Do We Need More of Keynes Now?
Keynesian ideas have never left the rooms of government and central-bank decision makers. The essence of the thinking of the most influential economists was and still is Keynesian. So various stimulus packages that are now introduced are a continuation of the same Keynesian policies we have been subjected to for many decades. The present economic crisis is the outcome of the large dose of Keynesianism we have been given over many decades. FULL ARTICLE
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Comments (78)
Comments (78)
Dennis
Regarding the Keynesian system, what Henry Hazlitt wrote way back in 1949 in the Introduction to L. Albert Hahn's "The Economics of Illusion" merits repeating:
"There is no more important task for the economic theorist today than to disentangle the network of confusion and error that now goes under the name of the Keynesian Revolution. Until this work has been thoroughly done, clarity and real progress in economics will not be possible."
Unfortunately, the mainstream economics profession has made little of the progress recommended by Hazlitt, and the result has been continuing erroneous and destructionist government policy, and recurring crises.
Published: October 31, 2008 8:34 AM
newson
the patient is seriously anaemic and requires an urgent bleeding.
i'd like to see more work on mises attacking the gdp construct and the way it over-emphasizes consumer spending. why not more background on how national accounts came into being? if gdp is not discredited as a pointer to national well-being, keynes will live on.
Published: October 31, 2008 9:05 AM
Wrm Fuzzy
Give the devil one day. It is Halloween after all. I think he ought to have one day a year where he is viewed only as a clown and not for what he really was: one of the most evil men who ever lived. It seems reasonable to be able to grant him a single day of respite since he will no doubt spend eternity burning in hell.
Published: October 31, 2008 9:31 AM
David Ch
NIce succinct critique of the Keynesian edifice - thank you.
If I may offer another medical analogy:
Keynes' most fundamental assertion was that unemployment is caused by insufficient consumption, and he and his fellows variously prescribed monetary and/or fiscal stimulus as a cure.
This is like saying that malnutrition is caused by insufficient excretion, and prescribing a course of laxatives.
Published: October 31, 2008 9:41 AM
michael
Shostak gives us some magnificent arguments in favor of Keynes, such as this:
"John Maynard Keynes held that one cannot have complete trust in a market economy, which is inherently unstable. If left free, the market economy could lead to self-destruction. Hence there is the need for governments and central banks to manage the economy."
If one wants to contradict this, he has to say that it's good for the market to crash and burn every couple of decades (as it's currently doing), without the distorting hand of the fire department to interfere with the workings of nature. We are all in agrement, I believe, that if strict Misian economics were to be applied at this point, we would have a severe depression marked by zero trade, zero lending and zero jobs?
But Shostak doesn't do a very good job of refuting Keynes. Look at his theory of "nonproductive consumption", which says that economic stimulus can not spur production. It proceeds from a basic fallacy.
I print up a thousand bucks in twenties, and start distributing them, every morning, in front of a bakery. Everyone goes in with their new money and buys everything on the shelf. This prompts the bakery to bake more stuff the following day than he did this morning. Their suppliers get a bigger order. They give their employees more hours. And the state, the community AND Uncle Sam all get a cut of the proceeds, in the form of more taxes.
The bakery owner and employees both have more money so they spend more money, benefitting all the other stores on the block. These people all pay taxes, so the state, the community and Uncle Sam benefit yet again. We get more public services from this funding. And more people have to work more hours to satisfy the new demand that has been generated. All buy more stuff with their additional income.
It's specious to say that the money being freshly created is not "backed" by production. It can work every bit as well when it precedes and spurs production. That's what an economic stimulus IS.
But maybe someone can point out exactly where this analysis goes wrong. Use actual examples, please, not mere theory.
Published: October 31, 2008 10:44 AM
mitcjm
michael,
You said:
"If one wants to contradict this, he has to say that it's good for the market to crash and burn every couple of decades (as it's currently doing), without the distorting hand of the fire department to interfere with the workings of nature."
Your analogy assumes that the fire has started spontaneously (that the market, if left alone, will necessarily 'crash and burn'). Maybe you should back up that claim first (how about you use 'mere' theory AND examples). Your analogy would be more apt if the fire deparment started the fire with gasoline (fiat money) and then claimed that what is needed is more gasoline to put it out.
As for your analogy of handing out money in front of the bakery, Shostak addressed the very point. Did you read the article? At least read this part:
"Since he secured this money by means other than the production of some useful goods or services, the counterfeiter has therefore obtained the $20 by exchanging nothing for it.
The counterfeiter uses the $20 to buy ten loaves of bread. What we have here is the diversion of real funding — ten loaves of bread — from a potato farmer towards the counterfeiter. Note that the diversion takes place by the counterfeiter paying a higher price for bread — he pays two dollars per loaf. Previously the price stood at one dollar per loaf. Also note that since the counterfeiter doesn't produce anything useful he is engaged in nonproductive consumption.
The potato farmer is now denied the bread that he must have to sustain himself while he is producing potatoes. Obviously this will impair the production of potatoes. As a result, fewer potatoes will become available, which in turn will undermine the consumption of the baker, thereby impairing his ability to produce.
We can see that, while productive consumption sustains wealth generators and promotes the expansion of real wealth, nonproductive consumption only leads to economic impoverishment."
Published: October 31, 2008 11:17 AM
I Hate Taxes
Newson,
The patient is DEAD.
Go watch the movie Weekend At Bernie.
Bernie is the dead economy and the Fed is pulling all the strings to make it look like it's still alive. That way the Fed is deceiving the world and pandering for confidence.
Once the stench of decomposition becomes obvious, the final crisis will come.
Published: October 31, 2008 11:29 AM
Inquisitor
There is no such thing as "mere theory". Disabuse yourself of this idiotic notion. Even mere examples need a theoretical apparatus to make sense of them. I'll use whatever the hell I damn please, including theory.
Now, when one says money is backed, one means one can go into a bank and request redemption for handing in a money-substitute, say one that is worth 1 ounce of gold will be redeemed at just that amount. THAT is what it means for it to be backed. To use the term in any other way is to confuse matters. Moving on, if production is spurred under the delusion that savings have increased (out of which investment is financed) due to credit expansion, it is immaterial whether there are more goods, because capital consumption will set in place. There are insufficient savings, interests rates indicate otherwise (due to being manipulated) and production that would otherwise be seen as wasteful takes place. All you've done is ramped up production by making investment artificially cheap... all you're doing is restating what Keynes has not proven theoretically.
Published: October 31, 2008 11:30 AM
Inquisitor
"If one wants to contradict this, he has to say that it's good for the market to crash and burn every couple of decades (as it's currently doing), without the distorting hand of the fire department to interfere with the workings of nature. We are all in agrement, I believe, that if strict Misian economics were to be applied at this point, we would have a severe depression marked by zero trade, zero lending and zero jobs?"
I am sorry, I was not aware the fire dept is in the business of setting fires as central banks are in the business of causing booms/busts? Maybe your analogy would actually have a point if it concerned a drunk who, to avoid a hangover, only drinks himself to death. Yeah. Much more pertinent IMO. In fact, the Fed does NOTHING to stop the "fire". All it does is push back its negative effects for a while longer, Greenspan's brilliant policies being a case in point. Please stop using mere analogies though...
Published: October 31, 2008 11:34 AM
I Hate Taxes
michael,
once the fresh money is spent, demand will fall and there will be over production which will cause a new crisis requiring even more bailout money etc.
Examples ? LOL ! Are you serious ?
1929, 1932, 1987, 2001, 2008 and on and on.
Published: October 31, 2008 11:34 AM
Wrm Fuzzy
If one wants to contradict this, he has to say that it's good for the market to crash and burn every couple of decades (as it's currently doing),
Never has there been any case in recorded history of a free market crashing in and of it's own accord. Markets crash because of interference. To claim that a free market could experience what we are seeing now is not only completely unsupportable by evidence, but it is also patently absurd. If we had a free market, the handful of insolvent companies would have already gone out of business, their assets would have been liquidated and they would not have dragged anyone else down with them.
If you think that inflation is going to help stimulate production then you don't understand anything. Inflation destroys capital, and quality of living is the ratio of capital per head in any society. That's why Keynesian economics don't work. But then, they were never meant to work. They were only meant to dupe a mentally retarded populace into accepting more slavery.
From here on, I will be ignoring you as it is fairly obvious from the sophistries you have been weaving across multiple comments that you don't really believe anything you are typing and that you are a CENTCOM or COINTELPRO operative that is only here to derail conversations and peddle fascist propaganda.
Published: October 31, 2008 11:44 AM
parsimonia
Michael obviously assumes that the market is and has been operating free from government intervention - which is absolutely not the case. Al Greenspan alone is responsible for about 30 years of government manipulation of the market.
I can't believe such a boldly false statement would be allowed on this blog without a pile on. But perhaps those in the know are busy generating real money.
Shostak did leave out the part about how the counterfeit money devalues the rest of the money supply and creates inflation. I think the explanation can be found in Rothbard's The case for a 100 Percent Gold Dollar and/or What Has Government Done to Our Money? both of which I'll be reading shortly.
Published: October 31, 2008 11:44 AM
Wrm Fuzzy
If one wants to contradict this, he has to say that it's good for the market to crash and burn every couple of decades (as it's currently doing),
Never has there been any case in recorded history of a free market crashing in and of it's own accord. Markets crash because of interference. To claim that a free market could experience what we are seeing now is not only completely unsupportable by evidence, but it is also patently absurd. If we had a free market, the handful of insolvent companies would have already gone out of business, their assets would have been liquidated and they would not have dragged anyone else down with them.
If you think that inflation is going to help stimulate production then you don't understand anything. Inflation destroys capital, and quality of living is the ratio of capital per head in any society. That's why Keynesian economics don't work. But then, they were never meant to work. They were only meant to dupe a mentally retarded populace into accepting more slavery.
From here on, I will be ignoring you as it is fairly obvious from the sophistries you have been weaving across multiple comments that you don't really believe anything you are typing and that you are a CENTCOM or COINTELPRO operative that is only here to derail conversations and peddle fascist propaganda.
Published: October 31, 2008 11:44 AM
Enjoy Every Sandwich
michael,
If it doesn't matter if money is backed or not, then why is counterfeiting a crime? Your example makes it sound as though the counterfeiter is performing a public service and should be lauded rather than jailed.
Published: October 31, 2008 11:46 AM
Inquisitor
Having read the article, I see Michael's point is even more incredibly wrong than I thought before... and I think mitcjm hits the nail on the head. Does counterfeiting increase wealth, Michael? If not, then why should the government's counterfeiting do so? If so, why not let everyone counterfeit money?
Published: October 31, 2008 11:48 AM
wuzacon
It is not clear to me why an increased price of goods (bread) would in and of itself lead the potato farmer to produce less potatoes. As others have pointed out, maybe it's not material, but it seems to me that at least in the short run a higher price of bread would lead to an increase in the production of potatoes so that the potato farmer can attempt to maintain his standard of living.
