1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/13524/in-defense-of-deflation/

In Defense of Deflation

August 10, 2010 by

What Austrians know for sure is this: Deflation can benefit all the people in an economy. But inflation can only benefit those who are massively indebted and inefficient — like governments. FULL ARTICLE by Doug French

{ 135 comments }

J. Murray August 10, 2010 at 8:09 am

I think this quote is properly attributed to Albert Einstein: “Insanity is defined as doing the same thing over and over again and expecting different results.”

You’d think that after 20 years of near zero interest rates in Japan, they would have gotten out of it by now if Keynesianism was right.

Jon Leckie August 10, 2010 at 8:27 am

Oh no Mr Murray, on the contrary, the Japanese experience shows a failure of the state to intervene with SUFFICIENT stimulus of the right sort and at the right time, that what was tried was too little and too late, and that once deflation (ohhh bogey bogey bogey!) sets in, all is lost and monetary policy is ineffective. So you can see that the Japanese experience actually CONFIRMS Keynesianism and validates the RIGHT sort of government intervention. Don’t worry about it!

(The key is to drink heavily before writing, once you stop thinking clearly, all of this makes sense.)

Jay Bird August 10, 2010 at 3:46 pm

I’d say that pacifism is a big problem for the Japanese, too. If they’d just start a war, all their economic problems would be solved! After all, that’s how FDR ended the Great Depression, right? Right? [extreme sarcasm intended]

Jon Leckie August 11, 2010 at 10:12 am

Amen, brother! But you know what, why go through all the hassle of travelling to another country just to blow their shit up – let’s just stay at home and trash our own stuff, then we get rich fixing it all back up again!

Huntsman August 10, 2010 at 9:58 am

Way to distinguish between price deflation and monetary deflation.

Dick Fox August 10, 2010 at 12:56 pm

I simply cannot understand why Austrian Economists, who so clearly understand the absurdity of crying about deflation when the money supply is expanding, ruin it all by praising deflation. There are many problems with this article.

First, profits are not the difference between the price of a good and its cost. This totally leaves out volume of sales. Profit from the sale of 10 items that cost $0.50 and sell for $1.00 is $5.00. Profit from the sale of 1,000 items that cost $0.75 and sell for $1.00 is $250.00. Now this may sound like nit-picking but the concept is important to understand this discussion.

Contrary to the assertions or Doug French and professor Hulsmann, prices many fall because of reduced demand. When that is the dynamic lower prices will not increase demand. From this your should see that lower prices can mean lower profits if sales volume falls.

Unemployment is also not restricted to either 1) the unemployed desiring to remain unemployed, or 2) being prevented from working at the wage-rate demanded. In the bust phase of the ABCT malinvestment becomes manifest in the form of falling demand and falling production. The economy can face a situation where the adjustment phase of the bust reduces production to where unemployment results. People may want to work at any wage, but until the adjustment is over there may simply be no jobs.

Also, when interest rates are low banks may still want to lend, but if the consumer has overextended his credit he simply cannot take on any more debt even at zero interest. Contrary to Rothbard’s comments banks may actually want to lend but simply are no qualified borrowers.

I absolutely agree that those calling for more quantitative easing and new stimulus are crazy under the definition of crazy as doing the same thing and expecting a different result. But equally crazy is not recognizing the real problems that come from real deflation.

Austrians need to return to Mises’s view that we “defend” neither inflation nor deflation. The economy functions best with a stable currency. Any time we move away from this position in either direction, we are introducing poison into the economy.

The Anti-Gnostic August 10, 2010 at 1:44 pm

Talk about missing the forest for the trees ….

“Deflation” as Mr. French uses the term, is cheered because it is the sine qua non of recovery from the crash that follows the inflation-induced boom. It is not a question of favoring either inflation or deflation as a matter of policy: the Austrian economist would have no monetary policy to begin with.

Matthew Swaringen August 10, 2010 at 1:49 pm

I’m thinking you are strawmanning by not placing this article in the context for which it is intended. Extreme deflation is not desirable, except insofar as it’s necessary for correction. And no one is claiming that some people are not going to lose who aren’t to blame for the crimes of inflation. On the contrary, the reason they want to end inflation now is because they want this to end. Deflation is unfortunately the only way for this to occur.

I also just disagree with you that there “may simply be no jobs” because there is always human desires to be fulfilled, even in recession environments. Temporarily low wage jobs (or self-created “make work” jobs) like going around looking for work that people can do for others is still possible. And if the wage is lower than the minimum making that work illegal, whose fault is that? Certainly not the fault of any Austrian.

I can tell you right now if people came to my house and were willing for low enough cost to do many things I’d pay them something to do it. I’m sure this is true for neighbors of these unemployed/etc. It may not be desirable for them to look for work in that fashion, but it is something that has been done in the past by others and has benefited them. I’d suggest reading Pedrag’s article here, and if you honestly think our current environment worse than serbia/croatia I’d like to know your reasoning for this. http://blog.mises.org/12670/involuntary-unemployment-the-case-of-serbia-and-croatia-read-more-ludwig-von-mises-institute-homepage-httpmises-orgixzz0nwy8wilf/

Dick Fox August 11, 2010 at 8:19 am

Matthew,

As economists we need to be precise. We should not have to assume away error by assuming context.

Daniel August 11, 2010 at 10:25 am

I concur

The distinction should (ideally) be made clear. I know it’s easy for those that are knowledgeable of Austrian Economics to take certain statements for granted (especially when speaking amonst themselves) but to those who do not know the Austrian School, it might appear as simply being a contrarian dissent (“they” like inflation, “austrians” like deflation) and makes discourse less accessible

The Austrian School is the “black sheep” school of economics (despite being the closest to reality than any other school of economics) it would be nice to make it as accessible as possible to anyone with interest in learning.

Eric August 10, 2010 at 3:39 pm

“Austrians need to return to Mises’s view that we “defend” neither inflation nor deflation. The economy functions best with a stable currency. Any time we move away from this position in either direction, we are introducing poison into the economy.”

I’m not sure how you can’t defend deflation if you have a stable currency. After all, if your currency is stable the leading cause of deflation is increased productivity.

michael August 10, 2010 at 4:13 pm

“After all, if your currency is stable the leading cause of deflation is increased productivity.”

Eric: We have a relatively stable dollar now, and no sudden increase in production. What has happened instead is a large falloff in discretionary incomes, due to unexpected job loss.

Broad-scale price deflation/inflation depends on two variables: supply and demand. In the current case, demand for most nonessential products has dropped. When many consumer prices recently dropped over a prolonged period, they were chasing lowered demand in search of the best price point for returning sales volume to normal. Some found it, others didn’t.

Likewise with the price of labor. Predrag (in his article on unemployment among Serbian refugees) is correct. A downsized chemical engineer, dumped by Glaxo in a bout of downsizing, can often find work mowing lawns. He or she just won’t make as much as they’ve become used to. Not until the pharmas are hiring on again– and probably not even then, if history is any guide.

Jonathan Finegold Catalán August 10, 2010 at 4:23 pm

Michael,

I’m not sure in what world the current dollar is stable.

J. Murray August 10, 2010 at 4:34 pm

In his apparently.

michael August 10, 2010 at 6:56 pm

In this one:

http://www.inflationdata.com/inflation/inflation_rate/historicalinflation.aspx

Price inflation has stayed in the 3% range or less over the past 18 years. And the prognosis is for it to go even lower before it begins to go up again. The specter of runaway inflation scares very few among us other than at this website.

J. Murray August 10, 2010 at 7:37 pm

That’s because you’re not living in Zimbabwe, where it’s a fact of life.

Matthew Swaringen August 10, 2010 at 7:39 pm

Compounded inflation as a monetary plan is compounded theft. 3% would mean about every 23 years the dollar is worth half what it was at the beginning of the cycle. For those with savings this means they are forced to put their money in stocks/commodities to get it to grow, markets that are by their nature speculative. I think I may have heard you argue against such things quite a few times.

When you consider that the value of a fixed currency would go up over time due to productivity increases, the difference is even more stark.

As for the “specter of runaway inflation” you’ll have to give that awhile. If it happens I doubt you’ll come back here to say you were wrong.

Daniel August 11, 2010 at 1:16 am

Not to mention transfering wealth from the poor to the rich.

Then again, michael asking for inflation should come as no surprise since it merely confirms what I already know: leftists are actually elitists

Jon Leckie August 11, 2010 at 5:54 am

But Daniel, they get to be elitist because they’re the only ones that “care”, elevating them to such a height of moral superiority that they no longer need to consider the costs of their efforts to order the world so as to “protect” the proles, who are incapable of ordering their lives otherwise. Enter condescension and patronism.

The most successful enterprise of the Left in the last 100 years has been capturing the moral and emotional high ground of the debate. This exempts them from having to prove the practical outcomes of the policy programs implemented in the name of “caring” and “compassion”: policy programs that gut the very processes by which a community can make the most of the scarce resources available to it.

Say it loudly, say it proudly: I’m an Austrian because I care about the community in which I live, because I want as many people as possible to live as good a life as is possible given the scarcity of resources available to the community, and because I think the Austrian program is the best way to achieve these objectives.

michael August 11, 2010 at 6:44 am

J Murray: The United States is not contemplating following the example of Zimbabwe. We have a proven track record of fiscal responsibility, even during times when the debt was far higher, as a proportion of GNP, than it is today. That’s why investors and central banks of all nations invest in our debt readily, even at all-time low rates. We are the investment of choice.

Zimbabwe, to put it mildly, is not. IMO playing the Zimbabwe card signals the weakness of your armamentarium of argument.

And Matthew: I will agree, if your plan is to live to 150, an anticipated average inflation rate of 3% signals to the prudent investor that they should probably seek a yield of 4-5%. That’s really not too high a mark to aim for.

Second, I don’t think I’ve really argued against the stock and commodities markets. I will say this, though. They both appear to be operated as bets that inflation will be faster than anticipated, to the degree that they try to push future earnings up above current rates. So they exert serious inflationary pressure, as the holders of capital goods try to obtain higher prices amidst a background of saturated demand.

In that, I hope they are unsuccessful. I do own a variety of stocks. But I buy to hold, not to trade. I look for a favorable P/E and a decent dividend yield. So I wouldn’t consider my ownership of a bit of the Big Enchilada to be contributory to the world plan to drown us in inflationary policies.

Lastly: “As for the “specter of runaway inflation” you’ll have to give that awhile. If it happens I doubt you’ll come back here to say you were wrong.”

I think it’s highly unlikely. Since the founding of the Bank of England (something like 1688 as I recall) national debt has been the foundation of wealth. I don’t think it’s about to go out of style. Investors have gotten used to choosing among nations for that one that has the strongest capability to repay. Right now it’s the United States. In a pinch, were there ever to be a run on our Treasury, a purge of federally held assets would certainly not cover outstanding claims. And I believe that is why everyone is so hesitant to precipitate such a thing. Their own savings are hostage to the dollar’s fortunes.

Even China, anxious to become the world’s number one player, would find its wealth collapsing in a heap of worthless IOUs if it ever tried to play the debt card. So I’m comfortable enough to remain invested in the Almighty Dollar.

If you think there’s another currency that’s undervalued, though, there are markets ready for you to play in. Maybe you should trade them for chips of another color.

J. Murray August 11, 2010 at 7:16 am

michael -

The point is, if inflation was good, then Zimbabwe should be incredibly wealthy. Zimbabwe used to be a fiscally sound nation, much like ours. It was one of the rare bright spots in Africa, a net exporter, and enjoyed a fairly high standard of living. Then they decided to engage in wealth redistribution (in their case, racially motivated) and monetary stimulus. Now it’s a mess. The USA is basically doing the same thing and we aren’t immune to the ill effects.

michael August 11, 2010 at 7:23 am

Zimbabwe’s a good example of a failed economic policy. As no one in any nation you or I are likely to visit is following such a policy, I think your observation is moot.

Runaway inflation destroys economies. Controlled inflation buoys them. A strict zero-inflation policy would keep the US economy in a perpetual state of mild contraction. Politicians elect not to back such a policy, as it would result in their quickly being ejected from office.

People like their money to be a little bit available. They like the good times that flow from such a policy, in terms of brisk business volumes, easy lending practises and full employment. We prefer such times over those of mild penury, want and induced thrift.

Jon Leckie August 11, 2010 at 8:52 am

michael, do you understand that your benign rate of inflation – where would you put it, 2-3%? – combined with the stagnation of average wages over the last 30 years has slowly eroded the purchasing power of that section of the community on whose behalf you inundate these pages with your waffle? Do you realise that this was Keyne’s explicit objective, to lower wage bills by stealing the purchasing power from the dollars paid to employees? No one is scared – hell no one really notices it happening – because the effect is not felt in a week, or months, or years, but decades. The effect is the same though. Those whose basic wages are not increased with inflation slowly but surely fall further and further behind.

Do you realise that the answer is not reflexively “pay higher wages”, but a stable monetary and market environment (ie. no central banking, no government interference) so that productivity gains can be felt by the average worker either through higher wages (if margins on production permit) or lower consumer good prices (ie. price deflation, which increases the workers’ purchasing power)?

You would impoverish the very section of the community that you profess to support. God I can’t believe I responded to you again. Hey why don’t you start your own blog somewhere, everyone from mises.org who enjoys your inanities can come and visit you there!

Daniel August 11, 2010 at 10:35 am

Jon, he fell into the same trap so many marxists fall into:

Condemning “the capitalists” for profiting by exploiting the proletariat by fooling them into giving up their “surplus value” and accepting lower wages, when in reality, it is the very “benign rate of inflation” which fools the working class into accepting constantly diminishing wages.

Daniel August 11, 2010 at 10:59 am

I forgot to add: inflation which is intentionally created by their [marxists'] own central bank

michael August 11, 2010 at 3:42 pm

Dear Everyone: Thanks for piling on in the matter of the slow pace of price inflation robbing paychecks over time of their buying power. It can’t be denied that it has that effect, requiring COLAs to compensate for the tendency.

