Like his idol, J.M. Keynes, Krugman believes that Say’s Law is evil and just plain wrong. I deal with Krugman and Say’s Law in this KIW post today.
Source link: http://archive.mises.org/14205/krugman-and-says-law/
Krugman and Say’s Law
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That consumption must have prior production (at home or overseas) is true but I am surprised Austrians make so much out of it. What doesn’t follow is that supply (total factor payments from production) will equal consumption or investment. Failures in aggregate demand do happen. Also, if you go back and look at what J. B. Say actually wrote it’s very easy to refute:
The Myth of Say’s law, http://socialdemocracy21stcentury.blogspot.com/2010/10/myth-of-says-law.html
You will also find a refutation of Say’s law there in the “correct” form formulated by Thomas Sowell (1994), who certainly did a lot of work to see what the Classicals really thought about it.
William Anderson says:
First, even if I were to give Krugman his point that S>I, nonetheless (and I have not seen this discussed anywhere) the nature of fractional reserve banking would take the existing savings/deposits and loan them out to where the actual new money created would be substantially greater than the savings base.
He ignores the role of subjective expectations in investment.
If banks and businesses’ expectations became pessimistic, then fractional reserve banking is utterly irrelevant: (1) bank’s willingness to grant loans and (2) demand for loans from business have both collapsed.
Instead, Austrians look to reasons as to why the resources are unemployed …. and to the larger issue of how the proportions involving the factors of production have been disturbed or distorted.
So, basically, anyone who agrees that the arguments against Austrian business cycle theory (ABCT) are compelling has no reason to accept such analysis?
Stop these funny arguments Y’all
The whole corpus of modern economics including the fiat money conundrum is based on ever increasing demand leading to positive growth which tends to perpetuate itself through its levers and pulleys. Efforts are made to sustain this positive acceleration ignoring the ground realities just to keep the numbers in place.
But we have to realise the geopolitical aspects on economy now!
We have 22 nuclear powers around the world precluding out n out war for resources
All these formulae used to work in a closed framework with near infinite resources
Further rise in demand was offset by the value addition magic created by new tech and science
Unless we have groundbreaking things on this new ‘value addition -finite resources’ premise we shall be witness to new kind of trade among nations which are guided by politics rather than demand/supply constraints
Lord Keynes,
Could you please clarify when you refer to “Failures in aggregate demand do happen” if you are making a pure observation; and if so, if that is simultaneously part of the Keynesian abstract model. Further, is it right to assume that Prof. Anderson is refering purely to the abstract model when ceding S>I for example’s sake? That would indeed mean that Anderson could also observe that “Failures in aggregate demand do happen” in the real world, leaving aside the problems of aggregation, but see it as a necessary disturbance to what would be a more smoothly functioning free market- a given in the praxeological abstract model. Therefore, your observation would be of no use in refuting Austrian theory. Rather, it would show that your abstractions have psychological components that the Austrians would not presume, i.e. animal spirits. How else would you explain in the abstract a discrepancy between supply and demand or S vs. I? Thanks.
Lord Keynes,
One of the gravest of Keynes’s and his followers’ many fallacies is that they generally ignore the fundamental importance of price flexibility in clearing markets, including the markets for labor and capital. Without price flexibility, markets generally will not clear, and, in virtually all instances, the cause of anything other than short-term price inflexibility is government intervention in the market. Keynesians basically ignore the all-important “micro” foundations of economics.
One of the gravest of Keynes’s and his followers’ many fallacies is that they generally ignore the fundamental importance of price flexibility in clearing markets, including the markets for labor and capital. Without price flexibility, markets generally will not clear
Keynes argued that even if all prices and wages were perfectly flexible, there would still be failures in aggregate demand. Any economy where money is used with (1) a medium of exchange role AND (2) a store of value function, under conditions of uncertainty and subjective expectations in real time can have significant idle money balances. The presence of the speculative demand for money for use on financial asset markets also makes things worse. Financial assets are not gross substitutes for commodities. Markets will not clear in the way imagined by the neoclassicals or Austrians:
http://socialdemocracy21stcentury.blogspot.com/2010/06/utility-of-money-in-post-keynesianism.html
“Keynes argued that even if all prices and wages were perfectly flexible, there would still be failures in aggregate demand. ”
What is “aggregate demand?” Why should anyone care about it?
”
Any economy where money is used with (1) a medium of exchange role AND (2) a store of value function, under conditions of uncertainty and subjective expectations in real time can have significant idle money balances.”
Which is an expression of individuals’ preferences.
” The presence of the speculative demand for money for use on financial asset markets also makes things worse. Financial assets are not gross substitutes for commodities. Markets will not clear in the way imagined by the neoclassicals or Austrians:”
But this is all pure assertion and bitching about people’s preferences as to what they want to hold.
You say:
“What is “aggregate demand?” Why should anyone care about it?”
Do you really not understand the concept?:
“In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level”
http://en.wikipedia.org/wiki/Aggregate_demand
Even your fellow Austrian George Selgin understands and appears to accept the concept of aggregate demand. Here is Selgin in his own words:
“It has also long been appreciated, by many though not all Austrians, that the Great Depression involved a collapse of aggregate demand that was itself not a necessary part of the Hayekian downturn, and that the popularity of Hayek’s theory suffered from his having put relatively little emphasis on that aspect of the crisis. In fact, Hayek’s ideal was that of a monetary policy that would stabilize MV, which means that he was not in fact ignorant of the damage done by collapsing demand. Alas, the Keynesians, who saw the depression solely as the result of collapsing demand, without recognizing the role played by the prior boom, ended up winning the day.”
http://thinkmarkets.wordpress.com/2010/09/18/the-second-austrian-moment/
Scroll down and see his remark towards the end of the comments
You say:
Which is an expression of individuals’ preferences.
and which leads to aggregate demand failures. You have not refuted the theoretical and real life failure of aggregate demand.
“Do you really not understand the concept?:”
No, I wanted you to define it so you can’t squirm out of defending it later by shifting definitions.
‘“In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level”
http://en.wikipedia.org/wiki/Aggregate_demand‘
Right, so why should this remain at any given level? Why is demand collapsing to begin with? Just stating it “collapsed” proves nothing.
“Even your fellow Austrian George Selgin understands and appears to accept the concept of aggregate demand. ”
*shrug* I don’t care, he doesn’t avail himself of it as Keynesians do.
“and which leads to aggregate demand failures.”
What is an “AD failure”?
” You have not refuted the theoretical and real life failure of aggregate demand.”
Because you’ve made no argument that there’s such a thing. Just asserted it.
What is an AD “failure”? You’ve not so much as presented an argument for the concept’s coherence even. Why should AD remain constant when malinvestment has transpired? Why should markets not clear at a new, more suitable level as compared to prior levels of demand as preferences alter?
Right, so why should this remain at any given level? Why is demand collapsing to begin with? Just stating it “collapsed” proves nothing.
What, prices? They don’t.
Just because prices adjust when there is excess supply of commodities in specific markets does not prevent a shortfall in aggregate demand.
“Just because prices adjust when there is excess supply of commodities in specific markets does not prevent a shortfall in aggregate demand.”
*sigh*
Question-begging assertion. WHY does it matter if there is a “shortfall” in AD? Why should AD stay at a given level? Excess relative to WHAT?
WHY does it matter if there is a “shortfall” in AD?
Your question is tantamount to saying: “Why does it matter that the US suffered a depression in the 1890s??”
I’ll tell you why: mass unemployment, wasted resources, starvation, misery.
Why should AD stay at a given level?
It doesn’t necessarily. It rises with population growth and demand. It can fall disastrously in the face of endogenous shocks like debt deflation or external shocks like a fall in export markets. Keynesian economics is about demand management minimizing involuntary unemployment and seeing that the economy can reach its potential GDP.
@Lord_Keynes: I think what Inquisitor is getting at (and my point in this exchange with John Salvatier) is: why is mass unemployment, etc. *necessarily* coincident with not keeping some macroeconomic metric high enough??
What if AD falls because people start procuring their goods on the non-cash economy? Or because it’s making crap they don’t want at current prices? Or because the ways currently used to produce things are monstrously inefficient?
Focusing on AD leaves you in this trap of thinking that if you can just get a few macroeconomic measures back to what they were last year (or in our case, c. 2005), then all that prosperity will be restored. It’s putting the cart before the proverbial horse.
A “good economy” in the sense that laymen use the term, is when wants are efficiently satisfied. Not when people dig holes and fill them back up. And not in the current version — where people draw down phantom home asset values to buy unsustainable consumption, where people buy more than they want “for the good of the economy”. The economy isn’t a volcano god, folks!
“I’ll tell you why: mass unemployment, wasted resources, starvation, misery.”
You’re begging the question.
“It doesn’t necessarily. It rises with population growth and demand. It can fall disastrously in the face of endogenous shocks like debt deflation or external shocks like a fall in export markets. Keynesian economics is about demand management minimizing involuntary unemployment and seeing that the economy can reach its potential GDP.”
The answer you should’ve given was for it to be at a level where the economy would be at full employment. This disregards why the economy should be there when it is restructuring, fails to answer why demand fell to begin with and takes it as causal rather than a consequence of government intervention in the market, fails to explain why this “potential GDP” (or ANY GDP level) matters and assumes demand can be “managed” without further distorting the structure of production. Compared to the Austrians, Keynesians are rank amateurs. Silas also expressed what I meant quite well.
Lord Keynes,
This bit was really hilarious.
Inquisitor: Why should AD stay at a given level?
You: It doesn’t necessarily. It rises with population growth and demand.
So demand rises with er…. um…. demand. ROFLMAO.
What he said. Nice ignoratio elenchi, though. Listen, Say’s Law is not hard to understand, nor is it controversial, nor does it magically put the finest In-N-Out burgers in the land into every man’s mouth. In short, what the hell do idle cash balances have to do with production creating (in essence, symbolizing) effectual demand and production and consumption being identical under assumptions? No wonder people hate economics, the same retarded arguments are always trotted out ad nauseum. Fine, I hate it too.
Lord Keynes,
Shouldn’t a drop in aggregate demand be big enough to cause a rise in aggregate supply so as to lower the price level even more than the initial drop in demand?
Assuming that’s not true though, what if everyone decided to become monks -the economy would be at a lower equilibrium but people’s subject values would be realized, so in the worst case scenario I don’t see how the economy isn’t utility maximizing?
Austrians argue that there is no such thing as “idle money balances.” All money is always held in someone’s cash balance, and cash balances provide a useful economic service to individuals, i.e., cash balances provide individuals with the services of a medium of exchange. If individuals increase their demand for money, what they are indicating is that at the current level of prices they prefer to hold larger cash balances than previously. The result of this increased demand for money is a general decline in the “price level.” Even with the medium of exchange, money, price flexibility is fundamental to clearing markets.
Also, as far as markets not clearing “in the way imagined by the neoclassicals or Austrians,” except possibly in the short-term, a multitude of laws are in existence whose purpose is to thwart the results of the market, thus preventing markets from clearing. Interest groups and government refuse to accept the results of the market and in a multitude of instances have used legal recourse in an attempt to overturn the market’s results. This was true in the 1920s and 1930s and is much more so today.
QED. Let’s pack it up, guys. Mises.org is dead via ipse dixit. Hey, check this one out before we go:
http://mises.org/resources/3655/Failure-of-the-New-Economics
Pp. 32-43, please. Linkmania!!!
Here is how one makes a non sequitur, children:
“(1) People desire to hold money as a hedge against future uncertainty (the “precautionary motive,” in Keynes’ theory), and since expectations are subjective such holdings can vary. In depressions or recessions, people may choose to hold more of their money as cash. In underdeveloped and pre-modern economies, hoarding can take the form of holding money physically outside of banks as cash or coin (Gootzeit 2003: 182). In the Great Depression, the rise in the hoarding of money was a significant factor, as it probably was in pre-1914 downturns in the business cycle (Wicker 1996: 144).
(2) Even when people hold money either as individuals or as savings in financial institutions, not all the money will be invested in production of producible commodities (= goods and services). Money can be used to speculate on asset prices. New savings or a rise in savings can be diverted to purchasing of financial assets (or real assets) with the money used to buy such assets then flowing to other speculators, who buy new financial assets or hold money idle in the process of using it in further speculation on assets. Thus there is a “speculative demand” for money that can rise or fall.
(3) In modern economies where savings are held in demand deposits and saving accounts in banks, money is invested by banks themselves. But even here investment by banks will be subject to subjective expectations under uncertainty. In recessions or depressions when expectations are low, banks may simply chose to keep their depositors’ money as excess reserves or use it to buy financial assets on secondary markets. Thus even modern banks can “hoard” by reducing investment and leaving money in idle balances (at central banks or held in reserve for speculation on financial assets).
(4) Money income can be spent on imports causing a trade deficit, which in pre-fiat money days could result in a contraction of the money supply and deflationary pressures.
(5) A government might levy taxes and a run budget surplus without re-injecting that money back into the economy (and effectively destroying it).
Once propositions (2) and (3) of Say’s law above are shown to be false, propositions (4) and (5) collapse completely, and the idea that supply equals demand ex post cannot be possible.
For all these reasons, aggregate demand failures can cause recessions, whenever aggregate demand falls short of supply. Equilibrium will not result and is not necessarily a condition of free markets. Say’s law is a myth.”
Prove it
I am sure you are an intelligent, articulate guy capable of doing so.
When you first prove that 1 – 5 entail your conclusion. I’m not doing your work for you, idiot.
“For all these reasons, aggregate demand failures can cause recessions, whenever aggregate demand falls short of supply.”
Krugman is conflating Say’s law with Walras’ law, namely that the economy will remain in a general equilibrium because surpluses in one sector must necessarily and automatically be corrected by market mechanisms (resources will “flow” from that sector towards sectors that are experiencing deficits). In such a condition, you can not have disequilibrium in the lonabale funds market (or inter-temporal disequilibrium).
But none of this deals with Say’s law in anyway whatever, which merely states that scarcity exists, and therefore general overproduction’s (or underconsumption) are entirely meaningless. We must attribute the cause of recessions to structural or relative imbalances. The question at hand, therefore, is what caused disequilibrium in the lonable funds market (a Keynesian will point to “psychological” factors) and how do we remedy this disequilibrium? But again, this has nothing to do with Say’s law.
Also, Keynesian’s tend to assume that because investment falls during a recession, and because savings rises, than savings must > investment. It’s impossible, in their minds at least, that this is actually the equilibrating process; that the economy is trying to both finish and purge itself of the over-investment within specific industries(malinvestments).
But then again, we’re all just “thrift apologists.”
What we really need to attack the Keynesians for is their brand of socialism, i.e. the benevolent social planner that manipulates the economy as he/she sees fit.
Lord Keynes, On another thread, I recently dared you to refute Say’s law in your own words. You couldn’t, but obviously you went home, went tow work, and you come up with that hodgepodge of pseudo-economic goggledegook you have now posted on your blog. You gotta be kidding. Keynes claimed to have refuted Say’s law with essentially the same kind of utter nonsense, and because Keynes’ entire General Theory depended upon rebutting Say’s law, Keynes’ entire General Theory flopped.
So, let me make it simple for you, and see if you can respond in your own words without reference to any of you other nonsensical blogs, nor to any other authority. If you can’t do that, just say so.
JB SAY; In order for people to consume, they must produce, because without production there can be nothing to consume, and without production, people would have nothing (no money) to spend on consumption.”
JM KEYNES: No, government can create and spend money, which will allow people to consume without producing.
SAY: Um, what will they consume?
KEYNES: They will consume bread, because the State, by its ability to print money, can turn stones into bread.
SAY: Huh???
LORD KEYNES THE SECOND: See my Post Keynesian blogs for the past year and check out all my cool citations and references to economists of great authority.
SAY: No can do. I’m dead.
Thanks for the laughs. I’ve been following your discussion with this moron and I should say it’s been entertaining.
Hahaha,good one
Keynesians always think that something that works must be good invariably
At present they think that they are saving people and their purchasing power thro’ all these bailouts- again! the trickle down system works only when the elite feel safe.
Funny why the elite are not so easily brainwashed by the gobbledygook.
Do we have anyone who is thinking of amicable solutions fro nations and their citizens for sharing earth’s resources for the next say 10,000 years?-”Naah we shall make him Man of the year coz he saved my ass yesterday”
Collective failure is amply rewarded on wallstreet!
Ned Netterville,
Thanks for your comments. You say:
In order for people to consume, they must produce, because without production there can be nothing to consume, and without production, people would have nothing (no money) to spend on consumption
That people need to engage in production before consumption is true. In other words, that consumption must have prior production (at home or overseas) is true. What doesn’t follow is that supply (total factor payments from production) will equal consumption or investment. Aggregate demand failures can occur. But your statement here is incorrect:
without production, people would have nothing (no money) to spend on consumption.
Without production, people would have no commodities (= wealth) for consumption. They might still have money.
But money is not wealth. Money is a unit of account and medium of exchange (also a store of value): but as a unit of account and medium of exchange it is a thing that facilitates exchange and production. The money itself is NOT wealth.
In a recession, deficit spending is a way of mobilizing idle resources like labour for production. The production (= wealth creation) is facilitated by money as wages or payment for other commodities, just as it would if the money came from a private loan.
See my most recent post:
http://socialdemocracy21stcentury.blogspot.com/
“What doesn’t follow is that supply (total factor payments from production) will equal consumption or investment. Aggregate demand failures can occur. But your statement here is incorrect:”
What you’ve not demonstrated is that these supposed “failures” are a problem.
“In a recession, deficit spending is a way of mobilizing idle resources like labour for production. The production (= wealth creation) is facilitated by money as wages or payment for other commodities, just as it would if the money came from a private loan.”
Ah, no. No no no. Production = wealth creation is something you just made up. Production for its own sake certainly is not wealth creation. “Deficit spending” (read: splurging money at gov’t-favoured ventures) and private loans out of real savings have nothing to do with one another. The latter come out of real, saved resources. The former is profligate wasteful spending. Takes a charlatan to equate them…
See here:
http://socialdemocracy21stcentury.blogspot.com/2010/10/money-is-it-wealth.html
Deficit spending in a recession is a way of mobilizing idle resources like labour for increased production. Actual production (= wealth creation) is facilitated by use of money as wages or payment for other commodities, just as it would if the money came from a private loan for construction or other business activity.
While deficit spending normally involves creation of public infrastructure and not factories or new capital goods directly, the use of idle resources and payment of wages increases demand for commodities. This process increases production (say, by raising capacity utilization) and leads to an expansionary phase of the business cycle where new business and factories are created to expand output.
And the Austrian retort to this is that such an interpretation ignores the structure of production and attempting to implement it leads to distortions in the information function of prices and therefore bubbles. How do you respond to that? How do you know that “mobilising idle resources” is not just wasting them on unproductive endeavours? Where do you even get the assumption that the aggregate output is the relevant variable that represents the “health” of the economy?
How can you even make a claim like this while earlier you complained that praxeology isn’t falsifiable?
And the Austrian retort to this is that such an interpretation ignores the structure of production and attempting to implement it leads to distortions in the information function of prices and therefore bubbles. How do you respond to that?
You are perfectly correct that this is the Austrian retort.
It is Austrian business cycle theory.
But that was refuted ages ago by Sraffa and Kaldor.
I mean the Austrian economist George Selgin appears to have accepted that aggregate demand is involved in the Great Depression. Here is Selgin in his own words:
“It has also long been appreciated, by many though not all Austrians, that the Great Depression involved a collapse of aggregate demand that was itself not a necessary part of the Hayekian downturn, and that the popularity of Hayek’s theory suffered from his having put relatively little emphasis on that aspect of the crisis. In fact, Hayek’s ideal was that of a monetary policy that would stabilize MV, which means that he was not in fact ignorant of the damage done by collapsing demand. Alas, the Keynesians, who saw the depression solely as the result of collapsing demand, without recognizing the role played by the prior boom, ended up winning the day.”
http://thinkmarkets.wordpress.com/2010/09/18/the-second-austrian-moment/
See the end of the comments section.
“I mean the Austrian economist George Selgin appears to have accepted that aggregate demand is involved in the Great Depression. ”
Selgin is really more Keynesian than Austrian at this stage.
Lord Keynes,
” But that was refuted ages ago by Sraffa and Kaldor. ”
Could you please explain their refutation? Citing them without explaining how they did it is precious little more than appeal to authority.
Selgin is really more Keynesian than Austrian at this stage
Really? Perhaps this suggests that intelligent Austrians are just “Keynesians in denial”, as one hated economist has argued:
http://krugman.blogs.nytimes.com/2010/04/07/austrian-followup/
“”How can you even make a claim like this while earlier you complained that praxeology isn’t falsifiable?”
If he said that, it proves just how ignorant he truly is.
As for the hack…
“Really? Perhaps this suggests that intelligent Austrians are just “Keynesians in denial”, as one hated economist has argued”
Arbitrary value judgement, really. I would be more inclined to say somewhere along the line their brains are muddled, so that like you, they are apt to accept ludicrous propositions like deficit spending will somehow boost the economy into recovery, stuff which a child could point out is wrong. But not grown up adults who are so ideologically invested in the bullshit they spin.
You’re reduced to repeating yourself now without addressing my objections. I saw that bit. You’ve not yet explained why it needs to happen or how it’s economically efficient, so my questions stand.
“But that was refuted ages ago by Sraffa and Kaldor.”
How? Explain their arguments that specifically pertain to the ABCT. No blog links, no citations. Outline the arguments. Sraffa is mentioned a lot by socialist hacks but seldom is it explained how he actually tackles Austrian arguments (as opposed to specific Hayekian and/or neoclassical ones, assuming he understood them.)
I’ve been asking him many times over but it is not forthcoming. I don’t think we should expect him to come up with it. He is just a troll.
Lord Keynes, I am following this discussion with interest. But you must make the argument yourself, not by appeal to absent authority. I have seen far too much of it coming from Keynesians and when you follow the piece of string to the end, it always assumes what’s in issue. So if you can make the argument, please do so, and if you can’t, please say so.
Ah, no. No no no. Production = wealth creation is something you just made up. Production for its own sake certainly is not wealth creation.
I also see you have shifted the argument to whether government spending on public infrastructure can be “productive”.
I assume you cannot refute how I have exposed the fallacy in the dialogue invented by Ned Netterville. Keynesianism is perfectly compatible with the idea that money is not wealth and that production needs to take place before consumption.
A recession by definition = idle resources, lower capacity utilization, unemployment.
Deficit spending just puts those idle resources to work. Production increases in the private sector when orders come in, employment falls, people are free to buy what commodities they want by deciding on the basis of their subjective use value.
That’s not the Austrian definition. Lower than what? What’s the optimum? And more importantly, what’s the optimal structure, as opposed to level?
Again, from Austrian perspective, it wastes them.
Maybe I should spend my time “optimally” and stop wasting it on restating the obvious.
Lower than what?
Lower than what it would be at full employment.
Maybe you should advocate the return to a pre-industrial society and/or slavery then. That eliminates the problem of unemployment.
Even assuming we accept this,
” A recession by definition = idle resources, lower capacity utilization, unemployment. ”
how is this
” Deficit spending just puts those idle resources to work ”
a valid response? Is it not necessary to understand what caused those resources to be idle, that capacity utilisation to be lower and that unemployment to be high? How does administering a cure without understanding the causes make any sense at all?
Further, though these questions have been raised before, let me repeat them. Why are those “idle” resources idle? Why is the capacity utilisation “lower”? Incidentally, you are yet to explain “lower” than what. Why is unemployment high?
Why is liquidation not an answer to the problem of idle resources and lower capacity utilisation, especially if the idleness of resources and the low level of capacity utilisation are the product of past poor decisions? Those who make poor decisions on the market should pay for it (be it in the form of lost capital or income), shouldn’t they? Isn’t that the essence of the market? Why do you so badly want to prevent that from happening?
How does administering a cure without understanding the causes make any sense at all?
Of course causes are important.
In the case of the Great Depression, there is a perfectly obvious cause: financial markets with no regulation that caused a huge asset bubble and excessive private debt, that then burst causing debt deflation, bank runs, deflationary spiral etc. , as argued by Irving Fisher and Hyman Minsky.
It isn’t increasing money supply that was the fundamental cause: it was inherently stable financial markets, just as Minsky said.
“In the case of the Great Depression, there is a perfectly obvious cause: financial markets with no regulation that caused a huge asset bubble and excessive private debt, that then burst causing debt deflation, bank runs, deflationary spiral etc. , as argued by Irving Fisher and Hyman Minsky.”
