Questions for Keynesians and Market Monetarists
In my never-ending quest to achieve total magnanimity, I gently ask the following questions to make sure I understand how rival camps view the world.
(1) To the Keynesians: I understand the point that “Ricardian Equivalence,” even if true, would not undermine the boost to current Aggregate Demand from a large government budget deficit. For example, if the government increases the deficit by $1 trillion this year, yes that will make taxpayers increase their saving to pay the higher taxes necessary to finance the bigger debt. However, the taxpayers will spread this pain out over time. If the interest rates on government debt and what taxpayers earned on their own savings were identical, a good first approximation would say that the taxpayers would just save the interest expense of the new debt.
So if the government runs a $1 trillion stimulus this year (spending money on bridges and schools with borrowed funds), and the average interest rate on this new debt is 2%, then the taxpayers in a rational expectations model with no frictions etc. would save an additional $20 billion this year. So on net the stimulus plan would still add $980 billion to Aggregate Demand.
But hang on, that’s not the end of the story. We have now reduced Aggregate Demand by $20 billion forever. So don’t we at least need to take that into account? Or is the idea that there is some critical threshold, and as long as AD is above that, the market can fend for itself?
(2) To the Market Monetarists: You have said that the Fed is being unreasonable with its (price) inflation forecasts, and that the markets have known all along that NGDP would grow anemically. OK, well we’ve been like this for 8 years now. Haven’t most wage contracts been written in the present environment, and so shouldn’t most people now be operating on the basis of contracts that expected these levels of NGDP?
“Haven’t most wage contracts been written in the present environment, and so shouldn’t most people now be operating on the basis of contracts that expected these levels of NGDP?”
-Yes, they should be and are.
Very sneaky Keynesian question. I think a serious answer would be that the idea the the economy recovers back to the long run growth path eventually with or without stimulus is only a first-order approximation and that there are residual costs from an extended recession that would be greater than any residual costs from a stimulus that shortens the recession. In the case of the most recent recession, liquidity trap conditions threatened to keep the economy in a depressed state for extended periods. So, there is every reason to believe boosting us out of that state was worth the cost. http://www.huffingtonpost.com/brad-delong/global-economic-depression_b_8924596.html
On the monetarist question I’d say (contrary to E. Harding) that if the Fed FOMC has managed to over anticipate inflation year after year then people negotiating wage contracts would too. http://econlog.econlib.org/archives/2015/10/when_the_fed_ig.html
The non-serious answer is, of course, in the long run we’re all – oh forget it.
Right now you’re living in the long run world that is the direct result of past decades of Keynesian corruption.
You could have had it better.
” I think a serious answer would be that the idea the the economy recovers back to the long run growth path eventually with or without stimulus is only a first-order approximation and that there are residual costs from an extended recession that would be greater than any residual costs from a stimulus that shortens the recession.”
The economy is supposed to cater to consumers, if I can put it super concisely.
So, stimulus is *always* economically destructive: If consumers wanted to pay for X with their scarce resources, they’d already be supporting the production processes that make it.
If consumers don’t want to pay for X, then propping up the production processes that make it will logically be money-losing, and it shouldn’t be stimulated.
Again, all of economics begins with consumer demand, only production which caters to that demand is economically beneficial, and economics ends with the satisfaction of those consumer demands.
That’s the economy in a nutshell.
Stimulus necessarily destroys the economy because it is uneconomical to produce for demand that will not materialize, and it is also uneconomical to rob tax victims of the funds necessary to prop up favored businesses (which is cronyism whether it comes from the Right or the Left).
How do I know that it’s uneconomical? Because only individuals economize, and only for the purpose of achieving their ends (however egalitarian they may be). So any action can only be “economical” from the perspective of the individual.
“Externalities” benefit *specific* people at the expense of specific other people, no matter how many are benefitted, so to enact policies that promote the realization of “externalities” is cronyism.
More on “externalities”:
Man, Economy, and State, with Power and Market
Appendix B: “Collective Goods” and “External Benefits”: Two Arguments for Government Activity
https://mises.org/library/appendix-b-%E2%80%9Ccollective-goods%E2%80%9D-and-%E2%80%9Cexternal-benefits%E2%80%9D-two-arguments-government-activity
Are you saying that it is categorically impossible for government to spend money efficiently? Even a blind squirrel finds a nut now and then.
“Are you saying that it is categorically impossible for government to spend money efficiently?”
Economic efficiency is something that can only be assessed by individuals, since only individuals economize, and only for their own individual goals (even when those goals are egalitarian).
So, yes, by definition central planning cannot result in economic efficiency.
This is why Austrians use Methodological Individualism.
“So, yes, by definition central planning cannot result in economic efficiency.”
It is one thing to say it is *unlikely* to do so. But to claim that “by definition” it can’t is nutty. It is like claiming that, “by definition”, a blind man can never make a basketball shot.
But even saying it is possible that the government will “unlikely” do so, is based on a definition of “efficiency” that, by definition, argues the government could do so.
“It is like claiming that, “by definition”, a blind man can never make a basketball shot.”
So, if economic efficiency is only meaningful from the individual’s perspective, how would a central planner be capable of being efficient for each individual without being inefficient for any other individual?
The central planner would need to know each individual’s preference rankings at all times (subject to change within seconds, mind you) so that it could know what they would be willing to give up (their opportunity costs) to pursue their highest-ranked end.
But then if it could do that, it wouldn’t be a *central* planner.
To believe in central planning, you have to believe in some kind of “greater good” – but that’s a religious argument that, while plausible, needs to be proven to those from whom you wish to get the funds to support the central planner.
Define “efficiently”.
Resources are allocated to where they achieve the greatest marginal product.
Marginal value comes from individual preferences.
Units of a desired good are marginal relative to its rank on someone’s preference scale.
Therefore, efficiency can only be assessed by referencing the individual’s preference scale – something that, strictly speaking, only *that* individual can do.
That rules out anything that ignores the individual’s preferences – such as central planning – as capable of determining economic efficiency.
(Of course, he reveals preferences through his actions, and we can make inferences from those – but preferences can change).
Marginal Product – measured in dollars.
” …measured in dollars.”
Wouldn’t that only account for nominal dollars?
If so, that would be equating dollars with real wealth, which is not necessarily true.
And where it’s not true, it wouldn’t be an efficient allocation of resources.
No, it is not equating dollars with wealth. It is assuming dollars are a universally accepted medium of exchange within the economy.
“It is assuming dollars are a universally accepted medium of exchange …”
Well, you said that economic efficiency is where resources are allocated to their greatest marginal product … measured in dollars.
So wouldn’t greatest as measured in dollars be the highest nominal dollar value?
If so, then you are, in fact, equating nominal dollars with real wealth, such that the higher the dollar value, the higher the real value, in your paradigm.
I’ll stipulate to: If dollars are the accepted medium of exchange and if in the marketplace today good A is priced by the market at $10 and good be is priced by the market at $10 then good A and good B have the same real value.
“… if in the marketplace today good A is priced by the market at $10 and good be is priced by the market at $10 then good A and good B have the same real value.”
It will take $10 to buy either one, but the opportunity costs of earning that $10 are going to be assessed based on the utility of the goods bought with it.
Which is to say that the goods are still going to be the measure of real wealth, rather than the nominal dollars.
As to two goods having the same real wealth if priced the same in dollars, were that the case, then any good priced at $10 would be a perfect substitute, whether a sandwich or broken glass:
Toward a Reconstruction of Utility and Welfare Economics
II – Utility Theory
The Fallacy of Indifference
https://mises.org/library/toward-reconstruction-utility-and-welfare-economics-0#2c
“Indifference can never be demonstrated by action. Quite the contrary. Every action necessarily signifies a choice, and every choice signifies a definite preference. Action specifically implies the contrary of indifference. The indifference concept is a particularly unfortunate example of the psychologizing error. Indifference classes are assumed to exist somewhere underlying and apart from action. This assumption is particularly exhibited in those discussions that try to “map” indifference curves empirically by the use of elaborate questionnaires.
“If a person is really indifferent between two alternatives, then he cannot and will not choose between them.29 Indifference is therefore never relevant for action and cannot be demonstrated in action. If a man, for example, is indifferent between the use of 5.1 ounces and 5.2 ounces of butter because of the minuteness of the unit, then there will be no occasion for him to act on these alternatives. He will use butter in larger-sized units, where varying amounts are not indifferent to him. The concept of “indifference” may be important for psychology, but not for economics. In psychology, we are interested in finding out intensities of value, possible indifference, and so on. In economics, however, we are only interested in values revealed through choices. It is immaterial to economics whether a man chooses alternative A to alternative B because he strongly prefers A or because he tossed a coin. The fact of ranking is what matters for economics, not the reasons for the individual’s arriving at that rank.”
“In economics, however, we are only interested in values revealed through choices.”
Market prices are values revealed through choices.
Suppose I have $10 of labor and $10 of materials that could be used to produce good A priced by the market at $25 or good B priced by the market at $30. I will choose produce good B. Choosing to produce good B creates more wealth and is more economically efficient. How would I decide between producing good A or good B in your system?
“Market prices are values revealed through choices.”
Well, the value of the seller is certainly revealed through the posting of prices.
The value of the buyer has to come into knowledge of the price and either accept or reject it in order for his value to be revealed.
“… I will choose produce good B. Choosing to produce good B creates more wealth and is more economically efficient. How would I decide between producing good A or good B in your system?”
