Noah Smith on Austrian economics
I’m no fan of Austrian macroeconomics, but even I think Noah Smith is way too hard on Austrian economics in this post. Although he does distinguish between Internet Austrianism and academic Austrianism, he doesn’t really do so very clearly in the portions of the post that mocks the Austrian school of thought–leaving the impression that his ridicule applies to both varieties. (Maybe it does.) Then suddenly, Smith is way too kind to Austrianism and too mean to ratex:
But at least Austrianism embraces the possibility that businesses might make big, systematic mistakes. That possibility is essentially ruled out by most modern mainstream models, which use “rational expectations” as their jumping-off point. It also requires that productive capital come in multiple forms, while mainstream macro usually assumes that all forms of capital are interchangeable. Over in China, it seems clear that there has been a lot wasted resources —ghost cities and overcapacity in various manufacturing industries. That in turn seems to have led to a bubble in Chinese real estate prices, whose slow decline may in turn have caused the recent spectacular stock bubble and crash.
There are lots of problems here:
1. Why would overbuilding of homes “have led to a bubble in Chinese real estate prices”? Wouldn’t it depress prices?
2. What does it mean to suggest that rational expectations doesn’t allow for systemic systematic mistakes? I always thought that meant it ruled out repeated mistakes in the same direction, predictable mistakes. Here he seems to apply it to economy wide mistakes. In fact, ratex does not rule out 99% of the population holding expectations at a point in time that, ex ante, are too optimistic. I’m sure that 99.99% of New Yorkers did not expect the Twin Towers to collapse on 9/11, and yet ex post their expectations that the Twin Towers would not collapse were too optimistic. Was that a systematic mistake? I don’t think so.
3. The ghost city phenomenon is a creation of the Chinese Communist government. There is nothing in ratex theory that I know of that rules out the possibility of communist governments doing a poor job of allocating resources.
HT: Gordon
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5. August 2015 at 18:35
Why does Noah Smith have so much attention from economists on blogosphere? Does he have a great contribution to economic science?
5. August 2015 at 18:47
I can only assume that this paper would give Noah Smith an intellectual aneurysm.
5. August 2015 at 18:54
“Why would overbuilding of homes “have led to a bubble in Chinese real estate prices”? Wouldn’t it depress prices?”
That’s what’s so great about leaving behind ratex. Non-ratex can explain everything!
5. August 2015 at 18:59
You’re the type of person who tries to find the best argument from someone you disagree with and you explain clearly with good arguments, evidence, and examples why they are wrong. You can convince people who disagree with you that they’re wrong and to see your side of things.
I don’t think Noah Smith has learned this skill yet.
5. August 2015 at 19:40
You are both an embarrassment on this topic.
Please stop.
5. August 2015 at 23:06
I think Noah meant that one of the effects of the bubble (irrational exuberance?) was the overbuilding of homes. Prices start rising. People rush into the market thinking this will continue. It doesn’t and they’re left with empty homes.
I’ve noticed that at least two econ bloggers skeptical of austrianism (Tyler Cowen and Noah Smith) seem to make an exception when it comes to a country they are skeptical of – China.
6. August 2015 at 00:06
It seems to me that the recent trend in criticizing ratex started with the Neo-Fisherians claiming that interest rates should be raised in order to raise inflation.
What’s interesting about that is the same people who were Krugman’s inlfationphobes suddenly stopped worrying about high inflation and started warning about low inflation and how only raising interest rates would solve the problem.
http://lastmenandovermen.blogspot.com/2015/08/why-is-fed-so-antsy-to-raise-rates.html
But for whatever reason, when Woodford came up with a rebuttal to the NFers he also questioned ratex.
That I think was the start of it.
6. August 2015 at 00:20
Andrew_fl, that paper is a very good find.
Austrian theory is compatible with rational expectations. It is about an information problem.
6. August 2015 at 04:26
Everyone, I do think that Noah Smith is a very talented blogger, I just think that on some occasions he shoots from the hip a bit too quickly. If you look at his recent post on Paul Romer, you can see that he’s mastered the proper writing style for blogging much better than most, and of course he’s also quite knowledgable about economic theory. My quibble is when he occasionally jumps to conclusions on not enough evidence.
Chuck, Maybe, but his wording seemed to clearly suggest the overbuilding was leading to higher prices. Perhaps he misspoke.
Mike, Maybe, but I’ve seen these criticisms ever since the 2008 banking crisis.
6. August 2015 at 04:41
Yes, they’ve been around before. I’m not saying the NF debate started it, but it seemed to intensify after.
6. August 2015 at 04:44
As I’m reading Woodford what he seems to be saying is that if Ratex leads to the NF result there must be something wrong with Ratex
6. August 2015 at 04:57
I think Noah’s post has the merit to acknowledge that pieces of Austrian thinking may have been successfully added to mainstream thinking, with no explicit references. Some of the self-styled Austrians are indeed stuck in the past. Their defense of the gold standard is an example of that. But there is nothing wrong with the idea of systematic bad investment (malinvestment) induced by government policies. Even if you don’t think that the moneatary stimulus took part in the 2008 crisis, maybe one believes other misplaced incentives like interest tax deductions, implicit federal guarantee in mortgages and explicit or implicit targets for banks to loan to subprime borrowers played a role in the crisis.
