How Does The Austrian Theory Of Business Cycles Explain The Tulip Bubble??

Iâ??ll try to give you the best answer possible today.

  1. All humans flock to opportunities, exploit opportunities, and defect from flocking to opportunities as the opportunities are exhausted and other, more preferable, opportunities emerge.
  2. In this sense, all human economies seek disequilibrium, because it is only in disequilibrium that opportunities exist (If we ever managed equality then we will all be poor.)
  3. Without credit, opportunities cannot be exploited at the lowest possible price (discount) simply because either (a) scarcity of the monetary resource, and (b) extraction of profits (premiums) and â??Rentsâ?? by savers.

    ( This topic is a significant point of contention, if not the central point of contention. The Rightâ??s position [and mine] is that itâ??s not clear that earning money from your savings is necessary or beneficial – only that it not be deflated. The Left/Keynesians hold the position that you do not even have any right to the stored value of your savings. The l|Libertarian position is that you have a right to â??seek rentsâ?? as an investor using your savings. The libertarian is decidedly false since that is the means by which predatory subclasses have used high trust local norms to accumulate, centralize capital, and turn it against host peoples.)

  4. Credit (Promise of future repayment) assists in more people flocking to opportunities, exploiting those opportunities faster, but also defecting from those opportunities more slowly, and ending those opportunities not gradually but in a â??bustâ??, leaving late defectors having lost their investments and unable to fulfill their promises.
  5. Therefore, the question has been, and remains, how much credit to provide at what price such that opportunities are exploited *by those able to exit* but not by people who *will not be able to exit*. While economic discourse appears difficult, this is actually the central question. The answer is relatively simple, in that if we are financing a shift from one network of specialization and trade to another, then that is reducing the unnecessary friction, or if we are creating opportunity for unskilled risk, and therefore creating a moral hazard (trap).

    (This topic is a significant point of contention, because it leaves most consumers out of the â??lotteryâ?? that loose credit can create, and out of the temporary consumption that loose credit creates, and produces a moral hazard for banks and credit institutions, by forcing them to lend money during booms to stay in business then creating waves of bankruptcies during the consequential corrections.)

  6. There are very few substantive questions in economics. (a) The means of calculating credit price and availability is one, (b) whether we can bypass the financial sector and provide liquidity directly to citizens(consumers) without simply having landlords and creditors absorb the profits now going to the financial sector, (c) the third is purely ethical and moral: and that is, do we return to intergenerational lending (all of human history until the keynesians), so that there is a good reason to provide income on savings, or do we continue extraction of rents through the financial system by charging the citizenry to borrow against their own production, or do we, as above, end the unnecessary distribution of credit capacity (and interest) for consumer consumption by just bypassing the financial sector altogether. Every other question in economics a derivative of these questions – or it is simply the use of economic analysis to investigate demonstrated human behavior, given that the (soft) social sciences (pseudosciences) of psychology, sociology, and political â??scienceâ?? have failed to produce any repeatable scientific findings by means of self reporting or direct testing.

Therefore, the Tulip Bubble is just a nice simple example that we use to illustrate how consumers can borrow money to invest in what they donâ??t understand and lose it.

There are thousands of other examples, particularly in the new world, but the Tulip Bulb Bubble is more helpful because it communicates to average people that they too are vulnerable to malincentives, not just people with much more money.

In other words, invest in what you do and know, and otherwise invest in index funds. In other words, Just as Little Red Riding Hood is a lesson to young girls who would do improper things for money are certain times, the Tulip Bulb serves as a parable for consumers – do what you know, and only what you know.

Leave a Reply