Problem with Austrian Economics?

[Blueskies]

Perhaps this is due to my misunderstanding. If so, please correct me.

One gripe that I've had with Austrian theory is on bubble formation.

Bubbles cannot be create simply from central banks. Bubbles are present in all parts of life--areas where I do not think central banks can reach.

Two quick examples from my childhood: Beanie Babby stuffed animals and Pokemon Cards. These things basically came out of nowhere, and practically overnight, became a huge sensation with some of these cards and dolls going for hundreds and hundreds of dollars. Then, in a year or two, all of a sudden no one wanted them anymore, and their values plummeted.

Different stores: the most recent one I can think of is the cupcake bakery. A few years ago, these were sprouting up all over the place. Now, most of them have gone under. Or cigar bars and champagne bars. Hugely popular, for a time. Then people got sick of them and most of them went away.

Its even present TV: Survivor sparking a wave of reality TV/gameshow hybrid copy cats that became immensely popular before plummeting in ratings and being cancelled. There's another TV bubble in its final stages right now with American Idol and all its knock-offs: soon people will get sick of these types of shows, and the majority will end up cancelled.

My point is that bubble formation is really just an extension of the human trait of creating fads. I think overly lose central banks can help to keep bubbles humming along, but I do not think getting rid of central banks would mean the end of economic bubbles.

 

[tsai3904]

You are right, bubbles do form with or without a central bank. I don't think anyone has argued that without a central bank, there would be no bubbles.

However, your examples didn't result in harming a large sector of the economy. With central banks, bubbles can get bigger and last far longer they they would otherwise if there wasn't a central bank fueling the bubble with cheap and abundant money.

 

[Black Flag]

It is your misunderstanding.

Austrians do not dispute the creation of bubbles - the main reason they do not is because their existence is a documented fact.
Austrians do not claim that all economic bubbles are a consequence of central banking - for the same reason as above, there is documented fact.

What Austrians do claim is that large, pervasive, concurrent bubbles over numerous multitudes of sectors is the consequence of central banking.

As you appropriately pointed out, bubbles can occur with cupcakes - but cupcakes make not the whole economy. Thus the rise and fall of this particular bubble - though messy for those who invest in cupcakes - really has no measurable effect on the economy.

But, bubble after bubble - each following the Austrian business cycle of the boom/crack-up of central bank manipulations of the money supply - is due to such manipulations.

Further, the segments that are now exposed to bubbles are massive and pervasive - real estate, banking and investments - arenas that either by geography (real estate), or national border (banking) or nearly infinite segmentation and variety (stocks/bonds) are suffering bubbles throughout their entire industry.

Example, real estate - sure there can be a bubble to buy land in California, but you'd not find such a bubble in, say, Montana - since the cause of the bubble in California (nice weather and no snow) is certainly no cause in Montana (cold weather and snow).

YET! The real estate bubble occurred everywhere, at the same time - California, Montana, Florida, Texas, New York, Virgina... need I go on?

How the heck is that possible - that everywhere has some geography that everyone wants to buy, buy, buy!! ....?

Impossible - unless there is manipulation happening at the heart of the economy - the manipulation of the money and credit.


..and THAT is what the Austrians say.

 

[redbluepill]

Fred Foldvary talks about real estate bubbles almost daily. He discusses both the Austrian and geonomic perspectives:
http://www.progress.org/2004/fold364.htm

 

[Gumba of Liberty]

Everything is a bubble. Every industry, every business, every person is a bubble waiting to pop. Every person is born, grows, plateaus, declines and dies. Boom and bust. Life is inherently unsustainable (sorry Al Gore). What central banks do is they bundle all booms and busts together. Central banks, naturally, centralize and nationalize booms and busts. The use of a single currency is the reason why States boom and bust rather than individuals and industries. Central banks make booms and bust longer, stronger, and a national rather than local or individual problem that needs national (Keynesian) solutions.

