07
May
2015
Murphy Twin Spin
==> Even I was surprised by how quickly (36 days) Jerry Taylor put a non-revenue-neutral carbon tax back on the political table, after he had just issued a study assuring conservatives that no such animal existed.
==> At Mises CA, I complain about an anti-import bumper sticker I saw in the parking lot. Hijinx ensue.
Bob, this may be a naive question, but is it really true that you’ll always have full-employment if wages are flexible? As someone who’s never studied economics, I find that claim shocking. What if there are people who don’t have any skills that any employer wants? What if someone’s only skill is working in an assembly line producing widgets, and all widget production is outsourced to another country?
You underbid your competitors and train on the job.
But you have to get government out of the way so you can also lower your costs.
It turns out that you are most valuable to capitalists when you can operate their machines. Sure, you COULD sweep their floors, but that’s not as profitable to them.
So, if no one else will hire you, it’s in their interest to hire you for dirt cheap.
Which means you just added a skill under your belt that will make you more marketable to more people.
Maybe someone else would be willing to pay you just a little bit more for doing similar tasks.
Think of jobs as a trade relationship, not a hierarchal one (don’t thank people for jobs). You need them, but they REALLY want to pay you as low a wage as possible.
So make them compete for your cheap labor.
“this may be a naive question, but is it really true that you’ll always have full-employment if wages are flexible? “
It is not naive. It cuts to the heart of why neoclassical and Austrian economics is claptrap. Keynes dealt with this issue in chapter 19 of the General Theory:
http://socialdemocracy21stcentury.blogspot.com/2014/01/the-general-theory-chapter-19-changes.html
Welcome back, LK.
From your article:
“Keynes analysed the effects of reductions in nominal wages in the following way:
(1) a reduction in nominal wages may reduce prices, but if the price falls are uneven, it will redistribute real income from wage-earners to other classes of society”
Did Keynes understand that, as preferences and productive capacity changed, output needed to be reduced in those areas which became less capable of meeting consumer demand?
The point of doing business isn’t to serve the wage-earner, but to serve the consumer.
The wage-earners who do not work for capitalists that are serving consumers must have their income lowered as the capitalists lose patronage to their competitors.
“Did Keynes understand that, as preferences and productive capacity changed, output needed to be reduced in those areas which became less capable of meeting consumer demand?”
Is the pope catholic?
Citation please.
LK. It looks to me that Keynes is talking about a policy of wage reduction. He says that to apply such a thing across all industries would be impossible, and so a monetary expansion policy is preferable and has similar results. Is this not describing a different thing than the response of specific industries to competition by reducing the wages? In the latter case it is not desirable to reduce wages across all sectors equally, and the re-distribution is a desirable effect.
The General Theory is to Keynes’ as the history of the bathtub was to Mencken. Some people just don’t get the joke.
http://www.sabhlokcity.com/2012/03/keyness-plagiarism-of-malthus-and-mccracken/
And as I explained to you the last time you peddled the fallacy filled chapter 19 of the GT, in Keynes’ so-called “demolition” of the classical theory that falling wage rates and prices cures unemployment, he completely contradicted the context and assumed RISING wage rates and prices.
Remember when you laughably claimed that “nowhere” did Keynes even mention the marginal efficiency of capital (or MEC), and I replied by posting citations of about 8 times he did use it?
You post these stock responses as if they haven’t been refuted a zillion times already.
And it was clear this is a bizarre distortion of the GT.
Wage rates and prices will be rising when the recovery gets going and in the boom, not the bust. You cited a passage from Chapter 11 — a competently different chapter in a different context — which is just an abstract discussion of the MEC in which increased purchases of capital goods happens in the recovery after the deflationary bust. Nowhere does Keynes assume an “absence of a fall in wage rates and prices” in the bust.
You are still confused.
That very part where you say “Wage rates and prices will be rising when the recovery gets going” is precisely the contradicting of the context of a FALL in wage rates and prices that the classical theorized can end depressions.
