29
Sep
2014
Economic Fallacies 1 of 4
I did four guest lectures for Liberty.me back in July/August. Here’s the first one; I don’t know if they eventually will all be made public. They asked me to go through my book The Politically Incorrect Guide to Capitalism, which I was happy to do because I haven’t publicly lectured on a lot of these topics. Some of this will be standard fare for most of you, but I imagine I’ll put a spin on certain points you’ve never heard before (unless you read the book, that is).
Wouldn’t the main reason that professional athletes make much more than teachers be that they serve millions of consumers at a time, while a teacher serves only 20-30. That’s why WalMart executives make more than a mom and pop grocery store.
Probably a better explanation: people are sports junkies.
That’s right, Walmart execs make more money than mom and pop grocery stores because people are sports junkies.
That’s correct. And where a mom-and-pop store sells a thousand sports-utility items a year Walmart sells 10 million of them.
Great point. Also pro athletes face a much tougher and narrower selection process than teachers, have many more performance metrics that are comparable and establish economic value, and as a result of narrow selection are much more elite in terms of talent and skills (say on a percentile basis relative to humanity). Despite the importance of teachers and teaching, the academic elite (aka professors, more directly comparable to pro athletes) do relatively little teaching. I’m not sure we can even reliably identify or characterize elite teachers due to unionization (rewarding seniority overwhelmingly over merit), unclear metrics, and classroom variance.
Bob may have mentioned all of this — I haven’t watched the video.
Teaching will gradually go toward the “elite pro” model as more of the process gets automated and prerecorded. I sat through heaps of crap lectures thinking “there must be a better way, but I need a piece of paper so don’t rock the boat.”
Teachers are holding back the tide for a little while, won’t be able to do it much longer. Then we can have fewer teachers, pay them individually more but collectively less.
Michael T:
No that is not the reason. What you are assuming there is that “income” in the general sense is only dependent on the number of income earners. This of course assumes everything else is constant, such as the number of consumers with money to spend.
If every individual earned the same income and thus were in a position to spend the same, would your proposition be correct.
To see how only the number of consumers isn’t the determining factor, compare the expected wages of someone who is an automobile engineer at Rolls Royce, a company whose customer base is relatively small, with a shelf stocker at Wal-Mart, a company that has many millions of customers.
The reason why sports athletes make so much more than teachers is because of the significant difference in relative demand, which is number of customers times the number of goods they buy times the price of those goods (even that is not accurate, because like you I am making a ceteris paribus assumption, which is that there is only one good and is homogeneous. I did that only to reveal why number of customers is not accurate).
Sorry, first paragraph should read “such as the income any individual consumer earns”. In other words, everyone makes the same.
It should also be mentioned that relative demands determining relative wages is distinct from the macro fallacy that increasing aggregate consumer spending increases wages. In the aggregate the dependency is the other way around, since, like in relative wage analysis, all expenditures are in competition with one another. Increasing in spending on X means otherwise lower spending everywhere else, ceteris paribus.
I did not mean to convey that the number of consumers is the only factor, just one that Bob didn’t mention. But if you look at the modern NBA, every player makes more than Bill Russell did, even adjusting for inflation. But the reason they make more is because they are able to perform in front of an audience of millions and Bill Russell rarely, if ever, played in front of more people than were at the arena. It’s not because they are better at basketball than Bill Russell.
But is the increase in salary for modern NBA salaries concomitant with the increase in number of NBA viewers and attendees at games?
I only signed up to liberty.me last week when I tried to access a link by Dr. Kinsella. I had no idea it was a full-blown “project” with interactive content, lectures and gosh knows what else (i’m still a newbie). That place could certainly use some promo. I would have joined ages ago, I love Mr. Tucker’s work. I met him in person once at FreedomFest. He was distant but I still like his work 🙂
I am a founding investor.
An mp3 link would help a lot, youtube doesnt keep on playing when i switch away from it on my android.
http://www.listentoyoutube.com/after.php
that link is good for me conversion.
Mp3
Great, thank you
Nice! I assume you’ll start by debunking Say’s Law, right?
