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Source link: http://archive.mises.org/13500/the-popular-interpretation-of-the-industrial-revolution/

The Popular Interpretation of the “Industrial Revolution”

August 6, 2010 by

Indeed, deplorable conditions existed, but one must not blame the factory owners, who did all they could to eradicate them. These evils were caused by the economic order of the precapitalistic era — the “good old days.” FULL ARTICLE by Ludwig von Mises

{ 173 comments }

michael August 6, 2010 at 8:38 am

In order that the Industrial Revolution be made possible there had to be a source of cheap labor. In Britain this was effected by the Enclosure movement.

A big money maker back in Renaissance times was wool, needed for clothing in Europe’s cold, damp climate. And kings always needed some big money maker, to finance their perpetual wars. So the King of England’s financial advisers recommended that he get into raising sheep.

The only trouble was, sheep took up a lot of land. And all England’s land was under the plow, being tilled by the peasants. So the King took title to a sufficient amount of land to satisfy his wants, and evicted them from what was now his property. He then enclosed the land, building fences where there were none before, to establish his ownership and keep out intruders.

During the century 1530-1630, half of England’s peasants were thrown off the land in this manner. Penniless and destitute, they wandered into the cities in search of sustenance, forming the first underclass: beggars, vagrants and ne’er-do-wells. There were few options, as jobs as we know them now were all but unknown.

A few were taken into family businesses as tradesmen’s apprentices. The rest became pickpockets, drunkards, prostitutes and the like. Some were given alms while others went to the poorhouse, to work off the lot their God had granted them. Or to the gibbet.

Enterprising sorts, though, found that they could use this mass of desperate humanity for their labor pool. So they devised ways to employ people in performing labors for them. Mining coal, smelting iron, tending great engines… the industrial hell of Hogarth and Blake was under way.

Oh, the opportunities abounded. Now one no longer had to thieve and connive his way through life. He could be a stoker, tending an eternal flame in the maw of a coal boiler.

But let’s let Mises retell the story:

“Such are the ideas permeating most of the historical studies dealing with the evolution of modern industrialism. The authors begin by sketching an idyllic image of conditions as they prevailed on the eve of the “Industrial Revolution.” At that time, they tell us, things were, by and large, satisfactory. The peasants were happy. So also were the industrial workers under the domestic system. They worked in their own cottages and enjoyed a certain economic independence since they owned a garden plot and their tools. But then “the Industrial Revolution fell like a war or a plague” on these people. The factory system reduced the free worker to virtual slavery; it lowered his standard of living to the level of bare subsistence; in cramming women and children into the mills it destroyed family life and sapped the very foundations of society, morality, and public health. A small minority of ruthless exploiters had cleverly succeeded in imposing their yoke upon the immense majority.”

That view is also true.. to a degree. The serious issue, though, is that relative to the number of opportunities available, the world just had too many people.

The best periods for labor were those following an outbreak of Plague. Labor, in the aftermath of the Great Death was at a premium. Wages sextupled in Britain, and peasants to till one’s fields were courted with extravagant promises. For once, able bodies were seen as being needed, not as nuisances. But such was not the case in 18th century England.

Mises does a good job in describing the early Industrial Era. He even points the way to the prescription for the disease:

“The outstanding fact about the Industrial Revolution is that it opened an age of mass production for the needs of the masses. The wage earners are no longer people toiling merely for other people’s well-being. They themselves are the main consumers of the products the factories turn out. Big business depends upon mass consumption. There is, in present-day America, not a single branch of big business that would not cater to the needs of the masses. The very principle of capitalist entrepreneurship is to provide for the common man. In his capacity as consumer the common man is the sovereign whose buying or abstention from buying decides the fate of entrepreneurial activities. There is in the market economy no other means of acquiring and preserving wealth than by supplying the masses in the best and cheapest way with all the goods they ask for.”

I think he’s saying that the enlightened industrialist emulates Henry Ford, by paying his workers enough to enable them to buy the products a fully industrialized society is capable of producing. Their purchases complete the circle begun by the accumulation of capital and the building of engines of production.

Jon Leckie August 6, 2010 at 8:54 am

Well well what a surprise to see who’s first to post. I’m going to quote mpolzkill: You are a preening douchebag. You’ve misquoted Mises for your own ends, your post is infected with an infuriatingly saccarhine quality, and your conclusion is utterly self-serving and simply wrong. All in all, you just continue your form of trotting out tired, boring, demand side, left wing pap. You seem to have a tremendous amount of information at your disposal, yet you trot it out in post after post in the same old tired perspective, never taking anything in – not a single damn WORD – from the patient and fulsome replies that other bloggers – with more patience than me – make to you on this site. For all of the words posted under your name, you contribute little to the discussion on these pages. And I’m aware of the irony of such a claim, when my own posts are so limited and in this case, so negative, but you can go to hell anyway.

Jon Leckie August 6, 2010 at 9:52 am

Here are some quotes for you michael:

“Most of the authors who wrote the history of the conditions of labor under capitalism were ignorant of economics and boasted of this ignorance. However, this contempt for sound economic reasoning did not mean that they approached the topic of their studies without prepossession and without bias in favor of any theory. They were guided by the popular fallacies concerning governmental omnipotence and the alleged blessings of labor unionism.

“… The first duty of a historian is to examine with the utmost care all the doctrines to which he resorts in dealing with the subject matter of his work. If he neglects to do this and naïvely espouses the garbled and confused ideas of popular opinion, he is not a historian but an apologist and propagandist.”

J. Murray August 6, 2010 at 10:07 am

The only reason Ford payed his employees more is so he could undermine his competition by attracting their best workers. It wasn’t out of any goodness in his heart.

michael August 6, 2010 at 10:18 am

Let’s ask Henry Ford to describe his own motivations:

“A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large.”

“A business that makes nothing but money is a poor business.”

And my favorite: “An idealist is a person who helps other people to be prosperous.”

http://www.brainyquote.com/quotes/authors/h/henry_ford.html

Ford wasn’t all mushy-brained about helping humanity. But he did see the practical side. Poorly paid workers were poorly motivated to help the company prosper. Well paid workers contribute to the common good of the enterprise they’re mutually engaged in. They feel a part of the company, and contribute to its fortunes.

It seems sensible enough. In fact, wait a minute! That’s the same exact approach I took with my workforce. I paid them well and expected big things from them.

J. Murray August 6, 2010 at 10:48 am

Look up a term called public relations. You just got suckered into Ford’s version. Ford knew the path to higher profits was higher output. Helping the employees wasn’t on his mind, it was the bottom line. It just happens that a higher salary attracts a more competent and motivated workforce. It’s called a win-win. It wasn’t like Ford up and paid his people more and it just happened to create superior output. If higher salaries generated lower sales and poor profits, then Ford would have cut pay to the workers.

The only reason Ford said those things is because, “If I pay my workers more, I get richer”, looks bad in print.

michael August 6, 2010 at 11:32 am

Undeniably, Ford helped himself by helping others.

You’re having to stretch a bit to twist things so they come out the way you want. Ford could have paid his employees the clearing rate for labor. He chose not to, for a variety of intelligent reasons.

Dave Albin August 6, 2010 at 4:21 pm

The main one being to make a profit – end of story.

Gil August 7, 2010 at 1:02 am

I thought Ford’s motive was to retain the experienced and stop temporary workers and absenteeism. On the other hand, I thought the whole point of the production line was to break a complex task down into sequence of simple tasks. In other words Ford wasn’t looking highly skilled workers just workers who would stay around for the long haul.

Bala August 6, 2010 at 11:07 am

michael,

Good point. Following up on this

http://blog.mises.org/13474/the-class-struggle/comment-page-1/#comment-708915

and the subsequent discussion we had on that thread, you have made an excellent observation that once again demonstrates that government intervention in the free market is the real problem.

” The only trouble was, sheep took up a lot of land. And all England’s land was under the plow, being tilled by the peasants. So the King took title to a sufficient amount of land to satisfy his wants, and evicted them from what was now his property. He then enclosed the land, building fences where there were none before, to establish his ownership and keep out intruders. ”

Thanks for giving this wonderful example that demonstrates that it is after all government intervention in the free market that leaves everyone, especially the vulnerable sections of society, worse off. After all, the king was the government, wasn’t he/ And wasn’t he the one that stole the land that belonged to the peasants?

Great show michael. Keep up the good work of demolishing your own former stand.

michael August 6, 2010 at 11:38 am

A contorted argument. You’ve found two instances of supposed government intervention, one a brazen land grab, that somehow “prove” your case that a government intervention is invariably damaging to the economy.

The land enclosures in England had a stimulating effect, in fact, on the British economy. Previously the land was being worked on a subsistence-and-barter level. After the fact it was being worked at a profit.

But I know you badly want to prove a point. Here’s a third example you can use: the Franco-Prussian War. Did you know that this egregious disruption of a prosperous economy was started by the actions of two governments?

Inquisitor August 6, 2010 at 11:53 am

“A contorted argument.”

That’d be your own.

“You’ve found two instances of supposed government intervention, one a brazen land grab, that somehow “prove” your case that a government intervention is invariably damaging to the economy.”

Not supposed. Actual.

“The land enclosures in England had a stimulating effect,”

Like the Obama stimulus?

” in fact, on the British economy. Previously the land was being worked on a subsistence-and-barter level. After the fact it was being worked at a profit.”

And what would’ve materialised absent these interventions, God?

Gil August 7, 2010 at 1:04 am

Nothing because the intervention to create land shortages thus forcing people to use their land more efficiently.

michael August 9, 2010 at 7:32 am

“The land enclosures in England had a stimulating effect… Previously the land was being worked on a subsistence-and-barter level. After the fact it was being worked at a profit.”

Response: “And what would’ve materialised absent these interventions, God?”

Absent someone intervening to put England on an ownership basis, it would still be a feudal, subsistence economy.

Maybe you can think of this more clearly if I put it this way: the Crown, in forcing the peasants off the land they had traditionally worked and putting it under his sole ownership, was not acting in his capacity as a “government”. He was acting as a business person. Think of the land not as transferring into government control but transferring to private ownership, into the hands of an entrepreneurial individual.

It’s like the Congo Free State, which transferred to the personal ownership of King Leopold of Belgium. It wasn’t transferred to Belgian rule until a number of years later.

Does that make it all better now?

Scott D August 9, 2010 at 8:02 am

“Absent someone intervening to put England on an ownership basis, it would still be a feudal, subsistence economy.”

That conclusion is…imaginative. I really hope you are joking.

Look at China, which for the last few decades has had a steady stream of workers leaving the farms for manufacturing jobs in the cities. No one is throwing them off their land. They are simply going to where the opportunities are better.

Bala August 9, 2010 at 8:31 am

michael,

I am really finding it difficult to control the invective, but you are absolutely horrible. You have the nerve to call a land-grabber / a robber / a plunderer a “business person”.

You a******e….. Robbing or grabbing the property of another is NOT a business transaction. You have some nerve to treat them on par with each other. Buying and selling are voluntary while grabbing land is an initiation of force.

Such statements make me seriously question if you are human at all!!!!

Bala August 6, 2010 at 12:15 pm

michael,

You are blabbering more each time you decide to post.

” A contorted argument. ”

Oh!!!

” You’ve found two instances of supposed government intervention ”

As Inquisitor pointed out, there is nothing “supposed” in these. They are genuine government interventions.

” , one a brazen land grab, that somehow “prove” your case that a government intervention is invariably damaging to the economy. ”

You explained it yourself. You said

” During the century 1530-1630, half of England’s peasants were thrown off the land in this manner. Penniless and destitute, they wandered into the cities in search of sustenance, forming the first underclass: beggars, vagrants and ne’er-do-wells. There were few options, as jobs as we know them now were all but unknown.

A few were taken into family businesses as tradesmen’s apprentices. The rest became pickpockets, drunkards, prostitutes and the like. Some were given alms while others went to the poorhouse, to work off the lot their God had granted them. Or to the gibbet. ”

So, here is a case where you have yourself demonstrated once more how government intervention left a lot of people worse off than they were before. From being on “subsistence farming”, meaning that they were at least able to support themselves and their families, they were down to being “beggars, vagrants, ne’er-do-wells. pickpockets, drunkards, prostitutes and the like”, meaning that they were unable to support even themselves, leave alone their families.

” The land enclosures in England had a stimulating effect, in fact, on the British economy. Previously the land was being worked on a subsistence-and-barter level. After the fact it was being worked at a profit. ”

Of course the thief profits in the transaction, especially if he does not get punished for his crime.

” But I know you badly want to prove a point. Here’s a third example you can use: the Franco-Prussian War. Did you know that this egregious disruption of a prosperous economy was started by the actions of two governments? ”

This is where your blabbering is obvious. In any case, all war is a curse brought upon mankind by governments. Death and destruction is all they bring.

Old Mexican August 6, 2010 at 11:24 am

Re: Michael,

I think he’s saying that the enlightened industrialist emulates Henry Ford, by paying his workers enough to enable them to buy the products a fully industrialized society is capable of producing.

There must be something wrong, as my salary is not great enough to buy a cement clinker kiln. And society does produce such things, don’t be wrong.

Their purchases complete the circle begun by the accumulation of capital and the building of engines of production.

It’s not a circle, Michael – that’s a Keynesian misconception.

Magnus August 6, 2010 at 12:36 pm

The “paying workers enough to buy the product back” argument is as thin as toilet paper, only less useful.

What about factory workers that produce soda? Are they paid enough to buy the product they produce? Most employed people I know of can afford to buy a soda. Does that really compare to a worker who builds ocean liners? Are ocean-liner-building employees supposed to be paid enough to buy ocean liners?

Michael A. Clem August 6, 2010 at 12:47 pm

Ha! Beat you to it… ;-)

Michael A. Clem August 6, 2010 at 11:55 am

The Industrial Revolution didn’t need cheap labor–it needed labor, period. It’s hard to say how much was fortunate circumstance and how much was deliberate effort on the part of early capitalists. As Mises pointed out, many factory owners failed and went out of business.
On the other point, what does it mean for an employee to be able to afford the products produced by his company? How does one actually factor in the wages, the product, and so forth. Someone working at a soft drink bottling plant will find it quite easy to “afford” to buy a bottle of pop. Do they deserve less pay than someone working at an automobile manufacturing plant, since an automobile is much more expensive than a bottle of pop? Perhaps someone could trot out some kind of percentage or such for labor, but it seems obvious that the value of labor to the employer is not in direct proportion to the value of what is produced. Thus, the old saying that labor should be able to buy the product produced is essentially a meaningless statement.

michael August 8, 2010 at 10:39 am

You purposely misunderstand the argument. When we say that labor should be able to buy the products it is capable of producing, we don’t mean in microcosm. We mean that the totality of income earned in production should equal something like the productive capacity of industry. Because only in such a case can industry be made to run at full capacity.

Why shouldn’t an increasing share of gross receipts go to the investors instead? Because they tend to have accumulated more money than the workers. Thus less of the money entering that stream re-enters the economy as purchases, and more as speculative investment. Workers tend to have lesser stores of wealth, and spend more of their income directly on purchasing products. (Not just the products they make, obviously.)

Thus they help raise the bottom line of profit-oriented companies, a category in which investment capital is distinctly no benefit. It helps profitability not at all.

The faithful have no good answer to this direct and obvious conclusion. I note with enjoyment their deployment of the various arguments proffered, about soda bottlers and cement kilns. They are a distraction away from the point.

These sorts of spurious arguments make me think the proponents are not actually business people, engaged in commerce, but instead people who trade in stocks and bonds, instruments that can be gamed to one’s advantage by people not directly involved in production.

Donald Rowe August 8, 2010 at 3:55 pm

Michael,

You are 100% correct in your description of the problem, that of workers [in the aggregate] not being able to buy the products [in their aggregate] when more of the money flows to the capitalists. But you are assuming a static, circular flowing economy, in which some of the money is drained away, by the rich owners, with each new revolution. If we actually had that static economy, you could go to the head of the class. Well, not really, unless we ignore entropy. There is no perpetual motion machine. If none of the money flowed to the investor/capitalist, the production/consumption cycle would still run down due to the natural forces of slowing down, wearing out, and breaking down of those production processes, and the fact that, well, consumption occurs, after all that is what we want in the first place. Effort must be expended to overcome entropy, and in incrementally greater relative amounts, due to the depletion of raw resources. Yes, effectively, labor cannot buy its product, and the gap will only get wider with time. The sucking up of the profit by the owner/investor/capitalist simply hastens the death spiral, as you have noted. But…

You failed to account for change. Everything changes, and change is never altogether predictable.

The death spiral is avoided (perhaps only temporarily, I will grant, but as the man said, in the long run we are all dead) only by the means of the input of an excess of labor. Yes, excess labor, more work. If the excess work just equaled the loss due to entropy, then we would see your static economy, but it would still be in the death spiral. More and more labor input would be required just to keep even. Additional input of excess labor, over and above the minimum to maintain production accounting for loss due to entropy, can be converted to increased production, decreases in unit cost of production, or even production of better alternatives altogether. But the process is very complex. There is no single flow chart, but if there were one it would look approximately like this:

Excess Labor Input —> profit —> capture of profit by owner/investor/capitalist —>
some of the profit spent for personal pleasure and some spent on improved production.

My point is that without the excess labor input there can be no increased efficiency in production. Somebody must pay for it. It really is that simple.

If you advocate for the profit from the excess labor to accrue to the government and the government then provide the innovation, them you must logically fall into one of two categories. Either you believe the government structure is a more effective mechanism than the system of many private internally motivated individuals are. Or else you, or your friends, are the beneficiary of government largess. Translation, if you receive *any* money from any government. If the second applies, then it would be honorable of you to disclose that fact.

If the first category is operative, then it is incumbent upon you to present credible arguments, first to the validity of that conclusion, and second to explain why there exists a vast discrepancy of accountability between the two systems of innovation. Failure in the one leads to pain and disruption for the actor, and in the other failure leads to pain and suffering of the masses, but not so much for the individual actor.

Cordially,
Don

michael August 9, 2010 at 8:06 am

Thanks again for engaging, Don. You’re right. Money obeys a circular flow only to the degree that it travels from one hand to another in a mythical small town of yesteryear. The baker sells his rolls to the barber, who uses money he earns cutting the policeman’s hair. It all recirculates in the town, except for the sum they pay the federal government in taxes.

And if the federal government returns the money in the form of federal salaries and services, the circle is complete. Like a koi pond whose production of plant life equals the consumption rate of the koi, while the koi’s production of waste equals the plants’ requirement of organic matter. The pond, when in balance, never needs cleaning or replenishment.

But that’s not what we have. Every dollar we spend at WalMart, to use the prototypical example, goes directly to Bentonville, Arkansas… other than the small sums going into the paychecks of the local employees. Corporate profit from every product we purchase is drained from the consumer economy. So in our economy there is a malfunctioning circular flow. A portion of the money we exchange for nearly everything we wage earners buy gets circulated upward and away from our hands.

So long as we still have a job, everything’s okay. Of course if the job pays so poorly we have to borrow to meet expenses we build up consumer debt, debt that in time accumulates to the point it can no longer be serviced… but in time these people conveniently fall out of the system and cease to be viable participants in the economy.

What is beyond controversy is that as corporate profits go up, less of our total available cash remains at the bottom– the world of the labor pool. And under such a system, assuming that consumer credit is not extended indefinitely and without limit, the economy must contract. Because the base supply of money from which most profits are formed (that is, income derived from wages) grows steadily smaller over time.

So under your ideal system, well described in your post, the contribution labor must pay toward the continuing accumulation of more and more capital, must in time run out. Labor will be tapped dry.

This is exacerbated by continuing economies of production, whereby fewer and fewer expensive human labor units will be necessary to support the machine… and more and more mechanical labor devices will be used, as they can be purchased and installed just once, and maintained over a long lifetime with no additional cost other than the occasional squirt of oil.

So in the future, the endgame of the capitalist economy will be a world in which the only consumers left will be the investor class. The labor class will have become all but extinct (we’ll still need a handful of drones to grease the mechanism).

I do not advocate that the profits accruing from jettisoning this “excess labor” adhere to government, unless they are used as welfare, to keep this excess of humanity from starving to death. Nor am I happy with allowing them to accrue to ownership, as this only means the sum total of humanity’s production of wealth is then confined to the enjoyment of a very small segment of humanity.

The problem I would like to see solved is the distribution of essential goods to all of humanity (the socialist prime goal) and the distribution of bonus goods to be allocated on a merit basis (the capitalist prime goal). That would be at the one end of the scale humanitarian, and at the other end competitive and productive.

That and birth control. It’s not going to become any easier in the year 2040, when we top out at nine billion angry people, all fighting one another for survival in a behavioral sink.

A refutation of this development model would involve our transition into an economy consisting of nine billion independent capitalists, all entrepreneurial or able to live off their investments. Realistic?

Donald Rowe August 9, 2010 at 1:19 pm

Michael,

Thank you for your reply. I admit that when I posted that comment I was tired and did not give it the scrutiny it deserved. I am afraid that its presentation may lead to misunderstanding of the essential points.

Allow me to try again to explain them in a slightly different manner.

First, the economic death spiral. Our hunter/gather ancestors had no money so there was no ‘flow’ circular or otherwise. They also enjoyed the entire fruits of their labor. I don’t presume to know what form of government, if any, they used. They didn’t become nomadic only because of itchy feet. The ‘hollow gut syndrome’ played a large part. Local resource depletion forced the striking of the tent and relocating. Over and over again. Remaining on exhausted hunting grounds would have led to the death spiral. That a move must happen became obvious to even the numbest neanderthal. More work was required.

