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Source link: http://archive.mises.org/9221/does-depression-economics-change-the-rules/

Does “Depression Economics” Change the Rules?

January 12, 2009 by

According to our most recent Nobel laureate, Paul Krugman, we are now in a period of “depression economics,” where the standard rules don’t apply. In particular, the argument goes, when there are idle resources lying around, the traditional economic problem of scarcity disappears. The government can prime the pump by throwing borrowed money around, and this can only boost total output, because employed workers produce more than unemployed workers. FULL ARTICLE


Grant January 13, 2009 at 5:23 pm

Bill Anderson,

The important thing here is that Murphy zeros in on the issue of causality. Bob says that resources are idle because those resources were malinvested during the boom and now need either to be liquidated or transferred to other uses.

Krugman, on the other hand, says they are idle because of “insufficient consumption.” In other words, consumers no longer are spending enough money to keep that “perpetual motion machine” known as a Keynesian economy going. Thus, government fills in the gap by spending

They’re both right, but I think Murphy is more right. Krugman is right in saying that a drop in demand has cost jobs and left resources idle in sectors unrelated to the boom (such as retail).

The housing bubble made a lot of people feel richer than they were. So those people consumed a lot. Housing and stock price crashes made a lot of people poorer than they thought they were going to be. Those people reduced their consumption. This drop in demand affected nearly all sectors of the economy (I believe retail is one of the hardest or the hardest hit).

Would the investments made in retail and other consumer sectors have been malinvestments in a normal economy of steady growth? Probably not. They were malinvestments in the bubble economy, fueled by artificial demand created by inflated asset prices. I think is an important point, because Keynesians often point to unemployment in sectors unrelated to the asset bubble as proof of a Keynesian world-view.

We aren’t as rich as we thought were, therefore consumption must drop. Keynesians believe we can keep consuming at bubble-levels anyways. I won’t believe it until I see some microeconomic explanation as to how that can happen (and I’m not holding my breath).

Dmitry Chernikov January 14, 2009 at 12:10 am

It seems to me that finding suitable employment in an economy that is restructuring itself takes time. If the government hires the temporarily unemployed labor for 3 months “building bridges,” then during those 3 months the workers indeed won’t have to worry about providing for themselves, but what will happen after the bridge is built? The government will either start another project and then another, etc., keeping these guys digging ditches and filling them up forever, or it’ll have to dismiss them, and they’ll be back where they started.

It may be argued that during those 3 months of employment the workers will try to find other jobs. But they can work for Wall-Mart, too, at minimum wage and look for a better job while doing that. For goodness’ sakes, markets do clear, and it is always possible to get a saver to part with his money at a high enough interest rate or an entrepreneur to part with his money at low enough salary. Alternatively, during the difficult period the workers can try consulting, working for short periods for different companies, or working odd jobs. Or, since every crisis is also an opportunity, they can try their luck at entrepreneurship. Maybe some of them had an idea for a business, and being laid off would give them a push to start it. The point is that unemployment is temporary and by slurping up the resources and keeping wages artificially high the government is preventing the economic correction from taking place.

Dmitry Chernikov January 14, 2009 at 12:30 am

I mean, look, the malinvested resources, including labor and skills invested into by workers, are no longer valued by human beings, having been revealed as participating in unsustainable projects. If these projects must be stopped and liquidated, then of course, the price of the factors of production employed in them will drop until new uses of these factors are found, in time. And the falling prices and wages are precisely an incentive for future entrepreneurs eventually to buy the factors and use them somehow. The longer the high prices persist, the longer these scarce resources will remain idle. So, for all you laid off folks, Walmart awaits.

Tom Human January 14, 2009 at 11:05 pm

Thanks for the good comments.

“There is arguably lot of instability now. The conditions have abruptly changed. I would argue that the best outcome would be if the market adapted the price and production structure to the new conditions AS FAST AS POSSIBLE.”

This is a good statement that anyone can agree with. The question is, “What is as fast as possible?”

In the same way that if you deform a piece of metal too fast, it will break, if you move individuals too fast, they will break.

If your top-flight engineer spends some time getting food out of garbage cans for his family, when some opportunity suddenly appears he simply isn’t going to be a top-flight engineer any more.

It’s important to sustain that engineer so he can keep feeding his kids and keep his house while you find something to do with him. If you break that engineer, he won’t work any more.

Humans are delicate.

“What you propose is essentially what happened during the Great Depression, at first the government exhorted businesses to maintain wage rates and cut into profits. While this maintained wages for a while, it did not allow them to adjust to the reduced discounted marginal revenue product available from the final sales of goods to consumers as monetary deflation from failing banks and business loans accelerated raising the purchasing power of money and consequently resulting in a falling price of goods.”

Again, there is nothing in your argument I disgree with, not one bit.

Let me even cut to the chase and say, “Yes, I’m advocating that the government do things that are _am kleinem_ somewhat uneconomic. Yes, we’re losing a little money with each transaction.”

The reason is that in the longer term, you are preserving and nurturing your assets, and these are assets you can’t turn on and off like light bulbs, these are your human assets.

So from a larger, longer-term perspective, it’s perfectly reasonable to pay your engineer to do something that’s somewhat uneconomic while you rearrange your economy to find something for him to do, because if you break ‘em, it’ll take you 30 years to make another one.

