Austrian Business Cycle Theory

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Here is a brief (7-8 minute) youtube of Dr.Tom Woods explaining the Austrian Business Cycle Theory. The "Austrian School of Economics" gets its name because the first such economists were from Austria.

http://www.youtube.com/watch?v=5K4Os5eXPw4

LysanderSpooner's picture
LysanderSpooner
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I like monastic theory. You produce stuff and distribute what's produced. When you produce more than is needed, you celebrate with time off. and simply use up the surplus stuff until more is needed.

When more stuff is needed, then end the vacation and produce some more.

If someone needs a house, build it. When no one needs a house, put the construction monks to work enjoying their favorite past time.

A successful economy is nothing more than producing required goods and distributing them where they are required.

Probably Austrian theory wouldn't get how well our "business cycles" (we do have them ) work for everyone.They have no mechanism in place for productive downturns, We do.They are a time of celebration for a job well done.

In your world, they are a time of evictions and a shortage in the food budget.

Retired Monk - "Ideology is a disease"

polycarp2
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Jul. 31, 2007 4:01 pm

I did not follow what he was saying. I can only observe

Austerity is merely propaganda considering that
a) Federal Deficits – Net Imports = Net Private Savings, is strictly true and the treasury and fed have been using these equations ever since they( the institutions) were created. How can anyone believe that reducing deficits on the left hand side increases savings on the right hand side?

Deficits and only deficits makes the economy grow.

Are Austrians for austerity because it rhymes better?

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pshakkottai
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I believe pshakkottai is mistaken.

He is saying a private economy with no government cannot grow.

That is absurd on it's face.

His mistake is attributing growth to the amount of savings over the amount of lending, i.e., net savings, which has to be zero. But this is not necessary. The economy grows not based on net savings but savings itself. The savings adds to the capital stock and hence output is higher next year.

Dr. Econ's picture
Dr. Econ
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Quote LysanderSpooner:

Here is a brief (7-8 minute) youtube of Dr.Tom Woods explaining the Austrian Business Cycle Theory. The "Austrian School of Economics" gets its name because the first such economists were from Austria.

http://www.youtube.com/watch?v=5K4Os5eXPw4

I have said a great deal in this thread

http://www.thomhartmann.com/forum/2012/07/austrian-economists-and-great-...

I wish to add something here. The problem with the Austrians is that the borrow a little from all schools a thought, to give a contradictory model of the economy.

The market is efficient and full of rational agents, yet, lenders are fooled by the attempts at government to inflate the economy. Consumers are fooled by prices and wages. This violates the classical model.

Supply creates it's own demand, but even though these agents are fooled in producing, consuming and supplying more labor, there is not enough 'demand' for all that supply. This violates the principle that supply creates it's own demand.

Further, although increases in money lead to increases in prices, somehow prices don't increase enough to stop this very investment from happening. This violates the principle of monetarism that increases in money increases prices.

Of course, all these violations of the classical and monetarist models are Keynesian in nature. Neo-Keynesians traditionally believed that the government fools consumers and workers into working for lower wages. Keynesians believed that supply does not create demand, but that increases in investment increase demand. Keynesians believe that markets don't clear, that there are aggregation issues and that prices and wages can be sticky.

The Austrians seem to pick and choose whatever comes to them in a contradictory mess.

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Dr. Econ
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At

http://pshakkottai.wordpress.com/2011/10/16/us-gdp-vs-govt-spending-2/

is shown empirical data (Gross Domestic Product data from years 1969 to 2009) which shows that

GDP = 5* (govt_spending).

This simply means no (govt_ funding) implies no GDP. Also

(Federal Deficits = Net Private Savings+ net imports), applies to USA and other nations that have their own currencies.

and has been verified in fig 4 of sectoral balances(which is the equation above)

UNDERSTANDING MODERN MONETARY THEORY (MMT) & OUR MODERN MONETARY SYSTEM | PRAGMATIC CAPITALISM

at

http://pragcap.com/resources/understanding-modern-monetary-system

Federal deficit is created money, the source for all economic activity.

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pshakkottai
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Dr. Econ wrote: Keynesians believed that supply does not create demand, but that increases in investment increase demand

poly replies: That depends on the investment. If the investment is made in increasing productivity, infrastructure and the like, that is so. If it's plowed into the $650 trillion in global derivatives....it isn't so.

Supply Side economics as envisioned by Paul Craig Roberts was meant to encourage productive investment to increase the output of goods and services and in the process increase employment and demand. . It wasn't meant to put financial chicanery and outsourcing on steroids.

Supply Side economic theory was captured and bastardized by a financial oligarchy to suit their own ends.

In actuality, it supported Kenesian theory with a differing approach..

