Can Fiscal Austerity Work With Tight Money?
[Disclaimer: Bob Wenzel doesn’t like me using the term “fiscal austerity,” since he thinks the public associates it with jacking up taxes and cutting social programs in order to bail out bankers. He has a point, but it will just get too cumbersome in this post if I try to come up with some alternate term. So, when I speak approvingly of “fiscal austerity,” all I mean is the government cutting its spending in order to reduce deficits. Also, I would like to thank the supportive von Pepe for encouraging me to write up this post.]
In my latest EconLib article, I show that the peer-reviewed economic literature is far friendlier towards “expansionary austerity”–the idea that reining in budget deficits through spending cuts can actually boost economic growth, even in the short term–than prominent Keynesians would lead you to believe. (David R. Henderson thinks it’s “one of [my] most important” EconLib articles yet, and recent events have proven that David’s model of the world is spot-on.)
Lars Christensen at the Market Monetarist blog generally likes my article, except he thinks I am ignoring the crucial role that monetary policy plays in all of this:
The Danish and Irish cases are hence often highlighted when the case is made that fiscal policy can be tightened without leading to a recession. I fully share this view. However, where a lot of the literature on expansionary fiscal contractions – including Bob’s mini survey of the literature – fails is that the role of monetary policy is not discussed. In fact I would argue that Denmark was a case of an expansionary monetary contraction – a the introduction of new strict pegged exchange rate regime strongly reduced inflation expectations (I might return to that issue in a later post…).
In all the cases I know of where there has been expansionary fiscal contractions monetary policy has been kept accommodative in the [sense] that nominal GDP – which of course is determined by the central bank – is kept “on track”. This was also the case in the Danish and Irish cases where NGDP grew strong through the fiscal consolidation period.
My view is therefore that that fiscal austerity certainly will not have to lead to a recession IF monetary policy ensures a stable growth rate of nominal GDP. This in my view mean that we will have to be a lot more skeptical about austerity for example in Spain or Greece being successful….
All the cases of expansionary fiscal consolidations I have studied has been accompanied by a period of fairly high and stable NGDP growth and the unsuccessful periods have been accompanied by monetary contractions. My challenge to Bob would therefore be that he should find just one case of a expansionary fiscal contraction where NGDP growth was weak… [Bold added.]
Now right off the bat, look at how loaded the deck is, in favor of the market monetarists. Of course, if they’re right then it doesn’t matter that the deck is loaded; they should still win the argument. But if they’re wrong–which I think they are–it makes it hard for me to prove it.
THEORY
What do I mean? Well, suppose a new president (perhaps a fan of this blog) takes office in a small country and (a) cuts government spending by 30% in one year and income taxes by 15%, in absolute terms, and (b) abolishes the central bank and ties its currency to gold. A large budget deficit is transformed in one year into a modest surplus. Further suppose that my wacky Austrian views happen to be right–and Lars/Scott Sumner are utterly wrong. What happens?
Well, because I’m right (by stipulation), the real economy is just fine. There might be an initial period where the official unemployment rate in the country shoots through the roof, because workers have to move out of government (or government-subsidized) sectors, and into purely private sectors. But the big tax cuts and stability provided by the new gold standard, as well as the drop in government borrowing, lead to a fall in interest rates and a surge in private investment and job creation. Within 6 months, the unemployment rate is below the level at the start of the policy change. For the year, real GDP is up 8% when all is said and done, while consumer prices fall 2%.
Now I would look at this as a stunning refutation of Lars’ views, and a great counterexample. But he would look at the figures and say, “What do you mean Bob? Clearly maintaining aggregate expenditures was crucial for that giant reduction in government spending to work out. Nominal GDP rose 6% during the year, and interest rates fell. It was only the relatively loose monetary policy that offset the fiscal contraction.”
Does everybody see what I’m saying? Lars has defined “accommodative monetary policy” in such a way that I would have to find a government that simultaneously slashed spending while deliberately engineered massive price deflation. If the market monetarists are wrong, then it means a government could enact very tight restrictions on monetary inflation–perhaps going back on gold–and yet their own metric would classify that as “not tight” so long as the economy didn’t collapse. That is not a good way to think about these issues, especially since the very issue under dispute is whether the market monetarists are right.
Furthermore, it’s not even an absolute value of NGDP growth that’s at issue. If I understand Sumner’s worldview, the reason “NGDP matters” is that workers and firms sign contracts that have nominal values. So, suppose I find an example from 1880-82 where a European government slashes spending by 30%, and the economy doesn’t falter. Furthermore, NGDP is flat throughout the period. Did I just win? No, because Sumner can say, “Hang on, this country was on the gold standard. For the prior decade, prices had generally fallen about 2% per year, and real growth was 3% per year, so NGDP growth was only 1% per year. Thus, NGDP being flat from 1880-82 was only 1 point below trend per year. Compared to the fiat money era, flat NGDP would indeed be scandalous, but back then it wasn’t that far below the norm, and so people’s nominal debt burdens wouldn’t have been much harder to service.” (I’m making up the numbers for this hypothetical 1880-82 scenario, but I’m just showing how incredibly difficult it would be to actually find a counterexample to the Sumnerian explanations.)
Finally, as an Austrian economist who endorses Misesian business cycle theory, I admit upfront that it’s going to be hard to find a deliberately contractionary fiscal and monetary policy, leading to economic expansion even in the short term. That’s because I explain recessions as due to a switch from loose to tight money, where I define those terms differently from how a market monetarist would.
HISTORY
I’m not going to give a perfect counterexample–since, as I explained above, that would almost be impossible in principle, even if the market monetarists are totally wrong–but World War II offers something pretty close. Let’s work through two graphs and see why.
This first graph shows the level of NGDP, current government expenditures (note that this isn’t the same thing as “how much money did the government spend those years?” but it’s close enough), and the monetary base. Notice that I put the monetary base on the right axis, so you could see it better.
In the next graph, I’ll show the same three variables, but this time as an index=100 at 1938 (and now of course they’re all on the same axis):
Now this is really the killer chart. From 1945-46, clearly there was a more severe contraction in fiscal policy, than a corresponding looseness in monetary policy, if we are going to use those terms in a way that is useful in refereeing the claims of the market monetarists. Furthermore, coming off of five years of rapid NGDP growth, now it is flat.
Of course, the obvious MM response is to say, “Right! And notice there was a recession right then, just like we’d predict.”
But the free market camp can’t have it both ways. We’ve been congratulating ourselves for years now on how the Keynesians were wrong for predicting a postwar depression. (Look what our gloating did to poor Daniel Kuehn.)
Now if we move on to the next year, 1946-47, it’s very interesting. Just eyeballing the chart it looks like government current expenditures (again, this term doesn’t mean what you probably think–I ran into this issue on a major paper last year) fell about 15 percent, the monetary base was about flat, and yet nominal GDP growth was quite strong (in percentage terms). So I’m guessing Lars would say, “Right, accommodating monetary policy!” even though the monetary base growth came to a screeching halt after half a decade of rapid growth.
I don’t have good NGDP figures, but I imagine you would find the same pattern–perhaps even more so–if you looked at the end of World War I, where the Fed engaged in unprecedentedly tight monetary policy, and the government slashed spending tremendously. (I give the stats here.) Yes, there was a sharp depression, but it was soon over and paved the way for the Roaring Twenties.
CONCLUSION
I admit I have not found the smoking gun Lars wanted, but I hope I’ve shown why that is almost impossible, even in principle, given that I believe in Austrian business cycle theory. In any event, market monetarists shouldn’t ever roll their eyes at Keynesians who refuse to see the difficulties that particular historical eras provide for their theories. This is because from my perspective, both camps have a tough time explaining why the US bounced back so quickly after 1920-21 and 1945-46, if their explanation of 1929-1939 is correct.
” Just eyeballing the chart it looks like government current expenditures (again, this term doesn’t mean what you probably think–I ran into this issue on a major paper last year) fell about 15 percent, the monetary base was about flat, and yet nominal GDP growth was quite strong (in percentage terms).”
I think MMist would respond to this by saying something like “Demand for money fell during that period for reasons related to the end of the war so this allowed NGDP to grow at a reasonable pace with no need for any expansionary monetary policy”, They would also believe that the 1945 depression could have been avoided by more monetary expansion.
There is a graph at Sydenham’s Law of public expenditure and GDP growth that shows clearly how the post war depression was a public sector depression and private sector boom.
The key to managing public spending is to neither continuously increase the rate of spending nor continuously decrease it. If the rate is kept constant at, say 1 or 2% growth per annum all will be well…
The period 1945-1948 has virtually no lessons for today.
It was an extraordinary period. During the war demand was depressed via rationing and high savings rates. Demand in terms of consumption and investment was then strong after the war.
The fall in government spending is merely the end of war production, and always had to happen as a precondition for transition to a peacetime economy.
Yes, there was a sharp depression, but it was soon over and paved the way for the Roaring Twenties.
The recession of 1920-1921 was not short. It was of average length at that time, and long by contrast with the average length of recessions pos-1945.
LK fair enough about the length of it. I guess what I have in mind is that the reasons Keynesians and monetarists give for the awfulness of 1929-1933, were worse for 1920-21, and yet it was over after 18 months. So since on paper it arguably should have been worse than the Great Depression, it was “soon over.”
Now I know you disagree with that analysis, I’m just explaining what the “soon” is in reference to. But yeah, I should try to be clearer in the future since it wasn’t short.
“Demand in terms of consumption and investment was then strong after the war.”
What boosted the post war economy was not “demand” for both capital and consumer goods, as if they are interchangeable, as if both are equally contributing factors to economic growth. It was “demand” for capital goods and labor specifically, relative to demand for consumer goods, that did it. Saving/investment is the only way to grow economies. Increased consumption without corresponding investment may be associated with increased employment and temporarily increased output, but this would be fleeting and impoverishing, since it would contain capital consumption, and capital consumption decreases productivity of labor and decreases prosperity.
Whether one calls 18 months “short” or “long” is obviously a function of the agenda one wants to advance by whoring that experience out.
Monetary savings are not required for production if real goods and resources are available.
If you’re saying that real resources and investment are required to grow real output, and that the postwar-boom was driven by private investment, that does not in any way conflict with Keynesianism.
Monetary savings are not required for production if real goods and resources are available.
Who said anything about cash hoarding? I said saving/investment.
To address that point though, monetary savings are not required to be reduced or eliminated for production. A higher cash preference can come out of reduced consumption and/or reduced investment. As long as the relative ratio remains the same, the relative demand for capital goods as compared to consumer goods will remain, and result in enough resources going to capital that can replace the worn out and used up capital that goes into consumption.
Keynesianism ignores relative spending and prices, and focuses on aggregates. Thus it cannot see a declining economy when more consumer goods are produced and fewer capital goods are produced. It’s all “output”.
If you’re saying that real resources and investment are required to grow real output, and that the postwar-boom was driven by private investment, that does not in any way conflict with Keynesianism.
I am saying that in a division of labor, monetary economy, abstaining from consumption spending and making productive expenditures is the only way to ensure that enough real resources go to capital, so that the resources used up in consumption are able to be replaced and more than replaced by new capital, so that the economy grows.
BTW, what you said does conflict with Keynesianism, if you understand Keynesianism beyond the superficial vulgar version of it, and go the academic, textbook version of it.
Textbook Keynesianism has the general thought process as follows:
In a free market without government deficits and fiat inflation, continuous capital accumulation will allegedly continuously decrease the average rate or rates of return (marginal efficiency of capital) in the economy.
At some point, the average rate of return will decrease to such a low level that investors will begin to hoard and not invest the money that is made available by existing abstentions from 100% consumption out of the increased nominal incomes generated out of increased real output (Yes, Keynes conflated real and nominal incomes).
As a result, savings will allegedly outrun profitable investment, and there will allegedly be a permanent “savings leakage”, i.e. cash hoarding, that will allegedly permanently mire the economy in a depression, with no further economic growth, if not an outright decline.
The ONLY way out of this inevitability, according to Keynes, is for the government to bring about an increase in government spending, so that the marginal efficiency of capital will rise and thus eliminate the cash hoarding and coax investors into investing more, to match the too high savings. This rise in spending, which is supposedly the ultimate foundation for economic growth, is not a rise in private investment. It is a rise in “spending”. War would do it. Pyramid building would do it. ANY spending brought about by government would do it.
Hence, textbook Keynesianism does not hold that saving/investment is the source of economic growth. It holds that saving/investment will eventually, given enough time of allegedly declining returns through continuous capital accumulation, destroy economies.
The only implication from the claim that saving/investment will eventually destroy economies, is that the other form of spending, i.e. not investment, i.e. consumption, ultimately grows economies.
Furthermore, textbook Keynesian theory has no other alternative than to believe that a rise in consumption never shrinks economies, no matter how large the increase, even if it comes at the expense of capital and productivity of labor. Keynes even ignorantly believed that a marginal propensity to consume of unity, or 1, i.e. consuming 100% out of incomes, can ensure full employment and full output…even though such a thing would entail zero nominal demand for capital goods and zero nominal demand for labor!
Investment arises spontaneously out of thin air in textbook Keynesianism. If there is consumer demand, than investment demand is automatic as a deux ex machina, even if consumer demand competes with capital goods demand and actually shrinks it! Apparently it doesn’t matter, because investment spending will always be there to grow economies when there is lots of consumption, even with potentially less capital.
(1) the waffling at the beginning appears to concede that point.
(2) the marginal efficiency of capital (MEC) is not even necessary for a Keynesian theory of a modern economy. Some Keynesians dispense with it.
(3) “Hence, textbook Keynesianism does not hold that saving/investment is the source of economic growth…..
Investment arises spontaneously out of thin air in textbook Keynesianism”
Yes, more absolute proof that you’re the most ignorant of all commentators here.
(1) Thanks for conceding my point.
(2) Since you are having trouble reading, I will repeat: I am explaining the academic, textbook version of Keynesianism, not the superficial vulgar versions. The MEC is central in the GT.
(3) Thanks for conceding my point. Your churlish insults fail to mask your profound ignorance.
Re (3):
The passage beginning with “Only if the marginal propensity to consume is equal to unity”, as found in the GT, has the necessary, logical implication that investment comes out of nowhere.
Just think about it instead of trying to defend it against criticisms. If everyone consumed 100% out of their incomes, then there would be zero demand for capital goods and labor, and yet Keynes proceeds as if employment and output can be maintained, even increased.
You have no knowledge about the very crackpot theory you have brainwashed your own mind with. How surprising.
You’re all data and zero understanding.
“The passage beginning with “Only if the marginal propensity to consume is equal to unity”, as found in the GT,”
There is no passage in the General Theory beginning with “Only if the marginal propensity to consume is equal to unity…”.
Congratulations on demonstrating again your ignorance.
In fact, the only sign of “Only if the marginal propensity to consume is equal to unity…” as a quotation anywhere, either via a web search or in Google books is in a quotation here by you in your guise of “Captain_ Freedom”:
http://consultingbyrpm.com/blog/2011/04/landsburg-1-krugman-0.html#comment-14671
It looks like just inventing quotes from the General Theory is now another of your ridiculous tactics.
Oh, I see I made mistake above. You did not invent the quote.
It is an inaccurate garbling of this:
“Perhaps it will help to rebut the crude conclusion that a reduction in money-wages will increase employment “because it reduces the cost of production”, if we follow up the course of events on the hypothesis most favourable to this view, namely that at the outset entrepreneurs expect the reduction in money-wages to have this effect. It is indeed not unlikely that the individual entrepreneur, seeing his own costs reduced, will overlook at the outset the repercussions on the demand for his product and will act on the assumption that he will be able to sell at a profit a larger output than before. If, then, entrepreneurs generally act on this expectation, will they in fact succeed in increasing their profits? Only if the community’s marginal propensity to consume is equal to unity, so that there is no gap between the increment of income and the increment of consumption; or if there is an increase in investment, corresponding to the gap between the increment of income and the increment of consumption, which will only occur if the schedule of marginal efficiencies of capital has increased relatively to the rate of interest. “
—-
Since that quote is talking about propensity to consume an “increment of income” (or additional income) it does NOT show Keynes saying that
” If everyone consumed 100% out of their incomes, then there would be zero demand for capital goods and labor.”
Nor does it imply or require the “logical implication that investment comes out of nowhere. ”
Quite clearly, you have no idea what you’re talking about.
LOL, look at all this waffling.
“There is no such passage! Haha! You can’t read!”
“Oh wait, there is such a passage.”
“But you’re still wrong!”
…………
LK, you’re just not able to think. You read the words only at the most superficial of levels.
I skipped the steps in between “marginal” and totality. Just keep increasing this “margin” until it encompasses the whole. Is this really so difficult for you?
The claim is that IF money wages fall, then full employment and output can be allegedly had if the MPC is unity.
In other words, imagine wages to be falling, which lowers costs of production.
The passage is saying that if THE COMMUNITY’S marginal propensity to consume is equal to unity (meaning the entire increasing difference of the wage income drop is “offset” by more consumption spending), then full employment and output can be had.
But this is wrong. If wages keep falling, tending towards zero (part of my stipulation of increased consumption), and assuming wage earners saved and invested a positive amount out of their wages prior, it follows that if consumption spending rises to offset the entire fall (which included positive investment), then even if consumption spending replaces wages, and even if consumption spending replaces capital goods spending, there is supposedly no drop in employment and output.
The flaw is easy to see.
MF, if we count the days of your life backward eventually you no longer exist and if we count them forward you’re dead.
When people talk about the paradox of savings they don’t say “what if people saved all of their income,” they talk about what happens when everyone saves more of their income at the same time.
They take it or granted that *in the long run* people will start spending again.
And yet you’re like a dog with a bone proposing an equally absurd collapse of all economic activity.
You’re just like the people who say Keynesians only want to increase spending and never decrease it because they don’t understand debt could be rising as debt/gdp is falling.
So you for some reason don’t understand that when the “increment of consumption” rises that it could induce more investment. (Or in the full-employment equilibrium scenario you describe maintain full-employment.)
That seems to be the confusion. I think Keynes is just describing a full-employment equilibrium and using the MEC to show how we might fall out of it. (Similar to how Hayek in “the paradox of savings” was trying to show how we might maintain one.)
And yet you’ve taken an absurdly literal reading of the passage to troll LK with.
xgsmmy:
“MF, if we count the days of your life backward eventually you no longer exist and if we count them forward you’re dead.”
Cool story.
Now talk about during people’s LIVES, you know, where economic science is applied. Economics is not a science about dead people.
“When people talk about the paradox of savings they don’t say “what if people saved all of their income,” they talk about what happens when everyone saves more of their income at the same time.”
Another cool story.
Now learn that the paradox of saving is a farce. If everyone tried to save more, then there is no reason why there would be problems, because everyone can save and invest more, which will not reduce profitability.
“They take it or granted that *in the long run* people will start spending again.”
They never stopped.
“And yet you’re like a dog with a bone proposing an equally absurd collapse of all economic activity.”
It’s called analyzing the logical implications of concepts.
The collapse of economic activity FOLLOWS from certain Keynesian assumptions.
“You’re just like the people who say Keynesians only want to increase spending and never decrease it because they don’t understand debt could be rising as debt/gdp is falling.”
You’re like the people who say others are like the people who say something you don’t agree with.
“So you for some reason don’t understand that when the “increment of consumption” rises that it could induce more investment.”
That investment “inducement” is precisely the “out of thin air” assumptions Keynesian make. You don’t understand that in the aggregate, consumption spending and capital goods spending are in competition with each other. In this context, you cannot say that a 10% rise in one part can make the other rise by 10%, for then you would be going over 100%.
You don’t understand that you can’t just assume that more consumption always induces more investment, because you can only do one thing with a given dollar. If you consume with it, that same dollar cannot be invested.
You don’t understand that the law of identity when applied in economics means you cannot treat consumer spending as associated with more capital spending.
When you consider more consumer spending, you have to consider it in a sort of cycle, repeating over and over again, and not just thinking something like “If I spend more money at McDonalds, then the McDonalds can have more money to buy beef and labor.” You can’t do that because that would be an act of SAVING and investment (the purchase of the beef and the purchase of the labor). Higher consumption that is followed by a reduction in consumption and increase in saving is not an example of what happens with an increase in consumption.
You also can’t do that because when you buy a hamburger, THERE NEEDS TO BE A PRIOR ACT OF SAVING and investment to make that hamburger available to you.
If we consider a rise in consumption, then we have to consider NO rise in saving and investment, and ONLY a rise in consumption. That is what a rise in consumption means. You can’t sloppily include a rise in investment whenever you consider a rise in consumption.
That’s your confusion.
If there is an increase in consumption, then that means there is a rise in demand for consumer goods PERIOD. That’s it. In that context, what happens is that there will be a rise in profitability of consumer goods relative to capital goods. That will pull more resources away from the machines that help produce the beef farms, and so on, and more towards McDonald’s restaurants themselves.
This will reduce overall productivity, and McDonalds will have to make do with less capital, despite the fact that they are making more dollars.
What you need to get through your mind is to stop conflating consumption with investment, and consumption spending with investment spending. You are taking capital goods investment and spending totally for granted, based solely on the presence of increased consumption.
Yet because consumption and investment are in competition with each other, both in real and nominal spending terms, it means that a rise in consumption must be treated as coming at the expense of investment, despite the fact that after you buying a hamburger, McDonalds turns around and buys more capital which “stimulates” those industries.
The “stimulus” is actually the other way around. The capital goods industries “stimulated” McDonalds in being physically able to sell more consumer goods. Without that initial capital “stimulus”, there can be no more consumer goods produced.
Clear as mud?
“I think Keynes is just describing a full-employment equilibrium and using the MEC to show how we might fall out of it.”
Too bad he contradicted the context of falling wage rates and prices when he considered a rise in capital goods prices in his claim that the MEC falls.
Your confusion here is that you don’t seem to be able to understand Keynes’ errors.
“And yet you’ve taken an absurdly literal reading of the passage to troll LK with.”
It’s not absurd. It’s called strict analysis. If it cannot stand up to such softball criticisms, then it’s bogus. Sorry.
Now learn that the paradox of saving is a farce. If everyone tried to save more, then there is no reason why there would be problems, because everyone can save and invest more, which will not reduce profitability.
MF, if you want to say that the paradox of saving is about “money hoarding” rather than saving, that’s fine, but know that you’re just playing semantics.
If savings is the exact same thing as investment rather than an accounting identity then I have to wonder why we have two words for the same thing. Note: that was a rhetorical statement.
That investment “inducement” is precisely the “out of thin air” assumptions Keynesian make. You don’t understand that in the aggregate, consumption spending and capital goods spending are in competition with each other.
Yes, and again, you’re ignoring reserve banking where investment creates savings “out of thin air”.
You don’t understand that the law of identity when applied in economics means you cannot treat consumer spending as associated with more capital spending.
Look, MF, in addition to an increase the money supply from private sector borrowing or Fed-accommodated government borrowing, the velocity of money could increase. (However in Keynes example this would only raise prices.)
Higher consumption that is followed by a reduction in consumption and increase in saving is not an example of what happens with an increase in consumption.
MF, Keynes is talking about higher consumption replacing lower investment.
But I see how my comment might have been confusing. (I was talking about situation where growth is not held constant and we’re below full-employment. I think the example you’re using from Keynes is describing a full-employment scenario.)
That will pull more resources away from the machines that help produce the beef farms, and so on, and more towards McDonald’s restaurants themselves.
Wow, this actually does seem right to me.
The thing is I think Keynes is saying when captial-goods prices rise consumer-good producers can either “hoard-money” or consume more.
He’s saying the only way to maintain the current level of production at full-employment is by them choosing to consume rather than “hoard”.
Yes, eventually the capital goods they have will wear out.
Yes, if they don’t invest in improvements their will be no growth.
That’s probably why Keynes used it as an example. He’s saying they will be *forced* to save more eventually so he can talk about falling prices and unemployment.
xgsmmy:
“MF, if you want to say that the paradox of saving is about “money hoarding” rather than saving, that’s fine, but know that you’re just playing semantics.”
If you still beat your wife, then know you’re a wife-beater.
“If savings is the exact same thing as investment rather than an accounting identity then I have to wonder why we have two words for the same thing.”
I define saving as the use of money for something other than consumption.
“That investment “inducement” is precisely the “out of thin air” assumptions Keynesian make. You don’t understand that in the aggregate, consumption spending and capital goods spending are in competition with each other.”
“Yes, and again, you’re ignoring reserve banking where investment creates savings “out of thin air”.”
Again, I am not ignoring reserve banking. I am explaining to you how markets work, not how fractional reserve banking systems work.
Credit expansion out of thin air that leads to more consumption, or more investment, brings about the business cycle.
Even if we include credit expansion, there is still a competition between consumer spending and investment spending. You can’t spend the same credit on both consumer goods and capital goods. You must choose.
“Look, MF, in addition to an increase the money supply from private sector borrowing or Fed-accommodated government borrowing, the velocity of money could increase.”
Velocity is a fudge factor. It has no independent definition other than the other variables in the so-called equation of exchange.
Even if velocity increased, it has a limit without inflation of the money supply. Plus, and very importantly, velocity is correlated with the rate of inflation. The higher the rate of inflation, the higher velocity becomes
“MF, Keynes is talking about higher consumption replacing lower investment.”
No, he is talking about higher consumption replacing cash holding.
Keynes talked about a lot of things. In the quote I cited, he talked about a drop in wages, and a rise in consumption. I took that claim to its logical conclusions.
“(I was talking about situation where growth is not held constant and we’re below full-employment. I think the example you’re using from Keynes is describing a full-employment scenario.)”
Even if there is less than full employment, my argument still applies.
“That will pull more resources away from the machines that help produce the beef farms, and so on, and more towards McDonald’s restaurants themselves.”
“Wow, this actually does seem right to me.”
Examples tend to do that for those who have trouble thinking abstractly and in technical terms.
“The thing is I think Keynes is saying when captial-goods prices rise consumer-good producers can either “hoard-money” or consume more.”
Except the context in which Keynes wanted to refute the claim that falling wage rates and prices can cure unemployment, is a context of falling capital goods prices, not rising capital goods prices.
“He’s saying the only way to maintain the current level of production at full-employment is by them choosing to consume rather than “hoard”.”
And I am saying that the context in which Keynes made that argument was falling wage rates and prices, not constant capital goods prices and costs, which of course will lead to losses and unemployment if there is a rise in cash preference.
“Yes, eventually the capital goods they have will wear out.”
Don’t forget, capital goods includes materials that are used up in production as well. For many materials, they are used up almost immediately (think milk at bakeries), while for others they are used up relatively more slowly (think factories made from steel).
“Yes, if they don’t invest in improvements their will be no growth.”
I am saying that those improvements require capital, and capital has to be available. Available capital today requires saving and investment yesterday, so to speak.
“That’s probably why Keynes used it as an example. He’s saying they will be *forced* to save more eventually so he can talk about falling prices and unemployment.”
Except falling prices cures unemployment.
If you still beat your wife, then know you’re a wife-beater.
MF, I’m saying that it’s fine to call it hoarding money, but it is still wrong to criticize the paradox of thrift.
In a reserve banking system a paradox of thrift may involve a lower demand for “credit money”. Most people would not call this “money hoarding”.
The point is the paradox of thrift works even if you just imagine people stuffing money in the mattress.
Even if we include credit expansion, there is still a competition between consumer spending and investment spending.
Nobody has said that there wasn’t. Keep beating that strawman, though.
No, he is talking about higher consumption replacing cash holding.
No, he’s talking about higher consumption *instead of* “cash holding”.
The higher consumption is necessary to maintain full-production employment (constant GDP) because of lower investment spending. Hence: higher consumption replacing lower investment.
Except the context in which Keynes wanted to refute the claim that falling wage rates and prices can cure unemployment, is a context of falling capital goods prices, not rising capital goods prices.
Nope, capital goods cannot fall if the MEC is zero (or whatever) because of resource (supply) constraints (shortage).
Either GDP has to fall or inflation has to rise. (Or consumption has to rise).
Don’t forget, capital goods includes materials that are used up in production as well. For many materials, they are used up almost immediately (think milk at bakeries), while for others they are used up relatively more slowly (think factories made from steel).
Right, but for simplicity we can imagine that the constraint is that the capital goods makers productivity is the bottleneck. There’s enough resources, they just can’t extract them any faster.
Except falling prices cures unemployment.
And in the long run we’re all dead?
xgsmmy:
“MF, I’m saying that it’s fine to call it hoarding money, but it is still wrong to criticize the paradox of thrift.”
You haven’t shown why it is wrong to criticize it.
“In a reserve banking system a paradox of thrift may involve a lower demand for “credit money”. Most people would not call this “money hoarding”.”
Then the paradox of thrift, in terms of money hoarding, would not apply.
“The point is the paradox of thrift works even if you just imagine people stuffing money in the mattress.”
You can’t stuff more money in your mattress unless someone else SPENDS money on you.
“Even if we include credit expansion, there is still a competition between consumer spending and investment spending.”
“Nobody has said that there wasn’t.”
I didn’t say that you said that there wasn’t.
“Keep beating that strawman, though.”
I wasn’t accusing you of holding that position.
“No, he is talking about higher consumption replacing cash holding.”
“No, he’s talking about higher consumption *instead of* “cash holding”.”
Distinction without a difference.
“The higher consumption is necessary to maintain full-production employment (constant GDP) because of lower investment spending.”
This is assuming prices of wage rates cannot fall.
“Hence: higher consumption replacing lower investment.”
Non sequitur based on faulty premise.
“Except the context in which Keynes wanted to refute the claim that falling wage rates and prices can cure unemployment, is a context of falling capital goods prices, not rising capital goods prices.”
“Nope, capital goods cannot fall if the MEC is zero (or whatever) because of resource (supply) constraints (shortage).”
False. Capital goods prices can fall and that will increase MEC. You can’t keep MEC constant when there is no reason for it to stay constant.
“Either GDP has to fall or inflation has to rise.”
Nominal GDP can fall. Real GDP does not.
“(Or consumption has to rise).”
Non sequitur.
“Right, but for simplicity we can imagine that the constraint is that the capital goods makers productivity is the bottleneck.”
There is no reason to assume such a simplistic thing. Bottlenecks are a consequence of partial relative overproduction and partial relative underproduction. In competition, such partial over and underproductions tend to be reversed due to the desire for profit and avoidance of losses.
“There’s enough resources, they just can’t extract them any faster.”
The desire for more resources always outstrips the ability to extract them.
“Except falling prices cures unemployment.”
“And in the long run we’re all dead?”
Falling prices do not take more than a person’s lifetime. Most people will not choose starvation over a lower wage rate.
You can’t stuff more money in your mattress unless someone else SPENDS money on you.
Yes, I know, that’s the paradox of thrift. My spending is your income and your spending is my income. So if we both increase our savings then both our incomes must fall.
I wasn’t accusing you of holding that position.
Nobody holds that position. (Well, I’m sure we can find someone who does.)
This is assuming prices of wage rates cannot fall.
For wage rates to fall either more people have to be unemployed or people have to work more for the same amount. But there are no more people to be employed! It’s full-employment with falling MEC.
You can’t keep MEC constant when there is no reason for it to stay constant.
I gave you a reason: supply constraints. Why aren’t you getting this?
Bottlenecks are a consequence of partial relative overproduction and partial relative underproduction. In competition, such partial over and underproductions tend to be reversed due to the desire for profit and avoidance of losses.
What’s with the jibber jabber?
In this case there is an “unproduction” of human beings and an overproduction of demand.
Yes, it will be reversed in this case by the inevitable increased “hoarding” because consumer goods producers don’t want to take losses since the MEC is falling too low for profitable investment.
Falling prices do not take more than a person’s lifetime. Most people will not choose starvation over a lower wage rate.
Absurdly literal readings of famous statement for one hundred!
(There has to be a job to accept a wage.)
xgsmmy:
“Yes, I know, that’s the paradox of thrift. My spending is your income and your spending is my income. So if we both increase our savings then both our incomes must fall.”
But then you would require someone ELSE to SPEND their money on both of us.
See, the error you are making is called the fallacy of composition. You isolate yourself and myself, and consider ourselves to hold more money, and then you make an inference on that, and then, you make the error of inferring the same thing to the economy as a whole. But you can’t do that. Everyone in the economy cannot hold more cash, unless there is a rise in the quantity of money.
In the aggregate, any attempt by people to hold more cash will not result in more cash being held, but the same cash being held.
You and I cannot hold more money unless someone else holds less money. If EVERYONE tried to hold more money, they couldn’t do it. They would be accomplishing the goal of higher purchasing power on the side of falling prices and the same quantity of money.
You don’t seem to understand that when people desire to hold more money, they really aren’t just wanting to hold more money qua money. They want more purchasing power. More money is the way an individual can accomplish that. But everyone together cannot do that at the same time. Purchasing power is increased for everyone on the side of falling prices.
Once prices fall, then the desire for more purchasing power will be accomplished, and no further desire to hold more money would exist, because prices are such that the desired purchasing power has been reached.
The paradox of thrift, both in terms of investment and in cash preference, is BOGUS.
“This is assuming prices of wage rates cannot fall.”
“For wage rates to fall either more people have to be unemployed or people have to work more for the same amount.”
False. Falling wage rates does not mean unemployment. Falling prices and wage rates means less money being spent on the same supply of goods and labor.
“But there are no more people to be employed! It’s full-employment with falling MEC.”
There is no falling MEC with capital accumulation. That’s your error.
“You can’t keep MEC constant when there is no reason for it to stay constant.”
“I gave you a reason: supply constraints. Why aren’t you getting this?”
BECAUSE IT IS FALSE and because I have already explained to you why it is false. Why aren’t you getting that? It’s like talking to a wall.
Resource constraints, again, for the third time, are UBIQUITOUS. Resources are ALWAYS scarce. That’s why resources have prices in the first place. It cannot possibly be an explanation for rising prices.
The assumption of rising capital goods prices, in a context of falling wage rates and prices, is, again, for the third time, a fallacy. You can’t argue against what falling wage rates and prices can accomplish by literally denying that context and assuming a rise in capital goods prices!
Again, in a context of FALLING wage rates and prices, this can cure unemployment, and capital goods prices will FALL, not rise.
“Bottlenecks are a consequence of partial relative overproduction and partial relative underproduction. In competition, such partial over and underproductions tend to be reversed due to the desire for profit and avoidance of losses.”
“What’s with the jibber jabber?”
What’s with your lack of critical thinking skills and economic illiteracy?
“In this case there is an “unproduction” of human beings and an overproduction of demand.”
Ridiculous. No, there is no such thing as too much demand. Demand for goods is practically infinite.
In the case I described, there is a relative underproduction of some goods, and relative overproduction of other goods. In a division of labor, where each industry depends on the others, when industries are out of whack relative to each other, it LOOKS like bottlenecks in general.
“Yes, it will be reversed in this case by the inevitable increased “hoarding” because consumer goods producers don’t want to take losses since the MEC is falling too low for profitable investment.”
The MEC is not falling with fallign wage rates. it is INCREASING with lower wage rates.
“Falling prices do not take more than a person’s lifetime. Most people will not choose starvation over a lower wage rate.”
“Absurdly literal readings of famous statement for one hundred!”
Then don’t make stupid statements that you don’t intend to be taken seriously.
“(There has to be a job to accept a wage.)”
Your wage would be negative.
Yikes, MF.
I just meant if both us tries to increase our savings both our incomes must fall in proportion to our increase in savings.
I did not mean that our total savings would rise.
You are by far the least charitable commenter on the internet.
You are so bad that I can’t trust that you will even recognize the hyperbole in that last statement.
I’m astounded by your lack of decorum and rampant psychological projections.
It’s simply stunning that someone who insults their interlocutor at every turn can cry foul at even llegitimate phrases like “moving the goalposts”.
I’ll try to wade through the rest of your bile if I have the time.
You must be physically incapable of admitting even the slightest mistake.
Whatever made you this way I curse it and the day I was born.
Good day.
Resource constraints, again, for the third time, are UBIQUITOUS. Resources are ALWAYS scarce.
Yes, “resources are always scarce”, but imagine all available resources are already being employed at their highest productivity so that any attempt to employ more resources will only bid resources up in price.
Falling prices and wage rates means less money being spent on the same supply of goods and labor.
Yes, MF, if all wages and prices fell simultaneously it’s just like nothing happened. Unfortunately we still face the lower bound of the MEC.
The assumption of rising capital goods prices, in a context of falling wage rates and prices, is, again, for the third time, a fallacy.
All resources are being used to their productive limit. Any attempt to employ more resources will either make the MEC unprofitable or result in rising inflation.
So producers have a choice: “hoard” or consume.
There are no other choices.
Again, in a context of FALLING wage rates and prices, this can cure unemployment, and capital goods prices will FALL, not rise.
Increased investment cures unemployment not falling prices.
(I can already see now how you’re going to say you were talking in the “context” of the other Keynes. John Boehner Keynes.)
Ridiculous. No, there is no such thing as too much demand. Demand for goods is practically infinite.
I said there was an overproduction of demand and not enough productive capacity to fulfill that demand.
Since this is not inconsistent with demand being “practically infinite”, it must be your first sentence that’s key.
Yet that sentence appears to deny the possibility of an inflationary spiral.
Stagflation cannot occur, thank the lords.
In the case I described, there is a relative underproduction of some goods, and relative overproduction of other goods. In a division of labor, where each industry depends on the others, when industries are out of whack relative to each other, it LOOKS like bottlenecks in general.
Are you trying to describe Say’s Law? That’s where it looks like you’re heading.
(Just case you raise this objection to something I posted before. Yes if people all work less at the same rate (work sharing) then you could eliminate “unemployment” that way. So call it underemployed if you want.)
Your wage would be negative.
Even then there would need to be a job.
(I’m accepting a wage by paying you to let me work?)
xgsmmy:
In other words, the context of rising capital goods prices that Keynes THOUGHT would take place in a context of falling wage rates and prices, is wrong.
Keynes was trying to refute the argument that falling wage rates and prices cures depressions. He tried to refute that argument by literally denying the context of falling wage rates and prices.
Can you not see how it is absurd to argue against the ability of falling wage rates and prices (and thus falling capital goods prices) to cure unemployment, by setting up his reply by assuming a rise in prices? It makes no sense to do that.
You can’t argue against the ability of a fall in wage rates and prices to cure unemployment, by assuming no fall in wage rates and prices in your argument!
The context of falling wage rates and prices leads to RISING MECs, not falling MECs. The context of increased savings and investment leads to RISING MECs, not falling MECs.
MF, just for the sake of argument, to take this in another direction, and accept your premise. (And keep in mind non-economist here.)
In a deflationary environment at the zero-lower bound of interest. If wages and prices are falling isn’t the MEC falling at an equal rate?
So that you have to assume a secondary assumption to claim that the MEC is rising?
(My brain is fried, now. I’m topsy-turvy.)
xgsmmy:
“and capital can only be produced through saving and investment, NOT consumption”
“Who said capital can be “produced” by “consumption”.”
“You did.”
“[Citation Needed]”
When you said there has to be an increase in consumption in order to prevent unemployment and fall in GDP. Preventing unemployment and fall in GDP would imply that an economy grows (i.e. capital accumulates) more than what it otherwise would have grown without such consumption. This is equivalent to saying consumption produces capital.
“During a depression, the brunt of the hurt is felt by capital goods companies, not consumer goods companies”
“Do you have a link for this?”
Yes, my posts. Link to them.
“I still want that 70% link too.”
You can link to my posts for that too.
“(Although, I haven’t had time to read through skylien’s link I don’t think it has empirical numbers.)”
You don’t need constantly updated empirical numbers. It is logically deduced from the fact that profits are less than 50%. A mathematical series of the form I showed above, with profits averaging 25% on capital invested, would have a sum equal to $5.00 total spending for every $1.00 consumption spending.
“You can’t help the capital goods stages by increasing the nominal profitability of consumer goods companies.”
“The consumer goods companies can be induced to buy more capital goods.”
They can’t purchase more capital goods unless there are capital goods available. Available capital goods requires prior saving and investment.
“You’re just reverting back to reverting back to the idea that consumer goods producers will consume all of their income.”
No, I am not. You keep insinuating that my hypothetical example of 100% consumption is a sort of prediction, when in reality it is used to test Keynesian theory. Keynesian theory holds that 100% consumption can maintain employment and output. That is false.
“More consumption spending during depressions can only reduce productivity of labor and standards of living. The increased nominal incomes are illusory growth.”
“Yikes.”
I’ll take that as yet another concession.
“That was not the context of the argument Keynes made to “rebut” the claim that falling wage rates and prices can eliminate unemployment and depressions.”
“[Citation Needed]”
Keynes’ “General Theory.”
“The context of the rising capital goods prices Keynes claimed took place, was when there is less than full employment, and falling wage rates and prices.”
“Falling or rising GDP?”
During periods of unemployment.
“Falling capital goods prices on the basis of the context of falling wage rates and prices, which was the context Keynes responded to.”
“Falling or rising GDP?”
During periods of unemployment. The argument Keynes responses to is that falling wage rates an prices can cure unemployment. He held that falling wage rates and prices cannot do it, because he fallaciously claimed capital goods prices will rise, even though they would fall in the context given.
“Yes, that obviousness is exactly what Keynes made the mistake of contradicting.”
“[Citation Needed]”
Keynes’s “General Theory”.
“Then you agree that Keynes was wrong when he presumed the opposite. Not explicitly of course, but implicitly in the course of his arguments.”
“Yikes.”
I’ll take that response to be another concession.
“At full capacity, any further NOMINAL investment will make the MEC fall, yes, but this is not problematic, for if any cash hoarding arises on the basis of a too low” MEC, then that would only increase profitability through falling asset prices, as explained, which will thus remove the impetus for cash hoarding, as explained, and restore a higher MEC, as explained.”
“After GDP stops falling it, will start rising”.–MF
False. That is not what I argued. I argued that the decline in profits will eventually be reversed. The aggregate spending can stabilize at a lower level.
If you propose a hypothetical scenario of an increased cash preference, then that is the same thing as proposing a hypothetical example of an aggregate money spending deflation, which is roughly the same as a decreased NGDP, or what you call it, just “GDP”.
My response was not to just claim that a fall in GDP will be followed by a rise in GDP, but rather, that a rise in cash preference, which manifests as a falling in aggregate spending, will at first be a scenario of declined net investment, which when combined with producer consumption, will result in a declined MEC. But because a rise in cash preference will be accompanied by a decline in productive expenditures, asset prices will fall to a new lower level. Once that occurs, accumulated capital in dollar terms will decline, and producer’s consumption and the same relative rate of net investment (since rising cash preference cannot be assumed to come from ONLY investment or ONLY consumption, but both, that is, time preferences don’t change), these will become a larger fraction relative to accumulated capital in dollar terms. That means a higher MEC after all is said and done. NGDP would be lower, but rates of profit will be higher, because assets (costs) are lower relative to producer consumption and net investment.
“Are you finally conceding here then, that what you claimed was impossible is possible?”
I cannot possibly “concede” an utter falsehood. Whether or not aggregate spending (NGDP) is higher or lower, is a transition period that the market process does not get stuck at, but adapts to by virtue of what happens to the resulting differences in nominal demands between investment, capital accumulation, and consumption.
“How much unemployment there is will I suppose decide whether you call it a recession or depression, but the point is that you are not keeping the context in question in mind.”
“No, falling GDP or constant GDP or rising GDP?”
What do you mean “No” here? You are evading the context of falling wage rates and prices in an environment of unemployment.
Whether NGDP is rising or falling depends on the assumed change in cash preference you postulate.
If cash preference rises, this is the same thing as saying NGDP falls, provided of course that money is not destroyed (e.g. credit default/payback).
“Leave aside the issue of the number of unemployed. The only issue there is whether it is below full employment, full employment, or above full employment.”
You’re telling me to leave aside the number of unemployed, AFTER you brought up the “complaint” that we have to make clear whether we are talking about “recession” or “depression”? You’re not making any sense. If you want to make clear whether we’re talking about “recession” or “depression”, then you are asking me to consider the number of people unemployed, because that’s how those terms are typically defined. 7% unemployment might be called a recession, whereas 25% unemployment might be called a depression.
Now you’re saying leave the numbers aside, and focus on whether the economy is “below full employment, at full employment, or above full employment.”
That was MY original focus before you derailed it with quibbling over the semantics of whether to call the economy in a recession or depression!
To repeat for the millionth time, the context in which Keynes made the argument that capital goods prices rise, was in an economy with unemployment. That is what I have ALWAYS argued, and so now it should hopefully be clear to you.
“The “secondary deflation” is just an arbitrary focus on one step in the process of falling wage rates and prices.”
“I thought secondary deflation was gratuitous part of deflation.”
Deflation is deflation is deflation.
“The unnecessary pain.”
If I choose to reduce my spending, and that all else equal this will reduce other people’s nominal incomes, this is NOT “unnecessary.” This is NECESSARY to accomplish my ends. The market is a process where individuals can achieve their ends. It isn’t a prison, whereby everyone has to spend, or else they’re punished by law. That punishment is unnecessary pain.
“Wouldn’t secondary deflation further distort prices in a possibly endless series of miscalculations?”
No. Voluntary deflation is a CORRECTION to previous distortions that undue inflation has wrought.
Voluntary deflation is a manifestation of individual valuations given the new conditions of knowledge and preferences. It is beyond judgments of “right” and “wrong”. It is what individuals now prefer. The market process is a mechanism by which individuals can accomplish their new desired ends. Criticizing this is just criticizing voluntary peaceful activity of others. Who are you judge other people in this way?
“But the economy doesn’t work that way. Prices fall sequentially, as each individual makes choices at different times, given the events that are transpiring around them.”
“So the government takes all the responsibility for the unsustainable boom (even though we can now see is possible without the government), and every individual is left to fend for himself in the collapse (with no necessary bottom)?”
Yes, because the government CANNOT fix the problems it itself created. The only solution to distortions to the market process, is to let individuals in the market process fix their problems and coordinate their actions with each other.
Yes, individuals in the market process have to bear the costs of what those in the government did. That’s one of the main reasons why Austrians are so adamant that booms do not occur in the first place. It’s because they know that the costs will be burdened on those who had nothing to do with bringing about the boom.
“(Thinking about diagnoses and prescriptions for past and current real crises.)
which is what economists claim can cure unemployment, but Keynes rebuted this by presuming a rise in capital prices.”
“Rising or falling or constant GDP?”
Stop evading the context. It’s falling capital goods prices.
“You seem to want to concede that point, but not totally, and hopefully quickly go to some other argument, which is the alleged evil of price deflation,”
“No, it’s just that when you talked about it before I was thinking about the present day where GDP is rising.”
If by GDP you mean total spending, total spending (continually) rises when there is inflation of the money supply. The reason NGDP fell 2008-2010 is because the total supply of money actually fell due to credit collapse.
The Federal Reserve System brought that credit expansion about, to a very high ratio relative to base money. This made the financial system like a house of cards.
“But now I’m thinking about the case where GDP is falling or hits a flat bottom and wondering if the MEC will start falling there too.”
As I recommended before, you ought to first understand what you have put on your plate first, because you ADHD over to another topic.
To answer your question, yes, when total spending falls, it will almost always be associated with a declining MEC, because while revenues decline instantly, costs fall with a time lag, since current costs are a function of past (productive) spending, when total money spending (and productive spending) were probably higher.
But this fall in MEC is temporary, because when total spending falls, so does productive spending tend to fall, and when productive spending falls, so too do costs eventually fall. Once costs do fall to a new lower level, then given the new (lower) total spending, MEC will rise once again (since net investment and producer consumption will put a constant and relentless pressure on MEC to rise).
“I’d forgotten about the initial crash.”
You were insistent that I address your claims in a context of full employment and full capacity. Now you’re saying you want to go to a scenario of a crash, which of course means unemployment and less than full capacity?
“No, because the MEC does not fall when capital goods prices fall.”
“This is just a tautology.”
[Facepalm]
“No, it is not a tautology. Falling capital goods prices and the MEC are different, but related beasts.”
“Could you expand on this? If you’re talking about all capital goods it seems true (discounted by the rate of interest). (Ignoring the spot price or whatever.)”
If you know what I said is true, why the heck did you claim it was nothing but a tautology?
“No, I argued that the MEC does not fall when capital goods prices fall.”
“What’s the difference? Is it the cost of money? Or the rate of profit? (Okay, I need to think about this I guess. And read about it.)”
The MEC can be understood in a few different ways, but the way I was using it, and the way I think you were using it, was aggregate profitability, i.e. rates of profit prevailing throughout the economy on capital invested, in nominal terms.
High inflation can drastically increase MECs by virtue of widening the difference between revenues and costs (since costs are a function of past spending, which was lower). This is not, by the way, inherently a good thing, because MECs just reflect, or in a free market would reflect, the time preferences of individuals. A high MEC is not objectively “better” than a lower MEC.
“MEC does not fall when capital goods prices fall, is not a tautology.”
“I’m confused.”
Maybe you think capital goods prices are the costs of capital in interest rate or borrowing terms.
I am defining capital goods prices as the dollar prices for capital goods, i.e. a machine is priced for sale at $100,000.
“False. You can’t hold the MEC as constant and then consider a change to investment, when the MEC is a FUNCTION of investment!!!!”
“MF, in the case you responded to raising consumption to offset falling investment restores the MEC to equilibrium at constant GDP.”
I recommend to stop evading the issue, and address it head on. The MEC does not constrain investment in any sense. The MEC is a PRODUCT of investment (and consumption), relative to each other. If the MEC is ANYTHING, 5% or 1%, or any other rate, a rise in investment will just keep making the nominal MEC fall, and by less and less of a fall as more and more investment is made. Real MEC would keep growing, making the smaller nominal MEC more and more worthwhile to invest!
The claim you made, that falling investment is accompanied by a rising consumption “to offset it”, is a confusion, because falling investment does not need rising consumption to “restore” GDP or unemployment. Indeed, CONSUMPTION SPENDING DOES NOT PAY WAGES. Not even NGDP pays wages. What pays wages is saving and investment in labor. This spending is in competition with consumption spending.
An employer that has savings available can financed his own consumption, or he can pay wages. He can’t do both with the same money.
Yes, falling NGDP may tend to be associated with falling employment, but this is only to the extent that wage rates do not fall. It’s not that falling NGDP did it, it’s the failure of wage rates to balance with the new (lower) nominal demand for labor.
More consumption spending cannot prevent the fall in wages, because more consumption spending just results in higher profits for consumer goods companies.
And no, you can’t argue that more consumption spending will be used by consumer goods company owners to pay subsequent wages, because that would be saving and investment, NOT consumption spending. So you would be contradicting the context of CONSUMPTION spending raises wage rates.
And even if the economy ends up with more employment in the consumer goods industries for whatever reason, this would end up harming workers’ standard of living, because with fewer workers in capital goods industries, and more workers in consumer goods industries, the rate of capital accumulation will be otherwise lower.
THIS is why I brought up the hypothetical of 100% consumption. For imagine that investment for some reason collapses 90%. If the “solution” to this is for there to be an equivalent rise in consumption spending, thus attracting almost all workers to consumption, then the capital base would eventually rust and wear out, be disintegrated, the productivity of labor would collapse, and real standards of living would plummet.
The more optimal solution therefore, is to make saving and investment as attractive as possible, to maximize it, so that the fall in investment is reversed, and workers can be attracted back into the capital goods stages from whence they came, so that the rate of capital accumulation does not plummet.
This would occur “naturally” in a free market with protections of property rights, but unfortunately, the state is guided by the exact Keynesian thinking as you, and they do everything they can to make investing as unattractive as possible, and as least capable as possible. Lots of government borrowing from the market’s savings, which redirects saving from investment to government spending, decreasing interest rates below what the market process would have put them at, which makes investment less attractive, and punishing cash holders – who would have made profits rise (as explained above) – with inflation.
“At that point raising or lowering investment pushes the MEC out of equilbrium as capital depreciates.”
There is no such thing as an equilibrium MEC apart from where voluntary investment and consumption would have put it. Capital depreciation does not lower the MEC.
“At full employment and full capacity, if there is a rise in investment, then the MEC will fall. It won’t hit a lower positive bound that will not fall no matter how much additional investment and fall in consumption is made. The MEC is a function of investment. If investment rises, then the MEC will fall, even if it has to fall from 2% to 1.8%.”
“If what you claim is true (that MEC can’t ever fall to zero or below) then the interest rate will eventually rise in response to inflation making the real MEC negative, even if nominal MEC is positive.”
The argument that the MEC can’t ever fall to zero, and below zero, is only true in the context of non-declining aggregate spending.
If you assume inflation is taking place, which will turn the existing nominal MEC negative in real terms, then this is the fault of those who are inflating. It’s not the fault of the market. I was explaining to you how MARKETS work, and yet you seem to want to haphazardly go back and forth between markets and hampered markets, as if there is no fundamental difference between the two.
At any rate, if there is inflation, then that will tend to raise the nominal MEC. The MEC won’t remain constant. The MEC is a function of investment, capital costs, and consumption. Inflation will tend to widen the spread between spending and costs, and thus raise MEC.
So the hypothetical negative real MEC you have assumed, is highly innaccurate.
In a context of zero inflation, then the nominal MEC will be positive and the real MEC will be positive.
“The MEC can not hit zero at full employment, because consumption of producers is always positive.”
“Unless this is a tautology then it’s not true because consumption can fall to zero. People can jump from tall buildings in a recession.”
What a ridiculous assertion. Economics as a science presumes people are alive, not dead. If everyone is dead, then there won’t be any investment or consumption.
Obviously, not everyone kills themselves. Consumption in the aggregate can never hit zero as long as humans LIVE.
And what I said is NOT a tautology. You keep throwing that term around when it is clear you haven’t the foggiest clue what it even means. Tautologies do not mean “obvious truths”, as if the only “real” truths are those that are complicated and hard to understand. Maybe that’s how truth appears to you, where the only time you think you’re close to a truth is when you are confused, but many truths are trivial.
What I said is not a tautology because the MEC and producer consumption are separate, but related concepts. Just like my discussion of the relationship between capital goods and the MEC was claimed by you as a tautology, now you’re saying my discussion of the relationship between producer consumption and the MEC is a tautology.
To reiterate, the MEC is one thing. Capital goods prices and spending is one thing. Producer consumption is one thing. They are related to each other, where producer consumption and capital goods investment determine the MEC, but this does not mean that saying “the MEC does not hit zero because producer consumption is always positive”, is a tautology. There are two different concepts there. It’s not like saying A is A.
“You’re insane. I did not once mention ABCT, not did I once mention economic calculation, nor did I even HINT at referring to those things. You’re totally out to lunch. I challenge you to show me where I mentioned ABCT or economic calculation in this thread with you.”
“My mistake. I went back and looked and it appears you were making a crowding out argument.”
[Facepalm]
“False, xgsmmy. The rate of interest is a function of profits, not the reverse”
“You’re just quibbling over semantics now. This is evasion. This is why the length of comments is rising and rising.
Saying you’re being evasive is not the same as saying you “have something to hide”.”
No, saying that profits determine interest, rather than vice versa, is not “semantics.” I am not arguing something by insisting that you are using the wrong word to describe what we are both agreeing to. I am not agreeing with you as to the determinants of interest or profits.
You claimed that interest rates affect profits. I responded to that by saying no, it’s the reverse.
The only reason these comments are getting longer and longer is because you choose to write such comments, and because I choose to write my comments. You are blaming me for choices you made. I recommend you maybe take responsibility for your own actions. Yes, I know, crazy thought.
I am not being evasive either. I have taken the time to respond to every claim you have made, and I have answered every question you have asked.
You have not done that in return. You have repeatedly changed topics, not finished an unfinished line of thinking, refused to seriously address the context of falling wage rates and prices, and repeatedly tried to derail this into discussions of GDP, whether to call recession a depression, and on and on.
