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#12
08-20-2007, 04:22 PM
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Re: Austrian Business Cycle Theory Redux (long)
thanks for taking the time to do this. great intro and well organized.
so let's go with one issue at a time. the first question i have is with respect to future consumption. how does increased wealth (and thus an increase in consumption ability) as a result of housing price increases (due in part to those low interest rates) and increased investment holdings (again due in part to lower interest rates) play into the theory. one aspect you stated was that the dislocation of future consumption to the present due to low interest rates eventually leads to an inability of companies to sell the increased production they realized. but icnreased wealth (even if NOT used to borrow unsustainably via responsible mortgages or investment gains) definitely does lead to increased consumption. is it the theory here that this increased consumption in the future isn't enough? lets start with that issue first. and just to head off a rebuttal: zygote has mentioned before that "investments in stocks don't result in real gains." i believe this issue has been put to rest that the capitalist system demands excess returns given to investors in order to compensate them for taking the risk of owning those shares. otherwise, they wouldn't hold shares. so investment in stocks (and other similar investments) do result in real gains, not just movement of savings into the future by the discounted value of that money. therefore, real gains as a result of investment lead to increased consumption abilities in the future and increased aggregate demand...maybe enough to offset the dislocations you discussed... Barron 
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#15
08-20-2007, 05:23 PM
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Re: Austrian Business Cycle Theory Redux (long)
hey borodog,
i'll just post these as i think of them, we can just deal with one at a time but i'll post them as they come to me. this next issue comes from the derivation of the business cycle itself. lets assume for the moment that central management doesn't exist. how would business cycles play out? it is my contention (and that of some pretty smart people) that humanity's inability to always plan correctly under uncertainty leads to the business cycle. further, assuming no central planning and solid grounded use of money that arrived from a gold-type specie system where the supply of money is fixed, how would the investment cycle play out? is it your (philosophy's) contention that in this world (no central planning, some kind of fixed monetary system based off something fixed), there would be no business cycle? if there would be, i assume you'dt hink it was the result of some economic or supply or demand shocks that temporarily jar the system out of its nice flat state... ...but what about the everyday issues. humans are not perfect when planning under uncertainty. there is uncertainty in demand over the coming quarter, and thus uncertainty in the amount to produce to meet that demnad. thus uncertainty in the amount to invest in for the means to produce that estimated amount. further, changes in demand happen far quicker than changes in supply. thus, i think business cycles would arise naturally. and, given a fixed monetary regime of the market's choosing, the ups and downs would be far worse than under a system of central management. this is just a hypothesis but i'd like to get the 'austrian' viewpoint on this thought process. thanks, Barron
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#16
08-20-2007, 06:31 PM
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Re: Austrian Business Cycle Theory Redux (long)
[ QUOTE ]
Thank you, but all I did was summarize Roger Garrison; There is nothing original here. [/ QUOTE ] I haven't read any of him so I don't know how much rewording/how more clear it is, but effective summaries can be very helpful to perspective students in peaking their interest, in online debates like these, and as a general quick reference tool.
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#18
08-20-2007, 08:30 PM
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Re: Austrian Business Cycle Theory Redux (long)
[ QUOTE ]
the first question i have is with respect to future consumption. how does increased wealth (and thus an increase in consumption ability) as a result of housing price increases (due in part to those low interest rates) and increased investment holdings (again due in part to lower interest rates) play into the theory. [/ QUOTE ] I'm no expert, but I believe the correct way to look at this is on an economy wide scale. Housing prices going up doesn't inherently create more wealth at all. The same houses still exist in the same fashion as before, only more expensive. Someone will gain from this (the seller) but someone will also be hurt by it (the buyer). Overall, the economy is not worse or better because houses are more expensive. So increasing housing prices does not create wealth. The amount of houses is still the same. I'm pretty sure that's correct.
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#19
08-20-2007, 08:45 PM
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Re: Austrian Business Cycle Theory Redux (long)
[ QUOTE ]
[ QUOTE ] the first question i have is with respect to future consumption. how does increased wealth (and thus an increase in consumption ability) as a result of housing price increases (due in part to those low interest rates) and increased investment holdings (again due in part to lower interest rates) play into the theory. [/ QUOTE ] I'm no expert, but I believe the correct way to look at this is on an economy wide scale. Housing prices going up doesn't inherently create more wealth at all. The same houses still exist in the same fashion as before, only more expensive. Someone will gain from this (the seller) but someone will also be hurt by it (the buyer). Overall, the economy is not worse or better because houses are more expensive. So increasing housing prices does not create wealth. The amount of houses is still the same. I'm pretty sure that's correct. [/ QUOTE ] I think you're half-right - overall real wealth doesn't change but the economy is worse off for the inflated prices. The way I read it, housing would be considered a factor of production, as shelter for labor. The artificially low interest rate leads to overvalued housing (investment properties). The misallocation of resources continues until an inevitable recession corrects for the mistakes.
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#20
08-20-2007, 09:29 PM
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Re: Austrian Business Cycle Theory Redux (long)
[ QUOTE ]
[ QUOTE ] [ QUOTE ] the first question i have is with respect to future consumption. how does increased wealth (and thus an increase in consumption ability) as a result of housing price increases (due in part to those low interest rates) and increased investment holdings (again due in part to lower interest rates) play into the theory. [/ QUOTE ] I'm no expert, but I believe the correct way to look at this is on an economy wide scale. Housing prices going up doesn't inherently create more wealth at all. The same houses still exist in the same fashion as before, only more expensive. Someone will gain from this (the seller) but someone will also be hurt by it (the buyer). Overall, the economy is not worse or better because houses are more expensive. So increasing housing prices does not create wealth. The amount of houses is still the same. I'm pretty sure that's correct. [/ QUOTE ] I think you're half-right - overall real wealth doesn't change but the economy is worse off for the inflated prices. The way I read it, housing would be considered a factor of production, as shelter for labor. The artificially low interest rate leads to overvalued housing (investment properties). The misallocation of resources continues until an inevitable recession corrects for the mistakes. [/ QUOTE ] Increased money supply creates artificial demand. I don't think anyone disagrees with that. However, US interest rates are not the only source of that money. Foreign investment is a source, foreign banks, and sector based allocation are also sources. The US real estate market suffered from all of those recently.
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Linear Mode
