21 Nov 2012

Yes Gene, Keynesians *Do* Focus on Consumption More Than Investment

Economics, Krugman 195 Comments

Gene Callahan is mystified:

So, I’m teaching Keynesian economics for the second time. And once again, I’m telling my students that, per Keynesians, recessions occur when intended investment falls short of savings. And the best way to fix this, per Keynesians, is for the government to invest in roads, bridges, parks, education, etc.

I’m fine with explaining all that. What I can’t figure out how to explain is why there are people saying Keynesianism is all about consumption and takes no account of investment.

Jonathan Finegold has some gentle remarks at his blog. Let me point out that Keynesians do stress the “paradox of thrift”–meaning it screws things up in a depression if people try to “be responsible” by consuming less and saving more–and of course there’s the “Marginal Propensity to Consume.”

If you’ll permit me, I suggest this article is relevant:

When Consumers Capitulate
By PAUL KRUGMAN
Published: October 31, 2008

The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.

It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.

Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.

Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.

Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.

At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.

I’ll bet you can guess what’s coming next.

For the fact is that we are in a liquidity trap right now…

The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.

The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.

No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.

If you put that article under a microscope, you get the faintest whiff of Krugman focusing on consumption as being really important for the US economy to not sputter.

195 Responses to “Yes Gene, Keynesians *Do* Focus on Consumption More Than Investment”

  1. ThomasL says:

    In this context, “roads, bridges, and parks,” are basically consumption anyway, not investment.

    When an investment happens, the investors say things like, “If we buy piece of machinery X now, we can build widgets Y% more efficiently in the future.” In government, it usually has to do with things like the # of people that will travel over the road or bridge, the amount of time it will take off common routes, &c.

    When Keynesians talk about infrastructure spending, they could care less about the ROI of any given project. The point is to spend the money now. A “consumption” Keynesian doesn’t care if it is wasted on magic beans, because the ROI he is looking for is going to redound to GDP, not to the investment itself. An “investment” Keynesian prefers the money not to be completely blown, but he still is not concerned with a positive ROI like a real investor; a negative return might still be worthwhile (eg, spending $100 to make $95).

    Basically, what separates an “investment” Keynesian from a “consumption” Keynesian is that the former cares if the thing bought is worth greater than zero, and the latter doesn’t. Neither one is concerned that it is worth more than what was paid for it, which is what makes it consumption rather investment.

    • Major_Freedom says:

      There is nothing in Keynes’ theory that would preclude 100% of all spending to be composed entirely of war spending, or pyramids, or fake dog doodoo. It does not distinguish one AD from another. Investment and production are supposed to increase spontaneously if AD is made sufficiently high by the government’s consumption activity.

      • Lee Waaks says:

        I think Keynesians do play word games with “investment”. Roads, bridges, etc. certainly can be classified as investment goods (especially if privatized), but when undertaken by the government can be extremely wasteful. In other words, any spending at all is not necessarily a good substitute for the investment spending that *would have taken place* but for alleged reasons of “animal spirits” has collapsed. However, the more important question is why Keynesians think investment would collapse in the first place, not withstanding their false cure. “Animal spirits” does not seem to have good explanatory power. As George Reisman shows in _Capitalism_ (see pp.694ff), there is no good reason at all to fear a sudden collapse in investment spending. Reisman also says that Keynesianism is “consumptionism par excellence”. I think they deserve this criticism due to their emphasis on government “investment”.

        • Matt Tanous says:

          As Rothbard put it, all government spending is consumption spending. Government does not invest in something for the purpose of producing something else to sell. It buys things to satisfy the whims of politicians and bureaucrats. The actual thing purchased is basically irrelevant.

          • Lord Keynes says:

            You’ve clearly never heard of Royal Mail.

            • Lord Keynes says:

              Or for that matter Singapore Airlines, Statoil ASA, CODELCO, and an endless number of successful, profitable state owned businesses/corporations.

            • Matt Tanous says:

              If it is profitable, it is no longer operating on government funds – although it probably benefits greatly from government monopolization.

              If *any* money comes from the government, then it is not profitable in any non-Orwellian sense.

        • anon says:

          Lee, I don’t think Keynesians focus on collasping investment. You can read Dean Baker talking about how investment in software and equipment is unusually high considering the state of the economy right now.

          The problem right now is the lack of demand from the collapse of the housing bubble.

          I believe the idea is not that investment has collapsed but that investments share of GDP (which has been supposedly been relatively stable historically) is just too low to bring us back to full employment on its own absent another bubble.

          This is why Keynesians call for the Government to step up its purchases including making needed investments.

    • anon says:

      Thomas, I believe Keynesians talk about deficient demand not deficient consumption because higher demand for products will induce business to invest more in new products and labor (human capital).

      • Major_Freedom says:

        Consumption is carried out by demand for consumer goods.

        Higher demand for products does not benefit those who produce those products. Only to the extent that the buyers themselves are putting real wealth into the economy, can their consumption spending represent a reward for putting wealth back in. The mere act of spending money isn’t a benefit to anyone except the spenders, because they get the goods, while the producers get pieces of paper. Those pieces of paper are only valuable to the extent that producers are supplying the economy with real wealth.

        If producers are getting money from customers who received it from the printing press, rather than from other producers, then producers are worse off.

        More money and spending does not benefit people in general. Sticky wages? Wages are made more rigid downward because of inflation, so it would be nonsensical to believe inflation can solve sticky wage problems.

        • anon says:

          MF, are you responding to me? Because you seem to be talking about side issues.

          The point was that for a Keynesian in a downturn increased government spending can result in higher private sector investment.

          One way this may work is that increased spending on consumer goods would result in lower unemployment and therefore higher investment in human capital.

          If you want to argue that Keynesians want to give money to parasites who are receiving transfers at the expense of producers but know that you’re changing the subject away from consumption and investment.

          • Major_Freedom says:

            anon:

            MF, are you responding to me? Because you seem to be talking about side issues.

            Just responding to your post. You distinguished between deficient demand and deficient consumption, when they are not entirely separate. For consumption entails demand.

            The point was that for a Keynesian in a downturn increased government spending can result in higher private sector investment.

            One way this may work is that increased spending on consumer goods would result in lower unemployment and therefore higher investment in human capital.

            Isn’t that the only way it is supposed to work?

            The only response I can give to that comment is to quote John Stuart Mill: “Demand for commodities is not demand for labor.” They can and do move in opposite directions. The demand for commodities and the demand for labor are actually in competition with each other. For any given dollar, one can only spend it in one way.

            Now, the typical response to this is to say OK, sure, let’s grant that, but Keynesianism argues that with higher consumer spending, businesses will turn around and save more (business owners abstain from consumption spending themselves) in order to finance more labor. But that argument won’t do, because the multiplier effect doctrine of Keynes says that spending only benefits workers to the extent that money is spent, not saved, i.e. high propensity to consume. Savings are regarded as a leakage.

            If you want to argue that Keynesians want to give money to parasites who are receiving transfers at the expense of producers but know that you’re changing the subject away from consumption and investment.

            Not exactly. That is a consumption activity.

            • anon says:

              MF, you seem to be overlooking something called competition, if these businesses spend all their money on consumption they lose out to their competitors and their future consumption will be lower.

              One wonders why in your consumption economy any one bothered to start a business to begin with. You also seem to switch back and forth between zero-sum economies for Keynesians and infinite pie growth economies for Austrians.

              • Major_Freedom says:

                MF, you seem to be overlooking something called competition

                Oh do tell me about competition.

                if these businesses spend all their money on consumption they lose out to their competitors and their future consumption will be lower.

                OK.

                One wonders why in your consumption economy any one bothered to start a business to begin with.

                I am critiquing the Keynesian doctrine. I am not saying this should happen, or will happen.

                You also seem to switch back and forth between zero-sum economies for Keynesians and infinite pie growth economies for Austrians.

                Keynesianism is zero growth.

                Austrianism is wertfrei. It doesn’t advocate for any particular political paradigm over another. Austrianism is the science of human action.

                I think you’re conflating Austrianism with laissez-faire liberalism.

                The reason why almost all Austrians are free market advocates is, I think, because Austrian economics is the only economics that is grounded in individualism, individual action to be precise. Libertarianism is also grounded in individualism.

                I also think that Austrians tend to be laissez-faire because the logic of Austrianism shows the counter-productive consequences of state interference in the market process, and so almost all Austrians can judge for themselves as individuals that free markets are economically (and ethically) superior.

              • Dan Lind says:

                Major_Freedom, you say,

                “The reason why almost all Austrians are free market advocates…”

                Who are these Austrians who are NOT free market advocates?

                An Austrian who is NOT a free market advocate must be someone who understands the “counter-productive consequences of state interference in the market process” (your words) and who advocates state interference because he values those consequences, yes?

              • Major_Freedom says:

                Dan Lind:

                That last paragraph was my own personal belief about why most Austrians are laissez-faire. I personally think the logic of Austrianism shows the “counter-productive consequences”. I am not saying that Austrian theory proper is explicit in it. I am not saying those who understand Austrian theory should therefore be knowledgeable of the counter-productive consequences. They do, but I think for different reasons. Yes there is the business cycle stuff, but the core of Austrianism is praxeology, which is wertfrei.

                As for examples of Austrians who are not laissez-faire, I think Lachmann isn’t laissez-faire.

  2. Lord Keynes says:

    Gene Callahan’s point was to refute the myth that Keynesianism “is all about consumption and takes no account of investment.

    That Keynesians are also concerned with consumption does not change the fact that the level of investment is also a major aspect of Keynesian theory.

    • Bob Murphy says:

      LK how many times did Krugman use consumer/consumption/consume versus investor/investment/invest in that article? What sort of evidence would possibly count, if I want to claim that Keynesians seem preoccupied with consumption to the virtual exclusion of investment?

      Of course investment is in the theory. The people whom Gene is attacking aren’t saying, “The word ‘investment’ appears nowhere in The General Theory, nor is there a variable for it in any of Samuelson’s work.” What they mean is, Keynesians write articles like the one I just quoted from Krugman.

      • Lord Keynes says:

        “LK how many times did Krugman use consumer/consumption/consume versus investor/investment/invest in that article”

        Why does Krugman need to use the word “invest/investment” directly? Aren’t you capable of drawing proper conclusions from these words:

        “No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.”

        I.e., Krugman is saying what is required is large scale public investment – public infrastructure spending.

        “The people whom Gene is attacking aren’t saying, “The word ‘investment’ appears nowhere in The General Theory, nor is there a variable for it in any of Samuelson’s work.” What they mean is, Keynesians write articles like the one I just quoted from Krugman.”

        Let Gene Callahan respond to that himself. I have no ides whether he really meant those type of people.

        But the fact is that there are any number of Austrians/libertarians/conservatives who are contemptibly ignorant of Keynesian theory, and who really do think Keynesianism has no interest in investment.

        • Major_Freedom says:

          I.e., Krugman is saying what is required is large scale public investment – public infrastructure spending.

          1. That isn’t investment. That is consumption.

          2. Krugman didn’t specify that he meant roads or bridges. He has written on many occasions that even war and alien invasion spending will do the trick.

          • Lord Keynes says:

            “1. That isn’t investment. That is consumption.”

            Yes, it is. Roads, bridges, harbours etc, can function as capital goods to business, in that they allow transportation of products and so on.

            • Major_Freedom says:

              No, it isn’t investment.

              My lawn allows me to traverse from my house to the sidewalk. That doesn’t mean my lawn is an investment.

              It doesn’t matter that they are “used” by business. All kinds of consumer goods are “used” by business. That doesn’t make them a capital good.

              Public roads, bridges, harbours are consumer projects because the financing of them was not made for the purposes of making subsequent sales. That’s what investments are.

              If you spend money on X, and you did so not for the purposes of making subsequent sales, then it is a consumer good. It doesn’t matter what the physicality of the good is. Physicality is not the criteria. The criteria is the human subjective element: the purpose of the purchase.

              If I posed a pick up truck to you, then you could not ascertain whether it is a consumer or investment good on the mere basis of its physicality. Only if you know the purpose of the purchase. If it is bought for leisure, for not making subsequent sales, then it is a consumer good. If it is bought by a business, to make deliveries of materials and equipment for example, then it is a capital good. It is capitalized on the business’ balance sheet.

              • Lord Keynes says:

                Public roads, bridges, harbours are consumer projects because the financing of them was not made for the purposes of making subsequent sales.

                There does not need to be an actual sale for something to be used as capital good.

                If I provided some goods to a business for nothing, and they used them as factor inputs/capital goods, then that is what they would now be.

                “If I posed a pick up truck to you, then you could not ascertain whether it is a consumer or investment good on the mere basis of its physicality. “

                Right!

                It would depend on what I used it for.

                E.g., if I used in it in my business as a capital good, then you would have provided a thing to me that is now functioning as a capital good.

                Well done! You have proven my point and destroyed your own argument.

              • Major_Freedom says:

                There does not need to be an actual sale for something to be used as capital good.

                I said PURPOSE of the expenditure. Whether there are actually sales later on depends on the customers.

                If I provided some goods to a business for nothing, and they used them as factor inputs/capital goods, then that is what they would now be.

                If the business acquired that good from you for the purposes of making sales, then yes, they’re capital goods.

                Your activity is not self-sustaining. When you own the good, it is a consumer good. You are engaging in consumption activity. The money you spent is gone. You can’t replace what you gave away unless you find a fresh new source of funds.

                If the business acquires that good to make future sales, then it becomes a capital good.

                “If I posed a pick up truck to you, then you could not ascertain whether it is a consumer or investment good on the mere basis of its physicality. “

                Right!

                It would depend on what I used it for.

                E.g., if I used in it in my business as a capital good, then you would have provided a thing to me that is now functioning as a capital good.

                If you acquired the good from me in order to make future sales, then it is a capital good to you.

                Well done! You have proven my point and destroyed your own argument.

                Except you conceded my argument is correct.

          • Major_Freedom says:

            You didn’t respond to my point number 2.

            Does that mean you concede you just made it up that Krugman was referring to roads and bridges when he said “major fiscal stimulus”, because you know it was absurd to believe that ALL government spending is stimulative?

            Is that why you call yourself “Post” Keynesian? Too much garbage in the original theory, huh?

            • Lord Keynes says:

              “Does that mean you concede you just made it up that Krugman was referring to roads and bridges when he said “major fiscal stimulus”

              No. I didn’t respond because your absurd statement did not merit any response.

              But here goes:

              Since, whenever Krugman talks about “fiscal stimulus”, as indeed most Keynesians in general, he normally means public infrastructure spending as a fundamental part of it – e.g., his support for, say, high speed rail in the US as part of the stimulus – my inference is entirely logical.

              Prove that he wasn’t talking about
              infrastructure spending.

              • Major_Freedom says:

                No. I didn’t respond because your absurd statement did not merit any response.

                Haha, in other words, you got nothing.

                But here goes:

                Since, whenever Krugman talks about “fiscal stimulus”, as indeed most Keynesians in general, he normally means public infrastructure spending as a fundamental part of it – e.g., his support for, say, high speed rail in the US as part of the stimulus – my inference is entirely logical.

                Hahaha, “normally”. You just proved my point. You cannot ascertain that this is necessarily one of those “normal” times.

                You’re just repeating the same absurd claim that I already shown was bogus.

                Prove that he wasn’t talking about
                infrastructure spending.

                Haha, nice switching of the burden of proof.

                You claimed he was talking about bridges and roads. You have the obligation to prove that’s what he meant, GIVEN the fact that on MANY occasions, Krugman has specifically said that financing wars and alien invasions would also be stimulative versions of fiscal policy.

                If someone says that financing war and fake alien invasions qualify as economically stimulative fiscal policies, and that same someone then mentions “fiscal policy” or “fiscal spending” without qualification in a particular article, then it is absurd to claim that this person only meant bridges and roads when they said “fiscal policy”!

        • Major_Freedom says:

          Serious question:

          Does LK have an automatic response program that alerts him to blogs that mentions the name “Keynes”? Seems like every time the name appears here, LK is here faster than a Keynesian is confused.

          • skylien says:

            @ LK and MF,

            I think it should be possible for both of you to agree on this point. I think MF goes too far to say building a road by government can never be an investment, while I think he is right to point out that building roads and bridges only for a stimulus effects means it is extremely unlikely that they are investment but rather mere consumption spending. Why? Just read the first comment of Thomas L above.