I’m not proposing throwing money in the toilet, of course. You have to obey the laws of economics. You have to realize that you’re employing this person at a loss – though that loss might be quite small, and if you see my taxation argument above, it might be more economic for a goverment to employ someone marginally employable because they can then tax them.

Yes, you have to be working hard to move this person to a real, economically viable job, no, you shouldn’t be doing things that are wildly economically unviable.

But still, that said, most people want a chance to live, and thrive, and survive, and if “the government” (which is “the people”) have to put in money – and even take money from other people who have not consented, frankly fuck you if my child(*) needs to eat, particularly if I’ve done everything right and am simply being dislocated by “economic” forces completely outside of my control – then that’s what’s going to be done.

Economics and economic efficiency are very important in the same way that the laws of electronics or gravity are important – you don’t want your circuits to catch fire or your buildings to fall down – but in exactly the same way have no particular moral imperative one way or the other, there’s nothing wrong with tall buildings or complex circuits.

These are human tools, intended for human uses, and used to make humans as happy as possible. People want to thrive, they want fairness, these tools should be used to attain these ends, but should not be ends in themselves.

Thanks again. I hope to convert you all from your Manichean free-market views into my more nuanced “efficient humanist” views, and will do so one keystroke at a time.

(* – actually I’m a single male so it’d be “fuck you if my nephew needs to eat”, but you get the point.)

Dmitry Chernikov January 15, 2009 at 12:47 am

Tom, may other people fuck you if their children need to eat, including “dislocate” you still further in the process?

Stanley Pinchak January 15, 2009 at 9:37 am

Why is it that statists are so anti-human and at the same time so elitist (or do I repeat myself)? Why do they assume that the common man is incapable of providing for himself and his family. Why do they assume that no man would have the traditional virtue of thrift and have saved up for a rainy day or several months?

Is it because the statists have used their socialist poison and youth indoctrination camps to purge these virtues from the population? Ever urging further dependence on the state, they appear oblivious to the fact that prudent action involves thinking for one’s future and the uncertainty which it may bring.

A prudent man will ignore the spendthrift’s budgeting advice. When the statists and the state have balanced their own budget and begun to live within their means, perhaps the exhortations emanating from these individuals may be worth considering. Until that time, it is better to do exactly the opposite as what they propose.

I would suggest that it is not enough to just prepare and lay down provisions for an uncertain future, but also be prepared to defend them from vultures with no morals. Maintain physical possession of as much as prudence guides.

Do statists understand that their advocacy of violation of the law can lead to nowhere but the destruction of civilization itself? For what society may exist when there is no protection from thieves and vandals, when the fruit of one’s labor and the property acquired rightly may be taken with no institutional recourse? Perhaps the secret desire of the statist is to destroy the state and to see what anarchy obtains? I would suggest that there are better ways to transition to a system of anarchy than to advocate a path of lawlessness and a breakdown in the division of labor. Mises was right, the anti-capitalist mentality remains anti-human and counter to the advancement civilization. This is made clear by even a cursory examination of the expected outcome of such nonsense proposals.

Henry Watkin January 15, 2009 at 10:33 pm

The government will have to borrow to build the bridge. The taxpayers will pay off the loan over many years during which the loan payments will not be available for private sector investment. Thus the government spending will “crowd out” private sector investment resources for decades.

Investors times January 26, 2009 at 5:34 am

One of the basics assumptions of Economics is that in a free market people are free to do everything they want so as to better their own interest.

However in a depression people are scared to do anything. So new laws have to be changes to reflect this fear.

Ned Netterville July 20, 2010 at 7:19 am

It is simple: taxes are stealing. Taxation is theft. There is only one difference between taxation and extortion. Tax collectors and their cohorts are immunized from prosecution, but they are nonetheless thieves, and all those who participate in the crime in anyway are accessories before and/or after the fact.

All tax laws include enFORCEment provisions. In other words, they will be collected by force–including imprisoning or even killing should the victims resist coughing up the extorted money. In this way, taxes introduce force and violence into otherwise peaceful human relations, and this introduction of violence into the human-intercourse equation inevitably has unseen, unpredictable-but-certain-to occur consequences–like wars, murders, school children killing school children, etc., etc. (Ask me how taxes and the people who propose them are responsible for the Columbine HS and similar school massacres–if you dare.) Because of the unseen consequences of their taxation schemes purportedly to succor the downtrodden, the poor, and the unemployed, “Progressives” who seek government action to cure recessions and other ills of the world are in reality thugs and murdering war mongers responsible for most if not all of those ills.)

To the victim taxpayers, deficit spending in good times or bad is the equivalent of being allowed to pay the extortionist with a credit card instead of cash, and it is consequently a lot more expensive because of the years of interest charges. Of course there is one difference between taxes and deficits: current taxpayer/victims, if they don’t live productively for too long, are able to pass some of the extortion burden off on the next generation of taxpayer victims including their own children and grandchildren. All of the Keynesian-Progressive-Communist-Democrat-Republican b-s theorytales about the “benefits” of government spending require attributing superhuman, divine-like attributes to government and its human operatives, which is the religious belief Mises dubbed statolatry.

Good article, Mr. Murphy, but I doubt it will change the mind of TOM HUMAN, ERIC OR JOEBHEAD. The problem is cognitive dissonance, or as Tolstoy said, in words Micheal Lewis borrowed as a preface to his survey of those insightful speculators who foresaw and made a killing on the bursting of the housing bubble in his book, THE BIG SHORT: “The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.” Hmmm. Could Tolstoy have known Krugman?

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