If your goal is to make more nominal dollars, then that’s true – but that’s not always the case, since wealth is subjective.
Maybe by producing something that sells for less nominal dollars happens to increase your wealth in real goods.
Or, maybe you have an ideological problem with producing the good that could sell for more nominal dollars. The Amish do this all the time.
Profit is always measured in real goods and services, with money used because it is believed to represent a store of value that is of greater value than the opportunities foregone in its acquisition.
(That, or of greater value than what will be gained at the time it will be spent, had something other than money been acquired.)
The market price is the price at which buyers and sellers are willing to trade. So, both your conditions are satisfied. So market prices are values revealed through choices by your rules.
Let’s say I take my $10 labor and $10 of materials and produce good C that has a market price of $15. What then? My accountant objects but, I tell him “Fear not, I’m creating wealth! If you doubt me ask guest – he’ll tell you – wealth is subjective!
“What then? My accountant objects but, I tell him “Fear not, I’m creating wealth! If you doubt me ask guest – he’ll tell you – wealth is subjective!”
If it’s your money, and if you value what you get more than the $5 you’ll be losing, then you *are* creating wealth precisely because it’s subjective.
And what if it is not my money. What if I am the head of a private corporation charged with deciding what to produce? What is the method for dealing with all the subjective definitions of wealth of all the stockholders?
“What is the method for dealing with all the subjective definitions of wealth of all the stockholders?”
Well, that’s the problem with the idea that more than one person can own something, and I have a nuanced view of corporations.
The short answer to your question is that a contract should decide what gets produced.
If stockholders don’t like what’s being produced, they can sell their shares based on the contract they, individually, make with the one who will ultimately make the decisions.
Keeping in mind that a share of a corporation is simply a claim only on its future dollar earnings what will determine the market price of the stock when a holder decides to sell?
Why do people choose to buy corporate shares if the only possible gain is an increase in the dollar denominated share price that has no relation (according to you) to wealth? In fact, why would people invest in any financial instrument that promises to return only more dollars where those dollars have no relation to wealth? And why do sellers accept, dollars which are not wealth, in exchange for physical goods which are subjectively related to wealth?
“… that has no relation (according to you) to wealth?”
No *necessary* relationship.
If paper were wealth, simply printing it would be enough, and you wouldn’t need to produce any goods.
But people don’t want money, per se, but rather what money will buy.
Money is only as good as its link to use-value.
Paper has no link to use-value, so that means people are being ripped off somewhere in the economy.
Commodity money has a use-value to someone in the economy, and its monetary value is derived from that, which is why prices in terms of it can reflect consumer preferences with a great deal of accuracy.
Well, tomorrow morning I’ll go to Starbucks and there I’ll discover, quite remarkably, that I can exchange $4 for a Grande Latte extra foam. This has been going on for months! Don’t those suckers know they’re being ripped off? It’s weird. It’s almost as if they think the “use value” of $4 was one latte. In fact, I think the use value of $4 is one latte.
That is an impossibility. That is a definition of perfection.
Well, that impossible perfection is supposed to be what happens in a free bad competitive market.
What do you mean “supposed to happen”? Are you making this claim based on some theory or are you quoting someone in particular?
And then defining efficiency that way?
Seems like you’re using the word “efficiency” to promote a straw man.
Major, I believe I am quoting any and every author of a book on introductory microeconomics written in the past 60 years including Austrian school folks. Try this https://mises.org/library/market-theory-and-price-system-0 Chapter 3 pg 38. Much less cumbersome is http://www.amazon.com/The-price-system-resource-allocation/dp/B0006BNP50.
Tendency, or actually?
Very important distinction.
People having economic freedom does not guarantee efficiency. It does guarantee a tendency towards it, or at least closest to it than what would occur with threats of coercion stopping people from doing what they want to do.
Major,
With all my respect going to you as someone who values freedom and is skeptical of central planners. Do you really want to be arguing that a free and competitive market does anything other than a phenomenal job of allocating resources to where they achieve the greatest marginal product and thereby produce the greatest wealth?
If you define “phenomenal job” as anything other than perfection and infallibility, then I won’t disagree.
Economic freedom guaranteeing a tendency towards the greatest marginal utility and greatest wealth is an reasonable argument to make.
I just have an issue with statements that convey the belief that everyone WILL without fail always succeed in acquiring the greatest marginal utility.
“Even a blind squirrel finds a nut now and then”
Then we should put the blind squirrels in charge.
“So, stimulus is *always* economically destructive: If consumers wanted to pay for X with their scarce resources, they’d already be supporting the production processes that make it.”
Someone hasn’t grasped the idea of unintended consequences!
Well, please enlighten me so that I can offer a rebuttal, already.
That is not sneaky at all. That is THE question that needs to be answered if I should be convinced of Keynsianism.. I asked that question in different froms a thousand times already, never to be answered.
Pulling demand forward means by definition it is missing in the future, hence more demand pulled forward is needed at later point in time.
Or put differently pulling demand forward begets more pulling of demand forward..
As key question here I would like to ask following question because it hits on “we owe it to ourselves” fallacy:
Why do people save at all? At each moment of time it was possible for all people to spend everything they have. Lets say all people spend everything they have today. Tomorrow all the money still is (forget foreigner for the moment) here owned by the same people in the aggregate ready to be spent again. Each day, no each second theoretically it could be spent in total. Why are people not doing it?
And it is not just why people don’t want to do it, but why can’t they actually?
Skylien, If there were no idle resources, no unemployment, then trying to boost aggregate demand might only bid up prices and wages. But in a recession, with people out of work, you are operating well below the kind of productive limit I believe you are talking about.
The debt from a debt financed stimulus is a net zero future aggregate demand impact. Some people lose paying more taxes, some win with the interest income stream.
The downside of debt financed stimulus is that it creates an investment opportunity that competes with private sector opportunities.
Capt J Parker, I am talking about the fact that people have a plan for what they want to spend their money. And if they are not spending it now then obviously the goods and services are not available for the price (or at all) that they want now.
Now a government taking some “idle” resources and employing them just in a RANDOM way does solve this problem how exactly?
Not at all of course, that is why after the deficit spending is over, and an eventual wealth effect wore off, you are in the same or more likely you are in a worse position than before because you wasted resources on the wrong kind of products and services!
Only the market can figure out what the market wants.
So you pulled some demand into the present, and because you wasted it on stuff nobody actually wants, there is even more demand lacking in the future.
People just focus on money and lose sight of what actually happens in the economy, which is production. And ANY production/output cannot be the answer.
Ok so, negative aggregate demand shock people are not buying as many consumables or capital goods because they don’t want to. Year 1: Government betters step in and buy stuff. Producers produce it and employ more people than they otherwise would have in the process of producing the valueless carp government is buying but we are still not at full productive capacity. Year 2, government stops the stimulus. Why do people in aggregate now spend less than if there had never been a stimulus? Assume debt financed stimulus with no foreigners holding debt.
“Year 2, government stops the stimulus. Why do people in aggregate now spend less than if there had never been a stimulus?”
Because all throughout the first year, productive capacity, with respect to consumer demand (which entails the capacity to pay in real goods, because that’s what the real economy is measured in), was being consumed.
In Year 2, when the printing stops and consumer preferences are revealed to be for something else, people have to reallocate all their resources back into line with consumer preferences.
And sometimes, that may even mean taking a loss and rebuilding one’s wealth.
Capt.
You are not just employing people, your are using resources like energy, steel, etc for products not needed (at least now, not in that form etc..) which means you are raising the prices (or keeping them from falling) of those goods through this artificial demand. Hence prices of goods and service that the market actually wants are higher than they otherwise would be, because otherwise more resources would be available for the correct goods and services, given an equal profit share.
Also even people cannot be pushed from one job to another with no opportunity cost. If you build the classical bridges to nowhere as stimulus, although what would be needed is, let’s say for the sake of the argument painters, than you have people that have learned the wrong craft. Again this raises the price on the hour of painters, because there are less people able to do it than otherwise.
If you are not stimulating the economy with building bridges to nowhere then the market has the chance to figure out what to do. If you employ “idle” resources via government than obviously there is no way how you (as a private person, which is the market 😉 could figure that out.
So if through stimulus you indirectly raise the prices of goods people actually want, then clearly after the stimulus stops people are even less likely to buy them (given preferences didn’t change).
Capt.
Well maybe one correction is needed. I guess if the government was able to exclusively employ ONLY “idle” resources (hence only keeps their price from falling), than after the government stops stimulus in year 2 than you are exactly back at square one. There would probably be no increased “lack” of demand but exactly the same.
In that case you only would have wasted time to figure out what really needs to be produced.
Capt.
Sorry for mixing up *than* and *then*… But I guess it is clear when which is needed..
Here is my take on the Keynsian bit:
The govt borrows $1T and gives it back to the people they borrowed it from as stimulus spending. They now have $1T in bonds, and $1T in extra income. But they will expect to pay the $1T back (to themselves!) over the lifetime of the bonds. Ricardian Equivalence says they will therefore keep the whole $1T of extra income to pay themselves back so the stimulus will have effect.
NO effect
I liked your answer better without the “NO.”
I like this answer but, 34% of the debt is owned by foreigners so, Dr. Murphys premise that there may be a negative impact of future long standing service of the stimulus debt still seems valid. If all the debt were domestically owned I think you’d have a really good point – in that situation paying for stimulus doesn’t necessiarily create a drag on gdp. One problem it might still create is a distributional one.