The classicals theorized that wage rates and prices FALL “when the recovery gets going”. Indeed, the fall is a crucial factor in the reasons for why recoveries can take place.
The passages I quoted show Keynes setting up his response to the classicals in a way that assumes a completely opposite context. He “refuted” the classical theory by totally ignoring it and not even addressing it.
It would be like me responding to your claim that rising aggregate spending cures depressions by setting up my response that assumes a falling aggregate spending, and then after all is said and done, I conclude with “And as I have shown, LK’s theory doesn’t do, can’t do, what he claims it can do.”
I would not even have engaged your theory of rising aggregate demand!
And that is precisely what Keynes did.
In the process of recovery from depression, yes indeed net investment does tend to rise, but that rise in net investment is predicated on a fall in wage rates and prices. The fall is a cause for it.
What Keynes did wrong is exactly what so many economists, including Keynesian follower Paul Samuelson in his popular textbooks, warn their students against: The fallacy of conflating an increase in the quantity demanded of a good in response to lower prices, with an increase in demand for the good.
If you refuse to even engage falling wage rates and prices as the classicals proposed, then you are engaging in intellectual dishonesty.
“In the process of recovery from depression, yes indeed net investment does tend to rise, but that rise in net investment is predicated on a fall in wage rates and prices.”
A recovery in Keynes’ thinking is neither “predicated on” nor requires falling wages and prices. In fact, Keynes’ whole argument is that governments should avoid wage and prices deflation (to stop deleterious income redistribution, deferred purchasing, debt deflation, shocked expectations etc.) by countering deflationary forces with fiscal policy.
Once again, we see you have no idea what you are talking about.
Aggregate demand doesn’t need to rise for things that consumers don’t want.
The Austrian position is that falling prices, absent government interventions, reveal that consumer preferences have changed.
Rather than attempting to trick consumers into spending on what was previously seen as sustainable, producers should just conform to consumer demand.
Problem solved.
The income “redistribution” of which you speak isn’t deleterious, it conforms to consumer demand.
And since consumer demand is the basis for all economic actions, to fight the direction of income distribution away from wage-earners is to fight reality.
I put “redistribution” in quotes, above, because consumers are the ones responsible for it – that is, it’s not really redistribution.
It’s voluntary buying and selling.
And if you want to be profitable as a business, you have to conform to consumer demand.
The Austrian explanation as to why the change in spending is such a shock is that the prior spending – the kind that was thought as “normal”, or “a new normal”, or a “permanently high plateau” – was not based on consumer preferences, but on government interventions in the form of granting central banks protection from the bank runs which permit customers the ability to correct for bad bank practices such as fractional reserve banking.
“A recovery in Keynes’ thinking is neither “predicated on” nor requires falling wages and prices.”
That is precisely the problem with Keynes so-called refutation of the classical theory, LK.
Keynes’ “thinking” about the classical theory of falling prices and wage rates curing recessions, consists of not even engaging the theory.
Keynes tried to engage it, by prefacing his response with:
“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.”
But in his subsequent “rebut”, he flatly contradicts that very context of a fall in wage rates.
I am not arguing that I somehow always assumed or thought that a recovery in Keynes’ thinking is predicated on falling wage rates and prices. Your latest response here makes no sense.
I am saying that precisely because his thinking about a fall in wage rates and prices flatly contradicts falling wage rates and prices, THAT is why his ” refutation” of the classicals was anything but. It was not a refutation. It was nothing but an evasion of the classical theory, by a bait and switch. He says he is going to rebut the theory that falling wage rates and prices can accomplish what the classivals claimed they did, not by showing how falling prices and wage rates do something different, but by totally contradicting there being a fall and presuming a rise!
You are STILL utterly confused. Think harder LK. Telling me “No MF, Keynes assumed a rise in prices and wage rates in a recovery, not a fall”, is confirming the very point I made all those months ago.