Retired Monk - "Ideology is a disease".

polycarp2
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Quote LysanderSpooner: Here is a brief (7-8 minute) youtube of Dr.Tom Woods explaining the Austrian Business Cycle Theory. The "Austrian School of Economics" gets its name because the first such economists were from Austria.

I have thought of even a more significant criticism, which ends this theory altogether.

And that is simply that these so-called 'booms' of yours last years, sometimes a decade! The idea that there is no 'demand' for a ten years after expansion is certainly absurd. And to fool someone for 10 years? Ridiculous.

Further, since expansions are much longer than recessions, how is it possible for all this 'malinvestment' - which has been accumulating for 10 years - to disapear in a quarter or two (while at the same time investment is increasing - albeit at a slower rate!). Either the excess investment must be minimal - and so unimportant - or not be malinvestment at all.

And what exactly is an interest rate that is too low? How low is low? Is the Fed setting a rate which is 1000 percent off? 100? 10? 1? Exactly how much bad investment is that going to generate? According to theory, the interest rate should be close to the growth rate of the economy - the long run rate of return cannot be higher than that. How much different was that during expansions? 1% 2%? It implausible to think that if you give an investor a slight break on an interest rate that it will cause that much damage later.

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Dr. Econ
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pshakkottai: Please extend your data range to 1800 to present. Does GDP = 5* (govt_spending) hold throughout this period? Using your own data source (BEA), in 1929 government expenditures were about 10% of GDP.

Based on this data, I don't think saying "no government spending equals no private economy" is valid, even if it is obviously absurd.

The term "net private savings" is also rather deceptive. As far as I've been able to determine, it was invented by Modern Monetary Theory (MMT). Everybody else would consider this "money needed to fund the government budget deficit". You say that net private savings has been used by the Fed and Treasury, can you provide a reference to the fed or treasury using the term? For that matter, a reference to a non-MMT economics text describing this term?

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ThomasW
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Quote ThomasW:

pshakkottai: Please extend your data range to 1800 to present. Does GDP = 5* (govt_spending) hold throughout this period? Using your own data source (BEA), in 1929 government expenditures were about 10% of GDP.

Based on this data, I don't think saying "no government spending equals no private economy" is valid, even if it is obviously absurd.

Pshakkottai, I agree with ThomasW here. Look, if you want to say you have a theory that Output should equal five times government spending, and that that is some sort of optimal arrangement, then let us here what that is. But simply looking at this as an empirical fact by itself seems silly. In fact, another way to look at it is to say that goverment is 20% of GDP. But this is only true in the modern period.

Quote ThomasW:...The term "net private savings" is also rather deceptive. As far as I've been able to determine, it was invented by Modern Monetary Theory (MMT).

Not at all. It simply means savings less lending. That is, in order for an economy to save, someone else must lend. There can be no net savings. This bothers Pshakkottai, because he thinks that the whole economy must save in order to grow. However, as I pointed out to him, the economy can grow simply if someone saves more than the amount of the old capital depreciating.

He wants to force people to physically save by devaluing the currency and investing it. The idea is not as terrible as it sounds.

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Dr. Econ
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Quote pshakkottai: Federal deficit is created money, the source for all economic activity.

I think I need to take back what I said a bit.

I believe in a debt based monetary system (which we have), you need to increase debt in order to increase money.

There is an argument that the economy should increase the amount of money at the rate of output growth - in order to stabilize prices. The idea is that competition reduces prices so innovations come about with lower prices. This means money is worth more, and hence this will pay for new investment. However, in modern economies, investors would never invest when prices are falling, since they associate this with deflation, or a fall in demand.

So it is true that the federal deficit, which is created money, should increase along with the rate of the growth of the economy.

But, the reason is that the economy has a poorly function pricing system. Money is not the 'source' of all economic activity, it is really just a 'fix' or 'patch'.

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PLease see a new plot with more details on how the bea data was processed to show cumulative deficits is equal to house hold net worth.

http://pshakkottai.wordpress.com/2012/07/31/cumulative-deficit-vs-househ...

In 1929 we had the gold standard and arbitrary money creation was not allowed. I will see if that would make any difference.

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pshakkottai
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Well, even if that were true, it would really tell us anything about what we are talking about.

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Dr. Econ
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a) Federal Deficits – Net Imports = Net Private Savings, is strictly true. See fig4 of http://pragcap.com/understanding-modern-monetary-syste

If this equation is summed over all years, we get

b) Cumulative Federal Deficits – Cumulative Net Imports = Cumulative Private Savings, or,

c) Cumulative govt “debt” = national wealth.

The net worth of the govt sector is the entry FL312090095 in sheet A007 Ann. The net worth external is FL262090095 and is given in A009 Ann, S. 9 a. Rest of the world which is the external account.

Cumulative private savings is Peoples’ wealth which is defined as the net worth of household and nonprofit sectors of the economy (FL152090005 in sheet A003).

The plot shows that b) is true.