“they will therefore keep the whole $1T of extra income to pay themselves back”
Bob explained exactly why that won’t happen.
Well, he certainly gave an example where it didn’t happen – but I don’t fully agree with it (or perhaps understand it) . If they have to not only pay the interest on the debt but also the principal back I don’t see why (if full RE) holds the stimulus will have any effect at all.
I suppose Bob is just assuming the debt never gets paid back. Fair enough.
But then the $20B in additional taxes will be cancelled out by $20B received by the bond holders in interest, so his example is still a bit off in my opinion.
Transformer,
I believe your observation that the $20B is a payment stream we owe to ourselves is just the type of pro Keynesian answer Dr. Murphy was looking for. Dr. Murphy claims under the terms of his example we have reduced aggregate demand by $20 B forever. But you, Transformer, point out that we have not because the payment stream goes back to bondholders (ourselves) and that adds $20B back to aggregate demand. But again, that is not the end of the story because: 1) Some of the $980B might be invested in capital goods that produce a return – adding to future aggregate demand and 2) Some of the $20B/y interest stream might be paid to foreigners. And then there is the fact that the $20B payments will redistribute income from non bondholding taxpayers (I.e. the middle-class) to bondholders ( I.e. the 0.1%) The redistributional issues ought to be the biggest problem for progressive Keynesians IMHO.
I agree.
My point really is that if you make some extremely simplifying assumptions (perfectly rational assumptions, the desire to spread consumption equally thru time, an economy with no foreign trade – only some of which Bob explicitly makes) then Bob’s example stops working.
Transformer, what do you mean ‘stops working?’ Do you mean it stops showing there is a problem with debt financed fiscal stimulus?
I just meant that the his conclusion – that people will spend an extra $980B in year 1 and $20B less ever after stops being making sense with different assumptions
Doesn’t a time preference for current over future dollars just refute you directly?
No, because all else is not equal.
For Keynesian-question, isn’t the point that agents are NOT rationally expecting the future costs of the stimulus? And so by borrowing-and-spending the government can reduce the amount of saving (which in keynesian models are reducing multiplier effect, right). Effectively “fooling” the public into spending more than they naturally would have? Obviously, if you assume the conclusion, you can show anything..
Sort of the same way New-Keynesian models use price inflation to create a full employment that wouldn’t occur because of sticky wages-sticky prices-worker misconception. With price inflation you “fool” the agents into lower wages/more labour offered?
Given that very few Keynesians bother coming around here any more, here’s a like to our old friend:
http://socialdemocracy21stcentury.blogspot.com.au/2011/09/ricardian-equivalence-is-myth.html
This is kind of fascinating in a mirror-image aspect. It is very strange to see Keynesians appealing to individuals while also trying to measure everything in the economy by aggregate figures: you have “Aggregate Demand”, “Aggregate Supply”, overall employment rate, and of course GDP. Everything is an aggregate except for when Ricardian equivalence comes out, and all of a sudden it’s really about individuals.
You would think at least at some level it would occur that some individuals may under-estimate while other individuals may over-estimate and you end up with that “guess the weight of the cow” such that the aggregate effect of a lot of individuals estimations (all of them individually wrong for various assorted reasons) ends up being pretty close to spot on.
LK also follows up with links to Bill Mitchell the Modern Monetary Theory guy, and that stuff just gets right out there.
I guess if you follow Keynesian theory to it’s logical conclusion, turn the dials up to 11, you end up with MMT which is clearly fruitcake territory. That should serve as a warning, maybe the starting position was a bit off. Oh well, I guess it’s going to be very difficult to convince the beneficiaries of stimulus money that it’s a bad thing.
So basically, the nutshell argument of the Keynesians and the MMT’ers is that most people aren’t too bright and need government clever people to lead them around. Same as ever I suppose.
Tel’s words of wisdom:
It is very strange to see Keynesians appealing to individuals while also trying to measure everything in the economy by aggregate figures: you have “Aggregate Demand”, “Aggregate Supply”
Total rubbish, Tel. Not everything is measured by aggregates in Keynesian theory. Disaggregated data is very important too. For your information, Austrian economics also uses aggregates: the ABCT and Say’s require aggregates. You’d know this if you weren’t a profoundly ignorant individual out of his depth and with comments probably being laughed at in private even by actual Austrian economists.
“For your information, Austrian economics also uses aggregates: the ABCT and Say’s require aggregates.”
Already answered.
“Not everything is measured by aggregates in Keynesian theory. Disaggregated data is very important too.”
Such as?
An individual business profit rate. The hour when an individual says starts work. Whether people work on weekends. Whether a business pays overtime. If a person is unemployed or employed. If a person has part-time or full time work. Whether a business employs unskilled labour or skilled labour etc etc etc.
These are not concepts of Keynes’ General Theory.
lol… And not all Keynesian theory or economic data or economic research concerns come out of the GT. Again and again you demonstrate your stupidity.
“And not all Keynesian theory or economic data or economic research concerns come out of the GT.”
Actually it does, or else it is not from Keynes’ theory.
Keynesianism = The General Theory
Everything else is borrowed from another foundation.
Disaggregated data is as far from Keynesian theory as is economics.
“Actually it does, or else it is not from Keynes’ theory.”
B.S. Keynesianism takes some fundamental ideas from the GT, but does not limit itself to this — just as Austrian economics does not limit itself merely to what was said by Carl Menger.
Keynesianism is the theory of JM Keynes.
The theory of JM Keynes is what is found in the writings of JM Keynes.
The economic treatise of Keynes is the GT, hence Keynesianism is the GT.
The reason why Austrianism does not limit itself to what Menger wrote is because Austrianism is defined as the collection of theories from Austrian economics, such as Menger.
If you referred to “Mengerianism”, or “Misesianism” or “Rothbardianism”, then you would be referring to the theories of Menger, Mises or Rothbard as found in their respective economic worldviews, in which case you could argue that Misesianism is this and this and this, while Rothbardianism is that that and that.
Your claim that Keynesianism considers disaggregated data to be “important’ is not only completely false, but shows you don’t even know what Keynesian theory is.
Don’t worry, it’s so riddled with contradictions and inconsistencies that nobody knows what Keynesianism truly is; not even Keynes knew what Keynes was talking about, as Hayek noted.
… and those variables are only important insofar as they can be compounded into the aggregates above… or in order for some economist to build those aggregates.
ABCT requires the concept of structure in an economy. In a Keynesian model economy all investment is equivalent to all other investment, thus mal-investment cannot happen. If you reduce an economy down to aggregate metrics, then you the concept of ABCT simply no longer exists.
Say’s Law works at the individual level. If one person is unable to produce anything that other people want, then this person is also unable to trade and therefore unable to enjoy consumption of what other people produce. Say’s Law also works at the business level, and every other level too.
“Say’s Law works at the individual level.”
So, wait, Say’s law NEVER works at an aggregate level?!!?
So total payments from aggregate supply never create a corresponding aggregate income to create aggregate demand? So you’ve proved Keynes was right! You evil Keynesian elitist,Tel! I knew you were just a filthy commie stooge.
If I have a law that says “every strawberry is red” then from this I can conclude that two strawberries will also be red, three strawberries will be red.
Come to think of it, strawberry jam would be red.
Now I’m pretty sure up above I mentioned, “Say’s Law also works at the business level, and every other level too.” What do you think I would have meant by that?
LK, not to get personal, have you been under pressure lately? Asian stock markets got you a bit upset or something?
I dunno, I’m just guessing, maybe you don’t have a lot of spare time to go over this stuff, don’t see this as accusatory. I just seem to remember your arguments used to be a bit more coherent.
“So total payments from aggregate supply never create a corresponding aggregate income to create aggregate demand?”
For the individual business owner, multiple sources of income (say customers) don’t create an aggregate of income, but rather a *marginal unit* – or relevant unit – of income:
Toward a Reconstruction of Utility and Welfare Economics
II – Utility Theory
Ordinal Marginal Utility and “Total Utility”
https://mises.org/library/toward-reconstruction-utility-and-welfare-economics-0#2a
“In human action, “marginal” refers not to an infinitely small unit, but to the relevant unit. Any unit relevant to a particular action is marginal. For example, if we are dealing in a specific situation with single eggs, then each egg is the unit; if we are dealing in terms of six-egg cartons, then each six-egg carton is the unit. In either case, we can speak of a marginal utility. In the former case, we deal with the “marginal utility of an egg” with various supplies of eggs; in the latter, with the “marginal utility of cartons” whatever the supply of cartons of eggs. Both utilities are marginal. In no sense is one utility a “total” of the other.”
So, there exists no aggregates in economics in the sense that Keynesian theory needs.
It’s Methodological Individualism all the way – from consumer demand to the most geographically distant and most time consuming production processes imaginable.
*Takes a bow*
There’s plenty of opportunity for those “actual Austrian economists” to come out and correct the record if they want to. I generally don’t get rude with people just because they disagree with me, and overall Austrians tend to be a helpful lot.
However, I do note that you never addressed the main point above which is that although each individual may have difficulty precisely estimating Ricardian equivalence, that doesn’t imply the aggregate result won’t be close to correct. Some individuals under-estimate, some of them over-estimate, and it averages out.