Yes, everyone knows Keynes advocated for governments to stop healthy market based redistribution, healthy market based cash preferences, healthy market based debt liquidation, but that is because in Keynes’ refutation of the classivals, he did not even consider falling costs of production, which is what falling wage rates and prices accomplishes. He assumed RISING wage rates just when you expect him to continue the theory of what happens when wage rates fall.
Maybe you should be reading the GT?
“in Keynes’ refutation of the classivals, he did not even consider falling costs of production, which is what falling wage rates and prices accomplishes.”
It is quite clear you have no ability to even engage with what Keynes argued in Chapter 19 of the GT.
The whole chapter is an analysis of exactly why the real balances effect is unlikely to be an effective solution to recession, e.g.,
(1) debt contracts tend to be fixed in nominal terms and nominal wage cuts severely exacerbate economic problems by debt deflation, thwarting rapid and effective adjustment, especially when this causes financial crisis or banking failures.
(2) wage and price and nominal profit deflation depress business expectations, and often lead to slumping investment
(3) if a reduction in money wages leads to expectations of further wage cuts in the future (as will happen in a deflationary spiral), then this may well be counterproductive as it may lead to deferment of both investment and consumption etc.
“debt contracts tend to be fixed in nominal terms and nominal wage cuts severely exacerbate economic problems …”
If you stop tricking people into taking on unsustainable debt – which is what inflationary monetary policy does – this won’t be a system-wide problem.
“as it may lead to deferment of both investment and consumption etc.”
Deferment of investment and consumption are *supposed* to happen in lines of production which don’t serve consumer preferences.
If the only reason existing lines of production continue to earn a profit in nominal dollars is due to inflationary monetary policy, then investment and consumption in those lines needs to be deferred.
And the reality of consumer preferences will bring this about, eventually, since the value that consumers place on the goods is going one way, while the would-be central planners are pricing them another.
Since consumer preferences are the basis of all economic activity, reality – that is, the market – always wins.
Of course what Bernanke and Yellen did is going to end in destruction.
LK,
It is quite clear by now that you don’t want to accept the fact that Keynes did not engage the classical theory. You won’t even deny it.
Between you and I, it is I who actually engaged the GT, because it is I who showed you that Keynes did not engage the classicals, and I provided many citations showing exactly that.
You on the other hand just keep showing that my assessment was correct. First you agreed that Keynes did not even engage falling prices and wage rates but instead assumed the opposite.
Now you are again showing the above assessment to be correct. You wrote:
(1) debt contracts tend to be fixed in nominal terms and nominal wage cuts severely exacerbate economic problems by debt deflation, thwarting rapid and effective adjustment, especially when this causes financial crisis or banking failures.
Debt contracts are not fixed. They are pre-agreed upon but can be, and often are, renegotiated. You are just assuming your conclusion correct when you attack “deflation” instead of showing how falling prices and wage rates cannot cure depressions and reverse unemployment.
“(2) wage and price and nominal profit deflation depress business expectations, and often lead to slumping investment”
False. During a depression, falling prices INCLUDES falling prices of capital goods and labor, and it is precisely the fall in those prices that allows more to be purchased. More capital goods purchased and more labor purchased means recovery. The prices don’t have to rise, indeed trying to reverse the fall in prices is what prolongs the corrections and leads to long periods of slump, such as the Great Depression.
“(3) if a reduction in money wages leads to expectations of further wage cuts in the future (as will happen in a deflationary spiral), then this may well be counterproductive as it may lead to deferment of both investment and consumption etc.”
You say this as if the deferment is an infinitely long delayment. If people expect falling prices, that does not bring about an infinitely long delay. People are not waiting an infinite number of months or years before buying electronics that they are almost certainly convinced will be lower in the future.
Present satisfaction is better than never any satisfaction.
Prices don’t fall to zero for all goods in a deflationary environment. This “spiral” you refer to as a shift, an adjustment, not an endless bottomless abyss.
