1. Can private spending "crowd out" public spending? If not, why not? What assumptions are required to definitively answer "no" and are these good assumptions? I'm not asking for a laundry list of why the government can be inefficient. That's fairly obvious and has been for... well... for as long as people have been talking about these sorts of things.
2. What empirical evidence is there for "malinvestments"? After the fact, of course we can point to specific bubbles. But more generally speaking how would we identify malinvestments and ascertain their relevance? My concern is that I find malinvestments to be an extremely plausible source of cyclical downturns but I have absolutely no basis for attributing any particular development to them. It's all one big black box with nothing to point to. A plausible theory with no way to assess it's importance in a given circumstance seems like it is either (1.) a tease, (2.) a missed opportunity, or both.
3. Why should we privelege the traditional economic concept of "unemployment," as in a labor surplus, at all? Does it matter? Another way of thinking about this is to ask whether "full employment" is the same as "a labor market in equilibrium", and if it's not - which one do we really care about?
Thursday, July 1, 2010
Subscribe to:
Post Comments (Atom)
Posts
You can't identify malinvestments during credit expansion because they all look profitable. It is only when the masquerade is ended when we realize which investments were profitable and which weren't (malinvestment).
ReplyDeleteIf you're not already reading Time and Money, I would refer you to the Powerpoint slide show Garrison put together for explaining how malinvestments are made.
I've started Time and Money - I expect to mostly finish it on the plane ride. Very good so far.
ReplyDeleteGarrison, as far as I know, only puts together a theoretical argument for malinvestments. That argument convinces me. I think it's a real, important, notable process. What I am stuck floundering on is the extent to which that process really operates.
And this is disconcerting isn't it? Perhaps not for someone who embraces a non-empirical epistemology, but I'm personally left wishing we had some way to assess this. I think it's important, but how important is it? Does it explain all of the business cycle (I seriously doubt it). Does it explain 20% of cyclical activity? 5%? The theory makes good sense, but how much weight should it be given? I know of no attempt to answer this question.
It doesn't "explain" any percentage of it. Malinvestments are the product of lowering the market rate of interest by fiat and credit expansion.
ReplyDeleteTo the extent investors borrow addition capital due to the lowered rate of interest (that they otherwise would not have borrowed - its not necessarily true that 100% of capital borrowed during a boom is malinvestment - its simply in recognition of the true market rate of interest), they create investments that are unprofitable and waste capital. That is the entire story of boom/bust. They take natural resources and arrange them in ways that destroy value because the new market rate of interest tells them it is profitable.
Once the rate of interest rises (like it always does), these will be found to be wasted and the bust has started.
"It doesn't "explain" any percentage of it."
ReplyDelete"That is the entire story of boom/bust."
I fear I'm misunderstanding something, because you seem to alternatively be answering "0%" and "100%". I'm guessing it is neither of those in actuality.
My language must be confusing. I'll try to be clearer.
ReplyDeleteWhen talking about what occurs during a boom bust cycle, the only important feature is malinvestment. That is what distorts the Hayekian triangle, leads to intertemporal discoordination, etc.
The only reason we have a boom/bust cycle is because we create malinvestment. In that sense, I guess it would be "100%" of the story, but that makes as much literal sense as saying that the story of generating nuclear power is "100% fission." It's not the phrase I would use.
Gotcha.
ReplyDeleteAnd my question is - how do you know that it explains 100% of the boom/bust cycle and not, say 50%.
Austrians don't generally dispute things like the inventory cycle as far as I know.
Why don't you think the inventory cycle explains about 50% of the variation and malinvestments explain the other 50%?
On what basis do you make your assessment, is all I'm asking.
And it's fine to say "gee - I don't know". I certainly can't assign a share to each of the things that I think are important in determining the performance of the economy.
ReplyDeleteBut you did assign a share, and I'm wondering on what basis it was assigned.
I wrote this once and blogger lost it for me, so here goes again:
ReplyDeleteAren't the crowding out effects mostly to do with price and competition effects? E.g. I WAS going to build a new paper mill, but the govt. just built one and now the competitive environment looks lees attractive. Or, I WAS going to hire a bunch of low wage people for my startup, but the government went on a hiring spree of low wage folks in my area, and my business model depended on the availability of cheap labor so now it doesn't work.
And isn't the govt. less sensitive to price and competition effects because the govt. usually isn't trying to make a profit but is trying to serve a public need, and is spending from the (very large) public coffers?
I had a point about bad investment, but Mattheus has it covered.
"Why don't you think the inventory cycle explains about 50% of the variation and malinvestments explain the other 50%?"
ReplyDeleteBecause I don't believe entrepreneurial mistakes in setting inventories has any significant bearing on the economy.
Maybe if you assume sticky wages, where entrepreneurs are forced to remain with idle inventories, there might be a case for exacerbation due to an unclearing market. I can see why that's attractive to Keynesians.
But I understand wages and prices are flexible. With flexible prices, inventories clear.