Did Capitalism cause the great depression?

[robbe]

Did Capitalism cause the great depression?

History textbooks take for granted that the Great Depression was caused by some inherent flaw in the free market, and that only wise government management of the economy can steer us clear of similar economic catastrophes in the future. This is the mainstream view, held by everyone from Marxists to run-of-the-mill conservatives: the market economy, whatever its benefits, is inherently unstable and susceptible to devastating downturns unless properly managed by central planners of one stripe or another. The business cycle—the boom and bust of prosperity and collapse—is an unavoidable feature of capitalism that can be mitigated by government action but never entirely eliminated.
One major school of economic thought—the so-called Austrian School, named for the country of origin of its principal founders—rejects this casual mainstream assumption and places the blame for boom and bust elsewhere. Significantly, it was economists of this school, practically alone among economists in the 1920s (the rest of whom insisted to their later embarrassment that an age of permanent prosperity had arrived), who predicted the Great Depression. It was his elaborations on this theory that won F. A. Hayek the Nobel Prize in economics in 1974.
Hayek’s Nobel sparked renewed interest in the Austrian theory of the business cycle, as did the bust that followed the dot-com boom of the 1990s, which was a textbook example of the Austrian theory in action.1 But the theory can also shed light on the Great Depression, one of the most catastrophic and least understood episodes in American economic history.
Copyright. Link Each "Copy & Paste" to It's Source. Only paste a small to medium section of the material. http://books.google.com/books?id=xvE...market&f=false
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Let me know your thoughts

-robbe

 

[Bombur]

Is there any way to not blame government for problems with an economy? The government will always be the one to establish the monetary system and the one to regulate or not regulate commerce(including international trade). The government will always be the one to establish property rights and protect those rights.

The problem with this line of thinking is that it will never establish a legitimate alternative. It is logic that is based on playing a blame game and not based on arguing for an actual economic system.

The government did screw up the Great Depression. That doesn't mean that without government there wouldn't have been one.

 

[oldfart]

Did Capitalism cause the great depression?

History textbooks take for granted that the Great Depression was caused by some inherent flaw in the free market, and that only wise government management of the economy can steer us clear of similar economic catastrophes in the future. This is the mainstream view, held by everyone from Marxists to run-of-the-mill conservatives: the market economy, whatever its benefits, is inherently unstable and susceptible to devastating downturns unless properly managed by central planners of one stripe or another. The business cycle—the boom and bust of prosperity and collapse—is an unavoidable feature of capitalism that can be mitigated by government action but never entirely eliminated.
One major school of economic thought—the so-called Austrian School, named for the country of origin of its principal founders—rejects this casual mainstream assumption and places the blame for boom and bust elsewhere. Significantly, it was economists of this school, practically alone among economists in the 1920s (the rest of whom insisted to their later embarrassment that an age of permanent prosperity had arrived), who predicted the Great Depression. It was his elaborations on this theory that won F. A. Hayek the Nobel Prize in economics in 1974.


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Let me know your thoughts

-robbe

My thoughts are as follows:

1. If you are going to post something obviously lifted from some blog or article, you should source it.

2. If you can't put your argument into your own words, don't expect any meaningful response. This kind of slop show up several times a week and I for one am tired of starting each refutation from scratch. Read the other 1,000 threads on Hayek, von Mises, Rothbard, and the Austrian School before you make this kind of wet-behind-the-ears post.

3. Try to name me one example of the successful application of Austrian economics. There are none.

4. Try to name me one correct prediction of an Austrian School economist. There are none. The chief tenet of the Austrian School is that they don't believe in models, numbers, or predictions. You could get this from Wikipedia.

5. Would you care to compare Rothbard's analysis of the Great Depression to Milton Friedman's as he and Anna Schwartz laid it out in "A Monetary History of the United States" which won him his Nobel? What was Rothbard's critique of Friedman?


6. If I sound harsh, it's because I want to give you an opportunity to learn enough to make a more intelligent post that will garner participation in a meaningful discussion. I wish you well.

 

[Politico]

No.

 

[TakeAStepBack]

Did Capitalism cause the great depression?

History textbooks take for granted that the Great Depression was caused by some inherent flaw in the free market, and that only wise government management of the economy can steer us clear of similar economic catastrophes in the future. This is the mainstream view, held by everyone from Marxists to run-of-the-mill conservatives: the market economy, whatever its benefits, is inherently unstable and susceptible to devastating downturns unless properly managed by central planners of one stripe or another. The business cycle—the boom and bust of prosperity and collapse—is an unavoidable feature of capitalism that can be mitigated by government action but never entirely eliminated.
One major school of economic thought—the so-called Austrian School, named for the country of origin of its principal founders—rejects this casual mainstream assumption and places the blame for boom and bust elsewhere. Significantly, it was economists of this school, practically alone among economists in the 1920s (the rest of whom insisted to their later embarrassment that an age of permanent prosperity had arrived), who predicted the Great Depression. It was his elaborations on this theory that won F. A. Hayek the Nobel Prize in economics in 1974.