I recommend that you do a little soul searching instead of accusing me of doing something that you have no proof of me doing, and considering the fact that you have such poor reading comprehension, that you even accused me (since recanted) of introducing highly complex topics such as ABCT and economic caculation, even though I did not once mention those things. That should be strong evidence for you to be more critical of your own ability to read and understand comments, before you start judging my comments. You can’t possibly understand that which you read, unless you yourself are first mentally capable of it. Improvement starts with you, not others.
“But imagine a central bank who can hit any interest rate target it wants to.”
Imagine the truth that interest rates mean something, and that if the central bank changes interest rates by fiat, it doesn’t mean it is helping people coordinate their actions because such coordination requires unhampered interest rates.
How about you stop trying to think like a central planner, and start trying to understand how peaceful, voluntary market activity works, and how it is coordinated, before you begin to understand how central banking affects it.
You can’t know how A affects B, unless you know B without being affected by A.
“You keep holding things constant and then imagining what happens when there is a change to certain variables, despite the fact that those variables you are changing GENERATE the very variables you are holding constant!”
“No, you won’t find your escape hatch here.”
It’ not an “escape hatch”. I am not “trying” to “find an escape hatch.” I am not looking to escape. I am not feeling pressured in any sense here. I am not on the defensive. I am helping you understand that which you as of yet don’t understand.
My argument that you are holding some variables constant, and then you are imagining the effect of changing other variables, I am telling you is an incorrect approach, because the variables you are holding constant are not in fact constant when you change those other variables!
How can you possibly not grasp that? How can you possibly respond to that argument of mine by claiming I am trying to find an “escape hatch”? You’re not making any sense.
“Interest rates, and MEC are not deux ex machina variables, dictated by investors by fiat, after which any change to other variables are to be analyzed by holding interest rates and MEC constant.”
“Nope.”
Nope? NOPE? You’re obviously highly confused.
The MEC and interest rates are a product. They are effects. They are effects of prior causes.
For the MEC, the prior causes are investment spending and consumption spending, as well as accounting for past productive spending. If investment spending changes, if consumption spending changes, or if accounting for past productive spending changes, then the MEC will change. The MEC is not a rigid value which somehow investment and consumption must adapt and mold and “fit” into.
“Try again.”
I don’t have to try again. You need to try to understand it again, because your last attempt was a disaster.
“The interest rate is the variable we have control over.”
This is not a rebuttal to what I said. I said that interest rates are an effect of prior causes. You can’t refute that by making the very vague and fuzzy claim that humans control it in some sense.
I wasn’t arguing that interest rates arise out of thin air. Are you not reading what I am writing? I am saying interest rates are not deux ex machina variables that are fixed by decree. They are a product of individual time preferences in coordination in the division of labor.
“MEC is constant in equilibrium at max capacity.”
False. The MEC IS NOT DETERMINED BY PHYSICAL PRODUCTIVITY.
You keep making the same error, over and over and over again, that the MEC somehow is fixed when the economy is at a GIVEN capacity.
You are fallaciously holding capacity fixed, when capacity is ALSO an effect, determined by the extent of prior saving and investment.
The more saving and investment there is, the more capacity an economy will have. There is no objective upper limit to capacity that is reached, beyond which it cannot ever go, no matter how much additional investment is made.
Capacity, again, for the sixth time, is a PRODUCT of investment. The higher the investment, which is a choice we have, then the higher the capacity.
The reason why the US has a higher capacity than say the Sudan, is because of our higher investment relative to the Sudan. Sudan is at its own capacity given its investment. We are at our capacity given our investment.
Both our capacity and the capacity of the Sudan can increase, if investment in both countries increase. Neither have a fixed, objective upper limit independent of investment above which both can never go.
You are confused because you are fallaciously interpreting “full capacity” to be a transcendent value decreed from some power independent of what humans choose to do when it comes to their saving and investment. In reality of course, “full capacity” is just the name given to the ACCIDENTAL maximum output that currently exists BY VIRTUE OF current investment. That capacity can go up, if investment goes up.
There is no such thing as any “output gap”. It is a fictitious figment of the imagination.
Any economy that is labelled as being at “full capacity”, can INCREASE its capacity if there is a relative rise in investment (future consumption) and relative fall in current consumption. For the more workers and resources that currently go into capital goods now, the more capital goods and consumer goods that can be produced in the future, and thus the higher the “capacity” of the economy will become.
“Interest rates move up and down, in an economy at full capacity, and with no inflation, by virtue of the difference between saving and investment.”
“Nope, try again. We have a central bank and credit expansion.”
You are not grasping the argument I am making. I am saying in an economy with full employment and no inflation, interest rates can change by virtue of changes to investment and consumption.
It is not a proper rebuttal to this to deny the assumptions made in the example, and say “Nope, we have credit expansion.”
It would be like you saying “In an economy without hurricanes, resources will tend be put to uses other than hurricane defenses”, and then I say “That’s wrong! We live in an economy where hurricanes take place.”
Once again, in an economy with full employment and NO inflation, interest rates change by virtue of changed investment and consumption. If you want to rebut this, then you have to show that in an economy with full employment and no inflation, changes to investment and consumption DO NOT change interest rates. I wait your response with baited breath.
To address your point about credit expansion (notice how while you keep evading my arguments, I am responding to every single argument you are making AND showing why your responses to my points are wrong?), if there is credit expansion, then this would probably affect nominal interest rates, yes. But it won’t affect real interest rates, which are determined by the relative valuations between future goods and present goods. The central bank cannot effect my temporal preference just by encouraging credit expansion in the banking system.
If credit expansion makes nominal interest rates fall by 50%, say from 10% to 5%, then this doesn’t mean people’s temporal preferences for goods over time has changed by that much. Indeed, they would almost certainly be different, and that is precisely why the business cycle occurs according to ABCT.
Moreover, the fall in interest rates from 10% to 5% would, if the credit expansion is temporary, eventually go back to 10% anyway (or whatever the new time preferences at that time would generate).
This is because once credit expansion comes to an end, the time preferences of individuals would once again reassert themselves, and investors and consumers would once again be able to coordinate their temporal preferences, and the credit circulation business cycle would come to an end.
“THERE IS NO OBJECTIVE LOWER BOUND to either interest rates”
“The real rate of interest can be negative.”
There is no objective lower bound to either interest rates or MEC.
“or MEC, other than zero, because zero is physically impossible,”
“The profits can turn into losses economy wide when GDP is falling.”
You are again assuming a rise in cash preference, which I already dealt with.
“as it would require zero consumption and 100% investment”
“No MF two people can lower their consumption by 50%. But also people can jump from tall buildings and put guns in their mouths.”
This is not a proper response to what I said.
If two people lower their consumption by 50%, then if that is done by accumulating cash, then OTHERS must be SPENDING cash on those two people. Furthermore, since reducing consumption via accumulating cash means no change to investment, it means that those two people’s time preferences have fallen, because now they are investing at a relatively higher rate. If there is no monetary disturbance to “counter-act”, i.e. frustrate this process, then it will be able to be communicated to investors and investors will be encouraged to invest in ways that satisfy this new state of affairs.
The effect on relative prices would be that there would tend to be a relative fall in consumer prices, and relative rise in capital goods prices, which will stimulate more investment since it is more profitable to produce capital goods than consumer goods. This will make the economy more capital intensive, and eventually raise people’s standards of living.
If on the other hand those two people reduced their consumption by 50% on the basis of increasing their investment, then the effect would be similar, the only difference is that capital goods prices would be higher in the absolute sense, in addition to being higher in the relative sense as compared to consumer goods prices.
“in other words, since consumption takes place, neither interest nor the MEC can reach zero in an economy with full capacity and no inflation.”
“I don’t know that this is true.”
You don’t know a lot of things that are true. Your statement here doesn’t mean much.
“As MEC falls the interest rate must fall to maintain equilibrium.”
I’ve already explained that profits influence interest rates. It’s not that interest rates MUST FALL TO MAINTAIN EQUILIBRIUM, as if you’re sitting there with a judge’s gown and gavel, ready to “act”, i.e. use violence, if you don’t observe interest rates fall.
“But at max capacity lowering the real interest further would create inflation.”
This is false. Only increasing the quantity of money and volume of spending can generate (sustained) price inflation.
If you mean the central bank lowering interest rates, then interest rates falling from one period to the next would only be associated with inflation if it took an OMO to do it, i.e. more inflation.
If on the other hand interest rates fall from one period to the next on the basis of changed time preferences, then such a fall in interest rates is NOT associated with inflation, since it didn’t require a central bank OMO to do it.
“But it could still hit zero (or near zero) if MEC is 2 percent.”
The MEC and interest rates can be lower than 2%. Nothing magical happens at 2%. It’s just a number.
“That will just make the MEC fall even more. There is no objective lower bound that determines investment. It is investment that, in part, determines MEC. You have the causation backwards.”
“Yes, I know it will make MEC fall. That’s is what I’ve been telling you and you said was impossible.”
I never said it was “impossible” for the MEC to fall. I have explained ad nausea how the MEC can fall. I have said on many occasions that a rise in investment spending and fall in consumption spending can make the MEC fall. Your memory is as in need of improvement as your awareness.
I said that the MEC does not become ZERO in an economy with capital accumulation, since the MEC is determined by relative nominal demands, not real output.
“No, I don’t have the “causation backwards” it goes in both directions.”
No, you do have the causation backwards because it does NOT “go in both directions.” It goes in only one direction. Investment determines MEC. The MEC does not determine investment.
The MEC is an EFFECT, a PRODUCT, a FUNCTION, of investment. If investment changes, then so does the MEC. The MEC, even if it is 0.5%, can accommodate LIMITLESS investment, since the MEC declines ASYMPTOTICALLY with each successive equal sized amount of investment. It does not decline linearly with linear increases in investment.
For example, if investment rises by $10 billion each period, and consumption falls $10 billion each period, then the MEC will NOT decline linearly, until it hits zero, then negative, such that there has to be more consumption or else bust. The MEC in this situation will decline a lot initially, but then it will decline less and less due to each additional round of increased investment. You might there see the MEC fall from 10%, to 5%, to 2.5%, to 1.75%, to 0.875%, to 0.4375%, and so on, where the MEC REMAINS POSITIVE, but keeps declining towards, but never reaching, zero.
Then, if there is a 5000% increase in investment, and equivalent spending sized decrease in consumption, then the MEC might go from 0.25% to 0.23%.
It has no fixed lower bound. It is what mathematicians call “unbounded below”. The set of all real numbers in the open interval (0,1) is the set of all real numbers between 0 and 1 that does not include 0 and 1 themselves. This interval seems finite, and in a sense it is, but it contains an infinite number of real numbers, because any number you pick that is arbitrarily close to 0, say, I can always pick a number CLOSER to 0. You can’t actually reach 0, but you can keep getting CLOSER to 0.
This is how the MEC behaves, mathematically, given the assumptions established thus far.
What investment does is get the MEC smaller and smaller, but it can never REACH zero, because producers are physically unable to invest 100% of their incomes. They HAVE to consume in order to even live and invest!
There is no practical limit to investment in a capitalist economy!
No matter how high investment gets, investment in the aggregate will ALWAYS be profitable, because the MEC can never reach zero due to the fact that total spending will exceed total costs.
“Businessmen have expectations, they make plans based on conditions. If they have to bid up capital they may lower investment without a corresponding rise in consumption and GDP would fall.”
False. If prices for capital rises in this way, it is BY VIRTUE of a rise in nominal demand. You can’t postulate an increase in nominal demand for capital goods, then assume capital goods prices rise, and then assume that capital goods spending does not rise after all in an environment of a rise in prices. That is a gross confusion in thinking. If you postulate an increase in nominal demand for capital goods, then you can’t then immediately contradict that context and assume a fall in nominal demand for capital goods.
“But in this model, that we’ve been talking about for hours, GDP is constant in equilibrium because productivity is stagnant and we’re at max capacity.”
No, productivity is not stagnant in our model. Fixed aggregate spending, fixed aggregate NGDP, DOES NOT MEAN stagnant productivity and fixed capacity that cannot rise.
For within the fixed aggregate spending, capital accumulation can occur on the basis of more production sold for lower prices. More capital goods can be produced with the help of the capital that exists, financed by the same nominal spending and the same nominal profitability, and in this content, capital goods prices can fall, and keep falling, without any drop in profitability.
If twice the goods are sold for half the prices, then profitability does not fall. For revenues do not fall.
The “stagnant economy” you are envisioning is a false one, given your own assumptions.
“(This is evasion. This is ridiculous.)”
I am not evading anything. You are. You are evading the context of falling capital goods prices, over and over and over and over and over and over and over and over again.
You conflate unchanged nominal spending growth with unchanged real output. Why? Because you are ignoring falling capital goods prices on the basis of more productivity.
“(You are nit-picking and quibbling over semantic points.)”
I am not nit-picking, nor am I quibbling over semantics. I am not nit-picking because the issues I am raising are important to showing you the very large mistakes you are making. I am not quibbling over semantics because I am not asking you to use different words to describe the same thing, nor am I arguing against what you are saying by focusing on your vocabulary choices.
You are just throwing everything you got at me, but they’re all just spitballs off a tank.
“There is no objective limit to how much investment is profitable, other than that which is decided by the individual time preferences of people.”
“Yes, yes there is, you’ve regressed. You’re confusing the nominal and real. We’re at max capacity. There is no infinitely smaller limit to exploit. You have to get real people to be more productive.”
First, I have not “regressed”. I have maintained the same position the whole time. Second, what you said proves my point.
The concept of an economy being at “max capacity” IS A FUNCTION of labor productivity.
You said that “you have to get people to be more productive.” Yes, indeed, that’s my point all along. You get people to be more productive BY HAVING THEM WORK WITH MORE AND BETTER CAPITAL GOODS.”
People produce more when they have more capital goods to work with, as compared to if they have fewer capital goods to work with. Agreed?
Well, the way to have people work with more capital goods is by ensuring that saving and investment are sufficiently high relative to consumption, so that the resources used up in consumption are not only replaced to as to maintain that trend of consumption growth, but also more than replace, in the form of new capital that is made of resources that are as of yet not used for immediate consumption, but for capital goods production that go to increase the production of both capital and consumer goods in the future.
Further, there is no fixed capacity in an economy with capital accumulation in an environment of fixed nominal spending. If investment is sufficiently high, capacity is gradually increasing, as more and more output is generated on the basis of capital accumulation. If anything, you might argue there is at any given time a fixed growth in capacity. But even there, that growth of capacity trend can increase by virtue of even more investment spending and even less consumption spending.
The trend of capacity growth can increase because of a higher rate of capital accumulation than before, which puts more capital goods in worker’s hands at an even more rapid pace, which increases their productivity at an even more rapid pace, which increases the growth trend in the economy’s “capacity.”
It is NOT TRUE that a given growth trend in capacity is fixed and objectively rigid. The higher people’s investment rates are, the greater total output can get, and the more rapid will consumer goods be produced. That in turn can allow people to increase their saving and investment spending even more, and still live good lives, until the next round of investment increase turns into a higher productivity and consumption. Then, that will allow for another increase in saving and investment.
There is no objective limit to this process.
Now, you claimed that I confused nominal with the real, when that is exactly the confusion you have had, which I have repeatedly tried to get you to understand, but to no avail. I know the difference, and it because I know the difference that I can point out the errors you are making that are grounded on NOT differentiating between the two! How’s that for irony.
“There is no limit to saving and investment. The MEC will fall, but successive increases of equal amounts of investment will NOT keep decreasing the MEC by equal amounts. It will decrease the MEC by ever small amounts, until it tapers off to that which is associated with the voluntary consumption of producers”
“No, wrong MF, two exploit the limit you have to get the real economy to get infinitely more productive.”
This statement does not justify being prefaced by a “No, MF”. I am explaining to you how the economy can get more productive, and yet you keep holding output fixed and unable to grow.
“But we’re at max capacity.”
Capacity, again, is a function of investment relative to consumption. It is not ever maxed out in the objective sense, beyond which humans cannot go no matter how many more capital goods they have and no matter how much their productivity rises.
Max capacity DOES NOT MEAN some objective fixed upper limit to productivity. Productivity can always grow by workers having more capital goods with which to work.
Capacity is not fixed. It is open ended. Capacity can, and does, increase by virtue of capital accumulation.
The kind of full capacity you seem to be talking about is a situation where humans are Gods and have control over every aspect of the entire universe, and cannot squeeze any more output out of the universe, because technological progress comes to end (since humans know everything), and because everything in the universe is being used as capital goods in their maximum technological implement.
What you are talking about is, I hope you can see, something that is going to be trillions, if not quadrillions of years out. Humans know only very little of the world, and we have only just acquired capital control over a tiny dot in the universe.
The potential for more technological progress and more capital control is for all intents and purposes, infinite.
On Earth, in the real world, your hypothetical of no more technological progress possible, and no more capital improvements possible, is not anything to do with what Keynes wrote, not anything to do with the real world, not anything to do with what I am saying, and no anything to do with economic science. it is religion.
“At an MEC of 1%, in an economy at full capacity, would suggest a very, very, VERY high saving and investment rate as compared to consumption. The tiny nominal rate of return would represent such a high real rate of return, that what you would probably see is a nominal return of 1%, and falling prices of 10% or so, for a real return of around 11%. Investment would be worthwhile even with such low nominal returns.”
“You’re trying to eat a free lunch, but we’re at max capacity.”
No, I am not trying to eat a free lunch, because what I am saying takes effort, it takes mental and physical labor, it takes production, and second, no, we’re not at max capacity.
We are at the capacity that is determined by the given investment rate. Max capacity is a function of the height of investment and technological knowledge IN THE PRESENT. But capital can and does accumulate through production, and new technology can be learned through experiments and research. There is no free lunch here, and there is no max capacity here.
You are holding capacity constant, when it need not be constant.
Capacity will only max out once humans are omniscient and once they have full capital control over the entire universe. That won’t happen in your lifetime, or anyone else’s lifetime for billions of years. Your assumption of max capacity is so unrealistic that it does not deserve serious analysis, nor does it deserve to even be recognized.
“Yes, in an economy with no inflation, this net investment will eventually cease generating the sort of profitability mentioned. At that point, the MEC will only be a function of producer’s consumption spending. For their capital spending would generate revenues that are equal to the depreciation costs each period. The additional source of profits would come from the spending that producers make on themselves.”
“Right, this is what I’ve been saying all along and you said was impossible.”
No, I did not say it was impossible. How can you claim I said it is impossible, when I was the one who explained it to you as what would take place?
You have also not been saying that all along. I have. You maybe learned it just recently, but it was only after my telling you.
“But eventually capital will depreciate to the point of recession.”
False. Capital that depreciates can be, and is right now as we type, replaced by new capital by virtue of a high enough nominal investment rate that pays people to produce more capital goods every day.
You’re talking nonsense.
We are not at max capacity now in the real world, and we will not be at max capacity in theory for billions of years at least, or however long it will take humans to become omniscient and omnipotent.
Right now, as you are claiming we are at max capacity, capital goods are being produced right now, and are being used to replace worn out capital that depreciates. It’s the very reason why economies GROW over time. Growing economies grow by virtue of a high enough saving and investment rate that generates enough new capital to not only just barely replace worn out and used up capital, but add to the capital base besides, which allows for higher productivity of labor, a higher production rate of consumer goods, and hence more consumption overall.
Look around you. 200 years ago that stuff did not exist. Why? Because the CAPITAL did not exist. There was a consumer nominal demand, there was a need, there was a desire, but all that consumer spending and need and desire cannot bring the consumer goods into existence. The ONLY thing that can do it is CAPITAL. Producing capital is how to grow economies and satisfy the consumption demands of people.
If you have a million people on a deserted island, and they each have $100 million to spend on consumption, then do you think their output would be as large as compared to 1 million people in an economy with capital, and, say, where each person has only $100 to spend?
Even though the “spending” and “consumer spending” on the island is much much higher than in the city, even though their “need” of consumer goods is higher (since they have no plumbing, no hospitals, no medicine, no modern food manufacturing plants, no factories, etc), their standard of living is worse. Why? Because they lack the capital.
In the city, where there is more capital, standards of living are higher.
“False. Profitability doesn’t reach zero, even when those costs cease being deferred. There is still the voluntary consumption spending of producers.”
“MF, I said there will be a point at which additional investments will not be profitable and respond by saying “False. Consumption will rise.”
No, I did not say “consumption WILL RISE.”
I said consumption WILL BE POSITIVE, I.E. GREATER THAN ZERO.
Consumption spending does not have to RISE when there is capital accumulation, in order for the MEC to be positive.
Consumption spending can keep falling, and capital goods spending can keep rising, and the MEC will stay positive, and will be as low and positive as the height of investment spending relative to consumption spending happens to be.
There does not need to be an external source of new consumption spending when producer’s consumption spending falls as they increase their investment.
They can increase their investment and decrease their consumption as much as they are biologically physical and capable of doing, and the MEC will STILL be positive, because producer consumption spending EXISTS. It’s not that it rises that does it. It’s solely that it exists that does it.
We don’t have to worry about producers consuming a positive amount. They will do that on their own recognizance without asking for your permission. They don’t need to be told to consume at least something or else they will die. They’re not that stupid.
“Yes, I know consumption can rise, it’s what I’ve been saying all along.”
Wait, I did not say that consumption rises here. You fallaciously inferred I said that, when I didn’t. Consumption spending can keep falling, and investment spending can keep rising, and the MEC will remain positive, because consumption spending EXISTS.
Do you not understand the difference between existing consumption spending, and rising consumption spending? I am arguing the former, not the latter.
“If producers in this context then increased their investment again, then the MEC would fall again, but by less so that before”
“No, capital has depreciated to the point where any further increase in investment will result in either inflation rising or GDP falling.”
No, if there is a rise in investment spending and fall in consumption spending, then not only is there is no general increase in prices (there is a change to relative prices, where capital goods prices rise at first, and consumer goods prices fall at first), but the change to relative prices is not even a “refutation” of my argument that successive increases in investment spending and successive decreases in consumption spending will generate a declining MEC that declines less and less as each round of increased investment spending and each additional round of decreased consumption spending.
Capacity is a function of existing investment. If investment spending increases, at that increases the prices of capital goods, and decreases the prices of consumer goods, then that will increase the relative profitability of capital goods and decrease the relative profitability of consumer goods.
That will then result in a reallocation of resources and labor away from consumption industries, and towards capital industries. More resources and more workers entering the capital goods industries can increase the rate at which capital goods are produced, and that will increase the economy’s “capacity.” Far from being at “max capacity”, the economy was at “a” capacity, concomitant with the existing allocation of resources and workers among capital goods and consumer goods industries.
An increase in investment and fall in consumption can move workers and resources away from consumption and into capital goods.
“You keep asserting, quite incorrectly, that the MEC somehow goes negative, when it doesn’t go negative at full capacity, but only keeps decreasing to the level that is generated by their given consumption.”
“MF, did you eat lunch today. Did your consumption fall to zero?”
I could only eat what I had for lunch because there was saving and investment in the capital that was used to help workers produce the food. Somebody in the past made the decision to increase their investment, which necessitated an abstention from their consumption, to pay wages to people, and to pay capital goods sellers, to produce the capital in question that the deli then purchased for use in the production of the sandwich I ate. Because of that capital, I was able to eat what I ate. If that capital did not exist, then my money I have available to spend on consumption, would have only been able to purchase something without the aid of such capital, like picking apples out of a wild orchard.
“This is wrong. The MEC is not a function of real productivity. It is a function of the difference between investment spending and consumption spending. The MEC goes down when there is a rise in investment spending and fall in consumption spending.”
“I’ve been saying all along that can consumption can rise to offset falling investment.”
You have been wrong all along, because consumption spending does not have to rise to “offset” decreased investment spending.
If investment spending falls, and consumer spending remains unchanged, then the prices of capital assets can fall, and those workers who produce capital assets can earn lower wage rates.
This is a reflection of people’s new relative valuation between capital goods and consumer goods. For if investment spending falls, but consumer spending does not change, then that is equivalent to their being a relatively higher valuation placed on consumer goods and a relative lower valuation placed on capital goods, or, yet another way of saying it, it is equivalent to a rise in time preference, that is, a relative rise in the valuation of present goods compared to future goods.
If this change in valuation is allowed to work its way through unhampered changed relative prices, then investors will learn that there is now more value in present goods, so they will adjust their allocation of capital.
“But, and here’s the key thing. Eventually consumption must fall as a function of depreciation and when it does GDP will fall.”
If there is a voluntary relative fall in investment as compared to consumption, then of course output will fall. This is in line with what people now want. Higher economic growth is not something I hold should be imposed on people if they don’t want to grow their standard of living at that high of a rate. I am against slavery. I am against tricking people using coercive and deceitful means as well.
If a person does not want to save and invest, and have a lower standard of living as a result, then I am against forcing that person to save and invest against their will.
Just like someone hitting themselves can be justified, it doesn’t mean that others hitting that person is equally justified.
I am not dogmatic so as to force economic growth on people. Economic growth should be in line with what people voluntarily want for themselves.
“The MEC does not go down when there is unchanged nominal investment spending, unchanged nominal consumption spending, but increased productivity on the basis of physical increases in productivity, and falling prices.”
“There are no more physical increases to exploit here. We. are. at. max. capacity.”
False. We. are. not. at. max. capacity.
We. are. at. the. capacity. that. is. a. function. of. the. given. investment.
If people have an ability to invest more, then by definition the economy is not at max capacity. The very existence of the possibility that people can invest more (and thus create potential problems in your flawed opinion) is sufficient proof that the economy is not at maximum capacity.
There is no such thing as maximum capacity in the objective sense, as long as humans are not omniscient and not omnipotent.
“MF, this discussion is at max capacity. And so I must lower my investment and raise my consumption, but I will invest again and let’s hope it will be a glorious recession indeed.”
You won’t succeed, because we’re not at max capacity. Indeed, we are in such desperate need of more saving and investment that the economy has slowed down to a crawl because of a lack of saving and investment.
A slow down in economic growth is due to a slow down in saving and investment.
You contribute NOTHING to economic growth by consuming resources for yourself. You only contribute to economic growth by your productivity, and if you’re a wage earner, then your productivity is only possible because you have access to capital goods, which requires saving and investment to produce, and because you are paid a wage, which requires your employer to save and invest to pay.
“I am not claiming any free lunch, you are.”
“–Sigh–”
Yes, I know it hurts to hear and you deal with that hurt by pretending that you’re only being misunderstood.
“You are saying that when there is more consumption, we can have more production. That is free lunch economics.”
“Consumption is consumption and production is production.”
“So what is my function?”–Major_Freedom (1973-2013)”
What is this craziness?
“Your argument of a “supply shortage” is misleading, because shortages only arise with price controls by the state, Shortages tend to be eliminated in a market by virtue of rising prices.”
“Semantics.”
It’s not semantics. Shortages are very different than rising prices on the basis of rising nominal demand.
Capital goods prices that rise is a good thing, a needed thing, if there is a rise in investment and fall in consumption, for rising capital goods prices will increase the PROFITABILITY of producing and selling capital goods. That will attract workers and resources into capital goods production, instead of consumer goods production, and that will have the eventual result of increasing the production of both capital goods and consumer goods!
How is that possible you may ask? How can fewer workers in consumer goods companies, and lower prices of consumer goods, be associated with more consumer goods production? By virtue of more capital.
It’s why we now have only 5% of the workforce in farming, instead of 80%, and yet that 5% of the workforce produce the entire population’s food materials. How is that possible? They have so much more capital than the farmers 200 years ago, that 5 people can now produce more than what required 80 people to produce 200 years ago.
“Yes, rising prices in this case will eventually result in investment becoming unprofitable.”
False. Rising capital goods prices will make the investment, production and selling of those capital goods MORE profitable.
You keep making the mistake of assuming that consumer goods sales are the only sales that generate revenues and profits. That’s false. Capital goods are also sold. They also earn revenues for the sellers of those goods. Their sales also generate profits.
“If capital goods prices rise by bidding in an economy at full capacity, then the MEC will just fall by less than it fell the last time there was that same amount of increased nominal demand for capital.”
“http://en.wikipedia.org/wiki/Zeno‘s_paradoxes#Achilles_and_the_tortoise”
Non-response.
“MF, that link messed up but is this what you’re trying to say?”
I am trying to say what I am in fact saying.
The MEC does not limit profitable investment. Investment can keep increasing from 50% of people’s incomes, to 60%, to 80%, to 99%, to 99.9% of people’s incomes, and the MEC will continue to be positive, because in each of these scenarios, consumption spending remains POSITIVE (and decreasing, but that’s not important here).
Since producers need to live and eat, no matter how much they invest, they can never invest 100% of their incomes. They’ll die. So we don’t have to worry about too much investment. Any quantity will be profitable because there will always be a difference between total spending and costs by virtue of the mere EXISTENCE of consumption. Consumption spending does NOT have to rise every time investment spending rises, even at what you call “full capacity”.
For when there is more investment spending in this situation, there will be a rise in relative nominal profitability of selling capital goods, which will lead to investors redirecting their capitals away from consumption industries, and towards capital goods stages. More capital can be brought into capital goods.
For example, if at full capacity investment rises by 5%, then that can result in transport trucks that were going to be allocated to delivering consumer goods, to delivering capital goods instead. That will raise the production of capital goods to whatever positive degree, and increase the “capacity” of the economy that you only THOUGHT was at full capacity.
This is nominally profitable, since by stipulation you assumed a rise in the prices of capital goods. So capital goods sellers can attract those transport trucks away from consumer goods sellers.
“In a race, the quickest runner can never overtake the slowest, since the pursuer must first reach the point whence the pursued started, so that the slower must always hold a lead. – as recounted by Aristotle,”
Zeno’s paradox does not apply to what I am saying. It LOOKS, at a very, very superficial level, to be similar, but I am not arguing that a faster moving quantity can never catch a slower moving quantity.
I am arguing that one positive number divided by another positive number can never equal zero, nor become negative, no matter how small one number gets and no matter how large the other number gets.
MEC = (Producer consumption spending + Investment spending) divided by (Investment spending).
I challenge you to find a positive number for producer consumption spending, and a positive number for investment spending, that will make MEC equal to zero.
I’ll give you a free copy of Economics In One Lesson if you can do it.
“It doesn’t fall linearly, such that successive equal amounts of additional investment somehow require successive equal amounts of consumption spending.”
“MF, you can’t just take the functions of consumption and investment in an infinite horizon.”
That’s what you are doing when you claimed max capacity, which is at an infinite time horizon.
“Investment is falling at the rate of capital depreciation and prices are rising in response.”
Is this an empirical statement? Nobody is arguing that investment pending CANNOT fall in the empirical sense.
You keep moving back and forth between hypotheticals and deductive scenarios, to empirical scenarios.
Yes, investment spending can potentially fall to zero. But my argument is that there is no limit to investment that is constrained by the MEC.
The MEC is determined by differences in nominal spending. It is not a physical output type quantity.
“Remember earlier when you kept saying the producers consumption must be positive because they have to eat? Well for investment to stay positive people have to stop eating and then GDP will be falling.”
No, GDP will rise because with more investment, there are more capital goods produced, and with more capital goods produced, worker productivity rises, and wit
xgsmmy:
“The MEC will always be falling in two situations: full employment and during a recession (falling GDP). Or the boom and the bust.”
You mean MEC falls when MEC falls? Who knew.
“Major_Friedman claims that Keynes illogically claimed “wage rates and prices” would be falling along with the MEC (and rising costs of capital), but during a recession (falling GDP) wage rates and prices are falling while the cost of capital is rising (and MEC falling).”
False. When wage rates and prices fall, so do capital goods (whose costs consist of wages, among other prices) prices fall.
“But when full employment is achieved, capital costs will rise (and the MEC fall), (full employment will be lost when capital goods wear out) again, leading back to recession and the cycle repeats.”
False. Capital costs can remain the same with the same nominal demand for capital goods, as capital goods prices fall on the basis of growing productivity that is itself based on previous accumulations of capital.
“During full employment capital producers consumption lowers and consumer producers rises while capital goods investment spending falls, while capital goods costs rise.”
False. If capital goods spending falls, then capital goods prices will fall.
“This can continue until depreciation takes hold, at which time you’ll face a hard choice: falling GDP or chasing prices into infinity.”
False dichotomy. Depreciation doesn’t suspend in time after which it suddenly takes place. Depreciation takes place AS capital goods are used to produce capital goods and consumer goods. it is ongoing.
If the nominal demand for capital goods rises, and the nominal demand for consumer goods falls, then the revenues and profits of capital goods sellers rises, and the revenues and profits of consumer goods sellers falls. There is no general downward pressure on MEC.
Furthermore, once the new spending allocations influence a new allocation of real resources that are produced using the existing capital, it will have the eventual effect of increasing overall productivity, increasing the supply of capital goods, which decreases the prices of capital goods, which decreases the nominal costs of capital goods for those who purchase them.
No, we were not at full capacity, because capacity is a function of investment, not vice versa. A rise in investment will expand capacity.
“Keynes described the boom and the bust in a way that is consistent with Major_Freedom’s claim.”
No, he did not. He fallaciously presumed that capital goods prices will rise in a context of falling wage rates and prices, when falling wage rates and prices mean falling capital goods prices
“I’ll need to check back to find the exact quotes.”
You won’t find any, because you are making the mistake of claiming something I said that I didn’t say.
“Major_Freedom also appear to have stopped suggesting that there is a “paradox of consumption” that Keynes ignored, as by his own model, consumption must fall.”
I am not ignoring it. I am responding to your new questions, your new false assertions.
I will mention it again when the situation calls for it. For now, it is not called for. This is not me “ignoring” it, it’s me using it when it is proper to use it.
“(Although he refuses to acknowledge that rising consumption in a depression can induce businesses to invest”
I already responded to this fallacy.
You refuse to acknowledge that rising consumption will only REDIRECT capital away from capital goods production, and towards consumer goods production, which will lower the productivity of labor, and lower people’s standard of living.
“that rising consumption means that your getting wealthier”
I already responded to this fallacy too.
You refuse to acknowledge that more consumption requires saving and investment.
“or that Keynes full employment model, does not imply 100% consumption forever but precisely that full employment will be temporary.)”
I did not claim his model IMPLIED 100% consumption forever, only that IF it occurred, Keynes’ model fallaciously assumes that employment and output can be maintained.
“Major_Freedom does not appear to be willing to admit that these two cases (the boom and the bust) are in fact complements of each other”
I cannot “admit” to utter falsehoods.
“leading into one another”
No, they don’t lead into one another. Boom leads to bust. Bust doesn’t lead to boom.
“and insists of discussion each in its own “context””
That’s the only way to have meaningful and correct discussions of arguments. By not denying the context in which they are made.
“while never admitting to previously denying that it was possible to have falling MEC and rising capital good prices with falling wage rates and prices (because GDP is falling).”
Never admitting to previously denying?
You never asked if I previously denied it.
To address this latest falsehood, no, capital goods prices do not rise in a context of falling wage rates and prices, regardless of what is happening to real GDP.
Real GDP can be going up, down, left or right. If the context is falling wage rates and prices, then capital goods prices fall, they do not rise.
You keep making the mistake of denying the context in which the argument is being made.
“He then switch tactics to avoid this problem by refusing to talk about GDP during recessions”
I am not switching tactics, you are. You keep switching to aggregate GDP, when the context is falling wage rates and prices during unemployment.
“by insisting on only to be talking about “periods of unemployment”, all the while not acknowledging error.”
Except you are making the error, not me. Your claim that capital goods prices rise in a context of falling wage rates and prices during unemployment, is an error. It is not correct. It is wrong.
False. If capital goods spending falls, then capital goods prices will fall.
Sorry, after capital goods depreciate, then capital goods prices will rise forcing GDP to fall.
So, capital goods prices are rising and falling at the same time?
You might want to learn to quote the material that you didn’t say.
Sorry, I (think) that should be: “but during a recession (falling GDP) wage rates and prices are falling while the real interest rate is rising (and MEC falling).”
You might want to learn to quote the material that you didn’t say.
Sorry.
“Sorry, after capital goods depreciate, then capital goods prices will rise forcing GDP to fall.”
You mean MEC falls when MEC falls? Who knew.
The MEC starts falling when capital starts depreciating at full employment. (Causing capital goods spending to fall, and (in order to maintain full employment) consumer goods spending).
And (I think) in a recession when GDP starts falling and real interest rate starts to rise.
Crap.
“The MEC starts falling when capital starts depreciating at full employment. (Causing capital goods spending to fall, and (in order to maintain full employment) consumer goods spending must rise).
And (I think) in a recession when GDP starts falling and real interest rate starts to rise.”
xgsmmy:
“Sorry, after capital goods depreciate, then capital goods prices will rise forcing GDP to fall.”
No, capital goods depreciate BECAUSE they are being used to PRODUCE new capital goods.
Depreciating capital goods means capital goods being used in the production process.
Capital goods prices do not rise when existing capital goods are used to produce new capital goods.
“Sorry, I (think) that should be: “but during a recession (falling GDP) wage rates and prices are falling while the real interest rate is rising (and MEC falling).”
Falling GDP does not mean falling MEC. MEC is a monetary concept, not a real concept.
“The MEC starts falling when capital starts depreciating at full employment.”
Capital goods don’t suddenly start depreciating. They are used in the production of new (capital) goods. That’s what depreciation means.
“(Causing capital goods spending to fall, and (in order to maintain full employment) consumer goods spending).”
False. Capital goods spending does not fall just because capital goods prices change.
“And (I think) in a recession when GDP starts falling and real interest rate starts to rise.”
Irrelevant to MEC.
“The MEC starts falling when capital starts depreciating at full employment. (Causing capital goods spending to fall, and (in order to maintain full employment) consumer goods spending must rise).”
False. Wages are not paid by consumption spending.
They are paid from saving and investment.
“Yes, more absolute proof that you’re the most ignorant of all commentators here.”
Yeah, well your momma is so fat…
MF, in an competitive economy companies aren’t just not going to replaced their capital goods.
You always always harp on this point for some reason, but I can’t see how it would happen exactly. What am I overlooking?
Sorry, that should have been “a” and not “an” and I only meant to include one “always.” Wasn’t trying to express annoyance or anything or emphasize “always.”
MF, in an competitive economy companies aren’t just not going to replaced their capital goods.
Replacing capital goods requires productive expenditure, which requires saving, not consumption, yet saving is destructive according to Keynesianism in a context of continual capital accumulation, since it allegedly results in a continual decline in profits until savings are hoarded.
MF, what about retained earnings? Or what about borrowing from a bank (in a modern monetary system where money is created “out of thin air”)?
Both are only possible out of abstaining from consumption.
If retained earnings are used for investment, they can’t be used for consumption. All spending is financed by money that is “hoarded” for at least some positive period of time.
Borrowing money requires others to save and invest in your ability to pay back interest.
Credit expansion is tricky, because while it can make it appear that savings increase, it is true only in nominal terms. It doesn’t have a corresponding real savings, the way “traditional” lending does, and that is precisely why the circulation credit business cycle arises
MF, the reason I was asking is because you’re saying (or have said in the past) that we can take demand (or consumption) for granted, but in a competitive market why can’t we take supply for granted?
Specifically why would a business ever choose not to replace their capital if there is strong demand for their products?
I get that we might have to worry about resource constraints, but why isn’t “competitive forces” a sufficient assumption to why we shouldn’t see the capital stock disappear?
(However, we might very well be concerned about infrastructure, scientific research and development, and education not being sufficient.)
xgsmmy:
“MF, the reason I was asking is because you’re saying (or have said in the past) that we can take demand (or consumption) for granted, but in a competitive market why can’t we take supply for granted?”
It is because, in the words of Ricardo, the desire to consume “is implanted in every man’s breast; nothing is required but the means, and nothing can afford the means but an increase in production.”
The will to purchase can be taken for granted, because all that is required to increase demand is the power of purchasing, and all that is required to increase the power of purchasing, is an increase in production.
This is not to say that just any old thing can be produced and it will find a buyer, it means that when production trends are carried out in line with people’s preferences, there is no limit to what they are willing to buy. People can become wealthy, and still want more.
You are mindblowingly wealthy as compared the richest Kings and Queens of ancient times, and yet you still want more.
Consumption is not something that has to be designed, or coordinated with others. You just need purchasing power, and purchasing power is based on supply.
“Specifically why would a business ever choose not to replace their capital if there is strong demand for their products?”
In a division of labor, too much consumption will make resources unavailable for the capital goods stages.
The fact that consumer goods companies can earn money AFTER the capital goods stages have already gone through their physical resource transformation and progressed down to the consumer stage in question, it doesn’t mean that those consumer goods companies can instantly replace their capital with the same quantity of new capital, as compared to there being relatively modest levels of consumption, and relatively generous resource allocation to capital goods, which would see relatively less consumer nominal spending and relatively more capital goods nominal spending.
You have to look at the economy not just in nominal terms, but in real terms as well.
Just because consumer goods companies earn lots of money, it doesn’t mean there is instant capital replacement and growth. Capital has to be produced FIRST, BEFORE there can be an increase in consumption. In order to produce capital goods, people CAN’T consume a portion of their gross nominal income.
You can’t just assume that companies that experience an increase in real demand for their products, can replace their capital. That capital has to have already been produced first. You can’t ignore that, because it takes time and money to make that capital available. But devoting time and money to capital means people cannot devote that same time and money to consumption.
Consumption is the reward, not the driver, for saving and expanding capital instead of consumption. This has the long term effect of raising both capital and consumption in real terms.
“I get that we might have to worry about resource constraints, but why isn’t “competitive forces” a sufficient assumption to why we shouldn’t see the capital stock disappear?”
I am focusing on how capital is replaced and comes into existence. I am not trying to make capital disappear. I am trying to figure out what expands it. It isn’t consumption.
“(However, we might very well be concerned about infrastructure, scientific research and development, and education not being sufficient.)”
Ah yes, spending typically associated with governmental activity. THEN we have to be concerned about the lack of a particular non-consumption activity.
Infrastructure, R&D, and education are all dependent on capital accumulation. Without capital, infrastructure will consist of mud roads and outhouses, R&D will consist of flints and wood kindling, and education will consist of scrawling etch marks in stone tablets.
Any government activity that consists of infrastructure, R&D, and education, can only ever TRANSFER existing resources from A to B. Without a capital base, there can be no “free” stuff given to you by mommy and daddy, financed by other mommies and daddies.
MF, you’ve seem to have shifted the goalposts somewhat from production to growth.
But the idea that an industry with strong demand would stand by without replacing their capital seems ludicrous. Even in a monopoly industry it’s difficult to imagine they’d be willing to do this. (I doubt a company with strong sales would not be able to get a loan if they need it.) (And you make it seem like companies don’t plan for capital losses.)
Throw in competition and it seems ludicrous that companies wouldn’t invest in improvements as well.
You’ve also shifted the goalposts to the capital goods industry, but the capital goods industry sells capital goods. Duh. Do you have them shutting down business because lack of incentive to work or something? Especially when they provide goods for an industry with high demand?
It’s ludicrous.
I’m also amazed that you of all people who denies anything can be known about the economy because of human learning, presumes to say something about the nature of “man’s breast”.
it means that when production trends are carried out in line with people’s preferences, there is no limit to what they are willing to buy.
This is a tautology.
You are mindblowingly wealthy as compared the richest Kings and Queens of ancient times, and yet you still want more.
I’d offer the counter-example of the starving artist.
You just need purchasing power, and purchasing power is based on supply.
Ultimately in the long-term it’s based on “supply”. In the short-term it’s based on spending and income, which is based on consumption and investment demand.
You have to look at the economy not just in nominal terms, but in real terms as well.
I’m not looking at it in nominal terms. I mentioned resource constraints in my post.
You ironically seem to agree with Keynes about the MEC, though. That as companies bid up the capital resources the efficiency of capital falls so the interest rate must fall so investment will rise.)
I am trying to figure out what expands it. It isn’t consumption.
So what expands capital goods is expanding capital goods? And consumption doesn’t expand capital goods because consumption is consuming?
Any government activity that consists of infrastructure, R&D, and education, can only ever TRANSFER existing resources from A to B.
MF, all trades transfer resources from “A to B”. But infrastructure doesn’t “only” transfer resources it builds infrastructure.
xgsmmy:
“MF, you’ve seem to have shifted the goalposts somewhat from production to growth.”
I wasn’t aware I was in net, being shot at.
I hold production and growth as two ways of saying the same thing.
If you don’t, please explain how you understand them to be different, and what it has to do with our discussion.
“But the idea that an industry with strong demand would stand by without replacing their capital seems ludicrous.”
I didn’t claim that would happen. I said that they CAN’T replace the capital unless that capital has been produced. And, that this production of capital requires abstentions from consumption through saving.
“(And you make it seem like companies don’t plan for capital losses.)”
I didn’t make it seem that way at all.
“Throw in competition and it seems ludicrous that companies wouldn’t invest in improvements as well.”
I didn’t say companies wouldn’t invest in improvements. I said they CAN’T invest in improvements if the capital needed is unavailable.
“You’ve also shifted the goalposts to the capital goods industry, but the capital goods industry sells capital goods.”
Again, I wasn’t shifting any goal posts. I am not in net. I didn’t “shift” to the capital goods industry. I STAYED in the capital goods industry the whole time, alongside the consumer goods industry. I was holding both in my mind, not just one or the other.
Yes, the capital goods industry sells capital goods. But what you seem to be overlooking is that any “improvements” a consumer goods company makes, on the basis of increased demand, DEPENDS on the capital goods industry having already produced those goods. If the capital goods industry doesn’t produce capital, than the capital improvements cannot be made, even if consumer goods companies WANT them, and desire them.
“Do you have them shutting down business because lack of incentive to work or something?”
No. You are totally misunderstanding my argument.
“Especially when they provide goods for an industry with high demand?”
That cannot occur unless there are people who save and invest in those capital goods. Jeepers, is this really so hard to understand? If you say that consumer goods companies will expand on the basis of more consumption, they can only expand if there are capital goods manufacturers who are producing such capital that makes such expansions possible. My main argument is that THIS capital expansion can only occur if there was saving and investment PRIOR to the acts and spending on the consumption stage.
Or, what’s equivalent, if we want to expand production of consumer goods, then NOW, we have to NOT consume, and devote time and money and resources to capital production, so that there can be an expansion in consumption. If there is ONLY an expansion of consumption, then that CANNOT expand productivity and the economy, because there is no corresponding increase in capital.
You are very sloppily taking expansion of capital as a given, that the only thing required is for consumer goods sellers to replace used up capital with more capital. Yes, that is physically what is happening, but you have to look at things in a temporal sense, of the time and money and resources that are needed to make such capital available in the first place, so that when consumer goods sellers call up their suppliers, the capital is there and available. If it isn’t available, because there were no prior acts of saving and investment in capital, then it doesn’t matter how much money consumer goods sellers are making or how many phone calls they make. They WILL NOT be able to expand their business.
“I’m also amazed that you of all people who denies anything can be known about the economy because of human learning, presumes to say something about the nature of “man’s breast”.”
That isn’t making an empirical prediction in terms of equations or scientific relations between constants. It is an argument based on the presence of our reason. Our reason makes us desire more than what is available. It makes us contemplate everything from the smallest quarks to the largest galaxies. This contemplation always outstrips our physical ability to control that which we contemplate.
I never said nothing can be known about the economy. I never said we can’t know anything about the economy because humans learn.
The connection between human learning and the Austrian critique of mainstream economics is much more specific. It is limited to not being able to scientifically predict exactly what specific consumer goods people will want, based on using constancy assumptions as found in physics and chemistry and other natural sciences.
You’re being antagonistic against me for no reason at all, based on some kind of self-perceived us versus them mentality you seem to have that makes you believe you have to refute me in order to win your battle.
“it means that when production trends are carried out in line with people’s preferences, there is no limit to what they are willing to buy.”
“This is a tautology.”
No it isn’t. The statement “when production trends are carried out in line with people’s preferences” is a relative distribution and allocation concept. The statement “there is no limit” is a concept that relates to the future. As long as producers provide goods and services in the relative distribution that consumers want, (for example, consumers may want a second car + other goods over a second home, if they had to pick one or the other (since resources are scarce), then there is no limit in the overall consumption sense of how much total wealth consumers want to consume).
In other words, if producers in a division of labor coordinate their resource production such that the distributions are in line with the relative preferences of consumers, then as long as they keep doing this, over time, then there is no endpoint such that humans will as a race say “OK, we are satisfied.”
Even if there is just one individual who wants more and more, that is enough to refute the idea that there can be a general overproduction of goods.
“You are mindblowingly wealthy as compared the richest Kings and Queens of ancient times, and yet you still want more.”
“I’d offer the counter-example of the starving artist.”
You can offer any seeming, alleged counter-examples you want. Even the starving artist has a desire for goods that exceeds what he has. A starving artist wants more food than what he has. He wants more art supplies that what he has. Any starving artist who truly stopped desiring and seeking more than what he has, will eventually run out of what he has, and die, and will no longer even be an example of a LIVING person who wants more than what they have!
“You just need purchasing power, and purchasing power is based on supply.”
“Ultimately in the long-term it’s based on “supply”. In the short-term it’s based on spending and income, which is based on consumption and investment demand.”
False. In the short and long run its based on supply.
You cannot buy anything unless you earn money that is a product of you increasing supply. You don’t get paid for the production you provide in the long run only. You get paid for the productivity you provide in the short and long runs.
There is no “demand in the short run / supply in the long run” truth.
“You have to look at the economy not just in nominal terms, but in real terms as well.”
“I’m not looking at it in nominal terms.”
Could have fooled me, Mr. “Ultimately in the long-term it’s based on supply. In the short-term it’s based on spending and income”
“I mentioned resource constraints in my post.”
It was too vague to address.
“You ironically seem to agree with Keynes about the MEC, though. That as companies bid up the capital resources the efficiency of capital falls so the interest rate must fall so investment will rise.)”
That is exactly the opposite of what I actually think. I do not hold that the MEC falls when there is capital accumulation. You are just explaining Keynes’ belief.
My position is that Keynes contradicted the context of that “crude position” of which he tried to “rebut”. The context is whether or not falling wage rates and prices can eliminate unemployment. Yet when he explains the MEC, like you said, he argues that a rise in investment will make capital goods prices rise. Yet the context is falling prices, not rising prices.
If wage rates and prices fall, then the increase in investment is in response to, and depends on, those lower prices.
A rise in investment that is brought about by a fall in wage rates and prices (which of course decreases the prices of capital goods), consists of no increasing capital goods prices, but falling capital goods prices.
Keynes committed the fallacy that even Paul Samuelson warned against: Not to conflate a rise in the quantity demanded in response to lower prices, with a rise in demand which raises prices.
How you could have possibly garnered from what I said that I agree with the MEC, is beyond me.
“I am trying to figure out what expands it. It isn’t consumption.”
“So what expands capital goods is expanding capital goods?”
Yes!
“And consumption doesn’t expand capital goods because consumption is consuming?”
Yes!
If you look at the economy in both nominal and real terms, then you will see that more consumption cannot possibly grow economies, because consumption uses up resources, and growing economies consist of producing resources.
Imagine everyone starting tomorrow began to take 100% of their incomes and consume with it. And I mean everyone. Workers, consumer goods sellers, capital goods sellers, investors, everyone.
What do you think would happen? The consumer goods industries would make trillions of new dollars that they did not make before. Consumer goods sellers would become extremely rich…in dollars.
But what would happen in real terms? Consumer goods sellers would make huge sums of money, but when they try to expand their business, by trying to produce more consumer goods, and increasing the size and number of their stores, guess what? They couldn’t do it, because all that requires capital, and nobody is producing capital.
So consumer goods sellers would then have to drastically cut back on their production. They would have to cut back on all the consumer goods production that depended on capital goods producers making enough capital available prior.
Then, billions of people would die because of the fact that a substantial portion of the population was founded upon the prior capital accumulation that boosted productivity enough to make it affordable to have more children.
Factories would crumble. Mines would shut down. Oil fields would be deserted. Everything and anything that has a price, but is not a consumer good, will dry up and run out, since virtually nobody would produce them without a nominal demand for them.
Modern civilization is built on saving and investment, not consumption. More consumption NEVER grows economies. Any increased incomes and employment that derive from increased consumption, is an illusory version of economic growth. It is not growth. It is at best stagnation.
xgsmmy:
“MF, all trades transfer resources from “A to B”. But infrastructure doesn’t “only” transfer resources it builds infrastructure.”
No, all trades do not consist of mere transfer. In trades there is a mutual gain to both parties, and so while money is transferred from person to person, and there is enough transferring of money for capital goods, then in physical terms abstracted from money, there can be real economic growth.
Current Infrastructure expansion depends on prior production of capital.
MF, I was differentiating an equilibrium replacement-level of production with an increasing level of production. Are you saying a replacement level is impossible?
DEPENDS on the capital goods industry having already produced those goods.
No, you’re ignoring credit again. (And what about the Austrian “time-structure”?) Capital goods can be *ordered*, *on credit*.
In order to produce capital goods, people CAN’T consume a portion of their gross nominal income.
No, you’re ignoring modern reserve banking.
My main argument is that THIS capital expansion can only occur if there was saving and investment PRIOR to the acts and spending on the consumption stage.
This is only true in the limit or “ultimately” in some metaphysical sense.
That isn’t making an empirical prediction in terms of equations or scientific relations between constants.
Yes, I agree, that’s why it’s inconsistent for you to claim to know the content of “man’s breast”.
It is limited to not being able to scientifically predict exactly what specific consumer goods people will want, based on using constancy assumptions as found in physics and chemistry and other natural sciences.
Keynesians don’t try to predict what specific consumer goods people want either. What does IS/LM have to do with specific consumer goods?
You’re being antagonistic against me for no reason at all,
I wasn’t trying to be. (I’d put a emoticon here, but I’d have to figure out how.)
“This is a tautology.”
No it isn’t.
Yes it is. You were just saying “if people want something they will buy it. If they didn’t buy it, they didn’t want it.” or “people will buy whatever they want. What will they buy? What they want. What will they not buy? What they don’t want.”
In other words, if producers in a division of labor coordinate their resource production such that the distributions are in line with the relative preferences of consumers, then as long as they keep doing this, over time, then there is no endpoint such that humans will as a race say “OK, we are satisfied.”
Again, all this says is if people make what people want then people will want what people make.
Even if there is just one individual who wants more and more, that is enough to refute the idea that there can be a general overproduction of goods.
No, this is a non-sequitur.
Any starving artist who truly stopped desiring and seeking more than what he has, will eventually run out of what he has, and die, and will no longer even be an example of a LIVING person who wants more than what they have!
MF, you were pushing the desire to consume to its limit in one direction and now you’re shifting the goalposts (it’s a figure of speech) to the other direction.
Or at least I thought that was what you were doing. (You were using tautologies so it’s hard to tell.)
But fair enough. The point I was trying to make is that people will not just consume everything.
The starving artist presumably could eat *more food*, but instead buys art supplies.(capital) to produce something.
You cannot buy anything unless you earn money that is a product of you increasing supply.
No, this is a morality tale. We can borrow. We have a government who makes transfers. We have reserve banking. You’re just saying Say’s Law.
Yes!
Yes!
MF, I was joking. Those are just tautologies.
No, all trades do not consist of mere transfer.
If you’d read what I wrote, I did not say “mere” transfers. It was you who claimed government can “only” transfer.
Current Infrastructure expansion depends on prior production of capital.
And this is a very different claim from the one you made before.
If wage rates and prices fall, then the increase in investment is in response to, and depends on, those lower prices.