That is what I mean when I say that all economic systems are in the death spiral, whether the participants are aware of it or not. It is only by means of the application of innovative change that the actual extinction can be averted. The ‘cost’ of innovative change can be measured in the amount of effort that is required. The effort to change ratio is far from linear across all efforts. That is, some change may occur with little cost and another change may take years of effort by nearly everyone. How this ‘cost’ is distributed is irrelevant to the point that extra effort *is* required. How much innovative change is enough to forestall the death spiral is, and will remain, a big unknown.

With the division of labor and the discovery of money, the necessary change was no longer confined to packing up and moving. These things allowed some of the people to devote some of their time to mental activities that could result in heretofore unknown options for change, and thus keep one jump ahead of the death spiral. Fast forward to today, and we still need to keep ahead of the same death spiral. We find that we conveniently have at our disposal the tool of *money*. With trade, money flows. Only when there is an excess of labor, (effort, work) done can there be any profit, (money not needed to sustain the status quo). This profit, (in the form of money) tends to be collected by the more adept among us, (competent, ruthless) and it serves to leverage, (increase, augment) the effects of their actions. Consequently, the result of *their* actions have more impact on the unfolding of the future.

For the purpose of avoiding the economic death spiral it is totally irrelevant from where the change comes, either privately or from a government. It only matters that the change is sufficient. For any single idea for innovation it is not possible to determine solely by its source whether it will be useful or not. After all do not all ideas ultimately come from the same place.

*** Do not construe this to mean that government solutions are otherwise equal to private ones. They are clearly not equivalent but *that* is not the issue here. ***

Second, that socialist/capitalist divide concept, it really must die. Just like your notion of the flow of money being jammed up against the borders of countries, the socialist/capitalist divide is not helpful. Socialist claim the humanitarian high ground, but it is a hollow claim. Every humanitarian plan implemented thus far in history to ‘distribute the wealth’ has led to the death spiral. They are all based in the denial of human nature, the denial of reality. You yourself cannot claim to deny knowledge of this simple fact. You have stated that you, as a businessman, paid your employees above the going rate to increase their productivity. Check me if I am wrong, but I suspect that you did this by increasing the amount of money they were able to take home in their paychecks. Would it not be more in keeping with your philosophic beliefs if you had donated that same amount to charity in the names of your employees, as a ‘special humanitarian bonus’? After all, were they not already living a better life style than the unwashed multitudes. But you did not do this because only a fool would think for more than a second that it would serve to boost the morale or productivity of those employees, and that was your actual goal not humanitarianism. No one here thinks you are that foolish. But it most certainly is foolish, if not outright stupid, to do the same thing again and again and to expect the result to be different *this* time. While I can appreciate your concern, (distain, disgust) about the potential effects of capitalism, it really is past time to discard ideas that have been tried repeatedly and have failed every time. What is needed at this point is a bit of new understanding so this artificial polarity can be discarded as well. And the need for new innovative ideas should, I think, be plainly obvious.

Your fear of capitalism is hampering your rationality. Your conclusions are based on speculation, not fact, as are the conclusions that socialism actually fails in practice, every time. As you look around, with you real eyes, anywhere in the world, you can see the effects of capitalism, and they are not what you can describe as unmitigated disasters, like socialism. Sure there are the very wealthy, enabled to be so by the capitalist system, but there are very many others who are in fact much better off than they would have been under socialism. The capitalist system employs the real world human trait of trying to create a better, (easier, more comfortable) life for oneself and one’s family in a fashion that leads to greater production of innovative ideas. And the capitalist system uses, (allows, does not destroy) the wondrous benefits of feedback, both positive and negative, that socialism rejects. Curiously, the unintended side effects of capitalism actually come closer to actually achieving the stated goals of socialism than does the direct effects of actual socialism. Go figure.

I do *not* mean that your fears are entirely unfounded, just that they are not *yet* realized. You may be right, I do not claim to know the answer to that. But there is, (are) other options, some not yet available in the popular literature. I will have more to say about this in the letter. Let me apologize in advance in case the world ends before it is ready.

Cordially,
Don

If this is still not clear, I fear that letter will need a rewrite.

Michael A. Clem August 9, 2010 at 9:42 am

I’m sorry, you’ll have to explain this to me. Why assume that only workers are making purchases? Investors don’t purchase things? Retirees, students, etc? And what’s this aggregate stuff really mean? Are you relying on neo-classical or Keynesian equations for this proportional statement? I don’t see the causality or necessity of this relationship. How do you determine “full capacity”? Businesses obviously need customers, but who the customers actually are can vary greatly depending upon the product/service provided, and the target market. I just don’t see a neat and easy equation that relates production income to productive capacity, or how that’s supposed to relate to the profitability of a company.
This completely ignores the individual worker or the subjective value of the product/service being provided.

Abhilash Nambiar August 6, 2010 at 9:08 am

Hugo Chavez are you reading any of this. Use google translate if needed and please start reading.

michael August 6, 2010 at 10:11 am

Boy, just try to say something nice about a guy…

I’ve been looking for a while now for one of the Great Masters to say something I can see the sense in– because everyone here just tells me I’m not even reading the articles or following the reasoning. So Mises says something like this:

“The truth is that economic conditions were highly unsatisfactory on the eve of the Industrial Revolution. The traditional social system was not elastic enough to provide for the needs of a rapidly increasing population. Neither farming nor the guilds had any use for the additional hands. Business was imbued with the inherited spirit of privilege and exclusive monopoly; its institutional foundations were licenses and the grant of a patent of monopoly; its philosophy was restriction and the prohibition of competition both domestic and foreign. The number of people for whom there was no room left in the rigid system of paternalism and government tutelage of business grew rapidly. They were virtually outcasts. The apathetic majority of these wretched people lived from the crumbs that fell from the tables of the established castes. In the harvest season they earned a trifle by occasional help on farms; for the rest they depended upon private charity and communal poor relief. Thousands of the most vigorous youths of these strata were pressed into the service of the Royal Army and Navy; many of them were killed or maimed in action; many more perished ingloriously from the hardships of the barbarous discipline, from tropical diseases, or from syphilis.Other thousands, the boldest and most ruthless of their class, infested the country as vagabonds, beggars, tramps, robbers, and prostitutes. The authorities did not know of any means to cope with these individuals other than the poorhouse and the workhouse. The support the government gave to the popular resentment against the introduction of new inventions and labor-saving devices made things quite hopeless.”

..and I say I agree wholeheartedly. The guy’s right. But it still doesn’t satisfy anyone.

Back to Mises:

“The factories freed the authorities and the ruling landed aristocracy from an embarrassing problem that had grown too large for them. They provided sustenance for the masses of paupers. They emptied the poorhouses, the workhouses, and the prisons. They converted starving beggars into self-supporting breadwinners.

“The factory owners did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work for the wages offered to them. Low as these wage rates were, they were nonetheless much more than these paupers could earn in any other field open to them. It is a distortion of facts to say that the factories carried off the housewives from the nurseries and the kitchens and the children from their play. These women had nothing to cook with and to feed their children. These children were destitute and starving. Their only refuge was the factory. It saved them, in the strict sense of the term, from death by starvation.”

Again, I totally agree. What is your problem?

The only thing I suggest, leading so many of you to breathless paroxysms of rage, is that the wages of these factory drones become demand, justifying the manufacture of consumer items. Is that so controversial as to never be admitted, not even in private?

Without customers, you don’t have a business. I don’t care how good the product is. You need someone who (a) wants to buy it and (b) has some cash. It follows that the better paid they are, the more cash they have and the more profit can be made from their commerce. Both in numbers of product sold and in possible sale price per item.

That’s what my business background has told me. When you identify a demand without a supply, you have opportunity. You can create supply.

But when you have a supply with no demand, you’ve got nothing. Liabilities you can’t satisfy. A failed enterprise.

Inquisitor August 6, 2010 at 10:16 am

TBH the problem is you’ve no understanding of texts you read. You probably skim read them searching for things to bitch about, come off looking like a clown when you’re disproven utterly and rinse-repeat this formula for EVERY article. Are you surprised? Do the world a favour, shut up, learn, then come and comment. As it is, you’ve the air of an arrogant prick.

michael August 6, 2010 at 10:28 am

1. I’ve read the article pretty closely. Twice, in fact.

2. Disproven utterly? Explain to me again how useful production is not dependent on a customer base. That all you need to do is produce something and watch the world beat a path to your door.

Use as your example the Segway. It’s a game-changer. Why, it creates its own demand.

3. I would think I’d disproved your contention about my just searching for something to bitch about in this very thread. What I’ve been doing is instead searching very hard for something worth praising.

4. What is TBH? Can you provide a translation?

Jon Leckie August 6, 2010 at 10:45 am

To Be Honest michael, no one owes you any explanation. If you don’t understand the arguments made by Austrians against demand side economics, go and read (or reread – but properly this time) Say, and Mises, and Hayek and any of a dozen contemporary writers posting on this site (like Kel Kelly’s book reviewed yesterday for Christ’s sake!), get inside of and understand their positions. Know thy enemy! Then explain why they’re incorrect and your pig-headed demand side bullshit is the way forward. I would be really interested. Until then, why people should continue to invest energy in discussing these points with you when you are demonstrably incapable of doing anything other parroting your bullshit is beyond me. End point: we know what you think. We get it. We’ve heard it all a thousand times before. Why don’t you invest some energy in understanding the opposing arguments? In fact, don’t answer, I can’t be bothered, I’m sure you’re completely correct, 100% innocent and mises.org is populated by a bunch of stupid ignorant pricks. But hey – don’t quote me on that, ok?

michael August 6, 2010 at 11:50 am

I understand the arguments, Leckie. They just make no prescriptive sense to a businessman. Maybe they make sense to an academic, but how useful is that?

When you have product but no customers you lose money. When you have potential customers but no product, you have opportunity. You can make the product to suit the need. Figuring this out is not rocket science.

“I’m sure you’re completely correct, 100% innocent and mises.org is populated by a bunch of stupid ignorant pricks.”

I wouldn’t say that. At least not the part about being stupid or ignorant. You all seem quite versed in the theory, not to mention relentlessly logical… just not very widely experienced in actual commerce.

How would I characterise you (pl.) generally? I think you’ve gotten carried away with the elegance of the theory to such a degree that you think it’s a universal explanation of economic behavior. And it’s very far from being that.

I also think you might benefit greatly from a brush-up course in critical thinking skills. You don’t “prove” a theory by looking for and finding instances where it seems to fit. You attempt to disprove it by looking for countervailing evidence. And if you’re unable to find such, you can then tentatively consider the theory “not yet disproven”. That’s how the scientific method proceeds.

Inquisitor August 6, 2010 at 11:56 am

“I understand the arguments, Leckie. They just make no prescriptive sense to a businessman. Maybe they make sense to an academic, but how useful is that?”

Here we go with the sneering arrogance again. Please tell me, what strawman are you blowing hot air against this time???

“just not very widely experienced in actual commerce.”

Says you.

“How would I characterise you (pl.) generally? I think you’ve gotten carried away with the elegance of the theory to such a degree that you think it’s a universal explanation of economic behavior. And it’s very far from being that.”

Says you.

“I also think you might benefit greatly from a brush-up course in critical thinking skills. You don’t “prove” a theory by looking for and finding instances where it seems to fit. You attempt to disprove it by looking for countervailing evidence. And if you’re unable to find such, you can then tentatively consider the theory “not yet disproven”. That’s how the scientific method proceeds.”

Says you.

There is not a single argument there. Just a string of veiled ad homines arguments, pure assertions and ignorance of the Austrian method. Frankly, why should anyone pay you heed? It’s revealing that “says you” suffices to describe the basis of your arguments…

Jon Leckie August 6, 2010 at 11:58 am

1. You quoted me. Out of context. What a surprise.2. Don’t assume who’s in business and who isn’t. I was a corporate/finance lawyer before being poached by my current employer, a start up of all things. I might just have more practical experience of the business world than you. Or I might not, who knows.3. Don’t patronise me, you tool. You’re just a trolling, self-absorbed, pretentious git. I think you’re only in it for the attention. You’re clearly not here to learn. So that’s my last post to you. I really should get back to work anyway.

Richie August 6, 2010 at 12:17 pm

I’ve said it before and I’ll say it again: the more you engage this piece of crap troll, the longer he stays. He is not worth the time.

Richie August 6, 2010 at 12:21 pm

“You all seem quite versed in the theory, not to mention relentlessly logical… just not very widely experienced in actual commerce.”

Yes, and Paul Krugman, Brad DeLong, Galbraith, and all of the other Keynesian intellectuals that you love are VERY experienced in “actual commerce.” Fall off of a cliff you hypocrite.

htran August 6, 2010 at 4:32 pm

“When you have product but no customers you lose money. When you have potential customers but no product, you have opportunity. You can make the product to suit the need. Figuring this out is not rocket science.”

That’s the market telling you to not make the product anymore. Why should the government step in to make sure the product must be sold at all? This is inefficient.

BTW, I’m glad you are here. I haven’t counted, but I’m sure blog post counts have been up since you’ve arrived.

michael August 9, 2010 at 8:21 am

“Don’t assume who’s in business and who isn’t. I was a corporate/finance lawyer before being poached by my current employer, a start up of all things. I might just have more practical experience of the business world than you. Or I might not, who knows.”

Not many professions could be further from the world of ordinary commerce than the one you inhabit. Your view of the economy is utterly different than the one from where I sit. And I’ll grant you’ve had deeper experience of the upper financial sphere. While I have my grounding in the world of paychecks and expenditures.

What I’ve been attempting to discuss here is how to develop models that nourish both aspects of our economy. And the majority of the people flaming me back have only been interested in theorizing that the only thing of importance is capital accumulation– a clearly self-serving view. They don’t want to hear about anything else.

Now it seems to me that the one area of our economy that’s flush with cash and getting better all the time is capital accumulation. Is there really such a shortage of investment capital that you’ve a need to get so worked up about it?

Meanwhile on the bottom of your equation is just those boring old millions of families, increasingly being left out of the model as extraneous to its profitability.

That’s my point. I know it rankles you to be told you should consider sharing the lifeboat with someone else. But the need is here.

Jon Leckie August 9, 2010 at 10:20 am

Just more of the same gobble-de-gook michael, just errant, arrogant nonsense. You’re not half as clever as you think you are. You shift the goal posts and change the issue on each post, just waffling and babbling away. No wonder you had to pay your workers so highly, I doubt you could afford to do otherwise being such a prat.

You’re an idiot, a silly little self-satisfied patronising and condescending fool of a man.

michael August 9, 2010 at 10:28 am

Jon, I’ll have to say– your comment is a little short on specifics.

As for pay, when I was paying my labor minimum age I found very few who were worth it. But when I was paying 2-1/2 times that amount I found it easy to procure good help.

Jon Leckie August 9, 2010 at 10:34 am

No thanks, douchebag, I’m not engaging in your games. Your head’s too far up your own arse for there to be any hope of sensible engagement with you. I’d really like you to consider this though: you’re an idiot. Truly. A really stupid little man. Good bye.

Michael A. Clem August 9, 2010 at 10:37 am

And the majority of the people flaming me back have only been interested in theorizing that the only thing of importance is capital accumulation…
All parts of the economy are important–it is a holistic view. But our main point has been that only through capital accumulation can productivity be increased. Increasing wages won't do it, finding new customers won't do it. Even increasing profit and profitability won't do it.
Now it seems to me that the one area of our economy that’s flush with cash and getting better all the time is capital accumulation.

Flush with cash, yes, but is it really capital accumulation? The point of the ABCT (Austrian Business Cycle Theory) is that printing and loaning more money is NOT capital accumulation, since no actual wealth is involved in this process, just an inflation of the currency.

Russ the Apostate August 9, 2010 at 10:42 am

michael wrote:
“And the majority of the people flaming me back have only been interested in theorizing that the only thing of importance is capital accumulation– a clearly self-serving view. They don’t want to hear about anything else….”

Capital accumulation is a huge concern to labor; it’s not just selff-serving. It’s what allows laborers to be able to make decent money, instead of having to live bare subsistence lives. But you don’t want to accept this, because it runs counter to your snake-oil nostrums. All you want to hear about how redistribution will stimulate demand, as an excuse for giving people handouts.

“… I know it rankles you to be told you should consider sharing the lifeboat with someone else. But the need is here.”

I know it also rankles to be told that when your heart tells you that something is the right thing to do, that your heart is mistaken.

It is horrible that some people have been unemployed for very long terms, through no fault of their own. I don’t think it’s a good thing, either. But your simplistic solution, redistributing money from the rich to the unemployed, is not the proper fix. It treats the symptoms of the disease, but it makes the disease itself worse. It’s like a man stranded in the winter cold, drinking from his flask of whiskey to keep himself warm. It may make him feel less cold, but it also makes him more likely to die from the cold.

Donald Rowe August 6, 2010 at 10:52 am

Acronym Definition
TBH To Be Honest
TBH The Burning Crusade (gaming, World of Warcraft)
TBH To Be Hired
TBH The Black Hand (online gaming guilds, band)
TBH Top Bar Hive (bee hives)
TBH Teddy Bear Hospital (project)
TBH The Big House (Michigan Wolverines)
TBH The Back Horn (band)
TBH Tyramine Beta Hydroxylase
TBH Tablas, Philippines (Airport Code)
TBH Temple Beth Hillel
TBH The Brother Hood (gaming clan)
TBH The Big Heavy (Boston, Massachusetts band)
TBH Total Body Hug
TBH Temple Beth Haverim (Agoura Hills, CA)
TBH Test Bench Harness
TBH Tribe of Ben Hur (fraternal organization)
TBH Tight Binding Hamiltonian (physics)
TBH That Blasted Hound (California band)
TBH Technical Basis for Harmonized Conformance
TBH The Bloody Heathens (band)
TBH Tirkkonen-Boariu-Hottinen (modulation scheme)
TBH Texas Bowhunter (online forum)
TBH Thomas Barnardo House (orphanage in Nairobi, Kenya)
TBH Text Back Hun (texting slang)
TBH Team Bavarian-Heaven eV (gaming group)
TBH Tracey Brunstrom and Hammond Group (Australia)

Jon Leckie August 6, 2010 at 10:52 am

Holy cow!

michael August 6, 2010 at 11:55 am

I’m, like Totally Boggled, Hombre.

Jay Lakner August 9, 2010 at 9:19 am

The Burning Crusade (World of Warcraft) is TBC, not TBH.

Peter Surda August 9, 2010 at 9:25 am

I wanted to say the same thing, but before hitting submit I decided it was too silly. Besides, it’s old. Now we have WoTLK and soon, Cataclysm.

Jay Lakner August 9, 2010 at 10:54 am

I’m curious about Cataclysm.
I’ll probably go back and play WoW for a month after it comes out just to see what they do.

(Actually, to be honest, I might start playing for a few weeks before it comes out and turn all my gold into things that I think will keep their value … Then convert them back into gold again after the post-expansion inflation surge settles down.)

(Yes I do realise I am a nerd)

Peter Surda August 11, 2010 at 5:08 am

For Austrians, the introduction of goblins, having racial traits revolving around gold sounds like a reason to try out Cataclysm once it’s out :-)

J. Murray August 6, 2010 at 11:06 am

The problem is that you’re picking and chosing quotes without considering the full work. I could easily find quotes in the Communist Manifesto that promotes a free market system, but only if I engage in a lie of omission. What you’re attempting to do is attribute the Labor Theory of Value to Mises when he is clearly a proponent of the Marginal Theory of Value. Simply paying people more wasn’t why the Industrial Revolution stole workers from the agricultural sector, it was the overall output that generated it, which lowered the costs further below the point of marginal value, leading to increased sales.

Increasing wages doesn’t necessarily lead to greater output. You can pay your employees $1 million a year each but that won’t lead them to generating revenues in excess of that salary point. In absence of any capital improvement that would increase your employees’ productivity 20 fold (assuming an average $50k/year salary), their salaries are stuck at that point in hopes that overall supply of what you provide declines or you are successful in lobbying government to create regulations that are friendly to your business operations and detrimental to your competitors.

Further, you conflate Mises as promoting a circular economic system, where money is what counts and simply increasing the amount of it in circulation leads to better things. It is not only possible, but a major feature of a free market system, where salaries remain static and even decline while increasing the quality of life. It’s not a matter of how much money you make, but how far it goes. If your salary doubles yet prices increase four fold, you’re worse off despite making more money. Again, this falls into the diminishing returns on salary. Productivity and salary isn’t on a linear scale, once a salary point is reached, you simply won’t generate new revenue beyond that point to justify the salary increase, that’s the 1:1 ratio point, after which, $1 in additional salary generates less than $1 in additional productivity, which you well know is a bad move. Never pay someone more than they can produce.

Where the free market functions is that the productivity industry wide increases over time through capital improvement (that thing that taxes, government borrowing, and newly printed money destroy), meaning to keep the salary the same, the productivity has to increase to offset the declining market price of the product. If prices decline due to productivity by 15% and you cut your employees’ salary by 10% to represent their relative decline in productivity compared to the market around you (because your profits you would have used on capital investment to keep up with the Joneses was taxed away), you still gave them a 5% nominal raise.