We leave that one up to you…
All you have to do is demonstrate yourself consuming something which has never been produced. Should be easy enough.
There are many versions of Say’s Law and some degree of conflict over the validity of each.
“Stuff has to be made”, unfortunately, does not make the list (at least any list that economists consider worthwhile thinking over).
So which is the legitimate correct version? And what is the authority to support the assertion of the legitimate correct one? How does that reconcile against Tel’s comment?
Please don’t be a Clinton and tell us “it depends on what your definition of “is” is.
“There are many versions of Say’s Law and some degree of conflict over the validity of each.”
Exactly!
A lot of scholars of the history of economic thought would argue that Say’s role in actually formulating the law is overrated. Thweatt (1979: 92–93) and Baumol (2003: 46) conclude that Adam Smith was in fact the real father of what is recognisably Say’s law in Classical economics, with the major work in developing the idea conducted by James Mill (1808), not necessarily Jean-Baptiste Say himself.
References above can be found here:
http://socialdemocracy21stcentury.blogspot.com/2013/04/says-law-overview-and-bibliography.html
Then which one claims legitimacy? Defend the selection. If not one interpretation is no better or worse than others. My issue with DK’s response to Tel was “There are many versions of Say’s Law” which was a dodge to Tel’s specific interpretation aspect.
I’m just going by Say himself:
Does appear to imply that production comes first, then exchange (i.e. trade, markets, etc) comes after that and consumption comes last. I admit I am going out on a limb to presume that all goods eventually get consumed one way or another, which Say never explicitly spelled out, but doesn’t seem too controversial.
Note carefully the subtlty here, a market requires at least two different products; both of which must come from somewhere (hence the important mention of “a product” and also “other products”).
Seems Say also believed in the same sequence of causality on a macro scale, which is kind of logical because a nation cannot magically summon goods out of the ether any better than an individual can.
“A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. “
Not true. Because almost ALL products will sell for above their cost of production to allow profits. Total factor payments prior to the sale do not equal the sale price.
“Not true.Because almost ALL products will sell for above their cost of production to allow profits. Total factor payments prior to the sale do not equal the sale price.”
Does not address the point being made by Say.
What other valuation would be more legitimate than market price discovery?
I can think of many, quite normal situations where goods are sold below the cost of production;
* End of line run-out sales.
* Warehouse clearance.
* Factory seconds.
* Promotional giveaways.
* Early adopter discounts for new models.
* Shop soiled demo units.
* Goodwill bonus points for regular customers.
There are also unusual situations as well such as the way Sony PlayStation 2 could sell high end graphics hardware surprisingly cheaper than equivalent open market PC hardware (that’s a long story, deserving of an article in itself) suffice to say some very complex behaviour can happen in a free market.
If you want to sympathize with Say, you focus on parts of his writing where he talks about consuming as a result of your own production (“we can only purchase the productions of others with our own productions”), which is not what you’re saying here.
That parts fine – but of course it doesn’t justify other claims by Say like “A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value”, which is very much a fallacy and has lead to a lot of problematic macroeconomics.
I shouldn’t say that Say alone has lead to these problems. He’s a nice whipping boy, but it’s not just him. Say doesn’t elicit much sympathy from me, but there are others that do – Adam Smith no less – that say similar stuff. Say just became a figurehead for the view (long before Keynes came along and tied him to it).
What I said was perfectly clear: if you could consume what was not produced it would contradict Say’s statement that production is an absolute necessary prerequisite to consumption.
It really is that simple, only Keynesian economics can find a way of getting confused over this.
You are very confused indeed if you think that is all there is to Say;’s law or that Keynesian deny that proposition.
The plain fact that a economic good needs to be produced to exist is not disputed by Keynesians; it is the other more important aspects of the law that are criticised.
E..g,
“Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; for we do not consume money, and it is not sought after in ordinary cases to conceal it: thus, when a producer desires to exchange his product for money, he may be considered as already asking for the merchandise which he proposes to buy with this money. It is thus that the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchandise for their merchandise “ (Say 1816: 103–105).