But consider the alternative. We have a standard remedy for inflation, especially for the kind that threatens to run away: structural adjustment programs. High interest rates. Shuttered banks. Massive layoffs. The suspension of public payments. No food in the marketplace. It’s a return to a barter economy, until it has been determined that the target has been met.

In our economy we don’t do such things on purpose; they get done during recessionary periods. What we do instead is to try to limit the economic contraction and minimize the pain.

The perfect moment to conduct your experiment would have been in mid-2007, when it became apparent that the world’s major banks were about to topple like dominos. All had been very badly overextended and a correction was in the works. Your prescription (and really, it’s very tempting to agree with you) would have been to Take No Action.

So let’s see what the outcome would have been. That’s what Hoover tried in the wake of October 1929, and the result was four long years in the trough of a near-total absence of any business activity. If we were to follow that template, we’d now only be ending the third year of severe depression, with no sign of movement on the horizon. Your remedy would be to force us into a period of permanent structural adjustment, an eternal 1933.

In the absence of some sort of New Deal, how long would it then take for markets to reappear and capital formation to commence anew? No one knows. We’ve never had the heart to extend the experiment for that many years.

Also, the events of 1937 illustrate that we can’t balance the budget and have a recovery at the same time. We can either do one or the other. To insist on balancing the budget at this moment through low taxes and fiscal austerity would be to keep us perpetually short of being able to get back on our feet. The coupon clippers would be able to do well for a while, as past earnings were distributed. After that? A long slow spell.

It’s not that either I or Keynes ever thought that budgets never needed to be balanced. Obviously they do. But balance them over the period of the economic cycle. There’s no need to have to balance them every fiscal year. I would use this time to spend freely but intelligently… then once jobs began to recover, to return to the fiscal policies of the late 1990s.

Such a recovery program would appear to be a political impossibility at this time. So the prognosis is for that long slow spell to continue.

Jon Leckie August 11, 2010 at 4:25 pm

michael says:
“We have a standard remedy for inflation, especially for the kind that threatens to run away: structural adjustment programs. High interest rates. Shuttered banks. Massive layoffs. The suspension of public payments. No food in the marketplace. It’s a return to a barter economy, until it has been determined that the target has been met.”

And then:
“That’s what Hoover tried in the wake of October 1929, and the result was four long years in the trough of a near-total absence of any business activity.”

And further:
“In the absence of some sort of New Deal, how long would it then take for markets to reappear and capital formation to commence anew? No one knows. We’ve never had the heart to extend the experiment for that many years.”

He’s clearly intelligent, but his poor mind is infected. Above the portal to that world, the world of michael the deluded (no longer the douchebag, that’s not really fair), should read those immortal words:

“Through me you pass into the city of woe:
Through me you pass into eternal pain:
Through me among the people lost for aye.

Justice the founder of my fabric mov’d:
To rear me was the task of power divine,
Supremest wisdom, and primeval love.

Before me things create were none, save things
Eternal, and eternal I endure.
All hope abandon ye who enter here.”

michael August 12, 2010 at 9:41 am

Jon: It doesn’t occur to you that your comment has added nothing of substance?

My observation was that imposing an Austrian solution on our current dilemma would propel us into a perpetual recession. Any recovery would be precluded, as events could not move forward from the zero point. Business would just proceed at a much slower pace than before… much in the same manner as if Herb Hoover had remained our president forever, and we had been stuck indefinitely in a 1933 mode. ‘Slow’ would become the new normal.

Such an observation ought to provide plenty of food for thought. In fact what I’m looking for is an effective argument from you or from anyone here, one that might broaden my understanding. Or even upgrade my opinion of you all from crank cult to legitimate branch of economic thought. But you’re giving me nothing to go on but empty jibes.

Jon Leckie August 12, 2010 at 9:47 am

There’s no point in responding to you with content, michael – you ignore it! You silly man, each of the “facts” from your post that I qouted are demonstrably wrong, as a matter of historical record! You contribute only noise, never substance. But you won’t respond to anyone else’s patient responses, so why should I do anything but mock you? You fool.

Further, you have demonstrated over and over again that you are not here to broaden your understanding or take on a new perspective. You are an arrogant blundering sneering ass, you take in nothing of the arguments presented on this site. You’re only worthy of contempt and invective.

Bala August 12, 2010 at 9:54 am

Jon Leckie

” There’s no point in responding to you with content, michael – you ignore it! ”

Amen to that.

” But you won’t respond to anyone else’s patient responses, so why should I do anything but mock you? ”

Amen to that again,

” You fool ”

You are being very uncharitable to the fools in this world.

Scott D August 12, 2010 at 12:24 pm

Take No Action…That’s what Hoover tried in the wake of October 1929

Here is Hoover’s own take on his “Do Nothing” economic policy from a 1932 speech:

“We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action…. No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times…. For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered…. They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.

Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for … “the common run of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom…. We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.”

For concrete examples of Hoover’s “Do Nothing” policy, observe:

–Hoover’s conferences with business leaders in December 1929, urging businesses to hold wages steady–which many, in fact, did, as many economists have observed as an unusual feature of this depression compared to prior depressions.
–The Hawley-Smoot Tarriff of 1930 – Certainly one of the most damaging pieces of legislation passed during the Depression era.
–Reconstruction Finance Corporation (RFC) Act of 1932 – Distributed aid and loans to state and local governments and various financial institutions.

Maybe you should follow the usual Keynesian tactic and just say that Hoover didn’t do enough, while ignoring the evidence of prior, much shorter depressions under laissez-faire policies.

michael August 12, 2010 at 1:47 pm

“There’s no point in responding to you with content, michael – you ignore it! You silly man, each of the “facts” from your post that I qouted are demonstrably wrong, as a matter of historical record!”

Possibly, but you have not pointed that out. Must I repeat that? You have addressed none of them. Namely:

1) michael says:
“We have a standard remedy for inflation, especially for the kind that threatens to run away: structural adjustment programs. High interest rates. Shuttered banks. Massive layoffs. The suspension of public payments. No food in the marketplace. It’s a return to a barter economy, until it has been determined that the target has been met.”

I contend that this would be the practical effect of implementing any deflationary policy. It’s been illustrated any number of times, in structural adjustments imposed by the IMF on bankrupt and rapidly inflating debtor nations.

Your take on the US is that we are a bankrupt and rapidly inflating nation. So show how your recipe for returning us to health would differ from that used with such success by the IMF.

2) And then:
“That’s what Hoover tried in the wake of October 1929, and the result was four long years in the trough of a near-total absence of any business activity.”

That’s pretty easy. At the beginning of October, 1929 we were ending the most wildly successful year in our nation’s economic history. Right so far? Then overnight, it was transformed into a credit freeze of unparalleled depth and severity. Hoover took no action other than a single plan, criticised at the time as being inept and insufficient. The result: four long years of credit contraction while damaged markets waited to heal.

So tell us your alternate history.

3) And further:
“In the absence of some sort of New Deal, how long would it then take for markets to reappear and capital formation to commence anew? No one knows. We’ve never had the heart to extend the experiment for that many years.”

Demonstrable. We have no idea… because the laissez faire approach has never resulted in a positive good. (Feel free to offer evidence to the contrary.)

“You contribute only noise, never substance. But you won’t respond to anyone else’s patient responses, so why should I do anything but mock you? You fool….” (You go on at some great length in this vein.)

This is the threadbare soul of your philosophy. All you can do is hurl insults. Should you elect to make a civil response addressing any of the points above I will be very pleased to comment on them in a constructive manner.

In fact I can see your ego has been bruised, so let me offer this olive branch:

“michael, do you understand that your benign rate of inflation – where would you put it, 2-3%? – combined with the stagnation of average wages over the last 30 years has slowly eroded the purchasing power of that section of the community on whose behalf you inundate these pages with your waffle?”

It’s a very strong argument, and one that can’t be glibly swept under the rug. Such a very gradual inflation has undeniably eroded buying power, and for that reason requires occasional cost-of-living adjustments in order to maintain wage parity with past levels.

Have I “proof”? Not easy to find current information at the moment, but here’s a comparison of real income gains and (losses) between 1977 and 1988, as given by Kevin Phillips in his The Politics of Rich and Poor (1990):

Lowest decile (Comparing constant 1987 dollars): (14.8%)
Second decile: (8.0%)
Third decile: (6.2%)
Fourth: (6.6%)
Fifth: (6.3%)
Sixth: (5.4%)
Seventh: (4.3%)
Eighth: (1.8%)
Ninth: a gain of 1.0%
Top decile: gains 16.5%
Top 5%: gains 23.4%
Top one percent: gains 49.8%

I think that’s indicative of a very strong bias in favor of the already quite well off; a bias in which the rate of price inflation plays only a very nominal role. But I’m sure you have equally devastating data to the effect that inflation is the more important issue.

I’d like to see it.

michael August 12, 2010 at 2:23 pm

Scott D: Not just a spirited answer, but a detailed and constructive one! Would that more of your colleagues took that attitude.

Yes, Herb Hoover did a couple of things. The speech you quote at length is, of course, typical political puffery. But you allege a specific: that Hoover made a nonbinding appeal to the business community that they hold wages at current levels, and that some of them complied. I’ll want to check that out, by examining wage erosion between December, 1929 and March, 1933. If such never happened, you’ve scored a point.

2. Smoot-Hawley. This was a ridiculous move, and certainly nothing a Keynesian, a socialist or a New dealer would have endorsed. It was a Republican initiative, and matched efforts on the part of every developed nation to erect trade barriers in a futile attempt to shore up domestic economies.

Smoot-Hawley was the main reason people today still think of trade barriers as being unthinkable.

3. The RFC. An example of too little being spent on too great a problem… although the $2 billion given to the states came in very handy. It was a decent model, but was applied only tentatively. Here’s Wikipedia:

http://en.wikipedia.org/wiki/Reconstruction_Finance_Corporation

In fact the RFC was sort of Obama-like in its failure to address the root of the problem in any forceful manner. Interestingly, Kevin Baker wrote a wickedly amusing article in the July, 2009 issue of Harper’s, titled Barack Hoover Obama. You’ll get a big kick out of it:

http://www.harpers.org/archive/2009/07/0082562

Still, you have a point. Hoover did not do nothing. He came up with one pre-New Deal concept, the RFC. And he even modeled it after a Keynesian concept, deficit spending. So he gets half a thumb’s up, for trying.

Four years. No results.

I would be more interested in looking at 1907, the details of which I don’t recall right now. Perhaps you have a point.

Jon Leckie August 13, 2010 at 4:10 am

Sure michael, here are some helpful references that you can read, ignore or misunderstand at your leisure (I know where my money will be):Your (1) (shuttered banks, barter economy etc). In a previous post, you stated that inflation isn’t a big deal because we can control it, as was demonstrated by the Volker Fed in the early 1980s. You will recall that interest rates shot up to what… 17, 18%? Within 18 months the economy was back on a growth pattern, with no shuttered up banks, bread queues or return to a bartar economy. Further examples can be found in the 1920s and in the second half of the 19th century, for more detail I refer you to: http://www.amazon.co.uk/Politically-Incorrect-Guide-Depression-Guides/dp/1596980966/ref=sr_1_1?ie=UTF8&s=books&qid=1281688950&sr=8-1

You hang on to your prejudices, citing cataclysmic downward spirals that would end civilisation to justify more of the same, regulatory intervention and fiscal and monetary stimulus. Malinvestments wreck the economy and must be cleared by the market mechanism, or they will continue to wreck the economy. This cataclysmic downward spiral does not occur at any point on the historical record, and certainly not the 1930s, yet you cling to it with such certainty. Which lead to (2).

Your (2) (Hoover was a do-nothing laissez-faire jerk who let the economy burn, and it took a real man like FDR to come and sort things out with massive government intervention). This is really a laugh. See the above link to Murphy’s book. Have a read, I’m sure you could finish it in a day. Bottom line is that Hoover intervened enormously. Scott D above has outlined part of what Hoover did. And after all those years of MASSIVE regulatory, fiscal and monetary intervention, what was the result? Absolutely nothing, a broken economy. The natural healing process of the uninhibited price mechanism reallocating capital to productive ends was not allowed to occur, leading to years of economic misery. And we’re in the middle of the sequel right now. See also Murphy’s articles on this site: here http://mises.org/daily/4613 and here http://mises.org/daily/4350, which contain further links. And for God’s sake michael do actually read them.

Your (3) (… I don’t even know what you’re saying here). See above at (1) and (2). The New Deal was a failure. A complete and total failure. But it is the fountainhead of Left wing government intervention and must be seen to be a success. You – quite incredibly – say “because the laissez faire approach has never resulted in a positive good. (Feel free to offer evidence to the contrary.)” This is just incredible. Everything around you, michael, every material progress in our combined histories, has been off the back of whatever productive capacity is left in the free market system, in whatever shell of laissez faire has been allowed to breathe under the weight of state intervention. As government intervention has eased back, growth has moved up, as the burden of the state has increased, the economy has suffered. If you honestly believe that laissez faire is broke, you should leave this site NOW – the gulf is too wide to cross.

You then – I don’t know, to deflect your acceptance of how insidious inflation is? – throw out some numbers showing how the top 0.5% benefit enormously? What is that supposed to do? We’ve had almost 100 years of massive state intervention, and you throw income inequality statistics at me ? Well jeez uh michael I guess that just shows how completely SHIT government interference is. You are a douchebag. And your answer is to have cost-of-living adjustments. So you would push up production costs through increased wages, either fuelling further consumer good inflation or leading to massive layoffs. Genius, mate. Genius. Oh but hand on, the increased wages would lift DEMAND and that would save the economy. OK. Douchebag.

Now as for your olive branch, well I think we all know what I’d suggest you do with that. My ego is fine. Please, please go away and READ something, don’t just come back and comment “constructively”, because you have not posted one constructive comment on this site. I’ve given you some links to some pretty good information, you may dispute it, argue with it, but please read it and consider that it might just have something of value. You condescending horse’s ass.

Scott D August 13, 2010 at 11:29 am

I wrote a response yesterday, but it never posted, so here it is again.