If prices are expected to fall, that doesn’t mean everyone is going to sacrifice current profits and current consumption at any price. If people do hoard cash, then the correction will only be that much quicker because that cash hoarding puts even more pressure on prices to fall. And once the fall is sufficient, that is when goods and labor are again purchased.
If you have $100, and you see the prices of goods fall, what that means is that people ARE buying those goods at those prices. That is what prices are. They are exchange ratios. And once the fall in prices is sufficient, you will eventually spend money out of that $100.
Rising prices has not resulted in all future spending to be made in the present, and there is no sound economic theory that proves falling prices results in all present spending to be delayed to the future.
All you did in your latest response was ignore the argument being made, which is that Keynes did not engage the classical theory of a fall in wage rates and prices. All you did was repeat your own flawed beliefs that falling prices are absolutely to be avoided because debt and imaginary death spirals.
The classicals argued that falling wage rates and prices cures depressions, and that the rise in net investment is predicated on and in response to the fall, which means this rise in net investment does NOT, contrary to your claim, mean rising prices all the time in every recovery in production and employment.
Some here:
http://consultingbyrpm.com/blog/2014/12/krugman-sticky-wages-i-win-flexible-wages-you-lose.html#comment-1358368
And what exactly is “full-employment” ?
Like any of these handwaving terms, it means what you want it to mean. Whatever the free market does is never sufficient, but when unemployment happens at the hands of government regulation, we just give it more stimulus and then make excuses and claim this is as full as employment gets. Then there’s the statistics:
Government: Have you been looking for work?
Unemployed Person: Yes I have.
Government: Found anything promising?
Unemployed Person: No, not going too good I’m afraid.
Government: What seems to be holding you back?
Unemployed Person: The heroin addiction doesn’t help much.
Government: Hmmm, heroin addiction, let me check that. Congratulations! You are no longer unemployed.
Not Unemployed Person: You got me a job with that?
Government: As a matter of fact, no. I don’t have a job for you. I have reclassified you as disabled. Here’s more money to help you buy smack. Go home and stop looking for work.
Disabled Person: That’s errr nice… thanks I suppose.
In Australia, it’s pretty close to that. The stats look good though, from a distance. One might hazard a guess that the reason young people turn to drugs is they get depressed from not being able to find a job. Mind you, just being depressed also makes you a disabled person. Did I mention our abnormally high minimum wage? Actually a complex family of minimum wage laws linked to industry awards, not only crippling the economy, but confusing as heck… probably nothing to do with employment, forgive my rambling.
“Like any of these handwaving terms, it means what you want it to mean. “
No, it doesn’t.
In terms of Austrian and neoclassical theory, it means that everybody who is looking for and competent to do work and willing to lower their wages in a competitive labour market will find a job as the market clears and labour supply and demand is equal.
We’ve been through this before. The meaning of “market clearing” is that no more buyers and sellers can find a mutually acceptable price. Thus, the implication is that all the people who wanted a job at the market price also found one. It’s all one and the same, true by tautology. Whatever you measure will always fit the theory, because the theory is nothing more than a way of interpreting what you just measured.
Thing is, you want to have your own meaning for “market clearing” which you are welcome to, but then it won’t fit Austrian theory any more, it will be LK theory that sounds similar but means a completely different thing, so why bother?
But anyway, in practice “full employment” doesn’t even mean that, because you ignore the famous “frictional unemployment” which also means whatever you want it to mean. There isn’t “a market” in labour, there are lots of individual buyers and sellers bumping into one another… there’s a reason for that, individual people are not substitutes for one another. Because there’s isn’t “a market” there’s no way for the non-existent market to clear. At any time a buyer and seller can bump into one another and make a deal, might be the next 10 seconds or next 10 years.
Even the Keynesians decided that “frictional unemployment” needs to be subtracted out, or at least, when they are in a mood to find excuses for government, rather than blaming the free market it need to be subtracted out. Can’t have an apples with apples comparison you know.
” The meaning of “market clearing” is that no more buyers and sellers can find a mutually acceptable price.”