The famous Francis Galton experiment asking a large number of people to guess the weight of an ox at a fairground demonstrated that the average was very close to the actual weight, even though none of the people guessing knew the real weight. This has been reproduced many times, most recently it was done online where the Planet Money crew posted just one photo of a cow and still got a surprisingly good average.
http://www.npr.org/sections/money/2015/08/07/430372183/episode-644-how-much-does-this-cow-weigh
What’s really strange is that no one at Mises org has covered this same topic. Don’t you guys feel bad that NPR is ahead of you?
Ricardian equivalence is NOT an Austrian idea, it’s a New Classical idea. Yet again we see you know jack about Austrian economics.
Try hitting the books of your own Austrian economists, e.g., Gerald P. O’Driscoll and Mario J. Rizzo in The Economics of Time and Ignorance, Oxford: Basil Blackwell, 1985, p. 222ff., and Jesús Huerta de Soto, Money. Bank Credit, and Ecomonic Cycles, Chapter VII.
Wait. Did I ever say “Ricardian equivalence is an Austrian idea”?
Hmmm, seems no I didn’t.
How about addressing the question… too difficult?
You IMPLY that Ricardian equivalence is true:
“I do note that you never addressed the main point above which is that although each individual may have difficulty precisely estimating Ricardian equivalence, that doesn’t imply the aggregate result won’t be close to correct. “
I do (mostly, not 100%) follow the Austrian school… and yet I’m not so amazingly arrogant to pretend that Austrian economics must necessarily have a total monopoly on the truth such that it snuffs out all the classical economics that came before it.
William Stanley Jevons could hardly be called “Austrian” and yet his ideas on marginal utility are strongly accepted by the Austrian school. How can this be? Because economics is not about being a member of a tribe, that’s how.
Francis Galton was not an economist at all, let alone one from the Austrian school. His system of eugenics by means of arranged marriages was manipulative and abhorrent. His discovery about the ability of a crowd to accurately estimate something better than elite experts was actually the opposite result to what he was expecting. Regardless of that, he made an important economic discovery which has been reproduced. The fact itself is what matters, I mention the person who discovered across it only as a convenient reference, and respect for the achievement, not to pump my fist in tribal allegiance.
But all of that is irrelevant distraction; rather than the tedious and pointless argument over exactly which school was the source of one particular idea… why not address the idea itself?
LK
You IMPLY you have poor reading comprehension.
To claim that one argument does not refute Ricardian equivalence, is not to “imply” Ricardian equivalence is true. It is a claim that Ricardian equivalence is not refuted by one particular fact.
LK
Do you ever write anything in good faith at all or are you just a troll?
“So basically, the nutshell argument of the Keynesians and the MMT’ers is that most people aren’t too bright and need government clever people to lead them around.”
Nope. The Keynesian basic argument (I don’t know MMT) is that there is a collective action problem that can’t be solved individually no matter how smart people are, because although there is a higher-utility equilibrium available, individuals acting without coordination people cannot reach it.
Now:
1) It maybe true that there are (many) individual Keynesians who are attracted to the theory simply because they think they are smarter than other people. But that doesn’t mean that that is the crux of the theory
2) Perhaps no such collective action problem really exists. (Although Austrian business cycle theory itself turns on a collective action problem, albeit one with a very different solution.)
3) Perhaps such a collective action problem does exist, but the government cannot solve it, or there exists a private solution preferable to the government solution.
It may be sensible to reject Keynesianism based on some combination of one, two, and three. It is not sensible to reject it based on creating a strawman and knocking it down.
Dictating with Siri: a weird extra “people” showed up above!
That’s not really fair is it? You fight with the weapons you have. All Austrians have is straw men.
It would help you to understand what Austrians are saying.
To quote some irrelevant straw man, who never had anything to do with any government healthcare policy:
That’s all Austrians have isn’t it? Straw men like Jonathan Gruber.
“The Keynesian basic argument (I don’t know MMT) is that there is a collective action problem that can’t be solved individually no matter how smart people are, because although there is a higher-utility equilibrium available, individuals acting without coordination people cannot reach it.”
But the Keynesian position presumes that individuals in government ARE smart enough to get society to this “higher-utility equilibrium.”
And of course, the individuals in government are this smart to the extent they agree with the Keynesians on the smartest actions to take, which of course implies that the Keynesians believe they themselves are smart enough to overcome this alleged problem that plagues the rest of the population.
It is one thing for a Keynesian to attack the free market and assert there are problems that no individuals are smart enough to solve. It is quite another to then promote themselves as having the answers of how to overcome those very problems.
This escape hatch tactic of anti-capitalist authors, of condemning the entire population of humans whilst presupposing the author has special insight into the nature of man, is a universal characteristic of such authors.
“And of course, the individuals in government are this smart to the extent they agree with the Keynesians on the smartest actions to take, which of course implies that the Keynesians believe they themselves are smart enough to overcome this alleged problem that plagues the rest of the population.”
Garbage. The issue here is not that the general population is dumb, it is that neoclassical rational expectations is wrong, because it makes absurd assumptions: it reduces everyone to a robotic agent with perfect foresight and an homo economicus neoclassical outlook.
In reality, you often do find people intuitively understand that Keynesian fiscal stimulus is the right thing to do in a recession. E.g., there was widespread support for Obama’s stimulus:
2012:
“Those who had heard at least something about the stimulus program were then asked whether the stimulus was the right or wrong thing to do for the country. A solid majority (55 percent) thought the stimulus program was the right thing to do.“
http://www.americanprogress.org/issues/public-opinion/news/2012/09/17/38031/public-opinion-snapshot-stimulus-plan-not-so-bad-after-all/
2009:
Americans overwhelmingly want Congress to pass an economic stimulus bill, a USA TODAY/Gallup Poll finds,
http://usatoday30.usatoday.com/news/washington/2009-02-02-poll-stimulus_N.htm
“Fifty-two percent of Americans interviewed Wednesday night are in favor of Congress passing a roughly $800 billion economic stimulus package; 38% are opposed.”
http://www.gallup.com/poll/114184/public-support-stimulus-package-unchanged.aspx
“The latest Gallup poll shows that support for the stimulus package has reached 59 percent in favor and just 33 percent opposed, despite the fact that the question mentions a price tag of “at least $800 billion.” That’s up from 52-38 in favor on February 4″
http://www.americanprogress.org/issues/public-opinion/news/2009/02/16/5629/public-opinion-snapshot-support-for-economic-stimulus-package-increases/
——————
It follows directly that the general population must be dumb ** by Austrian standards** and you Austrians clowns are the arrogant elitist social engineers pushing your dogma on an unwilling population.
Enjoy pondering on that, Major_Idiot, as you fall flat on your face having tripped up on your own words.
LK,
I’m willing to bet you don’t have many friends. I’m also willing bet that whatever friends you do have are at least intelligent/informed enough to keep your pomposity at bay long enough for you to be tolerated as a friend, or aquaintance, or stranger in the check-out of the grocery store.
That said, the average lay person is so ignorant to economic concepts as to have no idea the third element is to a supply and demand graph. They may have heard the term Federal Reserve, but wouldn’t tie it to “central bank” without multiple choice. …And so on. I deal with these people daily. They don’t care.
Citing a gallup poll that says 55% is a “solid majority” and therefore represents “people intuitively understand that Keynesian fiscal stimulus is the right thing to do in a recession” just says people are easily swayed by words like “stimulus”, “freedom”, “ban”, “terrorist”, etc.
These people aren’t stupid. They are ignorant. Willfully, and woefully ignorant.
“That said, the average lay person is so ignorant to economic concepts …
So… what you’re saying is that Austrians are elitist arrogant social engineers pushing your dogma on an unwilling population?? lol…
As for basic Austrian or even economic concepts, a number of Austrian commentators in Bob’s comments section are bloody clueless about these things. E.g.,Tel and Bib Roddis.
Liberty cannot be pushed on anyone.
Except when you are Hermann Hoppe:
“There can be no tolerance toward those habitually promoting lifestyles incompatible with this goal. They-the advocates of alternative, non-family-centered lifestyles such as, for instance, individual hedonism, parasitism, nature-environment worship, homosexuality, or communism-will have to be physically removed from society, too, if one is to maintain a libertarian order.”
http://www.dialoginternational.com/dialog_international/2011/04/the-sick-mind-of-hans-hermann-hoppe.html
Not surprised you don’t understand Hoppe’s argument either.
For individuals to refuse to deal with those they do not wish to deal with, by protecting their own property rights, such that the net effect is the undesirable individuals having to live their lives on their own property or be a welcomed guest on the property of others, is not pushing liberty on the undesirables. It is preventing the undesirables from pushing themselves on what belongs to others.
To “physically remove” someone in a private property order, is not, contrary to your insinuation, an act of kidnapping people from their own lands and throwing them to the other side of the proverbial river. It means individuals making the choice to not allow certain people from stepping on the lands of those who do not wish to deal with them. This may consist of what appears to be an aggressive, force initiating activity, but what Hoppe means is that such force is justified if and only if the undesirables refuse to leave the lands that belong to others. For then it would be trespassing, and in those cases, physical ousting is perfectly legitimate, the same principle as me throwing a KKK member out of my house if he refuses to leave.
Lew Rockwell gives a more detailed story of Hoppe and his “battle with the thought police”…
https://www.lewrockwell.com/lrc-blog/hoppe-on-covenant-communities-and-advocates-of-alternative-lifestyles/
The sort of incident that might get Americans voting for Trump just to put an end to Political Correctness.