And Austrians like Rothbard and Higgs argue this was hardly the case.
“It isn’t increasing money supply that was the fundamental cause: it was inherently stable financial markets, just as Minsky said.”
And how, pray tell, would inherently “stable” financial markets cause it?
“It isn’t increasing money supply that was the fundamental cause: it was inherently
stable financial markets, just as Minsky said.”
Of course, this is a type for
“It isn’t increasing money supply that was the fundamental cause: it was inherently unstable financial markets, just as Minsky said.”
Also, devastating asset bubbles and excessive private debt can happen in free banking system with NO central bank:
Charles R. Hickson and John D. Turner, 2002, “Free Banking Gone Awry: The Australian Banking Crisis of 1893,” Financial History Review 9: 147–167.
This huge property bubble in Australia in the 1880s under Australia’s free banking system occurred when Australia had no central bank, virtually no regulation, a gold standard, yet its experience with free banking ended in complete and utter catastrophe.
“Of course, this is a type for “It isn’t increasing money supply that was the fundamental cause: it was inherently unstable financial markets, just as Minsky said.”
And why were they “inherently” unstable?
“This huge property bubble in Australia in the 1880s under Australia’s free banking system occurred when Australia had no central bank, virtually no regulation, a gold standard, yet its experience with free banking ended in complete and utter catastrophe.”
I’m sorry, do you think I am going to just take your or their word for it without further details? Not a chance in hell. Especially when a central bank is not required for central banking to nonetheless be in effect. Now tell me, why is it WITH regulation – bountiful regulation – that these crises still occur, and do so systematically, hm? You need to realise the ABCT refers specifically to cycles in which the conditions it outlines obtained. It isn’t there to explain all crises but it does explain those set in motion by government profligacy.
Addressed to Lord Keynes….
” Also, devastating asset bubbles and excessive private debt can happen in free banking system with NO central bank ”
Who the f@#k denied that or claimed that central banks are necessary for devastating asset bubbles and excessive private debt creation? All I would say is that none of these bubbles is possible in the absence of government intervention that props up the banking system that creates these bubbles by subverting the free-market forces that make such bubbles impossible.
If you are wondering what I mean, suspension of the requirement of redemption of notes and deposits in specie is an intervention in favour of an errant banking system. Such suspensions (as happened in the 1800′s) did not happen on the free market. A “moratorium” on redemption of notes and deposits in specie means that courts will refuse to force banks to meet their contractual obligations to redeem their notes and deposits in gold and silver. That is a gross misuse (though an expected one) of the government’s monopoly over the system of justice.
Basically, prior to Central Banking, government’s intervened by taking the side of the thieves. Post Central Banking, governments have become the biggest thieves.
You say money is not wealth, yet maintain more of it must be produced to mobilize resources (including labor) when in a recession. In other words Keynesians say government protected banks should produce more money (when the economy is in a recession) to produce wealth. Austrians say government protected banks should not produce money, that doing so in fact destroys wealth because it encourages the continued mis-allocation of resources.
So, two schools of thought, one advocates the state create more money to increase wealth, the other says doing so will only perpetuate resource mis-aollocation and destroy wealth.
I don’t understand how charging Keynesianism with “more money equals more wealth” is controversial.
You say money is not wealth, yet maintain more of it must be produced to mobilize resources (including labor) when in a recession.
No, more money doesn’t need to be “produced.”
The government can borrow from private markets. The money it injects = money it withdrew.
“No, more money doesn’t need to be “produced.”
The government can borrow from private markets. The money it injects = money it withdrew.”
In which case it WILL crowd out private investment. Make up your bloody mind as to how the government finances its activities.
In which case it WILL crowd out private investment. Make up your bloody mind as to how the government finances its activities.
No, it wont: in a severe recession or depression, then by definition there are significant idle resources and idle savings not being invested. This is the devastating logical flaw in your argument: in a recession or depression, entrepreneurs are NOT using resources. If they were, there would be no recession. If the nation is experiencing negative GDP growth, then government borrowing from financial markets will not “crowd out” private sector investment or private sector use of resources.
“No, it wont: in a severe recession or depression, then by definition there are significant idle resources and idle savings not being invested.”
There are “idle” resources that due to their heterogeneous nature as factors of production are no longer suited to post-recession uses. This only applies to -those- resources. There is no such thing as “idle savings” as was mentioned by another poster here, that is a Keynesian fiction. But this does nothing to prove that the government is not drawing funds from individuals which would have otherwise been put to more efficient uses by private investors. The economy is not some homogeneous blob of resources. You’re not drawing from those idle resources but from funds that could be put to a multitude of uses, any one of them more efficient than what the government spends on. And drawing on those resources -will- diminish them and -will- increase borrowing costs to private individuals, no matter how many resources remain idle. Please go sell your charlatenry to someone more gullible.
“This is the devastating logical flaw in your argument: in a recession or depression, entrepreneurs are NOT using resources.”
Believe me, it’s not a logical flaw in my argument.
” If they were, there would be no recession. If the nation is experiencing negative GDP growth, then government borrowing from financial markets will not “crowd out” private sector investment or private sector use of resources.”
No, if bad investments were not propped up with easy money to begin with, THEN there would be no recession. GDP growth is a meaningless statistic. But even if I did not consider it to border on useless in expressing economic prosperity, it does not follow from the fact that there is a recession that government borrowing will not crowd out private sector access to funds.
GDP growth is a meaningless statistic
If you don’t even accept the concept of aggregates, then you can’t even accept concepts like GDP, the unemployment rate etc.
Logically, when asked if Keynesian policies are working, all you could say is:
“I have no idea, since I don’t accept the concept of aggregates. I have no idea whether we are in recession or not because I don’t believe in GDP figures. I don’t know whether there is any unemployment because unemployment statistics are invalid as aggregates.”
Oh my gawd!!! How can anyone at all be such a moron!
” in a recession or depression, entrepreneurs are NOT using resources. If they were, there would be no recession. ”
The entrepreneurs haven’t gone mad, have they? The reason they are not producing the goods that could be produced utilising these idle resources is that the goods that these resources can produce (in the current configuration) is not what the market wants. Leaving the situation as it is (without intervention) will lead to these resources being diverted to other lines of production which the market wants or being liquidated altogether because there is no alternate line where they may be employed.
The only losers in either case would be the entrepreneurs who made poor past decisions. Why is this a bad option?
” If the nation is experiencing negative GDP growth, then government borrowing from financial markets will not “crowd out” private sector investment or private sector use of resources. ”
No you moron, it will crowd out the private investment that would have happened in the alternate line of production that would have produced what the market really wants in order to prop up a line of production that produces something no one really wants in any case.
That’s called rewarding poor judgement. Of course, that suits the purposes of morons and parasites. Make all the mistakes you want to because government will bail you out anyway.
“GDP growth is a meaningless statistic
If you don’t even accept the concept of aggregates, then you can’t even accept concepts like GDP, the unemployment rate etc.”
No, just GDP.
“Logically, when asked if Keynesian policies are working, all you could say is:
“I have no idea, since I don’t accept the concept of aggregates. I have no idea whether we are in recession or not because I don’t believe in GDP figures. I don’t know whether there is any unemployment because unemployment statistics are invalid as aggregates.””
You’re a walking collection of fallacies. I do not accept GDP as meaningful in any way. It does not mean I do not think there are other metrics that might be useful. GDP is simply not one of them.
The reason they are not producing the goods that could be produced utilising these idle resources is that the goods that these resources can produce (in the current configuration) is not what the market wants.
It is individual consumers who purchase commodities, not the impersonal market.
A failure of aggregate demand can have many causes. If it is external shocks to the economy, say depression in the country’s largest trading partner, it is not because consumers don’t want to purchase commodities that demand for them has fallen: it’s because they have lost income and are now unemployed. While resources and labour are idle, they can be used for public infrastructure projects by Keynesian deficit spending, restoring demand and production.
The wages people receive from government spending can be spent on whatever commodities they like.
I do not accept GDP as meaningful in any way. It does not mean I do not think there are other metrics that might be useful. GDP is simply not one of them.
I see. Please tell what metric you use to establish whether the economy is growing or contracting?
Please tell what metric you use to know whether unemployment has risen or fallen?
“It is individual consumers who purchase commodities, not the impersonal market.
A failure of aggregate demand can have many causes.”
You’ve not shown this term to have any meaning.
“If it is external shocks to the economy, say depression in the country’s largest trading partner, it is not because consumers don’t want to purchase commodities that demand for them has fallen: it’s because they have lost income and are now unemployed. While resources and labour are idle, they can be used for public infrastructure projects by Keynesian deficit spending, restoring demand and production.”
Or it’s because of malinvestments propped up by government funny money, in which case further crowding out private investment and then using the funds procured for various “public” makeshift work only squanders available resources and potentially induces new bubbles. And sorry but in some cases it simply is because demand for particular resources has lapsed…
“The wages people receive from government spending can be spent on whatever commodities they like.”
How nice. If only those “wages” stemmed from real resources and/or were not expropriated.
“I see. Please tell what metric you use to establish whether the economy is growing or contracting?
Please tell what metric you use to know whether unemployment has risen or fallen?”
http://prawo.uni.wroc.pl/~kwasnicki/EkonLit/Skousen%20Beyond%20GDP.html
Inquisitor,
I am utterly shocked:
However, I am happy to report that the Commerce Department’s Bureau of Economic Analysis has just begun to publish a new series called “Gross Output,” an annual measure of total spending at all stages. GO is defined as Intermediate Input (II) plus GDP (final output). Intermediate Input (II) represents the sale of all products in the natural resource, manufacturing, and wholesale markets. GDP represents the final retail market.
Mark Skousen, Beyond GDP: A Breakthrough in National Income Accounting
The new national income statistic Gross Output (GO) that Skousen refers to is
(1) An aggregage and
(2) GDP (final output) as well!
So your statistic actually relies on GDP and, if it supposedly tells you anything valid about economic output, assumes the meaningful nature of both GDP and aggregate analysis!!
Inquisitor, if you believe this my hat goes off to you, sir.
“Inquisitor,
I am utterly shocked:”
Don’t let your jaw hit the ground too hard.
“So your statistic actually relies on GDP and, if it supposedly tells you anything valid about economic output, assumes the meaningful nature of both GDP and aggregate analysis!!”
Then I’ll elaborate for you: GDP as a standalone metric is meaningless. Insofar as it includes government spending, it is flawed and inaccurate and ill-suited as a measure of economic prosperity, i.e. … MEANINGLESS. I did not deny (or affirm) the value of aggregation, so that is not at issue (thus please retire your pitiful obfuscations.) The reason Skousen’s metric is superior is because it reveals the productive part of the economy as well as what money is spent on. Skousen’s is still not a perfect measure (by virtue of the fact that GDP represents its consumptive component) but it’s an improvement over GDP standalone. He outlines alternative ones in his Vienna & Chicago, and Reisman also has his own alternatives to GDP.
“Inquisitor, if you believe this my hat goes off to you, sir.”
You’re in no position to even try mock the beliefs of others considering the Keynesian dogma you believe in. You’ve addressed no substantive rebuttals to your arguments so far and are now trying to pick at straws.
So let’s clarify:
(1) You accept aggregate statistics in principle, but reject GDP. But you accept that aggregate consumption expenditure is meaningful and that aggregate intermediate goods expenditure is meaningful.
(2) You reject GDP because it includes government spending.
Therefore if we strip out government spending:
Gross Output = private consumption expenditure + gross investment + trade balance (exports − imports) + spending on intermediate goods.
So this is the aggregate statistic you believe is meaningful?
“So this is the aggregate statistic you believe is meaningful?”
Insofar as measuring economic prosperity? Yes. More so than GDP per se. I don’t reject GDP just because it has a G component, but because it only measures one part of the economy, giving it far more weight than it deserves. With G, it is meaningless for measuring economic prosperity; without it, it is still incomplete. Hence it can only be part of a suitable metric. At any rate, of what relevance is all this?
LK,
So now you’re shifting the argument. Are you telling me Keynsians do not advocate monetary stimulus in a recession? Really?!
Tell me this, when they do (and you and I both know that they do) then do you acknowledge that as far as Keynesians are concerned more money does mean more wealth? I think you owe an answer on that.
So now you’re shifting the argument. Are you telling me Keynsians do not advocate monetary stimulus in a recession?
Low interest rates and more liquidity can make borrowing easier by businesses.
Where have I ever said that Keynesians do not “advocate monetary stimulus in a recession”
Lord Keynes you moron,
Your rant does not address my explanation of the crowding out that happens. So, as of now, your statement that there is no crowding out is still utter nonsense. That apart,
” A failure of aggregate demand can have many causes. ”
First define what “failure of aggregate demand” is.
” If it is external shocks to the economy ”
A huge freaking “if”, you imbecile. Read this
http://mises.org/books/monetarytheory.pdf
” say depression in the country’s largest trading partner ”
What caused THAT depression you ignoramus?
” it is not because consumers don’t want to purchase commodities that demand for them has fallen ”
Whatever freaking reason you may add to this statement, it does not negate the point that consumers do not want to purchase those particular commodities.
” it’s because they have lost income and are now unemployed ”
You nincompoop. What caused THAT unemployment and the consequent loss of income?
” While resources and labour are idle, they can be used for public infrastructure projects by Keynesian deficit spending, restoring demand and production. ”
That they “can” be used for public infrastructure projects does not mean that using them for such projects is the right solution. Letting the market sort it out and allowing the entrepreneurs to decide what is the proper line of employment for these resources and labour is also an option. Why are you precluding it?
If you want to insist that “there is a depression on and private investment isn’t happening”, then the answer is simply that liquidation is probably better than investment. It is likely that a lot of poor investment made in the immediate past has to be purged from the system and that’s what the depression is all about. Not allowing it to work makes no sense.
” The wages people receive from government spending can be spent on whatever commodities they like. ”
How does this address the primary issue that the so-called “idle” resources are actually mis-allocated resources that need to be re-allocated?
p.s. I love Captain Haddock
Letting the market sort it out and allowing the entrepreneurs to decide what is the proper line of employment for these resources and labour is also an option. Why are you precluding it?
Because there is no tendency to self-correcting equilibrium in market economies. Business expectations and investment decisions are subjective. The Austrian Ludwig Lachmann was entirely correct:
“In a kaleidic society the equilibrating forces, operating slowly, especially where much of the capital equipment is durable and specific, are always overtaken by unexpected change before they have done their work, and the results of their operation disrupted before they can bear fruit. Restless asset markets, redistributing wealth every day by engendering capital gains and losses, are just one instance, though in a market economy an important one, of the forces of change thwarting the equilibrating forces. Equilibrium of the economic system as a whole will thus never be reached. Marshallian markets for individual goods may for a time find their respective equilibria. The economic system never does.”
(L. M. Lachmann, 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: p. 60-1).
He presents the evidence for this in detail there.
The “plan coordination” imagined by Hayek will not occur either under these conditions of uncertainty, subjective expectations and money with a store of value function.
With no equilibrium (full employment and optimum use of resource) there is a space for government intervention on both moral and economic grounds.
Lord Keynes,
Why the f@#k is equilibrium so essential? That assumption of yours lies at the bottom of all your nonsense.
If there is no equilibrium, then by definition there is no optimum use of resources. There can be involuntary unemployment, wasted resources.
It is here that moral arguments come into play.
As Mises argued:
“Economics neither approves nor disapproves of government measures restricting production and output. It merely considers it its duty to clarify the consequences of such measures. The choice of policies to be adopted devolves upon the people …. The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule” (Mises 1998 [1949]: 741).
For anyone who say accepts the sort of rule utilitarianism Mises did, there are moral justifications for government intervention, e.g., ending involuntary unemployment, stimulus for public works there is space in recession for such spending.
As I pointed out above even Say’s accepted public works.
Lord Keynes,
The spirit of Mises will rise to haunt you again. Mises, after saying what you cited, also went on to explain how any government intervention will necessarily fail to achieve its ends and is hence not a rational approach. Read Human Action completely rather than searching for that which seems to suit your line of argument (frankly, it doesn’t).
“If there is no equilibrium, then by definition there is no optimum use of resources. There can be involuntary unemployment, wasted resources.
It is here that moral arguments come into play.”
I’ve not the time to deal with your voluminous, ignorant rants, but regarding this what matters is the tendency to equilibrium, not settling at equilibrium. So your ‘argument’ is void. Keep up the evasion, it suits you.
Dear Lord (Keynes),
This is only valid within a very narrow scope of assumptions, for which you have provided no explanation, indeed you have not even formulated them. I refer you once again to Roy Cordato’s work. Once more I am pointing out how ridiculous this is in light of your objection to the unfalsifiability of praxeology.
I will explain here some of the assumptions:
- it requires an arbitrary selection of a goal (“ends”) that the economic actors are striving for
- it requires an arbitrary selection of a variable that is supposed to be representative for that goal
- it requires the ability to compare interpersonal utility
- it requires a static economy, or a dynamic economy within arbitrary boundaries
“Keynesianism is perfectly compatible with the idea that money is not wealth and that production needs to take place before consumption.”
It doesn’t matter. What matters are whether its policy proscriptions are in anyway sound. They’re not. Keynesianism is predicated on the notion that pouring money onto the problem can somehow “fix” it by jumpstarting the economy, in a sense.
“Deficit spending just puts those idle resources to work.”
Which assumes they “need” to be put to work. Why do they?
“Production increases in the private sector when orders come in, employment falls, people are free to buy what commodities they want by deciding on the basis of their subjective use value.”
Which says nothing as to whether it’s economically efficient, i.e. not wasteful. You just “see” certain activities happening. So what?
“Lower than what it would be at full employment.”
…which assumes the economy needs to stay there, when the previous level of full employment was one based on inflation.
This was mind-blowing.
Ned Netterville: without production, people would have nothing (no money) to spend on consumption.
You: Without production, people would have no commodities (= wealth) for consumption. They might still have money.
How will they have money? Does it grow on trees?
Even that money has to be “produced” prior to being used as a medium of exchange. Once again, does money grow on trees and do we just need to pluck it off them?
What an imbecile……
You: Without production, people would have no commodities (= wealth) for consumption. They might still have money.
There are many examples of how production falls dramatically with money supply staying the same: a major drought may devastate agricultural production in an economy whose major sector is primary commodities. Supply of commodities has collapsed, but people still have the same amount of money.
How will they have money? Does it grow on trees?
We live in a fiat money world. The central bank creates money in open market operations. The gold standard and commodity money disappeared decades ago.
I don’t think you even understand what it is you’re arguing against…
You moron….
” There are many examples of how production falls dramatically with money supply staying the same: a major drought may devastate agricultural production in an economy whose major sector is primary commodities. Supply of commodities has collapsed, but people still have the same amount of money. ”
When supply falls so drastically due to a drought, prices usually go through the roof. The same money stock chases a smaller volume of goods and services and prices rise.
There will therefore be no “surplus” money for people to “pluck out of trees”.
” We live in a fiat money world. The central bank creates money in open market operations. ”
Yeah moron. We all know that. None of us is living in wonderland (frankly, it looks like you are). ‘Fiat money” is counterfeit money produced outside of the free-market. What if I say it is not fit to be treated as “money” in an economic sense simply because it is produced outside of the free-market? Can we at least say that when I use the word “money” and you use the word “money”, we are referring to different things? Could we first agree on the definition of money and decide which of us is talking of “money” before proceeding further? Failing that, will you at least shut up?
How many days would your precious fiat money survive if the government fiat that props it up is removed? Remember The Continental?
When supply falls so drastically due to a drought, prices usually go through the roof. The same money stock chases a smaller volume of goods and services and prices rise.
Or there will be no commodities, and the people will be left with money that cannot purchase anything. Precisely as I said.
Whether you disagree with fiat money or not, that is the world we live in.
That being so, money is not “produced” like some commodity any more. Any analysis that assumes we don’t have fiat money creation by central banks does not apply to the real world.
Lord Keynes you retard,
” Or there will be no commodities, and the people will be left with money that cannot purchase anything. Precisely as I said. ”
Now that you have come to the nub of the issue, let us now ask the question of how government’s act of deficit spending to put money in people’s pockets under these circumstances makes commodities available for consumption.
Or do you believe that government as the power to wish up commodities from its paper money? Further, the people who do not have any commodities to buy already have money that they can deploy to produce the commodities they need. Why is deficit spending needed?
So it’s not ‘precisely as you said”.
” Whether you disagree with fiat money or not, that is the world we live in. ”
You douchebag….. That’s what I am saying too. I am just adding the point that it is the fiat money combined with FRB and Central Banking that is the cause of depressions. I am also saying that if you remove the fiat in the fiat money and leave people free to decide what should be money, depressions would almost vanish.
” That being so, money is not “produced” like some commodity any more. ”
Omigosh!!!! That only means that what is called “money” today is not really money. If it was not produced and if it did not evolve as a medium of exchange on a free-market, it is not money you moron.
” Any analysis that assumes we don’t have fiat money creation by central banks does not apply to the real world. ”
This is as brain-dead as it gets. The analysis does not assume that we don’t have fiat money creation by central banks. Instead, it outlines how a combination of fiat money, central banking and fractional reserve banking creates the business cycle.
F#$k. You are unbelievably retarded.
let us now ask the question of how government’s act of deficit spending to put money in people’s pockets under these circumstances makes commodities available for consumption
Under these conditions, where a bad supply shock has occurred you DON’T stimulate the economy. This is Keynesian deficit spending 101: when a severe supply contraction like a natural disaster like this has occurred, you need a demand contraction, and probably emergency measures. You don’t deficit spend. This is something first year Keynesian economics.
I am just adding the point that it is the fiat money combined with FRB and Central Banking that is the cause of depressions.
Since money still has a store of value function in such a world, failures in aggregate demand could still happen in such a system. Since business expectations and investment decisions are subjective, there is no reason why speculative bubbles and excessive private debt cannot happen even without a central banking or FRB. There is no reason why depressions by debt deflation will not happen in even under the condition you describe.
you retard, … You douchebag… This is as brain-dead as it gets… F#$k. You are unbelievably retarded
Lol. Thanks for these kind words : )
Lord Keynes,
” Lol. Thanks for these kind words ”
You deserved every bit of it and more.
” Since business expectations and investment decisions are subjective, there is no reason why speculative bubbles and excessive private debt cannot happen even without a central banking or FRB. ”
An interesting phenomenon called “interest rate” performs the job of allocating the available savings (which would be the only source of loanable funds) among competing demands for loans. When demand for credit exceeds supply of credit (genuine savings), interest rates go up and projects that are not worthy of investment do not get investment money. They just do not happen. Hence, no bubbles.
It is interest rate depression that causes the business cycle. Now!!!! We are back to ABCT, aren’t we? How about giving YOUR explanation of the Sraffa/Kaldor refutation of ABCT?
Bad loans get liquidated quickly in the absence of fiat money, FRB and central banking. Bubbles require a rash of poor lending decisions across the board. That would be possible if all the lending institutions were run by a munch of moronic, retarded imbeciles like Lord Keynes.
Lord Keynes, thanks for your response. I didn’t think you could make it through a reply without citing to you own work. I’m sorry, I won’t take the bait. I’ve already read through two of your blogs on what you call post-Keynesian economics and that was more than enough. I will return to your blog when you tell me or announce that you have dismissed the original Keynes and his “economic” mutterings, as well as the “work” of all those neo-Ks who desperately strive to preserve his “legacy.” And what is that legacy? A convoluted defense of spending OPM (sounds like opium, is equally addicting, stands for other people’s money). Those Neo-Keysians, Post-Keynesians, Math-Keynesians, etc.-Keynesians), Keynes epigones, as Mises referred to them, will say anything to protect their own supply of OPM and their pushers–the pols and bureaucritters hanging around fed.gov.con. They speak economic gobbledegook to cover their addiction. When you have dismissed them all, you’ll see, your blog will almost certainly achieve a degree of clarity.
However, I think I can get JB Say, whose law we are now talking about, to reply to your comments on this thread.
Lord Keynes, you said, “Without production, people would have no commodities (= wealth) for consumption. They might still have money.”
JB SAY: How could they possibly have any money if they hadn’t produced something to exchange for money?
LK: “But money is not wealth. Money is a unit of account and medium of exchange (also a store of value):”
JB: Right, except for the “money is a unit of account…also a store of value.” We’re talking economics, not accounting. Nor is money a store of value when it is fiat money and the inflation of Keynesian inflationists gets out of control–as in Zimbabwe. You know about Zimbabwe, do you not?
