce it or replace it in inventory. The problem is that aren't seeing any need to increase your productivity with such low demand.
@AFRIKTODAY We are not ignorant about the complexity of economics. Complex adaptive system are based on a quasi-evolutionary framework (quasi because the process is not blind, its based on N period discounted FCF's) of dynamic concentration of dynamically interacting heterogeneous agents(w/ long memory and emergent preferences) . A slight generalization of normal statistical analysis solves the problem (the accounting for of dynamic higher moments is necessary & sufficient)
@Questfortruth86 Your right.Treedas wrong.There are, two broad lines in macro economics.One "European", comes from Knut Wicksell, another "American" is in the tradition of Irving Fischer.Milton Friedman did not for sure introduced any new equation of exchange in any of his 3 books.Milton Friedman was a follower of Irving Fischers,and his monetarism is a development of Fischers work.Knut Wicksell inspired Austrian,& Stockholm school of economics as well as Keynes early monetary theory.
@Questfortruth86 4)However,both Lachmann and Schumpeter did not think that Hayek’s business cycle theory could be used to explain all business cycles (Batemarco 1998).More importantly, I.Kirzner has also made the following remarks on Hayek’s theory: 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.It goes back to Knut Wicksell"
@Questfortruth86 3) Here are some of the major works by Austrians where different forms of the ABCT are expounded: (1)The version of Mises in Human Action: A Treatise on Economics 1998. . (2)Hayek’s first version of ABCT in Prices and Production (London, 1931).After Nicholas Kaldor’s attack on it in “Capital Intensity and the Trade Cycle” (Economica n.s. 6.21 (1939):)Hayek had to re-write his theory in: (3)Hayek’s second version of ABCT in Profits,Interest and Investment.1939
The lack of demand and investment is due to the fact that interest rates were not allowed to rise properly after the crash. Had they risen, people would have been encouraged to put more of their money in savings accounts, thus increasing the loanable funds supply and encouraging investment.
2) As per Milton Friedman’s and Anna Schwartz’s account of the period in their Monetary History of the United States (1963), monetary policy is the crucial determinant: problems of international capitalist production remain distant from the action. And as in Eichengreen, again, the dysfunctional inter-war gold standard plays a central role.
@Questfortruth86 8) Hayek’s assumptions go much further than the idea of a starting equilibrium state.They also assume:(1) The flexibility of prices and perfect or near perfect adjustments in prices in response to demand and supply(2) frictionless markets,and perfect price information on the part of agents.But prices are not perfectly flexible,and in reality agents ex ante expectations can be severely disappointed ex post,and Knightian uncertainty causes subjective expectations
@Nintendomanwill You're using a modified version of Say's Law. Classical Say's Law states that money neutrality would occur. Money neutrality(Say's Law) holds if money is used in a purely current transaction based fashion. It is not. Thus, in a monetary economy, Say's law fails and their is short-run non-neutrality of money.
@Questfortruth86 Wicksell made improvements for which he is remembered today.The most important is probably his distinction between the natural and money rates of interest.The Money,or market, rate of interest is the observed rate at which banks carry on credit transactions.The natural rate is a bit more complicated.Wicksell defined it as the rate that is neutral for commodity prices and the rate at which the supply and demand for capital are in equilibrium in an economy not using money at all
@Nintendomanwill Im back. Say's law fails in monetary economys. If there is a sufficiently high degree of substitutability between non-real and real goods, the assumption of a purely barter system fails completely. Thus, it fails in all modern economies. Says law predicts monetary neutrality at all "scales" yet we see short run non-neutrality of money (monetary expansion has real effects in the short run). Please explain how this is possible if Say's law holds.
Full employment is the goal, though. People want to be employed (or else they wouldn't be counted in the labor force, such as with retires). Unemployment means there are people who are willing to work and produce. They are willing because they want income, so they can then demand goods and services. Thus it is an inefficiency that people can't demand things from each other because they lack the initial income to start the exchange process.
