Monday, November 1, 2010

Is the Recession Simply a Zero-Sum Game?

Paul Krugman seems to be a True Believer that any disagreement with the principles he espouses MUST come from bad faith. I mean, who could be against more government spending that would give the economy "traction" and put us back into prosperity?

Thus, he reasons, there must be a much darker reason that some people out there seem to believe that piling on more government debt and spending might not have the effects that Krugman claims will be at the end of the tunnel. Isn't he a Nobel winner? Is he not on the Princeton faculty? Did he not receive his doctorate at prestigious MIT? So, to disagree with him is to engage in No-Nothingness!

As the election has approached, Krugman has become even more shrill than usual, laying out personal attacks and portraying anyone who might disagree with him as being motivated by pure evil. Why are they evil? Read the second paragraph again.

In his column today, Krugman now lays our present troubles at the feet of what he calls "debt moralizers." He writes:
“How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement.

It’s a sentiment that resonates not just in America but in much of the world. The tone differs from place to place — listening to a German official denounce deficits, my wife whispered, “We’ll all be handed whips as we leave, so we can flagellate ourselves.” But the message is the same: debt is evil, debtors must pay for their sins, and from now on we all must live within our means.

And that kind of moralizing is the reason we’re mired in a seemingly endless slump.
First, I see Krugman continue his practice of taking stray quotes and fashioning huge movements from them. Being that the vast majority of so-called Tea Partiers could not tell you who Rick Santelli is, I doubt that hundreds of thousands of people have demonstrated across the country in the Name of Rick. (I guess we are supposed to believe that had he not said anything, the Democrats would not be facing huge midterm election losses.)

Second, I have not heard any U.S. politician claim that America must be good for its debts to China and other entities that have purchased U.S. Treasury debt, and the notion that suddenly we have become a nation of "debt moralizers" is really silly. Does anyone really think that if the Republicans take over Congress (or at least the House) -- or even the White House in two years -- that the USA suddenly will stop being the world's largest debtor nation in history?

But, even with these Krugman pronouncements, what I find amazing is his belief that the real problem is that businesses and individuals refuse to take on even more debt, and, specifically, that the infamous Housing Bubble was nothing more than a zero-sum game. He writes:
The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing, going far beyond the subprime loans many people still believe, wrongly, were at the heart of the problem. Real estate speculation ran wild in Florida and Nevada, but also in Spain, Ireland and Latvia. And all of it was paid for with borrowed money.

This borrowing made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. But it made the world vulnerable. When lenders suddenly decided that they had lent too much, that debt levels were excessive, debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. And recovery, such as it is, has been weak and uncertain — which is exactly what we should have expected, given the overhang of debt.

The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.
Thus, in Krugman's view, the Keynesian Cross really is a Model for the Whole World. The bubble really was nothing more than a huge wealth transfer, and now the people who got the wealth are selfishly squirreling it away. He goes on:
Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.
So there you have it. There WERE no malinvestments. All of the assets created in the boom have exactly the same value that they had before the crash occurred. However, those Bad, Bad Moralizers want to see people suffer for their sins:
But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.

And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity.
I can't say that I have watched too many "moralizers" flying into a rage, as the Rage Guy is Krugman himself. People who disagree with him, he writes, can only be motivated by Really Bad Intentions, and if you wonder why that is so, read the second paragraph of this post (again).

However, in this Keynesian-Cross/Zero-Sum analysis, something does not make sense. If all of this really is a zero-sum game, as Krugman is claiming, then why would the houses have to be sold at a loss? Is the lowering of housing values also a plot by Mitch McConnell and The Forces of Evil? After all, Krugman has written elsewhere that the Austrian Theory of the Business Cycle is nothing more than an economic version of the Phlogiston Theory of Fire. Part of that theory says that credit-fired economic booms also create large amounts of malinvested assets that cannot be sustained over time, and certainly the housing boom/bubble fits that description. (David Gordon wrote an excellent rebuttal to Krugman's portrayal of the ATBC in 1998.)

My point is this: Krugman cannot have it both ways. He is not free to claim both that all that has occurred is a transfer of wealth, and, at the same time, the value of housing truly has fallen. Furthermore, we are not just dealing with a "capacity" issue, as Robert Higgs' "Regime Uncertainty" theory has merit here.