LK: “but as a unit of account and medium of exchange it is a thing that facilitates exchange and production.”
JB: Hey, remember you’re talking to the author of Say’s law. No production means no money, no money means no consumption. Where is the money to come from without production? Money may facilitate an exchange, but first there must be production to provide the money with whcih to facilitate. Do you think you can create money out of thin air, like Keynes claimed he (or his policies) could create bread from stones? Best to leave creation to God. But if you think it is possible, please explain how here, but without sending me on a wild goose chase to some other creationist’s theorytale or bible.
LK: “The money itself is not wealth.”
JB: “Well, duuh. You already said that and I agreed.”
LK: “In a recession, deficit spending is a way of mobilizing idle resources like labour for production. The production (= wealth creation) is facilitated by money as wages or payment for other commodities, just as it would if the money came from a private loan.”
JB: Naah. Deficit spending is spending OPM (very addictive) even before those other people you’re gonna take it from earn it by producing. It’s like buying something with a credit card and claiming you’ve created something. Deficit spending is taxation on the installment plan, only a lot more expensive to the taxpaying producer because of the interest charges. Of course production could not be “facilitated” by money if there wasn’t production in the first place (my law) that earned the money. As private loans, private lenders lend money derived from production (my law), and they only lend it to known or anticipated successful producers who look like they can and will pay the loan back from production. Furthermore, when governments deficit spend like the Obama administration has been doing, there is a danger that the producers, aware of all the taxes that must be taken from them in the future to cover the deficit, may throw up their hands and decide to stop producing or reduce production in order to get themselves into a lower, Obama-favored, tax bracket. (Hey, we may have found a rational explanation for the current double dip.)
JB SAY: How could they possibly have any money if they hadn’t produced something to exchange for money?
Answer:
(1) from the money they earned and had saved from previous income derived from production;
(2) from the sale of their assets (real or financial).
(3) from debt
(4) Money is inherited too, if I inherit real assets like houses or property I can get money selling those assets on secondary markets.
Money may facilitate an exchange, but first there must be production to provide the money with whcih to facilitate.
You have clearly not thought of financial markets. One can get money by selling one’s financial assets, or real assets.
As private loans, private lenders lend money derived from production (my law), and they only lend it to known or anticipated successful producers who look like they can and will pay the loan back from production.
Unfortunately, history is replete with bankers who lend money for speculative purposes, not for production. Bankers lend money to speculators on financial asset prices.
Furthermore, when governments deficit spend like the Obama administration has been doing, there is a danger that the producers, aware of all the taxes that must be taken from them in the future to cover the deficit, may throw up their hands and decide to stop producing or reduce production in order to get themselves into a lower, Obama-favored, tax bracket
This is a proposition subject to empirical evidence. The evidence for it non-existent.
Thanks
You’re one of those people who need to be hammered at every turn until you begin responding to non-substantive arguments…
“Answer:
(1) from the money they earned and had saved from previous income derived from production;
(2) from the sale of their assets (real or financial).
(3) from debt
(4) Money is inherited too, if I inherit real assets like houses or property I can get money selling those assets on secondary markets.”
Which all require production to occur…
“You have clearly not thought of financial markets. One can get money by selling one’s financial assets, or real assets.”
Um… how does this disprove what he said?
“Unfortunately, history is replete with bankers who lend money for speculative purposes, not for production.”
Production is a speculative activity. Stepping outside our house is a speculative activity. Grow the fuck up and stop trying to imply speculative activities are not productive, when all action is by nature speculative.
“Bankers lend money to speculators on financial asset prices.”
…and?
“This is a proposition subject to empirical evidence. The evidence for it non-existent.”
Ipse dixit.
I sometimes wonder what you think it is your “arguments” prove.
Which all require production to occur…
They do not. Money is no longer commodity money. It is not “produced” like gold dug out of the ground.
Fractional reserve banking creates money through debt; open market operations create money.
This is the real world in which we live. Your Say’s law “world” where money is produced like any other commodity is irrelevant.
“They do not. Money is no longer commodity money. It is not “produced” like gold dug out of the ground.”
Small problem with this: it means you admit government-produced FRB funny money is part of the problem. Say’s exposition of course does not assume the possibility of just countfeiting money to attain one’s ends, it’s based on a free market order. The other problem is you seem to assume this is the only possible way things can now be done. Why? I agree fully that FRB systems do not require prior production for money to be in people’s hands. That is their fault though and not Say’s… and you never addressed one substantive argument Bala raised with respect to this.
I would call attention again to David Gordon’s superb demolition of a recent post-Keynesian work:
http://mises.org/daily/3756
in particular the disregard this school has for the fact that money has a purchasing power (a disregard shared by their more reputable brethren on the [non-prefixed] Keynesian side).
Inquisitor:
This is what the issue comes down to: the Keynesians deny that Say’s Law applies to money because they don’t believe money is a good (e.g., they believe it is a form of credit, or subscribe to state theories of money, etc.) and hence Say’s Law is thus inapplicable. Post-Keynesians tend to be more up front about this, whereas mainstream Keynesians try to have their cake and eat it to. It makes critiquing the system all the harder since it is not always clear when debating a Keynesian whether they are in rhetorical or theoretical mode. It’s pretty clear that the two sides have different meanings for the same terms.
“This is what the issue comes down to: the Keynesians deny that Say’s Law applies to money because they don’t believe money is a good (e.g., they believe it is a form of credit, or subscribe to state theories of money, etc.) and hence Say’s Law is thus inapplicable. Post-Keynesians tend to be more up front about this, whereas mainstream Keynesians try to have their cake and eat it to. It makes critiquing the system all the harder since it is not always clear when debating a Keynesian whether they are in rhetorical or theoretical mode. It’s pretty clear that the two sides have different meanings for the same terms.”
It’s rhetorical sleight of hand. The fact that the monetary system they endorse causes a breakdown in the proper operation of the market economy is not a ringing endorsement for it but rather an indictment. They require independent arguments to show why one should favour their approach and why it is not in fact economically harmful (which as we all know, it is.) Lord Keynes, both the original and the one here, has offered none.
This is what the issue comes down to: the Keynesians deny that Say’s Law applies to money because they don’t believe money is a good
Say’s law does not apply to an economy using money with a store of value function.
Under conditions of uncertainty and subjective expectations in real time, there can be significant idle money balances. The presence of the speculative demand for money for use on financial asset markets also makes things worse. Financial assets are not gross substitutes for commodities.
Lord Keynes,
” Say’s law does not apply to an economy using money with a store of value function. ”
And since, as I explained elsewhere on this comment thread, money is NOT a store of value, your objection to Say’s Law stands completely invalidated.
I repeat. money is a commodity that is used as a medium of exchange. It is not a store of value because value is a subjective assessment that exists ONLY in the minds of the individuals appraising the role that the money commodity may play in helping them achieve their ends.
Once we drop the “store of value” anti-concept, you have no legs to stand on.
used as a store of value just = held by people make purchase of commodities in the future or assets
Even if you redefine it you still don’t get out of your trap.
By the way, your view is false:
money is NOT a store of value, your objection to Say’s Law stands completely invalidated. I repeat. money is a commodity that is used as a medium of exchange. It is not a store of value because value is a subjective assessment that exists ONLY in the minds of the individuals appraising the role that the money commodity may play in helping them achieve their ends.
You confuse “use value” with “exchange value” .
Money has EXCHANGE VALUE – which can be project forward in time by holding it.
Even Rothbard disagrees with you and refutes you by saying that money has exchange value:
“Money is a commodity that serves as a general medium of exchange; its exchanges therefore permeate the economic system. …. its “price” has no unique expression on the market. Other commodities are all expressible in terms of units of money and therefore have uniquely identifiable prices. The money commodity, however, can be expressed only by an array of all the other commodities, i.e., all the goods and services that money can buy on the market … Yet the concept of the “price” or the “value” of money, or the “purchasing power of the monetary unit,” is no less real and important for all that. (Rothbard 2004: 756).
Lord Keynes,
You are truly the Chief Priest of the Order of Morons. First you try to twist Mises’ words out of shape. Now you torture Rothbard.
When Rothbard says “money has exchange value”, it does not mean that the “value” resides in the money. It means that the person who holds it makes the subjective assessment that it is possible to exchange the money commodity that he has on hand now or later for a certain quantity of another commodity and that he has preferences for how much of the other commodity he would like to get in exchange now or later. The “value”, therefore, still is in the subjective assessment of the person who holds the money.
If the “value” is not “in” the money commodity, it cannot act as a “store” of value.
Therefore, my objection still holds and you are still a moron.
When Rothbard says “money has exchange value”, it does not mean that the “value” resides in the money.
Yes, I know. That is already understood by saying “exchange value.”
It means that when we use the expression money as “a store of value”, “value” is to be understood in that sense.
So you agree with Rothbard that money has exchange value and that this is sense it is be understood when saying that money has a store of value function?
Lord Keynes,
That money has “exchange value” does not mean that it is a “store of value”. “Value” exists ONLY in the mind of the acting human and hence cannot be stored. In any case, your latest post has no argument and hence I shall not add any more either.
Therefore, you are still wrong.
“Value” exists ONLY in the mind of the acting human and hence cannot be stored.
You are still referring to “use value.”
That is NOT the sense that value has in exchange value.
Exchange value is the ratio of commodities or price that a good or service commands in the marketplace in exchange, although of course the use value/utility of any commodity is an individual subjective trait of the mind.
Mises says this clearly:
The subjective value of money must be measured by the marginal utility of the
goods for which the money can be exchanged. It follows that a valuation of money is possible only on the assumption that the money has a certain objective exchange-value (Mises, 1953, The Theory of Money and Credit (trans. H.E. Batson), J. Cape, London. p. 109).
See Mises:
It follows that a valuation of money is possible only on the assumption that the money has a certain objective exchange-value …. it is easy to see that this supposition cannot be anything but an expression of the exchange ratio
ruling at the time in the market between the money and commodities.
Once an exchange-ratio between money and commodities has been established in the market, it continues to exercise an influence beyond the period during which it is maintained; it provides the basis for the further valuation of money. Thus the past objective exchange-value of money has a certain significance for its present
and future valuation. The money-prices of to-day are linked with those of yesterday and before, and with those of to-morrow and after.
(Mises, 1953, The Theory of Money and Credit (trans. H.E. Batson), J. Cape, London. p. 109)
Lord Keynes,
You are still wrong, though you are desperately trying to take extracts from Mises and Rothbard to try to convince me that this was indeed their view. What you reveal instead is your utter and mindboggling ignorance.
” Exchange value is the ratio of commodities or price that a good or service commands in the marketplace in exchange ”
False. Price is the ratio of exchange. Exchange value is the subjective value assessment that a good, even though not of any use value to the immediate recipient, has value to him in an exchange because he is certain that it could be exchanged for that good that he actually wishes to consume, i.e., use.
Your attempt to conflate exchange value and price is downright idiotic. At least, the Mises quotes you have picked up do not say that exchange value and price are the same.
False. Price is the ratio of exchange.
LOL. It can be expressed in price, but exchange value defined as a ratio expressing the quantity of one commodity given up to obtain a specific quantity of another commodity is as old as Adam Smith, and was used in neoclassical economics too.
Maybe this has slipped you mind?
Exchange value is the subjective value assessment that a good, even though not of any use value to the immediate recipient, has value to him in an exchange because he is certain that it could be exchanged for that good that he actually wishes to consume, i.e., use.
Nope. Exchange value is not *subjective*:
The subjective value of money must be measured by the marginal utility of the
goods for which the money can be exchanged. It follows that a valuation of money is possible only on the assumption that the money has a certain objective exchange-value (Mises, 1953, The Theory of Money and Credit (trans. H.E. Batson), J. Cape, London. p. 109).
Lord Keynes,
Maybe it didn’t slip my mind? Maybe I disagree with Adam Smith on this (since he is the person credited with this statement)? Maybe I find it strange to see that anyone at all can say that “value”, which is fundamentally a subjective concept and is basically ordinal, is defined as the ratio of exchange, a cardinal number?
Let me explain it to you with an example. Let us say I sell a horse for an ounce of gold and then use the ounce of Gold to get 100 barrels of fish. Bear in mind that I accept the 1 ounce of Gold ONLY because the fish seller does not want to accept my horse in exchange for my horse. So, it is a “medium of exchange”.
Each of these 3, i.e., the horse, the 1 ounce of Gold and the 100 barrels of fish has a place on my value scale. I accept the gold because on account of its exchange value, it is higher on my value scale than the horse. I also offer the Gold in exchange for the 100 barrels of fish because the latter is higher up in my value scale than the former.
That value of the Gold is what I call “exchange value”. Basically, the exchange value of the 1 ounce of Gold is higher than the use value of the horse but lower than the use value of the horse.
The ratios are what we call the prices of the respective commodities. The price of the horse is 1 ounce of Gold and that of a barrel of fish is 1/100 of an ounce. The price of the Gold can only be expressed in terms of the goods exchanged for it, i.e., 1 horse or 100 barrels of fish.
So, your attempt to conflate exchange value with price is still misdirected.
p.s. The 1 ounce of Gold definitely has some use value but that is largely overshadowed by its value as a medium of exchange.
of a commodity is the ratio of how much of that commodity one could get in exchange for a given amount of some other commodity
The price of the horse is 1 ounce of Gold and that of a barrel of fish is 1/100 of an ounce.
So 1 horse = 100 barrels of fish (assuming you can count the fish in each barrel, so that, say, there are 10)
Then
1 horse = 1000 fish.
This is an objective exchange-value as Mises says.
” This is an objective exchange-value as Mises says ”
Wrong. The Horse Price of a fish is 1/1000 and the Fish Price of the horse is 1000. In any case, could you please show where Mises says that “exchange value” is “price”?
So let’s summarise:
(1 ) Exchange value is a ratio expressing the quantity of one commodity given up to obtain a specific quantity of another commodity (e.g., 1 horse = 1000 fish).
(2) The money has the power to affect the transaction of exchanging one commodity for another.
(3) Its purchasing power can be projected through time so that I can hold money right into some unknown point in the future when I want to make a purchase.
(4) Therefore any economy with money can allow foregoing of consumption today and failure to investment in capital goods production today, since these can be projected forward in time.
In other words, precisely what I have been saying.
Lord Keynes you brazen liar,
” Exchange value is a ratio expressing the quantity of one commodity given up to obtain a specific quantity of another commodity (e.g., 1 horse = 1000 fish). ”
This is precisely what I am NOT saying. I am amazed that in spite of all that I said being just above on this very thread, you have the temerity to say that I have said this.
” In other words, precisely what I have been saying. ”
You are a true-blue Keynesian. When all your arguments are shot down, you resort to brazen falsehood.You have truly deserved the sobriquet a@#$%^&e (I use the Queen’s English, as you would have seen by now)
How and where do you Keynesians learn to be this shameless?
could you please show where Mises says that “exchange value” is “price”?
Where did I ever say that “exchange value” IS “price”??
No where.
I said: It can be expressed in price.
Mises:
If the objective exchange-value of a good is its power to command
a certain quantity of other goods in exchange, its price is this actual
quantity of other goods. It follows that the concepts of price and
objective exchange-value are by no means identical. But it is,
nevertheless, true that both obey the same laws. For when the Law
of Price declares that a good actually commands a particular price,
and explains why it does so, it of course implies that the good is
able to command this price, and explains why it is able to do so.
The Law of Price comprehends the Law of Exchange-Value.
By ‘the objective exchange-value of money’ we are accordingly
to understand the possibility of obtaining a certain quantity of other
economic goods in exchange for a given quantity of money; and by
‘the price of money’ this actual quantity of other goods. It is possible
to express the exchange-value of a unit of money in units of any
other commodity and speak of the commodity-price of money;
(Mises, 1953, The Theory of Money and Credit (trans. H.E. Batson), J. Cape, London. p. 102).
Lord Keynes you pathetic idiot,
” Where did I ever say that “exchange value” IS “price”?? ”
Ha! Ha! Ha! Who said this?
” 1 horse = 1000 fish.
This is an objective exchange-value as Mises says. ”
” I said: It can be expressed in price. ”
Nonsense. “Exchange Value” like any thing called “Value” is an ordinal number. “Price” is a cardinal number. They can never and should never be used interchangeably.
Then just define “exchange value” in your two sentences.
(2) Money has the power to affect a transaction of exchanging one commodity for another.
(3) Its purchasing power can be projected through time so that I can hold money right into some unknown point in the future when I want to make to consume.
Do you agree or disagree?
Lord Keynes,
” Money has the power to affect a transaction of exchanging one commodity for another. ”
Money is that commodity which makes indirect exchange possible on a large scale like in the national or global economy . So, it has some “power”, though I am not sure in what sense you mean.
” Its purchasing power can be projected through time so that I can hold money right into some unknown point in the future when I want to make to consume. ”
This only means that I can have the confidence that it can be used in exchange not just now but at a point in time in the future as well. If people didn’t have that confidence, whatever became money would never have become money in the firs place. Even if it did, it would soon be replaced by something better.
However, this does not mean that its “purchasing power” can be “projected” through time.
” Do you agree or disagree? ”
I hope my agreement or disagreement is clear now. That apart, what does agreement on these mean when your main premise, (1), was demolished and dismissed?
” Then just define “exchange value” in your two sentences. ”
I already gave it. Still, here it is.
Exchange value is the subjective value assessment that a good, even though not of any use value to the immediate recipient, has value to him in an exchange because he is certain that it could be exchanged for that good that he actually wishes to consume, i.e., use.
The emphasis is on the phrase “is certain”. Mises used the word “confidence”. So, I am not way off.
However, this does not mean that its “purchasing power” can be “projected” through time.
You are saying that money cannot be used to buy commodities in the future?
That holding money into a point in future allows one to make a purchase then?
If money has such a function and there are shifts in people’s desire to hold it and in different quantities, there is no necessary reason why Say’s law holds.
Lord Keynes,
It does if you factor in reservation demand.
Ned, did you know Say himself admitted that his “law” doesn’t always hold, in later editions of his work?
Like… when governments intervene?
Say also recognised that technology creates structural unemployment, and in a footnote actually advocated public works spending by government:
“Without having recourse to local or temporary restrictions on the use of new methods or machinery which are invasions of the property of the inventors or fabricators, a benevolent administration [= government] ran make prevision for the employment of supplanted or inactive labour in the construction of works of public utility at the public expense as of canals, roads, churches or the like“ … (Say, J. B. 1832. A Treatise on Political Economy; or, The Production, Distribution, and Consumption of Wealth (4th edn; trans. C. R. Princep and C. C. Bibble), Grigg & Elliott, Philadelphia, p. 87, footnote).
So despite his law of markets, Say approved of government spending to provide “works of public utility” people were unemployed.
Say is no Austrian.
Bohm-Bawerk, Lachmann, Hayek and even Mises to a lesser degree supported some interventions. Obviously they’re no Austrians. They could err and did. So could Say. In this respect he is every bit as wrong as your god, Keynes.
Say is of course not one. He is a prototypical one. You’re too stupid to grasp nuances or comprehend what you’re quoting, though.
Inquisitor,
The next question that should be asked is: how did Say reconcile his policy of public works with Say’ law?
If government public works are compatible with public works, so is Keynesian public works spending.
I frankly don’t care how he reconciled it if he indeed argued for it. Now how about you try address all the counter-arguments here and stop trying to evade by bringing in dubious views of Say’s, eh? That he held them does not invalidate his other insights nor is it even of cursory interest in addressing the law’s validity, nor does it mean he was right on public works. Try harder.
hat he held them does not invalidate his other insights nor is it even of cursory interest in addressing the law’s validity
Correct. Say’s law of markets is invalid, because Say believes in neutral money, and he is deeply mistaken in thinking of money only as a neutral “veil” with no store of value function.
There is no necessary reason why all the income will be spent on (1) commodities or (2) investment in a particular time period, or even at all. Savings and changes in the rate of saving may happen.
Whatever interpretation of Say’s Law it is you think you’ve “demolished”, you’ve yet to successfully dislodge a single argument Ned propounded, which is how Austrian’s argue for Say’s Law. So… try address that issue?
His central proposition is that without prior production there is no money to purchase commodities.
This appears to commit him to the belief that money is a “produced” commodity. But money is not “produced” like gold dug out of the ground any more.
Fractional reserve banking creates money through debt; open market operations create money. This is the real world now. Money is also a store of value. Savings rates can rise, causing a fail in aggregate demand.
Lord Keynes you nitwit,
” This appears to commit him to the belief that money is a “produced” commodity. ”
It is not a belief. It is part of the goddamn definition of money.
” But money is not “produced” like gold dug out of the ground any more. ”
That probably only means that what you are happy to call “money” is not “money” after all.
” Savings rates can rise, causing a fail in aggregate demand ”
What IS this freaking thing that you call “failure in aggregate demand”?
It is not a belief. It is part of the goddamn definition of money.
Indeed: a theory that is irrelevant to modern fiat money using economies, where money has a store of value role.
If your “definition of money” on which Say’s law of markets is based is irrelevant to the real world, so is Say’s law.
Thanks for your comment.
Oh f@#K,
You moron. It is not that the theory is irrelevant. It explains what happens when you pretend that what isn’t money is money. It is extremely relevant because it explains why things happen the way they do. That brings us back to the central issue of the validity of ABCT. Could I please see your explanation of the Sraffa/Kaldor refutation of ABCT?
why have money if a money user doest expect its value to continue? ie, store of value. why not just breathe on things and call that the medium of exchange???
“exchange value” IS “price”??
No where.
I said: It can be expressed in price.
“, its price is this actual
quantity of other goods.”
when an exchange value isnt expressed as price what would it be during those instances?
Imagine a worker or producer that consumes 0 all his life (if such a thing was possible) and just keeps hoarding all the money he receives (as worker). Is this suposed to be a bad? Well, the hoarding would just push the prices down, and that marginal increasing on the value of money reflects the fact he is acting as a zero cost robot to everybody else. Would this be a bad thing?
The Keynesians have been able to convince that it is possible to feel wealthy by leveraging your future income through debt.
Although the presumptions seem to work they only work until they fail
Ponzi schemes are very liberating and addictive while you are the benefeciary of one.
Governments have invariably been enablers of the ponzi around the world
I sincerely hope ideas of true liberty and freedom make it the present global zeitgeist
On why government debt is not a Ponzi scheme and why such a view commits the fallacy of composition see here:
http://socialdemocracy21stcentury.blogspot.com/2010/06/rolling-over-government-debt-and-debt.html
I agree with you. Government debt is not a ponzi scheme. Ponzi schemes involve defrauding individual investors. Government debt involves defrauding just enough of the populace to get away with imposing it on everyone else, including those who see it as a fraud but are forced to support it.
Government debt is much, much worse.
Lord Keynes, There you go again, citing to another one of your own blogs. Come on, take a break. I’m sure someone, someday will visit your silly blog site without you putting up links to it from Mises.org.
I very much appreciate this thread and I appreciate Lord Keynes persisting with the argument, even in the face of personal insults.
I have wanted to see this issue argued out by Austrians and Keynesians to its logical conclusion for years. To this end, I don’t want to see the argument degenerate into a mere flame war, which might allow the worse case to cover its retreat with smoke. So could I please ask the Austrians to stop personally insulting LK and use him civilly, and could I ask LK to stop arguing by reference to absent authority. If you can make your argument, please do so, and if you can’t, please say so.
Now. The arguments may be summarised thus, correct me if I’m wrong.
Austrians: Say’s law is that production must precede consumption. Therefore government increasing the money supply or expanding credit or deficit spending, whether through central banking or other means, cannot create net wealth. It causes malinvestment which distorts the capital structure towards producing things that the mass of consumers do not in fact demand, relative to other sectors of capital, which causes the bust. Further inflation a) is immoral and b) only makes the economic problems worse. All it does is transfer wealth from A to B, or spend future wealth now, not create net wealth. If it did, we could make bread out of stones. The best remedy for the allegedly “idle” resources, and for the misallocation, is liquidation. And the best prevention is to abolish government manipulation of the money supply.
Keynesians: it is true that in general production must precede consumption. But even absent production, the money that people have or can get, from past production, can be used to buy stuff. This spending will stimulate economic activity that will make the society, considered as a whole, better off than it would have been in the absence of such spending. The original economic imbalance between idle capital and idle workers, and the recession, are caused by inherently unstable financial markets, financial markets with no regulation. Government can and should remedy or ameliorate the effects of recession by putting these idle resources to work.
Inquisitor: please say what metrics you accept that might enable an Austrian to say whether Keynesian policies are working?