6. August 2015 at 05:10
Scott:
I have been in China the past month traveling to Beijing, Shanghai and Zhejiang. I found the idea of overbuilding in China ludicrous. Anyone who says that hasn’t taken a subway at rush hour, or attempted to find a bathroom decent enough to change baby’s diaper, or taken the bullet train during travel rush fighting for seats. Nor have they talked to the low income locals who worry about housing. I think China needs more ghost cities to depress prices. The current economic climate resulted from fiscal tightening ( the anti-corruption drive is cutting off bonuses for many state workers), while monetary policy appears too tight. Of course due to Great Firewall, I can’t get NYT or Blomberg, so can’t get latest columns from Krugman or Noah, but I can get CNN and Yahoo, and your blog site.
6. August 2015 at 05:12
The whole “Chinese ghost city bubble” meme is really misunderstood. Sure there are boondoggles in Mongolia but a lot of those ghost cities are basically extensions of boomtowns. And it is tough for people to understand just how big a boomtown in China is; Shenzen is adding almost 300,000 people every year, Tianjin almost 600,000. So the general area of Shenzen needs to build a city the size of Pittsbugh, and Tianjin needs to build a city the size of Boston *every year*. And the real Boston takes over a decade just to make one road!
Most of those empty cities were built in anticipation of people relocating from elsewhere and have filled up quickly. And for those that haven’t, with building on that massive a scale, if they build residences for an extra 100,000 people in the wrong place here and there it’s hardly a sign of foolhardy building that isn’t necessary *somewhere*.
6. August 2015 at 05:26
Re China overbuilding: sure, not a good idea. But stepping back, if they have in fact overbuilt they now can allocate resources to present needs and they will have already built housing and offices and warehouses that they can use in the future. Most of these structures are not perishable, after all.
So the Chinese can look forward to higher living standards in future, with labor allocated to such things as nursing or present consumption.
But money wasted on military goods is wasted forever….
6. August 2015 at 05:55
Add on: yes, suppose we took the 1 trillion dollars a year spent on “national security” in the United States and instead spent it on infrastructure and housing, some of which may not be needed immediately. Economically speaking, would we be better off or worse off?
Next to Chinese “misallocations of resources” we look like lunatics….
6. August 2015 at 06:04
Greg Ransom,
Please lighten up.
6. August 2015 at 06:37
Scott wrote:
What does it mean to suggest that rational expectations doesn’t allow for systemic mistakes? I always thought that meant it ruled out repeated mistakes in the same direction, predictable mistakes.
I think you read Noah a bit too fast. He didn’t write that ratex rules out “systemic” mistakes – he wrote that it rules out “systematic” mistakes, i.e. the type of mistakes you describe in your second sentence.
6. August 2015 at 07:18
Greg Ransom is back, he hits hard; ransom-ware!
Ransom is right about Sumner being a joke. As o.nate points out, Sumner mischaracterizes Smith. Sumner further makes a ludicrous (and mangled, confusing ex post and ex ante in the same sentence) analogy between people’s opinion of structural forces in the Twin Tower on 9-11 with ratex. Since most people know nothing about structural engineering, and in fact the truth about the integrity of the Twin Towers was only apparent after a super-computer crunched the data in a finite element analysis, it makes sense that people’s expectations about the towers were faulty. Most people assume a building will not fall down, based on past experience. The inability of Sumner to draw a good analogy about ratex (he could have used Keynes’ beauty contest) shows his low IQ, probably 85-90.
And TravisV I think first linked to Noah Smith’s article in the last blog post comments section, not Gordon, for what that’s worth.
6. August 2015 at 07:18
“There is nothing in ratex theory that I know of that rules out the possibility of communist governments doing a poor job of allocating resources.”
clap-clap-clap! Awesome blogging there.
6. August 2015 at 07:25
It’s perfectly rational for capital to flow into investments that receive government subsidies, outsized tax breaks, lower Basel capital requirements (e.g. government bonds and AAA rated MBS’) etc. which then lead to systemic AND systematic malinvestment. I think Noah’s either confused or, more likely, started with a premise in – Austrians and ratex proponents are both wrong and need to be criticized – and wrote a poorly thought out column. I think he’s just internetting which is fine for message boards and comments sections but is disappointing to come from an outlet like Bloomberg.
6. August 2015 at 07:30
Maurizio- My only quibble was that they claimed the ABCT is normally set out with less than perfectly rational actors. From a praxeological point of view, to say that actors are less than perfectly rational is completely nonsensical, a contradiction in terms.
Then I read it and realized that it’s because non-Austrians have a very strange definition of what it means for people to behave rationally.
6. August 2015 at 09:03
@Andrew_FL: “From a praxeological point of view, to say that actors are less than perfectly rational is completely nonsensical, a contradiction in terms.”
It appears that you have identified a very strong criticism of praxeology.
6. August 2015 at 09:32
Greg, Welcome back!!
Mike, Yes, but I’ve argued he’s wrong that ratex leads to the NF result in new Keynesian models, which shows those models are flawed.
Jose, Agreed, but I don’t see that view as being especially Austrian. On the other hand I do agree that their take on the crisis of 2008 has broad appeal.
LC, I mostly agree, about both monetary policy and building in the main cities. I do think some of the secondary cities may be overbuilt for housing, with Ordos being a prime example. But elsewhere I’ve argued the Ghost City idea is being oversold. Zhengzhou appeared in that 60 Minutes piece, and is now filling up.
Njnnja and Ben, Agreed.
Thanks O. Nate, Actually I read him correctly but there was a typo in my post. I meant systematic. But maybe it was a Freudian slip, as the actual error in China seems more systemic.
Ray, That’s funny, I thought the easiest explanation is that 99.99% of New Yorkers did not expect a plane to crash into the Twin Towers that day. 🙂
And my IQ is certainly not 85-90, much lower.