For the past four years, the political Left has controlled the U.S. Senate and the U.S. House of Representatives, and for the last two years, the White House as well. All three entities have been a wellspring of anti-enterprise rhetoric, and we are reading on the NY Times editorial page that government must be more aggressive in criminalizing entrepreneurial error. This hardly is an atmosphere in which any firm would want to invest, given that if a someone were to misread the future, that mistake would mean he or she goes to prison.

Furthermore, Krugman's notion that more spending will cure everything by giving the economy more "traction" is nothing more than the application of circular logic to economic theory. Unfortunately, circular logical today is passed off by our "elites" are Real Wisdom.

When it became evident three years ago that the Housing Boom could not be sustained, the Bush administration and Congress had a couple of choices. They could have realized that it was futile to continue down the same path and to permit the economy to adjust to those assets that were sustainable, or it could pretend that all the economy needed to keep the charade going was to inject more "spending." Not surprisingly, they chose the latter, although now Krugman says that they were not playing Charades aggressively enough. Moreover, he further claims that the Really Bad People know the truth, but just enjoy making others suffer.

No, an economy is not a zero-sum game, nor is it just one big circle in which (to take Israel Kirzner's example) someone eats breakfast so he can go to work, and then goes to work so he can eat breakfast.

77 comments:

Anonymous said...

I like Krugman's line: "And if you point out that their arguments don’t add up, they fly into a rage."

Way to take on your intellectual adversaries' best arguments...

Fascinating to watch the empire crumble.

Bob Roddis said...

"And if you point out that their arguments don’t add up, they fly into a rage."

No, Krugman, you lying buffoon. They raise $100,000 for the poor and challenge you to an informed debate. You then fly into a new rage and ignore them while misrepresenting their views.

Krugman: a person of low moral character.

Daniel said...

Why do you always rely so heavily on this all-caps hyperbole: "Really Bad People", "Forces of Evil", "True Believer", etc.

In actuality, Krugman calls no one evil in this article - so why do you make the claim that he does?

Why do you always rely on these all-caps ideal-types, William? Can't you critique a position without mangling what your opposition is saying? When you have to continually fabricate and embellish so much of what Krugman says to disagree with him, it gives the impression that you can't make a solid argument against what he actually says.

Bob Roddis said...

Re: "all-caps"

Since I have never found a critic of the Austrian school who had even a basic familiarity with fundamental Austrian concepts (except for perhaps Bryan Caplan), it always seems important to go REAL SLOW with them and to emphasize important points (but to no avail).

Further, Krugman ALWAYS ignores and/or misrepresents Austrian ideas. ALWAYS. (Hint: The ALL-CAPS are for emphasis of such a TRULY AMAZING FACT).

William L. Anderson said...

Excuse me, Daniel, but if you read Krugman (and especially today's column), he really is claiming that his intellectual opponents reach their conclusions because they are moralistic bastards. I read the guy's stuff and he always seems to be attacking the motives of others.

I do the all-caps for emphasis, and that is my choice. If you don't like all caps, then just read Krugman, since he doesn't use that device.

dchamil said...

Re Krugman: The remedy for a failed policy always seems to be greater zeal. "Into the breach, comrades! We must fulfill and over-fulfill the historic Five-Year Plan of the Twenty-First Congress of the Communist Party!"

Bob Roddis said...

Anyone ever notice that our "in-house" critical commenters (or Krugman, for that matter) never bother to prove that economies have, should have or lack "traction"? According to them, we must always call in the SWAT TEAM to cure problems that do not exist.

Ike said...

So Krugman admits that "The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing," and his prescription is yet more unsustainable borrowing?

jason h said...

Why of course Ike! The laws of economics change in a recession.

All you have to do is pay people to dig ditches, and eventually the economy will turn around and the ditch diggers can get a real job.

'How can the economy turn around if people are wasting time and resources digging said ditches?', you might ask. Well now you are starting to sound like a evil Tea Bagger.

Bob Roddis said...

Since we have multiple quotes from 2001-2002 where Krugman emphasizes the alleged importance for Greenspan to create a housing bubble to replace the tech bubble, the recent statement that "The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing," and the following statement from 2006 (oft repeated by me), Ithink we have proven once and for all that Krugman concedes that the central bank is the cause of bubbles.

Paul Krugman: As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.

That Krugman supporters still like to argue this admission points to nothing but their own desperation.

William L. Anderson said...

