Business Cycles and Prediction (lecture 29 of 32)

August 26, 2004 9:51 PM by David J. Heinrich | Other posts by David J. Heinrich | Comments (2)

These notes are from the lecture Business Cylces and Prediction, given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them. This lecture was given by Prof. Thornton.

Introduction

• Textook examples of business cycles seem easy to predict.

• Real business cycles are much more difficult to predict.

• Problematic for mainstream economists, because they believe science is in prediction.

• Austrians reject prediction as unscientific.

• Ultimate Foundation of Economic Science and Manipulation of Money and Credit are important books for anyone interested in business cycles.

• Men are not like rocks. On prediction:
  • Things like rocks have regularity, allowing for perfect prediction.
  • This regularity doesn't apply to huamns; there are no constants in economic relations.
  • Praxeologically, you can make certain qualitative statements of prediction; but, there is much less certainty about predicting quantitatively how things will change.
  • The only way is through verstehen.

• Verstehen -- must use historical information to help you; you can use statistics to aid you, but this is still not scientific, because there are no constant relations.

  • No constant realtions.
  • Variations -- relations will change.

• Forecasting can be seen, from the scientific point of view, to be self-contradictory: one's own actions invalidate one's predictions.

Two Views of the Future

• Austrians start from fthe foundations of theory for predictions.

• Mainstrem is positivistic, so they jump into statistics:

  • Given a lot of contradictory evidence.
  • Confusion about what a bubble is.
  • Confusion about what the stock-market is.
  • Are bubbles natural? According to the mainstream, yes.

• The question of who actually did make accurate predictions about the economy goes beyond the talk of the day and to the fundamental issues:
  • Interesting to compare what Austrians said vs. what mainstream economists said, in regards to booms and busts.
  • "New era" economics.
  • LewRockwell.com -- Thornton.

Predictions

• Survey of business economists:
  • 1/4/1999: predicted low growth, high inflation (beginning) that year; econmy went very high.
  • 7/2/1999: Economists predicted a 50% increase.
  • 1/3/2000: Economists predicted enormous increases, "no end in sight". Just after, there was a huge crash.
  • 7/3/2000: Economists predicted a "soft landing", just as we got into a depression.

• Government economists prediction record:
  • From 1992 to 1996, they predicted the economy fairly accurately.
  • From 1996 to 2000, they under-predicted the economy.
  • From 2000 on, in apparant attempts to catch up with the old growth-rates, they over-predicted the economy, which had an enormous drop.

• Actual predictions:
  • Dow 36,000, 1999. "Different perspective on stocks." "Stocks are cheap." "No price is too high." Glassman and Hasset, supply siders.
  • Charles Murray noted that books such as Dow 36,000 are frequent at the top of booms.
  • Chris Meyer noted that no theory of cycles or bubbles can tell us when the boom will end.
  • JTomy Dicken has called the 2000 bubbles "history's greatest bubble".
  • Reisemn: clearly something is wrong, we cannot live as a society with everyone living by day-trading.

• Summarily, almost all of the people who were able to predict the collapse were Austrians, but Austrians always tend to predict bust. A few analysts were able to do asset research to find over-valuation.

• It's not that skyscrapers cause the boom to pop (bust), it's that booms cause skyscrapers.

• Cantillen effects (used by Austrians).

• Jim Puplava, FinancialSense.com, Thornton.

• Austrians can be permibears, because they see problems; but not all of them have a feeling for when it's going to end; so, you have to look at the record and weed out the permibears, who know Austrian economics, but don't have verstehen of what's going on. The volume of predictions for bust tends to get louder near the end of the bubble among Austrians; but among the mainstream, the volume of predictions of euphoria tends to get louder near the end of the bubble.