…You allege a specific: that Hoover made a nonbinding appeal to the business community that they hold wages at current levels, and that some of them complied. I’ll want to check that out, by examining wage erosion between December, 1929 and March, 1933. If such never happened, you’ve scored a point.

“With June 1929=100 we find that RAHE stood at 100.7 in June 1929, 99.8 in December, rising to 102.7 by June 1930 and to 105.3 in December 1930. June 1931 saw them peak at 111 falling to 108.3 by March 1933. Yet this period saw real payrolls fall by more than 60 per cent, real weekly earnings by about 30 per cent, factory employment fell by 42 per cent, unemployment rose to 25 per cent and production crashed. ”

Source: http://www.brookesnews.com/053101depression1.html

All the while, actual incomes fell and unemployment rose. Put simply, at Hoover’s suggestion (and we can’t know just what he might have threatened or promised), employers held wages up, but found that their labor costs were too high, so they had to cut back hours or fire workers. It was truly the worst possible action they could have taken at that point, with sales falling and downward pressure on prices.

2. Smoot-Hawley. This was a ridiculous move, and certainly nothing a Keynesian, a socialist or a New dealer would have endorsed. It was a Republican initiative, and matched efforts on the part of every developed nation to erect trade barriers in a futile attempt to shore up domestic economies.

Yes, some interventions are transparently, ludicrously harmful. Others are less obviously so.That doesn’t change the fact that this was an intervention, Hoover’s personal baby, in fact, and part of a host of interventions that he thought would boost the US economy. And, Republican or not, Hoover was a progressive, not a conservative. If the government of Hoover’s term had made it illegal to buy or sell on any day of the week but Tuesday, we would not call this Keynsian, but we would certainly call it interventionist and harmful. Only the most disingenuous would call it “laissez-faire” and subsequently blame a lack of government action for the tremendous hardship that followed.

3. The RFC. An example of too little being spent on too great a problem… although the $2 billion given to the states came in very handy. It was a decent model, but was applied only tentatively.

This is where Austrian and Keynsian economics will never meet. “Not enough” is thrown out apologetically after a massive and unprecedented intervention occurs, or occasionally, “it would have been even worse without it.” Such statements are often red herrings, and especially here. The RFC supports my point that Hoover pushed interventionist policies and was demonstrably not laissez-faire. I feel that this goes a very long way towards weakening the argument that the Great Depression was the result of doing nothing.

Four years. No results.

No positive results, anyway. Austrian economics tells us that the very policies Hoover supported would have been, on net, negative for the economy. I think that there would have been a recession, no matter what Hoover did, but the massive extent of the Great Depression, coinciding as it did with untried new Keynsian economic policies and idiotic actions like Smoot-Hawley, seems just a bit suspect.

I would be more interested in looking at 1907, the details of which I don’t recall right now.

I’ll see what I can dig up on the Panic of 1907. I’ve never been satisfied with the usual narrative that JP Morgan single-handedly saved everyone. Too pat.

And as a parting shot, here is another wonderful quote from Hoover in his December State of the Union address:

“It was recalled that past storms of similar character had resulted in retrenchment of construction, reduction of wages, and laying off of workers…I have, therefore, instituted systematic, voluntary measures of cooperation with the business institutions and with State and municipal authorities to make certain that fundamental businesses of the country shall continue as usual, that wages and therefore consuming power shall not be reduced, and that a special effort shall be made to expand construction work in order to assist in equalizing other deficits in employment.”

Scott D August 13, 2010 at 6:07 pm

The last paragraph above is from Hoover’s December 1929 State of the Union Address.

Karl Pukeman August 10, 2010 at 5:42 pm

Productivity gains are bad because they cost jobs. That increases unemployment and reduces aggregate demand since unemployed people don’t consume as much. The government/parasite class should print lots of money to steal the excess productivity and make it look like there aren’t really any gains.

michael August 10, 2010 at 6:58 pm

I think you have it backwards, Pukeman. Lost jobs erode productivity gains… because there’s no way to sell all that abundance you’ve created.

You should have seen the clearance sale when Circuit City was closing its doors. It took months! Even at giveaway prices, they couldn’t get rid of all the stuff no one either couldn’t or didn’t want to buy.

Matthew Swaringen August 10, 2010 at 7:41 pm

What were “giveaway prices”? If they were truly giveaway prices and they couldn’t wait months to sell they would have been sold, because they would have been seeking to sell the goods outside that area by posting them to ebay/etc. I’m doubtful. Do you have a price for a specific item that was “giveway”?

michael August 11, 2010 at 6:55 am

No, I don’t recall those prices. What I do recall was a very protracted liquidation process, one that was costing serious cash losses every day the stores remained full of stock. They were being hammered between the prices they “had to get” and the prices they “could get”. It was sad to watch.

I personally considered everything they had on offer to still be overpriced. I didn’t need any of it as much as I needed my satchel full of walking around money.

Donald Rowe August 11, 2010 at 8:09 am

I believe it was was much like the standard ‘furniture’ liquidation. Liquidator buys it all, jacks prices out of sight, heavily advertises the new ‘marked down’ (actually higher) prices, and then very slowly drops prices. The furniture liquidators typically bring in truckloads of lower quality merchandise and mark it higher than the better pieces that were the standard of the old business, so the closeout price is still nicely profitable. They sell and sell and sell until the legal time limit is reached, whereupon they pack the remainder up and move on to the next ‘liquidation’. Competing furniture stores sell very little while the liquidation is in progress and may even go bankrupt. The liquidator usually brings in his own staff. Cheers.

Bala August 11, 2010 at 8:19 am

michael,

” I personally considered everything they had on offer to still be overpriced. ”

Maybe you were not alone. Probably that’s what caused the closure to be as protracted as it was. That in turn probably means that prices needed to fall further.

” I didn’t need any of it as much as I needed my satchel full of walking around money. ”

How does pumping money into the hands of customer solve this problem without creating fresh problems of its own, such as the next edition of the boom-bust cycle?

michael August 11, 2010 at 8:31 am

Don: You obviously have some expertise in the category of liquidation sales. Yup, that’s much the way it went down. But in the end the buyer of those wholesaled goods still has to get them all off his hands at some price. No?

Bala: I wasn’t alone. No one wanted that stuff.

Putting money into the hands of consumers ‘undeservedly’, that is, without getting something of like value in direct compensation, is a task to be undertaken delicately. Give them too much and they’ve been given an alternative to working for a living. Give them too little, and they die on you. This causes the labor pool to contract, raising your labor costs.

I would suggest a successful policy would be found somewhere in the middle of those two extremes.

Bala August 11, 2010 at 8:52 pm

michael,

Your response

” Give them too much and they’ve been given an alternative to working for a living. Give them too little, and they die on you. This causes the labor pool to contract, raising your labor costs. ”

reveals how little you understand and know.

Firstly, how do you “give” that which you do not have or produce in the first place? How utterly shameless and brazen you are is obvious in that one word. You are ready and in fact eager to glorify theft in the name of “monetary policy”.

Secondly, when you say “too much” or “too little”, you reveal a fundamental error of thinking – to presume that you could “know” what is the right amount of money to be produced or in circulation at any point in time. Neither you nor any other central planner can ever know what is the right amount of money that should be in circulation.

The total “demand for money” is a product of the subjective valuations of the millions of individuals who constitute the market. To claim to “know” it is to claim that you are in a position to peer into the minds of all these millions of people and understand their subjective valuations. Nothing could be more vacuous or conceited (actually both) than this.

No indicators – price indices, unemployment rates, etc – will tell you if the money in circulation is too much or too little. These indicators will not tell you whether there is malinvestment happening in the economy and how much of it. Your claim that you will read into these to figure out monetary policy is as stupid as it can get.

All this apart, to claim that you can prevent a business cycle by “effective management” of money supply is nothing short of saying “Austrian Business Cycle Theory is bullshit”. So, why don’t you show us why you think so and why your “effective management” of money supply is possible at all?

” I would suggest a successful policy would be found somewhere in the middle of those two extremes. ”

How do you plan to find the “middle” when you are in no position to find/estimate the 2 extremes? Are you saying that groping around in the dark is good monetary policy? Are you saying that even though you are and know that you are groping in the dark, your tinkering with money supply is the right way forward? Are you saying that that is better than leaving money supply to the free market?

michael August 12, 2010 at 8:09 am

Bala: You’re choosing to ignore the fact that I don’t just advocate “tinkering with the money supply”. I’m saying we should borrow from the future enough money to mitigate the misfortunes that have been caused in the wake of the Meltdown. And that we should take effective control of the credit system that spawned it, so it is prevented from happening again, through an informed program of re-regulation. And finally, that we begin to repay the debts incurred once the economy has solidly entered a real recovery stage.

Of the three steps, the only one that has been or is ever likely to be implemented is the first: borrowing from the future. The $14.4 trillion so created has been extended directly to the financial community, to allay their distress at having created so many bad investments. None has trickled down to the mass of Americans, who are understandably upset at having been promised the bill to be paid.

Nor do I see the political will (in the USA) to do any different. People are befuddled by the complexity of the situation they have been placed in. Their instinct is to place their faith in charlatans and showmen, who promise easy ways out of the dilemma.

In contrast to the reality of the problems we face, those theories you advocate are brazen disguises for self-aggrandizement. Were we to elect politicians who followed through on promises to get government out of everyone’s business it would open the floodgates to untrammeled capitalist adventurism. We would just see the increased erosion of incomes below the top ten percent, stark poverty for those dependent on Social Security and Medicare and the great unemployed, and an accelerated concentration of capital around the one truly munificent area of the economy, the financial sector. Capital would flee the cheap change to be had in the industrial and retail sectors. People would clutch at whatever shreds of consumer credit appeared on the market like straws on a stormy sea.

The catchphrase “creation of wealth” refers to the natural tendency of money to agglutinate into an increasingly small number of pockets (where, once it becomes transformed into an engine for attracting more money, it becomes known as ‘capital’). To the owners of those pants, however, it does seem as though the wealth just keeps on being “created”… by the miracle of Austrian Theory, which ignores the concomitant disappearance of wealth from the bottom layers of society.

Here in America we really don’t expect that once the financial community is made even more whole that the factory doors will reopen and the “now hiring” sign will go back up on the gates. That particular engine for the creation of wealth was broken up and sold for parts a long time ago.

How does one quantify want? You’d have to have lived there for a while to understand.

Bala August 12, 2010 at 12:58 pm

michael,

This is unadulterated crap that has no connection with what I have said. Stop evading my main point and try addressing it.

I said that if you are claiming that tinkering with money supply can help stave off the business cycle, you are essentially saying that Austrian Business Cycle Theory is rubbish. Since you have said as much, I am asking you for the arguments that lead you to the conclusion that ABCT is rubbish.

Give the proof or shut the hell up.

michael August 12, 2010 at 1:18 pm

Bala: “Proof” is a requirement unsuited to the question at hand. It is an issue of policy, not an exercise in pure economic logic. So I will be unable to satisfy you.

Social spending does not hinder the business cycle in any way, save that it excepts some moneys from being at play in that cycle. It harms no one, other than to make the ridiculously rich a bit less rich. And it does a lot of good.

Moneys left in the business cycle, on the other hand, have a way of blowing themselves up into bubbles that explode. Is this the sort of wealth-growth you advocate?

All that can be amply demonstrated. None of it is amenable to the kinds of “proof” you are looking for. Sorry.

Secondly: you should agree that it is desirable that federal budgets be kept in zero balance. I also agree! I only differ in that I understand the logical cycle in which to impose balance is one whole business cycle. It makes no sense to try to impose balance from year to year.

Again, there is no mathematic or philosophic proof of this. There’s just the obvious truth of it. If the budget can be kept in balance, that’s a good thing.

JGiles August 12, 2010 at 1:45 pm

“Social spending does not hinder the business cycle in any way, save that it excepts some moneys from being at play in that cycle. It harms no one, other than to make the ridiculously rich a bit less rich. And it does a lot of good.”

I’m sorry Michael, but this statement right here ends my attempts to engage honestly and productively with you. To be blunt, it is a lie.

It is one of the most pernicious lies ever told, and one that has been responsible for an enormous amount of suffering. Michael, you don’t seem to understand that when someone around here says something “destroys wealth” or “slows the economy” they don’t mean that some fat cat somewhere gets a little less rich, they mean that actual people actually suffer and sometimes die.

I suspect that when you read the word “wealth” you automatically think we’re talking about rich people. WE’RE NOT.

We’re talking about EVERYBODY. Inflation hurts EVERYBODY. Malinvestment hurts EVERYBODY. Welfare spending hurts EVERYBODY; yes, even the people who receive the money!

And to be honest, none of your criticisms are at all relevant to the proposals on this site. EVERYTHING YOU SAY is based off of your experience with the CURRENT system; and the whole point here is that we want to CHANGE that system! So when you bring up negative points about our current crony-capitalist economy, and then act like this shatters the whole foundation of free-market thinking, all you do is make yourself look like an idiot! Everyone here HATES the current system for PRECISELY THOSE REASONS!

Look, before you post anything – ANYTHING – else here, do everyone, especially yourself, a big favor and go read “Economics in One Lesson”, by Henry Hazlitt. It’s a great introductory text; perhaps it can explain the ideas of Austrian economics more clearly than we can here. You can find it for free on this site, and it’s short. It will take only a few hours of your life. You might learn something. And if you have questions or objections, then go post on the forums, or bring them up here, or whatever, and someone will be happy to debate it with you. But for fuck’s sake learn what we’re saying, and why, before you try to dismiss it.

michael August 12, 2010 at 2:44 pm

JG: I will certainly have read Hazlitt’s Economics in One Lesson by the time I return here. Be of good cheer.

And I see by your generous use of agate caps that I have worked you up into a lather… for which I will extend my regrets. I am trying to take a constructive approach, and not to needlessly push your hot buttons.

I will offer in my own defense, though, that if we had any threatened shortage of investment capital I would be on your side of the debate. I did, after all, put in a decently rewarding career as a businessman. So I must be a capitalist, even though the capital I employed was more wit and grit than actual cash funding.