@Questfortruth86 Ludwig von Mises and Hayek adapted Wicksell’s cumulative cycle process. Keynes no doubt read and appreciated Wicksell’s approach and then built on it, stressing that cycles were generated by changes in real factors such as investment spending and interest rates and not by monetary changes. The seeds of the Keynesian-monetarist debates that began in the 1960s were planted first in the differences between Fisher and Wicksell.
Wow. That was awesome. Really appreciate the Mises Institute posting this. It helped me a lot to have a visual component in my understanding of the ATBC.
Keep it up.
I'm stunnend. I wish that my economic classes would be more like this.
This video was really awesome. I have done some reading, but this condensed, simplified, intuitive version was extremely helpful. Thanks!!
You sir are an excellent teacher! Loved the lecture. I have actually watched is several times just to try to absorb all of it well. Thanks for a really great class!
Great to see that the economics class that I took in college took more of its ideas from the Austrian perspective. Its been three years since I took that class and I am glad I was not force-fed the Keynesian garbage.
I'm not going to get into the jibber jabber of the conversation below, but instead I'm just going to say how awesome this video is...here it comes...this video is awesome because all I've learned in school is Keynesianism and Monetarism and this is refreshing to see economics in a different way. MISES ROCKS!
This was by far the best macro class I have ever had. Garrison does a fantastic job explaining how Keynes is wrong and why the Austrians are right.
@treddas851
"What have Mises-Hayek done?"
Mises incorporated monetary theory into marginal utility theory, something that all other neoclassical economists were simply incapable of doing (this was seen, at the time, as a major problem with subjective theories of value). He also explained, in great detail, how money emerges, the nature of inflation (it's not a uniform and/or measurable variable), and built upon Bohm-Bawerk's capital theory. (I purposely ignored business cycles for the moment)
Direct in the sense that you are directly answering my question. It requires no searching or research on my part to answer the question.
THANK YOU!
This is excellent. I'll keep it forever :)
Fantastic presentation!
That was an excellent video. Question: What is the sixth category added to the Hayekian triangle when saving occurs in the PPF?
@BachGuitar3 He's referring to his 2001 book "Time and Money: The Macroeconomics of Capital Structure". It's mentioned on a slide that's shown at the very beginning (in the background where they show the classroom) and at the very end.
Fantastic presentation. Thank you.
@Nintendomanwill I meant why there is a hump shaped response to output under a monetary shock.. lol mixed them up... sorry :P. Why the lag and eventual neutrality in the long run?
I've got a question. Early stages of production: the example of development is given. Tom Woods has an example of 'bricks to build a house'. Do the earliest stages of production include mining natural recourses? Or am I taking the later example too literally?
I try to understand the trade cycle looking at the production process from steel to a washing machine. And I wonder if decreased consumption will, if in a sound economy interest rates drop, result into more steel getting produced.
one of your best videos!
The material things we daily use are almost always products of mind: pen, shaver, plate, shirt, etc.
Man is a mind/body unity. Emotions are responses to values. Values are the product of the reasoning one has done or evaded. Romantic love is your sense-of-life response to the sense-of-life of another person in a sexual context. Sense-of-life, one's subconscious response to existence as a whole, is basically (not wholly) a product of the extent to one's mind guides one's daily choices.
The part where financial deregulation really started to get out of hand was in the 1980s with Ronald Reagan. When investment banks were allowed to be public companies rather than limited partnerships, that really screwed up the incentives along with the removal of Glass-Steagall and the financial innovations of securitization and the development of OTC derivatives.
What we need isn't more rules, we need skin in the game.
@Questfortruth86 2) The second phase from 1937 to the 1940s involved Hayek’s attempt to redefine equilibrium as plan co-ordination, which occurred in his important paper “Economics and Knowledge” (Hayek 1937)From the 1940s, there was a third phase where Hayek broke with equilibrium analysis and created a new concept of “spontaneous order” as a method for studying coordination processes in market economies.