-----

Let me know your thoughts

-robbe

My thoughts are as follows:

1. If you are going to post something obviously lifted from some blog or article, you should source it.

2. If you can't put your argument into your own words, don't expect any meaningful response. This kind of slop show up several times a week and I for one am tired of starting each refutation from scratch. Read the other 1,000 threads on Hayek, von Mises, Rothbard, and the Austrian School before you make this kind of wet-behind-the-ears post.

3. Try to name me one example of the successful application of Austrian economics. There are none.

4. Try to name me one correct prediction of an Austrian School economist. There are none. The chief tenet of the Austrian School is that they don't believe in models, numbers, or predictions. You could get this from Wikipedia.

5. Would you care to compare Rothbard's analysis of the Great Depression to Milton Friedman's as he and Anna Schwartz laid it out in "A Monetary History of the United States" which won him his Nobel? What was Rothbard's critique of Friedman?


6. If I sound harsh, it's because I want to give you an opportunity to learn enough to make a more intelligent post that will garner participation in a meaningful discussion. I wish you well.

As if you've ever refuted Austrian Scholar views besides the typical "I said so" "they are stupid" "They are flawed" responses.

 

[JimmieD]

The Austrian explanation, which exonerates capitalism of blame for recessions and depressions, begins by reminding us of the role that interest rates play in the economy. Interest rates coordinate production across time. As people consume less and save more, interest rates come down. That stands to reason: thanks to people’s additional saving, the banks now have more funds available to lend, and therefore the price of borrowing—namely, the interest rate—comes down. (On the other hand, if people save relatively little, the interest rate remains high, since in this case the banks have relatively little to lend and the price of borrowing remains high.) Businesses respond to these lower interest rates by taking the opportunity to embark on investment projects, such as building a new physical plant or acquiring additional machinery, that will increase their productive capacity in the future.
When people save more, they reveal a relative decline in their desire to consume in the present. That’s when it makes the most sense for businesses to carry out time-consuming investment projects with an eye to future production. On the other hand, if people possess an intense desire to consume in the present, their relatively low amount of saving and the high interest rates that result convey to business that now would not be a good time to shift resources toward projects intended to increase future production. The interest rate ensures a compatible mix of market forces: if people want to consume now, businesses respond accordingly; if people want to consume in the future, businesses allocate resources to satisfy that desire as well.

This is probably a legitimate way to explain some business "cycles" (really, the word for boom and bust that's probably better used is "fluctuations" since cycles implies something rhythmic and predictable). My issues with this explanation are several though.

(1) Why think this is the only explanation of business cycles? What is essentially being described here is an economic model with imperfect knowledge, no learning, heterogeneous capital and heterogeneous credit (among other assumptions). There are other possible explanations for a business cycles. For example, a business cycle could be caused by some sort of exogenous supply shock (maybe new technology, war, changes in investment, commodity shocks, or changes in labor) or demand shock (perhaps changes in tastes, preferences, risk tolerances, consumption, savings or time preferences) or information shock or perhaps something else. Why are these other possibilities to be discarded in favor of that one explanation?

(2) Supposedly in the Austrian Business Cycle, lower interest rates enable borrowers to fund projects that otherwise wouldn't be funded. But what about the lending side of the relation? Why or how do lenders, especially in the aggregate, manage to ignore (a) the natural interest rate and (b) the risks of their investments? Am I to believe that the vast majority of professional investors don't know anything about what the natural rate would be if the monetary authorities didn't intervene (especially since something like that is fairly easily calculatable)? Am I to believe that the vast majority of them all the sudden ignore their risk levels? It's not like lenders don't know what the central bank is doing, especially when it's telegraphed in a case like the Fed.

I think I see a tension in the ABCT. On one hand an ABCT requires the market to act with classsical assumptions when the central bank isn't intervening, but the market all the sudden relaxes many of those assumptions when the central bank intervenes, even though the market usually knows the central bank is intervening. Of course, if you drop the classical assumptions when the central bank isn't intervening, you end up in a model where boom and busts happen and are caused by things other than central bank intervention in interest rates, which sort-of defeats the purpose of a lot of Austrian economics.

In any case, I think the ABCT is a little dubious, but a possible explanation for business cycles in some cases.

But the interest rate can perform this coordinating function only if it is allowed to fluctuate freely in response to changing conditions. When the central bank—in the American case, the Federal Reserve System—manipulates the interest rate, it introduces systemic problems of discoordination and miscalculation.

Although it cannot do so directly, the Federal Reserve System has various means at its disposal to bring about lower interest rates. When it does so, interest rates are lower not because people have saved more and indicated a desire to consume less in the present, but instead because they have been forced down artificially. They no longer reflect the true state of consumer demand and economic conditions in general. These artificially low interest rates mislead investors.

Why do they mislead investors and why can't a freely fluctuating interest rate also cause shocks, booms and busts? Are lenders and borrowers both going to act with perfect information when interest rates are "fluctuating freely" so that booms and busts are eliminated, but act with imperfect informating when the central bank steps in?