            E.g: If a business owner buys a machine for 1000 Dollars which has a negative ROI and finally yields only 900 Dollars, then the business owner could as well just have bought a new kindle with the money, with the exception that the kindle had actually resulted in something the business owner could enjoy. The investment in the machine ex post showed that it was a waste, therefore consumption but not investment!

            When a government ex ante “invests” in infrastructure you are just not able to tell ex post if it was investment of consumption (waste) because there is no economic calculation.

            I know that for LK this is offset by the beneficial results that he thinks we get from “boosting” the economy. Yet that does not mean that the spending was investment in the proper sense of the term else everything the government spends was investment. LK, you wouldn’t dare argue that, would you?

            • skylien says:

              *was investment of consumption* should be of course *was investment or consumption*

            • Major_Freedom says:

              I think MF goes too far to say building a road by government can never be an investment, while I think he is right to point out that building roads and bridges only for a stimulus effects means it is extremely unlikely that they are investment but rather mere consumption spending. Why? Just read the first comment of Thomas L above.

              Governments do not build roads to earn sales revenues, and even if they charged a nominal fee, the difference must be made up by further (mandatory) taxation.

              E.g: If a business owner buys a machine for 1000 Dollars which has a negative ROI and finally yields only 900 Dollars, then the business owner could as well just have bought a new kindle with the money, with the exception that the kindle had actually resulted in something the business owner could enjoy. The investment in the machine ex post showed that it was a waste, therefore consumption but not investment!

              General Motors factories don’t suddenly turn into consumer goods just because GM suffers losses.

              • skylien says:

                I think LK is right that whatever a business uses to produce and is able to increase its revenue with is capital. No matter if the business bought it or it got it as a gift or government taxes the business to build with that money something the business will use for production.

                Yet if the government takes the money from the business by taxation it just forces its idea of what to invest in on the business and therefore violates economic calculation. Therefore you will never be able to determine if it was investment of consumption (in this case waste).

                Consumption just means to use something up without recreating higher or at least the same amount of wealth. It is clear that the factory doesn’t turn into candy if turns out to be a useless investment. That is why I called it a waste.

              • skylien says:

                OMG I made the same mistake two times in a row..

                *was investment of consumption* should be of course *was investment or consumption*

                No I didn’t do copy and paste…

              • Major_Freedom says:

                skylien:

                I think LK is right that whatever a business uses to produce and is able to increase its revenue with is capital. No matter if the business bought it or it got it as a gift or government taxes the business to build with that money something the business will use for production.

                Yes, technically a good doesn’t have to be SOLD to a company for it to be a capital good. My argument was in a context of a monetary economy, not a charity economy.

                If you want to extend it to including a charity economics, then if the owner possesses the good for the purposes of making subsequent sales, then it is a capital good.

            • Lord Keynes says:

              “E.g: If a business owner buys a machine for 1000 Dollars which has a negative ROI and finally yields only 900 Dollars, then the business owner could as well just have bought a new kindle with the money, with the exception that the kindle had actually resulted in something the business owner could enjoy. The investment in the machine ex post showed that it was a waste, therefore consumption but not investment!”

              That argument is logically flawed.

              No, the activity is a failed investment, not consumption.

              You actually produced goods for sale by the use of the machine. It is functioning as a capital good.

              It is just that it failed to pay for itself.

              Furthermore, why would not continued sales in subsequent years not pay for it?

              And even if the company went bankrupt, it would still be a failed investment.

              • skylien says:

                I don’t think it is flawed. Consumption like eating bread and a failed investment work completely the same way. You use wealth up without recreating at least the same amount of wealth.

              • skylien says:

                This means buying a kindle for 100 Dollars or a machine for 1000 Dollars that only yields 900 Dollars are both equal in the amount of wealth consumed. Both use up (consume) wealth that was valued at 100 Dollars.

              • Major_Freedom says:

                skylien:

                So a General Motors factory becomes a consumer good when GM incurs a loss one year?

                Something is off in your treatment, IMO.

              • skylien says:

                MF, no I don’t mean that it becomes literally a consumer good (like I said above, it doesn’t turn into candy), but it behaves like one. If GM makes a loss it is consuming capital.

                That is why you call it “consume” capital. It is equivalent to consume a consumers good. Both mean you consume wealth on net.

              • Major_Freedom says:

                skylien:

                MF, no I don’t mean that it becomes literally a consumer good (like I said above, it doesn’t turn into candy), but it behaves like one. If GM makes a loss it is consuming capital.

                That is why you call it “consume” capital. It is equivalent to consume a consumers good. Both mean you consume wealth on net.

                OK, fair enough.

                There is also a difference between productive consumption of capital, and unproductive consumption of capital, FYI.

      • anon says:

        Bob, you could read Dean Baker constantly talking about how consumption is high and savings low by historic standards and we shouldn’t expect higher consumption and lower savings in the near future unless we expect the housing bubble to return.

        Here’s him talking about consumption with a chart: http://www.cepr.net/index.php/blogs/beat-the-press/whats-really-dragging-down-the-us-economy#comments

        Here’s him talking about savings with a chart: http://www.cepr.net/index.php/blogs/beat-the-press/higher-household-debt-primarily-means-fewer-foreclosures.

        Here’s a video of Krugman and Stiglitz talking for about three minutes about savings being low: http://youtu.be/xd0Uz__ebzA?t=21m47s

        Finally here’s Baker putting it all together: “The other part of this story is that we really have no choice about seeing the dollar fall, especially for those ferocious deficit hawks who want to see the United States balance its budget. It is an accounting identity that the trade surplus is equal to net national savings. This means that if we have a trade deficit, net national saving is negative. There is no way around this fact. The deficit hawks may not like it, in the same way that they may not like 2 plus 2 being equal to 4, but there is nothing they can do to change it.

        If we have negative national saving, then either we have a budget deficit (negative public saving) or we have negative private saving, or some combination. At the moment, we have a large budget deficit that corresponds to our trade deficit. How could we have negative private saving?

        In a dream world, we could see private investment go through the roof as we build up the capital stock at a record pace. That is not going to happen. The non-residential investment share of GDP has fluctuated in a fairly narrow range over the post-war period. If the deficit hawks tell you they have some elixir that makes it suddenly soar through the roof, then they have been smoking something funny. That ain’t going to happen.”

        http://www.cepr.net/index.php/blogs/beat-the-press/the-end-of-china-bashing-toward-a-serious-discussion-of-the-trade-deficit

    • Major_Freedom says:

      Who is making the claim that Keynes didn’t crudely lump all heterogenous and temporally diverse capital into a single quantity blob called “K”?

      The reason why Keynesianism is identified (correctly) as consumptionist, actually has nothing to do with any understanding or misunderstanding of whether or not capital and investment are discussed, or mentioned, in Keynes’ theoretical works.

      It stems from the core principle of Keynes’ theory that distinguishes it from other doctrines: The alleged wealth that governmental AD management is supposed to bring, due to a pathological fear of savings and (over) production.

      Governmental AD management is carried out by government spending. The myth that many Keynesians, and even some non-Keynesians, propagate is the absurd notion that government acts as an “investor”, and that it makes “investments” through its spending.

      As ThomasL noted above, the government is not making an “investment” when it spends. Even if the government finances the construction of bridges, dams, roads, as well as weapons of mass destruction, $40000 self-portraits, and financing of terrorists in the middle east, it is not investing and the projects are not investments. The government is not spending for the purposes of making subsequent sales. It is not a profit making institution. It doesn’t produce anything. All it does is redirect resources from where the owners would have allocated them, to where the government allocates them.

      Even if the government finances a massive, complex and sophisticated project like the Hoover Dam, or the Space Shuttle, the expenditures for these projects are not made in order to make subsequent sales. They are therefore all consumption activities. Once the government spends the money, that’s it, it’s gone. The resources are used up. No further production is carried out on the basis of the initial resource utilization. The government will have to acquire a fresh new source of funds if it wants to repair or replace the resources for any projects. Its projects are not self-sustaining in the sense of earning revenues with which to acquire replacement resources.

      Thus, because Keynesianism is government AD management out of a pathological fear of savings, and because Keynesianism sees the government managing AD via spending, and because all government spending is consumption activity, it follows that Keynesianism is consumptionism par excellence.

      It is totally and completely irrelevant that “investment” and “capital” are merely mentioned in Keynes’ works.

      At its root, Keynesianism is nothing but the belief that parasitism is a source of enrichment to its victims. This is why those death dealers believe that wars (and death) can serve to increase wealth.

      • Lord Keynes says:

        “The government is not spending for the purposes of making subsequent sales. It is not a profit making institution. It doesn’t produce anything. “

        Even private businesses do not need to run a profit to be productive enterprises supplying goods people want and satisfying subjective utility preferences. They could run at cost of production.

        Even in GE theory, there is no profit, yet private production still takes place.

        Public goods such as roads, bridges, highways etc. are very productive, providing a service and good, facilitating private commerce and transport, just as a private road would. The only difference is that public goods do not necessarily require a profit markup. We pay for public goods via taxation.

        And plenty of governments have state owned enterprises – e..g., post offices, utility services etc. – which produce goods/services for sale.

        Furthermore, many countries do have profitable, productive state owned/run enterprises that produce goods and run profits:

        (1) Singapore Airlines
        (2) PSA International
        (3) Neptune Orient Lines
        (4) Chartered Semiconductor Manufacturing
        (5) Sing Tel
        (6) SembCorp
        (7) Petrobras
        (8) CODELCO (Corporación Nacional del Cobre de Chile)
        (9) LKAB (Luossavaara-Kiirunavaara Aktiebolag)
        (10) Air India Limited
        (11) China National Offshore Oil Corporation
        (12) Anshan Iron and Steel Corp.

        E.g., the profitable Chilean nationalised CODELCO – the biggest copper company in the world – has been state owned since the 1970s.

        You are wrong.

        “No further production is carried out on the basis of the initial resource utilization.”

        So the Hoover Dam doesn’t still produce electricity, huh?
        Just because the goods produced may not be sold in exactly the same way as private goods, it does not mean government infrastructure cannot function as capital goods or cannot produce something of economic value.

        ” Its projects are not self-sustaining in the sense of earning revenues with which to acquire replacement resources.”

        That is nonsense. For public goods are paid for by taxes.

        “It is totally and completely irrelevant that “investment” and “capital” are merely mentioned in Keynes’ works.”

        No, it isn’t, for inducing higher levels of private sector investment by fiscal and monetary policy is a fundamental part of Keynesianism.

        • Major_Freedom says:

          Even private businesses do not need to run a profit to be productive enterprises supplying goods people want and satisfying subjective utility preferences. They could run at cost of production.

          A private business’ expenditures are for the purpose of making subsequent sales. In order to run at cost, they would have to EARN what they previously spent through subsequent sales.

          If a private business spent not for the purposes of making subsequent sales, it would need continual influxes of fresh new funds to replace the worn out and used up resources. It would be consumption activity.

          You’re just proving my point. Positive profit is not the key factor. I said it is the purpose of making subsequent sales.

          Even in GE theory, there is no profit, yet private production still takes place.

          1. GE is a mental tool of cognition, not an empirically possible reality.

          2. There is no entrepreneurial profit in GE. But there is still profit on the basis of “originary interest.”

          Public goods such as roads, bridges, highways etc. are very productive, providing a service and good, facilitating private commerce and transport, just as a private road would.

          Public roads, bridges and weapons of mass destruction are financed not for the purposes of making subsequent sales. They are consumer projects. The fact that they are “used” does not mean they are capital goods.

          They are not “very productive”, because they earn zero revenues, or if they do, they are only nominal fee based. They use up resources and require continual fresh new funds to maintain them. Investments on the other hand are self-sustaining. The resources are replaced by using the funds earned in the subsequent sales.

          The only difference is that public goods do not necessarily require a profit markup. We pay for public goods via taxation.

          You ignore the key difference of the purpose of the expenditures.

          And plenty of governments have state owned enterprises – e..g., post offices, utility services etc. – which produce goods/services for sale.

          The government does not produce those things. They take money from the taxpayers, they finance the projects, resources are redirected, and then if the government charges a nominal fee, it is almost always at a loss.

          Furthermore, many countries do have profitable, productive state owned/run enterprises that produce goods and run profits:

          E.g., the profitable Chilean nationalised CODELCO – the biggest copper company in the world – has been state owned since the 1970s.

          For these examples, if they are expenditures made for the purpose of making profits, then they are investments, but of a fascistic/communist type, where the ORIGINAL funds were not earned, but confiscated, and where any losses are made up for by the taxpayer.

          “No further production is carried out on the basis of the initial resource utilization.”

          So the Hoover Dam doesn’t still produce electricity, huh?

          Still consumption, not production. Consumption activity can appear as investment activity when you incorrectly focus on the physicality, ignore the opportunity costs, and ignore the purpose of the spending.

          Just because the goods produced may not be sold in exactly the same way as private goods, it does not mean government infrastructure cannot function as capital goods or cannot produce something of economic value.

          It’s of a different character.

          ”Its projects are not self-sustaining in the sense of earning revenues with which to acquire replacement resources.”

          That is nonsense. For public goods are paid for by taxes.

          Rubbish. Taxes are not revenues paid for services rendered. They are mandatory, whether one uses the projects or not. The taxes are the very fresh new funds that I alluded to earlier that are required precisely because the project itself does not earn sales revenues and is not self-sustaining.

          “It is totally and completely irrelevant that “investment” and “capital” are merely mentioned in Keynes’ works.”

          No, it isn’t, for inducing higher levels of private sector investment by fiscal and monetary policy is a fundamental part of Keynesianism.

          I know, the fundamental part of Keynesianism is indeed the belief that consumption activity “induces” production and wealth. That is my point. “Fiscal and monetary policy” are the consumptionist activities that allegedly enriches those who produce for the consumers.

          • anon says:

            MF, you said for something to be an investment it needs to make sales and earn a profit, and then when Lord Keynes gives you a long list of public companies that do that you wave your hands saying it doesn’t matter because taxes are theft?

            If it didn’t matter all along why go to such trouble trying to explain what an investment is?

            Anyway is research an investment or does it have it’s own category? Because if research spending is an investment I don’t think anyone is confused by the “physicality” of things.

            • Major_Freedom says:

              MF, you said for something to be an investment it needs to make sales and earn a profit, and then when Lord Keynes gives you a long list of public companies that do that you wave your hands saying it doesn’t matter because taxes are theft?

              Actually I called them investments…but of a fascist/communist type. The original financing required taxation. Nobody can know if the projects are wasting resources or not.

              If it didn’t matter all along why go to such trouble trying to explain what an investment is?

              But it does matter.

              Anyway is research an investment or does it have it’s own category? Because if research spending is an investment I don’t think anyone is confused by the “physicality” of things.

              Research at a business is an investment. Research in your basement is consumption. Research at a government bureau is consumption.

              • Lord Keynes says:

                “Nobody can know if the projects are wasting resources or not.”

                LOL! They are profitable companies, so by your own criteria they are productive and not wasting resources.

                What we see here is the ridiculous retreat to the nonsense natural rights or Hoppean ethics (tax is theft!!) argument, whenever bozos like M_F when defeated in economic arguments.

              • anon says:

                Actually I called them investments…but of a fascist/communist type.

                So post offices are either fascist or communist? I’m calling Godwin on this one.

              • Major_Freedom says:

                LOL! They are profitable companies, so by your own criteria they are productive and not wasting resources.

                Can’t say that if their original financing was tax financed.

                If I took $100 of your money, and spent it to open up a lemonade stand, and I later earned $105 in total, then I cannot say I am not wasting resources.

                The profit is only part of the story. For if I didn’t take your money, then you may have earned $108 on that $100. I can’t know because it’s a counterfactual.

                What we see here is the ridiculous retreat to the nonsense natural rights or Hoppean ethics (tax is theft!!) argument, whenever bozos like M_F when defeated in economic arguments.

                No, what we have here is you trying desperately to avoid accepting the fact that taxation financed projects disqualifies you from concluding that a project is necessarily not wasteful.

                Taxation is theft yes, but that is a subsidiary point that refutes your claim that state owned enterprises that earn profits have necessarily not wasted resources.