Apart from things you can product in your yard, what can we sell to each other that we didn't have to first buy from someone else, or at least buy the materials from someone else?
It doesn't matter if there's another outside country using different currency. The price for the apple is $1 in this currency. Exchange rates change based on the demand one currency over another. But there's no change in demand for either currency here.
@Nintendomanwill Of course, we operate under different definitions of inflation. Anyway... there are questions that I must ask you. Why is there a hump shaped response to output under a monetary shock? Why is there seemingly non-neutrality of money in the short run and neutrality in the long run (within the bounds of randomness)?
>The downturn in the economy is not a result of consumer desires not being satisfied,
Yes, my demand for a mansion, a yacht, a string of polo ponies and a mink-wearing mistress has not been satisfied. As the economic consultants, the Rolling Stones, sang, "I can't get no satisfaction." Your economic wisdom is appreciated. As Bogie said of Edward G. Robinson in "Key Largo," "What does he want? He wants more!" I bet that youre a university graduate. Wow!
@Nintendomanwill Before I refute your points, I have a question for you. How is it that agents can be hyper-rational about the extremely complex macro-economy but fail in a prolonged systematic manner at comprehending a simple mean reversion in the interest rate?
I did not say that I do not use search engines. In fact, I use them quite a lot. I completely agree with you on why they are useful. I was only watching this video, and had a quick question that I wanted an answer too. I mindlessly asked it to the viewers, thinking that they were knowledgeable enough to answer it (and you were). I did not know that that asking a question was so out of the ordinary nor did I know that I would have to continuously explain my word choice.
My experience has been that search engines are very often close to direct or personalized. Theres a lot of people out there with similar interests to a lot of other people. Even when search engines fail, they may provide a pattern, positive or negative, for other search methods. They often provide background info, eg, the history of an idea, useful for querying individuals or specialized groups. Ive occasionally called professors at the local university.
@Questfortruth86 10)
In fact, Hayek delivered a lecture called “Price Expectations, Monetary Disturbances and Malinvestments” on December 7, 1933 in Copenhagen (first published in German in 1935; English trans. Hayek 1939) where he responded to Myrdal’s criticisms. Here he began to modify his ideas on the equilibrium interest rate and the concept of equilibrium more fully developed in his paper “Economics and Knowledge” (Hayek 1937).
Regarding paying back deficits. We're talking about maximizing economic output and growth. We can run at full output and still be paying down deficits. They aren't mutually exclusive events. Think of the budget more as financial accounting, as in who pays what and when. Think of the economy as the real output of wealth that get divided up in some form to all people.
1) According to the probarly most credited post WW2 economist
Paul A Samuelson,at MIT in his famous oscillator model economic trends and cycles works as follows: A- Damped monotonic B - Constant monotonic C- Explosive monotonic D -Explosive oscillations E - Constant oscillations F - Damped oscillations
How do his multiplier-accelerator reveal "cycles"? In fact, only parameter ranges (B , C) which are in situation E (constant oscillations) will yield constant cycles.
2) All other parameter constellations will result in something else -- either complete stability or complete instability - (whether monotonic or oscillating).Thus, regular cycles are "structurally unstable" in the sense that they emerge only if there is a precise parameter constellation and any slight movement or displacement of the economy from these parameter values will end the regular cycle dynamics and enter into either explosive or damped oscillations.
Economic potential is not wasted by holding onto money. The potential for future consumption can be more valuable than present consumption with the same amount of money. This deferral of consumption also helps to ensure that long-term investments will be profitable in the future, because consumers who save (or "hoard") now, will have more money to spend on the future outputs.
I hear a lot of people bashing Keynes about his theories. To be fair, Keynes understood the role of the financial sector in facilitating the role of capital. He also understood that if it didn't do a good job, the country wouldn't end up too well.
