What’s wrong with “a prolonged slump” when a market has failed? The urgency to dig a deeper and wider hold by the state is the state’s self-arrogance to believe that it has the secret or perfect potion for an ailed market.

The people’s ideology is to be placed aside while the state’s ideology prevails. The same minds that caused the problem are going to fix the problem with self-authorized and self-administered medicines.

Is any US government treasury department employee inside the Washington, DC beltway or congressional staff reading this? If so, simply reply yes and leave a clue that tells us you are really there.

The bailout market has failed, clearly.

No,

Stimulus cannot revive the economy.

Stimulus spending is like trying to fill a hole.
In order to fill that hole you will need dirt.
In order to find that dirt you will need to dig a hole.

No matter how much stimulus spending you make, you will always end up with a hole somewhere.

Psychology does play a part in the market but it is not enough to sustain it. Obviously, the psychology of 2001-2007 was enough to prop up an unsustainable housing market but was not enough to keep it going indefinitely.
As well, getting back to the baker, if the baker believes that a stimulus package will increase demand it is true that he may increase investment in production. The increase in production may payoff for some time as people spend their government checks.
However, the money for the customers to buy loaves of bread was taken away from other people who would have otherwise invested it. Unless the government perpetually gives people money then they will eventually stop buying more bread (than they otherwise would have). So now we have investments moved from those would normally use them to build their livelihoods (and thus have a great deal of incentive to pick real winners in the market) transferred to bakers who have invested money to increase production to a level that is not sustainable and does not reflect the market demand for bread.
Now replace the baker with the housing industry and it is clear that cheap money has not been and will not be the way to go.

In regard to “consumer confidence”: I don’t understand what this term really means. Why should the passage of a “stimulus program” affect what I choose to buy? My spending is based on what I need or want, balanced by what I can afford to spend/borrow for. How does the machinations of Washington, D.C. affect that? If they do pass a “stimulus”, am I supposed to feel confident and say to heck with thinking about my budget? Why?

Even if they put money directly into my hot little hand, it ain’t gonna be much, certainly not enough to significantly alter my plans.

greg,
I beg to differ. Productivity is most certainly increased with a second oven if the baker spends any time waiting on the first oven. Time which would be utilized toward the production of bread had he a second oven. Human action and time are the most fundamental constraints in any system of production, utilizing them more efficiently is an increase in productivity, even in the event that more labor saving devices are used at less than full capacity. It is the job of the entrepreneur to determine the tradeoff between capital investment and labor input as well as output goals in the effort to maximize his net profit. Increases in productivity do not necessarily require advances in the technological frontier, the only requirement is that output increase while holding one factor input constant. In your example, the factor is the baker’s labor hours.

I am a bit surprised by some of the comments. It is good to see that some Keynsians and other false scholars are reading the articles here. I hope they become educated and see reality for what it is.

If all of you would spend time reading Human Action you would have the understanding of how psychology really fits into the economy. Once you understand you will see this in action in the real world.

Finally, if all would remember malinvestment, this article would also be easily understood by those having difficulty. It would also prevent some of the comments that are really not fitting. The other reading that would fit is Rothbard’s, The Great Depression. These books as well as the article are full of sound principles not nonsense that has been proven over and over again to be false. It has been proven in print, in reality not only here in the US but in all nations that have followed this path of destruction and coersion. Redistribution of wealth has not worked yet. An unsound monetary and fiscal policy of fiat money has never been successful yet so why do people still try to convince sane people that it will work? Free markets, sound monetary and fiscal policy with sound money has proven itself. This continues to beg the question, why continue to do the same thing over and over yet expect different results?

prettyskin said: “The bailout market has failed, clearly.”

“Bailout market” is an oxymoron. Something that cannot exist can neither fail nor succeed.

“However, I think this is still far away… It will take time with or without the stimulus package. But stimulus package is a must so that it is seen by people that something is been done otherwise there will be despair that may lead to lawlessness”

Indeed. Delusion is preferrable to reality.

false scholar AND central government planner here.

The stimulus plan can do NOTHING to solve the crisis of the debt-money system, which is the unaffordability of the total debt-service obligations of this country.

The reason it can do nothing has been lain bare by the ‘digging the hole” analogy and the Rothbard quote on government’s limitation “to give” being equal only to what it can take.

On digging the hole, the problem with the debt-money system is not just that you can’t refill the hole, it is that, given the interest required, AND NOT CREATED, the faster you work to fill the hole, the deeper it gets.
Debt-money.
THAT is the problem.

Regards Rothbard’s correct observation, the substitution of a debt-free money system, fiat as it were, issued as in Friedman’s quantity theory, would correctly place the government in balance with the people.