Published: October 31, 2008 11:59 AM
fundamentalist
wuzacon: "It is not clear to me why an increased price of goods (bread) would in and of itself lead the potato farmer to produce less potatoes."
As the author wrote: "The potato farmer is now denied the bread that he must have to sustain himself while he is producing potatoes."
The farmer and baker represent the whole economy. If they didn't, clearly the farmer could buy bread elsewhere at the higher price, but his costs would be higher and his profit lower. Having the baker and farmer represent the whole economy demonstrates what happens in the large economy due to limited capital goods. Counterfeit money allows consumers to consume more and take away goods that producers needed to sustain them through the long production process. As a result, businesses fail because they can't get the needed inputs or the costs are so high as to destroy all profit.
Published: October 31, 2008 12:49 PM
Michael
No, of course we don't. It should be abundantly clear that the central-planning model is very economically destructive.
Published: October 31, 2008 1:00 PM
Eric
Wuzacon,
The law of supply and demand would normally determine the price of the bread. When you throw counterfeit money into the mix, then some of the bread will now be bought by the counterfeiters who produce nothing in exchange. So, the pie of real wealth is divided into smaller pieces to account for the new demand by the counterfeiters while the pie itself doesn't get any bigger. It simply has to be divided up amongst more consumers making each slice smaller.
If the newly created counterfeit money is injected first by spending it in bakeries, then the baker might begin to believe his business is increasing. This could lead him to believe his increased business could sustain higher prices (lost customers from the higher prices would be replaced by counterfeiters who become new customers). So he could raise his prices while others that aren't in the path of the money injection won't. He might also hire another baker to keep up with the new demand for his product. However, since the new money was not distributed equally amongst all those with cash holdings, the price of bread will go up before the price of potatoes goes up.
If the price of bread increases first, then the potato farmer has to divert more of his capital into maintaining himself in the pursuit of making the same number of potatoes. This could mean, for example, that he doesn't have the resources to repair some potato producing equipment. This could lead to lower efficiency of production, which could lead to fewer potatoes being produced, which was the question posed.
While reading this article on how the prior activity of government led to the current problems a picture flashed in my head of a dog chasing his tail. The dog runs faster and faster as the tail is pulled along until the dog drops from exhaustion. Just as the dog can't connect his current activity with the problem of an escaping tail, the Keynesian can't see the connection between his prior meddling and the current mess.
Published: October 31, 2008 1:41 PM
Maturin
I believe michael needs to read Hazlitt's "Economics in One Lesson." Rather than bashing the poor misguided soul, let us educate him.
The One Lesson is "the law of unintended consequences," or the failure to look beyond the immediate effects on the individuals of a transaction to the long-term effects on all.
Yes, printing $1000 and handing it out in front of the bakery would spur some spending for a few days in our little model village. But what about cobbler Joe, who was saving up his dollars to buy a new $10 workbench so his son could join him to double their productivity, and florist Nancy who was saving up her money to buy a new garden plot, so she could grow twice as many roses? Our little village now has a total of $2000 chasing products that were only $1000 in cost before you handed out the magical $1000 of inflationary and imaginary money. Now cobbler Joe's work bench will cost him $20, which he does not have saved to buy it, and he cannot grow his business. And florist Nancy can no longer afford that new garden, because it costs twice what she had saved, because your $1000 of fake money has driven up all the prices in the village.
Thanks to your stimulus, all of our hardworking villagers, despite their savings and industriousness, are twice as poor as they were before you "helped" them.
Published: October 31, 2008 1:55 PM
Maturin
Oh, and I forgot about poor grandma Lucille, whose life savings were about to afford her a retirement cottage, where she could have a few chickens and a garden to support her in her well-earned peace. Now she can no longer retire and must continue to slave away scrubbing floors for her counterfeiter landlord, despite her rheumatism and lumbago.
Do you really want Paulson and Bernanke to steal our retirement savings from us with the massive inflation their "Economic stimulus" will cause?
Published: October 31, 2008 2:42 PM
greg
The question is: Will the government print money to finance these packages or will they sell T-bills? Both have a direct impact on money supply and debt, but the selling of T-bills draw foreign money in at low rates. It will be interesting to see how rates move as there is going to be more T-bills coming on the market. We should see a noticable increase in rates as the government needs to attract more buyers.
My other point is: with all the programs coming on in the near future, why is gold trading down and the dollar is gaining against most major currencies? I think productivity gains here and expanded free trade has offset the impact of inflation.
Finally, I think the market could take care of our current problem. The market was down and it had one of the largest advances with TARP passage and it quickly faded. Just today, JP Morgan announced they were going to adjust interest rates to slow the foreclosures. That move made a positive impact on the market that carried to the end of the day and aftermarket trading.
Our problem today will not be corrected by expanded consumption, it will be corrected by companies that see a way to generate more business within the present economy. JP Morgan is not expanding their credit guidelines out of the goodness of their heart, they see a future market and a way to expand market share.
Published: October 31, 2008 3:50 PM
Eric
Greg:
"My other point is: with all the programs coming on in the near future, why is gold trading down and the dollar is gaining against most major currencies?"
The dollar obeys both supply AND demand pressures. Even though the supply is up, the demand is up even more - partly because the supply of other currencies is increasing as fast if not faster than the dollar. People are scared and they (still) believe the dollar is the safest investment. That's my theory at least.
I am betting that in the coming months (or years), the dollar will finally be exposed to have been inflated so much that its value will drop. But until that time, when you see gold, stocks, and bonds all sinking at the same time (against the dollar) then the dollar begins to look good and this is likely pushing up the demand for dollars.
I know I moved my pension inflation-linked bonds into the money market account this month, thus helping to prop up the dollar. I had been used to seeing my bond accounts balance my portfolio of stocks, but recently with everything else dropping, it's been the money market accounts that have done the best for me.
The only good thing about all this downturn is that I have been able to explain to my kids why in algebra minus a minus is a plus - :)
Published: October 31, 2008 4:40 PM
Mike D.
While most people at this site are aware of Keynesian Economics, it may not be well known that Keynes was heavily involved in a British intellectual socialist society called the Fabians. The following article should give a good insight into Keynes's social and political motivation.
http://en.wikipedia.org/wiki/Fabian_Society
Published: October 31, 2008 5:27 PM
michael
mitcjm, there is, IMO, such a thing as way too much theory and too little practise.
You say "Your analogy assumes that the fire has started spontaneously (that the market, if left alone, will necessarily 'crash and burn'). Maybe you should back up that claim first (how about you use 'mere' theory AND examples). Your analogy would be more apt if the fire deparment started the fire with gasoline (fiat money) and then claimed that what is needed is more gasoline to put it out."
Easy money is certainly a contributing factor. But even more relevant, I think, would be a dearth of useful limits on behaviors... regulations, if you will. They are the rules that make a good card game work.
Why are gamblers allowed, for example, to bet on bond outcomes (in the notorious credit default swaps) without having to act like insurance companies by posting a reserve from which to pay out losses? This has been a major contributing factor-- the failure of an unregulated $62 trillion market due to a lack of funding requirements.
It has happened before. In the Panic of 1907 the greatest precipitating force was bucket shops-- markets where speculators gambled on financial instruments without having to hold reserves. As a result the market sped headlong into its inevitable collapse. And the states immediately outlawed trading in derivatives. And I might remind you that it has been a good two years now since economists began warning us about instabilities inherent in the derivative market generally. We saw the same thing coming at us again.. and did nothing.
This kind of unlicensed gambling could readily be controlled by requiring that cash reserves be kept at all times sufficient to cover losses. Sure, the markets would slow down... that's the whole point. You could no longer put up a single dollar and wager on the movement of a hundred.
This is a direct cause of the chaos. There's no need to go back to the beginning and just tell us it's because money was invented. All money, it seems to me, even lumps of gold, is just a proxy for some abstract notion of value. It's a facilitator for trade, and rules should surround its creation and destruction. Reason tells us that when an economy expands, the money supply must expand in tandem. You don't always have the luxury of waiting until someone mines more gold. There are times when you just need to print some bills.. and wait for repayment in the form of tax revenues on the increase in business activity.
What just happened to us was that a lot of value was destroyed by our allowing watered securities to be traded. And if we just let things lay where they fell, there will be inadequate money to run global commerce until the day some frsh money gets invented again.
We've seen this all before, back in 1929. Do we still have to wait another three years before figuring out that we have to prime the pump? That's the way they did it over Herb Hoover's remaining three years in office. And they were not a comfortable three years.
Then you say my analogy breaks down because of the following, in the article:
"Since he secured this money by means other than the production of some useful goods or services, the counterfeiter has therefore obtained the $20 by exchanging nothing for it.
"The counterfeiter uses the $20 to buy ten loaves of bread. What we have here is the diversion of real funding — ten loaves of bread — from a potato farmer towards the counterfeiter. Note that the diversion takes place by the counterfeiter paying a higher price for bread — he pays two dollars per loaf. Previously the price stood at one dollar per loaf. Also note that since the counterfeiter doesn't produce anything useful he is engaged in nonproductive consumption."
You have to recall that the "counterfeiter" in question is in fact the US government. And when they hand out fresh notes for us to play with, they either take nothing in exchange for their injection of funds (as is the case with a tax rebate) or they take a share in the business being bailed out... which share has a cash value of nothing until such a time as the business can again stand on its own. And pays the money back to rid itself of federal ownership.
So the counterfeiter acts altruistically, squirting fresh grease in the gears so the engine can start turning again. Recall that money is intrinsically nothing but pieces of paper whose value is agreed on. Thus its only function is to act as a facilitator of commerce. It is not a good in itself.. although it can be traded as such on the currency markets.
One thing this injected cash does in a stalled economy is to circulate rapidly. And if a toll is exacted (in the form of taxes) every time it changes hands it only takes four or five trades before the entire amount has been earned back by the government. And then some.
If we were to transition today from a fiat money economy to a fixed-sum economy, we would very quickly founder in a permanent state of economic contraction. The global economy could no longer grow, and credit would be unobtainable once all the existing money had been placed.
That, to me, would be the worst of all states. Credit should be neither too easy nor too dear. The amount being injected should be managed for optimum performance. The analogy I like to use (I prefer these things to theories) is a carburetor. Too rich a fuel/air mix and the engine floods. Too lean a mix and it sputters and stalls. The ratio needs to be just right.
None of the above, of course, is in advocacy of the way the US government handles its responsibilities, or is implementing the current bailout. It is, after all, largely a tool of the financial sector. I merely say that it would be possible to get the management of the money supply right if one were even handed enough, and didn't tilt the board to the side of one's friends.
Published: October 31, 2008 7:13 PM
michael
I Hate Taxes says "once the fresh money is spent, demand will fall and there will be over production which will cause a new crisis requiring even more bailout money etc."
Are you of the understanding that money, when used once, just disappears? Mais non. The butcher passes it to the baker, who in turn passes it to the candlestick maker. And at every turn, the temporary possessor of this scrip pays a portion back into the printing company (that would be the US government) in the form of taxes. Thus the money arises first, and gets repaid over a certain term.