Ultimately, you have the whole equation backwards. Salaries don’t drive productivity, productivity drives salary. If simply increasing pay led to increased productivity then everyone would be filthy rich with multi-million dollar salaries for low-end wrench turners. But no matter how much you pay that wrench turner, he can only turn that wrench so many times in a day, so adding more to the paycheck won’t do anything but kill your business profits, profits you need to reinvest to remain competitive.

Jon Leckie August 6, 2010 at 11:14 am

The problem, J Murray, is that such a post as yours comes through to michael like this:

“Blah blah blah DEMAND SIDE blah blah blah blah blah”.

There’s no point in interacting with him. Like I said, he just needs to relax, stop posting, read carefully and then THINK. He needs to go back to basics, and really examine the arguments made by Austrians. If he then has considered, genuine problems with the foundational principles, they can be set out on this site and I for one would be extremely grateful because I want to examine my own biases and preconceptions, without mercy, to the extent possible. Such a process must be a dialogue because the Socratic maxim is a goal never achieved. Until that day arrives though this guy must be the biggest bore to ever grace this site.

michael August 6, 2010 at 12:18 pm

JM: “The problem is that you’re picking and chosing quotes without considering the full work. I could easily find quotes in the Communist Manifesto that promotes a free market system, but only if I engage in a lie of omission. What you’re attempting to do is attribute the Labor Theory of Value to Mises when he is clearly a proponent of the Marginal Theory of Value.”

No, you’re attributing to me a trait that I see running through the entire forum but have not myself committed. That’s taking a specific comment or shred of information and inflating it into a universal statement of ‘fact’, applicable in any context. Not what I’m about, bro.

Here’s what I actually said:

“I think he’s saying that the enlightened industrialist emulates Henry Ford, by paying his workers enough to enable them to buy the products a fully industrialized society is capable of producing. Their purchases complete the circle begun by the accumulation of capital and the building of engines of production.”

Just that. Invention plus capital leads to the physical means of production. But one then needs labor (to operate the wheels of production) and clientele (customers for one’s product).

The subject of the impact of industrialization on the fortunes of the 18th century rabble is a target-rich environment. You can make any number of statements about it. I chose, for brevity, to make the single one above.

To be sure, Mises is a very wordy fellow. He has made any number of other statements.

2. “Further, you conflate Mises as promoting a circular economic system, where money is what counts and simply increasing the amount of it in circulation leads to better things.”

Nothing could be further from the truth, although I did imply that Mises was endorsing the increased utility in having more people with more money to spend. You’ve attributed an incorrect conclusion to me, one I never made. Simply increasing the amount of money in circulation, everything else being the same, will only lead to price inflation, neatly “proving” your point.

But everything else isn’t the same. Rising wages (that is, putting the same amount of money into a greater number of pockets) leads to increased buying power. So if one’s object is to translate a greater capacity for production into better sales, it’s a goal to be sought.

Or perhaps you might respond that a hundred laborers with pay in their pockets can buy no more potatos than can a single proprietor, with that same sum in his pocket. Which would be mathematically correct but absurd. He would be unlikely to stimulate potato sales to the degree that his employees would.

If one is in a field where one doesn’t need many customers (say he makes muskets for the British government) he’d better serve himself by paying his help as poorly as possible, and letting all the gains their labor plus his capital creates (notice my allusion to the Labor Theory of Value) accrue to himself.

Of course he then might be liable to employee theft, sabotage and discontent. It’s a tradeoff that can’t be put into precise economic terms, but should definitely enter the proprietor’s consideration.

That would be my take on it.

michael August 9, 2010 at 8:25 am

“Ultimately, you have the whole equation backwards. Salaries don’t drive productivity, productivity drives salary. If simply increasing pay led to increased productivity then everyone would be filthy rich with multi-million dollar salaries for low-end wrench turners. But no matter how much you pay that wrench turner, he can only turn that wrench so many times in a day, so adding more to the paycheck won’t do anything but kill your business profits, profits you need to reinvest to remain competitive.”

Here’s an approach: fire your wrench-turner. Install a torque machine. It’s much more precise, and only needs to be purchased once.

When all the competition follows your lead you’ll have solved the labor problem: no labor.

That way you can produce all you want, and fill the shelves with your goods. As can your competition. Fuller and fuller… and when the shelves threaten to break, someone can just build more shelves to hold the stuff.

Circular flow of money be damned! All you need is production and more production.

Russ the Apostate August 9, 2010 at 9:08 am

What a coincidence! I am uniquely qualified to talk about this particular topic. I used to work for a company that made machines to automatically align wheels. This involved, among other things, replacing labor with torque machines!

1) Torque machines still need to be monitored, operated, and serviced, by humans. They may indeed temporarily unemploy some people; probably UAW people that get paid $28/hour for turning a wrench. (Yes, that’s $56,000/year, not including overtime, for manual labor involving no skill whatsoever. That’s a real number; at least it used to be, before the recession hit.) Anyway, the remaining laborers can now make more cars per person per hour with the torque machines than they did before without them. This added productivity means that they will eventually be able to get even more pay. After all, how did you think that the auto companies could pay people $28/hour for manual labor, and not go out of business? It’s because the automation that they have amplifies the productivity of their labor pool such that they can still make a profit, while paying such exorbitant rates for labor. (It’s the pensions and healthcare that are crushing them.) Without automation, the common laborer would be living at a 19th century standard of living, at best.

2) Torque machines and other automation also provide jobs. It takes people to design them, build them, program them, install them, service them, replace them, etc.

3) Torque machines don’t need to be installed only once. They break down, they need to be refitted to adjust to new models of product, etc.

4) Let’s say that we one day arrive at the science-fiction-like ability to have all our menial labor done by robots. Let’s say, like the ones in “I, Robot”, except they don’t want to kill us all and take over the world. Anyway, what would this mean? It would mean that anybody who owns a robot could hire it out, have it mindlessly slave away and earn money, which the owner could live off of while spending all his days fishing, or writing that novel, or figuring out how to quantize gravity, or whatever. Yeah, that sounds horrible.

Old Mexican August 6, 2010 at 11:30 am

Re: Michael,

Explain to me again how useful production is not dependent on a customer base. That all you need to do is produce something and watch the world beat a path to your door.

That’s how the personal computer revolution started, Michael. There was NO customer base when the first units were being offered through magazine advertisement. The decision to begin producing them was NOT dependent on a customer base, but based on a FUTURE customer base.

michael August 6, 2010 at 12:26 pm

That would be consistent with the way I put it, Mex, albeit in different terms.

When you have a need but no product, you have opportunity. You then provide the market with something they possibly never even realized they needed. Not until you placed it in the store.

It’s called invention. And elsewhere I’ve been derided for championing that same innovative process.

(The inverse of that rule is that when you have a product but no market for it, you have a failed business plan.)

Old Mexican August 6, 2010 at 4:21 pm

Re: Michael,

That would be consistent with the way I put it, Mex, albeit in different terms.

I don’t think so, Michael. Your comments indicate to me that you favor the circular flow of capital that people like Paul Krugman favors: Consumers spend, producers use money from consumers to produce, consumers spend, producers use money to produce, and so on, like a merry-go-round.

You will find a refutation of this idea here:http://mises.org/daily/3194

Also, it totally refutes the idea that wage leves must be contingent to the overall level of production of an economy. Wage levels are set according to OUTPUT, not purchasing power.

michael August 8, 2010 at 11:50 am

OM: In light of the many suggestions that I should address the arguments of the Austrians, as opposed to just repeating my own, I will do so here. By reading your proffered http://mises.org/daily/3194, which discusses the balance between public good and private virtue.

Krugman writes “The long-feared capitulation of American consumers has arrived…[R]eal consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.” As though this were a bad thing.

But of course it is. The engines of production have to slow, it would seem to me, in precisely the degree to which the purchase of their products has been curtailed. Otherwise they’re wasting money by stacking the shelves with unsold product.

And what good derives from this? First, as a majority of our consumer wares arrive from beyond our shores, it undeniably assists in correcting our imbalance of trade. And that’s a very serious issue. By our economic recession we slow the amount of American dollars going abroad, to people we don’t even know, for products we like to buy.

Here’s another good: Americans suffer from carrying dangerous levels of household debt. We’re now using what money we have to pay that down instead of making new purchases, and increasing our debt.

It’s a mixed bag. Some good, some bad. The big downside, for me, is so many jobs lost (20 million of us) as to have an impact on the American way of life. It’s a national disaster, having so many ruined families and empty homes on the market. It’s quite literally ‘depressing’.

Here’s another bad: the accumulation of capital goods, tools for the increase of production, is increasingly made useless when we enter conditions of large reserve capacity. More factories are idle. More retailers have closed their doors. More investments have gone south, being tied to the fortunes of the consumer economy.

You appear to very strongly oppose the “circular flow of capital”, whereby the funds spent in consumer purchases go directly into turning the wheels of industry, and fattening the payrolls of workers who themselves contribute toward the next round of profits. So let’s see what alternative model you might prefer.

The only other one I can see is the upward flow of capital from the profits of retail industry (and from government subsidy, itself just a second order of capital flow derived from taxing the first order of flow) into the pockets of investors, via the distribution of dividends, interest and capital gains.

The lion’s share of this upward distribution of profits does not re-enter the circular flow down below, because it is not spent on more purchases. Instead it remains in the financial sphere, the commanding heights of our economy.

Where it does vitally necessary work of some kind (I’m badly in need of a clarification of exactly what vital function this upward flow performs). Meanwhile the flow below, in the consumer/producer sphere, becomes increasingly starved over time, to the degree that the one-way flow upward is increasingly fattened. Is this a fair summation of your argument?

2. “Also, it [by which I suppose you mean Krugman's analysis] totally refutes the idea that wage leves must be contingent to the overall level of production of an economy. Wage levels are set according to OUTPUT, not purchasing power.”

Wage levels are certainly set, in some degree, by a company’s industrial output. But only because a greater output, once it is sold and the proceeds banked, becomes profit in the pocket of the company. They have more money with which to do whatever they want: expand into new plant, pay their workers more or just give it away as investor dividends or lavish executive comp.

Conversely, when sales are slow, output gets reduced. We have a chicken-and-egg situation here. Obviously, absent adequate purchasing power to buy the product, upper management will take the decision to slow production down. Because money spent in producing more Hummers for a public that isn’t buying them is money being wasted. So the Hummer plant goes idle, until such a time as demand returns.

And let’s take as an even better example some product that, unlike the Hummer, is not a discretionary purchase. Let’s take homes. If those furloughed Hummer employees join the other 20 million people with no income, they’re not about to snap up the backlog of empty homes entering the market (an estimated 2-1/2 million new foreclosures anticipated in the coming year). So also idled would be the production capital sunk in the entire construction and real estate industries.

It’s not just wage levels but the number of jobs that gets set by industry running at full capacity. And ‘full capacity’ is a way of expressing both maximum industrial output and maximal consumer buying power. The two are just different aspects of full prosperity.

3. This cries out for comment:

“So during a recession, Krugman thinks that (for some reason) consumers freak out and start spending less.”

“For some reason”, meaning liquidity suddenly dries up, businesses that finance their daily operations through short-term borrowing have no gas in their engines and potential customers get laid off by their place of work. A pretty good reason, IMO.

“Krugman thinks the free market can’t solve this problem, because individuals rationally respond to the onset of the crisis by increasing their cash balances, which only makes the crisis worse.”

If so, I would disagree. The free market could certainly solve this problem without intervention, saving itself and in the process saving lots of problems for the little guys. It could find the financial means to keep production going at full capacity.

It could show confidence in the economy by keeping employment and production at peak capacity, putting product on the shelf that families with income could afford to buy. With their own earnings, not just borrowed money.

Haven’t I just agreed with you? If we reject the arguments allegedly put forward by Krugman, shouldn’t we begin by asking ourselves why business leaders voluntarily cut back production, precipitating recession and cutting into their own bottom line?

That’s a question. I haven’t, so far as I am aware, offered any opinions here at a variance with your own. Tell me how business can take the lead in powering the country out of recession, unaided by a misguided and inevitably counterproductive federal government.

Inquisitor August 6, 2010 at 11:49 am

“2. Disproven utterly? Explain to me again how useful production is not dependent on a customer base. That all you need to do is produce something and watch the world beat a path to your door.”

Care to explain to me how this relates to all the OTHER garbage you spew elsewhere? Production is for the sake of consumption.

“3. I would think I’d disproved your contention about my just searching for something to bitch about in this very thread. What I’ve been doing is instead searching very hard for something worth praising.”

No, you’ve gone out of your way to find something to whine about as usual. Meandering about pointless things for which you’ve little proof to begin with, always objects of praise are sought after in your case to add a touch of whine.

michael August 6, 2010 at 12:31 pm

“Production is for the sake of consumption.”

I thought I’d requested that you use the Segway as your example, proving the case that production is what counts, and that consumption will just naturally follow.

Jon Leckie August 7, 2010 at 4:12 am

Who gives a shit what you requested, douchebag? Go and read Say for yourself. No one owes you anything.

Russ the Apostate August 6, 2010 at 10:45 am

The problem I have with this, Michael, is that you always ignore the downside of the methods you want to use to stimulate demand.

Let’s take the buggy whip industry as an example again. If there is no demand for buggy whips, and you somehow divert money to artificially create demand for the buggy whip industry, all that you have done is create demand for buggy whips at the expense of demand for something else that people would have valued more.

Or let’s take the concrete company. By stimulating demand for concrete for unneeded road projects (those that are actually needed, I have no problem with), you decrease the demand for something else that people would have valued more.

In paying a worker above market rate, the employer may enable the employee to buy more than he otherwise would have. But in order to cover this extra cost, he will also have to make the product he manufactures cost more. Writ large, this means the employees will get more money, but the purchasing power of their money will go down, so there will be no net gain. The extra money could have been better spent in some other way. In trying to artificially stimulate demand, the benefits of that other way are now lost.

You continually insist on ignoring opportunity costs. As long as you continue to do this, I think your policy prescriptions will continue to be wrong, no matter how many facts you may be able to marshall in arguing for your preferred policies.

You also completely misunderstand Mises’ lesson. Mises was not simply trying to point out how bad life in the pre-Industrial and early Industrial periods were. He was trying to say that even though life was bad, that was the best life that could be had, given the small amount of capital that could be leveraged. And when the amount of capital slowly accumulated, life became better. And the reason that capital could be accumulated was because of the relatively liberal economic policies of the day, which allowed capitalists to keep their wealth, instead of trying to redistribute it. In other words, Mises was trying to say that, in the long term, free market capitalism will result in much better lives for the common man than either socialism or corporatism can.

michael August 6, 2010 at 12:41 pm

Russ: First, I like the handle.

“Let’s take the buggy whip industry as an example again. If there is no demand for buggy whips, and you somehow divert money to artificially create demand for the buggy whip industry, all that you have done is create demand for buggy whips at the expense of demand for something else that people would have valued more.”

Certainly. But for the entrepreneur, the point is to make money. Let’s say you can somehow stimulate actual demand for buggy whips. Say you have a first rate ad agency, and they come up with some theme about nostalgia. Or maybe an appeal to the S&M crowd, always in need of good whips. And you’re selling those buggy whips like hot cakes.

Sure, the money you make selling buggy whips doesn’t get spent somewhere else… at least not just yet. But you have needs too. You just insert yourself into the loop.

So instead of the flow of funds looking like (no buggy whips)> (no profits)> (money then spent on new shoes), it looks more like this: (great whips on sale!)> (customer buys them)> (profits accrue)> (proprietor then goes out and buys new shoes). See? The money still gets spent on other things.

That’s the way running a business is supposed to work. You stick yourself in the money stream and dip your pan in the waters.

Plus, the greater circulation has a hidden benefit: it helps lower the federal deficit. Because in the first instance, the shoe seller pays taxes. Whereas in the second instance, the shoe seller pays taxes plus the buggy whip seller pays taxes. For Uncle Sam it’s a gain.

Seattle August 6, 2010 at 4:01 pm

So instead of the flow of funds looking like (no buggy whips)> (no profits)> (money then spent on new shoes), it looks more like this: (great whips on sale!)> (customer buys them)> (profits accrue)> (proprietor then goes out and buys new shoes). See? The money still gets spent on other things.

He was talking about when the state uses external controls on the market to create artificial demand (like, say, banning the automobile) so people will spend money on things that serve them less then their purchases would otherwise. And to anticipate you, no, advertising is not the same thing as forcing someone to pay for something.

michael August 6, 2010 at 7:23 pm

This would be like when the state extends unemployment benefits to people who lose their jobs on the private market? The money serves them less than it would have served the person who paid in the taxes?

How about Social Security? Would that money also be less well spent?

I can see the argument for many things. Government commits much waste, fraud and abuse. And it spends its share of money on dumb things that are politically useful.

Then there’s the pursuit of war, propping up the fortunes of those whose career is spent serving the war machine.

To me it’s not a question of whether we should either retain every aspect of our current government or throw it all out. It’s that we should keep the good parts, delete the bad ones and seek constantly to improve the way we pattern our existences.

Bala August 6, 2010 at 8:36 pm

michael,

What I find most surprising is that a person like you who agrees that government intervention makes everyone ( at least almost everyone) worse off

http://blog.mises.org/13500/the-popular-interpretation-of-the-industrial-revolution/#comment-709156

(just follow the links to all the statements of yours and my responses which together show that you share the above conclusions on government intervention) makes arguments for government intervention in the form of “stimulating demand”.

Let’s face it – Any governmental action to “stimulate demand” is intervention in the economy. And government intervention in the economy is bad for people (you said so and gave examples to demonstrate that). So governmental action to “stimulate demand” is bad for people.

Why do you support that which you consider bad for people?

Walt D. August 6, 2010 at 9:00 pm

“It’s that we should keep the good parts”
In mathematics, I think this is called the empty set.

michael August 8, 2010 at 12:02 pm

“What I find most surprising is that a person like you who agrees that government intervention makes everyone ( at least almost everyone) worse off…” (The sentence trails off.)

“Why do you support that which you consider bad for people?”

To phrase the argument in such a way points out the vast gulf in thinking between us.

Government spending makes some people better off and others worse off. It is a transfer of funds. The idea behind it is to assist those areas of the economy that are falling behind, and tax those that are getting ahead. So it neither makes everyone worse off or the majority worse off. It credits and debits various accounts.

There are innumerable areas where government spending has been wasted, either on those who don’t need the help but who can yell the loudest, or on ignorant schemes that have no positive effect. We can both agree.

There are just as many other areas where government recycling of funds has a positive benefit, one we cannot do without. A good example is the establishment of a retirement account for old folks who might otherwise be destitute.

So an argument I do not make is that government spending is all bad. Another argument I do not make is that government spending is all good.

2. “Let’s face it – Any governmental action to “stimulate demand” is intervention in the economy. And government intervention in the economy is bad for people (you said so and gave examples to demonstrate that). So governmental action to “stimulate demand” is bad for people.”

Nothing I have ever said should be interpreted to mean that ALL government spending is invariably bad. We can certainly find many bad examples, just as there are many good examples. But for you it is sufficient to offer the a priori statement that it is all bad. Which statement is disproven by every instance where there are positive benefits.

Bala August 8, 2010 at 8:41 pm

michael,

” But for you it is sufficient to offer the a priori statement that it is all bad. Which statement is disproven by every instance where there are positive benefits. ”

Wrong. An instance where there are positive benefits does not “disprove” my a priori theory that all government intervention is bad. The only way you can make such a claim is by using a convenient section of available data to prove your case.

Take the case of minimum wages, for instance. It is always possible for you to try to show how much more income is put in the hands of all the people who have got higher wages as a result of this intervention. However, you are in no position to figure out the data on the income lost to people whose marginal productivity (and hence possible wages on a free market) is below the minimum wages. You will therefore never know how much income was lost and to how many people. Left to myself, I may have recruited 4 people at a wage of Rs. 3000 per month than 3 people at Rs. 4000 per month, especially if the nature of the work I want done is such that 4 people is better than 3. However, minimum wages precludes this option for me unless I am ready to spend 33-1/3 % more than I can afford to.

The loss of potential employment is just one of the effects that you are unable to and hence failing to quantify. You are ignoring the subsequent effects. In my business, which I started in 1999, I was paying the lowest level of employee (the office assistants who do menial tasks) Rs. 1500 per month and front-desk sales-people Rs. 3000 per month. In those days, these were not bad salaries, incidentally. Today, with minimum wages at Rs. 3850, I am forced to pay the same office assistants around Rs. 4000. This puts pressure on what I pay front-office sales people whose salaries now range between Rs. 8000 and 12000 per month. Now add to the picture people like traveling sales people, managers, faculty members and the like.

The pressure of minimum wages is felt at all levels. This inevitably distorts the entire cost structure of the business. There are only 2 ways out of this. The first is to accept a lower margin. In the first place, this amounts to a lost income for the owner of the business, something you are completely failing to quantify. Secondly, this makes it tougher for the entrepreneur to make future investments and even to recover past investments. Thirdly, it may make the entire business unviable and lead to business closure, an effect you are just not in a position to quantify.

The other way out is to raise prices (this assumes that the business is otherwise efficiently run and that every competitor in the business faces the same pressure of minimum wages). This means that customers have to fork out more in order to get the same service. Please bear in mind that my paying more to my employees does not get the customer a better product or better service. He gets the same thing at a higher price. Paying more for my product means having less to spend on other things he may have otherwise bought. The important point, however, is that you are in no position to measure the exact extent of loss of spending power for my customers.

