Subject: Caplan on Business Cycles

From: [email-masked] (Tim Starr)
Date: Tue, 2 Jul 1996 01:07:14 -0700

>From: "Bryan D. Caplan" <[email-masked]>
>Subject: Rothbard's AGD
>
>I don't think I want to get into a further discussion of the stock market
>right now.  I will however point out the two big problems with Tim's
>reply on Rothbard's _America's Great Depression_.
>
>Your remark about entrepreneurs' time preference leading them to take
>advantage of a credit surplus against their long-term interests simply
>makes no sense at all.

Then we're even, because your comments thus far have made no sense at all
to me.

>Someone who can borrow and lend has no reason
>to take account of anyone's time preference but the marginal time
>preference expressed in interest rates.

That's nice, but completely irrelevant because most entrepreneurs don't
have the ability to borrow or lend.  They're usually one or the other.
With a central bank that lends at interest rates below the market-clearing
level, other lenders can either stick to the market-clearing level, in
which case they won't lend anything out 'cause borrowers will prefer the
central bank's loans, or they can match the central bank.  In the latter
case, they'll do so even if they know that the low rates aren't sustainable
in the long run.  Same goes for borrowers.

You seem to have a very strange view of how business operates.  Imagine a
corporate officer in a meeting trying to defend himself for refusing to
borrow at the below-market rates offered by the Fed instead of the at-market
rates offered by some private lender.  He'd get removed in an instant.  Or
imagine if he was a lender trying to defend himself for refusing to lend at
the below-market rates offered by the Fed, sticking to much higher rates.
He wouldn't be generating any assets, because he wouldn't be making any loans.
How do you expect him to keep his job?

"Yes, I know that my department's been doing nothing, but that's because the
Fed lowered interest rates too much.  We'll just have to wait for it to raise
'em again, then we'll start making some money again."

>You make another remark which would be valid in combination with a number
>of extra assumptions:
>
>When the bust comes, capital shortages are caused because the
>capital that would've been available was malinvested in capital goods
>which have to be liquidated, & the consumer goods industry can't boom
>because the workers laid off from the capital goods industries don't have
>any more income to spend on consumer goods & also because the malinvestment
>prevented capital from being allocated to consumer goods for which there
>would've been real demand. 
>
>In particular, the problem of laid-off workers would make sense if there
>were real wage rigidity.

Nope.  It makes sense as long as wage level corrections take time.  For as
long as it takes for wage levels to correct themselves, there will be surplus
labor (unemployment).  Wage level corrections aren't instantaneous.

>The problem of laid-off workers lacking income would make sense if the
>still-employed workers did not receive a compensating _increase_ in
>income.

Why should "still-employed workers" get any "compensating increase" in income
in the bust part of the business cycle?  The whole reason for the bust in the
first place is that there's been malinvestment in capital goods, with the
corresponding misallocation of wages to labor.  But, of course, you don't
believe in malinvestment.  Sorry, I forgot.

>...This makes sense only if there has been an increase in money
>demand (which may be identified with a decline in money velocity).

Or a decrease in money supply, which is what the bust part of the business
cycle is all about.

Why am I explaining elementary econ concepts to a PhD econ student?

>Of course, a combination of real-wage ridigity and an increase in money
>demand are themselves _sufficient_ to generate a depression.

Translation: a decrease in money supply will lead to above-market wages,
which will lead to unemployment, which will lead to the need for a down-
wards wage level correction until market-clearing levels are reached again.
If this downwards correction is prevented, then you'll have unemployment
that won't go away.  Congratulations!  You've just reinvented the Austrian
theory of the business cycle!  Too bad that's what you were trying to refute
in the first place.

Tim Starr - Renaissance Now!  Think Universally, Act Selfishly

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