LK:
How can you say that financial markets have “no regulation” while government is regulating the price of money?
What do you say to the Austrian argument that governmental manipulation of the money supply has the effect of
a) lowering the value of the marginal unit of money
b) affecting investment decisions in the sector in which the new money enters the economy
c) causing malinvestment
d) causing the boom and following bust
e) causing unjust redistribution?
Do you say that the effect of stimulus policies is to create a net benefit?
Or do stimulus policies merely redistribute wealth either by transferring wealth from A to B now, or from future persons to present persons, or by consuming capital?
“I very much appreciate this thread and I appreciate Lord Keynes persisting with the argument, even in the face of personal insults.”
Please don’t stroke a troll’s ego. He hasn’t addressed a single substantive argument here successfully and has only repeatedly alluded to his blog, itself filled with strings of citation with very little argument to them. He has a habit of commenting in this manner on this blog, repeating arguments that were put to death probably by selectively ignoring them altogether. He garners the hostility he does because of his idiocy. I address arguments he parrots for the benefit of people who might be reading and not out of any sense of respect for him himself. They’re not original to him nor is he making much of an effort to justify them.
As for which metric I favour, I mentioned it. I do -not- think it could be used to determine whether Keynesian policies are “working” because I do not believe economics is amenable to such weakly formed conclusions for a variety of reasons (one being you cannot control for outside interferences in economies.) Thus, it is necessary for Lord Keynes to provide theoretical reasons to believe Keynesian policies have benefited the economy, which he has not done…
How can you say that financial markets have “no regulation” while government is regulating the price of money?
I don’t say that financial markets have “no regulation”. Since the 1980s, they have had a severely flawed, inefficient system created by neoliberals, Republicans and even Democrats who subscribe to the nonsense of neoclassical economics/ New Classical economics, i.e., efficient markets hypothesis,rational expectations.
The beginning of the neoliberal bubble (which has nothing to do with traditional Keynesianism)
started under Reagan after the severely flawed deregulatory “Depository Institutions Deregulation and Monetary Control Act” (1980) and the “Garn–St. Germain Depository Institutions Act” (1982). The Savings and Loan crisis that resulted was related to these acts.
Note that it not the complete absence of regulation: it is the system of poor, ineffective and flawed regulation created by neoliberal legislation. The solution is return to a system of effective regulation, such as:
– commercial banks should only lend directly to borrowers: all loans would have to be shown and kept on their balance sheets
– banks should be banned from having “off-balance sheet” assets
- separation of commercial from investment banking
- prevention of too big to fail banks
What do you say to the Austrian argument that governmental manipulation of the money supply has the effect of (a) lowering the value of the marginal unit of money
In a recession the quantity theory of money does not work, deficits will cause capacity utilization to rise and employment to fall. The gold standard is no protection against inflation: the US had inflation under the gold standard from about 1896-1914, and also in in 1825-1827, 1834-1837, 1844-1847, 1852-1855.
b) affecting investment decisions in the sector in which the new money enters the economy,/i>
If money is spent by wage-earners (who are employed by government in recessions) according to their subjective valuation of commodities, there is no problem: this is people freely choosing what commodities they want to purchase. Why doesn’t demand remove producers making consumer goods no one wants? If no one wanted them they would not be produced. Businesses go bust all the time in a Keynesian mixed economy. The creative destruction that Schumpeter talked about still operates.
c) causing malinvestment
This depends on the Austrian business cycle theory which I don’t accept.
Since most government stimulus programs are public works, social spending, education spending, these can be justified on moral grounds anyway.
d) causing the boom and following bust
Booms and busts are endemic to capitalism. The purpose of Keynesianism is to smooth them out.
e) causing unjust redistribution?
“Unjust” is a value judgement. On what ethical theory do you base your claims that it is unjust? This becomes an argument about ethics not about economics.
Lord Keynes you crook,
” This depends on the Austrian business cycle theory which I don’t accept. ”
First explain Sraffa”s and Kaldor’s refutation of ABCT before you spout this nonsense again.
Lord Keynes,
Could you please elaborate and/or explain how public works progams are morally justifiable?
Mike S,
For anyone who say accepts the sort of rule utilitarianism that Mises did, there are moral justifications for many types of government intervention.
http://en.wikipedia.org/wiki/Rule_utilitarianism#Specific_criticism
Oh lord, the dead rise from the grave to comment on blog posts. The end time’s a comin’.
LK
1.
I notice you avoided answering my questions, which would prove whether you believe government can create something out of nothing by stamping pieces of paper:
Do you say that the effect of stimulus policies is to create a net benefit?
Or do stimulus policies merely redistribute wealth either by transferring wealth from A to B now, or from future persons to present persons, or by consuming capital?
2.
> “I don’t say that financial markets have “no regulation”.”
Yes you do:
“In the case of the Great Depression, there is a perfectly obvious cause: financial markets with no regulation that caused a huge asset bubble and excessive private debt…”
3.
> “The solution is return to a system of effective regulation…such as…”
This assumes that government can manage the economy to produce a net benefit by forced redistributions. It can’t. If government had the presumptive competence to optimize the allocation of scarce resources, then communism would have been a) possible and b) superior to public ownership in productivity and in fairness, and there would be no need of private property at all. There is no more reason or evidence to think government has such a competence or virtue in relation to part of the economy, than it has as to the whole.
4.
> “- commercial banks should only lend directly to borrowers: all loans would have to be shown and kept on their balance sheets
– banks should be banned from having “off-balance sheet” assets
- separation of commercial from investment banking
- prevention of too big to fail banks”
… and if these fail, you will say the solution is more governmental intervention, right?
5.
> “Why doesn’t demand remove producers making consumer goods no one wants?”
Because inflating the money supply makes ventures appear profitable based on the rise in prices caused by policy, in the absence of which, they would be seen to be loss-making. That’s the whole point.
6.
“This depends on the Austrian business cycle theory which I don’t accept.”
The question is not whether you ‘accept’ it; it’s whether you can refute it.
Obviously you can’t, or you wouldn’t be arguing by assuming what is in issue, and appeal to absent authority.
7.
> Booms and busts are endemic to capitalism.
This theory is only tenable if the theory of marginal utility does not apply to money. What reason is there to think that it doesn’t?
If it does, the booms and busts are explained by Austrian, and not explained by Keynesian theory.
8.
> The purpose of Keynesianism is to smooth them out.
(Goverment as all-knowing, benevolent, all-capable – religious ecstasy. BTW, if we took away all the adherents who just happen to get their money from government, I wonder how many would be left?)
If it’s true, then how come the biggest booms and busts in the history of the world have happened under governmental “smoothing out” of booms and busts informed by Keynesian doctrine?
9.
> “Unjust” is a value judgement. On what ethical theory do you base your claims that it is unjust?
I base my claim that it’s unjust on the theory that using force or threats to take the fruits of others’ labour is *ethically* indistinguishable from extortion, involuntary servitude, theft and slavery.
10.
> Since most government stimulus programs are public works, social spending, education spending, these can be justified on moral grounds anyway.
On what ethical theory do you base your claims that forced redistributions are moral? Don’t tell me, let me guess: capitalism is intrinsically exploitative, profit is an immoral quantity, everyone has an equal right to everyone else’s property, and government is all-knowing, all-capable and all-good?
Your belief is unfalsifiable circular anti-economic State-worshipping drivel. Thanks for providing the best exposition of Keynesian theory I have ever seen.
Do you say that the effect of stimulus policies is to create a net benefit?
Stimulus reduces unemployment and returns the economy to a period of expansion. It is a justified intervention that can be judged as moral, and efficient in the sense that wasted resources have not been allowed to remain idle.
Or do stimulus policies merely redistribute wealth either by transferring wealth from A to B now, or from future persons to present persons, or by consuming capital?
You assume the “wealth” (goods and services) consumed in a stimulus is being taken by force from producers. The goods and services consumed in the stimulus are exchanged for money on a market. If a private producer does not want to take government money from people employed in a stimulus project or does not want to supply commodities to the government, they could do so. They are not. Any suggestions that “illegitimate” transferring of wealth is happening are false.
Also, if private investors are lending money freely and willingly to governments, as is happening now all over the world, then whatever the foregoing of purchasing power that investors agree to by lending money is also voluntary.
Why do you think such voluntary “transferring of wealth [in the form of commodities bought for money given to people employed in a stimulus project ] from A to B now, or from future persons to present persons” is bad or illegitimate when bondholders lent the money freely?
“I don’t say that financial markets have “no regulation”.”
Yes you do: etc
My comments on regulatory systems refer to the post 1930s era. The 1920s era did not have significant regulation of financial markets. I should have said, “the minimal and insignificant regulation of 1920s”
This assumes that government can manage the economy to produce a net benefit by forced redistributions
That is false. Financial regulation does not amount to a command economy of planning of all production and consumption. This is an utterly unconvincing argument.
If it’s true, then how come the biggest booms and busts in the history of the world have happened under governmental “smoothing out” of booms and busts informed by Keynesian doctrine?
Which booms would that be? Keynesianism was not practised in 1920s America, before the massive bubble in 1929. Australia had a massive property bubble in the 1880s under a gold standard and a free banking system. The neoliberal system of the 1990s that produced the tech boom was not Keynesianism.
I base my claim that it’s unjust on the theory that using force or threats to take the fruits of others’ labour is *ethically* indistinguishable from extortion, involuntary servitude, theft and slavery.
Without sufficient justification, there is no reason why you should be taken seriously by anyone.
I assume you are relying on a natural rights/natural law justification?
If so, there are powerful arguments against your position which can be found in Kai Nielsen, “The Myth of Natural Law,” in S. Hook (ed.), Law and Philosophy: A Symposium, University Press, New York. 1963; and L. A. Rollins, The Myth of Natural Rights (Loompanics Unlimited, 1983),
On what ethical theory do you base your claims that forced redistributions are moral? Don’t tell me, let me guess: capitalism is intrinsically exploitative, profit is an immoral quantity, everyone has an equal right to everyone else’s property, and government is all-knowing, all-capable and all-good?
No, it can be easily justified by the type of rule utilitarianism that even Mises accepted.
Your belief is unfalsifiable circular anti-economic State-worshipping drivel.
You could try and show that the moral argument presented is invalid by presenting arguments against rule utilitarianism. That is a perfectly valid logical refutation, if you think you can do so.
I have limited time. So I shall respond only to 1 point.
” You assume the “wealth” (goods and services) consumed in a stimulus is being taken by force from producers. ”
It is not an assumption.
” The goods and services consumed in the stimulus are exchanged for money on a market. ”
This assumes that if the government decides to print some nonsense on slips of paper, the slips get value magically. Where did the “value” of the newly printed slips of paper come from? Only by devaluing the pre-existing stock of money in the hands of people. By printing new slips, the government is in effect stealing wealth from the existing holders of previously printed slips.
Stealing is an act of initiation of force. Hence, government printing up more slips of paper to buy stuff is an act of forcible expropriation.
This assumes that if the government decides to print some nonsense on slips of paper, the slips get value magically.
The government has borrowed from private markets. Why do you persist in stating that it is “printing money” in running a deficit?
Where did the “value” of the newly printed slips of paper come from? Only by devaluing the pre-existing stock of money in the hands of people.
Again, you rely on the flawed quantity theory. It can not and does not work in a recession or an economy with significant idle resources and unemployment.
” Again, you rely on the flawed quantity theory. ”
What is the “flaw”?
” It can not and does not work in a recession or an economy with significant idle resources and unemployment. ”
To say “It cannot”, you have to have a theory. So please lay out your theory of why it “cannot” work in an economy with significant “idle” resources and unemployment. No links please. just your explanations.
As for the “does not work”, it all depends on what you mean by “work”. So please explain the basis on which you are saying that it “does not” work.
p.s. Your notion of “idle resources” is nonsense in any case. Still, I would like to see your theory.
Since it is all laid out here, there is little point doing it in detail:
http://socialdemocracy21stcentury.blogspot.com/2010/07/quantity-theory-of-money-critique.html
In brief, the Cambridge Cash Balance equation:
M = kd PY
M = quantity of money
kd = demand to hold money per unit of money income
P = average price of the transactions
Y = the volume of all transactions that enter into the value of national income (goods and services)
M and P are causally related, if kd and Y are constant. It can be seen that kd must be constant for the quantity theory of money to work, as must Y.
Keynes correctly argued that neither kd nor Y is constant.
In the absence of full employment, Y will not be constant. Thus the theory breaks down, especially in a recession, depression or even in periods during expansions in the business cycle where full employment is not reached.
The velocity of money is unstable, subject to shocks and moves pro-cyclically.
Now the alternative Austrian theory of inflation (which is different from Friedman’s quantity theory) holds that inflation is just an increase in the money supply, but an increase in M does nor necessarily mean the price level will automatically rise, since changes in the price level are caused by both real and monetary factors. In a recession or period of high unemployment and low capacity utilization, there are powerful deflationary pressures that can overwhelm monetary factors. Japan showed this in the 2001–2006 period when despite quantitative easing (“inflation” in the Austrian sense) there was price deflation.
When a recession ends and an expansion returns there will be inflationary pressures, but that can be dealt with by inflation targeting and fiscal policy.
What is this thing called “price level”? I can understand prices of individual goods and services, but I am unable to understand this thing called “price level”. “Price level” of what?
And I said “No links please”. I even said please.
What is this thing called “price level”? I can understand prices of individual goods and services, but I am unable to understand this thing called “price level”
I see. So how could you possibly know money supply increases cause inflation?
If you believe price indices are meaningless, how can you condemn money supply increases?
Incidentally, going by the definition of “quantity theory” on your blog, you should know that Austrians do not subscribe to that. You still insist on repeating that nonsense again and again.
Money supply increases pushes up the stock of the monetary unity. Money is fundamentally a commodity like any other. Price is nothing but the exchange ratio of commodities. An addition to the money supply being an increase in the total stock of money, the price of money has to fall. Price of money is nothing but its purchasing power. Purchasing power of money is also the reciprocal of the money price of the good that the money buys. When PPM falls, prices of the goods must go up, shouldn’t they? You have an alternate explanation?
If only I could draw a graph of TD vs Total Stock to show what happens when the vertical Total Stock curve moves rightwards without the TD curve being affected (which would be true in this case given that money is not being consumed). Check MESPM (I think somewhere around pp212 or 213. I am just reading it but on my laptop) for the graphs.
Incidentally, going by the definition of “quantity theory” on your blog, you should know that Austrians do not subscribe to that
I am well aware that more intelligent Austrians do not subscribe to the “quantity theory”. However, many self-described Austrians you meet on blogs actually don’t understand that. If you see my comment above, I distinguish the “Austrian” view of inflation from the quantity theory.
Lord Keynes,
I missed out one point. You said
” So how could you possibly know money supply increases cause inflation? ”
Stupid question (not surprising, coming from an ignoramus).
Increase in money supply is THE inflation. Increase in price is a further consequence of that, though not immediate or in proportion or uniform either.
Increase in money supply is THE inflation. Increase in price is a further consequence of that, though not immediate or in proportion or uniform either.
And if you stated your Austrian theory of inflation properly, rising prices are not even a necessary consequence of rising money supply as real factors could prevent the price rise, as happened in Japan in 2001-2006.
Yeah! Prices “need not” rise. So what? They would still remain higher than they would have been in the absence of the inflation (increase in the money supply). The increase in the money supply interferes with the process of fall in price.
Regarding your other questions:
and if these fail, you will say the solution is more governmental intervention, right?
History just ran an experiment for us. The US allowed itself to have a flawed system of financial regulation, while Canada maintained an efficient one run on the principle of prevented reckless lending and securitization by banks. The result:
In 2008, the World Economic Forum ranked Canada’s banking system as the soundest in the world. The U.S. system was ranked at number 40 and Germany and Britain ranked 39 and 44. Canada’s banks have required no bailouts to save financial institutions.
That the reforms I mentioned would succeed seems probable.
If they don’t, then you could say legitimately that the policy is falsified. Until such a time, all question like yours are just speculation.
> “Why doesn’t demand remove producers making consumer goods no one wants?”
Because inflating the money supply makes ventures appear profitable based on the rise in prices caused by policy, in the absence of which, they would be seen to be loss-making. That’s the whole point
That does not answer my question, but evades it. If consumers in a mixed capitalist economy are using subjective value preferences to buy what commodities they desire, there will be no demand for commodities people do not want. Such business will still go broke, even during booms. Creative destruction is still at work. Even during the Reagan era boom about 50 000 to 60 000 businesses failed every year in the US:
http://www.positive-way.com/business/avoiding.htm
“This depends on the Austrian business cycle theory which I don’t accept.”
The question is not whether you ‘accept’ it; it’s whether you can refute it.
I can easily lay out the arguments against ABCT. That will take me a day to do properly.
Your claim that my position requires a “Government as all-knowing, benevolent, all-capable – religious ecstasy” is pure nonsense and a reductio ad absurdum argument.
Mixed economies have a very large space for the dynamism of capitalism and private production.
>Mixed economies have a very large space for the dynamism of capitalism and private production.
Ie, socialist thieves need capitalists to produce the wealth that the socialists want to steal. Without capitalist production, we have the Soviet Union and North Korea. Keynsian “economics” is a mere rationalization of altruism. Capitalism is selfishness in practice. See: _Atlas Shrugged_ or news reports.
Mr Lord Keynes
Could you comment on my previous post?
“Imagine a worker or producer that consumes 0 all his life (if such a thing was possible) and just keeps hoarding all the money he receives (as worker). Is this supposed to be a bad? Well, the hoarding would just push the prices down, and that marginal increasing on the value of money reflects the fact he is acting as a zero cost robot to everybody else. Would this be a bad thing?”
and
If money is a commodity money like gold/silver/etc, the fact that someone is hoarding physical gold/silver/etc is equivalent to say that someone is buying and stocking a product like any other that have a marginal cost to be produced… is actually “spending” work (exchanging work hours for a commodity) and buying a previously produced asset. He could do the same with any other asset, like houses, etc.
Is this the cause of the fall of aggregate demand? But the demand for physical gold/silver has increased, no? We must include this demand, because this increased demand push the prices up (falling prices) and gives more power to spend to all gold (money balances) balances. So, no fall of aggregate demand should come form here per se. The problem is the destruction of capital (poll of savings) when a pure expansion of credit takes place because of a pure expansion of IOUs not backed by physical gold/silver, lowering the interest rate and setting the conditions to a business cycle.
Imagine a worker or producer that consumes 0 all his life (if such a thing was possible)
One or two examples of some like that would have negligible macro effects. If there were really large numbers of people like that (but impossible since no one can live without consumption, who is feeding these people?), that would eventually cause aggregate demand deficiencies. Deflation is no good if it causes price wars, deflationary wage-price spirals, debt deflation, and depression. If everyone was like that, there would no consumption, so no point to production.
Regarding the second point, I cant understand what you’re saying.
” If there were really large numbers of people like that (but impossible since no one can live without consumption, who is feeding these people?), that would eventually cause aggregate demand deficiencies.”
If a person or a group of persons are hoarding money is because they are actually producing things that other people find it useful. So, they are only capable of hoarding because they are producing useful work or services/products and selling it. So we could have a zero cost robot or a group of zero cost robots and the rest of the world would benefit from it.
The problem of the so called “liquidity trap” is a consequence of the business cycle, not it’s cause, the bubble created the condition for a debt and banking (fractional reserves) crises. But the process of increasing money balances (hoarding) in it self only decreases the general level of prices that would be largely anticipated and smooth, and we must realize that an expanding economy is one where real prices are decreasing, so the natural thing is that, in the presence of a stable monetary system, prices would decrease with the expansion.
If a person or a group of persons are hoarding money is because they are actually producing things that other people find it useful. So, they are only capable of hoarding because they are producing useful work or services/products and selling it.
I see. So in your world people can never hold idle money from rent, dividends, interest payments? From money given as personal gifts? From money borrowed as debt?
Banks can never have excess reserves at the Fed created by open market operations?
So we could have a zero cost robot or a group of zero cost robots and the rest of the world would benefit from it.
Only if it was one, two, or a small number. By the time you get large numbers it has harmful macro effects.
Your zero cost robots are unusual examples of the paradox of thrift (or call it paradox of hoarding, if you want). Micro effects leading to bad macro level results.
The problem of the so called “liquidity trap” is a consequence of the business cycle,
Post Keynesians do not believe in the liquidity trap. That is a theory of neoclassical synthesis Keyensians.
About my second poin,t what I was trying to express is that in a commodity money, the hoarding (increase of gold/silver balances) is an increase in demand like any other increased in demand for any other product. Hoarding would be an increase in gold/silver demand. So in the concept of an aggregate demand, the increase in gold demand should be included (gold as money still has a marginal cost to be produced and requires capital, investment, etc).
So, in a commodity money, aggregate demand in your definition would have to be “aggregate demand” minus demand for gold/silver, to consider that “aggregate demand” is falling because some people are increasing their old/silver balances.
About my second poin,t what I was trying to express is that in a commodity money, the hoarding (increase of gold/silver balances) is an increase in demand like any other increased in demand for any other product
And here we come to the fundamental point. Money is NOT now a commodity. If people choose to hold more money in the sense of “consuming” it, and its price rises (basically deflation happens), you cant just hire unemployed people to “manufacture” or “produce” money.
Money is not manufactured by private business. Extra demand for it will not cause more private production, and falls in unemployment.
Even in the gold standard, if the price of gold rose relative to other commodities, you couldn’t just “manufacture” gold by hiring unemployed people. Gold is a rare metal, often it’s found by sheer chance and extraction can be time consuming, difficult and is often done in completely different countries.
” Money is NOT now a commodity.”
But it does not follow that money is not a *good*.
But it does not follow that money is not a *good*.
Money has utility, like goods (demand for money comes from the transactions motive, precautionary motive, speculative motive). The fact that it has utility is significant.
A rise in “demand” for it, in the sense that people either hoard it or put it into idle balances, leading to deflation (= a rise in money’s value) and unemployment, will NOT cause businesses to hire workers to “manufacture” money.The neoclassical self-equilibrating market doesn’t work.
Density!!!! Thy name is Lord Keynes!!!!!!!!
” Money is NOT now a commodity ”
Wrong as usual. What passes for money now is not a commodity. The issue is that what passes for money today is not money and what is money is prevented, by governmental coercion, from performing the role of money.
” Money is not manufactured by private business ”
Same issue as above. What’s money is not being manufactured as money by private business an what’s not money is being passed off as money by the biggest thug in town – government. That’s the biggest problem. The reason it is not being manufactured by private business is government coercion. Let’s get that out of the market place (where it has no place in any case) and let the market decide what happens and then we will see what happens to your hare-brained theories.
” Gold is a rare metal, often it’s found by sheer chance and extraction can be time consuming, difficult and is often done in completely different countries. ”
True, though I don’t see how it is true (except for the “rare metal” bit) only for Gold. In a water-starved region, you could say this for water as well. So, I don’t see how this
” Even in the gold standard, if the price of gold rose relative to other commodities, you couldn’t just “manufacture” gold by hiring unemployed people. ”
follows.
What passes for money now is not a commodity.
Correct. Say’s law does not apply to such money in the real world today.
You fail to see that Say’s law says (among other things ) that people cannot “obtain the money otherwise than by having acquired it by products” (Say, Catechism of Political Economy (trans. J. Richter), Sherwood, Neely, and Jones, London, 1816. p. 103).
That is not true today. You may hate it, but that is irrelevant to question: does Say’s assumption hold in a modern monetary system? Does it or doesn’t it? If it does not, Say’s assumption for the law of markets is invalid today. Say’s law does not work.
Say assumes money must itself be a “producible” commodity. Any world where money is no longer a “producible” commodity, where fiat money exists, fractional reserve banking (FRB) loans occur, and central bank open market operations exist is a world where Say’s assuption is false.
More density on display again.
” Say’s law does not apply to such money in the real world today. ”
Once again, you moron. It is not money you are talking of. So stop using confusing terminology with the purpose of obfuscating.
If you are saying that Say’s Law does not work in Paradise, I’m with you. But then we don’t live in Paradise, do we?
Similarly, any attempts to beat Say’s Law in the real world are bound to become monumental disasters, just as the current experiment in fiat money is going to become. Get back when you decide that it is not even worth being used as toilet paper.
” does Say’s assumption hold in a modern monetary system? Does it or doesn’t it? If it does not, Say’s assumption for the law of markets is invalid today. Say’s law does not work. ”
Imbecile. It works by setting the stage for the destruction of the modern monetary system. It’s got only around 4% left. The Roman Empire collapsed at 2%. QE2 should take us there or at least close to it.