If you like, you can think of taxes as being the rent you pay to Uncle Sam, to use his money. It is backed by nothing but its utility to you, and to me, in transacting our business. So I think in reality it will be unlikely that even you switch over to the barter system.. trading your lumps of gold for items in the marketplace.
Wrm Fuzzy makes a much bolder statement:
"Never has there been any case in recorded history of a free market crashing in and of it's own accord. Markets crash because of interference. To claim that a free market could experience what we are seeing now is not only completely unsupportable by evidence, but it is also patently absurd. If we had a free market, the handful of insolvent companies would have already gone out of business, their assets would have been liquidated and they would not have dragged anyone else down with them."
Our free markets have been crashing routinely of their own accord, because no one has put good rules into place to regulate their behavior. Begin with the S&L Crisis and you'll find a half dozen recent bubble and burst meltdowns caused by a lack of guidelines that might prohibit them. And, of course, good patrolmen on the beat.
It's this very freedom to create unbacked financial vehicles that has made investors unable to collect on any of their bets.
About the "handful of insolvent companies" we can allow to fail, it turns out that every financial institution across the globe has bit of this apple in some degree, and found its own pool of investments contaminated. The analogy, if somewhat inelegant, would be when someone at the party pees in the punchbowl. None of the punch is good any more.
Published: October 31, 2008 7:34 PM
maera
"Easy money is certainly a contributing factor. But even more relevant, I think, would be a dearth of useful limits on behaviors... regulations, if you will. They are the rules that make a good card game work."
We have regulations. What makes you think we don't? Besides, all the regulations in the world won't work if people don't have a bit of integrity. There's only so much the government can do but the heart of this bubble was Keynesian manipulation of demand for housing. Just imagine if those derivatives had been backed by sound mortgages. Imagine!
Published: October 31, 2008 8:24 PM
mitcjm
michael,
I'd suggest you do some reading in the mises.org literature section on money and its origin (look up Rothbard and Mises). This article may be a good place to start: http://mises.org/daily/1333
There is a very real difference between fiat money and money backed by something of value. Again, did you read the article? The very point was to demonstrate this difference yet you seem to be premising your argument on the assumption that there is no difference ("All money, it seems to me, even lumps of gold, is just a proxy for some abstract notion of value").
As for historical examples, they are nothing but meaningless bits of data without theory. I would suggest that even you have a theory, despite your aversion to "too much" theory. All reference to history is necessarily premised on some sort of theory of cause and effect. From what I gather from your posts, you postulate that lack of the right regulations causes crashes/crises (something about being able to "create unbacked financial vehicles"?) . Maybe you should attempt to outline this theory of cause and effect so that we can test it against the historical data.
Published: October 31, 2008 8:38 PM
Robert McFadzean
Suppose I purchase an asset for $300,000 and finance $250,000 with a bank that creates this money out of thin air by simply posting an entry to my account. Later the asset drops in value by $100,000 and I still owe the bank $240,000. Would it be reasonable for me to ask the bank to lop the $100,000 off the loan or at least say $60,000? Since it isn't 'real' money anyways, wouldn't it better for them to have me keep paying?
Published: October 31, 2008 8:47 PM
George
"In the Panic of 1907 the greatest precipitating force was bucket shops"
I haven't read about the panic of 1907 being related to bucket shops but just starting to think about that statement makes me really doubt it.
A bucket shop is sort of like a bookie who doesn't lay off the bets he accepts elsewhere. So a bucket shop, no matter how many orders/customers it has would have NO effect on the real stock market (since it doesn't perform real stock transactions).
How is this going to have much of an effect on the real economy (in 1907?)? Only the customers and the bucket shop owners can gain/loose money...
Published: October 31, 2008 9:40 PM
Inquisitor
"Are you of the understanding that money, when used once, just disappears? Mais non. The butcher passes it to the baker, who in turn passes it to the candlestick maker. And at every turn, the temporary possessor of this scrip pays a portion back into the printing company (that would be the US government) in the form of taxes. Thus the money arises first, and gets repaid over a certain term."
My what sheer nonsense. I'll ignore your long, dull rant above, and focus on this. Money changes hands anyway. So what? What has this shown? Nothing. It happens without gov't pumping money into the economy (yeah, because it's oh so altruistic; did Master forget to whip you today?) When it pumps cash in, it raises prices forcing actual producers to cut back on their former spending patterns whilst contributing nothing to the economy. Now, instead of regurgitating canards such as the government taxing this spent money (so what? why not just print it in copious amounts, or expand credit rabidly as it actually does?) why don't you answer why a counterfeiter cannot also "stimulate" production? You've given no real answer to this other than saying a government can tax. Well whoop-dee-do. A counterfeiter can print more and spend more. Big deal.
"Our free markets have been crashing routinely of their own accord, because no one has put good rules into place to regulate their behavior. Begin with the S&L Crisis and you'll find a half dozen recent bubble and burst meltdowns caused by a lack of guidelines that might prohibit them. And, of course, good patrolmen on the beat."
Yeah, it must be the lack of "regulation"...
"If you like, you can think of taxes as being the rent you pay to Uncle Sam, to use his money. "
I'd prefer to think of you as an advocate of counterfeiting.
"So the counterfeiter acts altruistically, squirting fresh grease in the gears so the engine can start turning again. "
Bullshit. The counterfeiter acts in its best interests, in this case preserving its means of spending.
"That, to me, would be the worst of all states. Credit should be neither too easy nor too dear. The amount being injected should be managed for optimum performance. The analogy I like to use (I prefer these things to theories) is a carburetor. Too rich a fuel/air mix and the engine floods. Too lean a mix and it sputters and stalls. The ratio needs to be just right."
My god what nonsense. How does one calculate this "optimum" precisely? Go on, give me a formula.
Published: October 31, 2008 9:56 PM
Eric
Micheal says "Reason tells us that when an economy expands, the money supply must expand in tandem. "
Which Reason is this? It's not the conclusions of Rothbard or Mises. Rothbard in his 3 short books on banking always runs through the logic on money and proves that once a money commodity is established no change in its quantity is required. Hint, a good money can be divided into as many smaller units as needed. And besides, they never expand the money supply equally around, so who do you think gets to be the lucky winners and losers.
Thus Micheal either does not accept this theorem of Rothbard, or he has yet in all this time bothered to read Murray's beautiful explanation on the mystery of money (and banking).
My favorite is the Case against the fed, which is a bit more complete than What's gov done to our money. But both address the quantity expansion myth square on.
Published: November 1, 2008 1:16 AM
Gu Si Fang
The idea of non productive consumption is very useful and exposed in a crystal-clear fashion, thanks!
I've been reading something which goes further, though. One could speak of "DESTRUCTIVE consumption". The idea is the following :
After a while, the counterfeiter is unmasked and the baker no longer accepts his fake money. In order to continue his nonproductive consumption, he has to engage in political intrigue, propaganda, coercion etc. The victims resist the plundering and the counterfeiter has to make an effort in order to embezzle ressources. The plunder no longer comes "for free". In the long run, there is no risk-free profit, therefore the effort grows until the marginal opportunity cost matches the marginal return of the plunder.
In our monetary system, the victims' reaction to counterfeiting are, for instance : intensive speculation, Fed watching, hedging, adjusting the economic calculation to take into account inflation, etc. The costs for the counterfeiter are : production of fake statistics, propaganda, political intrigue, lawmaking, sleepless nights, etc.
With nonproductive consumption, production is simply consumed by the amount of the plunder. But if we accept the concept of destructive consumption, production is DECREASED by the amount of the plunder.
Published: November 1, 2008 1:56 AM
Michael Smith
As others have pointed out, Michael's fundamental mistake is the failure to realize that any increase in demand achieved by printing up the 1,000 new $20 bills will be canceled by the decrease in demand that results from having everyone else's $20 bills decline in value by a corresponding amount.
Yes, you may succeed in making the baker better off; but what you’ve ignored is that fact that everyone else is now worse off -- they are worse off because the purchasing power of their dollars has been decreased by this fresh injection of brand new, out-of-thin-air money that you gave the baker.
Michael, you want more real-world proof that printing up money a) doesn’t create wealth, and b) doesn’t “stimulate” the economy? Well, here are some facts for you to chew on:
1) From January of 2000 to October of 2008, M2, the Federal Reserve’s best measure of the money supply, has increased 66.7%. Are real incomes up 66.7% since then? Are we 66.7% richer now than we were 8 years ago? The answer to both is a resounding, “NO!”.
2) Over that same time period, spending by the Federal government has increased by over 1.2 trillion dollars a year. That’s 1.2 TRILLION dollars additional spending every year. Are we, then, as a result, experiencing an economic boom? Has this vast increase in spending so stimulated the economy and “greased its gears” that we are now experiencing fantastic economic growth? The answer to both is another resounding, “NO!”.
The only question, Michael, is how many times Keynesian economics must fail before you realize it is false.
And when you say,
Our free markets have been crashing routinely of their own accord, because no one has put good rules into place to regulate their behavior.
You know not of what you speak. There hasn’t been a free market in this country in over 140 years. Blaming the various recessions and depressions on the free market is like blaming them on visiting Martians -- you are blaming them on something that just isn’t there.
Published: November 1, 2008 9:14 AM
michael
maera makes this point: "We have regulations. What makes you think we don't? Besides, all the regulations in the world won't work if people don't have a bit of integrity. There's only so much the government can do but the heart of this bubble was Keynesian manipulation of demand for housing. Just imagine if those derivatives had been backed by sound mortgages. Imagine!"
Merely having regulations is not quite the same as having well written, effective regulations with enforcement. Had we, for example, had sanctions in place against selling mortgages whose payees had not been vetted, or for whom false documentation had been submitted, we might not have been in quite the mess we're in. A "lemon law", if you will. Similarly when adjustable rate mortgages first came out, some 30-odd years ago, it was obvious they were merely a trap for the unwary. These things should have been outlawed.
The plain fact is, we now have and always will have people without "a bit of integrity". They are the reason good laws and rules are needed. We go off the tracks whenever we assume that some mysterious "wisdom of the market" will protect us from harm.
mitcjm has this to say: "There is a very real difference between fiat money and money backed by something of value. Again, did you read the article? The very point was to demonstrate this difference yet you seem to be premising your argument on the assumption that there is no difference ("All money, it seems to me, even lumps of gold, is just a proxy for some abstract notion of value")."
First, let's not assume I've not read your masters, Rothbard and Mises. Had I not, I would not be offering commentary on their shortcomings. The lofty theories they describe work perfectly well in a vacuum. Internal consistency is a hallmark of theory that need not describe the totality of concrete events. I have written about the obvious: the fact that whenever we encounter an actual crisis of confidence, the only way to ease the pain is to apply Keynesian tactics.
It is invariably noted in such circumstances that capitalism champions the right of the few to enrich themselves, only to the point where they encounter trouble. At that point, socialism must step in to rescue their fortunes at the public's expense.
This has nought to do with the notion that a currency backed by some finite substance couldn't form the basis of a functioning economy. Far from it. I only note that now that we are embarked on a world built on the basis of a flexible and responsive currency supply, we just can't get there from here.
The number of participants in the global economy is expanding rapidly. To insist that the amount of currency they circulate be fixed is a disaster. As you are a theory-dependent person, I suggest you wrap your theories around that obvious fact. If the world you prefer were fact, all that golden money would gravitate upward into the grasp of people whose love for it is so great they would refuse to part with it. And ordinary people would have to come up with something else with which to consummate their transactions.
Also, we would have created a structure with systemic deflation built into its core. A fixed amount of available gold would have to reflect the value of a constantly increasing amount of material wealth (food, fuel, finished goods, etc). The only way out of the dilemma would have to be a silly one-- the exploration and refining of lower and lower grades of ore for their gold, so as to increase our supply. To me, the imposition of this requirement would be a purposeless activity.
I agree with the gut instinct behind your philosophy-- that solid money has to be distinguishable from fake money. But please realize it's just a way to keep count. There's nothing magical about it. If you must have golden money, buy a few bars and keep them under your bed. Meanwhile, we in the outside world will continue to use dollars until they go the way of the cruzeiro. Then we'll switch to the next good thing, perhaps the renminbi.
The problems we have with the existing system all come from mismanagement, whether due to second rate minds at the helm (Greenspan comes to mind) or to greed and self-interest. The fix is to demand better from our public servants, and for the average citizen to become more fully informed.
You guys scare me. Radical and untried cures remind me of Marxism-- another economic fix that was going to save the world if we replaced the existing system with it.
Published: November 1, 2008 10:01 AM
mitcjm
michael,
You have not responded to any of the challenges put to you. You continue to parrot the same, baseless 'arguments'. It is people like you who are scary - people who want to impose their prefferred policy on others without understanding the pitfalls of those policies and without recognizing that those policies are necessarily based on theory of some sort.
You have not made clear any of the shortcomings of Rothbard or Mises. You have merely restated claims that others have challenged you on (it is purchasing power and not quantity of money that matters). Just like the article above, it appears that you have not read the Austrians or not understood them.
You have not dealt with the problems of fiat money that so many have pointed out to you (yet you continue to assert problems of 'real' money without substantiating your claims or responding to challenges).
You say that Austrian monetary theory has never been put into place. If you only consider the last 75 year, maybe you are right. Your ignorance of history is astounding (I'm surprised that you keep coming back to demonstrate that ignorance) .
As for theory, one that doesn't work in the real world is worthless. You state an aversion to too much theory without realizing that even you necessarily have a theory. This shows a shocking lack of critical thinking skills.
Again, I'd recommend that you do some reading and come back to discuss once you have some understanding of what you are talking about (then again you may just be a troll).
Published: November 1, 2008 10:29 AM
michael
Maera comments: "There's only so much the government can do but the heart of this bubble was Keynesian manipulation of demand for housing."
It certainly was not. The factors going into the mortgage mess were several. First and foremost, the real estate industry, including bulders and developers, have put into place an unsustainable model that relies on the value of housing rising faster than the value of anything else, in perpetuity. This model simply cannot be made to work.
For those too young to remember, the last time values imploded was back around 1980. People were unable to move because they held upside down mortgages, and could not afford to sell their homes. If home price inflation outpaces every other category, it simply must in time explode. So we need to develop a model for home ownership that does not rely on appreciation to make the numbers work.
The other major factor was a set of perverse incentives put into place for the originators of home loans. They had no incentive to place sound loans, as they could just sell them to bundlers and make their money off the origination fees (points) and commissions. So the incentive was to make the maximum number of loans no matter what the quality.
And they found buyers unwise enough to buy them all up. These buyers, let's recognize, were considered to be the "smartest people in the business". And these masters of the world again bundled them, into financial packages so divorced from reality that ratings agencies were unable to evaluate them. They were sold across the world.
Intelligent rules would have made the entire scam unworkable. Again, let's recognize that there are qualitative differences between dumb regs and smart regs. Lumping them all together as "good" or "bad" is simplistic in the extreme.
Then McFadzean writes: "Suppose I purchase an asset for $300,000 and finance $250,000 with a bank that creates this money out of thin air by simply posting an entry to my account. Later the asset drops in value by $100,000 and I still owe the bank $240,000. Would it be reasonable for me to ask the bank to lop the $100,000 off the loan or at least say $60,000? Since it isn't 'real' money anyways, wouldn't it better for them to have me keep paying?"
Not the way it works. When you "purchase" an asset this way you have only put up a $50,000 share. The lender has bought in for the remaining quarter mil. Paper is then created describing the manner in which you agree to buy him out. No money has been invented for this transaction to occur. It's all done in pre-existing dollars.
Should the appraised value of the asset fall below the amount of your indebtedness, you have a choice before you. You can either decide to stiff your lender, leaving him to hold a house worth $200,000 (in your example) into which he has sunk $240,000 in cash... or you can decide your credit rating is more valuable than the cash difference, in which case you continue paying off the loan. And you realize you have overbid for possession of the house.
If your loan rate ratchets upward, of course (as in an ARM), you may no longer be able to afford the payments. In that event, both you and the current holder of the note (not to mention all the bondholders who've bought a piece of the action) are the losers. The only gainer is the guy who originated the loan, selling it swiftly to hapless and credulous rubes.
But you're very much correct in thinking that it's to everyone's advantage to have the note holder and the purchaser get together to work out some fresh terms-- as is being done now by Morgan Stanley and hardly anyone else. This approach ensures in most cases a continuing (though reduced) cash flow, instead of nothing but a decaying and possibly unsalable pile of bricks on the books. For some reason most lenders would prefer to have this sensible option forced down their throats than to undertake it enthusiastically.
http://www.inman.com/news/2007/10/3/mortgage-bankers-oppose-workouts-bankrupt-homeown
The bailout package written up by Congress held 1100 pages of stuff designed to protect the financial world from the consequences of its own foolish behavior... but nothing requiring workouts of troubled loans as a condition of bail money. And MS has been just about the only institution to figure out that this direction is in its best interest.
Finally, George has his doubts that the Panics of either 1907 or of 2008 were related to the unrestricted activities of bucket shops. He says this:
"A bucket shop is sort of like a bookie who doesn't lay off the bets he accepts elsewhere."
Exactly. It's the creation of massive amounts of highly leveraged derivatives, based on the theoretical value of risky assets whose worth cannot be properly valued by the purchasers and traders.
"So a bucket shop, no matter how many orders/customers it has would have NO effect on the real stock market (since it doesn't perform real stock transactions)."
It DOES impact that greatly smaller realm, the world's stock markets, when all the world's financial markets have tasted deeply of the apple. Once they stop loaning funds, lots of things dependent on funding come to a halt. Like industry.
That's similar to the way the Great Depression came to pass as well. One sector collapsed and brought down the rest.
Published: November 1, 2008 11:23 AM
michael
Michael Smith writes "As others have pointed out, Michael's fundamental mistake is the failure to realize that any increase in demand achieved by printing up the 1,000 new $20 bills will be canceled by the decrease in demand that results from having everyone else's $20 bills decline in value by a corresponding amount."
I'm not recommending any increase in demand. I'm recommending an increase in economic activity-- number of transactions per unit of time-- as a remedy for periods when economic activity is stalled. As in the current predicament.
Further, I haven't recommended any increase in the amount of currency in circulation. Inflation can be curtailed by a retirement of new money put into circulation after it has done its work. And the perfect vehicle for such a curtailment is the payment of federal taxes. One puts in the fresh infusion of money, it does its work, being taxed multiple times, and then one retires the now-superfluous money. All that is required is fiscal discipline, and a more earnest attempt to balance the federal budget than we have recently seen.
We were on the right track in the late 1990s. If the current dilemma results in an increase in inflation, it will only point to the way in which the infusion of funds has been mishandled. So far, however, we seem to be seeing a mixed situation, with deflation in the prices of many basic commodities.
Others raising your voices against my heresies, please note that I am restricted in the number of responses per day I am permitted by the moderator. Valid questions have been raised, particularly by mitcjm in his latest post. I will have to return to these at a later date, when time and the moderator permit me a fuller answer. Thank you for your consideration.
Published: November 1, 2008 12:11 PM
Inquisitor
Mitcjm, we are speaking to a robot. It is best we ignore it, I guess.
Published: November 1, 2008 12:13 PM
mikey
Michael writes:
I print up a thousand bucks in twenties, and start distributing them, every morning, in front of a bakery. Everyone goes in with their new money and buys everything on the shelf. This prompts the bakery to bake more stuff the following day than he did this morning. Their suppliers get a bigger order. They give their employees more hours. And the state, the community AND Uncle Sam all get a cut of the proceeds, in the form of more taxes.
The bakery owner and employees both have more money so they spend more money, benefitting all the other stores on the block. These people all pay taxes, so the state, the community and Uncle Sam benefit yet again. We get more public services from this funding. And more people have to work more hours to satisfy the new demand that has been generated. All buy more stuff with their additional income.
It's specious to say that the money being freshly created is not "backed" by production. It can work every bit as well when it precedes and spurs production. That's what an economic stimulus IS.
But maybe someone can point out exactly where this analysis goes wrong. Use actual examples, please, not mere theory.
--------------------------------------------------------------
Print a thousand dollars and use it to travel to Zimbabwe.There is your actual example.
Money is not capital. It doesn't fund anything.
"And more people have to work more hours to satisfy the new demand that has been generated."
I like the "have to" part.... are you advocating a subtle, disguised form of forced labor?
Published: November 1, 2008 12:15 PM
Michael Smith
michael wrote:
Merely having regulations is not quite the same as having well written, effective regulations with enforcement. Had we, for example, had sanctions in place against selling mortgages whose payees had not been vetted, or for whom false documentation had been submitted, we might not have been in quite the mess we're in.
In the first place, the *owner* of a particular sum of money is the only person with any right whatsoever to decide what risks should -- or should not -- be taken in investing that money. My money belongs to me, not to you, not to society, and not to any government regulator/bureaucrat/goon that you and society might elect. If I wish to loan my money to the first random stranger I encounter in the streets, without any “vetting” at all, that is my business -- not yours -- and nothing justifies the notion that anyone else has a right to use force to prevent me from doing so.
Now, if I choose to put my money in a bank -- and give that banker the right to lend it as he sees fit -- that, too, is my right and neither you nor the government has any right to forcibly interfere. Provided the banker does not commit fraud by misleading me as to the type of investments he may make or by misleading borrowers about the terms of the loan -- then no crime has been committed and there is no grounds for government interference.
Morally, the government has no more right to dictate how I may invest my money than it has to dictate with whom I may sleep. Neither is any of its -- or your -- business.
What’s more, your attempt to blame the reduction in lending standards that occurred in the residential mortgage market on a lack of regulations and government involvement is preposterous. Regulations like the Community Reinvestment Act and the existence of government-sponsored entities like Freddie and Fannie, along with the extreme easy-money policy of the government-run central bank that endlessly inflates our fiat money supply -- these are all central factors in creating this problem and now making it worse.
It’s your beloved, wise, infallible, omniscient, indispensable, irreplaceable and benevolent government regulators that have created this mess. How many times must they fail before you realize that they -- not some nonexistent free market -- are to blame?
Published: November 1, 2008 12:26 PM
Michael Smith
I'm not recommending any increase in demand. I'm recommending an increase in economic activity-- number of transactions per unit of time-- as a remedy for periods when economic activity is stalled. As in the current predicament.
Further, I haven't recommended any increase in the amount of currency in circulation. Inflation can be curtailed by a retirement of new money put into circulation after it has done its work.
If it were true that "putting the money in" resulted in "an increase in economic activity", then taking the money out will result in a *decrease* in economic activity.
Published: November 1, 2008 12:48 PM
greg
Here is what you all are missing. There has been a huge drop off in the velocity of money. Investment banks were leveraged 40X against short term deposits and it was invested in the general market, real estate and commodities. This over leverage acted like increasing money supply and prices artificially went up. When the market started to collaspe, people moved out of these markets and you saw a decrease in prices and that was accelerated by margin calls. Basically going artificially down.
Now the Fed seeing this current deflation in the market is free to increase the money supply to offset this reduction in the velocity of money. Is it the right thing to do? I don't know, but when gas was selling at $1.50 a gallon I would hate to see it go to $2.00, but when it was selling for $4.00 a gallon, having it go to $2.00 makes me all warm and fuzzy as I head to Starbucks to spend my new found savings.
Published: November 1, 2008 2:49 PM
Stanley Pinchak
Michael Smith,
I want to clarify a point that you touched on. Regulation and furthermore, good regulation that michael wants requires a level of knowledge which is not attainable in this world ex ante. If good regulation were feasible, what is the difference between regulation and socialism, why is one attainable, but the other hopelessly flawed? Since Mises and Hayek (although the latter relents somewhat on the regulation aspect) showed the knowledge problems inherent in governmental intervention (and corporate vertical integration) are insurmountable, how can we hope to obtain good regulation. It requires a level of knowledge which is on the order of omniscience. Sure we can look back on a particular period of history and fight the last war going into the future, but we can not know in advance how the regulations necessary to correct the errors of the past will affect the actions of entrepreneurs and society as a whole in the future. Government can only see the immediate effects as Bastiat and Hazlitt repeatedly pointed out. They can not see how their attempts at good regulation will ultimately play out. This is the fundamental flaw with empirical economics as practiced by the technocrats and central planners. This is why Hayek warned against ignoring theory in favor of easily obtainable statistics.
I highly recommend an article that I was recently directed to by this blog, "Toward a General Theory of Error Cycles," by Hulsmann. In this article Hulsmann endeavors to ground Austrian Business Cycle Theory into a more general theory of governmentally caused error cycles. I found its argument quite persuasive and it leads one to recognize the futility of governmental intervention in the market to cause anything but harm. Hulsmann as well as a student of his also had recent articles on deflation as an irrational bogeyman. They point out that deflation is far from the nightmare painted by mainstream economists on the payroll of the biggest loser in a deflationary economy, the state. Instead deflation is a more overt (and it could be argued more just) form of redistribution as compared to inflation as the gainers and losers are obvious as opposed to hidden in inflation. The gainers are those who have acted prudently and within their means, the losers those who have over leveraged themselves and acted recklessly. Saving is not discouraged and capital consumption encouraged, and as long as deflation is not caused by governmental illusion, it is a phenomenon that the market can operate under without causing error cycles. An increased purchasing power of money is nothing to be afraid of.
Published: November 1, 2008 3:56 PM
stefaningberg
pretty much everyone has great points here. The discussion is good and it all makes sense since there is sound reasoning behind it. We know "fiat money" is bad, Keynsiane conomics is flawed and Gold is the only real medium of exchange. And yes while reading this article I agree with Frank Shostak and the points he is making. But sometimes I feel everyone contributing to this great website is turning in circles and not moving forward.
The point here should not be to prove to each other that we all understand that what the Fed and all other central banks are doing is wrong and has been wrong for a long time. The point should be to find ways forward. Thats is important in times like these, to not let the mainstream blame neo-liberalist for all what is wrong with our economy today but to fight back and add more people to the cause. Don't teach people what was wrong in the past but show them ways forward..maybe one day we will win out
Published: November 1, 2008 6:57 PM
Eric
micheal writes, I only note that now that we are embarked on a world built on the basis of a flexible and responsive currency supply, we just can't get there from here.
Well grasshopper, don't you mean YOU can't figure out how to get there? The sage Ron Paul has the way and all it requires is a small bit of freedom. Nobody has to do anything different, unless they want to. It's this easy,
Just legalize the use of other moneys. If the fed knows best, they've nothing to fear.
You also say you've refuted rothbard, ok, where's the refute on his theorm, and since I'm sure you've not really read it, here is the crucial part,
Qutoed from http://mises.org/money/2s8.asp
Thus, we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not--unlike other goods--confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices--i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value. Other goods have various "real" utilities, so than an increase in their supply satisfies more consumer wants. Money has only utility for prospective exchange; its utility lies in its exchange value, or "purchasing power." Our law--that an increase in money does not confer a social benefit--stems from its unique use as a medium of exchange.
An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the power of each gold ounce to do its work. We come to the startling truth that it doesn't matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit. There is no need to tamper with the market in order to alter the money supply that it determines.
Published: November 1, 2008 11:07 PM
Robert
The Austrian economist Steven Horwitz on how current institutions operate:
"In really existing capitalism with central banks, an increased relative demand for currency due to uncertainty can indeed touch off a decline in aggregate demand (assuming anything less than perfectly flexible prices) if the central bank does not react properly."
Some claim that free markets have never resulted in an overall drop in economic activity. One should understand that this is a meaningless tautology, not a statement about any empirical reality. Those putting this view forth also claim that free markets have never existed.
Published: November 2, 2008 3:51 AM
michael
michael: "Further, I haven't recommended any increase in the amount of currency in circulation. Inflation can be curtailed by a retirement of new money put into circulation after it has done its work.
M Smith: "If it were true that "putting the money in" resulted in "an increase in economic activity", then taking the money out will result in a *decrease* in economic activity."
Very much so. When the economy is stalled you get the engine going by making more funds available. And when it's overheated and there are speculative bubbles in the making fuelled by excess investment funds, you take money out to slow it down. This is just very basic stuff.
No one here has refuted that either... because that's the way we get out of these contractions, every time. More money comes into the marketplace, more consumers can consume, and so more producers have to hire more employees. The money comes back to the issuer in the form of taxes on the economic activity that has been generated.
No amount of ideological fervor can change such facts. They've been demonstrated on too many occasions. Where the government goes wrong is to continue running deficits, instead of retiring a portion of the money that comes back to them. Greater fiscal responsibility on the part of Congress would get the machinery up and running.
Instead we've been running in the opposite direction, with operating deficits greater and greater every year. We'll just end up in the pockets of our creditors that way. This model is unsustainable.
Then Stanley Pinchak offers this: "Regulation and furthermore, good regulation that michael wants requires a level of knowledge which is not attainable in this world ex ante. If good regulation were feasible, what is the difference between regulation and socialism, why is one attainable, but the other hopelessly flawed?"
A rocket scientist is not needed. Good regulations usually don't go into place not because no one has thought of them; it's because they are politically unpalatable. Meaning, those who don't want them give tons of cash to members of Congress. Informed individuals who do know what should be done tend to be disorganized.
A good example of the unwisdom of letting the markets take care of themselves is adjustable rate mortgages. The loan placement market loves these because it looks like a good way to rook borrowers into obligating themselves for greater repayments than they ever bargained on. So lenders pushed hapless buyers in that direction.
But the joke was on them, when the loan rates reset and the buyers could no longer afford to keep up. So families sudenly in over their heads are defaulting now in record numbers.
A rational response would be to renegotiate those sinking loans, because having some amount of money come in is a lot better than having nothing but a stack of bricks with broken windows and weeds on the lawn. But the current holders of the notes are too far from the realities of their own poor choices to understand that.
A quick fix? Outlaw ARMs.
Published: November 2, 2008 11:20 AM
Eric
Micheal, we wouldn't need ARMs if the FED was abolished, since w/o them there'd be no more legal counterfeiting and the money paid back on a loan would be equal to the money borrowed, instead of being diluted away into the politicians pockets.
Published: November 2, 2008 12:06 PM
adi
Hello all!
Actually I think that injection of “outside money” whether it is made by the central bank or a counterfeiter (or both) can help to stimulate aggregate demand and production when economy is in recession. Recession might have been caused by economic wizardry of central bankers or some external factors (like a drop in the import demand in the customer countries for a country heavily specialized on exporting some specific products).
This works because many agents are really liquidity or cash constrained or will became such in a general economic downturn. Suddenly there will not be credit available to finance day to day activities and level of economic activity could easily drop. Even if there would be enough “outside money” available this would not in all cases lead to situation where “inside money” is loaned to corporate sector or households. They might also try to increase their balances of “outside money” and not to spend. Deflationary spiral could follow from this. And if resources are temporarily idle for this reason then there will not be any shadow price for their use in other sectors. So no “Broken Window Fallacies” then ? So volume of production of both consumption and capital goods could in theory to increase without corresponding increase in the prices of those goods. Then production decisions of other industries would not be affected by the price changes of inputs.
And it is important to keep an eye also for balance sheet items and their liquidity characteristics and not just for some income stream in particular year. If households are heavily indebted they wont consume. And I have heard saying which goes like this: “Liquidity is not about physical amount of money readily available, it is about the state of confidence”. Excess demand for money leads temporarily to negative excess demand in the goods market (labor being considered as a good). It takes time for disturbances to have their all effects and go away.
But how it could be possible for government to keep production in the same level as before by monetary injection without causing twin deficits (both negative trade balance in goods and negative net lending for general government sector)? Import prices would increase and have effect on domestic production if imports are used as a inputs in production or investment goods. Governments public production could also easily divert resources to it from still working private sector industries. It could not limit purchases only to those industries which have been most affected. There is a connection between different industries which can be seen by Input-Output tables (derived from the Supply and Use tables, SUT's). It is not at all clear that prices of factors could not increase. And what happens to gross fixed capital formation if industries start to divert production to other goods?
Actually I think that only way for government to manage demand is to manage also supply; sort of market socialism where investment and production decisions (and most of consumption decisions) are made by “Il Ministro della Produzione nello Stato Collettivista”. And we know something about what sort of outcomes came from this kind of system.
Here in Europe existence of state owned enterprises (SOE's) in many countries just postponed needed structural changes since politicians could not allow for political reasons those go under. Some might be monopolies and appear to be profitable just because of institutional arrangement. Then there would be wasteful activities.
Is there some kind of aggregation problem in the Austrian economics? First analyzing individual cases like production or investment decisions from the viewpoint of individual agent and then claiming that this generalizes into whole economy ? I do not really know or no one has explained for me how this works in neoclassical or even in the heterodox economic theories... (Except by introducing some mathematical formalities like continuity in the unit interval and a zero measure for individual producer-consumer agents . Then integrate and you have a whole economy there).
Sincerely yours,
Adi,
national accountant and economist working for the “Govt”
Published: November 2, 2008 12:19 PM
Eric
Adi,
Here's what you missed, from Rothbard:
" To gauge the economic effects of inflation, let us see what happens when a group of counterfeiters set about their work. Suppose the economy has a supply of 10,000 gold ounces, and counterfeiters, so cunning that they cannot be detected, pump in 2,000 “ounces” more. What will be the consequences? First, there will be a clear gain to the counterfeiters. They take the newly-created money and use it to buy goods and services. In the words of the famous New Yorker cartoon, showing a group of counterfeiters in sober contemplation of their handiwork:
“Retail spending is about to get a needed shot in the arm.”
Precisely. Local spending, indeed, does get a shot in the arm. The new money works its way, step by step, throughout the economic system. As the new money spreads, it bids prices up—as we have seen, new money can only dilute the effectiveness of each dollar. But this dilution takes time and is therefore uneven; in the meantime, some people gain and other people lose. In short, the counterfeiters and their local retailers have found their incomes increased before any rise in the prices of the things they buy. But, on the other hand, people in remote areas of the economy, who have not yet received the new money, find their buying prices rising before their incomes. Retailers at the other end of the country, for example, will suffer losses. The first receivers of the new money gain most, and at the expense of the latest receivers.
Inflation, then, confers no general social benefit; instead, it redistributes the wealth in favor of the first-comers and at the expense of the laggards in the race. And inflation is, in effect, a race—to see who can get the new money earliest."
Published: November 2, 2008 12:36 PM
mikey
From Michael:
" When the economy is stalled ...."
Please answer the following question. What, in your view, causes an economy to "stall" in the first place?
Published: November 2, 2008 1:20 PM
Kurmudjin
"michael" in his umpteenth post above, appears to have inadvertantly refuted his own arguments:
"Where the government goes wrong is to continue running deficits, instead of retiring a portion of the money that comes back to them. Greater fiscal responsibility on the part of Congress would get the machinery up and running."
If michael can give us a documented example of Congress or The Fed ever practicing such "fiscal responsibility" and intentionally deflated the money supply after an intentional inflation, by recalling/retiring the money they "printed" to spur the economy, then we should agree that such a manipulation might make sense as an option to consider amongst others. Whether it is the wisest choice, with the least harmful long-term consequences, is a separate argument.
It appears that michael has the "unconstrained vision" of government that Dr. Thomas Sowell speaks of, http://www2.nationalreview.com/hoover/20081027.mov
I would venture to say that most advocates here who follow the Austrian School have the opposite, "constrained vision:" that human nature obligates us to view with suspicion the powerful and the politicians who claim to act in good faith on our behalf.
[M]ichael should read The Mirage of Inflation, from Hazlitt's One Lesson and consider whether an intentional centrally-created inflation could ever be stopped or reversed by further central action. (This is a much briefer and easier to digest synopsis of Credit and Money arguments put forth by von Mises, Hayek, et al in their more scholarly volumes.) I have never heard of any historical example of such occurring. Has anyone else?
Published: November 2, 2008 1:55 PM
Geoffrey Transom
The core problem with the Keynesian framework is the inability of monetary (and fiscal) stimulus to provide anything other than temporary economic stimulus (absent long-run "money fooling" or the violation of an intertemporal budget constraint, both of which are impossible).
But a secondary - and no less important - problem is the assumed existence of a benign government (benign with respect to social preferences).
That is, Keynes; theory assumes one of two things:
EITHER, the makeup of economic activity is unimportant (all increasess in GDP by expenditure are equal in utility terms)
OR that the government will use its monopoly of violence to extort money which it will then use SOLELY to satisfy inadequate demand IN THE INDUSTRIES IN WHICH PEOPLE WOULD ORDINARILY INVEST.
My worldview is such that I do not believe that there exists any species whose actions are not SELF-interested; this applies especially to species who make their way through parasitism.
Thus government (a parasitic organism composed of members of a political party, where each party has its OWN preferences and its OWN utility function) should be expected to produce socially-optimal results only by chance, specifically when the social optimum coincides with the optimal outcome for the political party in power.
In this I am at serious odds with folks like Aristotle and the other 'natural aristocrat' theorists; I believe that if you leave a big pile of money (the tax pot)) lying around, it is far more likely to attract unscrupulous mountebanks, who will swear blind to their intention to utilise it on behalf of the public... and then will set about enriching themselves and their cronies (yes, I'm looking at you, Dick 'dick' Cheney).
George Carlin made some very astute observations in his life, but none more so that the idea that if the current state of politics is as bad as we all think it is, then it says something none too complimentary about the polity.
But Carlin missed the idea that power attracts those who seek... power.
Cheerio
GT
France
Published: November 2, 2008 4:06 PM
Econophile
This was fun reading. Thank you, Michael, for stirring the pot so to speak. But my guess is that your correspondents are just denting their pick on your intellectual hide.
If you're going to engage in a dialectical debate, you can't start in the middle of a paragraph to win your point. You have to refute the theoretical basis of the point Shostak makes and you don't. It makes me suspicious of your claim you have read Mises and Rothbard. If you did, you would at least have challenged the opposing ideas in their "mere" theoretical language.
You point to the need for regulation to stop these pesky business cycles we keep having. This convinces me that you haven't read the masters.
There are some good papers floating around that point out that the current cycle is just your basic credit cycle caused by the Fed, our central banking authority. The theory behind this concept, developed by Mises, is pretty convincing, if you would read it.
Also, your analysis of the current housing-subprime crisis is not very convincing when you analyze it in a vacuum without considering the impact and role of monetary policy. But I don't think you'd be open to this kind of analysis.
Here's something to think about: these cycles seem to becoming more frequent and each time they impact different asset classes. So, if you start pumping money into the system, and you regulate all the "risk" out of the housing market, the bubble will just show up in some other asset class. It always has.
But, here is the challenge to you: let's see what is the result of the government's handling of this crisis. My guess is that the result will not be what you think. You think it will grease the wheels of commerce and that things will just go back to normal. You'll concede some economic distortion, but you think that things will just be great. Let's see where we are in a year.
Published: November 3, 2008 4:16 PM
frank
All the article can be refuted extremely easily (as Keynes would indeed have done it):
1) YES government is taking the money NOT from thin air but from the existing productive capacity (direct taxation, debt and printing money are all taxation)
2) YES governement is redistributing it to the (currently) non-productive segment (more or less, depending on how you define being "productive")
3) and YES this is VERY good if the INCREASE in productivity thus created (non-productive group become productive) surpass the DECREASE in productivity from the existing productive group (productive group become less productive)
An easy example of this is:
The money is taken from the productive creator/designer of $10,000 dress for Britney et alia, from the $10 billions bonus of the "productive" banker producer of derivative products AND is redirected to thousands (if not millions) of indigent american children in the form of childhood immunisation and basic health care which will lead to productive citizen in the future instead of poliomyelitis stricken disabled.
That is what Mr Shostak (and most "austrian" economist) still fail to comprehend! Fortunately (for them* and for others) people in the government know
better.
*I say "for them" also because without government funded basic research there would not only be no internet but they would likely not have the life expectancy we all enjoy.
Published: November 4, 2008 2:07 PM
Stanley Pinchak
frank,
redistributing wealth reduces the incentive to create wealth. This leads to a poorer society under redistribution as compared to Laissez-Faire conditions. The state can not know ex ante whether its interventions and redistributions will create a more productive society. The fact that the interventions are by definition not voluntary guarantees that the psychic satisfaction of one group is reduced compared ex ante. If it were true that slavery were more productive than free exchange (which is what you advocate in all but name), that would still not make it the best system for the satisfaction of wants, one of which is obviously leisure.
Government's directing of resources towards particular industries and research guarantees that those industries will become less efficient, bloated, and rent seeking, and that research will be completed as slowly as possible. How else can the newly created beneficiaries of the state's largess increase their share of the budget? It is amazing that any research is even completed as a result of the massive intervention of the state. This shows that there are altruistic researchers, willing to actually work for their government hand out. I have first hand experience in government research and it is not pretty (sorry taxpayers, I have since become enlightened). It seems as if the only time work gets done is to write up the grant request for the upcoming year.
Research is most efficiently produced under the free market. How many ill children need research on creating more destructive nuclear bombs? How much more money would be available from philanthropists for research on diseases which the market desired to cure if the governmental research leviathan were cut down? Furthermore, how many more charities would be able to efficiently provide care and services to the indigent if the bureaucracy and negative incentives of the welfare state were eliminated? You do realize that state subsidies lead to more of what is subsidized? The state subsidizes single parent indigent families. The state may give a man a fish (after it steals 5 from the productive and consumes 4 for its bureaucracy), instead private charities offer a helping hand.
Published: November 4, 2008 4:28 PM
Econophile
Frank:
Those are just wonderful ideas, assuming this is not a put on. I think it would be great if such intelligent people like you were put in charge of the economy because you seem to know what's best for us. Nothing worthwhile is created by business since the government knows best and does it for us. As Decider you can substitute your decisions for the millions of us who are obviously incapable of making our own decisions. Wait, wasn't this already tried somewhere? As I recall it didn't work very well.
Published: November 4, 2008 4:34 PM
frank
for stanley and econophile
You make the same errors that ideologue from the left or right do: you see everything as black and white.
Here is the point that you both miss:
1) because driving my car faster (50km/hr instead of 10km/hr) to go home bring me home faster does not mean that driving my car 1000 km/hr will get me home faster!
2) because drinking a glass of water is good does not mean dringing a gallon in one shot is!
So while it is perfectly true that "redistributing wealth reduces the incentive to create wealth", that does not mean that it does redistributing *some* wealth have beneficial effects that are themselves superior (like creating wealth elsewhere at a faster clip - look again at my examples)
Same for government research: some research are better done in private settings. But some research will NOT occur (unless funded or done by government)
1) because there is NO short-term incentive for corporation where the next quaterly earning statement is usually the most important motivator (options...) and 3-5 years is what is considered long-term (that is John Templeton's definition! and he is described as himself a long-term investor!).
2) because the research is too risky (high risk of not bearing any result) for even a large corporation, even though on a probability-adjusted basis the potential result would be very worthwhile.
For econophile:
"Nothing worthwhile is created by business"
As I said typical black and white thinking. We had 8 years of that... It killed the republican party.
"As Decider you can substitute your decisions for the millions of us"
Not at all, indeed 250 millions americans have DECIDED this. If you would go and do a referendum wishing to abolish the EPA in the USA (as some "austrian economist" are suggesting), you are 99.999999% certain to lose. Not even the republican would even dare suggest to do so!
However what you want is that very wealthy individual (and whatever the means in which they obtained their wealth - wether by monopolising resources or operating systems, intimidating or threatening, or running the mafia, or wether they are a mentally-handicapped person who just happen to inherit a huge sum) you would have the right of life and death over indigent children (see my example).
Fortunately, we, the people, have said NO.
If you don't like it you can find a different country (unfortunately for you, there doesn't exist any such country (as the austrian economist are fanstaming) - it is just as hypothetical, ideologically driven, theoretically and practically impossible (given human nature) than the communist dream).
There isn't a single successful country on earth without both a market economy AND a strong government.
Indeed without a strong and democratic government a free market economy is impossible.
Published: November 4, 2008 7:50 PM
Econophile
Frank:
Thanks for the response. I would like to have a nice discussion, but at this point we seem to be standing on different planets which means we haven't found a common frame of reference with which to begin.
But let me thank you for calling me an ideologue. Mea culpa.
I think Stanley has adequately responded to your suggestion that wealth redistribution has some beneficial effects. I am sure that it does have some good effects as shown by your example, but would that be the best way to solve the problems you point out? Usually statists can think of no other solution to problems other than government intervention. Stanley has pointed out the negative effects of that thinking. In my view it's a slippery slope which causes less effective results over time than would be otherwise achieved by the free market. And, as Stanley points out, government is a greedy, expansionist leviathan.
You are correct that there is some research that may not be undertaken by the private economy. Usually private research has some aim such as bettering the public by providing things they want (i.e., are willing to pay for). Rarely does private research aim at something people don’t want. I would grant that there may have been some good research that has come out of government labs, but see the above paragraph. How do you know such research wouldn't have come from the private realm?
Like many critics of the free market you look at the Republican Party or the Bush administration and assume that's the free market in action. If so, and I apologize in advance if I am wrong here in my assumption about you, you are incorrect. You are saying that the rest of the country has the right to trample my rights, which, as you point out, is exactly what they have done. You think this is fine. I think it has lead to a loss of my freedom as defined under our Constitution and a reduction in wealth and well being for everyone. I think the Austrians have explained this phenomenon quite well.
Frank, I'm not ready to bail out of here any time soon, so my goal is to make it a better place. Sorry you disagree. Be careful what you wish for, as they say.
Published: November 5, 2008 4:58 PM
fundamentalist
Frank: “that does not mean that it does redistributing *some* wealth have beneficial effects that are themselves superior (like creating wealth elsewhere at a faster clip - look again at my examples)…”
There is only one way to create wealth, and that is through savings. Savings are invested in new business ventures, new equipment and new technologies. That’s not to say that charity isn’t a good thing. It is. But it doesn’t create wealth. In fact, giving to charity reduces the amount of savings available for investment and retards wealth production. But it still may be worth it.
The real question is not whether to help people or not, but whether private charity is better than state charity. Anyone who has studied the issue knows that private charity is far more effective and efficient than state charity. The same thing goes for state-funded research, which is mostly waste. Although some research may not be funded for profit, history has proven that wealthy individuals will provide the necessary funds for such research. There is no need to the waste that state-funded research creates.
Published: November 5, 2008 5:25 PM
frank
"How do you know such research wouldn't have come from the private realm?"
1) Because, as I has explained, there would be no short-term (less than 5 years) private benefit for doing so.
2) because the result of the research may not be safeguarded by patent.
Ex:
a) no research will get done on a naturally occuring inexpensive product that could have significant health benefit because you would not be able to finance the expensive double-blind studies with patents (since you cannot patent it)
b) no private research would be done for preventive or epidemiologic research. There is no (sufficient) money to be made by an individual for telling the world that X activity is dangerous (and no, selling a book on it is not enough to pay for that type of research). And yet the benefit can be absolutely extraordinary (and compensate handfully for improductive reserach - just like publicity - you don't know which add will actually gives result until you try it)
"The real question is not whether to help people or not, but whether private charity is better than state charity."
Not at all.
The real question is: does redistributing wealth CREATE wealth by redistibuting money/savings from improductive activities ($10 millions bonus to CEO who bankrupt their banks, destroy business, and dilapidate the life-time saving of individual) to HIGHLY productive activities such as childhood immunisation.
But I do understand that you trying to go around the question! Because you indeed know the answer and it doesn't "fit" your theory, and you face the same problem as the communists: reality is stubborn and doesn't "fit" ! So let's not answer the troubling question and repeat an irrelevant mantra
Nonetheless, this should not be taken as a complete criticism of the austrian school. There is fundamental absolutely essential principles in it and actually I do think it is in years ahead better then the corrupt Bush's republicans. Nevertheless, and this is what I deplore, by trying to misapply it, shall I say mindlessly, in situation where either the theory does not fit because other parameters must be taken into account, or the theory is ok, but the "practitionners" can figure out how to apply it, you do a great disservice because you turn off virtually every intelligent person. (The case I presented you is typical of why people walk away from the austrian school).
Result: you become a marginal ideology easily dismissed. In a sense you don't think that Adam and Eve were created with dinosaurs as a famous person think (and you can see her fate...), but you are not too far from the equivalent in the economic world.
I think with a little bit of introspection and a little more of sophistication you could turn it into something VERY useful. But for this to happen, you would need economists that are not only repeating "classic" authors but actually improve on it.
Published: November 5, 2008 8:28 PM
Gerry Flaychy
"The introduction of money doesn't change what was said so far. For instance the baker can exchange his ten loaves of bread for $10 — he then uses money to secure ten potatoes. Likewise the potato farmer can now exchange his ten dollars for ten loaves of bread. Observe that, apart from fulfilling the role of the medium of exchange, money has contributed absolutely nothing to the production of bread and potatoes.
Nonproductive Consumption
So far we have seen that to secure potatoes, the baker had to exchange bread for money and then employed money to secure potatoes. Something was exchanged for money, which in turn was exchanged for something else — or something for something is exchanged with the help of money.
Trouble erupts when money is created "out of thin air." Such money gives rise to consumption, which is not backed by any production. It leads to an exchange of nothing for something." Frank Shostak
For the 10 $, I don't see any difference if this 10 $ is coming from the king, or the central bank, or a counterfeiter: the baker can exchange his ten loaves of bread for this $10, and then uses this money to secure his ten potatoes, whatever the source of this 10 $. In either way, this 10 $ is backed by any production.
Published: November 5, 2008 9:07 PM
Stanley Pinchak
frank,
Austrian Economics is an a priori science. If there is no logical error in the deduction, then based on the truth of the action axiom, the deduction is true. I fear that it is people who fall into the trap of the middle of the road reasoning as pointed out by Mises who are in need of introspection. In your example you have assumed a particular set of values and their ordering and utilize force to obtain them. By doing this you are stepping from the economic realm to the political and ethical. Austrian Economic Theory and History prove that attempts by planners to inflict their value scale on society leads to a poorer society. Being a value free science, Austrian Economics doesn't tell you what to do or not to do in a particular situation, it only can tell you what outcomes may happen when a particular action is taken. The fact remains that central planning leads to a lower overall level of satisfaction for society.
The onus is on you to explain why the negative ramifications, which will be both direct and indirect, of your planning are justified in a coherent and universal manner. For you have instituted an ethic by the political enforcement of your values. If you say that for utilitarian reasons we must rob A and give to B to help C, you must be aware that this ethic is not universal and a very dangerous ethic to subscribe to. Rothbard points to an example of utilitarian ethic in action in the case of a small town with a very small minority of redheads. The majority of the town dislikes redheads and would receive satisfaction, and would even increase productivity and scientific advancement if they were not so distracted in their animosity towards redheads. The utilitarian ethic would say that the best solution is the final solution. Eliminate the redheads and the majority will increase their satisfaction and subsequently their productive capacity. Luckily you seem to have a dictatorial or monarchical viewpoint of implementing your values, in this case, society may be better off than in a democracy where the former illustration has a greater potential for occurring. You as dictator may see financial benefit for yourself in merely forcing these individuals to leave(after taxing them of course), or trading them like chattel to locales outside of your realm.
If you want to discover where you have gone wrong, I recommend Rothbard's, "The Ethics of Liberty." If you don't believe in natural rights and you still wish to subscribe to utilitarianism, I recommend that you read Henry Hazlitt's, "Foundations of Morality."
Published: November 5, 2008 10:39 PM
frank
"Austrian Economics doesn't tell you what to do or not to do in a particular situation, it only can tell you what outcomes may happen when a particular action is taken."
"Austrian Economics is an a priori science. If there is no logical error in the deduction, then based on the truth of the action axiom, the deduction is true"
Ok, if I "redistribute" the 10 millions bonus of failing bankers to institute universal childhood immunisation, then austrian economics tell me that I will make a few very incompetent bankers quite unhappy and make millions of children healthier and grateful
Youpi! No problem with austrian economics!
"Austrian Economic Theory and History prove that attempts by planners to inflict their value scale on society leads to a poorer society."
Oups! what is happening here! :
Value scale? --> weren't we suppose to not "assumed a particular set of values" ?
History? ---> wasn't it an a priori theory? Then what has reality (aka history) has to do with it? Since when to we need to check history to verify that 2+2 was equal to 4, 10 years ago? So it isn't anymore a "deductive" theory?
"The fact remains that central planning leads to a lower overall level of satisfaction for society. "
Again !
1) "lower overall level of satisfaction" => value judgment!
2) "the fact remains" => not anymore a deductive theory but a theory verify by EMPIRICAL FACTS !?
And then you get to the really uncomfortable stuff: if you are "valuing" something better than something else, then you have to also accept that I can value childhood immunisation better then the incompetent bankers bonus. It's my values against yours. Who wins? Depends if you are in a religious country (the dogma wins), a dictatorship (the dictator's view wins) or a democracy (the majority wins). As a matter of facts, in most western democracy, majority has chosen childhood immunisation.
So in conclusion: inasmuch austrian economy is deductive, no problem we agree but really there is not much use for it. But as soon as you enter the real world or use it to say that something is more "valuable" then something else then you enter the non-deductive realms and then you can either
1) extends austrian economy to the empirical world, or
2) keep it as a deductive theory (in which case you cannot issue value judgement regarding any democratic law pass, including any law that would redistribute property)
You logically have to chose between the 2. What will your choice be?
Published: November 6, 2008 12:46 AM
Kevin B
frank: 'Value scale? --> weren't we suppose to not "assumed a particular set of values" ?'
Value scales are demonstrated through action. If I choose X over Y, then I value X > Y. If my value scale is such that X > Y, then aggressive force isn't required for me to choose X. If aggressive force is used to make me choose, then it makes me choose Y, which I value less than X.
Central planners use aggressive force to achieve their goals, therefore their goals run counter to the value scales of those upon whom the aggression is imposed.
Published: November 6, 2008 2:58 AM
Kevin B
frank: 'if you are "valuing" something better than something else, then you have to also accept that I can value childhood immunisation better then the incompetent bankers bonus. It's my values against yours. Who wins?'
In order to minimize dissatisfaction so far as we can measure, everyone would put their personal property to the uses they value most. You are free to put your resources toward childhood immunization, and others are free to give money to bankers, etc. Nobody should "win" the wrestling of others' resources out of their hands unless your goal is to increase conflict.
We try to recognize (and respect) private ownership, in order to minimize conflict over scarce resources, in order to minimize dissatisfaction.
Published: November 6, 2008 3:12 AM
frank
"Central planners use aggressive force to achieve their goals"
Yes, but in a DEMOCRACY the majority wins. So if people gives the government to mandate to redistribute the incompetent bankers money to childhood immunisation, what is an austrian economist to do? Destroy democracy?
Of course one could answer like Stanley: "redistributing wealth reduces the incentive to create wealth" and vice versa and therefore, the redistributive action would have for effect to reduce the incentive to have greedy incompetents as bankers and increase the incentive to create and provide childhood immunisation, and one would have to live with the consequence of the democratic decision as predicted by austrian economist. But this is exactly the outcome that the democratic people wanted !
"Nobody should "win" the wrestling of others' resources out of their hands unless your goal is to increase conflict."
But you are assuming that there is an universally accepted (value-free) determination of what constitutes personal property, and this is not the case. Even among austrian economist there is a big debate of wether software patents should constitute property. And what about inheritance when the money came for "illicit" (but then it may not have been illicit!) gains (from other generation like slave owners), etc.
So you are back to square one: what you consider property may be different from what other considers "property". There is an inherent subjective (shall I say, *value* element to it) aspect to it. For example, personnally I might not consider the incompetent bankers bonus to be "licit" property at all even though you might. So who decide? In a democracry, the majority. So if the majority decide to "redistribute" those bonus, they may not in fact not be taking the "property" of someone else at all (if they define property differently then you do).
Published: November 6, 2008 8:01 AM
Stanley Pinchak
frank,
It is disturbing that you accept as healthy the tyranny of the majority. Did you not read my recounting of Rothbard's fictional anecdote. Did it not illustrate clearly enough the danger behind the utilitarian ethic and majoritarian rule?
You seem to want to talk ethics while constantly cloaking your scheme of redistribution in economic trappings. It is true that any ethical system will have economic repercussions, but let's clear the air. You are defending slavery as long as the majority imposes it. Clearly this is not a universal ethic and thus can not be the foundation of a stable political system. You accuse me of falling into the trap of leftist idealogues, when your ethic obviously sets the stage for Marxist class conflict (really caste). John C Calhoun recognized that there are two ways to gain wealth, the economic means and the political means. He recognized that there are two different groups of people under a redistribution regime, the net tax payers and the net tax recipients. You create a system guaranteed to have inherent conflict and unable to provide equality before the law. You propose a society based on might makes right. How have your proposals advanced the basis of society beyond stone age bands of marauders and brigands?
Published: November 6, 2008 8:56 AM
frank
"You create a system guaranteed to have inherent conflict and unable to provide equality before the law"
I just explained to you that what is the "law" IS already conflictual. Property rights are defined differently for different people. So your argument falls flat. You want to remove inherent "economic" conflict by "a priori" dream-world "conflict-less" property rights.
But in the real world, property right are just as inherently conflictual as the economy. It's the human/animal nature. Whoever is most powerful will write property law to advantage himsel. You cannot "talk away" conflict with nice-sounding words. You are just like the marxists: you have created a world that does not and cannot exist.
But I understand you: it is fun to dream! It is a form of evasion from the daily life. It's like religion or alcool. And that may be what makes the appeal of utopian austrian economy!
Now come back to reality... it's time to go back to work!
Published: November 6, 2008 11:08 AM
Kevin B
frank: ' ...in a DEMOCRACY the majority wins. So if people gives the government to mandate to redistribute the incompetent bankers money to childhood immunisation, what is an austrian economist to do? '
The Austrian economist points out that not all the people agree. If a hypothetical society is so democratic that the wishes of the majority are directly carried out, then the team of central planners is made up of the majority of voters. Unless there is 100% agreement, then there is conflict.
'Destroy democracy? '
I think a better system can be proposed. Prejudice of thought, in this case in the favor of democracy, is detrimental to the understanding.
' But you are assuming that there is an universally accepted (value-free) determination of what constitutes personal property... '
I assume no such thing. As I said, "we try to recognize (and respect) private ownership", and this is a constant struggle. Why should we not expect disagreement over what constitutes "property"? It is unreasonable to expect to solve all our problems in a day.
' ...what you consider property may be different from what other considers "property". '
I agree. And I don't expect a ravenous wolf to behave as a sheep. There are individuals who see me as their property. As long as such individuals exist, no system will eliminate conflict. My personal goal is to reason with others who *aren't* sociopaths in order to proceed to that situation as close to the ideal as can be attained. If you see others as your property, then I don't expect you to understand.
' So who decide? In a democracry, the majority. '
You present a good case against democracy. People, given their unique value scales, are likely to use democracy to achieve their ends at the expense of others. In this way democracy is used as a tool for conflict. Perhaps democracy should be cast aside in favor of a system that does not promote conflict.
Published: November 6, 2008 2:04 PM
frank
"Nobody should "win" the wrestling of others' resources out of their hands unless your goal is to increase conflict."
"Why should we not expect disagreement over what constitutes "property"? "
Great. Now (after I did orient you) you have finally spot the weakness of your own argument (even though you might not have realised it yet!). This is because, if you decry the "wrestling... " that increase conflict than clearly you must also be decrying the "disagreement over what constitutes "property"" which is also source of conflict.
So now you can see reality more clearly: reality is not reality with everything you don't like neatly removed to fit a nice aseptic version of reality that fit like magic the austrian economist prejudices. Reality is messy, it is made of choices. And that includes 1) how you define property and 2) how you allocate resources.
And the values implicit in those choices will always clash between individual (a good example is between you and me!). Society as we know it is the current embodiement of the current resolution of those clashes based on myriad of individual decisions express through the markets and political decision making (easier made in a functioning democrary).
The result is that slavery was abolished (wether you like it or not - I guess you might have had a definition of property different from most people have nowadays) and that universal health care for children is a reality save for a few poor countries in Africa and a large western country which I will be polite not to name (but this is going to change pretty soon as the people of that country have recently cast their vote for some change to come!)
Published: November 6, 2008 10:06 PM
Econophile
Frank:
If you haven't read any of the Austrians, I highly recommend starting with Henry Hazlitt's "Economics in One Lesson." Perhaps then we can have a conversation. Like many people, I think that you really don't know what the Austrians are about. I would say that many of the adherents of Austrian theory have read Keynes and many of the treatises supporting your belief in statist solutions, but have rejected them. You could return the favor by reading something that Austrians believe is a good start for someone who hasn't explored their ideas.
As an aside, regarding your comments on research, it took about 26 years for private companies to develop Lipitor. This includes the orginal research and discovery of statins. Lipitor itself was finally synthesized in 1985, but wasn't brought to market until 1997. Estimates are that it takes about $800,000,000 to bring such a drug to market these days. So, unlike much of government research, private companies brought about a drug that took many years to develop, is beneficial to humanity, and makes money for Pfizer.
Published: November 6, 2008 11:13 PM
frank
Econophile
Sorry, but I have ALREADY read Hazlitt's book (a very good book) and also Gene Callahan book (some parts good, some other thoroughly ridiculous - like the chapters where he recommends switching EPA to be replaced by Consumer's Report ! - This is the type of sheer stupidity and ignorance that lead me to believe that either current austrian economist are either mindless or suicidal.
On the other hand I recommend that you reread my post. You have not answered the main points, so maybe you need to read them a few times to understand them. You are like marxists or religious folks: you have a dogma to defend and so are totally unable to be open to arguments that would shake the dogma. In such minds: dogma is first... reality is second...
This is quite unfortunate. It is a sheer waste of brain power.
As for:
"So, unlike much of government research, private companies brought about a drug that took many years to develop, is beneficial to humanity, and makes money for Pfizer."
This is a good example of ideology.
NOBODY has ever said that private companies cannot perform well (although I understand that your point was that this was a long duration research - but this is a SPECIAL case brought in by patents AS I EXPLAINED TO YOU BEFORE (again: when the final product is not patentable, the private research CANNOT and WILL NOT occur))
Furthermore you conveniently left aside that all the researchers benefited from signification education (from kindergarden and up) and infrastructure that could NOT have ALL been provided by private industries (as I have explained to you before and above).
And so:
1) without government's prior investment in those infrastructure, lipitor would likely NOT exist
2) and must listen to your own smarter folks (such as Bastiat): there is what you see and what you don't
a) you see: Lipitor and think this private investment is great and it is
b) you don't see: what all that money invested elsewhere could have produced, including PUBLICISING (at dramatically lower cost) government funded research that have established the simple fact that eating 3 servings of high omega-3 fish (such as salmon) is preventively-wise AS EFFECTIVE as Lipitor (with 50% reduction of risk of heart disease) and with non of the side-effects (and no, there is no sufficient mercury in salmon to be concerned about before you try to re-broadcast pfizer sponsored neo-conservative despicable disinformation). And the fact you didn't know about this shows exactly the point that Bastiat made (and in this case it is worse because there is ACTIVE DISINFORMATION involved by private company and impossibility for Joe the plumber to clarify it (insufficient time, money and education) (and Consumer's Report does not have the money to advertise like Pfizer... and would have nothing to advertise if the government research on omega-3 fish hadn't been done)
In fact I believed in some sense that great minds such as Bastiat have been highjacked by a bigotry following that have deformed and mostly destroys the common sense out of originally very sound economic points.
Published: November 6, 2008 11:57 PM
Kevin B
Frank,
Sorry to burst your bubble, but you haven't said anything new. People disagree over what constitutes property. Duh.
' Reality is ... made of choices. '
Another "new" piece of information?
' The result is that slavery was abolished (wether you like it or not... '
??? If either of us supports slavery, it's you. You seem to have the idea that it is OK to use aggression to attain your wants. I can only make a personal value judgement that that makes you a threat to my safety, but not that you shouldn't pursue your happiness based on your own set of values.
If you don't see other people as your property then say so. Otherwise, you're wasting our time.
Published: November 7, 2008 2:35 AM
frank
Kevin
Ok, I understand you don't want to answer.
I know it must be difficult for you to have to deal with someone who actually confront your dogma
You react like an economic "taliban" and many of the sects and religions that abound.
There is nothing I can do for you. You've been brainwashed. I don't think there is an easy cure for it. You might want to read of few good books on it (check amazon)
As for myself, I realised that so-called current "austrian economist" are simply a bunch of mindless robot repeating a mantra almost exactly like the neo-conservative pundits we see on fox news. I don't think it's a fullfilling life, but hey, everybody can live the life they want or are stuck in !
It is no surprise that the usa in the last 8 years has been an historic case example of how stupidity, corruption and greed can dramatically harm even a strong country.
I live in Canada and I so glad I am not living in the USA. Here, it's like breathing fresh air. The true wealth per capita (INCLUDING human life quality) is astonishingly higher.
This is my last post.
I got the final anwer loud and clear: there is nothing to be expected to be learned from zealots pseudo-economists.
Published: November 7, 2008 3:44 AM
Kevin B
goodbye frank
Published: November 7, 2008 1:26 PM
Econophile
Goodbye, Frank.
Published: November 7, 2008 2:42 PM