Anyway, Libertarians have mixed views on Democracy and this is hardly news to anyone. A fully anarchist capitalist society purely based on property rights would not tolerate Democracy. However property rights need to be defined by someone, and need to be defended by someone, and you need a team to do that; so in practice you get back to something akin to Democracy one way or another.
The actual point Hoppe was making is that a group who agree amongst themselves to uphold certain social structures and moral norms will not be compatible with another group who don’t uphold those values… thus groups need the power to exclude people who don’t fit in. Please note that “push OUT” does not have the same meaning as “push ON”.
If you want an example of this in motion, you can take a look at the recent imports into Europe and the various rape incidents these cultural incompatibilities are causing. As Milo Yiannopoulos likes to point out, the relative positions of Muslims, homosexuals, and feminist slutwalkers on the Politically Correct Victim Ladder, can get a bit touchy at times.
LK, you are just inventing rubbish. That’s nothing like what he said.
The general public have been repeatedly sold the idea that these clever economists will solve things for them, it’s all under control. Hence they don’t bother learning all the jargon and the history, and the theory. In other words they have been conned. They were willing to just trust in authority and not worry about it, and the consequences haven’t been too good.
What the Austrians are doing is the exact opposite of social engineering. We are the ones getting out there and making an effort to explain things, and get the general public up to speed. Bob’s books for example are deliberately written to be as readable as possible. The Austrian school avoids jargon.
What the average person intuitively understands is that you always have trade-offs. If you go to the supermarket, you only have so much money to spend, if you buy the most expensive steak probably that means you might have to cut back on some other item. You say to them, “Hey, government budget works like a household budget, if the government directs a lot of resources into one particular project, that’s going to result in some other project missing out.” This is really easy to understand.
Problem is the Keynesians just keep saying, “No problem, we print money, everyone gets rich, stimulus has no downside.” It’s like a fantasy, but when this guy with a lot of credentials sells it to them, people can be convinced to swallow it.
And yeah, I accept that some other libertarians and Austrians sell different kinds of fantasy in their own way… and I discourage them.
And we can have the discussion some other time about the good and bad points of Democracy. It’s the worst system until you try the others.
Where does what i said remotely lend itself to Austrians being social engineers?
Why is it so hard to grasp that Austrians, or more specifically austro-libertarians seek to achieve (and maintain) their ideal society through the exchange of ideas. There is no force. If the ideas don’t take hold, the ideal will not come to fruition. Austrians, it seems to me, are generally operating on the belief that their ideas are correct/true and will over time be seen as such by both the intellectual community and the non-intellectual community who believes what it’s told.
Thanks to the internet, which makes Gutenberg’s achievement pale in comparison, these ideas are spreading more rapidly than ever. At least currently there’s a receding yolk of censorship from your statist ilk. Something tells me your kind aren’t going to play nicely in a real “market” of ideas, as if your own commentary or Krugman’s weren’t telling enough.
“In reality, you often do find people intuitively understand that Keynesian fiscal stimulus is the right thing to do in a recession.”
I was one of these people, when it was called the Bush stimulus.
The economy was crashing, and tons of people were unexpectedly losing money, their jobs, and their homes.
If a crashing economy is a bad thing, and only the government has enough money to prop it back up, then logically only the government *can* save the economy.
That’s the basis for why people supported the stimulus.
And then Ron Paul called the housing crash.
And what he said about *this* crash, he’d been saying for the past 30 years!
This guy is so brazen as to repeat himself for the past 30 years, and he expects people to take him seriously. I *had* to know why he thought he knew something that everyone else, apparently, didn’t.
(And it didn’t help Conservatives that they found his *obviously* Constitutional position on money to be crankish, since they claim to be Constitutionalists, themselves.)
He kept mentioning something called Austrian Economics, and searches returned results for a site called “mai’sez dot org”, and some odd-ball, cult-sounding line of thought called Praxeology.
Just that name, Praxeology, sounds really retarded, so I had no interest in looking into that. And it looked like it was something the Left was into (Roderick Long, heh), so I went ahead and skipped that.
But Ron Paul held a lot of Constitutional views, so I checked out the Austrian stuff he was talking about.
And now Tel knows why I link almost exclusively to YouTube videos.
“The issue here is not that the general population is dumb, it is that neoclassical rational expectations is wrong, because it makes absurd assumptions: it reduces everyone to a robotic agent with perfect foresight and an homo economicus neoclassical outlook.”
Hogwash. You are making an absurd argument. The issue is that you are pushing your Keynesianism as a political activity, in the real world, against real life empirical individuals. To claim that the reason for this is as a reaction to some contemporary theoretical framework, is to claim Keynesianism is literally psychosis. An introduction of real world conflict, intimidation, coercion and oppression, in the name of a thought.
No LK, you are so wrong it is not even funny. Keynesian polities as a real world activity can only be advanced as a reaction to or anticipation of real world inadequacy of empirical human beings. In other words, yes your theory really does presuppose the position that the common man is unfit to manage his own affairs, that the general population will inevitably spiral towards self-annihilation. The Keynesian prescription is not a ritual in the name of a theoretical anti-homo economicus. It is presented, necessarily, as a prescription against some real world failing of non-Keynensian statists, I.e. failings in man that an elite, under the intellectual guidance of Keynesians, do not suffer from.
“In reality, you often do find people intuitively understand that Keynesian fiscal stimulus is the right thing to do in a recession. E.g., there was widespread support for Obama’s stimulus”
It is not the right thing to do. It doesn’t matter how little or how much support any theory has to the question of truth of a theory.
Keynesian theory had zero support before Keynes, obviously. According to your logic, it should never have been invented since it didn’t start with any support, not from the majority and not from an elite as today.
“It follows directly that the general population must be dumb ** by Austrian standards** and you Austrians clowns are the arrogant elitist social engineers pushing your dogma on an unwilling population.”
Total non sequitur. That does not follow at all.
Austro-libertsrianiam is not pushing anything on anyone. It is a REMOVAL of pushing from the likes of thugs, criminals, statists, encouraged by Keynesians. Individual liberty is not a top down, forced-fed political oppression like Keynesianism. It is a bottom up, consensual release of oppression so that the individual can decide what to do with his or her own property, not the psychopaths in the state.
LK, your posts were low quality before, but this recent display of ignorance after crawling out from the rock you’ve been living under, shows that your intelligence has atrophied.
“That does not follow at all. “
Yes, it does. Ron Paul can’t elected president. Period. And support for libertarianism is never more than a small minority.
Again, ponder on that, you clown.
“Hogwash. You are making an absurd argument. “
We can also see that you have no clue about what neoclassical rational expectations even is. This is why you are reduced temper tantrums. Again, ponder on your idiocy.
“Yes, it does.”
No, it doesn’t. You claimed “you Austrians clowns are the arrogant elitist social engineers pushing your dogma on an unwilling population”.
First, no we are not PUSHING against anyone. We are actively educating the population, individual by individual.
You Keynesians are not in the education business. You are in the political pushing business. You want to physically push your dogma on the population.
Secondly, no it does not follow because Austro-libertarians are convinced that individuals are smart enough to manage their own affairs without being told what to do by any state.
The fact that that the ideas are in the minority does not in any way shape or form imply that the theory itself presumes the majority are stupid. It is not a necessary presumption.
In Keynesianism it is a presumption because the theory does not permit individuals to manage their own lives. It presumes that left their own devices, humanity will self-annihilate, or at least spiral towards progressing impoverishment, where if miraculously humanity survived, it would be ending in a state of scratching the ground for bare subsistence like monkeys or gorillas.
If you Keynesian sociopaths really did not presume the common man is too stupid to manage his own life, then you would be advocating for the common man to have total and complete liberty to choose what to do with his person and property. You would advocate for an ending of all taxation, so that the common men can finance what they want for themselves, and to refrain from turning men against each other in a perpetual civil war that you call democracy.
“We can also see that you have no clue about what neoclassical rational expectations even is.”
Another non sequitur. No, I know what it is, I am telling you it is not relevant to the presumptions behind the political activity of Keynesian policies. The oppression of real world individuals you claimed, falsely, was but a response to or anticipation of neoclassical expectations THEORY.
To advocate for a state to impose the will of the few, on the many, or the many on the few, in the name of fighting a theory that by the way Austrians don’t even accept, is like I said psychosis.
This is wrong. It is not smarts, it is coordination that is at issue. A government can quickly coordinate certain activities that a few hundred million individuals could not.
“… it is coordination that is at issue.”
Coordination to what end, though?
If the goal isn’t the satisfaction of the ends of each and every individual consumer, then the coordination isn’t economically efficient, it’s cronyism.
The economy is consumers employing means to attempt to alleviate some felt unease. If production or labor is undertaken for any other purpose than to profit off of these consumers, then these resources are being malinvested because
you’re not supposed to produce for demand that won’t exist.
You can’t centrally coordinate attempts to satisfy subjective ends – they’re subjective.
False. Coordination requires intelligence.
You also conveniently forgot to mention that the definition used by Keynesians for this “higher utility equilibrium” presupposes the existence of government, since according to Keynes laissez-faire capitalism is inherently plagued with a tendency towards “inadequate demand”, especially during periods of higher unemployment and idle resources, that cannot be solved by laissez-faire activity.