MF, if capital goods prices are rising, then capital goods producers real income is rising and consumer goods producers is falling. If capital goods producers face resource constraints then further investment in capital goods will exacerbate the problem.
If consumer goods producers raise prices in response then you’ll get rising inflation.
That’s probably why “the context is falling prices”.
A rise in investment that is brought about by a fall in wage rates and prices (which of course decreases the prices of capital goods), consists of no increasing capital goods prices, but falling capital goods prices.
How will capital goods prices fall when capital goods producers face resource constraints?
Sorry, messed up the last part.
A rise in investment that is brought about by a fall in wage rates and prices (which of course decreases the prices of capital goods), consists of no increasing capital goods prices, but falling capital goods prices.
How will capital goods prices fall when capital goods producers face resource constraints?
xgsmmy:
“MF, I was differentiating an equilibrium replacement-level of production with an increasing level of production. Are you saying a replacement level is impossible?”
Equilibrium rests on the assumption of adequate saving and capital accumulation to replace worn out and used up capital in the production of consumer goods.
But that is precisely what is being discussed, so taking the context as equilibrium masks the very thing I am trying to explain.
“DEPENDS on the capital goods industry having already produced those goods.”
“No, you’re ignoring credit again.”
You’re unduly focusing on nominals again.
No, I am not ignoring credit. Credit is money. Money can’t buy capital goods unless capital goods are PRODUCED already. And that, as mentioned requires prior acts of saving and investment
“(And what about the Austrian “time-structure”?) Capital goods can be *ordered*, *on credit*.”
From who? Where? They’d have to be produced first before you can take possession of them.
“In order to produce capital goods, people CAN’T consume a portion of their gross nominal income.”
“No, you’re ignoring modern reserve banking.”
No, I’m not ignoring credit expansion. Credit expansion adds a nominal component to existing nominal demand. It doesn’t bring about more capital goods. But even there, if credit expansion comes into existence, that credit cannot be used for consumption if is used for investment.
The very fact that credit expansion can lead to investment without a corresponding act of real saving from already earned money, is the very reason the business cycle takes place, which is proof that the “growth” is not sustainable growth. it is illusory growth.
“My main argument is that THIS capital expansion can only occur if there was saving and investment PRIOR to the acts and spending on the consumption stage.”
“This is only true in the limit or “ultimately” in some metaphysical sense.”
No, it’s true always, everywhere, in the real world sense.
“Yes, I agree, that’s why it’s inconsistent for you to claim to know the content of “man’s breast”.”
That doesn’t follow. The lack of predicting exactly what will be consumed, does not mean that I cannot say that as long as humans exist and act, consumption will be a part of human life.
“Keynesians don’t try to predict what specific consumer goods people want either.”
No, but they still assume constancy in other areas besides specific consumption goods.
“What does IS/LM have to do with specific consumer goods?”
Nothing.
“This is a tautology.”
“No it isn’t.”
“Yes it is.”
No it isn’t. I was not saying “if people want something they will buy it. If they didn’t buy it, they didn’t want it.” Nor am I saying that “people will buy whatever they want.”
I am saying there is no limit in the overall wealth sense of how much people want to consume. That producers can never produce a supply of goods that fully satisfies human desires. That any supply produced, so long as it is in the correct distribution, will only satisfy desires temporarily, after which time people want more.
This is not a tautology because I am comparing distribution of current goods, with the goods that people want but are not available (yet).
“In other words, if producers in a division of labor coordinate their resource production such that the distributions are in line with the relative preferences of consumers, then as long as they keep doing this, over time, then there is no endpoint such that humans will as a race say “OK, we are satisfied.”
“Again, all this says is if people make what people want then people will want what people make.”
No, that is not saying that at all. It is saying if producers make the correct distribution choices as to what distribution choices people want, which is a cross sectional concept, then this is distinct from the SIZE of the total aggregate of goods. The size can keep growing, but within the total, each portion of the total can only grow to a delimited extent relative to all other portions.
Imagine a puzzle of 1000 pieces, each of which changes shape, but cannot be any other shape than what the other shapes are shaped like, where some pieces grow relative to other pieces, where some pieces cannot grow more unless other pieces grow more, all the while the puzzle as a whole is growing in total size.
It is possible for individual pieces to become too large and too small relative to other pieces, but this does not mean that there is a limit to the size of the overall puzzle.
“Even if there is just one individual who wants more and more, that is enough to refute the idea that there can be a general overproduction of goods.”
“No, this is a non-sequitur.”
No, it isn’t. In that scenario, there can only be a relative underproduction of the goods desired by the individual, and a relative overproduction of goods that the rest of the population does not want because we stipulated that they are satiated (and on their way to dying).
“Any starving artist who truly stopped desiring and seeking more than what he has, will eventually run out of what he has, and die, and will no longer even be an example of a LIVING person who wants more than what they have!”
“MF, you were pushing the desire to consume to its limit in one direction and now you’re shifting the goalposts (it’s a figure of speech) to the other direction.”
I am not shifting any goalposts. I am explaining to you the relations between various concepts. If you can’t keep track of them at once, it’s not because I am shifting the goal posts. It’s because you are presuming me to be sticking to a single context of 100% consumption. The fact that I am now talking about capital was in response to your introduction of it when you said that more consumption induces investment.
You can’t accuse me of shifting goalposts in my responses to your statements, on the basis that I am somehow not supposed to talk about anything other than what you can keep track of.
“Or at least I thought that was what you were doing. (You were using tautologies so it’s hard to tell.)”
I was not using any tautologies.
“But fair enough. The point I was trying to make is that people will not just consume everything.”
I wasn’t talking about my personal expectations of what people may or may not do. I was talking specifically about the implications of Keynesian theory. I was not saying Keynesian theory predicts 100% consumption. I was saying what Keynesian theory claims in a context of 100% consumption, and how what actually happens contradicts what Keynesian theory says happens.
“The starving artist presumably could eat *more food*, but instead buys art supplies.(capital) to produce something.”
That capital has to be produced first before the starving artist can buy and take possession of it. That production takes time. It requires prior acts of saving and investment, either by the artist himself, or others who saved and didn’t consume with that money.
“You cannot buy anything unless you earn money that is a product of you increasing supply.”
“No, this is a morality tale.”
What do you mean no, this is a morality tale? Did I say anything such as “This is not a morality tale”?
“We can borrow.”
Borrowing from who? Someone who made money available to be borrowed, instead of consuming with it, and money that is earned.
If it’s credit expansion, that’s not earned money, and because of that, it sends the wrong signals. That isn’t a morality tale, it’s economics.
“We have a government who makes transfers. We have reserve banking. You’re just saying Say’s Law.”
No, I am not just saying Say’s Law. The government can transfer, yes, but they can only transfer what has already been produced. I didn’t say the government can’t make such transfers.
“Yes!”
“Yes!”
“MF, I was joking. Those are just tautologies.”
No, they’re not. The fact that the same word “capital” is being used, it doesn’t mean it is referring to the same exact capital. Capital is heterogeneous.
The statement “Capital goods depends on capital goods” means “The capital good “iron ore excavator” depends on the capital goods “steel, wiring, rubber, etc”, i.e. all the materials, i.e. capital goods, that go into the production of iron ore excavators.
Capital goods set B, in the present, depend on the production of capital goods set A, produced in the past, because without A available, B cannot be produced.
In order to expand consumer goods, there needs to be more materials, i.e. capital goods, that go into the production of consumer goods. And to expand that capital, there has to be an expansion of the prior stage capital goods that go into the production of those capital goods.
And so on, up the chain to where production of consumer goods starts: At the mines and in the fields. If there is no mining, there can be no production of goods that are made by the resources that come out of mines.
But expanding mines requires saving and investment. If too much money is spent on consumption, then too many resources will go to consumption goods, and not enough will go to capital goods.
xgsmmy:
“If you’d read what I wrote, I did not say “mere” transfers. It was you who claimed government can “only” transfer.”
I am saying the government can only transfer wealth.
“Current Infrastructure expansion depends on prior production of capital.”
“And this is a very different claim from the one you made before.”
So what? I am making all sorts of arguments because economics is an integrated science. Concepts depend on other concepts. You can’t just talk about one thing and expect to understand it all.
“MF, if capital goods prices are rising, then capital goods producers real income is rising and consumer goods producers is falling.”
Why would capital goods prices be rising? I am talking about the context of a fall in wage rates and prices, and consequent rise in the quantity demanded in response to the fall in prices.
Why are you introducing a rise in capital goods prices?
“If capital goods producers face resource constraints then further investment in capital goods will exacerbate the problem.”
No, it will ALLEVIATE the problem. If there is a resource constraint, then the solution is to increase the supply of that which is constrained, to alleviate the relative constraint!
“If consumer goods producers raise prices in response then you’ll get rising inflation.”
You’d get rising consumer price inflation, not price inflation per se. Only if capital goods prices rise as well, can you say that there is price inflation per se. But the only way for both consumer prices and capital goods prices to consistently rise, is for either supply to fall or nominal demand to rise. But consistently increasing nominal demand in the aggregate is due to inflation of the money supply.
“That’s probably why “the context is falling prices”.”
Actually, the context of falling prices is related to either increased supply, or decreased money and spending.
“A rise in investment that is brought about by a fall in wage rates and prices (which of course decreases the prices of capital goods), consists of no increasing capital goods prices, but falling capital goods prices.”
“How will capital goods prices fall when capital goods producers face resource constraints?”
Scarcity is always present. Capital goods prices can fall when there is less money spent on them.
Money can’t buy capital goods unless capital goods are PRODUCED already.
MF, maybe if you want to call humans “capital goods” so that humans have to be “produced already,” I suppose that’s true. (I just realized you may be referring to money as capital.)
I was taking humans for granted.
And yes, I’m assuming *some* capital already exists because it already exists in Keynes example.
No, I am not ignoring credit. Credit is money. Money can’t buy capital goods unless capital goods are PRODUCED already.
MF (in case you weren’t thinking of money as capital), if I give you some money and tell you to build me a website and you use the money to buy food, did the website exist before I gave you the money. (Yes, this requires a “prior act of saving” by me.)
But even there, if credit expansion comes into existence, that credit cannot be used for consumption if is used for investment.
I agree. What’s the problem here? No one has said “consumption is investment”. What are you talking about?
The very fact that credit expansion can lead to investment without a corresponding act of real saving from already earned money,
1. You just conceded the argument.
is the very reason the business cycle takes place, which is proof that the “growth” is not sustainable growth. it is illusory growth.
2. And then moved the goalposts.
We already know Keynesians and Austerians disagree about government spending and monetary policy.
That capital has to be produced first before the starving artist can buy and take possession of it.
My god, MF. You were saying Keynesian economics is nonsense because producers may start consuming 100% of their income.
So I give you the example of the starving artist who still invests some his income even though he’s hungry.
Why would capital goods prices be rising?
Because resources are constrained.
No, it will ALLEVIATE the problem. If there is a resource constraint, then the solution is to increase the supply of that which is constrained, to alleviate the relative constraint!
No, MF, no more resources are available. The economy is running at full-capacity.
Actually, the context of falling prices is related to either increased supply, or decreased money and spending.
Exactly, when the MEC falls to zero, consumer-goods producers will eventually be forced to cut spending.
Scarcity is always present. Capital goods prices can fall when there is less money spent on them.
And if less money is spend on capital goods then it’s either spent on consumption or it’s “hoarded”.
xgsmmy:
“MF, maybe if you want to call humans “capital goods” so that humans have to be “produced already,” I suppose that’s true.”
It is true for material goods. All production takes time.
“(I just realized you may be referring to money as capital.)”
I wasn’t.
“I was taking humans for granted.”
So was I.
“And yes, I’m assuming *some* capital already exists because it already exists in Keynes example.”
Existing sums are always definite sums. I don’t know what you mean by “some” capital, as if there can be anything other than less than infinity.
Anyway, now ask what made that existing “some” capital possible. Ask how it came to be, before they were even used in the production of consumer goods, the output of which was sold to consumers.
“No, I am not ignoring credit. Credit is money. Money can’t buy capital goods unless capital goods are PRODUCED already.”
“MF (in case you weren’t thinking of money as capital), if I give you some money and tell you to build me a website and you use the money to buy food, did the website exist before I gave you the money.”
If I acquire food, or if I build a website, both of those require resources that have to have already been produced prior.
For food, all the machines, materials, equipment, warehouses, refrigerators, transportation vehicles, and so on, to make available the food I buy as a consumer.
For the website, the same thing. Computers, routers, ethernet, servers, energy, and all the capital materials that went into the production of those things, have to have already been produced and made available for me to buy them now given that you gave me money now.
“(Yes, this requires a “prior act of saving” by me.)”
it also requires a prior act of saving by all the people who are responsible for the production of the materials and capital that go into food and websites on the internet.
Essentially every consumer good requires capital from virtually all of the major capital goods industries, such as energy, mining, refining, etc. Just consider a pencil, and all the resources that are required to build it, and the resources required to build those resources, and the resources required to build those resources, and so on. Just the tip of the pencil, the little metal tip, requires the metallurgical industry, the mining industry, the transportation industry. All of these are capital goods based and financed 100% by savings. The revenues of the mining industry for example is financed 100% by other people’s savings, because we don’t consume directly out of mines. The money spent on raw materials coming out of mines is fully financed by saving, not consumption. The stage after mining, also is financed 100% by saving. And the stage after that, and after that, and so on, 100% saving all the way through.
The consumption stage is very last, and represents only a small fraction of total spending in the economy.
You may not grasp this yet, because for most Keynesians they think as a worker who spends 100% of their income on consumption, but the truth is that in the economy as a whole, MOST, indeed the overwhelming majority of all “spending” that takes place, is financed by saving.
Saving finances most of what goes on in modern capitalist economies!
Ever heard of the typical saying “Consumption is 70% of the economy”? Yeah, that is a result of ignoring a huge component of the economy. Of COURSE it will look like consumption is the most important spending when you ignore most capital spending!
“I agree. What’s the problem here? No one has said “consumption is investment”. What are you talking about?”
I am talking about the tendency to assume that more consumption means more investment.
“The very fact that credit expansion can lead to investment without a corresponding act of real saving from already earned money,”
“1. You just conceded the argument.”
No, I did not, because there I was talking about nominal terms. Before, I was talking about real terms. You introduced a nominal disturbance, so I addressed it. I wasn’t “conceding” the point you are making. I know that credit expansion can generate investment greater than saving.
“is the very reason the business cycle takes place, which is proof that the “growth” is not sustainable growth. it is illusory growth.”
“2. And then moved the goalposts.”
I didn’t move any goal posts. I am not in net. I am not being shot at. It’s me and you and that’s it. No net. No shooting at any nets. No moving of any goalposts.
“We already know Keynesians and Austerians disagree about government spending and monetary policy.”
Keynesians are austerians…of private sector activity.
xgsmmy:
“My god, MF. You were saying Keynesian economics is nonsense because producers may start consuming 100% of their income.”
No, I didn’t say that. I said that the logical implication of Keynesianism is that IF there is 100% consumption, supposedly no unemployment and full output would be maintained.
“So I give you the example of the starving artist who still invests some his income even though he’s hungry.”
No, you gave me the example of a starving artist to allegedly counter my claim that consumption is within every man’s breast.
And yet that example only reinforced my point, since even the starving artist wants more than what he has.
My God xgsmmy, you can’t even keep track of your own statements.
“Why would capital goods prices be rising?”
“Because resources are constrained.”
This is wrong. Resources are always constrained. It cannot be an explanation for why capital goods as such rise in prices.
Only if there is a reduction in supply, or increase in nominal demand, or both, can capital goods prices rise.
But if there is no decrease in supply, and no increase in nominal demand, but a fall in prices and increase in quantity demanded, then investment can increase.
“No, it will ALLEVIATE the problem. If there is a resource constraint, then the solution is to increase the supply of that which is constrained, to alleviate the relative constraint!”
“No, MF, no more resources are available. The economy is running at full-capacity.”
Then there are no resource constraints in the way you originally interpreted it.
If there is now full capacity, then resource constraints cannot make prices rise further, unless there is a rise in nominal demand for them.
“Actually, the context of falling prices is related to either increased supply, or decreased money and spending.”
“Exactly, when the MEC falls to zero, consumer-goods producers will eventually be forced to cut spending.”
MEC does not fall to zero with capital accumulation. That’s my point. Capital can accumulate on the basis of FALLING capital goods prices, as more are produced in the same nominal demand.
“Scarcity is always present. Capital goods prices can fall when there is less money spent on them.”
“And if less money is spend on capital goods then it’s either spent on consumption or it’s “hoarded”.”
False. The money supply can fall on the basis of credit default. Now who’s ignoring credit?
This is wrong. Resources are always constrained. It cannot be an explanation for why capital goods as such rise in prices.
Only if there is a reduction in supply, or increase in nominal demand, or both, can capital goods prices rise.
No, MF. Keynes is saying increasing investment will grow the economy until the MEC hits a lower bound. At that point is when further increases in investment *demand* will compete over a limited *supply* of resources. (Because productivity has stalled (for whatever reason) and they’re at full-employment so there are no additional workers to make capital goods.)
So in order to maintain the current GDP at a constant level (as opposed to falling) consumer goods makers have to consume more.
Eventually though (if the situation continues)they will be forced to “hoard”.
If they continued to invest at the same rate they will be bidding against each other for the same supply, but this would push up the price and make the MEC negative and there would be bankruptcies or whatever.
Anyway, now ask what made that existing “some” capital possible. Ask how it came to be, before they were even used in the production of consumer goods, the output of which was sold to consumers.
I mentioned the whole humans thing. I thought we could maybe jump past all that to modern economies with credit expansion.
Ultimately you’re right. Supply comes from time and energy or whatever, but we don’t live in a cash up front or barter exchange economy.
If I acquire food, or if I build a website, both of those require resources that have to have already been produced prior.
You’re missing the point. I still paid for a capital good that didn’t already exist. Imagine I borrowed the money from a modern bank if it helps.
I’ve already said many times that “ultimately” you’re right. That supply must come first. Even if it’s just humans. But we’re talking market failures here. (I know you disagree with the diagnosis, but that is the topic.)
MOST, indeed the overwhelming majority of all “spending” that takes place, is financed by saving.
How much is financed by credit expansion?
Do you have a link for your claim that the 70% number is wrong?
I am talking about the tendency to assume that more consumption means more investment.
And increased consumption can induce more investment in a depression.
I see that MF found himself a playmate. Holy crap you guys write a lot.
xgsmmy
For what its worth: A lot of capital spending is not considered because they leave it away as double counting.
For certain applications that is no problem yet the only problem with that is that you it obfuscates how much in the economy actually is spend on consumption and on capital.
See this link:
http://mises.org/rothbard/mes/chap6bb.asp
Search for ” In analyzing the income-expenditure balance sheets of the production structure,”
There it starts. I’d recommend though to just read the whole book of Rothbard. You will spare yourself a lot of arguing even if you do not agree with it.
xgsmmy:
“No, MF. Keynes is saying increasing investment will grow the economy until the MEC hits a lower bound.”
I know what Keynes is claiming. I was the one who said that Keynes claimed that profits will continually decline in a capital accumulating economy. Why in the world are you prefacing your post with “No, MF…” when I was the one who said what you followed that opening with?
My argument is that Keynes claim is WRONG. Profits do not continually decline in a capital accumulating economy. His error was assuming a rise in the prices of capital goods as capital accumulates, when in reality as more capital is produced on the physical basis of there being more capital available, and if there is a fall in wage rates, then the prices of capital goods will fall, not rise.
Now I know that because I am claiming Keynes is wrong, you’re going to have a compulsion to knee jerk against this and try to find out what I am saying wrong, but I am not wrong about this. I am right. When wage rates fall, and as more capital goods are produced due to physical increases in productivity, then capital goods prices fall, not rise.
So the MEC does not keep falling towards zero as capital accumulates. Capital can accumulate in the physical sense ad infinitum, and profits will remain at a positive lower bound on the basis of there being a difference between aggregate nominal spending and aggregate nominal costs.
“At that point is when further increases in investment *demand* will compete over a limited *supply* of resources.”
False. There is ALWAYS, got that? ALWAYS a “limited” supply of capital available for sale and use. That’s the very reason why capital has PRICES. Prices are paid for SCARCE goods, not unlimited supply “goods.”
“(Because productivity has stalled (for whatever reason) and they’re at full-employment so there are no additional workers to make capital goods.)”
There is no reason for productivity to “stall” in a free market. if it does stall, then the profit motive will tend to put capital back into use, because you can’t make money just sitting on a capital good.
“So in order to maintain the current GDP at a constant level (as opposed to falling) consumer goods makers have to consume more.”
False. Consumer spending does not have to rise, especially in an environment where the value of accumulated savings and capital falls. What improves the economy once again is more savings and investment. This savings and investment generate revenues and profits for capital goods companies and make it profitable to hire workers.
“Eventually though (if the situation continues)they will be forced to “hoard”.”
False. Hoarding will only increase profits in the long run, because the significant source of hoarding is at the business level, not the consumer level. When businesses hoard, they are making fewer productive expenditures. This makes costs fall, and when costs fall, and given the spending of businessmen and investors on their own consumption, this will increase profits, not decrease them.
More consumption is not what is needed when an economy has problems in capital.
“If they continued to invest at the same rate they will be bidding against each other for the same supply, but this would push up the price and make the MEC negative and there would be bankruptcies or whatever.”
False. The increase in investment is predicated on a fall in capital goods prices. You are making the exact same error as Keynes. You are assuming a rise in the prices of capital goods when during a scenario of falling wage rates and prices, capital goods prices fall, not rise.
Just because businesses are competing for the same capital, that alone doesn’t mean prices rise. The very fact that there are prices is due to competition for those goods. The competitive factor is already contained in the prices, AS THEY FALL.
“Anyway, now ask what made that existing “some” capital possible. Ask how it came to be, before they were even used in the production of consumer goods, the output of which was sold to consumers.”
“I mentioned the whole humans thing.”
Yes, but that wasn’t correct. Asking you how capital came to be, such that it is available today, isn’t answered with churlish comments about humans being alive or dead in the past or future.
The answer is prior saving and investment in capital. That is what made the capital available today possible. So any consumer goods company that wants to improve their business, they need capital, but that means capital has to be available, and capital can only be produced through saving and investment, NOT consumption
“I thought we could maybe jump past all that to modern economies with credit expansion.”
You are not ready to jump steps like this. You still don’t understand the basics of capital.
“Ultimately you’re right. Supply comes from time and energy or whatever, but we don’t live in a cash up front or barter exchange economy.”
That “but” is irrelevant and not useful.
“If I acquire food, or if I build a website, both of those require resources that have to have already been produced prior.”
“You’re missing the point.”
I am not missing any point. I am making my own points that seem to be going over your head.
“I still paid for a capital good that didn’t already exist.”
You can’t buy a capital good that doesn’t exist.
“Imagine I borrowed the money from a modern bank if it helps.”
Borrowing money doesn’t conjure capital goods out of thin air.
“I’ve already said many times that “ultimately” you’re right. That supply must come first. Even if it’s just humans. But we’re talking market failures here. (I know you disagree with the diagnosis, but that is the topic.)”
No, that is not the topic at all. The topic is how economies grow.
You are only talking about market failures because you don’t understand how markets work. Those who don’t understand how markets work see market failure all around them, because they can’t distinguish between free markets and the absolutely absent free market society that we actually live in.
The market failure you’re talking about is not a market failure at all. It is a hypothetical, contingent upon poor and contradictory assumptions, such as assuming capital prices rise despite the fact that they fall when wage rates fall.
“MOST, indeed the overwhelming majority of all “spending” that takes place, is financed by saving.”
“How much is financed by credit expansion?”
Credit expansion finances both consumer goods and capital goods. In an economy with zero credit expansion, most spending is financed by savings.
If you add credit expansion to things, then it is still the case that most spending is financed by non-consumption.
“Do you have a link for your claim that the 70% number is wrong?”
The link is me. This post.
It can easily be deduced. It follows from the fact that profits are less than 50%.
If we assume an average of 25% profits on capital invested, then for every dollar spent on consumption, around $0.80 is costs, and around $0.20 is profit (25%).
That $0.80 costs of consumer goods companies is due to consumer goods companies spending $0.80 productively.
That $0.80 spending is revenues for capital goods companies one step removed from consumption. They earn 25% profit, which means on $0.80 sales, they incur costs of $0.80(1-0.25) = $0.60.
That $0.60 is revenues for capital goods companies another step removed. These companies incur costs of $0.60(1-0.25) = $0.45. That $0.45 are revenues for capital goods companies another step removed.
And then $0.34. And then $0.25, $0.19, $0.14, $0.11, $0.08, etc, etc, etc.
Now, since all these stages are CONCURRENT in terms of operating activity, since they are all operating simultaneously, we can find out how much spending there is, and its break down, by adding up the individual components.
Total revenues are $1.00 + $0.80 + $0.60 + $0.45 + $0.34 + $0.25 + $0.19 + $0.14 + $0.11 + $0.08 + … = $5.00.
Total consumer spending = $1.00
This means that out of $5.00 total spending, there is $4.00 of spending that is not consumption, i.e. saving and investment.
$4.00 of saving and investment spending out of $5.00 total spending is 80% spending financed by saving, and 20% financed by consumption.
In other words, the “70% consumption” is not only wrong, but reality is pretty much the exact opposite.
My result followed from a very generous 20% profit. Imagine profits being around 10%, and the amount of total spending financed by saving is even greater.
“I am talking about the tendency to assume that more consumption means more investment.”
“And increased consumption can induce more investment in a depression.”
There you go again, assuming investment arises out of thin air on the basis of more consumption, despite the fact that the problem during depressions is collapsed saving and investment. To heal such an economy, more saving and investment is needed, which will replenish profitability in the sectors that are most harmed. It will finance revenues for capital goods companies. It will finance wage payments.
Consumption is not the answer to economies that suffer problems in capital.
His error was assuming a rise in the prices of capital goods as capital accumulates, when in reality as more capital is produced on the physical basis of there being more capital available
There is no more capital available. All capital resources are being employed at their highest productivity.
but I am not wrong about this. I am right.
(…)
There is no reason for productivity to “stall” in a free market. if it does stall, then the profit motive will tend to put capital back into use, because you can’t make money just sitting on a capital good.
Ah, so producers won’t consume all of their capital after all.
Hoarding will only increase profits in the long run, because the significant source of hoarding is at the business level, not the consumer level.
??? I’m not sure if I’ve gone mad or you have. How will hoarding only increase profits in the “long run”?
The long run is just the new equilibrium, right?
capital can only be produced through saving and investment, NOT consumption
Again, in a depression increased consumption can induce businesses to increase investment.
You can’t buy a capital good that doesn’t exist.
??? Where did the website come from. I gave you money to build it. Are you saying I’m buying you and you are the capital good? I’m having a hard time seeing how that is different to what I said about humans.
The link is me. This post.
While your explaination makes sense to me, and I appreciate it, and while I still need to read skylien’s link, which I appreciate, I still would like some source claiming that it is accurate.
There you go again, assuming investment arises out of thin air on the basis of more consumption,
No, if investment spending falls, consumption spending can rise (in theory) to offset it to maintain full-employment.
But I don’t assume it arises out of thin air (except maybe the money borrowed from a bank). I assume that a business with strong demand will increase their investments. They will probably be forced to. Only if you assume they consume their capital and are unable to secure a loan despite strong sales does this not make sense.
despite the fact that the problem during depressions is collapsed saving and investment. To heal such an economy, more saving and investment is needed
1. Savings and investment fell and caused a depression.
2. To fix this you need to raise savings and investment.
3. ????
4. Profit.
If you didn’t constantly use savings and investment interchangeably it would help. But I assume stage 3 is the “money hoarding stage”. I am genuinely curious about why the rate of profit is higher in the long run (or short run if you meant short run) because of it.
Do you mean catch up growth? That’s my best guess as I’m no economist, obviously.
xgsmmy:
“There is no more capital available. All capital resources are being employed at their highest productivity.”
False. The context is falling wage rates during a depression. During a depression, there are copious amounts of idle resources not being used.
At any rate, the statement “there are no more capital goods available” is just another way of saying capital goods are scarce. The fact that capital goods are scarce is not by itself sufficient to prove that they will keep increasing in price. Price is a function of supply and demand, and if the context is FALLING wage rates and FALLING prices, then the increase in investment that results IS IN RESPONSE TO, and DEPENDS ON, falling prices.
So the increase in investment in this context does not operate to raise capital goods prices. Capital goods prices are falling in this context, which is accompanied by an increase in investment due to the fall in prices.
The MEC does not fall when costs fall. The MEC rises when costs fall.
“”but I am not wrong about this. I am right.”
“(…)”
I am just making explicit for myself what you are only implicitly and sheepishly keeping to yourself for yourself.
“There is no reason for productivity to “stall” in a free market. if it does stall, then the profit motive will tend to put capital back into use, because you can’t make money just sitting on a capital good.”
“Ah, so producers won’t consume all of their capital after all.”
I wasn’t arguing that investors WILL consume their capitals. The consumption of capital is, again, a hypothetical example posed to “test” the rigorousness of Keynesian theory, and Keynesian theory holds that consumption of capital will not reduce output, because “incomes” aren’t falling. Jeez are you ever confused.
“Hoarding will only increase profits in the long run, because the significant source of hoarding is at the business level, not the consumer level.”
“??? I’m not sure if I’ve gone mad or you have.”
Nobody has gone mad.
You are just confused, that’s all. You are viewing the economy from a laborer’s perspective, whereas I am looking at the economy from an individual’s perspective, which includes both laborers and employers.
Wage earners tend not to capriciously and suddenly hoard money. They seek more money when their incomes are at more risk, and their incomes are a function of saving, not consumption. Wages are paid out of saving and capital. In order to pay wages, there has to be people who don’t consume with that money, but buy wages with that money.
” How will hoarding only increase profits in the “long run”?”
I already mentioned this. It is due to the fact that cash hoarding at the balance sheet level will reduce productive expenditures. A reduction in productive expenditures will reduce costs. A reduction in costs will increase profits, ceteris paribus.
“The long run is just the new equilibrium, right?”
Depends on what you mean by “equilibrium.” If you mean the level of cash hoarding will cease rising at the same previously high rates, and will come to taper off, such that there is no more reason to say there is increasing cash hoarding taking place anymore, then yes. If you mean a permanent new state of affairs, then no.
“capital can only be produced through saving and investment, NOT consumption.”
“Again, in a depression increased consumption can induce businesses to increase investment.”
Again, you are again taking investment for granted and assuming it arises out of thin air as long as consumption increases, when in fact consumption spending and capital goods spending are in competition with each other. A rise in consumption spending makes fewer dollars available for investment and wages, because when you spend money on consumption, you are NOT spending money on investment or wages. You are spending money on yourself, on consumer goods.
You are also failing to understand the point I made at the very start: You can’t consume anything unless what you consume has already been produced prior, and that production requires saving and investment.
Any “inducement to invest” that arises on the basis of additional consumption spending will be LESS investment that otherwise would have been had if that money was instead spent on investment and wages, not consumption.
And no, before you again confuse yourself, capital goods prices will not rise in this situation, because the rise in investment here is in response to LOWER capital goods prices that arise because of lower costs of production, due to lower wage rates and prices (which is the context all along).
When capital goods prices fall, there can be an overall increase in investment, as investments that were previously postponed due to too high of prices, are eventually made. The fall in prices attracts previously unused savings (the way you define it), which has the net effect of raising total investment, in the context of falling capital goods prices.
“You can’t buy a capital good that doesn’t exist.”
“??? Where did the website come from. ”
Where you said “More consumption can induce more investment.”
“I gave you money to build it.”
That money you gave me is SAVED money, not consumed money. You giving that money to be to build something, is money you did not spend on your own consumption.
If you instead paid me money to buy a finished consumer good, then that would have required myself, or someone else not you, to have saved and invested money in the production of that good, to make it available for your final purchase. So you are still taking saving and investment for granted.
Consumption does not drive the economy. Saving and investment drives the economy. Most consumer spending that ultimately covers the costs of consumer goods companies, is financed out of saving and investment. Every nickel of wage payments at companies is financed by savings. Every dividend and interest payment is financed by prior saving.
Saving is what originates most of the spending that takes place in modern capitalist economies. It’s not consumer spending. The money that wage earners receive does not come from consumers. It comes from capitalists who pay workers who then buy consumer products.
The direction goes saving consumption, not consumption, saving. You can’t spend money on goods that haven’t been produced yet. Goods that are produced MUST entail saving and investment.
If consumption spending kept rising, and kept rising, and kept rising, then eventually there would be no more spending on capital or wages, since these require abstentions from consuming.
This is why I am bringing this up. You and the rest of the Keynesian theory presumes that as long as “incomes” rise, then investment somehow arises out of thin air, when in reality too much consumption can result in capital consumption. This is not a prediction, this is not a statement of what will take place. It is an “If that is true, then…” statement.
“Are you saying I’m buying you and you are the capital good?”
No.
“I’m having a hard time seeing how that is different to what I said about humans.”
That’s because you are establishing that theory of humans in your mind, and THEN you are trying to understand what I am saying by using that theory. That’s why what I am saying LOOKS like your theory! You have rose colored spectacles on, and you are claiming you can’t see how my arguments are anything other than rose-colored.
My arguments are about prior saving and investment in real things. Yes, humans are responsible for this, but you’re missing the bigger picture.
“While your explaination makes sense to me, and I appreciate it, and while I still need to read skylien’s link, which I appreciate, I still would like some source claiming that it is accurate.”
The source is me. You can link to me.
I don’t understand why you need a link, when any link will direct you to something that was written by another human like me.
“There you go again, assuming investment arises out of thin air on the basis of more consumption,”
“No, if investment spending falls, consumption spending can rise (in theory) to offset it to maintain full-employment.”
Wages are financed out of saving and investment. If investment falls, then more consumption spending will only increase the profitability of consumer goods companies. It won’t help any of the workers or employers in the myriad of capital goods stages, whose incomes are financed 100% by SAVING, rather than consumption.
More consumption spending will just redirect resources to the consumption stage, which will leave fewer resources to the capital stages, and overall productivity and standard of living will fall.
Consumption does not stop unemployment. Unemployment is stopped by MAXIMUM saving and investment.
“But I don’t assume it arises out of thin air (except maybe the money borrowed from a bank).”
Then where is the money coming from that pays the wages and capital goods, if there is more consumption spending?
“I assume that a business with strong demand will increase their investments.”
You are again committing the fallacy of composition. You are assuming that what is true for the individual company, is true for the economy as a whole. Yes, at the individual company level, investment is stimulated by demand. But in the aggregate, it’s the reverse. In the aggregate, more consumption makes more investment impossible, since spending money on consumption means you aren’t spending money on investment. The more consumption there is, the less money is available for investment.
“They will probably be forced to. Only if you assume they consume their capital and are unable to secure a loan despite strong sales does this not make sense.”
No, those are certainly not the only caveats that would refute what you are saying.
“despite the fact that the problem during depressions is collapsed saving and investment. To heal such an economy, more saving and investment is needed”
“1. Savings and investment fell and caused a depression.”
“2. To fix this you need to raise savings and investment.”
“3. ????”
“4. Profit.”
Am I talking to a 10 year old? Seriously, how old are you? You sound like you’re not out of high school.
“If you didn’t constantly use savings and investment interchangeably it would help.”
Huh? If you didn’t constantly divorce them it would help. Saving in terms of more cash cannot occur unless there is an increase in the quantity of money. If there is no inflation, then if everyone tried to hold more cash, then prices of assets would fall, and eventually the desire to hold more cash would be eliminated, because again the whole reason why people are wanting more cash is not to eat it, not to sit on it, not to burn it, but to have higher purchasing power.
They can accomplish this if there is no inflation that constantly frustrates their plans.
The conflation of saving with cash hoarding is PRECISELY why you are going astray.
“But I assume stage 3 is the “money hoarding stage”. I am genuinely curious about why the rate of profit is higher in the long run (or short run if you meant short run) because of it.”
Already explained.
“Do you mean catch up growth?”
No.
“That’s my best guess as I’m no economist, obviously.”
Yet you are making claims with certainty as if you are one.
False. The context is falling wage rates during a depression. During a depression, there are copious amounts of idle resources not being used.
No, MF, the “context” is the falling MEC.
That the falling MEC must inevitably lead to a decrease in spending when at full-employment capacity, i.e. not a “depression”.
That capital is already being deployed at its maximum capacity, so that attempts to go beyond full will only lead to falling profits as producers attempt to bid already fully employed capital away from one another.
And when the falling and not rising MEC fall below the lower bound at which it is no longer profitable to continue to invest, the only way the maintain full-employment at current production is for producers to increase their consumption.
But, alas, such a happy, steady, state cannot continue as produces must someday replace their capi<tal.
And when they try to do this the rate of profit will fall below the MEC and so spending must fall and unemployment or underemployment must rise.
If not you’d see inflation spiraling higher and higher.
So the increase in investment in this context does not operate to raise capital goods prices. Capital goods prices are falling in this context
No, the context is John Maynard Keynes and rising capital goods prices. You’re thinking of John Boehner Keynes.
“His “context”” was falling capital goods prices.
I wasn’t arguing that investors WILL consume their capitals. The consumption of capital is, again, a hypothetical example posed to “test” the rigorousness of Keynesian theory, and Keynesian theory holds that consumption of capital will not reduce output, because “incomes” aren’t falling. Jeez are you ever confused.
No, it is precisely for the reason that they must inevitably replace their capital that Keynes showed that eventually spending MUST FALL and underemployment MUST RISE in the context of a falling MEC.
xgsmmy:
“False. The context is falling wage rates during a depression. During a depression, there are copious amounts of idle resources not being used.”
“No, MF, the “context” is the falling MEC.”
No xgsmmy, the context is rising MEC, since the context is falling wage rates and prices.
When capital goods prices fall, MEC rises, not falls.
“That the falling MEC must inevitably lead to a decrease in spending when at full-employment capacity, i.e. not a “depression”.”
Wrong. MEC does not continually fall with capital accumulation. That is where Keynes is wrong.
“That capital is already being deployed at its maximum capacity, so that attempts to go beyond full will only lead to falling profits as producers attempt to bid already fully employed capital away from one another.”
During a depression, capital goods are not at full capacity.
During “normal” times, when there is full capacity, more investment and less consumption will decrease MEC, yes, but it will never reach zero as long as consumption remains greater than zero, which is guaranteed no matter what, and does not need any governmental “stimulus”, and would only shrink the economy more than what would otherwise be the case due to existing consumption in the market.
Note that this is NOT an argument saying that more consumption will benefit the economy due to a rise in MEC. The MEC doesn’t need to rise if people have time preferences and investment desires such that it would be at that level. A low MARKET driven MEC would stimulate investment in line with actual time preferences, because with a low MEC, future cash flows are discounted less, and become more valuable.
Yet the capital accumulation I was referring to above occurs on the basis not of continual increases in investment spending, but on a sufficiently high amount of investment spending relative to consumption spending. When investment spending is sufficiently high relative to consumption spending, then capital accumulation can take place on the basis of physical increases in output and given relative money spending amounts.
A net increase in capital one period can physically produce more capital the next period without any additional spending on capital as such. Then, with a greater amount of capital available next period, an even greater amount of capital can be produced the next period, and so on. It would be exponential, not linear.
“And when the falling and not rising MEC fall below the lower bound at which it is no longer profitable to continue to invest, the only way the maintain full-employment at current production is for producers to increase their consumption.”
The MEC does not hit the lower bound as long as consumption of producers is above zero. The rate of profit can do negative because of the negative net investment component. But that does not require more consumption to alleviate. Indeed it CANNOT be alleviated through more consumption. This is because as more net investment is made, profitability, i.e. the MEC, RISES. It does NOT fall.
More net investment will make the MEC rise because when companies make investments in capital, it generates revenues equal to the capital expenditures, but the costs are much less, due to depreciation.
For example, suppose the MEC falls. Suppose there is more net investment of $1 billion on machines that will last 10 years. This will not make the MEC fall further. In fact, it will make it RISE. For the $1 billion generates revenues to capital goods companies of $1 billion. But there would only be costs that year of $100 million, because the costs are deferred into the future.
Thus, in this example, there will be a rise of $900 million in net investment AND a $900 million increase in profitability in the economy! The MEC would RISE, not fall, with more investment.
You are ignoring the fact that capital goods investment generates revenues to producers no less than consumer goods spending. It is not true that more investment only increases costs in the economy. That is the false assumption you are making that is leading you to conclude that the MEC falls.
“But, alas, such a happy, steady, state cannot continue as produces must someday replace their capi<tal."
Again, that requires saving and investment, not consumption.
"And when they try to do this the rate of profit will fall below the MEC and so spending must fall and unemployment or underemployment must rise."
False. The MEC would rise, not fall.
"If not you’d see inflation spiraling higher and higher."
Not if there is no inflation of the money supply. If capital goods prices rise, it must be because of a higher nominal demand (or lower supply). But if there is a higher nominal demand for capital, than there will be lower spending on consumption, ceteris paribus.
"So the increase in investment in this context does not operate to raise capital goods prices.”
“Capital goods prices are falling in this context”
“No, the context is John Maynard Keynes and rising capital goods prices.”
No, the context is falling wage rates and prices, and me pointing out the error of Keynes when he assumed a rise in capital goods prices in that context.
Yet when wage rates and prices fall, capital goods prices fall, not rise.
Also, as shown, when there is more net investment, profitability (MEC) rises. It does not fall.
You, like Keynes, fallaciously held costs constant, when costs are falling in the context of falling wage rates and prices.
“You’re thinking of John Boehner Keynes.”
You’re not thinking of what Keynes actually wrote. You have said before that you are going by what you think he might be saying when you hear various quotes I cite to you. That shows you haven’t closely read his works.
“His “context”” was falling capital goods prices.”
Whose context was that? Keynes assumed that capital goods prices would rise in a context of falling wage rates and prices, when in reality they would fall.
Wages are paid out of saving and capital. In order to pay wages, there has to be people who don’t consume with that money, but buy wages with that money.
So this is the Say’s Law of higher profits (did productivity rise?), but with a higher natural rate of unemployment? Where does the “hoarding” come in? It seems you have spending rising.
It is due to the fact that cash hoarding at the balance sheet level will reduce productive expenditures. A reduction in productive expenditures will reduce costs. A reduction in costs will increase profits, ceteris paribus.
I think this is the fallacy of composition that so bothered you before. Economy-wide “hoarding” is falling total spending (unless I’ve gone mad).
So are you saying when the hoarding ends the rate of profit will be higher or total profits will be higher?
Again, you are again taking investment for granted and assuming it arises out of thin air as long as consumption increases, when in fact consumption spending and capital goods spending are in competition with each other.
No, not outside full-employment, not when you have credit expansion, not when you don’t assume producers will consume their capital or not raise production to meet demand.
xgsmmy:
“So this is the Say’s Law of higher profits (did productivity rise?), but with a higher natural rate of unemployment?”
No, it is not Say’s Law.
“Where does the “hoarding” come in?”
I don’t know, you brought it up. I said it was impossible at the aggregate level, since anyone who tried to acquire money, requires someone else to spend money.
“It seems you have spending rising.”
Not unless there is inflation of the money supply (in the long run).
“It is due to the fact that cash hoarding at the balance sheet level will reduce productive expenditures. A reduction in productive expenditures will reduce costs. A reduction in costs will increase profits, ceteris paribus.”
“Economy-wide “hoarding” is falling total spending (unless I’ve gone mad).”
Yes, that’s correct. But I am talking about the economy once the negative net investment comes to an end due to falling asset prices. If the new spending stabilizes, then profits would be greater than before, for the reasons mentioned.
“So are you saying when the hoarding ends the rate of profit will be higher or total profits will be higher?”
Yes.
“Again, you are again taking investment for granted and assuming it arises out of thin air as long as consumption increases, when in fact consumption spending and capital goods spending are in competition with each other.”
“No, not outside full-employment, not when you have credit expansion”
Even with credit expansion, you can’t invest and consume with the same credit money.
“not when you don’t assume producers will consume their capital or not raise production to meet demand.”
Fallacy of composition. That’s only true for individual producers who compete. In the aggregate, competition offsets, and capital spending is in competition with consumer spending.
xgsmmy:
“No, it is precisely for the reason that they must inevitably replace their capital that Keynes showed that eventually spending MUST FALL and underemployment MUST RISE in the context of a falling MEC.”
No, Keynes concluded that the MEC will fall, in a context of falling wage rates and prices. He didn’t set a falling MEC as a context. He concluded the MEC will fall by a series of explanations that presumes a rise in wage rates and prices.
That is the error I brought up, which continues to go over your head, and my guess is because you think that because I am criticizing Keynes, I must be one of “them” that you feel compelled to argue against, even if it means making copious amounts of errors yourself. You just “feel” I am wrong and you’ll say anything to satisfy that prejudice.
When capital goods prices fall, MEC rises, not falls.
You keep saying this but no one is disputing your overall story, the problem is it’s the wrong story. Our story, Keynes’ story, is one of falling MEC,
Wrong. MEC does not continually fall with capital accumulation. That is where Keynes is wrong.
It does when you’re already at MAXIMUM productivity.
No one is saying MEC must fall if productivity is still rising or there is more idle resources, but in Keynes’ story there are no more idle resources. Capital is already being employed at maximum productive capacity.
During a depression, capital goods are not at full capacity.
Yes, of course, for me and Keynes. But at least for recessions aren’t Austrians committed to the view that they are supply-side “structural” problems.
(I know Bob claims that there can be an increased demand for money in Austrian economics, but I’m confused about how that is incompatible with Keynesianism, if it is.)
During “normal” times, when there is full capacity, more investment and less consumption will decrease MEC, yes, but it will never reach zero as long as consumption remains greater than zero, which is guaranteed no matter what
Didn’t Keynes say it would be 2 percent? Are you now conceding something? Remember I’m not economist, so if you’ve now changed the argument to some technical matter regarding Keynes argument away from your previous view I’d very much appreciate some help here.
Isn’t that the rate of interest must fall as the MEC falls so that eventually further investments are unprofitable.
I admit to not understanding right now what the lower bound of the MEC really is.
and does not need any governmental “stimulus”, and would only shrink the economy more than what would otherwise be the case due to existing consumption in the market.
This is called “moving the goal posts”. Look it up, dude.
Note that this is NOT an argument saying that more consumption will benefit the economy due to a rise in MEC.
Keynes is not saying that that a rise in consumption will “help” the economy (with falling MEC) either.
He’s saying when you reach the lower bound of profitability it’s the only way to maintain profitability.
The MEC doesn’t need to rise if people have time preferences and investment desires such that it would be at that level.
So this a convoluted economic rationalization for market outcomes to justify libertarian anarchists conceptions of individual liberty?
Oops, I meant to say increasing consumption with MEC at the lower bound is the only way to maintain full-employment production.
capital accumulation can take place on the basis of physical increases in output
Yet no one is disputing this and never has been. The problem is you want the to be the story Keynes is telling when he’s telling a different story.
Keynes is first telling a story of how a full-employment economy might fall into a depression in order to then tell how it might climb back out, but you want to have him in the depression already.
The MEC does not hit the lower bound as long as consumption of producers is above zero.
Yes, this is why I started saying “lower bound” and not “zero lower bound” because as a non-smart person lacking in the required skills, I was unsure what the lower bound was.
The rate of profit can do negative because of the negative net investment component. But that does not require more consumption to alleviate. Indeed it CANNOT be alleviated through more consumption.
If the MEC falls to where further investments will be unprofitable the only way to maintain full-employment is for produces to increase their consumption.
This is because as more net investment is made, profitability, i.e. the MEC, RISES. It does NOT fall.
This is a non-sequitur (from the previous quote) and a tautology.
it generates revenues equal to the capital expenditures, but the costs are much less, due to depreciation.
MF, please don’t try to find an escape hatch by “shifting the goalposts” to depreciation.
You are ignoring the fact that capital goods investment generates revenues to producers no less than consumer goods spending. It is not true that more investment only increases costs in the economy.
No, no one is ignoring capital goods producers. Capital goods producers are already employed at MAXIMUM productive capacity. Increasing investment requires bidding against capacity AWAY FROM someone else, driving up prices.
You are dangerously close to declaring the impossibility of price inflation.
I meant to stress the fact that Keynes talking about the point at which FURTHER investment will be unprofitable, to then later talk about what must happen next.
He is not starting from a place, where they are ALREADY unprofitable.
I also meant to stress the fact that at maximum productive full-employment capacity the ONLY WAY to increase investment is to bid away ALREADY EMPLOYED resources from your competitors.
I must be one of “them” that you feel compelled to argue against, even if it means making copious amounts of errors yourself. You just “feel” I am wrong and you’ll say anything to satisfy that prejudice.
(…)
No, Keynes concluded that the MEC will fall, in a context of falling wage rates and prices. He didn’t set a falling MEC as a context.
No, it’s the exact opposite. The context is full-employment maximum capacity. So that with further investment the MEC will be falling. With a falling MEC, the interest rate is falling. Eventually you hit a lower bound (of one or the other I’m an uncertain non-economist),
He concluded the MEC will fall by a series of explanations that presumes a rise in wage rates and prices.
Yes, he “concluded” by increasing investment beyond full productive capacity EVENTUALLY the MEC must fall because the INTEREST RATE WILL FALL TO ZERO.
Even if you want to start him in the depression EVENTUALLY if you push investment BEYOND productive capacity the MEC will fall.
You just saying that if we NEVER REACH FULL CAPACITY the MEC WILL NEVER FALL. That is your whole point, that is why your wrong. That is why Keynesianism is a story of the bust AND THE BOOM.
The answer is prior saving and investment in capital. That is what made the capital available today possible. So any consumer goods company that wants to improve their business, they need capital, but that means capital has to be available,
MF, If I go out in the wood and build a fire to cook fish I catch with by bare hands. What is the capital good? Me? The fish? The sticks and stones? God?
Otherwise where did the fire come from if it already existed?
and capital can only be produced through saving and investment, NOT consumption
Who said capital can be “produced” by “consumption”. Are you maybe saying “consumption is consumption” and “production is production” because those are just tautologies, MF.
The argument is that in a depression increased consumption spending can induce investment spending.
xgsmmy:
“When capital goods prices fall, MEC rises, not falls.”
“You keep saying this but no one is disputing your overall story, the problem is it’s the wrong story. Our story, Keynes’ story, is one of falling MEC,”
You obviously didn’t understand my last series of posts.
I know that the story of Keynes is a falling MEC. My argument however is that his conclusion of a falling MEC, given the context in which he is writing (a response to the argument that falling wage rates and prices can cure depressions) is an incorrect conclusion.
A falling MEC is not the starting point of Keynes’ argument. It is not an assumption. It is not the “context.” A falling MEC is what Keynes claimed would occur in the context of falling wage rates and prices.
That is what I am arguing. That is what I am saying is incorrect.
“Wrong. MEC does not continually fall with capital accumulation. That is where Keynes is wrong.”
“It does when you’re already at MAXIMUM productivity.”
Not only was the context of maximum productivity NOT the context of Keynes’ claim that the MEC falls, but even at full capacity, it is incorrect.
Falling capital goods prices as more capital is produced (and invested) does not lead to rising capital goods prices and rising costs, such that MEC falls. It leads to falling capital goods prices and the same costs, such that MEC does not fall.
“No one is saying MEC must fall if productivity is still rising or there is more idle resources, but in Keynes’ story there are no more idle resources.”
False. The context in which Keynes wrote his response that the MEC must fall was in a depression, with unemployment and idle resources.
The context is the question of whether or not falling wage rates can cure unemployment. That is NOT a context of full capacity. That is a context of unused capacity, and idle labor.
“Capital is already being employed at maximum productive capacity.”
Not in the context of this discussion.
And even if there was full capacity, capital accumulation does not make the MEC fall because capital prices fall when more are produced. The fall in capital goods prices can be sold into the demand overall nominal demand for them, and hence the same nominal costs. The same nominal costs relative to spending does not make the MEC fall. Only rising costs relative to spending makes the MEC fall.
“During a depression, capital goods are not at full capacity.”
“Yes, of course, for me and Keynes. But at least for recessions aren’t Austrians committed to the view that they are supply-side “structural” problems.”
Keynes assumed a rise in capital prices even during a depression when there is more investment on the basis of falling capital goods prices!
The error Keynes (and you) are making is assuming a rise in capital foods prices even though the rise in investment is in response to lower, not higher, capital goods prices.
“(I know Bob claims that there can be an increased demand for money in Austrian economics, but I’m confused about how that is incompatible with Keynesianism, if it is.)”
An increase in demand for money will only make prices fall even more than they otherwise would fall. It would only hasten the fall in wage rates and prices that can cure unemployment and depressions.
“During “normal” times, when there is full capacity, more investment and less consumption will decrease MEC, yes, but it will never reach zero as long as consumption remains greater than zero, which is guaranteed no matter what”
“Didn’t Keynes say it would be 2 percent?”
Yes, Keynes claimed an arbitrary 2%.
“Are you now conceding something?”
No, I am saying the same thing in different ways so that you can see Keynes’ error.
“Remember I’m not economist”
Your false modesty betrays your “Keynes is right even when he is wrong” demeanor.
” so if you’ve now changed the argument to some technical matter regarding Keynes argument away from your previous view I’d very much appreciate some help here.”
There has been no change.
“Isn’t that the rate of interest must fall as the MEC falls so that eventually further investments are unprofitable.”
No, because the MEC does not fall when capital goods prices fall.
“I admit to not understanding right now what the lower bound of the MEC really is.”
Profits can become negative on the basis of negative net investment. But because producers always consume something, there will always be total spending greater than capital goods spending specifically.
“and does not need any governmental “stimulus”, and would only shrink the economy more than what would otherwise be the case due to existing consumption in the market.”
“This is called “moving the goal posts”. Look it up, dude.”
Again, I am not in net. Again, I am not being shot at. Again, I am not moving any goal posts. I am making a series of arguments in response to, as well as over and above, your statements.
I am not moving any goal posts.
“Note that this is NOT an argument saying that more consumption will benefit the economy due to a rise in MEC.”
“Keynes is not saying that that a rise in consumption will “help” the economy (with falling MEC) either.
He’s saying when you reach the lower bound of profitability it’s the only way to maintain profitability.”
Distinction without a difference.
And it’s false anyway. Profitability INCREASES with more net investment, because the revenues that are generated exceed the costs that are generated, since costs are deferred into the future with net investment.
The MEC does not fall with more net investment. It RISES.
If profitability (MEC) should ever reach low levels, there is nothing better to increase it than additional net investment, because not only will it help with the capital stages that suffered the brunt of the recession, but it will also restore profitability.
You are again ignoring the revenues that are generated by net investment itself. A company that adds to net investment is generating additional revenues and additional profits for capital goods companies.
Workers don’t only work in consumer goods companies.
“The MEC doesn’t need to rise if people have time preferences and investment desires such that it would be at that level.
“So this a convoluted economic rationalization for market outcomes to justify libertarian anarchists conceptions of individual liberty?”
No. It’s a clear economics explanation to show that the MEC does not fall when there is more investment in response to lower priced capital goods.
“Oops, I meant to say increasing consumption with MEC at the lower bound is the only way to maintain full-employment production.”
This is not correct. You cannot consume more unless there is investment first.
“capital accumulation can take place on the basis of physical increases in output”
“Yet no one is disputing this and never has been.”
False. Keynes disputed it when he assumed that the MEC will fall as more investment is made in a context of falling wage rates and prices.
“The problem is you want the to be the story Keynes is telling when he’s telling a different story.”
No, you are just not understanding Keynes’ story.
“Keynes is first telling a story of how a full-employment economy might fall into a depression in order to then tell how it might climb back out”
I am considering his argument about a falling MEC in the context of falling wage rates and prices, which was the context he was responding to when he argued the MEC will rise!