 

[heavenlyboy34]

Everything is a bubble. Every industry, every business, every person is a bubble waiting to pop. Every person is born, grows, plateaus, declines and dies. Boom and bust. Life is inherently unsustainable (sorry Al Gore). What central banks do is they bundle all booms and busts together. Central banks, naturally, centralize and nationalize booms and busts. The use of a single currency is the reason why States boom and bust rather than individuals and industries. Central banks make booms and bust longer, stronger, and a national rather than local or individual problem that needs national (Keynesian) solutions.

Cycles are not the same as bubbles. Christmas tree sales go way up in the winter, but this is just a seasonal cycle-not a bubble.

 

[jacmicwag]

Perhaps this is due to my misunderstanding. If so, please correct me.

One gripe that I've had with Austrian theory is on bubble formation.

Bubbles cannot be create simply from central banks. Bubbles are present in all parts of life--areas where I do not think central banks can reach.

Two quick examples from my childhood: Beanie Babby stuffed animals and Pokemon Cards. These things basically came out of nowhere, and practically overnight, became a huge sensation with some of these cards and dolls going for hundreds and hundreds of dollars. Then, in a year or two, all of a sudden no one wanted them anymore, and their values plummeted.

Different stores: the most recent one I can think of is the cupcake bakery. A few years ago, these were sprouting up all over the place. Now, most of them have gone under. Or cigar bars and champagne bars. Hugely popular, for a time. Then people got sick of them and most of them went away.

Its even present TV: Survivor sparking a wave of reality TV/gameshow hybrid copy cats that became immensely popular before plummeting in ratings and being cancelled. There's another TV bubble in its final stages right now with American Idol and all its knock-offs: soon people will get sick of these types of shows, and the majority will end up cancelled.

My point is that bubble formation is really just an extension of the human trait of creating fads. I think overly lose central banks can help to keep bubbles humming along, but I do not think getting rid of central banks would mean the end of economic bubbles.

Kind of my thought too.

 

[TruthAtLast]

It isn't bubbles. it is the correction

As you mentioned in the original post, bubbles exist and will always exist in a free market due to supply & demand flows. Demand can be influenced by advertising, word of mouth, or other social activity. Supply (too many reality shows or beanie babies) are overly inflated as a response to demand.

However, the problem isn't the bubbles. In each case you mention there was a natural correction that occured due to market forces. Some people made money when it was good and had the business sense to either get out at the right time or not get in at the wrong time. Others lost money. But that is to be expected and even encouraged in a true free market system.

The problem comes when an entity (such as a central bank) keeps the correction from happening. They manipulate the economy so that instead of it being a relatively small market-based bubble, it becomes a large, ever-growing, systemic corruption of ecomonic forces.

We can go on and on about money printing, fractional reserve banking, and other inherant issues at the core of central banking. But even putting some of those aside, when the NASDAQ bubble burst (which only really affected one segment of the economy), if Greenspan and Bush weren't so worried about preventing a recession and the natural market correction then we wouldn't have had such low interest rates to help fuel the fire of the Housing bubble. It seems every new president has this problem. Bush didn't want a recession in his first term. So what if it was part Clinton's fault, he just got there. What did he do? He "stimulated" the economy which included working with the Fed to promote "growth".

Like Bush, Obama gets an economic catastrophe in his first term. So what if it was part Bush's fault, he just got there. What did he do? he "stimulated" the economy which included working with the Fed to promote "growth".

See any similarities? Two different parties, the apperance of two different ideologies on the surface, yet the same actions and same results. Both parties care about the power of Government. That is the only thing that matters. Everything else is political theater. Unfortunately these bubbles keep getting bigger and bigger because we STILL wont allow the correction to occur. And now the mother of all bubbles with the D&D (debt & dollar) is getting ready to burst.

The other side of the argument is that without the bust, maybe we wouldn't have had the boom. Would we not have had those amazingly large profits during those boom years? Maybe. Maybe not. It was a false economy. It wasn't real. It had to end and it DID end. It was manipulated by legislation in Congress and the low interest rates by the Fed. We likely would have seen a quick correction and pullback, a stable bottom, and sustained growth going forward based on a solid financial foundation.

Of course there are many layers to this formula as we all know. Inflation, globalization, soverign debt crisis overseas, over spending and entitlement programs here at home are all factors that weight heavily on the entire economy.

 

[CaptUSA]

You are conflating "Product life cycle" with "bubbles".

