“… 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.

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.

” 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.

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.

Michael = terrible sophist

Bala = painfully earnest

” 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.

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.

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.”

” 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?

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.

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.

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.

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.

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.