And why think that the central bank controls interest rates? Why can't it be that the central bank just responds (perhaps almost helplessly, ignorantly, or ineffectually) to the changing market conditions? After all there is data to suggest that changes in interest rates are most closely modeled by random walks, even with central banks in play.

Usually this is the point where someone will hurl ad hominem insults at me and call me a "Keynesian" (even though that term applies to very few people in reality today and usually means "I disagree with you") a statist or something else. I am libertarian, but I do try to live in the real world and make sure models fit facts.

 

[TakeAStepBack]

(1) Why think this is the only explanation of business cycles?

Austrians do not think that. They point to the business cycles under fiat inflationary monetary policy as the ABC. It involve what other schools have only mildly been willing to concede. That excessive credit and supplies create mis-allocation in production and malinvestment. And these folks smell a ABC years in hte making.Natural downturns under Austrian view are considered for what they are. So that's not a premise that matters.

Supposedly in the Austrian Business Cycle, lower interest rates enable borrowers to fund projects that otherwise wouldn't be funded. But what about the lending side of the relation? Why or how do lenders, especially in the aggregate, manage to ignore (a) the natural interest rate and (b) the risks of their investments?

Not so much otherwise, as it creates distortion s in supply/demand. Among other problems. This is pretty widely accepted. Including at the federal reserve now. They realize that artificial interest creates excess M@ that creates production dislocation.

And, because there is a lender of last resort. It's not that there isn't a risk, it's that the moral hazard is already created.

I think I see a tension in the ABCT. On one hand an ABCT requires the market to act with classsical assumptions when the central bank isn't intervening

No, it doesn't.

Why do they mislead investors and why can't a freely fluctuating interest rate also cause shocks, booms and busts?

Already covered.

 

[hjmick]

Fucking plagiarists...


It's lifted word for word from the book 33 Questions About American History You're Not Supposed To Ask. It's question number 22.


My thoughts?

You're a fucking thief.

 

[oldfart]

As if you've ever refuted Austrian Scholar views besides the typical "I said so" "they are stupid" "They are flawed" responses.

Jump in whenever you feel like it.

http://www.usmessageboard.com/economy/303738-discussion-of-the-austrian-school.html

http://www.usmessageboard.com/clean-debate-zone/303835-the-austrian-school-of-economics.html

 

[TakeAStepBack]

As if you've ever refuted Austrian Scholar views besides the typical "I said so" "they are stupid" "They are flawed" responses.

Jump in whenever you feel like it.

http://www.usmessageboard.com/economy/303738-discussion-of-the-austrian-school.html

http://www.usmessageboard.com/clean-debate-zone/303835-the-austrian-school-of-economics.html

Are you fucking serious? Have a look at that first reference, poindexter.

 

[CrusaderFrank]

The Crash and Recession started when Federal Reserve intentionally strangled the US economy nearly to death; FDR's Soviet-style central planning turned it into the FDR Depression: the worst economic collapse since the 7 Biblical Lean Years

 

[JimmieD]

(1) Why think this is the only explanation of business cycles?

Austrians do not think that. They point to the business cycles under fiat inflationary monetary policy as the ABC. It involve what other schools have only mildly been willing to concede.

Economics today isn't really broken down into schools so that one school battles another school. Sure, there are some out there, but it's just not the main scene. Economics today is a bunch of disparate DSGE models and econometric data analysis. It's really pretty boring which is why the battle of the schools gets more attention and traffic on the internet. There are models that have been around some time that capture "financial frictions" or "credit market friction." You don't find them becuase they're stuck in some academic journals or some white papers at a Fed bank. In fact, the devil himself Ben Bernanke had such a model (http://faculty.wcas.northwestern.edu/~lchrist/course/Czech/BGG 1999 Handbook chapter.pdf). See also (http://www.newyorkfed.org/research/staff_reports/sr618.pdf)

Supposedly in the Austrian Business Cycle, lower interest rates enable borrowers to fund projects that otherwise wouldn't be funded. But what about the lending side of the relation? Why or how do lenders, especially in the aggregate, manage to ignore (a) the natural interest rate and (b) the risks of their investments?

Not so much otherwise, as it creates distortion s in supply/demand. Among other problems.

We're talking about supply and demand for credit I presume. Are we to assume that the supply curve will just shift until there is no excess demand? Why think the supply of credit is soley a function of interest rates? Beyond this being a simple an unrealistic model, for the supply curve to shift till there is no excess demand requires lack of information about interest rates when that information is more than readily available to the market - just turn on CNBC after a Fed meeting. Supply of credit is also more than just a function of interest rate. You also have to factor in inflation, duration, risk, and probably some other things. By the same token, demand for credit is also more than a function of interest rates.

It's not automatic that when interest rates drop that lenders will do things like ramp up their risk and extend their duration, which is essentially the claim when it's said that resources are misallocated. The ABCT is not sufficient to explain business cycles. It may explain some limited instances, but not all. I don't think there is any 1 explanation for business cycles.