Who Were the Sea Peoples?

"A modern example of this conundrum [of thinking that one can outguess financial markets] occurred when many pundits blamed the Fed for missing a housing bubble that was also missed by the financial markets." -- The Midas Paradox , p. 12 Let's consider a single market, say, for tulips. Obviously it is either a nonsense claim, or a tautological claim that there are no bubbles, to say that if there is a bubble in the tulip market, the tulip market ought to have spotted it. For the tulip market participants themselves to detect a bubble would be for the tulip market participants to prevent said bubble! We can divide bubble theories into three broad categories: collective irrationality theories, partial information theories, and prisoner's dilemma theories. In collective irrationality theories, a "mania" gets going in some market, and market participants buy because they are carried away by their "animal spirits." Per these theories, someone outsi...

Again from this paper : "Information asymmetry among the economic players generates an incentive for non-cooperative strategies. Specifically, we assume that the producers’ control on the means of production of the companies allow them to extract rents from them at the expense of the sector of investors that do not enjoy such control (the creditors), who in turn impose limits on this “predatory activity” by subjecting the corporate leadership through creditor controls, resulting in dynamic process analogue to the classical Lotka-Volterra Predator-Prey model."

From a very interesting paper using a predator-prey model to capture the business cycle: "From a financial markets viewpoint, the implication is of course that everyone could be buying a stock that each one of the investors privately thinks is overvalued, but which nevertheless keeps soaring because the purchase decision is not made on the basis on one's individual assessment of the asset value itself but of everyone else's assessment: in short, this interpretation says that, in a financial 'bubble', an asset price would go up because everyone is buying it, and everyone would buy it because it is going up, regardless of its fundamentals." This definition seems sound to me, and contra Scott Sumner, it shows how we can have a bubble even if we cannot reliably profit from the fact that it exists: we have no idea how long people will keep buying an asset because everyone else is buying it.

From Chapter XVII of Theories of Surplus Value : But the crisis is precisely the phase of disturbance and interruption of the process of reproduction. And this disturbance cannot be explained by the fact that it does not occur in those times when there is no crisis. There is no doubt that no one "will continually produce a commodity for which there is no demand," but no one is talking about such an absurd hypothesis. Nor has it anything to do with the problem. The immediate purpose of capitalist production is not “the possession of other goods”, but the appropriation of value, of money, of abstract wealth... Money is not only "the medium by which the exchange is effected," but at the same time the medium by which the exchange of product with product is divided into two acts, which are independent of each other, and separate in time and space... That only particular commodities, and not all kinds of commodities, can form “a glut in the market” and that th...

(Part three of an examination of Garrison's business-cycle  theory as an over-investment theory: part two is here .) It is true that lowering of the interest rate will raise the net present value of a long-term investment by more than it will reduce the net present value of a short-term investment. However, this does not mean that a lowering of the interest-rate will make it more likely that I will undertake a new long-term investment the new short-term investment. The fact is, what I will look at is the yield on my Investment versus my cost of borrowing to finance the investment. If the investment returns 5%, the interest rate was 6%, and it is been lowered to 4%, the investment now looks profitable to me, whether the investment is a one-year investment or 30 year investment. Thus, what we will see is more investment projects being undertaken, whatever the length of the project. (And of course, less saving.) But doesn't the greater increase in the net present value of a l...

I suggested here that Roger Garrison's business cycle theory should be disentangled from its Hayekian-triangle encrustations and show itself as a theory of how low interest rates can produce temporary movements beyond the PPF (where the PPF is understood to represent sustainable combinations of investment and consumption production). What that would do would be to free the theory up from its (I think) unnecessary ties to the shaky notion of a "lengthening structure of production." Long before the Cambridge capital controversy highlighted the reswitching problem, no less an esteemed Austrian than Mises had declared, "The 'average period of production' is an empty concept" ( Human Action , p. 522). So if we eliminate that feature and rely instead on Garrison's idea of movements beyond the PPF, is there something distinctively "Austrian" left in the theory? I think so: it is the notion of a capital structure . We must take that into accou...