6. August 2015 at 09:45
Capitalism by its nature is a totalitarian ideology. It died in 1907 and the Federal Reserve System gave the illusion it lived to it really died for real in 1933 and the bourgeois state demanded it survive again.
Major Freedom, you whine about “doctor government”, but worship international capitalism and the capitalist in its nature. Before the govenrment “intervened” millions of workers were slaughtered in the 19th century on the job. 50,000 a year in the 1890’s itself. How is that any different than Stalin using slave labor in the Ukraine so the Russian beltway could have heat in the winter(which they did’t have before)?
You intellectualize fantasies like all materialists do. You mutter what socialism is, yet fail to see its christian heritage to a materialistic ideology. The Nature of Austrianism is the Rothschilds. The founders of the international gold standard through their west indies finds in the early 1800’s. The financing of Carl Menger and eventually Von Mises.
When a capitalist gets so large, he becomes larger than the nation itself, he becomes a tyrant and killer of nations. The bourgeois as a evolution are going for greater and greater individual pursuits. The conservative complains about this and demands only the bourgeois that merged with the decaying feudal aristocracy be the right bourgeois. Yet, how can the bourgeois just be that and deny liberalism to all the classes, denying them expansion of the market? That paradox reached a climax in the post-WWII era and the bourgeois threw the last shackles of the Aristocracy off. Now selfish individual pursuits are required for todays world. We all deserve to be selfish and Austrians lead the way.
6. August 2015 at 09:57
Don-I invite you to deny that human beings act purposefully. It will be amusing because it will either prove you are in fact a mere computer, or you are incapable of keeping yourself from falling into performative contradiction.
It’s okay, Alan Greenspan once doubted whether he existed, apparently unaware that the act of contemplating one’s existence has to be performed by a being that exists. It happens to the best of people.
6. August 2015 at 10:27
Hi Scott,
Actually, ratex has to rule out things like 9/11, otherwise it wouldn’t render models tractable. While it’s understandably difficult to work with human events as coming from a distribution (caveat emptor), the concept of ratex requires both the mean and variance of the distribution of your random variable to exist. “Heavy tailed” distributions with more common extreme events can be excluded.
I think you can have an AR process as the source of your randomness, so under ratex you can have correlated mistakes in the short run, but not over the long run. Noah’s point is that the long run mean of your distribution cannot differ from the model output by a systematic error. But he doesn’t specify the model so it is really a vague statement.
That systematic error depends on your underlying model, so in a model that lets people be over-optimistic (say, bad news takes longer to be absorbed), you can have a ratex model with over-optimism.
But that is really a model-dependent statement.
6. August 2015 at 10:39
Kevin: Non-ratex can explain everything!
Coffee everywhere. Your fault.
There’s actually a nice wiki on ratex:
https://en.wikipedia.org/wiki/Rational_expectations
“But at least Austrianism embraces the possibility that businesses might make big, systematic mistakes. That possibility is essentially ruled out by most modern mainstream models, which use “rational expectations” as their jumping-off point.”
Sheer nonsense.
systematic: done or acting according to a fixed plan or system
Of course businesses can make mistakes, they just don’t do so as part of some economy-wide plan or system. Ratex doesn’t assume Solyndras cannot exist, it only assumes the entire economy cannot be composed solely of Solyndras, i.e. that investors are rational on average.
If Noah is aware of some systematic error among investors he should stop blogging and become the world’s first trillionaire.
6. August 2015 at 10:57
benjamin cole — Nope, sorry, those capital expenditures have huge maintenance costs and depreciation and externalities. That’s why Detroit is a post-apocalyptic blight rather than a paradise of cheap abundant housing.
US infrastructure spending has been remarkably stable at around 2.5% of GDP, and the global security vacuum caused by removing $600B of US defense spending would create gigantic economic costs. Someday we may not need defense spending, but those days are definitely not here yet.
6. August 2015 at 11:14
Here’s a wonderfully poetic example: Spain spent $1B on this airport, which is now being sold for essentially nothing — to China. 🙂
6. August 2015 at 11:24
I think the biggest problem with the Austrian ‘malinvestment’ theory is most growing markets begin and grow as a good investments. Big Bubbles and Malinvestment does come from poor economies (as investors know not to trust. Valenzuela is collapsing we are hardly effected.) but from good and growing economies. Look at the Big Ones, 1929, 1989 Japan, 2000 Dotcom or US 2008? It almost feels like Big Bubbles bursting is punishment for an exceptionally hard working economy. (Just think the hardest working and dynamic economy was the US Roaring Twenties, and later the Japan Inc. and then the US 1990s Information Age. The fundamentals were strong in these economies.)
So will China have a bubble busting at some point. Obviously, if a nation is overbuilding housing, they don’t know when to stop as it will take 2 – 3 years before the realities of overbuilding are apparent. However, I don’t see China having some kind of society collapse and still think they go some version of going the lost decade(s) Japanese style.
6. August 2015 at 11:25
TallDave,
the global security vacuum caused by removing $600B of US defense spending would create gigantic economic costs.
What would happen? What if the US dropped Military Spending to $450B and avoided Mid East wars? What problems would that cause?
6. August 2015 at 11:38
Then there’s Zim-Austrianism;
http://insiderzim.com/minister-says-retrenchments-are-good-for-ailing-industry/
——–quote——
Industry and Commerce Minister, Mike Bimha, said the ongoing wave of job losses is good for the industry, which he said has been saddled with ‘excess workforce’ before a recent Supreme Court ruling gave employers leeway to fire workers without the costs associated with retrenchment packages.