So I will assert this: far more harm has been done to the health of the capital-intensive model of wealth creation through freely chosen malinvestment than has been done through expenditures on social programs.

Social programs include student loans and a public educational system that at one time was a model for the world to follow. In fact prior to 9-11 bright graduate students the world over used to come here for the privilege of learning at the best schools. Most of them stayed on, to enhance our economy. Others went home again, to enhance that of our trading partners. Either way, we gained from this use of public funds.

And the education money that was removed from hypothetical capital formation was peanuts, in comparison to brazen scams like the subprime mortgage meltdown, which polluted $38 trillion in investment paper to the point where it was beyond redemption.

THAT is the kind of thing we’ve been seeing over and over and over again, ever since the S&L scandal. Capitalism has been corrupted. Only it hasn’t been by the socialists. The capitalists themselves have become the great destroyers of wealth in our time.

We stand in no shortage of concentrated funds suitable for plunging into the various speculative instruments being offered. Temporarily maybe, at the moment. Holders of capital are unsure of the future, so keep their funds in the vault. That’s not my fault.

So when you say “It is one of the most pernicious lies ever told, and one that has been responsible for an enormous amount of suffering. Michael, you don’t seem to understand that when someone around here says something “destroys wealth” or “slows the economy” they don’t mean that some fat cat somewhere gets a little less rich, they mean that actual people actually suffer and sometimes die” I sense the presence of crocodile tears.

Most capital schemes we see today involve deeply arcane bets on the performance of various commodities. They have little to do with the actual provision of jobs or goods in the marketplace. I’m all in favor of policies that encourage short-term operating loans to small businesses. I was one, and know they generate more new employment than do our large corporations. And new and vulnerable businesses have serious credit requirements, unlike older, established giants who should be able to conduct their daily operations out of cash reserves.

So in my mind your complaint is something of a red herring. We have no shortage of capital. Even today, it’s there all right. Locked up in the vaults, and under the mattresses of the nation’s most influential financial players.

The Kid Salami August 12, 2010 at 2:45 pm

JGiles

Good advice no question on Hazlitt. The trouble is, he already had it out about the broken window fallacy, where he took point missing to hitherto unheard of levels.

http://blog.mises.org/13357/the-more-the-state-intervenes/#comment-704581

I mean, he started his response with

“But as a lifelong fixer of broken windows, I would remind you that over time, all products of the human hand wear out and break down.”

Have you ever heard the likes?

michael August 12, 2010 at 2:52 pm

Salami: Let me here go on the record:

Breaking windows destroys value. Repairing them enhances value. Breaking and then repairing them creates zero value, and only generates a bill to be paid.

Matthew Swaringen August 12, 2010 at 3:11 pm

“Breaking windows destroys value. Repairing them enhances value. Breaking and then repairing them creates zero value, and only generates a bill to be paid.”

Then why, as you said yourself, when WW2 ended with many tanks we no longer needed, dumped and discarded, many times destroyed, etc. do you say that WW2 caused us to be better off than before the war occurred?

Why do you discard other explanations for recovery and go with the one that espouses the logic that you reject in these 3 sentences?

It seems like this circles around your belief that labor prices are set too low if left to the market, so we need the government to force them to pay wages high enough that people can purchase from them. But this belief is one you seemingly take on faith, because you have to know that the market is hardly free right now.

michael August 12, 2010 at 3:34 pm

“Then why, as you said yourself, when WW2 ended with many tanks we no longer needed, dumped and discarded, many times destroyed, etc. do you say that WW2 caused us to be better off than before the war occurred?”

I did not say so. Please don’t misquote me. I said that the war, while a truly terrible thing, had a number of benefits. Which is a demonstrably true statement.

The beneficiaries were the American people, who gained a period of unprecedented prosperity. The losers were 16 million civilian dead, plus all the soldiery dead, plus an entire continent devastated.

No matter what the catastrophe, there is always some gain to be had. Without the war’s destruction, modern Europe and Asia would not have been made. All the fortunes, not to mention the jobs, created by the reconstruction effort would never have happened. They’d have remained in their prewar conditions, under petty fascist governments forever bickering with one another and very likely a widespread condition of slow growth.

So please don’t quote me as saying that WW Two made everything better for everyone. It did not… but it did provide some opportunities for full employment and for the creation of a new world.

You really can’t balance the number of tanks destroyed against the number of new homes built, etc, and believe that your calculation actually means anything. Every morning, we begin with what survived the night before. And we move forward, hopefully, from there. Those of us who remember WW Two mostly understand that we either move together, as the human race, or we move toward more war.

Bala August 12, 2010 at 7:41 pm

michael,

ROFLMAO!!!!

I say! It really aches… I mean laughing so much hurts…

I say

” I said that if you are claiming that tinkering with money supply can help stave off the business cycle, you are essentially saying that Austrian Business Cycle Theory is rubbish. Since you have said as much, I am asking you for the arguments that lead you to the conclusion that ABCT is rubbish.

Give the proof or shut the hell up. ”

and you reply

” you should agree that it is desirable that federal budgets be kept in zero balance. I also agree! I only differ in that I understand the logical cycle in which to impose balance is one whole business cycle. It makes no sense to try to impose balance from year to year.

Again, there is no mathematic or philosophic proof of this. There’s just the obvious truth of it. If the budget can be kept in balance, that’s a good thing. ”

Is this what “Business Cycle” means to you? This means you have no freaking idea of what Austrian Business Cycle Theory is and that you are busy implying that it is nonsense.

I have never met a worse freaking idiot in my life. The term “Business Cycle” does not mean 1 calendar year you moron. It means the Boom-Bust cycle that we observe operating in the economy.

Bala August 12, 2010 at 11:59 pm

michael,

Here’s more proof that you are a moron.

” Moneys left in the business cycle, on the other hand, have a way of blowing themselves up into bubbles that explode. ”

This is just one more instance that shows that you have no clue to what the term “Business Cycle” means.

Bala August 13, 2010 at 12:07 am

michael,

I was laughing so much thinking of what you would say next on the “business cycle” that I just had to type this out. I guess your next statement would be something like this.

“I ride this cycle to go to my office everyday. My office where I do business. Hence, this cycle is my business cycle.”

What a freaking moron you are!!!! Thanks for the laughs, anyway.

The Kid Salami August 13, 2010 at 4:02 am

My god, i really really want to ignore you Michael the Douchebag but you remind me of what Bill Hicks said about watching ‘Cops’ on tv – “I can’t not watch it” – and compared it to having a sore tooth where you just have to keep touching it. That’s what i’m like with your posts, I can’t not read them.

“Every morning, we begin with what survived the night before. And we move forward, hopefully, from there. Those of us who remember WW Two mostly understand that we either move together, as the human race, or we move toward more war.”

What! This passes for analysis for you? Seriously, get a grip of yourself. You’re a grown man – aren’t you embarrassed to have written on this blog about business cycles for about two months without actually even knowing what the business cycle is and spewing this kind of meaningless stream-of-consciousness pre-teen babble, it really is just nauseating.

“No matter what the catastrophe, there is always some gain to be had.”

Yes, murders boost overtime for homicide detectives, this is true – great point, I missed that.

“Without the war’s destruction, modern Europe and Asia would not have been made. All the fortunes, not to mention the jobs, created by the reconstruction effort would never have happened.”

You’re just an idiot. Those particualr jobs wouldn’t have happened no – but they would have all sat on their hands otherwise and starved to death while trying to fell local buildings with jedi mind tricks? Different jobs would have come about you idiot.

There are two things that at root you just don’t get (and don’t want to get as they puncture your entire world view). They are the concepts of opportunity cost and scarcity. The reconstruction effort didn’t “create” anything – it took from somewhere else.

As a side note, the fact that you are clearly more intelligent and informed than the average person and yet still remain almost unbelievably far away from an understanding of what is going on means that the entire western world is truly screwed – the main capital stock (ie. the knowledge and skill of the people) is ….well, words fail me. Fucked is what it is. I dread to think what is in the pipeline.

Jay Lakner August 13, 2010 at 5:17 am

I’m convinced that “Michael” is just some practical joker. I’m guessing that one of the senior fellows of this institute got bored and decided to give us all a laugh.
I’ve been trying to work out who it is for a while now by closely comparing Michael’s writing style and mannerisms with those of everyone else. I still have no idea.
But I expect any day now that a Tucker or a Woods or whoever will say “Gotcha!” and reveal the elaborate hoax.
The alternative, that Michael is a real person and honestly believes what he is saying, is just too disturbing to contemplate.

The Kid Salami August 13, 2010 at 5:32 am

Have any of the fellows commissioned any secret computer programs? M the D’s writing reminds me of the postmodernism generator – if you haven’t seen it, it’s a program which generates essays of gibberish that read like the kind of crap you get in sociology journals, it’s genius.

http://www.elsewhere.org/pomo/

Incidentally, I discovered this via the Alan Sokal affair, which everyone should read about if they haven’t already – the exact same thing could be done in economics I’m certain.

http://www.physics.nyu.edu/faculty/sokal/noretta.html

Dantiumpro August 13, 2010 at 6:25 am

“Without the war’s destruction, modern Europe and Asia would not have been made. All the fortunes, not to mention the jobs, created by the reconstruction effort would never have happened.”

Without the war’s destruction, modern Europe and Asia would be different to how they are now. Some (many?) of the fortunes, not to mention the jobs, would be different.

Without the war’s destruction, many people who are now dead (or have never lived) would probably be alive now. There would probably have been less human suffering.

If a window breaks it may need replacing but it is not a good thing for it to have broken in the first place.

If we replace the window perhaps we invest the extra effort in moving the apperture to somewhere it is less likely to be broken, rather than letting the same problem occur again and again. Maybe less glaziers are needed then because less windows break, and many can go and do something else. Perhaps the money saved on replacing broken windows is spent on the new products and services these ex-glaziers provide.

That’s why I don’t “think of the jobs” stimulus creates because many of them involve replacing poorly situated windows, ready for them to break again. Is that what you got from reading Bastiat, michael?

michael August 13, 2010 at 9:47 am

All this abuse tells me it’s time for me to devote a few more words to the business cycle as I understand it. In my view it stems from malinvestment.

I’m having some trouble finding a working download for Hazlitt’s Economics on One Lesson (something about a violation of terms of use), so I can’t quote from it directly. But I believe one of the core principles is this:

“Too many of us fail to see that the labor and capital that goes into reconstruction has forgone alternative uses.”

Tautologically true. By buying the chicken strips I have denied the beef producer his share of profit. So let’s carry this gem into the realm of investments.

One has a million bucks and has to choose between backing a fresh startup by a promising enrepreneur, or buying some mortgage-backed securities. Our investor knows zippo about the details of either field, and he’s a very busy man so his time is limited. But he does understand that the rate of failure on mortgages is both very low and very predictable. Particularly when bundled into large numbers, so he doesn’t hang his fortunes on a single peg.

Whereas the numbers on new startups, irrespective of the quality of the concept and business plan, are very dismal. Most of them don’t survive. So it’s a slam dunk. He buys the securities.

Then they fizzle. The entrepreneur, meanwhile, may have found a receptive public and wanted to add twenty people to his work force. But without the investment capital his business winds down to the point where he breaks his lease and puts the furniture up on eBay.

Multiply this investor’s wrong guess by a million and you get one trillion dollars’ worth of wrong guesses. That’s what you get in a free market. Government has nothing to do with this bad allocation of funds, it all comes from humans and their free decisions.

Note that government’s no better at guessing where the money should go. They had their chance to buy up the bad mortgages en masse and hire workout artists to restore what value they could to the portfolio. They begged off, merely buying sackfuls of bad apples and letting them rot.

I’ll keep looking for original texts with the power to explain how these obvious facts aren’t really so. But the fact is, in a market totally free from distorting influence, investors will continue to over-speculate in a high-flying market and flee a sinking one. Every time. The capital that might have gone into productive areas does so every time… until one day it doesn’t. And then the poorly named business cycle rolls over to a fresh low point.

Now let’s compare my off-the-cuff observations with what I can find close at hand about the actual Austrian POV:

“The theory views business cycles (or, as some Austrians prefer, “credit cycles”) as the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.

“Proponents believe that a sustained period of low interest rates and excessive credit creation results in a volatile and unstable imbalance between saving and investment. According to the theory, the business cycle unfolds in the following way: Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. It is asserted that this leads to an unsustainable credit-sourced boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. Though disputed, proponents hold that a credit-sourced boom results in widespread malinvestments. In the theory, a correction or “credit crunch” – commonly called a “recession” or “bust” – occurs when exponential credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally “clear”, causing resources to be reallocated back towards more efficient uses.”

So you also would agree that the business cycle stems from malinvestments. But it would appear that you feel the money in the speculator’s pocket gets there from his excessive borrowing from available credit. (“Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. It is asserted that this leads to an unsustainable credit-sourced boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities.”)

Are you sure about this? Don’t investor/speculators normally buy their chips with their own money? How do loans extended by the banks wind up in bad investments?

I will grant that there are tons of money floating around generally, from policies that expand credit. But I don’t see that we can lay all malinvestment at the feet of the Federal Reserve. It comes from free investors making their best guesses. And that can’t be cured by shrinking the money supply. The only thing that approach will do is to induce prolonged recession. Or so it would appear.

Please respond to what I think is a valid question. And don’t just get all snippy on me. I’m trying to see this the way you do. All you need to do is a better job explaining it.

Bala August 13, 2010 at 10:00 am

michael you moron,

Read these

http://mises.org/books/monetarytheory.pdf
http://mises.org/books/economic_depressions_rothbard.pdf
http://mises.org/books/mysteryofbanking.pdf
http://mises.org/books/pricesproduction.pdf

If you are too lazy to read and understand them for yourself, at least do us a favour and STFU.

michael August 13, 2010 at 10:14 am

Thank you for not replying to my legitimate question, Bala. And for doing so in such a gracious manner.

I have been doing some reading so far. And when I ask a question concerning the sublime theory, it’s because the meaning is not yet apparent.

It’s not allowable to ask questions? Well, okay.