As a person running a business in which I have seen the effects of minimum wages on a businessman, I see your statement as completely hollow because you seem to be insisting that the effects that you have seen, i.e., higher wages of those benefited, are all that matter and that the losses on the other sides are to be ignored because you are in no position to quantify them.

Even if you go one step further and add that government deficit spending will lead to creation of more money which will ultimately reach the hands of people, which will in turn be more spending power in their hands, you would be guilty of ignoring two problems – the effects such money creation has on prices and the role it plays in the creation of the business cycle by giving the banking system far greater potential to expand credit and perpetuate the business cycle. Both these bring untold and incalculable harm to millions, nay billions of people.

My attempt is just to show that every time you make a claim that “all government intervention is not bad”, the ghost of Bastiat will make its presence felt and remind you that you are failing to account for all effects of all orders of a particular intervention.

The only way to figure out these effects is by a priori reasoning based on fundamental aspects of human nature and particularly of human action. Your selective data collection cannot refute the conclusions of this a priori reasoning.

Russ the Apostate August 8, 2010 at 9:58 pm

“Government spending makes some people better off and others worse off. It is a transfer of funds. The idea behind it is to assist those areas of the economy that are falling behind, and tax those that are getting ahead. So it neither makes everyone worse off or the majority worse off. It credits and debits various accounts.”

Assisting areas that are falling behind and taxing those that are getting ahead is equivalent to rewarding failure in the market and punishing success. Since the market is a method of optimizing the allocation of resources, all that redistribution will do is reward inefficient uses of capital, and punish efficient uses of same, thus encouraging less efficient allocation of capital. This slows down the growth of the pie. It might even reduce the size of the pie. If the size of the pie is reduced in such a way that everyone gets a smaller piece in absolute terms, then everybody is worse off, even if some people get a bigger piece in relative terms.

“There are just as many other areas where government recycling of funds has a positive benefit, one we cannot do without. A good example is the establishment of a retirement account for old folks who might otherwise be destitute.”

Certainly, Social Security helps the old folks who would otherwise be destitute, at least in the short term. But, let’s try turning off our hearts for a moment, and turn on our brains. Ignoring the long-term “shrinking pie” effect, redistribution certainly helps those who are net receivers of redistributed funds. But how does it help those who are net “donors”? How is there a positive net benefit from Social Security?

Bala August 9, 2010 at 1:39 am

michael,

I just saw this

” There are just as many other areas where government recycling of funds has a positive benefit, one we cannot do without. A good example is the establishment of a retirement account for old folks who might otherwise be destitute. ”

and was floored. As I understand it, old people who have put aside money for their retirement are basically people who are enjoying the fruits of their own responsible behaviour in the past. On the contrary, old people who are destitute (absent the government created account) are people who are suffering the pain caused by their own irresponsibility and lack of foresight in the past.

The former group does not require a retirement account and hence your proposal is superfluous for them. Creating an account for the latter group is nothing more than rewarding irresponsibility and lack of foresight. That apart, any money government puts into this account is either robbed in the name of taxes or stolen by printing up money. Neither of these (robbing or stealing) can have net economic benefit.

So what’s your argument?

michael August 9, 2010 at 8:49 am

Bala: You describe the race to the bottom perfectly, here:

“Take the case of minimum wages, for instance. It is always possible for you to try to show how much more income is put in the hands of all the people who have got higher wages as a result of this intervention. However, you are in no position to figure out the data on the income lost to people whose marginal productivity (and hence possible wages on a free market) is below the minimum wages. You will therefore never know how much income was lost and to how many people. Left to myself, I may have recruited 4 people at a wage of Rs. 3000 per month than 3 people at Rs. 4000 per month, especially if the nature of the work I want done is such that 4 people is better than 3. However, minimum wages precludes this option for me unless I am ready to spend 33-1/3 % more than I can afford to.”

You do have the option of raising prices. And if need be, of doing a bit less volume.

And if the government mandates an increase in your minimum wage you are not at any competitive disadvantage. All your competitors have to do precisely the same thing!

So who loses out, if you only get to employ three employees at four rupees, instead of four employees at three rupees? Is one potential employee now destitute?

Of course. But there are many millions of Indians already destitute. The only way they can rise above that state is if someone begins paying some of them a living wage. So I would say, hire the three at four rupees. And if your business works better with four employees, hire another one. Then raise your price. Or if you can’t do that, make up the loss in increased volume, by getting them to produce more. And search for a wider market.

This is a system that actually works better when a minimum wage is imposed from above, and not just granted by one employer with competition ready to undercut him in price.

Bala August 9, 2010 at 8:53 am

michael,

What makes you think I was asking you for advice on how to run my business? I know how to do that myself. My point was restricted to showing how many costs you would have failed to account for with your superficial justification for minimum wages.

If instead of responding to that, you turn around and proffer your (unsolicited) advice, I can only think of you as a crook of the lowest order.

Bala August 9, 2010 at 8:56 am

michael,

” You do have the option of raising prices. And if need be, of doing a bit less volume. ‘

You freaking idiot!!! Who the F is going to make up for the losses I incur in the event of my losing business on account of either of these options while at the same time taking on the higher wage bill that is being forced on me?

Why the F are you unable to see this as a loss? Why does this not offset the gain to the workers who get a slightly higher pay and thus result in a net economic loss?

Bala August 9, 2010 at 9:01 am

michael,

” Or if you can’t do that, make up the loss in increased volume, by getting them to produce more. And search for a wider market. ”

What the F makes you think I am not already running after greater volumes, higher productivity from my employees and wider markets? As a businessman, I do that all the time – minimum wages or no minimum wages.

All I know is that minimum wages cause me losses that I am not even able to quantify. Absent this act of coercion, my prices would have been lower and I would have provided my services to so many more customers than I already have. Why is this not a net economic loss?

michael August 9, 2010 at 1:16 pm

“What makes you think I was asking you for advice on how to run my business? I know how to do that myself. My point was restricted to showing how many costs you would have failed to account for with your superficial justification for minimum wages.

“If instead of responding to that, you turn around and proffer your (unsolicited) advice, I can only think of you as a crook of the lowest order.”

I wouldn’t think of doing that, Bala. Why don’t we look at the costs we have failed to account for?

In this brave new world, all minimum wages have been repealed. And now, instead of having to pay your four employees 3000 rupees each month, you and your competitors have all decided to pay them 1000 rupees each month.

So you’re making lots more money now. But is there anything you’ve failed to take into account?

michael August 9, 2010 at 1:22 pm

“Assisting areas that are falling behind and taxing those that are getting ahead is equivalent to rewarding failure in the market and punishing success. Since the market is a method of optimizing the allocation of resources, all that redistribution will do is reward inefficient uses of capital, and punish efficient uses of same, thus encouraging less efficient allocation of capital. This slows down the growth of the pie. It might even reduce the size of the pie. If the size of the pie is reduced in such a way that everyone gets a smaller piece in absolute terms, then everybody is worse off, even if some people get a bigger piece in relative terms.”

There’s been very little rewarding of the poor at the expense of the rich, Russ. Can you have failed to see who hires our elected representatives?

The bailout benefited the banks. How much of the money ever hit the street, or resulted in a single foreclosure proceeding being halted?

The health care bill rewarded the insurance and pharmaceutical industries. In fact the language was drafted by them. How much good does it do for those in need of health insurance?

It’s not that these businesses are not efficient. They are very efficient, in vacuuming up available funds.

But let’s return to your core belief, that government intervention can reduce the size of the pie. How long have we had federal interventions into the economy? Eighty years? Longer?

And has the pie been reduced?

Bala August 10, 2010 at 6:28 am

” I wouldn’t think of doing that, Bala. ”

Scumbag… Advising me was what you did, whether or not you are ready to accept it.

” Why don’t we look at the costs we have failed to account for? ”

Yeah!! Let’s do that.

” In this brave new world, all minimum wages have been repealed. And now, instead of having to pay your four employees 3000 rupees each month, you and your competitors have all decided to pay them 1000 rupees each month.

So you’re making lots more money now. But is there anything you’ve failed to take into account? ”

No, you douchebag. Any effects that follow are the effects of the lack of intervention. In other words, that is how the free-market works. That means that barring random misfortune befalling me, I gain in proportion to my good choices and lose in proportion to my bad choices. None of these consequences is a loss thrust upon me, unlike the losses I face on account of government intervention.

mpolzkill August 10, 2010 at 6:54 am

But you didn’t fail to take it into account, did you Bala? The Micheals of the world in your employee’s ear? It boggles the mind how easy it all is, and the monstrosity of them bribing (and near ruining) your employees with your own own money.

Russ the Apostate August 6, 2010 at 4:18 pm

Michael,

Seattle’s replies are quite pertinent. I couldn’t have said them better, so I won’t try.

“That’s the way running a business is supposed to work. You stick yourself in the money stream and dip your pan in the waters.”

Yes, of course. But again you are ignoring opportunity costs. Let’s say that I dip my pan into the waters by making buggy whips. Let’s also say that the buggy whip market is already saturated (a fair assumption, I would say). I won’t make much money this way. What to do? Is the economically efficient answer to petition the government to artificially stimulate the demand for buggy whips? No. The economically efficient answer is fo me to get into another market than buggy whips, so that I am supplying a good for which the market has not yet been saturated. Failure in business is just society’s way of telling me that I should be in another business where I could be making a greater contribution to the needs of society.

“Because in the first instance, the shoe seller pays taxes. Whereas in the second instance, the shoe seller pays taxes plus the buggy whip seller pays taxes. For Uncle Sam it’s a gain.”

*sigh* We’ve been over this before. Yes, for Uncle Sam, it’s a gain. But that doesn’t mean it’s a gain for society as a whole. If Uncle Sam takes a cut for every transaction, then those transactions that are marginally profitable without the tax will not be made at all with the tax. Taxation reduces economic activity.

michael August 6, 2010 at 7:32 pm

You’re not saying anything I wouldn’t agree with. Yet I think if you and I made a bet as to which one could make more money selling buggy whips in the current market, I think I’d win it.

As for whether increasing Uncle Sam’s revenues would be of benefit to either of us, or to society as a whole, I do note quite a lot of anguish here over the amount of the federal debt. Would it not be in all our mutual interests if we might increase the velocity of money through making business pick up, if the result was to increase tax revenues as well, lowering the amount Uncle owes his creditors? I think it would. After all, he is not an animate object. And we are living beings. It’s our debt as dollar users and US citizens we’re talking about.

So for you, taxation reduces economic activity… a proposition the arithmetic does not bear out (unless you say that government-funded economic activity is not economic activity). Whereas for me, increased economic activity increases tax revenues, making our lives in the US easier to finance. I doubt we will ever come to any meeting in the middle.

Russ the Apostate August 6, 2010 at 7:49 pm

michael wrote:
“You’re not saying anything I wouldn’t agree with. Yet I think if you and I made a bet as to which one could make more money selling buggy whips in the current market, I think I’d win it.”

The best businessmen don’t necessarily make the best economists, and vice versa. Yes, if you and I were competing, if you went after government “stimulus”, you would probably win, because I wouldn’t do so for moral reasons. That doesn’t mean that your way is better for the economy as a whole.

“As for whether increasing Uncle Sam’s revenues would be of benefit to either of us, or to society as a whole, I do note quite a lot of anguish here over the amount of the federal debt.”

I would like to see the debt eventually eliminated, yes, but that does not mean that more taxation is always a good thing in general, which is what you seemed to be arguing, at least until now. This is the first time I have seen you mention servicing the debt in your argument that the more “taxable moments”, the better.

“Would it not be in all our mutual interests if we might increase the velocity of money through making business pick up, if the result was to increase tax revenues as well, lowering the amount Uncle owes his creditors?”

I think the best way to lower the debt is to lower Federal spending, not to increase taxes. That way, more spending will done privately, where it will be economically efficient, rather than government spending that is less likely to be so.

“So for you, taxation reduces economic activity… a proposition the arithmetic does not bear out (unless you say that government-funded economic activity is not economic activity).”

Taxation might generate government-funded economic activity, but I would argue that that is not the most economically efficient economic activity. I don’t see the point in stimulating lots of very economically inefficient spending.

Bala August 6, 2010 at 10:11 pm

michael,

You said

” Would it not be in all our mutual interests if we might increase the velocity of money through making business pick up, if the result was to increase tax revenues as well, lowering the amount Uncle owes his creditors? I think it would. ”

There is no disagreement on the issue that government debt has to be brought down. In fact, I would go on to say that it should be wiped out. The difference of opinion stems from the disagreement over means.

You say “‘increase the velocity of money through making business pick up, thus bring about an increase tax revenues, thus lowering the amount Uncle owes his creditors”.

A lot of us out here disagree. We say that this is not a solution because it ignores a number of real problems including the most fundamental one of all – that government spending is intervention in the economy. And as we agreed (thanks to all the examples you helped to identify), all government intervention in the economy is bad for people.

So, a lot of people out here will say that you are barking up the wrong tree. The correct approach, as I see it (and I think many out here would agree) is to pare down government spending. The logic is that if
Deficit = Revenue – Expenditure
then, there are 3 ways of bringing it down – Increase revenue, Decrease Expenditure or do both.

Since the heart of the disease afflicting the economy is government intervention, a large part of it in the form of government spending, let’s cut that first. I am quite sure (and many people out here will agree) that as a consequence, Revenue will either increase or decrease less than in proportion.

So, why do you oppose this (I am assuming you do because you are prescribing increased government spending)?

michael August 8, 2010 at 12:08 pm

“The best businessmen don’t necessarily make the best economists, and vice versa.”

Oh, absolutely they do, Russ. Because the economics professor in his classroom has no penalty for being wrong. Whatever he says will just be copied down in the student’s notebook, to be regurgitated in essay exams and academic papers dependent on his grade.

The business person, on the other hand, is punished severely for every failure to understand something important about the economy he swims in, like a fish in the sea.

You’re also stuck in one gear. “The best businessmen don’t necessarily make the best economists, and vice versa. Yes, if you and I were competing, if you went after government “stimulus”, you would probably win, because I wouldn’t do so for moral reasons.”

Note that this has never entered my argument. I would never ask for a subsidy to outsell you in the area of buggy whips. I’d do it by meeting the needs of the S&M crowd. They’d ‘beat’ a path to my door.

mpolzkill August 8, 2010 at 12:16 pm

It’s quite a thing to watch in action, the “big lie” technique. Battle it vigilantly, you merely become droning or shrill.

michael August 8, 2010 at 12:16 pm

“There is no disagreement on the issue that government debt has to be brought down. In fact, I would go on to say that it should be wiped out. The difference of opinion stems from the disagreement over means.”

Bala, there’s very serious disagreement over whether it should be cleared entirely. This would flood the bond markets with stored capital looking for a home. All that debt serves a vital purpose. And not just for the government, but for bondholders.

All that excess cash would re-enter the investment world in a mass, precipitating a glut that would result invariably in the world’s largest liquidity sink. It would become useless, and the going rate for money would be zero.

It would perform one undeniable good: it would liquidate Federal Reserve assets. That is, the Fed could pursue a policy of placing assets on the market and dissolving the proceeds of sale. This would go a long way in allowing credit markets to contract in a rational fashion. But at the end of the process I believe we’d still have an enormous cash glut.

Your thoughts?

Russ the Apostate August 8, 2010 at 9:25 pm

Russ wrote:
“The best businessmen don’t necessarily make the best economists, and vice versa.”

michael wrote:
Oh, absolutely they do, Russ. Because the economics professor in his classroom has no penalty for being wrong. … The business person, on the other hand, is punished severely for every failure to understand something important about the economy he swims in, like a fish in the sea.”

The problem with this is twofold: 1) Economists who make bad predictions do get penalized. They are penalized by the fact that their reputations as economists go down whenever their predictions are wrong. 2) The businessman is not concerned (as a businessman, at least) with improving the economy as a whole. He is only concerned with maximizing profits for his business. Policies that he favors may benefit his business, but not the economy as a whole. He may not get penalized for this, if these policies result in his getting a bigger piece of a shrinking pie.

“You’re also stuck in one gear. “The best businessmen don’t necessarily make the best economists, and vice versa. Yes, if you and I were competing, if you went after government “stimulus”, you would probably win, because I wouldn’t do so for moral reasons.”

Note that this has never entered my argument.”

I think that moral reasons enter your argument every time you argue for redistributing money to the unemployed. You try to come up with economic justifications for doing so, granted, but I don’t think your real motivation has anything to do with a search for true economic theories, which you don’t even seem to believe are a possibility.

“I would never ask for a subsidy to outsell you in the area of buggy whips.”

Yes, you do. Anytime you ask to redistribute money to the unemployed to “stimulate demand”, you are asking for a subsidy.

Russ the Apostate August 8, 2010 at 9:32 pm

“All that excess cash would re-enter the investment world in a mass, precipitating a glut that would result invariably in the world’s largest liquidity sink. It would become useless, and the going rate for money would be zero.”

If the debt were repaid immediately, wouldn’t that just result in a transfer of money from the US to its debtors? Granted, that might not be a short-term good thing for the US, but in the big picture, it would not create more money, it would just transfer it.

Besides, I thought that investing in non-productive instruments was a bad thing? What is more unproductive than bonds, which are serviced, not by the production of wealth, but by taxes?

Bala August 9, 2010 at 12:19 am

” Bala, there’s very serious disagreement over whether it should be cleared entirely. ”

Oh!!! Do I take it then that there is no disagreement, at least of the serious variety, on reducing governmental expenditure? Are we then ready to look at which government expenditures are pointless and wasteful and may therefore be culled out?

There are two ways to study this issue. The first is to go expenditure by expenditure. The other is to see if it is possible to generalise that all government expenditure is wasteful. The latter, incidentally, is what I am saying on the other conversation we are having on this blog post. So, if that is settled, this is. Therefore, let’s focus our energies on understanding whether the statement “all government intervention is bad for the economy” before we get into specifics.

On the effects of reduction of government debt to zero, I think Russ has answered it rather effectively.

michael August 9, 2010 at 8:57 am

“I think that moral reasons enter your argument every time you argue for redistributing money to the unemployed. You try to come up with economic justifications for doing so, granted, but I don’t think your real motivation has anything to do with a search for true economic theories, which you don’t even seem to believe are a possibility.”

That’s a pretty fair summation, Russ. I’m looking for a true economic theory that is able to spread the wealth we’re capable of creating out to everyone who needs a piece of it. I think it would be a spur to production to be producing for a market of seven billion people, all of whom have enough cash to be able to afford the product, than to a restricted world of two or three million, who have cash because the system they’ve constructed denies it to anyone else.

It’s a moralistic argument to a degree, sure. But don’t ignore the practical argument.

In that world with 2-3 billion winners and 4-5 billion losers, there are maintenance costs. Namely, a huge and hugely expensive military. You do have to pay a lot of people to work around the clock, bombing all those angry have-nots to smithereens before they overrun and devour you.

Is that an argument from morality? Or an argument of necessity? Look it over closely and you tell me.

Russ the Apostate August 9, 2010 at 9:44 am

michael wrote:
“That’s a pretty fair summation, Russ.”

Wow! A person who freely admits that, at least some of the time, his economic arguments are just rationalizations for his moral prejudices, instead of etched-in-stone objective truths. I’m impressed at your honesty.

“I’m looking for a true economic theory …”

But… but… but… I thought you didn’t believe in economic theories?

“…that is able to spread the wealth we’re capable of creating out to everyone who needs a piece of it. I think it would be a spur to production to be producing for a market of seven billion people, all of whom have enough cash to be able to afford the product, than to a restricted world of two or three million, who have cash because the system they’ve constructed denies it to anyone else.”

1) If a person needs a handout, that pretty much implies that he can’t get the money to pay for what he needs on the free market. That implies that the person is not capable of producing much of anything that other people want. Diverting funds from productive people to such unproductive people does not seem to me to be a great way of stimulating the economy. It is economically inefficient.

2) Since the redistribution is just a transfer of funds, as you’ve admitted, it really creates no new wealth. It will stimulate the demand of those who are net consumers, and reduce the demand of those who are net “donors”. If we look at things from a purely economic, non-moral point of view where peoples’ “needs” don’t count for anything, I can’t see how you can claim that the increased demand of some people is not counter-acted by the reduced demand of other people. I don’t see how this can result in any net gains. In fact, the costs of redistribution will probably result in a net loss.

3) Just because you want there to be a true economic justification for redistribution, that doesn’t necessarily mean that there is one. That’s why they call economics “the dismal science”.

“In that world with 2-3 billion winners and 4-5 billion losers, there are maintenance costs. Namely, a huge and hugely expensive military. You do have to pay a lot of people to work around the clock, bombing all those angry have-nots to smithereens before they overrun and devour you.”

I don’t think that most of the have-nots in the world are any threat to us, nor do I believe they are have-nots primarily because of capitalism. (I think the IMF and World Bank do more damage to the have-nots than corporations do.) Of those who are threats and are have-nots, I don’t think they are threats because they are have-nots. I think that is a leftist, economically deterministic, pre-9/11 way of looking at the world. Bin Laden isn’t(wasn’t?) exactly a have-not, nor were the British 7/7 terrorists.

Or, if you agree with some people here, that the threats we have to face are due to blowback from our imperialistic militarism, then all we would have to do to both get rid of the threats and save money is de-militarize.

michael August 10, 2010 at 4:54 pm

Russ: All your arguments appear to need me very badly in the role of supplicant to the public teat. But your arrows miss the mark. My career was spent entirely in private industry. In fact government’s regulatory thrust mostly went to impede my efforts in providing safe, clean, affordable housing. So let me humbly submit you’ve got the wrong guy.