The people provide ALL of the capability and capacity for the growth in the economy that is provided a means of exchange by the government’s debt-free treasury issue.

The government is EXACTLY limited to giving to the people the money which is provided as a means of exchange equal to their increase in production and consumption, which is what they give back to the government.

Debt-free money.
Problem solved.

http://www.financialsense.com/fsu/editorials/2005/1212b.html

respectfully.

I think what is getting people into trouble is the belief that the “instability” of an appearently random system, such as the free market, is dangerous because it has no “control”. This is a false assumption.

The free market, like any “appearently random” system has controls, or more accurately, feed-back loops, by which the caotic changes that take place within the system “feed back” into the system, stabilizing it.

A simple example of such caos can be found in most homes. Your washing machine is “self balancing”, during the spin cycle. How does this happen? Caos. There are two fly-weights inside and underneath the tub. They are attached only at the center and are free to move around that center in either direction. The weights are dissimilar and will move at different speeds, and in different directions depending on the forces applied. When the load is off-ballance, these fly weights shift, automatically, in responce to the shifting of the center as the load spins. Their movement is out of sync with the movement of the load, and also with the other fly-weight. The result is that some of the movement counters the movement of the load, centering the mass of the whole system.

Free markets, and all caotic systems have these same tendencies. What Keynes is afraid of is precisely what make it work! If in the above example, one or more of the flyweights were “regulated”, then the system would fail to achieve the same level of balance, or, would be more stable for a single cycle, and less stable when the load shifted. Manual controls are inherently incapable of predicting future loads, and because of burocratic lag, incapable of being adjusted in time with the changing load. Only the free moving, caotic, flyweights are capable, without any intervention whatsoever, of balancing the load in real time.

It could be argued that if enough controls are put into place, the system could not get out of balance. However, this would make the washing machine very inefficient, as it would require actively (with additional energy), countering the movements of the the load. Or, the load would have to be the exact same load, distributed exactly the same each time.

The market analogy would be either a completely controlled economy (Communism and such), or a static economy, (Again, Communism Extreme).

Another problem with Keynes’ fear of the free market is the notion that the market is participated in by un-thinking robots or static points of market interaction. This is definately not so. It is the diversity of thought amoung the players, the innovation and planning by the entities involved, the thinking and reasoning, good or bad, that make the market come alive. The market is super-system of free-thinking and free-acting fundamentals, not static points.

Keynes, and people like him, would rather trust in the thinking of a select few, than have faith in all of their fellows. I believe that most people are mostly good most of the time, and take full faith in thier ability to make decisions and act rightly. That is the belief that must be maintained, and even protected by Freedom seeking people, and is the cornerstone of free-markets and free-trade economies.

The United States constitution, and government was the first ever to fully take this view seriously and implement a set of checks and balances in government institutions to protect it. Un fortunately, over time, we have forgotten how important our faith in each other really is, and have regulated our freedoms away, all the while singing the songs of Keynes and his fearful ilk.

mahesh joshi

Just because a person feels something doesn’t mean his feelings correspond to reality. It amazes me that you believe that promoting illusions and fairy tales are appropriate means to cure what ails the economy.

Advertisers and marketing specialists appeal to people’s emotions when they attempt to sell their goods and services. However, once they have engaged a person’s emotions they must back up their claims with logic and proof.

If people used the same criteria when judging the claims of politicians, free market capitalism might stand a chance of gaining the support of the masses. You know, this makes me wonder why people are more skeptical of the claims of advertisers than they are of the claims of government officials—when it is evident that advertisers are much more truthful in their statements.

Please, let’s not conflate Austrianism with libertarianism, however coincidental they might be.

January 22, 2009
Fiscal Policy In Democracy Buys Votes!

It should be obvious now why the politicians keep claiming that democracy is the best form of government. The inevitable failure of their interventionist schemes can then find no specific culprit to blame, meanwhile the money siphoned off by the political class quickly finds its specific pockets!

Democracy is the ideological lie that uses fiscal policy to buy votes. In a classical liberalism society there will be no such thing as fiscal policy! Fiscal policy is a license for interventionism granted to the political power elite and as such it is a monopoly power that disrupts the market economy.

The ‘sacrifice’ not spoken of by the demagogic mouthpieces of the unConstitutional coup is the voters’ sacrifice of the bribes promised by the politicians in the corrupt system of government called democracy. That type of sacrifice is not spoken about because it would undermine the incentive to lie and steal which are part of the corruptions of a democratic system.

The overabundance of ideology surrounding all of these arguments is, frankly, ridiculous, and if these types of debates are any indication of the state of the field, I am entirely unsurprised that economics has remained banished to the “science-sidelines” along with psychology and the social sciences.