In other words, it is not that individuals in a free market cannot reach this higher utility equilibrium because there is an inherent flaw is laissez-faire activity. Instead, individuals in a free market cannot reach it by definition because there is no government intervention in demand. In other words, higher level equilibrium is DEFINED as government correcting the flaw of inadequate demand that plagues laissez faire activity.
” (Although Austrian business cycle theory itself turns on a collective action problem, albeit one with a very different solution.)”
No. Specific individuals are mislead into making malinvestments. And while artificially low interest rates are going to be more attractive to investors in longer term projects, there’s nothing in ABCT that says only those such projects will make malinvestments.
Austrian theory (proper) never gives up its commitment to Methodological Individualism.
We use terms like “industries” and “sectors of the economy” for convenience, only.
False. Of course it turns on a collective action problem: for one thing, the collective tendency of banks to lower the money rate of interest below the natural rate. This happens even in the absence of a central bank, as Hayek argued.
There are lots of collective action issues if you actually understood your own damn theory:
http://socialdemocracy21stcentury.blogspot.com/2014/09/a-brief-outline-of-mises-abct.html
“for one thing, the collective tendency of banks to lower the money rate of interest below the natural rate. This happens even in the absence of a central bank.”
This has never been proven.
“This has never been proven.”
Hahahaha — then no Austrian business cycle has ever happened in any country with no central bank and a private banking system — at any time in history.
Way to go M_F!
Monetary Lessons from America’s Past | Thomas E. Woods, Jr.
http://www.youtube.com/watch?v=91OIBnrjzLU
Economic Cycles Before the Fed | Thomas E Woods, Jr.
[www]http://www.youtube.com/watch?v=TxcjT8T3EGU
ABCT is not an empirical based theory.
Yours is, so I am entitled to say that what you said has not been proven.
Are you saying ABCT did not apply until the Fed was created, and cannot be used on the historical examples from 19th century America?
No, read my comments again.
Mises and Hayek thought that the ABCT could happen in economies WITHOUT central banks.
M_F says “This has never been proven.”
Empirically it has not.
You are an alleged empiricist.
Guess not. You’re as a priorist as Mises reading Kant on Leibniz’s birthday.
hahaha… so now an ABC can never happen in an economy where there is no central bank? Better break the sad news to Mises and Hayek.
It also follows directly that no Austrian business cycle can EVER have occurred in 19th century America, or 19th century Canada or 19th century Australia. Thanks for ripping up and flushing your own Austrian theroy down the toilet, M_F.
The business cycle happens because of fraudulent expansion of the money supply.
No central bank required.
Monetary Lessons from America’s Past | Thomas E. Woods, Jr.
[www]http://www.youtube.com/watch?v=91OIBnrjzLU
Also, my Spidey sense is tingling:
History of Australia (1851–1900) – Booms, depressions and trade unions [Wikepedia]
“Shortages of labour led to high wages for a prosperous skilled working class, whose unions demanded and got an eight-hour day and other benefits unheard of in Europe.
Australia gained a reputation as “the working man’s paradise.” Some employers tried to undercut the unions by importing Chinese labour. This produced a reaction which led to all the colonies restricting Chinese and other Asian immigration. …”
“… The Great Boom could not last forever, and in 1891 it gave way to the Great Crash, a decade-long depression …”
Also interesting:
Some Words on 1893 Australia
http://www.economicthought.net/blog/2012/05/some-words-on-1893-australia/
“3. Risk: It is claimed that Australian banks made risky investment decisions, especially in real estate. What is not clear, though, is whether the true risk was assessed ex ante or ex post. This is important, because if the risk was revealed ex post then it could mean that banks were not taking these risks knowingly. …”
“… For instance, we know that the prices of many of these assets were artificially maintained by further capital inflows from Britain. Banks did not have any information concerning their true value, especially in the case of an unexpected flight of British capital (which occurred in the first few years of the 1890s, due especially to financial troubles in Britain [and the United States]). Most of the banks which failed had large British deposits.”
“so now an ABC can never happen in an economy where there is no central bank?”
What do you mean “so now”?
Austrians have always held that it is not central banking per se, but the actions taken by individuals, of which central banking is but one form. There are other ways government an manipulate interest rates and credit.
“It also follows directly that no Austrian business cycle can EVER have occurred in 19th century America, or 19th century Canada or 19th century Australia”
That does not follow at all.
Central banking is but one way governments can cause ABC.
You are evading the obviously uncomfortable truth that in YOUR empirical framework, you have no evidence for what you claim is true about laissez-faire banking.
First you say:
(1) that it has never been proven that there has ever been any “collective tendency of banks to lower the money rate of interest below the natural rate.”
but then
(2) suddenly we hear that, yes, it does happen.
The law of non-contradiction clearly doesn’t apply in your bizarro world.
No, I never said it does happen.
You are conflating banks in a free market, which you do not observe, with the cause of the business cycle in a hampered market, which we do observe.
You have no empirical evidence that ABC occurs in a laissez-faire market.
Interest rates and prices temporarily changing by significant degrees due to unexpected influxes or exports of money into a geographical territory, such as Australia during the 19th century, is not evidence of a TENDENCY in free markets to lower rates below natural rates.
The concept of tendency is what is characteristic of a free market. The characteristic of a free market is that there can be unexpected swings in both directions, lower and higher rates. There is no tendency towards one or the other.
I was asking the Major. His positions seem inconsistent.
Craw,
ABC can be caused by more than central banks.
Prior to central banking does not mean prior to government intervention in banking.
“You have no empirical evidence that ABC occurs in a laissez-faire market.”
Once again we see that the B.S. that comes out of your mouth has little to do with actual Austrian economics, since Hayek’s and Mises’ theory was that even the laissez-faire market with FR banking DOES have a tendency to produce ABCs.
What passes for Austrianism for you is a made-up, invented, fabricated product of your own imagination.
No doubt when you say “laissez-faire market ” you also mean a unfree market where vicious collectivist violence has been used to smash up FR banking and jail FR bankers.
Yet more proof of your vicious commie hatred of capitalism.
LK,
“Hayek’s and Mises’ theory was that even the laissez-faire market with FR banking DOES have a tendency to produce ABCs.”
No it isn’t. That is just a straw man.
Your characterization of Austrian theory is made up, invented, fabricated.
What you are doing is making the false claim that fractional reserve banking has a tendency in free markets to steadily increase. No, there is no evidence of that and there is nothing in Austrian theory that implies such a claim as inherent in it.
ABC is a theory of business cycles, not isolated instances of unexpected money inflows or outflows, nor isolated instances of particular banks expending credit unduly.
As has been pointed out repeatedly to you, in a free market there is no law against people using credit issued by banks as a medium of exchange. As long as there is no fraud or deceit, fractional reserve banking is not universally regarded in Austrian circles as fraud.
Your claim is demolished.
And your response to what you quoted from me doesn’t even address the quote.
The fact is you have no evidence of the claim that ABC occurs in a free market.
This fact is not refuted by your absurd proselytizations on the theoretical structure of ABCT.
You have zero empirical evidence of ABC occurring in laissez faire markets. None. Nada.
And yet you continue to claim they occur in laissez-faire.
Your actual worldview is a priorist, not empirical at all.
ABCT is a theory of government intervention in money being the root cause of the business cycle, particularly the intervention that takes the form of altered interest rates and credit.
“the collective tendency of banks”
You mean the individual banks that must adhere to Federal regulations?
They are each, individually, made slaves to regulations.
Methodoligical Individualism holds.
LK was talking about that set of data he collected for that recent time when the world was anarcho-capitalist. Then he tested the hypothesis and found the empirical data supports what he said.
He definitely did not say what he said from any a priorist background. That would be contradictory to his professed principles.
“You mean the individual banks that must adhere to Federal regulations?”
No, historically, in any economy with no central bank and a private banking system.
If you are saying that ABCs happen in economies with no central bank and a private banking system with either some regulations or none, then you proved what I said: in your ABCT, there is a collective tendency of banks to lower the money rate of interest below the natural rate.
Good for you, guest.
What private banking system!??
E.g., Australia’s free banking system in the 19th century.
There is no evidence that the banking system in Australia over-expanded and caused ABC during the 19th century.
In fact, the evidence points towards what Austrian theory has never claimed is impossible in a free market, that is, the phenomena of unexpected money supply changes, such as significant changes in imported money or exported money.
The mere existence of bank failures does not disprove ABCT. ABCT is not a propaganda fluff piece that bankruptcies will never occur in laissez faire markets.
“There is no evidence that the banking system in Australia over-expanded and caused ABC during the 19th century.”
Correct. Glad you agree that Austrian economics is pure nonsense.
The fact that there is no evidence of over-expansion does not disprove Austrian theory. That is just absurd.
Australia never had an entirely free banking system. For example the Bank of New South Wales had special connection to government right from the first colony. However, Australia did allow free banks with light regulation (or used to allow at any rate). That is to say a mix of free banks and less free banks existed at the time of crisis in the 1890’s
Yes, the injection of gold. In the case of Victoria the big finds were Ballarat and Bendigo starting 1851. Later the gold rush swung towards the West with Kalgoorlie and the Pilbara starting up around 1890.
Also, injection of speculative money coming from overseas, and given the relatively small size of Australian banking, it didn’t take much for the speculators to have a big effect.