President Robert Mugabe said on Wednesday that over 9,000 workers had lost their jobs since the Supreme Court’s July 17 ruling which allowed employers to dismiss workers on notice and without severance packages.
“To me, it is a reflection that we had taken too long to amend labour laws,” Bimha told delegates at the Confederation of Zimbabwe Industries (CZI) congress.
“You cannot continue to have a lot of employees when business is not doing well.”
Bimha said companies have been dipping into operating budgets to pay retrenchment packages.
“It is expensive for companies to retrench and most industries were eating into their capital reserves hence the failure of companies to rise,” said Bimha.
He said government supports productivity related wages, singling out Ziscosteel, which has been idle since 2008 when it was shut down, but has accumulated a wage bill that stood at $200 million as of 2014.
———-endquote———-
6. August 2015 at 11:42
This African seems pretty rational too;
http://www.nytimes.com/2015/08/05/opinion/in-zimbabwe-we-dont-cry-for-lions.html?action=click&contentCollection=Opinion&module=MostEmailed&version=Full®ion=Marginalia&src=me&pgtype=article
———quote———
When I was 9 years old, a solitary lion prowled villages near my home. After it killed a few chickens, some goats and finally a cow, we were warned to walk to school in groups and stop playing outside. My sisters no longer went alone to the river to collect water or wash dishes; my mother waited for my father and older brothers, armed with machetes, axes and spears, to escort her into the bush to collect firewood.
A week later, my mother gathered me with nine of my siblings to explain that her uncle had been attacked but escaped with nothing more than an injured leg. The lion sucked the life out of the village: No one socialized by fires at night; no one dared stroll over to a neighbor’s homestead.
When the lion was finally killed, no one cared whether its murderer was a local person or a white trophy hunter, whether it was poached or killed legally. We danced and sang about the vanquishing of the fearsome beast and our escape from serious harm.
———–endquote——–
Three cheers for the Great White Hunter-Dentist!
6. August 2015 at 13:20
@TallDave
I think Noah used “systematic” in the sense of a “hoard mentality” from a significant portion of market participants, which led them to have unrealistic expectations about certain asset prices. I may be wrong, but I understood it that way.
6. August 2015 at 13:44
@Andrew_FL: “I invite you to deny that human beings act purposefully.” I would never claim such a thing. But of course you’re doing devious misdirection, as your previous claim was “to say that actors are less than perfectly rational is completely nonsensical“, which is completely different. It’s the words “perfect” and “rational” which make your original claim so absurd. Humans can easily act “purposeful”, from time to time, without coming anywhere near the standard of “perfectly rational” at all times.
“it will either prove you are in fact a mere computer” I don’t know whether you overestimate humans, or underestimate computers, but in any case, there is nothing (“purposeful”) that humans are capable of, that computers are not also (in principle) capable of. Of course, the achievements of current computers are far, far below the capabilities of current humans, but by the phrase “mere computer” I assume you mean a statement about what is possible in principle, and that statement is false.
6. August 2015 at 14:23
Don, to act rationally means nothing more and nothing less than to act purposefully. To do so perfectly means nothing more and nothing less than that actions is purposeful, which it is by definition.
A computer that can act purposefully is not a mere computer. It’s a person. If you don’t distinguish between computers and persons your definitely not worth talking to about anything.
As it turns out, unsurprisingly like most non Austrians, you have a nonsensical idea about what it means to behave rationally.
6. August 2015 at 14:57
I’m not so much concerned about China’s overbuilding as I am about China’s ugly buildings. Why is modern architecture so effin ugly?
The Chinese (and the West) built much prettier architecture two hundred years ago even though they were much much poorer. Yes, I know most buildings back then were terrible and only the pretty stuff survived, but they’re much richer now so why can’t middle class people afford good-looking homes?
When people look back on this golden age of Chinese economic dynamism they will see endless vistas of ugly grey blocks.
6. August 2015 at 16:01
Lots of problems you say? I’ll predict that every single alleged “problem” Sumner writes about, will contain fallacies, errors and/or misunderstandings. I haven’t read anything he wrote beyond “problems” yet, so what follows is me quoting and then replying in real time:
” Why would overbuilding of homes “have led to a bubble in Chinese real estate prices”? Wouldn’t it depress prices?”
You have the causation reversed. The the overbuilding of homes is in response to the higher spending and prices that originated at the PBOC.
The additional production of houses does not by itself reduce prices over time, it only puts downward pressure on the prices. In other words, the rising price trend with the inflation is somewhat less than it otherwise would have been without the additional inflation, ceteris paribus.
There is no law in economics that says increasing production must necessarily be associated with absolutely falling price levels over time. If the inflation from the central bank is high enough, as it is from the PBOC, then prices go up even with the increased production. Come on, this is basic supply and demand.
“What does it mean to suggest that rational expectations doesn’t allow for systemic systematic mistakes? I always thought that meant it ruled out repeated mistakes in the same direction, predictable mistakes. Here he seems to apply it to economy wide mistakes. In fact, ratex does not rule out 99% of the population holding expectations at a point in time that, ex ante, are too optimistic. I’m sure that 99.99% of New Yorkers did not expect the Twin Towers to collapse on 9/11, and yet ex post their expectations that the Twin Towers would not collapse were too optimistic. Was that a systematic mistake? I don’t think so.”
The fundamental confusion that socialists and statists of all stripes (I.e. monetarists) share is an inability to distinguish between market/consensual activity and aggressive/coercive activity.
If Ratex is a theory of laissez markets, then there is no empirical data available, so it has not been either falsified or confirmed by any historical data.