Too much centralized management of an economy is clearly not productive, that much is clear. The market, when unfettered and free, does an excellent job of self-correcting. Government has proven itself to be quite poor at predicting the consequences of its actions, and in my opinion, it is far from clear that a quick spreading of cash will turn this economy around any faster than it would by itself in the situation we’re in right now.

But the suggestion that the effects of such actions are _always_ going to be negative is as naive as its opposite, and arguments to either purpose reek of ideological bias. Due to the fact that distribution of wealth affects the relative levels of production and consumption, there is clearly some optimal distribution that maximizes economic performance relative to a given metric (not that we can even agree on the metric, but that’s one for another day…), which will vary depending on the current economic climate (this is where psychology enters in, in part – rational expectations of any sort depend quite critically on future expectations, which in turn depend on the future expectations of others). If the current distribution of wealth does not optimize performance relative to our desired metric under the current conditions, which is increasingly likely whenever those conditions change rapidly (wealth distributions vary far more slowly, and cannot achieve quick balance in response to a system shock), then a readjustment of that distribution _will_ help the economy, philosophical arguments to the contrary be damned.

In other words, it is absolutely theoretically possible to siphon off some portion of our current collective wealth and “waste” it through government reallocation in a manner that leads to greater economic output further down the road, trading current wealth for future wealth. The problem is predicting when this is proper and what should be done. It doesn’t help anyone to try and develop arguments that “prove” that intervention is always harmful any more than it does to “prove” that is always good; as in most things, the right answer requires a realistic balance, something which is sorely lacking in most of the simplified models that economists delude themselves with.

I suspect that I am on the wrong page (again), but, to me, both Keynesian and Austrian explanations of what we observe only make sense if one reads passively. I live in California, so when I think of government intervention, I think of freeways and dams. The eighth largest economy on the planet would be a collection of fishing villages and small farming communities without the government’s ability to coerce capital and labor into building dams and roads. I do not know that private capital ever had enough patience to wait for development of that kind of wealth. On the other hand, government has a commitment to breaking things and killing people, as in armies, navies etc. That leads to what, to me, seems missing in Keynesian and Austrian logic. Government, as well as the private citizen, has a choice to do something constructive, or not. Actually, I think that idea was Ben Franklin’s contribution to American culture.

Deefburger’s blog goes a long way to providing a perspective, if not an explanation of the system. But chaos theory is non-linear math and logic, and is presently in the same developmental stage as linear logic and math were between Galileo and Newton. Deefburger does fail to mention that his washing machine system will eventually self destruct. Even simpler systems, like a pendulum, eventually show chaotic behavior.

And that brings us to Andyberm: Do not be so impressed with the “hard sciences.” The “hard sciences” are often stuck in the linear math stage. Physics cannot explain the simple vortex, because it relies on Cartesian Coordinates, which are straight lines. As a result, we have, quite unbeleivably, moved from “flat earth” thinking to “flat universe” thinking. Biologists, ecologists, and the global warming scientists, etc. cannot use the math from the “hard sciences”; it just doesn’t work. (Although the political arm of “global warmers” is doing so.)

All that does not excuse the present generation of employed economists. They have relegated themselves to being sycophants and shamans to collect a check. I understand the frustrations of the Austrian school, watching others get paid to “suck up.”

Thirty years ago, I was the “Chairman of the Board” of a drug program. Dope fiends can never get “high” enough, detoxing is to be avoided at all cost, and one intoxication is as good as another if times are tough. In the same vein, politicians can never get enough power, the rich can never be rich enough, and the electorate can never be prosperous enough. I find myself embarrassed that one can predict “civilized” behavior on such a primitive level. Else, we do have leadership and free will, when they are exercised.

I agree with you all, because you make sense. But, they are not planning on making any sense! there is no real plan to ever “pay” it back or tax it out of the population. their plan demands “new” money with no backing, that is its strength and weakness. noone feels the pain of it, so it can have an effect, just like the millions and millions of new money of the last eight years had an effect. until the downturn. they are just hoping for more of the same. i am not sure anyone believes the government can sustain itself on a “real” fiscal policy with “real” accounting.

Hmm, it would appear that history has come almost full circle in America. We are presently at 1927, how much longer until it becomes 1929, and we have a dictator for life such as FDR, a notorious socialist whose economic and social policies extended the depression by at least ten years. We’ve just emerged from the fascist state of the Bushies and Cheneys. How long before Obummer thinks he’s Lincoln and introduces high tariffs and taxes? Certainly this “buy American” certainly suggests the protectionism that proliferated prior to and finally culminated in the Civil War is alive and flourishing today. I do believe the thought has crossed his mind. One large, hard turn to the Marxist/Leninist United Socialist States of America. LOL

Michael Kirkby
mkirkby@grantthornton.ca