“but you want to have him in the depression already.”
Keynes himself is the one who responded to the depression situation context, when he responded to the argument that unemployment can be cured through falling wage rates.
I am not putting Keynes there, he put himself there. I am responding to his argument that he made in the context of a depression and whether or not falling wage rates and prices can cure the depression.
“The MEC does not hit the lower bound as long as consumption of producers is above zero.”
“Yes, this is why I started saying “lower bound” and not “zero lower bound” because as a non-smart person lacking in the required skills, I was unsure what the lower bound was.”
There is no lower bound as long as profitability remains positive. If there should ever be cash hoarding at a low profitability, that would only make profitability eventually RISE, thus removing the seeming impetus for cash hoarding.
“The rate of profit can do negative because of the negative net investment component. But that does not require more consumption to alleviate. Indeed it CANNOT be alleviated through more consumption.”
“If the MEC falls to where further investments will be unprofitable the only way to maintain full-employment is for produces to increase their consumption.”
False. More net investment will INCREASE profitability. You are fallaciously presuming, over and over, that consumer goods revenues are the only revenues that generate profits.
Investment generates revenues for capital goods companies. The MEC includes the profits of capital goods companies, whose earnings are financed 100% by saving and investment, NOT consumption.
More consumption and less investment does not restore profitability. It just adds to it, and in the process, impoverishes people.
It is not necessary for profits to be nominally high before investment is “attractive”. Higher nominal profits can be a worse alternative than lower nominal profits.
“This is because as more net investment is made, profitability, i.e. the MEC, RISES. It does NOT fall.”
“This is a non-sequitur (from the previous quote) and a tautology.”
It is neither a non sequitur, nor is it a tautology. It is not a non sequitur because the previous quote is not the ground of that quote. It is not a tautology, because it is an argument that during depressions, when there are unused capital, and unemployed labor, a rise in net investment will increase profitability.
And if there is cash hoarding, that will eventually raise profitability as well, since the fall in spending is negative net investment, which will eventually come to an end as wage rates and prices fall (which is the context).
“it generates revenues equal to the capital expenditures, but the costs are much less, due to depreciation.”
“MF, please don’t try to find an escape hatch by “shifting the goalposts” to depreciation.”
I am not shifting goal posts, and it is not an escape hatch. It is what I have had in mind the whole time. It’s just that you are making so many errors, that I have to go through them instead of saying everything that is in my mind that completes my story.
Depreciation is intimately tied up with my other argument for the reason why net investment adds to profitability, instead of decreasing it as Keynes claimed.
“You are ignoring the fact that capital goods investment generates revenues to producers no less than consumer goods spending. It is not true that more investment only increases costs in the economy.”
“No, no one is ignoring capital goods producers.”
You are ignoring them when you claim the MEC falls with more investment.
“Capital goods producers are already employed at MAXIMUM productive capacity.”
That is not the context of Keynes’ discussion of why falling wage rates and prices cannot lift an economy out of depression.
Keynes’ arguments for why falling wage rates and prices cannot lift economies out of depression, is not a context of full capacity and full employment.
And even if there was full employment and full capacity, capital accumulation does not make the MEC fall, since the accumulation is taking place on the basis of falling capital goods prices, not rising prices.
“Increasing investment requires bidding against capacity AWAY FROM someone else, driving up prices.”
False. Increasing investment is in response to, and depends on, falling capital goods prices.
If there is full capacity, and full employment, and THEN there is an additional investment, yes, that will reduce the MEC. But that lower MEC is not inherently a problem, because a lower MEC does NOT mean a lower real MEC. Investors would be better off with the lower MEC because it represents higher productivity and real MEC.
“You are dangerously close to declaring the impossibility of price inflation.”
Not in the slightest.
xgsmmy:
“I meant to stress the fact that Keynes talking about the point at which FURTHER investment will be unprofitable, to then later talk about what must happen next.”
Except that is wrong too. The MEC can never fall to zero in a context of full capacity and full employment. It can only ever keep asymptotically reaching zero, because no matter how much producers invest, they will have to consume SOMETHING, and that will result in total spending exceeding total costs, since there consumption is financed out of dividends and interest, which are not income statement costs that they deduct from their sales revenues to calculate their profits. They are direct extractions of wealth from their companies.
“He is not starting from a place, where they are ALREADY unprofitable.”
This is false. Keynes’ argument was about how falling wage rates and prices cannot cure depressions. That is not a context of full capacity.
“I also meant to stress the fact that at maximum productive full-employment capacity the ONLY WAY to increase investment is to bid away ALREADY EMPLOYED resources from your competitors.”
If resources are “already employed”, then they are no longer for sale and not even a part of the supply that is sold and whose prices change.
What you probably meant to say is what happens when the existing prices of capital goods reflect no undue building up of inventory, and there is a further increase in investment.
The answer to that is that it will make the MEC fall, but by less than previous equal sized increases in investment. This is because the same sized and continuous increases in investment will come to represent smaller and smaller fractions of the market value of accumulated capital. So the MEC will asympototically tend towards zero, but never reaching zero.
The time preference of producers will determine how low the MEC gets. If investors want to spend at least X on consumption, then the MEC will become fixed at a particular level.
“I must be one of “them” that you feel compelled to argue against, even if it means making copious amounts of errors yourself. You just “feel” I am wrong and you’ll say anything to satisfy that prejudice.”
“(…)”
(…)
“No, Keynes concluded that the MEC will fall, in a context of falling wage rates and prices. He didn’t set a falling MEC as a context.”
“No, it’s the exact opposite. The context is full-employment maximum capacity.”
No, the context is not full employment or full capacity. The context is the argument Keynes responded to, which is whether or not a fall in wage rates and prices can cure unemployment/depression.
Keynes’ argument was in response to an argument made in a context of less than full employment.
“So that with further investment the MEC will be falling. With a falling MEC, the interest rate is falling. Eventually you hit a lower bound (of one or the other I’m an uncertain non-economist),”
Hitting a lower bound MEC does not mean that the economy ceases to grow. The existing MEC is always a lower bound and upper bound, as it reflects the time preferences of people. More and more investment can never rise so much that consumption falls to zero, since producers would die. The fact that their consumption spending is positive, means that the MEC can never fall to zero even if investors tried (this time in a context of full employment).
It is NOT true to claim that because the MEC will keep declining as more and more investment spending relative to consumption spending is made, that at some point, there cannot be any more investment, which means in order to grow the economy, there has to be more consumption. This is a gross confusion of how the economy grows. The economy can grow, and indeed can only grow, indefinitely with the same overall capital spending that is high enough relative to consumer spending such that the resources used up in consumption are replaced, and more than replaced, by new capital that comes into existence physically, and not because of more nominal spending on capital than before.
A growing economy does not need more consumption spending once the MEC “hits a lower bound”. More consumption spending financed by inflation or welfare or credit expansion will only redirect real resources needed for capital goods stages, to the consumer goods stage, and it will end up SHRINKING the economy, not growing it.
If there is full capacity and full employment, and there is maximum investment and maximum consumption, then any additional consumption spending would only divert existing resources away from capital and towards consumption, which will shrink the economy.
Yes, the MEC will rise in the nominal sense, but that will represent an impoverishing MEC.
“He concluded the MEC will fall by a series of explanations that presumes a rise in wage rates and prices.”
“Yes, he “concluded” by increasing investment beyond full productive capacity EVENTUALLY the MEC must fall because the INTEREST RATE WILL FALL TO ZERO.”
FALSE. Keynes claimed that the SHORT TERM result from increased investment DURING A DEPRESSION would be rising capital goods prices and falling MEC. He didn’t argue rising capital goods prices and falling MEC at full employment. He argued such in response to a prior claim made by other economists that fallin wage rates and prices can cure depressions.
It is not an argument to assume a different context than the one you are responding to!
“Even if you want to start him in the depression EVENTUALLY if you push investment BEYOND productive capacity the MEC will fall.”
If the MEC falls at full capacity, it doesn’t mean more investment can be made by virtue of inflation or welfare or credit expansion financed consumption. For the context of full capacity means that more consumption will pull resources away from capital goods production, to consumer goods production. That will decrease overall productivity and lower people’s standards of living.
“You just saying that if we NEVER REACH FULL CAPACITY the MEC WILL NEVER FALL. That is your whole point”
No, it isn’t. The context of full capacity, and increased saving and investment and less consumer spending, would only make the economy even more capital intensive. Yes, the MEC will fall here, but that is not inherently an issue, since an economy can get along perfectly will with a 2% profit instead of a 10% profit, if that is what the time preferences of people generate.
“that is why your wrong.”
You are not correctly characterizing my position, nor my arguments.
“That is why Keynesianism is a story of the bust AND THE BOOM.”
It made the error of assuming rising capital goods prices in a context of FALLING wage rates and prices. Keynes made the argument that capital goods prices RISE in a context of FALLING wage rates and prices to cure depressions.
That is what I am responding to, yet you keep repeating that the rising capital goods prices Keynes envisioned is somehow in a context of full employment and full capacity. That is incorrect.
YOU are imagining rising investment in a context of full employment, but that IS NOT the context in the argument Keynes made about rising capital goods prices DURING A DEPRESSION.
“The answer is prior saving and investment in capital. That is what made the capital available today possible. So any consumer goods company that wants to improve their business, they need capital, but that means capital has to be available,”
“MF, If I go out in the wood and build a fire to cook fish I catch with by bare hands. What is the capital good? Me? The fish? The sticks and stones? God?”
xgsmmy, if you’re a consumer goods company owner, say Starbucks, and you want to expand your business, would you go out into the woods, or would you go to a capital goods supplier?
Yes, taken back far enough, all resources come from human labor. Nobody is disputing that. But if the ONLY thing people used is their bare hands, then the human race would not be able to get past the hunting and gathering level.
In order for people to get past hunting and gathering, they need capital goods to use in their labor. Instead of bare hands, a hand shovel. Instead of a hand shovel, a steamshovel. And so on.
Capital improvements are made by human labor yes, but material capital is crucial to increase labor productivity.
So if you ask me in 2012, MF, how can companies grow, I will say they grow by saving and investing (which creates capital). That capital is what grows the economy (along with human labor, and technology).
Consuming more is the REWARD for saving and investing. Consuming more DOES NOT bring about more capital. It is USING UP of resources. USING UP resources means you can’t use them in conjunction with labor to increase labor productivity for further production.
“Otherwise where did the fire come from if it already existed?”
When I say that improvements require more capital that already exists, it is in response to your claim that more consumption will increase investment. More consumption does not increase investment. It only REDIRECTS capital from A to B. Capital comes into existence through saving, not consuming, and consuming only redirect what has been saved, to that particular consumption activity, instead of some other consumption activity, or a capital good production activity.
You are constantly committing the fallacy of composition by considering what happens at the individual firm level (more demand from company XYZ will stimulate investment of company XYZ), and then extrapolating that to the economy as a whole, where you can’t do that, because in the economy as a whole, consumer choices are mutually exclusive, and redirect existing, scarce capital. It does not increase it overall.
“and capital can only be produced through saving and investment, NOT consumption”
“Who said capital can be “produced” by “consumption”.”
You did.
“Are you maybe saying “consumption is consumption” and “production is production” because those are just tautologies, MF.”
No, I am not saying that.
“The argument is that in a depression increased consumption spending can induce investment spending.”
You are again assuming capital and investment arises out of thin air.
The argument is that in a depression more capital investment will restore profitability in the very areas that are MOST depressed.
During a depression, the brunt of the hurt is felt by capital goods companies, not consumer goods companies. You can’t help the capital goods stages by increasing the nominal profitability of consumer goods companies.
More consumption spending during depressions can only reduce productivity of labor and standards of living. The increased nominal incomes are illusory growth.
A falling MEC is not the starting point of Keynes’ argument. It is not an assumption. It is not the “context.” A falling MEC is what Keynes claimed would occur in the context of falling wage rates and prices.
I agree that falling MEC is not the “starting point” the “starting point” is the point at which your reach maximum productive capacity or “full-employment”. The MEC need not fall if the interest rate is non-zero.
Falling capital goods prices as more capital is produced (and invested) does not lead to rising capital goods prices and rising costs, such that MEC falls. It leads to falling capital goods prices and the same costs, such that MEC does not fall.
No, MF, not “falling capital goods prices”, rising capital goods prices.
You just said “falling capital goods prices” does not lead to “rising capital goods prices”. I agree, if capital goods prices are falling they are not rising.
But if you’re already at maximum productive capacity trying to increase investment beyond that capacity can only cause rising capital goods prices. (In the model in question.)
False. The context in which Keynes wrote his response that the MEC must fall was in a depression, with unemployment and idle resources.
If you’d like to say the context was that Keynes wrote it during a depression or that Keynes was depressed when he wrote it, I’m too lazy to try to verify those things.
And even if there was full capacity, capital accumulation does not make the MEC fall because capital prices fall when more are produced. The fall in capital goods prices can be sold into the demand overall nominal demand for them, and hence the same nominal costs. The same nominal costs relative to spending does not make the MEC fall. Only rising costs relative to spending makes the MEC fall.
More capital goods can’t be produced, MF. The economy is at maximum productive capacity.
In order for one company to invest more (produce more) they have to bid capital away from a competitor. There are no idle resources, there is no free lunch (in this scenario).
Keynes assumed a rise in capital prices even during a depression when there is more investment on the basis of falling capital goods prices!
MF, let’s recession not depression, okay. If investment is falling not rising, then tell your story, okay.
The error Keynes (and you) are making is assuming a rise in capital foods prices even though the rise in investment is in response to lower, not higher, capital goods prices.
Again, tell this story with “recession” instead of “depression”.
An increase in demand for money will only make prices fall even more than they otherwise would fall. It would only hasten the fall in wage rates and prices that can cure unemployment and depressions.
What about the possibility of “secondary deflation”?
No, because the MEC does not fall when capital goods prices fall.
This is just a tautology. “The MEC does not fall when the MEC does not fall.”
Profits can become negative on the basis of negative net investment. But because producers always consume something, there will always be total spending greater than capital goods spending specifically.
If the MEC falls to its lower bound (whatever it is) so that further investments are unprofitable, then producers have to consume MORE to maintain full-employment not just “something.” They were already consuming something. They have to increase consumption.
Again, I am not in net.
MF, look up “moving the goalposts”. No one thinks you’re in a net. You are using an evasive argument style that if carried to its limit would mean an argument without end. It’s unproductive.
I am not moving any goal posts.
Yes, you did, you changed the topic to ABCT or economic caluclation or whatever.
And it’s false anyway. Profitability INCREASES with more net investment, because the revenues that are generated exceed the costs that are generated, since costs are deferred into the future with net investment.
No, MF, because the rate of interest has a nominal lower bound, and producers have to bid against one another for addition capital because all resources are fully employed already there will be an interval of time in which a producer can bid up the price raising the real rate above the natural rate.
All your saying is that productivity will grow faster than investment demand so that growth never ends.
Every cost deferred “into the future” eventually comes due today. Eventually costs can be deferred no longer and so businesses are not able to continue invest profitably any longer.
If profitability (MEC) should ever reach low levels, there is nothing better to increase it than additional net investment, because not only will it help with the capital stages that suffered the brunt of the recession, but it will also restore profitability.
Yes in a depression increasing spending will help the economy. I know, man.
The MEC does not fall with more net investment. It RISES.
You can keep saying as many times as you want but it won’t make it true when the MEC fall to it’s lower bound because the economy has reached it’s maximum productive capacity.
You keep wanting eat a free lunch here, and in the process you’re denying the possibility of a price inflation from increasing spending with a supply shortage.
You are again ignoring the revenues that are generated by net investment itself. A company that adds to net investment is generating additional revenues and additional profits for capital goods companies.
No, I’m not MF. The increased income to capital goods producers will (say) increase aggregate consumer spending but consumer goods producers are unable to produce more goods because they are ALSO at MAXIMUM productive capacity.
So there will be a shortage of (say) consumer goods now and their price will rise and so it goes round and round like a hot potato.
Workers don’t only work in consumer goods companies.
No. It’s a clear economics explanation to show that the MEC does not fall< when there is more investment in response to lower priced capital goods.
Okay, I thought you were saying it didn’t matter if the MEC fell, not that it simply does not need to rise.
Fair enough, MF. Although, it’s still a convoluted justification for no change, that is based on libertarian anarchist conception of individual liberty if not still justification for them.
This is not correct. You cannot consume more unless there is investment first.
MF, this just more Say’s Law metaphysics.
But it is still true in the model in question that at maximum production the only way to maintain full-employment (at least until capital goods wear out) is for consumer goods producers to increase consumption. (Or raise prices in an inflationary spiral.)
False. Keynes disputed it when he assumed that the MEC will fall as more investment is made in a context of falling wage rates and prices.
No, Keynes assumed capital accumulation would CONTINUE until “physical capital” was EXHAUSTED.
There is no lower bound as long as profitability remains positive. If there should ever be cash hoarding at a low profitability, that would only make profitability eventually RISE, thus removing the seeming impetus for cash hoarding.
Aaaand. You just conceded the arugment and moved the goalposts from the short to long term.
I’m still waiting for an explanation for why “cash hoarding” MUST increase “long term profitability”.
I hope it’s not to say simply that PROFITS WILL RISE AGAIN WHEN PROFITS RISE AGAIN.
False. More net investment will INCREASE profitability. You are fallaciously presuming, over and over, that consumer goods revenues are the only revenues that generate profits.
No, as demonstrated above, consumer goods producers are ALSO at maximum production.
THERE ARE NO MORE WORKERS TO HIRE TO PRODUCE MORE GOODS.
More consumption and less investment does not restore profitability. It just adds to it, and in the process, impoverishes people.
No in this case it maintains full-employment until capital goods start to wear out.
Higher nominal profits can be a worse alternative than lower nominal profits.
What if inflation is higher? (genuine question)
But you still need POSITIVE profits to avoid bankruptcy.
It is not a non sequitur because the previous quote is not the ground of that quote.
THIS IS A TAUTOLOGY.
since the accumulation is
And even if there was full employment and full capacity, capital accumulation does not make the MEC fall, since the accumulation is taking place on the basis of falling capital goods prices, not rising prices.
(…)
False. Increasing investment is in response to, and depends on, falling capital goods prices.
No, the ability to increase investment profitably at maximum productive capacity requires…
Otherwise the only way to…
Eventually capital goods will…
xgsmmy:
“I agree that falling MEC is not the “starting point” the “starting point” is the point at which your reach maximum productive capacity or “full-employment”.”
That was not the context of the argument Keynes made to “rebut” the claim that falling wage rates and prices can eliminate unemployment and depressions.
The context of the rising capital goods prices Keynes claimed took place, was when there is less than full employment, and falling wage rates and prices.
“The MEC need not fall if the interest rate is non-zero.”
So it need to fall.
“Falling capital goods prices as more capital is produced (and invested) does not lead to rising capital goods prices and rising costs, such that MEC falls. It leads to falling capital goods prices and the same costs, such that MEC does not fall.”
“No, MF, not “falling capital goods prices”, rising capital goods prices.”
No xgsmmy, not “rising capital goods prices”. Falling capital goods prices on the basis of the context of falling wage rates and prices, which was the context Keynes responded to.
“You just said “falling capital goods prices” does not lead to “rising capital goods prices”.”
Yes, that obviousness is exactly what Keynes made the mistake of contradicting. It sounds basic when stated, and yet that is exactly what Keynes contradicted. That is my argument that you don’t seem to want to seriously address, because you keep repeating the fallacy that Keynes claimed rising capital goods prices was made in a context of full employment. That is not the case.
“I agree, if capital goods prices are falling they are not rising.”
Then you agree that Keynes was wrong when he presumed the opposite. Not explicitly of course, but implicitly in the course of his arguments.
“But if you’re already at maximum productive capacity trying to increase investment beyond that capacity can only cause rising capital goods prices. (In the model in question.)”
That isn’t the model in question. That’s your model that isn’t the model Keynes responded to.
“False. The context in which Keynes wrote his response that the MEC must fall was in a depression, with unemployment and idle resources.”
“If you’d like to say the context was that Keynes wrote it during a depression or that Keynes was depressed when he wrote it, I’m too lazy to try to verify those things.”
No, I mean the context was that Keynes tried to refute the argument about falling wage rates and prices to cure unemployment in a depression, by adopting the context of depression and unemployment, and then ignoring the context of falling wage rates and prices, and presuming that capital goods prices rise instead of fall.
“More capital goods can’t be produced, MF. The economy is at maximum productive capacity.”
That is not the context under discussion, xgsmmy. The context under discussion is the context Keynes wrote in when he claimed that capital goods prices fall. That context was falling wage rates and prices, and thus falling capital goods prices, not rising capital goods prices.
At any rate, at full capacity, the economy CAN INDEED produce more capital goods, on the basis of the same existing nominal demand distribution between consumption spending and capital goods spending, taking place alongside a physical increase in capital output on the basis of prior accumulations of capital, also in the same demand distributions.
At full capacity, any further NOMINAL investment will make the MEC fall, yes, but this is not problematic, for if any cash hoarding arises on the basis of a too low” MEC, then that would only increase profitability through falling asset prices, as explained, which will thus remove the impetus for cash hoarding, as explained, and restore a higher MEC, as explained.
“In order for one company to invest more (produce more) they have to bid capital away from a competitor. There are no idle resources, there is no free lunch (in this scenario).”
This not the scenario in which Keynes wrote that capital goods prices rise.
He wrote in a context of falling wage rates and prices to cure depression.
“Keynes assumed a rise in capital prices even during a depression when there is more investment on the basis of falling capital goods prices!”
“MF, let’s recession not depression, okay. If investment is falling not rising, then tell your story, okay.”
First, whether or not you use the word recession or depression is irrelevant. It’s quibbling over semantics. For the context is whether or not falling wage rates and prices can eliminate unemployment. How much unemployment there is will I suppose decide whether you call it a recession or depression, but the point is that you are not keeping the context in question in mind. You keep going to a different context of full employment and full capacity. That is not the context in which Keynes claimed capital goods prices will rise.
Second, I already explained my story. At this point, it’s just repeating myself because you keep repeating the same errors over and over again.
“The error Keynes (and you) are making is assuming a rise in capital foods prices even though the rise in investment is in response to lower, not higher, capital goods prices.”
“Again, tell this story with “recession” instead of “depression”.”
Again, it doesn’t matter whether there is recession or depression. If there is a little unemployment, or a lot of unemployment, the same argument applies. It’s still the case that falling wage rates and prices can cure unemployment, whatever height it reaches. If unemployment is very high, then wage rates would probably have to come down a lot more as compared to if there is only a little unemployment.
Nothing of substance changes whether you call it a depression or recession.
So again, to repeat,
The error Keynes (and you) are making is assuming a rise in capital foods prices even though the rise in investment is in response to lower, not higher, capital goods prices.
“An increase in demand for money will only make prices fall even more than they otherwise would fall. It would only hasten the fall in wage rates and prices that can cure unemployment and depressions.”
“What about the possibility of “secondary deflation”?”
That is another way of saying falling wage rates and prices.
Wage rates and prices don’t all fall instantaneously, together, in unison, equally across the board. They fall sequentially, from person to person, firm to firm, and industry to industry. The “secondary deflation” is just an arbitrary focus on one step in the process of falling wage rates and prices.
It is like believing that “primary deflation” should be a one time, across the board, instantaneous, and equal price fall, and if there is anything that happens because of this alleged event, it’s “secondary deflation”.
But the economy doesn’t work that way. Prices fall sequentially, as each individual makes choices at different times, given the events that are transpiring around them.
Prices will fall one type of good, or one good, at a time, to be perfectly accurate.
Secondary deflation is just a step in the process of falling wage rates and prices (and falling capital goods prices), which is what economists claim can cure unemployment, but Keynes rebuted this by presuming a rise in capital prices.
You seem to want to concede that point, but not totally, and hopefully quickly go to some other argument, which is the alleged evil of price deflation, and hopefully derail this conversation to one of “secondary deflation”, which, you might probably claim “EVEN HAYEK WAS AGAINST IT”.
“No, because the MEC does not fall when capital goods prices fall.”
“This is just a tautology.”
[Facepalm]
No, it is not a tautology. Falling capital goods prices and the MEC are different, but related beasts.
“The MEC does not fall when the MEC does not fall.”
No, I argued that the MEC does not fall when capital goods prices fall.
Just because the statement is obvious to you, it doesn’t mean it is a tautology. Tautologies are specific animals. A is A. All bachelors are unmarried men.
MEC does not fall when capital goods prices fall, is not a tautology.
“Profits can become negative on the basis of negative net investment. But because producers always consume something, there will always be total spending greater than capital goods spending specifically.”
“If the MEC falls to its lower bound (whatever it is) so that further investments are unprofitable, then producers have to consume MORE to maintain full-employment not just “something.””
False. You can’t hold the MEC as constant and then consider a change to investment, when the MEC is a FUNCTION of investment!!!!
At full employment and full capacity, if there is a rise in investment, then the MEC will fall. It won’t hit a lower positive bound that will not fall no matter how much additional investment and fall in consumption is made. The MEC is a function of investment. If investment rises, then the MEC will fall, even if it has to fall from 2% to 1.8%.
The MEC can not hit zero at full employment, because consumption of producers is always positive.
“They were already consuming something. They have to increase consumption.”
No, they don’t have to increase their consumption spending.
“Again, I am not in net.”
“MF, look up “moving the goalposts”. No one thinks you’re in a net. You are using an evasive argument style that if carried to its limit would mean an argument without end.”
Nonsense. I am not being evasive. You are. You keep evading the context of falling wage rates and prices, and you keep trying to replace that context with a context of rising capital goods prices.
I am not being evasive at all. I have nothing to hide. I have nothing I am wanting to cover up and hope you don’t notice.
“I am not moving any goal posts.”
“Yes, you did, you changed the topic to ABCT or economic caluclation or whatever.”
You’re insane. I did not once mention ABCT, not did I once mention economic calculation, nor did I even HINT at referring to those things. You’re totally out to lunch. I challenge you to show me where I mentioned ABCT or economic calculation in this thread with you.
“And it’s false anyway. Profitability INCREASES with more net investment, because the revenues that are generated exceed the costs that are generated, since costs are deferred into the future with net investment.”
“No, MF, because the rate of interest has a nominal lower bound”
False, xgsmmy. The rate of interest is a function of profits, not the reverse.
You keep holding things constant and then imagining what happens when there is a change to certain variables, despite the fact that those variables you are changing GENERATE the very variables you are holding constant!
Interest rates, and MEC are not deux ex machina variables, dictated by investors by fiat, after which any change to other variables are to be analyzed by holding interest rates and MEC constant.
Interest rates move up and down, in an economy at full capacity, and with no inflation, by virtue of the difference between saving and investment. THERE IS NO OBJECTIVE LOWER BOUND to either interest rates or MEC, other than zero, because zero is physically impossible, as it would require zero consumption and 100% investment. Since time preference is positive, or, in other words, since consumption takes place, neither interest nor the MEC can reach zero in an economy with full capacity and no inflation.
They can only keep getting smaller and smaller, as far as people take it by virtue of their time preference, which I suppose has a maximum at where people live off of bare subsistence.
“and producers have to bid against one another for addition capital because all resources are fully employed already”
That will just make the MEC fall even more. There is no objective lower bound that determines investment. It is investment that, in part, determines MEC. You have the causation backwards.
The MEC doesn’t decide how much investment can be made. The MEC is determined by how much investment is made and how much consumption is made (in spending terms).
If the MEC is at 2%, then additional investment might put it at 1%. Then an equal dose of additional investment might put it at 0.8%. Then 0.6%. Then 0.5%. Then 0.55%, and so on.
It is not necessary that in order to “accommodate” more investment, the MEC has to keep falling at the same rate per each investment amount, and then fall below zero in order to accommodate more equal amounts of investment.
Successive additions of investment NEAR the zero bound will have a marginally declining decrease. There is no objective limit to how much investment is profitable, other than that which is decided by the individual time preferences of people. The economy does not need an external “spender” to ensure that if investment is “too high”, such that it allegedly requires a negative MEC, that there can be more consumption spending to “offset” this additional investment, where in its absence, the economy will somehow choke on its own savings.
There is no limit to saving and investment. The MEC will fall, but successive increases of equal amounts of investment will NOT keep decreasing the MEC by equal amounts. It will decrease the MEC by ever small amounts, until it tapers off to that which is associated with the voluntary consumption of producers. If there is yet another round of investment and fall in consumption, then the MEC will fall to an even lower, but still positive, number, thus making investment worthwhile.
At an MEC of 1%, in an economy at full capacity, would suggest a very, very, VERY high saving and investment rate as compared to consumption. The tiny nominal rate of return would represent such a high real rate of return, that what you would probably see is a nominal return of 1%, and falling prices of 10% or so, for a real return of around 11%. Investment would be worthwhile even with such low nominal returns.
“there will be an interval of time in which a producer can bid up the price raising the real rate above the natural rate.”
The natural rate is a FUNCTION of producer bidding. The natural rates are market rates, not magical fairytale rates that investors and everyone else as a group are somehow having to deal with, and compare their rates.
“All your saying is that productivity will grow faster than investment demand so that growth never ends.”
No, I am saying that capital accumulation is related to productivity and output like force is related to to accelerating speed.
“Every cost deferred “into the future” eventually comes due today.”
Yes, in an economy with no inflation, this net investment will eventually cease generating the sort of profitability mentioned. At that point, the MEC will only be a function of producer’s consumption spending. For their capital spending would generate revenues that are equal to the depreciation costs each period. The additional source of profits would come from the spending that producers make on themselves.
“Eventually costs can be deferred no longer and so businesses are not able to continue invest profitably any longer.”
False. Profitability doesn’t reach zero, even when those costs cease being deferred. There is still the voluntary consumption spending of producers.
If producers in this context then increased their investment again, then the MEC would fall again, but by less so that before. It would taper off to whatever their consumption spending is. Since they can’t consume and invest with the same money, the MEC will be a function of whatever the consumption and investment is. Both will be positive. The MEC will remain positive.
You keep asserting, quite incorrectly, that the MEC somehow goes negative, when it doesn’t go negative at full capacity, but only keeps decreasing to the level that is generated by their given consumption.
“If profitability (MEC) should ever reach low levels, there is nothing better to increase it than additional net investment, because not only will it help with the capital stages that suffered the brunt of the recession, but it will also restore profitability.”
“Yes in a depression increasing spending will help the economy. I know, man.”
Not just “spending”. It’s a specific form of spending. Spending financed by saving, not consumption.
“The MEC does not fall with more net investment. It RISES.”
“You can keep saying as many times as you want but it won’t make it true when the MEC fall to it’s lower bound because the economy has reached it’s maximum productive capacity.”
This is wrong. The MEC is not a function of real productivity. It is a function of the difference between investment spending and consumption spending. The MEC goes down when there is a rise in investment spending and fall in consumption spending.
The MEC does not go down when there is unchanged nominal investment spending, unchanged nominal consumption spending, but increased productivity on the basis of physical increases in productivity, and falling prices.
“You keep wanting eat a free lunch here, and in the process you’re denying the possibility of a price inflation from increasing spending with a supply shortage.”
I am not claiming any free lunch, you are. You are saying that when there is more consumption, we can have more production. That is free lunch economics.
I am saying something quite different.
Your argument of a “supply shortage” is misleading, because shortages only arise with price controls by the state, Shortages tend to be eliminated in a market by virtue of rising prices.
If capital goods prices rise by bidding in an economy at full capacity, then the MEC will just fall by less than it fell the last time there was that same amount of increased nominal demand for capital.
You don’t seem to understand the concept of exponential and logarithmic phenomena.
In a context of full capacity, and given capital spending and consumer spending, if there should be an increase in investment and fall in consumption, then the MEC will fall asymptotically. It doesn’t fall linearly, such that successive equal amounts of additional investment somehow require successive equal amounts of consumption spending.
As long as producers live, which is to say as long as they spend SOMETHING on their consumption, which is going to be ALWAYS as long as human life exists, then it doesn’t matter how much more investment is made. it will ALWAYS be profitable, because the MEC will always be positive in the context of full capacity and no monetary disturbance.
“You are again ignoring the revenues that are generated by net investment itself. A company that adds to net investment is generating additional revenues and additional profits for capital goods companies.”
“No, I’m not MF. The increased income to capital goods producers will (say) increase aggregate consumer spending”
Yes, you are ignoring it. You just proved it. You just considered a rise in investment SPENDING, which of course would generate revenues and profits to capital goods companies, and you can only think of what happens to consumption spending.
You just proved you are ignoring capital goods company revenues and profits!
“but consumer goods producers are unable to produce more goods because they are ALSO at MAXIMUM productive capacity.”
The MEC is not a function of physical output. The MEC is a function of differences in nominal demands, i.e. money spending.
Investment spending can be 99% of everyone’s income, that is, people can invest 99% of their incomes and only consume 1%, and the MEC will STILL be positive, because producer’s consumption spending is positive.
“So there will be a shortage of (say) consumer goods now and their price will rise and so it goes round and round like a hot potato.”
False. You are keeping variables constant when you cannot do that. Declaring that the economy is at full capacity is a FUNCTION of existing investment. It is not a function of any investment whatever.
If investment is increased, then the capacity of the economy will INCREASE, not stay the same such that savings lead to cash hoarding and losses.
Capacity is not sent from above. It is a function of how much investment we choose to make. The lower the investment, the lower the capacity. The higher the investment, the higher the capacity.
There is no fixed capacity. More investment spending will increase the profitability of capital goods companies, and redirect existing scarce resources into capital goods, which will have the net upshot of increasing economic capacity.
STOP HOLDING CAPACITY CONSTANT IN THE FACE OF CHANGED INVESTMENT.
xgsmmy:
“Okay, I thought you were saying it didn’t matter if the MEC fell, not that it simply does not need to rise.”
No, I was saying that the MEC can fall, but its fall will be asymptotic towards where producers put it through their time preference. It won’t be linear such that more investment spending eventually becomes unprofitable, such that only more consumer spending can solve the alleged problem.
“Fair enough, MF. Although, it’s still a convoluted justification for no change, that is based on libertarian anarchist conception of individual liberty if not still justification for them.”
No, it’s based on economic science. It’s true with and without a government.
It’s not convoluted either. You are just going to have to admit to being not exactly quick on the uptake.
“This is not correct. You cannot consume more unless there is investment first.”
“MF, this just more Say’s Law metaphysics.”
No, it isn’t, although it’s related. It’s just a physical statement of fact.
Merely insinuating something is Say’s Law, or related to Say’s Law, doesn’t mean you have refuted it. Especially since Say’s Law, PROPERLY UNDERSTOOD, and not misunderstood in the way Keynes and his followers misunderstood it, is TRUE.
“But it is still true in the model in question that at maximum production the only way to maintain full-employment (at least until capital goods wear out) is for consumer goods producers to increase consumption.”
False. You keep claiming this falsehood. Why? It isn’t true.
Producers don’t have to INCREASE their consumption. It can be the bare minimum, and that will make profits (MEC) positive, assuming full capacity.
Your error is that you keep holding too many things constant in your mind, when as soon as you consider a change to investment (and thus consumption), all those variables you are holding constant, are not in fact constant. When the investment and consumption ratio changes, then the MEC changes, interest rates change, all those things you are taking for granted at “a lower bound” will DECREASE FURTHER.
There is no such thing as a lower bound to MEC independent of investment and consumption. The MEC is DETERMINED BY investment and consumption.
The higher the ratio of investment to consumption, the lower the positive MEC will become. As it gets closer to zero, if it ever does, then the decline from successive doses of investment will result in a declining fall in MEC. MEC does NOT have to go negative in order to “accommodate” more investment.
Remember, the lower the MEC and r, the further into the future will costs be deferred into the future. If you are imagining a continually falling MEC, then you are imagining a continually deferring costs. There is no limit other than the time preferences of people.
Assuming an economy with no unemployment and full capacity, the MEC will be positive with investing even 99.99999999999999999999999999999999999999999999999% of people’s incomes.
The nominal MECs would probably be 0.000000001%, but REAL returns would probably be 50% or 60%, making investment INCREDIBLY worthwhile.
“(Or raise prices in an inflationary spiral.)”
Can’t happen without a crazy central bank.
“False. Keynes disputed it when he assumed that the MEC will fall as more investment is made in a context of falling wage rates and prices.”
“No, Keynes assumed capital accumulation would CONTINUE until “physical capital” was EXHAUSTED.”
No, Keynes claimed that the MEC will fall as more investment is made in a context of falling wage rates and prices.
“There is no lower bound as long as profitability remains positive. If there should ever be cash hoarding at a low profitability, that would only make profitability eventually RISE, thus removing the seeming impetus for cash hoarding.”
“Aaaand. You just conceded the arugment and moved the goalposts from the short to long term.”
No, I didn’t concede what you think I am conceding, and I haven’t switched the goal posts either. I am not in net. I am not being shot at. I am making a series of explanations so that you understand where you are going wrong.
I have claimed that cash hoarding will eventually result in increased profitability once negative net investment is eliminated through falling asset prices (which derive from increased cash hoarding), THE WHOLE TIME.
I didn’t “suddenly” switch from short term to long term. I have always claimed that should there be a sudden change in cash preference, that this would decrease the price of assets and eventually eliminate negative net investment.
The solution to this is not to increase consumption, because the problem isn’t lack of consumption, it’s a problem with money.
“I’m still waiting for an explanation for why “cash hoarding” MUST increase “long term profitability”.”
I have already explained it above.
“I hope it’s not to say simply that PROFITS WILL RISE AGAIN WHEN PROFITS RISE AGAIN.”
I hope you will read what I already wrote this time, instead of making these perpetual “If you are saying…” or “I hope you’re not saying…” weasel words.
“False. More net investment will INCREASE profitability. You are fallaciously presuming, over and over, that consumer goods revenues are the only revenues that generate profits.”
“No, as demonstrated above, consumer goods producers are ALSO at maximum production.”
You did not “demonstrate” that anywhere.
YOU JUST ASSERTED IT.
Production is, again, a FUNCTION of investment. If investment relative to consumption is X, then that will be associated with a given RATE of capital accumulation and economic growth in the physical sense. If investment is sufficiently high, then the RATE of capital accumulation will be positive, and economic growth will be positive.
If investment spending is not at a sufficiently high level, then capital consumption, i.e. capital decumulation, would take place.
More investment in an economy with a given RATE of capital accumulation and economic growth, will INCREASE the RATE of capital accumulation and economic growth.
More consumption spending will DECREASE the RATE of capital accumulation and economic growth.
“THERE ARE NO MORE WORKERS TO HIRE TO PRODUCE MORE GOODS.”
THE SAME SUPPLY OF WORKERS CAN WORK WITH MORE AND BETTER CAPITAL, SO THAT THEIR OUTPUT INCREASES FOR THE SAME NOMINAL COSTS, THUS ALLOWING FOR CAPITAL ACCUMULATION AND ECONOMIC PROGRESS.
“More consumption and less investment does not restore profitability. It just adds to it, and in the process, impoverishes people.”
“No in this case it maintains full-employment until capital goods start to wear out.”
False. Workers don’t only work in consumer industries. Workers work in capital goods industries as well, and it is capital goods industries that suffer the most during depressions. More consumption spending will just increase the profitability of consumer goods companies, leave capital goods companies owners and workers out in the wind, and in the process, shrink the size of the economy, productivity, and standards of living.
More saving and investment will fix the problems of low profitability and unemployment in the capital goods industries.
There is no gain to people by putting more resources and more workers into consumer goods companies, and away from capital goods companies. That will impoverish everyone, workers included.
“Higher nominal profits can be a worse alternative than lower nominal profits.”
“What if inflation is higher?”
You still need to understand how markets work, before you can even begin to understand how markets can become distorted.
I am holding inflation and total spending constant, with some minor adjustments to things like demand for money, for argumentative purposes. These are already seeming to confuse you, so I would highly recommend you don’t take another piece of pie on your plate, until you’re finished with the 14 you have taken.
“But you still need POSITIVE profits to avoid bankruptcy.”
In an economy at full employment, there is no limit to profitable additional investment, because producers can’t invest 100% of their incomes. They need to eat.
“It is not a non sequitur because the previous quote is not the ground of that quote.”
“THIS IS A TAUTOLOGY.”
NO IT IS NOT. IT IS A RESPONSE TO YOUR CLAIM THAT MY QUOTE IS GROUNDED ON THE PRIOR QUOTE. THE LATTER QUOTE IS GROUNDED ON ANOTHER, NOT THE DIRECTLY PRECEDING QUOTE.
“And even if there was full employment and full capacity, capital accumulation does not make the MEC fall, since the accumulation is taking place on the basis of falling capital goods prices, not rising prices.”
“(…)”
I’ll assume by your silence that you have conceded that point.
“False. Increasing investment is in response to, and depends on, falling capital goods prices.”
“No, the ability to increase investment profitably at maximum productive capacity requires…”
Again, what you call “maximum productive capacity” is a FUNCTION of the existing investment. It doesn’t limit investment. Investment determines maximum capacity, not the other way around.
If investment X generates a maximum capacity C, then C can increase if X increases.
STOP HOLDING CAPACITY CONSTANT IN THE FACT OF CHANGED INVESTMENT, WHEN IT IS INVESTMENT THAT DETERMINES CAPACITY.
“Otherwise the only way to…”
If you’re still insinuating more consumption spending, you’re still wrong.
“Eventually capital goods will…”
Help workers and capitalists to produce more capital goods that not only replace worn up capital goods, but INCREASE the net supply of capital goods.
This occurs when investment spending is sufficiently high relative to consumer spending.
More consumer spending will decrease productivity, and lower standards of living.
Typo:
“OK, so it need NOT fall.”
Sorry, typo:
“Then 0.45%, and so on.
The MEC can never fall to zero in a context of full capacity and full employment. It can only ever keep asymptotically reaching zero, because no matter how much producers invest, they will have to consume SOMETHING, and that will result in total spending exceeding total costs, since there consumption is financed out of dividends and interest, which are not income statement costs that they deduct from their sales revenues to calculate their profits. They are direct extractions of wealth from their companies.
You’re still trying to eat a free lunch. There are no free lunches (in the economy I’m describing).
Deduct as much you want from revenue: that just means profits are lower.
If investment falls due to overcapacity (and stagnant growth) then consumption must rise to maintain current GDP.
If it does not rise then profits will turn negative and you will get bankruptcies.
Producers (or whoever) do not have to keep consuming and even if they do eventually they will be forced to stop consuming because their capital will need to be replaced.
I seem to remember MF arguing that Keynes was saying nonsense because he was saying producers would consume all of their income. Now he thinks they absolutely must consume something. I’m sure he will say he just meant they must eat. I’d ask him to imagine people eating less or even someone with nothing to eat at all because when they lose their job they have no income to eat with. So yes MF will say they can continue to maintain full employment even as GDP is falling as laid off workers jump off of buildings.
If resources are “already employed”, then they are no longer for sale and not even a part of the supply that is sold and whose prices change.
No, there are still prices because already employed workers can be lured away from their current employer by offering them higher pay.
The answer to that is that it will make the MEC fall, but by less than previous equal sized increases in investment. This is because the same sized and continuous increases in investment will come to represent smaller and smaller fractions of the market value of accumulated capital. So the MEC will asympototically tend towards zero, but never reaching zero.
No what will happen instead is that the rate of interest will eventually rise above the MEC and you will get spiraling inflation.
This is could perhaps be reconciled with NGDP targeting only in this case GDP is zero and you have reached the structural limit of the model. After inflation rises too high the central bank will be forced to raise interest rate above the MEC and you will either get rising consumption to equilibrate GDP or you will get a recession.
The time preference of producers will determine how low the MEC gets. If investors want to spend at least X on consumption, then the MEC will become fixed at a particular level.
Yes, exactly finally we’re getting somewhere.
However, producers will eventually be forced to replace their capital and so eventually (all things equal) we will get a recession.
(…)
MF,
Hitting a lower bound MEC does not mean that the economy ceases to grow. The existing MEC is always a lower bound and upper bound, as it reflects the time preferences of people. More and more investment can never rise so much that consumption falls to zero, since producers would die. The fact that their consumption spending is positive, means that the MEC can never fall to zero even if investors tried (this time in a context of full employment).
Workers can become unemployed. Producers can die. People do die. Capital will wear out.
But no the argument is not that the economy as a whole’s consumption will fall to zero. It’s only that someone in the economy must lower consumption. It doesn’t have to be to zero.
The argument that producer’s consumption must rise in response to lack of profitable investments in order to maintain current GDP. But eventually someone or some group must lower consumption. (Underemployed rather than unemployed would work.)
It is NOT true to claim that because the MEC will keep declining as more and more investment spending relative to consumption spending is made, that at some point, there cannot be any more investment, which means in order to grow the economy, there has to be more consumption.
No, in order to maintain current GDP, not grow GDP, consumption must rise.
Trying to invest more will raise prices and either result in unprofitable investments and bankruptcies or set of an inflationary spiral.
This is a gross confusion of how the economy grows. The economy can grow, and indeed can only grow, indefinitely with the same overall capital spending that is high enough relative to consumer spending such that the resources used up in consumption are replaced, and more than replaced, by new capital that comes into existence physically, and not because of more nominal spending on capital than before.
Exactly, in this case, the capital can’t be more than replaced. That is the economy has stopped growing.
But also trying to replace the existing entire stock of capital will fail because the economy is at max capacity so that the capital stock can only partially be replaced and so by the logic of the model is primed for recession.
A growing economy does not need more consumption spending once the MEC “hits a lower bound”.
No, the economy has stopped growing. The rise in consumption is from lower investment and can only be maintained so long as the current structure of capital can hold out.
More consumption spending financed by inflation or welfare or credit expansion will only redirect real resources needed for capital goods stages, to the consumer goods stage, and it will end up SHRINKING the economy, not growing it.
If the economy is growing, which this one is not, then you can have rising total consumption and investment even while consumption occupies a higher percentage of GDP.
If there is full capacity and full employment, and there is maximum investment and maximum consumption, then any additional consumption spending would only divert existing resources away from capital and towards consumption, which will shrink the economy.
Yes. Exactly. Only rising consumption in the short term can keep GDP constant until capital needs to be replaced.
Otherwise this is the exact argument I’ve been making and you’ve been so adamant was an impossibility.
Edit: that should be GDP growth is zero above.
Keynes claimed that the SHORT TERM result from increased investment DURING A DEPRESSION would be rising capital goods prices
You need to stipulate if you mean rising or falling GDP. For me a recession is falling GDP and a depression is rising GDP with excess capacity.
Could you point me to the offending passage though?
If the MEC falls at full capacity, it doesn’t mean more investment can be made by virtue of inflation or welfare or credit expansion financed consumption.
Correct. You’re making my arguments for me now. The rise in consumption that allows GDP to remain constant, brief as it may be, is taken from lower investment spending out of profits.
Expanding credit will only be inflationary or result in losses.
However depending on the structure of society it could support more tax financed welfare transfers that pull from others consumption.
For the context of full capacity means that more consumption will pull resources away from capital goods production, to consumer goods production. That will decrease overall productivity and lower people’s standards of living.
No, in this case the rise in consumption is from lowered investment the consumer goods producers increasing consumption is replacing falling consumption from capital goods producers.
There’s no increase in production of consumer goods. Consumer goods production is at max capacity.
Eventually the rising consumption of consumer goods producers will need to be reversed at which point the economy falls into recession.
Yes, then GDP will fall lowering at least someones wellfare.
Supply shortages represent a trade off between rising prices and falling welfare. That’s how you can get stagflation.
You can use rationing and controls to spread the burden around and keep more people employed at lower welfare.
No, it isn’t. The context of full capacity, and increased saving and investment and less consumer spending, would only make the economy even more capital intensive. Yes, the MEC will fall here, but that is not inherently an issue, since an economy can get along perfectly will with a 2% profit instead of a 10% profit, if that is what the time preferences of people generate.
2 percent profit can only be maintained until capital goods need replacing.
At that point you have a choice between raising prices or taking losses.
Perhaps the economy can continue at current GDP with prices rising into infinity.
It made the error of assuming rising capital goods prices in a context of FALLING wage rates and prices. Keynes made the argument that capital goods prices RISE in a context of FALLING wage rates and prices to cure depressions.
MF, I could wrong here. Maybe you have the passage and it will be plain as day. But I’m wondering if you have even considered for a second if it might be you who has made the mistake?
YOU are imagining rising investment in a context of full employment, but that IS NOT the context in the argument Keynes made about rising capital goods prices DURING A DEPRESSION.
Falling GDP or rising GDP?
Yes, taken back far enough, all resources come from human labor. Nobody is disputing that.
Actually, yes, it was you who was disputing it. Over and over again. Up and down this comments section.
But if the ONLY thing people used is their bare hands, then the human race would not be able to get past the hunting and gathering level.
No, see, this is an example of something no one is disputing.
So if you ask me in 2012, MF, how can companies grow, I will say they grow by saving and investing (which creates capital). That capital is what grows the economy (along with human labor, and technology).
And once again you would be wrong because companies can expand by credit expansion.
The specific capital good that will be produced does not have to exist before it can be paid for expect in the metaphysical sense of humans and their parents and the earth and on backward down the rabbit hole.
Consuming more is the REWARD for saving and investing. Consuming more DOES NOT bring about more capital. It is USING UP of resources. USING UP resources means you can’t use them in conjunction with labor to increase labor productivity for further production.
Again, all this is Say’s Law. All you’re really saying is “consumption is consumption and production is production”.
But in a depression rising consumption spending can induce businesses to increase investment spending.
Investments create savings.
More consumption does not increase investment. It only REDIRECTS capital from A to B.
Yes, “consumption is consumption,” but no, in growing economy consumption and investment can both rise.
You are constantly committing the fallacy of composition by considering what happens at the individual firm level
Yikes.
(more demand from company XYZ will stimulate investment of company XYZ), and then extrapolating that to the economy as a whole, where you can’t do that, because in the economy as a whole, consumer choices are mutually exclusive, and redirect existing, scarce capital. It does not increase it overall.
“Consumption is consumption and production is production.”
xgsmmy:
“You’re still trying to eat a free lunch.”
I haven’t tried to eat a free lunch before, so how in the world can I be “still trying” to do it now?
What I said in no way presumes a free lunch. Successful investment takes effort. Production takes effort. There is nothing gotten for free in anything I have stated.
Ironically, it is precisely you who is trying to get a free lunch, via the claim that more consumption generates more production.
“Deduct as much you want from revenue: that just means profits are lower.”
Yes, but those deductions can never EQUAL revenues, since there is consumption financed out of dividends and interest, which are not expenses that producers deduct from their revenues in order to calculate their profits.
“If investment falls due to overcapacity (and stagnant growth) then consumption must rise to maintain current GDP.”
False. There is no such thing as “overcapacity” in the aggregate. The desire for more wealth is essentially infinite.
There can only be partial relative overproduction and (UNSEEN) partial relative underproduction, of wealth.
More consumption only uses up resources without replacing them with new resources.
You cannot grow an economy by removing real resources from it.
More consumption is never needed in any situation in any case anywhere, to grow economies.
Minimum consumption, which is virtually automatic as long as people are alive, is fully sufficient to generating aggregate profits in the economy and making limitless investment profitable.
“If it does not rise then profits will turn negative and you will get bankruptcies.”
No, profits will NOT turn negative. They will decrease, but decrease less than before with equivalent sized increases in investment.
There is no such thing as general overproduction or general overcapacity. More investment can always be made in those previously unexploited profitable investment opportunities that constitute the partial relative underproduction in question.
“Producers (or whoever) do not have to keep consuming and even if they do eventually they will be forced to stop consuming because their capital will need to be replaced.”
They don’t need to STOP consuming. They just can’t consume 100% out of their incomes.
“I seem to remember MF arguing that Keynes was saying nonsense because he was saying producers would consume all of their income.”
You seem to remember wrong, because I didn’t say producers WOULD consume everything. I was, again, for what is this, the fifth time?, only postulating 100% consumption TO TEST Keynes’ theory of “as long as the community’s marginal propensity to consume is equal to unity” claim.
“Now he thinks they absolutely must consume something. I’m sure he will say he just meant they must eat. I’d ask him to imagine people eating less or even someone with nothing to eat at all because when they lose their job they have no income to eat with. So yes MF will say they can continue to maintain full employment even as GDP is falling as laid off workers jump off of buildings.”
Are you talking to me or someone else? You’re saying my name in the third or second person as if your’e speaking to a crowd.
You are just not reading what I am saying.
The claim that producers will consume SOMETHING does not in any way contradict my hypotheticals of 100% consumption or 100% investment.
“If resources are “already employed”, then they are no longer for sale and not even a part of the supply that is sold and whose prices change.”
“No, there are still prices because already employed workers can be lured away from their current employer by offering them higher pay.”
We’ve gone over this. If there is an increase in investment, then the MEC will fall. The MEC is a FUNCTION of investment. It does not determine, or limit, or constrain investment.
“The answer to that is that it will make the MEC fall, but by less than previous equal sized increases in investment. This is because the same sized and continuous increases in investment will come to represent smaller and smaller fractions of the market value of accumulated capital. So the MEC will asympototically tend towards zero, but never reaching zero.”
“No what will happen instead is that the rate of interest will eventually rise above the MEC and you will get spiraling inflation.”
No, that is impossible unless there is inflation of the money supply. You are mistakenly assuming that low interest rates, or interest rates being lower than profits (MEC) is ipso facto inflationary.
But prices in the aggregate cannot keep rising to infinity unless there is more money in existence.
Since I am holding the money supply and total spending stable in order to isolate the determinants of the MEC as it pertains to investment and consumption, then inflation will NOT spiral towards infinity, even if interest rates should ever go full retard and go above the MEC.
The MEC is determined by investment and consumption. Interest rates are determined and constrained by profits, i.e. MEC.
It doesn’t make a lick of difference if interest rates fall or rise while MEC rises or falls, when it comes to aggregate spending. Aggregate spending is determined by aggregate money supply, NOT interest rates, nor the difference between interest rates and MECs.
“This is could perhaps be reconciled with NGDP targeting only in this case GDP is zero and you have reached the structural limit of the model. After inflation rises too high the central bank will be forced to raise interest rate above the MEC and you will either get rising consumption to equilibrate GDP or you will get a recession.”
False. There is no limit to capital accumulation even with fixed aggregate spending, fixed aggregate capital investment spending, and fixed aggregate consumption spending. Capital accumulation can take place on the basis of falling prices of capital goods.
“The time preference of producers will determine how low the MEC gets. If investors want to spend at least X on consumption, then the MEC will become fixed at a particular level.”
“Yes, exactly finally we’re getting somewhere.”
I am not saying what you think I am saying. I am not saying that the MEC will be fixed REGARDLESS of investment. I am saying that the MEC will be fixed IN ACCORDANCE WITH the fixed investment to consumption ratio, should it be fixed.
“However, producers will eventually be forced to replace their capital and so eventually (all things equal) we will get a recession.”
False. Replacing capital can be made on the basis of capital accumulation in the physical sense, GIVEN a particular investment to consumption ratio. If that ratio changes, so will the rate of capital accumulation.
The very reason tha capital has to be replaced is why consumption cannot grow economies, even at full capacity and more investment.
There is no limit to investment that constrains investment, other than a biological need to consume.
“Workers can become unemployed. Producers can die. People do die.”
Falling wage rates can cure unemployment.
“Capital will wear out.”
Capital can be replaced by investment.
“But no the argument is not that the economy as a whole’s consumption will fall to zero. It’s only that someone in the economy must lower consumption. It doesn’t have to be to zero.”
Yes, but with too much consumption, there is not enough capital produced to replace worn out capital.