First, to your comment about life in the torque machine biz. It certainly appears to be true that automation creates as many jobs as it extinguishes. We’ve had automation for a hundred years, and it was not that long ago that we had, in a practical sense, full employment. I’m impressed by that.

But second, I think you misstate my case here:

“Wow! A person who freely admits that, at least some of the time, his economic arguments are just rationalizations for his moral prejudices, instead of etched-in-stone objective truths. I’m impressed at your honesty.”

My economic arguments are just my best guess, based on experience, as to how the world of commerce actually operates. And I seem at a variance to most of you because I don’t see that the Austrian model has that much relevance.

What you call my “moral prejudices”, on the other hand, are my convictions as to what our priorities as a society should be. Obviously no template for a society that serves all of its constituents will not work if it is not grounded in a realistic and workable economic model. And what I’m doing here (other than annoying some of you) is learning things. I learn from exposure.

Let’s not confuse the two. Correct assumptions about economic behavior are not the same as prescriptive remedies. But good remedies depend on correct assumptions.

“I’m looking for a true economic theory that is able to spread the wealth we’re capable of creating out to everyone who needs a piece of it. I think it would be a spur to production to be producing for a market of seven billion people, all of whom have enough cash to be able to afford the product, than to a restricted world of two or three million, who have cash because the system they’ve constructed denies it to anyone else.”

“But… but… but… I thought you didn’t believe in economic theories?”

Not in the way most people here do. I don’t believe anyone has the Holy Writ. Nor do I think, based on a lifetime of observation, that anyone can. There’s just too much that goes into the totality of economic life, and too many discrete situations that all call out for different remedies. I’m very cynical about fits-all solutions.

But I would very much like to solve the puzzle for the maintenance of conditions of full employment… just as most of you here would like to solve the puzzle for a completely stable currency. Both may be a will o’ the wisp. But we toil on, in the service of our dreams.

You continue on:

“1) If a person needs a handout, that pretty much implies that he can’t get the money to pay for what he needs on the free market. That implies that the person is not capable of producing much of anything that other people want.”

If you divide humanity up into two classes, one productive and the other not, I think you miss the most basic thing about us: we all need very badly to be able to make a living.

When unemployment suddenly strikes, it converts one productive, engaged human being into one economically redundant labor unit. It’s the same person, he’s just now desperate to get back on the train. There is no substantive difference between those with work and those looking for work, excepting a distinctive set of those who are unable and unwilling to contribute toward the gain of any employer: the unemployed underclass.

“Diverting funds from productive people to such unproductive people does not seem to me to be a great way of stimulating the economy. It is economically inefficient.”

If we assume it is, a majority among us would still admit that it serves a higher purpose. It keeps real people afloat in stormy seas. It would also have kept the housing and real estate industry afloat, had we had as a governmental priority the working out of several million home loans gone bad. The loss of those trillions in real property value has also been “economically inefficient”.

It would also have stimulated the retail industry, in keeping demand up to the degree that chains that failed in the downturn might not have failed. And it would also have kept your stock portfolio up.

It would also have resulted in minimal actual expense to the taxpayer, by stimulating the exchange of goods and services and consequently multiplying the number of taxable instances. I side with the logic that sees two-thirds of the money so expended in a downturn coming back in the form of tax receipts within the first two years. And that is a conservative estimate.

Much of our fiscal dilemma in fact is that money that gets lodged in financial ventures is largely lost to taxation. And when it gets cashed out it is taxed at the lower rates for dividends and capital gains. A financial transactions tax would be, for me, a step in the right direction. The country was able to function very nicely back when taxes were set at sustainable, and much higher, rates. For instance when Ike was president.

But I can see I’ve given you enough to chew on. I’ll wait for you to respond if you have any interest in doing so. In fact I’ll close with a point of close agreement:

“Or, if you agree with some people here, that the threats we have to face are due to blowback from our imperialistic militarism, then all we would have to do to both get rid of the threats and save money is de-militarize.”

Amen to that.

mpolzkill August 6, 2010 at 9:20 pm

Michael: “Russ: First, I like the handle.”

Told you that was a douchebag handle, Russ. Has a real “Pete Best” kind of quality to it.

Russ the Apostate August 7, 2010 at 6:31 am

If you feel that strongly against it, Matthew, I must be doing something right. *grin*

mpolzkill August 7, 2010 at 10:11 am

Yep, just like in Iraq and Langley. It sure is dark fun to baffle a fundamentally dishonest person with the truth all the time. Keep on making an ass of yourself, what do I care. Well, I completely won’t care after I get out of your protection racket.

Ohhh Henry August 6, 2010 at 10:46 am

During the century 1530-1630, half of England’s peasants were thrown off the land in this manner. Penniless and destitute, they wandered into the cities in search of sustenance, forming the first underclass: beggars, vagrants and ne’er-do-wells. There were few options, as jobs as we know them now were all but unknown.

Actually jobs as we know them were quite well known back in those days, but landless peasants were prevented from doing them by government-supported cartels called guilds. It was freedom which was all but unknown. The industrial revolution provided both relative freedom and (not coincidentally) jobs in abundance.

michael August 6, 2010 at 12:56 pm

“Actually jobs as we know them were quite well known back in those days, but landless peasants were prevented from doing them by government-supported cartels called guilds.”

By “jobs” I meant the exchange of labor for wages– and those were fairly rare before the Industrial Revolution. The guilds, quite independent of any government, certainly limited the number of entrants into a given craft, for obvious reasons. But it was not exactly a wage-for-labor relationship, more a master-and-slave relationship until the young fellow was released from his indenture and apprenticeship. Nor were the guildsmen lackeys of the Crown. They were independent proprietors banding together to achieve mutual ends.

Young apprentices were taken in by the family, and allowed to sleep on the floor. The intention was to increase the number of sons the guildsman had, and so increase the output of his shop. There’s a very good account of this in Peter Laslett’s The World We Have Lost.

There were in fact a small number of actual jobs earlier on, in the linen and glass factories of medieval Flanders and Italy. But the concept of pulling in total strangers and putting them to work on one’s production line greatly expanded after coal came into general use, steam was employed in making large engines and iron began to be smelted by modern methods.

Early factories, making bulk products for wide distribution, were very limited in extent. But present probably in Roman times, and certainly by the 12th century.

Seattle August 6, 2010 at 4:03 pm

The guilds, quite independent of any government

Seriously? Anyone attempting to do business in guild-controlled areas (which were more in the cities than in the countryside, hence why the factories opened in rural areas first) wasn’t met very kindly by the state. When the prop-up laws ended, the guilds went with them.

Martin OB August 6, 2010 at 10:51 am

The following is the best refutation I’ve found of most myths about child labor during the industrial revolution:

http://www.thefreemanonline.org/columns/child-labor-and-the-british-industrial-revolution/#

Mashuri August 6, 2010 at 2:31 pm

Michael,I believe you need to read the entire book (“Human Action”) rather than this excerpt to understand where Mises is coming from. I say this because you’re approaching this from an inductive, positivist approach which is exactly what his book refutes. I’d say the most important part of this particular article you need to pay attention to is here (emphasis added):

It is obvious that this controversy cannot be settled by appeal to historical experience. With regard to the establishment of the facts there is no disagreement between the two groups. Their antagonism concerns the interpretation of events, and this interpretation must be guided by the theory chosen. The epistemological and logical considerations that determine the correctness or incorrectness of a theory are logically and temporally antecedent to the elucidation of the historical problem involved. The historical facts as such neither prove nor disprove any theory. They need to be interpreted in the light of theoretical insight.

I want to focus on what you wrote earlier:

I wouldn’t say that. At least not the part about being stupid or ignorant. You all seem quite versed in the theory, not to mention relentlessly logical… just not very widely experienced in actual commerce.How would I characterise you (pl.) generally? I think you’ve gotten carried away with the elegance of the theory to such a degree that you think it’s a universal explanation of economic behavior. And it’s very far from being that.I also think you might benefit greatly from a brush-up course in critical thinking skills. You don’t “prove” a theory by looking for and finding instances where it seems to fit. You attempt to disprove it by looking for countervailing evidence. And if you’re unable to find such, you can then tentatively consider the theory “not yet disproven”. That’s how the scientific method proceeds.

I fully agree. However, I think you have fallen victim to what you criticize in your final paragraph. You have been interpreting history in a way that suits your predispositions. Please present your falsifiable theories instead.

Mashuri August 6, 2010 at 2:44 pm

BTW, I’d like to to add that attempting to “disprove it by countervailing evidence” suggests that the method is empirical and inductive by nature, which is incompatible with a logical science like economics. This is why Keynesianism has failed so dismally.

michael August 6, 2010 at 7:47 pm

Are you seriously telling me that your brand of economics is superior to other disciplines because it doesn’t rely on observation, and doesn’t attempt to falsify theoretical musings by comparing them to actual data?

That is seriously screwed up. You appear to think that just because your theories are internally consistent (that is, logical) that it doesn’t matter whether they are incompatible with observable evidence. Do I read you correctly?

All scientific evidence is inductive and empirical. That’s because it takes place in the realm of reality. If one goes off to never-never land he can create as many imaginary worlds as he pleases. They may be beautiful or sublime; they’re just not relevant to anything here.

“I think you have fallen victim to what you criticize in your final paragraph. You have been interpreting history in a way that suits your predispositions. Please present your falsifiable theories instead.”

In my experience, every theory (that is, every universal rule one attempts to draw) is easily falsifiable. That’s why I present no universal rules, only concrete instances that I use to belie the supposed eternal truths being bandied about here. I don’t think there’s a single generality one can make that isn’t wrong when applied to some instance. And I have done very well, living by no universal rules.

Russ the Apostate August 6, 2010 at 8:01 pm

I won’t go into defending the extreme a prioristic view of some here, because I don’t buy into it myself.

I will say that just because a “law” of economics might have exceptions here or there, that doesn’t mean that it doesn’t hold quite well as a general rule. And your extremely “pragmatic” viewpoint really doesn’t make much sense, considering your own policy prescriptions. If the economic sphere is as chaotic as you say it is, then how can you possibly come to any policy prescriptions that make any sense? How can you know that the outcome of the policies that you favor is what you think it will be? Even if you arrive at a policy that has a good outcome by experiment, how can you tell that the outcome of the policy wil continue to be what it once was? If the economic sphere is really so non-deterministic as you say, then I would think that making policy prescriptions could be just as well done by throwing darts at a board. Or instead of making random changes in policy, it could be done by making no changes in policy. Or by making changes in policy that fit Austrian policy, just for fun. In short, if the economic sphere is that non-deterministic, all bets are off. It doesn’t matter what your policy is. After all, you can’t make predictions based on “concrete instances”, if there are no rules by which concrete instances occur.

Richard August 7, 2010 at 10:56 am

Michael,

Is Logic a science? Are logical laws derived empirically through observation?

You also wrote ” I don’t think there’s a single generality one can make that isn’t wrong when applied to some instance. And I have done very well, living by no universal rules.”

Sounds like a universal rule to me.

mpolzkill August 7, 2010 at 11:04 am

This sleazeball constantly brags about how well he has done in life. In a corporatocracy a man with no ethical standards whatsoever outside of demanding that all be taxed to care for “the poor” can excel financially? Amazing!

mpolzkill August 7, 2010 at 11:13 am

Wait, that wasn’t totally fair to the sleazeball. He also struts in the street like a peacock whenever a Republican is leading a war.

newson August 7, 2010 at 8:35 pm

more likely he works for someone who’s enjoyed financial success.

michael August 8, 2010 at 12:42 pm

Logic alone is not competent to describe reality. Actual events are commonly so bafflingly complex that “logical” explanations fail due to not properly understanding the issue’s complexity.

Logic is just dandy for mathematical questions, posed in a vacuum. But in something the size of an entire economy it offers one the false assurance of a simplistic answer. It invites people to assume they have a more complete understanding of the situation than in fact they do.

Richard August 8, 2010 at 1:51 pm

michael,

You did not answer my question. Is logic a science? Are logical laws derived empirically through observation?

michael August 9, 2010 at 9:21 am

“Is logic a science?”

No, Richard, logic is not a science. It’s a branch of mathematics. Science deals only in observable phenomena in the physical world. Logic and math describe an ideal reality, one which compares to the real world and has essential uses in studying it.

“Are logical laws derived empirically through observation?”

No, they are derived through the use of reason.

The trouble with being enticed into placing logical axioms above actual observation is that they appear simple and profound. Whereas reality is messy and contradictory. One can make simple, logical assumptions about how things are and they will be completely counter to other, equally logical assumptions about how things are.

This is why I compare Austrians with Marxists. They both tend to share the common trait of thinking that their simple, logical “proofs” of their theoretical constructs are valid universally. And if they are, why do they contradict one another?

What all these axioms do is to sum up reality with an excessive simplicity. Logic is far from the perfect tool with which to get anything done… although, like any good tool, there are certainly uses to which it can be profitably put.

We need to learn which uses are warranted, and which are illusory. Otherwise we perpetuate the error of the religious believers, each of whom worships the one true God (therefore all the others must worship FALSE gods).

That’s why those who search for my guiding philosophy only find a portmanteau set of assumptions. Each is providential, to be discarded whenever the facts at hand no longer mitigate its use. I know it must be frustrating, trying to cope with someone who has only tentative theoretical foundations… but that’s exactly what I think best describes homo economicus. It’s seven billion people, each trying to get by and many of the more fortunate ones trying (very effectively) to scoop up all the money in circulation.

The scientific method does employ logic. But it makes no a priori assumptions. Everything derives from observation… and a single inconvenient fact can upset a world of hypothesis. Because the facts always trump the conjectures.

Peter Surda August 9, 2010 at 9:47 am

Michael,

the correct counter to a allegedly logical argument is either to question the axioms or to show that the the logical steps involved in it are incorrect. Denying logic itself is not a proper counter.

The reasons why axioms sometimes look “too simplistic” is because of parsimony, and is not a reason per se to exclude them.

It is true that a theory can be disproved by a single fact counter to it. However, I have already point out in the past that Austrian economics requires that one looks at all the facts, not just a subset of them. That is, regrettably, what you are doing.

Michael A. Clem August 9, 2010 at 11:19 am

There are two aspects of logical arguments: the premises and the conclusion. If the premises are correct, and the logical reasoning to the conclusion is correct, then the conclusion is necessarily true. The premises are where empirical observation takes place. Obviously, a flawed premise will lead to a false or misleading conclusion. Obviously, logic merely for its own sake is mere mental masturbation (Alice in Wonderland?). But, if a premise is based on empirical observation and is correct, then logic can indeed be used to further science, and is not merely operating in a vacuum.

michael August 9, 2010 at 12:20 pm

“There are two aspects of logical arguments: the premises and the conclusion. If the premises are correct, and the logical reasoning to the conclusion is correct, then the conclusion is necessarily true. The premises are where empirical observation takes place. Obviously, a flawed premise will lead to a false or misleading conclusion.”

Michael (Clem) (that is, the good Michael): Your summary is a constructive one. Of course, in order that the premises of something as complex as an economic issue are “correct” (that is, sufficient to depict the entirety of the problem) they must be vast.

It’s like the plot of (I think) Forbidden Planet, where the computer large enough to accurately model the earth had to become a planet the size of the earth.

We can have a premise that fails on the count of logicality. Example: “production is the engine that drives the economy”. Example 2: “consumption is the engine that drives the economy”. Both are demonstrably incorrect; they are interdependent. You can’t have an economic gain without customers. Nor can you have a completed sale without a product.

As for the correct conclusion, I think the problem I have with the thinking here is that to form such a thing, good reasoning is essential… but not sufficient. The conclusion can still be wrong, but if it is untested, the person believing it may still believe it to be true.

Until a premise is tested for insufficiency or other error, it is only a hypothesis. Testing is the only thing that can illustrate whether or not the initial summation of the problem is actually complete– or even accurate.

So in forming a hypothesis you need a premise that is logically consistent… that is, both halves of what you state are sufficient to prove a logically correct statement. But you’re still a very long way from being able to demonstrate before the world that the truth of it cannot be effectively challenged. You haven’t subjected it to any scientific scrutiny.

BTW users of the scientific method shy away from saying that this or that is “true” or “proven”. You can prove a mathematical solution– that’s in the nature of math. But you can’t prove the existence of gravity. You can only demonstrate it. “Proof” stands outside the realm of the physical.

That they never taught you this in Econ class just tells me they committed an error of omission.

Russ the Apostate August 9, 2010 at 12:42 pm

“It’s like the plot of (I think) Forbidden Planet, where the computer large enough to accurately model the earth had to become a planet the size of the earth.”

If the real economy is too complicated to be modelled by Austrian economics, isn’t it also too complicated to be modelled by your demand-side theory? Why can’t you just admit that this attempted refutation of Austrian theory, if valid, would also hoist you on your own petard?

michael August 9, 2010 at 12:55 pm

Russ, I’m not claiming I have a fits-all theory that will set the economic world on its ass. I’m just demonstrating that you don’t either.

Every recipe for improving the economy has a theoretical basis. It is also in part pure guesswork, as we enjoy less than perfect knowledge. The cook fiddles with the broth until it starts to smell like it’s going to taste good. So he serves it up. And if circumstances change and another approach is needed, he changes the recipe and serves up something else.

We can all see the historic successes and the failures. And that’s how we learn. Recall the late 1970s, when we were all afraid that problems like runaway inflation and stagflation might become endemic. The Fed found a pretty simple formula to get all that back under control. At least that’s what the data show us.

Suppose in 1979 the formula everyone arrived at was that in an atmosphere of imperfect knowledge our best course would be to take no action at all. Wouldn’t we be likely to either still be inflating in double digits each year, or have hyperinflated and seen the demise of the dollar? I think we would.

Russ the Apostate August 9, 2010 at 1:17 pm

michael wrote:
“Russ, I’m not claiming I have a fits-all theory that will set the economic world on its ass. I’m just demonstrating that you don’t either.”

I don’t claim that Austrians have perfect theory. As a matter of fact, I don’t claim to be a full-fledged Austrian at all. I have strong disagreements with their epistemology, although I do think they tend to have a better track record than most.

“Every recipe for improving the economy has a theoretical basis. It is also in part pure guesswork, as we enjoy less than perfect knowledge. The cook fiddles with the broth until it starts to smell like it’s going to taste good. So he serves it up. And if circumstances change and another approach is needed, he changes the recipe and serves up something else.”

My point, which you keep trying to dodge, is that if the economy were as completely unpredictable as you claim it to be (at least when arguing against Austrian theories), then any theory, including your own, would also be absolutely worthless. The very fact that you yourself make predictions (i.e. that redistributing to the unemployed will boost the economy) shows that you don’t really believe this. If the economy is somewhat predictable, then the Austrians might have some theories that make valid predictions, too. They don’t have to be perfect, as some think they are. They just have to make predictions that have a positive correlation with reality.

“We can all see the historic successes and the failures. And that’s how we learn. Recall the late 1970s, when we were all afraid that problems like runaway inflation and stagflation might become endemic. The Fed found a pretty simple formula to get all that back under control. At least that’s what the data show us.”

Yeah. The formula was “Stop inflating. Lower taxes. Lower regulations. Don’t use Nixonian price controls.” Etc., etc. It worked pretty well for Reagan. It would have worked even better if he had lowered spending as well. It would work equally well for Obama, if he weren’t brainwashed by socialist dogma.

“Suppose in 1979 the formula everyone arrived at was that in an atmosphere of imperfect knowledge our best course would be to take no action at all. Wouldn’t we be likely to either still be inflating in double digits each year, or have hyperinflated and seen the demise of the dollar? I think we would.”

What person here is advocating taking no action at all? We’re just advocating different actions than you are. Lowering taxes, eliminating onerous regulations, lowering spending, etc., is not taking no action at all.

Bala August 9, 2010 at 7:26 pm

michael,

Looks like no one has bothered to take this one up (I guess the are all sick and tired of you)

” We can have a premise that fails on the count of logicality. Example: “production is the engine that drives the economy”. Example 2: “consumption is the engine that drives the economy”. Both are demonstrably incorrect; they are interdependent. You can’t have an economic gain without customers. Nor can you have a completed sale without a product. ”

When we say “Production is the engine of the economy”, we mean to say that it is production that drives the economy and not that mere production is all that matters.

Let me try simplifying it for you. Consider a situation where a lot of people have produced a lot of different things. Let’s assume that quite a few of them have produced more than what they can or would want to consume. The excess of production over consumption is the surplus. What does each person do with the surplus? One way is to store it for future use. But then there is only so much you can consume and beyond a point, everything has its shelf life. A second is to let it go to seed this time and decide to produce less next time around. A third is to look around to see what other product produced by someone else can give him more satisfaction (utility) than the additional satisfaction (marginal utility) that consuming more of his own production can give. In this case, the producer will have to look around till he finds another producer who sees the first producer’s produce as giving more utility than the marginal utility of his own produce to him. Thus is born the act of exchange and the economy. From here, it is just a few steps to the indirect exchange economy.