JGiles August 13, 2010 at 10:24 am

Bala, chill out. I understand you’re angry, but it isn’t productive.

Ok, Michael; You’re asking, essentially, why a bajillion individual investors all guessed wrong at the same time. Now we’re getting to the heart of the matter.

Normally, that kind of thing just can’t happen, because investors go through a rigorous process of natural selection. If you guess wrong, you lose all your money, and then you can’t invest anymore. The investors who succeed are the ones who can reliably guess RIGHT.

So why’d all these guys who reliably guess right suddenly guess wrong, all at the same time? Well, for a few reasons.

1). Those mortgage-backed securities? All guaranteed AAA, no risk, solid gold, by a few credit rating agencies. Who have a total monopoly on their market. Who are backed by the government. Who explicitly have no liability, whatsoever, if their ratings are wrong.

2). Those bad mortgages? Made by banks, using Federal money that they got essentially for free due to the policies of the Federal Reserve under Bush, which policies also gave low-income people MASSIVE incentives to buy houses, which they honestly couldn’t afford. In short, only enormous amounts of government intervention made it POSSIBLE for so many bad mortgages to be made in such a short time. And then, of course, when the banks realized they were about to get jacked over by their own stupid practices, the government stepped in to rescue them, just like they counted on, meaning they suffered NO CONSEQUENCES for their criminal idiocy.

In a free market, this kind of thing simply would not happen. If rating agencies actually competed with each other, an AAA rating from one, contrasted with a CCC from another, would ring warning bells. If homeowning didn’t get a huge subsidy, people who couldn’t afford payments on homes wouldn’t buy them en masse. And if banks weren’t bailed out by the government, so they had to suffer the full consequences of their actions, they’d be a lot more leery of taking insane risks with their depositor’s money.

Russ the Apostate August 13, 2010 at 10:25 am

“Whereas the numbers on new startups, irrespective of the quality of the concept and business plan, are very dismal. Most of them don’t survive. So it’s a slam dunk. He buys the securities.”

Strawman. Equities are also available in bundles that distribute the risk. A savvy businessman like you hasn’t heard of “mutual funds” before? Hint: Go for the “no-load” ones.

“But the fact is, in a market totally free from distorting influence, investors will continue to over-speculate in a high-flying market and flee a sinking one.”

No, they will not “over-speculate”; they will speculate. Over-speculation will not occur without distorting influences that encourage excessive risk-taking; at least not in any significant amount. And speculation in good markets and lack of same in bad markets is not a bad thing. Investing in bad investments is just a waste (mis-allocation) of capital.

“How do loans extended by the banks wind up in bad investments?”

When money is artificially cheap, businessmen will take out loans for excessively risky ventures; ventures that wouldn’t be deemed worth the risk if money were at a reasonable price. Witness the dot-com bubble. Many people invested in ventures, the business plans of which were similar to a popular cartoon: Step 1) Put up a flashy web site. Step 2) (A vague cloud…) Step 3) Profit! Now assume that some of this risky investment is in the manufacturing arena. Manufacturing capital needs labor to make it profitable. So these shaky ventures hire people. When the market shakes out for whatever reason, it is noticed that all that capital is (mal-)invested in ventures that produce things that people don’t really want in the non-bubble market. Then capital has to be re-allocated to produce what people do want. When that happens, the labor that worked the mis-allocated capital find out that they were mis-allocated, too. They lose their jobs, and have to wait out the capital re-allocation before they can re-allocate themselves to a new employer.

“I will grant that there are tons of money floating around generally, from policies that expand credit. But I don’t see that we can lay all malinvestment at the feet of the Federal Reserve. It comes from free investors making their best guesses.”

Yes, investors can make mistakes. They won’t always guess right. But easy money, as I said earlier, actively encourages investors to take chances on excessively risky ventures. In short, easy money encourages investors to make mistakes. It’s like a casino giving a gambler hookers and free drinks.

“I’m trying to see this the way you do. All you need to do is a better job explaining it.”

Maybe you need to do a better job trying understand it. Here are some helpful clues:

1) Develop a real interest in learning the laws by which economies work. This involves the assumption that economies do indeed follow certain laws, at least in general, and that we cannot simply make economies work however we want through sheer willpower. If you refuse to provisionally accept this assumption, you are wasting your time.

2) Try to think with your head, not your heart. I’m not saying you shouldn’t have a heart. Provisionally accept that the policies that your heart favors are possibly not, in fact, the best policies to further your goal of reducing human suffering. If you cannot do this, you are also wasting your time.

Bala August 13, 2010 at 11:25 am

michael,

” So you also would agree that the business cycle stems from malinvestments. ”

No. We say that malinvestments are caused during the boom phase of the business cycle by the excessive pumping of cheap credit into to system of production. This credit is pumped into the production system by the banking system consisting of banks and central banks. In order to make this credit expansion possible, the banking system does 2 things
1. It depresses the interest rate way below what it would have been on a free market
2. It creates massive amounts of money out of thin air – You could say monetary inflation is the counterpart of credit expansion. For every $1 of credit expanded above what a free-market would allow, $1 needs to be added to the money supply

Why do we call these “malinvestments”? Simply because these projects were earlier rejected by the free market. That is signalled by the fact that they did not receive credit from the free-market. Considering that on the free-market, a lender’s primary job is to evaluate the credit-worthiness of a borrower, rejected borrowers must (in general) be of poor creditworthiness and rejected projects must be poorer investments than the free-market would like them to be.

Why should banks depress the interest rates? Simply because it is profitable to expand credit by creating money at no cost and lending it out at an interest. For a given (downward sloping) demand curve, a right-ward shift in the supply curve (that is what has to happen to the supply of credit in the case of credit expansion) means that prices have to fall.

Why should they create the money out of thin air? Simply because they do not have the money to lend out.

What are the effects of this massive credit expansion backed by equally massive monetary inflation?
1. It causes the structure of production to become longer, i.e., more capitalistic. This is what would happen in a free-market too when genuine savings enter the production system as credit. However, the reason such lengthening of the production system through credit expansion is unsustainable is on account of the simple fact that such lengthening essentially means that production is now happening to meet consumption requirements at a date further in the future. In simple terms, it assumes that investors have postponed consumption to a future date. However, under credit expansion, no such postponement of consumption (also known as saving) has happened. Hence, when the goods hit the market, the consumers are not going to be in a position to buy them. In this manner, credit expansion causes a serious rift between production and consumption. Producers who have invested in producing for the future find that their products have far fewer takers.
2. Simultaneously, the monetary inflation that occurred in the early stages of credit expansion now causes the prices of consumer goods to rise. This further reduces consumption. Rising prices of intermediates also eats into the profits of producers.

Thus, producers face a double whammy. On the one hand, people are buying less because they do not have the money to buy that which is being produced and because the goods have become expensive. On the other, costs of production are rising whittling down profits even more.

This causes a rash of failures forcing a series of credit contractions on the banking system. This in turn forces the banking system to raise interest rates further increasing the number of failures resulting in the phenomenon that we know as the depression.

This is why Austrians would not agree with your statement

” So you also would agree that the business cycle stems from malinvestments. ”

They would say that they business cycle stems from the artificial depression of interest rates in order to make credit expansion possible. The unsustainable nature of the boom caused through credit expansion is an inherent characteristic of that boom. The price inflation that follows and the raising of interest rates in the future is an inevitable part of this process. This is why Austrians say that a boom fuelled by credit expansion has to necessarily end in a massive bust also known as a depression.

” But it would appear that you feel the money in the speculator’s pocket gets there from his excessive borrowing from available credit. ”

What makes the excessive credit available and profitable?

” Low interest rates tend to stimulate borrowing from the banking system. ”

You need to learn about the gratuitous nature of credit in a system of fractional reserve banking.

” This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. ”

Correct so far.

” It is asserted that this leads to an unsustainable credit-sourced boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. ”

Not asserted – Explained in great detail.

” Are you sure about this? ”

Pretty sure.

” Don’t investor/speculators normally buy their chips with their own money? ”

Not when the can borrow from a banking system that is desperate to extend credit to all and sundry.

” How do loans extended by the banks wind up in bad investments? ”

When banks are desperate to extend credit by depressing interest rates, there is a lot of scope to make poor lending decisions. Aggressive lending policies have to lead to loans being made to customers of progressively poorer creditworthiness.

” I will grant that there are tons of money floating around generally, from policies that expand credit. But I don’t see that we can lay all malinvestment at the feet of the Federal Reserve. ”

Because the Federal Reserve is the base of the pyramiding scheme that we call the banking system. As Rothbard showed in “The Mystery of Banking”, every $1 of money created by the Fed gives the entire banking system the power to create upto $29 in new money and extend an equal amount of credit.

Further, but for the Fed, armed with its monopoly powers, being ready to save them, banks would not be able to be as reckless as they have been in the last (nearly) 100 years.

” It comes from free investors making their best guesses. ”

Yes. But it is made possible by a pyramiding scheme with the Fed at its base.

” And that can’t be cured by shrinking the money supply. ”

If excessive credit expansion fuelled by equal monetary inflation is the cause of the boom-bust cycle, stopping it is the only cure.

” The only thing that approach will do is to induce prolonged recession. ”

Monetary contraction is only a necessary step to bring the recession to an early end, as it happened in the Depression of 1920-21. The recession itself was caused by loose money and credit policies. It is in the boom that the seeds of the bust are sowed. Fighting the contraction is what will prolong the depression, as it happened during the Great Depression.

Gil August 10, 2010 at 7:53 pm

Actually that’s a good point. It’s the same with inflation and deflation – both have winners and losers. After lower prices are good if you have money but not good if you don’t because each dollar now require more effort to acquire it.

Stephen Grossman August 10, 2010 at 4:14 pm

>There is no reason why inflation should ever reduce rather than increase unemployment,” Hülsmann writes.

I believe “inflation” should be deflation.

Gil August 10, 2010 at 7:54 pm

Why? Inflation would cheapen wages if there are no pay rises in kind thus making labour cheaper and allow the employer to hire more workers.

A. Viirlaid August 10, 2010 at 8:23 pm

Stephen Grossman, the same line caught my eye too.

I got some clarification from the original at http://mises.org/daily/3231

The title of the relevant article is “Deflation and Liberty” by Jörg Guido Hülsmann (Saturday, December 13, 2008).

The specific source paragraph is quoted here:

Similarly, there is no reason why inflation should ever reduce rather than increase unemployment.

People become unemployed or remain unemployed when they do not wish to work, or if they are forcibly prevented from working for the wage rate an employer is willing to pay.

Inflation does not change this fact. What inflation does is to reduce the purchasing power of each money unit.

If the workers anticipate these effects, they will ask for higher nominal wages as a compensation for the loss of purchasing power.

In this case, inflation has no effect on unemployment. Quite to the contrary, it can even have negative effects, namely, if the workers overestimate the inflation-induced reduction of their real wages and thus ask for wage-rate increases that bring about even more unemployment.

Only if they do not know that the quantity of money has been increased to lure them into business at current wage rates will they consent to work rather than remaining unemployed.

All plans to reduce unemployment through inflation therefore boil down to fooling the workers—a childish strategy, to say the least.

Cheers.

Chris August 10, 2010 at 9:41 pm

I am confused– In deflation, when prices lower to produce the product and the overall cost of the product lowers— does this take into account products made around the world? Or would the United States have to wait for some demand to lower before product cost would lower?

michael August 11, 2010 at 7:17 am

Chris: Let me try to shed some light.

The United States is not a principal player in price deflation. That’s a contest between consumers and producers to negotiate a maximum number of acceptable deals. Each producer tries to undercut his competition, so he can grab a larger share of the market.

This means he has to search abroad for the cheapest labor he can find, in the most amenable country in terms of regulatory structure. And as nearly every nation on earth stands ready to prostitute its other social goals in the service of fuller employment, that means the country with the lowest labor rate. In China, wages are rising through excess demand for workers. So the Chinese have been outsourcing to places like Cambodia and Zambia.

In the USA, shelf prices for many products have been eroding since Reagan was president. Lumber may be going up (from decreasing world inventories) but cheap hand tools, made abroad, still in many cases cost (in numbers of dollars) what they used to when your dad was a kid. High tech items, famously, get cheaper every year they’re on the market.

This trend helps keep overall prices steady, as the rises in some costs are offset by stability or price drops in others. Professional services pretty much lead the inflationary pack, and continue going through the roof. Any time you don’t require the services of a doctor, a lawyer, a lobbyist or an accountant, you’re staying ahead of inflation.

During the good times, the stores are full, employment is near full and price inflation (the CPI) stays around 3%. Tight money policies, that attempt to keep inflation below that point, cause the stores to empty and the unemployment rolls to fill, so the government doesn’t try to curb inflation too severely.

So I think the best way to describe it is that when demand slows, it causes sales to be lower than desired. And that impels producers to lower their prices to the minimum possible, without incurring actual losses.

Chris August 11, 2010 at 3:39 pm

Thank you.
I have a great interest in this topic and this would be the first time I have asked any question on this websight. I thank you for the help. I also understand a little bit more.

Bala August 11, 2010 at 9:14 pm

Be wary of any answer michael gives. This is the real danger with michael – misleading the unintroduced.

” So I think the best way to describe it is that when demand slows, it causes sales to be lower than desired. ”

Worth a good laugh!! Isn’t “demand slowing down” itself a conclusion drawn from the fact that sales are lower than desired? Demand-side fallacies rearing their ugly head?

michael August 12, 2010 at 8:12 am

Actually that comment was tautological. When demand slows, sales volume of necessity is also reduced. Explain how it can be any other way.

Your criticisms would be made more effective if you added content.

Bala August 12, 2010 at 9:50 am

michael,

” Explain how it can be any other way. ”

Actually, my point was that it is not a tautology. My point remains that demand is only a statistic. In fact, I would go on and say that the way you Keynesians use it, it is more a product of your fantasies than anything real.