If on the other hand Ratex is used to describe economies with aggressive/coercive activity, then it is absurd. It is absurd because such an approach would presume that an absence of market based information, can somehow not distort or mislead individual actors who require such market based information in order for their expectations to not be systematically wrong.
This is the main fallacy in Ratex. An economy in which it is meant to describe, namely laissez faire (whether its adherents consciously understand this or not), does not exist, so we could not even know whether Ratex is correct since we lack the required dataset. But if absence of markets doesn’t prevent it from being tested, then it presumes that an absence of information doesn’t prevent human actors from avoiding systematic errors.
But then HOW can individual actors continually avoid systematic errors without the only information needed to teach them how to avoid them
If Sumner believes that Ratex is correct for economies that lack market based information…
…as if humans can coincidentally avoid making errors CAUSED by that lack of information…
…as if they can eventually learn the absolute nothingness…
…as if it is possible to look at a void long enough and hard enough that magically people could somehow learn what information would have been present had there been no aggression…
…then Sumner believes that no matter how little market based information people have access to, they can still coordinate their activities just as well as in laissez faire economies as they could in economies without market prices!
“The ghost city phenomenon is a creation of the Chinese Communist government. There is nothing in ratex theory that I know of that rules out the possibility of communist governments doing a poor job of allocating resources.”
Inflation is a creation of government. Absence of market signals in the very production and distribution of money itself, is a creation of government.
The reason “private” investors don’t know how many houses to build in an environment without market determined money supply, spending and prices, is the same reason governments don’t know how many houses to build.
Here is a question for Summer:
Does Ratex rule out government central bank errors? More importantly, does Ratex DEFINE what constitutes a central bank error? If it does not (hint: it really does not), if central bank errors are defined in terms of deviations away from laissez faire money, then central banks are ALWAYS making errors, and thus ALWAYS causing errors that result from absence of market money!
I recommend you cease trying to protect and defend the existence of the indefensible central bank, Sumner. It is degrading and incredibly awkward. You end up having to deny what is obviously true, and you end up attacking what is obviously innocent.
6. August 2015 at 16:05
@Andrew_FL: “to act rationally means…” Nope, sorry, wrong. The word “rational” already has a well-understood pre-existing definition. You don’t get to arbitrarily redefine it as a rhetorical trick.
“A computer that can act purposefully is not a mere computer. It’s a person.” Wrong again. There already exist plenty of computers that act purposefully. None of them are anywhere close to achieving legal — or even informal — status as a “person”. (For that matter, animals act purposefully, but also aren’t people.)
“you have a nonsensical idea about what it means to behave rationally” Do you actually know what any words mean? Even if you choose to reject the standard dictionary definition of “rational”, and choose to deliberately confuse your audience by using your own private definition instead … that still doesn’t make the standard definition “nonsensical”. Things can still make sense, but be wrong. (Such as your ideas, for example.)
6. August 2015 at 17:31
@TallDave- Just FYI, I think you are not debating the Rational Expectations topic properly. I think that Ratex is a variant of Say’s Law in that “general gluts” are not allowed (even though BTW Say himself thought such gluts were possible). That is to say, if one company or sector overinvests, it will be balanced out by another sector. Hence Ratex predicts, like Say’s Law, “no recession due to over-expansion / a bubble is possible”.
6. August 2015 at 17:51
collin — $600B is the entire US defense budget. If the US simply shut down its military next year… well.
6. August 2015 at 18:11
Jose Romeu Robazzi — the ratex model accepts that significant portions of the market may be investing irrationally, that just creates profit opportunities for others which average out to rational expectations overall. That’s actually why the free market works so well — it transfers wealth to the rational investors, e.g. from the Solyndra investors to the frackers, or from AIG and Fannie Mae to John Paulson.
The simple, unyielding reality that underpins the ratex model is that irrationality creates profit opportunities for the rational.
6. August 2015 at 18:42
TallDave:
What is this “free market” are you talking about?
We aren’t living in one by a long shot, in case you believed otherwise.
6. August 2015 at 18:43
Geddis is a linguistic prescriptivism Nazi.
6. August 2015 at 18:49
Definitions are creatures of human creation. They are not “out there” readymade and waiting to be discovered.
If you want to define rational one way, but Andrew_FL wants to define it another way, and you both are explicit in what definitions you use, which by the way is what Andrew_FL is doing, so you are mistaken to accuse him of “deliberately” misleading his readers, then neither of you are wrong.
He is not wrong for defining rational as purposeful behavior. This is the truth of the matter which is of course why you are compelled to say he is deliberately misleading people. You cannot say he is wrong, because you know definitions cannot be wrong.
Your posts are garbage.
6. August 2015 at 19:22
Greenbacks:
“Capitalism by its nature is a totalitarian ideology. It died in 1907 and the Federal Reserve System gave the illusion it lived to it really died for real in 1933 and the bourgeois state demanded it survive again.”
The only way you can define capitalism as totalitarian is if you define individuals being absolute masters over their own persons and property such that they rather than you have ultimate decision making rights over the disposition of their persons and property, which may make you feel powerless, defeated, if not envious and misguided as to what actually constitutes respect for property rights as opposed to violations of property rights, then yes, capitalism is the most totalitarian system ever devised.
In this definition, there are 7.5 billion potential totalitarian dictators capable of becoming absolute masters over their own lives and ruled by nobody.
But, of course, if you want to whine about the evils of you and I respecting each other’ property rights, but worship national socialism in which the individual is stripped of his mastery over himself, and replaced by a small clique of masters who you might label as “representatives”, as if I even want anyone else representing me without my consent, as if you are to judge the method by which such ” representatives” are to be “elected” to this role of authority.