That is the rambling of a man who forgot that people can hoard money, and money can be spent on secondary financial or real asset markets.
Why can’t hoarding simply be deferred consumption? Who defines when savings crosses the line of “hording”? Money spent on secondary financial or real assets a legitimate deployment of that money according to the preferences of the holder. Consumption of consumer goods does not hold higher nobility.
The act of saving as most people understand it typically involves depositing money in a bank. This money is not hoarded, unless it is kept as reserves. The portion which is not is lent out-some one else spends it.
But I also think hoarding *is* deferred consumption-it’s only done temporarily. But an individual can save money without hoarding it. Instead they supply loanable funds. Only that kind of savings is equal to investment (making the reasonable assumption that the market for loanable funds clears). Hoarding does not contribute to the supply of loanable funds and therefore is not available to the demand side of that market, investment.
Andrew
“Hoarding does not contribute to the supply of loanable funds …”
Appears you are defining “hoarding” as those funds “saved” in excess of those needed for lending demand.
I get that but it doesn’t seem applicable in a fractional reserve fiat currency world.
I’m not sure I follow why the definition would be inapplicable. Doesn’t “This money is not hoarded, unless it is kept as reserves. The portion which is not is lent out-some one else spends it.” *Assume* fractional reserves? Keyword being “portion.”
Unless the element that makes what I said inapplicable is the fiat currency element? Which again I’m not seeing why it would? Maybe I’m missing something important here, if so I want to know!
Ugh, this nest comment structure. Getting difficult to read…If you prefer, you can reply to my other below comment.
“This money is not hoarded, unless it is kept as reserves. The portion which is not is lent out-some one else spends it.”
Wrong. The banks do not lend out your money. They take your money, and it becomes their property; they add it to reserves.
They use reserves for clearing, and extend credit to whatever creditworthy customers they want.
If credit growth declines or goes negative, it is quite possible for people to hoard money in demand deposits.
Banks don’t lend money? Wow, this is the most incredible comment I’ve seen yet.
If a bank is not lending out money it is the *bank* that is hoarding, not the depositors.
Banks create loans. Loans create deposits, which are a form of credit money which adds to the broad money supply.
The money you give to a bank, which becomes part of its reserves, is used for clearing.
No, they do not *normally* “lend” out the reserves in the way you think, except in one case: they can of course lend excess “reserves” to other banks in the interbank lending market, but that is quite different from the actual normal activities of credit money creation and loans to private non-bank clients that you (mistakenly) think of as lending.
Are you claiming that of money deposited at a bank, *all* of that money is kept as reserves?
And that of all the money banks lend out, *none* of it is money which was deposited with them in the first place?
I would be guessing that Say does not want to individually list out: gold coins, silver coins, IOU notes, coloured shells, beads, financial debt instruments, fiat currency, grain warehouse notes, etc… on to infinity. Instead he just says “money” as some medium of exchange which might be any of those things.
The implication, which the reader is supposed to understand is that all chains of exchange will eventually come to an end with consumption (via some medium of exchange, or possibly more than one).
You attempt to inject an additional stipulation that this process of exchange is instantaneous… but there’s no suggestion Say ever believed such a thing, nor that Say intended to imply it. The exchange merely happens at whatever speed the participants are comfortable with and are capable of achieving. Slow transport, limits of postage, clearing customs, seasonal issues would have all been normal and expected in Say’s day and age.
I think it’s fair to point out that people can in principle hoard anything. Someone could stack tins of bake beans in the shed, this has nothing whatsoever to do with money. A very long time ago humans discovered that grain grows better in the summer so they built graineries for the purpose of hoarding grain; and there’s good reason to do so because you have something to eat in winter and you have seeds for next spring.
Exactly how much hoarding is optimal is something best decided by the people themselves. Someone hoarding too much or not enough will make a loss, someone hoarding a suitable amount will make a profit. Each particular case will have merits, there is no simple rule for it.