That apart, my objection to the statement

” So I think the best way to describe it is that when demand slows, it causes sales to be lower than desired. ”

was to the word “causes”. I was only pointing out that saying “demand has slowed down” is just a different way of saying “sales are lower than they were or were expected to be”. To use “causes” can only imply an intent to hint that stimulating demand is a proper solution to the problem of falling sales. That’s what I was pre-empting by referring to “demand-side fallacies”. Looks like you are incapable of either understanding or being honest.

michael August 12, 2010 at 3:40 pm

Demand is very far from being only a statistic. It’s the only thing that keeps one’s business from ruin.

You’re being intentionally obtuse with such a statement. In your business, if there were no demand for your wares you’d have to adapt, and create a product for which there was demand, or else go out of business. That’s the plain fact.

“To use “causes” can only imply an intent to hint that stimulating demand is a proper solution to the problem of falling sales.”

Incorrect. Let’s return to WW Two’s aftermath, and examine the Marshall Plan. We loaned Europe billions back when that was real money, so they would rebuild the continent with American products and have some ready means of paying. We extended credit to them! Are you telling me that extending credit is an illegitimate tactic for generating sales? A lot of furniture, appliance and auto showrooms would disagree with you.

For stating that obvious fact, you call me dishonest.

Bala August 12, 2010 at 8:19 pm

michael,

And you do not have a whit of an idea that the term “demand” as used in businessman’s parlance is different from the term “demand” as used in Economics.

You are using the term incorrectly and are hence revealing yourself as an idiot of the lowest order.

Bala August 12, 2010 at 11:51 pm

michael,

Are you really this dense?

” Are you telling me that extending credit is an illegitimate tactic for generating sales? A lot of furniture, appliance and auto showrooms would disagree with you. ”

No. I am not telling you that a business extending credit to its customers is illegitimate. What I am saying is that a government creating money that does not exist in order to “stimulate demand” has the consequence of perpetuating the business cycle. This is apart from the fact that the very creation of money by government is an act of theft and the act of giving it away (as doles or as expenditure) is a criminal redistribution of wealth.

Rebuilding a war-ravaged continent is economic activity. However, creating money out of nothing because you do not have money on hand and using such money to fund the rebuilding is no different from throwing a brick at a shop window to stimulate the glass window pane manufacturing industry. For every bit of wealth that was added in Europe as part of the rebuilding, there was wealth that was destroyed.

Even worse is destroying one part of the economy so that another part of the economy could benefit by first destroying and then rebuilding the destroyed part.

They all fall under the category of the “Broken Window Fallacy” which you have neither understood nor addressed till now.

” We loaned Europe billions back when that was real money, ”

What was “real money”? You and your claims are truly comical.

Donald Rowe August 12, 2010 at 9:32 am

Welcome, Chris, to a little bit of anarchy and chaos. It is apparent that on these blogs anyone can say anything about anything, except perhaps egregious personal attacks.

michael, “Explain how it can be any other way.”

Pardon me if I am dense, but I think I have witnessed posters here respond to your ‘demand’ at least, let me see, a bazillion times.

In ‘normal’, that is, relatively stable money supply conditions, supply and demand actually do that delicate dance of balance which you describe. But after the money supply is knocked out of whack by a bolus of money being produced, and more of that money flows to the producers, they will naturally, surprise surprise, produce more. This makes everybody happy, let the good times roll. Until such time as their credit lines are curtailed (over a short time), as is wont to happen in the real world when an error is detected. ‘Oh no! What shall we do?’ Well, the producers could cut production now or keep it up and then go bankrupt later.
So … jobs are cut. . . .demand drops. . . blah, blah, blah

I would like to add “Do you get the picture now?” but that would be silly, wouldn’t it.
Perhaps you missed this post. http://blog.mises.org/13472/give-capitalism-a-chance/#comment-708658

michael August 12, 2010 at 9:55 am

Hi again, Don. One small correction: egregious personal attacks are permitted. I get them every day, from those far more rude than you.

As for the apparent irrelevance, in your mind, of demand, must I say again that without demand you don’t have a business? That if you can’t sell your product all the capital you’ve invested in your operation is wasted, and without issue?

Demand is the name of the game. The intelligent business person produces just enough to meet it… unsold inventory being the liability it is.

Let’s take a closer look at your “bolus”. First, we set the stage by observing there has been a slowing of consumer demand. Such a thing is a necessary precondition for a recovery program; without a recession there’s no need for any injection of funds.

So this artificial injection of money into a specific set of hands (let’s say an extension of unemployment comp to people who are currently unable to earn an income) revivifies commerce by bring the number of paying customers up to something like what it was initially.

This buoys consumption and thus stimulates production to get back to work. The factories spend their profits from the increased sales by hiring on their old workforce. And the stimulus, no longer being needed, is terminated. Unemployment comp ceases the moment the unemployed regain their jobs.

They then pay sufficient taxes from their new wages to pay down the debt that has been created in the service of their need. There’s nothing wrong with this equation. It’s the way UC works, and the way it was intended to work. It’s a legitimate function of government.

I would anticipate an answer that doesn’t address this equation, but rather preaches to me in the most general of terms how utterly mistaken I am.

Jon Leckie August 12, 2010 at 10:02 am

Must … resist… urge to attack michael personally and egregiously… must fight… MICHAEL YOU’RE A CONTEMPTIBLE FOOL! Oh jeez oh darn … well I tried.

michael you must start your own blog. It is really terribly rude of you to come here day after day and write the same old thing. It’s making me nauseous. You’ve explored Austrian Economics, I think everyone would agree that you’ve done your very best to understand, and failed utterly. So why don’t you move on, hmm?

Donald Rowe August 12, 2010 at 10:40 am

michael,

Sorry, I was in the midst of a JetBlue moment, without all the $%^&*.
I don’t think I have said that you are utterly mistaken, as in not even wrong.
My point is simply that you either cannot or will not see that there is very much more to be considered here. The simple solution that you seem to espouse is certainly not the only one, and many here think it is far from the best, for everyone that is, not just the few who benefit directly.
I appreciate that your mind is made up on these economic matters. That’s fine. Others may want to explore other options. Some think there is still time to avert a disaster of heretofore unseen magnitude, so they persevere. As long as people in the seats of power share your depth of thought, I remain pessimistic.

Cordially,
Don

michael August 12, 2010 at 11:09 am

Thanks again, Don, for a clear (and profanity-free) moment.

My mind is far from settled, as the economy itself is far from settled. No one, neither I, you, nor anyone else, can claim to have settled the mess because we’re still in the midst of it. I will be happy to realign and improve my thinking points whenever someone shows me conclusive error. And so far that hasn’t occurred. It’s rare to see anything I’ve said even directly addressed.

You say there is more to be considered than what I’ve offered as a faithful description of the current morass. Absolutely there is! Again it’s like the plot of Forbidden Planet, where the computer required to explain the world is so huge it forms another planet of like size.

Don’t be stingy with your valuable insights. Offer up just one a day! I’ll consider it as carefully as I would a package on my doorstep, wrapped in duct tape, with no return address.

Every time the government makes a move, someone benefits and someone else doesn’t. And every time government doesn’t make a move, the usual suspects still prosper at the expense of the usual fall guys. Why? Because the rules of the game are already fixed to offer the kinds of benefits we’re so familiar with: increasing inequality of both wealth and (to a lesser degree) income.

To take sides for or against government action is, I think, to badly miss the reality of what’s been going on. Certainly the peanut gallery, full of folks who believe I’m a government plant, haven’t a clue.

The thing that most intrigues me in your comment is this:

“Some think there is still time to avert a disaster of heretofore unseen magnitude, so they persevere.”

I’ve been reading a lot of posts– and so far I haven’t seen anyone come up with a decent prescription for action. I’m not talking about theoretical pie in the sky, I’m talking about getting it done… now! You’re saying there are some who have gotten this far?

My side doesn’t have the weight of either the public or the government behind it– so we are forced to just stand around like ineffectual Cassandras, lecturing the various actors on the errors of their ways. Don’t wait around for us to lead the revolution. It will be up to you fellows to screw things up in a different way than they’re now screwed up… if only you can progress to the next stage, that of political action.

Russ the Apostate August 12, 2010 at 11:18 am

“I’ve been reading a lot of posts– and so far I haven’t seen anyone come up with a decent prescription for action. I’m not talking about theoretical pie in the sky, I’m talking about getting it done… now!”

Here’s the problem, Michael. There are people who have come up with ideas on how to fix our problems. The fact that they rely on theory is irrelevant; that’s a red herring on your part. You rely on Keynesian theory yourself. The problem for you is that the ideas presented here don’t come up with an immediate fix to the problem of unemployment. They don’t immediately put people back to work. The problem is, there probably is no way to fix things that doesn’t involve some short-term pain for some people, which you are unwilling to accept. You’re like a junkie who wants to get off the junk because of the cost its having on his health, but doesn’t want to suffer any withdrawal symptoms whatsoever. Even methadone only does so much, and I doubt there is an economic methadone.

michael August 12, 2010 at 11:51 am

“Here’s the problem, Michael. There are people who have come up with ideas on how to fix our problems. The fact that they rely on theory is irrelevant; that’s a red herring on your part. You rely on Keynesian theory yourself. The problem for you is that the ideas presented here don’t come up with an immediate fix to the problem of unemployment. They don’t immediately put people back to work. The problem is, there probably is no way to fix things that doesn’t involve some short-term pain for some people, which you are unwilling to accept.”

Not what I’m talking about, Russ. It’s a given that in the current political climate, policies that might result in fuller employment aren’t palatable to the voting public. Obama, an astute politician, will never implement such policies in more than a token amount for that reason. So my side’s not going to win this next round anyway.

Your side wants to solve the puzzle for a different variable: untrammeled greed and the freedom to operate without restraint. Fine. We differ. But what I’m saying is that all you’re coming up with is talk. You talk incessantly with one another and with whoever else wanders onto this forum. I’m seeing nothing in the way of planned political action, other than a few open houses being advertised.

Here’s the current political scene as I see it. No one likes either side. They don’t like the Republicans, who got us into this mess, and they don’t like the Democrats, who are floundering badly, and failing to get us out of it. They want some real choice and they’re angry about it.

You can’t capitalize on that? You’re waiting for a better moment? The brass ring is just coming around now.

Donald Rowe August 12, 2010 at 1:13 pm

michael,

“Don’t be stingy with your valuable insights.”

I’m not stingy and I will deliver a package as one lump. After some more rewriting. I feel no urgency to get ‘er done. There is no quick fix, and I have a life in the real world.

My hope is that after reading it you may be able to see that what now appears to be two sides, left and right, are in fact clones or twins, hardly enough difference to bother choosing between them. Oh yes, it has ideas that will be alienate ‘most everyone.

Whenever I read another of your posts, the mental image that comes unbidden is that of an old man crouched at the keyhole of a closed door. Inside there is a cavernous room full of wonder, but he can only see a tiny slice of it. And the door will not open by itself.

Have a good week.

Cordially,
Don

Russ the Apostate August 13, 2010 at 7:12 am

“But what I’m saying is that all you’re coming up with is talk. You talk incessantly with one another and with whoever else wanders onto this forum. I’m seeing nothing in the way of planned political action, other than a few open houses being advertised.”

Your big failure here is the failure that most leftists have; you think that all problems should be solved by political action. But there are some things that need to be done that shouldn’t be done by government. One of them is to educate people so that they have a clue how economies really work. Then, when they do decide to get politically active, they will have a clue how to properly direct their energies.

Dantiumpro August 13, 2010 at 8:01 am

“But there are some things that need to be done that shouldn’t be done by government. One of them is to educate people so that they have a clue how economies really work. Then, when they do decide to get politically active, they will have a clue how to properly direct their energies.”

Well said Russ.

Or maybe educating people should be done by government, if government has a place at all. But that would mean encouraging a degree of self-sufficiency, understanding and independence rather than fostering dependence, and we wouldn’t need as much ‘government’ then.

Boom-bust keeps us thanking government for it’s management in good times and rejoicing they could work things out in the bad. Unless we understand the cycle of course, which is unlikely if we’re too busy lining the streets pleading with the government to “do something”. Even if that “something” means the cycle is bound to repeat itself again.

Russ the Apostate August 13, 2010 at 8:28 am

Dantiumpro wrote:
“Or maybe educating people should be done by government, if government has a place at all. But that would mean encouraging a degree of self-sufficiency, understanding and independence rather than fostering dependence, and we wouldn’t need as much ‘government’ then.”

As you may know, I’m not an anarchist; I do believe there is some place for government. But I think that it’s obvious to any sane person with half a brain that if you give people lots of power over you, you need to keep a close eye on them. Having the watchmen watch themselves never works out too well. If he wants to remain somewhat free, it’s the citizen’s responsibility to educate himself on what the watchmen are doing, and that includes what they are doing to the economy. And how can you understand what the watchmen are doing to the economy if you don’t understand how the economy works? And since the point is to keep an eye on the watchmen, are you really going to take the watchmen’s word that their economic policies will have the effects they say? This is where mises.org comes in; informing people about how economies work. It may not be activism, in a strictly political sense, but it’s still necessary.

Besides, I don’t trust Michael’s calls for activism. Recently in Michigan, somebody who was agitating for an official state Tea Party was discovered to be a union activist who wanted to split the Republican vote, thus helping the Democrats. I wouldn’t be surprised if Michael would favor something similar with libertarians.

Matt Wing August 12, 2010 at 1:52 pm

The problem with your “equation” is that it attempts to solve a problem without identifying the cause. Bala pointed this out just a few posts above, you failed to reply. Low demand does not cause low sales. It does not make sense, which is why he is laughing at you.

Let me explain in a simple analogy. Your, and Keynes, analysis of a marathon runner who starts to walk: You would say that the runner’s jogging speed slowed down, causing him to walk. But the true cause of his walking is the runner’s jogging speed slowed down, because his body (lungs) is fatigued, not able to sufficiently supply oxygen to his blood. This causes him to have to walk, so he can catch his breath.

A slower jogging speed is not the problem, and low demand is not the problem.

michael August 12, 2010 at 3:44 pm

Welcome to the debate, Matt. But there’s no comparison between a runner’s need for oxygen and a store’s need for customers.