” Any world where money is no longer a “producible” commodity, where fiat money exists, fractional reserve banking (FRB) loans occur, and central bank open market operations exist is a world where Say’s assuption is false. ”
False. Any such world is a world that uses as money that which does not deserve to be money. While it may temporarily escape Say’s Law, the rest of the real world does not and cannot. Goods and services do not get conjured out of thin air. This inherent contradiction between the monetary system and the real world is absolutely irreconcilable and is soon going to be recognised as the reason for the destruction of your vaunted monetary system.
And it’s not Say’s “assumption”. It was an observation made in the real world. Visions that you have in your fantasies do not falsify observations made in the real world. Moron.
Incidentally, did you notice that the price of Gold is now over $1370? Silver is hitting new records as well. You hold on to your toilet paper. I’ll hold on to the barbarous relic. Let’s see who survives.
Regrettably, you are confusing Austrian anti-inflation theory with Say’s law.
Here are main propositions of Say’s law as formulated by Sowell (1994):
(1) The total factor payments for producing output are necessarily sufficient to purchase that output
In theory, yes. But this doesn’t prove that it actually will at all.
(2) There is no loss of purchasing power anywhere in the economy. People save only to the extent of their desire to invest and do not hold money beyond their transactions need during the current period
Completely false. Money (even commodity money) has a store of value function. Savings can rise. Use of money on financial asset markets takes it away from spending on consumption and capital goods investment.
(3) Investment is only an internal transfer of aggregate demand. The same amount that could have been spent by the thrifty consumer will be spent by the capitalists and/or the workers in the investment goods sector
False. Any economy with financial asset markets means total factor payments can easily move away from capital goods. And idle money savings can also occur.
(4) A higher rate of savings will cause a higher rate of subsequent growth in aggregate output
False. It will not when money is saved in idle balances.
(5) Disequilibrium in the economy can exist only because the internal proportions of output differ from consumer’s preferred mix—not because output is excessive in the aggregate
False. In the presence of idle savings and shifting demand for non-producible financial assets, there will not be aggregate demand failures.
Correction
there *will* be aggregate demand failures.
” Regrettably, you are confusing Austrian anti-inflation theory with Say’s law ”
As I understand Say’s Law (and I do not claim to be an expert), it simply means that you cannot exchange or consume that which you have not produced. Please show me where I am wrong.
I am not prepared to run behind your diversions unless you address this point.
” there will be aggregate demand failures. ”
For the umpteenth time, what in tarnation is “aggregate demand failure”?
As I understand Say’s Law (and I do not claim to be an expert), it simply means that you cannot exchange or consume that which you have not produced. Please show me where I am wrong.
The idea that “you cannot exchange or consume that which you have not produced” is not a central proposition of Say’s law. It is certainly an assumption of Say.
And as a statement it is perfectly true. It does not follow that any of the other proposition of Say’s law (i.e., total factor payments from aggregate supply will equal aggregate demand in a given time period) are true.
For the umpteenth time, what in tarnation is “aggregate demand failure”?,/i>
It is a concept whose meaningfulness is PRESUPPOSED by Say’s law:
It means that in a given time period (say a year) (1) total factor payments from production (= aggregate supply) will be spend on (2) consumption or capital goods/business investment in new commodity output (= aggregate demand), and that this will ALWAYS be equal.
For the umpteenth time, what in tarnation is “aggregate demand failure”?
(1) Say’s law:
In a given time period (say a year) (1) total factor payments from production (= aggregate supply) will be spend on (2) consumption or capital goods/business investment in new commodity output (= aggregate demand), and that this will ALWAYS be equal.
(2) A failure of Say’s law
When (1) does not happen:
In a given time period (say a year) (1) the total value of all factor payments from production (= aggregate supply) are spent on (2) all consumption or capital goods/business investment in new commodity output (= aggregate demand), but this is NOT EQUAL
That is a failure of Say’s law.
Lord Keynes,
A close reading of your five “false” declarations indicates that they are all false declarations.
False Declaration 1 – In theory, yes. But this doesn’t prove that it actually will at all.
An utterly meaningless objection.
False Declaration 2 –
” Money (even commodity money) has a store of value function ”
So what? Money is fundamentally a commodity. The ability to act as a “store” of value itself derives from the “exchange value” which in turn ultimately derives from the actual “use value”. It is only when you try to pass off a non-commodity as “money” that you come up with your idiotic assertions.
” Savings can rise ”
So what? Where does the proposition you are trying to falsify ever say that savings will remain fixed? Savings rise when the time preferences of individuals undergo a change with an increase in preference for future consumption. How does this invalidate the proposition?
” Use of money on financial asset markets takes it away from spending on consumption and capital goods investment. ”
How?
False Declaration 3 – Any economy with financial asset markets means total factor payments can easily move away from capital goods.
Wait a sec. I know this question should have been addressed to the previous statement, but how the hell does it matter!! What are “financial assets”? When a person pays a certain amount of money to get a “financial asset”, what is it that he gets and where does the money go once it has changed hands (I get the sneaky feeling that financial assets are all claims to future goods)? Why will that mean a move away from capital goods? Could you please name a financial asset, by investing in which factor payments move away from consumption or capital goods?
False Declaration 4 – It will not when money is saved in idle balances.
This relies on the fundamentally flawed concept of “idle balances”. There are no such things as “idle balances”. Money in the safe of the miser (who has an intention of just hoarding it) does the job of making the money in the hands of every other person more valuable. The only thing idle is your brain.
False Declaration 5 – In the presence of idle savings and shifting demand for non-producible financial assets, there will be aggregate demand failures
Once again, this is a statement that relies on fundamentally flawed concepts. The first is the concept of “idle balances” which, as I stated above, is as meaningless as can be. The second is the class of “non-producible financial assets”. What are they? Demonstrate that what you call “non-producible” financial assets do not derive their value from a produced commodity or service.
Now that all your 5 false declarations don’t see true any more, where do we go from here?
An utterly meaningless objection.
No, is a very meaningless objection.
You say:
False Declaration 2 –
” Money (even commodity money) has a store of value function ”
So what? Money is fundamentally a commodity.
Um… You say it’s a “false declaration” but then say “so what?’ which only mean that accept that it is true. Let’s move on, shall we?
So what? Where does the proposition you are trying to falsify ever say that savings will remain fixed?
It doesn’t: it says that total factor payments will be spent on consumption or capital goods investment. When saving rise and become idle, that is when supply will not equal demand.
What are “financial assets”? When a person pays a certain amount of money to get a “financial asset”, what is it that he gets and where does the money go once it has changed hands
Financial assets: stocks and shares and other financial instruments.
Money can become tied up in exchanges on asset markets in a trap, as money alternates between being (1) held idle before buying assets and (2) purchasing assets, and then being held idle again by the new owner of the money in preparation for further speculation, and when new assets are bought back to (1).
The first is the concept of “idle balances” which, as I stated above, is as meaningless as can be.
Regrettably, it isn’t: If you take money away from spending on consumption or capital goods investment, or hold it at home without spending, it is idle.
“non-producible financial assets” = a stock, share, bond
when the price of these assets rises, businesses cannot “hire” the unemployed to start “manufacturing” or “producing” stocks or shares to bring the price of such assets down. These financial assets are not substitutes for “produced” commodities whose production employs most people.
Demonstrate that what you call “non-producible” financial assets do not derive their value from a produced commodity or service.
Financial asset prices, as you should know, are subject to fundamentally subjective factors relevant to investor behavior. The most perfect example of how there can be no link between actual production of commodities and stock price was the Dotcom bubble: people buying stocks and shares of companies that were loss making or that even weren’t producing anything.
Lord Keynes,
” No, is a very meaningless objection ”
Please explain the meaning and I will show how meaningless it is.
” You say it’s a “false declaration” but then say “so what?’ which only mean that accept that it is true ”
That means “Even if true, so what?”. I explained that even the “store of value” function ultimately derives from the “exchange value” which in turn derives from the “use value”. Your attempt to define money based on “store of value” is completely nonsensical and false. Money may perform the function (among many others) of being a store of value, but that is not the definition of money. That is why your statement is false. It is based on treating an incidental facet as the main definition. You are doing it because you have swallowed the legitimacy of fiat money.
” When saving rise and become idle, that is when supply will not equal demand. ”
Moron. There is no such thing as “idle” savings. Even money in a safety locker does work. It makes money in circulation more valuable in terms of other commodities that the money buys. It is the assumption of “idle” savings that makes this objection of yours false.
” stocks and shares and other financial instruments ”
Thanks for the clarification. I just wanted you to commit to it and not leave room for you to slime out (as you must, given that you are a nonsense-spouting Keynesian… sorry about the redundancy in the last 2 words).
” Money can become tied up in exchanges on asset markets in a trap ”
Ignoramus. Money paid to gain ownership of a share is money paid for part ownership in a firm that owns assets and produces value. It is the existence of a market for shares that makes it possible for firms to raise share capital for investment in their lines of production.
That apart, when A pays money to B to buy shares of XYZ Inc, it is foolish (but you do not shrink from it) to say that THE money is locked up. You are so stupid that you cannot see the difference between the statements “A’s money is locked up” and “THE money is locked up”. After the transaction, A owns the share and B has the money. THE money is NOT locked up any more but available with B for spending on consumer goods or for investing in capital goods or just for plain holding as addition to his cash balances.
Only a moron (like a true-blue Keynesian) can say that THE money is locked up.
” If you take money away from spending on consumption or capital goods investment, or hold it at home without spending, it is idle. ”
This mind-blowingly idiotic statement only shows that you have no clue about what “price” is and how prices get established in an indirect exchange economy. I suggest you read this
http://mises.org/books/mespm.pdf
Read chapters 1-4 to get a basic Economics education (which you don’t seem to have).
For a simple explanation, money in he safe increases the purchasing power of every unit of money in circulation. Thus, it makes it possible for people to engage in more consumption or more savings with the same consumption. Money that does this work CANNOT be called idle (unless of course you are dumb enough to swallow Keynesian poppycock).
” These financial assets are not substitutes for “produced” commodities whose production employs most people ”
One more mind-blowingly moronic statement that can come ONLY from a true Keynesian. The financial assets are all claims to future money that will be made when the firm produces goods and services, exchanges them on the economy and earns its surpluses.
To understand more deeply the enormous stupidity of your statement that these are non-producing assets, let us go back in time to the point of formation of the company. The assets you accuse of being “non-producing” were created as claims of ownership given in exchange for the transfer of REAL PRODUCTION, i.e., money PRODUCED through previous economic activity. The money was further deployed to purchase assets that had to be produced prior to their procurement. The assets were further deployed to PRODUCE goods and services that would then be exchanged on the market. The value of these financial assets is calculated in terms of the NET PRESENT VALUE OF FUTURE CASH FLOWS which is just an estimate of the extent of surplus that could come out of the production done by these assets.
So, to claim that these assets are non-producing or non-produced is idiocy of the highest order. You seem to be capable of that.
” Financial asset prices, as you should know, are subject to fundamentally subjective factors relevant to investor behavior. ”
Ooof!!! This was like a 2-ton punch right in the solar plexus. It knocked the wind out of my sails. Which price isn’t subject to fundamentally subjective factors, you imbecile? Price is a ratio that evolves from market exchanges that evolve from a subjective valuation called “use-value”.
” The most perfect example of how there can be no link between actual production of commodities and stock price was the Dotcom bubble: ”
What a nitwit you are!!! Stock prices are based on the NPV of future cash flows (also called the DCF method). NO stock price is based on production, especially if you mean present or past production. EVERY stock price is based on expectation of future production. The error in the Dotcom bubble was an error in predicting the cash flows that come from FUTURE production. That does not make it “not based on production”.
” people buying stocks and shares of companies that were loss making or that even weren’t producing anything. ”
They thought they were on to THE NEXT BIG THING. Under Capitalism, people are free to make their mistakes, except that they also pay the price of their mistakes.
So moron, your objections to Sowell’s formulation of Say’s Law stands completely torn to pieces unless you can address even one of my points.
Your attempt to define money based on “store of value” is completely nonsensical and false
I define money (as you can easily see on my blog) as (1) a unit of account, (2) a medium of exchange and (3) a store of value.
I am pointing out here that money’s role as (3) a store of value is ignored by Say.
Money may perform the function (among many others) of being a store of value, but that is not the definition of money.
I know. Just as I have said here ages ago:
http://socialdemocracy21stcentury.blogspot.com/2010/06/what-is-money-short-analysis.html
There is no such thing as “idle” savings. Even money in a safety locker does work. It makes money in circulation more valuable in terms of other commodities that the money buys.
Idle money in large amounts leading to a shortfall in aggregate demand can indeed cause deflation. So Say’s (which states there can NEVER be a shortfall in aggregate demand) is wrong.
It is the existence of a market for shares that makes it possible for firms to raise share capital for investment in their lines of production
It is certainly true that companies can use rising share values either by new stock issue or by obtaining loans. That they WILL do so does not follow at all. There is no necessary or logical reason why reason why money diverted to financial asset markets from consumption and capital goods investment will equal capital goods investment by business.
THE money is NOT locked up any more but available with B for spending on consumer goods or for investing in capital goods or just for plain holding as addition to his cash balances.
There is no reason why B will buy consumer goods or invest in capital goods, he can buy assets again, and the money will continue in this circle.
For a simple explanation, money in he safe increases the purchasing power of every unit of money in circulation
ONLY if deflation happens. There can easily be a shortfall in aggregate demand WITHOUT deflation. Without deflation the money is still idle, even in your definition of increasing “purchasing power of every unit of money in circulation”.
To understand more deeply the enormous stupidity of your statement that these are non-producing assets,
Regrettably, you have evaded the point completely: a stock or share cannot be “produced” in the sense that businesses cannot “hire” the unemployed to start “manufacturing” or “producing” stocks or shares when their price rises. These financial assets are not substitutes for “produced” commodities whose production employs most people.
Lord Keynes,
” I define money (as you can easily see on my blog) as (1) a unit of account, (2) a medium of exchange and (3) a store of value. ”
And your definition is plain wrong. The ONLY correct DEFINITION is that money is a medium of exchange. The remaining additions have no place in the definition and are the ones that lead to your errors.
Do you get it? I am saying that your grand (nonsensical) theories are based on a flawed definition.
” I am pointing out here that money’s role as (3) a store of value is ignored by Say. ”
That’s because “value” exists ONLY in the subjective assessments of the people who wish to acquire a good. Further, the role as a “store of value” is already subsumed in its role as a medium of exchange. You are the one failing to recognise it.
What you are failing to recognise, fundamentally, is that if it is not PRODUCED and EXCHANGED IN A FREE MARKET and if it did not evolve into the role of a medium of exchange through EXCHANGE ON A FREE MARKET, it is NOT money.
You keep referring to non-money as though it were money.
” Idle money in large amounts leading to a shortfall in aggregate demand ”
Most nonsensical statement. Firstly, it is stupid to call it “idle money”. No matter how many times you repeat it, I will keep rejecting this usage. Secondly, your failure to recognise money as a commodity produced on the market is causing you to fail to recognise that what you see as a shortfall in aggregate demand is actually compensated by an increase in the demand for money in cash balances. Thirdly, “shortfall” compared to what????
” can indeed cause deflation. ”
Deflation, even taken as an increase in the purchasing power of money, is not bad, especially if it happens on a free market. The free-market can self correct to it.
” So Say’s (which states there can NEVER be a shortfall in aggregate demand) is wrong. ”
Very nonsensical once again. Firstly, your concept of “shortfall” requires an appropriate level. There is no such appropriate level. It is a mythical concept created by Keynesians to try to justify their ludicrous theories. Secondly, a leftward move in the demand schedules of some goods is being compensated by a rightward move in the demand schedule for money.
” There is no necessary or logical reason why reason why money diverted to financial asset markets from consumption and capital goods investment will equal capital goods investment by business. ”
The money exists in someone’s cash balance, does it not? Please tell me what makes Keynesians this blind?
” ONLY if deflation happens. ”
No “if’s” if deflation is understood as a decrease in the money supply just as inflation is an increase in the money supply.
” There can easily be a shortfall in aggregate demand WITHOUT deflation. ”
More idiotic use of the meaningless concept of “shortfall” which in turn is linked to the meaningless and brain-dead concept of full employment which in turn is linked to the stupid concept of being at an equilibrium. As someone else explained, it is the striving towards equilibrium that is important, not the equilibrium itself.
” Without deflation the money is still idle, even in your definition of increasing “purchasing power of every unit of money in circulation”. ”
If deflation is a decrease in the money supply, there is no meaning to the concept of “idle money”
” These financial assets are not substitutes for “produced” commodities whose production employs most people. ”
They are an exchange of present goods for future goods. What makes you moronic enough to fail to understand this?
” a stock or share cannot be “produced” in the sense that businesses cannot “hire” the unemployed to start “manufacturing” or “producing” stocks or shares when their price rises ”
But, imbecile, the current holder of a share may sell it to someone else and use the money on consumption and investment. And please do not raise the bogey of the money chasing more investment goods once again. Even if that happens, it just reflects a continuing preference for future goods over present goods. Only the kind of future good preferred has changed. So your objection on this line would be utterly meaningless.
And your definition is plain wrong. The ONLY correct DEFINITION is that money is a medium of exchange. The remaining additions have no place in the definition and are the ones that lead to your errors.
So in other words.This is how money should be defined and how it should be in your *ideal” world.
Meanwhile in the real world money is in fact used to project consumption forward in time. In fact, such use of money is widespread and continuing happening.
In the real world, Say’s law does not hold.
But it does hold in your *imaginary* world where money can ONLY be defined as a medium of exchange.
Thanks
Lord Keynes,
” This is how money should be defined and how it should be in your *ideal” world. ”
No you moron. That is the ONLY defensible and sound definition possible in the goddamn REAL WORLD. The freaking real world includes real people who make real subjective assessments called “value”. In the REAL WORLD, That value does not reside in any good, material or otherwise.
When I say “money is a medium of exchange”, I am describing an aspect of observed REALITY. When you say “money is a store of value”, you are trying to treat subjective valuations as aspect of he reality itself.
So, you are the one creating a fantasy world and distorting definitions to make your fantasy world appear real.
Thanks for helping me understand Keynesianism for the poppycock it is.
When you say “money is a store of value”, you are trying to treat subjective valuations as aspect of he reality itself.
Regrettably, you have already committed yourself to the proposition that in the real world money is in fact used to project consumption forward in time in ways that do not guarantee that aggregate supply will equal aggregate demand .
If that is true, Say’s law still does not hold.
Thanks.
Lord Keynes,
Here is why you continue to be wrong.
” Regrettably, you have already committed yourself to the proposition that in the real world money is in fact used to project consumption forward in time in ways that do not guarantee that aggregate supply will equal aggregate demand . ”
Aggregate supply will be equal to aggregate demand if you include reservation demand. It is a simple equality
Total Supply (Current period’s production+Inventory brought forward) = Total Demand (Consumption Demand+Reservation Demand)
You are yet to refute this. So Say’s Law is still valid.
” Say assumes money must itself be a “producible” commodity ”
It sure is getting torturous. That is not an “assumption”. It was based on the observation that in the real world where people are free to decide what is money, only that which is “produced” can become money because anything else would be too unstable to survive in that role.
Say’s Law is the basis of the operation of the real world and not of Paradise. It does not claim to explain what happens when the language of guns (the only language your precious government knows) enters the picture. It, however, makes it clear that such attempts at using force to beat the laws of the real world are bound to meet their Waterloo.
It was based on the observation that in the real world where people are free to decide what is money, only that which is “produced” can become money because anything else would be too unstable to survive in that role.
False. In the real world and in the 19th century gold standard, people repeatedly and freely choose to engage in fractional reserve banking (FRB)
FRB creates fiduciary media unbacked by commodity money. No governments were *forcing* Americans to engage in FRB in the free banking era from 1837-1863 .
These were private voluntary transactions between businessmen and people with money savings.
” No governments were *forcing* Americans to engage in FRB in the free banking era from 1837-1863 ”
Yes you imbecile, but governments were right there with moratoria on redemption on notes and deposits in specie (an act of direct intervention) and the National Banking System (in 1963). If call that free, you deserve the sh1t you are getting.
That fact that governments were “right there with moratoria on redemption on notes and deposits in specie” does not explain why people CONTINUED to freely engage in FRB.
If no one wanted FRB and found it immoral, then why did people STILL freely do it, even after these episodes?
You have simply evaded the question.
Thanks
Why people freely engaged in FRB does not explain why FRB survived and became dominant. You are the one engaging in evasion.
” That fact that governments were “right there with moratoria on redemption on notes and deposits in specie” does not explain why people CONTINUED to freely engage in FRB. ”
It may not, but it explained why FRB survived inspite of the fact that it has to (and did) cause losses to those who put money in it. It also explains why the fractions became ever smaller and FRB became more and more dominant over 100% reserve banking.
So, you should not be using the FRB of the 1800′s to support your case.
” If no one wanted FRB and found it immoral, then why did people STILL freely do it, even after these episodes? ”
Immorality has nothing to do with it you dolt. It has to do with the security of the notes and deposits one holds. When the biggest gun in town is ready to back an unstable scheme, dishonest though it may be, it sure attains a higher level of stability, albeit temporarily.
It may not, but it explained why FRB survived inspite of the fact that it has to (and did) cause losses to those who put money in it.
Actually here the evidence of libertarian scholars suggests that FRB was generally stable. The view that it survived only because of government is false:
Sechrest, Larry. 1993. Free Banking: Theory, History, and a Laissez-Faire Model, Westport, Connecticut: Quorum Books, 1993.
Selgin, George. 1998. The Theory of Free Banking: Money Supply under Competitive Note Issue. Totowa, New Jersey: Rowman & Littlefield.
Selgin, George A., and White, Lawrence H., 1996, “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians!,” Review of Austrian Economics, Vol. 9, No. 2, pp. 83–107.
White, Lawrence H. 1995. Free Banking in Britain: Theory, Experience, and Debate, 1800–1845, 2nd ed. London: Institute of Economic Affairs.
And I present
http://mises.org/books/mysteryofbanking.pdf
p.s. – Our respective choices of authors are indicative of the same divide
Indeed, so all you can say is libertarian and Austrian scholars are DIVIDED on the question whether FRB was stable and worked.
There is a school that says “no”, but also a school that has looked at the free banking experience and says “yes”.
Lord Keynes,
You are so crooked I feel tempted to conclude that you must be michael in a new disguise.
” There is a school that says “no”, but also a school that has looked at the free banking experience and says “yes”. ”
The way you have worded it, it almost sounds as though only the school that says “yes” has looked at the free-banking experience while the school that says “no” is talking through its hat. Were you always this slimy?
LK; Irrefutable, conclusive, completely factual, court admissible, logically undeniable, scientifically derived evidence that you and Krugman and Keynes the first are wrong on all counts. The proof–THE EMPIRICAL TRUTH–has been broadcast worldwide:
Gold’s price in Bernanke dollars pierces $1360!
Wow! Do you guys ever sleep?!?
Hi Professor,
I live in India. It’s 5:40 pm out here. I hope that explains the timings of my posts.
And thanks for the persistence and for k-i-w
Do you say that the effect of stimulus policies is to create a net benefit?
Stimulus reduces unemployment and returns the economy to a period of expansion. It is a justified intervention that can be judged as moral, and efficient in the sense that wasted resources have not been allowed to remain idle.
You do not answer whether it creates a net benefit.
Or do stimulus policies merely redistribute wealth either by transferring wealth from A to B now, or from future persons to present persons, or by consuming capital?
>You assume the “wealth” (goods and services) consumed in a stimulus is being taken by force from producers.
I assume that, based on force, by increasing the stock of money substitutes, thereby diluting the pre-existing stock of money or money substitutes, the wealth is transferred from the people who own it to government’s pet favourites.
> The goods and services consumed in the stimulus are exchanged for money on a market. [Other argument to the effect that participation of consumers and produces in stimulus policies is voluntary].
If it were true that participation in stimulus policies is voluntary, then there would be no need for government to do anything, would there?
The real wealth that is taken from its true owners by government manipulating the money supply – was that given voluntarily? No.
> My comments on regulatory systems refer to the post 1930s era. The 1920s era did not have significant regulation of financial markets. I should have said, “the minimal and insignificant regulation of 1920s”
While ever government is manipulating the price of money, there is significant regulation of financial markets, because the whole point of manipulating it, is to affect the market price of money, isn’t it? What else could it be? It therefore affects the allocation of capital, diverting scarce resources to uses that the masses of consumers judge are *not* their most important or urgent uses, otherwise they would have put their money their without government regulation, wouldn’t they?