I must admit I was puzzled by Tel’s comment as well. Clearly people consume things that they take from the state of nature. I think he meant to say “successfully purchased something that wasn’t sold.” Although that doesn’t sound like Say’s Law to me.
As I understand Say’s Law, it says that people acquire the medium of exchange by offering what they can supply for it, not for the purpose of acquiring the medium of exchange for it’s own sake, but because they intend to use the medium of exchange to acquire what others supply. People do not, as a general rule, have the accumulation of the medium of exchange as an end in and of itself.
Which is true “in the long run” which is just to say eventually accumulated amounts of the medium of exchange will be spent eventually.
But suppose people decide they wish to hold onto money longer than they normally would (and by hold, I mean hoard, not save-an increase in the demand for money) here we would expect a corresponding delay in their supply of goods/services translating into demand for goods/services. Supply creates future demand rather than current demand.
Wait a minute though, why would people en masse decide to do that? And in the Great Depression in particular, isn’t it true that what actually happened was that the supply of money collapsed, not that for no reason at all people just decided they wanted to hold onto money? If the reason why they decide to hoard money is they anticipate falling prices in general, why do they anticipate falling prices? Isn’t it because they either anticipate or have already seen a decreasing supply of money in the future? Then isn’t it wrong to focus so heavily on money demand as the source of the problem?
These are not intended to be entirely rhetorical questions. I’d find where both sides think I’m going wrong here/have been badly propagandized, very, very interesting. In particular I tried to phrase things in terms neutral to Monetarist-Austrian controversies, but I’m pretty sure I failed.
I would add that some interpretations of Say’s Law seem to having money as completely neutral. This obviously can’t be the Austrian understanding.
The People’s Romance
Why People Love Government (as Much as They Do), by Daniel Klein
“TPR [MF: The People’s Romance] helps us to understand how authoritarians and totalitarians think. If TPR is a principal value, with each person’s well-being thought to depend on everyone else’s proper participation, then it authorizes a kind of joint, though not necessarily absolute, ownership of everyone by everyone, which means, of course, by the government. One person’s conspicuous opting out of the romance really does damage the others’ interests.”
“Joseph Schumpeter, in his assessment of the social democratic “club” view of society, indicates its pervasiveness: “ever since the princes’ feudal incomes ceased to be of major importance, the state has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force. . . . The theory which construes taxes on the analogy of club dues or of the purchase of the services of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind””
“Why are government officials and enthusiasts often hostile to leading corporations such as Microsoft, McDonald’s, Wal-Mart, and Martha Stewart? Why are they often hostile to other bases for independent private cultural power such as private builders, private schools, and talk radio? Part of the answer may be that they are jealous in guarding their role as medium and focal point in TPR. Why are they hostile to placeless “suburban sprawl,” private communities, private shopping malls, the private automobile (especially big ones), gun ownership and toting, and home schooling? Because these practices are means of withdrawing from TPR and creating an autonomous
circle of authority, power, and experience.”
“Thus, TPR explains why atrocious policies such as the war on drugs can be enacted
and cheered and can persist. Even though Republicans supposedly care about freedom
and Democrats supposedly care about “the little guy,” the politicians do nothing to
abate the policy. The vast majority of academic Democrats have never lifted a finger
against this overt Nazism. As for the general population, although public opinion on
the matter has shifted in the libertarian direction, it has favored the policy for generations.
Many watch COPS on television to see real-life Gestapo-like bullies bust into
private homes and drag off defenseless innocents to be locked in cages like animals.
Thomas Szasz (1974, 1992) provides an explanation that makes this despicable undertaking
understandable in terms of TPR. The targeting of drugs, drug addicts, and drug
pushers is a modern instantiation of the primitive impulse to find a scapegoat against
which the power and unity of the group can be organized, exercised, flaunted, and
exulted in. Szasz observes that drug-abuse hysteria and the war on drugs “are pretexts
for scapegoating deviants and strengthening the State” (1992, 62). “[A]s a propaganda
tool, dangerous drugs are therapeutic for the body politic of the nation, welding our
heterogeneous society together into one country and one people” (115).”