You fill up your showroom with mattresses and box springs and end tables and settees and sofas. And no one walks in the door. They’re all pinching their pennies, and making do with their old furniture.

Does this low demand cause low sales? I think it does. Explain why it does not.

Bala August 13, 2010 at 6:13 am

Well… actually…. It is high demand that causes low sales. Go figure.

Incidentally, how is that “business cycle” that you purchased recently doing?

Dantiumpro August 13, 2010 at 6:51 am

Could producing or holding in stock things that have a relatively high Opportunity Cost to acquire cause low sales? I think it does.

JGiles August 13, 2010 at 8:20 am

Sure; if demand is low you sell less.

Now take it a step further. WHY is demand low?

Well, demand is low because people don’t want what you’re selling; that is, the opportunity cost of whatever you’re selling is higher than the marginal benefit to them.

And what that means is that YOU, not the customer, screwed up. You are not offering something customers value more than they value their cash, which is the very definition of a failed business plan. The business of business is to predict what customers want. A business which does that succeeds, one that doesn’t fails. The fact that conditions have changed is no excuse; you have to change as well. If you’re selling furniture and no-one is buying it, “stimulus” is not the answer; cutting prices, or offering more service and better quality, or, in really bad cases, getting out of the furniture business entirely is the answer.

The solution to a recession or depression is not to “fix” consumer behavior by throwing money at them; it is to allow the market to fix business behavior, by forcing those businesses to close or change their strategy who aren’t providing things that the consumers really want or need.

michael August 13, 2010 at 8:27 am

Had you ever been in business I think you’d understand there might be several reasons behind slow demand. For one thing, if demand has been steady and suddenly it slows up, something new has happened. Everyone probably didn’t decide one day to stop loving your product.

I realize it’s an uphill struggle to overcome your preconceptions. But the first thing I would look for, as a supplier, might be a fresh product line being put out by my competitors. They might have switched allegiance to Sony’s product, as opposed to my Atari line. If not, it might have something to do with the drop in consumer confidence, neatly tracked in the business section. That would indicate that it’s all products everywhere that people are not buying.

Or, maybe people are shrinking from using up more consumer credit; they’re paying down their cards. Or maybe too many of my customers are losing their jobs. There might even be any combination of those reasons.

In business we can’t sit around trying to deduce sole causes deriving from theory. We have to figure out today’s situation… and meet it. We might either change our marketing plan, slow down production until business picks up, or some combination of the two.

Russ the Apostate August 13, 2010 at 8:41 am

“In business we can’t sit around trying to deduce sole causes deriving from theory. We have to figure out today’s situation… and meet it. We might either change our marketing plan, slow down production until business picks up, or some combination of the two.”

How can you “meet today’s situation”, if you don’t know what today’s situation is, or what’s causing it? If you stage a big marketing drive, and the situation is due to a general economic slump, then you have probably wasted your effort. If you slow down production and the situation is a new competitor or competing product, you are slitting your own throat. A strategy of “just do something” is not going to cut it in business. A business has to have a plan based on the reality of “today’s situation”, or it will soon not be in business. This is why I serious doubt whether you are a businessman at all. You’ve already claimed to have lived through the Great Depression, and understood the economic situation at the time, which would put you at about 75, which I also seriously doubt.

Anyway, quit trying to argue from authority as a businessman, because even if you really are one, we have no way of verifying that. An argumentum ad auctoritatem that has nothing to give it credence isn’t very effective.

Bala August 13, 2010 at 9:53 am

michael,

You have the following to answer to because out there, your utter stupidity was exposed for all to see.

Here

http://blog.mises.org/13524/in-defense-of-deflation/#comment-711995

and here

http://blog.mises.org/13524/in-defense-of-deflation/#comment-712092

and, above all, here

http://blog.mises.org/13524/in-defense-of-deflation/#comment-711975

michael August 16, 2010 at 9:41 am

“How can you “meet today’s situation”, if you don’t know what today’s situation is, or what’s causing it? If you stage a big marketing drive, and the situation is due to a general economic slump, then you have probably wasted your effort. If you slow down production and the situation is a new competitor or competing product, you are slitting your own throat. A strategy of “just do something” is not going to cut it in business. A business has to have a plan based on the reality of “today’s situation”, or it will soon not be in business.”

You are correct, Russ. When you’re in business you either guess right every time, and get by, or you guess wrong once, and fail. What can I say? I got by.

“This is why I serious doubt whether you are a businessman at all. You’ve already claimed to have lived through the Great Depression, and understood the economic situation at the time, which would put you at about 75, which I also seriously doubt.”

In this you would be wrong. It was my father who went through both the Big Ones (the Depression and the War), and who described them in some close detail to me. My early first-hand familiarity was with the 1940s and 50s. So I’m Truman Era, a bit younger than your guesstimate. The 1947 postwar economy was really the first year that was vivid to me, with its boom times, plentiful money, stores full of all new products and one scary bout of price inflation. It was the Atomic Age, a miracle economy. Everything cheap was plastic or acrylic, easily breakable but with a shiny, colorful finish. ’47 was the year the old painted store signs got replaced with neon.

Russ the Apostate August 13, 2010 at 8:12 am

“The problem with your “equation” is that it attempts to solve a problem without identifying the cause.”

A related problem is that Michael is not trying to solve the same problem that we are.

The problem he’s concerned with is unemployment. He believes that if you use artificial means to get people working, the recession will take care of itself (because he wants to believe that).

The problem we are more concerned with is identifying and eliminating the causes of recessions in general. A systemic problem requires a systemic cure, not just the treatment of symptoms. We believe that once we get the causes of recession under control, the unemployment issue will take care of itself. Michael thinks that this shows insufficient concern for the immediate needs of the unemployed. He refuses to accept that sometimes the best way to save a patient will cause him some short-term pain.

michael August 13, 2010 at 8:32 am

Michael has a further problem. He notes that the do-nothing approach only settles the economy firmly into a recessionary phase. It may in time work itself out, but in the mean time the most vulnerable members of society feel the hardest blows. He has a problem with inflicting pain on that scale without offering relief. It would be akin to refusing a wounded man medical service, on the grounds that it would only impair the body’s ability to repair the damage by itself.

But michael is being open minded. Today he’s looking for the free download of Hazlett, which will purportedly explain everything to the degree that skepticism is no longer conceivable.

JGiles August 13, 2010 at 8:47 am
Russ the Apostate August 13, 2010 at 8:48 am

“He notes that the do-nothing approach only settles the economy firmly into a recessionary phase.”

Russ notes that the “just do something” approach can be even worse than the do-nothing approach. The “just do something” approach, if it latches onto the wrong “something”, will actively make the economy worse.

Besides, most of us here are not advocating doing nothing. That’s another strawman. We simply aren’t advocating the same things you are.

“It would be akin to refusing a wounded man medical service….”

I don’t have any problem whatsoever with you giving to charity to help the unemployed. It’s only when you advocate that the government force others to do the same, in the name of a half-baked and discredited economic theory, that I have a problem.

michael August 14, 2010 at 12:54 pm

“I don’t have any problem whatsoever with you giving to charity to help the unemployed. It’s only when you advocate that the government force others to do the same, in the name of a half-baked and discredited economic theory, that I have a problem.”

Russ, may I submit that the principle has only been discredited by the austrians? And that that’s far from being a conclusive damnation?

Also I believe the concept has been very thoroughly baked. The Romans, early on, started baking bread to offer cheaply to the public. It allowed business to expand without unduly requiring that payment for labor be raised. It was a publicly funded subsidy designed to benefit the poor (that is, almost everyone in the capital) as well as anyone who wanted to employ free labor for pay. It prefigured modern state capitalism as well as state socialism.

They also sponsored circuses at state expanse, to keep the plebes amused and content. Thus the phrase “bread and circuses”. It still works well, although sponsorship of sporting events has since become a private endeavor.

Moscow used to do much the same thing. Most ordinary goods were dirt cheap and either not very good or in short supply. The Romans were really much better at it.

JGiles August 16, 2010 at 6:58 am

Um, Michael, has it occurred to you that “bread and circuses” is a NEGATIVE phrase, generally used in a pejorative sense?

The Roman model fed a sense of entitlement, drained the treasury, created a powerful and violent political group of “plebes” who rioted whenever their trough wasn’t refilled quickly enough, burning down significant parts of the city on a few occasions, and arguably contributed significantly to the downfall of the Roman Empire. Quoting the Roman experience in support of your ideas does not help you.

michael August 16, 2010 at 9:28 am

Mr Giles: To you the phrase “bread and circuses” may indeed be pejorative. But it would appear that Rome’s experiment in state socialism was immensely popular with everyone in the entire Roman world. They flocked in from the provinces, where the daily ration consisted of subsistence agriculture (digging holes in the ground with sticks), slavery and piracy from utter desperation, to a world full of marvels like subsidised public housing, baths, sanitation systems, fun and games (that era’s television was at the circus) and above all, cheap, plentiful bread.

What’s not to like, right? It was a big step up for people. Rome was, in its day, quite a popular destination for aspiring peasants.

You are correct that it ultimately bred in the lower classes a sense of entitlement, and that the model was a budget-buster, requiring a constantly expanding circle of conquest to make ends meet. I think it’s a slight stretch to say it’s a primal cause of the collapse of Rome (the Empire was unsustainable in many ways)… but chronic budgetary imbalances certainly led into the whole complex of problems leading to the State’s internal rot.

Rome simply outgrew its model. For the latifundia to remain profitable you needed such a bloated military that they came to overpower every other force in the Roman world. And they were not good statesmen– in fact were mostly uneducated thugs finding themselves with a tottering civilization to be managed.

JGiles August 17, 2010 at 7:44 am

You are of course correct; Roman state socialism was immensely popular with the poor, because it relieved them of the responsibility of providing for themselves. That left them with more time to riot, necessitating more circuses to calm them down.

My argument is that the Roman model didn’t fail because the Romans were “not good statesmen”; there were certainly bad and incompetent people in the upper echelons of Roman society, but there were also large numbers of competent and effective ones. Rather, the model failed because it must NECESSARILY fail. I assert that state socialism inevitably creates a class of people dependent on the state, and that class inevitably grows and becomes more demanding. Eventually, it becomes to large and bellicose for the state to support any longer, and the system crumbles.

A primary cause? Probably not, but as you said, being chronically broke didn’t help the Empire’s stability at all. And I WILL argue that the bread-and-circuses model was a primary cause of the decline of the Urbs Roma itself; the Imperial court moved out of Rome centuries before it was sacked, precisely because it had become such a dangerous and uncontrollable place.

michael August 17, 2010 at 8:29 am

“Roman state socialism was immensely popular with the poor, because it relieved them of the responsibility of providing for themselves.”

This is consonant with the view that people are basically irresponsible and lazy, just looking for the public teat so they can suckle on it. But your comment presumes they had options– that anyone who wanted to work hard could become his own entrepreneur and prosper. And the world just wasn’t there yet.

The alternative to an interesting life in the big city with a degree of personal opportunity was bare subsistence. Most people in the countryside were either servants or slaves; or they scratched a living from the dirt, suffering from rickets and leading stunted, miserable lives; or they joined the army; or they resorted to banditry. That was about it back then.

And the Roman development model was just like our own: the economy either continually expanded or it began to die. Whereas the model you fellows want to replace it with is one of stasis: instead of expanding or contracting dynamically, it’s always half dead.

Which is not necessarily that bad. But it takes getting used to. Americans, for instance, would never accept it because they’d have to get used to so much more chronic poverty. We would no longer have a culture of abundance.

“And I WILL argue that the bread-and-circuses model was a primary cause of the decline of the Urbs Roma itself; the Imperial court moved out of Rome centuries before it was sacked, precisely because it had become such a dangerous and uncontrollable place.”

Like any management system, the bread & circuses model requires competent management. (I note, as a manager, the tendency here to elevate or destroy models without inquiring into the nuts and bolts that make them hold together.) New York City, our modern Rome, was by the 1970s a cesspool of failed social policies. Everything only went from bad to worse until Rudy Giuliani showed up. Then the city began to work again, the way it did much earlier under LaGuardia.

It wasn’t the system that was defective. Everything depended on the capabilities of the man in charge.

JGiles August 17, 2010 at 9:38 am

“This is consonant with the view that people are basically irresponsible and lazy, just looking for the public teat so they can suckle on it. But your comment presumes they had options– that anyone who wanted to work hard could become his own entrepreneur and prosper. And the world just wasn’t there yet.

The alternative to an interesting life in the big city with a degree of personal opportunity was bare subsistence. Most people in the countryside were either servants or slaves; or they scratched a living from the dirt, suffering from rickets and leading stunted, miserable lives; or they joined the army; or they resorted to banditry. That was about it back then.”

To your first point; my view is not necessarily that people are basically “irresponsible and lazy”, but rather that if you give someone something for free, they will usually take it. Why wouldn’t they? And if you give someone a LOT of things for free, consistently, they will BECOME irresponsible and lazy, because after a while they come to EXPECT to receive things for free. And more, Rome’s experience at least seems to indicate that if you ever stop giving people free stuff once you’ve started, they tend to become violent about it.

Your second point; “the world just wasn’t there yet.”
Hmm. . . then, um, where’d the big city come from? It didn’t spring full-formed from the ground.

Oh, right. Somebody – some entrepreneur – built himself a house, and started farming. And some others built nearby, and then more came, and then they put a wall around it, and then people started trading with them from other towns. . .

To say that the opportunity for entrepreneurial action didn’t exist in the ancient world is, honestly, absurd. The ancient world was BUILT by entrepreneurial action.

“And the Roman development model was just like our own: the economy either continually expanded or it began to die. Whereas the model you fellows want to replace it with is one of stasis: instead of expanding or contracting dynamically, it’s always half dead.
Which is not necessarily that bad. But it takes getting used to. Americans, for instance, would never accept it because they’d have to get used to so much more chronic poverty. We would no longer have a culture of abundance.”