Before capitalism freed the individual to decide how his body and property are to be used to produce goods, either for himself or for trade with others, nay, what has continued on to this day, governments the world over have slaughtered millions of individuals including those who work for wages and work for profit.
Governments have killed more people than all other human institutions combined.
During the 20th century alone, when capitalism was attacked from the worldwide movement towards socialism, over 200 million people were killed by governments.
As far as people getting killed “on the job”, these deaths are not CAUSED by respect for private property rights. They were caused by accidents, murders, disease, and other causes that are not anything to do with ” I Major Freedom will refrain from initiating aggression against your person and property, and likewise you similarly refrain from aggression against my person and property.”
Governments are not responsible for the improvements in working conditions. They could only make law what capitalism has already allowed people to do voluntarily.
Working conditions were tough during the 19th century not because there was not enough government, but because there was not enough technology, productivity, which capitalism maximizes.
The world of man was for millenia impoverished. The working conditions during the 19th century were, as bad as it was from our modern eyes, far better than it was previous to that during the 18th, 17th, 16th centuries, etc.
Do you think it is a coincidence that anti-capitalists like yourself always fail to address working conditions PRE 19th century? Before capitalism was even practised? It is almost as if you believe the medieval world was jolly like it is in the music video the Safety Dance.
If you think working conditions were toughest during the 19th century, then you are a history ignoramus who has no business anywhere but with his nose in history books.
Capitalism during the 19th century was a period in which millions of workers in Europe, particularly the UK, and in the US, VOLUNTARILY and quite willingly left their farms and wastelands to go work in the factories and in the cities.
Capitalism lifted the world from hundreds of millions of deaths, to tens of millions of death and a population and science explosion.
You fools who pretend to have a grasp on world history by reading the rantings of psychotic 19th century German intellectuals hellbent on enacting a war against private property rights, all in the name of prosperity, but then when more poverty resulted, general prosperity turned into concerns over relative inequality.
The Nature of Austrianism is certainly not the Rothschilds. Read Murray Rothbard. His works are littered with veritable attacks and vociferations on the Rothschilds.
Rothbard was by the way Dean of the Mises Institute for a number of years and is widely considered an intellectual rebirth of the Austrian tradition.
You have no clue what you’re talking about. You wax ignorantly on buzz words like “materialism”, hilariously accusing me of being one, when the Austrian school in the Misesian tradition is not only different, but is the exact opposite to, materialism. Mises’ epistemology stems frem the Idealism in the Kantian tradition.
Rothschilds…hahaha. A family that sought government protection from legitimate economic competition, totally against Mises’ classical Liberalism, and we’re supposed to believe that because A paid B, that A’s beliefs get magically transmitted to the works of B even if they contradict what A did and said.
By your logic, because your income was financed by capitalist circulation, everything you say is an apology for capitalism! You know, like how you don’t even know that everything you say is determined by your class interest and not by considerations for truth. Unless of course your name is Marx or Proudhon. Then the absolutism somehow escapes you.
Go back to the books and stop reading Prodhoun and Marx for a while, mkay?
6. August 2015 at 19:34
Major Freedom-Thanks for the help. I don’t think it’s worth engaging Don, he just throws insults and innuendo around. Since he has now resorted to argumentum ad verecundiam as to the appropriate definition of rationality, it’s clear he’s not interested in economic reasoning.
I just note that his original argument against economic reasoning, indeed the entire method of reasoning of the social sciences proper-at least when done correctly-has completely evaporated replaced by an argument over definitions that has no bearing on his original assault against logic.
6. August 2015 at 20:15
Geddis, the second you were accused of being a Nazi you won the argument. Keep up the good work!
6. August 2015 at 22:28
Re: rationality: Is the brainless bacterium E. Coli effectively engaging in “rational” utility maximization?
Jason Smith proposes that this is the case.
If that’s correct, what’s that say about so-called human rationality, planning and expectations?
6. August 2015 at 23:54
@Tom Brown- unpredictability is the hallmark of higher intelligence. If everything goes in a deterministic manner, there’s no free will. That’s btw the premise behind the book by Penrose, “Emperor’s Mind”. But Sumner would have you think the world operates by immutable ‘laws’ of economics (more like rules of thumb if you ask me). And of course Sumner hold the key to these laws, like Newton. After all, he’s the blogger that saved the world!
7. August 2015 at 05:06
Jason, That’s simply wrong, ratex in no way rules out unlikely events. It just means the public’s expectations are consistent with the model. If the model says 9/11 is possible, and the public believes it is possible, then you have ratex.
Chuck, Chinese architecture is definitely improving, but they have a long way to go. I agree that most of it is pretty ugly.
Ray, You said:
“I think that Ratex is a variant of Say’s Law in that “general gluts” are not allowed (even though BTW Say himself thought such gluts were possible). That is to say, if one company or sector overinvests, it will be balanced out by another sector.”
Thanks for making my day! You are confusing ratex with new classical econ. Even NK models use ratex.
7. August 2015 at 07:41
CA, you fail logic forever.
7. August 2015 at 07:57
@sumner – I stand corrected. But Ratex seems then to be untestable, if, ex post, it’s simply an accounting identity that says: “the public thought X, but Y happened”. Make a prediction using Ratex please, ex ante, and I might find it useful. But to say, ex post, that Ratex ‘explained’ some behavior is unscientific metaphysical nonsense.