As an example, let me take an agrarian economy where I am a producer of rice and a lot of other people have produced other foods such as other cereals, pulses, oilseeds, vegetables, fruits, meat products, fish, etc. All that is required is for people to want to consume a mix of different foods – cereals, pulses, oil, vegetables, fruits, meat products, fish, etc. They can satisfy their want only if they themselves have something to offer in exchange. Without that, they are only seekers of alms and not members of the exchange economy. Frankly, anyone who understands (however vaguely) that consuming a mix of foods is better than consuming just rice and has rice to trade is automatically on the market offering his rice for trade. This is how demand too is born. This is how production drives demand.

Thus, if everyone gets down to producing more of that they are good at, there is a chance that trade may happen provided there are others who also see value in what a person produces and are ready to give what they have produced in exchange. Seen this way, “Demand” requires the prior existence of a marketable surplus and flows out of the marketable surplus.

On the other hand, imagine a situation where everyone just sits around and “demands” what they want. Nothing is going to happen except that a lot of noise would be generated when people scream out their demands.

I hope it is now clear why production is the engine of the economy and not demand. Demand is just people exchanging their marketable surplus, which in turn was made possible by production.

Your scenario in which everyone produces and there is no demand is a straw-man that’s not from the real world.

michael August 10, 2010 at 7:17 am

“Let me try simplifying it for you. Consider a situation where a lot of people have produced a lot of different things. Let’s assume that quite a few of them have produced more than what they can or would want to consume. The excess of production over consumption is the surplus. What does each person do with the surplus? One way is to store it for future use. But then there is only so much you can consume and beyond a point, everything has its shelf life. A second is to let it go to seed this time and decide to produce less next time around. A third is to look around to see what other product produced by someone else can give him more satisfaction…” etc.

Hi Bala. This seems like a productive discussion.

Your train of reasoning is useful for a food product, where at some point your market (humanity) is going to want to eat another meal. You can wait out the slow spots, if storage isn’t too expensive and the white mold doesn’t get you.

It doesn’t quite work for industrial products. Let’s take two: the Segway and the Edsel. Top execs were so sure they could anticipate desire they spent huge sums in rushing these babies to market. And the response was underwhelming.

So the only thing you can do in such a situation is take the hit. Consumption trumps production in creating a viable flow of money. Production isn’t always right.

Much safer would be the production of action games. We know the appetites of gamers is constant and voracious. And the products are prices such that nearly everyone can afford to buy a predictable number of new games each year. So speculative production in such a market is almost sure to succeed. Informed market research should drive your choices.

It’s different in the production of food. Here’s you argument:

“All that is required is for people to want to consume a mix of different foods – cereals, pulses, oil, vegetables, fruits, meat products, fish, etc. They can satisfy their want only if they themselves have something to offer in exchange. Without that, they are only seekers of alms and not members of the exchange economy. Frankly, anyone who understands (however vaguely) that consuming a mix of foods is better than consuming just rice and has rice to trade is automatically on the market offering his rice for trade. This is how demand too is born. This is how production drives demand.”

So long as you can sell your entire crop to people with enough money to buy it, that’s certainly true. But if the money runs out before the supply does, there’s not much you can do. Maybe give it away and take a tax loss, if your country’s tax code permits that.

And I do observe that there comes a point where your customers’ money runs out. In watching the news on TV I’m looking at a lot of flood victims. And among them, the adult males and children all appear very well fed… whereas the mothers mostly appear emaciated, haggard and suffering from advanced malnutrition. It would seem that these families had limited food budgets, and the mothers denied themselves so their children and menfolk could live.

These people are not good candidates for your campaign of healthy eating through consuming a varied diet. They will look for the cheapest food on the market… and if it’s rice, they will eat nothing but rice. Your whole wheat chappatis will go unsold.

But here I go, telling you your business again. I’m just saying, it’s not enough to provide a good and let the market buy it. You have to anticipate what your market really wants, and provide exactly that. It’s they who drive your decisions.

Donald Rowe August 10, 2010 at 8:34 am

michael,

Excellent progress. It is good to see that your understanding is gathering speed.

“It doesn’t quite work for industrial products. Let’s take two: the Segway and the Edsel. Top execs were so sure they could anticipate desire they spent huge sums in rushing these babies to market. And the response was underwhelming.

So the only thing you can do in such a situation is take the hit. Consumption trumps production in creating a viable flow of money. Production isn’t always right.”

That is a major point – production is *not* always right! You finally get it.

We should celebrate every single failure because it is a *choice* not taken. That is very valuable indeed, and the ‘cost’ of the *mistake* is borne by the rich money bags you despise. The next step in the process is to determine the details of the failure, sort of like a post-mortem of a disease victim. Find the problem, make adjustments and try again. Amazing. And no central control is even necessary. Pretty cool. (The finer points like, too much production going wrong at the same time and why, can come later.)

Not to be petty, or looking for the minutia just to pick, but I would recommend a one word change in the quote above – ‘creating’ to ‘guiding’, so it becomes ‘ “Consumption trumps production in guiding a viable flow of money.” ‘ Perfect.

Cordially,
Don

Gerry Flaychy August 10, 2010 at 9:55 am

“As an example, let me take an agrarian economy where I am a producer of rice and a lot of other people have produced other foods such as other cereals, pulses, oilseeds, vegetables, fruits, meat products, fish, etc. … They can satisfy their want only if they themselves have something to offer in exchange. “_Bala

With this example, do you want to mean that, for somebody to buy a product from somebody else, he has himself to product something in exchange;
that, to make an exchange, the production of one implies the production of the other;
so that the production of each one of them becomes then, the demand for the other ?

michael August 10, 2010 at 5:08 pm

Don, I just found this exchange:

Me: “Consumption trumps production in creating a viable flow of money. Production isn’t always right.”

You: “That is a major point – production is *not* always right! You finally get it.”

While I appreciate your congratulating me, this just goes to a point I’ve been making as long as I’ve been contributing here: the customer is king. Production is merely an item in the expense column until the moment someone buys your product. So this isn’t my Saul-like conversion to your religion you’re seeing. It’s just more of my same old diatribe.

The economic history of America describes the search for markets. Our gift was to be tremendously productive, an energetic young society with entrepreneurial gifts. But we had the misfortune to be born into a world without much money. So build as we might, we had to stop before long and come to realize we had need of some market for our wares.

It took a long time, and many early imperial adventures, before we realized that the market we were seeking was our own employees. No matter what we did abroad, the only money we made was obtained from extractive industries, not sales. If we had any hope of selling our wares to the foreigners, we had to first loan them the money to make the purchase. The Marshall Plan and the IMF were two attempts to do just that. Both were government stimulus programs in search of ways to create rich markets.

I note the irony that a large Communist nation followed in these footsteps, and made of itself the only Communist nation to prosper and rise to economic power. But then they’ve had a long history of commercial success. (The Chinese, of course.)

The hidden benefit of the scheme, of course, is that after the sale has been made and the proceeds pocketed, they still owe you. Big time. Just like we owe China.

Bala August 11, 2010 at 7:57 am

” Your train of reasoning is useful for a food product, where at some point your market (humanity) is going to want to eat another meal. You can wait out the slow spots, if storage isn’t too expensive and the white mold doesn’t get you.

It doesn’t quite work for industrial products. ”

Why? What are “industrial products”? In what ways are “industrial products” different from “food products”? The fact is that they are not. A simple way of understanding this is that I could exchange my rice for wheat or for televisions. All that the latter requires is for someone who has produced televisions to want rice in exchange.

At a very basic level, the point you are missing is that “exchange” requires two parties, each of who has something to offer that the other wants. In addition to this, they should be able agree on an exchange ratio (commonly known as the price). If any of the parties does not have a product or service to offer in exchange, there is no deal. No exchange.

” Let’s take two: the Segway and the Edsel. Top execs were so sure they could anticipate desire they spent huge sums in rushing these babies to market. And the response was underwhelming. ”

This statement of yours shows that you completely fail to understand the difference between two very important concepts – “need” and “demand”. A producer is not meeting a “demand”. He is serving a “need” felt by the customer. Identification of a “need”, to satisfy which a customer is ready to offer something he has produced, results in a “business idea”, i.e., setting up an running a production system that produces a product/service that satisfies that “need”.

Let’s take the very example you have chosen. People who buy cars actually have a “need” for transportation of a particular kind. This “need” existed even before the first car was designed, leave alone produced. Prior to the production of cars, this need was served by a number of options such as horses, animal-drawn carriages, steam-boats on rivers, etc. Prior to the discovery of steam-power, animals and animal-drawn vehicles were the only options for transportation.

Some times, “needs” are “latent”. Certain products, while designed to meet “felt needs” (i.e., needs that are recognised prior to production and which trigger the production) satisfy certain other “needs” that customers did not “feel” prior to the product. These are what we call “latent needs”.

Producers of cars cater to such “needs” – “felt’ and “latent” – of their customers. The better they serve their customers’ “needs”, the more successful they will be at their business.

Customers too make their choices based on which needs they wish to satisfy most urgently. That depends on their ability to pay. If I earn only enough as to buy a car that costs Rs. 4 lakh, buying a car that costs Rs. 8 lakh means that I will have to leave a lot of my other “needs” unfulfilled.

In the particular case of Segway, the problem was not the lack of “demand” for Segway but a faulty assessment of “need”. The producers of Segway thought that customers have a need for a 2-wheeled electric personal transport vehicle and put over $100 million behind it but could not get the success they wanted because the “need” did not exist. At least, the “need” was not so strong that a customer could justify to himself the choice of Segway over other options for transportation.

” Production isn’t always right. ”

My position does not require that production should always be right. It only says that “need” exists, with or without production. “Needs” are sometimes felt and sometimes latent. Production is an attempt to profitably satisfy these needs. The sum total of all the transactions involving people attempting to satisfy these needs by buying specific products/services constitutes “demand”.

“Need” is real. Production is the striving to satisfy “needs”. “Demand” is just a statistic.

” So the only thing you can do in such a situation is take the hit. Consumption trumps production in creating a viable flow of money. ”

You forget that money by itself has to be “produced” first before it can be exchanged. You are so steeped in your statolatry that you fail to see this obvious point.

” Much safer would be the production of action games. ”

“Safer” or “riskier” is a matter of judgement. See how easily you mistake your personal judgements for pronouncements of universally valid truths.

” We know the appetites of gamers is constant and voracious. ”

People have an appetite for “entertainment”. Prior to gaming, people bought various other forms of entertainment. Thrill-seekers would use their leisure time undertaking adventures of various kinds. “Gaming” just satisfies a particular form of that “need” for a particular kind of customers. Smart producers who recognise this “need” and the readiness of people to give stuff that the producer values in exchange for the “game” end up “creating” the demand (I use “create” because demand is only a statistic).

” And the products are prices such that nearly everyone can afford to buy a predictable number of new games each year. ”

The “affordable” prices become possible because of the number of people who experience the “need” to entertain themselves through gaming. The reason the number of games sold each year is “predictable” is probably linked to the underlying factors that drive the “need” of the customer for entertainment. It could be age. It could be life-style. It could be education and exposure. It could be the need for “acceptance” in one’s peer group (if one is a teenager). It couod be a lot more things. My idea is not to speculate on this but to show that there are underlying needs.

” Informed market research should drive your choices. ”

Have you studied market research? I have studied as well as done a little bit of market research. And what I have learnt of it tells me that the goal of market research is not to estimate demand but to identify/understand “needs” (felt and latent), the factors that drive the existence and strength of the “needs” and the extent of their prevalence so that one may decide appropriate business strategies. Real market research NEVER pretends to estimate demand.

” It’s different in the production of food. ”

It’s different ONLY to the extent that food satisfies “needs” different from the ones that transportation vehicles do.

” So long as you can sell your entire crop to people with enough money to buy it, that’s certainly true. But if the money runs out before the supply does, there’s not much you can do. ”

My argument does not require “money” for it to be valid. It is as valid in a direct exchange economy as in an indirect exchange economy. Further, let me repeat that you are guilty of ignoring that money by itself has to be “produced” before it can be exchanged. Your statement, therefore turns out to be unintended agreement with my position.

” And I do observe that there comes a point where your customers’ money runs out. ”

That means that that’s all my customer has produced. I should have known that before. I would have to consider myself foolish/unfortunate for having acted without knowing this.

” You have to anticipate what your market really wants, and provide exactly that. ”

Thanks for mentioning the obvious. However, you err in calling that demand. You are talking of “needs”. As a producer, my job is to know what “needs” of my customer I am satisfying.

” It’s they who drive your decisions. ”

Of course!! Customer is the king. He who serves the customers’ needs most effectively shall turn out to be most successful. To do so, he has to “produce” goods and services for which customers exchange goods and services that they themselves produce(d). And, at the risk of repetition, demand is just a statistic.

Bala August 11, 2010 at 8:11 am

Gerry Flaychy,

” With this example….. so that the production of each one of them becomes then, the demand for the other ? ”

Why do you ask this? Do you think I would err in saying so?

michael August 11, 2010 at 8:19 am

Bala: Let’s both try to avoid the pitfalls of sophistry. Obviously, there are ways in which food commodities and industrial commodities behave alike; there are other ways in which they don’t.

So long as your food, kept off a slow market, doesn’t spoil there will still be demand for it. It is considered to be a necessity. But the Segway? No one needs it. Maybe consumers would be tempted to buy one for a hundred bucks. But if the maker is unwilling to sell at that price, they haven’t got a deal. (You’ve said as much.) Exchange does require two parties. But if one doesn’t want what the other has, there’s no exchange.

Your discourse on need versus demand is interesting. But not quite what I was getting at. This is how it looks to you:

“Need” is real. Production is the striving to satisfy “needs”. “Demand” is just a statistic.

And this is how it looks to me:

“Need” is a psychological state, existing in the mind of the potential customer. “Demand” is his demonstrated willingness to put his money on the table and literally demand the product. “Actual sales” are what drives my decisions as to what to produce, in what quantity, and where to price it.

Whenever one puts out a new product, or changes the price of an existing one, he can only go by his best guess as to how the market will respond. In this, the market ends up, as usual, being king.

We really are both saying similar things if different ways.

I do confess, though, to the crime of “statolatry”. Everything I say presupposes a condition of commerce operating from within a stable state. Were I doing business in an unstable state, or in a non-state, I might find the most successful business model to be the employment of a Tek-9. In which case I would point it at the customer and tell him “I have nine reasons why you should buy my product: continued life.”

Bala August 11, 2010 at 8:39 am

michael,

” Bala: Let’s both try to avoid the pitfalls of sophistry. ”

Who’s the sophist?

” Obviously, there are ways in which food commodities and industrial commodities behave alike; there are other ways in which they don’t. ”

I agree. But where they behave alike is in the simple fact that they both need to be “produced” before they can be exchanged.

That apart, the objective of my discourse was simply to show that “need” and not “demand” drives production. There is no demand prior to production. Demand can only come up when there is something to demand (and to offer in exchange, meaning be produced first).

” We really are both saying similar things if different ways. ”

That’s rather brazen of you. I am saying that to demand, you first need to produce. You are saying “demand” is everything. These are not the same thing in different ways.

” “Need” is a psychological state, existing in the mind of the potential customer. ”

Good. That is an important step forward. Having made this “leap” I am sure the next one is obvious – That you can’t add up “needs” and call that “Aggregate Needs”. That would be rather stupid. The same goes for “aggregate demand”.

” “Demand” is his demonstrated willingness to put his money on the table and literally demand the product. ”

No!!! That assumes that money is something objective. The way I would put it is that the customer, by putting money on the table, displays that satisfying the “needs” that the product in question satisfies is more important to him than the “need” to keep the money in his hands just as cash holding or to spend that money to satisfy other “needs”.

How do you add all that up into something meaningful called “demand for the product”? How do you further go on to add this across products and industries and call it “aggregate demand”?

I hope this exposes the utter foolishness of the notions you seem to subscribe to.

Finally, you still haven’t responded to a very basic point I made – that money too needs to be produced before it is exchanged.

mpolzkill August 11, 2010 at 8:50 am

“Who’s the sophist?”

Michael = terrible sophist

Bala = painfully earnest

Bala August 11, 2010 at 8:54 am

mpolzkill,

” Bala = painfully earnest ”

I apologise for any pain caused by my rather long and boring posts. If on the other hand you mean that the pain is all mine, let me assure you that I enjoy educating. I have spent the last 11 years of my life (all the productive parts of it) teaching.

mpolzkill August 11, 2010 at 9:01 am

I was just giving you the business a bit while noting that you are the furthest thing from a sophist.

Gerry Flaychy August 11, 2010 at 8:46 am

Bala, I just want to know if I understand correctly. But you are not obliged to answer me if you don’t feel to answer.

Bala August 11, 2010 at 8:51 am

Gerry Flaychy,

I’m sorry if that sounded too defensive, but I would like to understand your intent before answering it.

Dropping my defensiveness, let me now say that you worded my idea right. Please feel free to correct me if I am wrong.

Gerry Flaychy August 11, 2010 at 9:14 am

Bala, my intent was to understand correctly what you said before I can know if I agree with it or not.
For me you are not wrong and I agree with this view of exchange.

Dave Albin August 8, 2010 at 8:27 am

Economic “science” (and all science) is only as good as the data set – that’s the problem with the central planners; their data set is far from complete, and yet they make policy as if it were complete. It is impossible for a group of economists to understand (or even record) all of the relevant data and their interactions – that is why monetary and economic policy lead to boom and bust cycles so regularly, and allow the market to be exploited.

I can come up with all sorts of data sets from the biological world that show how resources are shared, competition plays out, etc., (very similar to our economics game) and try to use this to predict what will happen. In very simple situations (one or a few resources with a few players), I can do it. Put in real world data, with millions of resources and actors, and all interacting at the same time, I will get some data – but it will be essentially worthless. This is what central planners try to do to the economy, and thus, it’s no wonder that their predictions are wrong. So, it would stand to reason that making policy with this data would be wrong, too.

michael August 9, 2010 at 12:27 pm

Dave: If the data possessed by the central planners is far from complete, so must be the data possessed by the Austrians. Is one set of thinkers necessarily in possession of better data than the other?

The planners have the easier job. All they have to do is to test their best guess empirically. If it brings about the improvements they desire, and no unforeseen consequences bare their ugly heads, the project is judged a success.

The theoreticians have an impossible task: to prove that their theses are correct in every conceivable circumstance.

Of course, in real life the planners do have a theoretical basis for making their plans. And every plan, once implemented, stands in need of some correction down the road. So the people who guide our economy continually make corrections in light of each morning’s news.

Where most of us differ from the Austrians is that we can see where an entirely unplanned economy would very quickly go off the tracks and crash. Which, in Austrian terms, is freely admitted and described as a “correction”.

Dave Albin August 9, 2010 at 10:03 pm

The difference is that Austrians admit that central planning is not possible, which is quite simply, the truth. The booms and busts are prolonged by intervention and planning. Corrections are shorter-lived in a free market. The planners have an impossible job, and yet, they don’t seem to realize this or care much when their plans are inaccurate. Why do they keep tinkering and correcting when they almost always over or under correct? This is the problem (back to what I said above) – they are working with a very incomplete and poorly understood data set. Sadly, I think you are right – they skim the morning news and make massive policy changes.

Daniel August 6, 2010 at 6:18 pm

michael, I don’t care about your bullshit regarding TIR, but I will continue to insist on what I have requested before, listen to this: http://mises.org/media/1975and, before you reply anything (before even doing what I asked)The book does have references (surprise: not all references are in the form of footnotes)This is not the book, it’s a lecture, which DOES have references, but you would know that if you had listened to it, instead of calling me a gullible sucker and a liarJust listen to the goddam thing and stop pussy-footing and being evasive. I’m certain your attention can be focused for 35 minutes on something you merely need to stand still to understand.Protip: use a notebook and pen while listening to it, write down the references, then verify them yourself, then misunderstand them or take them out of context or disregard most of it and hang on to some irrelevant detail, then write a huge block of text about it
PS: bring back preview :(

Daniel August 6, 2010 at 6:22 pm

michael, I don’t care about your bullshit regarding TIR, but I will continue to insist on what I have requested before, listen to this: http://mises.org/media/1975

and, before you reply anything (before even doing what I asked)

The book does have references (surprise: not all references are in the form of footnotes)

This is not the book, it’s a lecture, which DOES have references, but you would know that if you had listened to it, instead of calling me a gullible sucker and a liar

Just listen to the goddam thing and stop pussy-footing and being evasive. I’m certain your attention can be focused for 35 minutes on something you merely need to stand still to understand.

Protip: use a notebook and pen while listening to it, write down the references, then verify them yourself, then misunderstand them or take them out of context or disregard most of it and hang on to some irrelevant detail, then write a huge block of text about it

michael August 7, 2010 at 1:33 pm

Hi Daniel, thanks for your patience.

At this point it would be rude of me not to give your lecture a fair hearing. I’m beginning to see that during my exploration in recent weeks of this novel Austrian world I’ve been giving an exaggerated attention to its inhabitants, and their odd (to me) manner of thinking… and too little to the core texts that animate them.

And I’m taking notes as I go. Here’s my first note:

A. A bookkeeping assessment of the deficit spending that financed WW Two would show that zero stimulus had been achieved– because every dollar borrowed would have to be repaid at some point up there in the future. So over time, every stimulus has its downside. In fact there would be a less-than-zero effect, as interest would have to be paid on the debt in addition to repayment of the principal.

That would be, I’m assuming, the Austrian take.

