by It is a crucial point: Austrians complain about asset bubbles, but their Austrian business cycle theory (ABCT) or economic theory in general does not focus on stock market speculation or asset bubbles as a fundamental and inherent means by which an economy is destabilised.For example, in the ABCT it is real and unsustainable higher-order capital investment that is supposed to wreck the economy, not debt-financed asset speculation.The Austrians today are falsely claiming that they have some kind of prescient theory explaining the recent stock market gyrations or asset bubbles. This is rubbish.Karen I. Vaughn in her excellent book Austrian Economics in America: The Migration of a Tradition hits the nail on the head: “Mises never discusses the possibility of systematic speculative error except in the context of his trade cycle theory, in which speculators-investors are misled by improper monetary signals emanating from a fractional reserve banking. Yet if the future cannot be predicted, or as Shackle would say, if the future is created out of the actions of the past, why is it not least conceivably possible for speculative activity to be on net incorrect at least some of the time? Certainly, we have the empirical evidence of speculative bubbles that are endogenous to markets as an example of market instability.
Topics:
Lord Keynes considers the following as important: ABCT, capitalism, stock bubbles
This could be interesting, too:
Peter Radford writes AJR, Nobel, and prompt engineering
Asad Zaman writes Escaping the jungle: Rethinking land ownership for a sustainable Future
Lars Pålsson Syll writes In praise of pluralism
Joel Eissenberg writes Capitalism prevails
For example, in the ABCT it is real and unsustainable higher-order capital investment that is supposed to wreck the economy, not debt-financed asset speculation.
The Austrians today are falsely claiming that they have some kind of prescient theory explaining the recent stock market gyrations or asset bubbles. This is rubbish.
Karen I. Vaughn in her excellent book Austrian Economics in America: The Migration of a Tradition hits the nail on the head:
Vaughn is entirely correct: the Austrians’ trade cycle theory is flawed by failing to take into account asset bubbles in a systemic theoretical way.“Mises never discusses the possibility of systematic speculative error except in the context of his trade cycle theory, in which speculators-investors are misled by improper monetary signals emanating from a fractional reserve banking. Yet if the future cannot be predicted, or as Shackle would say, if the future is created out of the actions of the past, why is it not least conceivably possible for speculative activity to be on net incorrect at least some of the time? Certainly, we have the empirical evidence of speculative bubbles that are endogenous to markets as an example of market instability. One would think that the extent and potential limiting factors that affect such endogenous instabilities would be of great importance for fully understanding market orders, yet it is an issue surprisingly missing in the Austrian literature. Hence, although, we can appreciate the force of Mises’ argument as far as it goes, it seems that a crucial part of the case for the effective functioning of a market economy is missing.” (Vaughn. 1994: 87–88).
When we add to this the failure to understand and apply to economic theory the concepts of fundamental uncertainty, subjective expectations, debt deflation, and wage and price rigidities, as well as their commitment to bankrupt ideas like loanable funds theory, we have one deeply defective and unsound theory.
BIBLIOGRAPHY
Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.