[Wolfman]

This is something I keep hearing from certain people of a certain ideology which shall remain nameless, but it rhymes with "Ninertarian", and these certain individuals keep making a certain claim, which goes something like this:

[A]ustrians predicted the 1929 stock crash during a period where other economists were talking about a ''new age of prosperity'', the same thing happened before the 1970's stagflation and the dotcom bubble and housing bubble.

Presently, Ninertarians are an extreme minority in politics and economics, especially economics. Some Ninertarians claim that this is because of some vast near conspiracy. As I see it, there are two reasons why a Ninertarian can make the above statement, be a minority, and claim there is some pseudo-conspiracy to prevent them from taking rightful control of government:
1. Ninertarians are really the ubermensch and are being conspired against
2. Ninertarians did not predict jack shit, but relied on infinite monkeys, and are infact insane.

Now, I'm not one to casually dismiss any ideology which can make such bold claims about economic (in)stability, so I'll give you all a chance to prove you're not bat shit, ball to the wall insane. We'll call this the Ninertarian Challenge, because I'm feeling like a smart ass. Now, this is going to come with some conditions:

1. The prediction must be moderately specific (ie, 'there's going to be a stock market crash in the US in the late 1920s, leading to a depression')
2. It must have been made 3 or more years before the predicted event happened (ie, predicting the Great Depression before 1926)
3. The predicted year of the predicted event must have been within 2 years of the actual event happening (ie, predicting the Great Depression starting in 1927-1931)
4. The majority of the members, or major figures in the Orthodox School(s) of economics disagreed about the predicted event
5. There was a predicted cause of the predicted event which was:
a. Made in way which can be justified way (ie, saying there's going to be a crash in 1929 because I said so, is not a reason)
b. Was arguably true

In the event of a disagreement over whether or not a specific claim met the above criteria (or I missed something), I'll bring in an independent authority to weigh in on the situation.

[Nunt]

I'm no expert in the subject, so I am unable to extensively comment on your 5 conditions to prove that the Austrian Business Cycle Theory (ABCT) did predict several crisis. However, looking back, we can see that both the current financial crisis, the great depression and the dotcom bubble fit the picture that is presented by the ABCT.

Namely:
1) An expansion of the money supply causes the interest rate to fall below the equilibrium, natural interest rate. Usually this expansion is caused by central bank behavior, but the ABCT leave other sources of money expansion open (like changes in the fractional reserves).
2) There is a disconnection between savings and investment decisions. People make investment decisions based on an interest rate that is un-naturally low. The decisions that investors make are wrong because they use wrong information.
3) When people massively make wrong investments, they create a boom somewhere in the economy. They are using valuable resources, incurring costs, in the hope that at some later time, these costs can be recuperated with profit.
4) As they made the wrong decisions, those costs are not recuperable. They incur losses, and the bubble bursts.

Before each crisis there was a period of easy money (caused by central banks in all 3 cases). This led to a investmentboom in an asset market (stocks, stocks, houses), at some point the market realizes those investments are not worth their current prices. The asset market bursts, people loose a lot of money because they believed the wrong ideas. For example Irving Fisher (a famous economist) said just days before the 1929 stock market crash: ""Stock prices have reached what looks like a permanently high plateau." Also in the housing market many people believed that house prices would keep on rising forever. If you bought a house, the increase in the house's price would pay for your loan, even if you income was insufficient to pay the mortgage. And the reason they believed in those wrong ideas was because the interest rate was wrong.

So even if the ABCT can't predict crises, I still believe it has real value. It helps us to understand the nature of (some) economic crises better. And it fits with the facts. Browsing I found the following quote:

Steele, G. R. (2001). Keynes and Hayek. Routledge. p. 9. ISBN 978-0-415-25138-9.
"In the February 1929 report of the Institute, Hayek made his bold
prediction of an impending business crisis in the United States. Whereas
orthodox monetary theorists were misled by the experience of economic
growth without inflation, Hayek warned that maladjustments were the
inevitable consequence of monetary expansion and that a crisis was impending.
To Hayek, price stability in a decade of sustained growth in real output
is evidence of excessive monetary expansion. On the favourable side, US
prices had not actually risen prior to 1927, so there was every reason to
suppose that the (inevitable) recession would be mild. However, the US
authoritie"

This seems to fit requirements 1,2,3, and 5. Only requirement 2 is not met. However, I think that is the least important requirement of your list. When someone predicts something, it only matters that he is able to predict it before it takes place. Does it really matter how much time there is between the prediction and the actual event. I agree that a two-year warning would be better than a 6-month warning. At the time that Hayek made his prediction, there event hadn't occured yet, so I would call it a succesful prediction.