In my continually rethinking of cycle issues, I have come to the conclusion that Roger Garrison's cycle theory ought to liberate itself from its Hayekian triangles and stand on its own as a theory of a temporary movement beyond the production possibilities frontier. Garrison defines his PPF as a sustainable combination of output. How can we move beyond that? A story as simple as this will do: Let's say we own a factory that produces some investment good. Our normal schedule is to run the machines in the factory 20 hours per day, allowing four huors for them to cool down and to be repaired. But the good we produce becomes in great demand for some consumption good it is used to produce. We could invest in more machines, but instead we decide to "make hay while the sun shines": we run our machines 24 hours a day, with no maintenance or cool down periods. For some time, the production of both investment and consumption goods may rise. That is the "boom." Bu...

Many business cycle models are not really cycle models at all. That does not mean they are wrong : it might be the people who say there is a business cycle who are wrong. But I think it is good to distinguish between theories with actual cycles in them and those that explain awa y what they see as there mere appearance of cycles. And in a side note, Smith agrees with my evaluation of Minsky: Minsky's theory contained an actual cycle.

"One group of theories, which includes the writings of W. S. JEVONS, H. S. JEVONS, and H. L. MOORE, seeks to account for the periodicity of business cycles by establishing the existence of a similar periodicity in agricultural output. The chain of causation runs from cosmic influences to weather conditions, from weather conditions to harvests, and from harvests to general business." -- Gottfried Haberler, Prosperity and Depression , p. 151 This type of theory fills in the box for "truly cyclical but also exogenous." These are true cycle theories: there is a real causal explanation of the economy coming around to what is in some ways the "same" state: the economy cycles because, say, for W.S. Jevons, sunspots cycle. But obviously sunspots are about as exogenous as a cause of economic events can be. By the way, just what constitutes a cycle, in the sense of going back through the "same" states, is going to be somewhat in the eyes of the theori...

As long ago as 2003 , in response to some Austrians whom I saw mocking "psychological" takes on the business cycle, I was stressing that there is no reason to view structural or monetary theories and psychological theories as rivals: they can complement each other, as Roger and I argued in the paper linked to above. But, once again, Gottfried Haberler beat me there: "But the distinction between the writers who give prominence to these 'psychological' factors and the writers so far reviewed is, taken as a whole, a distinction of emphasis rather than of kind. The 'psychological' factors are put forward as supplemental to the monetary and other economic factors and not as alternative elements of causation, while on the other hand they are in no sense overlooked by the writers of the other group, or most of them, though they may be assigned a less prominent place in the chain of causation." -- Prosperity and Depression , p. 150

Imagine a bunch of nutritionists, each one of whom kept insisting that there was only a single form of nutritional problem. One tells us: "It's overeating! People only go wrong nutritionally when they have too many calories." Another says: "No, it is undereating! People become too frail." Yet another insists that the only problem is a diet with too much protein and not enough carbohydrates, and yet another that the only difficulty is the reverse. I think that this is analogous to wars (often ideological) over the theory of the business cycle. Why should we believe there is only a single way in which the macroeconomy can become "ill"? And Gottfried Haberler agrees: "Vertical maladjustments of each type on the one hand and horizontal maladjustments and insufficiency of total demand (insufficiency of money supply) on the other are quite compatible. To a certain extent they probably always go together and are frequently difficult to distinguish....

Mr. LOVEDAY then points out that for various reasons these financial rigidities have increased. "In recent years, the joint- stock system, under names varying with the law in different countries, has replaced to a constantly increasing extent the more personal enterprise. . . . Gradually with the growth of the big industrial concern, with the extension of the multiple shop . . . a greater and greater proportion of the population has been thrust out of positions of direct, independent control into the mass of wage-earning and salaried classes. Such persons can no longer invest in themselves; to the extent that they play for safety or apparent safety, and give preference to fixed-interest-bearing obligations over profit-sharing equities, they inevitably add to the rigidity of the financial system. Many forces have induced them to prefer safety to profit..." -- Prosperity and Depression , p. 117 Wilhelm Röpke referred to the treatment for this as the "de-proletarianizati...