Then they Keynesians look on the resulting distortion of the capital structure and declare that its an intrinsic fault of capitalism.
This assumes that government can manage the economy to produce a net benefit by forced redistributions
> That is false. Financial regulation does not amount to a command economy of planning of all production and consumption.
It doesn’t need to. Financial regulation only needs to claim that it can achieve a net benefit. There is no reason or evidence to believe this that does not assume it in the premises of the argument as you do.
I base my claim that it’s unjust on the theory that using force or threats to take the fruits of others’ labour is *ethically* indistinguishable from extortion, involuntary servitude, theft and slavery.
>Without sufficient justification, there is no reason why you should be taken seriously by anyone.
So you can’t categorically eliminate the possibility that slavery is immoral? Presumably you would need to do some empirical observations, perhaps a couple of statistical analyses first?
> You could try and show that the moral argument presented is invalid by presenting arguments against rule utilitarianism
You haven’t presented a moral argument. In your own terms, you’ve just argued that government re-directing idle resources to employ people or build infrastructure can be morally justified. You haven’t shown how or why; have not answered whether it provides a net benefit, have not shown how any redistribution does not rely on government’s monopoly of aggressive violence; have not eliminated the possibility that the negative consequences are worse than the positive, have not justified it.
That the reforms I mentioned would succeed seems probable.
If they don’t, then you could say legitimately that the policy is falsified. Until such a time, all question like yours are just speculation.
So you can’t falsify it as of now. You require a contingency that neither you nor I can satisfy. It would require you to use force or threats to experiment with other people’s lives, liberty and property. The disproof would be full of theoretical and practical complications and difficulties, and wiggle room. If any detail of any of your supposed reforms were not carried out, you could deny that it was falsified. The fact that all prior government interventions, on all the same pretensions, have not worked is taken as no disproof.
In practice, your belief is unfalsifiable.
BTW, it’s simple to disprove the Austrian view, at least in theory. Just prove that the theory of marginal utility doesn’t apply to money.
If consumers in a mixed capitalist economy are using subjective value preferences to buy what commodities they desire, there will be no demand for commodities people do not want.
It’s not a question of demand for things people don’t want. It’s that the effect of the policy of credit expansion is to enable people to buy goods which, absent the policy, would not be preferred. The effect is to distort the capital structure thus worsening the misallocation of resources the policy is intended to improve.
> I can easily lay out the arguments against ABCT.
With respect I would rather you show that you understand it first.
Your claim that my position requires a “Government as all-knowing, benevolent, all-capable – religious ecstasy” is pure nonsense and a reductio ad absurdum argument.
It is common ground that the absurdity would be to think that the government could manage the whole economy. That being so, you have not shown how government has any greater competence as to the part, than it has as to the whole. Therefore you are assuming what is in issue, and thine argument is circular my Lord.
Mixed economies have a very large space for the dynamism of capitalism and private production.
Very good of you to condescend to permit people the use of their own property. It’s just that every time the interventionists interventions don’t work, they blame capitalism and expand the government – just like you’re doing – thus reducing the space for the dynamism of capitalism, while admitting that government is not competent to manage the whole.
You do not answer whether it creates a net benefit.
It depends on how you want to define “benefit.” Give me your definition.
If it were true that participation in stimulus policies is voluntary, then there would be no need for government to do anything, would there?
This is a bizarre non sequitur.
The real wealth that is taken from its true owners by government manipulating the money supply – was that given voluntarily? No.
I see…. You have switched the subject completely. Now you want to talk about the “the money supply”. I assume, then, that you don’t dispute that investors are freely lending money to governments. My refutation of you is completely correct.
While ever government is manipulating the price of money, there is significant regulation of financial markets, because the whole point of manipulating it, is to affect the market price of money, isn’t it? What else could it be? It therefore affects the allocation of capital
Only if you accept ABCT and the Austrian argument against fiat money. Those theories don’t work. ABCT simply cannot explain why entrepreneurs and business people would foolishly believe that interest rates will stay low indefinitely. Although expectations are certainly subjective and not “rational” in the sense of New Classical rational expectations theory, ABCT still requires a degree of stupidity in entrepreneurs that is at variance with real world evidence. Why would entrepreneurs consistently assume in every cycle that interest rates will not rise when experience shows that this is precisely what happens repeatedly in the past? Also ABCT predicts that employment is supposed to RISE at the beginning of recessions, something which is refuted by every recession since the 1830s.
So you can’t falsify it as of now. You require a contingency that neither you nor I can satisfy.
Just as in any Austrian argument that free banking and completely free markets would result in the elimination of the business cycle?? Until such policies are implemented, those propositions are not falsifiable either. You’re in the same boat.
It would require you to use force or threats to experiment with other people’s lives, liberty and property.
The implementation of a pure Austrian system in the US would NEVER receive the voluntary support of the whole US population. Any attempt to implement your ideal system would require “force or threats to experiment with other people’s lives, liberty and property” as well. Not much of an argument here.
It’s that the effect of the policy of credit expansion is to enable people to buy goods which, absent the policy, would not be preferred. The effect is to distort the capital structure thus worsening the misallocation of resources the policy is intended to improve.
ABCT theory is utterly unconvincing. See above.
That being so, you have not shown how government has any greater competence as to the part, than it has as to the whole.
it is called empirical evidence.
Mixed economies have existed since 1930s. The era of effective financial regulation saw no devastating national or global financial meltdowns. Asset bubbles were minimized. Depressions disappeared. The pre-1929 business cycle with its periodic financial meltdowns and depressions ended. The return of serious assets bubbles and financial crises post-1980 is precisely a function of dismantling a system that worked and putting in its place a flawed system derived from monetarist and New Classical economics.
” The return of serious assets bubbles and financial crises post-1980 is precisely a function of dismantling a system that worked and putting in its place a flawed system derived from monetarist and New Classical economics. ”
Oh!!! Do you mean to say that if the policies that were followed till 1980 had been continued, the world would not have seen the asset bubbles of the last 3 decades? What do you base this claim on?
And talking of the absence of depressions. I suggest you read
http://mises.org/books/economic_depressions_rothbard.pdf.
Just the first few pages. You will learn how depressions were eliminated.
Do you mean to say that if the policies that were followed till 1980 had been continued, the world would not have seen the asset bubbles of the last 3 decades? What do you base this claim on?
The empirical evidence, which shows that under such a system these bubble were minimal and serious financial crises non-existent. The proposition that they would also not have happened if such a system was maintained is based not only on this historical record but also on the actual real world experience of countries today that maintained effective financial regulation like Canada.
In 2008, the World Economic Forum ranked Canada’s banking system as the soundest in the world. The U.S. system was ranked at number 40 and Germany and Britain ranked 39 and 44. Canada’s banks have required no bailouts to save financial institutions.
Why?
Canada’s banks were highly restricted by regulators from mass securitizing of mortgage debt. Canada’s banks also were prohibited from taking on high levels of leverage to make larger and riskier loans. The Canadian mortgage industry was regulated to maintain high lending standards, instead of lax ones allowing an explosion in sub-prime mortgages. As I said, it is the system of regulation.
A highly inefficient US system led to disaster. Systems can be ineffective or effective.
By the way, Rothbard’s essay doesn’t explain why depressions disappeared post-1945 until the disastrous adoption of neoliberalism in many countries post-1980, all he does is argue for the complete elimination of FRB, no regulation at all, and a gold standard.
Since such a system has NEVER existed , on what do you base your claim that such a system will work?
Systems of effective financial regulation have been tried in the real world and recently with empirical evidence to support them.
The fantasy anarcho-capitalist world of Rothbard has never existed.
No libertarian argues for no regulation, but instead for regulation via the market system. Regulation within business exists naturally as without it business fails to gain maximum profit. If incentive structures fail inside a business it will lose versus it’s competition. A system of coercion, cheap money, and poorly written government regulation leads to less competition and a distortion of the natural incentive structure.
You’ll have to be more specific on “effective financial regulation.” As long as you are vague you can make almost anything sound perfect without it getting any critical review.
- separation of commercial banks from investment banks
– commercial banks should only lend directly to borrowers: all loans would have to be shown and kept on their balance sheets
– an end to commercial banks’ third-party commission deals which might involve banks acting as “brokers” and on-selling loans or other financial assets for profit
– banks should be banned from having “off-balance sheet” assets
– banks should be banned from trading in credit default insurance.
- banks should not be too big too fail , even in the investment banking sector
- high lending standards must be maintained, no NINJA loans liar loans, as in Canada
- no bailouts of investment banks; deposit insurance for commercial banks, which if they fail willl be audited, have their management fired, their bad parts liquidated
- separation of commercial banks from investment banks
There is an article at this site that agrees with you on this one (in the current framework). I’ll defer to that article on this as I haven’t reviewed the subject in enough detail.
– commercial banks should only lend directly to borrowers: all loans would have to be shown and kept on their balance sheets
Why wouldn’t they want to do this anyway? Off-balance-sheet loans would be bad for their own profit/loss determination. Also how do you ensure the bank is doing it on the government end? Wouldn’t private interests (those who deposit money in the bank) also want to know that their money is secure?
– an end to commercial banks’ third-party commission deals which might involve banks acting as “brokers” and on-selling loans or other financial assets for profit
Why does this have to be bad?
– banks should be banned from having “off-balance sheet” assets
Same as a previous item, not sure how they would function very well without knowing what assets and liabilities they have. This is in their interest.
– banks should be banned from trading in credit default insurance.
Why does this have to be bad?
- banks should not be too big too fail , even in the investment banking sector
Define: “too big to fail” ? Is the Federal Reserve “too big to fail”?
- high lending standards must be maintained, no NINJA loans liar loans, as in Canada
I don’t see why anyone would want to loan to people who they think can’t pay back the money? If it’s someone earning a commission then the employer would have an interest in preventing this. I’m not sure how political pressure solves this issue (same question relates to your other items such as balance sheet/etc.)
- no bailouts of investment banks; deposit insurance for commercial banks, which if they fail will be audited, have their management fired, their bad parts liquidated
Why provide deposit insurance? Why not let the people lose their money? Doesn’t having insurance destroy their incentive to be interested in the bank paying for or developing sufficient internal auditing controls? When you say that the management should be fired, are you saying they should only be fired?
Why not let liability for the management be determined based on the contract demanded by depositors? Perhaps the management (and even lower positions) should be on the hook themselves for their own bad behavior. If I were depositing money in a bank without federal insurance I would expect a lot of things to ensure that my money is well protected. But if I get free federal insurance, why should I care if the bank knows what it’s doing?
It seems like many of your rules are designed to reverse the harm caused by the deposit insurance.
In the past government’s have taken other actions to prevent bank runs as well, including in periods of relative economic freedom. These actions resulted in establishing a precedent that destroyed people’s own incentive to protect themselves.
Lord Keynes,
” By the way, Rothbard’s essay doesn’t explain why depressions disappeared post-1945 until the disastrous adoption of neoliberalism in many countries post-1980, ”
Rothbard explains how by changing the name of the phenomenon from “depression” to “recession” and further on to “downturn” and “slowdown”, depressions were abolished. Creating euphemisms does not abolish the phenomenon. You are just demonstrating that being a Keynesian requires one to be a complete moron. If you can miss the first few lines of a small essay, I am at a loss of words to describe your approach.
Rothbard explains how by changing the name of the phenomenon from “depression” to “recession” and further on to “downturn” and “slowdown”,
Rothbard is wrong: depressions have a perfectly clear definition as downturns in the business cycle with 10% loss of output or more.
Such contractions disappeared in the post 1945 era. Denying that is laughable.
Tell me, Bala, when was there a depression after 1945:
http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
Care to give a specific date and recession?
I suspect not…
Wonder of wonders!!! I cannot. And that’s because mainstream economists decided not to use the dreaded D-word to refer to what happened in 1953-54, 1957-58, 1973-75, 1980-82, 1990-91, 1997, 2001-03 and 2008-2010(ongoing).
You can’t build castles on shifting sands. You can’t build theories on shifting definitions. You seem very keen to hide behind euphemisms.
There is no “shifting definitions.”
An output fall of more than 10% is a depression. That is an objective definition.
And that’s because mainstream economists decided not to use the dreaded D-word to refer to what happened
Wrong, they don’t because these are not output falls of 10% or more.
Even granting this (I am not, but just for the sake of argument), a lot depends on what you take as “output”. If you take GDP(which I guess you do), that automatically makes any claim meaningless. GDP is a stupid concept. A convenient fabrication to prop up Keynesian poppycock.
LK “The neoclassical self-equilibrating market doesn’t work.”
If by “neoclassical self-equilibrating market” you the mean free market, which is a hypothetical construct of a market free from government intervention, the only possible way you could know whether it works or not is by using Mises’ apriori, Austrian methodology (praxeology), discursively reasoning from the fundamental principle of human action. (A methodology you panned on your weblog.)
Obviously, you cannot have arrived at your conclusion by empirical means since there has never been a market free from government intervention on which to conduct your “scientific” experiments. (If you do not mean free market, please provide your alternative definition of a neoclassical self-equilibrating market. And if you do mean free market, why in heaven’s name can’t you just say so. It is so much easier to say free than neoclassical self-equilibrating, and people might begin to understand you?) Of course you’ll have to submit to the economic world the line of your discursive reasoning by which you came to your conclusion to see if it has any chance of holding water, logically speaking that is. You are welcome to get started and give it a try right here and now.
More empirical evidence from the real world that post-Keynesianism ought to be discarded: Gold pierces 1385 Ben Bernanke fiat dollars.
If by “neoclassical self-equilibrating market” you the mean free market, which is a hypothetical construct of a market free from government intervention, the only possible way you could know whether it works or not is by using Mises’ apriori, Austrian methodology (praxeology)
Wrong, the first place to start looking is in the real world for periods that approximated it: say, some countries in the 19th century.
Just because something isn’t an exact or precise example of libertarian economics doesn’t mean you can’t draw reasonable conclusions from approximations.
if you really don’t agree that approximations of systems provide some reasonable evidence for how they would work in the exact form, you might as well say that Marxism failed because it wasn’t a perfect form of Marxism.
I imagine that if libertarians ever implemented their system somewhere and it failed horribly they would suddenly (just like Marxists) complain that it wasn’t *really* a libertarian system at all or it wasn’t completely libertarian.
Libertarians don’t believe in “implementing their system.” It’s not a top down thing like that, it’s giving people the freedom to choose and voluntary associate/disassociate as they please.
19th century approximations are useful, but the data on them is limited and most incidents I’ve seen thus far had some important government involvement related to them. Now you might find something that hasn’t had a lot of research and for which information isn’t readily available where that is not the case, but because the data and history from that time is limited it will unfortunately be unconvincing.
On the matter of “failed horribly” I am no utopian when it comes to voluntary society. I believe businesses will fail, banks will fail, people will go bankrupt, etc. on occasion. There might even be some issues that affect a large number of people (including myself, should such a society exist in my lifetime). Failures should be dealt with in a way consistent with voluntarism, not with institutionalized violence.
Canada, Sweden, etc. are not good comparisons to the United States. The population size is much different. The cultures are different. One size does not fit all. Even if you believe in a system of perfect rules massive governments make little sense, which is all the more reason to seek a voluntary system of governance because it leads to a lot of smaller entities that can compete on their merits. You aren’t forced into following something that is ridiculous or going with banks that have rules you think are either too strict or too lax.
Libertarians don’t believe in “implementing their system.” It’s not a top down thing like that, it’s giving people the freedom to choose and voluntary associate/disassociate as they please.
Here’s Ron Paul:
http://www.goldcore.com/goldcore_blog/ron_paul_cnbc_abolish_federal_reserve
So abolishing the Federal Reserve as president isn’t a top down reform?
Lord Keynes, you are now conflating different types of libertarians. I know you follow this site enough to know about Rothbard, so you know many people here are anarcho-capitalists. Throwing out Ron Paul as if everyone here is a minarchist is being a bit disingenuous. I recognize that there are minarchists here, but you should at least verify the party you are speaking with before attempting to conflate his position with Ron Paul’s.
Aside from that when Ron Paul talks of abolishing the Federal Reserve I have not seen him go into specifics about how that would be done, but I would expect that he would do it not by outlawing this private institution, but rather not granting it the privileges and regulatory powers it currently has.
I recognize that there are minarchists here, but you should at least verify the party you are speaking with before attempting to conflate his position with Ron Paul’s.
No problem. What is your libertarian position and ideal economy/system?
How would you implement it?
I am a voluntarist. I would prefer people to leave me alone to associate with those I want to.
I don’t expect anyone to implement this for me. I would prefer people trade with me if they want to, and not trade with me if they don’t want to, the same as I would do with them.
There is no magic that I can use to make people stop using government coercion. Using a government myself would be generally counterproductive. I don’t expect people to suddenly stop simply because I’d really really like it. I think people should stop because they believe it works better for them. It is difficult to convince those who have much to gain from the threat of government violence. It is also difficult to convince people like you that this is the best way as well.
Nevertheless, it is a choice I think is far better than trying to screw others over through the modern democratic system.
LK: “Also ABCT predicts that employment is supposed to RISE at the beginning of recessions, something which is refuted by every recession since the 1830s.”
It does not! “If it were possible to calculate the future state of the market, the future would not be uncertain.”–Ludwig von Mises (HUMAN ACTION)
LK : “it is called empirical evidence.”
Which is utterly useless and non-germane to economic science, because all other things are never equal. Please, try to understand, economics deals with the real world and real people. You cannot use the so-called “scientific method” to experiment upon people–unless you’re a Nazi doctor like Josef Mengele with a bunch of throwaway Jews at your disposal in a concentration camp, which, if you read Hayek’s THE ROAD TO SERFDOM, you will realize is where your “economic system” of ever increasing government control of people’s lives can ultimately lead. If you believe in “empirical evidence,” World War I, Germany’s hyper inflation of the 1920s, the Crash of 1929, the Great Depression prolonged for two decades by the New Deal, World War II, The Great Famine of China, which took place from 1958-61 and is one of the greatest tragedies of recorded history, killing between 14 and 40 million people, Soviet famines in 1921-23 and 1932-33, the Cambodian famine of 1978-1979, and the North Korean famine of the early 1990s, these events having all been precipitated by socialist-government interventionist policies in “mixed economies,” surely ought to be sufficient empirical evidence to persuade a nice guy (or gal) like you to end your flirtation with post-Keynesian socialism.
LK: “Mixed economies have existed since 1930s. The era of effective financial regulation saw no devastating national or global financial meltdowns. Asset bubbles were minimized. Depressions disappeared. The pre-1929 business cycle with its periodic financial meltdowns and depressions ended. The return of serious assets bubbles and financial crises post-1980 is precisely a function of dismantling a system that worked and putting in its place a flawed system derived from monetarist and New Classical economics.”
Nope! Mixed economies existed in the Soviet Union when Lenin took power and implemented disasterous socialist reforms. Roosevelt’s mixture of New-Deal socialism extended the Great Depression for almost two decades–the longest in US history. And, unfortunately, few if any socialist, mixed-economy policies were eliminated during the 1980s to explain your hypothesis based on the distortion of empirical “evidence.” If you want empirical evidence, see the preceding paragraph, but I doubt if it will change your mind, since it merely empirical but not subject to falsification.
Unfortunately for you, even Mises wouldn’t have accepted your attempt to lump mixed economeis in with communist ones.
Totalitarian communist command economies were not Western mixed economies. Even Mises knew this and was capable of distinguishing them: he understood that the first was NOT the same as the second, and his whole augment (which was utterly unconvincing anyway) was that mixed economies would *inevitably* BECOME totalitarian economies:
“the supporters of the most recent variety of interventionism, the German “soziale Marktwirtschaft [i.e., post-WWII social market economy in Germany],” stress that they consider the market economy to be the best possible and most desirable system of society’s economic organization, and that they are opposed to the government omnipotence of socialism …. Thus the doctrine and the practice of interventionism ultimately tend to abandon what originally distinguished them from outright socialism and to adopt entirely the principles of totalitarian all-round planning” (Mises 1996: 723–724).
If there were no difference between the two, Mises would never have talked about what originally distinguished them from outright socialism.
“Unfortunately for you, even Mises wouldn’t have accepted your attempt to lump mixed economeis in with communist ones.”
Mises originally wrote “Socialism” in 1922, so naturally he focused on the form of socialism consisting of the naturalization of the means of production. But I think he would agree that both traditional socialism and modern welfare socialism are the same, in the sense that they both are based on the notion “from each according to his ability, to each according to his need”. The only difference between traditional socialism and modern welfare socialism is strategy, not core beliefs or values. And the reason the world has transitioned from traditional to welfare socialism is because the world has realized that Mises was right with respect to the ability of the traditional form of socialism to distribute goods efficiently, whereas welfare socialism allows free markets to work (to a certain extent) and then parasites off of them. In other words, traditional socialism is a werewolf that rips its victims’ heads off; welfare socialism is a vampire that slowly drains the victims dry. That is the difference between traditional socialism and “mixed” economies.
welfare socialism allows free markets to work (to a certain extent) and then parasites off of them.
Or free enterprise benefits tremendously from government provision of services that would be poorly done by the free market.
Far from being parasitic, government facilitates market exchanges through public infrastructure and public services.
Which services would be done poorly by the market? How do you know?
Health care is big one.
Here you have to look at real world markets not the fantasy world of anarcho-capitalism or other libertarian system that have never existed.
As I said above, the first place to start looking is in the real world for periods that approximated free markets: say, some countries in the 19th century.
Just because something isn’t an exact or precise example of your libertarian economics doesn’t mean you can’t draw reasonable conclusions from approximations about free market systems.
Are you claiming increases in technology that have allowed better health care exist not because of the market?
You can’t use the 1900s as a comparison on health care like you can’t use it for food production. There is no denying that production was not present at the time for food like it is now. There is likewise no denying that significant increases in medical technology have come about since the 1900s. All things are not equal.
Are you claiming increases in technology that have allowed better health care exist not because of the market?/i>
No, the issue of health care is a moral one.
Ability to pay is not a criterion by which you decide healthcare.
And, btw, I notice you did not dispute my assertion that World War I, Germany’s hyper inflation of the 1920s, the Crash of 1929, the Great Depression prolonged for two decades by the New Deal, World War II, The Great Famine of China, the Soviet famines in 1921-23 and 1932-33, the Cambodian famine of 1978-1979, and the North Korean famine of the early 1990s, were all products of government intervention
They are the product of government interventions by
(1) evil or incompetent people as politicians and warmongers in the case of WWI or WWII
(2) utterly wrong and incorrect policy choices by Weimar politicians;
(3) utterly evil and brutal Communist leaders in the case of The Great Famine of China, the Soviet famines in 1921-23 and 1932-33, the Cambodian famine of 1978-1979, and the North Korean famine of the early 1990.
As usual, imputing that an abstract concept like government intervention is the fundamental CAUSE of these interventions is ridiculous. It’s human beings involved in making those decisions that who were response for them.
To see how flawed your reasoning is you might as well say that parenthood is the CAUSE of child abuse because some parents are immoral and violent to child.
Sorry, but it’s not “parenthood” responsible but evil parents. Just as evil or incompetent politicians are responsible for those things you mention, not government intervention per se, which can just like parenthood be either used well or evilly.
It’s a lot easier for people to do evil things when they are the monopoly of coercive force. While government itself (which is not a reality but an abstraction of what are ultimately millions of individual choices) is not the perpetrator of evil that system does create vastly more evil, even than the tribal warfare that has existed in ages past.
The fact it does not always do so reflects the choices of most people not to allow for this to occur, but when you give people a carrot over and over again to increase the state of their own welfare by stealing others wealth it should be no surprise that such perverse incentives lead to bad things.
I’ll agree with you that it is wrong to say such a system necessarily leads to totalitarianism. However, such a system is significantly more likely to lead that way, and the larger the area government covers and the larger favors it can provide the higher the probability is it will attain that at some point in it’s future.
It’s a lot easier for people to do evil things when they are the monopoly of coercive force
Indeed – which applies to parenthood.
That systems and institutions do have influences no one can deny.
I’ll agree with you that it is wrong to say such a system necessarily leads to totalitarianism.
Yes.
However, such a system is significantly more likely to lead that way, and the larger the area government covers and the larger favors it can provide the higher the probability is it will attain that at some point in it’s future.