[Dr House]

[youtube]LfascZSTU4o[/youtube]

[Wolfman]

I'm not sure if I would call Arthur Laffer an Orthodox Economist. I also forgot a condition:

6. There needs to be multiple such predicted events, as even a broken clock is right twice a day.

[Nunt]

I'm not sure if I would call Arthur Laffer an Orthodox Economist. I also forgot a condition:

6. There needs to be multiple such predicted events, as even a broken clock is right twice a day.

My quote about Hayek combined with Dr House's video of Peter Schiff seem to satisfy this condition. Two separate crisis predicted in the last 80 years. I wouldn't go as far as to say that every crisis can be predicted by the ABCT, some crisis probably have different cause than described in the ABCT. And even a crisis that can be predicted by the ABCT will automatically be predicted. There's a lot of other stuff going on in the economy. So its hard to see which things are relevant. There are other factors that may increase or decrease the severity of the comming recession and maybe we have no data about that.

I believe that the ability to explain the crisis with hindsight, is more important than prediction to show that the theory is correct. If we can explain how and why the crisis occured using the ABCT, then this shows that the ABCT is relevant and useful.

[Eran]

Let me start by pointing out that, yet again, people confuse Libertarianism and Austrian School economics. As such, this conversation belongs in the Economics forum rather than the Libertarianism one.

Some libertarians are not Austrian. The Friedmans, for example.

Second, as a follower of the Austrian School, I reject your challenge outright. Austrian Economics, unlike mainstream schools, rejects the notion that the study of economics either could or should result in specific predictions. This is one of the fundamental methodological differences between the approaches.

You challenge is like that of an Astrologer challenging scientific astronomers to use their "science" to predict events on Earth. Astronomers never claim to be better astrologers. They never claim to be able to predict personal fortunes. Neither to Austrian Economists.

The Austrian claim is that artificially-induced growth isn't sustainable in the long-term. That economic booms generated by artificial low-interest policy will, sooner or later cause a collapse. The causes of the collapse can be logically tied to government policies during the boom. In other words, Austrians argue (and logically prove) that other things being equal, an economy in which there is no inflation of the money supply would be more stable than one in which the central government engages in such inflation.

Austrians recognize that there are very large number of factors influencing the economy. More to the point, those factors include Human Action - the chosen activities of thinking people, making predicting those actions impossible. They reject the vain attempts of mathematical economists to engage in such predictions.

Challenge Rejected

[Nunt]

Austrian Economics, unlike mainstream schools, rejects the notion that the study of economics either could or should result in specific predictions. They reject the vain attempts of mathematical economists to engage in such predictions.

To be honest, I don't think that mainstream schools are really focused on prediction. They are more focussed on explaining cause and effect relationships. Even mathematical models are used to explain what is actually going on. Thus, for example, they can calculate a model that predicts that if you increase the money supply, then prices will increase. However, this is not a real prediction, since it is ceteris paribus (all other things remaining equal). So mainstream economics is more like finding cause and effect relationships than making real life predictions.

There are some school who even argue that once you have predicted an event it 1) would already have come true or 2) it will never happen because you were able to predict it. See for example the Efficient-market hypothesis.

[Wolfman]

My quote about Hayek combined with Dr House's video of Peter Schiff seem to satisfy this condition.

I'm dismissing Hayek's prediction for not satisfying condition 3. Effectively, Hayek watched an avalanche coming and told the ski resort to update their insurance.

I believe that the ability to explain the crisis with hindsight, is more important than prediction to show that the theory is correct. If we can explain how and why the crisis occured using the ABCT, then this shows that the ABCT is relevant and useful.