“The argument that producer’s consumption must rise in response to lack of profitable investments in order to maintain current GDP.”
False. Producer’s consumption does not have to rise. It can remain as low as it can possibly get, and profits will remain positive.
“But eventually someone or some group must lower consumption.”
Yes, savings is required to grow economies.
“No, in order to maintain current GDP, not grow GDP, consumption must rise.”
False. GDP decreases when resources are used up without being replaced, i.e. when there is consumption.
GDP does not grow through using up resources without replacement (consumption).
Only PRODUCTIVE using up of resources (investment) grows economies .
“Trying to invest more will raise prices and either result in unprofitable investments and bankruptcies or set of an inflationary spiral.”
You are AGAIN ignoring the fact that higher SOLD capital goods will generate HIGHER profits for capital goods companies!
Consumer revenues are not the only revenues that generate profits.
“Exactly, in this case, the capital can’t be more than replaced. That is the economy has stopped growing.”
Even in that case the capital can be replaced and more than replaced, due to the fact that the economy has acquired a higher capacity by virtue of increased investment.
Capacity is a FUNCTION of investment.
“But also trying to replace the existing entire stock of capital will fail because the economy is at max capacity so that the capital stock can only partially be replaced and so by the logic of the model is primed for recession.”
False. Capacity is a FUNCTION of investment. It does not limit investment.
More investment can INCREASE capacity.
“No, the economy has stopped growing.”
There is no reason for a cessation in growth. Investment can increase and raise capacity.
“The rise in consumption is from lower investment and can only be maintained so long as the current structure of capital can hold out.”
That’s why saving and investment drive the economy, not consumption.
“Yes. Exactly. Only rising consumption in the short term can keep GDP constant until capital needs to be replaced.”
No, consumption does not increase GDP.
“Otherwise this is the exact argument I’ve been making and you’ve been so adamant was an impossibility.”
Nope. We’re not on the same page. Yet.
“and capital can only be produced through saving and investment, NOT consumption”
“Who said capital can be “produced” by “consumption”.”
“You did.”
[Citation Needed]
During a depression, the brunt of the hurt is felt by capital goods companies, not consumer goods companies
Do you have a link for this? I still want that 70% link too. (Although, I haven’t had time to read through skylien’s link I don’t think it has empirical numbers.)
You can’t help the capital goods stages by increasing the nominal profitability of consumer goods companies.
The consumer goods companies can be induced to buy more capital goods.
You’re just reverting back to reverting back to the idea that consumer goods producers will consume all of their income.
More consumption spending during depressions can only reduce productivity of labor and standards of living. The increased nominal incomes are illusory growth.
Yikes.
That was not the context of the argument Keynes made to “rebut” the claim that falling wage rates and prices can eliminate unemployment and depressions.
[Citation Needed]
The context of the rising capital goods prices Keynes claimed took place, was when there is less than full employment, and falling wage rates and prices.
Falling or rising GDP?
Falling capital goods prices on the basis of the context of falling wage rates and prices, which was the context Keynes responded to.
Falling or rising GDP?
Yes, that obviousness is exactly what Keynes made the mistake of contradicting.
[Citation Needed]
Then you agree that Keynes was wrong when he presumed the opposite. Not explicitly of course, but implicitly in the course of his arguments.
Yikes.
At full capacity, any further NOMINAL investment will make the MEC fall, yes, but this is not problematic, for if any cash hoarding arises on the basis of a too low” MEC, then that would only increase profitability through falling asset prices, as explained, which will thus remove the impetus for cash hoarding, as explained, and restore a higher MEC, as explained.
“After GDP stops falling it, will start rising”.–MF
Are you finally conceding here then, that what you claimed was impossible is possible?
How much unemployment there is will I suppose decide whether you call it a recession or depression, but the point is that you are not keeping the context in question in mind.
No, falling GDP or constant GDP or rising GDP?
Leave aside the issue of the number of unemployed. The only issue there is whether it is below full employment, full employment, or above full employment.
The “secondary deflation” is just an arbitrary focus on one step in the process of falling wage rates and prices.
I thought secondary deflation was gratuitous part of deflation. The unnecessary pain.
Wouldn’t secondary deflation further distort prices in a possibly endless series of miscalculations?
But the economy doesn’t work that way. Prices fall sequentially, as each individual makes choices at different times, given the events that are transpiring around them.
So the government takes all the responsibility for the unsustainable boom (even though we can now see is possible without the government), and every individual is left to fend for himself in the collapse (with no necessary bottom)? (Thinking about diagnoses and prescriptions for past and current real crises.)
which is what economists claim can cure unemployment, but Keynes rebuted this by presuming a rise in capital prices.
Rising or falling or constant GDP?
You seem to want to concede that point, but not totally, and hopefully quickly go to some other argument, which is the alleged evil of price deflation,
No, it’s just that when you talked about it before I was thinking about the present day where GDP is rising.
But now I’m thinking about the case where GDP is falling or hits a flat bottom and wondering if the MEC will start falling there too.
I’d forgotten about the initial crash.
“No, because the MEC does not fall when capital goods prices fall.”
“This is just a tautology.”
[Facepalm]
No, it is not a tautology. Falling capital goods prices and the MEC are different, but related beasts.
Could you expand on this? If you’re talking about all capital goods it seems true (discounted by the rate of interest). (Ignoring the spot price or whatever.)
No, I argued that the MEC does not fall when capital goods prices fall.
What’s the difference? Is it the cost of money? Or the rate of profit? (Okay, I need to think about this I guess. And read about it.)
MEC does not fall when capital goods prices fall, is not a tautology.
I’m confused.
False. You can’t hold the MEC as constant and then consider a change to investment, when the MEC is a FUNCTION of investment!!!!
MF, in the case you responded to raising consumption to offset falling investment restores the MEC to equilibrium at constant GDP.
At that point raising or lowering investment pushes the MEC out of equilbrium as capital depreciates.
At full employment and full capacity, if there is a rise in investment, then the MEC will fall. It won’t hit a lower positive bound that will not fall no matter how much additional investment and fall in consumption is made. The MEC is a function of investment. If investment rises, then the MEC will fall, even if it has to fall from 2% to 1.8%.
If what you claim is true (that MEC can’t ever fall to zero or below) then the interest rate will eventually rise in response to inflation making the real MEC negative, even if nominal MEC is positive.
The MEC can not hit zero at full employment, because consumption of producers is always positive.
Unless this is a tautology then it’s not true because consumption can fall to zero. People can jump from tall buildings in a recession.
You’re insane. I did not once mention ABCT, not did I once mention economic calculation, nor did I even HINT at referring to those things. You’re totally out to lunch. I challenge you to show me where I mentioned ABCT or economic calculation in this thread with you.
My mistake. I went back and looked and it appears you were making a crowding out argument.
False, xgsmmy. The rate of interest is a function of profits, not the reverse.
You’re just quibbling over semantics now. This is evasion. This is why the length of comments is rising and rising.
Saying you’re being evasive is not the same as saying you “have something to hide”.
But imagine a central bank who can hit any interest rate target it wants to.
You keep holding things constant and then imagining what happens when there is a change to certain variables, despite the fact that those variables you are changing GENERATE the very variables you are holding constant!
No, you won’t find your escape hatch here.
Interest rates, and MEC are not deux ex machina variables, dictated by investors by fiat, after which any change to other variables are to be analyzed by holding interest rates and MEC constant.
Nope. Try again. The interest rate is the variable we have control over.
MEC is constant in equilibrium at max capacity.
Interest rates move up and down, in an economy at full capacity, and with no inflation, by virtue of the difference between saving and investment.
Nope, try again. We have a central bank and credit expansion.
THERE IS NO OBJECTIVE LOWER BOUND to either interest rates
The real rate of interest can be negative.
or MEC, other than zero, because zero is physically impossible,
The profits can turn into losses economy wide when GDP is falling.
as it would require zero consumption and 100% investment
No MF two people can lower their consumption by 50%. But also people can jump from tall buildings and put guns in their mouths.
in other words, since consumption takes place, neither interest nor the MEC can reach zero in an economy with full capacity and no inflation.
I don’t know that this is true. As MEC falls the interest rate must fall to maintain equilibrium. But at max capacity lowering the real interest further would create inflation. But it could still hit zero (or near zero) if MEC is 2 percent.
That will just make the MEC fall even more. There is no objective lower bound that determines investment. It is investment that, in part, determines MEC. You have the causation backwards.
Yes, I know it will make MEC fall. That’s is what I’ve been telling you and you said was impossible.
No, I don’t have the “causation backwards” it goes in both directions. Businessmen have expectations, they make plans based on conditions. If they have to bid up capital they may lower investment without a corresponding rise in consumption and GDP would fall.
But in this model, that we’ve been talking about for hours, GDP is constant in equilibrium because productivity is stagnant and we’re at max capacity.
(This is evasion. This is ridiculous.)
(You are nit-picking and quibbling over semantic points.)
There is no objective limit to how much investment is profitable, other than that which is decided by the individual time preferences of people.
Yes, yes there is, you’ve regressed. You’re confusing the nominal and real. We’re at max capacity. There is no infinitely smaller limit to exploit. You have to get real people to be more productive.
There is no limit to saving and investment. The MEC will fall, but successive increases of equal amounts of investment will NOT keep decreasing the MEC by equal amounts. It will decrease the MEC by ever small amounts, until it tapers off to that which is associated with the voluntary consumption of producers
No, wrong MF, two exploit the limit you have to get the real economy to get infinitely more productive. But we’re at max capacity.
At an MEC of 1%, in an economy at full capacity, would suggest a very, very, VERY high saving and investment rate as compared to consumption. The tiny nominal rate of return would represent such a high real rate of return, that what you would probably see is a nominal return of 1%, and falling prices of 10% or so, for a real return of around 11%. Investment would be worthwhile even with such low nominal returns.
You’re trying to eat a free lunch, but we’re at max capacity.
Yes, in an economy with no inflation, this net investment will eventually cease generating the sort of profitability mentioned. At that point, the MEC will only be a function of producer’s consumption spending. For their capital spending would generate revenues that are equal to the depreciation costs each period. The additional source of profits would come from the spending that producers make on themselves.
Right, this is what I’ve been saying all along and you said was impossible.
But eventually capital will depreciate to the point of recession.
False. Profitability doesn’t reach zero, even when those costs cease being deferred. There is still the voluntary consumption spending of producers.
MF, I said there will be a point at which additional investments will not be profitable and respond by saying “False. Consumption will rise.”
Yes, I know consumption can rise, it’s what I’ve been saying all along.
If producers in this context then increased their investment again, then the MEC would fall again, but by less so that before
No, capital has depreciated to the point where any further increase in investment will result in either inflation rising or GDP falling.
You keep asserting, quite incorrectly, that the MEC somehow goes negative, when it doesn’t go negative at full capacity, but only keeps decreasing to the level that is generated by their given consumption.
MF, did you eat lunch today. Did your consumption fall to zero?
This is wrong. The MEC is not a function of real productivity. It is a function of the difference between investment spending and consumption spending. The MEC goes down when there is a rise in investment spending and fall in consumption spending.
I’ve been saying all along that can consumption can rise to offset falling investment.
But, and here’s the key thing. Eventually consumption must fall as a function of depreciation and when it does GDP will fall.
The MEC does not go down when there is unchanged nominal investment spending, unchanged nominal consumption spending, but increased productivity on the basis of physical increases in productivity, and falling prices.
There are no more physical increases to exploit here. We. are. at. max. capacity.
MF, this discussion is at max capacity. And so I must lower my investment and raise my consumption, but I will invest again and let’s hope it will be a glorious recession indeed.
I am not claiming any free lunch, you are.
–Sigh–
You are saying that when there is more consumption, we can have more production. That is free lunch economics.
“Consumption is consumption and production is production. So what is my function?”–Major_Freedom (1973-2013)
Your argument of a “supply shortage” is misleading, because shortages only arise with price controls by the state, Shortages tend to be eliminated in a market by virtue of rising prices.
Semantics. Yes, rising prices in this case will eventually result in investment becoming unprofitable.
If capital goods prices rise by bidding in an economy at full capacity, then the MEC will just fall by less than it fell the last time there was that same amount of increased nominal demand for capital.
http://en.wikipedia.org/wiki/Zeno's_paradoxes#Achilles_and_the_tortoise
MF, that link messed up but is this what you’re trying to say?
“In a race, the quickest runner can never overtake the slowest, since the pursuer must first reach the point whence the pursued started, so that the slower must always hold a lead. – as recounted by Aristotle, Physics VI:9, 239b15”
It doesn’t fall linearly, such that successive equal amounts of additional investment somehow require successive equal amounts of consumption spending.
MF, you can’t just take the functions of consumption and investment in an infinite horizon.
Investment is falling at the rate of capital depreciation and prices are rising in response.
Remember earlier when you kept saying the producers consumption must be positive because they have to eat? Well for investment to stay positive people have to stop eating and then GDP will be falling.
As long as producers live, which is to say as long as they spend SOMETHING on their consumption, which is going to be ALWAYS as long as human life exists
No, MF, GDP will fall as capital depreciates.
Note that before capital depreciation hits zero producers will be forced to turn back from consuming and start investing again.
At which time GDP will start to fall and total consumption will go negative. (I think this is right.)
then it doesn’t matter how much more investment is made. it will ALWAYS be profitable, because the MEC will always be positive in the context of full capacity and no monetary disturbance.
Wow.
You just proved you are ignoring capital goods company revenues and profits!
No, MF. For simplicity, I’m only considering one capital goods producer and one consumer goods producer.
Investment spending can be 99% of everyone’s income, that is, people can invest 99% of their incomes and only consume 1%, and the MEC will STILL be positive, because producer’s consumption spending is positive.
Right and eventually capital will depreciate by 2%, investment will be 101% and consumption will be -1%.
Yep, looks like everything’s fine.
False. You are keeping variables constant when you cannot do that. Declaring that the economy is at full capacity is a FUNCTION of existing investment. It is not a function of any investment whatever.
No. the economy’s capacity is a real world constraint.
The variable you’re are searching for is time.
In the model in question there are no more humans to do more work. You either have to increase the number humans or get the humans to work harder for the same amount in the same interval of time.
If investment is increased, then the capacity of the economy will INCREASE, not stay the same such that savings lead to cash hoarding and losses.
No eventually there will come a time when consumer goods producers are forced to lower consumption and increase investment prior to that they were forced to increase consumption and lower investment.
However, in the interval of time in between the stock of capital started to on net depreciate and prices started to rise forcing consumption spending to start to fall.
The moment consumption spending is forced to fall is the moment that GDP starts to fall.
Capacity is not sent from above. It is a function of how much investment we choose to make. The lower the investment, the lower the capacity. The higher the investment, the higher the capacity.
No we are all out of humans. We are all out of human time.
STOP HOLDING CAPACITY CONSTANT IN THE FACE OF CHANGED INVESTMENT.
FML.
No, I was saying that the MEC can fall, but its fall will be asymptotic towards where producers put it through their time preference. It won’t be linear such that more investment spending eventually becomes unprofitable, such that only more consumer spending can solve the alleged problem.
MF has invented the perpetual motion machine. The evenly accumulating asymptotic economy.
It’s not convoluted either. You are just going to have to admit to being not exactly quick on the uptake.
Oh.
Producers don’t have to INCREASE their consumption. It can be the bare minimum, and that will make profits (MEC) positive, assuming full capacity.
No, producers are forced to increase their consumption in response to depreciation driving up prices.
Your error is that you keep holding too many things constant in your mind,
Oh.
There is no such thing as a lower bound to MEC independent of investment and consumption. The MEC is DETERMINED BY investment and consumption.
Depreciation. Prices. Humans. Time.
The higher the ratio of investment to consumption, the lower the positive MEC will become. As it gets closer to zero, if it ever does, then the decline from successive doses of investment will result in a declining fall in MEC. MEC does NOT have to go negative in order to “accommodate” more investment.
Oh.
Remember, the lower the MEC and r, the further into the future will costs be deferred into the future. If you are imagining a continually falling MEC, then you are imagining a continually deferring costs.
Costs will come due. The Real rate will turn negative. Humans need more time.
There is no limit other than the time preferences of people.
Who is John Galt?
Assuming an economy with no unemployment and full capacity, the MEC will be positive with investing even 99.99999999999999999999999999999999999999999999999% of people’s incomes.
Deprecation. Humans hungry. Humans angry.
The nominal MECs would probably be 0.000000001%, but REAL returns would probably be 50% or 60%, making investment INCREDIBLY worthwhile.
“If everything when it occupies an equal space is at rest, and if that which is in locomotion is always occupying such a space at any moment, the flying arrow is therefore motionless.[11] – as recounted by Aristotle, Physics VI:9, 239b5”
No, Keynes claimed that the MEC will fall as more investment is made in a context of falling wage rates and prices.
Rising, constant or falling GDP?
Citation, please.
I am not in net. I am not being shot at. I am making a series of explanations so that you understand where you are going wrong.
Oh, my.
I didn’t “suddenly” switch from short term to long term. I have always claimed that should there be a sudden change in cash preference, that this would decrease the price of assets and eventually eliminate negative net investment.
The long run.
The solution to this is not to increase consumption, because the problem isn’t lack of consumption, it’s a problem with money.
Increasing consumption in a depression can induce businesses to invest.
Production is, again, a FUNCTION of investment. If investment relative to consumption is X, then that will be associated with a given RATE of capital accumulation and economic growth in the physical sense. If investment is sufficiently high, then the RATE of capital accumulation will be positive, and economic growth will be positive.
No, we are at max capacity. There are no more humans.
If investment spending is not at a sufficiently high level, then capital consumption, i.e. capital decumulation, would take place.
No, investment must fall as depreciation drives up costs. Consumption will be forced to respond but depreciation will continue and eventually consumption will be forced to fall and GDP will fall and unemployment will rise and our recession will take hold.
More investment in an economy with a given RATE of capital accumulation and economic growth, will INCREASE the RATE of capital accumulation and economic growth.
No more growth. No more humans.
More consumption spending will DECREASE the RATE of capital accumulation and economic growth.
No, consumption must rise in response to depreciation driving up investment costs.
THE SAME SUPPLY OF WORKERS CAN WORK WITH MORE AND BETTER CAPITAL, SO THAT THEIR OUTPUT INCREASES FOR THE SAME NOMINAL COSTS, THUS ALLOWING FOR CAPITAL ACCUMULATION AND ECONOMIC PROGRESS.
No, the humans need more time. GDP growth is zero.
and it is capital goods industries that suffer the most during depressions.
Citation, please.
More consumption spending will just increase the profitability of consumer goods companies, leave capital goods companies owners and workers out in the wind, and in the process, shrink the size of the economy, productivity, and standards of living.
No, in this case it’s the only way to maintain full employment.
More saving and investment will fix the problems of low profitability and unemployment in the capital goods industries.
No, in this case, investment is forced to fall because depreciation is driving up investment costs.
There is no “saving and investment”. There is investments and saving in that order.
Either the private sector has to be increasing borrowing or the government has to be increasing spending (at a given rate of interest) by a higher rate than it’s increasing taxes or net exports are rising for there to be more personal savings.
There is no gain to people by putting more resources and more workers into consumer goods companies, and away from capital goods companies. That will impoverish everyone, workers included.
If they are making more consumer goods then they are consuming more. Higher consumption means you’re wealthier.
You still need to understand how markets work, before you can even begin to understand how markets can become distorted.
“Consumption is consumption and production is production? What is my function? -– As recounted by Freedom, Major”
I am holding inflation and total spending constant, with some minor adjustments to things like demand for money, for argumentative purposes. These are already seeming to confuse you, so I would highly recommend you don’t take another piece of pie on your plate, until you’re finished with the 14 you have taken.
Oh, my.
In an economy at full employment, there is no limit to profitable additional investment, because producers can’t invest 100% of their incomes. They need to eat.
They need to eat…their lunches aren’t free. The clock is ticking.
“And even if there was full employment and full capacity, capital accumulation does not make the MEC fall, since the accumulation is taking place on the basis of falling capital goods prices, not rising prices.”
[Citation Needed]
Again, what you call “maximum productive capacity” is a FUNCTION of the existing investment. It doesn’t limit investment. Investment determines maximum capacity, not the other way around.
We’re all out of humans.
If investment X generates a maximum capacity C, then C can increase if X increases.
There are no more humans and there is no more time.
STOP HOLDING CAPACITY CONSTANT IN THE FACT OF CHANGED INVESTMENT, WHEN IT IS INVESTMENT THAT DETERMINES CAPACITY.
In this case, increasing investment will lower capacity, and decreasing investment will lower capacity.
If you’re still insinuating more consumption spending, you’re still wrong.
[Headache.]
“Eventually capital goods will…”
Help workers and capitalists to produce more capital goods that not only replace worn up capital goods, but INCREASE the net supply of capital goods.
Can’t replace capital goods without lowering GDP. Trying to increase the capital goods will only drive out prices and lower GDP.
This occurs when investment spending is sufficiently high relative to consumer spending.
No, if the economy is growing consuming spending and investment spending can both be growing.
If the economy is growing consumer spending can be growing faster than investment spending and we still have more of both.
But our economy is not growing. We’re at full capacity.
More consumer spending will decrease productivity, and lower standards of living.
Increasing consumption means you’re getting wealthier.
Ironically, it is precisely you who is trying to get a free lunch, via the claim that more consumption generates more production.
Increasing consumption in a depression can induce businesses to increase investments.
Yes, but those deductions can never EQUAL revenues, since there is consumption financed out of dividends and interest, which are not expenses that producers deduct from their revenues in order to calculate their profits.
No, people can lose their jobs, people can put guns in their mouths. People can have nothing to eat.
False. There is no such thing as “overcapacity” in the aggregate. The desire for more wealth is essentially infinite.
All the people are working. I can’t find any people not working.
There can only be partial relative overproduction and (UNSEEN) partial relative underproduction, of wealth.
We need more babies. Get me some babies.
More consumption only uses up resources without replacing them with new resources.
“Consumption is consumption.”
Our capital goods are durable. Consumption has to rise in response to depreciation driving up investment cost to maintain full employment.
You cannot grow an economy by removing real resources from it.
“If the economy is shrinking it is not growing.”
But if the economy is growing the rate of consumption could be rising at higher rate than investment and we can still have more of both.
If aggregate consumption is increasing people are getting wealthier.
More consumption is never needed in any situation in any case anywhere, to grow economies.
People need food. Consumption complement investment. Purpose of production.
Minimum consumption, which is virtually automatic as long as people are alive, is fully sufficient to generating aggregate profits in the economy and making limitless investment profitable.
“We must make ourselves poorer to make ourselves richer.”
“Apples can travel back in time.”
No, profits will NOT turn negative. They will decrease, but decrease less than before with equivalent sized increases in investment.
“That which is in locomotion must arrive at the half-way stage before it arrives at the goal.– as recounted by Aristotle, Physics VI:9, 239b10”
There is no such thing as general overproduction or general overcapacity. More investment can always be made in those previously unexploited profitable investment opportunities that constitute the partial relative underproduction in question.
“We are all child labor employers now.”
They don’t need to STOP consuming. They just can’t consume 100% out of their incomes.
[Gunshot.]
You seem to remember wrong, because I didn’t say producers WOULD consume everything. I was, again, for what is this, the fifth time?, only postulating 100% consumption TO TEST Keynes’ theory of “as long as the community’s marginal propensity to consume is equal to unity” claim.
Oh, dear.
Are you talking to me or someone else? You’re saying my name in the third or second person as if your’e speaking to a crowd.
Oh, dear.
You are just not reading what I am saying.
FML.
The claim that producers will consume SOMETHING does not in any way contradict my hypotheticals of 100% consumption or 100% investment.
We’ve gone over this. If there is an increase in investment, then the MEC will fall. The MEC is a FUNCTION of investment. It does not determine, or limit, or constrain investment.
Increasing investment will cause the MEC to become unprofitable.
No, that is impossible unless there is inflation of the money supply. You are mistakenly assuming that low interest rates, or interest rates being lower than profits (MEC) is ipso facto inflationary.
No, we’re at max capacity. We’re supply constrained. We face a trade-off of chasing higher prices or lowering aggregate welfare.
But prices in the aggregate cannot keep rising to infinity unless there is more money in existence.
Velocity.
Since I am holding the money supply and total spending stable in order to isolate the determinants of the MEC as it pertains to investment and consumption, then inflation will NOT spiral towards infinity, even if interest rates should ever go full retard and go above the MEC.
“…”
It doesn’t make a lick of difference if interest rates fall or rise while MEC rises or falls, when it comes to aggregate spending.
As deprecation pushes up investment costs the interest rate must fall to equilibrate the MEC at full employment.
Aggregate spending is determined by aggregate money supply, NOT interest rates, nor the difference between interest rates and MECs.
The interest rate must fall to keep investments profitable. at full employment.
False. There is no limit to capital accumulation even with fixed aggregate spending, fixed aggregate capital investment spending, and fixed aggregate consumption spending. Capital accumulation can take place on the basis of falling prices of capital goods.
Productivity improvements? (Genuine question.)
Our economy’s productivity has stopped improving, though.
I am not saying what you think I am saying. I am not saying that the MEC will be fixed REGARDLESS of investment. I am saying that the MEC will be fixed IN ACCORDANCE WITH the fixed investment to consumption ratio, should it be fixed.
As the MEC falls consumption will have to rise by as much as investment falls. This can be maintained so long as capital is maintained.
False. Replacing capital can be made on the basis of capital accumulation in the physical sense, GIVEN a particular investment to consumption ratio. If that ratio changes, so will the rate of capital accumulation.
All our capital is already fully employed. We can’t employ any more capital.
The very reason tha capital has to be replaced is why consumption cannot grow economies, even at full capacity and more investment.
At full capacity consumption will have to rise to offset falling investment to maintain full employment output.
Consumption can induce businesses to increase investments in a depression.
A growing economy can be increasing in consumption and investment at the same time.
There is no limit to investment that constrains investment, other than a biological need to consume.
“OPEC does not exist.”
“There was no rationing during World War 2.”
“The five day work week does not exist.”
“I’m going to live forever.”
“I have no kids.”
Falling wage rates can cure unemployment.
Euphemism.
Yes, but with too much consumption, there is not enough capital produced to replace worn out capital.
No, there is not enough capital already.
False. Producer’s consumption does not have to rise. It can remain as low as it can possibly get, and profits will remain positive.
“False.”
Yes, savings is required to grow economies.
“False.” Investment is required. Investments create savings.
False. GDP decreases when resources are used up without being replaced, i.e. when there is consumption.
“Consumption is consumption and production is production.”
GDP does not grow through using up resources without replacement (consumption).
“Consumption is consumption and production is production.”
Only PRODUCTIVE using up of resources (investment) grows economies .
“Only productive investments produce productively.”
You are AGAIN ignoring the fact that higher SOLD capital goods will generate HIGHER profits for capital goods companies!
Higher profits for capital goods makers is higher costs for consumer goods makers. This will bid up consumer good makers prices or cause bankruptcies if spending falls.
Consumer revenues are not the only revenues that generate profits.
[Shaking my head.]
Even in that case the capital can be replaced and more than replaced, due to the fact that the economy has acquired a higher capacity by virtue of increased investment.
[Shaking my head in disbelief.]
Capacity is a FUNCTION of investment.
[Will wonders never cease?]
False. Capacity is a FUNCTION of investment. It does not limit investment.
[…]
More investment can INCREASE capacity.
Babies? Anyone?
Bring me your babies.
There is no reason for a cessation in growth. Investment can increase and raise capacity.
No, not in this case.
That’s why saving and investment drive the economy, not consumption.
Increasing consumption can induce businesses to invest more in a depression.
Savings are reductions in spending. Investments and Fed accommodated interest rates and government spending create savings.
“Yes. Exactly. Only rising consumption in the short term can keep GDP constant until capital needs to be replaced.”
No, consumption does not increase GDP.
FML.
Nope. We’re not on the same page. Yet.
Oh.
xgsmmy:
“and capital can only be produced through saving and investment, NOT consumption”
“Who said capital can be “produced” by “consumption”.”
“You did.”
“[Citation Needed]”
When you said there has to be an increase in consumption in order to prevent unemployment and fall in GDP. Preventing unemployment and fall in GDP would imply that an economy grows (i.e. capital accumulates) more than what it otherwise would have grown without such consumption. This is equivalent to saying consumption produces capital.
“During a depression, the brunt of the hurt is felt by capital goods companies, not consumer goods companies”
“Do you have a link for this?”
Yes, my posts. Link to them.
“I still want that 70% link too.”
You can link to my posts for that too.
“(Although, I haven’t had time to read through skylien’s link I don’t think it has empirical numbers.)”
You don’t need constantly updated empirical numbers. It is logically deduced from the fact that profits are less than 50%. A mathematical series of the form I showed above, with profits averaging 25% on capital invested, would have a sum equal to $5.00 total spending for every $1.00 consumption spending.
“You can’t help the capital goods stages by increasing the nominal profitability of consumer goods companies.”
“The consumer goods companies can be induced to buy more capital goods.”
They can’t purchase more capital goods unless there are capital goods available. Available capital goods requires prior saving and investment.
“You’re just reverting back to reverting back to the idea that consumer goods producers will consume all of their income.”
No, I am not. You keep insinuating that my hypothetical example of 100% consumption is a sort of prediction, when in reality it is used to test Keynesian theory. Keynesian theory holds that 100% consumption can maintain employment and output. That is false.
“More consumption spending during depressions can only reduce productivity of labor and standards of living. The increased nominal incomes are illusory growth.”
“Yikes.”
I’ll take that as yet another concession.
“That was not the context of the argument Keynes made to “rebut” the claim that falling wage rates and prices can eliminate unemployment and depressions.”
“[Citation Needed]”
Keynes’ “General Theory.”
“The context of the rising capital goods prices Keynes claimed took place, was when there is less than full employment, and falling wage rates and prices.”
“Falling or rising GDP?”
During periods of unemployment.
“Falling capital goods prices on the basis of the context of falling wage rates and prices, which was the context Keynes responded to.”
“Falling or rising GDP?”
During periods of unemployment. The argument Keynes responses to is that falling wage rates an prices can cure unemployment. He held that falling wage rates and prices cannot do it, because he fallaciously claimed capital goods prices will rise, even though they would fall in the context given.
“Yes, that obviousness is exactly what Keynes made the mistake of contradicting.”
“[Citation Needed]”
Keynes’s “General Theory”.
“Then you agree that Keynes was wrong when he presumed the opposite. Not explicitly of course, but implicitly in the course of his arguments.”
“Yikes.”
I’ll take that response to be another concession.
“At full capacity, any further NOMINAL investment will make the MEC fall, yes, but this is not problematic, for if any cash hoarding arises on the basis of a too low” MEC, then that would only increase profitability through falling asset prices, as explained, which will thus remove the impetus for cash hoarding, as explained, and restore a higher MEC, as explained.”
“After GDP stops falling it, will start rising”.–MF
False. That is not what I argued. I argued that the decline in profits will eventually be reversed. The aggregate spending can stabilize at a lower level.
If you propose a hypothetical scenario of an increased cash preference, then that is the same thing as proposing a hypothetical example of an aggregate money spending deflation, which is roughly the same as a decreased NGDP, or what you call it, just “GDP”.
My response was not to just claim that a fall in GDP will be followed by a rise in GDP, but rather, that a rise in cash preference, which manifests as a falling in aggregate spending, will at first be a scenario of declined net investment, which when combined with producer consumption, will result in a declined MEC. But because a rise in cash preference will be accompanied by a decline in productive expenditures, asset prices will fall to a new lower level. Once that occurs, accumulated capital in dollar terms will decline, and producer’s consumption and the same relative rate of net investment (since rising cash preference cannot be assumed to come from ONLY investment or ONLY consumption, but both, that is, time preferences don’t change), these will become a larger fraction relative to accumulated capital in dollar terms. That means a higher MEC after all is said and done. NGDP would be lower, but rates of profit will be higher, because assets (costs) are lower relative to producer consumption and net investment.
“Are you finally conceding here then, that what you claimed was impossible is possible?”
I cannot possibly “concede” an utter falsehood. Whether or not aggregate spending (NGDP) is higher or lower, is a transition period that the market process does not get stuck at, but adapts to by virtue of what happens to the resulting differences in nominal demands between investment, capital accumulation, and consumption.
“How much unemployment there is will I suppose decide whether you call it a recession or depression, but the point is that you are not keeping the context in question in mind.”
“No, falling GDP or constant GDP or rising GDP?”
What do you mean “No” here? You are evading the context of falling wage rates and prices in an environment of unemployment.
Whether NGDP is rising or falling depends on the assumed change in cash preference you postulate.
If cash preference rises, this is the same thing as saying NGDP falls, provided of course that money is not destroyed (e.g. credit default/payback).
“Leave aside the issue of the number of unemployed. The only issue there is whether it is below full employment, full employment, or above full employment.”
You’re telling me to leave aside the number of unemployed, AFTER you brought up the “complaint” that we have to make clear whether we are talking about “recession” or “depression”? You’re not making any sense. If you want to make clear whether we’re talking about “recession” or “depression”, then you are asking me to consider the number of people unemployed, because that’s how those terms are typically defined. 7% unemployment might be called a recession, whereas 25% unemployment might be called a depression.
Now you’re saying leave the numbers aside, and focus on whether the economy is “below full employment, at full employment, or above full employment.”
That was MY original focus before you derailed it with quibbling over the semantics of whether to call the economy in a recession or depression!
To repeat for the millionth time, the context in which Keynes made the argument that capital goods prices rise, was in an economy with unemployment. That is what I have ALWAYS argued, and so now it should hopefully be clear to you.
“The “secondary deflation” is just an arbitrary focus on one step in the process of falling wage rates and prices.”
“I thought secondary deflation was gratuitous part of deflation.”
Deflation is deflation is deflation.
“The unnecessary pain.”
If I choose to reduce my spending, and that all else equal this will reduce other people’s nominal incomes, this is NOT “unnecessary.” This is NECESSARY to accomplish my ends. The market is a process where individuals can achieve their ends. It isn’t a prison, whereby everyone has to spend, or else they’re punished by law. That punishment is unnecessary pain.
“Wouldn’t secondary deflation further distort prices in a possibly endless series of miscalculations?”
No. Voluntary deflation is a CORRECTION to previous distortions that undue inflation has wrought.
Voluntary deflation is a manifestation of individual valuations given the new conditions of knowledge and preferences. It is beyond judgments of “right” and “wrong”. It is what individuals now prefer. The market process is a mechanism by which individuals can accomplish their new desired ends. Criticizing this is just criticizing voluntary peaceful activity of others. Who are you judge other people in this way?
“But the economy doesn’t work that way. Prices fall sequentially, as each individual makes choices at different times, given the events that are transpiring around them.”
“So the government takes all the responsibility for the unsustainable boom (even though we can now see is possible without the government), and every individual is left to fend for himself in the collapse (with no necessary bottom)?”
Yes, because the government CANNOT fix the problems it itself created. The only solution to distortions to the market process, is to let individuals in the market process fix their problems and coordinate their actions with each other.
Yes, individuals in the market process have to bear the costs of what those in the government did. That’s one of the main reasons why Austrians are so adamant that booms do not occur in the first place. It’s because they know that the costs will be burdened on those who had nothing to do with bringing about the boom.
“(Thinking about diagnoses and prescriptions for past and current real crises.)
which is what economists claim can cure unemployment, but Keynes rebuted this by presuming a rise in capital prices.”
“Rising or falling or constant GDP?”
Stop evading the context. It’s falling capital goods prices.
“You seem to want to concede that point, but not totally, and hopefully quickly go to some other argument, which is the alleged evil of price deflation,”
“No, it’s just that when you talked about it before I was thinking about the present day where GDP is rising.”
If by GDP you mean total spending, total spending (continually) rises when there is inflation of the money supply. The reason NGDP fell 2008-2010 is because the total supply of money actually fell due to credit collapse.
The Federal Reserve System brought that credit expansion about, to a very high ratio relative to base money. This made the financial system like a house of cards.
“But now I’m thinking about the case where GDP is falling or hits a flat bottom and wondering if the MEC will start falling there too.”
As I recommended before, you ought to first understand what you have put on your plate first, because you ADHD over to another topic.
To answer your question, yes, when total spending falls, it will almost always be associated with a declining MEC, because while revenues decline instantly, costs fall with a time lag, since current costs are a function of past (productive) spending, when total money spending (and productive spending) were probably higher.
But this fall in MEC is temporary, because when total spending falls, so does productive spending tend to fall, and when productive spending falls, so too do costs eventually fall. Once costs do fall to a new lower level, then given the new (lower) total spending, MEC will rise once again (since net investment and producer consumption will put a constant and relentless pressure on MEC to rise).
“I’d forgotten about the initial crash.”
You were insistent that I address your claims in a context of full employment and full capacity. Now you’re saying you want to go to a scenario of a crash, which of course means unemployment and less than full capacity?
“No, because the MEC does not fall when capital goods prices fall.”
“This is just a tautology.”
[Facepalm]
“No, it is not a tautology. Falling capital goods prices and the MEC are different, but related beasts.”
“Could you expand on this? If you’re talking about all capital goods it seems true (discounted by the rate of interest). (Ignoring the spot price or whatever.)”
If you know what I said is true, why the heck did you claim it was nothing but a tautology?
“No, I argued that the MEC does not fall when capital goods prices fall.”
“What’s the difference? Is it the cost of money? Or the rate of profit? (Okay, I need to think about this I guess. And read about it.)”
The MEC can be understood in a few different ways, but the way I was using it, and the way I think you were using it, was aggregate profitability, i.e. rates of profit prevailing throughout the economy on capital invested, in nominal terms.
High inflation can drastically increase MECs by virtue of widening the difference between revenues and costs (since costs are a function of past spending, which was lower). This is not, by the way, inherently a good thing, because MECs just reflect, or in a free market would reflect, the time preferences of individuals. A high MEC is not objectively “better” than a lower MEC.
“MEC does not fall when capital goods prices fall, is not a tautology.”
“I’m confused.”
Maybe you think capital goods prices are the costs of capital in interest rate or borrowing terms.
I am defining capital goods prices as the dollar prices for capital goods, i.e. a machine is priced for sale at $100,000.
“False. You can’t hold the MEC as constant and then consider a change to investment, when the MEC is a FUNCTION of investment!!!!”
“MF, in the case you responded to raising consumption to offset falling investment restores the MEC to equilibrium at constant GDP.”
I recommend to stop evading the issue, and address it head on. The MEC does not constrain investment in any sense. The MEC is a PRODUCT of investment (and consumption), relative to each other. If the MEC is ANYTHING, 5% or 1%, or any other rate, a rise in investment will just keep making the nominal MEC fall, and by less and less of a fall as more and more investment is made. Real MEC would keep growing, making the smaller nominal MEC more and more worthwhile to invest!
The claim you made, that falling investment is accompanied by a rising consumption “to offset it”, is a confusion, because falling investment does not need rising consumption to “restore” GDP or unemployment. Indeed, CONSUMPTION SPENDING DOES NOT PAY WAGES. Not even NGDP pays wages. What pays wages is saving and investment in labor. This spending is in competition with consumption spending.
An employer that has savings available can financed his own consumption, or he can pay wages. He can’t do both with the same money.
Yes, falling NGDP may tend to be associated with falling employment, but this is only to the extent that wage rates do not fall. It’s not that falling NGDP did it, it’s the failure of wage rates to balance with the new (lower) nominal demand for labor.
More consumption spending cannot prevent the fall in wages, because more consumption spending just results in higher profits for consumer goods companies.
And no, you can’t argue that more consumption spending will be used by consumer goods company owners to pay subsequent wages, because that would be saving and investment, NOT consumption spending. So you would be contradicting the context of CONSUMPTION spending raises wage rates.
And even if the economy ends up with more employment in the consumer goods industries for whatever reason, this would end up harming workers’ standard of living, because with fewer workers in capital goods industries, and more workers in consumer goods industries, the rate of capital accumulation will be otherwise lower.
THIS is why I brought up the hypothetical of 100% consumption. For imagine that investment for some reason collapses 90%. If the “solution” to this is for there to be an equivalent rise in consumption spending, thus attracting almost all workers to consumption, then the capital base would eventually rust and wear out, be disintegrated, the productivity of labor would collapse, and real standards of living would plummet.
The more optimal solution therefore, is to make saving and investment as attractive as possible, to maximize it, so that the fall in investment is reversed, and workers can be attracted back into the capital goods stages from whence they came, so that the rate of capital accumulation does not plummet.
This would occur “naturally” in a free market with protections of property rights, but unfortunately, the state is guided by the exact Keynesian thinking as you, and they do everything they can to make investing as unattractive as possible, and as least capable as possible. Lots of government borrowing from the market’s savings, which redirects saving from investment to government spending, decreasing interest rates below what the market process would have put them at, which makes investment less attractive, and punishing cash holders – who would have made profits rise (as explained above) – with inflation.
“At that point raising or lowering investment pushes the MEC out of equilbrium as capital depreciates.”
There is no such thing as an equilibrium MEC apart from where voluntary investment and consumption would have put it. Capital depreciation does not lower the MEC.
“At full employment and full capacity, if there is a rise in investment, then the MEC will fall. It won’t hit a lower positive bound that will not fall no matter how much additional investment and fall in consumption is made. The MEC is a function of investment. If investment rises, then the MEC will fall, even if it has to fall from 2% to 1.8%.”
“If what you claim is true (that MEC can’t ever fall to zero or below) then the interest rate will eventually rise in response to inflation making the real MEC negative, even if nominal MEC is positive.”
The argument that the MEC can’t ever fall to zero, and below zero, is only true in the context of non-declining aggregate spending.
If you assume inflation is taking place, which will turn the existing nominal MEC negative in real terms, then this is the fault of those who are inflating. It’s not the fault of the market. I was explaining to you how MARKETS work, and yet you seem to want to haphazardly go back and forth between markets and hampered markets, as if there is no fundamental difference between the two.
At any rate, if there is inflation, then that will tend to raise the nominal MEC. The MEC won’t remain constant. The MEC is a function of investment, capital costs, and consumption. Inflation will tend to widen the spread between spending and costs, and thus raise MEC.
So the hypothetical negative real MEC you have assumed, is highly innaccurate.
In a context of zero inflation, then the nominal MEC will be positive and the real MEC will be positive.
“The MEC can not hit zero at full employment, because consumption of producers is always positive.”
“Unless this is a tautology then it’s not true because consumption can fall to zero. People can jump from tall buildings in a recession.”
What a ridiculous assertion. Economics as a science presumes people are alive, not dead. If everyone is dead, then there won’t be any investment or consumption.
Obviously, not everyone kills themselves. Consumption in the aggregate can never hit zero as long as humans LIVE.
And what I said is NOT a tautology. You keep throwing that term around when it is clear you haven’t the foggiest clue what it even means. Tautologies do not mean “obvious truths”, as if the only “real” truths are those that are complicated and hard to understand. Maybe that’s how truth appears to you, where the only time you think you’re close to a truth is when you are confused, but many truths are trivial.
What I said is not a tautology because the MEC and producer consumption are separate, but related concepts. Just like my discussion of the relationship between capital goods and the MEC was claimed by you as a tautology, now you’re saying my discussion of the relationship between producer consumption and the MEC is a tautology.
To reiterate, the MEC is one thing. Capital goods prices and spending is one thing. Producer consumption is one thing. They are related to each other, where producer consumption and capital goods investment determine the MEC, but this does not mean that saying “the MEC does not hit zero because producer consumption is always positive”, is a tautology. There are two different concepts there. It’s not like saying A is A.
“You’re insane. I did not once mention ABCT, not did I once mention economic calculation, nor did I even HINT at referring to those things. You’re totally out to lunch. I challenge you to show me where I mentioned ABCT or economic calculation in this thread with you.”
“My mistake. I went back and looked and it appears you were making a crowding out argument.”
[Facepalm]
“False, xgsmmy. The rate of interest is a function of profits, not the reverse”
“You’re just quibbling over semantics now. This is evasion. This is why the length of comments is rising and rising.
Saying you’re being evasive is not the same as saying you “have something to hide”.”
No, saying that profits determine interest, rather than vice versa, is not “semantics.” I am not arguing something by insisting that you are using the wrong word to describe what we are both agreeing to. I am not agreeing with you as to the determinants of interest or profits.
You claimed that interest rates affect profits. I responded to that by saying no, it’s the reverse.
The only reason these comments are getting longer and longer is because you choose to write such comments, and because I choose to write my comments. You are blaming me for choices you made. I recommend you maybe take responsibility for your own actions. Yes, I know, crazy thought.
I am not being evasive either. I have taken the time to respond to every claim you have made, and I have answered every question you have asked.
You have not done that in return. You have repeatedly changed topics, not finished an unfinished line of thinking, refused to seriously address the context of falling wage rates and prices, and repeatedly tried to derail this into discussions of GDP, whether to call recession a depression, and on and on.
I recommend that you do a little soul searching instead of accusing me of doing something that you have no proof of me doing, and considering the fact that you have such poor reading comprehension, that you even accused me (since recanted) of introducing highly complex topics such as ABCT and economic caculation, even though I did not once mention those things. That should be strong evidence for you to be more critical of your own ability to read and understand comments, before you start judging my comments. You can’t possibly understand that which you read, unless you yourself are first mentally capable of it. Improvement starts with you, not others.
“But imagine a central bank who can hit any interest rate target it wants to.”
Imagine the truth that interest rates mean something, and that if the central bank changes interest rates by fiat, it doesn’t mean it is helping people coordinate their actions because such coordination requires unhampered interest rates.
How about you stop trying to think like a central planner, and start trying to understand how peaceful, voluntary market activity works, and how it is coordinated, before you begin to understand how central banking affects it.
You can’t know how A affects B, unless you know B without being affected by A.
“You keep holding things constant and then imagining what happens when there is a change to certain variables, despite the fact that those variables you are changing GENERATE the very variables you are holding constant!”
“No, you won’t find your escape hatch here.”
It’ not an “escape hatch”. I am not “trying” to “find an escape hatch.” I am not looking to escape. I am not feeling pressured in any sense here. I am not on the defensive. I am helping you understand that which you as of yet don’t understand.
My argument that you are holding some variables constant, and then you are imagining the effect of changing other variables, I am telling you is an incorrect approach, because the variables you are holding constant are not in fact constant when you change those other variables!
How can you possibly not grasp that? How can you possibly respond to that argument of mine by claiming I am trying to find an “escape hatch”? You’re not making any sense.
“Interest rates, and MEC are not deux ex machina variables, dictated by investors by fiat, after which any change to other variables are to be analyzed by holding interest rates and MEC constant.”
“Nope.”
Nope? NOPE? You’re obviously highly confused.
The MEC and interest rates are a product. They are effects. They are effects of prior causes.
For the MEC, the prior causes are investment spending and consumption spending, as well as accounting for past productive spending. If investment spending changes, if consumption spending changes, or if accounting for past productive spending changes, then the MEC will change. The MEC is not a rigid value which somehow investment and consumption must adapt and mold and “fit” into.
“Try again.”
I don’t have to try again. You need to try to understand it again, because your last attempt was a disaster.
“The interest rate is the variable we have control over.”
This is not a rebuttal to what I said. I said that interest rates are an effect of prior causes. You can’t refute that by making the very vague and fuzzy claim that humans control it in some sense.
I wasn’t arguing that interest rates arise out of thin air. Are you not reading what I am writing? I am saying interest rates are not deux ex machina variables that are fixed by decree. They are a product of individual time preferences in coordination in the division of labor.
“MEC is constant in equilibrium at max capacity.”
False. The MEC IS NOT DETERMINED BY PHYSICAL PRODUCTIVITY.
You keep making the same error, over and over and over again, that the MEC somehow is fixed when the economy is at a GIVEN capacity.
You are fallaciously holding capacity fixed, when capacity is ALSO an effect, determined by the extent of prior saving and investment.
The more saving and investment there is, the more capacity an economy will have. There is no objective upper limit to capacity that is reached, beyond which it cannot ever go, no matter how much additional investment is made.
Capacity, again, for the sixth time, is a PRODUCT of investment. The higher the investment, which is a choice we have, then the higher the capacity.
The reason why the US has a higher capacity than say the Sudan, is because of our higher investment relative to the Sudan. Sudan is at its own capacity given its investment. We are at our capacity given our investment.
Both our capacity and the capacity of the Sudan can increase, if investment in both countries increase. Neither have a fixed, objective upper limit independent of investment above which both can never go.
You are confused because you are fallaciously interpreting “full capacity” to be a transcendent value decreed from some power independent of what humans choose to do when it comes to their saving and investment. In reality of course, “full capacity” is just the name given to the ACCIDENTAL maximum output that currently exists BY VIRTUE OF current investment. That capacity can go up, if investment goes up.
There is no such thing as any “output gap”. It is a fictitious figment of the imagination.
Any economy that is labelled as being at “full capacity”, can INCREASE its capacity if there is a relative rise in investment (future consumption) and relative fall in current consumption. For the more workers and resources that currently go into capital goods now, the more capital goods and consumer goods that can be produced in the future, and thus the higher the “capacity” of the economy will become.
“Interest rates move up and down, in an economy at full capacity, and with no inflation, by virtue of the difference between saving and investment.”
“Nope, try again. We have a central bank and credit expansion.”
You are not grasping the argument I am making. I am saying in an economy with full employment and no inflation, interest rates can change by virtue of changes to investment and consumption.
It is not a proper rebuttal to this to deny the assumptions made in the example, and say “Nope, we have credit expansion.”
It would be like you saying “In an economy without hurricanes, resources will tend be put to uses other than hurricane defenses”, and then I say “That’s wrong! We live in an economy where hurricanes take place.”
Once again, in an economy with full employment and NO inflation, interest rates change by virtue of changed investment and consumption. If you want to rebut this, then you have to show that in an economy with full employment and no inflation, changes to investment and consumption DO NOT change interest rates. I wait your response with baited breath.
To address your point about credit expansion (notice how while you keep evading my arguments, I am responding to every single argument you are making AND showing why your responses to my points are wrong?), if there is credit expansion, then this would probably affect nominal interest rates, yes. But it won’t affect real interest rates, which are determined by the relative valuations between future goods and present goods. The central bank cannot effect my temporal preference just by encouraging credit expansion in the banking system.
If credit expansion makes nominal interest rates fall by 50%, say from 10% to 5%, then this doesn’t mean people’s temporal preferences for goods over time has changed by that much. Indeed, they would almost certainly be different, and that is precisely why the business cycle occurs according to ABCT.
Moreover, the fall in interest rates from 10% to 5% would, if the credit expansion is temporary, eventually go back to 10% anyway (or whatever the new time preferences at that time would generate).
This is because once credit expansion comes to an end, the time preferences of individuals would once again reassert themselves, and investors and consumers would once again be able to coordinate their temporal preferences, and the credit circulation business cycle would come to an end.
“THERE IS NO OBJECTIVE LOWER BOUND to either interest rates”
“The real rate of interest can be negative.”
There is no objective lower bound to either interest rates or MEC.
“or MEC, other than zero, because zero is physically impossible,”
“The profits can turn into losses economy wide when GDP is falling.”
You are again assuming a rise in cash preference, which I already dealt with.
“as it would require zero consumption and 100% investment”
“No MF two people can lower their consumption by 50%. But also people can jump from tall buildings and put guns in their mouths.”
This is not a proper response to what I said.
If two people lower their consumption by 50%, then if that is done by accumulating cash, then OTHERS must be SPENDING cash on those two people. Furthermore, since reducing consumption via accumulating cash means no change to investment, it means that those two people’s time preferences have fallen, because now they are investing at a relatively higher rate. If there is no monetary disturbance to “counter-act”, i.e. frustrate this process, then it will be able to be communicated to investors and investors will be encouraged to invest in ways that satisfy this new state of affairs.
The effect on relative prices would be that there would tend to be a relative fall in consumer prices, and relative rise in capital goods prices, which will stimulate more investment since it is more profitable to produce capital goods than consumer goods. This will make the economy more capital intensive, and eventually raise people’s standards of living.
If on the other hand those two people reduced their consumption by 50% on the basis of increasing their investment, then the effect would be similar, the only difference is that capital goods prices would be higher in the absolute sense, in addition to being higher in the relative sense as compared to consumer goods prices.
“in other words, since consumption takes place, neither interest nor the MEC can reach zero in an economy with full capacity and no inflation.”
“I don’t know that this is true.”
You don’t know a lot of things that are true. Your statement here doesn’t mean much.
“As MEC falls the interest rate must fall to maintain equilibrium.”
I’ve already explained that profits influence interest rates. It’s not that interest rates MUST FALL TO MAINTAIN EQUILIBRIUM, as if you’re sitting there with a judge’s gown and gavel, ready to “act”, i.e. use violence, if you don’t observe interest rates fall.
“But at max capacity lowering the real interest further would create inflation.”
This is false. Only increasing the quantity of money and volume of spending can generate (sustained) price inflation.
If you mean the central bank lowering interest rates, then interest rates falling from one period to the next would only be associated with inflation if it took an OMO to do it, i.e. more inflation.
If on the other hand interest rates fall from one period to the next on the basis of changed time preferences, then such a fall in interest rates is NOT associated with inflation, since it didn’t require a central bank OMO to do it.
“But it could still hit zero (or near zero) if MEC is 2 percent.”
The MEC and interest rates can be lower than 2%. Nothing magical happens at 2%. It’s just a number.
“That will just make the MEC fall even more. There is no objective lower bound that determines investment. It is investment that, in part, determines MEC. You have the causation backwards.”
“Yes, I know it will make MEC fall. That’s is what I’ve been telling you and you said was impossible.”
I never said it was “impossible” for the MEC to fall. I have explained ad nausea how the MEC can fall. I have said on many occasions that a rise in investment spending and fall in consumption spending can make the MEC fall. Your memory is as in need of improvement as your awareness.
I said that the MEC does not become ZERO in an economy with capital accumulation, since the MEC is determined by relative nominal demands, not real output.
“No, I don’t have the “causation backwards” it goes in both directions.”
No, you do have the causation backwards because it does NOT “go in both directions.” It goes in only one direction. Investment determines MEC. The MEC does not determine investment.
The MEC is an EFFECT, a PRODUCT, a FUNCTION, of investment. If investment changes, then so does the MEC. The MEC, even if it is 0.5%, can accommodate LIMITLESS investment, since the MEC declines ASYMPTOTICALLY with each successive equal sized amount of investment. It does not decline linearly with linear increases in investment.
For example, if investment rises by $10 billion each period, and consumption falls $10 billion each period, then the MEC will NOT decline linearly, until it hits zero, then negative, such that there has to be more consumption or else bust. The MEC in this situation will decline a lot initially, but then it will decline less and less due to each additional round of increased investment. You might there see the MEC fall from 10%, to 5%, to 2.5%, to 1.75%, to 0.875%, to 0.4375%, and so on, where the MEC REMAINS POSITIVE, but keeps declining towards, but never reaching, zero.
Then, if there is a 5000% increase in investment, and equivalent spending sized decrease in consumption, then the MEC might go from 0.25% to 0.23%.
It has no fixed lower bound. It is what mathematicians call “unbounded below”. The set of all real numbers in the open interval (0,1) is the set of all real numbers between 0 and 1 that does not include 0 and 1 themselves. This interval seems finite, and in a sense it is, but it contains an infinite number of real numbers, because any number you pick that is arbitrarily close to 0, say, I can always pick a number CLOSER to 0. You can’t actually reach 0, but you can keep getting CLOSER to 0.
This is how the MEC behaves, mathematically, given the assumptions established thus far.
What investment does is get the MEC smaller and smaller, but it can never REACH zero, because producers are physically unable to invest 100% of their incomes. They HAVE to consume in order to even live and invest!
