Real Business Cycle Theory does not match even basic facts

Screen Shot 2015-08-19 at 8.04.01 AMGreat catch by Noah Smith here on how measured returns to capital destroy real business cycle theory. Look at this chart and notice returns to capital are crazy high, and by some measures, at 30 year highs.

This is devastating for RBCT. Investment should be off the charts today according to RBCT. Yet we are suffering through a relative dearth of investment. It should have been off the charts in 2005 too…

Screen Shot 2015-08-19 at 8.10.28 AMThis second chart is business investment as a percentage of GDP, over roughtly the same time frame as the returns to capital chart above. We are not investing at 30 year highs, even though the returns to that investment look to be great.

Where is the rational response by business owners to the incredible returns they will get for investing? Where was the response in 2005?

Noah used the term “Gaslighting” to describe RBC. Gaslighting is:

Gaslighting or gas-lighting is a form of mental abuse in which information is twisted or spun, selectively omitted to favor the abuser, or false information is presented with the intent of making victims doubt their own memory, perception, and sanity.[1][2] Instances may range simply from thedenial by an abuser that previous abusive incidents ever occurred, up to the staging of bizarre events by the abuser with the intention of disorienting the victim.

Haha! It’s like bullshit, but with abusive intent. And it’s such a kind word!

 

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Expert in business development, product development, and direct marketing. Developed strategic sales plans, product innovations, and business plans for multiple companies. Conceived the patent pending Spot Equivalent Futures (SEF) mechanism, which allows true replication of spot and swap like products in the futures space.

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