My colleague in this research and I were considering that we had two major dimensions along which to classify business cycle theories: exogenous versus endogenous, and truly cyclical versus pseudo-cyclical. Examples: An exogenous theory would be one that attributed cycles to, say, sunspots effecting agricultural output. An endogenous one would attribute, perhaps, the pessimism of the downturn to an expected reaction to the over-optimism of the boom. A truly cyclical theory contains an explanation of why boom turns into bust which turns into boom: it explains why these states tend to repeat. A pseudo-cyclical theory (like real business cycle theory) explains the appearance of a cycle as being the result of random disturbances plus, perhaps, hysteresis. But I think we need a third dimension as well: real versus monetary. At first I thought this could be subsumed under exogenous versus endogenous, where real factors are exogenous and monetary ones are endogenous. But now I see t...

Haberler said much the same thing as I was pointing at yesterday , of course having arrived at this opinion decades before I did: It is true, a horizontal maladjustment alone (that is to say, an over-delopment of a particular branch of industry) can explain only a partial -- as opposed to a general -- depression for the reason that, if industry A is over-developed, there must be an industry B which is under-developed and, if A is depressed, B must prosper. But the same is true, as we have seen, of a vertical maldistribution of the factors of production. In order to explain a general depression, it is necessary to recognize that a deflationary cumulative process can be set in motion by partial dislocation of the productive process. If this is accepted, there is no difficulty in assuming that such a vicious spiral of contraction may be started by a horizontal, as well as by a vertical, maladjustment in the structure of production. -- Prosperity and Depression , p. 111

Here's Scott Sumner : "The recession was mostly caused by a big fall in AD, although real factors such as reallocation out of housing might have played a modest role." Too often macroeconomics is conducted like warfare, where one's favorite theory has to crush all others and emerge as the "victor." I think this is wrong-headed: it's as though we were doctors, and each held a theory as to what makes people ill: "It's viruses!" "No, bacteria!" "Ridiculous: it's cancer!" The fact is that all of these things can happen to people. And there is simply no reason in the world an economy can't suffer from both an Austrian-type misallocation of resources and an aggregate demand shortfall, as Sumner correctly notes.

Here . Some people have called me a "born-again Keynesian." Others have said I've "sold out to the dark side." Uh-uh. What I really am is someone who found out that the "kindergarten Keynesianism" he was spoon-fed by various "pop-Austrian" authors was as inaccurate as the "kindergarten Hayekianism" he found amongst various scribes on the left. (And I discovered that when I had to teach Keynes, and, as an honest teacher, felt I had to really get his ideas as he saw them before I could properly teach them.) So what I "really" am is a guy who now is working his ass off to grasp this whole debate, including the perspective of the hundreds of economists besides Keynes and Hayek who offered thoughts on the nature of the business cycle.

One of the masterminds of real business cycle theory admits that sometimes financial shocks do matter, here . (Hat tip Ryan Murphy.)

"[We are] not content to focus analysis on the fluctuations of one or two great variables, such as production or employment [but seek] to interpret the system of business as a whole... to penetrate the facade of business aggregates and trace the detailed processes -- psychological, institutional, and technological -- by which they are fashioned and linked together." Who said it? (No googling!)

"The various theories under review here have been examined, as far as possible, under the following heads: General characteristics. Explanation of the upswing (prosperity). Explanation of the upper turning-point (crisis). Explanation of the downswing (depression). Explanation of the  lower turning-point (revival). Reasons given for recurrence, periodicity, etc. International complications." -- Prosperity and Depression , p. 13

I wrote : "What I can't figure out how to explain is why there are people saying Keynesianism is all about consumption and takes no account of investment." (Emphasis new.) I.e., I wrote "Keynesianism is not 100% about consumption and 0% about investment." Then Murphy wrote a response as if I had written "Keynesians are totally about investment and never think about consumption." I.e., he wrote "Gene thinks Keynesianism is 0% about consumption and 100% about investment." Any theory of the business cycle really ought to take both consumption and investment into account, don't you think? Wasn't it Mises who kept stressing that the only point of production is consumption? Should we be criticizing him for his silly "consumption-based" economics? UPDATE: Two other very naughty bits in Bob's post: 1) He notes that Keynesians sometimes talk about "the paradox of thrift" and "the marginal propensi...