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You know that his father WAS a Misesian.

No....sounds like the same old left leaning Buffet. Remember nothing wrong with businessmen suffering.

Dr. Levy has some great insights in this matter. Talking to him, he has mentioned that the risk of default on the securitized debt packages sold on the market were not always calculated in the most ethical and generally accepted methodology If returns and risk are not properly in balance, a market adjustment must necessarily happen at some point.

I seriously doubt Buffet is a true follower of Mises. Was Ludwig for an inheritance tax? Buffet is currently advocating such a transfer of wealth. Mises would never advocate plunder. It seems to me Buffet is more a follower of Marx because an inheritance tax is one of the tenants in the Communist Manifesto.

Buffett supports Obama, according to the Los Angeles Times, because "the Democrat would spread the wealth around."

With Misesians like that, we don't need Marxists.

Here's a proposed campaign slogan for McCain:

A hand-out or a job, men working for one another or bums panhandling one another.

I agree that Buffet is not always in the right place on some political and economic issues including inheritance taxes. The only thing I said in my post was that Buffet was Misesian (so to speak) only on the issue of how to deal with the subprime crisis.

Three more points however:

1. To be fully Misesian with regard to the subprime crisis, Buffet would also have to say that the Federal Reserve should not ease its policy again. The dearth of credit is part of the cycle and it is because of the dearth of credit that some businesses go bust. Mises saw this as a necessary part of the cure. As far as I know Buffet has not made that point.

2. Value investing, which is the technique of investment developed by Benjamin Graham and refined by Warren Buffet, is entirely compatible with Austrian economics. In fact, I do not know any other theory in economics (and certainly not in modern finance, which talks about efficient markets and the like) that can account for value investing. Value investors are entrepreneurs in the Mises/Kirzner sense. Buffet himself knows this, read Buffet's introduction to Graham's Intelligent Investor for instance.

3. Buffet is NOT a communist. True, his political ideas are often in the wrong place, but I believe this is only because of the guilt of being one of the richest men in the world (and also probably because Republicans are no better when it comes to defending freedom anyway). Buffet fully understands the way markets work -- better than most people who support markets actually. And remember that Mises saw the presence of a stock market as the ultimate sign of a capitalist economy. Who then better than Buffet could be considered the ideal capitalist-entrepreneur-investor?

Mr Suatet,

You were on firm enough ground when you said that Buffett was Misesian on the one issue.

But, if "Buffett fully understands the way markets work," Mises does not.

Let's not confuse Buffett the practising capitalist with Buffett the ideological anti-capitalist, for, clearly, his left hand does not know what his right hand is doing.

See my Mad Dog Economics, at econotrashtalk.org.

I would not want to say that Buffet knows business cycles well. Part of the whole idea behind Ben Graham's Intelligent Investor is that the financial market fluctuates so much that trying to predict movements is worthless. Old Warren might be good at knowing how to value securities, but he himself makes it known he doesn't try to predict recessions. Perhaps part of the reason he has left leanings and loves value investing is out of a distrust of market swings? Interesting to note that his father Howard was outspoken as Congressman against FDR and the New Deal policies.

I would like to respond to Mr. Sautet's first point in the comments section by asking if the Federal Reserve is entirely to blame with their "easy" monetary policies? It would seem that in an economy in which banks are able to create credit, the distinction between savings and investment becomes seriously distorted. In fact one who decides to save all of his income will have no appreciable affect on the supply for lonable funds because that supply would be the same if he had chosen to spend all of it. He either deposits all of his income at which point the bank loans it all out (minus reserves), or he spends it all at some department store, at which point that department store deposits it and then their bank loans it all out (minus reserves). One's decision to save will not at all be different from one's decision to spend.

Nearly all Austrians rely on the market for loanable funds --- in fact, I do not see how the Austrian Business Cycle theory could work without this model. But we must recognize the limitations of this model. Austrians concerned with market processes should immediately note the impossibility of a perfectly equilibrated market in loanable funds. Additionally, the existence of bank credit makes the distinction between savings and investment meaningless which, as a consequence, casts considerable doubt on the usefulness of the market for lonable funds model.