PS – http://equitablegrowth.org/2015/08/06/must-read-olivier-blanchard-reconstructing-macroeconomics/ (econ models too complex to be meaningful)
7. August 2015 at 08:03
Ray, Penrose’s book was speculative by his own admission. In the decades since, I’m not sure his hypothesis garnered much support from other scientists (e.g. [1]), especially in light of recent experiments such as this.
7. August 2015 at 09:03
… but even if we grant that unpredictable human free will exists, I don’t think that’s inconsistent with Jason’s framework (which isn’t too concerned with the choices or motivations of individuals).
7. August 2015 at 10:04
Just to play devil’s advocate I would suggest that building ghost towns would cause prices to rise because of misallocation of resources. Less housing built in desirable areas causes prices to rise due to scarcity.
I’m skeptical of the ghost town stuff but I don’t really know
7. August 2015 at 12:46
@Ray Lopez: “If everything goes in a deterministic manner, there’s no free will.” Wonderful! Yet another topic in which you have no education, but are eager to make bold statements about. Sorry, no, free will is not incompatible with determinism. (Of course, you’d first need to define “free will”, but if you go by most people’s intuitions about what it refers to, they are mistaken to believe that it necessarily rules out determinism.) Your uneducated guesses are not a guide to truth.
“Penrose, “Emperor’s Mind”” Penrose was a genius in mathematical geometry, and theoretical physics … but arrogantly assumed that his intuitions would serve him as well in cognitive science and artificial intelligence. He made numerous elementary errors in that book, and his speculative conclusions are essentially all false.
@Tom Brown: Yup. And that’s just experimental evidence, not even bringing up Penrose’s errors of logic (and errors of computer science) in Emperor.
7. August 2015 at 13:27
@Don, thanks for the response. Perhaps it’s fair to say that amongst those who are determinists, there remains some dispute about the concept of free will though. Daniel Dennett takes a position that sounds close to yours (compatibalism?), and perhaps to a slightly lesser degree, so does Sean M. Carroll. But clearly Jerry Coyne (my 2nd link above) does not. Personally I think Coyne’s take is attractive because it’s the most straighforward, however I can see an argument that “free will” is still a useful way to describe part of our human experience. I’m undecided.
7. August 2015 at 13:29
… should be “1st link”
7. August 2015 at 14:31
…starting at 26:56 Coyne presents his criticism of compatibilism. It’s pretty good.
7. August 2015 at 15:31
… also, it seems to me that “quantum indeterminism” and “libertarian free will” are two separate issues (using Coyne’s terms). Even if quantum indeterminism was a significant factor at the scale of what causes neurons to fire (thus making our thoughts and actions indeterminate), that doesn’t change the results of the Soon et al experiment: that we become aware of what we’ve supposedly “decided” after the “decision” is actually made.
7. August 2015 at 16:22
Sorry Ray, I don’t have time to teach you economics in the comment section. In any case, it would spoil the fun of reading your silly comments.
7. August 2015 at 17:24
@sumner – “Sorry Ray, I don’t have time to teach you economics in the comment section. In any case, it would spoil the fun of reading your silly comments” – I make a mistake in defining ratex (not sure if it’s even a mistake actually) and you think you’ve won the debate? Go on little man, celebrate. But in your heart you know you’ve lost, as the Fed does not ‘steer’ the economy and as no less than Fed chair Ben S. Bernanke wrote, it has only between 3.2% to 13.2% effect out of 100%, i.e., nearly no effect. Then you come back with a howler that the Fed has “zero effect”, apparently trying to shift the goalposts by now arguing real vs nominal effects. No, little man, the Fed even by nominal values has nearly no effect (~10% out of 100%) on the change in the economy. That’s the power of econometrics. It’s wise that you avoid this topic as it’s a death knell to your influence. No more K. Duda’s to fund your rants on the net if this inconvenient truth is understood by your readers.
7. August 2015 at 17:42
@readers – note Sumner originally made a mistake in defining ratex, which means he was as confused as the rest of us (original term in brackets, now corrected): “What does it mean to suggest that rational expectations doesn’t allow for [systemic] systematic mistakes” (Sumner).
You see, like non-constant velocity in the quantity theory of money, like implied volatility in the Black-Scholes model of option pricing, ratex is the ‘glue’ that holds together both NK, monetarist and other bogus models that purport to show the government has either fiscal or monetary effect on the economy. For fiscal effect, it kind of makes sense that ‘putting people to work by spending money’ will effect GDP (though ‘digging a hole and filling it up again’ implies such effect may be close to zero, long term, though short term there is probably some sort of nominal effect, and let’s not even talk about the bogus ‘multiplier’ which is nearly zero). However, with monetary effect, it’s less clear that printing money will even change nominal variables much, absent perhaps hyperinflation, since people adjust to prices quickly (money is neutral). No less than Ben S. Bernanke says so, is a 2003 paper I’ve repeatedly cited, who says the nominal effect of monetarism is between 3.2%-13.2% (out of 100%) on the increase in GDP (i.e., nearly nothing, if US GPD = 17.4T, and the economy grows 3%/yr nominal, and the effect is say 10%, within the range allowed, then this is a mere .0522T or 52B, or 52B/17.4T = 0.3%, nearly nothing).
Think about that, you are arguing over nothing with monetarism. It reminds me of the counter-intuitive studies that show, adjusted for IQ (using as a cutoff people who barely got into college vs those who did not, meaning they both had the same IQ; Sumner btw concedes to having a low IQ) that college does NOT pay, and going to college is largely ‘signaling’ to potential employers that you have high IQ and/or are worthy to be hired. You actually learn very little. But educators like Sumner would like you to believe otherwise, in the same way they want you to believe they know the secrets to a non-linear economy that does not obey the neat rules of thumb they have lovingly memorized over the course of their pitiful, wasted, lifetimes.
