Part III: The Cluster of Errors

The Austrian Theory of Boom and Bust with Lawrence H. White

Are Austrians a broken clock that’s right twice a day (when there’s a bubble that busts)? Why do entrepreneurs continue to be fooled by manipulation of interest rates by the central bank?

In this EconStories mini-documentary, part III in our first series on the Mises/Hayek theory of boom and bust, Lawrence H. White addresses the expectations and the cluster of entrepreneurial errors that reveal themselves during a bust.

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cluster

Are Austrians a broken clock that’s right twice a day (when there’s a bubble that busts)? Why do entrepreneurs continue to be fooled by manipulation of interest rates by the central bank?

In this EconStories mini-documentary, part III in our first series on the Mises/Hayek theory of boom and bust, Lawrence H. White addresses the expectations and the cluster of entrepreneurial errors that reveal themselves during a bust.

Lawrence H. White is a professor of economics at George Mason University. Prior to position at George Mason, he was the F. A. Hayek Professor of Economic History in the Department of Economics, University of Missouri-St. Louis. He has been a visiting professor at the Queen’s School of Management and Economics, Queen’s University of Belfast, and a visiting scholar at the Federal Reserve Bank of Atlanta.

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Comments Link
  • http://www.youtube.com/profile?user=piprod01 piprod01

    [..YouTube..] Wooo! I thought you’d never upload another video! >.<

  • http://www.youtube.com/profile?user=iFreedom4ever iFreedom4ever

    [..YouTube..] Thanks for the detail analysis of ABCT… well done. Keep them coming and I’ll keep sharing them.

  • http://www.youtube.com/profile?user=cowboy219 cowboy219

    [..YouTube..] the music is interfering with the guy’s voice… i’m having a hard time focusing on the guy’s points while the music is playing… please remove the music. !!!

  • http://www.youtube.com/profile?user=cowboy219 cowboy219

    [..YouTube..] wow… it’s really hard to understand this guy with the music playing in the background… could you upload a version without the background music? PLEASEEEEEEE it’s driving me nuts.

  • http://www.youtube.com/profile?user=nukedoom nukedoom

    [..YouTube..] I like your videos. Plz upload more often.

  • http://www.youtube.com/profile?user=gunsandbullhorns gunsandbullhorns

    [..YouTube..] Awesome. I was hoping somebody would do a video like this.

  • Taylor O

    I get an error when clicking play “This is a private video”

  • Trading

    It´s the INTEREST, stupid

    Mathematically perfected economy is a currency not subject to interest, comprising a debt financing all permissible enterprise, paid by each and every debtor exactly as they consume of the associated production.

    There is no inflation or deflation, as the currency in circulation is always equal to the current value of existent production across however much of the economy is supported by a circulation.

    The remaining circulation is always sufficient to pay off debt. Further production therefore is not impeded by a deficient circulation, deplenished by paying more than what circulation was introduced for to finance the production.

    Debt is not multiplied beyond the circulation or remaining value of indebted assets.

    Mathematically perfected economy is no more than a singular prescription, dissolving unjust intervention.

    http://endtheecb.ning.com

  • Stephen

    The problem people face when interest rates are baldly being manipulated via an expansion of monetary supply is that -not- investing results in a loss of value of cash and cash equivalents as the currency is devalued. The only way to retain stored value during monetary expansion is to invest. This is the explicit purpose of monetary expansion: to force people to invest by forcibly removing value from the assets of anyone who does not (the Orwellian terms for this being “encouraging” or “facilitating” investment). The compounding problem is that investment is being forced into an environment in which price signals are falsified by artificial interest rates and readily available credit, making it extremely difficult to identify worthwhile investments. The very policy which is forcing people to invest is creating conditions in which investments are more likely to be made poorly.

    The winners in this are those are most immediately in line for receipt of the newly created money. In the Greenspan era of monetary expansion, this was primarily bankers and associated financial firms. In the current era, banks are loathe to lend after being burnt at the tail end of the last boom, so monetary expansion is accomplished via an expansion of government debt via the Reserve Bank’s purchase of the resulting bonds. Thus the winners of this cycles will be the recipients of government contracts, subsidies, bailouts (including the same banks), and direct handouts. The losers this time are not only those who are sitting on cash, but the future generations saddled with an unsustainable debt which is most likely to repaid by further devaluation.

    The irony is that the philosophy behind the current expansion is that the government can direct investment better than markets, supported by the observation that markets, during the last cycle of monetary expansion – when price signals were falsified by Reserve Banks’ intervention – capital was wildly misallocated. The only way to prevent a descent on this downward spiral is to remove the center pole: The Reserve Bank’s ability to manipulate interest rates and inflate the monetary supply.

  • Wcoltd

    How do investors get fooled whenever there is a credit expansion? because as long as credit is expanding, speculation will be a fruitful endeavor, so the economy becomes much like a casino, where a persons success has more to do with anticipating actions of the central bank than it does by anticipating consumer demand.
    There is a prisoners dilemma, where those who engage in destructive behavior benefit where those who do not engage in it loose.

    The thing about credit expansion, is that regardless whether you play the market or stay out you loose. Because during the boom of the cycle asset prices rise, but after the bust, they never go back to where they were before, because all the defaulted money becomes untied, meaning the monetary base expands by that much. On the aggregate, people loose during this cycle whether they play the game or not. Only a small portion can come out on top, those who play the game just right, get out at the right time.

    Credit expansion leaves you with no good alternatives that is why investors can be perpetually fooled.

  • Alejandro94

    Hello, I am a 17 year old Mexican kid who is very interested in economics. I have only taken a course on macroeconomics over the summer, but i am still confused over what position to take: keyneisan or classical? My course only provided a keynesian point of view, which i have come to understand pretty well, but still without fully understanding classical arguments. Is there any books you recommend me in order to learn about this?  I really appreciate it, thank you very much