"When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done"--J.M. Keynes
Note: What is commonly interpreted as Keynes is actually what was developed Hicks.
The Austrian response to this question would be that goods are not defined or characterized by their physical properties but rather by how they are employed by individuals in their attempt to satisfy their subjective desires. Sugar can be, and is, both a consumer good in some circumstances, and a producer good in others.
Houses are typically considered long-term durable goods, and therefore share many characteristics with capital goods. Sometimes houses are indeed capital goods proper.
This blew me away.
@Nintendomanwill I was asking why money supply has a hump shaped response to output. I also asked why there is short run non-neutrality of money but apparent neutrality of money in the long run. Please explain. Also, please explain how otherwise fully rational individuals cannot possibly comprehend mean reversion of interest rates. On one side agents are geniuses but in the other they are mentally deficient. How is it that those inefficient allocators are removed by market forces?
It doesn't really matter if we're getting our own raw materials or buying from someone else. Introducing more participants in the economy just makes it more complex, but doesn't change the fundamentals. Our buying of raw materials from someone else increases their business, encouraging them to expand rather than contract. And in a round-about law-of-averages type way, they'll be spending their increased income in the economy, buying some of our apples with it, etc.
4) In Economic Depressions: Their Cause and Cure written in 1969, Rothbard sets out a form of ABCT which seems typic general form of it.He points to malinvestments in capital goods by businesses as the fundamental cause of recessions:
“And there is a third universal fact that a theory of the cycle must account for. Invariably, the booms and busts are much more intense and severe in the “capital goods industries”-the industries making machines and equipment" (Rothbard 1969: 32-33)
How do Austrians distinguish consumption from investment in practical terms ? Is buying a house, for example, categorized as "consumption" or "investment" ?
According to what the consumer think of what he buys
@@Mashwag That's the conclusion I've arrived at after 4 years. Great minds.... !
Keynesian economics doesn't ignore consumption and investment. It adds them to find the total output in the economy. The difference is that Austrian economics seems to assume that a decrease in one necessarily leads to an equal and opposite decrease in the other in a way that maintains full employment. Keynes doesn't make that assumption. If it did happen that way, Keynes wouldn't suggest that a decrease in consumption requires any action, since investment would have increased equally.
Wow, Excellent Video!
5) ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree.In the housing bubble, loans were made to people who clearly were unlikely to pay them back. Debt was used bid up asset prices in property, allowing yet more debt (via refinancing) for purchasing of commodities (whether durable or non-durable). ABCT in the form examined above does not explain this process.
@Questfortruth86 Yes it´s true.Wicksell’s work was an attempt at integrating general equilibrium theory earned from Leon Walras,the Austrian theory of capital (but i think he learned more from Eugen von Böhm-Bawerk’s,1884, classic,Capital and Interest,but i am not sure?) and the marginal productivity theory of income distribution from David Ricardo’s 1817 treatise On the Principles of Political Economy and Taxation.He was working on a grand synthesis of these three theoretical approaches.
When the Fed creates loanable funds, it distorts the coordinating price signal provided by the interest rate.
Saving provides the demand for future outputs. It also, lowers the price level, making the investment projects easier to see through to completion.
@zsylvana
"the Austrian theory of business cycles,which uses Wicksell’s concept of a natural rate of interest."
This is actually a Bohm-Bawerkian conception (he called it "natural interest," and "surplus value"). Wicksell explicitly cites Bohm-Bawerks' "Positive Theory of Capital" (1888) when he first introduces the concept in "Interest and Prices" (1896).
@Nintendomanwill "inflation distorts intersectoral prices" Please tell me why you think it distorts prices?
@Nintendomanwill I meant long run real effects. I understand that Say's law is internally consistent if the assumptions hold. Under Say's law, I understand why there is never such a thing as insufficient demand and how monetary policy could lead to massive inflation. Please explain how they have real effects from purely Says argument (no additional Austrian based prolonged systematic irrationality condition).