There is no practical limit to investment in a capitalist economy!
No matter how high investment gets, investment in the aggregate will ALWAYS be profitable, because the MEC can never reach zero due to the fact that total spending will exceed total costs.
“Businessmen have expectations, they make plans based on conditions. If they have to bid up capital they may lower investment without a corresponding rise in consumption and GDP would fall.”
False. If prices for capital rises in this way, it is BY VIRTUE of a rise in nominal demand. You can’t postulate an increase in nominal demand for capital goods, then assume capital goods prices rise, and then assume that capital goods spending does not rise after all in an environment of a rise in prices. That is a gross confusion in thinking. If you postulate an increase in nominal demand for capital goods, then you can’t then immediately contradict that context and assume a fall in nominal demand for capital goods.
“But in this model, that we’ve been talking about for hours, GDP is constant in equilibrium because productivity is stagnant and we’re at max capacity.”
No, productivity is not stagnant in our model. Fixed aggregate spending, fixed aggregate NGDP, DOES NOT MEAN stagnant productivity and fixed capacity that cannot rise.
For within the fixed aggregate spending, capital accumulation can occur on the basis of more production sold for lower prices. More capital goods can be produced with the help of the capital that exists, financed by the same nominal spending and the same nominal profitability, and in this content, capital goods prices can fall, and keep falling, without any drop in profitability.
If twice the goods are sold for half the prices, then profitability does not fall. For revenues do not fall.
The “stagnant economy” you are envisioning is a false one, given your own assumptions.
“(This is evasion. This is ridiculous.)”
I am not evading anything. You are. You are evading the context of falling capital goods prices, over and over and over and over and over and over and over and over again.
You conflate unchanged nominal spending growth with unchanged real output. Why? Because you are ignoring falling capital goods prices on the basis of more productivity.
“(You are nit-picking and quibbling over semantic points.)”
I am not nit-picking, nor am I quibbling over semantics. I am not nit-picking because the issues I am raising are important to showing you the very large mistakes you are making. I am not quibbling over semantics because I am not asking you to use different words to describe the same thing, nor am I arguing against what you are saying by focusing on your vocabulary choices.
You are just throwing everything you got at me, but they’re all just spitballs off a tank.
“There is no objective limit to how much investment is profitable, other than that which is decided by the individual time preferences of people.”
“Yes, yes there is, you’ve regressed. You’re confusing the nominal and real. We’re at max capacity. There is no infinitely smaller limit to exploit. You have to get real people to be more productive.”
First, I have not “regressed”. I have maintained the same position the whole time. Second, what you said proves my point.
The concept of an economy being at “max capacity” IS A FUNCTION of labor productivity.
You said that “you have to get people to be more productive.” Yes, indeed, that’s my point all along. You get people to be more productive BY HAVING THEM WORK WITH MORE AND BETTER CAPITAL GOODS.”
People produce more when they have more capital goods to work with, as compared to if they have fewer capital goods to work with. Agreed?
Well, the way to have people work with more capital goods is by ensuring that saving and investment are sufficiently high relative to consumption, so that the resources used up in consumption are not only replaced to as to maintain that trend of consumption growth, but also more than replace, in the form of new capital that is made of resources that are as of yet not used for immediate consumption, but for capital goods production that go to increase the production of both capital and consumer goods in the future.
Further, there is no fixed capacity in an economy with capital accumulation in an environment of fixed nominal spending. If investment is sufficiently high, capacity is gradually increasing, as more and more output is generated on the basis of capital accumulation. If anything, you might argue there is at any given time a fixed growth in capacity. But even there, that growth of capacity trend can increase by virtue of even more investment spending and even less consumption spending.
The trend of capacity growth can increase because of a higher rate of capital accumulation than before, which puts more capital goods in worker’s hands at an even more rapid pace, which increases their productivity at an even more rapid pace, which increases the growth trend in the economy’s “capacity.”
It is NOT TRUE that a given growth trend in capacity is fixed and objectively rigid. The higher people’s investment rates are, the greater total output can get, and the more rapid will consumer goods be produced. That in turn can allow people to increase their saving and investment spending even more, and still live good lives, until the next round of investment increase turns into a higher productivity and consumption. Then, that will allow for another increase in saving and investment.
There is no objective limit to this process.
Now, you claimed that I confused nominal with the real, when that is exactly the confusion you have had, which I have repeatedly tried to get you to understand, but to no avail. I know the difference, and it because I know the difference that I can point out the errors you are making that are grounded on NOT differentiating between the two! How’s that for irony.
“There is no limit to saving and investment. The MEC will fall, but successive increases of equal amounts of investment will NOT keep decreasing the MEC by equal amounts. It will decrease the MEC by ever small amounts, until it tapers off to that which is associated with the voluntary consumption of producers”
“No, wrong MF, two exploit the limit you have to get the real economy to get infinitely more productive.”
This statement does not justify being prefaced by a “No, MF”. I am explaining to you how the economy can get more productive, and yet you keep holding output fixed and unable to grow.
“But we’re at max capacity.”
Capacity, again, is a function of investment relative to consumption. It is not ever maxed out in the objective sense, beyond which humans cannot go no matter how many more capital goods they have and no matter how much their productivity rises.
Max capacity DOES NOT MEAN some objective fixed upper limit to productivity. Productivity can always grow by workers having more capital goods with which to work.
Capacity is not fixed. It is open ended. Capacity can, and does, increase by virtue of capital accumulation.
The kind of full capacity you seem to be talking about is a situation where humans are Gods and have control over every aspect of the entire universe, and cannot squeeze any more output out of the universe, because technological progress comes to end (since humans know everything), and because everything in the universe is being used as capital goods in their maximum technological implement.
What you are talking about is, I hope you can see, something that is going to be trillions, if not quadrillions of years out. Humans know only very little of the world, and we have only just acquired capital control over a tiny dot in the universe.
The potential for more technological progress and more capital control is for all intents and purposes, infinite.
On Earth, in the real world, your hypothetical of no more technological progress possible, and no more capital improvements possible, is not anything to do with what Keynes wrote, not anything to do with the real world, not anything to do with what I am saying, and no anything to do with economic science. it is religion.
“At an MEC of 1%, in an economy at full capacity, would suggest a very, very, VERY high saving and investment rate as compared to consumption. The tiny nominal rate of return would represent such a high real rate of return, that what you would probably see is a nominal return of 1%, and falling prices of 10% or so, for a real return of around 11%. Investment would be worthwhile even with such low nominal returns.”
“You’re trying to eat a free lunch, but we’re at max capacity.”
No, I am not trying to eat a free lunch, because what I am saying takes effort, it takes mental and physical labor, it takes production, and second, no, we’re not at max capacity.
We are at the capacity that is determined by the given investment rate. Max capacity is a function of the height of investment and technological knowledge IN THE PRESENT. But capital can and does accumulate through production, and new technology can be learned through experiments and research. There is no free lunch here, and there is no max capacity here.
You are holding capacity constant, when it need not be constant.
Capacity will only max out once humans are omniscient and once they have full capital control over the entire universe. That won’t happen in your lifetime, or anyone else’s lifetime for billions of years. Your assumption of max capacity is so unrealistic that it does not deserve serious analysis, nor does it deserve to even be recognized.
“Yes, in an economy with no inflation, this net investment will eventually cease generating the sort of profitability mentioned. At that point, the MEC will only be a function of producer’s consumption spending. For their capital spending would generate revenues that are equal to the depreciation costs each period. The additional source of profits would come from the spending that producers make on themselves.”
“Right, this is what I’ve been saying all along and you said was impossible.”
No, I did not say it was impossible. How can you claim I said it is impossible, when I was the one who explained it to you as what would take place?
You have also not been saying that all along. I have. You maybe learned it just recently, but it was only after my telling you.
“But eventually capital will depreciate to the point of recession.”
False. Capital that depreciates can be, and is right now as we type, replaced by new capital by virtue of a high enough nominal investment rate that pays people to produce more capital goods every day.
You’re talking nonsense.
We are not at max capacity now in the real world, and we will not be at max capacity in theory for billions of years at least, or however long it will take humans to become omniscient and omnipotent.
Right now, as you are claiming we are at max capacity, capital goods are being produced right now, and are being used to replace worn out capital that depreciates. It’s the very reason why economies GROW over time. Growing economies grow by virtue of a high enough saving and investment rate that generates enough new capital to not only just barely replace worn out and used up capital, but add to the capital base besides, which allows for higher productivity of labor, a higher production rate of consumer goods, and hence more consumption overall.
Look around you. 200 years ago that stuff did not exist. Why? Because the CAPITAL did not exist. There was a consumer nominal demand, there was a need, there was a desire, but all that consumer spending and need and desire cannot bring the consumer goods into existence. The ONLY thing that can do it is CAPITAL. Producing capital is how to grow economies and satisfy the consumption demands of people.
If you have a million people on a deserted island, and they each have $100 million to spend on consumption, then do you think their output would be as large as compared to 1 million people in an economy with capital, and, say, where each person has only $100 to spend?
Even though the “spending” and “consumer spending” on the island is much much higher than in the city, even though their “need” of consumer goods is higher (since they have no plumbing, no hospitals, no medicine, no modern food manufacturing plants, no factories, etc), their standard of living is worse. Why? Because they lack the capital.
In the city, where there is more capital, standards of living are higher.
“False. Profitability doesn’t reach zero, even when those costs cease being deferred. There is still the voluntary consumption spending of producers.”
“MF, I said there will be a point at which additional investments will not be profitable and respond by saying “False. Consumption will rise.”
No, I did not say “consumption WILL RISE.”
I said consumption WILL BE POSITIVE, I.E. GREATER THAN ZERO.
Consumption spending does not have to RISE when there is capital accumulation, in order for the MEC to be positive.
Consumption spending can keep falling, and capital goods spending can keep rising, and the MEC will stay positive, and will be as low and positive as the height of investment spending relative to consumption spending happens to be.
There does not need to be an external source of new consumption spending when producer’s consumption spending falls as they increase their investment.
They can increase their investment and decrease their consumption as much as they are biologically physical and capable of doing, and the MEC will STILL be positive, because producer consumption spending EXISTS. It’s not that it rises that does it. It’s solely that it exists that does it.
We don’t have to worry about producers consuming a positive amount. They will do that on their own recognizance without asking for your permission. They don’t need to be told to consume at least something or else they will die. They’re not that stupid.
“Yes, I know consumption can rise, it’s what I’ve been saying all along.”
Wait, I did not say that consumption rises here. You fallaciously inferred I said that, when I didn’t. Consumption spending can keep falling, and investment spending can keep rising, and the MEC will remain positive, because consumption spending EXISTS.
Do you not understand the difference between existing consumption spending, and rising consumption spending? I am arguing the former, not the latter.
“If producers in this context then increased their investment again, then the MEC would fall again, but by less so that before”
“No, capital has depreciated to the point where any further increase in investment will result in either inflation rising or GDP falling.”
No, if there is a rise in investment spending and fall in consumption spending, then not only is there is no general increase in prices (there is a change to relative prices, where capital goods prices rise at first, and consumer goods prices fall at first), but the change to relative prices is not even a “refutation” of my argument that successive increases in investment spending and successive decreases in consumption spending will generate a declining MEC that declines less and less as each round of increased investment spending and each additional round of decreased consumption spending.
Capacity is a function of existing investment. If investment spending increases, at that increases the prices of capital goods, and decreases the prices of consumer goods, then that will increase the relative profitability of capital goods and decrease the relative profitability of consumer goods.
That will then result in a reallocation of resources and labor away from consumption industries, and towards capital industries. More resources and more workers entering the capital goods industries can increase the rate at which capital goods are produced, and that will increase the economy’s “capacity.” Far from being at “max capacity”, the economy was at “a” capacity, concomitant with the existing allocation of resources and workers among capital goods and consumer goods industries.
An increase in investment and fall in consumption can move workers and resources away from consumption and into capital goods.
“You keep asserting, quite incorrectly, that the MEC somehow goes negative, when it doesn’t go negative at full capacity, but only keeps decreasing to the level that is generated by their given consumption.”
“MF, did you eat lunch today. Did your consumption fall to zero?”
I could only eat what I had for lunch because there was saving and investment in the capital that was used to help workers produce the food. Somebody in the past made the decision to increase their investment, which necessitated an abstention from their consumption, to pay wages to people, and to pay capital goods sellers, to produce the capital in question that the deli then purchased for use in the production of the sandwich I ate. Because of that capital, I was able to eat what I ate. If that capital did not exist, then my money I have available to spend on consumption, would have only been able to purchase something without the aid of such capital, like picking apples out of a wild orchard.
“This is wrong. The MEC is not a function of real productivity. It is a function of the difference between investment spending and consumption spending. The MEC goes down when there is a rise in investment spending and fall in consumption spending.”
“I’ve been saying all along that can consumption can rise to offset falling investment.”
You have been wrong all along, because consumption spending does not have to rise to “offset” decreased investment spending.
If investment spending falls, and consumer spending remains unchanged, then the prices of capital assets can fall, and those workers who produce capital assets can earn lower wage rates.
This is a reflection of people’s new relative valuation between capital goods and consumer goods. For if investment spending falls, but consumer spending does not change, then that is equivalent to their being a relatively higher valuation placed on consumer goods and a relative lower valuation placed on capital goods, or, yet another way of saying it, it is equivalent to a rise in time preference, that is, a relative rise in the valuation of present goods compared to future goods.
If this change in valuation is allowed to work its way through unhampered changed relative prices, then investors will learn that there is now more value in present goods, so they will adjust their allocation of capital.
“But, and here’s the key thing. Eventually consumption must fall as a function of depreciation and when it does GDP will fall.”
If there is a voluntary relative fall in investment as compared to consumption, then of course output will fall. This is in line with what people now want. Higher economic growth is not something I hold should be imposed on people if they don’t want to grow their standard of living at that high of a rate. I am against slavery. I am against tricking people using coercive and deceitful means as well.
If a person does not want to save and invest, and have a lower standard of living as a result, then I am against forcing that person to save and invest against their will.
Just like someone hitting themselves can be justified, it doesn’t mean that others hitting that person is equally justified.
I am not dogmatic so as to force economic growth on people. Economic growth should be in line with what people voluntarily want for themselves.
“The MEC does not go down when there is unchanged nominal investment spending, unchanged nominal consumption spending, but increased productivity on the basis of physical increases in productivity, and falling prices.”
“There are no more physical increases to exploit here. We. are. at. max. capacity.”
False. We. are. not. at. max. capacity.
We. are. at. the. capacity. that. is. a. function. of. the. given. investment.
If people have an ability to invest more, then by definition the economy is not at max capacity. The very existence of the possibility that people can invest more (and thus create potential problems in your flawed opinion) is sufficient proof that the economy is not at maximum capacity.
There is no such thing as maximum capacity in the objective sense, as long as humans are not omniscient and not omnipotent.
“MF, this discussion is at max capacity. And so I must lower my investment and raise my consumption, but I will invest again and let’s hope it will be a glorious recession indeed.”
You won’t succeed, because we’re not at max capacity. Indeed, we are in such desperate need of more saving and investment that the economy has slowed down to a crawl because of a lack of saving and investment.
A slow down in economic growth is due to a slow down in saving and investment.
You contribute NOTHING to economic growth by consuming resources for yourself. You only contribute to economic growth by your productivity, and if you’re a wage earner, then your productivity is only possible because you have access to capital goods, which requires saving and investment to produce, and because you are paid a wage, which requires your employer to save and invest to pay.
“I am not claiming any free lunch, you are.”
“–Sigh–”
Yes, I know it hurts to hear and you deal with that hurt by pretending that you’re only being misunderstood.
“You are saying that when there is more consumption, we can have more production. That is free lunch economics.”
“Consumption is consumption and production is production.”
“So what is my function?”–Major_Freedom (1973-2013)”
What is this craziness?
“Your argument of a “supply shortage” is misleading, because shortages only arise with price controls by the state, Shortages tend to be eliminated in a market by virtue of rising prices.”
“Semantics.”
It’s not semantics. Shortages are very different than rising prices on the basis of rising nominal demand.
Capital goods prices that rise is a good thing, a needed thing, if there is a rise in investment and fall in consumption, for rising capital goods prices will increase the PROFITABILITY of producing and selling capital goods. That will attract workers and resources into capital goods production, instead of consumer goods production, and that will have the eventual result of increasing the production of both capital goods and consumer goods!
How is that possible you may ask? How can fewer workers in consumer goods companies, and lower prices of consumer goods, be associated with more consumer goods production? By virtue of more capital.
It’s why we now have only 5% of the workforce in farming, instead of 80%, and yet that 5% of the workforce produce the entire population’s food materials. How is that possible? They have so much more capital than the farmers 200 years ago, that 5 people can now produce more than what required 80 people to produce 200 years ago.
“Yes, rising prices in this case will eventually result in investment becoming unprofitable.”
False. Rising capital goods prices will make the investment, production and selling of those capital goods MORE profitable.
You keep making the mistake of assuming that consumer goods sales are the only sales that generate revenues and profits. That’s false. Capital goods are also sold. They also earn revenues for the sellers of those goods. Their sales also generate profits.
“If capital goods prices rise by bidding in an economy at full capacity, then the MEC will just fall by less than it fell the last time there was that same amount of increased nominal demand for capital.”
“http://en.wikipedia.org/wiki/Zeno‘s_paradoxes#Achilles_and_the_tortoise”
Non-response.
“MF, that link messed up but is this what you’re trying to say?”
I am trying to say what I am in fact saying.
The MEC does not limit profitable investment. Investment can keep increasing from 50% of people’s incomes, to 60%, to 80%, to 99%, to 99.9% of people’s incomes, and the MEC will continue to be positive, because in each of these scenarios, consumption spending remains POSITIVE (and decreasing, but that’s not important here).
Since producers need to live and eat, no matter how much they invest, they can never invest 100% of their incomes. They’ll die. So we don’t have to worry about too much investment. Any quantity will be profitable because there will always be a difference between total spending and costs by virtue of the mere EXISTENCE of consumption. Consumption spending does NOT have to rise every time investment spending rises, even at what you call “full capacity”.
For when there is more investment spending in this situation, there will be a rise in relative nominal profitability of selling capital goods, which will lead to investors redirecting their capitals away from consumption industries, and towards capital goods stages. More capital can be brought into capital goods.
For example, if at full capacity investment rises by 5%, then that can result in transport trucks that were going to be allocated to delivering consumer goods, to delivering capital goods instead. That will raise the production of capital goods to whatever positive degree, and increase the “capacity” of the economy that you only THOUGHT was at full capacity.
This is nominally profitable, since by stipulation you assumed a rise in the prices of capital goods. So capital goods sellers can attract those transport trucks away from consumer goods sellers.
“In a race, the quickest runner can never overtake the slowest, since the pursuer must first reach the point whence the pursued started, so that the slower must always hold a lead. – as recounted by Aristotle,”
Zeno’s paradox does not apply to what I am saying. It LOOKS, at a very, very superficial level, to be similar, but I am not arguing that a faster moving quantity can never catch a slower moving quantity.
I am arguing that one positive number divided by another positive number can never equal zero, nor become negative, no matter how small one number gets and no matter how large the other number gets.
MEC = (Producer consumption spending + Investment spending) divided by (Investment spending).
I challenge you to find a positive number for producer consumption spending, and a positive number for investment spending, that will make MEC equal to zero.
I’ll give you a free copy of Economics In One Lesson if you can do it.
“It doesn’t fall linearly, such that successive equal amounts of additional investment somehow require successive equal amounts of consumption spending.”
“MF, you can’t just take the functions of consumption and investment in an infinite horizon.”
That’s what you are doing when you claimed max capacity, which is at an infinite time horizon.
“Investment is falling at the rate of capital depreciation and prices are rising in response.”
Is this an empirical statement? Nobody is arguing that investment pending CANNOT fall in the empirical sense.
You keep moving back and forth between hypotheticals and deductive scenarios, to empirical scenarios.
Yes, investment spending can potentially fall to zero. But my argument is that there is no limit to investment that is constrained by the MEC.
The MEC is determined by differences in nominal spending. It is not a physical output type quantity.
“Remember earlier when you kept saying the producers consumption must be positive because they have to eat? Well for investment to stay positive people have to stop eating and then GDP will be falling.”
No, GDP will rise because with more investment, there are more capital goods produced, and with more capital goods produced, worker productivity rises, and wit
When you said there has to be an increase in consumption in order to prevent unemployment and fall in GDP. Preventing unemployment and fall in GDP would imply that an economy grows (i.e. capital accumulates) more than what it otherwise would have grown without such consumption. This is equivalent to saying consumption produces capital.
No, MF, it prevents it from falling. It falls less (in this case zero) than it otherwise would have.
Yes, my posts. Link to them.
You can link to my posts for that too.
Thanks!
You don’t need constantly updated empirical numbers. It is logically deduced from the fact that profits are less than 50%.
Right, but I don’t know if your assumptions about the accounting of the “structure of production and consumption” are right.
And no, I still have not got around to skylien’s link. And now he’s telling me I need to read an entire book!
They can’t purchase more capital goods unless there are capital goods available.
“Producers will consume 100% of their income.”
But no, they can order them to be made.
Available capital goods requires prior saving and investment.
No, they can make the goods when they’re ordered.
Investing in capital goods creates savings for capital goods makers if their income is rising faster than they’re spending.
Keynesian theory holds that 100% consumption can maintain employment and output. That is false.
100% consumption can mantain income and output if there is positive personal savings and inventory.
It simply can not last.
Sorry, about that, bolding, MF.
I’ll take that as yet another concession.
No, if consumption is rising, then living standards are increasing.
Keynes’ “General Theory.”
Okay, MF, i’ll try to use the one quote you’ve provided thus far to see if I can support your claim. (If I can find some time. I’m pretty much at full capacity right now.)
“Falling or rising GDP?”
During periods of unemployment.
“FSCCCM.”
“FFFFA.”
He held that falling wage rates and prices cannot do it, because he fallaciously claimed capital goods prices will rise, even though they would fall in the context given.
GDP? Up or down?
Constant?
I’ll take that response to be another concession.
No, if you’re saying he did not actually say, what you claim he said, but that it’s “hidden” in the model, then I find that extraordinary.
“Implicit”, how so? What is GDP doing? Do you have the passage on hand?
My response was not to just claim that a fall in GDP will be followed by a rise in GDP, but rather, that a rise in cash preference, which manifests as a falling in aggregate spending, will at first be a scenario of declined net investment, which when combined with producer consumption, will result in a declined MEC. But because a rise in cash preference will be accompanied by a decline in productive expenditures, asset prices will fall to a new lower level. Once that occurs, accumulated capital in dollar terms will decline, and producer’s consumption and the same relative rate of net investment (since rising cash preference cannot be assumed to come from ONLY investment or ONLY consumption, but both, that is, time preferences don’t change), these will become a larger fraction relative to accumulated capital in dollar terms. That means a higher MEC after all is said and done. NGDP would be lower, but rates of profit will be higher, because assets (costs) are lower relative to producer consumption and net investment.
So there’s a rise in “cash preference” lowering MEC followed by an “instant deflation” that stabilizes at a higher stock of savings, at which time there is a dissavings and the MEC starts to rise?
Instant recession and recovery. It is like a theme park ride.
If you propose a hypothetical scenario of an increased cash preference, then that is the same thing as proposing a hypothetical example of an aggregate money spending deflation, which is roughly the same as a decreased NGDP, or what you call it, just “GDP”.
Holy Shnikes, you’re a wily one.
No, MF, NGDP is not the same thing is as GDP. NGDP includes changes in prices.
What do you mean “No” here? You are evading the context of falling wage rates and prices in an environment of unemployment.
No, I’m suggesting that with falling GDP, (not NGDP), that you’d still have falling MEC.
Whether NGDP is rising
or falling depends on the assumed change in cash preference you postulate.
“Instant deflation’s gonna get you.”
I cannot possibly “concede” an utter falsehood. Whether or not aggregate spending (NGDP) is higher or lower, is a transition period that the market process does not get stuck at, but adapts to by virtue of what happens to the resulting differences in nominal demands between investment, capital accumulation, and consumption.
The goalposts, they be moving, they be moving real good.
“No, falling GDP or constant GDP or rising GDP?”
What do you mean “No” here? You are evading the context of falling wage rates and prices in an environment of unemployment.
Whether NGDP is rising or falling depends on the assumed change in cash preference you postulate.
If cash preference rises, this is the same thing as saying NGDP falls, provided of course that money is not destroyed (e.g. credit default/payback).
No, it’s not the same MF. If cash preference rises you have not explained any price changes
You’re telling me to leave aside the number of unemployed, AFTER you brought up the “complaint” that we have to make clear whether we are talking about “recession” or “depression”? You’re not making any sense.
MF, I just mean the total number is not important, only whether employment and GDP is rising or falling or staying the same.
To me a recession is falling GDP and a depression is rising GDP with excess capacity.
If you want to make clear whether we’re talking about “recession” or “depression”, then you are asking me to consider the number of people unemployed, because that’s how those terms are typically defined. 7% unemployment might be called a recession, whereas 25% unemployment might be called a depression.
No, (to me) 7% might be called a depression, 25%, a great depression.
You can have a recession within a depression as the U.S. did in 1937.
Now you’re saying leave the numbers aside, and focus on whether the economy is “below full employment, at full employment, or above full employment.”
Below full employment means there is unnecessary unemployment.
Above full employment means there is not enough to employ.
Full employment is the equilibrium level of employment.
That was MY original focus before you derailed it with quibbling over the semantics of whether to call the economy in a recession or depression!
I’m very sad right, now.
To repeat for the millionth time, the context in which Keynes made the argument that capital goods prices rise, was in an economy with unemployment. That is what I have ALWAYS argued, and so now it should hopefully be clear to you.
GDP (as opposed to NGDP), I’m curious, what’s it doing?
“I thought secondary deflation was gratuitous part of deflation.”
Deflation is deflation is deflation.
??? You’ve got to be kidding me. Why bother calling it “secondary deflation”? If it just regular old spiraling downward prices?
“The unnecessary pain.”
If I choose to reduce my spending, and that all else equal this will reduce other people’s nominal incomes, this is NOT “unnecessary.” This is NECESSARY to accomplish my ends.
Nobody’s making you spend, egomaniac.
People want to spend. They like it.
The market is a process where individuals can achieve their ends
[Readies the exit bag.]
[“Achieves” an end.]
It isn’t a prison
You are in a prison. You just don’t realize it.
, whereby everyone has to spend, or else they’re punished by law. That punishment is unnecessary pain.
[Strawman]
No. Voluntary deflation is a CORRECTION to previous distortions that undue inflation has wrought.
Come out and spend.
So, again, the government gets all the blame for the crash, even though (as we have seen) you don’t need the government for that, but the economic rationalization for “secondary deflation” is a natural rights argument.
And MF can not even bring himself to even talk about how it might affect other people or why “secondary deflation” has a special name.
But MF, if the “secondary deflation, affects investments that were not “malinvestments”, then how do back to equilibrium?
A lot of Austrians want 100% reserve banking, right, is this why?
You just start over at the new equilibrium?
Voluntary deflation is a manifestation of individual valuations given the new conditions of knowledge and preferences. It is beyond judgments of “right” and “wrong”. It is what individuals now prefer.
MF: “It’s beyond right and wrong.”
Why?
MF: “Natrual rights.”
Funny how “individuals” starts to look kind of collective in that statement.
“To each according to his production, from each according to his preferences.”–World “Liberty”
“Anarcho-capilists” are the new Maxists.
Yes, because the government CANNOT fix the problems it itself created.
You haven’t demonstrated the latter assumption, which as we have now seen can occur without government.
Nice sneaky phraseology.
I’d ask you to demonstrate the former, but, since you haven’t proved the later, what’s the point.
Yes, individuals in the market process have to bear the costs of what those in the government did.
How has the government harmed you personally, MF. What’s your sob story? Are is all this a tautological bluff?
That’s one of the main reasons why Austrians are so adamant that booms do not occur in the first place.
[Think of the children.]
It’s because they know that the costs will be burdened on those who had nothing to do with bringing about the boom.
[Who’ll now be child laborers.]
“Rising or falling or constant GDP?”
Stop evading the context. It’s falling capital goods prices.
I’m trying to find out the context, MF. Specifically, what is happening with GDP.
If by GDP you mean
MF, by GDP, I mean real GDP.
Yet hear you are again, being evasive:
“total spending, total spending (continually) rises when there is inflation of the money supply. The reason NGDP fell 2008-2010 is because the total supply of money actually fell due to credit collapse.”
I didn’t ask this question. You’re changing the subject. We were talking about Keynes and the MEC.
The Federal Reserve System brought that credit expansion about,
No, people borrowed money voluntarily.
to a very high ratio relative to base money.
What’s the relationship to base money? (Serious question.) Base money is what reserves and “inside money” combined? What’s the policy limitation when reserves relatively shrink? Is it that reversing course is too risky because too much risk is piled up throughout the system? Hence your “house of cards” reference?
But this off topic, Keynesians like Dean Baker don’t support bubbles. Austrians don’t “own” the crash.
Ironically, when arguing you can exploit that limit forever you created “a financial bubble” of requiring higher and higher profits further and further into the future that a crisis in confidence or withdrawal of reserves could cause to come crashing down, down, down.
Unfortunately, (fortunately) for you it was impossible because it required more and more (until the crash) economic activity. (Which was ruled out by assumption.)
As I recommended before, you ought to first understand what you have put on your plate first, because you ADHD over to another topic.
To answer your question, yes, when total spending falls, it will almost always be associated with a declining MEC
So we have falling prices and lower MEC? Isn’t that your whole knock on Keynes?
because while revenues decline instantly, costs fall with a time lag, since current costs are a function of past (productive) spending, when total money spending (and productive spending) were probably higher.
Agree.
But this fall in MEC is temporary,
Nobody said it wasn’t temporary. It’s just that in the long run we’re all going to be typing this thread. (Although, society could collapse!)
because when total spending falls, so does productive spending tend to fall, and when productive spending falls, so too do costs eventually fall.
The long run.
Once costs do fall to a new lower level, then given the new (lower) total spending, MEC will rise once again (since net investment and producer consumption will put a constant and relentless pressure on MEC to rise).
And the boom starts again. Okay, so we dealt the crash, let’s climb our way back up.
You were insistent that I address your claims in a context of full employment and full capacity.
No, you were insistent that the context was falling prices and rising MEC. And now that we dealt with that. (If you notice on the other thread up the page, you’ll see me say, that I’m going to accept your premise for the sake of argument. The “context” you insisted on. Though, maybe it was me. I’ve lost my bearings at this point. I’m all upside down. It’s been nice, having it out. Thanks, MF, truly.)
Now you’re saying you want to go to a scenario of a crash, which of course means unemployment and less than full capacity?
No, now that we dealt with that, I’m ready to go back to full capacity. (I am beyond full capacity now.)
Maybe you think capital goods prices are the costs of capital in interest rate or borrowing terms.
Okay, so the MEC is what you take in profit on a piece of capital at a moment in time and the cost of capital is how much you paid the capital up front. (Or on a payment schedule out through time.)
So the MEC doesn’t fall below a positive lower bound until after you’ve already bought your last piece of capital?
Edit: I meant falling MEC, and rising capital costs.
Real MEC would keep growing, making the smaller nominal MEC more and more worthwhile to invest!
Well, no, not if it’s the cost of replacement capital, that fall into unprofitability. So that the MEC fulfills your asymptotic function.
CONSUMPTION SPENDING DOES NOT PAY WAGES. Not even NGDP pays wages. What pays wages is saving and investment in labor. This spending is in competition with consumption spending.
Wrong MF, the consumer goods producers rising consumption replaces capital goods producers now falling consumption. The total consumption is the same, what has fallen is investment spending on new capital goods.
An employer that has savings available can financed his own consumption, or he can pay wages. He can’t do both with the same money.
See above. Wages are the same what has fallen is spending on captial goods and capital good makers consumption. Soon depreciation will set in and the recession will begin.
Yes, falling NGDP may tend to be associated with falling employment, but this is only to the extent that wage rates do not fall. It’s not that falling NGDP did it, it’s the failure of wage rates to balance with the new (lower) nominal demand for labor.
No, MF, we will have to replace our capital goods which will cause falling income of consumer goods producers.
Yes, I’ve already agreed, that “underemployment” is consistent with this.
The key point is GDP will be falling. (Why are you talking about NGDP?)
More consumption spending cannot prevent the fall in wages, because more consumption spending just results in higher profits for consumer goods companies.
Yes, that why consumer good producers consumption had to rise to maintain full employment.
And no, you can’t argue that more consumption spending will be used by consumer goods company owners to pay subsequent wages,
I’m not. GDP growth is zero.
because that would be saving and investment, NOT consumption spending. So you would be contradicting the context of CONSUMPTION spending raises wage rates.
We’ve reach unity. How long can we maintain full employment now? How long till our capital goods wear out? The glorious recession is near.
And even if the economy ends up with more employment in the consumer goods industries for whatever reason, this would end up harming workers’ standard of living, because with fewer workers in capital goods industries, and more workers in consumer goods industries, the rate of capital accumulation will be otherwise lower.
GDP growth is zero, but we could make capital more productive as it depreciates and so increase the size of the consumer goods industry relative to the capital goods industry. (I think.)
THIS is why I brought up the hypothetical of 100% consumption. For imagine that investment for some reason collapses 90%. If the “solution” to this is for there to be an equivalent rise in consumption spending, thus attracting almost all workers to consumption, then the capital base would eventually rust and wear out, be disintegrated, the productivity of labor would collapse, and real standards of living would plummet.
MF, that’s how we get the recession. We have to replace capital goods.
But you’re weirdly focus on percentage of investment spending. That doesn’t tell us anything. Rising consumption is what tells us that people are getting wealthier.
This would occur “naturally” in a free market with protections of property rights, but unfortunately, the state is guided by the exact Keynesian thinking as you, and they do everything they can to make investing as unattractive as possible, and as least capable as possible.
You’re right, MF, Dean Baker is President.
Lots of government borrowing from the market’s savings, which redirects saving from investment to government spending, decreasing interest rates below what the market process would have put them at, which makes investment less attractive,
Wrong, In a recession the Fed tries to push down interest rates. In order to maintain their target they have to willing to buy government debt on demand. So that when the Government borrows the Fed accommodates the borrowing so that any bond investors who decide they have more profitable investments elsewhere can dump their bonds in the liquid market and the Fed will be waiting with cash on hand.
This is how government borrowing can increase the money supply.
Crowding out occurs when the government and private sector are fighting over underlying resources. But in a recession there are idle resources. The government puts our idle resources to work, increases our production. Makes us richer in the present.
and punishing cash holders – who would have made profits rise (as explained above) – with inflation.
I’ll have go back and look because I can’t remember what this is? Was this the theme park ride deflation?
There is no such thing as an equilibrium MEC apart from where voluntary investment and consumption would have put it.
Is there an equilibrium MEC,
MF?
MF: “No.”
Why?
MF: “Natural rights.”
Capital depreciation does not lower the MEC.
Consumer goods producers are have to cut back spending to replace capital at a rising price. This causes GDP to start falling lowering the profitability of their investment.
If you assume inflation is taking place, which will turn the existing nominal MEC negative in real terms, then this is the fault of those who are inflating. It’s not the fault of the market.
The only way to continue current levels of production is to bid away workers from already fully employed firms or fully employed firms from other firms.
If the workers can’t be bid away, then capital will depreciate below replacement levels of production.
This is because we are at full capacity.
The private sector can’t support a higher level of investment at this time.
The argument that the MEC can’t ever fall to zero, and below zero, is only true in the context of non-declining aggregate spending.
Aggregate spending either must decline or go chasing prices. Those are are only two choices.
I was explaining to you how MARKETS work,
Oh, MF.
and yet you seem to want to haphazardly go back and forth between markets and hampered markets, as if there is no fundamental difference between the two.
The market is not “hampered” it’s a fully employed private market primed for an inevitable recession.
If you assume inflation is taking place, which will turn the existing nominal MEC negative in real terms, then this is the fault of those who are inflating. It’s not the fault of the market.
We’re at full capacity. Workers must be bid away. If they are not bid away, our capital will fall to ruins. And our production will plummet.
At any rate, if there is inflation, then that will tend to raise the nominal MEC. The MEC won’t remain constant.
So if we replace this with “cost of capital” instead?
Cost of capital is the up front cost? The MEC is the back end profit?
So the price of capital could have an unprofitable but positive asymptotic 2% MEC and 0% interest rates?
What a ridiculous assertion. Economics as a science presumes people are alive, not dead. If everyone is dead, then there won’t be any investment or consumption.
Woosh.
Obviously, not everyone kills themselves. Consumption in the aggregate can never hit zero as long as humans LIVE.
It’s a game of musical chairs. In a deflation the last one to stop spending must jump from the building.
You keep throwing that term around when it is clear you haven’t the foggiest clue what it even means.
[Waves back at Major_Freedom.]
Maybe that’s how truth appears to you, where the only time you think you’re close to a truth is when you are confused, but many truths are trivial.
[High Fives Major_Freedom.]
Just like my discussion of the relationship between capital goods and the MEC was claimed by you as a tautology, now you’re saying my discussion of the relationship between producer consumption and the MEC is a tautology.
[Major_Freedom and Major_Freedom’s interlocutor stop looking at one another and leave their respective corresponding rooms to enter another room.]
I was confused about the difference between capital costs and the MEC. Hopefully, I’m not too off base now.
To reiterate, the MEC is one thing. Capital goods prices and spending is one thing. Producer consumption is one thing
Thanks.
They are related to each other, where producer consumption and capital goods investment determine the MEC, but this does not mean that saying “the MEC does not hit zero because producer consumption is always positive”, is a tautology. There are two different concepts there. It’s not like saying A is A.
Yes, thanks. I think I got it now. (But you never know.)
You claimed that interest rates affect profits. I responded to that by saying no, it’s the reverse.
Okay, so you’re imagining the falling rate of profit corresponding with a falling rate of interest?
The only reason these comments are getting longer and longer is because you choose to write such comments, and because I choose
Say’s Law of comments.”I choose what I choose and you choose what you choose.”
“My comments are my comments are your comments are your comments.”–Major_Freedom
You are blaming me for choices you made.
You are blaming me, for blaming you?
I’m not blaming you, man.
I recommend you maybe take responsibility for your own actions.
Is there some way to not take responsibility? What did you have in mind?
Yes, I know, crazy thought.
Spooky.
I am not being evasive either. I have taken the time to respond to every claim you have made, and I have answered every question you have asked.
Yes, thank you. Although, I at this point don’t even know if you now agree with me that in our full capacity economy the recession is inevitable. That you don’t need Fed-led “malinvestments” after all.
I sense a falling rate of profit below me. Here comes the bust.
You have not done that in return. You have repeatedly changed topics, not finished an unfinished line of thinking, refused to seriously address the context of falling wage rates and prices, and repeatedly tried to derail this into discussions of GDP, whether to call recession a depression, and on and on.
We’ve dealt with falling wage rates and profits, with falling MEC, when GDP is falling.
I don’t really know whatever you talking about, though.
You haven’t as far I know admitted of any errors, so I’m left wondering where we still disagree, now.
I’m not sure what your so upset about.
This seems like one of those best defense is a good offense, things. (Maybe, I’ll figure out later.)
I recommend that you do a little soul searching
Ok.
instead of accusing me of doing something that you have no proof of me doing,
??? I’m sorry?
and considering the fact that you have such poor reading comprehension,
MF, you can’t really expect too much from me, when you talk to me this way. (I’m too tired right too care about what your saying, right now, though. I’m just trying to make it to the end of your never ending comment. So, I apologize for the increasing sloppy and perfunctory responses.)
that you even accused me (since recanted)
Should I not have recanted?
of introducing highly complex topics such as ABCT and economic caculation, even though I did not once mention those things.
Highly complex in this case meaning of little, if any, practical significance.
That should be strong evidence for you to be more critical of your own ability to read and understand comments, before you start judging my comments.
Are you being “ironic”, right now, or something?
You can’t possibly understand that which you read, unless you yourself are first mentally capable</b
of it. Improvement starts with you, not others.
Are you an others? Are you a you? [Major_Freedom falls inside a net. He is now being shot at.]
Look, I don’t know where you went, MF.
I guess I’ll see you around. (Although, maybe you lost your job when the recession hit.)
I am not on the defensive.
[Irony.]
My argument that you are holding some variables constant, and then you are imagining the effect of changing other variables, I am telling you is an incorrect approach, because the variables you are holding constant are not in fact constant when you change those other variables
I’m not holding any variables constant, what variable do you think I’m holding constant?
The economy’s at full-capacity, that is the only “constant”. I’m sorry you don’t like it. It’s the (unlike your “highly complex” theories) the inescapable logic of the supply side bottleneck.
You can chase prices or you can lower welfare. What is your choice. Will you keep going round and round with me? Driving up our prices in an inflationary comment war or will the INEVITABLE recession never begin. (Oops, not never, you’re dead. Hope. you. had. some. kids.)
The MEC is not a rigid value which somehow investment and consumption must adapt and mold and “fit” into.
I did not say they were. MF, try to understand. THE ECONOMY IS AT FULL CA PA C TY! THE E CON O MY IS AT FULL CA PA C TY. THE ECONOMY IS?
There is no alternative. Chase prices, have a recession. Make your choice. The blue pill or the red pill.
You are going to have to take your medicine, MF. (Yikes.)
“Gravity is coming for you.”
xgsmmy:
“No, MF, it prevents it from falling. It falls less (in this case zero) than it otherwise would have.”
No, it falls by MORE than it otherwise would have fallen, because using up resources without replacing them (consumption) shrinks the economy by more than it otherwise would have shrunk without said consumption of resources.
Consuming resources does not “prevent” an economy from shrinking. It actually shrinks the economy.
ONLY saving and investment grows the economy, because ONLY saving and investment adds to the economy’s resources.
“You don’t need constantly updated empirical numbers. It is logically deduced from the fact that profits are less than 50%.”
“Right, but I don’t know if your assumptions about the accounting of the “structure of production and consumption” are right.”
The accounting follows from the assumed profit rate.
“And no, I still have not got around to skylien’s link.”
I don’t expect you to ever.
“And now he’s telling me I need to read an entire book!”
Oh NO! Reading!
“They can’t purchase more capital goods unless there are capital goods available.”
“Producers will consume 100% of their income.”
“But no, they can order them to be made.”
That requires saving and investment in the production of that which is “ordered.”
“Available capital goods requires prior saving and investment.”
“No, they can make the goods when they’re ordered.”
No, it requires saving and investment to produce them. Ordering goods is a communication. Actually producing those goods requires expending money on prior capital goods and labor, to produce them such that they can be ordered. The people who produce those ordered goods cannot consume 100% of their incomes. They have to abstain from consumption to finance the materials and labor needed to produce those goods.
“Investing in capital goods creates savings for capital goods makers if their income is rising faster than they’re spending.”
This is just another convoluted and incorrect way of saying that capital goods sellers can earn profit if their selling prices are higher than their costs. It is convoluted because you are conflating profit with saving. It is incorrect because the cash the capital goods sellers end up with after the sale are product sales revenues, not profits. Profits are accounting abstractions. They are not money sums.
Since money a capital goods seller ends up with are product sales revenues, their “cash savings” is equal to the selling prices multiplied by the number of units sold.
Regardless of your confusion concerning profits, money, and saving, the fact is that those goods could not even be sold unless the producer saved and invested in the production of those goods.
“Keynesian theory holds that 100% consumption can maintain employment and output. That is false.”
“100% consumption can mantain income and output if there is positive personal savings and inventory.”
If there is 100% consumption, then nominal income will remain positive, cash holdings and cash transfers will remain positive, but wage payments would collapse to zero, because all money is being spent on consumption goods, not labor, and the demand for capital goods would collapse to zero, because all money is being spent on consumption goods, not capital goods.
Keynesian theory does not merely hold that “income” will remain positive, nor that “cash holdings” will remain positive, but EMPLOYMENT will remain positive. That is the error, because employment is only possible if wage payments are made, and wage payments are NOT consumption goods payments. So wage payments would be impossible in a society where there is 100% consumption spending.
“It simply can not last.”
What simply cannot last?
“I’ll take that as yet another concession.”
“No, if consumption is rising, then living standards are increasing.”
Consumption can only rise if capital is rising. Capital can only rise if there is production of capital. Production of capital can only rise if there is saving and investment.
Consuming more is a reward for saving and investing. More consumption doesn’t CAUSE higher standards of living. The cause is prior saving and investment. More consumption is the EFFECT of doing that which raises standard of living, i.e. saving and investment.
“Keynes’ “General Theory.”
“Okay, MF, i’ll try to use the one quote you’ve provided thus far to see if I can support your claim. (If I can find some time. I’m pretty much at full capacity right now.)”
You’re nowhere even close to full capacity. You are consuming far too much and saving and investing your time in education far too little.
If you were to reallocate your resources and time to self-education, your capacity that you thought was full, will be realized as being virtually empty, and you’ll punch yourself for inventing a fake upper bound in your own mind.
“Falling or rising GDP?”
“During periods of unemployment.”
“FSCCCM.”
“FFFFA.”
During periods of unemployment, falling wage rates and prices can eliminate unemployment, and it will also decrease, not increase the prices of capital goods.
Also, during periods of unemployment, the MEC will not fall as more net investment is made, and will in fact rise as more net investment is made, because net investment generates revenues that are greater than costs, since costs are depreciated over time.
Net investment restores profitability, it doesn’t decrease it further as Keynes fallaciously maintained.
“He held that falling wage rates and prices cannot do it, because he fallaciously claimed capital goods prices will rise, even though they would fall in the context given.”
“GDP? Up or down?
Constant?”
GDP is a product of the process of price formation. Whether or not it increases, stays the same, or decreases, is an effect.
“I’ll take that response to be another concession.”
“No, if you’re saying he did not actually say, what you claim he said, but that it’s “hidden” in the model, then I find that extraordinary.”
Why is it extraordinary? Because in your mind, there is just no way that Keynes could have made a mistake? He’s infallible? That if he made a mistake here, then it would open a can of worms of potentially more mistakes, which would then cast doubt on your entire worldview, which would be so incomprehensibly discomforting, that rather than admitting you invested in a loser, you will instead keep believing you’ll experience a payoff, and so you’ll react by believing I MUST be wrong somewhere, and hope that by saying the alphabet to me, you’ll eventually land on a letter that allows you to reinforce your hope?
“Implicit”, how so?”
Implicit in the way he responds to the argument that is itself in a context of falling wage rates and prices, and then, in the course of his argument, casually assert that capital goods prices rise, after which he then concludes that falling wage rates and prices cannot do what his counter-parties are arguing.
“What is GDP doing? Do you have the passage on hand?”
On hand? No. But if you CTRL+F in The General Theory, and search for “If there is an increased investment”, then I am sure you will find it.
“So there’s a rise in “cash preference” lowering MEC followed by an “instant deflation” that stabilizes at a higher stock of savings, at which time there is a dissavings and the MEC starts to rise?”
Two errors here.
First, it’s just deflation. Not “instant” deflation. Nothing that occurs in human life is “instant.” The deflation occurs over time.
Second, I am not assuming any subsequent “dissaving”. The context is rising cash preference. The eventual rise in the MEC stops the increasing cash preference. I am not claiming it reverses it. The MEC rises AND aggregate spending tends to a new lower level.
If I were to argue that the cash preference would reverse, then I would be contradicting the context of higher cash preference.
It would be like responding to your request of what happens when cash preference rises, by me saying “Cash preference doesn’t rise.” I would be doing EXACTLY what Keynes did when he responded to “What happens when wage rates and prices fall?”, when he argued “Prices rise.”
“Instant recession and recovery. It is like a theme park ride.”
Straw man. I notice a habit of yours. You first hypothesize what you think I might be suggesting, buy asking if that is what I in fact mean, and then, soon after, you then pretend that I answered your question, and you talk as if I answered in the way you think I should answer.
Perhaps if you ask a question, WAIT until I respond before you go on. Otherwise, why ask the question at all? Just ask questions and then answer them yourself. You don’t need me for that.
“If you propose a hypothetical scenario of an increased cash preference, then that is the same thing as proposing a hypothetical example of an aggregate money spending deflation, which is roughly the same as a decreased NGDP, or what you call it, just “GDP”.
“Holy Shnikes, you’re a wily one.”
“No, MF, NGDP is not the same thing is as GDP.”
Read what I said. I said WHAT YOU CALL GDP, is aggregate money spending. I know GDP is not NGDP. Aggregate money spending is not real GDP. It is spending on real GDP. Spending on real GDP is NGDP.
You said that unemployment will rise if GDP falls. That to me suggests that you are treating GDP in spending terms. For why would employment rise if GDP falls, given the assumption that money spending on labor remains, and given that wage rates remain? What does changing output have to do with wage payments and wage rates, which are the actual determinants of employment?
I gave you the benefit of the doubt in at least understanding that employment depends on labor nominal demand and labor prices. I guess I should not have done that. Your confusion goes even deeper than I originally suspected. You’re almost completely lost.
“NGDP includes changes in prices.”
No, it does not. If production doubles, and prices fall by half, then NGDP will be the same as compared to if production tripled, and prices fell to a third.
NGDP measures total spending, not prices.
“What do you mean “No” here? You are evading the context of falling wage rates and prices in an environment of unemployment.”
“No, I’m suggesting that with falling GDP, (not NGDP), that you’d still have falling MEC.”
This is false. Falling real GDP doesn’t decrease the MEC. What decreases the MEC is a falling difference between two nominal demands, namely, the nominal demand for output and the nominal demand for input.
The MEC is a monetary concept. It does not track real output. It tracks nominal profit rates on capital invested.
Your confusion seems to know no bounds.
“Whether NGDP is rising
or falling depends on the assumed change in cash preference you postulate.”
“Instant deflation’s gonna get you.”
I never claimed it was instant.
“I cannot possibly “concede” an utter falsehood. Whether or not aggregate spending (NGDP) is higher or lower, is a transition period that the market process does not get stuck at, but adapts to by virtue of what happens to the resulting differences in nominal demands between investment, capital accumulation, and consumption.”
“The goalposts, they be moving, they be moving real good.”
No, I am not in net. I am not being shot at. I am explaining to you how the market process works. If you can’t keep up, it doesn’t mean I am changing goalposts. I am not being challenged here. There is not even a game being played. You are in the stands, in the crowd, reading.
“Whether NGDP is rising or falling depends on the assumed change in cash preference you postulate.
If cash preference rises, this is the same thing as saying NGDP falls, provided of course that money is not destroyed (e.g. credit default/payback).”
“No, it’s not the same MF. If cash preference rises you have not explained any price changes”
NGDP doesn’t measure prices. NGDP measures total nominal spending. Rising cash preference is indeed the same thing as saying NGDP falls, provided money is not being destroyed.
I don’t need to explain price changes to explain NGDP changes. NGDP tracks the dollars spent, for example the dollar revenues earned by GM, plus the dollar revenues earned by Apple, plus…and so on. It doesn’t track the prices of GM products or the prices of Apple products.
Confusion is your middle name, isn’t it?
“MF, I just mean the total number is not important, only whether employment and GDP is rising or falling or staying the same.”
The presence or lack of presence of unemployment is what I ORIGINALLY argued is important, but then YOU said it’s important to distinguish between recession and depression and not to mix those terms. So I distinguished those terms by the extent of unemployment, i.e. the quantity of unemployed, i.e. the NUMBER of unemployed (5%, 10%, 25%, etc).
I was responding to your silly off topic quibbling over semantics of recessions versus depressions.
If you don’t want to focus on X, then don’t bring it up. it’s pretty basic.
“To me a recession is falling GDP and a depression is rising GDP with excess capacity.”
You define a depression as containing rising real GDP? Your definitions are as absurd as your economics. I am afraid to ask, but where in the world did you first accept the notion that depressions contain rising real GDP? You just made it up, didn’t you.
“If you want to make clear whether we’re talking about “recession” or “depression”, then you are asking me to consider the number of people unemployed, because that’s how those terms are typically defined. 7% unemployment might be called a recession, whereas 25% unemployment might be called a depression.”
“No, (to me) 7% might be called a depression, 25%, a great depression.”
So if there is 0% unemployment, rising real GDP but positive yet miniscule “excess capacity”, and that occurs for say 100,000 years in a row, and average standards of living rises by Jetsons-like standards, and beyond, where real wealth per capita is 1000 or 5000 times what they are now, you will still define that to have been a 100,000 year long depression?
You’d be laughed out any economics department, meeting, classroom, seminar, and convention.
I highly recommend you change your definition to be less…ridiculous.
“You can have a recession within a depression as the U.S. did in 1937.”
Real GDP fell from 1937 to 1938. Even by your own ridiculous definition, there was no depression, because you define a depression to contain rising GDP.
“Now you’re saying leave the numbers aside, and focus on whether the economy is “below full employment, at full employment, or above full employment.”
“Below full employment means there is unnecessary unemployment.”
No, below full employment means there are those who want to work, but cannot find work. “Unnecessary” is too vague.
“Above full employment means there is not enough to employ.”
Above full employment is an impossibility.
“Full employment is the equilibrium level of employment.”
Equilibriums are never reached.
“That was MY original focus before you derailed it with quibbling over the semantics of whether to call the economy in a recession or depression!”
“I’m very sad right, now.”
Well, you can keep sending me posts and I’ll keep responding. If that makes you less depressed, then I am guessing that is good for you.
“To repeat for the millionth time, the context in which Keynes made the argument that capital goods prices rise, was in an economy with unemployment. That is what I have ALWAYS argued, and so now it should hopefully be clear to you.”
“GDP (as opposed to NGDP), I’m curious, what’s it doing?”
It could rise, stay the same, or fall. There is no necessary connection between what I said above about Keynes’ error, and the exact trend of real GDP. There is no one to one connection.
“I thought secondary deflation was gratuitous part of deflation.”
“Deflation is deflation is deflation.”
“??? You’ve got to be kidding me. Why bother calling it “secondary deflation”?”
Because of a confusion of what deflation is, of course.
“If it just regular old spiraling downward prices?”
Not spiraling forever. At some point, prices will be so low, and money balances will be so relatively high, that goods and services will be so cheap that the rise in cash hoarding stops, and spending stops falling, and prices and spending end up at lower levels.
“The unnecessary pain.”
It is not “unnecessary.” If people want it, if people choose to spend less of their own money, it’s very much necessary. Necessary is up to the individual and their own property, not you for everyone, and not me for everyone.
“If I choose to reduce my spending, and that all else equal this will reduce other people’s nominal incomes, this is NOT “unnecessary.” This is NECESSARY to accomplish my ends.”
“Nobody’s making you spend, egomaniac.”
I didn’t claim anyone is making me spend, closeted egomaniac.
But I will claim it now, since you brought it up. The IRS is making me send money to them.
Keynesians desire inflation to PUNISH those who refuse to spend, so as to coax them into spending more to avoid said punishment.
My argument that reduced spending is NECESSARY when people choose to do it, was in response to your claim that it is somehow not necessary, as if you know what’s best for others. You don’t even know yourself.
“People want to spend. They like it.”
People also want to hold money. They like it.
“The market is a process where individuals can achieve their ends”
“[Readies the exit bag.]”
Since you told me you’re depressed, I’ll tell you what I think is going on here. I think what is happening here is that you are looking to escape your own body and in so doing escape your depression. not actually of course, but mentally, or spiritually. You don’t like yourself, and so when you read me saying that the market process is a mechanism by which individuals can achieve their ends, the mention of individuals reminds you of yourself, which makes you sad, so you respond to what I said by reading your barfbag.
