In a recent paper cited last month in The Economist, a trio of economists ran a kitchen sink’s worth of correlations on investment numbers. Kothari et al. concluded that profit growth and stock6967 price boost investment, but that interest rates have a negative effect. This claim runs counter to Austrian business cycle theory, so let’s have a look.

Despite their data actually saying that lower rates actually lower investment, Kothari, et al. conclude there is “little evidence” of a relationship. I guess they have to say this because, otherwise, people would laugh. Why would people laugh? Because if your data says that lower prices lead to lower demand, you either have bad data, or you have too much noise.

Either way it’s not causal, and it could be embarrassing to say it is. Am I being unfair to Kothari? Does not data speak the phoenix of truth, arising from the ashes of superstition? Well, when the data says something that contradicts elementary theory, you have three choices as a researcher. First, maybe the theory is wrong. Second, you check whether your data is wrong: too many zeros? Is it mistyped? (Notorious economist Thomas Piketty might have benefited from this.) Third, you conclude the data is noisy. Therefore it is not saying what you think it’s saying.

Well, the theory that a lower price for an identical product raises demand is pretty sound — that’s why demand curves slope downward. If it were not true, I would buy Cokes for a dollar, sell them for ten, and have a line around the block.

So if the theory is sound, then the remaining possibilities are that it’s bad data — either it’s a typo or it’s full of noise. I have no reason to doubt Kothari et al.’s figures, and MIT runs a tight ship. So it’s probably not typos.

So we zero in on that noise. Can we think of any noisy factors surrounding interest rate policy? Wait, perhaps you’ve heard of something called a central bank.

Written by: – continue at LUDWIG VON MISES INSTITUTE

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