Since gold supply drove up Victorian land prices and speculators were making bets on this trend going forever, some of those speculators ended up losing. We saw a surge in Perth land prices during the recent mining boom around about 2005 – 2012 and the prices of both the minerals and the land have slumped since then. I’m sure someone must have made a loss on that as well.
I don’t see this as a failure of free banking. Some banks but not all by any means, got themselves in trouble. That’s normal in any free market.
Do we cry and moan and wring hands about the failure of the computer industry? The list of defunct computer companies is huge.
https://en.wikipedia.org/wiki/Category:Defunct_computer_companies
Somehow there’s people freaking out when a bank goes broke as if that’s some terrible black mark against capitalism… and yet companies in other lines of business go broke and we just shrug… yeah perfectly normal.
But getting back to the theory, you have a big event like a gold rush, people naturally speculate on the future trend, and some get it wrong. Not different to the rise of the Internet which has been a different kind of gold rush. Well slightly different, because gold as money directly effected banking while the Internet effected tech-stocks. But why treat a bank as anything magical compared with any other business?
Also, just not related to Keynes, or to anything LK has said… I really don’t like libertarians pushing this “free market solves all problems for all people” concept. No it does not.
There are going to be losers in a free market. You simply cannot have the freedom to try new things without the risk of failure… and it’s highly likely that some percentage of ventures will fail.
It just doesn’t make good sense from a political standpoint to oversell and create a false expectation.
“Since gold supply drove up Victorian land prices and speculators were making bets on this trend going forever, some of those speculators ended up losing.”
Nice.
The same thing happened with Tulipmania, Doug French noted.
(HT to Robert Wenzel)
“Good for you, guest.”
Thanks, LK. Glad you’re back, btw.
😀
That’s not a collective tendency, that’s individual banks that try to use paper as money.
Bank runs tended to prevent the fraud of artificially low interest rates.
“The Keynesian basic argument (I don’t know MMT) is that there is a collective action problem that can’t be solved individually no matter how smart people are”
Right. E.g., deleterious macroeconomic effects — debt deflation, recession, real output collapse, unemployment — emerge from what can be actually intelligent and rational micro behaviour of individuals in certain circumstances (e.g., a family must cut consumption and increase saving to pay down debt if one partner loses a job, but when enough people are forced to do the same thing the economy implodes).
Macroeconomic effects are not intended by the individuals themselves, and intervention by a government can remedy the problem.
Government is composed of individuals.
What you are really saying is that you believe in the existence of complex social problems that cannot be solved by peaceful interaction, that is, by reason and voluntarism, but by threats of aggression and actual aggression.
This belief is so untenable that you are compelled to invoke apocalyptic rhetoric like “implode” to describe what is actually healthy corrective actions to eliminate past errors in judgment.
“What you are really saying is that you believe in the existence of complex social problems that cannot be solved by peaceful interaction, that is, by reason and voluntarism, but by threats of aggression and actual aggression.”
No, that is your Rothbardian theory, M_F.
The vicious anti-capitalist Rothbardianism that loathes the capitalist miracle of free fractional reserve banking, falsely accuses it of fraud when it is not, and wants to use brutal, thuggish collectivist violence against innocent bankers and business-people.
This no doubt stems from your deep pathological personal hatred of capitalism, M_F. You could never run a free fractional reserve bank yourself and you resent the profit-making free enterprise of hard working bankers.
This is probably a legacy of your Marxism. Once a commie always a vile commie, M_F — and you’re still a commie at heart.
In your scenario, do they create the fractional capital prior or post production?
…so what you’re saying is that you believe in the existence of complex social problems that cannot be solved by peaceful interaction, that is, by reason and voluntarism, but by threats of aggression and actual aggression.
Undue fractional reserve banking is punished in a free market. Governments inflating bank reserves as a means to solve the “problem” of corrections to malinvestment is your theory, not mine.
“debt deflation” – Like blaming gravity for a plane crash, debt deflation is the logical result of treating phony paper claims as if they were real loanable funds which have to be corrected for at some point.
“recession” – These are the result of government attempts to prop up businesses the profitability of which consumers aren’t supporting. Let the failing businesses fail, and people will naturally reallocate their scarce resources in the service of satisfying consumer demand, where production is *supposed* to be happening.
“real output collapse” – You can output as much as you want, but if consumers don’t want it, or don’t want it at that price, then real output is *supposed* to collapse. Output is *not* wealth creation unless it’s what consumers want.
“unemployment” – After conditioning workers to believe that higher nominal wages in an environment of monetary inflation equals more wealth, it’s no wonder that when the reality of what consumers *actually* value hits them – and therefore what production processes and jobs are *actually* profitable in terms of goods and services – they are not going to understand that their wages *should* fall in the previously artificially propped up sectors of the economy in which they were employed.
(e.g., a family must cut consumption and increase saving to pay down debt if one partner loses a job, but when enough people are forced to do the same thing the economy implodes).
Your Keynes economics has foisted the dual income debt based model upon us.
You and your example are the problem.
“… but when enough people are forced to do the same thing the economy implodes”
No, the artificially propped up parts of the economy implode when enough people are forced to do the same thing.
The economy gets better when businesses *stop* outputting for non-existent demand.
“The economy” isn’t businesses making profits, per se.
Rather, “the economy” is consumers satisfying their preferences. No production is economical unless it serves this end.
Businesses are created to make a profit off of consumers’ attempts to satisfy their own preferences.
Laborers are piggy-backing off of businesses’ attempt to profit off of consumers.
That’s the economy. No damage happens to the economy when consumers voluntarily withhold spending.
Well, the following is from that famous well known Keynesian (I’ve put the link down at the bottom in a different comment):
Or in the common vernacular: I’m smart, regular people are ignorant and lazy.
Now, I can’t disprove your point by quoting one individual Keynesian, nor even two, three, or four… but when the leaders of the field are using this argument there might be some reason to believe this is the best argument they have.
B.S. He’s saying people just don’t accept dubious neoclassical assumptions, and even if they did they wouldn’t have the inclination or even savings to do what is assumed in New Classical models.
When someone says, “very few people have the knowledge”… that does not mean, yes they do have the knowledge but they just don’t agree with it. You see, those are quite different things.
Saying someone does not have knowledge means they are ignorant. You can’t just make up your own meaning for what he said,
lol.. saying all people are ignorant of exactly what will happen in the future (that is, they lack knowledge of what exactly will happen) does not imply that they are stupid or dumb, merely that they are not godlike agents with perfect foresight — the latter being an actual absurd assumption of Rational expectations.
You, Tel, lack knowledge of what exactly will happen in 2017, but this does not make you a dumb ass per se, merely ignorant and not capable of godlike foresight.
Though, as it happens, we know you’re a dumb ass for other reasons.
You are changing your story now. Check before you said, “people just don’t accept dubious neoclassical assumptions” but now it has become, “merely that they are not godlike agents with perfect foresight”.
However, that is not the common use of the word “ignorant”. You are bending over backwards to accommodate Krugman any way you can. Why not let his words speak for themselves? What do you owe to Krugman that you feel the need to apologize on his behalf?
Tel, you think you have him but he will only bend more. These guys never stand up straight.
“… but this does not make you a dumb ass per se …”
lol.
LK,
Keynesianism claims Godlike foresight about the alleged inevitable tendency of capitalism to choke on its own savings and persistent “inadequate demand” as capital accumulates and profit rates fall.
This is the whole reason for the a priori assumption that free markets fail and require the good government doctor to spend money on that which consumers would not otherwise have financed if they had the choice.
I might also point out the link between Keynes himself and elitism:
That tends to give the impression of someone who thinks he is the smartest guy in the room. Admittedly I’ve quoted from Rothbard who might not have been inclined to be favourable to Keynes. Never the less, others have come to similar conclusions. Keynes was a supporter of the British Eugenics Society which says enough in itself about belief in the power of elites to rule the life and death of others.
Hey Gene, I’ve hit the search engines on all of the likely keywords in your explanation there. I cannot find anyone describing Keynesian stimulus (either monetary or fiscal) as the response to a “collective action problem” except perhaps by roundabout inference. Is this a new thing? It is a new interpretation of old theory, or just you?
If you want to read that interpretation into some of Krugman’s articles you could probably do that, and maybe even make sense of it, but it would require quite a deliberate effort to do so. I’m not saying it’s wrong, just doesn’t seem to be well represented.
Can you find a prominent Keynesian who does describe stimulus as the solution to a “collective action problem” as you put it? Could you also perhaps explain why other types of interpersonal coordination are not available to solve this (e.g. contracts, agreements, corporations, or property rights) ?
I’ll start searching youtube now, maybe there’s a talk on it or something.
Not Keynesian stimulus, Keynesian stance. In contrast to the strawman claim that Keynesianism is the claim “we are smarter” Gene correctly explains that smarter is not the claim, secret insight is not the claim; instead the claim is about the nature of the problem.
Gene has answered a specific bad argument and has put his answer well and clearly.
The discussion is about Keynesian stimulus, and the argument is whether government has a was of knowing a better way for you to spend your money than what you could yourself know.
Gene said,
That’s not a “stance”, that’s a claim that there is a real problem that requires some action to solve it… and the action invariably is stimulus in one form or another, please don’t go pretending that Keynesians don’t dearly love their stimulus plans.
I asked for some reference to a real Keynesian explaining the problem on these terms, neither you nor Gene has offered such a thing.
I have been able to cite a few examples of prominent Keynesians coming up with explanations very close to “we are just smarter than you are”, and that includes Keynes himself who invariably believed himself to be the smartest guy in the room.