For me, I am not depressed. So when I hear or read or speak of individuals, the fact that it reminds me of myself does not make me recoil with sickness or sadness.
You are an egomaniac the same way everyone else is an egomaniac. The only difference with you is that you want to gratify your egoism through something other than at least recognizing that you exist and that you live and that you are real.
You have your own way of serving your own ends. Your own ends, however, and unfortunately, requires others to cease serving their own ends. You want others to not serve their own ends, so that you can accomplish your own ends which takes into account only your ends and nobody else’s ends.
My self-serving ends on the other hand contain and take into account a full respect for other individual’s ends. My ends can extend as far and as wide as other individual ends start.
You hate other individual ends because you want to find your own ends, your own egoism, elsewhere behind some rock, or some tree, or in other people who are to be controlled the way you control your own arms and legs. Others are mere extensions of your own self, because to recognize your own self in your own body, would feel like a prison.
“Achieves” an end.]”
“It isn’t a prison”
“You are in a prison. You just don’t realize it.”
Ah, see that? I was exactly right. I am responding to your statements as I read them, and right on schedule, you then tell me that you feel like you are in a prison.
No wonder you feel a psychological compulsion to believe consumption drives growth. Just like a prisoner has to CONSUME, i.e. use up and not replace, not necessarily “eat”, the walls and the bars of his cell, in order to gain freedom, so too do you feel like you have to consume your way to freedom, in your body that is a prison.
You want to consume and thus destroy your physical surroundings, so that the imprisoning feeling you have can be eliminated.
No wonder you’re not responding to logic or reason. A man in a jail cell would probably not listen to a miserly old sage across the hall to not only accept his cell, but to build more and make his cell space smaller.
You are seeing me as someone who wants to imprison you further than you already are imprisoned. All this talk of saving and investing, all this planning for the future, when all you want is to have freedom NOW, and the time to act is now. You have to consume, i.e. destroy the walls and bars, in order to make the world a better place. That is how to “improve” the world, ultimately. After all, like you said, consuming more means higher standard of living. Breaking down more walls and more bars means more freedom, doesn’t it?
What you have is just poor philosophical principles. It’s not genetic. It’s not emotional. It’s technical and educational.
You have adopted a thread of philosophical thought that dates back to antiquity. Many philosophers have struggled with the exact same thing you are struggling with. Unfortunately, that thread of thought, when really put into action, when expanded to its maximum, when fully expressed in all its glory, when it is seriously attempted in order to change the world, it necessarily and unavoidably leads to totalitarianism and massive death tolls.
This isn’t hyperbole. This isn’t just playing tricks on you. I am dead serious.
You have two choices. You can either remain depressed and confused and feel resentment towards the world because you are an egoist trapped in a physical body, and “succeed” in getting what you want only through the complete destruction of modern material civilization, and billions of deaths around the world, because of what you did, or, you can recognize the fact that your egoism, and hence YOU, cannot exist unless there is a non-egoist material external world that limits your ego.
If you had zero limitation, then there would only be your ego, and without any non-ego, you wouldn’t even know you’re an ego, since knowledge requires object and subject, not just subject. Hence you wouldn’t even know you existed. You would be effectively dead. Is that what you want?
The only way that you can KNOW anything, including your own existence, is necessarily through the co-existence of your ego and a non-ego that surrounds you.
Without that “prison”, you would be dead and non-existent.
Now, does this mean that because we must accept SOME imprisonment, that prison is MORALLY justified? No, because there is a huge, cosmic sized difference between metaphysical imprisonment, and physical imprisonment. The former is a philosophical issue, the latter is a social issue.
I admit that I sometimes have a difficult time reconciling the two, and understanding how I can be so accepting of one “prison”, but not another. It’s almost arbitrary, isn’t it?
The way I reconcile it is by realizing that since the ego requires the non-ego, a desire to escape that limitation is to have either the ego become all, and thus you cease knowing you exist, or, for the non-ego to become all, and thus you actually cease to exist. To me they are equivalent. If I don’t know am I alive, I am dead to me. If I am not alive, there is no knowledge in me that I am alive.
What you are doing is desiring for your ego to become all, which of course implies that my ego, and the billions of other egos in the world, must become non-ego. This is precisely why your philosophy, when attempted to be put into full effect, results in totalitarianism. Since egos cannot shake their own egos, and since they cannot live as the sole ego in a world of non-ego without destroying other egos, it requires one ego to rule all with absolute control.
This of course is impossible, which is why totalitarians will forever be frustrated by other egos not being what they are not.
Is your ideal a universe where you are absolute ego ruler, and everyone else only acts according to your exact bidding, in such a way that they cannot even think unless you tell them what to think?
I can tell you that this ideal is going to lead to you having a far lower standard of living than a world where you purposefully limit your ego by the existence of other egos, not just the physical non-ego world. Why? Because other egos, when not limited by your ego, can produce things that you cannot because you’re a unique ego that can only produce what you produce.
With billions of other egos, all acting freely using their own portion of the non-ego, you can live a life that is much more prosperous and fun, because the world would be formed more in accordance with your human desires, instead of just your egoist desires. Your unique AND your human desires can be gratified at a higher level.
“whereby everyone has to spend, or else they’re punished by law. That punishment is unnecessary pain.”
“[Strawman]”
I wasn’t claiming you hold that necessarily. Just that this is what Keynesianism implies.
“No. Voluntary deflation is a CORRECTION to previous distortions that undue inflation has wrought.”
“Come out and spend.”
Not until you offer me something I would value more than the other things I am spending money on.
“So, again, the government gets all the blame for the crash, even though (as we have seen) you don’t need the government for that, but the economic rationalization for “secondary deflation” is a natural rights argument.”
Secondary deflation, historically, has occurred in societies that have government intervention, and have caused what you call the initial deflation.
I know you don’t like it when the government is criticized, because you need it to express your desire for power, since you feel imprisoned in reality. I get it.
Except those in the government express their own egoism through selfish violence, not selfish trade. The government is an institution of violence, not production.
Violence reduces production, and reducing production reduces standards of living AND the kind of freedom you desire, which is metaphysical. You can have more metaphysical freedom by humans having more control over the physical world, so that you can have more room to move through your human characteristic that you share with all other humans. You can’t get as much freedom by eliminating other people’s freedoms, since you need their freedom if they are to help you change the world to make it more suitable to you. If they only acted the way you told them to act, if they only thought what you told them to think, the entire world’s population would have the combined knowledge of just one person, namely you. You don’t know even a fraction of the dispersed knowledge that exists among the entire population, so your ideal would impoverish yourself.
“And MF can not even bring himself to even talk about how it might affect other people or why “secondary deflation” has a special name.”
Secondary deflation is not something brought down by Mount Olympus, whereby us mortals suffer under the wrath of Zeus.
Secondary deflation is a product of individuals choosing to use their own property in ways that differ from the recent past. SO WHAT? Since when did people using their own money differently, without pointing guns at you, without threatening you with violence or your property with theft or destruction, constitute grounds for you to INTRODUCE violence via state activity?
Shouldn’t violence only be used when someone introduces violence themselves?
Or is killing people justified because they refused to obey your commands regarding their own bodies and property?
“But MF, if the “secondary deflation, affects investments that were not “malinvestments”, then how do back to equilibrium?”
Your question presumes a falsehood. If any deflation affects any investments, those investments are malinvestments. Yes, this is the case even if ALL investments are affected. It means everyone in the market process made mistakes in judgment.
If I spend less money on hoola hoops say, and this causes a reduction in revenues for hoola hoop sellers, and in response they reduce their spending on that type of capital and labor, and then those capital goods sellers and laborers reduce their spending, and so on, what is happening here is that my initial reduced spending is telling hoola hoop sellers, AND THOSE WHO ARE SUSTAINING THE HOOLA HOOP SELLERS, that they are ALL making errors as it pertains to their activity and my own activity
In a division of labor society, so many individuals, imperceptibly to most people, support one another’s activity to 3, 4, 5, 6, 20, 30 “steps” outward, in a complex chain.
My spending money on hoola hoops is essentially telling MANY others in that complex coordination that they are all doing the right thing. The hoola hoop sellers are doing the right thing. Those who are supporting the hoola hoop sellers in terms of materials and labor, are doing the right thing. Those who are supporting those suppliers and laborers via their production, are doing the right thing. And so on.
But if I change my preferences, or if someone else changes their preferences, then it doesn’t just mean the hoola hoop sellers should change their activity IF they want to keep earning profits. OTHERS have to change their activity too. It means that those capital goods sellers who were supplying the hoola hoop sellers, should change their activity. It means the laborers in hoola hoop companies should change their activity. And because those people are now living a different life, it means that the other people THEY depend on, for example the deli down the street, they should change their activity too.
Human life constantly changes. If one person changes their preferences, it necessitates changes all throughout the economy.
So if an initial deflation requires changes all throughout the economy, then it is absurd to arbitrarily stop accepting change only one step removed, say at the hoola hoop companies. It is wiser to accept that changes have to be made in virtually all areas of the economy.
Now, before you run for the hills in horror at how “fragile” the market process is, you have to understand that when the market process is not tampered with, especially by the state, but including everyone else too, then these changes would be made almost as if nobody even knows that the changes are being brought about by changing INDIVIDUAL preferences. The process is the most effective method at preventing errors and rewarding correct forecasts. It isn’t perfect, nothing human is perfect, but it’s the best we have.
No introduction of violent activity can possibly “improve” this process. For it is grounded on reason, not physical motions devoid of reason, i.e. violence.
Printing more pieces of paper, to prevent “secondary deflation”, is really just a call to trick individuals into not changing their activity to suit the preferences of other individuals. It’s like suddenly turning out the lights at a social gathering, and claiming that because there is a lot more motions and chaos and chattering, the group of people are being “stimulated” by the wise and knowledgeable turner offer of lights.
Stimulating “activity”, instead of rational activity, and claiming one has improved people’s lives, is like claiming turning a chess match into a grudge match fist fight, has improved people’s lives.
“A lot of Austrians want 100% reserve banking, right, is this why?”
Those Austrians PREFER 100% reserve banking because the resulting interest rates would MOST represent actual time preferences of individuals, so that the coordination in the temporal sense, meaning coordination in terms of WHEN people want goods, can be maximized.
Their justification, which is correct, is that credit expansion offers coordination in the division of labor no improvements, no benefits, but in fact discoordination.
The reason there is a split between Austrians on this issue is because the “coordination” Austrians want to limit the egoism that disrupts the temporal coordination in the division of labor, whereas the “economic freedom” Austrians don’t want to limit such egoism because there is no direct violation of property rights (assuming the bank and demand deposit client agree to the contract).
Personally, I am OK with credit expansion, as long as EVERYONE affected by it, understands it and agrees to it. But in reality, as an empirical matter, most people don’t understand it. Thus, as an empirical matter, I hold it is not justified. Only if everyone becomes knowledgeable of it, will it become justifiable in my opinion. But then, if everyone IS knowledgeable of it, it will cease having any real effect, and will just result in changing numbers on income statements, balance sheets, and paychecks. It won’t raise anyone’s standard of living and it won’t reduce anyone’s standard of living.
So ultimately FRB is something that can only DO anything on the real side of the economy, only IF people are ignorant of it and hence only IF it is unjustified.
The issue can be resolved by asking the question of whether or not it is justified for A and B to voluntarily contract in such a way that harms C, because C doesn’t know the nature of A and B’s contract and believes his own circumstances are different than what they actually are.
“You just start over at the new equilibrium?”
Equilibriums aren’t ever reached.
“Voluntary deflation is a manifestation of individual valuations given the new conditions of knowledge and preferences. It is beyond judgments of “right” and “wrong”. It is what individuals now prefer.”
“MF: “It’s beyond right and wrong.”
“Why?”
“MF: “Natrual rights.”
You’re having a conversation with someone other than me.
“Funny how “individuals” starts to look kind of collective in that statement.”
Funny how appearances are not necessarily correct representations of what actually exists.
“To each according to his production, from each according to his preferences.”–World “Liberty”
To each according to his worth, from each according to his consent.
“Anarcho-capilists” are the new Maxists.”
Yeah, because Marx did not want to abolish private property.
“Yes, because the government CANNOT fix the problems it itself created.”
“You haven’t demonstrated the latter assumption, which as we have now seen can occur without government.”
No, we have not “now seen” that at all. You have not demonstrated it.
The fact that you can think of how it could occur in a world without government, does not justify the government’s actively doing it. It would be like claiming that because I cannot prove that murder will not take place in a world without government, that somehow that justifies government murder.
There is a difference between what happens, and what ought to happen. Well, assuming you’re not confusing yourself with Hegelian historicism, where everything rational is real, and everything real is rational.
“Nice sneaky phraseology.”
You only perceive such sneaky phraseology because you are a partaker in it.
I am not using any sneaky phraseology. I am being far more direct than you.
“I’d ask you to demonstrate the former, but, since you haven’t proved the later, what’s the point.”
You haven’t asked.
“Yes, individuals in the market process have to bear the costs of what those in the government did.”
“How has the government harmed you personally, MF. What’s your sob story? Are is all this a tautological bluff?”
Those in the government uses violence against people who did not initiate violence themselves. This isn’t a sob story, although if you want sob stories, you can always talk to the families and decendants of those who were murdered by governments throughout history. Around 200 million during the 20th century alone, if you want to know the numbers.
But I guess with such huge numbers, it becomes so big so as to numb yourself, the way you are numb to distant stars.
“That’s one of the main reasons why Austrians are so adamant that booms do not occur in the first place.”
“[Think of the children.]”
It’s think of other people, not just children.
“It’s because they know that the costs will be burdened on those who had nothing to do with bringing about the boom.”
“[Who’ll now be child laborers.]”
Adults cannot become children.
Well, in your case I’m not sure…
“Rising or falling or constant GDP?”
“Stop evading the context. It’s falling capital goods prices.”
“I’m trying to find out the context, MF. Specifically, what is happening with GDP.”
What happens to real GDP in the short term doesn’t directly follow from what happens to prices of capital goods.
It’s like I say “Capital accumulation raises productivity of labor and standards of living”, and then you say, “Yeah, but what is happening in the NFL? Is the AFC going to win, or the NFC? Answer me! This is important!”
Falling wage rates and prices eliminates unemployment. This statement is not refuted or confirmed by asking what is happening to real GDP during that time.
“Yet hear you are again, being evasive:”
You haven’t shown how I was “evasive” a first time, so I don’t understand what you mean by “again.”
“total spending, total spending (continually) rises when there is inflation of the money supply. The reason NGDP fell 2008-2010 is because the total supply of money actually fell due to credit collapse.”
“I didn’t ask this question.”
I didn’t say you asked that question.
“You’re changing the subject.”
No, I am not changing any subject.
“We were talking about Keynes and the MEC.”
You asked about GDP.
“The Federal Reserve System brought that credit expansion about,”
“No, people borrowed money voluntarily.”
They can’t borrow unless the bank issues the loan. The bank can’t issue the loan unless it has enough money, reserves, to satisfy its expenses, withdrawal requests, and inter-bank transfers. Banks get more money from the Fed, which encourages more credit expansion, ceteris paribus, so yes, the Federal Reserve is in fact responsible for the amount of credit expansion that takes place in the real world.
“to a very high ratio relative to base money.”
“What’s the relationship to base money? (Serious question.) Base money is what reserves and “inside money” combined?”
Why do you occasionally write “(serious question)”? Are you saying that your other questions are not serious? Why aren’t you being serious considering how much time you’re investing here?
To answer your question, the relationship to base money is that the more base money exists, or is expected to exist, the more banks have the potential to expand credit. It is usually greater than one to one, but not always.
“What’s the policy limitation when reserves relatively shrink?”
Ask the violence users who are bringing about that “policy”. Ask the violence advocates who call for such “policy.”
“Is it that reversing course is too risky because too much risk is piled up throughout the system?”
Ultimately, it’s because with less overall “spending”, there are fewer taxes collected. With fewer taxes, those in the state have an incentive to increasing that which increases taxes, i.e. spending.
Since their own egoist desires would never fly if communicated honestly, they have to make up the false story that more money and spending from the state’s monopoly money machine is good for the people too.
“Hence your “house of cards” reference?”
It’s a house of cards because with credit expansion, debt default and debt paybacks can literally erase money from existence. With 100% reserve money, no amount of debt default or paybacks can destroy money.
“Keynesians like Dean Baker don’t support bubbles.”
Who cares? What matters is what their actions result in. Keynesian policies generate bubbles.
“Austrians don’t “own” the crash.”
Who claimed they did? Anyway, Austrians do “own” the boom, which is the cause for crashes.
“Ironically, when arguing you can exploit that limit forever you created “a financial bubble” of requiring higher and higher profits further and further into the future that a crisis in confidence or withdrawal of reserves could cause to come crashing down, down, down.”
I hope you can see why advocating for a bigger bubble to replace a previously collapsed bubble is a bad idea.
“Unfortunately, (fortunately) for you it was impossible because it required more and more (until the crash) economic activity. (Which was ruled out by assumption.)”
“Activity” defined by what?
“As I recommended before, you ought to first understand what you have put on your plate first, because you ADHD over to another topic.”
“To answer your question, yes, when total spending falls, it will almost always be associated with a declining MEC”
“So we have falling prices and lower MEC? Isn’t that your whole knock on Keynes?”
No, it’s not. Falling prices is not the same thing as falling aggregate spending.
“But this fall in MEC is temporary,”
“Nobody said it wasn’t temporary. It’s just that in the long run we’re all going to be typing this thread.”
The long run will be worse if we don’t fix the errors in the present. The long run is eventually reached you know, before we die.
“because when total spending falls, so does productive spending tend to fall, and when productive spending falls, so too do costs eventually fall.”
“The long run.”
Where economists should be focusing their minds.
“Once costs do fall to a new lower level, then given the new (lower) total spending, MEC will rise once again (since net investment and producer consumption will put a constant and relentless pressure on MEC to rise).”
“And the boom starts again.”
No, there won’t be a boom if the central bank doesn’t “stimulate”.
“Okay, so we dealt the crash, let’s climb our way back up.”
By doing more of what caused the crash? More central bank “fixing”?
xgsmmy,
“And no, I still have not got around to skylien’s link. And now he’s telling me I need to read an entire book!”
I was merely suggesting, nothing more. And I did that because of what I read it seems you have not a good grasp of how the Austrian framework and concepts are set up.
If you rather prefer to make endless discussions with MF then this your choice.
From my experience it is much more fruitful to read first hand what it is about, and only later or maybe already while you are on it only engage in specific discussions, questions etc..
If there is a voluntary relative fall in investment as compared to consumption, then of course output will fall. This is in line with what people now want.
(Instead of admitting his error MF now changes the subject to natural rights.)
ABCT ya!
Higher economic growth is not something I hold should be imposed on people if they don’t want to grow their standard of living at that high of a rate. I am against slavery.
(In which MF compares deficit spending to slavery.)
You are already free. Do whatever you’re able to do. Whatever you can.
If a person does not want to save and invest, and have a lower standard of living as a result,
(Code for: you’re own your own.)
Just like someone hitting themselves can be justified, it doesn’t mean that others hitting that person is equally justified.
??? Everything’s permitted, MF. What can you do?
I am not dogmatic
Oh?
so as to force economic growth on people. Economic growth should be in line with what people voluntarily want for themselves.
MF, stop growing then.
If people have an ability to invest more, then by definition the economy is not at max capacity. The very existence of the possibility that people can invest more (and thus create potential problems in your flawed opinion) is sufficient proof that the economy is not at maximum capacity.
MF, when you try to invest more GDP will fall at the same time.
“If the economy never stops growing it never stops growing.”–Major_Freedom
“What’s good for the goose in not good for the gander.”–Major_Freedom
“The interest rate was too low, “malinvestments” (not your ordinary investment, mind you) are invetible, the crash is coming! Call Peter Schiff!”–Major_Freedom
“If the private economy tries to move beyond full employment, then a recession is inevitable–John Boehner Keynes
“No, natural rights”–Major_Freedom
“Oh.”–Boehner Keynes
“Perpertual motion.”–Major_Freedom
“Oh.”–Boehner Keynes
“We might be chronically underemployed!”–Major_Freedom
There is no such thing as maximum capacity in the objective sense, as long as humans are not omniscient and not omnipotent.
Keep trying to run past that turtle, MF. Pick any interval time you want, however small. Unless you’re going sci-fi on me.
Here, let’s say you and me try to stay awake a little later every day, alright? Sound, okay? It’s the staying awake economy and sleeping is our consumption. How productive can we get in one 24 hour period while still consuming something?
“MF, this discussion is at max capacity. And so I must lower my investment and raise my consumption, but I will invest again and let’s hope it will be a glorious recession indeed.”
You won’t succeed, because we’re not at max capacity. Indeed, we are in such desperate need of more saving and investment that the economy has slowed down to a crawl because of a lack of saving and investment.
This one is truly unbelievable. MF,
If me and you are commenting back and forth, back and forth, back and forth. Eventually we will have the run out too the woods and invest in “hunting” and “gathering”, but no look, our commenting economy has collapsed.
Capital goods prices that rise is a good thing, a needed thing, if there is a rise in investment and fall in consumption,
If total consumption is falling then welfare is falling.
eventual result of increasing the production of both capital goods and consumer goods!
The long run.
It’s why we now have only 5% of the workforce in farming, instead of 80%, and yet that 5% of the workforce produce the entire population’s food materials. How is that possible? They have so much more capital than the farmers 200 years ago, that 5 people can now produce more than what required 80 people to produce 200 years ago.
“Economic growth is good.”
“More productive capital is more productive capital.”
What argument do you think you are making here?
False. Rising capital goods prices will make the investment, production and selling of those capital goods MORE profitable.
Yes, and you face a hard trade off between chasing prices and lowering GDP. Because GDP growth is zero. Higher capital goods prices means higher costs for consumer goods makers.
You keep making the mistake of assuming that consumer goods sales are the only sales that generate revenues and profits. That’s false. Capital goods are also sold. They also earn revenues for the sellers of those goods. Their sales also generate profits.
Yes, I know. You keep this and it is not true. There is no free lunch here.
Higher capital goods prices mean higher consumer goods makers costs because GDP growth is zero.
The MEC does not limit profitable investment. Investment can keep increasing from 50% of people’s incomes, to 60%, to 80%, to 99%, to 99.9% of people’s incomes, and the MEC will continue to be positive, because in each of these scenarios, consumption spending remains POSITIVE (and decreasing, but that’s not important here).
MF, right, I was confusing capital goods prices with the MEC (which if you go back to the earlier discussion I admitted to being unsure about how far the MEC could fall.).
But capital goods prices will rise and business will become unprofitable.
Since producers need to live and eat, no matter how much they invest, they can never invest 100% of their incomes. They’ll die. So we don’t have to worry about too much investment.
MF, we’re not worried about “too much investment” but the coming recession.
And yes, that means someone may not have and income to buy food and can die.
Any quantity will be profitable because there will always be a difference between total spending and costs by virtue of the mere EXISTENCE of consumption. Consumption spending does NOT have to rise every time investment spending rises, even at what you call “full capacity”.
You keep regressing CONSUMPTION RISES IN THE MODEL BECAUSE IF IT DIDN’T THE RECESSION WOULD START POSTHASTE. THAT IS THE ONLY REASON.
YOU CAN NOT RAISE INVESTMENT IN THIS MODEL AT FULL CAPACITY WITHOUT CAUSING A RECESSION.
For when there is more investment spending in this situation, there will be a rise in relative nominal profitability of selling capital goods, which will lead to investors redirecting their capitals away from consumption industries, and towards capital goods stages. More capital can be brought into capital goods.
Yes, this is when the recession will begin. GDP will fall.
For example, if at full capacity investment rises by 5%, then that can result in transport trucks that were going to be allocated to delivering consumer goods, to delivering capital goods instead. That will raise the production of capital goods to whatever positive degree, and increase the “capacity” of the economy that you only THOUGHT was at full capacity.
No, MF, it can’t because all the trucks were already being used and one truck has started to break down. You can either buy a new truck or fix the old truck. THOSE ARE YOUR ONLY CHOICES. GDP WILL FALL IN THIS MODEL.
This is nominally profitable, since by stipulation you assumed a rise in the prices of capital goods. So capital goods sellers can attract those transport trucks away from consumer goods sellers.
NO, MF. YOUR OTHER TRUCK IS BREAKING DOWN.
MF, it’s just a model. Learn to live with the supply side.
I am arguing that one positive number divided by another positive number can never equal zero, nor become negative, no matter how small one number gets and no matter how large the other number gets.
Captial goods prices will rise on the front end. You can only either chase prices or have a recession.
MEC = (Producer consumption spending + Investment spending) divided by (Investment spending).
Some will stop eating if only for an hour.
I challenge you to find a positive number for producer consumption spending, and a positive number for investment spending, that will make MEC equal to zero.
When you try to raise investment spending total spending will fall if you don’t chase prices.
Is this an empirical statement? Nobody is arguing that investment pending CANNOT fall in the empirical sense.
No, MF, we’re talking about the model in question.
Yes, investment spending can potentially fall to zero. But my argument is that there is no limit to investment that is constrained by the MEC.
Please, tell me this is not just some uncharitable exploiting of my (admitted) confusion over the MEC. Capital goods will rise on the front end to make the MEC negative on the back end, right?
No, GDP will rise because with more investment, there are more capital goods produced, and with more capital goods produced, worker productivity rises, and wit
No, your other capital goods are wearing out at the same time.
xgsmmy:
“You were insistent that I address your claims in a context of full employment and full capacity.”
“No, you were insistent that the context was falling prices and rising MEC.”
How does that justify a “No”? How can me telling you what you insisted, be “refuted” by you telling me what I insisted?
You insisted that the context was full employment. So I addressed your questions given that context AND the context of my argument, which is falling wage rates and prices during unemployment.
“And now that we dealt with that.”
That was the original context of my original argument, the one you decides to respond to.
“(If you notice on the other thread up the page, you’ll see me say, that I’m going to accept your premise for the sake of argument. The “context” you insisted on. Though, maybe it was me. I’ve lost my bearings at this point. I’m all upside down. It’s been nice, having it out. Thanks, MF, truly.)”
Just so you know, I am not doing this for you. I am doing this for me.
“Now you’re saying you want to go to a scenario of a crash, which of course means unemployment and less than full capacity?”
“No, now that we dealt with that, I’m ready to go back to full capacity. (I am beyond full capacity now.)”
Capital accumulation still doesn’t decrease the MEC even at full capacity, because capital accumulates in an environment of falling capital goods prices as more are physically produced by virtue of using the existing supply of capital in production.
“Maybe you think capital goods prices are the costs of capital in interest rate or borrowing terms.”
“Okay, so the MEC is what you take in profit on a piece of capital at a moment in time and the cost of capital is how much you paid the capital up front. (Or on a payment schedule out through time.)”
“So the MEC doesn’t fall below a positive lower bound until after you’ve already bought your last piece of capital?”
There is no last piece of capital. Capital is produced by human effort in the using up of existing capital in production. The result, as long as consumption is small enough, is more abundant capital then before.
That more abundant capital is the foundation for further capital production, and, provided consumption is still low enough, but can be a little higher now that there is more capital, then the result will be even greater capital. And so on. More capital is used to produce more consumption AND more capital, and if total production of capital exceeds total using up of capital, the economy can grow. Too much consumption, and the economy will shrink. Consumption only reduces output from what it otherwise would have been.
“Edit: I meant falling MEC, and rising capital costs.”
If capital goods prices rise by virtue of an increased nominal demand for capital goods and decreased nominal demand for consumer goods, then yes, the MEC will fall, but it will not ever hit zero in this context, because producer consumption is still positive.
“Real MEC would keep growing, making the smaller nominal MEC more and more worthwhile to invest!”
“Well, no, not if it’s the cost of replacement capital, that fall into unprofitability.”
You are again ignoring the fact that capital goods sales generate revenues and profits for capital goods companies. Yes, costs will rise, but so will revenues, and not only that, but revenues will rise by MORE than the costs, because capital costs are depreciated over time. They are not immediately expensed the way wages are.
Capital goods prices rising does not mean equivalently higher costs at that time. It means higher costs spread out over a period of time, and during that time, because the assumption is higher capital goods prices, there is higher revenues the whole time that are greater than the costs, since the revenues are not allocated over time, but accounted for as the goods are sold.
“So that the MEC fulfills your asymptotic function.”
See above.
“CONSUMPTION SPENDING DOES NOT PAY WAGES. Not even NGDP pays wages. What pays wages is saving and investment in labor. This spending is in competition with consumption spending.”
“Wrong MF, the consumer goods producers rising consumption replaces capital goods producers now falling consumption.”
This is not a refutation of my argument that consumption spending does not pay wages.
Again, I did not assume producer’s nominal consumption is rising. In fact, in the context in question, producer investment is rising, and their consumption spending is falling. In this context, the fall in prices of consumer goods, and fall in profits of consumer goods, is offset by a rise in prices of capital goods and rise in profits of selling capital goods. There is no aggregate fall in profitability and hence no fall in economy MEC.
Furthermore, you need to stop trying to think of ways to “replace” falling spending by just any old spending. One spending does not do the same thing as every other spending. Spending on consumer goods brings about effects far different than spending on capital goods. You can’t say that because a fall in capital goods spending is “offset” by a rise in consumer goods spending, that nothing is different and you can sit back and think nothing more of it.
If producer’s investment rises, and their consumption spending falls, it need not be “offset” by an external rise in consumption spending, because the rise in their investment will generate more revenues and profits for capital goods sellers.
You keep ignoring the fact that whenever you think of higher prices capital goods, or more spending on capital goods, you are instantly including the revenues and profits of capital goods sellers, their employees, and so on.
Consumer goods are not the only goods that earn revenues and profits.
“The total consumption is the same, what has fallen is investment spending on new capital goods.”
You keep switching back and forth between full capacity and a higher nominal for capital goods, to falling investment and falling nominal demand for capital goods.
Pick a context, and stick with it already.
1. If the context is a rise in nominal demand for capital goods, and fall in nominal demand for consumer goods, then this will decrease revenues and profits of consumer goods companies, and increase revenues and profits of capital goods companies. Then, because the demand for capital goods is higher, aggregate costs will rise relative to total spending (but not overtake it, because consumption spending by producers is still positive). The result of that is a fall in nominal MEC (but not zero). The lower nominal MEC will be a higher real MEC, since productivity and output are higher by virtue of the increased investment.
2. If the context is a fall in nominal demand for capital goods, and there is no rise in consumption spending, then this is equivalent to saying that cash preference has risen, and that time preference has risen (because the new ratio of investment to consumption is now smaller). This will eventually decrease asset prices, and with decreased asset prices, costs will fall. With lower aggregate spending and lower costs, profitability (MEC) tends to be positive (after going negative for a time).
Pick a context please.
“An employer that has savings available can financed his own consumption, or he can pay wages. He can’t do both with the same money.”
“See above. Wages are the same what has fallen is spending on captial goods and capital good makers consumption. Soon depreciation will set in and the recession will begin.”
If spending on capital goods has fallen, then wage payments would eventually fall for those in capital goods production. You can’t keep wages constant.
Further, if spending on capital goods falls, then that is people choosing to invest less relative to consumption. Of course output will fall, because people’s time preferences have risen. You can call this a “recession” purely by virtue of declining output, but you would be overlooking the crucial caveat that this is a voluntary reduction in output.
If I choose to eliminate my saving and investing, and I start consuming 100% out of my income, then my eventual falling standard of living is my choice. I am choosing a higher standard of living in the present, and lower standard of living in the future. It doesn’t matter that I don’t like this outcome. It doesn’t matter that I would much rather consume 100% now and have the same higher standard of living growth in the future as if I saved and invested, but that isn’t possible. You can’t replicate saving and investment with consumption.
“Yes, falling NGDP may tend to be associated with falling employment, but this is only to the extent that wage rates do not fall. It’s not that falling NGDP did it, it’s the failure of wage rates to balance with the new (lower) nominal demand for labor.”
“No, MF, we will have to replace our capital goods which will cause falling income of consumer goods producers.”
This is not a refutation of my argument either. You’re responding to my arguments with “No, MF…”, but then you are responding to something I never said. You’re making a different argument concerning something else.
To address this latest something else, it doesn’t require out outright FALL of consumer goods nominal demand to ensure that worn out capital is replaced. The same repeated consumer spending and the same repeated capital goods spending can be, if the ratio is sufficiently tilted towards investment, sufficient to replace worn out and used up capital, with more capital. The same yearly expenditures for capital goods can replace used up capital goods (and more than replace if capital goods prices fall on the basis of more production of capital goods).
You are confused because you think that any expenditure this year to replace used up capital goods this year, MUST be accompanied by an absolutely lower spending on consumer goods. But that’s not the case. The same yearly expenditures on capital goods can be made without having to reduce consumer spending, and that yearly spending can replace, and more than replace if prices fall, used up capital goods.
“Yes, I’ve already agreed, that “underemployment” is consistent with this.”
You mean it is not inconsistent with. There’s a difference.
“The key point is GDP will be falling. (Why are you talking about NGDP?)”
Because the MEC is a monetary concept, and because employment is a function of nominal demand for labor, and nominal labor prices.
GDP falling in the short run, with increased investment, is the price that must be paid in order to achieve higher growth later on.
Just like working out at the gym is the price you must pay if you want a better body, just like eating healthy food is the price you must pay if you want to be healthy, just like working hard is the price you must pay if you want to build something, so too is the price you must pay to increase capital, to reduce your consumption.
Abstaining from consumption is a prerequisite to growing capital.
You keep worrying over falling GDP, but if people CHOOSE to reduce their current consumption, so that they can invest and thus increase their future consumption, is, quite honestly, a very immature worry. It is what I would expect from a child who doesn’t understand why he can’t be at both in the bathroom brushing his teeth, and the playground, at the same time. No fun!
Falling GDP in the short run is not only expected, but necessary, if people are going to devote more time and effort and resources to expanding capital in order to increase their future consumption. Yes, in the long long run, we’re all dead, but that doesn’t mean that everyone has to consume 100% out of their incomes and have a lower standard of living in the future than they otherwise would have had, just so that they don’t ever have to experience an actual fall in standard of living.
The problem with thinking the way you think is that it is too focused on observations, and not enough on self-reflection.
You seem to want to believe that if you never experience an outright fall in your standard of living from one period of time to the next, that somehow this is always synonymous with you living better now than you otherwise could have lived if you saved and invested more in the past and experienced a fall in standard of living from one time to the next at that time.
Non-falling GDP is not optimal, if you are like me and are willing to make trade-offs.
What’s better to you? Growing your standard of living by 0.1% each year, with no outright fall over any time period, or reducing your standard of living now by say 25%, for 5 years, after which time your standard of living would be at 10% higher growth per year?
This is where time preference comes in. If your time preference is so high that you cannot save and invest a single dollar, lest your standard of living outright fall from one period to the next, and you want to always avoid a falling standard of living, then you will have a different life than someone who IS willing to reduce their standard of living, initially, for a period of time, because they want to have a higher standard of living than they otherwise could have had, down the road.
If you both start out with the same endowment, and you consumed 100% of your income and the other guy saved and invested 25% of his income, then while you will have a higher standard of living initially, while you can claim “See? Consumption is what increases our standard of living!”, little do you seem to realize that the other guy is going to eventually overtake you, and after 5 years or so, his investment will start to pay off, and he’ll have a higher standard of living than you from then on.
Because you don’t understand that production is driven by saving and investing, not consumption, you’ll probably want to keep up with the other guy by taking out debt from a bank, and spending it on increased consumption, so that you can pretend you’re a sacrificer and future oriented thinker just like the other guy.
Then, when your debt comes due, you’ll complain that the problem is your income hasn’t increased enough in nominal terms, so more inflation, right? Let’s reduce the value of the saver’s real income and be able to compete with him a little more for consumer goods. Anything is better than experiencing a falling standard of living from one moment in time to the next, ever! For it would mean I am necessarily going into the abyss. I’m one of “those people”. Fear! Fear! Horror! Save me mommy and daddy government! Do something!
“More consumption spending cannot prevent the fall in wages, because more consumption spending just results in higher profits for consumer goods companies.”
“Yes, that why consumer good producers consumption had to rise to maintain full employment.”
Again, consumer goods sales doesn’t finance wages. Saving and investment finances wages. More consumption only increases consumer goods company profits.
More consumption spending will just redirect saving and capital away from capital goods production, and into consumer goods production. It will end up reducing standards of living.
Consumption spending does not have to increase to “offset” falling investment spending in order to ensure full employment. Indeed, it CANNOT do it. The only thing that can ensure full employment is that the prices of labor are low enough to clear the market given the nominal demand for labor. More consumption spending won’t help laborers. You are not buying their labor when you spend money on your own consumption. You are only helping labor by buying labor yourself.
“And no, you can’t argue that more consumption spending will be used by consumer goods company owners to pay subsequent wages,”
“I’m not. GDP growth is zero.”
GDP growth is irrelevant to employment. Employment depends on nominal demand for labor, and nominal price of labor. Real output can fall, stay the same, or grow in this context.
“because that would be saving and investment, NOT consumption spending. So you would be contradicting the context of CONSUMPTION spending raises wage rates.”
“We’ve reach unity. How long can we maintain full employment now?”
As long as saving and investment, as long as the nominal demand for labor, is positive, and nominal wage rates are free to fall and not be stopped by violence.
“How long till our capital goods wear out?”
As long as property rights are respected, and as long as economic freedom exists, practically never, because humans (or whatever species evolves from us) can colonize the universe.
“The glorious recession is near.”
Just s you know, the telltale sign of a crank is a penchant for putting their own lives at the center of some massive and significant social event, as if the stars have aligned during their particular existence, and no other.
It happens because like I said before, you are trying to find your egoism, or put your egoism, in the external world around you. Thus, you short circuit your mental process and the result is you having a “revelation” of some secret inner workings of the cosmos, that there will be a large “revolution”…soon. Why soon? Because you are alive now. The stars and your life will finally become one, just like you have dreamed. Your ego becomes all. Blah blah blah.
There have been lots of cranks throughout history that have done this. You know what the constancy among them all is? They never were at the temporal center of the revolution they thought would happen.
it’s always “soon” there will be a huge social upheaval where suddenly there is no more capital, and there will be fire and brimstone.
“And even if the economy ends up with more employment in the consumer goods industries for whatever reason, this would end up harming workers’ standard of living, because with fewer workers in capital goods industries, and more workers in consumer goods industries, the rate of capital accumulation will be otherwise lower.”
“GDP growth is zero”
If GDP starts at zero, then GDP growth would become negative as more workers go into consumption and fewer go into capital goods.
“but we could make capital more productive as it depreciates”
You can’t do that without saving and investing in capital goods, but you just stipulated that consumption spending rises and investment spending falls, so you can’t have it both ways.
“and so increase the size of the consumer goods industry relative to the capital goods industry. (I think.)”
WRONG!
“THIS is why I brought up the hypothetical of 100% consumption. For imagine that investment for some reason collapses 90%. If the “solution” to this is for there to be an equivalent rise in consumption spending, thus attracting almost all workers to consumption, then the capital base would eventually rust and wear out, be disintegrated, the productivity of labor would collapse, and real standards of living would plummet.”
“MF, that’s how we get the recession.”
xgsmmy, that is not inevitable. Capital can continue to be accumulated by making it attractive enough to people to save and invest. That starts with you.
“We have to replace capital goods.”
The same capital goods nominal spending can replace, and more than replace as prices fall, the capital goods used up. Through productive effort rewarded by such spending.
“But you’re weirdly focus on percentage of investment spending. That doesn’t tell us anything. Rising consumption is what tells us that people are getting wealthier.”
You’re going backwards.
Wealth is not only consumer goods. Wealth is, in a modern economy, predominantly capital goods.
Rising capital is what tells us that people are getting wealthier. Rising consumption is the effect, the reward, not the cause. You can’t mimic production by consumption.
“This would occur “naturally” in a free market with protections of property rights, but unfortunately, the state is guided by the exact Keynesian thinking as you, and they do everything they can to make investing as unattractive as possible, and as least capable as possible.”
“You’re right, MF, Dean Baker is President.”
Dean Baker is not the only Keynesian in the government. And the President doesn’t have 100% power (although you probably wish he did).
Almost all economic advisers, almost all economists paid by the state and who work in universities and think tanks, and almost all economics textbooks, preach Keynesianism.
Keynesianism dominates the economics establishment.
“Lots of government borrowing from the market’s savings, which redirects saving from investment to government spending, decreasing interest rates below what the market process would have put them at, which makes investment less attractive,”
“Wrong, In a recession the Fed tries to push down interest rates.”
That isn’t a refutation of what I argued above. You’re just agreeing with me on this one.
Pushing down interest rates is exactly what caused a recession to become inevitable in the first place, when the prior boom was founded upon central banks bringing interest rates down in order to stop the recession at that time.
“In order to maintain their target they have to willing to buy government debt on demand.”
Their target is not market driven. The resulting prices are thus not market driven prices. The non-market driven prices thus misleads market actors, who make errors, which requires corrections, which leads to falling GDP (your second worst nightmare).
“So that when the Government borrows the Fed accommodates the borrowing so that any bond investors who decide they have more profitable investments elsewhere can dump their bonds in the liquid market and the Fed will be waiting with cash on hand.”
Profitable investments are in part a function of borrowing costs. If borrowing costs are pushed down via non-market means, then the resulting profitable investments will not be market driven profitable investments, and scarce capital and labor will be allocated to lines not consistent with market preferences. Boom and then bust.
“This is how government borrowing can increase the money supply.”
The money supply doesn’t need to increase by the government.
“Crowding out occurs when the government and private sector are fighting over underlying resources.”
Government spending always crowds out the market in real terms.
“But in a recession there are idle resources. The government puts our idle resources to work, increases our production. Makes us richer in the present.”
False. Government spending leads to resources being directed to lines that are not consistent with market preferences.
Resources are “idle” in recessions because of past government meddling that mislead producers into producing resources that are not valued as high as they thought they would be.
Government spending doesn’t arise in a vacuum either. It has costs, which you ignore.
“and punishing cash holders – who would have made profits rise (as explained above) – with inflation.”
“I’ll have go back and look because I can’t remember what this is?”
Can’t remember what what is?
“Was this the theme park ride deflation?”
No, it was the economic deflation.
“There is no such thing as an equilibrium MEC apart from where voluntary investment and consumption would have put it.”
“Is there an equilibrium MEC,MF?”
There is an MEC that is tended towards given the current investment spending and consumption spending allocations.
“MF: “No.””
“Why?”
“MF: “Natural rights.””
You are having a conversation with someone other than me.
“Capital depreciation does not lower the MEC.”
“Consumer goods producers are have to cut back spending to replace capital at a rising price.”
Depreciating capital is depreciating because they are being used to produce more capital. You are fallaciously presuming that depreciating capital depreciates for reasons other than being used to produce other capital goods. You’re contradicting the entire meaning of depreciation.
Depreciation does not mean merely wearing out and disappearance of goods. It means the allocating of costs to a capital good’s lifetime as it is being used to produce other capital goods (and consumer goods, depending on the good type).
“This causes GDP to start falling lowering the profitability of their investment.”
False. GDP falling does not lower profits. Profits are a function of two nominal demands.
“If you assume inflation is taking place, which will turn the existing nominal MEC negative in real terms, then this is the fault of those who are inflating. It’s not the fault of the market.”
“The only way to continue current levels of production is to bid away workers from already fully employed firms or fully employed firms from other firms.”
No, it is not necessary to constantly shift workers away from other lines. The same workers can produce more and more capital goods as more and more capital goods are produced and used by labor in labor productivity.
Workers can produce more capital goods using the existing capital goods, and thus depreciating those capital goods.
“If the workers can’t be bid away, then capital will depreciate below replacement levels of production.”
“This is because we are at full capacity.”
Capacity is a function of investment. If investment increases, so will capacity. Workers don’t have to be bid away from other lines. The same workers can utilize more and more capital goods in their work.
“The private sector can’t support a higher level of investment at this time.”
Yes, it can. It can support practically limitless investment. A higher level of investment will increase the capacity of the economy, since capacity is a function of investment, not the other way around.
Investment is not constrained by capacity. Capacity is constrained by investment.
“The argument that the MEC can’t ever fall to zero, and below zero, is only true in the context of non-declining aggregate spending.”
“Aggregate spending either must decline or go chasing prices.”
Yes, falling prices result from higher output. Higher output is the only way economies grow.
Higher capital output and falling prices can go on practically indefinitely, provided we have capitalism.
“Those are are only two choices.”
No, you’re totally ignoring the choice of rising investment and falling capital goods prices.
Just like Keynes.
“I was explaining to you how MARKETS work,”
“Oh, MF.”
Yes?
“and yet you seem to want to haphazardly go back and forth between markets and hampered markets, as if there is no fundamental difference between the two.”
“The market is not “hampered” it’s a fully employed private market primed for an inevitable recession.”
No, it’s a hampered market primed for recession because of non-market (e.g. government) meddling.
Recessions are not inevitable. You are fallaciously presuming an end to capital accumulation when the only end is at total omniscience and omnipotence, trillions of years down the road.
“If you assume inflation is taking place, which will turn the existing nominal MEC negative in real terms, then this is the fault of those who are inflating. It’s not the fault of the market.”
“We’re at full capacity. Workers must be bid away. If they are not bid away, our capital will fall to ruins. And our production will plummet.”
False. Workers don’t need to be “bid away.” The same workers can produce more and more capital goods as more and more capital goods are produced and used by labor.
The reason why only 5% of the workforce is in farming is because they have such much more capital to work with as compared to farmers 200 years ago, which required 80% of the workforce to be farmers in order to produce enough food.
More capital is what you are ignoring. “Full capacity” does not mean an end to capital goods production. It means a capped RATE of capital goods production, which is a function of investment.
“At any rate, if there is inflation, then that will tend to raise the nominal MEC. The MEC won’t remain constant.”
“So if we replace this with “cost of capital” instead? Cost of capital is the up front cost? The MEC is the back end profit?”
MEC is the difference between two demands, demand for outputs, and demand for inputs.
The greater the investment, the lower the MEC in nominal terms, but the higher in real terms.
“So the price of capital could have an unprofitable but positive asymptotic 2% MEC and 0% interest rates?”
If the MEC is 2%, then nominal profitability is positive, not negative.
“What a ridiculous assertion. Economics as a science presumes people are alive, not dead. If everyone is dead, then there won’t be any investment or consumption.”
“Woosh.”
Explain.
“Obviously, not everyone kills themselves. Consumption in the aggregate can never hit zero as long as humans LIVE.”
“It’s a game of musical chairs.”
No, it’s life.
“In a deflation the last one to stop spending must jump from the building.”
Spending does not stop, even during deflation. It just decreases from one time to the next.
“You keep throwing that term around when it is clear you haven’t the foggiest clue what it even means.”
“[Waves back at Major_Freedom.]”
I didn’t wave.
“Maybe that’s how truth appears to you, where the only time you think you’re close to a truth is when you are confused, but many truths are trivial.”
“[High Fives Major_Freedom.]”
I didn’t have my hand up.
“Just like my discussion of the relationship between capital goods and the MEC was claimed by you as a tautology, now you’re saying my discussion of the relationship between producer consumption and the MEC is a tautology.”
“[Major_Freedom and Major_Freedom’s interlocutor stop looking at one another and leave their respective corresponding rooms to enter another room.]”
I am not going in any other room than the one I am in.
“I was confused about the difference between capital costs and the MEC.”
“Hopefully, I’m not too off base now.”
You haven’t really shown that.
“You claimed that interest rates affect profits. I responded to that by saying no, it’s the reverse.”
“Okay, so you’re imagining the falling rate of profit corresponding with a falling rate of interest?”
No, I am saying because profits determine the height of interest, falling profits will tend to reduce interest rates.
“The only reason these comments are getting longer and longer is because you choose to write such comments, and because I choose”
“Say’s Law of comments.”I choose what I choose and you choose what you choose.”
That isn’t even close to Say’s Law, not even by analogy.
“My comments are my comments are your comments are your comments.”–Major_Freedom”
Yet you blamed me for your comments.
“You are blaming me for choices you made.”
“You are blaming me, for blaming you?”
No, I am blaming you for not blaming the person who is actually responsible for your actions here.
“I’m not blaming you, man.”
You did before.
“I recommend you maybe take responsibility for your own actions.”
“Is there some way to not take responsibility? What did you have in mind?”
I don’t have in mind ways to not take responsibility for my own actions.
Is there some way to not take responsibility for one’s actions? No.
“Yes, I know, crazy thought.
Spooky.”
I didn’t say that.
“I am not being evasive either. I have taken the time to respond to every claim you have made, and I have answered every question you have asked.”
“Yes, thank you. Although, I at this point don’t even know if you now agree with me that in our full capacity economy the recession is inevitable.”
I absolutely positively do not agree with that.
“That you don’t need Fed-led “malinvestments” after all.”
Maybe you are conflating what you hope I will say, with what I am in fact saying.
“I sense a falling rate of profit below me. Here comes the bust.”
Falling rates of profit could mean increasing investment and a more capital intensive economy with higher standards of living. Falling profits don’t always mean falling aggregate spending and deflation.
But with the communist monetary mechanism that currently exists, falling profits are typically a sign of deflation (which is controlled by said communist monetary mechanism).
“You have not done that in return. You have repeatedly changed topics, not finished an unfinished line of thinking, refused to seriously address the context of falling wage rates and prices, and repeatedly tried to derail this into discussions of GDP, whether to call recession a depression, and on and on.”
“We’ve dealt with falling wage rates and profits, with falling MEC, when GDP is falling.”
You haven’t dealt with it closely enough.
“I don’t really know whatever you talking about, though.”
I am talking about what you are complaining about is virtually identical to what you yourself are doing.
“You haven’t as far I know admitted of any errors, so I’m left wondering where we still disagree, now.”
Show me something that I said that is wrong, and I’ll be only too happy to admit I was wrong.
Just because you eat, shit, and put your pants on, it doesn’t mean you can point out errors made by any other individual no matter who they are. It’s not enough to simply be human.
“I’m not sure what your so upset about.”
Bad grammar tends to get to me, for one thing.
“This seems like one of those best defense is a good offense, things.”
Is that what you are doing?
“instead of accusing me of doing something that you have no proof of me doing,”
“??? I’m sorry?”
You’re asking me to repeat what I just wrote, despite the fact that you have it in front of you?
“and considering the fact that you have such poor reading comprehension,”
“MF, you can’t really expect too much from me, when you talk to me this way.”
See that? You’re blaming me for your own actions again. You’re holding me responsible for what you do. You say it’s my fault and my responsibility for how you behave.
You behaved that way before I started to tell you that you have poor reading comprehension. That’s why I said it!
You can choose to do what you want. If you don’t like the way I write, then you are free to cease and desist.
“(I’m too tired right too care about what your saying, right now, though. I’m just trying to make it to the end of your never ending comment. So, I apologize for the increasing sloppy and perfunctory responses.)”
You don’t care what I am saying, you just want to make it to the end? This is hilarious. \
Just so you know, you will NEVER make it to the end of what I have to say. Ask the other posters here, and they’ll tell you.
“that you even accused me (since recanted)”
“Should I not have recanted?”
It means I can’t trust your accusations.
“of introducing highly complex topics such as ABCT and economic caculation, even though I did not once mention those things.”
“Highly complex in this case meaning of little, if any, practical significance.”
No, highly complex in this case meaning high above your head. It has tremendous practical significance. The fact that Keynesians say it is of little use is precisely strong evidence it has uses.
“That should be strong evidence for you to be more critical of your own ability to read and understand comments, before you start judging my comments.”
“Are you being “ironic”, right now, or something?”
No, I am being direct.
“You can’t possibly understand that which you read, unless you yourself are first mentally capable of it. Improvement starts with you, not others.”
“Are you an others? Are you a you? [Major_Freedom falls inside a net. He is now being shot at.]”
I am me. You are you. Improvement for you starts with you. Improvement for me starts with me.
“Look, I don’t know where you went, MF.”
You mean physically?
“I guess I’ll see you around. (Although, maybe you lost your job when the recession hit.)”
Nope.
“I am not on the defensive.”
“[Irony.]”
You don’t understand irony either.
“My argument that you are holding some variables constant, and then you are imagining the effect of changing other variables, I am telling you is an incorrect approach, because the variables you are holding constant are not in fact constant when you change those other variables”
“I’m not holding any variables constant, what variable do you think I’m holding constant?”
You are holding the variables MEC and interest rates constant, when considered a change to investment and consumption.
“The economy’s at full-capacity, that is the only “constant”. I’m sorry you don’t like it.”
It’s not that I don’t like it, it’s that it is false.
The economy’s capacity is a FUNCTION of investment. Investment is not constrained by the MEC. The MEC is a freely fluctuating variable that results from individual’s choices to invest and consume.
“It’s the (unlike your “highly complex” theories) the inescapable logic of the supply side bottleneck.”
The MEC is a nominal variable. Bottlenecks are real. You’re conflating real with nominal.
“You can chase prices or you can lower welfare.”
False dichotomy.
“What is your choice. Will you keep going round and round with me?”
Yes.
“Driving up our prices in an inflationary comment war or will the INEVITABLE recession never begin.”
It is only inevitable once you’re dead.
“(Oops, not never, you’re dead. Hope. you. had. some. kids.)”
I would have no qualms about dying without having had any kids.
“The MEC is not a rigid value which somehow investment and consumption must adapt and mold and “fit” into.”
“I did not say they were. MF, try to understand.”
You did say that, because you said “There can’t be more investment, since the MEC will go negative” (paraphrased).
“THE ECONOMY IS AT FULL CA PA C TY! THE E CON O MY IS AT FULL CA PA C TY. THE ECONOMY IS?”
THE ECONOMY’S CAPACITY IS A FUNCTION OF INVESTMENT. THE ECONOMY’S CAPACITY IS A FUNCTION OF INVESTMENT. THE ECONOMY’S CAPACITY IS…
“There is no alternative.”
Yes, there is. Investment more and consume less in the present, in order to consume more in the future.
“Chase prices, have a recession. Make your choice. The blue pill or the red pill.”
Chase prices.
“You are going to have to take your medicine, MF.”
You’re not a doctor.
“(Yikes.)”
Why?
“Gravity is coming for you.”
It’s always there.
Please, try to understand what I’m saying.
There is no net increase in consumption. Total consumption stays the same. Consumption simply transfers from capital goods producers to consumer goods producers. They economy does not grow, it merely maintains it’s same level of production.
Darnit, MF. Now I have to revise my word count numbers.
I’m not question your ability to make assumption that result in the conclusions you want. I simply would like to see what someone who has looked at the data has to say. If I find the time I’ll read everything you guys want me to read. But right now I’m fully employed.
You’ve devolved backwards to the humans making fires to cook fish. I would like to move forward to the modern economy. Capital goods that have not yet been produced can be made from human labor and natural resources. Where are the capital goods that must be “saved” and “invested”? I try to move one step forward, and you say, no look back, and I look all the way backward, and you say, no. Can capital goods be ordered? Why must you persist in using “savings and investment” together always when they are different?
Xgsmmy,
Considering how much time you’ve spent here, your “full-employment” is certainly not synonymous with “gainful” employment. I can certainly see a few minutes/hours better spent.
Your argument circular. Where do capital goods come from? Capital goods.
We already discussed the humans. You want to have it both ways. “No resources already exist, all capital goods already exist.” You have your head looking both ways at once. The humans and natural resources already exist. That’s all you get, if you cannot order capital goods. Everything thing else, ever productivity increase, can be accounted for through inheriting the durable capital from the last generation. Everything else can be assumed by humans and natural resources. You want to deny this so you can say the words “savings and investments” mindlessly over and over again, and deny paying for something that does not already exist. Take your own advice, don’t keep your variables constant. While I’m paying you, your paying me. While you’re typing your comment, I’m typing mine.
xgsmmy:
“If there is a voluntary relative fall in investment as compared to consumption, then of course output will fall. This is in line with what people now want.”