One can only marvel at your ignorance of Austrian economics:
“A surplus (or a ‘glut’) occurs when producers are trying to sell more units of a good or service than consumers want to purchase (at a particular price). A shortage occurs when consumers want to buy more units than producers want to sell (at a particular price). In this context, the equilibrium price (or the market-clearing price) is the one at which the amount supplied exactly equals the amount demanded. If the market is in equilibrium, there is no surplus and no shortage.” (Murphy, Robert P. 2010. Lessons for the Young Economist. Ludwig von Mises Institute, Auburn, Ala. pp. 156–157).
That is exactly what Tel said.
Supply and demand are CHOICES, they are not numbers of people or any non-praxeological statistic.
From an empirical perspective I don’t believe it is possible to measure what “producers are trying to sell” nor is it possible to measure what “consumers want to purchase”. We don’t typically drill little holes in people’s heads to insert brain probes. Intentionality is a concept that allows an economist to intuitively visualise the negotiation process, and thus helps to explain what is going on, but it’s nothing more than that. Tell me what units do you use to measure intentions (MKS system preferably) ?
All real transactions balance, that’s how accounting works, by design. You come to my shop and buy three widgets, so supply = demand = 3. Unless widgets are appearing out of thin air you aren’t going to walk away with more than what you purchased. If you eat the widget you might walk away with less than what you purchased but I’m going to write that down as consumption.
If you decide you don’t like my shop and you buy nothing then supply = demand = 0 and that’s a market clearing position because neither of us could find a price we could mutually agree on to make a sale.
What LK doesn’t get, or better said ignores (I am sure that he does understand it, but it ruins his Keynesian policies) is reservation demand.
Total supply – actual demand for buying – reservation demand = 0
The gold market is a poster child market for being misanalysed by most people because they only talk about yearly mined supply vs yearly demand from industry, jewelry and investment. And forget about the huge total supply and therefore huge reservation demand already there. They treat that as a never changing fixed given, as if all the gold were consumed and destroyed.
And the same is true about markets which are starting to stock pile. Why are they doing this? You need to understand where the reservation demand comes from. They increase their reservation demand because they expect to sell later at a higher price than they could get now. And the main reason today is that usually the government and the CB are taking care about increasing the price some way or another. So the main cause for so called sticky prices and gluts are Keynesian policies in the first place.
Keshav, if a Keynesian says we need the government to engage in deficit spending to return to “full employment,” people with zero marginal productivity wouldn’t be hired in that scenario, either.
Yes, someone needs to be able to produce at least 1 penny in additional income for his employer, in order to be employable in a conventional setting with flexible wages.
If we continue to export goods what will our children buy?
Brilliant!
If debt is just taxes deferred, as you have said can be reasonably argued, then reducing debt can be argued to be off-setting tax, just future tax. Taylor’s previous articles apparently totally missed $695 billion for debt reduction, which is not revenue neutral in the conventional sense. Either he missed this hole, or he just assumed that debt reduction = tax reduction, so justified to himself that it was revenue neutral. Now, we cannot be sure what he was thinking, only make inferences from what he writes. You said “I think it’s clear that that’s not what he was thinking when he said the plan was revenue neutral. If that *had* been what he was thinking, he would have said so…” Perhaps this is him “saying so” without acknowledging he made a mistake?
My guess is that he made this assumption, you called him on it, so now he has to explain himself. This new post is explaining why debt reduction, while not technically revenue neutral, is in his view de facto revenue neutral.
From the bumper sticker article:
“An individual household, for example, could guarantee itself “full employment” by refraining from trade altogether, and producing everything internally. It would also hover on the edge of starvation.
“The people who created that sticker in the photo understand that it helps Americans when we buy goods from each other. The division of labor allows for specialization and higher productivity, enriching everybody in the process. There’s nothing magical about that principle only working domestically.”
This was the argument that convinced me that it isn’t economically destructive for foreign workers to underbid Americans; and that “Buy American” (only) *is* destructive.
Best argument ever.
Made in America? So what?