Throw us a a link or something, don’t make excuses.
Of course it’s a stance we’re discussing. “The basic Keynesian argument” — we are discussing the basic argument, which is a stance, and is not a stimulus.
“But hang on, that’s not the end of the story. We have now reduced Aggregate Demand by $20 billion forever. So don’t we at least need to take that into account? “
What would 20 billion matter, when the multiplier effect of 980 billion will be very large indeed?
In any case, rational expectations is insane nonsense and bizarrely missing from all these crackpot neoclassical models is a proper understanding of the banking system which produces endogenous money and adds to AD. Any Austrian worth his name who understands the notion of subjective expectations should understand how stupid RE is. This post is like arguing how many angels can fit on the head of a pin.
Subjective expectations theory is incompatible with Keynesianism.
Not Post Keynesianism.
Especially Post Keynesianism.
It still presumes the same statist transcending of subjective expectations as orthodox Keynesianism, with the main silly difference being a fetishism for effective demand.
Have you tried Post Modern Keynesianism?
How about Post Normal Keynesianism?
Post Hoc Keynesianism?
Post Hoc Ergo Propter Hoc Keynesianism would be a redundancy.
“What would 20 billion matter, when the multiplier effect of 980 billion will be very large indeed?”
Is that 980B only paper or anything actually created/produced and how do you measure the value of what is produced?
Because the 20 billion happens every single year, while the 980 billion is a one-off boost… forever is a lot of years.
In the long run the tortoise beats the hare, and despite what Keynes said we are not “all dead”, although he is dead the generations after him are left to clean up his mess (just as our children will be left cleaning up our financial mess).
If the 980 billion was not spent, the economy would be poorer by 980 billion for year forever…. forever is a lot of years.
And, wait, 20 is bigger than 980. Maybe you have difficulty grasping maths?
Do you have difficulty grasping the idea of a one-off payment vs an annual payment?
Any math problem, any time, you’re on.
I repeat: if the 980 billion was not spent, the economy would be poorer by 980 billion for very year forever. You just got hoist on your own petard.
The economy is not a person.
If 980 billion is not spent, that doesn’t mean everyone is 980 billion poorer. The 980 billion dollars doesn’t just disappear if not spent in the present.
At any rate, using money as a measure of wealth is flawed anyway. Zimbabwe was not millions of times richer than everyone else. It is real goods that make people wealthy.
You’re so backwards.
“The economy is not a person. …”
“… It is real goods that make people wealthy.”
Exactly right. Only individuals can be rich or poor.
A miser isn’t poorer for not spending; He values what he perceives he will receive in the future more than what he could get right now.
So not spending makes him richer.
He has less stuff now, but the definition of wealth comes from the individual’s own preferences.
More of something does not necessarily equal more wealth.
It could even mean less wealth.if the time and resources used to increase output could have been used in the production of something that was valued more by the individual – to include the enjoyment of leisure.
That’s beside the point for Racardian equivalence.
We can argue some other day about whether groups of individuals are allowed to regard themselves as members of an incorporated body.
Tel,
You knew it was coming:
Only individuals can regard themselves as anything at all.
😀
Stocks and Flows.
If you really believe that the correct way to evaluate a loan is to compare the entire principle against the interest payment just in the first year… then you should be borrowing yourself up to billionaire status.
I look forward to stories in all the financial news. Those flat-footed conventional accountants will be astounded. Heck, I too will be astounded.
Prove the Riemann Hypothesis.
If you want a test that can differentiate you need to pick something that some people pass and others don’t.
Your choice is, I admit, a fascinating question, but already numerically verified up to 10^10 from an engineering perspective that’s considered acceptable proof. From an economic perspective it’s so well tested it’s almost a conspiracy.
Here, study hard and try to keep up.
http://www.ehow.com/info_12033013_stock-flow-variables.html
This one is kind of relevant to Bob’s question:
http://krugman.blogs.nytimes.com/2011/12/26/a-note-on-the-ricardian-equivalence-argument-against-stimulus-slightly-wonkish/
So yes, Krugman takes the “long run we are all dead” approach and only looks at the first year $6000 spending cut, while ignoring the second year, third year and so on up to 30 years or whatever. It should be clear that a temporary one-off boost can be achieved up to the point where debt levels are high, at which point you are still paying back all those earlier boosts and it starts going backwards.
He also ignores the secondary effect that when banks create money for loans, it bids up the price (of houses in this case) so you get escalating prices on existing houses. These may actually encourage consumption as existing home owners borrow for consumption against equity. I guess this might not apply to government debt in quite the same way as it does to home loans.
“… so maybe you would expect a fall in spending by $6000; that offsets only a small fraction of the debt-financed purchase.”
So maybe you would expect a fall in spending by $6000 if someone saved that small fraction of the boost to “aggregate demand” that will happen in the future all at once … HEY, WAIT A MINUTE!
😀
“But hang on, that’s not the end of the story. We have now reduced Aggregate Demand by $20 billion forever. So don’t we at least need to take that into account?”
Why have we reduced Aggregate Demand by $20 billion forever ? Isn’t the $20B just a transfer from tax payers to bond holders ?
” then the taxpayers in a rational expectations model with no frictions etc. would save an additional $20 billion this year. So on net the stimulus plan would still add $980 billion to Aggregate Demand.”
If you also assume that they will “consumption smooth” between periods and that there are a very large number of future periods then they will NOT spend an extra $980B in the first year and $20B less forever more.
Rather they will save the whole $1T and earn $20B in interest that will use to pay the extra taxes each year. With these assumptions the “stimulus” doesn’t have any affect on AD even if the debt is never paid off.
based on these assumption even if the
The entire Keynesian prognosis is based upon the unfounded claim that the free market has failed and requires a cure. They cannot locate this alleged failure in history or in theory and meticulously avoid mentioning that the Austrian analysis notes that the problems of the 1930s were originally due to central bank monetary shenanigans that go all the way back to WWI. Back in 1977, this interview with Hayek was probably the very first thing I really ever heard about Keynes and Keynesianism because, at that time, the hipsters were all Maoists and not Keynesians. Hayek describes “The General Theory” as an ad hoc ruse by Keynes to repair the problem of high British wages which had been caused by PRIOR MONETARY INTERVENTIONS and the power of British labor unions and was applicable to ONLY that particular situation:
http://bobroddis.blogspot.com/2014/02/being-polite-to-keynesians.html
The Keynesians start their analysis in the middle of the story where the true story shows that the problems of the day were caused by prior government intervention. TGT and the Keynesians meticulous ignore our analysis because they know they cannot refute it. They know that they dare not even state it fairly because it would then be clear to all how their analysis has ignored and distorted our analysis.
I think the PIIGS crises highlight this more than anything else, at least in modern times. A lot of the diagnoses from Keynesians and Austrians are remarkably similar. I see Austrians as being pro-“austerity” when that attribution could not be further from the truth. Bagus’ crisis of the Euro gives no such endorsement for Eur-o-sterity. While the ultimate fiscal and monetary arrangement will differ to either school, the immediate recommendation is likely the same: dissolve the E.U. Keynesians can’t deny the fact that the Maastricht rules are being skirted.
The ABCT was widely debated and discussed in the 1930s as was Austrian economics — but Hayek and Mises lost the debate. You’re still as ignorant as ever.
LK, the idea that if “everyone saves all at once, the economy implodes” is the same thing as the idea that “consumers are buying the wrong stuff”.
Keynesianism reduces to producers being upset that consumers aren’t buying their stuff.
The abruptness, in a crash/correction, of the change in consumer spending occurs because the artificially propped up sectors of the economy are revealed to be wealth-destructive in terms of real goods and services.
But even if such an abruptness could occur in a free market – with retailers close enough to see their customers reveal their preferences with non-printed money – that would not be a problem to solve.
The reason is because consumer demand is the *basis* for production; You’re not supposed to produce for demand that will not materialize.
Stop misleading investors into supporting production processes for which consumers haven’t revealed preferences, and you won’t have the crash/correction, later.
When, where and how did the statists extract out the NAP free market failure feature from the funny-money/debt deflation/unsustainable prices feature so as to blame it all on the NAP free market?
Hmmmm, Mr. Empirical Evidence Man? And where is that analysis written down in THE BOOK? Cite pages please.
Because there was a bank somewhere sometime that issued fiduciary notes, ergo central banks don’t ever cause the business cycle.
This brilliant insight, along with “This one guy somewhere sometime murderer another person, ergo Stalin didn’t in any way bring about any purges”, can be found in LK’s book of knee slapper apologetics.
How much more time should we give “Lord Keynes” to find that long lost “analysis” where the real Keynes separates out the historical “market failure” from the funny money distortions in THE BOOK?
Market failure = People don’t buy what we want them to, anymore. :,(
Dwain that is not a very nice thing to say.
LK,
Hayek and Mises not only won the debate, but they won it so handily that the losers had to make up the myth of market socialism as the only way they knew now to salvage what was left of their beliefs.
You didn’t see Mises have to make up socialist capitalism as a way to salvage capitalism.
The person who is ignorant is you.
Boom!
I can always count on Bob Roddis to say it like it is.
I love it when threads go really whack like this one.
Socialism is really whack. Keynes is really whack. Central planning is really whack. They are all anti logic/anti life and lead to death. What did you expect.
I think this thread is awesome.