And yet government’s role has increased and reversed historically – the neoliberal era has been one of privatization and abandonment of Keynesianism.
You might as well argue that government intervention was an evolutionary development responding directly to the failures of market systems.
LK,
Mao’s powerbase was the peasantantry. It is difficult to believe that he would have intentionally starved them. A recent study argued empirically that there was easily enough food to sustain the entire pop. of farm China through the Great Leap Forward. Yet, the farm collectives that had the greatest yield were also the ones hardest hit by famine that winter of ’59-’60. Grain procurement, on a progressive timetable, was based on already bogus numbers collected the previous year. The military, sent to alleviate, did not deploy until the following season. It was a central planning disaster.
LK, Your reasoning appears to be flawed. Just as there never has been a truly free market anywhere during at least the last two centuries, likewise there has never been a purely socialist economy in that time frame. Only the degree or percent of State ownership of the means of production and State intervention in the market distinguishes the Soviet economy during the Stalin era, for example, and the US economy during the Bush/Obama years. I acknowledge that there is a distinction between the former authoritarian government and the latter democratic one, but that doesn’t affect the fact that both Stalin and B-O reigned over mixed economies. The Mises quotation you inserted doesn’t contradict my comment at all.
And, btw, I notice you did not dispute my assertion that World War I, Germany’s hyper inflation of the 1920s, the Crash of 1929, the Great Depression prolonged for two decades by the New Deal, World War II, The Great Famine of China, the Soviet famines in 1921-23 and 1932-33, the Cambodian famine of 1978-1979, and the North Korean famine of the early 1990s, were all products of government intervention. If you will concede that, as you failure to challenge implies, I will concede that Canada’s relatively milder financial meltdown versus the US’s was the consequence of more “effective regulation–if indeed it was milder, I must add, because not knowing the facts I must rely on your assertion, and you have already asserted many facts herein, which were in fact not factual)
But let’s go back to the difference between Misian a priori praxeology, and your post Keynesian empiricism. Denying that you employed a priori reasoning to arrive at your conclusion that a free markets won’t work, you said, “Just because something isn’t an exact or precise example of libertarian economics doesn’t mean you can’t draw reasonable conclusions from approximations.” I am glad to see that you recognize that your empirical methods are neither exact nor precise nor capable of anything more than approximations. With correct application of Mises’ praxeology, you could achieve apodictic certainty rather than speculation. Wouldn’t that be more interesting than compiling all sorts of economic data, statistics, mathematical formulas and charts, and then guessing, based on your ideology, what they “prove.” After all, that is the way of post-Keynesian empirical economics, barely an improvement on tarot economics and sooth saying.
The two schools are obviously talking past each other. All the economic issues resolve to the underlying issues of methodology.
The Austrians do not accept that you can make worthwhile empirical findings in a welter of myriad uncontrolled variables and impossible counter-factuals. Any findings the Keynesians make cannot distinguish A preceding B, from A causing B; cannot distinguish correlation from causation; cannot say whether a result is *because of*, or *despite* policy. The only empirical findings you can sensibly use as a matter of economic science are the few universal propositions of fact, not zillions of contingent ones; and proceed by logical deduction from there.
On the other hand, the Keynesians do not accept that you can proceed by praxeology, by logical deduction from axioms; and assert the “empirical” and positive” method. But yet all their empirical tenets must resolve to an underlying basis in pure theory, because if the propositions do not meet a threshold test of logic, then they are no more scientific than believing that we can make bread out of stones.
So we have the Keynesian method: assume that capitalism, motivated by animal spirits and barbarous relics, instrinsically produces idle resources and mass impoverishment, assume that employment is intrinsically exploitative (LTV), assume that government has superior knowledge to the people who constitute it, cover the lot in a slather and wodge of statistics and impressive physics-like mathematics; sell to politicians the idea that endlessly expanding government is a virtue and civic duty; and wacko-the-diddlo! – we have the marvelous results of wealth creation by stamping pieces of paper that we now see in the GFC and Obama’s corrupt and ham-fisted reaction to it!
assume that employment is intrinsically exploitative (LTV),
Nope, that’s Marxism.
Keynes held and Keynesians hold a subjective theory of value
Then why not solve the problem of unemployment by letting the unemployed be employed at the market rate? Why wouldn’t the whole alleged problem be solved by repealing minimum wage laws?
Even if all prices and wages were perfectly flexible, there would still be failures in aggregate demand. Any economy where money is used as (1) a medium of exchange role AND (2) as a store of value, under conditions of uncertainty and subjective expectations in real time can have significant idle money balances. The presence of the speculative demand for money for use on financial asset markets also makes things worse. Financial assets are not gross substitutes for commodities. Markets will not clear in the way imagined by the neoclassicals or Austrians.
Free markets lead to less than optimum or full use of resources.
” Markets will not clear in the way imagined by the neoclassicals or Austrians.”
You speak with a lot of certainty, how do you explain 1920-21?
Unfortunately, the depression of 1920-21 is hardly an example of the type of depression of the gold standard business cycle. This was right after WWI as the US switched back from the war economy to consumer economy, and there was a supply shock in the form of returning servicemen. There was no huge asset bubble, excessive debt, debt deflation, financial collapse, bank runs, contraction in the money supply that were typical in 19th century/gold standard recessions or depressions.
If you want an example of how markets don’t clear take a look at the 1890s depression in Europe and the US. Or Australia’s horrendous 1890s depression after its free banking system blew up completely.
The neoclassicals believe that the market will tend to equilibrium. That means optimum use of resources, including labour. High unemployment even in expansions in the business cycle means that equilibrium has NOT been reached. As is well known, unemployment like this (what Keynes called involuntary unemployment) is a ubiquitous feature of free markets, even in expansions with rising output.
Jees, LK, please read what Justin J just said to you. Your subsequent assertions do not, as he said, distinguish correlation from causation; [you] cannot say whether a result is *because of*, or *despite* policy. You are stringing words together that are illogical.
LK, please refer to what Justin J just said to you. Your comment on aggregate demand fails to, as Justin pointed out, “distinguish correlation from causation; [you] cannot say whether a result is *because of*, or *despite* policy. You are stringing words together, but they don’t make sense. You are sounding more and more like John Maynard Keynes, the original.
It seems to me that Keynesians have two huge problems. First, they do not account for the issue of money as it currently exists. Secondly, they do not seek to understand an economy in which individuals interact freely, but are only concerned with manipulating the economy to achieve their desired outcomes.
First, they do not account for the issue of money as it currently exists.
Money as it currently exists is a big issue for Keynesians – it is the existence of money with a store of value function (in addition to the unit of account and medium of exchnage role) that explains where Say’s law does not work.
Money does not store “value” because “value” is a subjective concept that exists ONLY in the minds of individuals and not in goods. That’s why your (and the Keynesian) claim to have refuted Say’s law is utterly retarded.
As you should know perfectly well, when money is described as a store of value, this of course means a store of purchasing power.
And everything you say above totally contradicts your (apparent) belief here that people do not wish to defer purchasing power.
If they choose to defer purchasing into the future as they can and do, then the Say’s law claim that aggregate supply equals aggregate is false.
It does not “store” purchasing power either.
And I am not contradicting myself. I never said that people do not wish to defer purchasing power. The very phrase “defer purchasing power” is an output of a stupid and confused mind like yours.
” If they choose to defer purchasing into the future as they can and do, then the Say’s law claim that aggregate supply equals aggregate is false. ”
Firstly, it is not “purchasing” that is deferred. It is the consumption of a particular good that is deferred. When a person does so, he is choosing the good “money in hand now” over “consumption good in hand now”. Instead of the good, he has the money in hand. That’s all.
Secondly, when you talk of “demand”, you seem to forget the important concept of “reservation demand”, the demand of producers to hold their own goods in anticipation of better prices in the future. Reservation demand too is a form of demand. So your claim that the very act of saving refutes Say’s law is downright stupid. Total Stocks (current period’s production+carried over stocks) = Total Demand (Consumption Demand+Reservation Demand). Aggregate demand shortfall is a product of a stupid Keynesian mind that forgets to account for reservation demand.
It does not “store” purchasing power either.
I see. So logically you CANNOT keep money and then buy commodities in the future to that amount? This is an incredible contradiction.
Firstly, it is not “purchasing” that is deferred. It is the consumption of a particular good that is deferred.
deferred “purchasing” = the consumption of a particular good that is deferred.
Total Stocks (current period’s production+carried over stocks) = Total Demand (Consumption Demand+Reservation Demand). Aggregate demand shortfall is a product of a stupid Keynesian mind that forgets to account for reservation demand
There is absolutely no reason why carried over stocks will find buyers in a new period.
Say’s law still does not work.
Lord Keynes,
Your state of mental retardation makes my head spin faster than ever.
” So logically you CANNOT keep money and then buy commodities in the future to that amount? This is an incredible contradiction. ”
Money is a commodity. It is a “thing”. It can be kept. If at some point in the future, there are people ready to offer their goods and/or services in exchange for the “thing” I have and am ready to offer, good for me. I would be purchasing a good of “value” to me.
However, there is no guarantee that the “thing” I keep will exchange for anything at all in the future. A sudden surge in the supply of the “thing” can greatly and adversely affect its exchange ratio with respect to other goods. That can mean a serious loss of purchasing power. So, to claim that money is a “store of purchasing power” is stupidity. If Keynesians do that, that’s more proof that Keynesians are stupid.
” There is absolutely no reason why carried over stocks will find buyers in a new period. ”
If they do not find buyers, they stay on in “reservation demand”, you moron. They get carried forward as inventory. Say’s Law is still valid, dolt.
Money is a commodity. It is a “thing”. It can be kept. If at some point in the future, there are people ready to offer their goods and/or services in exchange for the “thing” I have and am ready to offer, good for me. I would be purchasing a good of “value” to me.
Then people can keep money and then buy commodities in the future.
Your just back to precisely what I asserted to be true.
This is significant and Say’s law will not hold in the presence of shifting decisions to hold money for future consumption of goods or services
If they do not find buyers, they stay on in “reservation demand”, you moron. They get carried forward as inventory. Say’s Law is still valid, dolt./i>
Not necessarily. Companies often give unsold inventory away for free.
Lord Keynes you crook,
” Your just back to precisely what I asserted to be true. ”
Nonsense. I am still denying that the “purchasing power” is deferred. I am still denying that money has “stored” value. I am still saying that “value” is a subjective assessment that exists only in the minds of individuals and not in the commodity that functions as the medium of exchange.
” This is significant and Say’s law will not hold in the presence of shifting decisions to hold money for future consumption of goods or services ”
How does shifting decisions to hold money for future consumption invalidate Say’s Law? Still refusing to digest the concept of “reservation demand”?
” Not necessarily. Companies often give unsold inventory away for free ”
That only means that the company has revised the position of the unsold goods in their hierarchy of value. The “value” they receive is completely psychic as is every other value they derive from production and consumption.
What an utter moron.
How does shifting decisions to hold money for future consumption invalidate Say’s Law
Easy:
Say’s law: in a given time period (say a year) (1) total factor payments from production (= aggregate supply) will be spend on (2) consumption or capital goods/business investment in new commodity output (= aggregate demand), and that this will ALWAYS be equal.
If people hold money for future consumption in shifting amounts beyond this time period, Say’s law does not hold.
And it especially won’t hold when money can be diverted in shifting amounts to buy financial assets. The equality imagined by Say’s does not need to hold either in the short or long run
Lord Keynes,
Thanks for making it this simple for me.
This is what you said.
” Say’s law: in a given time period (say a year) (1) total factor payments from production (= aggregate supply) will be spend on (2) consumption or capital goods/business investment in new commodity output (= aggregate demand), and that this will ALWAYS be equal. ”
There is only is teeny-weeny illegitimate phrase in this – “in a given time”. Where the f@#k did this come from? This is not Say’s Law but your bastardised version of Say’s Law.
What you have done is to create a straw-man of Say’s Law and to then claim success in knocking it down. You did not knock down Say’s Law but your straw man.
You are still a moron. Your previous post just improved your rank in The Order of Morons.
There is only is teeny-weeny illegitimate phrase in this – “in a given time”. Where the f@#k did this come from? This is not Say’s Law but your bastardised version of Say’s Law.
The only sense in which Say’s law has any meaning is in a time period, by definition!
As I said, in a “given period”: you can change it to 2 years, 3 years, 4 years, 6 years, 10 years, 30 years, if you like.
There is no necessary reason WHY aggregate supply will equal aggregate demand in any of those periods. Equilibrium is not a necessary condition.
This is precisely why the neoclassicals were defeated in the 1930s. They kept claiming that “in the long run” Say’s law works.
It doesn’t, either in the short run or the long run.
And, just as Keynes said, even if it did *work* in the long run that is effectively useless to the unemployed workers who would suffer 10, 20, or 30 years of involuntary unemployment. In the long run they will be dead by the time a job is available
Lord Keynes you dolt,
” The only sense in which Say’s law has any meaning is in a time period, by definition! ”
OK. Take any time period, but take the godaamn TOTAL DEMAND – That includes consumption demand AND reservation demand.
If you include reservation demand, Say’s Law works in ANY freaking period.
Care to prove me wrong? Once again
Total Supply (Production in current period+Inventory Brought Forward) = Total Demand (Consumption demand+Reservation Demand)
Aggregate supply will be equal to aggregate demand if you include reservation demand. It is a simple equality
Total Supply (Current period’s production+Inventory brought forward) = Total Demand (Consumption Demand+Reservation Demand)
Your attempt to defend Say’s law using reservation demand does not work.
Reservation demand is demand by hold pre-existing stock off the market in order to obtain a higher price in the future.
That in NO way invalidates the fact that shifts in money savings that are not spent on consumption or investment in capital goods can cause a shortfall in demand.
If you want to include money as good, in order for this to work once again money has to be commodity – but it is not now, it has not been for years.
In the real world, such money is fiat money.
Again, your analysis = irrelevant to the real world. Analysis for an imaginary world only.
Lord Keynes,
” That in NO way invalidates the fact that shifts in money savings that are not spent on consumption or investment in capital goods can cause a shortfall in demand. ”
Wrong. It invalidates it. It shows that there is no such thing as a shortfall in demand because Total Supply is always equal to Total Demand.
You are trying to slime out by using (quite deliberately) a false definition of Demand that excludes reservation demand.
Unfortunately, reservation demand was never invoked by J. B. Say or other classical economists in defence of Say’s law. Show me anyone who does apart from you. Your attempt fails and everyone else defending Say’s has probably already seen that it doesn’t work, so that’s why they don’t use it.
Reservation demand in when producers or sellers of commodities hold their commodities off the market and refuse to sell them, because they expect higher prices in the future.
But what can the expression “reservation demand” mean when applied to money? When applied to commodities, it means that commodities are held off the market by sellers in expectation of higher prices in the future. Logically, then, reservation demand for money would be holding money in expectation of a higher price for money in the future in terms of its purchasing power. That is, a higher price for money can only mean a rise in money’s purchasing power, whether through general price deflation or falls in the prices of a commodity or commodities one wishes to purchase.
You can’t then use “reservation demand” to refer to all net money added to and held in cash balances (“net hoarding”), because they are plenty of forms of idle money that cannot legitimately be called “reservation demand.” You change the meaning of “reservation demand” in a sleight of hand.
At most, “reservation demand” for money can only describe one subcategory of Keynes’ speculative demand for money: that category that involves holding money in expectation of general price deflation or price falls in one or other commodities.
Speculative demand for money includes many other categories, including holding money to buy assets expected to rise in price in the future.
And even if one chooses to make “reservation demand” for money in its only proper sense equal to its value as inserted into aggregate supply, this still leaves other idle money balances not spent on consumption or investment in capital goods.
Without total factor payments going to purchase commodities or to capital goods investment, aggregate demand failures can occur.
See Appendix 2:
http://socialdemocracy21stcentury.blogspot.com/2010/10/myth-of-says-law.html
Lord Keynes,
All the rambling apart, you also said this
” And even if one chooses to make “reservation demand” for money in its only proper sense equal to its value as inserted into aggregate supply, this still leaves other idle money balances not spent on consumption or investment in capital goods. ”
One more time….. There is no such thing as “idle” money. It is a false concept that you insist on using. I have rejected it many times over with enough explanation. You seem extremely pig-headed about continuing to use it.
You seem to have a problem with the possibility that I could hold off a purchase because I expect the get a better (lower) price in the future. Why does this not make sense? Why is money I hold in hand without using to buy consumption and investment goods not “reserve demand” for money?
And why should I cite any classical (or other) economists in support of my statement? I just happened to be reading that section of “Man, Economy and State” and brought it up because I thought it made perfect sense and was very relevant in this discussion. If you think I am wrong, explain why rather than use “appeal to authority”.
p.s. This is a negative form of appeal to authority where you are saying that my argument is worthless because no classical economist has used it. Why do you exclude the possibility that I am applying the concepts that I learnt from those economists in a new and correct way?
You seem to have a problem with the possibility that I could hold off a purchase because I expect the get a better (lower) price in the future.
Nope. That type of holding of money is ALREADY admitted and accepted in my analysis.
Reservation demand for money would be holding money in expectation of a higher price for money in the future in terms of its purchasing power. That is, a higher price for money can only mean a rise in money’s purchasing power, whether through general price deflation or falls in the prices of a commodity or commodities one wishes to purchase.
At most, “reservation demand” for money can only describe one subcategory of Keynes’ speculative demand for money: that category that involves holding money in expectation of general price deflation or price falls in one or other commodities.
Speculative demand for money includes many other categories, including holding money to buy assets expected to rise in price in the future.
Lord Keynes,
More rambling is all I see you doing. What you have said just above has no bearing on the discussion we are having regarding the role of “reservation demand” for consumption and investment goods. You are therefore failing to address my point that your (and Keynes’) claim of having refuted Say’s Law is utter nonsense and trying to create a diversion instead.
What you have said just above has no bearing on the discussion we are having regarding the role of “reservation demand” for consumption and investment goods. You are therefore failing to address my point that your (and Keynes’) claim of having refuted Say’s Law is utter nonsense and trying to create a diversion instead.
Bala,
The concept of reservation demand was NEVER used to defend Say’s law by J. B. Say, the Classical economists or by the neoclassicals. Thus Keynes did not need to refute this form of the law because it did not eve exist then.
The use of reservation demand for money as a novel defense of Say’s law appears to begin (though not explicitly as far as I can see) in Rothbard’s Man, Economy, and State: A Treatise on Economic Principles.
You can also find it in Hoppe, Hulsmann, and Block, 1998. “Against Fiduciary Media,” Quarterly Journal of Austrian Economics 1.1: 19–50.
The “reservation demand ” defense fails completely, as it STILL doesn’t address the issue of how money can be held and not spent on consumption or capital goods, in varying quantities by large groups of people.
Also in the form postulated by Hoppe, Hulsmann, and Block, it requires as a pre-condition to work no fiduciary media.
Therefore it cannot and does not apply to the real world.
Lord Keynes,
” The concept of reservation demand was NEVER used to defend Say’s law by J. B. Say ”
When did Say “defend” Say’s Law? just curious because he never even propounded it as Say’s Law.
” the Classical economists or by the neoclassicals ”
So what?
” Thus Keynes did not need to refute this form of the law because it did not eve exist then. ”
Yup!! More clue to the fact that Keynes had no clue to Economics and was talking and writing balderdash.
” The use of reservation demand for money as a novel defense of Say’s law appears to begin (though not explicitly as far as I can see) in Rothbard’s Man, Economy, and State: A Treatise on Economic Principles. ”
Yup. I am reading it and do not find the explicit defence. I cooked it up on the fly as I was debating you. If you find it too tough to handle, then I’ve probably used it right. I must have used it right, considering how weak your attacks are and how pathetic you are sounding ever since.
” You can also find it in Hoppe, Hulsmann, and Block, 1998. “Against Fiduciary Media,” Quarterly Journal of Austrian Economics 1.1: 19–50. ”
Thanks for the reading tip. Will take it up.
” The “reservation demand ” defense fails completely, as it STILL doesn’t address the issue of how money can be held and not spent on consumption or capital goods, in varying quantities by large groups of people. ”
Now you are back to blabbering. Money not spent on consumption or capital goods has NO BEARING on the reservation demand for a good. The reservation demand is the demand of producers to hold (frankly hold out) hoping for a better price in the future. So you have done nothing of substance to defeat the reservation demand based argument that I have provided.
” Also in the form postulated by Hoppe, Hulsmann, and Block, it requires as a pre-condition to work no fiduciary media. ”
I can address this only after reading it but going by my general assessment of you, your statement above is highly likely to be wrong (as usual). In any case, my argument DOES NOT REQUIRE the absence of fiduciary media and you haven’t defeated it.
” Therefore it cannot and does not apply to the real world. ”
Therefore it applies to the real world except that some (frankly quite a few) people are foolish enough to think that they can violate inviolable laws and get away with it. Such people are usually called insane. I guess that label fits the entire Keynesian crowd.
You are still the Chief Priest of the Order of Morons.
Lord Keynes,
I just noticed this.
” doesn’t address the issue of how money can be held and not spent on consumption or capital goods, in varying quantities by large groups of people ”
If it is indeed not that widespread, the why on earth are you (and all Keynesians) kicking up such a row about it? That apart, I have already explained that such money is not “idle” an performs a valuable economic function.
Hence, your attack still has no legs.
When did Say “defend” Say’s Law? just curious because he never even propounded it as Say’s Law.
Correct. He called it the law of markets (“loi des débouchés”, in French) which I note on my own blog post.
He discusses his law of markets in A Treatise on Political Economy, Book 1, Chapter 15 (Say 1832: 132–140; the first edition of which was published in 1803) and in the Catechism of Political Economy (Say 1816: 103–105).
You tell me where he ever uses the concept of reservation demand for money?
He doesn’t
Why?
Because it radically violated one of MAJOR assumptions for his law of markets:
Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; for we do not consume money, and it is not sought after in ordinary cases to conceal it: thus, when a producer desires to exchange his product for money, he may be considered as already asking for the merchandise which he proposes to buy with this money. It is thus that the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchandise for their merchandise (Say 1816: 103–105).
So what?
Invoking it is just desperate attempt to save Say’s law.
Money not spent on consumption or capital goods has NO BEARING on the reservation demand for a good.
But does for Say’s law of markets – and that is the FATAL flaw with invoking the concept.
I can address this only after reading it but …
No problem:
“[Selgin and White] have overlooked Say’s law: all goods (property) are bought with other goods, no one can demand anything without supplying something else, and no one can demand or supply more of anything unless he demands or supplies less of something else. But this is here not the case whenever a fiduciary note is supplied and demanded. The increased demand for money is satisfied without the demander demanding, and without the supplier supplying, less of anything else. Through the issue and sale of fiduciary media, wishes are accommodated, not effective demand. Property is appropriated (effectively demanded) without supplying other property in exchange. Hence, this is not a market exchange which is governed by Say’s law – but an act of undue appropriation (Hoppe, Hulsmann, Block 1998: 40).
One obvious consequence of such a view is that Say’s law can only hold in a world without fiduciary media and fiat money! For Say’s law to work in the way postulated here there must only be commodity money and no fractional reserve banking or fiduciary media. We don’t live in such a world, so Say’s law does not hold.
Lord Keynes,
” You tell me where he ever uses the concept of reservation demand for money? ”
The reason he did not do it was probably that he did not encounter any idiotic Keynesians (sorry again about the redundancy) running amok and screaming “In the long-run we are all dead anyway!”
This again betrays the fact that you are yet to comprehend that my use of “reservation demand” is strictly to address the short run. In the long run, reservation demand is irrelevant and Say’s Law still holds. I was just showing that the Keynesian idea that in the short run Say’s Law of markets does not operate is completely proven wrong by a proper application of the concept of “reservation demand”.
” He doesn’t. Why? ”
I have already explained it.
” Because it radically violated one of MAJOR assumptions for his law of markets: ”
No. Because all debate in Economics at the time he wrote his treatise focused on the long run. The short run was a Keynesian fabrication to try to (dishonestly) evade Say’s Law.
” Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product ”
Frankly, just remove the word “immediately” and study the whole thing with the concept “reservation demand” in the picture and it will all fall in place.
” Invoking it is just desperate attempt to save Say’s law. ”
Invoking “short-run” while ignoring reservation demand is either retarded economics or plain intellectual dishonesty.
” But does for Say’s law of markets – and that is the FATAL flaw with invoking the concept. ”
The fatal flaw in YOUR argument is that it wants to deal with the short run while ignoring reservation demand and then claim that the law is invalidated. How Keynesian!!!