Wake up readers. Let the scales fall from your eyes. Economics is a confidence game, and once economists have you in their confidence the games begin.
7. August 2015 at 21:24
@Tom Brown: The answer to Coyne is Compatibilism #2 (in his presentation), aka Daniel Dennett’s answer. Coyne’s “criticism” is essentially “this feels intuitively absurd to me!” or “I don’t understand it!”, which is hardly much of a serious criticism. But yes: crows and chess programs also have “free will”. (Which is, to be specific, the ability of your body to execute whatever action your controlling brain eventually decides on. Coyne does begin the video defining free will as acting contrary to the laws of physics, and he’s right that that kind doesn’t exist.)
Coyne actually makes an important technical error in his discussion of #2: he claims that “the outcome is deterministic … it’s absolutely predictable”, which is false. Deterministic only means predictable in theory, not predictable in practice. For example, it’s easy to construct very very tiny computer programs, whose output is deterministic, but not predicable any faster than just running the program and seeing what it happens to produce.
8. August 2015 at 00:26
@Don Geddis,
Regarding “absolutely predictable,” Coyne discusses the difference between predictability in theory and predictability in practice earlier in the talk (here).
Also it sounds like Sam Harris agrees with Coyne rather than Dennett and Carroll. Coyne rattles off a few other names that agree with him (Einstein I believe was one that he claimed), but he does concede that “his side” is in the minority. I’m familiar with Dennett’s arguments on it. I guess Steve Weinberg is also a compatibilist. However, I still lean towards “free will is an illusion” and that perhaps we sense intention after we’ve already starting doing or thinking something. Also, I agree with Coyne that we don’t need to rescue free will for morality’s sake.
But I’m willing to change my mind… er… I will be compelled to belief something else if I encounter mind changing evidence and argumentation. Lol.
8. August 2015 at 05:04
What could be more pathetic than the army of internet-Austrian commenters washing up on the shores of econ blogs anytime their pet theory gets a mention? Is there any theory in economics with less relevance?
8. August 2015 at 05:10
I spoke too soon – Ray is more pathetic, a person who bafflingly enough cannot even write a full sentence without a basic error, a person so confused he once agreed wholeheartedly with Major Freedom, only to have our old friend Major frantically backpedal. What does it say when the anarcho-capitalists think you’re being incoherent!
8. August 2015 at 07:08
Ray, Sorry, but Bernanke agrees with me. Bernanke says the Fed caused the Great Depression. Bernanke says the Fed caused inflation to be 2% on average during recent decades. Bernanke does believe the Fed steers the nominal economy.
You said:
“However, with monetary effect, it’s less clear that printing money will even change nominal variables much, absent perhaps hyperinflation, since people adjust to prices quickly (money is neutral).”
You are reaching new highs, or should I say new lows. Money neutrality has no bearing on the Fed’s ability to affect nominal variables. I’m afraid you’ve slipped below 120, and are rapidly sliding towards 110.
8. August 2015 at 10:54
Hi Scott,
You said: “If the model says 9/11 is possible, and the public believes it is possible, then you have ratex.”
It depends on whether you think 9/11 is drawn from a distribution with a finite (not infinite/undefined) mean & variance or not — I was taking it as an example of an event drawn from something like a Pareto distribution which has infinite mean & variance (which I thought I was clear about when I said: “ratex requires both the mean and variance of the distribution of your random variable to exist”).
To quote from the page on rational expectations from econlib:
http://www.econlib.org/library/Enc/RationalExpectations.html
“Investors buy stocks they expect to have a higher-than-average return and sell those they expect to have lower returns.”
This statement is nonsensical with a Pareto distribution since it has an infinite average. You should drive up all prices and every event is 9/11 in this case.
So not all kinds of expectations, in particular apocalyptic or maniacally optimistic expectations (finite probabilities assigned to extreme events), are allowed.
Here’s a good example: a giant Earth-destroying asteroid. If rational expectations let you have a giant asteroid, the expected value of any asset is zero. Why does anything have any value at all except possibly a spacecraft? Because expectations differ from ratex.
A distribution that doesn’t have a convergent mean & variance isn’t allowed in a ratex theory.
Yes, there’s no way of knowing whether 9/11 is drawn from a distribution with convergent mean & variance or not. But I believe things like a nuclear apocalypse are possible (maybe that’s just because I was a child of the 80s). Hence, I technically don’t have rational expectations with regard to assets. It’s more like bounded rationality.
9. August 2015 at 07:18
Jason, You are confusing the broad concept of rational expectations with specific ratex models of asset prices. Whatever can happen can obviously be rationally expected. You are making this much too complicated.
9. August 2015 at 08:35
Scott, under the broad concept of rational expectations, what’s an example of something that can’t happen?
9. August 2015 at 08:46
… Donald Trump winning the nomination? The election? (c:
9. August 2015 at 17:32
Didn’t Noah Smith write an article some time ago saying that “signalling is a fad”. Which was completely wrong.
As for Austrian economics, my opinion would be Tyler Cowen’s opinion. I’d trust his instincts very much on this.
I feel like Austrians have intellectual contributions that mainstream ignores but I can’t really comment because I don’t understand the details.
10. August 2015 at 07:18
Tom, I’d say that ratex doesn’t allow the public to have expectations that differ from the implications of the model.
No, ratex would allow Trump to win.
Anon, Yes, I’d trust Tyler more on Austrian theory, especially the microeconomic part of Austrian theory (which is the best part.)