And that's a position I'd be willing to debate, but it's a significantly different position then claiming that the ABCT/Austrians in general have been able to successfully predict major depressions while other economists were dismissing it.

people confuse Libertarianism and Austrian School economics

Anarcho-Capitalism, Right Libertarianism, Austrian Economics, and Objectivism are all the same thing so far as I'm concerned (and I've seen an An-Cap here say that as well), and if you would like, I'd amend the original post to include that.

Austrian Economics, unlike mainstream schools, rejects the notion that the study of economics either could or should result in specific predictions. This is one of the fundamental methodological differences between the approaches.

You should tell that to the Ninertarian in the OP, Hayek, and Schiff. Because all of them either did that, or claimed to do that.

[Nunt]

I'm dismissing Hayek's prediction for not satisfying condition 3. Effectively, Hayek watched an avalanche coming and told the ski resort to update their insurance.

I disagree. At the time Hayek made his prediction, there was no public knowledge that there was going to be a crash. He saw a possible crash while everyone else was still buying stocks and believing they'd be millionaires in 5 years time. The ABCT allowed him to see to incomming avalanche before everyone else noticed it. So in my opinion, that is still a prediction. The distinction that you make between 2 years in advance is a prediction and 6 months in advance is not a prediction, is entirely arbitrary. It wouldn't be much of a prediction if the economic crash was already occuring. But at the time he made the prediction, it was not public knowledge that the crisis was comming.

Even if he said it just 1 day BEFORE the crash, it would still be a prediction. The crash hadn't occured then. Of course he saw signs that made him do that prediction. But this is of course also true for someone who makes a prediction 2 years before the crash. He also saw signs of an avalanche comming. What is important, is that there was no avalanche yet at the time of the prediction.

And that's a position I'd be willing to debate, but it's a significantly different position then claiming that the ABCT/Austrians in general have been able to successfully predict major depressions while other economists were dismissing it.

I believe there is some truth to that. Hayek and Schiff did predict crisis on the basis of a theory explaining why and how there would be a crisis. And they made those predictions before the actual crisis. However, I would view this as an extra perk of the theory. But not something really important. For example, one could have made the prediction that Nixon's policy to have maximum prices at gas stations would cause lines and shortages. But whether or not anyone actually made that prediction, is not relevant for the accuracy of the theory.

Anarcho-Capitalism, Right Libertarianism, Austrian Economics, and Objectivism are all the same thing so far as I'm concerned (and I've seen an An-Cap here say that as well), and if you would like, I'd amend the original post to include that.

Aggregating several things that have some similarities, but are not exactly the same is confusing.

You should tell that to the Ninertarian in the OP, Hayek, and Schiff. Because all of them either did that,

Even if the goal of your theory is not the predict, that doesn't make you can't try to make some predictions with it. An economic theory shouldn't be judged by its ability to make predictions. Because even though the theory may be right, there is also a lot of other stuff going on in the economy. Taking again the example of Nixon's maximum price laws. Maybe if I was an economist in the 1970's I would have made the prediction that there would be lines and shortages. However, imagine that at the same time Nixon instituted maximum prices, there is a great cultural change in favor of bicycles and everybody rides their bike to work. Then there probably wouldnt be any lines and shortages. But my theory was not disproved by that.

or claimed to do that.

Do you doubt the sources that are given here? I was unable to dig up the original 1929 article, but the quote from Steele's book seems genuine enough. There is no reason to believe that the author or publicist would be wrong here, right? Also the video seems pretty good evidence that Schiff really did make that prediction as you see him making that prediction on television. Do you perhaps think the video is fake?

If you doubt the authenticity of the sources presented to you, you should say so and give your reasons. Because this would be a whole other discussion. If you don't doubt it, then you should also say that and not insinuate that those predictions weren't really made.

[Wolfman]

I disagree. At the time Hayek made his prediction, there was no public knowledge that there was going to be a crash. He saw a possible crash while everyone else was still buying stocks and believing they'd be millionaires in 5 years time. The ABCT allowed him to see to incomming avalanche before everyone else noticed it.