              • Major_Freedom says:

                anon:

                So post offices are either fascist or communist?

                Socialism is government ownership and/or control of the means of production.

                Fascism is government control, but not ownership, of the means of production.

                Communism is government ownership and control of the means of production.

                So yes, a state owned and controlled post office is a communist institution.

                Sorry to burst your bubble!

                I’m calling Godwin on this one.

                Godwin? Godwin is about introducing Hitler into a discussion, not fascism. There were French fascists and Italian fascists. Economic fascism is not necessarily Nazism.

              • Lord Keynes says:

                “Fascism is government control, but not ownership, of the means of production.”

                In fact, fascism as a historical movement never had a well defined economic program.

                The early fascists like Mussolini originally pursued laissez faire:

                “From 1922 to 1925, Mussolini’s regime pursued a laissez-faire economic policy under the liberal finance minister Alberto De Stefani. De Stefani reduced taxes, regulations, and trade restrictions and allowed businesses to compete with one another. .”
                Sheldon Richman, “Fascism,” Concise Encyclopedia of Economics
                http://www.econlib.org/library/Enc1/Fascism.html

                Mises’ buddy the Austrian fascist Dollfuss (and later Schuschnigg) pursued deflationary, neoclassical policies to a considerable extent:

                “In tackling the economic crisis the Dollfuss-Schuschnigg dictatorship pursued harsh deflationary policies designed to balance the budget and stabilize the currency. The government’s program featured severe spending cuts, high interest rates, and frozen wages. “

                http://socialdemocracy21stcentury.blogspot.com/2012/05/fascism-and-keynesianism.html

              • anon says:

                So yes, a state owned and controlled post office is a communist institution.

                MF, I think you’re confusing a social democracy or a mixed economy with “communism” and “fascism”.

                At the very least people distinguish European-style socialism from Stalin.

                It’s ironic you want an overly broad definition, in my opinion to the point of meaninglessness, of communism, but a very narrow definition of Godwin’s Law.

                Nonetheless, I concede your point about Godwin.

              • John S says:

                Why do we even need a govt run post office? Certainly UPS, Fed Ex, DHL, or some other private entity could provide mail service profitably.

                Even residents of outlying areas could get mail service, if they were willing to put up with (varying degrees of) less frequent delivery. They would also make more use of Internet-based communication.

          • Lord Keynes says:

            (1) “A private business’ expenditures are for the purpose of making subsequent sales. etc”

            You have not refuted the original statement:

            “Even private businesses do not need to run a profit to be productive enterprises supplying goods people want and satisfying subjective utility preferences. They could run at cost of production.”

            (2) “The government does not produce those things. They take money from the taxpayers, they finance the projects, resources are redirected, and then if the government charges a nominal fee, it is almost always at a loss.”

            Rubbish. Plenty of government-owned services produce a profit and are funded by revenue from sales. E.g., the UK government-owned postal service called ”
            Royal Mail”. Many other examples exist, e..g, the very ones I have given above.

            (3) “For these examples, if they are expenditures made for the purpose of making profits, then they are investments, but of a fascistic/communist type, where the ORIGINAL funds were not earned, but confiscated, and where any losses are made up for by the taxpayer. “

            Even if it were true, a red herring.

            That fact you resort to this red herring suggests that you cannot refute the statement that “many countries do have profitable, productive state owned/run enterprises that produce goods and run profits:”

            • Major_Freedom says:

              You have not refuted the original statement:

              “Even private businesses do not need to run a profit to be productive enterprises supplying goods people want and satisfying subjective utility preferences. They could run at cost of production.”

              That statement did not refute my statement about investments earning future sales as a criteria. It confirmed my argument. There is no reason for me to “refute” it.

              (2) “The government does not produce those things. They take money from the taxpayers, they finance the projects, resources are redirected, and then if the government charges a nominal fee, it is almost always at a loss.”

              Rubbish. Plenty of government-owned services produce a profit and are funded by revenue from sales.

              You’re not refuting what I said. I said almost always. You can’t refute that by pointing to isolated examples to the contrary. Only if I said they ALWAYS incur losses would your response be warranted.

              (3) “For these examples, if they are expenditures made for the purpose of making profits, then they are investments, but of a fascistic/communist type, where the ORIGINAL funds were not earned, but confiscated, and where any losses are made up for by the taxpayer. “

              Even if it were true, a red herring.

              No, it is not a red herring, because it is an argument on topic.

              That fact you resort to this red herring suggests that you cannot refute the statement that “many countries do have profitable, productive state owned/run enterprises that produce goods and run profits:”

              I already said those are investments, but of a fascist/communist type, where the original financing was mandatory and where the taxpayers make up for any losses.

              At any rate, these instances are far, far, FAR outnumbered by government spending that is not profit making, so even including these few instances, still makes the government a consuming institution.

              The government is like a leech roommate who eats other people’s food, uses other people’s soap, dresses in their clothes, and sleeps in their beds, but cuts the grass every once in a while. It’s still a consumer.

              • Lord Keynes says:

                Your red herrings and waffling has not refuted any of these points:

                (1) Even private businesses do not need to run a profit to be productive enterprises supplying goods people want and satisfying subjective utility preferences. They could run at cost of production.

                So you agree profit is NOT strictly necessary for
                an investment project?

                (2) It is perfectly possible for a good to be free at the point of delivery and yet still function as a capital good.

                You have proven that above inadvertently in this exchange:

                >“If I posed a pick up >truck to you, then you >could not ascertain >whether it is a >consumer or investment >good on the mere basis >of its physicality. “

                Right!

                It would depend on what I used it for.

                E.g., if I used in it in my business as a capital good, then you would have provided a thing to me that is now functioning as a capital good.

                If you acquired the good from me in order to make future sales, then it is a capital good to you.

                ——

              • Major_Freedom says:

                So you agree profit is NOT strictly necessary for
                an investment project?

                I said investments are for the purposes of making subsequent sales. This is ex ante.

                Whether or not the investment earns a negative, zero, or positive profit, is ex post.

                (2) It is perfectly possible for a good to be free at the point of delivery and yet still function as a capital good.

                If the receiver accepts for the purposes of making subsequent sales, then it is a capital good, yes.

                You have proven that above inadvertently in this exchange:

                “If I posed a pick up truck to you, then you could not ascertain whether it is a consumer or investment good on the mere basis of its physicality.“

                Right!

                It would depend on what I used it for.

                E.g., if I used in it in my business as a capital good, then you would have provided a thing to me that is now functioning as a capital good.

                You mean capital good is a capital good? Profound.

                If you acquired the good from me in order to make future sales, then it is a capital good to you.

                You have a funny way of conceding my argument. You copy and paste my own arguments back to me, and then you say “See? You conceded I am right!”

              • Lord Keynes says:

                You’ve conceded that a good provided free at the point of delivery can function as a capital good. Therefore there is no serious reason why public roads, bridges, harbours etc, cannot function as capital goods to business.

                Yes, in your confused mind, your loss in the debate above was a victory!

                If it makes you feel better…

              • Major_Freedom says:

                You’ve conceded that a good provided free at the point of delivery can function as a capital good.

                Therefore there is no serious reason why public roads, bridges, harbours etc, cannot function as capital goods to business.

                You turkey. Those things aren’t provided for free to business. Business is taxed to finance those things.

                Talk about confused up the wazoo!

                To LK, all government goodies are free and don’t cost anything!

                Can you say statism is belief in santa clause OR WHAT?

                Yes, in your confused mind, your loss in the debate above was a victory!

                Bwahahahaha, oh yeah, I was the one who lost. Hilarious! You lost so hard that in your miasma of loss, you have actually created a world for yourself where you win.

                If it makes you feel better…

                Paging Dr. Freud.

              • Major_Freedom says:

                In the case of public roads, the businesses have no choice but to pay for them, so they might as well use them. That does not make public roads capital goods.

                From the perspective of the business owners, they do not own the roads as their property, so it is not a “gift” to them. A capital good has to at least be owned by the person whose intentions make them a capital good.

              • Major_Freedom says:

                Like if I owned a park for the purposes of making sales, and I charged people a fee to visit it, then it is a capital good because the key perspective is the owner.

                It doesn’t matter if others gain consumer utility by looking at it, or they use the bird sounds and so on to listen to while they are sitting around the park (but not in it). It’s still a capital good.

                Similarly, when private business use public roads and bridges, they are not owners of them, so they cannot be considered capital goods from their perspective.

                I can’t declare your stuff a consumer or capital good based on my usage of it. It’s your intentions as the owner that matter.

              • Lord Keynes says:

                “Those things aren’t provided for free to business. Business is taxed to finance those things.”

                Notice my statement:

                “a good provided free at the point of delivery can function as a capital good.”

                Your response is a laughable straw man, since I never denied that taxes are levied to pay for public goods. In fact, I even said it above!

                All that was asserted is that “a good provided free at the point of delivery can function as a capital good.”

                That is true. You have lost the argument. The resort to straw man arguments pretty much demonstrates your defeat – and intellectual bankruptcy.

                To LK, all government goodies are free and don’t cost anything!

                Again: straw man.
                See above.

                “A capital good has to at least be owned by the person whose intentions make them a capital good.”

                False. You can rent a capital good and it is still a capital good.

                You can even give someone a machine to use for free as a capital good (while retaining ownership yourself), and it will still function as a capital good.

              • Major_Freedom says:

                Notice my statement:

                “a good provided free at the point of delivery can function as a capital good.”

                Notice my statement:

                “From the perspective of the business owners, they do not own the roads as their property, so it is not a “gift” to them. A capital good has to at least be owned by the person whose intentions make them a capital good.”

                Roads, bridges, and dams are not the property of the businesses that “use” them (after being forced to pay for them).

                Your response is a laughable straw man, since I never denied that taxes are levied to pay for public goods. In fact, I even said it above!
                All that was asserted is that “a good provided free at the point of delivery can function as a capital good.”

                This totally contradicts the concept of goods, because goods are property. You are keeping roads and bridges in a sort of no man’s land, where the state does and does not own them, and the businesses do and do not own them.

                A business that uses a road “for free at the point of use” is not an owner of that road. It isn’t capitalized.

                You have lost the argument. The resort to straw man arguments pretty much demonstrates your defeat – and intellectual bankruptcy.

                “A capital good has to at least be owned by the person whose intentions make them a capital good.”

                False. You can rent a capital good and it is still a capital good.

                False. It is a capital good because it is owned by the party renting it out to make sales. It is not a capital good because you’re renting it. The capital nature of the good is from the perspective of the owner, the party that purchased it for the purposes of making sales.

                You can even give someone a machine to use for free as a capital good (while retaining ownership yourself), and it will still function as a capital good.

                If the owner bought it not for the purposes of making subsequent sales, then it is a consumer good.

                From the perspective of the user however, it is a capital good.

                So you posited a good that is a consumer good from the perspective of the owner, and a capital good from the perspective of the user. It’s a quasi-capital-consumer good.

                These cases are minimal.

              • Lord Keynes says:

                ” It is a capital good because it is owned by the party renting it out to make sales. It is not a capital good because you’re renting it”

                LOL! So if I own a business where all my capital goods are rented (buildings, computers, cars, etc.), which is perfectly possible in real life, and I produce a service people pay for and make a profit, then I have no capital goods!

                In reality of course, rented capital goods are a ubiquitous phenomenon in the business world.

                Therefore there is no need for businesses to own public goods when they use them as capital goods.

                And your last comments just concede my point.

              • anon says:

                So you posited a good that is a consumer good from the perspective of the owner, and a capital good from the perspective of the user. It’s a quasi-capital-consumer good.

                These cases are minimal

                If I can use a good as capital without owning it, how does this not contradict your assertion that roads can’t be capital goods because businesses don’t own them. Because it is so “minimal”?

              • Major_Freedom says:

                LOL! So if I own a business where all my capital goods are rented (buildings, computers, cars, etc.), which is perfectly possible in real life, and I produce a service people pay for and make a profit, then I have no capital goods!

                No, they are capital goods because the owner of those capital goods bought those capital goods for the purposes of making subsequent sales, i.e. rental income.

                Subsequent sales encompasses both final gross sale and rental income.

                In reality of course, rented capital goods are a ubiquitous phenomenon in the business world.
                Therefore there is no need for businesses to own public goods when they use them as capital goods.

                But public goods are not capital goods from the owner’s perspective. The businesses don’t own them as their own property, and the statesmen do not own those goods as their property either.

                And your last comments just concede my point.

                You have a funny way of labeling an argument I myself made. How can I concede my own argument?

              • Major_Freedom says:

                anon:

                If I can use a good as capital without owning it, how does this not contradict your assertion that roads can’t be capital goods because businesses don’t own them.

                Because the statesmen don’t own them as property either. In that argument I said they are not capital goods because businesses don’t own them, as a response to the discussion about a good being a capital good because a business is using it.

                Because it is so “minimal”?

                No, that’s not the reason.

                Remember, my definitions are in the context of a monetary society. Sure, if you posit some scenarios where money is not exchanged, then we’re no longer talking about a monetary economy, and my definitions will be insufficient.

                My definitions are in the context of a monetary economy, which I made clear pretty early on.

              • Lord Keynes says:

                “But public goods are not capital goods from the owner’s perspective. The businesses don’t own them as their own property, and the statesmen do not own those goods as their property either.”

                The first sentence is false.

                The second is a red herring.

              • Major_Freedom says:

                The first sentence is true.

                The second sentence is on topic.

      • anon says:

        MF, so DARPA’s role in developing the internet was consumption. What about the basic research the government does for new drugs? Isn’t the Post Office run on a revenue neutral basis? Do subway tickets come from tax payers?

        • Major_Freedom says:

          LK:

          I already gave my argument for what constitutes capital and consumer goods.

          A good can “sustain” someone and assist in their production of other goods. That doesn’t make it a capital good. For consumer goods can sustain people in this way.

  3. Nick says:

    OK. Lets build a new railway.

    Cost 50 bn.

    Will the tickets pay for the cost of servicing the debt?

    Yes – its an investment
    No – its spending.

    Simple test.

    • Major_Freedom says:

      That’s not quite right.

      Suppose Wal-Mart builds a fully stocked store in Antarctica, hoping to make sales.

      Suppose it makes zero sales.

      That doesn’t make it a consumption spending activity. It’s still an investment.

      What matters is the purpose of the spending.

      Is the spending made to make future sales?

      Yes – Investment

      No – Consumption.

      • anon says:

        MF, so if Wal-Mart builds the store along the Antarctica railroad line and this increases economic activity, including ticket sales, but also raises tax revenue, is this an investment?

        • Major_Freedom says:

          If Wal-Mart built the store to make future sales, then it is an investment.

          • anon says:

            I mean is the train an investment if it causes businesses to invest along it which raises tax revenues and ticket sales. Obviously from your other comments you disagree, but if nothing else it is “like” an investment.

            If you can divide private sector activity into consumption and investment why not divide public sector activity into two things as well? If the public sector cannot invest, why can it not also not consume? There seems an inconsistency in your reasoning there.

            • Major_Freedom says:

              I mean is the train an investment

              Was it financed to make future sales?

              If you can divide private sector activity into consumption and investment why not divide public sector activity into two things as well?

              It is asking to take producer and consumer, and then apply that dichotomy to “consumer.”

              If the public sector cannot invest, why can it not also not consume?

              One person’s consumption does not necessarily require that person to invest.

              There seems an inconsistency in your reasoning there.

              not sure what you mean.

              • anon says:

                Was it financed to make future sales?

                MF, you already said it doesn’t matter if it was because taxes are theft, but as Lord Keynes has said you’re trying to waffle on this by saying they’re “fascist” investments.

                It is asking to take producer and consumer, and then apply that dichotomy to “consumer.”

                Did you mean “like” asking?

                So are you back to saying the government can’t make investments?

                The point I was trying to make is that you want to split the private sector into two rather broadly defined halves and then point to the public sector and say one of those halves doesn’t apply. But these halves can perhaps be further divided or perhaps they’re at least at the margin not so easily divided so that they overlap in complicated ways. But if you want to say government “investment” is not really investment but consumption perhaps government “consumption” is not really consumption either.

              • anon says:

                To clarify it seems your saying the government can only consume is an arbitrary reflection of your bias against government.

                But even if you want to say the government can’t invest because taxes are theft, you could still divide up what the government does into differnt categories. Calling research consumption doesn’t consume the research.

