- Oct 2018
From reading this I'm left with the impression that the housing boom was just a housing boom, not a general long-term projects boom, as you would expect from the ABCT.
Why was housiing and just housing the epicenter of the boom and bust? Or wasn't it?
If it was just housing, couldn't we explain it (or at least conceive of a different hypothetical scenario) without interest rates even changing? Imagine that the government prints money and uses it to pay companies to build houses -- or creates a special lending program just for houses, but don't messes up with the general interest rate -, wouldn't that have basically the same effect?
If so, perhaps we should start considering a new ABCT version that just talks about new money being created and going to specific sectors, instead of the whole interest/intertemporal adjustments/hayekian triangles talk. Why is this wrong?
It's not that people switched from buying hot dogs to hamburgers; instead they switched from buying "present consumption" to buying "future consumption."
What if we said that people switched from buying hot dogs to bonds? Not anything "future", just a bond, today.
If they switched to hamburgers, that would increase investment in the hamburger industry in expense of the hot dog industry.
In the same way, if they switch to bonds, that will increase the investment in the "bonds industry", which is basically lending money.
Because the capital structure of the economy becomes internally inconsistent, eventually some entrepreneurs must abandon their projects because there are insufficient capital goods to carry them all to completion.
This argument have confused me my entire life in all explanations of the Austrian Business Cycle Theory. It is the core of the most famous of all, that Mises story about the master builder who doesn't have enough material to finish the house he's building.
It is misleading and ultimately wrong because economic goods (in the Menger definition) are always insufficient. In simple terms, given the market price, every good can be obtained.
What happens after the economy realizes it was in a malinvestment boom, prices of capital goods adjust in a way that they can become too expensive for some projects to be completed profitably.