“(Instead of admitting his error MF now changes the subject to natural rights.)”
What error? I never claimed that GDP will NEVER fall when there is increased investment, such that this latest comment contradicts it.
I didn’t change the subject to natural rights. Economics and ethics are not distinct fields of inquiry. They are related because they are both human endeavors. All economic action, no matter what it is, presupposes a particular ethic.
You are presupposing a natural rights ethic of “violence from government is good when it benefits me.”
“ABCT ya!”
What do you mean?
“Higher economic growth is not something I hold should be imposed on people if they don’t want to grow their standard of living at that high of a rate. I am against slavery.”
“(In which MF compares deficit spending to slavery.)”
Deficit spending is grounded on initiations of force just like slavery is. I was comparing them through their common ground.
“You are already free. Do whatever you’re able to do. Whatever you can.”
I am not free from the violence that is threatened against people to pay the IRS, and obey the government’s courts and police.
“If a person does not want to save and invest, and have a lower standard of living as a result,”
“(Code for: you’re own your own.)”
No, it’s code for you sleep in the bed you make.
“Just like someone hitting themselves can be justified, it doesn’t mean that others hitting that person is equally justified.”
“??? Everything’s permitted, MF. What can you do?”
Not everything is permitted by everyone.
“I am not dogmatic”
“Oh?”
Right.
“so as to force economic growth on people.”
“Economic growth should be in line with what people voluntarily want for themselves.”
“MF, stop growing then.”
I do not choose to stop growing.
“If people have an ability to invest more, then by definition the economy is not at max capacity. The very existence of the possibility that people can invest more (and thus create potential problems in your flawed opinion) is sufficient proof that the economy is not at maximum capacity.”
“MF, when you try to invest more GDP will fall at the same time.”
Falling GDP in the short run is a requirement for spending more time and resources and energy in producing more capital goods. Falling GDP is in the short run in this case.
Falling GDP is not a trump card that proves I’m wrong about what I am saying. Falling GDP in the short run is necessary if there is going to be greater growth later on.
If I value having a lower standard of living now, and higher standard of living in the future, instead of otherwise, and if others desire that, then it’s justified.
“If the economy never stops growing it never stops growing.”–Major_Freedom”
I never claimed that.
“What’s good for the goose in not good for the gander.”–Major_Freedom”
I never claimed that.
“The interest rate was too low, “malinvestments” (not your ordinary investment, mind you) are invetible, the crash is coming! Call Peter Schiff!”–Major_Freedom”
I never claimed that.
“If the private economy tries to move beyond full employment, then a recession is inevitable–John Boehner Keynes
“No, natural rights”–Major_Freedom”
I never claimed that, and the other person is imaginary.
“Oh.”–Boehner Keynes”
““Perpertual motion.”–Major_Freedom”
““Oh.”–Boehner Keynes”
“We might be chronically underemployed!”–Major_Freedom”
I never said any of this either.
“There is no such thing as maximum capacity in the objective sense, as long as humans are not omniscient and not omnipotent.”
“Keep trying to run past that turtle, MF.”
It’s not Zeno’s paradox.
“Pick any interval time you want, however small. Unless you’re going sci-fi on me.”
No, I’m staying economic science on you.
“Here, let’s say you and me try to stay awake a little later every day, alright? Sound, okay? It’s the staying awake economy and sleeping is our consumption. How productive can we get in one 24 hour period while still consuming something?”
Since consumption is always positive, you don’t ever have to worry about too much investment. Even if you tried to invest all your time on this blog, eventually your head will hit the keyboard and you’ll sleep.
“MF, this discussion is at max capacity. And so I must lower my investment and raise my consumption, but I will invest again and let’s hope it will be a glorious recession indeed.”
Investment requires abstaining from consumption. Who knew?
“You won’t succeed, because we’re not at max capacity. Indeed, we are in such desperate need of more saving and investment that the economy has slowed down to a crawl because of a lack of saving and investment.”
“This one is truly unbelievable. MF,”
It only seems unbelievable to you because of your fallacious beliefs.
“If me and you are commenting back and forth, back and forth, back and forth. Eventually we will have the run out too the woods and invest in “hunting” and “gathering”, but no look, our commenting economy has collapsed.”
You are consuming right now, not investing.
Spending time on this blog, is a consumption activity, because you are not producing goods or services for sale to others.
You don’t even know what you’re doing. How confused can you get?
If you don’t even know what you are doing, how in the world can you possibly understand your experiences?
“Capital goods prices that rise is a good thing, a needed thing, if there is a rise in investment and fall in consumption,”
“If total consumption is falling then welfare is falling.”
That is necessary if welfare is to increase in the future as desired by those who choose to consume less in the present because they value less consumption now and more consumption later, over more consumption now and less consumption later.
“eventual result of increasing the production of both capital goods and consumer goods!”
“The long run.”
You’ll eventually reach it.
“It’s why we now have only 5% of the workforce in farming, instead of 80%, and yet that 5% of the workforce produce the entire population’s food materials. How is that possible? They have so much more capital than the farmers 200 years ago, that 5 people can now produce more than what required 80 people to produce 200 years ago.”
“Economic growth is good.”
If people want it and are willing to do what it takes, yes.
“More productive capital is more productive capital.”
You keep stating these tautologies, and yet you complained when I (didn’t) use them.
“What argument do you think you are making here?”
The argument that is written.
“False. Rising capital goods prices will make the investment, production and selling of those capital goods MORE profitable.”
“Yes, and you face a hard trade off between chasing prices and lowering GDP.”
That is a trade off that many individuals, myself included, are willing to make for ourselves. We are willing to lower our current standard of living, in order to save and invest and eventually increase our standard of living further down the road.
“Because GDP growth is zero.”
GDP growth is an aggregate outcome that no individual experiences. Individual “GDPs” can go up or down independent of aggregate GDP.
“Higher capital goods prices means higher costs for consumer goods makers.”
In the short run yes, and higher capital goods prices means higher revenues for capital goods companies.
In the longer run, the increase in total productivity will make prices fall, and the costs to consumer goods companies will end up being LOWER than they were before.
“You keep making the mistake of assuming that consumer goods sales are the only sales that generate revenues and profits. That’s false. Capital goods are also sold. They also earn revenues for the sellers of those goods. Their sales also generate profits.”
“Yes, I know. You keep this and it is not true.”
No, it is true.
“There is no free lunch here.”
I didn’t claim there was.
“Higher capital goods prices mean higher consumer goods makers costs because GDP growth is zero.”
GDP growth is a function of investment. You are again holding a variable constant when it is not constant.
More investment will temporarily decrease GDP, then increase GDP above what it otherwise would have been at that time had there been no additional investment.
“The MEC does not limit profitable investment. Investment can keep increasing from 50% of people’s incomes, to 60%, to 80%, to 99%, to 99.9% of people’s incomes, and the MEC will continue to be positive, because in each of these scenarios, consumption spending remains POSITIVE (and decreasing, but that’s not important here).”
“MF, right, I was confusing capital goods prices with the MEC (which if you go back to the earlier discussion I admitted to being unsure about how far the MEC could fall.).”
This connects to rising GDP and falling business costs.
“But capital goods prices will rise and business will become unprofitable.”
No, rising capital goods prices will rise and business will remain profitable. Lower profits in consumer goods, and higher profits in capital goods. Higher capital goods prices doesn’t mean the entire consumer goods industry suddenly earns zero profits, or negative profits.
Higher capital goods prices will mean consumer companies can buy as many factors of production as before. Their existing capital costs are a function of their past capital spending, not current capital prices.
If current capital prices rise, then consumer goods companies will only be able to buy fewer capital goods going forward. THAT IS A GOOD THING, because people WANT those resources to be released from use in consumption, to be used in capital goods companies instead. The capital goods companies will be able to employ those capital goods at those higher prices because those capital goods companies are EARNING higher prices for those capital goods.
If the capital goods prices did not rise, and consumer goods companies kept purchasing the same amount of capital goods as before, then those scarce resources would never be able to be released from consumption, for use in investment, which is desired.
You are complaining about something that is not only necessary for a higher rate of economic growth, but you are also claiming it is somehow a refutation of said argument!
How’s that for epic confusion.
“Since producers need to live and eat, no matter how much they invest, they can never invest 100% of their incomes. They’ll die. So we don’t have to worry about too much investment.”
“MF, we’re not worried about “too much investment” but the coming recession.”
Recessions are not inevitable on the basis of too much voluntary saving and investment.
You are worried about something the Keynesian inspired government has caused.
“And yes, that means someone may not have and income to buy food and can die.”
First you mock Austrians for not wanting the boom, by saying “Think of the children”, now here you are saying think of the children. Hypocrite much?
“Any quantity will be profitable because there will always be a difference between total spending and costs by virtue of the mere EXISTENCE of consumption.”
“Consumption spending does NOT have to rise every time investment spending rises, even at what you call “full capacity”.”
“You keep regressing”
No, I am not “regressing” at all.
“CONSUMPTION RISES IN THE MODEL BECAUSE IF IT DIDN’T THE RECESSION WOULD START POSTHASTE.”
DECREASED CURRENT CONSUMPTION IS NECESSARY FOR THERE TO BE ECONOMIC GROWTH.
ALSO, FALLING GDP DOES NOT MEAN THAT EVERY SINGLE INDIVIDUAL EXPERIENCES A DECREASED CONSUMPTION. IT ONLY MEANS THAT TOTAL CONSUMPTION IS FALLING. TOTAL CONSUMPTION FALLING CAN BE HAD ON THE BASIS OF WEALTHY PEOPLE REDUCING THEIR CONSUMPTION WHILE EVERYONE ELSE MAINTAINS THE SAME CONSUMPTION.
“THAT IS THE ONLY REASON.”
NO, THERE IS ANOTHER REASON. THAT OTHER REASON IS INDIVIDUALS CHOOSING TO REDUCE THEIR CONSUMPTION SO THAT THEY CAN SAVE AND INVEST IN THE PRODUCTION OF NEW CAPITAL AND CONSUMER GOODS IN THE FUTURE.
“YOU CAN NOT RAISE INVESTMENT IN THIS MODEL AT FULL CAPACITY WITHOUT CAUSING A RECESSION.”
TOTAL GDP FALLING IS NECESSARY IF THERE IS GOING TO BE TIME, RESOURCES AND LABOR DEVOTED TO THE PRODUCTION OF CAPITAL GOODS THAT INCREASE PEOPLE’S STANDARD OF LIVING.
WITHOUT THAT SAVING AND INVESTMENT, THE ECONOMY CANNOT GROW.
“For when there is more investment spending in this situation, there will be a rise in relative nominal profitability of selling capital goods, which will lead to investors redirecting their capitals away from consumption industries, and towards capital goods stages. More capital can be brought into capital goods.”
“Yes, this is when the recession will begin. GDP will fall.”
Less consumption is a requirement in the short run if people are going to produce more capital that increases the production of consumer goods later on.
You’re not saying anything significant when you assert that the production of consumer goods temporarily declines when there is more investment.
At full capacity, or less than full capacity (using your terms), a switch to more investment will require a temporary reduction in the production and sale of consumer goods.
It’s true always. You’re not saying what you think you’re saying.
“For example, if at full capacity investment rises by 5%, then that can result in transport trucks that were going to be allocated to delivering consumer goods, to delivering capital goods instead. That will raise the production of capital goods to whatever positive degree, and increase the “capacity” of the economy that you only THOUGHT was at full capacity.”
“No, MF, it can’t because all the trucks were already being used and one truck has started to break down.”
You are again fallaciously assuming zero production, even while “all the trucks being used” implies production.
Trucks are produced and sold over time. There is no fixed supply. They grow by virtue of existing capital usage.
“You can either buy a new truck or fix the old truck.”
With more investment, capital goods prices rise, and that can include trucks, because trucks used for production are capital goods. A company that increases its investment in trucks may raise the price of trucks, and thus outbid those trucks away from consumer goods companies that are earning less money.
This redirection is desired because of the increased investment and fall in consumption spending.
“THOSE ARE YOUR ONLY CHOICES. GDP WILL FALL IN THIS MODEL.”
Saving and investment requires abstaining from consumption.
“This is nominally profitable, since by stipulation you assumed a rise in the prices of capital goods. So capital goods sellers can attract those transport trucks away from consumer goods sellers.”
“NO, MF. YOUR OTHER TRUCK IS BREAKING DOWN.”
NO, IT IS BREAKING DOWN BECAUSE IT IS BEING USED IN THE PRODUCTION OF WEALTH, WHICH IS SOLD FOR MONEY, WHICH CAN THEN PURCHASE ANOTHER TRUCK.
“MF, it’s just a model. Learn to live with the supply side.”
Your model is garbage.
“I am arguing that one positive number divided by another positive number can never equal zero, nor become negative, no matter how small one number gets and no matter how large the other number gets.”
“Captial goods prices will rise on the front end. You can only either chase prices or have a recession.”
No, capital goods prices that rise earn higher revenues and profits for capital goods companies on the front end.
“MEC = (Producer consumption spending + Investment spending) divided by (Investment spending).”
“Some will stop eating if only for an hour.”
Your choice.
“I challenge you to find a positive number for producer consumption spending, and a positive number for investment spending, that will make MEC equal to zero.”
“When you try to raise investment spending total spending will fall if you don’t chase prices.”
You didn’t answer the question.
“Is this an empirical statement? Nobody is arguing that investment pending CANNOT fall in the empirical sense.”
“No, MF, we’re talking about the model in question.”
No, we’re talking about the model actually in question, not one where capital is being used up to produce other capital, but for some reason new capital is not being produced.
“Yes, investment spending can potentially fall to zero. But my argument is that there is no limit to investment that is constrained by the MEC.”
“Please, tell me this is not just some uncharitable exploiting of my (admitted) confusion over the MEC.”
I am not tricking you.
“Capital goods will rise on the front end to make the MEC negative on the back end, right?”
Increased investment that increases capital goods prices will increase capital goods seller’s revenues and profits.
“No, GDP will rise because with more investment, there are more capital goods produced, and with more capital goods produced, worker productivity rises, and wit”
“No, your other capital goods are wearing out at the same time.”
They are wearing out because they are being used to produce new capital.
xgsmmy:
“Please, try to understand what I’m saying.”
I cannot understand how you can say that, considering the fact that I am the only one making the effort to understand you on this blog.
“There is no net increase in consumption. Total consumption stays the same. Consumption simply transfers from capital goods producers to consumer goods producers. They economy does not grow, it merely maintains it’s same level of production.”
This is false. More capital goods production means that labor productivity can rise, which increases the supply of both capital and consumer goods.
You’re presuming a non-growing economy despite the fact that there is more capital with which to use to increase output.
“The accounting follows from the assumed profit rate.”
“I’m not question your ability to make assumption that result in the conclusions you want.”
It’s not a conclusion I “want”, as if it’s separate from what exists.
“I simply would like to see what someone who has looked at the data has to say.”
You mean historical data? You can find that yourself. It’s easy.
“If I find the time I’ll read everything you guys want me to read. But right now I’m fully employed.”
You can change your time allocation.
“That requires saving and investment in the production of that which is “ordered.””
“You’ve devolved backwards to the humans making fires to cook fish.”
Yes, going back far enough, today’s capital accumulation has been the result of saving and investment dating back to antiquity.
Point?
“I would like to move forward to the modern economy.”
Without saving and investment? Good luck.
“Capital goods that have not yet been produced can be made from human labor and natural resources. Where are the capital goods that must be “saved” and “invested”?”
Capital goods that have not been produced yet can ALSO be produced using existing capital that has been produced. THOSE capital goods that are used up were produced using capital produced prior to that. And that capital was produced using capital that was produced prior to that.
And so on, back in time, as the capital was smaller compared to the time after, and so on, until we get back to cavemen who first used a club to catch the first deer.
“I try to move one step forward, and you say, no look back, and I look all the way backward, and you say, no.”
I didn’t say don’t look backward.
“Can capital goods be ordered?”
Ordered capital goods that are delivered must be produced via saving and investment.
“Why must you persist in using “savings and investment” together always when they are different?”
They are not different if you define saving to be something other than cash holding.
“Actually producing those goods requires expending money on prior capital goods and labor, to produce them such that they can be ordered. The people who produce those ordered goods cannot consume 100% of their incomes. They have to abstain from consumption to finance the materials and labor needed to produce those goods.”
“Your argument circular.”
No, it is unidirectional.
“Where do capital goods come from? Capital goods.”
TODAY’S capital goods comes from prior capital.
That prior capital comes from capital prior to that.
And so on, until the capital was so basic that it was wooden clubs used by cavemen.
Ultimately, human labor is the originator. But going forward, once newer and better capital is produced, the capital produced after that is produced by existing capital and labor, rather than just labor as occurred in the distant past.
“We already discussed the humans. You want to have it both ways.
No, you’re just confused.
“No resources already exist, all capital goods already exist.”
Yes, TODAY that is true, and hopefully will be true going forward. I didn’t say it has always been true.
Of course if you go back far enough, everything was produced without the aid of capital. But thankfully because people chose to save and invest, new capital came into existence that did not exist before, and that capital was used along with labor to produce more and better capital goods and consumer goods.
“You have your head looking both ways at once.”
Of course. You have to see multiple things at once to get economics.
“The humans and natural resources already exist. That’s all you get, if you cannot order capital goods.”
But you can get more capital goods, if there is a nominal demand for them and people are paid to produce them.
“Everything thing else, ever productivity increase, can be accounted for through inheriting the durable capital from the last generation.”
Yes.
“Everything else can be assumed by humans and natural resources.”
Yes.
“You want to deny this so you can say the words “savings and investments” mindlessly over and over again”
No, I am saying saving and investment because I define saving in such a way that it excludes cash holding.
“and deny paying for something that does not already exist.”
No, I am not denying that.
“Take your own advice, don’t keep your variables constant.”
I am not keeping them constant. I am explaining to you how new capital comes into existence.
“While I’m paying you, your paying me. While you’re typing your comment, I’m typing mine.”
You’re not paying me, and I am not paying you.
Joseph Fetz said:
Considering how much time you’ve spent here, your “full-employment” is certainly not synonymous with “gainful” employment. I can certainly see a few minutes/hours better spent.
Then why aren’t you spending them?
Okay.
xgsmmy:
“False, it is that the money supply that is increasing so that their savings are increasing faster than they are spending.”
You can’t increase your cash balance unless others are spending money on you.
Cash balances during inflation must be exactly equal to the spending of that money, because the money spreads throughout the economy, raising people’s cash balances, through spending.
Again you’re holding a variable constant, and then imagining another variable changing, when that second variable is itself causing the first to change.
“They bank account filling up, like a sink with more water going inside of it.”
And how do you think those people’s bank accounts are rising?
It’s by other people SPENDING money on them.
“This is the only way too increase personal savings for everyone that doesn’t stop production, save for the case of instant deflation.”
This is just MMT insanity.
Increasing “saving” as defined by cash balances, is not in fact necessary to prevent production from stopping. Production can occur with a fixed money supply, fixed aggregate spending, fixed investment spending, and falling prices as more goods are produced.
Try again.
Increasing consumption results in higher standards of living.
If your consumption is decreasing then your living standards are falling.
Investments and consumption are complementary. “Savings” is net decreasing economic production and consumption as it is increasing.
xgsmmy:
“Increasing consumption results in higher standards of living.”
Increasing consumption can only occur with saving and investment.
You can’t consume what isn’t first produced. Production is not consumption.
“If your consumption is decreasing then your living standards are falling.”
If your consumption spending increases, and your investment spending falls, then your standard of living will fall.
“Investments and consumption are complementary.”
No, they are mutually exclusive.
“Savings” is net decreasing economic production and consumption as it is increasing.”
No, saving is abstaining from consumption.
The MEC will always be falling in two situations: full employment and during a recession (falling GDP). Or the boom and the bust.
Major_Friedman claims that Keynes illogically claimed “wage rates and prices” would be falling along with the MEC (and rising costs of capital), but during a recession (falling GDP) wage rates and prices are falling while the cost of capital is rising (and MEC falling).
But when full employment is achieved, capital costs will rise (and the MEC fall), (full employment will be lost when capital goods wear out) again, leading back to recession and the cycle repeats.
During full employment capital producers consumption lowers and consumer producers rises while capital goods investment spending falls, while capital goods costs rise.
This can continue until depreciation takes hold, at which time you’ll face a hard choice: falling GDP or chasing prices into infinity.
Keynes described the boom and the bust in a way that is consistent with Major_Freedom’s claim.
I’ll need to check back to find the exact quotes.
Major_Freedom also appear to have stopped suggesting that there is a “paradox of consumption” that Keynes ignored, as by his own model, consumption must fall. (Although he refuses to acknowledge that rising consumption in a depression can induce businesses to invest, that rising consumption means that your getting wealthier, or that Keynes full employment model, does not imply 100% consumption forever but precisely that full employment will be temporary.)
Major_Freedom does not appear to be willing to admit that these two cases (the boom and the bust) are in fact complements of each other leading into one another and insists of discussion each in its own “context”, while never admitting to previously denying that it was possible to have falling MEC and rising capital good prices with falling wage rates and prices (because GDP is falling).
He then switch tactics to avoid this problem by refusing to talk about GDP during recessions by insisting on only to be talking about “periods of unemployment”, all the while not acknowledging error.
[Intellectual Honesty]
http://consultingbyrpm.com/blog/2012/12/keynes-hearts-saving.html#comment-52826
Major_Freedom at
Bill Woolsey:
Keynes blamed recessions on reduced investment.
This is not correct. Keynes blamed recessions on insufficient “spending”, which is either insufficient investment spending or insufficient consumption spending. And, what’s more, he held that under certain conditions (full employment, interest rates below 2%, among other conditions) there is no room for additional investment spending, and so the only solution is more consumer spending.
xgsmmy:
See response here:
http://consultingbyrpm.com/blog/2013/01/can-fiscal-austerity-work-with-tight-money.html#comment-55918
xgsmmy:
“[Intellectual Honesty]”
Ah yes, when all else fails, accuse me of intellectual dishonesty. You can’t win on intellectual merit.
“Major_Freedom at
Bill Woolsey:
Keynes blamed recessions on reduced investment.
This is not correct. Keynes blamed recessions on insufficient “spending”, which is either insufficient investment spending or insufficient consumption spending. And, what’s more, he held that under certain conditions (full employment, interest rates below 2%, among other conditions) there is no room for additional investment spending, and so the only solution is more consumer spending.”
Your point? You’re just copying and pasting what I said as if that alone is sufficient to making an argument.
xgsmmy:
“The MEC will always be falling in two situations: full employment and during a recession (falling GDP). Or the boom and the bust.”
My last response to this part was incomplete.
The MEC does not fall at full employment and falling output.
The MEC is a function of two nominal demands, demand for output and demand for inputs. If this does not change, then it doesn’t matter what happens to real output. The same MEC will persist.
There was a lot of exceptional stuff in the post-WWII situation. Capital had been actively destroyed in Europe so they pretty much had no choice but to rebuild. Also, the war greatly accelerated technological development, so they rebuilt everything much better than it was built to start with.
If there had been no war, it would have been more efficient to just replace capital infrastructure a bit at a time.
Also, if you are using US statistics, remember those themselves are unusual because the US kind of came out of the “isolation” phase and into the “world police” phase with the US dollar being defacto world currency, and a great many brilliant people from Europe moved to the USA to start a new life. It’s a fundamental transformation that just can’t be explained in terms of a few macro-economic variables.
“(David R. Henderson thinks it’s “one of [my] most important” EconLib articles yet, and recent events have proven that David’s model of the world is spot-on.)”
That’s hilarious.
Nothing works instantaneously.
Good post, Bob. Aren’t the Clinton years an obvious example of “expansionary austerity”? Is it because the 93 tax increases that you guys don’t include them in your narrative?
And since government spending (or current spending) was higher after the war (WW2) than before the war doesn’t that complicate things for you guys?
I’ve also read several things on the Canadian austerity like this and this, that tell the monetary policy (and exchange rate) story for Canada.
I also remember Daniel talking about there being positive supply shocks at the end of WW1.
I need to re-internalize the supply-side argument of Romer, Broadberry, and some others. It’s not a simple argument, but it made some sense to me.
The high discount rate was obviously decisive so I have a hard time thinking there weren’t any demand side issues to talk about. My take-away is that there really is no reason to think that we necessarily needed fiscal policy or that Harding’s relatively modest tightening of fiscal policy after the recovery had gotten started mattered much at all.
If anything fiscal tightening didn’t help matters – Wilson tightened a hell of a lot more than Harding right before the recession, after all.
So a lot of the claims about fiscal policy and 1920-21 seem very wrong to me.
But if you’re interested in what was going on on the supply side in 1920-21 I suggest just going to Romer and then to Broadberry (he’s writing about the UK so probably relevant to the US but not as good as Romer if what you’re interested in is the US).
I think the problem is that Market Monetarists and Keynesians don’t generally think about their theory as saying “when government or the Fed do X, Y happens to output”. They think of it as saying “when X happens to supply and demand for goods and Y happens to supply and demand for money, Z happens to output”. That has information for policy, of course, but I don’t understand why you still think we have trouble explaining the post-war period.
Private demand was strong, right? As an extra bonus some Keynesians were predicting very Keynesian reasons why private demand was strong (others weren’t). So what’s the concern here?
It’s not about government it’s about demand.
No, it’s about prices. Neither side of what determines a price is more important than another.
Excuse me, “the” other, not “another”.
Well, when we’re talking about short run fluctuations like we are here I’d say it’s pretty safe to say that demand matters more. But more broadly, I’d definitely agree with you.
Suspend time?
We can always be framed as existing in short run fluctuations.
It’s an unfair framework. “Maybe in the long run you’re right, but this is about short run fluctuations” can always be used as an excuse to justify Keynesian and Monetarist activity.
The short run is not more important than the long run. The individual’s run is most important, and if an individual is more concerned about the long run than the short run, as compared to you, then it is unjust to lump them in as means to achieve your “short run is more important than the long run” activity.
Why can’t Keynesians and Monetarists only include themselves in their temporal desires? By what right do you short term minded people have a blank check to be cashed by everyone, including long term minded people?
This whole idea that the short run X can ever be objectively most important totally ignores the individual preferences of those who have an even shorter run outlook and those who have a longer term outlook.
Can’t you see that you are stomping your jackboot on other people’s necks when you demand that short term preferences dominate over everyone?
Sure, if you and others want to consume a lot and save a little, then by all means. But why should your means include those who want to look in the long run by saving?
That’s because in the long run we’re all dead.
🙂
Not the long run during people’s lives.
In the very very short run we’re always cash hoarding, holding resources idle, not spending, suffering from demand shocks, supply shocks, etc, etc, etc.
Long run to me isn’t past my life. It’s within my life, but past the time period that Keynesians seem unable to think beyond.
Also, I don’t think it’s right to characterize the 1920-21 recession as particularly quick… it was still among the longest in the twentieth century.
You’re right. When we take the “among the top” worst people who ever lived, and I don’t tell you how far down the list this “top” extends, then you’re right up there with Stalin.
He’s worse than Stalin! He abandoned KenKuehnianism for KuehnKeniansism. SPLITTER!!
Maybe in the statist box there is all this wide, far reaching variants of how to f^&k people over using violence.
But to me, KenKuehnianism and KuehnKeniansism are just days the statist week.
I don’t think Market Monetarists and Austrians disagree about the process by which the economy would react to “fiscal austerity” – reducing government defects via budget cuts.
The fall in government spending would cause both a drop in overall demand in the economy and free up resources that had previous been used to provide government services. This will require a process of relative price adjustments and resource re-allocations that both Austrians and MMist would likely agree would lead to an economy more able to meet the needs of consumers.
Where MMis and Austrians would disagree is about the importance of price stickiness and monetary policy in getting to the new equilibrium. MMist would believe that price stickiness would make the transition process rather painful and involve a recession if the CB does not take the appropriate actions (most likely monetary expansion) to stabilizes NGDP. Austrians believe that such CB policy is likely to lead to inflation and/or further distortions to the pricing structure as the monetary expansion hits the economy in an uneven way. For Austrians there is no alternative but to go through the price adjustments with no monetary easing – but they would tend to think that without such “stimulus” the effects of price stickiness would be minimized.
Certainly the free market advocate “can’t have it both ways”, but the Keynesians sure do!
And what about free market Keynesians?
Is that sort of like a Christian atheist?
LOL
That one seems like an oxymoron.
I can’t imagine how mine is.
I can’t imagine how mine of necessity is, I should say.
DK wrote:
I can’t imagine how mine is.
Oh c’mon Daniel, you can’t even *imagine* why someone might think “free market Keynesian” is an oxymoron? I get that you *disagree*, but you can’t even imagine?
I can imagine certain sentences that someone might string together to address the point.
I can even imagine why someone might claim such a thing.
I can’t imagine why someone would think such a thing without being uncharitable to the intelligence of the hypothetical person who would be thinking it.
Because charity has diminishing returns the further down you go?
Daniel, Daniel, Daniel. It’s another purity test. You’re either pregnant or not, you’re either free market or not. Supporting one teeny weeny bit of intervention makes you a statist.
Ken & Daniel: According to libertarians’ own definitions, Daniel is a libertarian. Ha!
Bob et al.: No, according to lots of libertarian definitions, he’s clearly not.
Ken & Daniel: We know that, idiots. We’re saying, it’s implicit in your minds, but you never come right out and say it. Why aren’t you clearer?
Bob et al.: Let’s be crystal clear: Daniel, here is our definition… You don’t fit it.
Ken: OMG!!! It’s another purity test!! Daniel these guys are freaking nuts.
No, it just doesn’t make you free market.
You know, like if you murder someone, then according to the annoying and strict “purity test” folk, it sucks to be labelled someone who is not anti-murder, doesn’t it?
I like how you insinuate that Keynesianism as “teeny weeny bit of intervention”. That made me laugh.
Haha, nice one Murphy.
It seems theoretical possible that in a stateless society it is observed that periodically investment levels get depressed for no discernible reason and it takes a long time for wages to adjust and so resources end up getting wasted.
Members agree to voluntarily pay into a fund that when these periodic episodes occur is used to invest in infrastructure projects. This uses up the spare resources until investment picks up again.
This would meet the criteria for free market Keynesian.
C’est moi. Just like Salman Rushdie is a Muslim atheist. I was raised in a christian culture and spent some time in Sunday schools. The Christian god is the only one I find actually worth disbelieving in; the others are like Thor, too absurd to merit much consideration. (That’s doubtless a reflection of cultural and emotional influences on me, not an endorsement or christian claims. I cite Rushdie as he probably considers Allah the only god worth considering.)
Bob interesting stuff-both this piece and the econlib piece. When you say this however, I get a little confused:
“I show that the peer-reviewed economic literature is far friendlier towards “expansionary austerity”–the idea that reining in budget deficits through spending cuts can actually boost economic growth, even in the short term–than prominent Keynesians would lead you to believe.”
“Well, suppose a new president (perhaps a fan of this blog) takes office in a small country and (a) cuts government spending by 30% in one year and income taxes by 15%, in absolute terms, and (b) abolishes the central bank and ties its currency to gold. A large budget deficit is transformed in one year into a modest surplus. ”
In this scenario your 30% cut in government spending is to an extent cancelled out by the 15% income tax cut. This is a point that Krugman has made: that a lot of people-like yourself-who love fiscal austerity-can’t get enough of it-worry about tax hikes. From a fiscal standpoint however a spending cut or tax hike has the same impact.
If you want to make the case for fisacl austierity that’s one thing. But you are biting off a whole lot more by wanting to advocate for tax cuts and spending cuts under the name fiscal austerity: a tax cut is the opposite of austierty, it’s stimulative.
I get that you have supply side reasons for liking tax cuts however Keynesians often do as well-like Kennedys cut back in the 60s. What I do find is that supply siders often like different types of tax cuts: like you guys didn’t care much for the payroll tax holiday. This of course is why liberals like myself think supply siders are mostly about regressive tax cuts
In any case I don’t feel like you really explain either in your econlib piece or here why spending cuts are to be preferred to tax increases. Why does a piece advocating fisacl austerity spend so much time advocating a fiscally stimulative policy-tax cuts?
Another coment you made was: “from my perspective, both camps have a tough time explaining why the US bounced back so quickly after 1920-21 and 1945-46, if their explanation of 1929-1939 is correct.”
To me these these diferent periods are apples and oranges. In 1920-21 the Fed quite deliberatly imposed fiscal austerity to quell WWI inflation. Once double digit inlfation became double digit delfation all the Fed had to do was take it’s foot off the austerity brake.
The Depression of 1929-39 was very different. It wasn’t Fed induced. I mean, yes, I know the monetarists say the Fed faiiled to keep up the monetary supply but however that may be it wasn’t deliberately induced in the same way. I believe the causes of the Great Depression were much different than 1920-21
As for 1945-46 that was driven by WWII demoblization-a totally inapposite comparison to the 30s.
Finally, in your Econlib piece the only “transmission mechanism” you mentioned in terms of why fiscal austerity could lead to economic growth is that it will restore confidence to Krugman’s bond vigilantes. Why should we not scorn such claims as Krugman does when you look at the current bond yields?
Mike Sax, so if John Boehner proposes cutting off unemployment benefits and SS/Medicare payments to save $300 billion next year in spending, but he couples it with $100 billion in corporate tax rate cuts, you think Krugman would agree that would be expansionary?
That would be a net cut in the deficit of $200B and represent austerity.
It it was $100B cut in benefits and a $300 tax cut to be funded by borrowing then I think Krugman would indeed see that as expansionary (but probably would not be his best policy choice).
From a bookkeeping budget standpoint it would mean a fiscal cut of $200 billion. Krugman wouldn’t support that-nor would I.
Liberals like Krugman also care about progressivity. However, I’m just wondering how a post about fisacl austerity speaks about tax cuts-as they are expansionary.
In theory someone who believes in fisacl austerity could be imagined to support both tax increases and spending cuts. Yet most austeirty advocates seem to also be supply siders. Where is hte connection other than spending cuts and tax cuts are both things you guys like?
Mike I don’t even know what to say at this point. I had the government cutting spending by 30% and taxes by 15%, and you seemed to be saying this wasn’t distinguishing myself from the Keynesian position. Now you are agreeing that neither you nor Krugman would support that, because it’s contractionary.
I don’t view the world in terms of the government’s budget deficit. It makes a huge difference in my mind if the government balances the budget by cutting spending, rather than by raising taxes.
I think the point is that the 15% tax cut just confuses your argument.
From a MM perspective they would would want to see any cut in government spending offset by an increase in the money supply sufficient to keep NGDP on trend.
They would prefer this to be done by monetary policy but would probably see a 15% tax cut as fiscal policy that moves NGDP in the right direction anyway and would lessen the need for monetary policy.
I think MMists would believe that (other things being equal) a cut in govt spending matched by an equal cut in taxes would be neutral from an NGDP perspective (but as free market advocates, good from a economic efficiency perspective).
To clarify: I perceive the argument as being about the economic effects of decreasing the deficit, and a tax cut increases the deficit.
You can make a pretty good argument that most government spending is misallocation. After all, why wasn’t ti spent that way voluntarily? This argument doesn’t apply to all govt spending, but to a goodly chunk of it. So let’s say you believe that. Then you want to reduce the amount of gov’t spending, in the sure and certain hope that left in private hands it will be spent ‘better’. Less misallocation. So if you think like that — misallocation is what really matters — then there is a big, big difference between cutting spending and raising taxes.
I wonder if you saw this piece by Bruce Barlett-going the other way and aruging that actually tax hikes can be expansionary-or at least you can find correlations-just as you do for the opposite.
http://economix.blogs.nytimes.com/2013/01/08/tax-increases-and-bull-markets/
One can’t but notice that the market soared after the fisacl cliff deal.
I’ve often pitied that you Austrians don’t pay more attention to one of the most statistically measured countries in the world. I’m pretty sure you would find all the answers regarding the post-WWI period that you are looking for.
After having read your article I thought I’d have a look myself. So I am staring right at the statistics from that period and find that in the aftermath of 1918:
tax revenues fell
state expenses fell
debt went up
employment went like a yo-yo
I think you guys could have a field day anytime over the Keynesians if you bother to have a look, considering this is more like a canary in the whole context of 20th century development.
From free market interest, freest market, free immigration, pure gold standard, lowest taxes to the highest taxes and most manipulated currency.
I am talking about Sweden.
All statistics:
1870‑1913
http://www.scb.se/Pages/List____323850.aspx
1914-
http://www.scb.se/Pages/List____283991.aspx
1920: http://www.scb.se/Grupp/Hitta_statistik/Historisk_statistik/_Dokument/Statistisk%20%C3%A5rsbok%201914-2001/Statistisk%20arsbok%20for%20Sverige%201920.pdf
1926: http://www.scb.se/Grupp/Hitta_statistik/Historisk_statistik/_Dokument/Statistisk%20%C3%A5rsbok%201914-2001/Statistisk%20arsbok%20for%20Sverige%201926.pdf
If you can some French you can probably interpret the columns.
Feel free to contact me per email if you are interested.
Wow, what a nail biting, anticipatory, build up to a climax that is a language I can’t even read.
Hoiking out of the indentation. Bob gets it wrong thus:
Bob has mis-paraphrased. Just insert “some” in the bit Bob attributes to me and DK and it’s right.
But it’s also not remotely contradictory.
It’s like this kind of conversation:
Ken B: According to SOME religions worshipping Jesus as God earns you damnation.
Bbb: Nonsense Ken B, my religion does just the opposite.
And yet, earlier Ken B. you took me to the woodshed for not realizing that “the point” Daniel was making was that all of these definitions were in our minds, and not being made explicit. It seems whenever I bust you on something, “the point” of our argument to that moment suddenly changes so that you’re still right.
No the point is unchanged. Your misunderstanding of it seems to have changed, that’s all. Some liberatarian statements of what libertarianism is are so general and feel good they fit DK. That was the point of my mock definition of KenKuehnianism. Of course the real criteria they have in mind do not fit DK.
Imagine then this example.
Bob: A religious person is one who believes there are powers in the world he cannot comprehend, patterns he can sense but cannot grasp, truths he can glimpse yet cannot doubt.
Ken B: By that account I’m religious.
Bob: No you are not! Bite your tongue!
Ken B: Indeed I am not, but if we judge just by that peroration, I am. It’s not really a very good definition.
Is there anyone reading who thinks Ken B. is making a good case here? If so, maybe I’ll point out specifically how he is changing what “the point” is. But I suspect no one else cares.
I do! I do!
Oh in that case: Earlier I showed that Daniel himself agreed that Rothbardians and “most” (exact word) non-Rothbardians had definitions that didn’t fit him. So I complained that you guys were making a big stink about the moronic libertarians who can’t even define Daniel out of their movement, when he himself admitted that all Rothbardians and most non-Rothbardians didn’t admit him, per their definitions which he very well knew.
Then at that point you said no “the point” was that these definitions were just implicit. That when the libertarians in question went to publicize their definitions, they watered them down.
Then later, you made fun of the libertarians for having such rigid definitions, and for trying to have purity tests to exclude people.
So at that point, I pointed out how full of crap you guys were. You initially mocked libertarians for having a big-tent definition, then you mocked them for doing exactly what you wanted, namely to be clear that Daniel wasn’t one of them.
At this point, you said “No Bob, all we were saying is that *some* libertarians have wishy washy definitions…” And you maintained that this was “the point” all along, even though you literally said “the point” earlier was the distinction between official and implicit definitions.
OK I’m done. Ken B. will now object that I argue too much.
There goes Bob, trying to steal my thunder.
Also, the main contention that I had with DK was in his saying such a thing as “free market Keynesians”, not necessarily the political implications of affiliation.
By any known definition of “free market”, state actions are not included (because they are involuntary). However, DK has often argued that state actions are market actions by conflating concession, compliance, subjugation and acceptance with voluntary action, which is kind of like saying that water is air because it contains oxygen.
Just wrong on what DK and I said though Bob. Anyway one can mock democrats for vague feel good big tent ism and also mock them for abortion litmus tests. Especially when one is mocking *different* democrats.
Joe, the phrase was free market Keynesian, not free market Kuehn. Keynesianism is a theory.
Plus you here show the purity obsession. Say I like the market but believe that in some circumstances it can fail. Even if I go beyond theory to advocating action it’s only by purity standards you can say I’m not a free market guy.
I’m a pretty hard line free speeches, but think you cannot yell fire in a crowded theater. Only an ideological purist would insist I’m not a free speeches.
Come Ken, you gotta admit that the whole water/air thing was pretty clever in describing the context of DK’s arguments on this.
OK Joe, I admit that was a nice turn!
It doesn’t mean that I am right, I rarely am. Well, once in a blue moon, anyway.
See below. I don’t think he is.
“It’s not really a very good definition.”
Yeah, because the non-aggression principle is as wishy washy and vague as “powers in the world one cannot comprehend, patterns one can sense but cannot grasp, truths one can glimpse yet cannot doubt.”
Because the meaning of it is so vague and wishy washy that it’s somehow possible to arrive at the conclusion that “some” definitions of libertarianism permit the pointing guns at innocent people and forcing them to pay taxes in a currency that is being monopolized by violence, so that said currency can be borrowed and monetized by the initiators of violence in order to pay special interests and achieve what is called ‘Keynesian style’ policies.
Since the problem is that libertarianism is too vague.
Since libertarians are not being explicit in what it means.
And, to add insult to injury, when libertarianism is understood and presented in such a way that makes Keynesian policies anti-libertarian, then we have to hear the nonsense of “It’s a purity test everyone! None of us are good enough!”
Ken B, the fact that you’re all butthurt over not being invited to the cool kid’s party, doesn’t mean that you can just arbitrarily assert that the cool kids are using an unnecessarily narrow definition of “cool” in order to make fun of you.
You are not cool if you favor pointing guns at innocent people to make them do things that are not the peaceful things they otherwise would have done because they value those ends more than your ends or the ends of DK and his Keynesian thug-buddies.
Libertarianism is not unclear. It is not the wishy washy crap you set up that MAY “trick” a religious person into thinking you’re religious.
If you wanted to use such an analogy, here is how it would go down:
Bob: A libertarian person is one who believes initiating violence against person or property are wrong.
Ken B: By that account Keynesian policies are libertarian, because democracy is not coercive against anyone.
Bob: No it’s not! Bite your tongue!
Ken B: Yeah, well, maybe according to your narrow, “purity test” version of libertarianism, only you and Jim in Buffalo are actually libertarians, because I remember punching someone in grade 4 without just cause. Many people have violated that definition. Yeah, I’ll take your definition of libertarianism and dump it in the bin along with the other 54,432 versions of it I’ve heard in my lifetime. You can’t fault Keynesian totalitarians for claiming they’re libertarians, since according to THEIR definition, they are not contradicting themselves.
See, what you are doing Ken B is trying to win by quibbling over semantics. That means you lost.
Except M_F not all definitions of the term reference the NAP. I agree once you stipulate that, and count taxing as aggression, then it’s obvious DK isn’t covered. But not all statements are like that are they?
Yes, just like “not all” definitions of anything includes anything in particular…when you create a definition that does not include the particular in question.
Definitions are as subjective to you, as you want them to be for you.
But for others, definitions, because they reference real things, or at least should reference real things, should be defined by keeping in mind those real things, not the word.
For someone to call themselves a libertarian, certain specific real world activity is being referred to. Yes, if you wanted, you could define Stalin as a libertarian and Murphy as a communist.
But if you KNOW what a person means when they say a word, there is no excuse to feign ignorance and pretend that the person holds as vague an understanding as the volatility of definition making would imply.
Bob is just saying that when libertarianism was defined generally, you guys complained, and said that it’s all implicit, almost secret like.
Then when it is defined more particularly, you realize it excludes you, and so you pejoratively complain Bob is engaging in a “purity test.” Then what that is pointed out to you, you say pshaw, “The “point” all along was that there are many different definitions of libertarianism.”
For real? You’re taking this to the depths of silliness.
No M_F look back. This started when DK said some definitions he sees fit him. Ones omitting the fine print as it were, like the strict application of NAP. That’s the context here.
There was once one mathematician who was a jerk.
Mathematicians are idiots. QED.
No true Scottish Libertarian would omit the NAP.
Ken B:
‘No M_F look back. This started when DK said some definitions he sees fit him. Ones omitting the fine print as it were, like the strict application of NAP. That’s the context here.”
No, this started when DK first said libertarians are using an implicit definition of libertarianism, and then you complained when the definition was made explicit in a way that excludes DK.
The fundamental principle that binds all libertarian definitions is freedom.
Freedom from what? From coercion.
What is coercion? In general, it occurs when one’s “external” environment is not to one’s preferences. The original “libertarians” were philosophers who used it in the metaphysical, quasi-Plotinean sense of absolute limitlessness. Where there is not even a physical world to limit the one, the ego.
But in 2012, most philosophers have accepted that human life is inherently physically limited, so libertarianism now means freedom not from the physical world in general, but from unnecessary, “unnatural” limits.
For anarcho-capitalists, the limit imposed by initiating violence against person and property is “unnatural” and unjustified.
For anarcho-socialists, when they’re not busy contradicting themselves, the limit imposed by private property is “unnatural” and unjustified.
For DK, the limit imposed by certain acts of protecting private property, but not others, are “unnatural” and unjustified. For example, any private property protection that goes against his desired statist ends, are “unnatural” and unjustified. DK wants to consider the initial antagonism against private property owners that is necessary for his statist ends to be achieved, is “libertarian”, because heck, after all, he’s not advocating for other forms of statist aggression.
Just that aggression where the majority supports it, and within that category, just that aggression that is not obviously aggression, like the majority voting to kill or enslave the minority, but rather, more insidious and deceitful forms of aggression, like the aggression that underlies the fiat monetary system. That’s OK, because the alternative is “inefficient” in his view, which has its own problems, because once you start down the “efficiency = justified”, then that opens up a can of worms where self-contradictions are necessary to avoid the logical conclusions.
I don’t see how ANY definition of libertarianism can condone ANY aggression against the individual’s person or property, for that would violate the victim’s liberty (obviously).
You might not like the “narrow” definition that anarcho-capitalists have established, but it really is the most logical “definition” of libertarianism, given that we all agree libertarianism is grounded, ultimately, in freedom, and we all agree that we can’t escape out physical bodies and hence rely on our physical surroundings to not just survive, but live happy lives.
The argument “You are violating my liberty when you refuse to give me charity using your property” is a contradiction when translated to a universal principle that can satisfy the requirements of being a human ethic, so the only definitions that can accommodate socialist forms of libertarianism, are contradictory ones.
Logic is the reason you perceive a “purity test”, and why DK thinks it is not right to limit the definition to anarcho-capitalism.
Logic limits possible outcomes. It is not dogmatic Rothbardians who are psychologically insisting on their own definition, it’s a relentless insistence that logic not be violated.
I think that’s it’s safe to xgsmmy is a troll. He’s had over 70 comments in this thread (or about 40% of all comments), most of which lacked substantive content and/or were purely inflammatory. If I were to factor in his total word count, he’d be pushing about 65% (even with MF’s comments weighted).
He hates MF, and has become the thing he hates.
Joseph, please look up “trolling”. Also, I think you are inappropriately comparing comment numbers while ignoring comment length.
You’re like the people who think Keynesians don’t ever reduce spending because while the debt may be increasing debt, debt to GDP will be falling.
I responded when responded to. It is you who have now insulted me three times, with substance free personal attacks.
If you disagree with something I have to say, please address my actual words and arguments.
I’d much prefer that, than to have you, try to get the mob to brand me as something I have no intention of being.
That is all, good day.
And yes, Ken B, if you gaze into the abyss, the abyss gazes back into you.
I don’t think you’re a troll but I think you’ve let MF get to you.
I also don’t think that you are a troll, and I think you want to argue in all honesty, though I have never seen someone doing about 25 comments consecutively without any answer from someone else. What’s the Guinness record for this?
I may repeat (don’t know if you saw my single comment about this to you already): Instead of doing such huge and broad discussions read MES (Men Economy and State) from Rothbard. You get it for free at Mises.org, and after that I think you can have much more specific discussions…
Don’t mention the record book. Last thing we need is for MF to think the goal posts have moved!
I think I just broke my own record for the longest post I’ve ever made.
http://consultingbyrpm.com/blog/2013/01/can-fiscal-austerity-work-with-tight-money.html#comment-55826
Actually, that isn’t the post. My post went into the abyss.
Murphy, can you save it?
Actually, it is the post, but the bottom part went into the abyss.
I think I just discovered the maximum characters that can be typed in one post.
To infinity and beyond!
To be honest, I don’t think that you’re necessarily a troll. However, on the MPK thread you did make some very inflammatory and unsubstantiated remarks, to which I told you that your criteria were so disparate that it is hard to take you seriously. In other words, you didn’t provide an argument to be refuted, you just lumped a bunch of crap together, such that one cannot even begin to understand what your meaning is in order to refute you (instead only the vitriol remains). That is typically an indication of trollish behavior.
And yes, I did say that I thought that you were full of shit. You make a statement that “in a libertarian world slavery is freedom”. Then, to substantiate your position, you post something that is more muddled and confused than your original statement. Then you ask me to prove you wrong!
Perhaps if you’d be a little more clear on what it is that I am to prove, then I can do so. Otherwise, I will see it just as I described: bullshit!
Ok, I didn’t originally describe it as bullshit, but that is essentially what I meant.
How am I diverting? You said you would not read the link, now you tell me you have read the link. Yet you have not commented on the link.
Joseph, I posted a link to a “blog essay” for you to read, that I did not write, so your response now is a cop out.
But I did make an argument, or at least attempted to do so.
Maybe I was too “disparate” or maybe you just didn’t understand what I was saying, but you were obviously not receptive to hearing more.
I do not think “unsubstantiated” means what you think it means, but I replied saying that I was not saying that I thought the groups I was referring to held the views that I attributed to them.
I was raising questions about the logical consistency of the positions in question.
Ok, well please explain to me the exact meaning behind “in a libertarian world freedom is slavery”. Don’t post links, don’t talk about things that aren’t directly supportive of this statement, just post your own reasoning behind the statement itself.
I’ve already explained it. If you can’t be bothered, don’t bother.
Assertions are not explanations, nor are they arguments, that is the problem at issue.
JF, you’re wasting your time. If he isn’t a troll then he is someone who can’t articulate his argument. Either way you’ve got nothing to gain here.
Here, let me be more clear about what I am talking about.
You said:
“Ironically, in a libertarian world slavery is freedom.”
Then you explained your position thusly:
“1. Libertarians are not “at liberty” because they renounce “positive” violence (a part of human nature), including against property. (Although, I’d argue it’s impossible to be an “anarcho-capitalist” and not a pacifist.)
2. If you did want to be free, what then is the easiest way? “Sell yourself” (or get conscripted into) slavery. Now you’re truly free.”
Then when challenged on this you say:
“As far as “anarcho-capitalism” not being compatible with self-defense: self-defense and punishment both suffer from the economic calculation problem that so bothers Bob Roddis.
So counter-cyclical self-defense should create “malinvestments” and an inevitable “blowback”.
But that’s not all: contract enforcement and debt slavery are “retroactively” determined acts of aggression. Creditors and contractors, if consistent by logic, should accept the risk of losses they take on voluntarily.
And we haven’t even got to the non-sense about trespassing, natural resources, and the utter lack of a commons.”
Followed by:
“You might ask yourself, where does all this lead? Probably Gandhian-style anarchism, but logically you’re probably committed to Jainism.”
Do you seriously not see the problem here, that everything that you said above is not only disparate, but also mere assertion?
This is simply not how correct argumentation works, which is why I have usually just chosen to ignore you. You can view that as some sort of victory for yourself, that’s fine, I do not rely on the opinions of others for my self-esteem.
And Please, if anybody other than xgsmmy thinks that I am totally cuckoo on this, and that what xgsmmy presented is a completely respectable, consistent, and thorough argument, please feel free to correct me.
Joseph, I also don’t get his argument.
Joseph, I explained it. You didn’t understand it. I posted a link for you to read. You have refused to read the link, and are now making demands of me?
If you won’t read it, I’m not going to waste my time, on it.
I read the link.
You’re diverting.
Joseph, I understand that you think I haven’t given you enough attention. But I posted a link, you refused to read the link, I tell this, you reply saying, no, you have in fact read it. Yet continue with more accusations of alleged improprieties of mine. I have a limited amount of time to devote to your special needs, friend.
It seems to me it is you who has no answer to the problems, I raised.
So, let me be sure as to what you’re saying. You’re saying that the link is the primary material that you’re standing behind, and that the words that you said have no relevance?
Why are you pushing that link so hard? I read the link, but I am more concerned with the words of the messenger. After all, I am not talking to the author of that article, I am talking to you.
As I have already stated, you’re diverting.
Here, I’ll remind you again of what my concern is.
You said:
“Ironically, in a libertarian world slavery is freedom.”
Then you explained your position thusly:
“1. Libertarians are not “at liberty” because they renounce “positive” violence (a part of human nature), including against property. (Although, I’d argue it’s impossible to be an “anarcho-capitalist” and not a pacifist.)
2. If you did want to be free, what then is the easiest way? “Sell yourself” (or get conscripted into) slavery. Now you’re truly free.”
Then when challenged on this you say:
“As far as “anarcho-capitalism” not being compatible with self-defense: self-defense and punishment both suffer from the economic calculation problem that so bothers Bob Roddis.
So counter-cyclical self-defense should create “malinvestments” and an inevitable “blowback”.
But that’s not all: contract enforcement and debt slavery are “retroactively” determined acts of aggression. Creditors and contractors, if consistent by logic, should accept the risk of losses they take on voluntarily.
And we haven’t even got to the non-sense about trespassing, natural resources, and the utter lack of a commons.”
Followed by:
“You might ask yourself, where does all this lead? Probably Gandhian-style anarchism, but logically you’re probably committed to Jainism.”
Just to be clear as to what is at issue.
Joseph, I made a joke. Then gave an explanation. You did not understand my explanation. So I posted a link for you to read. You won’t read it. That is all there is to it.
I’m not saying I’m not standing by my words. I specifically asked for feedback. Do you remember that?
If you wanted to understand you would read. I don’t know what else to tell you.
You have given no indication you know what I’m talking about. Or have any thoughts at all.
Told you so, Joe.
That you did, Dan. That you did.
In any case, it is in the public record. I am comfortable with that for the time being.
I could not agree more.
OK, now I am getting a browser error, “thread too long, cannot render. Change topics for pity’s sake”
LOL. I was like, “There’s no way I’m going to follow along with that thread.”
… Well, maybe if it wasn’t indented so far.
Maybe they can sum it up for us, later.
Guys — and you know who you are — get a room. The rest of us may not read it but we still need to load it.
There’s a joke about junk DNA here, and this page relicating on screens all over the world, and maybe with time I could frame it.
Are you using a Commodore 64?
Seriously, your computer is having problems loading TEXT?
Maybe if I was loading JPEGS, OK, but text?
I’ll get a room when you get a new computer.
To be fair, I was having quite a few hanging loads over the course of the last few days when navigating to this blog. They seem to have disappeared for the time being. My gear is top notch.
“To be fair, I was having quite a few hanging loads over the course of the last few days…”
–Actual quote from Joseph Fetz
LOL! I originally laughed when I read “My gear is top notch.”
Well, it is in every sense.
And that rack! Oo la-la!
Damn you, Bob Murphy!!!
(good catch, though)
Is your irony detector running on an 8086?
Nah, it’s on the abacus I left behind in grade 2.