              • Major_Freedom says:

                anon:

                MF, you already said it doesn’t matter if it was because taxes are theft, but as Lord Keynes has said you’re trying to waffle on this by saying they’re “fascist” investments.

                If the state owns it, and it is financed to earn profits, then I already said it is a fascist/communist investment. What “waffling” are you talking about?

                So are you back to saying the government can’t make investments?

                I never stopped saying that.

                The point I was trying to make is that you want to split the private sector into two rather broadly defined halves and then point to the public sector and say one of those halves doesn’t apply. But these halves can perhaps be further divided or perhaps they’re at least at the margin not so easily divided so that they overlap in complicated ways. But if you want to say government “investment” is not really investment but consumption perhaps government “consumption” is not really consumption either.

                How’s that?

              • anon says:

                it is a fascist/communist investment. What “waffling” are you talking about?

                So are you back to saying the government can’t make investments?

                I never stopped saying that.

                What am I missing that this isn’t an outright contradiction? Are fascist investments really consumption?

              • Major_Freedom says:
              • anon says:

                I have always used “investment” in the context of a monetary (division of labor) economy.

                In other words you’re moving the goalposts by redefining words after the fact then saying you were speaking in that “context” all along.

                So all government spending is consumption except the part that’s fascist investment, like the USPS, and fascist investment is not investment because the USPS doesn’t use money or division of labor? Really?

              • Major_Freedom says:

                In other words you’re moving the goalposts by redefining words after the fact then saying you were speaking in that “context” all along.

                No, I set that goalpost up near the start. You just didn’t know where the posts were, and then after I told you where they were, you accuse me of having moved them.

                If only there was a timestamp signal on posts.

                So all government spending is consumption except the part that’s fascist investment, like the USPS, and fascist investment is not investment because the USPS doesn’t use money or division of labor?

                Investment != Fascist/communist investment.

                All government spending is not investment.

                Some government spending is fascist/communist investment.

                Really.

              • anon says:

                So, again the postal service doesn’t use money or division of labor?

                And you allow no difference between mixed economies like social democracies and “fascism/communism”?

                Are you Jonah Goldberg?

                Isn’t communism a macro thing. How can you have “communists institutions” in a mixed economy?

              • anon says:

                All government spending is not investment.
                Some government spending is fascist/communist investment.

                MF, if you want to say government investment is not “true” investment because it’s fascist that’s merely a no true Scotsman fallacy.

                But what you said was all government spending is consumption not “not investment”. If you want to say “fascist investment” is really consumption then that sounds like a contradiction.

                I anticipate you’ll then say fascists investment is not “true” investment, but then we’ll be going in circles.

              • Major_Freedom says:

                MF, if you want to say government investment is not “true” investment because it’s fascist that’s merely a no true Scotsman fallacy.

                Not if I declared the context and did not admit of any exceptions.

                I think you are conflating a lack of knowing the context with me not setting it up until you found out about it.

                But what you said was all government spending is consumption not “not investment”.

                In the context of a monetary economy, not investment and consumption are the same thing.

                If you want to say “fascist investment” is really consumption then that sounds like a contradiction.

                Did I say that?

                I anticipate you’ll then say fascists investment is not “true” investment, but then we’ll be going in circles.

                I already set the context. I don’t need to change it at this point for my recent statements to be consistent.

              • anon says:

                Not if I declared the context and did not admit of any exceptions.
                I think you are conflating a lack of knowing the context with me not setting it up until you found out about it.

                MF, for one thing you’re saying the context is a monetary economy with division of labor, but does a post office not use money or division of labor?

                But even if you want to claim you posted the “true” context before saying anything else. (Or perhaps you wrote your views clearly somewhere else in the past.) I don’t know why this would matter, anyway.

                You’re just shifting the argument back one step and we’re arguing and saying “No true context” rather than “No true investment.”

                Even if in your worldview you define government investment as consumption this is still a redefinition, on your terms, so it’s misleading to talk about it as if it were consumption as is normally understood.

                Lord Keynes seems right in that you’re basically saying government investment is not investment because it’s fascist because natural rights therefore it’s consumption because ????

                Which brings me to:

                Did I say that?

                You said the government could make “fascists investments”, but also that all government spending is consumption. You’ll have to explain how calling fascist investments “consumption” is helpful and not confusing when we could just call them “fascist investments” for this not to be a contradiction or willfully misleading or tendentious language. (Calling the investments “fascist/communist” and not say “government” seems bad enough to me already.)

              • Major_Freedom says:

                anon:

                MF, for one thing you’re saying the context is a monetary economy with division of labor, but does a post office not use money or division of labor?

                What do you mean by “use”? It’s government owned. That’s socialism, not division of labor economics.

                But even if you want to claim you posted the “true” context before saying anything else. (Or perhaps you wrote your views clearly somewhere else in the past.) I don’t know why this would matter, anyway.

                It matters because A. You accused me of shifting goalposts after I only revealed to you the context I already set up prior, and B. You said I introduced a new context after I actually did so. I will defend myself against your accusations. If you don’t see a point to that, then I don’t really care.

                You’re just shifting the argument back one step and we’re arguing and saying “No true context” rather than “No true investment.”

                No, you’re just pissed that you thought you had a gotcha against me, because you were sloppy and didn’t pay attention to what I actually said, before you chose to go off on this quest of proving yourself right by using me.

                Even if in your worldview you define government investment as consumption this is still a redefinition, on your terms

                Redefinition? It’s my definition. Definitions are not objective. To say my definition is a redefinition is merely a rhetorical flourish intended to cast a cloud over my definition, as if I am obligated to use definitions that I consider to be misleading, flawed, and inappropriate.

                so it’s misleading to talk about it as if it were consumption as is normally understood.

                But the government DOES engage in consumption as it is normally understood. Even if you want to define certain government activity as “investment”, that “investment” even in your own worldview is far outweighed by the blatantly clear consumption activity. Look at the Federal budget. Out of all spending, war, medicaid, medicare, and social security take up the lion’s share of spending. These are not investments even using your misleading “government as investor” definition. So on net, you would have to admit that the government as such is a net consumer. And a big one at that.

                Lord Keynes seems right in that you’re basically saying government investment is not investment because it’s fascist because natural rights therefore it’s consumption because ????

                I never said that.

                Which brings me to:

                Did I say that?

                You said the government could make “fascists investments”, but also that all government spending is consumption. You’ll have to explain how calling fascist investments “consumption” is helpful and not confusing when we could just call them “fascist investments” for this not to be a contradiction or willfully misleading or tendentious language.

                Still not seeing a problem.

                The only problem I see is a desire on your part to want to believe government invests in a monetary division of labor society. It doesn’t. Me calling a particular consumption spending “fascist investment” is how I would define what LK was referring to in his little list of profit making state owned enterprises. I don’t see how it contradicts my argument that the government is a consumer, not an investor.

                If you don’t like it, fine, but I am not as interested in wordgames as you are, and this “debate” is boring the crap out of me.

                (Calling the investments “fascist/communist” and not say “government” seems bad enough to me already.)

                You sound like you don’t like hearing the truth about what government owning and/or controlling a means of production really means. Socialism is government ownership and/or control of the means of production. Fascism and communism are two types of socialism. It’s not difficult. If you don’t like hearing the words fascist and communist, then use your powers and stop fascist and communist institutions from existing. Then I will stop identifying them.

              • Major_Freedom says:

                So, again the postal service doesn’t use money or division of labor?

                Using money is not sufficient.

                And you allow no difference between mixed economies like social democracies and “fascism/communism”?

                The institutions are fascist/communist.

                An economic system is fascist or communist when all or most institutions are fascist/communist.

                Are you Jonah Goldberg?

                Are you Rachel Maddow?

                Isn’t communism a macro thing. How can you have “communists institutions” in a mixed economy?

                By having the government owning and controlling it.

              • anon says:

                It matters because A. You accused me of shifting goalposts after I only revealed to you the context I already set up prior, and B. You said I introduced a new context after I actually did so. I will defend myself against your accusations. If you don’t see a point to that, then I don’t really care.

                I believe you did introduce a new “context” but as you yourself said there’s no time stamps, so I was trying to move beyond that. Anyway, you could have written the same thing five years ago, it wouldn’t change anything as we still disagree about your definitions.

                I’ll reiterate that saying people are taking your words “out of context” is not a very strong argument as it only pushes the argument, one level back.

                In this case your “context” appears to involve more words you’re redefining like “division of labor”.

                The only problem I see is a desire on your part to want to believe government invests in a monetary division of labor society. It doesn’t.

                What are you saying a monetary division of labor is and why can’t the government invest in it?

                Me calling a particular consumption spending “fascist investment” is how I would define what LK was referring to in his little list of profit making state owned enterprises. I don’t see how it contradicts my argument that the government is a consumer, not an investor.

                You don’t see how saying all government spending is consumption and then later saying, of course, the government can make “facist” investments is confusing.

                You don’t believe private consumption and investment are the same, but fascist investments still count as consumption, right?

                You didn’t answer why we wouldn’t just call them fascist investments if that’s what they are.

                But the government DOES engage in consumption as it is normally understood. Even if you want to define certain government activity as “investment”, that “investment” even in your own worldview is far outweighed by the blatantly clear consumption activity. Look at the Federal budget. Out of all spending, war, medicaid, medicare, and social security take up the lion’s share of spending. These are not investments even using your misleading “government as investor” definition. So on net, you would have to admit that the government as such is a net consumer. And a big one at that.

                MF, who are you arguing with? I never said the government can’t consume, it was you who said they can’t invest.

                Redefinition? It’s my definition. Definitions are not objective.

                The point is that by redefining government investment as consumption calling it consumption isn’t really much of criticism of it. Beyond which it is simply confusing because then we need a new word for Government consumption.

                But compare your saying there are no objective definitions to this:

                You sound like you don’t like hearing the truth about what government owning and/or controlling a means of production really means. Socialism is government ownership and/or control of the means of production. Fascism and communism are two types of socialism. It’s not difficult. If you don’t like hearing the words fascist and communist, then use your powers and stop fascist and communist institutions from existing. Then I will stop identifying them.

                See someone might say the lack of democracy in fascism is one of it’s chief characteristics and this might complicate your “true” definitions. I’m thinking you express opposition to democratic institutions in the past, does that mean you’re a fascist?

                The institutions are fascist/communist.
                An economic system is fascist or communist when all or most institutions are fascist/communist.

                This is begging the question MF. Look it up please.

              • Major_Freedom says:

                anon:

                I believe you did introduce a new “context” but as you yourself said there’s no time stamps, so I was trying to move beyond that. Anyway, you could have written the same thing five years ago, it wouldn’t change anything as we still disagree about your definitions.

                And this concerns me…why?

                I’ll reiterate that saying people are taking your words “out of context” is not a very strong argument as it only pushes the argument, one level back.

                In this case your “context” appears to involve more words you’re redefining like “division of labor”.

                Again, I am not “redefining” anything. I am DEFINING. Redefining suggests someone else’s definition is somehow more fundamental, or superior.

                What are you saying a monetary division of labor is and why can’t the government invest in it?

                Already explained.

                You don’t see how saying all government spending is consumption and then later saying, of course, the government can make “facist” investments is confusing.

                No.

                You don’t believe private consumption and investment are the same, but fascist investments still count as consumption, right?

                Right.

                You didn’t answer why we wouldn’t just call them fascist investments if that’s what they are.

                But that is what I said I call the examples in the list LK posed.

                MF, who are you arguing with? I never said the government can’t consume, it was you who said they can’t invest.

                I never said you said they don’t consume.

                The point is that by redefining government investment as consumption calling it consumption isn’t really much of criticism of it.

                Again, I haven’t “redefined” anything. I have DEFINED things.

                Beyond which it is simply confusing because then we need a new word for Government consumption.

                I just use consumption.

                See someone might say the lack of democracy in fascism is one of it’s chief characteristics and this might complicate your “true” definitions.

                Democracy is the politics. I was using fascism and communism in a context of economics. Who owns the means of production.

                Democratic processes can vote to enact communism, and fascism, or not. The defining feature of fascism and communism, vis a vis capitalism, is the ownership of means of production.

                I’m thinking you express opposition to democratic institutions in the past, does that mean you’re a fascist?

                No.

                This is begging the question MF. Look it up please.

                It’s not begging the question. There are no premises that match the conclusion. Look it up? Why do I need to look it up? I’ll just find someone else’s definition, and you’ll just say that definition is a “redefinition” if it doesn’t match your definition.

              • anon says:

                And this concerns me…why?

                MF, you’re kidding me, right? I said it doesn’t matter and you insist on defending yourself because I’m taking you out of context, so I respond, and now you’re saying it doesn’t matter?

                Again, I am not “redefining” anything. I am DEFINING. Redefining suggests someone else’s definition is somehow more fundamental, or superior.

                Congratulations, you’ve redefined, “redefined” and the snake has eaten its own tail.

                Already explained.

                Where? More time stamps?

                Okay, you win MF, this cramped forum simply cannot support any more “subjective” definitions where postal workers are communists and abolishing democracy is just politics.

                It’s pretty hard to respond to one word answers too.

                An economic system is fascist or communist when all or most institutions are fascist/communist.

                Notice how you say an economic system is fascist when it is mostly fascist.

                Then you say:

                It’s not begging the question. There are no premises that match the conclusion.

            • Bala says:

              “I mean is the train an investment if it causes businesses to invest along it which raises tax revenues and ticket sales.”

              I know I’m late, but the answer is NO.

              “why not divide public sector activity into two things as well?”

              Please explain why an individual consuming and deferring consumption to produce are called consumption and investment respectively. The explain who is doing the deferral of consumption in “public sector spending”. Tha would be a good point to start the discussion.

              • Bala says:

                Darned typos!!!

  4. Adrian Gabriel says:

    Interesting points Jonathan makes. One could make the case that anybody willing to suggest MPC is a good ratio by which to calculate even the MEC is a Keynesian. As Rothbard demonstrated, MEC is the rate of interest. It is interesting economists even venture into still injecting methods of economic socialist calculation, or in the initialisms or elements requiring mathematics, when clearly understanding capital theory would eliminate the desire to make one’s self look foolish when the numbers are off…since they always are off. Rothbard makes some great points. The productivity of production processes has no basic relation to the rate of return on business investment. This rate of return depends on the price spreads between stages, and these price spreads will tend to be equal in the ERE. This is unlike in the Keynesian circular-flow and in neo-classical doctrine, where aggregate demand is adjusted according to irrational aspects of broad assumption in the producer’s loan market.

    The Keynesians (as I would lump all lovers of modern orthodox mechanics) maintain that the interest rate, is co-determined by time preference (which determines the supply of individual savings) and by marginal (value) productivity of in¬vestment (which determines the demand for savings by businessmen), which in turn is determined by the rates of return that can be achieved in investments. But as Austrians are quite aware, MPC is only good at calculating the interest rate in a broad macro-level economy. This is their failure. They are partly right in only one respect—that the rate of interest in the producers’ loan market is dependent on the rates of return on investment. They hardly realize the extent of this dependence, however. It is clear that these rates of return, which will be equalized into one uniform rate, constitute the significant rate of interest in the production structure. Remember, Keynesian mechanics has failed in elucidating this very fact. They are blind to the price spreads of the various factors of the production process, they can only see the interest rate of the long run…Capital is homogenous for them. Even Austrians like Selgin fail in these respects. In order to adhere to their mechanics, he seems to include lots of Keynesian elements in his analysis. For one, the velocity of money. Mises railed against this plenty of times. The most unique factor Rothbard made clear was indeed the importance of capital theory, but even was able to show how Hayek missed the importance of value scales in determining time preference, and thus the importance of praxeology.

    Overall, it is clear that Keynesians are focused in consumption, especially since they require a large focus on government intervention. Government intervention is a form of forced consumption. It is consumption by the government that reduces the incomes of people and businessmen (the private sector). Indeed in these respects we are aware that savings will fall due to a shift in time preferences if prices stay the same or rise. With taxes, prices only tend to rise. Thus, I could be radical enough to affirm my often stated claim that anybody that allows for government intervention into their models is a consumption based economist. They are already trying to predict asset allocation which is impossible, and thus consumption becomes a central part of their analysis, either by the government or individuals. Savings has taken a backseat to statism.