This is all explained in great detail in Fiona C. Maclachlan's excellent book "Keynes' General Theory of Interest". In this book, she very cleverly articulates several very importantly extreme methodological arguments throughout the book only to abandon them at the end of the story because she sees them "nihilistic".

This is unfortunate.

I don't think that the appearance of "nihilism" should scare us away from discovering important insights. Maintaining an openness to discovery and discussion is the key to intellectual advancement. Once we do this, I am afraid the Austrian Business Cycle theory will fall out of disuse. It is far too clean and unproblematic to be admitted to a school that concerns itself with the dynamic and conflicting processes of the market system. Bruce Caldwell says as much in his excellent book "Hayek's Challenge" when he writes,

"[a] theory of complex phenomena ... cannot make precise predictions about the path a cycle must take, which is what his original cycle theory purported to do [Hayek's]".

Mr. Sautet:

I did not say he is a Communist. I said he was sympathetic to the Communist Manifesto. One of the tenants in the Communist Manifesto is that society needs an inheritance tax. IF Buffet were a Misisian...which he clearly isn't, he would have to take the stance that an inheritance tax is at least unnecessary and at most inefficient, evil and immoral.

No matter how guilty he feels...which seems to be an unsubstantiated claim because how do you know he feels guilty? He wouldn't have set up a trust, moved his assets out of the U.S. and given his children money and a team of lawyers to protect and transfer his wealth when he dies would he have?

Matt writes:

"I would like to respond to Mr. Sautet's first point in the comments section by asking if the Federal Reserve is entirely to blame with their "easy" monetary policies"

I can't speak for Fred, but I don't think the Fed is "entirely" to blame for the housing problems. Zoning laws and other regulations played a role too.

"It would seem that in an economy in which banks are able to create credit, the distinction between savings and investment becomes seriously distorted. In fact one who decides to save all of his income will have no appreciable affect on the supply for lonable funds because that supply would be the same if he had chosen to spend all of it. He either deposits all of his income at which point the bank loans it all out (minus reserves), or he spends it all at some department store, at which point that department store deposits it and then their bank loans it all out (minus reserves). One's decision to save will not at all be different from one's decision to spend."

First of all, even if this is true or relevant, it assumes that households and firms hold balances of bank liabilities at the same rate, which may or may not be true.

Second, it remains the case that the aggregate level of net saving and investment is what matters here.

"Nearly all Austrians rely on the market for loanable funds --- in fact, I do not see how the Austrian Business Cycle theory could work without this model. But we must recognize the limitations of this model. Austrians concerned with market processes should immediately note the impossibility of a perfectly equilibrated market in loanable funds."

Of course. I think most Austrian macro writers in the last two decades have been clear to note that this isn't about perfect equilibria but the cost of deviations from such equilibria. In other words, the Austrian argument doesn't rest on perfection. It never has.

"Additionally, the existence of bank credit makes the distinction between savings and investment meaningless which, as a consequence, casts considerable doubt on the usefulness of the market for lonable funds model."

See above.

"I don't think that the appearance of "nihilism" should scare us away from discovering important insights. Maintaining an openness to discovery and discussion is the key to intellectual advancement. Once we do this, I am afraid the Austrian Business Cycle theory will fall out of disuse. It is far too clean and unproblematic to be admitted to a school that concerns itself with the dynamic and conflicting processes of the market system."

Perhaps so. In fact, several recent Austrian papers have argued that the real point is "intertemporal discoordination" which can occur in ways that aren't through the precise mechanism of the ABCT. You might see Butos's paper in Critical Review on the problems of the early 90s and Garrison and Callahan's paper on the tech-boom of the late 90s. Both of these offer Austrian analyses of macro crises that focus on intertemporal discoordination but do not use the exact mechanism of the cycle theory.

In other words, Matt, this is not news.

"Bruce Caldwell says as much in his excellent book "Hayek's Challenge" when he writes,

"[a] theory of complex phenomena ... cannot make precise predictions about the path a cycle must take, which is what his original cycle theory purported to do [Hayek's]"."