The product life cycle is a natural occurence. "Bubbles", the way we usually discuss them, are artificially created by falsifying demand.

 

[awake]

Who says that your examples are not direct evidence of central bank manipulation? Ever heard of Tulip Mania? There is creative destruction at work in the market, things do come and go, but central banking can print whole industries to life and crash them when the policy of inflation stops working.

 

[Blueskies]

Who says that your examples are not direct evidence of central bank manipulation? Ever heard of Tulip Mania? There is creative destruction at work in the market, things do come and go, but central banking can print whole industries to life and crash them when the policy of inflation stops working.

That seems like a stretch to me. Tulip mania is not an accurate comparison to say, the Beanie Bubble example, as Tulip Mania had a major effect on the entire Dutch economy, while the Beanie Babby crazy is just kind of a fun story to talk about.

That said, I do think liquidity plays an issue. For example, both the Beanie Babby and Pokemon Card phenomenon occurred at roughly the same period of time--the late 1990s. This was a period of time when there many children (the echo boomers) and many parents with rising real incomes (due to the economic growth). They were able to buy their children these toys at exaggerated prices because they had the income to do it. You would not see a similar toy bubble in the present time because parents largely don't have the budgets to fund such an occurrence.

You are conflating "Product life cycle" with "bubbles".

The product life cycle is a natural occurence. "Bubbles", the way we usually discuss them, are artificially created by falsifying demand.

Are you talking to me? If so I disagree. There are some products that enter the market place in a controlled fashion--most products, in fact. But every once in a while, you get mini-bubbles. Dexter, for example, is an immensely popular cable television show. But it did not spawn a wave of serial killer knock-offs. American idol did. Why? I don't know. Something to do with human psychology perhaps.

Here's a question for those who think central banks are directly responsible for the creation of bubbles: if we can pinpoint the cause of the bubbles, why cannot we predict which markets they will infect?

EDIT:

Not saying I'm defending central banks at all here. I think excess liquidity makes bubbles far worse and (as another poster alluded to) centralizes and compounds the problems. But, I disagree with Austrians who argue simply that central banks directly cause all bubbles.

 

[Dsylexic]

simple way to explain why austrians point confidently at the central bank:money is one half of all transactions.so if one of all transactions is centrally planned you dont need a model or great brains to figure out that the problems arising out of it will be pervasive and hurt almost everyone who uses money(which is everyone using the paper currency).
the question should be why economists of any hue dont stand up against central planning.probably because they reckon,the central planners will be intelligent economists just like themselves.this is why Hayek;s nobel acceptance speech should be mandatory reading for anyone studying economics

 

[CaptUSA]

Are you talking to me? If so I disagree. There are some products that enter the market place in a controlled fashion--most products, in fact. But every once in a while, you get mini-bubbles. Dexter, for example, is an immensely popular cable television show. But it did not spawn a wave of serial killer knock-offs. American idol did. Why? I don't know. Something to do with human psychology perhaps.

It's called marketing. And yes, good marketing can increase demand, but this is not an artificial increase. This is a natural increase. People place a higher value on an item than they do the money they are willing to part with. This does not create a "bubble". (At least not in the terms we are used to discussing them)

A "bubble" is created through falsification of demand (as opposed to inflating demand through good marketing). Falsification of demand is done when the buyer gets a subsidy to buy an item that he would have otherwise not have bought.

For example: Let's say you want a widget and you value that widget at $10. If you can find it for less than that, you will buy it. If it's more than that, you won't. But let's say the government wants you to buy that widget so it gives you an extra $2 to buy it. Now, you will buy a $12 widget even though you only value it at $10. This is what creates the bubble. The bubble is not created when you value something more (as in good marketing), the bubble is created when the item you want costs more than the value you place upon it. You have inflated the price by $2 over your demand price.

Further, the company selling the widget, now figures out that the demand for its product has grown so it raises its prices further. If the government still wants people to have this widget, it increases the subsidy. Thus, further inflating the bubble.

Product life-cycles are not bubbles. Good marketers just increase real demand - not artificial. (although, really good marketers go to Washington to increase artificial demand as well, I suppose.)