Actually, the Technocrats predicted the Great Depression a few years Hayek, and within about a month of the actual start.

So in my opinion, that is still a prediction. The distinction that you make between 2 years in advance is a prediction and 6 months in advance is not a prediction, is entirely arbitrary. It wouldn't be much of a prediction if the economic crash was already occuring. But at the time he made the prediction, it was not public knowledge that the crisis was comming.

Basically what Hayek did.

I believe there is some truth to that. Hayek and Schiff did predict crisis on the basis of a theory explaining why and how there would be a crisis. And they made those predictions before the actual crisis. However, I would view this as an extra perk of the theory. But not something really important. For example, one could have made the prediction that Nixon's policy to have maximum prices at gas stations would cause lines and shortages. But whether or not anyone actually made that prediction, is not relevant for the accuracy of the theory.

Actually, you have to make a prediction in order for it to be a prediction. There have been plenty of theories in different fields that said "under these conditions, this will happen" and based that on previous experiences, and could predict the results of experiments already made. But, still failed at predicting future events.

Aggregating several things that have some similarities, but are not exactly the same is confusing.

My reasoning is a discussion for another time. I partly assumed that the responders (mostly being my former interlocutors) would realize what I was talking about.

Even if the goal of your theory is not the predict, that doesn't make you can't try to make some predictions with it. An economic theory shouldn't be judged by its ability to make predictions. Because even though the theory may be right, there is also a lot of other stuff going on in the economy. Taking again the example of Nixon's maximum price laws. Maybe if I was an economist in the 1970's I would have made the prediction that there would be lines and shortages. However, imagine that at the same time Nixon instituted maximum prices, there is a great cultural change in favor of bicycles and everybody rides their bike to work. Then there probably wouldnt be any lines and shortages. But my theory was not disproved by that.

Scientific theories are judged based on their ability to predict events.

Do you doubt the sources that are given here?

I was referring to Kman's claim, not those of Hayek or Schiff.

[Nunt]

Actually, the Technocrats predicted the Great Depression a few years Hayek, and within about a month of the actual start.

I had no idea. Do you have a source for their prediction and underlying theory?

Basically what Hayek did.

What is the start of the 1929 crisis then? Was it before Hayek's prediction? And if the crisis started before that, why was this not common knowledge? Imo a crisis only officially starts when markets realize something is wrong. And at the time of the prediction, markets thought everything was super. Of course, Hayek made his prediction based on the seeds of the crisis that was already there. But how else can you make a prediction? You can't predict a crisis without there being any signs of it. You need a reason to predict it. There need to be symptoms.

At the time of Hayek's prediction, there were seeds of crisis, there were symptoms of a crisis, but the actual crisis was not actually occuring. Ask anyone in the Spring of 1929 whether the economy is booming or in crisis and they would answer you that the economy is booming. Stocks were rising, unemployment was low, the economy was growing.

What you call 'the crisis already started when Hayek made his predictions' is actually saying that the seeds of the crisis were already there. But in even if someone would made the prediction 2 years earlier, then the seeds of the crisis were also already there. The distinction you make (based solely on time) is entirely arbitrary. There are no arguments that you can give that would say that the crisis actually started in Spring 1929, that at the same time not argue that the crisis started in Spring 1927. I'd like to see you try. If you're succesful, you should write a book because you have reinterpreted economic history.

So lets just stick with the official starting date of the Great Depression, shall we? That is August 1929.

[Wolfman]

I had no idea. Do you have a source for their prediction and underlying theory?

Nope. I've looked, but I can only find them claiming that they have predicted the Great Depression.

What you call 'the crisis already started when Hayek made his predictions' is actually saying that the seeds of the crisis were already there.

Not what I said.

There are no arguments that you can give that would say that the crisis actually started in Spring 1929, that at the same time not argue that the crisis started in Spring 1927.

I didn't say that either.

[Nunt]

I think you started this discussion with a very obvious purpose: to show that the ABCT did not predict a single crisis. You seem bent on showing how wrong ABCT rather than actually giving arguements a fair hearing. All time I spend here is waisted. I therefore redraw from this discussion.