Yes he does. But he does so after saying "the specific cycle" theory developed by Hayek is "chiefly of antiquarian interest." I think that's a touch too strong, but note what he follows the quote you provide with: a discussion of what an Austrian macro NOT solely focused on that particular cycle theory might do. (Full disclosure: it's a discussion of my 2000 book.) Caldwell also points to Garrison's 2001 book as well as the free banking literature as "innovative extensions of the Austrian tradition."

My point Matt is that you are beating a dead horse. You are asking Austrians to go places that they've already gone. I can't find the exact quote at the moment, but somewhere in my 2000 book I argue that Austrian macroeconomics cannot be defined by the ABCT - there is more to Austrian macro than that.

It seems to me that is the same point Caldwell is making, which might explain why he follows the line you quote with the discussion that he does.

Steven Horwitz, in response to my example of the distorting effects of bank credit, writes:

"First of all, even if this is true or relevant, it assumes that households and firms hold balances of bank liabilities at the same rate, which may or may not be true."

I think it is true (and relevant!) that the creation of bank credit seriously distorts the otherwise intelligible distinction between savings and consumption. Now you raise an excellent point by suggesting that firms do not typically hold "balances of bank liabilities at the same rate" as households do. Firms usually, as Fiona Maclachlan explains, enter "directly into the bond market" rather than deposit all of their money in a bank account. In this situation, then perhaps the argument could be made that they are "introducing a new supply of lonable funds". However (and this may take us a little far afield), Machlachlan, using the liquidity preference theory of interest argues that:

"a great deal of the activity in the bond market has nothing to do with new saving and new investment. The marginal bond seller may not be a firm trying to raise new funds but rather a wealth-holder who wants to sell bonds so that he can invest in something else. Similarly, the marginal buyer may not be someone who has done any new saving but rather a wealth-holder who is cashing in another investment to buy the bond. The price of bonds is determined on the margin but this marginal trade does not appear in the lonable funds diagram" (page 144).

What I take away from this argument is that speculation will in all circumstances act to distort the real forces of savings and investment. Moreover, these speculative acts play a far greater role in determining the interest rate than do acts of saving and investment, whether it be conducted on a micro- or "aggregate level".

And about this point:

"most Austrian macro writers in the last two decades have been clear to note that this isn't about perfect equilibria but the cost of deviations from such equilibria. In other words, the Austrian argument doesn't rest on perfection. It never has."

Now I still need to think about this more deeply, but this problem seems similar to Plato's quest for absolute certainty, or the discovery of the "ideal forms": How can we say we are getting closer to truth if we must always remain ignorant of that state? Similarly, if perfect equilibria is not the goal (presumably because it is unattainable, and thus unknowable), then how can we say we are either approximating it or deviating from it?

And I should have been more fair. Horwitz is right. Immediately after the passage I quoted from Caldwell, Caldwell does proceed to praise the recent efforts of people like Dr. Horwitz for their emphases on traditional Austrian concepts like uncertainty, processes, etc.

And in closing I will say that there does exist some disconnect between the younger and older generation of the Austrian school. I think this disconnect is likely to become exacerbated because when the older generation is asked to teach Austrian economics to the younger generation, they often rely on equilibrating (clean and unproblematic) methods to explain how markets work (this can be seen in programs like the FEE Austrian program and Mises University). It is very difficult for younger students to know how the older generation thinks about and studies Austrian economics because the literature is contained in inaccessible journal articles and $200 Routledge books. I am trying my best to study at the same level as the "Austrian veterans" but it will take some time. So I do apologize if it seems like I am "beating a dead horse".

I think its good to know from someone who is making money - whats really going on

In the last week, I have been focusing on settling a number of matters before I go east for a few days for the Horatio Alger ceremony. I’ ve been working on my speech, which will contain lessons learned during my lifetime and which are important for the attendees to hear directly from my mouth. There will be a group of Horatio Alger student scholars who will also attend these events, and I will try to make my presentation meaningful to them as well. In addition, since I don’ t travel much, we’ ll be packing...

This post is reaaly informative and a good resource too. Thanks for sharing your thoughts.

I am also using a T5220 for an Oracle/WebLogic deployment in cluster mode. Personally I would have preferred to go with an M-series server for it’s simpler processor model. I’m just curious as to what information you were able to get hold off that convinced you that a T5220 was suitable for Oracle, as to date I am still not convinced.

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