The corollary would be that government spending NEVER enters the productive economic stream, in that it makes no positive net contribution. That is, it never aids in the creation of wealth. That is, there is no multiplier effect. It stands at a net zero effect because you have to take out the money to put in the money. It constitutes rearranging the change in one’s pockets, from one to the other.

Do I capture the argument fairly? If so, let’s go forward.

B. I found this useful description of Say’s Law today:

“[Say's Law of Markets] held that the act of producing goods provided the purchasing power (neither too much nor too little) for buying them. Thus there was invariable equivalence betweeen the value of what was produced and the purchasing power available to buy that production.”

(BTW I wish someone here had been able to describe Say’s Law so effectively during all the time I was railing against it. Put this way it’s comprehensible.)

So that I would conclude that neither government spending, in the form of stimulus borrowed from future earnings or disbursement of tax receipts in hand, nor private spending from the stores of money accumulating from either the earning of wages or the disbursement of profits, results in any net creation of wealth. And the reason for that is that one cannot charge MORE for the purchase of goods produced than has been spent on their production, without implying an increase in the amount of money in circulation. There’s only so much money in this system.

So both systems share the same defect. Neither results in any increase in capital (without, of course, the issuing of new money to describe the same amount of value) but rather describes a redistribution of the finite amount of money already in existence. Thus there is zero growth either way.

C. But let’s rather measure the wealth that’s been created. On the one hand the privately owned factory assembles shoes (let’s say). So that after the money has been circulated once, not only does the same amount of money still exist, but now there are a certain number of pairs of shoes in existence: a gain in wealth.

Very good. But think of this: the builder of the shoe factory has also had to borrow funds (or take them from savings) to build the factory. This represents buried monetary assets used in building his engine of production. So this sum must be deducted from the total of money in circulation. It is no longer in circulation.

Strict bookkeeping demands that we take that debit into account.

Now let’s see where that money comes from. Should it come from the pocket of a venture capitalist, interest must be paid on it, resulting in a further (and continuing) debit. If the investor is a shareholder, he holds stock which is a debit against the value of the company. And if he gains dividends or interest from the enterprise, those are likewise debits in the money stream.

The flaw here can be described in a nutshell. Suppose a tiny world, in which there is only one dollar in existence. If I loan it to you at 5% interest, you pay me a nickel for every year you borrow that dollar. Let’s let five years go by.

You still owe me the full dollar… but you also have paid me 25 cents. There’s no way a universe where the payment of interest is legal can exist without a degree of inflation of the money supply. The numbers just don’t add up!

This is no doubt the reason the Muslims forbade the charging of interest. A culture that invented the zero was certainly mathematically astute enough to have figured out the flaw.

D. But I digress. Let’s return the the capitalist in search of funds to build his shoe factory. But this time, instead of the needed funds coming from the pocket of some venture capitalist, they come in the form of a small business loan, from Uncle Sam.

U.S. has gained those funds from tax receipts, in the same way our venture capitalist has gained them from interest or dividends. And by either avenue of gain, the provider of capital has produced funds that have come from an illusory gain. If from taxes, they are a deduction made on production. And if from funds earned in the form of interest or dividends, they come from an illusory accounting that leaves out the implied multiplication of the total money supply.

So both forms of commerce are equally built on magic dust. Without increasing the money supply they are quite unsustainable.

Your thoughts on all the above would be invited.

BTW I’m now only up to 01:34 of the lecture. I still have 35 minutes to go. I’ll listen to the rest of it now.

JGiles August 7, 2010 at 2:09 pm

B: Yes, you’re exactly right. Spending never creates wealth. The product is the wealth; by the time money is spent, the wealth has already been created. The spending is merely shuffling it around. THIS is the case against government intervention, as I understand it; Government cannot, because of the calculation problem, know what people want to be created, and throwing money around can’t fix that problem.

C: “Very good. But think of this: the builder of the shoe factory has also had to borrow funds (or take them from savings) to build the factory. This represents buried monetary assets used in building his engine of production. So this sum must be deducted from the total of money in circulation. It is no longer in circulation.Strict bookkeeping demands that we take that debit into account.”

Incorrect. The money still exists and is still circulating; after all, the factory wasn’t built out of money, it was built out of bricks. The money is merely in someone else’s hands now.

The money, to take your example, comes from a venture capitalist, 5% interest, etc. By the end of five years, yes, the factory owner has paid 25 cents and still owes a dollar. But this isn’t a problem; it simply means he needs to persuade someone else to give him a dollar by trading some shoes for it, so he can pay the debt off. The money supply doesn’t need to change; someone else needs to have less money, so the factory owner can have more money, so he can pay off his debt. And since the factory owner is lowering prices by creating wealth, it’s possible for other people to lose money without actually losing any value; they have the same standard of living as before, despite the fact that they have less money, or alternatively a better standard of living with the same money.As the amount of shoes in the economy increases, the price of shoes drops, because the utility people have for shoes also decreases; once you have one pair of shoes, you don’t need another one immediately, so you’re willing to wait or pay less for a second pair. As such, without the supply of money ever changing, the price drops because more shoes exist.

The issue you’re having is that you are conflating money with capital. Money is not capital. Money is a token, which can represent a CLAIM on capital; that is, machines, buildings, and products. Money is not a factor of production; it does not disappear when used.

michael August 8, 2010 at 12:53 pm

I will concede your take on C.

As to the implication of interest being that the full repayment requires a greater sum of money than exists, I’ll have to stick with my own take on it. My example was in a microcosm, where one dollar was in existence. In a world with zillions of dollars being lent back and forth, the conclusion still holds true. In order that full repayment take place, such a world needs more money than exists. So it must either inflate the money supply or go into default.

And in our world, inexorable pressures from investors wanting a return have caused the money supply to continually expand. To deny them that necessary expansion is to incur a business recession or depression.

That’s a flaw in the model. A big one. The solution you describe is a shell game.

JGiles August 8, 2010 at 1:35 pm

You’re forgetting the fact that money can be spent multiple times.

Go back to your one-dollar example. Let’s say the total money supply is only two dollars; the factory owner has borrowed a dollar, built his factory, and is selling shoes for five cents each. Every year he pays 10 cents on his loan, some of which goes to interest and some to principle. Let’s say it takes him twenty-four years to pay it off.

He’s paid 2.40 to the investor in total. That should be impossible, right? After all, there’s only two dollars to go around!

Except, of course, that he’s only been paying 10 cents per year. The investor, during those twenty-four years, spends money, which goes to other people, and those people then need to buy shoes occasionally. In order to do so, they need to give some of that money back to the factory owner, and then he pays it back to the investor again. Assuming the money isn’t in some way destroyed, it might go through the cycle several times.

Your conclusion would only hold true if the payments DUE on every loan were, at one time, greater in sum than the money supply. The total value of the loans can be greater than the extent money supply with no difficulty, as long as the loans don’t mature all at once.

michael August 9, 2010 at 9:41 am

“Go back to your one-dollar example. Let’s say the total money supply is only two dollars; the factory owner has borrowed a dollar, built his factory, and is selling shoes for five cents each. Every year he pays 10 cents on his loan, some of which goes to interest and some to principle. Let’s say it takes him twenty-four years to pay it off.”

In this world, only one dollar exists. And if you’ve used it to build your one-dollar shoe factory, no sales are possible. The dollar has been used up.

But let’s go to a ten dollar world. You use one dollar to build your factory and hold a reserve to buy leather and to pay workers. And you sell shoes to the holders of the other nine dollars.

You sell five dollars’ worth of shoes over the next five years. And you pay 25 cents in interest to your banker. Then you repay the interest, another dollar.

Now the banker holds $1.25, you hold $5 and the market holds the remaining $2.75. They are now richer in shoes, but poorer in funds. The money has transferred from, well, let’s call them the working class. Now they have to work more to earn back some of the money they spent. But at each revolution of the cycle, they end up with less, in order that you and the banker enjoy a greater profit from their labors.

And so we see empirically. As the economy proceeds, the only way the public can begin to stay even is through a constantly expanding money supply. Otherwise over time, all the available funds transfer to the capitalists’ side of the table.

The total sum of all investor value lost in the 2007 meltdown was $38 trillion, according to one account. Estimates vary widely, but all are in that range. And by all accounts there’s not that much money on earth. Yet most of that value represents actual money that was exchanged in its acquisition.

Obviously there’s been a tremendous overuse of expansionary credit involved in our economic ‘miracle’. And if we had to ever pay it all back to the hole in the continuum from which we borrowed it, we would then owe ourselves more than we could ever possibly earn.

2. I see the truth of what you’re saying here:

“The issue you’re having is that you are conflating money with capital. Money is not capital. Money is a token, which can represent a CLAIM on capital; that is, machines, buildings, and products. Money is not a factor of production; it does not disappear when used.”

It’s another way of saying that money used as operating capital (in the ordinary sense of the word) makes stuff happen. It builds things. And the tokens remain in circulation. It’s just that over time the forces that guide its direction of flow cause it to end up in fewer and fewer hands. Those who have to earn it to have access to it, spend it. Then they are faced with the requirement to earn more, or to exit the economy.

JGiles August 9, 2010 at 10:50 am

“In this world, only one dollar exists. And if you’ve used it to build your one-dollar shoe factory, no sales are possible. The dollar has been used up.”

Here you make the same mistake again. That dollar has NOT been “used up”. It has moved. Specifically, it has split up and gone into the hands of various bricklayers, machine-makers, and leather suppliers. These people need to buy shoes, and now they have money. So the money cycles back to the supplier, who makes more shoes, which sends the money on to different leather suppliers and workers, who then buy shoes, and the carousel keeps moving, producing more goods with each revolution.

“You sell five dollars’ worth of shoes over the next five years. And you pay 25 cents in interest to your banker. Then you repay the interest, another dollar.Now the banker holds $1.25, you hold $5 and the market holds the remaining $2.75. They are now richer in shoes, but poorer in funds. The money has transferred from, well, let’s call them the working class. Now they have to work more to earn back some of the money they spent. But at each revolution of the cycle, they end up with less, in order that you and the banker enjoy a greater profit from their labors.”

A couple problems. First off, 1.25+5+2.75 = 9, not 10. That dollar you spent building the factory STILL EXISTS. Dollars don’t disappear when invested. This is what Austrians mean when we talk about “wealth creation”; the money still exists, and there is more real capital around because it changed hands. Money is just tokens getting traded around, remember; one person spending money means someone else just earned money.

Second, that fat-cat banker isn’t just swimming in his Olympic-sized pool full of greenbacks. Either he’s investing it (that is, promoting capital expansion and thus producing more wealth), or he’s using it to support his fabulously wealthy and indolent lifestyle (that is, giving other people money, so they can buy things, and produce more capital). Hell, maybe he’s buying shoes! And the same applies to the factory owner; that $5 does him no earthly good unless he’s making it work, so of course he is. And THAT means that all that money is cycling back through the hands of the working class.

“And so we see empirically. As the economy proceeds, the only way the public can begin to stay even is through a constantly expanding money supply. Otherwise over time, all the available funds transfer to the capitalists’ side of the table.”

But it doesn’t stay there. Money sitting around is no good to anybody. Money owned by “capitalists” gets invested in capital; which means that it goes back to the working class, who are the ones that produce capital! And then they buy things, which sends it back to the capitalists, who pay the working class, who buy things. . .

michael August 9, 2010 at 12:46 pm

J Giles: I’ll grant you everything you’ve said. The money does circulate in just such a fashion. The issue remains, though, that as income inequality in our economy has been widening over the past thirty years, and as we can see no existing force that might countervail that tendency, over time the lower ninety percent will end up with mere crumbs… while the top one percent will have become vastly more wealthy until they have the entire pie. Because at each turn of the wheel these owners of our economy take another tithe.

Is this good for production? I’ll grant you, Warren Buffet probably owns more pairs of shoes than does Joe Sixpack. But I’ll wager that he buys fewer shoes than do the entire bottom fifth of the income totem pole. Our factory owner stands to profit more in an environment of greater income equality, where each person probably owns several pairs of shoes, and buys more on a regular basis.

2. “Second, that fat-cat banker isn’t just swimming in his Olympic-sized pool full of greenbacks. Either he’s investing it (that is, promoting capital expansion and thus producing more wealth), or he’s using it to support his fabulously wealthy and indolent lifestyle (that is, giving other people money, so they can buy things, and produce more capital). Hell, maybe he’s buying shoes!”

Demonstrably, what he and his friends have actually been buying have mostly been financial hedges, derivatives and guess-based securities. That is, speculative uses of money that don’t necessarily reflect actual value… just as ten years ago they were all buying high flying speculations in tech stocks. And such investments periodically flame out in a spectacular display of destruction, a potlatch ceremony of accumulated capital.

We can all point to ridiculous wastes of money spent by the government. We should also properly appreciate the equally wasteful excesses coming from private investors, each making their own informed choices. And if the private derivatives market has recently seen equity losses in the range of $38 trillion, it dwarfs even the cost of Iraq and Afghanistan. Or so it would appear.

Maybe the investment class should give its money to the government. It would at least be destroyed at a slower rate!

Russ the Apostate August 9, 2010 at 12:56 pm

“The issue remains, though, that as income inequality in our economy has been widening over the past thirty years, and as we can see no existing force that might countervail that tendency, over time the lower ninety percent will end up with mere crumbs… while the top one percent will have become vastly more wealthy until they have the entire pie. Because at each turn of the wheel these owners of our economy take another tithe.”

You’re confused. It’s the government that takes tithes in the form of taxation. (Oh, that it were only a tithe!) And the force that might countervail the tendency to the widening income gap would be to lower taxes so that middle class people can also afford to invest their money in profitable ways.

michael August 9, 2010 at 1:06 pm

You’ll have to explain, then, how it is that the government gets poorer and poorer, having to live on borrowed wealth, and the lower 90% of earners also over time get a smaller and smaller share of the pie, while those fortunates at the top handily accumulate more and more of our collectively held wealth. Whether one measures in terms of total working capital, personal wealth or income, they win out handily over everyone else.

And I’m still curious as to why everyone says that there’s such a need for investment funds. Isn’t that the one category of money we have the very most of?

“And the force that might countervail the tendency to the widening income gap would be to lower taxes so that middle class people can also afford to invest their money in profitable ways.”

They get to invest in IRAs right now. And that’s the one most exposed category of investment, that whenever there’s a slight downturn, IRA owners lose their shirts.

Someone’s making all the money those people lose.

JGiles August 9, 2010 at 1:25 pm

Ok, so let’s see where we are. What I’ve laid out here is the free-market theory; that in a free market, things get better for everybody in the way I’ve described. More capital is created, no inflation or deflation is necessary, everyone ends up better off, sunshine and roses, etc.

What you just said is, “But that’s not what we’ve seen happen, so your theory is wrong.”

To which the response is; well, this theory has never actually been tested in the US. There hasn’t BEEN a free market in the US, ever. Well, I take that back, fur traders in the 15-1700s probably had an almost entirely free market.

So the theory says everything ought to be great. The world isn’t great, which would seem to be a refutation; except that the preconditions of the theory haven’t been met. So current conditions can’t justly be blamed on the fallacies of free-market theory.

Now we’ve concluded that we can’t definitively say yea or nay, because there hasn’t been any real test. Of course, definitive tests are nearly impossible to come by in economics. Still, let’s look around and see if we can come up with any evidence in favor of (or against)the free market.

Ok, the polar opposite, total state control, has been obviously shown to be a flop; take a look at the Soviet Union. Total meltdown. Full-fledged Communism obviously isn’t the answer.

What about China, the other large Communist country? Well, it was also in economic meltdown mode for a long time. . . until the Chinese government started loosening its economic controls. Then China went into a fast economic climb. Less regulation seems to have led directly to prosperity. Of course, China still isn’t as free as the US. . . and it still isn’t anything like as rich as the US either, per capita. This seems to indicate there’s a direct correlation between more economic freedom and more prosperity.

So we’ve seen total state control and partial state control. Now let’s pick a third example, and try to get as close to the free-market ideal as we can. I’d suggest Hong Kong.Well, for a long time Hong Kong has had very, very few government interventions into the market. No Social Security, very low taxes, no minimum wage even. . . and growth has been both fast and steady. This is not to say that Hong Kong is an ideal free market; in one glaring departure from laissez-faire ideals, the government controls the entire real estate market. But Hong Kong is the freest economy in the world. . . and it’s also one of the strongest.

So at least from looking at these examples, it seems to me that less government intervention and socialization leads to a wealthier people. Given that, I draw the conclusion that the immense inequality you complain of in America is caused not by economic freedom, but by the government. This is supported, in my eyes, by the fact that income inequality is much, much higher in countries where the government has more economic control; for instance, in Venezuela, the income difference between the top and bottom deciles is some 48 times, as compared to 16 times for the US and a bit under 18 times for Hong Kong.

In my eyes, despite the lack of a scientifically rigorous proof, the preponderance of evidence seems to be on the side of laissez-faire. So here’s my challenge to you, Michael; present YOUR evidence. Explain why it is that economic freedom benefits the people only to a point. Tell me (and support your assertions) how it comes to be that letting people do as they wish with their own property ceases to be optimal once some given level of freedom is achieved, and find me an example of a government that out-performed the free market. If you can do that, I’ll convert. But I don’t think you can. I don’t think such an animal exists.

Russ the Apostate August 9, 2010 at 1:36 pm

michael wrote:
“You’ll have to explain, then, how it is that the government gets poorer and poorer, having to live on borrowed wealth…”

If the government is getting poorer, it’s because politicians continue to promise the people that magical things will happen, if only the people will vote for them. In other words, the government spends beyond its means. That’s not the fault of the wealthy few. In democracy, wealth doesn’t count so much; my vote can cancel out Warren Buffet’s.

“…and the lower 90% of earners also over time get a smaller and smaller share of the pie…”

What does it matter the relative size of a person’s piece of the pie, as long as it gets bigger in absolute terms?

“… while those fortunates at the top handily accumulate more and more of our collectively held wealth.”

Collectively held wealth? Excuse me, but most wealth isn’t collectively held (nor should it be). My bank account is my wealth, not everybody’s.

“Whether one measures in terms of total working capital, personal wealth or income, they win out handily over everyone else.”

So what? They also make it possible for me to have wealth that the average person of 150 years ago could not possibly have conceived of. I have a machine in my house that controls the climate inside the house! And another machine that acts as an icebox, keeping my food fresh, without my having to lug ice! (It even makes ice!) I have a machine that allows me to listen to any music I want, any time of the day. I have a machine that allows me to watch little miniature plays, like my own little theatre in the comfort and privacy of my own home! And of course, I have machines that allow me to communicate with anybody else in the world who has a similar machine! I never want for food. I have cheap treatment for diseases that killed Rothschilds back in the day. I have an embarrassment of riches, such that if I climbed into a time machine and told somebody from 1860 that common people would have such things, I would be considered either a liar or a madman. What does it matter that some people have yet more than me?

“And I’m still curious as to why everyone says that there’s such a need for investment funds. Isn’t that the one category of money we have the very most of?”

What we need to do is let the market decide where the money should be spent.

“They get to invest in IRAs right now. And that’s the one most exposed category of investment, that whenever there’s a slight downturn, IRA owners lose their shirts.”

IRAs and 401(k)s are at least partially tax dodges. People invest their money in them to avoid having to pay taxes on that money. If the government would just lower taxes drastically across the board, instead of using such incentives to try to engineer where people invest their money, maybe there wouldn’t be such a problem?

michael August 10, 2010 at 5:25 pm

Me again, Russ. Our dialog:

Me: “…and the lower 90% of earners also over time get a smaller and smaller share of the pie…”

“What does it matter the relative size of a person’s piece of the pie, as long as it gets bigger in absolute terms?”

It’s not getting very much bigger, meaning the totality of money in circulation. In fact when you measure the value lost in each burst bubble, the portion accessible to 99% of us has repeatedly gotten a lot smaller. I will agree that the money handed over for all those worthless shares of garbage did end up in someone’s pocket. But it certainly left the street. That part of the pie that virtually all of us have to share got a LOT smaller. $38 trillion smaller in 2007, in fact. The lost money still exists– but now it belongs to a handful of very quiet people.

But you will naturally shift the conversation away from money, chastising me and telling me that the expanding pie is really one of WEALTH. That’s something very different. It’s our possessions. It’s our store of capital. It’s that magical stuff we pray to, and which gives us meaning and prosperity.

We, meaning in this instance probably more like the 60% of Americans, have less of that too. We never did have very much of it. And the numbers, for us, are eroding over time.

“Over the past three decades the American left has made much of the fact that income inequality in this country has been rising steadily – a rise, in its view, that constitutes ironclad evidence that the economy is increasingly troubled.

“When the political left has mounted such arguments, the right generally has countered by pointing out that income levels in the U.S. were also rising and that upward mobility, long a hallmark of the American economy, was not only still possible but also quite common.

“Until recently, it was hard to declare a clear-cut winner in this protracted debate. Both sides could produce reasonable support for their respective positions, and most centrist observers would probably call it a draw and be on their way.

“Today, though, a certain dispiriting clarity is emerging, which is placing the right’s argument in considerable jeopardy.

“To cut to the chase, over the past decade or so inequality in the U.S. has increased, median income has stagnated and the chances for upward mobility have dwindled…”

http://www.newsobserver.com/2010/08/09/618119/were-seeing-more-inequality.html#ixzz0wFDbGwlL

It’s worth reading the whole article, which is well enough sourced that you can check out the assertions yourself.

michael August 10, 2010 at 7:35 pm

JGiles: The way you put it, the theory is compelling. Now all you need is some place to perform the experiment.