” We don’t live in such a world, so Say’s law does not hold. ”
My argument does not require fiduciary media to exist and you haven’t defeated it yet. Very simply put, in the long run, reservation demand (basically speculative in nature) is irrelevant while in the short run, any attempt to attack Say’s Law without factoring in reservation demand is hare-brained economics, which Keynesian economics is.
Frankly, just remove the word “immediately” and study the whole thing with the concept “reservation demand” in the picture and it will all fall in place.
Excellent, Excellent!
So you admit that according to *your* defense of Say’s law, Say’s own analysis is flawed??
That you have to change the meaning of his text radically in order to make Say’s law work in your *new* version of it?
This is powerful concession – you have admitted Say’s own analysis wont work.
Thanks.
Lord Keynes you moron,
” So you admit that according to *your* defense of Say’s law, Say’s own analysis is flawed?? ”
No. I am just saying that no one, not even Say, could have anticipated that a retard like Keynes would come along and change the focus of economics from “long run” to “short run”. I am saying that in Say’s time, economics was ONLY study of the long run effects. It was Keynes who diverted attention from real economics into a bastardised version of economics that focused completely on short run while ignoring (I wouldn’t yet say deliberately) important short run effects like “reservation demand”.
In simple terms, Say was absolutely right. He was explaining economics. Keynes, the black magician came along with his voodoo that he claimed was economics. He used his voodoo techniques to create a straw-man of Say’s Law, knocked down the straw-man and claimed victory over the law itself.
My explanation here is just a special application of Say’s Law in the long run to the particular case of short-run with the aim of showing that the Keynesian dismissal of Say’s Law is poppycock.
No. I am just saying that no one, not even Say, could have anticipated that a retard like Keynes would come along and change the focus of economics from “long run” to “short run”
Unfortunately, the critique of Say’s law applies to the long run, just as much to the short run.
I am saying that in Say’s time, economics was ONLY study of the long run effects.
Oh my god. This is truly laughable.
You are saying that in Say’s time (1767–1832) economics was NEVER concerned with short run effects?? Never?
Here is Thomas Sowell (who is sympathetic to the Austrian school):
“No such assumption was explicit in the writings of the classical economists, and their repeated acknowledgments of important short-run changes in real variables due to monetary changes implicitly denied perfect price flexibility. As noted above, the classical economists agreed that an increased money supply could, under some short- run conditions, lower the interest rate, bring fuller utilization of capacity, and thereby increase real output. Ricardo also acknowledged that money wage rates might lag behind rising prices, causing a short-run reduction of real wage rates and a corresponding increase of the profit rate, and therefore of the rate of savings and investment” Thomas Sowell, Classical economics reconsidered, p. 65
Lord Keynes,
I thought Keynesian voodoo is basically about the short-term as in the long run, we are all dead. What does this mean then?
” Unfortunately, the critique of Say’s law applies to the long run, just as much to the short run. ”
In any case, you are yet to present how it does.
Lord Keynes,
Saying “Economics is the study of long-run effects” does not mean that the short run is never studied. Explaining the long run necessarily requires explaining the short run and sometimes even explaining why short run phenomena that appear counter to long run predictions do not negate the long-run predictions themselves.
That, incidentally was what Sowell was doing in the section you quoted. Thanks for the help.
Regarding Keynes’ “long run” remark. He made it precisely because the neoclassicals of his era conceded that Say’s law or equilibrium does necessarily happen at all in the short run.
It was the *neoclassicals* who then fell back on the long run as a defense of equilibrium. They kept claiming that “in the long run” Say’s law works.
It doesn’t, either in the short run or the long run.
Keynes said, even if it does *work* in the long run, that is effectively useless to the unemployed workers who would suffer 5, 10, or 15 years of involuntary unemployment. In the long run, they will be dead by the time the *self-correcting* markets give them a job.
Lord Keynes,
Your explanation of the context of Keynes’ “long run” remark does not address my arguments against the validity of you claim of having refuted Say’s Law. Could I see that please?
Given that you are constantly shifting your definition of Say’s law. Define Say’s law yourself.
In modern formulations of Say’s law, there are two main variants of it:
(1) Say’s Identity
According to Baumol (1977: 146),
is the assertion that no one ever wants to hold money for any significant amount of time, so that, as a result, every offer (supply) of a quantity of goods automatically constitutes a demand for a bundle of some other items of equal market value.
(2) Say’s Equality
Again, according to Baumol (1977: 146), Say’s Equality
admits the possibility of (brief) periods of disequilibrium during which the total demand for goods may fall short of the total supply, but maintains that there exist reliable equilibrating forces that must soon bring the two together.
Baumol, W. J. 1977. “Say’s (at Least) Eight Laws, or What Say and James Mill May Really Have Meant,” Economica n.s. 44.174: 145–161.
Which one do you subscribe to?
Lord Keynes,
I doubt if I have ever encountered anyone at all as slimy as you are. Ned Netterville was absolutely right. You Keynsians are harder to pin down than a rat running loose in a barn. This, however, was the crowning glory.
” Given that you are constantly shifting your definition of Say’s law. ”
You a@#$%^&*e……. I had taken the very definition of Say’s Law that you had taken and claimed to have demonstrated to be false. All I did was to show that your arguments were completely incorrect and hence that Say’s Law, as YOU had formulated it in YOUR goddamn argument, was still valid.
Given that I had taken the very formulation YOU had chosen, it sure takes some temerity to accuse me of “shifting definitions”.
Lord Keynes,
That apart, since YOU are the one claiming to have shown Say’s Law to be false, the onus is on YOU to say which formulation of Say’s Law you are claiming to have shot down. Is it Sowell’s or Baumol’s or someone else’s?
Thanks for your comments.
Say’s Identity is incorrect because it presupposes that all factor payments will be used in either consumption or investment in capital goods, when in reality that need not happen due to people holding money without consumption or investment in capital goods .
Say’s equality (and Sowell’s propositions derived from the Classical economists are an expansion of it) will also not work. A money-using economy where money can be saved without consumption or investment in capital goods (and in which it can be diverted to asset market speculation) will not have “equilibrating forces” leading to long run equality between total factor payments and consumption or investment in capital goods
Lord Keynes,
Let me study your statements one by one.
” Say’s Identity is incorrect because it presupposes that all factor payments will be used in either consumption or investment in capital goods, when in reality that need not happen due to people holding money without consumption or investment in capital goods . ”
This is nothing more than an assertion with no explanation.
” Say’s equality (and Sowell’s propositions derived from the Classical economists are an expansion of it) will also not work. ”
One more assertion without any explanation.
” A money-using economy where money can be saved without consumption or investment in capital goods (and in which it can be diverted to asset market speculation) will not have “equilibrating forces” leading to long run equality between total factor payments and consumption or investment in capital goods ”
Ahhh!!!! The first whiff of an explanation coming after all this time. Interesting to note that you even tried to explain. The only problem is that the moment you give this explanation, the enormity of your (and Keynesian) stupidity is revealed in its full “glory”.
Let me now analyse this attempt at explaining part by part.
” ….. where money can be saved without consumption or investment in capital goods (and in which it can be diverted to asset market speculation)…… ”
That’s a nice self-contradictory way of putting it. If money is saved without consumption or investment in capital goods, it can’t be diverted to asset markets and if it is diverted to asset markets, it cannot be saved without consumption or investment in capital goods. Which one is it now?
” ….will not have “equilibrating forces” leading to long run equality between total factor payments and consumption or investment in capital goods ”
Ah!!!! The importance of equilibrating forces can never be overestimated, can it? And, I presume, goes your argument, since the equilibrating forces are absent and since equilibrium is absolutely imperative in the Keynesian framework (after all, where else do you have full employment), someone or something has to push for equilibrium. And thus are we unenlightened folks supposed to realise the importance of government intervention in the economy. Wow! Brilliant!!
Except for a small point. The equilibrating forces are present but your grossly deficient Keynesian framework does not enable you to recognise it. Let me explain this carefully.
There are firstly 2 possibilities. Either the money is hoarded (in which case it is not spent on consumption or producers’ goods) or it is invested in the asset market in which case the money has come back into circulation by going into hands different from that ones that wanted to hoard. In case 2, there is no need to look for the equilibrating forces because the money is back in circulation as a medium of exchange.
It is only in case 1 that we need to look for the equilibrating forces. Interestingly, that is not something I have not explained to you before. Hoarded money is NOT idle. It performs at least 2 important economic roles. Firstly, since money is a medium of exchange, the holder can only be holding it with the aim of exchanging it for consumers’ or producers’ goods at some indeterminate time in the future. As a good, it provides the satisfaction to the holder that the goods he desires can be obtained as and when he decides to. It is part of the cash balance that he requires because he lives not in the hypothetical evenly rotating economy but in the real world.
Secondly, hoarding of money by some people reduces the stock of money available as a medium of exchange. It therefore raises the purchasing power of the circulating money in the hands of people who do not wish to hoard. These people will have two options – Consume more with the same money or consume as much, have a surplus in hand and invest that by lending it to the production system. In option 1, it keeps the production system going and makes people better off by giving them a better standard of living at the same income. In option 2, it helps lengthen the production system in a sustainable manner as the lengthening is achieved through the injection of real savings and not through the creation of fiduciary media. This would have happened even if the hoarded money had been sent into the production system as capital.
So you are still talking utter and unadulterated rot. You and your Keynesian have only 1 proper place – the intellectual trash can.
or it is invested in the asset market in which case the money has come back into circulation by going into hands different from that ones that wanted to hoard. In case 2, there is no need to look for the equilibrating forces because the money is back in circulation as a medium of exchange.
Nope. It can become trapped in transactions on these secondary markets for financial assets in cycles of (1) payment for a financial asset and (2) holding in preparation for further purchasing of a financial asset, and then back to (1).
Fluctuations in (1) money held in this way and (2) people’s holding of money not spent on consumption or capital goods investment mean that Say’s equality will not necessarily hold in the short or long run.
Financial assets on secondary markets are not “gross substitutes” for producible commodities, so no self equilibrating forces will allow business to hire the employed to “produce” financial assets just because their price has risen.
See Davidson, P. 2002. Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham.
Lord Keynes,
That was a good one.
” Nope. It can become trapped in transactions on these secondary markets for financial assets in cycles of (1) payment for a financial asset and (2) holding in preparation for further purchasing of a financial asset, and then back to (1). ”
In which case it is no different from hoarding. In that case the analysis I applied to hoarding works. So much for your attempted explanation. Your attack on Say’s Law still remains invalid.
In which case it is no different from hoarding. In that case the analysis I applied to hoarding works.
Nope.
There is absolutely no necessary reason why money’s purchasing power will rise under these circumstances. Money can be held in these idle cash balances without its purchasing power rising, and the only result will be aggregate demand failures.
Thanks
Lord Keynes,
” Nope. There is absolutely no necessary reason why money’s purchasing power will rise under these circumstances. ”
But then you have offered no argument to explain why my argument for an increase in the purchasing power of the remaining money in circulation is incorrect. So, you are only making mindless assertions and mistaking them for arguments. How Keynesian.
” Money can be held in these idle cash balances without its purchasing power rising, and the only result will be aggregate demand failures. ”
I have shown with sufficient explanation that the concepts of “idle cash balances” and “aggregate demand failures” are both Keynesian poppycock. They are both devoid of any meaning because there is no such thing as idle money and the concept of aggregate demand failure is completely gutted once we bring reservation demand of the sellers into the picture.
(Aggregate Demand Failure is a short-term concept and in the short-term, you cannot ignore the concept “reservation demand”)
So, you are still talking rot. Once again, very Keynesian.
“idle cash balances” and “aggregate demand failures” are both Keynesian poppycock. They are both devoid of any meaning because there is no such thing as idle money and the concept of aggregate demand failure is completely gutted once we bring reservation demand of the sellers into the picture
Unfortunately, for Say’s law to be meaningful, both concepts are meaningful preconditions.
The concept of reservation demand for money is completely incompatible with the Classical formulations of Say’s law.
J. B. Say:
Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; for we do not consume money, and it is not sought after in ordinary cases to conceal it: [= incompatible with a reservation demand of money] thus, when a producer desires to exchange his product for money, he may be considered as already asking for the merchandise which he proposes to buy with this money. It is thus that the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchandise for their merchandise (Say 1816: 103–105).
Thanks
Lord Keynes,
” [= incompatible with a reservation demand of money] ”
I have already dealt with the “immediate” part and you are wasting time returning to this again. You remind me of the “Vikram and Betaal” stories that we learn out here in India. In those stories (there is a huge series of them), Vikram (the king) is supposed to take a corpse (occupied by a vampire or Betaal) to a holy man who wishes to perform some rituals. Every time Vikram speaks, the Betaal goes back to the tamarind tree from which he picked it up and he has to restart all over again. To make matters worse, the Betaal keeps telling stories with sticky situations everytime and threatens Vikram that if he does not answer, his head will chatter into a thousand pieces.
You are sounding very much like that Betaal.
Since I have dealt with the “immediate” part, it destroys the concept of “idle cash balance” and your objection to it.
As far as aggregate demand failure goes, how is it relevant to the Classical formulation of Say’s Law? Further, when I say that “reservation demand” renders the concept “aggregate demand failure” meaningless, I am talking of “reservation demand” for consumers’ goods on the part of sellers of consumers’ goods. I wonder how reservation demand for money enters the picture and why you are repeatedly climbing up the tamarind tree like the Betaal.
Even if there is a ‘failure of aggregate demand’, still, why should not the problem of unemployment be solved by the unemployed being employed at the market rate?
Lord Keynes, just between you and us, are you actually Paul Krugman?
No
Even if there is a ‘failure of aggregate demand’, still, why should not the problem of unemployment be solved by the unemployed being employed at the market rate?
That is just the point: they wont.
There is no optimum use of resources
They won’t be hired at any rate?
They won’t be hired at any rate?
Not in an economy that has no tendency to equilibrium:
There are some Austrians who get this like Ludwig Lachmann:
“In a kaleidic society the equilibrating forces, operating slowly, especially where much of the capital equipment is durable and specific, are always overtaken by unexpected change before they have done their work, and the results of their operation disrupted before they can bear fruit. Restless asset markets, redistributing wealth every day by engendering capital gains and losses, are just one instance, though in a market economy an important one, of the forces of change thwarting the equilibrating forces. Equilibrium of the economic system as a whole will thus never be reached. Marshallian markets for individual goods may for a time find their respective equilibria. The economic system never does.”
(L. M. Lachmann, 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: p. 60-1).
Lachmann does not say that there is no tendency toward equilibrium in this statement. He only says that it will never be reached. But so does Mises. It is in the nature of subjective valuations– they are not constants. Supply and demand are in a dance in real time. The concept of equilibrium is useful as an abstract concept only. It is, further, one of the reasons why mathematical economics is useless– future equilibrium cannot be assumed.
Lachmann does not say that there is no tendency toward equilibrium in this statement. He only says that it will never be reached.
If equilibrium can never be reached, you have conceded half the argument.
If there is a “tendency” for equilibrium but it can *never* be reached, and this tendency repeatedly causes sub-optimum use of resources, then the case that free markets are the *best* system is already lost.
A system of government intervention that can push the deficient “tendency” for equilibrium (which by definition can never be reached) to optimum use of resources would follow logically, once Rothbard’s natural rights/natural law defense of libertarianism collapses.
And reverting to Mises’ utilitarianism is no good because Rothbard demonstrated that
Mises, not only as a praxeologist but even as a utilitarian liberal, can have no word of criticism against these statist measures once the majority of the public have taken their praxeological consequences into account and chosen them anyway on behalf of goals other than wealth and prosperity. (Rothbard, The Ethics of Liberty, New York University Press, 2002: 213).
” A system of government intervention that can ……. ”
If only it can….
If wishes were horses, then beggars would ride.
If equilibrium is something that cannot be known beforehand and is never actually attained, what in government makes it prescient and omniscient in your mind? For it to know optimum deployment it would have to assume it knows future equilibrium. The government is in the same position as everyone else concerning the future. Nobody knows it. At least entrepreneurs in a market economy use today’s prices in evaluating results of past actions and anticipating the nearest future.
Does government in your scenario have this evaluative ability? Its internal allocations have no reference to direct feedback from customers in the form of buying/not buying. There is no profit/loss accounting and hence, no ability to understand opportunity costs. It takes by force its means and cannot calculate the costs to its victims within a social context. Nevermind that it does not have the natural incentive to allocate resources optimally– government has power and power tends to corrupt. Quis custodiet ipsos custodes?
You think that even given a situation where there has been ‘suboptimal deployment’ that government could be rational at all, not just as compared to an entrepreneur? What rationality is left to government? Given my description of its problem, it sure looks like any suboptimality would be the result of government. How do you account for that?
You say:
If equilibrium is something that cannot be known beforehand and is never actually attained, what in government makes it prescient and omniscient in your mind?
The government does not need to be *omniscient*.
It needs to use countercyclical monetary and fiscal policies to get economies out of recessions pushing an economy to full employment, then allowing private enterprise to function, just as it did in the post-WWII business cycles. Government public works and stimulus projects are short term. When full employment is reached, labour returns to private sectors. People are consuming whatever commodities they want to consume. Private enterprise is supplying them.
” It needs to use countercyclical monetary and fiscal policies to get economies out of recessions pushing an economy to full employment ”
How do we know that these policies are capable of achieving the goal of full employment in the first place? Mises had a lot to say on the certainty of their ineffectiveness. The book that figures in is called ‘Human Action”. What do you have?
A simple no would have sufficed.
So these people are just going to lie down in the gutter with their tongues hanging out because no-one will employ them at any price because society will be kaleidic.
And we know this, not from mathematical equations, but the prior empirical observation that they are in fact unemployed now?
So the line of reasoning is: because unemployed now, therefore will not be employed at any price? Because society is “kaleidic”? Come on, you’re kidding right?
You’re being hit all over the park.
No free market economy where Say’s law does not hold will have a tendency to equilibrium.
There is no necessary tendency to full employment.
Involuntary unemployment can be intractable in such a system.
Involuntary Keynesianism can be even more intractable apparently.
Bala said to Lord Keynes, “Where the f@#k did this come from? This is not Say’s Law but your bastardised version of Say’s Law. What you have done is to create a straw-man of Say’s Law and to then claim success in knocking it down. You did not knock down Say’s Law but your straw man.”
Bala, It comes from the original, real McCoy John Maynard Keynes. He was the first useful-to-statists idiot to claim to have refuted Say’s unimpeachable law by defining a pseudo version of Say’s law and then ripping apart the straw man he concocted while proclaiming to the world to have revolutionized economics by refuting Say. He was well rewarded by statists for his effort. British statists made him a Lord while American statists installed his epigones, as Mises referred to them, throughout academia. Ever since then, Keynesians have been employing the same bait-and-switch mumbojumbo as their primary economics methodology, sprinkling it with accounting terms and math equations to hide their ignorance and statist intentions. Anyone who thinks they can pin this resurrected Lord Keynes down by consistent and logical argumentation has never tried to catch a rat running loose in a barn. The only way to catch the little critter is with the assistance of a good rat terrier.
Rats are brilliant little creatures though. They deserve more respect than a comparison with Keynesians. How about a bedbug analogy instead?
So line of reasoning is this:
from the observed fact of unemployment, conclude that no-one would employ the unemployed at the market rate, by way of a theory, the “evidence” for which is the observed fact of unemployment.
If we strip away all the gizzard-lore and mumbo-jumbo, that’s pretty much it.
Lord Keynes: “Unfortunately, the depression of 1920-21 is hardly an example of the type of depression of the gold standard business cycle. This was right after WWI as the US switched back from the war economy to consumer economy, and there was a supply shock in the form of returning servicemen. There was no huge asset bubble, excessive debt, debt deflation, financial collapse, bank runs, contraction in the money supply that were typical in 19th century/gold standard recessions or depressions.
If you want an example of how markets don’t clear take a look at the 1890s depression in Europe and the US. Or Australia’s horrendous 1890s depression after its free banking system blew up completely.”
The original Lord Keynes at least scrupled to get his facts right. The 1921 downturn came after a very large asst (stock) bubble, itself due to unprecedentedly high inflation (with annualized rates for some quarters hitting 40%!). Then came a very severe monetary contraction and deflation. “Returning servicemen” had nothing to do with it–”Keynes” makes this up, perhaps dimly recalling what many _expected_ would happen after WWII, but which didn’t happen then, either. The crisis was, in fact, as good an illustration of a gold standard cycle as any. (These facts are all readily verified by the statistics for the period.)
As for Australia, it did suffer a major crisis in 1893, but its (relatively) free banking system didn’t “blow up entirely.” Instead, about half the banks failed. Very bad, to be sure. But Australia still had a banking system when the dust settled, and that’s no small consideration.
Having read a fair number of “Keynes’s” posts, I strongly advise people on this list who are really trying to learn some econ not to take his word for anything: in blogs as in the marketplace generally, _caveat emptor_!!!
Regarding the 1920-1921 downturn, my points are generally correct:
after WWI as the US switched back from the war economy to consumer economy
This is what makes this recession atypical.
there was a supply shock in the form of returning servicemen.
One of the biggest adjustments was the re-entry of soldiers into the civilian labor force. In 1918, the Armed Forces employed 2.9 million people. This fell to 1.5 million in 1919 and a mere 380,000 by 1920. The impact on the labor market was most striking in 1920, when the civilian labor force increased by 1.6 million people, or 4.1%, in a single year (though smaller than Post-World War II demobilization in 1946 and 1947, it is otherwise the largest documented one-year labor force increase)
http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321
there was no … excessive debt, debt deflation, financial collapse, bank runs
That stock market prices were high and overvalued and hit a peak 2 months before the onset of the recession is true. I made a mistake in denying this.
But was this stock market bubble caused by excessive private debt and overleveraging as in 1929 or other gold standard business cycles?
I doubt it. Also, there was no serious financial crisis: although there were bank failures, as Karl Brunner (Great Depression revisited, 1981, p. 44) shows, there were no mass bank runs and collapses reducing the money supply disastrously in 1921-1921. That suggests that the stock bubble was not due to excessive private debt and overleveraging. Debt deflationary effects were not as serious as in other recessions.
You say:
itself due to unprecedentedly high inflation (with annualized rates for some quarters hitting 40%!)
Caused by the war? In other words, this is an atypical period.
Then came a very severe monetary contraction
Yes, the Fed raised interest rates to 6% by January/February 1920, a very sharp contractionary move, as Friedman always argued.
But, then, this underscores how this recession *wasn’t* like US downturns in the 19th century, since the US had no central bank before 1912.
If you admit that Fed policy helped to cause the recession, then Fed easing of interest rates in 1921 also had a role in ending the recession. The recovery then has to be partly related to central bank policy, not to the free market.
You say:
As for Australia, it did suffer a major crisis in 1893, but its (relatively) free banking system didn’t “blow up entirely.” Instead, about half the banks failed. Very bad, to be sure. But Australia still had a banking system when the dust settled, and that’s no small consideration.
Australia in the 1880s is an example of a system that probably came *closest* to a libertarian free banking system than any other nation in the past 2 centuries.
The disastrous failure of that system is empirical evidence that free banking is *not* the best or ideal system imagined by libertarians.
P.S.
You say:
Having read a fair number of “Keynes’s” posts, I strongly advise people on this list who are really trying to learn some econ not to take his word for anything:
Given that I actually accept a number of your arguments for FRB and fiduciary media (against Hoppe and Rothbard), don’t you think you’re exaggerating a bit?
I will also say your paper “Those Dishonest Goldsmiths” is absolutely outstanding and one that every economist (no matter what their school) should read.
Ahhh, against the gale winds of John Maynard Keynes, Lord Keynes and the phalanx of post, neo- and other reformed and reformulated epigones of JMK, JB Say and his law stand completely unscathed and entirely undaunted.
I think that Lord Keynes has forgotten the 4th and 5th definitions of money in his continual reassessment of what “money” is:
1. Money can be used for kindling when the dollar goes the way of the Continental.
2. Money can be “hoarded” for insulation (like rolled up newspapers) when we find ourselves sleeping on park benches thanks to the Keyensian inflation or the eventual deflation (that is–in the long-run–always a threat to Keynesian “Theory”). In fact, the more we “hoard” that money, the more they’ll print; therefore, there will be more insulation to “hoard” for the many more homeless who find themselves sleeping on park benches and eating stone soup.
I could come up with a million more definitions, based on my subjective desires.
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