  5. Daniel Kuehn says:

    That’s not a very helpful way of talking about the paradox of thrift, Bob. Consumers are welcome to save more.. The question is not how much they are consuming relative to how much they are saving – it’s how much they are investing relative to how much they are saving.

    • skylien says:

      You mean the “paradox of thrift” better was called “the problem of hoarding” ?

    • Major_Freedom says:

      Don’t worry DK, Keynes also had in his back pocket an argument that the economy can only accommodate a particular quantity of saving. He thought that with more investment, rates of return will fall to such a low level that investors will allegedly not be willing to invest further, and as a result, savings will “leak” out of the economy into cash hoards. So it’s up to the good government doctor to lance the festering boil and release its benevolent juices via deficit spending, so that the rate of return can rise back up and coax investors into putting more savings into investment.

      So it really is a question of sufficient consumption. Too much investment and the market will (allegedly) fail. Consumption, in Keynesianism, really is the ultimate backstop. In Keynesianism, under no circumstances can investment spending be treated as “just as efficacious” as consumer spending, when it comes to its affect on AD or whatever.

      This is why Keynes emphasized a propensity to consume model, rather than a propensity to invest model. It’s also why he emphasized a paradox of thrift model, rather than a paradox of profligacy model. For the latter model, it is true that if everyone took all of their nominal incomes and consumed with it, then unemployment would collapse and output would collapse, because the demand for labor would collapse (as business revenues are used by the owners to consume for themselves). Without nominal demand for labor, there is no employment, and output would collapse. Yet Keynes never argued about how one individual’s desire to consume all their income can cause economic problems if everyone tried to do the same thing.

      • Daniel Kuehn says:

        MF – right, but the reason why the economy would have such long-term tendencies (according to Keynes – I don’t entirely agree with him on this point) is because of the nature of capital, not anything about consumption.

        • Major_Freedom says:

          Yes, which is why there is an emphasis on consumption (propensity to consume, etc), since there is this “problem” with capital. Consumption is the ultimate-spending-of-last-resort last line of defense.

          If investment spending drops 50%, then, supposedly, if the state can bring about an equivalent offsetting rise in consumer spending, then as far as Keynesianism is concerned, the job’s done.

          I never could understand why that is. Keynesians should introduce the concept of “Not all equally sized ADs are equally wealth generating”

          I mean, if one economy had 70% investment spending and 30% consumer spending because it was pro-capitalist, while another had the same AD with 100% consumer spending because it was not, then there allegedly should be no difference on output or employment. One AD is any AD. You even said it yourself below: “I mean – any spending would do the trick.”

          • anon says:

            MF, if a Keynesian thinks the market isn’t investing enough they can advocate for higher public investments.

            For example if R&D is too low government can do basic R&D.

            • Major_Freedom says:

              Haha, the government doesn’t “invest”. They consume.

              What you mean is the state can spend more money and then have insufficient funds thereafter to maintain the activity, which means another round of taxation and/or inflation.

              Like how I could “invest” by taking 35% of your annual salary and then financing the construction of missiles that will be sold to the leaders of hostile Islamic countries.

              • anon says:

                MF, me and Lord Keynes have just had a whole long debate with you about how the government can make investments.

                I’m talking about basic research like for new drugs and you respond with talk about selling missiles to hostile countries?

                You act like the private sector doesn’t have to spend money to invest, and doesn’t have to get more to invest more. Saying the public sector has to tax more to invest more is no different, but as Lord Keynes pointed out it’s not even true as their are publicly owned entities that are self-sustaining.

                You’re attempts to redefine language is beside the point though as I was responding to your claim that nothing can be done about falling private investment. If the market for new investment fails then the government can pick up some of the slack.

                You seem to want to claim that falling private investment is bad, but that nothing should be done because taxes are theft.

              • Major_Freedom says:

                anon:

                MF, me and Lord Keynes have just had a whole long debate with you about how the government can make investments.

                And yet you don’t seem to have learned that the government is a consumer, not an investor.

                I’m talking about basic research like for new drugs and you respond with talk about selling missiles to hostile countries?

                I’m talking about selling missiles to hostile countries, and you’re talking about medicine for blind children?

                You act like the private sector doesn’t have to spend money to invest, and doesn’t have to get more to invest more.

                Psychobabble.

                I know that private producers must sell goods to willing participants to acquire money with which to invest. Can’t say the same thing is true for the government. Well, other than the $2.2 million in charity the IRS received last year.

                Saying the public sector has to tax more to invest more is no different,

                Of course it’s different. Voluntary revenues from willing customers is literally the exact opposite to violence backed taxation.

                but as Lord Keynes pointed out it’s not even true as their are publicly owned entities that are self-sustaining.

                Yes, I could be an “investor” too by taking your money and buying shares in Microsoft. Are you for real?

                You’re attempts to redefine language is beside the point though as I was responding to your claim that nothing can be done about falling private investment.

                Except I am not “redefining” anything. I am DEFINING concepts. Redefining implies your definitions are somehow objectively superior to mine. But definitions are not objective statements.

                If the market for new investment fails then the government can pick up some of the slack.

                Because when investment in cars falls, it makes sense that the government spends more money on roads?

                There is no “slack” in the market. If an owner does not sell an asset after 1 month, or 1 year, and you prefer him to sell after 1 week of ownership, that does not entitle you to declare that this asset is “idle” and therefore there is “slack”. Resources are judged subjectively, period. If that means shorter or longer “idle” times, then so be it. There is nothing more you can say about it and remain economically scientific.

                You seem to want to claim that falling private investment is bad, but that nothing should be done because taxes are theft.

                Again, what is it with you statists who conflate government doing nothing with do nothing in general? Your claims reminds me of Bastiat:

                “Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all. We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain.”

                Here’s a hint: A free market policy is a DO SOMETHING policy. It is millions, if not billions of property owners making decisions to best serve their interests. Governments are not needed to “spend” to “boost” economies. It only does damage by benefiting some at the expense of others in the short run, and hurting everyone in the long run. Just look at the economy today. That’s the product of decades of government “solutions”.

              • anon says:

                And yet you don’t seem to have learned that the government is a consumer, not an investor.

                MF, you already admitted they can make “fascist” investments. You’re like “my sister, my daughter, my sister, my daughter.”

                Except I am not “redefining” anything. I am DEFINING concepts.

                MF, if you take an already existing word and define it anew it seems you’re are redefining that word at least. If you want to play semantics and say your inventing new “concepts” that’s fine, it doesn’t change anything.

                Whether or not definitions in general are objective, I don’t think it will help you either way. For one thing, I’ve never claimed they were, but am merely confused by the idea that if government investment now means government consumption, why is that a criticism of government investment? And what will we now call government consumption?

                The only thing you seem to have to say for yourself is that taxes are theft. Which we all already knew you believed before.

                Because when investment in cars falls, it makes sense that the government spends more money on roads?

                MF, please don’t put words in my mouth. Who is arguing this position? If you want to look at the government spending money on cars you can look at the auto-bailout, but you could also look at public transportation. Or scientific research on fuel efficiency or battery technology. But this wasn’t my example.

                There is no “slack” in the market. If an owner does not sell an asset after 1 month, or 1 year, and you prefer him to sell after 1 week of ownership, that does not entitle you to declare that this asset is “idle” and therefore there is “slack”. Resources are judged subjectively, period. If that means shorter or longer “idle” times, then so be it. There is nothing more you can say about it and remain economically scientific.

                MF, you were saying there was something wrong with Keynesian economics because too much consumption would be bad and apparently nothing could be done. I suggested something could perhaps be done and you retreat and say it doesn’t matter if there is too much consumption because all value is subjective, period. (Does that mean that all value is subjective is an objective definition.)

                Again, what is it with you statists who conflate government doing nothing with do nothing in general? Your claims reminds me of Bastiat:

                Here’s a hint: A free market policy is a DO SOMETHING policy.

                MF, you seem to think, I think people would just do nothing if there was no government around. (One thing they might do is start a government.) What I’m saying is the Austrian prescription for an economic downturn is nothing should be done. That whatever outcome happens is the outcome that should happen. If you disagree and Austrianism really says to abandon ship given some outcome please tell me what it is.

              • Major_Freedom says:

                MF, you already admitted they can make “fascist” investments.

                I actually “admitted” to saying that what LK was referring to can be called fascist/communist investment. That doesn’t preclude me from being able to say all government spending is consumption.

                You’re like “my sister, my daughter, my sister, my daughter.”

                No, I’m like consumption is not investment is not fascist/communist investment.

                MF, if you take an already existing word and define it anew it seems you’re are redefining that word at least.

                Words aren’t already existing. Words are only relevant to the extent that people use them. I am a person, hence the word is founded upon my usage.

                If you want to play semantics and say your inventing new “concepts” that’s fine, it doesn’t change anything.

                You mean you are considering no longer playing semantics? That would be OK.

                Whether or not definitions in general are objective, I don’t think it will help you either way.

                It is not supposed to help me. It was said merely to challenge your conjecture that I am “redefining” words.

                For one thing, I’ve never claimed they were, but am merely confused by the idea that if government investment now means government consumption, why is that a criticism of government investment?

                You mean you’re asking how can a mere definition be a criticism? And you’re telling me you’re not interested in semantics?

                And what will we now call government consumption?

                Consumption, like I said already.

                The only thing you seem to have to say for yourself is that taxes are theft.

                Right, because everything else I said does not really exist. Just focus on taxes equals theft and believe you won.

                Which we all already knew you believed before.

                It’s not a mere belief. It’s knowledge.

                “Because when investment in cars falls, it makes sense that the government spends more money on roads?”

                MF, please don’t put words in my mouth. Who is arguing this position?

                You did. You said the government can “offset” the drop in investment, by spending more in what the government spends money on.

                Sounds ridiculous when your own position is put in non-semantic flourishes, doesn’t it?

                If you want to look at the government spending money on cars you can look at the auto-bailout, but you could also look at public transportation. Or scientific research on fuel efficiency or battery technology. But this wasn’t my example.

                Oh, that makes it all better and totally makes sense. Fall in car investment, so the government puts more money in some random other industry that is not according to free trade and respect for property rights.

                MF, you were saying there was something wrong with Keynesian economics because too much consumption would be bad and apparently nothing could be done.

                I never claimed that Keynesianism is bad because of “too much consumption”. I did not make any argument about a “correct” or “optimal” rate of consumption. But if individual market actors want to consume X, and the government consumes at their expense, then they will only be able to consume X – x, and THAT is what I argue is the fundamental aspect of Keynesianism. The state consumes more resources, and that is supposed to benefit the producers because of what happens to money flows, as if producers want to work and produce to ONLY earn money, and sit on it forever, and not consume with it themselves. Keynesianism gives producers more devalued money, which fosters the illusion that producers are more wealthy.

                I suggested something could perhaps be done and you retreat and say it doesn’t matter if there is too much consumption because all value is subjective, period.

                I did not say that either. I did not “retreat” from the argument that something should be done. I hold that something should be done. I just hold that the government specifically does not have any role here, only market participants do. You conflated that with a “do nothing” policy, as if the millions of market actors who can fix their lives and hence “the economy”, doesn’t even exist.

                (Does that mean that all value is subjective is an objective definition.)

                Exactly. It is an objective fact that value is subjective, which means no one’s values can be arrogated to the status of objective values for everyone else. No violent impositions of value of some against others. Let individuals use their own property in the way they subjectively see fit. That includes by logical extension a prohibition on property violations.

                MF, you seem to think, I think people would just do nothing if there was no government around.

                That “thinking” is not unwarranted, since you specifically characterized the Austrian solution as a “do nothing” solution.

                (One thing they might do is start a government.) What I’m saying is the Austrian prescription for an economic downturn is nothing should be done.

                There you go again. That is a FALSE assertion. The Austrian is not a “do nothing” solution. It is a “let the individual market actors DO what they want, without being coerced by the state.” That is a DO SOMETHING solution. Millions of market actors each doing what they want with their bodies and material property to better their lives.

                Is this so impossible to understand? WHY WHY WHY do you only look at the state when you think of the concept of human action? Why is it that when you consider the state doing nothing, that nothing is being done?

                That whatever outcome happens is the outcome that should happen. If you disagree and Austrianism really says to abandon ship given some outcome please tell me what it is.

                Austrians do not advocate for abandoning any ship. Let each individual steer and guide THEIR OWN ships, so that the seas will be smooth sailing and crashes will be minimized.

                What you want is for one all knowing overlord to steer all the ships, even though he has no idea of where the locations each ship captain wants to go, and yet those ship captains are still influencing their own ships because that is all they know how to do. So their steering, combined with the interference from the overlords’ putting of his hands on everyone else’s wheel, leads to ship crashes.

                Austrians hold that each ship captain should be free to steer his own ship anywhere he wants, as long as he doesn’t initiate force against other individual’s ships.

                This is a do something solution. It just doesn’t include the state, and for some reason, you have this warped worldview that if there isn’t an overlord sticking his hands on everyone else’s ship, that somehow nobody will steer their own ships themselves.

                Let the individual ship captains decide where they want to go. You do this by simply shutting the hell up and not ordering them around. It’s amazing what people will do when they don’t ask for your permission to steer their own ships. You should try it. I know it’s hard for central planning mindsets, but it’s about time you realize I don’t need you to help me with my own ship. Neither do millions of other people.

              • anon says:

                No, I’m like consumption is not investment is not fascist/communist investment.

                I’m not sure this sentence make sense. But if it just says those three things are different then we’ve gone nowhere because you’re just trying to back out of saying all government investment is consumption, but some government investment is also “fascist” investment. As if that makes sense.

                Words aren’t already existing. Words are only relevant to the extent that people use them. I am a person, hence the word is founded upon my usage.

                Did you independently invent the words and definitions for investment, consumption, and fascism? Or did you perhaps learn of them from other sources?

                The first sentence you wrote is ambiguous, so perhaps you want to clear that up.

                It’s amazing, though, that we can even talk to each other at all. Perhaps if you abandoned some of the radical private language arguments you might find we could communicate even better.

                Exactly. It is an objective fact that value is subjective, which means no one’s values can be arrogated to the status of objective values for everyone else. No violent impositions of value of some against others. Let individuals use their own property in the way they subjectively see fit. That includes by logical extension a prohibition on property violations.

                MF, this doesn’t make sense. 1. Asserting something is an objective fact does not prove it is true. But it seems believable enough for folk psychology, so whatever. (But notice the contradiction between saying something is objective and everything is subjective. You could just as well find things that people or people and other animals have in common. So your objective fact is perhaps difficult to determine for now.)

                2. Nothing else you wrote follows from the premise. If value is subjective then someone’s value might be to violently impose their values on others.

                3. This is what I don’t get about anarchism because anything follows from anarchism including government so that if you believe in a particular kind of anarchism that is a goal you have to fight for not some fundamental truth.

                There you go again. That is a FALSE assertion. The Austrian is not a “do nothing” solution. It is a “let the individual market actors DO what they want, without being coerced by the state.”

                So given that we do have a state don’t we still have to discuss the unwinding of the state?

                Why is it that when you consider the state doing nothing, that nothing is being done?

                Because when you talk of unemployment caused by malinvestment.it sounds like you’re saying unemployment is good. It’s convenient to say without the government the unemployment would be taken of or the only reason there is unemployment is the government and without them there would be none or it wouldn’t be a problem.

                That is a DO SOMETHING solution. Millions of market actors each doing what they want with their bodies and material property to better their lives.

                Let me just say that I’m very sympathetic to this and some of the talk about ship captains. I can even imagine an Austrian do something world, it sounds pretty nice, but don’t imagine it coming about in the near future and don’t think the near future it is the best solution. I’m intrigued by the fact that you don’t seem to even claim to want even a minimal state. But I’ve spent too much time on this already and maybe we’ll have the chance to discuss this more productively in the future.

              • Lord Keynes says:

                M_F says:
                “Words aren’t already existing. Words are only relevant to the extent that people use them. I am a person, hence the word is founded upon my usage.”

                Anon, this guy is a
                clown.