Obviously you can’t do it in the USA. It’s impossible to get there from here. Here our government is the very culprit that prints the money. No matter what kind of transaction you want to conduct, the other party wants dollars in exchange. And dollars are just an imaginary currency.

And you can’t conduct your experiment in the rest of the world either. Because the world over, even in Vanuatu, the currency of preference is the US dollar. The entire global system of trade has been hopelessly compromised.

So there’s that problem. But also, you put the onus on me, and tell me that I must also prove that if your virtual Austria ever became a fact, it still wouldn’t work.

If it’s hard to prove a negative, it’s ultra-hard to prove an imaginary. The only thing I can offer is that over the past 28 centuries of economic history, the owners of the means of production always end up with all the money. And some redistributive method must be employed before the game can proceed.

Normally the method employed has been war. But that’s innately messy, and ends up destroying more wealth than it redistributes. Also, there’s the problem that the new owners are rarely any more savory than the old owners were.

I like the method employed in a modern mixed economy, like that of the New Deal thirties. The state intervenes to the degree necessary to nourish those who’ve lost the economic game, while still encouraging the game’s winners to play on and to prosper. They still get to keep most of the pie. They just don’t get to end up with ALL the pie.

JGiles August 11, 2010 at 8:32 am

And now we come to real heart of the matter. You are arguing from precedent; saying, “Look, this is how it is, and how it always has been, and how it’s always gonna be. Deal with it.”

And I am arguing from idealism, saying, “But this is how it OUGHT to be, and we should work towards that.”

I have presented evidence, which seems fairly clear to me, that freer economies create more wealth. I can’t find any evidence that more state control makes people richer, or more equal, or better off in any way than a free market does. Maybe it exists, and I haven’t found it. If you know of any, please show me. I am always willing to change my beliefs.

In “the last 28 centuries of economic history”, no libertarian economy has ever existed, that I am aware of. In the past, the violence the rich and the governments used to steal their money was more obvious, but it continues today. And to me it seems clear that the economic problems of the world are in large part caused by that violence.

So, really, I’m chasing a pipe dream, and I’m trying to convince you to chase it too. If we can get enough people chasing it, maybe we can catch it.

michael August 11, 2010 at 2:55 pm

“I have presented evidence, which seems fairly clear to me, that freer economies create more wealth. I can’t find any evidence that more state control makes people richer, or more equal, or better off in any way than a free market does.”

But later on, you say there’s been no such thing as a libertarian society in all of history. So what you’ve presented is not anything like evidence: it’s merely a logical train of thought. Marx, in his time, presented the same kind of argument. One not based on evidence but on surmise that was so convincing, he felt it must be true.

Here are the three societies that have been able to create wealth on a broad scale since the beginning of the Industrial Revolution: Netherlands, Great Britain and the United States. Which of them have had no governmental function involved in the management of their economies? Which of them has had no central bank from which to issue debt? Which has had no social programs?

The other necessary element for the creation of wealth has been a fresh continent to plunder. India, Africa, the Americas, the Indies… whenever adventurers with modern armaments and a sincere desire to become rich find fresh horizons guarded by poorly armed natives, a bout of wealth creation is the speedy result. Without such a precondition, wealth ‘creation’ amounts in large part to rearranging deck chairs on the Titanic. It amounts to organizing the existing wealth in such a fashion that its distribution becomes more limited, until finally it is owned by the very few.

The only counterweight to that tendency is technologic innovation; that is, finding novel ways to reuse the things we already possess.

tlpalmer August 6, 2010 at 10:44 pm

Does anyone have a figure on how many employees the feds have distracting blog postings? From what I read here and other sites there are either a good number or tv is in reruns. I trust it is known who I refer to.

newson August 7, 2010 at 1:28 am

i hope the pay is as ratshit as are the comments. the hours are obviously long.

newson August 7, 2010 at 1:32 am

it seems that the strategic use of drones is not restricted to foreign territories.

Per-Olof Samuelsson August 7, 2010 at 5:13 am

Just a short “thank you” for publishing those extracts. (I read Human Action in 1980 and have not re-read the whole book since then. So those reminders are really welcome.)

igbymac August 7, 2010 at 9:06 am

The apologists of government interference with business and of labor unionism ascribe all the improvements in the conditions of the workers to the actions of governments and unions. Except for them, they contend, the workers’ standard of living would be no higher today than it was in the early years of the factory system.

It is obvious that this controversy cannot be settled by appeal to historical experience.

An enjoyable philosophical read.

Of note, 60-odd years have passed since the article was written and we now have a bit of history previously unavailable to illuminate the labour union element. Since 1980, the effective purchasing power of the people in the USA has dropped 17% correlating with a virtually steady decline of labour union membership since 1983.

mpolzkill August 7, 2010 at 10:29 am

Comrade, are you going to answer my questions here:

http://blog.mises.org/13472/give-capitalism-a-chance/#comment-709043

or are you just going to keep spouting the lamest union propaganda ever?

newson August 8, 2010 at 1:30 am

on a tangent, i like your john pilger video. he’s good on us imperialism, but terribly blind when it comes to despots on the left, especially those in latin america.

Fallon August 7, 2010 at 2:56 pm

It is not lack of detail that is problem, Mises is saying. All data are past events. It is recognizing the need for apriori tools in creating a rational cause/effect analysis of a necessarily, arbitrarily, chosen set of data. Now, then, what is the quality of the apriori assumptions and their applications in a historical work? Given the enormity of the task, an attempt to “predict the past” of acting, subjective-valuing, choice-making humans, one then can see that a historian applies “understanding” in her work. Understanding is how historical data concerning humans is unavoidably weighted for cause.

Richie August 7, 2010 at 6:18 pm

“Since 1980, the effective purchasing power of the people in the USA has dropped 17% correlating with a virtually steady decline of labour union membership since 1983.”

I noticed you emphasized “correlating”, which I take to mean that you do not imply causation. I still would not take too much from the decline of labor union membership. Go back and check to see how much purchasing power has declined since 1913 (what mafia organization was created that year?), then you’ll see the real enemy of the dollar’s purchasing power.

igbymac August 7, 2010 at 7:30 pm

Richie, you accurately noted my word choice of correlation; it is simply historic data unavailable in 1949 that might warrant some investigation.

Everyone is familiar with the Federal Reserve’s impact at some level, including Woodrow Wilson. But from 1913 until 1949, its effects could be accounted for in some part by the author and his theory’s development.

newson August 7, 2010 at 8:18 pm

the third world has plenty of unions, many of which dominate entire sectors.

Old Mexican August 8, 2010 at 7:30 pm

Re: Michael,

But of course [lack of consumer spending is a bad thing]. The engines of production have to slow, it would seem to me, in precisely the degree to which the purchase of their products has been curtailed. Otherwise they’re wasting money by stacking the shelves with unsold product.

Makes one wonder why would producers bother to stock the shelves with Halloween costumes and paraphernalia if people will suddenly stop buying after Oct 31.

It’s a mixed bag. Some good, some bad. The big downside, for me, is so many jobs lost (20 million of us) as to have an impact on the American way of life. It’s a national disaster, having so many ruined families and empty homes on the market. It’s quite literally ‘depressing’.

It’s not called a “Correction” for nothing, Michael.

Here’s another bad: the accumulation of capital goods, tools for the increase of production, is increasingly made useless when we enter conditions of large reserve capacity. More factories are idle. More retailers have closed their doors. More investments have gone south, being tied to the fortunes of the consumer economy.

And?

You appear to very strongly oppose the “circular flow of capital”,

I am not simply “opposed” to it – the fact has been pointed out that it is not a correct representation of how the economy works.

[...]whereby the funds spent in consumer purchases go directly into turning the wheels of industry, and fattening the payrolls of workers who themselves contribute toward the next round of profits.

You forget capital purchases. Again, I work in the cement business, and workers do not flock our stores to buy sacks of cement. Most of our customers are in the business of putting up buildings and other infrastructure. The circular model thus does not work, and a model that cannot explain all cases is flawed.

The only other one I can see is the upward flow of capital from the profits of retail industry [...]

This tells me you have very little appreciation of what “capital” means. You equate Capital with Money, which is incorrect.

The lion’s share of this upward distribution of profits does not re-enter the circular flow down below, because it is not spent on more purchases. Instead it remains in the financial sphere, the commanding heights of our economy.

I will let know our Capex manager that you told me that capital just stays “up there” somewhere with the owners. He will get a kick out of it.

Is this a fair summation of your argument?

Not by a long shot. The problem with the circular model of capital is that a) it is one dimensional and b) it is simplistic. The biggest issue resides in treating each actor as a single block: a) all consumers as simply “Consumers” and b) all producers as simply “Producers.” This is a totally unrealistic view, since consumers can be producers and viceversa, but for people like Krugman, he sees no distinction.

This simplistic view of things makes Paul Krugman and other Keynesians reach the conclusion (which is logical given the flawed model) that if you give money to people, they will spend it and thus make the merry-go-round work again. This conclusion totally misinterprets the complexity of a n economy where the actors can be both consumers and producers, as well as misconstrues the role of money (or, like you, even misinterpret what money is.)

Wage levels are certainly set, in some degree, by a company’s industrial output.

Yes, in some degree. They are actually determined by a worker’s productivity. The more productive the worker, the more he can earn.

But only because a greater output, once it is sold and the proceeds banked, becomes profit in the pocket of the company. They have more money with which to do whatever they want: expand into new plant, pay their workers more or just give it away as investor dividends or lavish executive comp. [lavish???]

I am going to dismiss your attempt at innuendo, Michael, to say that whatever decision a company makes regarding their profits, the decision is not going to be something the investors do not want.

And ‘full capacity’ is a way of expressing both maximum industrial output and maximal consumer buying power[sic]. The two are just different aspects of full prosperity.

You are confused about what “maximum capacity” means.

Haven’t I just agreed with you? If we reject the arguments allegedly put forward by Krugman, shouldn’t we begin by asking ourselves why business leaders voluntarily cut back production, precipitating recession and cutting into their own bottom line?

Not all businesses cut back, Michael. Krugman believes ALL of them do (because of his Consumer=economy model), which is why he prescribes money being pumped into the economy.

Tell me how business can take the lead in powering the country out of recession, unaided by a misguided and inevitably counterproductive federal government.

You haven’t understood anything, Michael: The recession is the CURE to the previous malinvestment. What businesses have to do is liquidate the bad investments so the better-managed businesses can put these assets to work. The government is acting as if the problem is the recession itself, when in fact, the problem already happened. Krugman and others instead prescribe that money is poured into everything to grease the gears, as if the economy was this Goldberg machine that got stuck in the middle somewhere . . .

Jon Leckie August 9, 2010 at 4:58 am

Maybe this will help michael break through the invisible walls of the self-imposed intellectual prison in which he finds himself: A Keynes v Hayek rap battle. Very entertaining and very informative.

“I’m sorry there buddy if this sounds like invective/
but prepare to be schooled in my Austrian perspective”

http://www.youtube.com/watch?v=d0nERTFo-Sk

michael August 9, 2010 at 10:25 am

Mex: Most of your post just tells me it’s no concern of yours what happens to anyone else. And that’s just an opinion, more or less equal to any other. But there are a few matters of fact we can still try to clarify.

1. “The only other one I can see is the upward flow of capital from the profits of retail industry [...]”

Your reply: “This tells me you have very little appreciation of what “capital” means. You equate Capital with Money, which is incorrect.”

I use it in the popular sense. ‘Investment capital’ is the term people commonly use to refer to income extended toward investing in business infrastructure. If you want to say “capital” when you mean business infrastructure, fine.

2. “The lion’s share of this upward distribution of profits does not re-enter the circular flow down below, because it is not spent on more purchases. Instead it remains in the financial sphere, the commanding heights of our economy.”

Your reply: “I will let know our Capex manager that you told me that capital just stays “up there” somewhere with the owners. He will get a kick out of it.”

In context, I was talking about the distinction between those of us who are primarily wage earners and those who enjoy substantial investment income, such that they are less dependent on wages. And I do understand that shares are owned by a great many people, in the form of IRAs and the like. It’s only that those comprise an infinitesimal portion of total investments, not to mention an infinitesimal portion of the average wage earner’s income stream.

The share of the two is constantly changing, with income inequality increasing over time. That is, available funds in circulation over time accrue to the top fraction of earners at a greater rate than they do to the bottom 90%. Likewise wealth (that is, possessions plus investment capital) belongs inordinately to the top. And the curve is the same whether we compare the top one percent with the bottom 90% or we compare the top tenth of one percent to the bottom 90% of the top ten percent… whether we’re measuring income or wealth.

This tells me that the structure of our society is in fact making the rich richer and the poor poorer. I know you don’t mind a bit. But over time this is unsustainable. Once the worker bees have been sucked dry there will be little in the way of profit stream for any of your investments. And that is especially the case in your ideal world, where the money supply has stabilized. Your fellows will end up with all the money on earth and no access to any more, once the bleeding is complete.

2. You’re in the concrete biz? I hope you’ve taken the high road, and refused to bid on any projects funded by state, local or federal funds.

Smile, bub. We may be class enemies… but I’m pleased to see you find there’s no reason for personal rancor. Comes the revolution I’ll put in a good word for you. :)

Old Mexican August 9, 2010 at 11:06 am

Re: Michael,

Mex: Most of your post just tells me it’s no concern of yours what happens to anyone else.

Which is irrelevant in an economics discussion. Concerns are one thing, actions are another.

I use [capital] in the popular sense.

You’re in the wrong place.

‘Investment capital’ is the term people commonly use to refer to income extended toward investing in business infrastructure. If you want to say “capital” when you mean business infrastructure, fine.

No, investment capital IS capital – the problem here. Michael, is that you equate money with capital, but this is not the case. Capital comes from SAVINGS, not just money.

In context, I was talking about the distinction between those of us who are primarily wage earners and those who enjoy substantial investment income,

The distinction is worthless, Michael. I do not subscribe to the collectivist mindset of looking at people as “groups”. Capital comes from savings; a person that invests must have accumulated savings at one time, and for that he or she had to be productive, earn a wage, exchange or trade.

It’s only that those [with IRAs and 401K] comprise an infinitesimal portion of total investments, not to mention an infinitesimal portion of the average wage earner’s income stream.

Must be keeping you awake at night. I usually take melatonin when equally useless information keeps me awake…

The share of the two is constantly changing, with income inequality increasing over time. That is, available funds in circulation over time accrue to the top fraction of earners at a greater rate than they do to the bottom 90%.

Those miserable bastards. Imagine that, keeping the fruits of the use of their property.

By the way, there is no such thing as “income inequality”, Michael. I earn more than a shoe polisher because I am more productive than a shoe polisher, so why would that make our wages comparable is beyond me.

This tells me that the structure of our society is in fact making the rich richer and the poor poorer. I know you don’t mind a bit.

I don’t mind it because it is not true. What is “poor”, to begin with? Certainly, the government has placed the so-called “poverty line” ever higher up because the “poor” have this nasty habit of outperforming the previous “poverty line”. At that rate, I am going to become “poor” without even noticing it.

Since the rest of your argument rests on this faulty thinking, I will have to ignore it. I already answered.

2. You’re in the concrete [sic] biz? I hope you’ve taken the high road, and refused to bid on any projects funded by state, local or federal funds.

I’m not the owner, Michael. The company I work for is global, and it makes both cement and concrete, not just concrete. Our sales department will take any customer that pays. The point is that my wage is not contingent to the number of bags of cement I could buy. The “Ford made clients of his workers” canard does not apply.

michael August 10, 2010 at 7:47 am

Your comment presents a target-rich environment, Mex.

Me: “‘Investment capital’ is the term people commonly use to refer to income extended toward investing in business infrastructure. If you want to say “capital” when you mean business infrastructure, fine.”

You: “No, investment capital IS capital – the problem here. Michael, is that you equate money with capital, but this is not the case. Capital comes from SAVINGS, not just money.”

You offer a distinction without a difference. If I have $1000 and decide to put it into a mutual fund instead of buying a new computer with it, it’s still money. I’ve just used it in a different way. I do understand that we don’t speak of it as capital unless we use it to invest in some productive process.

This would lead to an interesting question: Can we say we are investing in a productive process if we put it up in asset-based securities? These bake no bricks, nor do they hull any wheat. All they are is vehicles for speculation. To buy them is exactly the same thing as buying chips in a casino at Vegas. All you’re doing is wagering, not adding to the amount of available capital in the world of production.

So there should be a new word for the kind of money one puts in play in this fashion. It’s clearly not capital.

Me: “In context, I was talking about the distinction between those of us who are primarily wage earners and those who enjoy substantial investment income…”

You: “The distinction is worthless, Michael. I do not subscribe to the collectivist mindset of looking at people as “groups”. Capital comes from savings; a person that invests must have accumulated savings at one time, and for that he or she had to be productive, earn a wage, exchange or trade.”

The distinction is valid. Those of us who use money mostly in the form of wage income and the purchasing of commodities have a very different view of money than do those who view money as the thing that does the actual work, while they just make decisions as to how to deploy it.

We only get to save any money when our incomes exceed our outgo. That’s why Social Security is so basic to our economy: it provides a savings floor for people who during their working life are never able otherwise to put aside any money.

Your comments that follow are an interesting blend of denial and aggression. You take pride in sneering at the under-people. But that is merely your opinion. Let’s address only fact:

“By the way, there is no such thing as “income inequality”, Michael. I earn more than a shoe polisher because I am more productive than a shoe polisher, so why would that make our wages comparable is beyond me.”

There is certainly income inequality, and the gap has been widening at an increasing rate over the past thirty years. That is, the shoe polisher has been earning less and less for performing the same function, while you are making more and more, for performing the same function.

Here’s an article from yesterday’s paper that describes the trend:

http://www.newsobserver.com/2010/08/09/618119/were-seeing-more-inequality.html

Why would that make our wages comparable? Your query makes no sense. Yours are going up. Those of wage earners are going down.

I continue: “This tells me that the structure of our society is in fact making the rich richer and the poor poorer. I know you don’t mind a bit.”

And you: “I don’t mind it because it is not true. What is “poor”, to begin with? Certainly, the government has placed the so-called “poverty line” ever higher up because the “poor” have this nasty habit of outperforming the previous “poverty line”. At that rate, I am going to become “poor” without even noticing it.”

That’s a core myth that sustains the financial and managerial classes, insulating them from seeing clearly the world they create. There are indeed poor people, meaning people desperately driven to find some way to get more money than is available to them. For reasons of education, character or background they are unable to. Without this pool of the desperate and jobless, your labor costs would be much higher.

BTW your business is entirely dependent on demand. When the real estate market sags and construction slows, you have to curtail production. That is, unless a kindly government takes up the slack and uses your product for maintenance purposes. Not a bag will move without the demand of someone wanting to buy it.

JGiles August 9, 2010 at 11:12 am

Michael, you’re absolutely right. The current structure of our society makes the rich richer and the poor poorer.

That’s a stunning indictment of the inefficiency of government intervention in and control of the economy, and a powerful argument in favor of a free and unfettered market.

Barry Loberfeld August 9, 2010 at 11:18 am

+1

Michael A. Clem August 11, 2010 at 2:32 pm

What’s really frustrating about “michael” is that he certainly seems to get part of the economic picture, but not the whole picture. It’s Bastiat’s “seen and unseen” all over again. michael sees the value of increasing employee wages, for example, but fails to see that that does NOT increase overall purchasing power unless productivity has increased. Without a productivity increase, it’s only some employees making more at the expense of others making less or going unemployed (similar to the flaw in increasing the minimum wage). It’s like he’s seeing cause and effect and mixing up effect for cause.

Jon Leckie August 11, 2010 at 3:08 pm

I think that’s right Mr Clem, but what for me is the most frustrating aspect of “michael” is that he just cannot take on what anyone else says. He replies at length, at such interminable, boring, repetitive length, but it’s completely one-sided. Several people – not me! I have only invective and contempt for him – have attempted to engage constructively with him, and for precisely ZERO result. He doesn’t want to learn, he’s apparently incapable of it. That’s what is really frustrating. His facts are wrong, his theory is wrong, and his repeated assertions that he has no theory but relies on his empirical observations as a successful entrepreneur (probably gathered from running a Wendy’s in Shitsville, Douchebagland) is just wrong. He’s just wrong wrong wrong, but is so supremely confident that his view is correct. That’s really REALLY frustrating. As I quoted above from the original excerpt from Mises:

“… this contempt for sound economic reasoning did not mean that they approached the topic of their studies without prepossession and without bias in favor of any theory. They were guided by the popular fallacies concerning governmental omnipotence and the alleged blessings of labor unionism.”

Sums him up perfectly.

Richie August 11, 2010 at 6:14 pm

Ignore the piece of s**t and he’ll go away. For some reason, some here still engage him in “debate.” Why? He twists people’s meanings, thinks he knows the Austrian viewpoint through and through, when really all he has is his bulls**t preconceived notion, and totally ignores people when they point out his contradictions. Obviously the s**tface is an intellectual lightweight when he stated once that no minimum wage existed in 1946, yet he acts as though he knows everything about history. When he first started posting here, he had me. I got angry at his arrogance. But now, I barely read his posts. Mostly I check to see what “mpolzkill” has in reply. I still believe he’s on Brad DeLong or Paul Krugman’s payroll. Clearly he has no life, since all he does is spew out his bulls**t here almost all day every day.

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