You misunderstand us. We don’t want a “culture of stasis”. Rather, we claim that absent government intervention, the economy would expand both faster and with more stability. We would have a TRUE “culture of abundance”, as opposed to the profligacy of today, which we fund by stealing from our children. Or actually, it’s looking more and more like the past has funded it by stealing from us. I anticipate significant economic crumbling in my lifetime.

Chronic poverty? Why? In a free, capitalistic economy, a man with two hands and a good work ethic has all he needs to earn himself a living. Yes, people who wouldn’t work would starve. That would be their choice. But I think there would be very few such people, because in general people are perfectly willing to work for their bread. It’s only if someone gives it to them gratis that they won’t.

“It wasn’t the system that was defective. Everything depended on the capabilities of the man in charge.”

I say that a system which depends entirely on the man in charge IS defective. That’s the whole point of ABCT; A free, capitalistic economy doesn’t HAVE a “man in charge”, and it doesn’t need one. Or, rather, it would have (in America) 300 million men and women in charge. The system we propose essentially boils down to the assertion that in a large group of people, at any given time, more will make good decisions than will make bad ones, and the ones who make good decisions will gain while the ones who make bad decisions will lose. Thus, good decisions are promoted and spread across society while bad ones are marginalized and forgotten. THAT is what we want. And no State – not the American government, not the Roman state socialism, nothing – can replace it.

Eventually you get a bad man in charge, and usually he does a lot of damage to a lot of people. The solution is not to put a man in charge in the first place.

David August 10, 2010 at 10:13 pm

It seems to me like every economist defending inflation and decrying deflation as the end of capitalism is simply defending the fleecing of the middle and lower class – who are most profoundly affected by inflation (our money becomes worth less over time, even outpacing interest in savings accounts) and also most profoundly affected by deflation (our money becomes worth more over time).

michael August 12, 2010 at 11:58 am

David: Current policies do fleece the middle and lower classes, favoring the fortunate. But it’s more that they facilitate the flow of money upward than it is the piddling amount of inflation that results. In relative terms, the top one percent is walking away from the lower 99. And inflation for them is a walk in the park.

The problem with deflationary policies is apparent if you study what happens every time money gains in worth. Such periods are always linked with high unemployment. Look it up in the historical tables. Money in those times has scarcity value.

David August 14, 2010 at 1:06 pm

The problem with deflationary policies is apparent if you study what happens every time money gains in worth. Such periods are always linked with high unemployment. Look it up in the historical tables. Money in those times has scarcity value.

That’s factually incorrect.

michael August 16, 2010 at 9:08 am

Incorrect? I don’t think so. I’ll grant that it’s less than a complete picture though. Let’s go back eighty years, to see what examples we can find:

In 1921 and 1922 the inflation rate was a negative, (10.85%) and (6.2%) respectively. Unemployment was high. Yet in mid-1926 we saw the beginning of a very protracted mildly deflationary period (zero to minus 2-3%), and unemployment didn’t rise steeply until 1930.

Once deflation dropped below that point, down from -4% to staggering numbers around negative 10, we were in the trough of the Great Depression.

In 1935, 36 and 37 the economy was recovering, and employment started to also recover. There was mild inflation.

The in 1938 and 39 Congress imposed disastrous attempts to balance the budget prematurely. The Depression returned, as did higher unemployment and the reappearance of deflation. It’s this phase of the failed recovery that has the most relevance to us today.

1942 and 1947 were both highly inflationary years. But there was also low unemployment.

Then we get to 1949 and 50, years in which there was mild deflation. And here I’ll have to say, I don’t recall any problem with unemployment. So in this instance the general pattern isn’t followed.

In the late fifties, early sixties there was a happy combination of low inflation and full employment.

In the 1970s there were unemployment peaks in 1971, 1975 and 1982. !974, 1975 and 1979-81, on the other hand, were the years of peak (double-digit) inflation. So here I have to go with you. No positive correlation between unemployment and deflation, in fact a negative one.

The short deflationary period of 2007 immediately preceded the sharp rise in unemployment we still have with us. We call these things economic contractions.

Sources:
http://eh.net/encyclopedia/article/Smiley.1920s.final
http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=7
http://www.ofm.wa.gov/trends/tables/fig105.asp

So in terms of the serious recessionary-depressionary periods, I’ll have to go with my brief encapsulation. But I do note there was an anomalous period of stagflation in the 1973-82 era that didn’t follow the pattern. You’re partly right, in that it’s a general rule with occasional exceptions.

I’d be interested in such evidence as you can uncover.

Dagnytg August 11, 2010 at 3:19 am

“It’s the same with inflation and deflation – both have winners and losers.”

Gil,

Your mistaken…

In a deflationary environment, it’s the winners who win (those who work hard, save, and make sound investments.

In an inflationary environment, it’s the losers who win (those who don’t work hard, spend money they don’t have, and make malinvestments.

Deflation values work…inflation values speculation…it’s really that simple.

Huntsmen August 11, 2010 at 12:35 pm

“In a deflationary environment, it’s the winners who win (those who work hard, save, and make sound investments.”

It’s just so convinient for many wannabe Austrians here to side sweep Mises’s and Hayek’s views on deflation. Put down the Peter Schiff book, junior.

Dagnytg August 11, 2010 at 5:20 pm

Hmmm…interesting response from a supposed Austrian no less.

Deflation occurs as consequence of inflation so I’m not sure where your confusion comes from.

I think your misinterpretation of my deconstructionist version of deflation/inflation is guided in the idea that I somehow favor a government policy of contracting the money supply in order to achieve deflation.

Mises was against such a policy and as an anarcho-libertarian so am I. But Mises did believe in a monetary authority and I do not. As an anarcho-libertarian (as are many of the bloggers on this site) I feel no intellectual allegiance to any economic theory only those that support freedom. The Austrian school and its simple premise of “human action” appeal to my libertarian instincts. The ABCT also has great merit.

I have never read a Peter Schiff book (though I have read a few of his articles mostly on housing.)

I suggest you put down…whatever you have in your hands…and read some Rothbard:

“It is true that deflation takes from one group and gives to another, as does inflation. Yet not only does credit contraction speed recovery and counteract the distortions of the boom, but it also, in a broad sense, takes away from the original coercive gainers and benefits the original coerced losers.”

Thanks for the “junior” comment…I feel younger all ready;)

Huntsmen August 12, 2010 at 3:14 pm

“Deflation occurs as consequence of inflation so I’m not sure where your confusion comes from.”

Monetary deflation occurs as a result of disequilibrium between the money rate of interest and the natural rate of interest (where demand for loan capital would equal the available supply of savings). This is the sort of deflation I am referring to, which can come about as a result of money rate of interest being elevated above the natural rate of interest, due to both endogenous and exogenous factors. What you end up with is a choke-hold on the accumulation of capital and prices falling below costs (forcing forgoing of consumption and using existing scarce funds to keep business afloat) in the aggregate, since the demand for cash holding has not been satiated.

“Read some Rothbard”

I’ll stick with monetary equilibrium theory, thanks.

Huntsmen August 12, 2010 at 3:27 pm

I’ll add that there is a difference between monetary deflation and price deflation. The latter is anticipated by entrpreneurs and raises the volume of production following the standard of living for the common man.

Dagnytg August 14, 2010 at 3:15 pm

Huntsman, it’s obvious that you are a very intelligent person and have a great vocabulary but I think you miss my point.

When Mises refers to inflation, he means monetary inflation. (I assumed you would understand that to be my definition of inflation since I referred to Mises in my previous post.) There is no need to discern between the two types (monetary and price). In Austrian economics, there is no such thing as price inflation/deflation. Inflation can only be derived through monetary policies-deflation as a result.

What you describe in one paragraph using words like “endogenous and exogenous” (really… wouldn’t the words internal and external be more efficient?)…I can say in one sentence:

“Deflation occurs as consequence of inflation…”

A person with a 6th grade vocabulary can understand this sentence…not so with your explanation. We say the same thing. I just do it with fewer words and can capsulize the essence of the idea in a single sentence.

I come from the anti-intellectual corner of the world. In other words, I believe that the communication of ideas is more important than the convolution of ideas and the details implicit to them.

Don’t get me wrong, it is necessary that there be an intellectual foundation for any revolution to take place. Mises, Rothbard, Hayek, Rand, etc, but in the end it’s the Thomas Paines and Bastiats of the world that create change (along with many of the writers here at mises.org.) – those who can communicate, teach, and show practical application.

So, as I said earlier…

“Deflation values work…inflation values speculation…it’s really that simple.”

Thanks for the dialogue:)

The Kid Salami August 13, 2010 at 10:15 am

I never really properly understood the difference between inflation and deflation (if indeed I do) until I read this.

http://mises.org/books/deflationandliberty.pdf

Baten August 11, 2010 at 4:13 am

We are still turnig around the long ago answered question: costs are determined by prices or prices are determined by costs?

michael August 11, 2010 at 7:27 am

Prices are not determined by costs. They are determined by what a ready customer is able and willing to offer. If the producer can’t meet that price point he loses business.

Are costs determined by prices? If you want to stay in business, you do have to get your costs under the going prices in order to sell the product. So I would say yes.

Daniel August 11, 2010 at 8:14 am

How you manage to understand imputation but get everything else wrong is beyond me

mpolzkill August 11, 2010 at 9:20 am

“How you manage to…get everything else wrong”

Determination.

newson August 12, 2010 at 10:13 am

that’s the job of the agent provocateur.

Barbarossa August 12, 2010 at 12:56 pm

“How you manage to understand imputation but get everything else wrong is beyond me.”

lol, I was just thinking that. When I read it I had to take a second look at the name of the poster. I think that that just proves this guy understands economics and pretends not to on purpose, since he serves some statist agenda. I wonder who bankrolls this guy.

michael August 12, 2010 at 3:50 pm

“I wonder who bankrolls this guy.”

Myself. I took Ben Franklin’s advice to heart, to neither a borrower nor a lender be. And I launched my business from personal savings, so as not to have the nuisance of a money partner.

Did I understand economics? Well, I ended up with more money than what I began with. I must have misunderstood the lesson about the only important thing being production.

BTW, unlike everything everyone’s been telling me here, in my business production DID NOT precede demand. If there was a demand for my services, I provided them. If not, I didn’t.

The Kid Salami August 16, 2010 at 7:49 am

Yes, but you are still just obstinately and bewilderingly refusing to see that the demand for your goods of which you speak comes from production somewhere – someone somewhere produced something in order to have anything at all to trade for your services and therefore have a “demand” for them. They can’t just demand your services at will (unless you were giving them away – if the value of these services was anything like the value of your comments here, this would make sense).

So the total demand is limited by the total production. This demand could be, relative to the amount produced, “high” if everything produced was desired by a consumer at the planned for price (meaning that the resouces were most efficiently allocated).

Or could be, relatively, “low” if many producers produced stuff that it turned out no’one actually wanted – like, say, there was some economy wide reason that the information available to producers was distorted and people built/made/trained for/invested in the wrong stuff. I wonder if there are any historical examples of such economy wide folly?

You should introduce a new word into your vocab, “desire”. If you make ferraris , then everyone has a “desire” for them. Only those who have at their disposal a sufficient amount of property to obtain one in exchange can be said to have a “demand” for them though.

michael August 16, 2010 at 8:12 am

Kid: I don’t see the utility of your comment, that “someone somewhere produced something in order to have anything at all to trade for your services and therefore have a “demand” for them.” I think that goes without saying. You don’t have a paying customer unless somewhere, somehow, the guy was able to put a few dollars into his pocket. In a practical sense, such a comment sheds no light.

So a formula like “total demand equals total production” is of no practical use (at least outside the field of macroeconomics). If you have a product or service to sell, you’re only interested in finding out how much your market segment is prepared to spend. My impression is that you’re taking the hard way around the block to figure out something that’s very obvious and easy to see.

“Desire” plays no part in my calculations. Many people sell something for which there is no lust in anyone’s heart. How badly do you desire the services of an accountant, or a gastroenterologist? Such people only consider how much the market will bear when calculating their rates.

And if someone is broke, and has his nose pressed against your showroom window glass, how useful is his desire to you? The only thing you might be able to do with his desire would be to consider opening up a financing arm, to lend him your money to buy your product with. (Note: Ford and GM have done very well with this approach.)

The Kid Salami August 16, 2010 at 8:47 am

Well, I’m not the one who said

“in my business production DID NOT precede demand”

I’m pointing out that your production – the “seen” production from your point of view – may not have preceded the demand of your customers, but someone else’se production – the “unseen” – most certainly did. So it is ok to say production did not precede demand for one isolated person or exchange, but extrapolating this to the economy as a whole is simply incorrect – economy wide, production most certainly does precede demand.

You now appear to agree with this. So, let me ask you – what was the “utility” of your statement “in my business production DID NOT precede demand”?

Bala August 16, 2010 at 8:56 am

michael,

As always, you are unable to realise that Kid’s point is simply that production drives the economy and not demand. Only those who produce can demand. So, the way to understand the working of an economy is by understanding what drives production and not what drives demand.

Bala August 16, 2010 at 9:09 am

michael,

” The only thing you might be able to do with his desire would be to consider opening up a financing arm, to lend him your money to buy your product with. (Note: Ford and GM have done very well with this approach.) ”

You forget (rather conveniently) that someone had to have already produced the money that Ford and GM loaned out to their customers.

Jim Raynor August 12, 2010 at 2:01 pm

Here’s Hayek’s view on deflation and follow-up by Steven Horrowtiz to balance out the Rothbardian dogma infecting the Mises Institute.

http://austrianeconomists.typepad.com/weblog/2009/10/hayek-on-deflation-and-the-great-depression.html

newson August 12, 2010 at 8:32 pm

bagus shows that hayek’s views on deflation vary markedly over his career. likewise, mises views are not always consistent.
http://mises.org/journals/qjae/pdf/qjae6_4_3.pdf

Beefcake the Mighty August 12, 2010 at 8:59 pm

Wow, now that’s a blast from the past; the good ol’ days before the GMU gang became coordination problem solvers, or problematic coordinationists, or something like that.

Comments on this entry are closed.

{ 1 trackback }

Previous post:

Next post: