According to Paul Krugman, it seems that World War II created a foundation for long-run prosperity. Yes, what we really need is to add to our deficit and debt in ways unimaginable. (Thank goodness, Krugman does not recommend that our armed forces invade yet another hapless Third World country.)
I answer Krugman here and here.
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As an engineer who has not gone into economics, its amazing that the field is filled with utter guess work. Trying to prove the unproveable. I see why Keynesian is so famous. His general theory was able to propell economists from the a weak science to a strong one. Everyone know that in science it goes social, physiological, biological, physical, mathematical. Economics used to be even off the far end of that scale, it was so imprecise and impossible. The formula allow keynes to move all the way down to physical/mathematical. This believe in the formula is take as an axiom. Everything that happens that is good is because of the formula, everything else that happens is completely ignored. This is why Krugman and Berneke always talk about how they are fixing things and yet never give a reason why things are broken. Like Greenspan, its easy to see that Krugman is in this for politics. He has done his work with math (read his books), nothing is going to change his mind – ever.
Anderson’s work constitutes the rankest sort of propaganda, when he mixes two utterly different phenomena in the minds of the credulous… as he does here:
“I find interesting that Krugman now has decided that World War II, a time when at least 50 million people met horrible deaths, really was a wonderful time of plenty and happiness, or at least it gave us an “economic boom,” and Krugman believes booms are good.”
The purpose of this line of argument is to taint the one thing, a period when for whatever reason we had a dynamically expanding economy, with quite another thing, the suffering and destruction of WW Two. As a tactic, the nicest way one can put it is that it’s not intellectually sound.
Yes, most Americans would consider booms to be good as opposed to that other condition: busts. And if we could only elect leaders who knew how to manage it, we would prefer a steady state in the middle over an unpredictable cycling between the two extremes.
One thing the war’s destruction did, undeniably, was to increase the amount of economic opportunity. Rebuilding creates the same need for wage earners as does plain old building. The only difference is, in the wake of a destructive war, people really do need to rebuild. Whereas in a period of peace and prosperity, at some point we’ve built and sold all the houses and televisions and clothing and new cars and ski equipment the public needs. Appetites are for the moment satiated. So demand slackens, and with it consumption, and with consumption profits, and with profits production. So workers get laid off, despite the fact that they still need their biweekly paychecks coming in so they can pay the rent and grocery bills. The root cause of the cycle is momentary satiation, more than it is any fluctuations in the money supply.
It’s a conundrum. Workers need work– otherwise the paradigm of pay-for-production doesn’t satisfy people’s needs. So there needs to be something still to be done.
If it’s not war, which no one should want, we need to have some other societal goal to require more work to be accomplished. Maybe a push to explore and colonize the moon and nearby planets. But we, as a society, desperately need to be doing SOMETHING in order to justify our daily bread.
A second point is that Krugman points toward the Austrian solution when he says this:
“Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.”
Isn’t it the case that in the four long years following the 1929 Crash, the Austrian solution was applied? Didn’t the Fed restrict credit issuance in order to soak up all that excess money in the system? And what was the result? Four long years of no economic activity, followed by the cascading failure of hundreds of banks.
We’ve tried the experiment. The results were not encouraging.
“Anderson’s work constitutes the rankest sort of propaganda, when he mixes two utterly different phenomena in the minds of the credulous… as he does here:”
“Isn’t it the case that in the four long years following the 1929 Crash, the Austrian solution was applied? Didn’t the Fed restrict credit issuance in order to soak up all that excess money in the system? And what was the result? Four long years of no economic activity, followed by the cascading failure of hundreds of banks.”
Michael, please go stick your head in a toilet. It’s more likely to put up with the sheer amount of excrement you spew than the posters here.
Have you read Rothbard’s AGD? No? If not, zip it.
“It’s a conundrum. Workers need work– otherwise the paradigm of pay-for-production doesn’t satisfy people’s needs. So there needs to be something still to be done.”"If it’s not war, which no one should want, we need to have some other societal goal to require more work to be accomplished. Maybe a push to explore and colonize the moon and nearby planets. But we, as a society, desperately need to be doing SOMETHING in order to justify our daily bread.”
While I have always questioned the validity of “michael”‘s self-proclaimed credentials, comments such as those above continue to eliminate any doubt that may remain.
Clearly, any person that believes what he states above is nothing more that a troll. Implicit in his comment is that murdering people is perfectly acceptable so long as those that contribute to the mass slaughter of innocents continue to earn an income.
I do my best to starve the troll, but sometimes it is irresistible.
It’s basically apologia for all makeshift “work” out there, no matter how divorced from consumer preferences…
“Implicit in his comment is that murdering people is perfectly acceptable..”
“It’s basically apologia for all makeshift “work” out there..”
Anything but, guys. I’ve neither endorsed make-work nor murder. What I said was that man, in order to earn his bread, has to find work. And in a consumer-led economy, there comes a point where there are few more products people want to buy. Demand has been generally satisfied. So workers get laid off until pent-up demand again develops.
That’s not good enough. Some program is needed to find useful work to perform, so people can commence with the task of earning income. There’s really nothing odd or exceptional about this statement.
Also, the most necessary work does not arise from consumer preferences. It arises from raw need on the part of those who have no access to money, so cannot become consumers. These are the world’s two billion or so “absolute poor”. We could always pay people to provide food, housing, medicine, etc. for them.
It would be a natural fit of complementary needs.
Michael,
Quit making excuses. We’ve already established that all you care about is getting people jobs, so we all know that even if no useful work were to be done, you would still favor give them something. So you would endorse makework, if it was a choice between that and no jobs. The fact that you might try to make the jobs useful at first is really not a good enough excuse. You’re for makework, and we all know it.
We live in a world where there’s immense amounts of work needing to be done. But there’s little market for that work… for the reason that it’s to satisfy the needs of people too poor to constitute demand. This is a basic fact of life that lies beyond the limits of your philosophic bubble.
Such work would of necessity be performed at a net loss. Nonetheless I would have that work done, and would invent sufficient credit to make it happen. That’s the humanist position. The alternative would be to let such absolutely poor people starve, as they were not economic units.
“… for the reason that it’s to satisfy the needs of people too poor to constitute demand. This is a basic fact of life that lies beyond the limits of your philosophic bubble.”
No, the reason I reject this “basic fact of life” is because it’s all based on your pseudo-Keynesian economic theory, which is patent nonsense. If you would bother to learn some valid economic theory, so that you could properly evaluate and interpret the disparate “scientific facts” you so love, then you would know this, but this apparently “lies beyond the limits of your philosophic bubble.”
“That’s the humanist position.”
Typical leftist nonsense, to claim the moral high ground when you are in fact the killers. No, yours is the socialist position. From each according to his ability, to each according to his need.
He’d gladly have you in leg irons cracking rocks. Close your eyes and think of Krugman, you lug.
michael SEZ:
We’ve tried the experiment. The results were not encouraging.
michael, you are trying to contribute, IMO. So in that spirit I will respond.
I don’t think that you can accurately refer to the 4 years after 1929 as being used for applying the “Austrian solution”.
Yes, The FED went ‘nuts’ before and after 1929 —- better The FED had not existed then or NOW.
This is because The FED has been responsible for more pain than the American Republic and her people should ever have had to endure (completely unnecessarily) since 1913 at the hands of one agency, especially one that is not an ‘enemy’ agency.
Not only was The FEDeral Reserve actively involved in first creating and then exacerbating The Great Depression, they are doing the same thing today. (Admittedly with slightly different approaches, but the effects will be the same IMO.)
Furthermore, if you were to read FREEDOM FROM FEAR by historian David M. Kennedy, you would realize that (Republican) President Hoover was a far bigger interventionist, proportionately, than was FDR.
FDR’s New Deal was simply a continuation of “The Interventionist and Engineer” Hoover’s policies. Republican or Democrat, it did not matter then, and it won’t matter now.
You don’t have to bother arguing with most of the people here on this site. Most of us know that Austrian-type solutions will never be implemented. Most of know that it is in the blood of most politicians (other than the Ron Paul-types) to INTERVENE —- “Intervention” is the only reason that most politicians believe they exist. It is their lifeblood. The only problem is, that in carrying out their life’s work, they have to bleed the rest of us white.
The Austrian ‘solution’ is simply “Do Not Intervene” — neither to create the Bubbles in the first place nor to alleviate the bad effects of the inevitable subsequent Busts.
Of course no one here suggests that people who are suffering should not receive some kind of public assistance — especially since most of us understand that those suffering are in their present dire straits precisely because of the prior actions of the American Federal Government and of The (American) Federal Reserve.
So we all know that someone like Paul Krugman will more likely be listened to for ‘solutions’ than anyone here. You won’t “convert” anyone and you don’t need to try. There are far more Keynesians, Krugmanites, and Bernankians out there than there are ‘Austrians’ (= relatively-speaking, Austrian economists are an endangered species.)
But that likelihood of winning the discussion does NOT mean that the non-Austrians are right in their analyses. Nor does it mean that Americans will be well-served by the policies that will inevitably be implemented over the next 10 years —- IMO a SINGLE decade is the minimum length of time that this tragedy will continue, given that Intervention is the prevailing political philosophy of both Left and Right.
By the way, it would help you and Krugman to understand that one reason the 1950-s were such a time of recovery was that by and large the American people were left to their own devices to ‘fix things’. One book that would help (all of us, especially Paul Krugman) in understanding this very basic and true fact is by Tom Brokaw.
Please see http://en.wikipedia.org/wiki/Greatest_Generation
As to your other theorizing, I am really confused:
Maybe we should all gather together to build The American Pyramids?
I have never heard of such an economic event as “momentary satiation”, ever, anywhere in History — do you have an example?
That is, could you be a little more precise?
There are no economies I have ever heard of that have “momentarily satiated” their members, except in such novels as LOST HORIZON.
http://en.wikipedia.org/wiki/Lost_Horizon_(novel)
http://en.wikipedia.org/wiki/Shangri-La
Even the quest for our “daily bread” that you refer to clearly invalidates your concept.
The fact that we need “bread” (or its substitutes) on a “daily” basis makes it clear to me, at any rate, that your concept is imaginary.
AV: Let’s return to my actual comment. I said that the Fed did not relieve the distress caused by the 1929 Crash by expanding the money supply. And as a result, the money supply contracted, bringing in its wake an expanding wave of bank and company failures. The end result was the familiar effects: massive unemployment and frozen credit markets for another decade.
The remedy you like is for the Fed to just disappear, presumably flooding the bond market with its accumulated assets. (Do you even know what I’m talking about here?) This would shrink the money supply– a condition we’ve always seen associated with recession or depression. In other words it would bring on the very condition we would want to avoid: frozen credit markets and massive unemployment.
2. Sorry about the “momentary satiation”. I should have proofed my comment, and written instead “The root cause of the cycle is monetary satiation, more than it is any fluctuations in the money supply.”
My point was, if we don’t need everyone in society working in order to satisfy demand, what then do we do with all the other people? Just let half of them be robbers, and make the other half cops to put them away? That’s not a good model.
3. “The fact that we need “bread” (or its substitutes) on a “daily” basis makes it clear to me, at any rate, that your concept is imaginary.”
Are you telling me you don’t need to eat on a daily basis? I believe you do. This kind of comment says a lot about your whole approach to argumentation. Try to do better, AV.
I think you, Michael, are exaggerating just a tad, here:
What I wrote, had you actually carefully read my entry, was that the QUEST for our daily bread BY AND OF ITSELF already indicates that there is WORK THAT MUST BE DONE (on THIS planet). Bread does not drop like manna from the heavens, at least not where I reside. It must be earned the old-fashioned way, BY WORK.
You don’t need to CREATE WORK because the Need For Work is everywhere you look. The Quest to Eat means we must farm, package, distribute that food. That provides employment. This proves your concept is imaginary, because, as I have illustrated, there is no “justification” required (as you call it). Or do you subsist on AIR —— I am entitled to ask that question OF YOU, not the other way around, as you imply.
You don’t need ill-conceived ‘projects’ like “exploring and colonizing the moon and nearby planets”. Just what Economic Planet are you from?
You seem to say we need some kind of over-arching government-sponsored “projects” under the banner of “SOMETHING”: “Please lords Bernanke and Geithner, give me a project, anything, so long as it is SOMETHING” to mop up all these “unused resources”.
You are being silly and melodramatic.
Don’t you think there are enough worthwhile “projects” already existing here on Earth, without you or some government bureaucrat identifying them for us?
As far as The FED contracting the Money Supply, yes, they screwed up, as shown by the famous book by Milton Friedman & Anna Jacobson Schwartz —— A Monetary History of the United States, 1867-1960. And you cannot contradict me, because I did not say anything different about that point. And further the intervention of The FED proved that intervention then, and in 2001 to 2008 and now again by Bernanke in 2009-2010 has not and will not work. That is the only thing that Austrian Economists say — how can you fail to see that, by darting around and creating all kinds of other straw-men arguments and silly scenarios that do not and cannot exist?
Can I ask you a personal question —— is it in your nature to look for disagreements? Because by observation here, IMHO, you are very good at it —— you should be able to find a job on television where such a disagreeable nature can pay you big bucks, and then you will be very successful, at least monetarily.
Getting back to the root issue, intervention always leaves things worse off then before. Let it go, I beg of you and of Bernanke and of Krugman.
When will we all get off this mad merry-go-round?
Fear the boom…embrace the bust!!!
The boom is the distortion of reality. It is a drinking binge that goes on and on until we pass out. Then we wake up with this horrible hangover (the bust). But we should be glad that the hangover will soon pass and reality will be restored. Keynesians can only prescribe more hair of the dog that bit them. The following hangover is only worse. Then we find that according to the Keynesians the problem was we didn’t drink enough alcohol…Fear the boom…embrace the bust. As bad as it is, it is the best we can hope for.
Right, because Austrians teach to drastically increase spending, forcibly increase wages, hold prices high, and start giant public work projects that suck labor and resources out of the economy.
Ever wonder why it’s called the Hoover Dam? Certainly not because of Hoover’s free market approach to the Depression. Show me an Austrian that supported that nonsense and I’ll call you a liar.
Good points J. Murray!
BTW, I assume that you were tongue-in-cheek with the comment about “Austrians teach to drastically increase spending… that suck labor and resources out of the economy.”
Cheers.
Now I see what you meant J. Murray. This was thanks to the clarification from michael below.
Like michael argues, Keynesians make the mistake of thinking that “lack of utilization of capacity” is somehow at the heart of the bust — or, at the very least, that we can try to “fix” a bust by bringing public money forth to be wasted on so-called public works projects.
The bust cannot be “cured” by using up that now under-utilized capacity.
But this thinking though is so terribly seductive, in its apparent ‘simplicity’, that I cannot blame anyone for falling for such illogic. And because it is so TERRIBLY seductive, it bears further examination. It cannot be simple accepted or simply rejected — it must be incisively examined and then summarily rejected as a putative ‘solution’ IMO especially here on an Austrian Economics website.
The other reason that such a ‘solution’ appeals to us is of course because there is a lot of human suffering in unemployment. And let no one doubt it, most of the unemployed are in that state, thanks to the well-intended interventions of central bankers and others. Notwithstanding Dr. Paul Krugman’s motto (“The Conscience of a Liberal”) he does not have a monopoly on caring about human suffering. Nor IMHO does he have a monopoly on ‘solutions’ to our present Grave State.
I give my respect to Michael (really, it feels disrespectful for me to use lower-case when typing the name “michael“) — most especially because of the heartfelt genuineness with which the arguments are made (by the person with the moniker “michael“).
Michael, if you have time and the inclination, please read a good article (IMO) at http://www.leithner.com.au/newsletter/jul10_newsletter.pdf
The writer, Chris Leithner, in a side note, remarks, “Lest anyone think that Paul Krugman of Princeton University is a real economist (instead of a Keynesian political operative)…”
Keynesians do not acknowledge that the fact of the apparent availability of certain, key resources (let’s say empty factories, millions and millions of unemployed people, and more-than-available and under-utilized oil, gasoline, and trucks and so on) may not be sufficient to allow for what Keynesians refer to as “full utilization of those resources”. That is, Keynesians do not examine why it should require intervention to “put those resources to work”.
So Keynesians never IMHO properly ask why those resources are not being used. They simply assume we can print up some money or borrow some money and put those unused resources “to work”. They just assume that there is an unknown or misunderstood, possibly periodic, weakness within capitalism, that is, a ‘problem’ or an ‘act of God’ that caused those resources to be “underutilized” in the first place.
But borrowing to increase ‘capacity utilization’ is fraught with potential damaging consequences. It is certainly true that we can increase our nation’s GDP (at least temporarily) with the use of borrowed money. No Austrian economist disputes this. But you have to ask yourself “what does this borrowing get for us?” Does it bring us permanent self-sustaining jobs? Does it make the putative Recovery self-sustaining? Can we always “jump-start’ the Economy? Why is it that the Economy requires such periodic “jump-starting” in the very first place? Can we always pick ourselves up only by the effort of pulling on our bootstraps?
The Hoover Dam example is very instructive. It certainly helped the companies and worker who built it, at least during the multi-year period of construction. But did it have many spinoff effects into the rest of the Depression Era economy? Not many — most of the benefits came to America over the decades since the building of that dam — originally known as the Boulder Dam: http://en.wikipedia.org/wiki/Hoover_Dam
President Hoover, a very intelligent person, and an engineer by profession, decided that a president could “fix” the economy just like building a road through a wilderness or building a dam to tame a river for hydro power and irrigation. He started many of the initiatives that later morphed into The New Deal under FDR.
But like any interventionist facing the Mother of all Recessions, Hoover and Roosevelt incurred very big failures in trying to ‘solve’ the situation. The same problem faces our current politicians. You cannot fix a Burst Bubble with another Bubble — well you can, but then you soon face the problem of fixing an even greater Burst Bubble later.
Time is the only healer. As I read in one of Doug Noland’s recent essays “As the great German economist Dr. Kurt Richebächer was fond of saying, ‘The only cure for a Bubble is not to allow it to inflate.’”</
http://en.wikipedia.org/wiki/Kurt_Richeb%C3%A4cher
http://prudentbear.com/index.php/creditbubblebulletinview?art_id=10425
Here is an interesting proposition from Michael:
I have to write in response that “downturns” do not just happen. They are made by human intervention. The small downturn of 2000-2001 was exacerbated by a FED-man-on-steroids, our favorite Money Wizard, The Maestro, Alan Greenspan.
Now this latest bust from that manmade boom is going to be ameliorated by ‘projects’. Well, sure they might, to some degree, but to what effect and for how long? Is the idea to create another boom à la Dr. Alan Greenspan? Michael writes “restores that asset to a fuller capacity” and I say no, not for long, not unless there is an organic demand from within the economy for that ‘asset’.
“All projects of any nature add to the size of an economy.” Yes, I acknowledge that you can make an aggregate statistical measure of the Economy like the GDP or the wispy “aggregate demand” statistic go up, but what exactly does that mean? FDR discovered that he increased GDP year by year, but unemployment did not drop below 17% during all of the 1930-s. So there is no net benefit necessarily in increasing a Statistical Aggregate. Such fooling-around can even distract us from what might actually HELP PEOPLE, which after is all, is what alleviating the harm from this manmade disaster is all about, right? I hope!
I have a question and a proposition — namely, why not just STOP making the Booms and their inevitable subsequent Busts? Surely the time has come to “bite the bullet”?
We have not learned a thing. The young Ben Bernanke, having learned the ‘lessons’ of how ‘bad’ Price Deflation was during the 1930-s (at his grandfather’s knee) has already told us in 2002 that he won’t be making that particular ‘mistake’ no matter what. Might that aversion to price deflation by itself not also lead to serious policy mistakes? Sure it might.
Mr. Noland is extremely worried that the new credit bubble The FED and Federal Government are inflating will be the cause of much future suffering because the entire Money System is slowly being violated and destroyed.
Michael, no one doubts that your heart is not in the right place. The question I have is, what about your head?
“Michael, no one doubts that your heart is not in the right place.”
That double-negative is not what I meant. (Others might think that , but I do not.)
It should have been:
“Michael, no one doubts that your heart is in the right place.”
“Others might think that , but I do not.”
Right, so you need to correct yourself again, Viirlaid:
“Michael, *I* don’t doubt that your heart is in the right place.”
His “heart” is in *my* wallet, that’s the wrong place.
To mpolzkill
Touché
Touché
Touché
In other words –> Good Point!
AV: you’re head and shoulders above the typical member of this crowd in terms of being able to make a cogent argument. Thanks.
“Keynesians make the mistake of thinking that “lack of utilization of capacity” is somehow at the heart of the bust — or, at the very least, that we can try to “fix” a bust by bringing public money forth to be wasted on so-called public works projects.
“The bust cannot be “cured” by using up that now under-utilized capacity.”
Let’s take a second look at the problem. When we have a bust, we still have all the workers, willing to work. And we still have all the owners, hoping to make a profit. And all the managers are willing to manage. And the physical plant? It’s still all there. So what’s missing, the ingredient that can make it all happen?
I hope by now you’ve guessed. It’s some money. And money is just an artificial construct, invented for our convenience in trading with one another. How can we see any impediment to making some more in an emergency, just to get us over the hump? If we believe in balancing the books, certainly we can resolve to pay it all back once we get things rolling again.
2. I’ll read your article when I get a moment. Right now I have to close this program and do some errands.
3. “They just assume that there is an unknown or misunderstood, possibly periodic, weakness within capitalism, that is, a ‘problem’ or an ‘act of God’ that caused those resources to be “underutilized” in the first place.”
I think I have a pretty good understanding of how recurrent bubbles and busts are created. And it’s not the same as what we find here. I’ll get back to you on that as time permits.
Thanks for interesting comments.
Money is the missing ingredient.
Well…
I won’t predict anything about the Future because no one (other than God, if He is awake) would know.
But here is an example in China where $$$ (or at least Chinese equivalent, fiat money) has achieved “An Empty City”. Kind of scary. And a tale of what that missing ingredient can do all right.
http://www.youtube.com/watch?v=0h7V3Twb-Qk&feature=related
Sure there are better expenditures. But as Chris Leithner in his essay explains, why should any of us expect government officials, no matter how educated, to be able to make better decisions than “Mr. Market”. Clearly we should not.
And yet that is what we are left with in order to expect “better things”.
I think this next guy makes his point about China a little too unnecessarily mouth-frothingly, but he was entertaining just the same.
My point which agrees with his (Richard Wolff, economist, “The New School”) is that China is on exactly the same sad trajectory as the rest of us in our respective Fiat Money Madlands.
http://www.youtube.com/watch?v=1sjMJXJkpAo&feature=related
The Chinese are just not there yet.
And Australia and Canada (where I hail from), which are resource economies, are currently experiencing their respective hiatuses from Market Reality due only to China’s massive central-bank orchestrated interventions with money-injections. That is why resource-based economies have skipped most of the pain so far.
So while I respect your “missing element” theory — I just do not see the good that will come from introducing it.
Time will tell. Hey, and if we are lucky, and in the meantime someone discovers “Free Limitless Energy from Zero-Point Energy”, we’ll have nothing to worry about, and you and I can take a trip to Paris for the equivalent of $10 in today’s money after that wondrous discovery. We’ll hoist a few pints and admire the ladies.
That kind of outcome will make even our beloved Dear Dr. Greenspan look like a genius in getting the Future so right IMO!
“Austrians teach to drastically increase spending, forcibly increase wages, hold prices high, and start giant public work projects that suck labor and resources out of the economy.”
You’ve kind of faltered on this one, JM. No giant project “sucks labor and resources” out of an economy. All projects of any nature add to the size of an economy.
By definition, recovery programs only take place during a downturn. Capital plant, material resources and labor are all running short of capacity. So ANY program, whether public or privately funded, restores that asset to a fuller capacity.
I would really like to see you acknowledge this. Because it is quite obviously true. And because since I’ve been showing up here, I have NEVER seen any one of you accede on any point whatsoever. No matter how untenable your position.
So please show a bit of intellectual integrity. Admit to the obvious. Thanks in advance.
>>“All projects of any nature add to the size of an economy.”
No one here will “acknowledge” this because it is wrong. It’s been explained to you 1000 times, and I would love to see you show some intellectual integrity by (a) admitting the truth and (b) convincing us that you have actually read the books that this website is dedicated to.
People don’t normally go to a website about Existentialism without having read Sartre. They don’t go to a website about genetics without having read Darwin. Or, if they do, they don’t normally post 800 comments presuming to tell everyone who has actually read the material what’s what. Or, if they do, they don’t deny that this behavior makes one look like a fool.
You, however, do all three.
Here’s where you’re wrong. Using a volumetric metaphor like “size of an economy” is only minimally useful. The quality of an economy can’t really be measured by its “size,” the way you would measure a tank of water.
Likewise, you are also wrong when you say (as you have in other threads) that merely increasing the total volume of spending improves the economy.
The health of an economy is measured by the degree of coordination among its consumers and producers, which we all are, in varying roles. A more efficient and well-coordinated division of labor yields a more vibrant, wealthier economy. A relative loss of coordination is another term of recession and depression.
So, you are wrong when you say that merely increasing the overall amount of labor being performed, or dollars transferred, is equivalent to an improvement in the economy. It is perfectly possible (and historically commonplace) for an economy to increase its total quantity of activity, while simultaneously experiencing a relative loss of coordination, and thus show an overall loss of wealth.
I realize that the government pretends to calculate the health of the economy according to the kind of one-dimensional, brain-dead, useless metrics that you prefer to use. They add up the total spending, of any kind and type whatsoever, and pretend that this number is the “GDP,” as though all transactions are equivalent, as though it measures anything useful. It’s like putting a patient on a scale and using her weight measurement to diagnose whether she has tuberculosis or lung cancer. The total volume of dollars changing hands, or the total volume of active hands engaged in labor, does not measure the quality of an economy.
Instead, the health of the global economy is determined by the degree to which productivity is matched with consumption. Needless to say, this coordinating, matching process is complicated. (It’s more complex than many people are capable of comprehending, the way some people are incapable of grasping astronomical magnitude.) The economy, even in the US alone, represents the coordinated consumption and production patterns of 300 million people. Globally, we’re at over 6 billion.
To add to the complexity, the patterns of both consumption and production are constantly changing. Plus, people don’t fully know what their consumption pattern is actually going to be until they actually engage in it, until they actually make the decision to spend a dollar the one time they can. As a result, predictions of consumption behavior are inherently inaccurate, since the behavior they are measuring is at least partially unknowable in advance.
So, again, you are entirely wrong when you assert that any and all labor “adds” to an economy, and wrong when you say that any and all spending “adds” to it as well. There are some kinds of labor, and some kinds of spending, that lead people astray, that distract them from the kinds of labor and spending that would actually improve the economy, and draws them instead into less-valuable forms of spending and production. Governmental pork-barrel, vote-buying, make-work projects are a common example.
Sometimes the coordinating mechanism — the signals — that do the exceedingly complex work of efficiently coordinating the labor of billions of people get distorted and manipulated, which causes people to consume differently than they otherwise would, and produce things that appear to be profitable, but are not. They end up consuming capital instead of growing it. This kind of signal-error is comparable to navigating a boat out to sea rather than back to port because the compass is inaccurate, only a zillion times more complicated.
Excellent. Well done on a fine post.
I second your approval, Jon Leckie.
Phinn, well done.
I have had the same kind of discussions with a friend who is a devout Keynesian — “devout” is the about the only word that does justice in his case, IMO.
I tried endlessly to show how “Aggregate Demand” like GDP/GNP, another Statistical Aggregate, is not meaningful for making policy decisions, as Keynesians like Krugman are wont to do.
First of all “Aggregate Demand” simply measures the result of all demands in the overall Economy.
It does not follow from this, that one can prudently base policy on trying to shift overall aggregate demand; and yet our prevailing economic philosophy in government takes this as gospel.
Also, policymakers forget that they simply cannot directly influence an entity called “Aggregate Demand” because such an entity does not exist. (That was where I spent most of my energy, trying to illustrate that any Aggregation like Aggregate Demand can only be understood at the disaggregated level.)
So “Demand” exists at the micro level, at the level of each purchasing department or consumer. Statistics can aggregate those individual demands, but any policymaker who blindly tries to increase “Aggregate Demand” without understanding that what they are doing is affecting something entirely different —— and in the process doing nothing, or more likely, great harm —— well, that policymaker is simply acting on words… “Increase Aggregate Demand, ah, GOOOOOOD, decrease that Aggregate Demand, ah, BAAAAAAD.”
When one reads Bernanke’s magnum opus, “Deflation: Making Sure IT Doesn’t Happen Here” at http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm one is immediately struck how weird is the concept of a ‘central banker’ (first shot) making conclusions about the desirability of his policy recommendations based entirely on “Aggregate Demand” (second shot).
As though Bernanke can conclude from having increased “Aggregate Demand” that he has done something GOOD. IT does not follow that making sure “IT” (price deflation) does not happen “here”, that Bernanke has done anything but perhaps something very foolhardy (third shot).
A good example of what Phinn refers to can be found in the administration of President Franklin D. Roosevelt. The New Deal increased GDP (an aggregate) but did not result in much improvement in employment. People argue that FDR put a stop to the ‘slide’ to oblivion. But that slide was most likely burned out by the time he got to office. It is not clear that his interventions helped, and they may have hurt.
By 1940 before Pearl Harbor the GDP went up 25% IN ONE YEAR. And this was before the War Machine was turned into high gear, Krugman notwithstanding.
Please see
http://www.usgovernmentspending.com/downchart_gs.php?year=1927_1955&view=1&expand=&units=b&fy=fy10&chart=G0-fed&bar=0&stack=1&size=m&title=US%20Federal%20Deficit%20As%20Percent%20Of%20GDP&state=US&color=c&local=s
http://en.wikipedia.org/wiki/User_talk:Peace01234
Year GDP-US Federal
Billions Deficit
Percentage
1927 95.5 -0.94
1928 97.4 -0.66
1929 103.6 -0.48
1930 91.2 -0.87
1931 76.5 0.13
1932 58.7 1.63
1933 56.4 1.84
1934 66 2.06
1935 73.3 3.02
1936 83.8 3.99
1937 91.9 2.61
1938 86.1 1.22
1939 92.2 2.14
1940 101.4 3.06
1941 126.7 4.72
1942 161.9 19.49
1943 198.6 55.71
1944 219.8 49.12
1945 223 53.68
1946 222.2 20.13
1947 244.1 -3.23
1948 269.1 -11.66
1949 267.2 -3.96
1950 293.7 1.27
1951 339.3 -7.80
1952 358.3 -0.23
1953 379.3 5.75
1954 380.4 1.86
1955 414.7 1.53
Unemployment
Rate by Year
1930 8.94%
1931 13.00%
1932 18.80%
1933 19.80%
1934 21.30%
1935 19.50%
1936 16.60%
1937 14.10%
1938 17.80%
1939 16.00%
1940 14.60%
1941 9.90%
1942 4.70%
1943 1.90%
1944 1.20%
1945 1.90%
1946 3.90%
1947 3.90%
1948 3.80%
1949 5.90%
1950 5.30%
1951 3.30%
1952 3.00%
1953 2.90%
1954 5.50%
1955 4.40%
Here, at the bottom, are a few empty mall stories, one even on The Golden Mile in Chicago (there may be other reasons for that one, I do not know). So much for human intervention in knowing how to properly and beneficially “spend money”.
One error that Keynesians make today, is that they equate Saving with “Cash Hoarding”. Truly, some people in the Great Depression did keep their dough under mattresses or their silver dollars in jars buried in the backyard, but most people today put their savings into financial paper, like bonds and money market instruments. That money is not lost to the Economy —— it is available for borrowing. If borrowers cannot make use of that money, then it is not a ‘solution’ for Government to spend it on behalf of the Economy (IMHO).
Today, the Economy cannot use More Debt efficaciously and, if you like, the Economy is “trying” to save more (to anthropomorphize The Economy for a moment).
Please refer to a recent essay at
America Has a Structural Problem
Back to the “missing element” question —— sounds almost like “The Fifth Element”?!? Just like the original Fifth Element, money is very critical to all of us. I don’t mean in the store-of-value sense, though that too is important.
This “Missing Element” is identified by Keynesians, and by other ‘mercantilist’ economists, as being Money. Hey, if it is “missing-in-action” we can just borrow or print some more, right? Well, it is not that simple in reality.
http://en.wikipedia.org/wiki/Mercantilism
While it can be argued that more Money, whether borrowed or just net-new printed, can inflate more Bubble-Economy-distortions (and appear, in the very short run, to create ‘good times’), “more” Money cannot bring prosperity in any sustainable way.
At same point, “more” Money even becomes completely ineffectual and entirely damaging to an Economy. Witness the Weimar Republic of Germany in 1922 or Zimbabwe more recently. But this damage at lower levels of intervention (apparently at non-price-inflationary levels) is still damaging.
The insidious effect of introducing distorting amounts of net-new fiat Money into an Economy can be more completely understood by referring to the Science of Physics, specifically to the branch of physics known as Thermodynamics.
Our Money System —— I won’t use the plural as in “systems” due to the current interrelated nature of all the separate national fiat money systems in our arguably now-economically-integrated World Economy —— depends for the manifestation of the Best Effects on an unfettered and free flow (and storage in times and places) of that money.
This is not equivalent to suggesting that some business activities should not be regulated. Monopolies and other cartels do require “Trust-busting” on occasion especially when those conglomerates stifle business activity. Don’t let anyone ever fool you —— we would all rather prefer no competition to the alternative. In fact, therein is one true case where what may appear to be “good for the individual, or for the individual enterprise” is not good for the aggregate society. We all, even individually, benefit more when there is choice and competition.
But Money is different. It does not require, nor does it benefit from the Money-pulations of our Central Banks and other authorities.
Here, what Physics and Information Theory can help us appreciate, is that the beneficial Invisible Hand of Adam Smith acts through Money. Money is a conveyer of information. If governments act in ways that break that useful conduit, they do so at peril to all of us and our economic wellbeing. Decision-making is made perilous and is made on shifting ground. An infirm and non-undergirded process of resource allocation begins in such an Economy.
Distorted information will result. Resources cannot be allocated in a way that optimizes the effective use of those (always limited) resources (even, if those resources, appear not to be limited in a downturn, they nevertheless are —— used today, they can not be used again. This applies to what appears to be Unused Capacity —— using that capacity in a way that would not be allocated by the Invisible Hand is still diminishing that capacity —— thus is how depreciation and amortization came to be understood.
What behooves all of us to understand that lack of, or distortion of, information is at the heart of Entropy. When governments redirect resources as they are doing today to address the supposed Lack of Aggregate Demand ‘problem’ they are introducing more Entropy to the Money, Financial and Economic System, than need be introduced.
Nevertheless, Entropy is always present. Just the act of living causes Life to increase Entropy. We, and all Life, use energy (from the sun=food, from oil, — these 2 are somewhat equivalent in our technological economy — from other Life, including from our family and friends and our businesses). Using energy is what all life does. It is the cost of living. In fact you could argue biologically, that Life arose with the free energy that was not being utilized, as this Energy degraded, unused, from higher-useable forms to lower ones.
What happens IMO is that governments see “waste of unused capacity and energy” during downturns, especially like the one we are in currently. Governments incorrectly conclude that they are capable of knowing how to make use of that unused capacity and energy. So they distort the flow of money (information) and decide on behalf of the Invisible Hand.
But no economist has every proven that this theory is valid. It is simply assumed to be valid. In fact Austrian Economics proves that the opposite is true. It is just that it is so seductive to politicians who are by nature True Interventionists. If they cannot “do something” then in their own eyes (and in the eyes of voters) they lose their very raison d’être. The political imperative practically forces the Act of Intervention.
But just like Hypnosis was incorrectly (even by the court system, for a long time) “simply” assumed to “uncover suppressed memories” it did no such thing —— in fact, Hypnosis is very effective at planting False Memories. So the analysts who were uncovering memories in their opinion, were doing the opposite. So it is with our tendency to treat Money so cavalierly.
So we end up with a Broken Money System. Information is distorted. Resources are misdirected. Optimal results will not be obtained. Resources once used up can not be brought back. Energy converted from a more usable form to a lesser one cannot be reconstituted (for free).
In other words Good Information (via an undistorted money flow) results in the best economic outcomes. Bad Information results in unnecessarily greater Entropy (= economic disorder) than the alternative —— Information in essence relates to Entropy in a way that the more our governments (with good intentions of course) break the free and unfettered flow-of-money-process, the more they diminish the economic good.
The Soviet Union became unglued because of decades of misdirected allocation of economic resources. But that historical example is a good one to show how long such misallocation can persist, even seemingly sometimes creating “good conditions”. But the rot was always there as were the hidden human costs (well, some not so hidden).
When we introduce “noise” into an Information System, which The Money System in essence is, then we force the parts of that system to ‘play by’ the rules that this noisy information seems to convey. No one inside a Financial Bubble for example really knows for sure that they are inside such a bubble. Maybe they are not. All the information they have appears to suggest that things are ‘normal’. And so that is how we made our tragic misallocating decisions in large part during the manmade Housing Boom for example.
It is much like the Human Mind. If your mind tells you that you have just heard a sound or seen a light, have you? Sure you have. The only problem is, that such a sound or light might not actually be there inside “Real Reality”.
China — http://www.youtube.com/watch?v=uQGrxfzqSCI
http://www.youtube.com/watch?v=emzKAa9rKgU
http://www.youtube.com/watch?v=iaPYgzbqUKc&feature=related
Chicago — http://www.youtube.com/watch?v=u16Hq-wPVDI&feature=related
The Curse of Fiat Money
michael, we’ve decided that we disagree with everything you say. We’ve also decided that we’re not going to read your posts anymore as you waste our time.
We’ve tried the experiment. The results were not encouraging.
We wish you all the best but despair for you and hope that we never meet you in person, as you really do appear to us to be a simply awful person.
Unable to address the issues in any intelligent way, you’ve decided to come up with a really juvenile comment. Way to go, JL.
hey come on big guy, don’t cry about it. You’re running a scam, it’s obvious. You’ve trotted out two arguments that have been explored on other blogs here, you just repeat your arguments over and over. There’s no point dealing with you, I did try. Dry those tears.
You haven’t even begun to try, Jon. I asserted that the Austrian approach had been tried during the period 1929-32, when the Fed made no move to expand the money supply by issuing “bridge” credit. And the results were bad. Very bad.
Your move. Explain, using facts, why it was still the good thing to do.
It’s been addressed on other pages, michael. You paid no attention whatsoever. You were referred to literature. You chose not to bother.
You’re like a dog that comes in off the street and takes a dump on the carpet, day after day. So I’m not feeding you anymore. Richie and others are correct, you’re just a bad smell.
And quit whinging about the treatment you get here. Go to a Krugman site if you want praise. Here your crap is seen for what it is. And you’re seen for what you are.
The insults just continue. You know, that’s really craven behavior. You would so like to hurt me that you persist in imagining that I can be injured by someone’s errant opinion.
The literature people have referred me to does not address actual issues, ones amenable to scientific inquiry. Hayek himself seems antipathetic to the scientific approach, which he denigrated as ‘scientism’. And all his followers seem capable of is to pile one theory on top another, hoping that the circular effect of all those self-supporting theories will somehow obviate any need for quantifiable evidence.
It’s no wonder Austrian economics are attractive to such a tiny segment of the academic community. In this form, it’s mumbo jumbo.
Let’s give it another try, Jon. In the unfolding events of 1929-32 Austrian theory was actually applied to an economic crisis– that is, the Fed stood by and did nothing while the money supply contracted precipitously. How well did it work?
“You know, that’s really craven behavior.”
Your trolling and intellectual cowardice are by far worse.
“Hayek himself seems antipathetic to the scientific approach, which he denigrated as ‘scientism’.”
Talk about misrepresentation/lying/hyper-simplification.
“Let’s give it another try, Jon.”
Let’s give it another try, tr- Michael. Have you read any Austrian works on the area? Yes/no? If no, then what makes you think you’re even raising an “interesting” objection (hint: Rothbard disproved your rather lame contention)?
Unless michael is seriously attempting to argue with his bare face hanging out that only what the Fed does matters in the context of “the Austrian approach,” the argument is specious and smacks of bad faith — in other words, typical of michael. It can be recharacterized in fewer words as “How about a little fire, Scarecrow?”
I was not seriously arguing that, Ken. It’s a red herring.
Federal Reserve policy during the period I cite was precisely as the Austrians would have had it. And the results were abysmal.
Here’s another specious argument you can use: “As no member of the Fed during the period you cite identified himself as a member of the Austrian School, any policies they enacted could not have been Austrian. Fool! Blockhead! Liar! Pants on fire!”
Your error is in assuming that there is only one principle responsible for the economic disasters of The Great Depression. Certainly the expansion of the money supply from 1920-1929 was the primary cause, but secondary factors (mostly cause by inept government actions) begun in the Hoover administration and continued through most of the Roosevelt years caused the crash to expand in scope and magnitude. Think for a moment of the San Francisco earthquake (1906). Certainly the earthquake did a lot of damage, but is was the fires that swept through the city that caused the most damage. While this isn’t a perfect analogy, it illustrates the point.
“Your error is in assuming that there is only one principle responsible for the economic disasters of The Great Depression.”
Nice try, Chuck. But I never asserted that and my comment doesn’t depend on that.
The causes of every complex phenomenon are manifold. For brevity’s sake, we try to pick them apart in order to discuss them. I’m being accused anyway of being far too wordy, so here my comment was pithy.
Here’s what I said again:
“I asserted that the Austrian approach had been tried during the period 1929-32, when the Fed made no move to expand the money supply by issuing “bridge” credit. And the results were bad. Very bad.”
If you need to marshal other facts in order to refute my view, please do so. It’s a tactic hardly anyone ever attempts around here.
In your San Francisco analogy, the earthquake would be the proximal cause. The fires? Merely consequent events. Likewise the Great Depression does have a nest of causational factors. These should be considered as being quite distinct from the debate over which remedies were efficacious and which ones made things worse.
Among the foremost causes of the GD would be the too-easy dissemination of credit into speculative markets. Here, I and the Austrians agree. But the first remedy that was tried was to take no monetary action. And that made everything worse.
He’s either a troll or just a run of the mill idiot. I can’t believe the sort of garbage he comes up with and actually thinks it deserves an “intelligent” response.
Is there a reason he can’t be both?
True, should be “and/or”!
Wait.
Michael said,
“Federal Reserve policy during the period I cite was precisely as the Austrians would have had it. And the results were abysmal.”
Well, you got the second part right. But, then again, that’s just “business as usual” for the Fed.
Fed policy “precisely as the Austrians would have had it”? There really is no such thing- because the first act of such a “policy” would be to shut down the Fed and remove all legal barriers to the market supplying (and limiting the supply of) money. The Fed will do this the same day pigs fly, Satan opens a ski resort, and the DEA endorses legal heroin.
What Brian Keavey said. The statement, even giving it its meager due (rather than, say, yet another bad-faith argument) is entirely meaningless even if the Fed actually did sit on its hands, because there was ample state intervention in markets from other quarters. Hawley-Smoot ring a bell?
Brian: The Fed took no action. (And got no results.) That’s the next best thing to there not being a Federal Reserve.
That’s what we’d get if we ever did dissolve the Fed. — that is, make it call in all the loans it has made over the years. Frozen banks. No credit. Business at a standstill. Millions laid off. It would suck all the money out of the system.
It can’t be any other way. Think about it: dissolving the Fed would force another Depression, by demanding that all its loans become due. There’s no other way it can retire all the money it’s put out on the street.
You guys really don’t understand your own philosophy. You’re just cheerleaders for it.
We do. You don’t.
Fly away, troll
Daniel: If you do understand your philosophy, when then are you so unable to articulate it?
And not just you, personally. Nearly everyone here just says go read X or Y. They can’t come up with an intelligent response themselves to any of the points I raise. I cherish those few replies I get from people who are able to describe a proper argument. But that doesn’t seem to be a talent most of you in the peanut gallery possess.
I posed a proper and legitimate question above. If you can, go back and address it.
The Fed did ‘take action’ – it inflated after the Crash of 1929. It did not act the way “Austrians would have had it.” Even if it had the ‘voluntary’ price controls Hoover imposed would have made it that much harder for prices and wages to adjust.
Richard: You need to take another look at history. The Fed did not expand the money supply after that Crash.
>> In one of the great paradoxes of human history, a federal regulatory institution — created for the purpose of stabilizing the banking system and, thereby, the overall economy by functioning as a lender of last resort — caused the worst depression in our history. President Woodrow Wilson promised that the Federal Reserve Act of 1913 would provide the economy with a “Supreme Court of Finance” that would ensure the liquidity for economic growth and prosperity. Instead, the Federal Reserve collapsed purchasing power and forced 25 percent of the workforce into unemployment. The inattention and incompetence that caused this disaster are so great as to warrant, in the words of economist Clark Warburton, “a charge of lack of adherence to the intent of the law.”
This massive destruction of liquidity began when the Federal Reserve responded to the 1929 stock market crash by allowing the quantity of money to decline by 2.6 percent over the next year. This extremely tight monetary policy put the economy into severe recession.
All that was needed to turn the economy around was for the Federal Reserve to add to bank reserves by purchasing government securities. This would have expanded the money supply and was the policy called for by the Federal Reserve’s charter. Instead, the Federal Reserve made another mistake.
The most important charge in the Federal Reserve’s charter is to be a lender of last resort. This means that when a bank is in trouble and cannot meet its depositors’ demands for cash, the Federal Reserve must provide the liquidity. Otherwise, panic from inability to withdraw funds can spread throughout the banking system, forcing banks to disrupt business and shrink the money supply by calling loans and reducing deposits. The main rationale for creating twelve Federal Reserve District Banks was, as Sen. John Shafroth, Colorado Democrat, put it:
no bank should be more than one night’s train ride from its Federal Reserve bank. In cases of a run on his bank, a banker could gather up his commercial paper with maturities of thirty, sixty and ninety days, catch the train and be at the Federal Reserve Bank by morning, discount his notes and wire his bank that there was plenty of money to pay depositors. To place Reserve banks more than a night’s train ride from the member banks it served would make it impossible to meet one of the very needs for which it was designed.
When a bank exhausts its vault cash, it needs to raise more by selling (discounting) its loans to the Federal Reserve or by selling bonds from its investment portfolio to the Federal Reserve. The most direct way the Federal Reserve can provide liquidity is to conduct open market operations and purchase bonds from the banking system.
The Federal Reserve was derelict in this responsibility during the three banking crises that culminated in the Great Depression. Indeed, more often than not the Federal Reserve sold bonds and raised the discount rate, thus reducing banking liquidity when it should have increased liquidity. The first banking crisis began in the autumn of 1930 when the Federal Reserve stood aside and permitted banks to fail in the South and Midwest. The result was to undermine confidence in banks. Runs on banks spread as depositors rushed to convert their deposits into currency.
http://www.hoover.org/publications/policy-review/article/6214
Michael, Milton Friedman would be very proud of you.
“The most important charge in the Federal Reserve’s charter is to be a lender of last resort. This means that when a bank is in trouble and cannot meet its depositors’ demands for cash, the Federal Reserve must provide the liquidity. Otherwise, panic from inability to withdraw funds can spread throughout the banking system, forcing banks to disrupt business and shrink the money supply by calling loans and reducing deposits.”
“When a bank exhausts its vault cash, it needs to raise more by selling (discounting) its loans to the Federal Reserve or by selling bonds from its investment portfolio to the Federal Reserve. The most direct way the Federal Reserve can provide liquidity is to conduct open market operations and purchase bonds from the banking system.”
For brevity’s sake, spare us the textbook lecture. We already know this stuff.
If you can, go read Rothbard’s AGD and have your question answered in depth. Your points aren’t intelligent. They’re ignorant.
So why haven’t we recovered yet? We lowered interest rates, spent stimulus money, propped up prices, and even destroyed a few windows along the way (Cash for Clunkers failed, BTW).
http://blogs.edmunds.com/strategies/2010/08/with-used-car-prices-up-10-percent-over-2009-buyers-need-shopping-discipline.html
I’d like to award Daniel, Inquisitor, and Jon for their exemplary display of conventional Rothbardian conduct . You three are an inspiration to those who personalize discussion, froth at the mouth, and end up spinning completely out of control. Kinsella would be proud.
Why thank you! Your opinion is so valued -… oh wait, it isn’t.
There is nothing worse than an idiot who thinks he’s smart. Michael is definitely one of those people. He makes reading the comments here a completely dreadful experience. I’m sure the people who run this site don’t like banning people, but they really should consider it for somebody as belligerent and unwilling to learn as Michael.
Just to point out, I’m pretty sure that pointing out how “austrian policy” (oxymoron) caused a depression is counter-productive. In the short run every Austrian knows that the economy will have to go through some downturn, called the “bust” but this downturn would be quickly corrected. In any case it is not inconsistent to say that Austrians don’t fear the bust -we embrace it as the tonic of our economic ills. So calling out austrians because we cause depressions is not to show a contradiction within austrian theory -one of the reasons for being an Austro-lib is to cause depressions.
Bluntly put, but yeah. After all these years of quantitative easing, it looks like the Fed can’t ease anymore. It’s going to get harder and harder to fool people, michael.
“In the short run every Austrian knows that the economy will have to go through some downturn, called the “bust” but this downturn would be quickly corrected.”
How long is “quickly”, fakename? The tight money cure was applied for four years, and the only discernible effect it had was to precipitate a cascading failure among thousands of banks and failing firms. All the time the Fed was practising fiscal restraint, everything grew worse.
And in fact that earlier example we have of the let-’em-all-collapse approach was the one precipitated by Andrew Jackson, when he destroyed the 2nd Bank of the US. That one took five full years to work itself out, in a society that was far smaller and simpler than the one we have today.
“In any case it is not inconsistent to say that Austrians don’t fear the bust -we embrace it as the tonic of our economic ills.”
Who is it that these economic contractions benefit? Certainly not the public.
Bottom line: “one of the reasons for being an Austro-lib is to cause depressions.”
Bottom line is: You’ve no clue what you’re talking about. There was no “Austrian” solution during those years. Give AGD and find out for yourself, instead of regurgitating tired nonsense that’s been refuted to death. No one cares to argue with you because a) you come across as a stupid troll and b) you just don’t know what you’re talking about. You’ve no real understanding of economics or epistemology, you are arrogant enough to presume you’re beyond learning because… you’ve “been in business”, whatever the hell that means. So, get over yourself, do some learning or just plainly shut it.
Michael,
In answer to your response above, I do maintain the Fed took action.
You posted an article that claimed the overall money supply contracted. If you include demand deposits issued by banks as part of the money supply, then yes I would agree that that component of the money supply contracted.
The Fed had no direct control over these demand deposits. It did have control over the monetary base, and it did expand the monetary base in reaction to stock market crash of 1929 to help support fragile financial institutions. The fact that that demand deposits contracted despite the actions of the Fed to increase the monetary base does not mean the Fed ‘took no action.’ It did. (The monetarists say the Fed didn’t expand the monetary base enough to arrest the contraction of demand deposits. I do not know of any proof they offer that if it had the economy would have recovered.)
I tried arguing with a creationist once. Basically the gist of his argument was “lack of continuous fossil evidence, complexity of the iris, second law of thermo” as well as the alleged immorality of the Darwinism. Now matter how many times I tried to explain such things as punctuated equilibrium, age of the universe based on radiocarbon dating, observed speciation events, no matter how much literature and scientific publications I referred to him, it all came to naught, because for that man there only existed the Bible, and nothing else outside of it. Did he adapt his views or at least try to rationally challenge the evidence and arguments I brought forward with new ideas, as a real debate and discussion should? No, he ignored everything I said and just continued repeating the same blatantly ignorant nonsense as before, that by all tokens I have just disproved.
Michael, maybe when you’ve first posted on this site, I might have taken your side. But your intellectual misconduct is inexcusable. There are piles upon piles of material on mises.org which address the exact same arguments that you use. It’s like you take that high school economics textbook and you treat it as your Bible where every word and every concept is infallible, even in the face of historical and theoretical evidence presented to you, which shows the contrary.
I don’t care if you disagree with Austrian economics. In fact I believe there needs to be more legitimate criticism directed towards many of the school’s concepts. The problem with you, and academics in general it seems, is that you’re seemingly incapable of even considering contrary positions and arguments which exist outside of your comfortable, established intellectual spheres. When something comes around to challenge it, you refuse to even acknowledge, let alone try to reasonably debate its points.
Austrian economics did not cause the depression. The idea that Hoover pursued a laissez faire, “Austrian” policy is a myth. Hoover did everything in his power to intervene in the economy in the vain hopes of averting the crisis brought about by years of loose monetary policy on behalf of the Federal Reserve. It’s precisely the same hogwash about stimulating credit into the economy to facilitate consumer activity that you’re so fond of, which over the years, wiped out people’s capital holdings, pushed up prices and created artificial demand the country’s production could not possibly keep up with. This point has been beaten into the ground hundreds of times on this site – almost every other Mises.org publication directly or indirectly deals with it. Either you at least make yourself barely acquainted with the literature on this site, or continue opening yourself up to verbal abuse by repeating the same old arguments like a broken record.
Good post Tim.
Tim, your argument is nicely reasoned in some ways. Maybe I should get to the core of my complaint with the Austrian School. It has to do with your reliance exclusively on deductive, as opposed to inductive reasoning. It’s a basic intellectual defect.
The problem I encounter with virtually every one of the comments I read here is that they all rely solely on deductive reasoning– as though economics were a mere philosophic exercise. This is touched on in Sterling Terrell’s Mises.org essay “Dear Department Chairman”, from which I would like to quote extensively:
“The discovery of knowledge can be broken down into two main approaches (excluding the category of divine revelation): inductive reasoning and deductive reasoning. Simply put, inductive reasoning is the discovery of knowledge through observation (as in the scientific method). Conversely, deductive reasoning is the discovery of knowledge done through logic. Or, said differently, deductive knowledge is gained in an a priori (knowledge before experience) fashion that follows naturally from stated axioms.
“Importantly, knowledge gained through deductive means is no less valid than knowledge gained through inductive means.
“The issue is that in the realm of mainstream economics today this is not recognized to be true. Deductive reasoning is sneered at, especially when it is not presented in the formality of Greek letters. Most economists label those that use deduction as “unscientific” and “imprecise.” The emphasis on induction is so strong in economics PhD programs today that a grad student with a background in math or statistics can finish his or her PhD with superb grades and know literally nothing about cause-and-effect economics.
“Let me be clear, having induction as the mainstream of economic thought is not the issue that I wish to bring up: the issue is having inductive analysis as the mainstream of economic discovery while deductive discovery is not only looked down upon — it is not even taught. Innovation in economic thought requires a dynamic debate by all. It must be a process that includes healthy academic discussion by those who favor inductive and those who favor deductive discovery.” etc.
http://mises.org/daily/4192
The core problem with the approach is that deductive methods only go halfway toward establishing a theory as being “true”. They are fully capable of formulating a hypothesis to be tested… but they imply no requirement that actual testing ever take place. The theory in question then needs to be falsified by experiment, or at the very least be falsified by counterexamples, where the theory failed to hold up.
You all never admit such a thing. Your theories are all absurdly easy to falsify just by referring to the historic record. Yet you never admit anything, instead just going blithely along in a fantasy world of your own devising. In every instance, your conclusions are implicit in the way you frame your questions. Your deductions are always ‘proven’ tautologically, by reference to theorems that were established in a vacuum, as though the real world were constructed along the lines of the world of mathematics.
You say “The problem with you, and academics in general it seems, is that you’re seemingly incapable of even considering contrary positions and arguments which exist outside of your comfortable, established intellectual spheres. When something comes around to challenge it, you refuse to even acknowledge, let alone try to reasonably debate its points.”
The “comfortable, established intellectual sphere” I am comfortable with is the one in which theories, no matter how elegant and seemingly perfect they may appear, must be tested in the crucible of reality. If that does not comprise “reasonable debate” to you, I have no answer you will find acceptable. Instead of addressing those instances where Austrian theory has been tried and found wanting, every one of you just ends up telling me I should drink more of the Koolaid, and read this and that by one of the Masters. I’ve read enough to know what they consist of: theories about how reality should behave, that is, if it followed their theories.
The reason I keep repeating the same old arguments is that none of you have addressed them. And so the arguments stand. During the period 1929-33, the Fed undertook no expansionary monetary policy to alleviate endemic weakness in the overextended banking system, as Keynesian economic thought and plain common sense would have dictated. And during that period, everything went from bad to worse.
Your theory is that things should have gotten better. But they didn’t. They didn’t. They didn’t.
“The core problem with the approach is that deductive methods only go halfway toward establishing a theory as being “true”. They are fully capable of formulating a hypothesis to be tested… but they imply no requirement that actual testing ever take place. The theory in question then needs to be falsified by experiment, or at the very least be falsified by counterexamples, where the theory failed to hold up.”
Ugh, no, it doesn’t. Assuming the truth of that which praxeological arguments argue against isn’t sufficient to dislodge their arguments vs the hypothetico-deductive methodology. You’re just asserting what you think science “should” be. Well, who cares?
“You all never admit such a thing. Your theories are all absurdly easy to falsify just by referring to the historic record. ”
Bullshit.
“Yet you never admit anything,”
There is nothing to “admit”.
” instead just going blithely along in a fantasy world of your own devising.”
Something you are guilty of, not us.
” In every instance, your conclusions are implicit in the way you frame your questions. Your deductions are always ‘proven’ tautologically, by reference to theorems that were established in a vacuum, as though the real world were constructed along the lines of the world of mathematics.”
They’re not tautologies. The axioms were not drawn in a vacuum, they derive from the action axiom. You truly do not know what the fuck you are talking about.
“Your theory is that things should have gotten better. But they didn’t. They didn’t. They didn’t.”
Considering the conditions under which the theory predicted that were not even operant and there were government actions undertaken to counteract free market correction, no, of course they didn’t.
An exercise in disinformation, Inquisitor. You say “Assuming the truth of that which praxeological arguments argue against isn’t sufficient to dislodge their arguments vs the hypothetico-deductive methodology.”
This kind of thing is utter nonsense, waste verbiage. Just because it sounds profound to the credulous doesn’t mean you’ve made any kind of statement. Shorn of excess verbiage, all you’ve said is that even if the instances I cite are true, that’s still not enough to dislodge the profundity of your arguments. But of course, any rational person would say that it’s more than enough.
And it’s even poorly put. I offer no “hypothetico-deductive methodology.” All I offer is that contrary evidence falsifies universal theories. If you say all cats are black and I produce one white cat, you’re done. Nothing can revive your premise.
“The axioms were not drawn in a vacuum, they derive from the action axiom.”
What this obviously means is that anything can mean whatever you want it to mean, simply because you WILL it. Enough screaming and shouting will cause any observation based on empirical evidence to wither away, in the stark light of your will to not believe in it.
It’s the miracle of unknowing, the triumph of irrationality. Before I came here I wouldn’t have believed guys like you could still exist.
“An exercise in disinformation, Inquisitor.”
You’re the master of it.
“This kind of thing is utter nonsense, waste verbiage. Just because it sounds profound to the credulous doesn’t mean you’ve made any kind of statement.”
It’s the terminology used to describe the so-called scientific method, you dimwit. If you’re going to try engage the Austrian method, make sure you know what you’re talking about. The term occurs in even basic introductory texts to the Philosophy of science.
” All I offer is that contrary evidence falsifies universal theories. If you say all cats are black and I produce one white cat, you’re done. Nothing can revive your premise.”
Contrary evidence to what? How do you even KNOW it is “contrary evidence”? What theoretical apparatus allows you to determine that of these multifaceted facts are “contradictory evidence” hm? Is it “obvious”? Or is it your business acumen?
“What this obviously means is that anything can mean whatever you want it to mean, simply because you WILL it.”
You’re basing this on… what?
“It’s the miracle of unknowing, the triumph of irrationality. Before I came here I wouldn’t have believed guys like you could still exist.”
Hey, I wouldn’t believe people as profoundly ignorant and incapable of learning as you exist, but there we go.
michael,
“The core problem with the approach is that deductive methods only go halfway toward establishing a theory as being “true”. They are fully capable of formulating a hypothesis to be tested… but they imply no requirement that actual testing ever take place. The theory in question then needs to be falsified by experiment, or at the very least be falsified by counterexamples, where the theory failed to hold up.”
Believe it or not, deduction actually is sufficient to establish a theory as correct or incorrect. As an example, I could devise a very simple “proof” of Green’s Theorem: take an empty room, cover all the ways in and out, count the number of people going in and the number of people going out over a certain period of time, subtract the number going out from the number going in, and then at the end of the period of measurement, block all attempts to exit and count up the number of people inside the room. Assuming I conducted my experiment correctly, I will find that the difference between the number of people going in and the number of people going out is precisely equal to the number of people in the room. But, why would I do this if I’ve already established Green’s Theorem using deductive means? In fact, if my experiment contradicted Green’s Theorem, I would not consider that a disproof, but rather an indication that I did my experiment incorrectly.
Your objection overlooks an important phrase used in all sciences: ceteris paribus, all other things being the same. The Theory of Gravity does not claim that objects near the Earth’s surface will move toward the center of the Earth with an acceleration of 9.8m/s/s. Rather, it says that, ceteris paribus, such an object will experience an acceleration toward the center of the Earth that is 9.8m/s/s greater than it otherwise would have been. By the same token, Austrian Business Cycle Theory does not predict that monetary inflation causes interest rates to fall and consumer prices to rise, it merely says that interest rates and consumer prices will be higher or lower than they would have been in the absence of monetary inflation. If we were to fix an economy in general equilibrium and then allow only one perturbation, monetary inflation, we would see exactly what ABC Theory predicts. All praxeological laws are of this character.
Your historical “refutations” are all invalid because they do not fulfill the ceteris paribus requirement. Your point about the Great Depression is an excellent example. Leaving aside that the Federal Reserve did inflate from 1929 to late 1930, monetary policy was not the only aspect of the government response to the collapse. You leave out things like the Smoot-Hawley Tariff and the ensuing trade war, efforts to keep wages above market levels, extensive government spending, and all of this merely under Hoover. Roosevelt of course took Hoover’s policies and expanded them. In order to refute Austrian claims about the monetary aspects of the Depression, you need to either isolate those aspects in the historical record or deal directly with the basis and reasoning of the theory itself.
Green’s Theorem is pure mathematics, where purely deductive means are valid. It is not a theory of empirical science.
Russ,
You are correct about Green’s Theorem, but why must science be purely empirical? Why is deduction not a valid method of studying the world?
As I understand it, deduction is a valid method of studying the known world but not a valid method of “knowing” the hitherto unknown. In the case of Austrian theory, it is entirely an attempt to study the known world, based as it is on the action axiom. Hence, it is perfectly valid to base it completely on deduction. Austrian theory’s main strength is that its axiomatic foundations are very strong.
As I understand it, deductive logic is true by definition; it has no empirical content, and says nothing about the world. When you add empirical content to deductive logic in an attempt to study the world, then you are basically making a model. Even if the empirical content is true, and the logic is valid, the model may not be a complete model of how the world works. So, the model could still be wrong. The only way to determine if this is true is to attempt to falsify the model.
In other words, pure deductive logic is not a valid method of studying the world, because it says nothing about the world; it has no empirical content. When you add empirical content, then you have an empirical model, and you have to employ empirical emthods of falsification.
The problem with economics is, of course, that employing empirical emthods of falsification is so problematic. You wind up having to be satisfied, to a great extent, with unfalsified, and practically speaking unfalsifiable, models. With physics, that’s not the case. In your Green’s Theorem example, if a lot of people kept coming up with falsifications of your Green’s Theorem-based physical theory, then you would eventually have to come to grips with the facts that your theory/model must be missing something.
Russ,
There’s a bit more to deduction than just application of definitions. First, you can explicitly construct construct an example to demonstrate a theory. For example, you could easily prove that if A and B are elements of the power set of C, then A is not necessarily a subset of B, and vice versa. This is pretty easy to show by taking A={1}, B={2}, and C={1,2}. Second, you can enumerate all the cases that might or might not fit a theory and check to see if they actually do. The triangle inequality is a good example of this. Third, you can suppose the theory to be false and attempt to find a contradiction. One of the best examples of this is the proof that the square root of two is irrational. Different theories lend themselves to different proof techniques.
Also, deduction can have an empirical aspect. For example, while the action axiom is unarguably true, we observe that man cannot simply will himself to be satisfied (explicit construction: hunger cannot be willed away), that his wants are practically infinite (proof by contradiction: if his wants were not practically infinite, he would eventually stop acting and die, which means his wants are practically infinite, which is a contradiction), that there are finite resources that he can employ (explicit construction: his body is finite and he has finite time in which to act). From these facts, we deduce the concept of costs, the fact that man cannot achieve all of his goals simultaneously and so must choose to pursue some sooner and others later. This tells us something about the world because we have employed direct knowledge of the world in our deduction.
Another good example of Austrian mixing of observation and deduction is time-preference. We define time-preference as a preference between ends at one time over identical ends at another. Time-preference can be positive (present ends preferred to future ends), negative (future ends preferred to present ends), or zero (time does not matter for preference formation). We observe that if man does not eat over a certain, fairly short, period of time, he dies. We then determine that if his time-preference were negative, man would never eat (or act in general), and so he would die. If his time-preference were zero, he likewise would never get around to eating, as he would always be willing to postpone consumption, and consequently would die. Thus, time-preference must be positive. The only way to disprove this would be to show that people do not ever consume and still survive; and I’m not expecting any such proof any time soon.
“There’s a bit more to deduction than just application of definitions. First, you can explicitly construct construct an example to demonstrate a theory. For example, you could easily prove that if A and B are elements of the power set of C, then A is not necessarily a subset of B, and vice versa.”
First off, demonstrative examples are not proofs. Second, any proof in logic or mathematics depends on the definitions of the things dealt with.
“Also, deduction can have an empirical aspect….”
This is what I mean by adding empirical content to the logic. Certainly, this can be done. And certainly, it can be useful. But when you do this, you are no longer dealing with something that is purely deductive in nature.
I am not trying to defend a purely positivistic approach in economics here. I used to be more positivistic, but I have come to appreciate the Austrian approach more. But I still don’t believe in apodictically true science. To me, this is a contradiction in terms; I don’t believe in the Kantian synthetic a priori category. To me, something is either deductive, true by definition, and empty of empirical content; or it is scientific, has empirical content, and is only “conditionally true” (until it is falsified). I do not admit of any other categories.
Russ,
“First off, demonstrative examples are not proofs.”
Actually, they can be, especially when the claim you are trying to prove is a negation. This is formally called providing a counterexample and is a perfectly valid form of proof in certain cases.
“Second, any proof in logic or mathematics depends on the definitions of the things dealt with.”
True, all proofs require consistently applied definitions. That isn’t the same thing as the conclusions being true “by definition.” An example of something that is true by definition would be that in a metric space, d(x,y)=d(y,x), which is part of the definition of a metric space. By contrast, the square root of two is not defined to be irrational, but if there were such a number, (p/q)= 2, p and q integers, then q would have to be both even and odd, which is impossible. This is an example of how a statement can be proved deductively and yet not be true merely by definition.
“To me, something is either deductive, true by definition, and empty of empirical content; or it is scientific, has empirical content, and is only “conditionally true” (until it is falsified).”
I realize that you’re trying to not be positivistic, but this dichotomy is pure positivism: statements are either tautologies or “conditionally true.” However, this statement is not a tautological, and if it is conditionally true, then it may be falsified, so there may very well be statements which cannot be falsified, but that are not tautologies. Being a former positivist myself, I do think the positivists are on to something: that for a statement to be meaningful, there must be a difference between a world in which it is true and a world in which it is false. Austrian theory falls into this category because it is in principle falsifiable. For example, if we were to fix an economy in general equilibrium, double the money supply and then allow the economy to return to equilibrium, we would expect to find that the general price level to have doubled. If it had not, then the quantity theory of money would be falsified and disproved. The difficulty arises when positivists insist that a claim must be falsifiable in practice, which, as far as I’m aware, no scientific theories actually are, in any discipline.
“Believe it or not, deduction actually is sufficient to establish a theory as correct or incorrect. As an example, I could devise a very simple “proof” of Green’s Theorem: take an empty room, cover all the ways in and out, count the number of people going in and the number of people going out over a certain period of time, subtract the number going out from the number going in, and then at the end of the period of measurement, block all attempts to exit and count up the number of people inside the room. Assuming I conducted my experiment correctly, I will find that the difference between the number of people going in and the number of people going out is precisely equal to the number of people in the room.”
Yes… other than the number of pregnant women giving birth and the number of people consumed by cannibals. Deductive reasoning only gives a flawed impression that the world can be described fully by means of neat little logical theorems. In reality it can’t.
michael,
Indeed, my construction for a proof of Green’s Theorem leaves things out because the theory doesn’t actually refer to people, but to differentiable functions, which don’t give birth or eat each other; implicit in the proof is the requirement that the people being counted behave the same way. You do an excellent job of ignoring my point about ceteris paribus, which makes your objection meaningless.
michael wrote:
“Deductive reasoning only gives a flawed impression that the world can be described fully by means of neat little logical theorems. In reality it can’t.”
So are you saying that the real world is logically incoherent and self-contradictory? If so, then how can any economic theory, including your own, ever make any sense of it whatsoever? Even if you are only saying that the real world is too complex to be meaningfully modelled by any economic theory, that would also make any theory, including your own, basically useless. Saying that you don’t have any one theory, but a pastiche of logically contradictory ones, does not save you here. You’d still need some sort of “meta-theory” to tell you when to apply which of the several theories in your toolbox.
“Your point about the Great Depression is an excellent example. Leaving aside that the Federal Reserve did inflate from 1929 to late 1930, monetary policy was not the only aspect of the government response to the collapse.”
So how come no one else seems to know this? Your information appears to come from some alternate universe.
“In one of the great paradoxes of human history, a federal regulatory institution — created for the purpose of stabilizing the banking system and, thereby, the overall economy by functioning as a lender of last resort — caused the worst depression in our history. President Woodrow Wilson promised that the Federal Reserve Act of 1913 would provide the economy with a “Supreme Court of Finance” that would ensure the liquidity for economic growth and prosperity. Instead, the Federal Reserve collapsed purchasing power and forced 25 percent of the workforce into unemployment. The inattention and incompetence that caused this disaster are so great as to warrant, in the words of economist Clark Warburton, “a charge of lack of adherence to the intent of the law.”
“This massive destruction of liquidity began when the Federal Reserve responded to the 1929 stock market crash by allowing the quantity of money to decline by 2.6 percent over the next year. This extremely tight monetary policy put the economy into severe recession. [I note that that was the year you say they were pursuing their inflationary policy.]
“All that was needed to turn the economy around was for the Federal Reserve to add to bank reserves by purchasing government securities. This would have expanded the money supply and was the policy called for by the Federal Reserve’s charter. Instead, the Federal Reserve made another mistake.
“The most important charge in the Federal Reserve’s charter is to be a lender of last resort. This means that when a bank is in trouble and cannot meet its depositors’ demands for cash, the Federal Reserve must provide the liquidity. Otherwise, panic from inability to withdraw funds can spread throughout the banking system, forcing banks to disrupt business and shrink the money supply by calling loans and reducing deposits. The main rationale for creating twelve Federal Reserve District Banks was, as Sen. John Shafroth, Colorado Democrat, put it:
” no bank should be more than one night’s train ride from its Federal Reserve bank. In cases of a run on his bank, a banker could gather up his commercial paper with maturities of thirty, sixty and ninety days, catch the train and be at the Federal Reserve Bank by morning, discount his notes and wire his bank that there was plenty of money to pay depositors. To place Reserve banks more than a night’s train ride from the member banks it served would make it impossible to meet one of the very needs for which it was designed.
“When a bank exhausts its vault cash, it needs to raise more by selling (discounting) its loans to the Federal Reserve or by selling bonds from its investment portfolio to the Federal Reserve. The most direct way the Federal Reserve can provide liquidity is to conduct open market operations and purchase bonds from the banking system.
“The Federal Reserve was derelict in this responsibility during the three banking crises that culminated in the Great Depression. Indeed, more often than not the Federal Reserve sold bonds and raised the discount rate, thus reducing banking liquidity when it should have increased liquidity. The first banking crisis began in the autumn of 1930 when the Federal Reserve stood aside and permitted banks to fail in the South and Midwest. The result was to undermine confidence in banks. Runs on banks spread as depositors rushed to convert their deposits into currency.” etcetera
http://www.hoover.org/publications/policy-review/article/6214
Funny. I don’t see a word in there about the Fed’s inflationary policy.
michael,
“So how come no one else seems to know this? Your information appears to come from some alternate universe.”
Allow me to quote Milton Friedman’s Free to Choose:
“[The] depressing effects of the stock market crash were strongly reinforced by the subsequent behavior of the Federal Reserve System. At the time of the crash, the New York Federal Reserve Bank, almost by conditioned reflex instilled during the Strong era, immediately acted on its own to cushion to shock by purchasing government securities, thereby adding to bank reserves. That enabled commercial banks to cushion the shock by providing additional loans to stock market firms and purchasing securities from them and others affected adversely by the crash….Instead of actively expanding the money supply by more than usual to offset the contraction, the System allowed the quantity of money to decline slowly throughout 1930. Compared to the decline of roughly one-third in the quantity of money from late 1930 to early 1933, the decline in the quantity of money up to October 1930 seems mild–a mere 2.6 percent.” Emphasis mine.
This means that the Fed was inflating, just not as much as the money supply was falling.
I also have to point out how you have provided what I am sure you consider to be a devastating rebuttal to my comment about the part of the situation that I was explicitly ignoring; you still have not dealt with what I was actually talking about.
Michael,
“The problem I encounter with virtually every one of the comments I read here is that they all rely solely on deductive reasoning– as though economics were a mere philosophic exercise.”
I have the same problem with Austrian theory. But, Austrians have some good points as well. You say that X caused the Great Depression. OK, so how can you prove that your theory of how the Great Depression was caused is true? If you want to proceed scientifically, then you have to come up with a theory that makes predictions and then try to falsify it. The problem here is that it is incredibly difficult, if not practically impossible, to falsify the more complex economic theories. Even the more mainstream schools don’t agree about what causes the business cycle. This kind of disagreement on relatively basic things would be unthinkable in a more falsifiable science such as physics. So, what, then, are we left with?
One way to proceed would be to simply claim that certain effects follow certain causes, which is in effect to proclaim a theory, even though it’s not practically a falsifiable theory. The obvious problem with this is that it commits the post hoc ergo propter hoc fallacy, which Bala has pointed out. This is what you do. You claim that such-and-such caused the Great Depression, and so-and-so got us out of it, even though you don’t claim to cleave to theories, but only to “facts”. But only theories can make predictions, or explain causation. Your economic philosophy doesn’t make any sense.
“The reason I keep repeating the same old arguments is that none of you have addressed them. And so the arguments stand. During the period 1929-33, the Fed undertook no expansionary monetary policy to alleviate endemic weakness in the overextended banking system, as Keynesian economic thought and plain common sense would have dictated. And during that period, everything went from bad to worse.
Your theory is that things should have gotten better. But they didn’t. They didn’t. They didn’t.”
First off, as I believe someone else pointed out, things were getting better in the 9 months or so immediately after Black Tuesday, until the attempts at intervention were started. Unemployment peaked, and was starting to drop again, a sure sign that capital was “re-allocating”.
Secondly, there was a lot that happened during the Great Depression other than Fed policy. There was the Smoot-Hawley tarriffs, there was Hoover’s attempts at economic engineering, there was Roosevelt’s attempts, many countries changed their monetary policies (went off the gold standard). etc. Any deductive economic theory says, “X will cause Y, all other things being held equal”. But all other things weren’t held equal; there are many other factors to take into account.
Thus, your “falsification” of Austrian theory is faulty on two counts, as far as I can see.
Russ, sorry to delay in answering this.
“OK, so how can you prove that your theory of how the Great Depression was caused is true? If you want to proceed scientifically, then you have to come up with a theory that makes predictions and then try to falsify it. The problem here is that it is incredibly difficult, if not practically impossible, to falsify the more complex economic theories.”
Big events are of necessity complicated. There’s a lot going on, and some of it is probably following contradictory currents. But If I put the Austrian arguments side-by-side with the conventional arguments I end up noticing that a preponderance of the evidence supports the traditional view of things.
If it didn’t, I’d switch sides. Nothing inside me impels me toward being conventional.
“First off, as I believe someone else pointed out, things were getting better in the 9 months or so immediately after Black Tuesday, until the attempts at intervention were started. Unemployment peaked, and was starting to drop again, a sure sign that capital was “re-allocating”.”
This must have been the feeblest of upticks, and one that quickly ran out of steam. I’m trying to find mention of it in two books that deal with the events of the time in fair detail, and it’s barely even mentioned. Those would be Wm. E. Leuchtenburg’s Perils of Prosperity, 1914-1932 and Broadus Mitchell’s The Depression Decade from New Era Through New Deal, 1929-1941.
‘Perils’ says that everyone’s first impulse was to either recommend a strong dose of deflation (apparently big business was sort of Austrian even in those days) or to enter a state of denial, saying it would all work out for the best. “Business cycles are inevitable, it was said, and there was nothing to do but wait out this latest disaster. Any attempt to interrupt this process would only make matters worse.”
But it worsened, until the incoming president Hoover took a more activist role, alienating business and people like Treasury Secretary Andrew Mellon, who famously said that we should liquidate everything and everyone until the rot had been purged from the system. But Hoover’s action, according to Leuchtenburg, were far too cautious and too late to make any difference in the downward spiral. He advocated few federal programs, and local and private charities were swamped by the immensity of the work before them. His efforts were as a fart in a typhoon (my wording). And he torpedoed initiatives that could have made a difference, like vetoing a bill providing for a federal employment service and for the gathering of unemployment statistics. Thus perfectly armed with ignorance, he disregarded information from his staff to the effect that the country was experiencing unprecedented joblessness.
It does refer to a brief upturn in the spring of 1931, 18 months after the crash, but then says it was swiftly demolished by financial collapses sweeping in from abroad.
The second book has a long chapter on “Hoover’s Depression Policies”, which goes into a lot of detail but basically says his conception of the causes of the Crash were off base, so it would be unrealistic to expect much from his cures. I’ve found nothing yet about the weak, stalled recovery of spring, 1931.
So that’s about it. I’d welcome any actual information about this episode, which I expect is available right here at Mises. And possibly nowhere else.
“But Hoover’s action, according to Leuchtenburg, were far too cautious and too late to make any difference in the downward spiral.”
Yes, this is always and ever the cry of the socialists. Never is enough of other peoples’ money spent to satisfy them. I think we’re back to my previous point, that economic facts themselves mean nothing without a theory by which to interpret them, and different theories make the facts mean different things. You think your interpretation fits the facts better; I disagree. So, we’re stuck disagreeing. I would bother to bone up on my economics and history in preparation for a debate, if I thought it would make any difference in your mindset, but I don’t, so I won’t.
He is “above” learning. Nay, beyond it… I do wonder what Michael claims to have read. He seems utterly uneducated in every facet of Austrian theory he’s chosen to comment on, yet he supposedly has read widely. When called out on his ignorance, he will go into some tirade against academics that is of no relevance at all to the matter at hand, and will evoke his alleged business experience. He’s either a troll or someone too stubborn to learn. If the latter, he is wasting our and his time here, mostly by posting ‘facts’ and ‘theories’ that have been discredited by Austrians.
“He seems utterly uneducated in every facet of Austrian theory he’s chosen to comment on, yet he supposedly has read widely.”
Not only widely, but narrowly, to the task at hand. You’ll note that more and more, I’m citing works from your own canon to prove my points.
“..he is wasting our and his time here, mostly by posting ‘facts’ and ‘theories’ that have been discredited by Austrians.”
How exactly does one discredit a fact with a philosophy?
I suppose we now have several choices -1) talk about philosophy, 2) don’t talk anymore, 3) talk about economics. Since I personally don’t want to do 2, and since 3 is going nowhere I would like to talk about 1 and alone (unless anyone else is willing) “feed our troll”.
Please then, tell me about you philosophical empiricism…
then maybe we can talk about economics
By showing it to be a non-fact.
Even criteria for the selection of particular events as ‘facts’ is philosophically guided. There is no “pure”, unadulterated fact.
He is a troll. As you say, he claims to have read everything, but yet he totally misrepresents the Austrian theory.
“It’s the miracle of unknowing, the triumph of irrationality. Before I came here I wouldn’t have believed guys like you could still exist.”
“It’s a basic intellectual defect.”
“You all never admit such a thing. Your theories are all absurdly easy to falsify just by referring to the historic record. Yet you never admit anything, instead just going blithely along in a fantasy world of your own devising. In every instance, your conclusions are implicit in the way you frame your questions. Your deductions are always ‘proven’ tautologically, by reference to theorems that were established in a vacuum, as though the real world were constructed along the lines of the world of mathematics.”
Statements such as these are indicative of trolling. He is throwing out bait to get us angry; to distract us and let our emotions take over. I used to be guilty of getting angry at him. Now, I ignore most of his rants. They are simply different variations of the same thing. How are we able to debate intelligently with someone who believed no minimum wage existed in 1946?
He will be gone soon. He is having his fun and getting his laughter now. Soon, his act will grow tiresome. Everyone will ignore him and his fun will be over.
I’ve come to that conclusion, so I’m gonna ask for my prior response to be removed. He can wallow in his ignorance if it is genuine since he’s given us nothing to justify clarifying his misunderstandings. It’s funny that someone would try debate methodology and get in a huff when I use a very commonly recurring term in the field used to describe the supposed scientific method.
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