                On my blog some time ago he did not like the meaning of “immediately” as used in a passage by J. B. Say, and then decided to just change its meaning:

                “Other than the misleading word “immediately”, which can be taken to mean any time at all, since the standard for “short” and “long” periods of time is not objective but subjective, “

                http://socialdemocracy21stcentury.blogspot.com/2011/12/say-repudiated-says-law.html?showComment=1322754858471#c4751417681290758722

                “1 second, 1 minute, 1 hour, 1 day, 1 week, and 1 year, can all be considered “immediate” if the standard is a person’s life.

                http://socialdemocracy21stcentury.blogspot.com/2011/12/say-repudiated-says-law.html?showComment=1322757550391#c6698775224110716495

              • Major_Freedom says:

                anon:

                I’m not sure this sentence make sense. But if it just says those three things are different then we’ve gone nowhere because you’re just trying to back out of saying all government investment is consumption, but some government investment is also “fascist” investment.

                I still maintain all government spending is consumption. I don’t see what the problem is.

                As if that makes sense.
                Words aren’t already existing. Words are only relevant to the extent that people use them. I am a person, hence the word is founded upon my usage.
                Did you independently invent the words and definitions for investment, consumption, and fascism? Or did you perhaps learn of them from other sources?

                As with most people, my definitions are a combination of existing, and novel, definitions.

                The first sentence you wrote is ambiguous, so perhaps you want to clear that up.

                Ambiguous how?

                It’s amazing, though, that we can even talk to each other at all. Perhaps if you abandoned some of the radical private language arguments you might find we could communicate even better.

                Didn’t Wittgenstein show that private languages are impossible?

                “Exactly. It is an objective fact that value is subjective, which means no one’s values can be arrogated to the status of objective values for everyone else. No violent impositions of value of some against others. Let individuals use their own property in the way they subjectively see fit. That includes by logical extension a prohibition on property violations.”

                MF, this doesn’t make sense. 1. Asserting something is an objective fact does not prove it is true.

                I neither said nor implied that.

                But it seems believable enough for folk psychology, so whatever. (But notice the contradiction between saying something is objective and everything is subjective.

                Yes, I know that statement is a contradiction, which is why I didn’t say that either.

                I said all values are subjective. That is an objective statement about subjective values. No contradiction.

                2. Nothing else you wrote follows from the premise. If value is subjective then someone’s value might be to violently impose their values on others.

                Sure, some people’s values really do consist of imposing their values on others. But then they would be denying other people’s subjective values.

                3. This is what I don’t get about anarchism because anything follows from anarchism including government so that if you believe in a particular kind of anarchism that is a goal you have to fight for not some fundamental truth.

                Statism does not “follow” anarchism. Anarchism is absence of statism.

                So given that we do have a state don’t we still have to discuss the unwinding of the state?

                Unwinding of state interference cannot be done by positive, continual interference by the state.

                Why is it that when you consider the state doing nothing, that nothing is being done?

                Not sure I understand. You’re asking me why nothing is being done whilst I am saying the state should do nothing? I don’t think nothing is being done.

                Because when you talk of unemployment caused by malinvestment.it sounds like you’re saying unemployment is good.

                So if I say headaches and nausea are a part of the sobering up process, I have to consider headaches and nausea as intrinsically “good”?

                I don’t think unemployment is intrinsically “good.”

                It’s convenient to say without the government the unemployment would be taken of or the only reason there is unemployment is the government and without them there would be none or it wouldn’t be a problem.

                I think it’s multiples of times more convenient to say the government should or will take care of the unemployed, or that the only reason there is unemployment is the market and without the market process there wouldn’t be a problem.

                With statism, you don’t have to think more than “let the state handle it.”. With the market process, it is inevitable that you become a part of the process by having to think of ways that YOU personally can reduce unemployment. Perhaps you can save money rather than blowing it all on yourself, and hire some people to clean your home or cut your grass for $5.00 an hour or something.

                Let me just say that I’m very sympathetic to this and some of the talk about ship captains. I can even imagine an Austrian do something world, it sounds pretty nice, but don’t imagine it coming about in the near future and don’t think the near future it is the best solution. I’m intrigued by the fact that you don’t seem to even claim to want even a minimal state. But I’ve spent too much time on this already and maybe we’ll have the chance to discuss this more productively in the future.

                Till then.

                ——————–

                Lord Keynes:

                “Words aren’t already existing. Words are only relevant to the extent that people use them. I am a person, hence the word is founded upon my usage.”

                Anon, this guy is a
                clown.

                Awww, you sound very much threatened. So much so that you feel compelled to convince someone else to think a certain way about me. How utterly flattering. or maybe it’s “sheer” flattery, LOL.

                On my blog some time ago he did not like the meaning of “immediately” as used in a passage by J. B. Say, and then decided to just change its meaning:

                Whilst you are plugging your blog, you’re giving me free advertising. Thanks!

              • anon says:

                MF, when you say “words aren’t already existing,” it sounds like you are saying you’re speaking a private language.

                If you want to make some weaker point that you are merely deconstructing definitions to make a point, I fail to see how your deconstruction of the difference between government consumption and investment has made a point when your entire argument seems to rest on “taxes are theft.”

                I still maintain all government spending is consumption. I don’t see what the problem is.

                MF, you’ve been unable to answer how something can be both called “fascist investment” and consumption at the same time without contradiction or confusion.

                Specially why, if some government “consumption” is also investment, why it is wrong to talk about government investment other than because you believe all taxes are theft.

                So if I say headaches and nausea are a part of the sobering up process, I have to consider headaches and nausea as intrinsically “good”?

                If you have a headache and refuse to an aspirin.

                I think it’s multiples of times more convenient to say the government should or will take care of the unemployed, or that the only reason there is unemployment is the market and without the market process there wouldn’t be a problem.

                This is the problem with equating Keynesianism with communism (or fascism). I don’t know any Keynesians who want to get rid of the market.

                You want to get rid of the government and think anyone who doesn’t wants to abolish all markets?

                Nor do I think any Keynesians deny governments can cause problems.

                With the market process, it is inevitable that you become a part of the process by having to think of ways that YOU personally can reduce unemployment. Perhaps you can save money rather than blowing it all on yourself, and hire some people to clean your home or cut your grass for $5.00 an hour or something.

                I fail to see how these things are impossible in a mixed economy. I certainly don’t think it is “inevitable” in a world without government. I think again you’ve taken some government and translated it into total government.

                Why is it that when you consider the state doing nothing, that nothing is being done?

                MF, I think you’re mixing up your responses and mine, this was something you said to me.

                Statism does not “follow” anarchism. Anarchism is absence of statism.

                Yes, but anything follows from anarchism including statism especially when you say all value is subjective.

                By what mechanism does anarchism maintain its utopian purity?

                What force compels non-violence?

                Unwinding of state interference cannot be done by positive, continual interference by the state.

                It “cannot”, why not? How should it be done?

                I said all values are subjective. That is an objective statement about subjective values. No contradiction.

                Where is your proof for your fact? How do you know objectively all values are subjective? Are you saying it’s impossible theoretically to measure human value? Or you measured it and determined it’s all subjective?

                Anyway, I’ll accept it, but would say I think it’s incorrect to use subjective value as justification for outcomes. (Saying the unemployed or poor are unemployed and poor because they value unemployment and poverty.)

                Sure, some people’s values really do consist of imposing their values on others. But then they would be denying other people’s subjective values.

                I don’t understand this. If one person subjectively values violence and another doesn’t it means these values are in conflict. It doesn’t mean either person is denying subjective values exist. They’re denying the expression of the other’s value. (Perhaps following the subjective value as justification line would say that a murder victim simply didn’t value non-violence enough to stop themselves from getting murdered. And if you, MF, valued anarchism more, anarchism would exist.)

    • Richard Moss says:

      Daniel,

      So when Krugman writes this…

      The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

      … he is talking about not just consumer’s consumer spending, but also consumer’s investment spending?

      If I have that right, that is a bit confusing. When someone says that consumer spending has slipped, I think they are saying spending on consumer goods has fallen, not that spending by consumers on investment and/or consumer goods has fallen.

      • Major_Freedom says:

        Richard, I think what Krugman means is that AD falls BY WAY OF a fall in consumption. He is saying IF consumer spending falls, THEN so and so forth. That itself isn’t sufficient for identifying Keynesianism as consumptionism.

        For if instead Krugman said:

        “The point is that if investors cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.”

        Then would you accuse Keynesianism of being “investment…uh..ism”?

        And before you say Krugman would never say that, please note that he did say something like this, when he was advocating for a housing bubble way back in 2002. He said something to the effect that because there is an “investment slump” after the Nasdaq bubble burst, Greenspan should “lower interest rates” to stimulate housing, and from housing related spending, the economy can rebound.

        • Richard Moss says:

          MF,

          You wroteRichard, I think what Krugman means is that AD falls BY WAY OF a fall in consumption.

          Perhaps now I am the source of confusion.

          Daniel criticized Bob for suggesting the problem is consumer’s saving instead of consuming, when its really consumers saving (hoarding?) instead of investing. I don’t think that is what you are talking about.

          I threw up the Krugman quote only to highlight that for Daniel to criticize Bob for his phrasing of the problem seems to me unfair.

          When Krugman says things like “consumers cut their spending”, I understand it they reduced their spending on consumption, not on investment.

          We need to be careful with these terms. People do say things like ‘consumer’s saving’, not ‘saver’s saving’ and I don’t think that is odd. But, at the same time, when people say ‘consumer’s spending’ I hear them saying ‘spending on consumer goods’ not ‘spending on consumer goods and/or investing in capital.’

          Maybe I wrongly interpreted Krugman, but I think it’s certainly understandable why I might.

          • Major_Freedom says:

            PK was definitely talking about consumer spending and individuals abstaining from consumer spending (saving) in that quote you mentioned, but when you are reading Keynesian arguments, a good rule of thumb is to put all comments in a context of AD.

            So anticipate Krugman worrying about falling AD, and then go read that quote you posted again.

            Once you do, you will see that it’s not the fall in consumer spending per se that is the problem, it’s the fall in consumer spending…as it affects AD. In other words, it’s the fall in AD. That’s why he added “…and nothing else takes the place of that spending”.

            I am sure that if PK is asked point blank, he would say it would be bad if investors reduced their spending…”and nothing else takes the place of that spending”. Yes, he talks more about consumer spending than investment spending, but that’s probably because he believes the myth that consumer spending makes up most of the spending in the economy (“70% of GDP”, etc).

      • Richard Moss says:

        * consumer’s consumption spending

      • Daniel Kuehn says:

        Not consumer’s investment spending – I would think firm’s investment spending. Isn’t that obvious from the context of what Krugman said about the Fed?

      • Daniel Kuehn says:

        I mean – any spending would do the trick. Obviously if consumers said “actually we will consume more after all”, that would be great too (indeed – it would give investors all the more reason to invest!). But he’s talking about the paradox of thrift, so I’d think he’s curious about what investors do in response to that increased saving. That’s certainly implied by the discussion of the Fed.

        • Major_Freedom says:

          I mean – any spending would do the trick.

          “Eecheewawa. Napu nabu, yiad yetna Keynesian”

          Translation: “Dang. That’s why I am not a Keynesian.”

  6. Tom E. Snyder says:

    It seems to me that the source of investment funds for Keynesians is not saving but new money from the Fed.

    • Major_Freedom says:

      Of course. Investment has to literally arise out of nothing since Keynesians attack savings. The government spends money to manage AD, and the government prints money to manage investment.

      Ultimately money printing is necessary for persistent budget deficits (since we’re seemingly always in a sluggish economy for some reason, according to Keynesians). Without it, deficits would eventually eliminate further borrowing since the debt payments would be so high so as to swamp out the tax revenues.

  7. Transformer says:

    I have a question for Bob,

    You say (attributing this view to Keynesians ):

    ” it screws things up in a depression if people try to “be responsible” by consuming less and saving more”

    What do the you think the effect of increased savings during a recession would be ? Would it aid the recovery and if so how ?

    • Major_Freedom says:

      Recessions are characterized by a drop in the value of accumulated savings and capital (because of malinvestment).

      This drop then leads to a reduction in investment, which typically consists of a reduction in the demand for labor, and that leads to unemployment and declining output (if wage rates don’t fall sufficiently).

      Hence, it makes sense that a solution would be to find a way to increase the value of accumulated savings and capital while avoiding malinvestment. That requires more savings, not less savings and more consumption spending financed by non-market means that distorts the capital structure.

      • Major_Freedom says:

        I know you asked Bob but it’s always good to get more answers than fewer answers.

        • anon says:

          I know you asked Bob but it’s always good to get more answers than fewer answers.

          And a noisy signal hits a scare resource: a person’s attention.

          Hence, it makes sense that a solution would be to find a way to increase the value of accumulated savings and capital while avoiding malinvestment. That requires more savings,

          This doesn’t seem like a solution so much as saying nothing should be done.

          I don’t think an Austrian economy “requires” anything. There is no necessary bottom to bad times.

          Austrians seem to use a strangely Darwinian view–that we’ll all be stronger in the long run if we don’t use vaccines. (Never mind that “stronger” is relative and may be worse not only for those who die out (failed businesses and the unemployed) but also in the long run.)

          • Major_Freedom says:

            “Hence, it makes sense that a solution would be to find a way to increase the value of accumulated savings and capital while avoiding malinvestment. That requires more savings,”

            This doesn’t seem like a solution so much as saying nothing should be done.

            Yes, because to your ears, any solution that doesn’t include government is “doing nothing.”

            Those of us who know better understand that increased saving and investment on the part of hundreds of thousands, if not millions of people, is very much a “do something” solution. If government stops trying to “fix” the economy, then the people will fix it.

            Austrians seem to use a strangely Darwinian view–that we’ll all be stronger in the long run if we don’t use vaccines. (Never mind that “stronger” is relative and may be worse not only for those who die out (failed businesses and the unemployed) but also in the long run.)

            Except the vaccines are drugs that have the very side effects you now say need a government cure.

            Austrians don’t advocate for a “Darwinian” solution. Social Darwinism is a long ago refuted meme that circle (and perhaps jerks) among liberal-progressive crowds.

            If anything, it is social Darwinism to point guns at people and influence them not by persuasion, but by force.

            • anon says:

              Look, MF, I’m saying Austrians talk of economic efficiency in the same way as Darwinian fitness.

              Calling all the newly failed businesses (and unemployed workers) in a recession “malinvestments” implies a misunderstanding of natural selection that what survives is the “best” outcome rather than merely what survives.

              It’s very similar to some biologist saying we should reject modern medicine because it will weaken the gene pool.

              (I get that austrians fall back on various arguments such as natural rights or maybe objectivism, but I’m talking about their economic arguments.)

              • Major_Freedom says:

                anon:

                Look, MF, I’m saying Austrians talk of economic efficiency in the same way as Darwinian fitness.

                No, they don’t. Darwin is dog eat dog. Survival of the fittest. Free market process contains MUTUALLY BENEFICIAL trading.

                Calling all the newly failed businesses (and unemployed workers) in a recession “malinvestments” implies a misunderstanding of natural selection that what survives is the “best” outcome rather than merely what survives.

                I didn’t claim ALL failing businesses are malinvestments.

                Failing businessmen aren’t erased from existence. There is positive wealth generation when bad businesses fail and good businesses take over. There is no fixed food supply and fight to the death.

                Your imagery of the free market is repugnant and woefully inaccurate.

                It’s very similar to some biologist saying we should reject modern medicine because it will weaken the gene pool.

                Except the “medicine” you are advocating is the very poison that has lead you to this point in calling for medicine!

                (I get that austrians fall back on various arguments such as natural rights or maybe objectivism, but I’m talking about their economic arguments.)

                I get it that statists often fall back on might makes right and let’s soak the rich and put any dissenters in jail. I get your game. I get what you want. You fall back on guilt, the poor, the children, and all other straws that, ironically enough, are better served in the society I am advocating, and they are worse off in yours.

              • anon says:

                “Free market process contains MUTUALLY BENEFICIAL trading.”

                MF, you seem to forget you don’t believe “truly” free markets exist.

                But I believe we were talking about recessions. I’m guessing you don’t think recession happen in austrian systems. Perhaps they do, but you don’t call them recessions.

                Or maybe you don’t define recessions as market processes.

                Darwin is dog eat dog. Survival of the fittest.

                I don’t think this is the most up to date description of evolutionary biology. Perhaps I’m wrong. I think you’ve set up a false dichotomy between evolution and the free market, since the free market exists within evolution.

                Failing businessmen aren’t erased from existence. There is positive wealth generation when bad businesses fail and good businesses take over. There is no fixed food supply and fight to the death.
                Your imagery of the free market is repugnant and woefully inaccurate.

                MF, I think you need to say there can be positive wealth generation when a company gets “taken over.” Perhaps both companies will fail. (I don’t know why I have to say these obvious things.)

                You seem to imagine things always go up and never that they go down. The pie can get bigger, but it can also get smaller.

                Except the “medicine” you are advocating is the very poison that has lead you to this point in calling for medicine!

                Yes, I know that austrians like to say that everything is the governments fault because it exists. If only it didn’t exist there would be no problems. Were does the austrian state exist that I can point to? Somalia? Or is Austrianism a no true Scotsman? Are they just the counterparts to those communists who say communism in Russia wasn’t really communism?

                I get it that statists often fall back on might makes right and let’s soak the rich and put any dissenters in jail. I get your game. I get what you want. You fall back on guilt, the poor, the children, and all other straws that, ironically enough, are better served in the society I am advocating, and they are worse off in yours.

                MF, I thought you said all value in subjective, so how could you possibly know if someone is better off or not? But I’d appreciate it if you didn’t continue to attribute arguments to me that I did not make though. I’m playing a game and making you feel guilty? I want to throw dissenters in jail? I talked about children?

                My personal views are probably more complex than you’re giving me credit for.

              • Major_Freedom says:

                anon:

                MF, you seem to forget you don’t believe “truly” free markets exist.

                I didn’t forget that. I remind people of it all the time when they blame the free market for this, that, or the other.

                But I believe we were talking about recessions. I’m guessing you don’t think recession happen in austrian systems.

                They probably would, but they would almost certainly feel like individual industry bubbles and busts.

                Perhaps they do, but you don’t call them recessions.
                Or maybe you don’t define recessions as market processes.

                Darwin is dog eat dog. Survival of the fittest.

                I don’t think this is the most up to date description of evolutionary biology.

                I was referring to what most people are talking about when they utter the phrase Social Darwinism.

                Perhaps I’m wrong. I think you’ve set up a false dichotomy between evolution and the free market, since the free market exists within evolution.

                I didn’t set up the dichotomy, you did. You said that the Austrian solution is Darwinism, which suggests that non-Austrian solutions are non-Darwinism, which further suggests that you are setting up a dichotomy between evolution and non-free markets. And yet, wouldn’t your position lead you to claim that non-free markets exist within evolution?

                I think you need to say there can be positive wealth generation when a company gets “taken over.” Perhaps both companies will fail. (I don’t know why I have to say these obvious things.)

                Not necessarily. Wealth can be generated when wasteful companies are liquidated and the resources “sold for scrap”, as it were.

                You seem to imagine things always go up and never that they go down.

                I never claimed that, not has anything I said implied that.

                The pie can get bigger, but it can also get smaller.

                Sure, with parasitical statists and other thugs running around. And natural disasters.

                Yes, I know that austrians like to say that everything is the governments fault because it exists. If only it didn’t exist there would be no problems.

                Yes, I know that statists like to say that everything is the market’s fault because it partially exists. If only it were lessened further (i.e. more regulations, more government spending, more inflation, etc) there would be no problems.

                Were does the austrian state exist that I can point to? Somalia? Or is Austrianism a no true Scotsman?

                Somalia inherited a statist society. But they have improved since the collapse of the state. See the paper “Better off Stateless.”

                Are they just the counterparts to those communists who say communism in Russia wasn’t really communism?

                No, because that really was communism.

                At any rate, Austrian economics is not normative. It does not advocate for free markets. Austrianism is wertfrei.

                I thought you said all value in subjective, so how could you possibly know if someone is better off or not?

                When their own subjective values are able to be put into action without being stopped by coercion.

                But I’d appreciate it if you didn’t continue to attribute arguments to me that I did not make though. I’m playing a game and making you feel guilty? I want to throw dissenters in jail? I talked about children?

                Give it time.

                My personal views are probably more complex than you’re giving me credit for.

                We will see.

              • anon says:

                Look the view that we shouldn’t take any medicine seem to think that evolution as a result of medicine is somehow “artificial” because it’s (possibly) influenced by humans and it seems austrians have a similar view regarding government actions in the economy, that they don’t count. (Or only count negatively.)

              • Bala says:

                Once again, what you call medicine is actually poison. Once you realise that, it will be easier to stop talking past each other.

                Incidentally, the explanation for why it is poison is economic, not political. Government action, by definition, is violent exchange and violent exchange ALWAYS leaves the victim of the violence worse off. The subjective, ordinal nature of utility makes it impossible for anyone to talk of welfare tradeoffs and hence of net economic benefit in such cases.

            • anon says:

              I didn’t set up the dichotomy, you did. You said that the Austrian solution is Darwinism, which suggests that non-Austrian solutions are non-Darwinism, which further suggests that you are setting up a dichotomy between evolution and non-free markets. And yet, wouldn’t your position lead you to claim that non-free markets exist within evolution?

              Of course non-free markets exist within evolution. MF, I was making an analogy between austrian arguments that increased efficiency (lower “malinvestment”) is good to a Darwinian view that it’s better not to take medicine because in the long run the gene pool is stronger.

              You can be a evolutionary biologist and not think we should not take medicine, and be an economist and not subscribe to austrian economics.

              The point is the gene pool developing an immunity to certain diseases may not be the higher priority and could have perverse consequences. (To the extent people should care about the future anyway.)

              It doesn’t mean non-free markets are necessarily any better, just that when people talk about malinvestments as not being legitimate investments I also wonder what they could mean. I suspect it’s similar to your view that all government investment is really consumption. Any private investment that benefited from central banking must not really be investments.

          • Bala says:

            “Austrians seem to use a strangely Darwinian view–that we’ll all be stronger in the long run if we don’t use vaccines.”

            Actually, it’s “We’ll all be better if we weren’t getting injected with poison in the name of giving us vaccine shots”.

            • Major_Freedom says:

              Keynesians seem to use a strangely Masochistic view-that we’ll all be stronger in the long run if we don’t use the vaccine of the free market, and continue to poison ourselves with what caused the very problems we’re now trying to solve that Keynesians suggest should be more poison.

  8. Major_Freedom says:

    Murphy, this might interest you:

    http://www.reuters.com/article/2012/11/21/us-usa-hunger-holiday-idUSBRE8AK08Q20121121

    Maybe when poor people start dropping like flies, Krugman will finally find the time to spare 1 hour of his precious time and release $70,000 for the NY Food Bank.

    • Bob Roddis says:

      That assumes that liberals like Krugman actually care about working class and poor people. I decided in 1972 after working road construction and working in auto plants that liberals hated working class and poor people. The reason liberals are so attracted to socialism and Keynesianism is because they think average people are too stupid to run their own lives and need a genius (just ask him) like Krugman to run their lives via an all-encompassing bureaucracy. Further, providing private funds to a soup kitchen is just a vile, right wing, racist Austrian trick to embarrass the marvelous government provided welfare system.

  9. Transformer says:

    “This drop then leads to a reduction in investment, which typically consists of a reduction in the demand for labor, and that leads to unemployment and declining output”

    sounds likea reasonable description of what happens in a recession

    But given the “reduction in investment” why would “a solution would be to find a way to increase the value of accumulated savings” be true ?

    (I assume that: “investment” is expenditure on capital goods and “savings” is money savings out of income).

    If what is needed is more investment (to make up the shortfall) how will additional savings out of income spur this in this recession scenario ?

    • Major_Freedom says:

      If what is needed is more investment (to make up the shortfall) how will additional savings out of income spur this in this recession scenario ?

      The printing press, obviously. /s

      Seriously though, if more non-malinvestment investment is needed, then there has to be saving at least equal to the investment needed for recovery. Given the fact that the savings rate is chronically low in this country, I would imagine that savings will always need to rise during a recession, given the magnitude of the fall in the value of accumulated savings and capital being multiples of times larger than any cash hoarding.

      • Transformer says:

        But if people are already saving more than than is being invested, won’t additional savings make the situation worse and deepen the recession ?

        • Bala says:

          You ask this question because your definitions of investment and saving are grossly inadequate and even flawed.

        • Major_Freedom says:

          No, because that will change relative prices in accordance with actual market participant values, and that will lead to a more healthy economy.

          Recessions are caused by prior government interference that made investments exceed savings, through the printing press.

          • Transformer says:

            If savings exceed investment won’t relative prices adjust until these things are again macthed , and (other things being equal) won’t that be at a lower of investment than before. ?

            • Bala says:

              The cash balance question rears its ugly head again :)

              • Ken B says:

                Bala, I will gladly relieve you of any onerous cash balance plaguing. Goes for everyone here.
                In tough times we all need to pitch in.

            • Major_Freedom says:

              Not necessarily lower in real terms.

              • Transformer says:

                What happens if prices are sticky?

              • Major_Freedom says:

                Then at least find out why prices are sticky.

                It would be terrible if a major reason for it is the very thing you are calling for to get around the problem.

              • Lord Keynes says:

                The empirical work has already been done: a great deal of price rigidity is caused directly by private businesses and corporations in their price administration/price setting activities, by which they cost of production plus profit markup to set prices, and maintain them.

                http://socialdemocracy21stcentury.blogspot.com/2012/06/price-rigidity-in-new-keynesianism-and.html

                http://socialdemocracy21stcentury.blogspot.com/2012/07/more-on-prices-in-real-world.html

                According to Jonathan Catalan, “Böhm-Bawerk developed a theory of “cost plus markup” pricing:

                http://www.economicthought.net/blog/?p=2987

                It is supposedly discussed in Reisman’s book “Capitalism” too:

                http://www.economicthought.net/blog/?p=987

                Certainly Lachmann understood the empirical evidence:

                http://socialdemocracy21stcentury.blogspot.com/2012/08/lachmann-and-post-keynesianism-on-prices.html

              • Major_Freedom says:

                LK:

                I meant actual reasons, not made up reasons.

                Costs plus markeup doesn’t explain sticky prices, because you’re begging the question of why costs, which are a function of prices, are sticky.

              • Transformer says:

                I’m not calling for anything – I’m just trying to ascertain the framework for this discussion.

              • Transformer says:

                LK,

                I don’t think Böhm-Bawerk theory of “cost plus markup” pricing necessarily provides support for sticky prices.

                Its a theory of how prices will tend to reflect the value of original factors used in their production plus the prevailing rate of profit but says nothing as to the stickiness or otherwise of those prices as far as I am aware.

              • Lord Keynes says:

                “Costs plus markeup doesn’t explain sticky prices”

                Often business leave their prices unchanged for significant periods of time, from three months to a year, despite changes in demand – yes, clearly it doesn’t.explain sticky prices.

                Idiot.

              • Bala says:

                “Idiot”

                O Genius!!!

                “Often business leave their prices unchanged for significant periods of time, from three months to a year, despite changes in demand”

                Please explain how this means that prices are sticky. Please bear in mind that the claim that prices are sticky means that prices are BY NATURE sticky. Particular observations of particular sellers refusing the change their quoted price does not by any stretch of the imagination tell us that prices are by nature sticky.

                Further, as I explained to Transformer down below, it is not prices that are “sticky”. It is sellers who are stuck on to their old selling price and are waiting to confirm whether buyers value scales are really what they seem to be. You seem to be mistaking psychology for economics.

              • Lord Keynes says:

                “Please bear in mind that the claim that prices are sticky means that prices are BY NATURE sticky. “

                It doesn’t mean that at all, you laughable blockhead

                Price stickiness just means the empirical observation that prices and wages are slow to adjust in the real world – especially downward – in contrast to the rapidly or smoothly adjusting prices in neoclassical and (some) Austrian models of how economies work, especially the neoclassical equilibrium models.

                It’s got nothing to with “nature”, if nature is supposed to mean the “natural world”, “physical world”, or “phenomena of nature/biology/geology.”

                Price stickiness is very much a thing explained by economic, social scientific, and behavioral factors.

              • Bala says:

                O Genius,

                You still don’t get the English language, do you? You said

                “Price stickiness just means the empirical observation that prices and wages are slow to adjust in the real world”

                Note that the finite verb in this sentence is “are”. It is the Simple Present Tense. That tense is used to describe habits and the nature of the subject. When I say “I am Bala”, it means “I exist with the label Bala as part of my identity”. When you say “The soup is hot”, you mean that the soup exists with the attribute “hot” as a part of its identity. This is the wrong tense to use with empirical observations because empirical observations are always in the past and the proper tense to use is the Past Tense. In place of “are” you should have used “were”. By using “are”, you are claiming that it is in the nature of prices to behave as described in the predicate. This switch from a description of past observation to a claim about the nature of prices is just another example of the intellectual dishonesty of you whatever-Keynesians.

                If you had said “Prices have been observed to be sticky downward many a time”, I wouldn’t object but when you say “Prices are sticky”, I have a problem.

                Further, you also seem to fail to understand the concept “price”. The economic phenomenon “Price” is the exchange ratio that can only be observed in actual exchanges. At every hypothetical price, there would be a certain demand and a certain supply of any good. If at a certain price, demand falls short of supply, it is a signal to the sellers stuck with inventory that they would get more buyers if they dropped their price. Economic theory explains that in the long-run, if one leaves out the speculative element, sellers would realise that there is only 1 way to get rid of the stock they are stuck with – to drop their prices. That there is no other way is a logical conclusion if one explains demand and supply starting from the axiom of action.

                If there were cases where sellers did not drop their prices for extended periods even though demand is less that supply at their current quoted price, then clearly, there are other factors at work. The task of economic theory is to identify this fact – that there must be other factors, specifically speculative factors.

                The task of an intellectually honest person would be to use economic theory to thus properly UNDERSTAND the empirical data and identify new areas of exploration, theoretical and empirical, to broaden and deepen one’s understanding of the phenomena being studied. To just state the empirical observations as though they are a mind-blowing finding is intellectually puerile. It is not surprising to see you engaging in this.

                “the rapidly or smoothly adjusting prices in neoclassical and (some) Austrian models”

                Austrian models? Are you sort of mixing it up with some models (of the female gender) of Austrian origin? To the best of my understanding, Austrian Economics eschews economic modelling. Looks like you never learnt the difference between a “construct” and a “model”.

                “especially the neoclassical equilibrium models.”

                Ahh!!!!

                “It’s got nothing to with “nature”, if nature is supposed to mean the “natural world”, “physical world”, or “phenomena of nature/biology/geology.” ”

                It means none of these, genius. Looks like you need one more English lesson. “Nature” does not just mean “the natural world”. It means “how a thing would behave given what it is”. In this case, given what price is and what drives price, “nature” stands for the behaviour that you would expect the phenomenon of price to show. If I, for instance, say that it is in the nature of tigers to eat meat, it means that eating meat is how a tiger would be expected to behave and that it is inconceivable to imagine a tiger that doesn’t. If I say it is in the nature of the north pole of a magnet to repel the north pole of another magnet, I mean to say that that is the way I expect the north pole of any magnet to behave and that it is inconceivable that the north pole of any magnet behaves otherwise.

                So, when you say “Prices are sticky”, you are essentially saying that it is inconceivable that they could be otherwise.

                Phew!!!

              • Major_Freedom says:

                LK:

                Often business leave their prices unchanged for significant periods of time, from three months to a year, despite changes in demand-yes, clearly it doesn’t.explain sticky prices.

                You are just sloppily attempting to DEFINE sticky prices with that comment. You are essentially just saying “That prices are sticky for 3 months to a year, explains why prices are sticky.” You are not explaining WHY those prices are sticky.

                I won’t respond to your “idiot” comment.

              • Bala says:

                MF,

                Good summary. Thanks.

              • Lord Keynes says:

                Bala@ …“Note that the finite verb in this sentence is “are”. It is the Simple Present Tense. … etc”

                So after all this largely irrelevant waffle, you agree that:

                ‘If you had said “Prices have been observed to be sticky downward many a time”, I wouldn’t object “

                So: Prices have been observed to be sticky downward many a time.

                There is considerable evidence that price administration by people who manage businesses/corporations is an important cause of it.

                You then launch into idiotic nonsense about prices per se being sticky (“behaviour that you would expect the phenomenon of price to show etc.”), when all we’re talking about here is how people in some businesses set prices in the real world.

                “So, when you say “Prices are sticky”, you are essentially saying that it is inconceivable that they could be otherwise.

                No, I am not.

                In short: your earlier comment is harebrained and rubbish.

              • Lord Keynes says:

                M_F@
                “You are just sloppily attempting to DEFINE sticky prices with that comment…”

                False.

                I am providing a clear and empirically sound explanation of a phenomenon already well defined.

                Your response is essentially: the fact that many people in businesses administer prices and do not change them in response to demand changes has nothing to with price stickiness.

                In other words, sheer idiocy.

              • Bala says:

                O Genius!!

                You asserted this

                “So: Prices have been observed to be sticky downward many a time.”

                Quite interesting. What you observed was not prices being sticky. That is quite an idiotic concept. Only brain-dead whatever-Keynesians (pardon the redundancy) can swallow that pigswill. What the observers really saw was people getting stuck on particular prices and refusing to accept reality. The peculiar behaviour out there was of the people and not of the price. You are discussing a purely psychological and not an economic phenomenon. Psychological processes do have an effect on economic phenomena but the study of those is not the province of economics.

                First economic chronicling. Now economic psychology. Looks like you delve into everything except economics. Very interesting choices.

              • Major_Freedom says:

                LK:

                I am providing a clear and empirically sound explanation of a phenomenon already well defined.

                False. All you’re doing is presenting your definition of sticky prices, which is prices not changing for 3 months to a year in the face of a changed demand.

                You said prices are sticky because businesses refuse to cut prices, because they set prices according to cost plus mark-up. But that doesn’t explain why prices are sticky, because that just implies that costs are sticky. But costs are a function of prices too, so you’re effectively saying that prices are sticky because prices are sticky.

                Your response is essentially: the fact that many people in businesses administer prices and do not change them in response to demand changes has nothing to with price stickiness.

                No, I didn’t say “it has nothing to do with sticky prices.” That is a straw man. I said it doesn’t explain why prices are sticky. You just moved the reasoning to another set of sticky prices (i.e. costs). For if costs fell, then the cost plus mark-up pricing would result in non-sticky declining prices.

                In other words, sheer idiocy.

                Sheer? Are you sure “sheer” is better than, say, “utter”? Maybe “complete” packs a better punch. “Sheer” sounds rather flimsy.

                You still have not explained why prices are sticky, despite your ridiculous mantra “I am providing a clear and empirically sound explanation.”

    • Bala says:

      “I assume that: “investment” is expenditure on capital goods and “savings” is money savings out of income”

      So advances made by a capitalist to land and labour factors do not constitute “investment”? And total cumulative past savings do not come under “savings”? Interesting.

      • Major_Freedom says:

        Wittgenstein would have a conniption if he saw this thread on definition wars.

      • Transformer says:

        “advances made by a capitalist to land and labor factors” would indeed be investment.

        And no reason why my definition of savings would exclude the possibility of accumulated savings over time – but obviously we are more interested in savings out of income for the purposes of this discussion.

        I

        • Bala says:

          No. You said this

          ““savings” is money savings out of income”

          So how do I reconcile this?

          • Transformer says:

            You used the phrase “total cumulative past savings” so you appear to face the same definitional problem.

            • Bala says:

              No. I am saying all savings, past and present come under the term “savings”. As JMFC put it, it’s the difference between “saving” and “savings”. It might be clearer if one spoke of net and gross savings instead.

        • Jonathan M.F. Catalán says:

          I use “saving” and “savings” confusingly too, but the former is a flow and the latter is a stock. It’s prob. more technically correct to say that saving is income minus consumption.

          • Bala says:

            JMFC,

            But then the term income is also a shade vague, isn’t it? Are we talking of net income or gross income? Taking Rothbard’s Fig 41, is the income in a period 100oz or 418 oz? If the latter, then savings (which would then become synonymous with saving as you put it) would become Income – Consumption (418 – 100).

            Somehow, that’s where I lose people like Transformer. Am I off base?

            • Transformer says:

              I believe Rothbard would have seen it as:

              Consumption is 100
              Income is 418
              Saving (and Investment) is 318

              Cash balances don’t seem to figure in an ERE
              :

              • Bala says:

                You asked this question

                “If what is needed is more investment (to make up the shortfall) how will additional savings out of income spur this in this recession scenario ?”

                The answer is right here. As per your own interpretation of Rothbard, all investment comes out of saving from income. So for more investment, what we need is more saving (or savings) out of income.

              • Transformer says:

                OK, lets use the Rothbard model as a framework

                What happens if people decide to save an additional 20 of the 100 they previously consumed.

                Rothbard would say – no problem – time preference has changed, switch some production from consumer goods to investment goods and everything will be fine.

                However what if the reduction in consumption goods is not due to a change in time preference but due to uncertainty about the future and at the same time investors also decide they will only invest 280 instead of 380 and hold the rest in cash ?

                Throw in price stickiness (which has been empirically shown to exist) and you have the aggregate demand problem that Krugman is describing in his post.

              • Bala says:

                “What happens if people decide to save an additional 20 of the 100 they previously consumed.”

                You are missing the key point in your own statement. People DECIDE to “save”. That means that they have decided to defer consumption. Deferred consumption means to exchange the savings for consumers’ goods at some time in the future. That means that there is an opportunity for producers to profit (and I mean really profit, not just earn interest income) by choosing now to produce to cater to this future demand. It also means that it makes less sense to produce more for consumption in the present.

                You are missing the meaning of your own statement when you say this next

                “However what if the reduction in consumption goods is not due to a change in time preference”

                And out here,

                “but due to uncertainty about the future and at the same time investors also decide they will only invest 280 instead of 380 and hold the rest in cash ?”

                is where I said the cash balance question raises its ugly head again. You seem to want to have your cake and eat it as well.

              • Transformer says:

                When you say

                “That means that there is an opportunity for producers to profit (and I mean really profit, not just earn interest income) by choosing now to produce to cater to this future demand’

                I think you identify the heart of the issue. In theory, if people had perfect foresight about the future and prices were perfectly flexible they could indeed use these additional savings to produce for the future.

                However in a world of uncertainty and of price stickiness , especially when demand for consumer goods has just gone down as would happen at the start of a recession, they are highly unlikely to start new production processes that will increase the output of consumer goods in the future and much more likely to actually cut back on production based on the market signals they are getting.

                It is my view that much Austrian theory is not good at distinguishing between changes in demand due to changes in time preference and changes in demand due to uncertainty about the future.

              • Bala says:

                I’ll summarise by saying you are wrong. However, before I elaborate, please explain what you mean by the term “uncertainty about the future”. Usage of vague terms that are not amenable to common understanding does not help. Once you explain your term, your erroneous conclusions on Austrian theory will become apparent. Also explain what you mean by “sticky prices” and explain how you say that prices, by nature” will be “sticky”. Please do not cite empirical evidence as it will only show that in particular cases, particular producers did not change their prices for particular periods. That would not allow you to draw generalised conclusions about the sticky nature of prices simply because what applies to particular instances of the concept does not apply to the concept itself. Let’s not say something like “A is a man. A is stupid. Hence Man is stupid.”

              • Bala says:

                Oops…

                “what applies to particular instances of the concept does not necessarily apply to the concept itself.”

              • Bala says:

                ” especially when demand for consumer goods has just gone down as would happen at the start of a recession”

                Why does demand for consumers’ goods go down at the start of a recession? What is a recession and why does it start? What is the relationship between the start of recessions and demand for consumers’ goods?

              • Bala says:

                “they are highly unlikely to start new production processes that will increase the output of consumer goods in the future and much more likely to actually cut back on production based on the market signals they are getting.”

                What if the cutbacks are necessitated by past erroneous decisions to manufacture particular consumers’ goods for which consumers have lower demand than hoped for? Why should these errors not be corrected? Talking of errors also brings me to the question “Why is there a cluster of entrepreneurial errors at the start of every recession?”

              • Transformer says:

                “Uncertainty about the future”

                Rothbard’s example that you referenced earlier is based on a model with no uncertainty. Everyone can make decisions in the present knowing what the future will be like. As soon as you move away from this kind of model then people have to make decisions now based on guesses about the future. The less certain they are that their guesses are correct the more likely they are to defer both consumption and investment in the present, and this will lead to less economic activity than would exists in a world of certainty.

                “price stickiness” : When economic activity decreases there is downward pressure on prices. (demand has dropped). However no-one knows that the right answer is for all prices to fall (and the price of money to rise) so everyone bases their decisions on the old value of money which causes prices to be sticky. Only through an iterative process that can take some time will prices adjust to the new value of money.

              • Transformer says:

                Bala,

                I understand ABCT very well. Its quite an elegant theory but it seems an unnecessary complication to bring it this discussion, which I take to be on the economic implications of a fall in aggregate demand (which could happen for reasons other than ABCT).

              • Bala says:

                “Rothbard’s example that you referenced earlier is based on a model with no uncertainty.”

                After explaining how this works in Chapter 6, Rothbard goes on and explains how uncertainty and change influence this explanation in Chapters 8 and 9. It appears you have missed it, for how else could you say this?

                “Everyone can make decisions in the present knowing what the future will be like.”

                I thought Rothbard covered this right in the beginning of Chapter 8 where he spoke of entrepreneurial profit and loss. Your statement also betrays the possibility that you haven’t understood the concept of the ERE. Rothbard’s explanation does not expect that individuals (I guess magically) “know” what the future is like but rather it explains what would happen were there to be no change in values, resources and technologies as a result of which individuals would face a future of certainty. Having explained economic phenomena in the absence of such change, he goes on to explain what would happen when there is the possibility of change.

                Uncertainty is brought in very clearly as the lack of knowledge, at the time of any action, what the future would look like. As there is no way individuals can “know” this future, acting man acts on an estimate or guess (educated or otherwise) on what the future would be if and if he did not act. That he may be right or wrong, in the ecocomic sphere, determines nothing more than whether he makes a profit or a loss. This much is explained in Chapter 8. So, uncertainty is very much a part of Rothbard’s analysis. To claim that my explanation does not take uncertainty into account is to completely fail to grasp my explanation.

                “When economic activity decreases there is downward pressure on prices.”

                Wait a second!!! The primary driver of both the level of economic activity and of prices (which are an economic phenomena) is the set of all value scales of all the individuals who constitute the market. What you call the “downward pressure on prices” is nothing more than the recognition that value scales have changed, at least for some individuals, especially those who were estimated to be buyers based on their previous value scales. Alternately, it is the dawning of the realisation that the value scales of the potential buyers are arranged differently from how the sellers originally thought they would be, resulting in demand schedules with lower quantity demanded than the sellers are ready to offer at their current quoted price. Either way, it is just the market doing its job – pushing prices to the point where the market is cleared. So I don’t understand what you are reading into this.

                “However no-one knows that the right answer is for all prices to fall (and the price of money to rise) so everyone bases their decisions on the old value of money which causes prices to be sticky.”

                Oh!! But every seller stuck with inventory knows that at the price he is quoting, the number of people ready to buy is not as much as he would like it to be. The Law of Demand also educates every seller that at a lower price, there would be more buyers. So it is not the prices that are sticky but the seller who is stuck to his original price. To claim that prices are sticky is to presuppose that prices have a mind of their own and move independent of the people that quote them.

                “Only through an iterative process that can take some time will prices adjust to the new value of money.”

                Once again, this is just the market doing its job. And whoever (I mean which Austrian) said that prices will necessarily adjust immediately? That it takes time is a given. What theory explains is the equilibrium and the path to it in the absence of FURTHER change. So to fault the theory on grounds of failing to take stickiness of prices is rather flawed.

              • Transformer says:

                I think you state quite well Rothbard’s position on uncertainty. He indeed sees it in terms of “nothing more than whether he [the actor] makes a profit or a loss.”. He underplays the implications of the actor deciding to “stay liquid” and neither consume nor invest his money income.

                I am glad you see at least see the possibility of price stickiness – because if you pursue that line of thought you may recognize the possibility of recessions caused by demand-side factors, rather than the structural issues that Austrians economists often overly focus on.

              • Bala says:

                “I am glad you see at least see the possibility of price stickiness”

                I am sorry if I implied otherwise, but NO! I do not see the possibility of price stickiness. I see the very concept of sticky prices as erroneous.

              • Bala says:

                “He underplays the implications of the actor deciding to “stay liquid” and neither consume nor invest his money income.”

                False. You seem to have failed to read Chapter 11.

              • Transformer says:

                Chapter 11 is the weakest in MES.

                It is here that Rothbard asserts that increased demand for money is not a problem because prices will adjust instantly.

              • Bala says:

                Is Rothbard discussing Economic Theory or Economic Psychology? It looks like you are mixing psychology into an economic treatise and want everyone else to do so.

                “Sticky prices” is an anti-concept. People getting stuck up on particular prices because they have experienced them and do not want to accept something lower for some time even in the face of reduced demand is a purely psychological phenomenon. Why you insist on mixing psychology into economic theory beats me.

  10. Major_Freedom says:

    “Consumption — to repeat the obvious — is the sole end and object of all economic activity. Opportunities for employment are necessarily limited by the extent of aggregate demand. Aggregate demand can be derived only from present consumption or from present provision for future consumption.” – The General Theory of Employment, Interest, and Money, p. 104.

    “[S]ince the expectation of consumption is the only raison d’être of employment, there should be nothing paradoxical in the conclusion that a diminished propensity to consume has cet. par. a depressing effect on employment.” – Id., p. 211.

    “I should support at the same time all sorts of policies for increasing the propensity to consume. For it is unlikely that full employment can be maintained, whatever we may do about investment, with the existing propensity to consume.” – Id., p. 325.

    • Jonathan M.F. Catalán says:

      The last two excerpts are important; the first one should be uncontroversial. But, the last two are key, because it shows one of the most important assumptions of Keynesianism: more investment requires more consumption in nominal terms. What makes it nominal is the reference to the MPC (income minus savings); there’s no hint that even through a decrease in the MPC a greater quantity of consumer goods can be consumed.

      • Major_Freedom says:

        there’s no hint that even through a decrease in the MPC a greater quantity of consumer goods can be consumed.

        Bingo. This is also why it is not off base to charge Keynesianism with implicitly assuming that savings (abstentions from consumption, i.e. falling MPC) somehow “leak” out of the economy (and, by extension, investment comes out of nowhere). There is no hint of understanding that a falling MPC can be associated with a rising MPI (marginal propensity to invest) by a mere spending transfer.

        A lower nominal demand for consumer goods (lower MPC) and higher demand for capital goods can have the outcome of what you said: a greater quantity of consumer goods.

  11. Adrian Gabriel says:

    It’s important to note that the MPC does not accurately measure the marginal efficiency of capital either because the MPC is simply a ratio of savings to income. It measures itself upon the assumption that people consume, thus it measures how much of a stock of goods can be purchased. This measurement does not take into account anything more than that. For this reason the Marginal Efficiency of Capital is so far strung. It takes into account future profit expectations rather than interest rates as determining factors of savings and investment. Many times these Keynesian ratios get stuck in a battle of how to properly constitute what savings is. Savings, or saving, is well defined by Austrians as simply using the term capital. In these regards, the Austrians can give a term to the amount of costs that thus measures the amount of savings. Capital is not so much a cost as it is a measurement of the amount of savings in an economy. This all goes back to the importance of subjective value theory. Austrians are quite aware that at each stage of the production process, consumers’ goods and producers’ goods are merely valued subjectively. At this point, how can anybody ever true explaining Keynesian elements such as MPC with any validity of reality. It is false to claim all actors see consumption and investment in the same light. Through action people can see that consumers’ goods are also capital goods to other actors at a earlier stage of the production process.

  12. Bob Roddis says:

    These comments by Mr. Keynes on this 75 second video have finally convinced me to abandon the Austrian cult. This is such deep thinking. Awe inspiring even.

    http://mikenormaneconomics.blogspot.com/2012/11/j-m-keynes-when-day-of-peace-comes.html

    • Ken B says:

      Wait till DK learns how quickly and easily you give in Bob R!

  13. Anonymous says:

    Here’s a Krugman article barely mentions consumption and almost all investment. Does this prove that Keynesians focus more on investment than consumption?

    http://www.pkarchive.org/cranks/vulgar.html

Leave a Reply