“Cumulative private savings” is the “net worth of household and nonprofit sectors.” This answers ThomasW’s comment

“ The term "net private savings" is also rather deceptive. As far as I've been able to determine, it was invented by Modern Monetary Theory (MMT).”

Another proof of MMT.

http://pshakkottai.wordpress.com/2012/03/30/another-proof-of-mmt-4/

This is a plot of gross national wealth on the x axis plotted vs. the same quantity in the same year minus govt deficit minus External balance. The years start at 1960 and end at 2011.The plot combines BEA Section S A007 S.7 a Federal Govt and A003 S.3 .a. Households and Nonprofit Institutions Serving Households. (FL152090005 minus FL312090095 minus FL262090095) is the value along the y axis which agrees with the household net worth FL152090005.

Each (deficit plus net export) adds to peoples’ wealth. The dollars are current values not adjusted for inflation. This line is much more straight because no inflation adjustments to fixed dollars were involved. This is a proof of

a) Federal Deficits – Net Imports = Net Private Savings

Another way of thinking about the plot is as a plot of actual wealth on the x axis compared to the predicted wealth calculated using the MMT equations of balance which is consistent with whatever balance BEA is using. We can conclude that BEA is also using MMT accounting.

Net private savings is defined in

“ Government surpluses must equal non-government deficits (with no external account):

The bottom row of the Current Transactions Matrix indicates that government savings (surplus) or tax revenue net of government spending and payment of interest on bonds ((T – G –ibt-1Bt-1) are equal to the non-government sector’s dis-savings (deficit = pDK – Fu – Sh),” with terms defined in the current transactions matrix described in “Stock-flow consistent macro models

Posted on Tuesday, September 8, 2009 by bill” at

http://bilbo.economicoutlook.net/blog/?p=4870

There is a typo in the table. In the banks column Dividends should be –Fb. Subscript t-1 refers to the previous period and ” i” is the interest rate.

“For the household sector, the sources of funds include wages, interest on deposits, and distributed dividends from banks and firms. Uses of funds include consumption and payment of taxes on household income.

For firms, sources of funds include revenue from the sale of goods and services to households and government, as well as that component derived from the sale capital goods to other firms. These funds are used for investment, the payment of corporate taxes, the payment of interest on borrowings, and the distribution of dividends.

Banks receive interest on loans and issued bank bills, and use their funds for payment of interest on deposits and the distribution of profits.

By summing across the rows for the flow-of-funds accounts of banks, households and firms, it is apparent that all transactions cancel out with the exception of the interest paid on bank bills by government, the payment of taxes by firms and households, and the receipt of revenue by firms for the sale of goods and services to the government.

However, and very significantly, these components are all vertical transactions between the government and non-government sectors. That is they do not net to zero but create/destroy net financial assets in the non-government sector.”

Depreciation or appreciation enters only in the taxation. It does not enter directly in the Transfer Matrix.

Regarding “I believe in a debt based monetary system (which we have), you need to increase debt in order to increase money.” In all horizontal transactions, debt and savings cancel. But in vertical transactions, money is created (or destroyed by taxes) and change financial assets in the non-government sector. The federal government does not create or destroy dollars by borrowing. It creates dollars by spending and it destroys dollars by taxing.

“In summary, the words “debt,” “owe,” “borrow,” and “lend,” when describing personal (monetarily non-sovereign) finances, involve the creation and destruction of money. Those identical words, when describing federal finances, involve nothing more than an equal exchange. No money is created or destroyed.” From

http://rodgermmitchell.wordpress.com/2011/12/24/why-federal-debt-is-not-debt-and-federal-borrowing-is-not-borrowing/

Did I miss anything?

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pshakkottai
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Jul. 11, 2011 11:27 am

Where do I find "entry FL312090095 in sheet A007 Ann" or any of the other items you're referring to here? I've scanned the various links and must be missing something.

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ThomasW
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Jul. 26, 2012 12:35 pm

Go to web site

http://www.bea.gov/national/nipaweb/Ni_FedBeaSna/DownSS2.asp?3Place=N

and download the first xls file

The xls spreadsheets are arranged as a single spreadsheet per section. Each table in the section is on a tab within the spreadsheet.
Download as xls file section 1 (3933.7k)

With a table of contents


Section S - FedBeaSna


Code

Title


A001

S.1.a Total Economy - Current Account


A002

S.2.a Selected Aggregates for Total Economy and Sectors


A003

S.3.a Households and Nonprofit Institutions Serving Households


A004

S.4.a Nonfinancial Noncorporate Business


A005

S.5.a Nonfinancial Corporate Business


A006

S.6.a Financial Business


A007

S.7.a Federal Government


Etc

The excel sheets are self explanatory.


The label FA106902501 is For gross value added in sheet A005 Ann for S.5.a Nonfinancial Corporate Business for example.

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