@Nintendomanwill For all our disagreements on economics, I must say that you are a good debater and very well versed in Austrian economics. If one adds expectation elements to Austrian theory & it is found not to be a factor, the adjusted construct will be no different than the original one. A little augmentation goes a long way if it is a factor/
Another problem is that for new businesses to cause greater demand to match the supply they bring, they would need to offer something that causes people to spend more without spending less on something else. That means a business that competes for people's disposable income without increasing their disposable income does not create greater demand overall. So unless the business caters to wealthy people with a new non-substitute good, you'd only benefit temporarily from extra wages (aka stimulus)
Did you watch the video? Dr. Garrison knows all about mechanical analysis and WHEN TO APPLY IT. He started off as an electrical engineer. He learned math first, then economics. Direct calculations in economics are subjective valuations between individuals exchanging goods and services.
@zsylvana
I'm not going to read all of your comments, but the very first sentence in this passage is simply incorrect. Specifically, the assertion that "ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers" is false. Hayek deals with both situations in his work.
@Questfortruth86 3) While Hayek developed an intertemporal equilibrium theory in 1928 in his paper “Intertemporal Price Equilibrium and Movement in the Value of Money” (Hayek 1984 [1928]),he did not use this in Prices and Production (1931). Instead, he reverted to the stationary equilibrium approach, by adopting the simple stationary-equilibrium model put forward by Wicksell in Interest and Money as the starting point for his analysis.
@Questfortruth86
Mark Blaug,one of the foremost historians of economic thought,proclaim that Knut Wicksell “more or less founded modern macroeconomics”(Blaug 1986,274).
Wicksell’s work inspired directly to three major traditions in economic theory:
the quantity theory of money and its implications for allowing an analysis of aggregate macro outcomes as well as their appropriate monetary policies;
the Austrian theory of business cycles,which uses Wicksell’s concept of a natural rate of interest
Why is everyone down-rating my comments? Constructive criticism is important. Offering generalizations of models is conducive to their long run success.
"Feedback loop" is a term taken from engineering and repurposed in economics to create an aura of scientism (see Rothbard's "Mantle of Science"). Basically, it's when buyers/sellers respond to an event in a way which aggravates that event. stock prices fell yesterday, so stock owners sell today to avoid future losses, which further lowers the price, and so on. Keynesians see this as a "market failure" since it's "irrational." I see it as buyers/sellers maximizing their utilities ex ante.
@Questfortruth86 1) The Austrian business cycle theory (ABCT) is a credit-based explanation of the business cycle used by Austrian economists. ABCT has, however, come in different forms and was developed over many years by Mises, Hayek, Rothbard and more recently by modern Austrians like Roger Garrison. It is not monolithic,and some Austrians like Israel M. Kirzner have even criticised Hayek’s development of ABCT as not entirely consistent with Mises’ exposition in 1912.
@Nintendomanwill When did I state perfection? When is H-D Chaos shocked w/ dynamic heavy tailed fluctuations..perfection? Evolutionary processes function without interventionism. I am not a statist. A CAS breaks down/losses its upside potential in controlled instances.
The downturn in the economy is not a result of consumer desires not being satisfied, as if businesses just aren't producing the correct goods and services. It's an overall drop in demand. Policies that increase demand will still cause consumers to demand the things they want, not cause them to purchase things they don't desire. Useless investments (things people don't want) still fail just fine.
@Questfortruth86 In Wicksell’s model, the interest rate divergence phenomenon was crucial for understanding the differences between Wicksell’s quantity theory of money and the view held by his rival Irving Fisher.For Fisher,changes in the quantity of money fully explained changes in long-run prices; for Wicksell,the quantity of money was but one aspect of the mechanism that changed prices because the flow of goods and services worked its way through the economy by first changing interest rates
@AFRIKTODAY For all our disagreement, I think its great that you support freedom and the free markets. I will also like to state the positives of Austrian economics. The view that the market cannot be simply aggregated is reigning true. The disaggregation of capital and agents (although I believe the dynamics are far more complex than presented in this video) was a step in the right direction.
(Continued from below) The problem is that a decrease in consumption does not lead to an equal increase in investment. It's more complicated than that. There's more to money than just quantity. For example, changes in velocity of money is just like having more or less money, even with a constant money supply. And in laymen terms, it definitely can be the case where consumers decide to consume less, while businesses decide investment opportunities aren't worth it (even with zero interest loans).
@AFRIKTODAY You didnt answer this. "How can you quantify, absent of statistical analysis, if differences are significant enough to warrant the acceptance/rejection of a theoretical model." How can you state that a difference( lets say of slope) warrants a significant linear relationship?
amazing lecture!
All spending is someone's income. That's includes govt. spending. Cutting taxes in itself does increase demand. But cutting spending to pay for it reduces incomes by the same amount. It's the same as business competing for the same consumer demand. It doesn't create greater overall demand and employment. However, cutting taxes via deficit spending, financed by new Fed money, does create overall greater demand, greater employment, and greater output. That IS increased value.
I's true that Austrians distinguish between business cycles and recessions. Not all recessions are the result of a credit expansion primarily funneled into the "higher order" capital goods sectors which create unsustainable booms and therefore busts. But thats precisely the point. Hayek specifically deals with the situation where the newly created sums take the form of consumer credits in P&P. He claims that it leads to a relatively immediate bust (contracts the structure of production).
@Nintendomanwill I dispute their models which are centered around the Gaussian/stability dynamic. The misuse of these simplifications significantly underestimates extremal risk.
That's because in a modern economy, there are multiple types of cycles. There's the common business cycles that come usually because central banks try to kill price inflation. Then, there's the debt cycle where debt/income ratios get far too out of line and need to correct. That's what's occurring now where all countries have to undergo decreases in standards of living as debts are wiped out(either by liquidation, by some sort of a jubilee, or in real terms by inflation).
Austrians do not assume that decrease in consumption leads to an equal and opposite increase in investment. We do, however, believe that the interest rate, when not tampered with, coordinates consumption and investment to produce sustainable growth. If a recession were answered by allowing interest rates to rise properly, consumption and investment would both decrease, allowing people to rebuild savings, which will eventually bring the interest rate back down properly.
@Questfortruth86 1)It is well known that Hayek abandoned general equilibrium theory after the 1940s for the concept of a “spontaneously emerging market order.”But Hayek’s views on equilibrium also evolved over time,and some scholars feel it is necessary to divide Hayek’s career into 3 phases in his views on equilibrium - In the first phase down to 1937,Hayek thought that “all legitimate economic explanations should be based upon an analysis of equilibrium” (Gloria-Palermo 1999)
what does it say at the very end when the bald man appears??? cant figure it out
I understand why you think it is mysticism, it is in a way. It is mystical because the equilibrium of time preference and credit can never really be reached or what we call the ERE. The cyclical nature is not an Austrian assertion. Most schools of thought use business cycles. We believe the cyclical nature is skewed by monetary expansion. Since there has been a great deal more expansion in the last few decades, it has created deeper and more frequent crises as you stated. Thanks for commenting.
Also, we are not taking money out of the private sector here. The opposite. We're putting money into the private sector. That's the point of deficit spending. Priming the pump. Solving the inefficiency that is unemployment by giving people the ability to demand what they want, creating employment for them to continue the process, and it's done through deficit spending.
@zsylvana
In fact, Wicksell took the concept of natural interest from Bohm-Bawerk, Mises’ professor at Vienna. Bohm-Bawerk referred to the pure rate of interest as the “natural rate.” In other words, Wicksell was employing the Bohm-Bawerkian capital framework though it is true he would later modify it. This is absolutely crucial to understanding WIcksell’s trade cycle theory, and it’s something that Keynes entirely missed (Hayek deeply stressed this in his critique of treatise on money).
"There must be no alternatives to your product either in or outside of your market. The NFL has a virtual monopoly on Professional Football. "
Remember there is also the potential for competition. The reason the NFL doesnt raise prices and gives a bad service, its not only because there are substitute products but also the mere threat of new competition coming in.
@Questfortruth86 5) An equilibrium state is the starting point of a real world economy allegedly subject to Hayek’s Austrian trade cycle (Loasby 1997: 54: “Hayek began ... with a monetary expansion ... impinging on a perfectly co-ordinated economy”). Hayek explicitly stated that he had assumed full employment equilibrium in Prices and Production (1931). U. Witt has identified the severe problem running through Hayek’s reliance on general equilibrium for his trade cycle theory.
I'm right there with you that we need a new monetary system; so I don't know why you're bringing up the Fed when I basically agree. I'd also like to see investment banks be limited partnerships again, separating investment banking from retail banking, reducing leverage across the board, maybe even an elimination of fractional reserve banking for commercial banks.
Even the institution of full reserve banking would be a regulation on the financial sector.
@Nintendomanwill I said they haven't factored it in (they didnt ....most mathematical models were based on stable gaussian dynamics) ... I didn't say it was impossible to establish complexity based analysis
Wow, these are cool (star wars computer game) sound effects. I have the urge to applaud every time "the economy grows" or "people save more" ;)
@Questfortruth86 5) What appears to me to be the most important form of ABCT: the form postulating distortions in the capital goods sector (for a good summary of this form of ABCT, see Garrison 1997: 23-27), and how this simply cannot be invoked as a serious or fundamental explanation of the US housing boom in the 2000s and financial crisis of 2008.
Direct?
I don't get what you mean with not accounting for production costs and how that means it's exchanging favors without growth. Doing work for each other is definitely the same as any other form of economic growth. Exchanging money has always been like exchanging favors, with money being the IOU. It's still productive, creating wealth.
When speaking of monoplies there are (imo) two important categories. Those over necessary goods and those over goods which can be substitued with other goods.
In the case of necessary goods , if a monoply occured on a free market and a price was charged which allowed for exessive profits then other companies would surley join in and compete to get on on the mega profits.
On subsituable, selling a product at an outragous rate will kill demand, thus lowering profits.
i havent slept in days so
That doesn't account for the production costs of each others' goods and services. If there were no variable costs to account for, we would simply be exchanging favors, which doesn't create any economic growth.
@AFRIKTODAY So let me get this straight... you can construct a theory based on a set of axioms that you assume to hold in all cases. The model which is based on that set of "self evident"axioms is then stated to be correct even if it produces results that are empirically incorrect.
@Questfortruth86 4) In Prices and Production, an initial stationary state moves to disequilibrium and then moves via boom and bust into a new stationary state. This might be viewed as an application of Hayek’s intertemporal equilibrium theory of 1928 where perfect foresight is needed as an assumption. Hayek’s definition of monetary stability is a state where voluntary savings equal voluntary investment.The unique natural rate of interest is taken over from Wicksell.
"Hoarding" is nothing more than investing in one's own future.
Also, we're not talking about saved money going to investment either. That would be fine if that's what was happening, since that'd help maintain full employment. Instead, investors are finding there isn't much worth investing in, particularly due to the low demand and expectations for demand.
You can buy that "machine" now if you want. There's spare labor to produce it or replace it in inventory. The problem is that aren't seeing any need to increase your productivity with such low demand.
@AFRIKTODAY We are not ignorant about the complexity of economics. Complex adaptive system are based on a quasi-evolutionary framework (quasi because the process is not blind, its based on N period discounted FCF's) of dynamic concentration of dynamically interacting heterogeneous agents(w/ long memory and emergent preferences) . A slight generalization of normal statistical analysis solves the problem (the accounting for of dynamic higher moments is necessary & sufficient)
@Questfortruth86 Your right.Treedas wrong.There are, two broad lines in macro economics.One "European", comes from Knut Wicksell, another "American" is in the tradition of Irving Fischer.Milton Friedman did not for sure introduced any new equation of exchange in any of his 3 books.Milton Friedman was a follower of Irving Fischers,and his monetarism is a development of Fischers work.Knut Wicksell inspired Austrian,& Stockholm school of economics as well as Keynes early monetary theory.
@Questfortruth86 4)However,both Lachmann and Schumpeter did not think that Hayek’s business cycle theory could be used to explain all business cycles (Batemarco 1998).More importantly, I.Kirzner has also made the following remarks on Hayek’s theory:
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.It goes back to Knut Wicksell"
@Questfortruth86 3) Here are some of the major works by Austrians where different forms of the ABCT are expounded:
(1)The version of Mises in Human Action: A Treatise on Economics 1998. .
(2)Hayek’s first version of ABCT in Prices and Production (London, 1931).After Nicholas Kaldor’s attack on it in “Capital Intensity and the Trade Cycle” (Economica n.s. 6.21 (1939):)Hayek had to re-write his theory in:
(3)Hayek’s second version of ABCT in Profits,Interest and Investment.1939
The lack of demand and investment is due to the fact that interest rates were not allowed to rise properly after the crash. Had they risen, people would have been encouraged to put more of their money in savings accounts, thus increasing the loanable funds supply and encouraging investment.
WHATS THE BOOK THAT HE KEEPS REFERRING TO?????
2) As per Milton Friedman’s and Anna Schwartz’s account of the period in their Monetary History of the United States (1963), monetary policy is the crucial determinant: problems of international capitalist production remain distant from the action. And as in Eichengreen, again, the dysfunctional inter-war gold standard plays a central role.
@Questfortruth86 8) Hayek’s assumptions go much further than the idea of a starting equilibrium state.They also assume:(1) The flexibility of prices and perfect or near perfect adjustments in prices in response to demand and supply(2) frictionless markets,and perfect price information on the part of agents.But prices are not perfectly flexible,and in reality agents ex ante expectations can be severely disappointed ex post,and Knightian uncertainty causes subjective expectations
@Nintendomanwill You're using a modified version of Say's Law. Classical Say's Law states that money neutrality would occur. Money neutrality(Say's Law) holds if money is used in a purely current transaction based fashion. It is not. Thus, in a monetary economy, Say's law fails and their is short-run non-neutrality of money.
@Questfortruth86 Wicksell made improvements for which he is remembered today.The most important is probably his distinction between the natural and money rates of interest.The Money,or market, rate of interest is the observed rate at which banks carry on credit transactions.The natural rate is a bit more complicated.Wicksell defined it as the rate that is neutral for commodity prices and the rate at which the supply and demand for capital are in equilibrium in an economy not using money at all
@Nintendomanwill Im back. Say's law fails in monetary economys. If there is a sufficiently high degree of substitutability between non-real and real goods, the assumption of a purely barter system fails completely. Thus, it fails in all modern economies. Says law predicts monetary neutrality at all "scales" yet we see short run non-neutrality of money (monetary expansion has real effects in the short run). Please explain how this is possible if Say's law holds.
Full employment is the goal, though. People want to be employed (or else they wouldn't be counted in the labor force, such as with retires). Unemployment means there are people who are willing to work and produce. They are willing because they want income, so they can then demand goods and services. Thus it is an inefficiency that people can't demand things from each other because they lack the initial income to start the exchange process.
@Questfortruth86 Ludwig von Mises and Hayek adapted Wicksell’s cumulative cycle process. Keynes no doubt read and appreciated Wicksell’s approach and then built on it, stressing that cycles were generated by changes in real factors such as investment spending and interest rates and not by monetary changes. The seeds of the Keynesian-monetarist debates that began in the 1960s were planted first in the differences between Fisher and Wicksell.