Jason and Ike, you guys need to stop making sense, as you are going to be deemed enemies of the people. You see, if government starts even more borrowing and spending, then everyone in business who is hoarding his cash is going to see that, well, government is borrowing and spending.

That will make business owners very, very confident that there will be spending, so they will start spending, too. Now, none of this involves any real economic activity, just spending. But more spending begats more spending begats more spending begats prosperity. Dont'cha see it? It's magic!

Lord Keynes said...

Part of that theory says that credit-fired economic booms also create large amounts of malinvested assets that cannot be sustained over time, and certainly the housing boom/bubble fits that description.

LOL... Maybe you should read your own theory again!
ABCT postulates low interest rates causing malinvestments in high-order capital goods, not people treating their homes like ATMs and using debt to buy consumer goods. ABCT doesn't explain low lending standards to consumers, securitization, or financial crises.

Austrians are still desperately, pathetically trying to make their largely irrelevant ABCT fit a boom that isn't explained by it.

Tom Palmer has your number:

http://tomgpalmer.com/2009/11/01/norberg-on-the-financial-crisis-great/

Bob Roddis said...

Even Palmer states that a funny money bubble in housing is possible under alternative Austrian-like theories. Again, all LK can come up with are disputes about the application of corollaries of basic Austrian concepts. Nothing LK ever says suggests that money dilution is anything other than a system of fraud and theft that is going to seriously distort the price and capital structure especially as to long term projects. People can and do debate where, how and when that is going to take place.

Lord Keynes said...

Then you should read Palmer again

Woods insists, contrary to the evidence, that the artificially induced boom resulted in a lengthening of the capital structure through overinvestment in too many “long-term projects.” ... In fact, what we saw was a bubble in housing, which is not a “long-term project” ... but a speculative investment in a durable consumer good, with an additional twist: the low refinancing rates and the inducements to refinance led many to treat their homes as ATM machines and withdraw cash to finance, not “long-term projects,” but consumption. But Mises and Hayek explained a previous boom-and-bust cycle in terms of a lengthening of the capital structure, so we must believe — we must, a priori! — that all boom-and-bust cycles must — they must! — follow the same process. That’s religion, not analysis

Get it? You are like cultists. ABCT is a religion.

Anonymous said...

I can write Krugman columns too! I just need to write a computer program that generates a column per week of witless rhetoric based on only three basic input phrases:

i) Debt is wealth


ii) War is peace

iii) I never advocated a housing bubble

LOL.

Now about Lord Keynes's comment above. A house is a long term project which requires a capital investment, that's why you have to borrow money for it and spend years paying it off. And speculative investment by industrialists in production facilities, when initiated due to false signals such as low interest rates, is consumption. That's not religion, that's the fact jack.

Lord Keynes said...

A house is a long term project

Nope. It certainly isn't if you buy one second hand on secondary markets. And, even if one gets built for you, it is (1) a consumer durable and (2) a real asset, not a capital good.
You get a big, fat zero on economics 101.

which requires a capital investment

Loaning money for buying a consumer durable without production of any commodities is not "investment".

that's why you have to borrow money for it and spend years paying it off.

Borrowing money and paying it off for years is what happens when ANYONE takes a loan, whether it is for a capital good or a consumer good.

Maybe you should read Rothbard?:

To the extent that the new money is loaned to consumers rather than businesses, the [sc. ABCT] cycle effects ... do not occur

Rothbard, 2004 [1962]. Man, Economy, and State: A Treatise on Economic Principles, p. 995–996, note 110.


Rothbard understood it, too bad modern Austrian cultists don't.

Richard said...

LK,

I would count on Palmer for his knowledge of ABCT. What actual analysis does he provide? For example, does he look at the amount of producer loans in relation to consumer loans leading up to and after the boom?

http://screencast.com/t/mMb8mmBCIJ

We did not have a situation where lower interest rates ONLY encouraged the creation of consumer loans - the situation Rothbard said would not lead to a bust (read that quote from him again - consumers rather than businesses). They also encouraged production projects which lengthened the production structure.

Not to mention, as you explained to you on the Mises blog, because of inflation houses have obtained a quasi-capital good status. Not everyone bought houses just for consumption. Many bought them them as an investment - to sell at a higher price at a later date - or to use as ATMS. This further distorted the capital structure.

As for being cultists, well, that conflicts with your other back handed comments criticizing Austrians because they disagree with one another on certain matters.

Lord Keynes said...

They also encouraged production projects which lengthened the production structure.

The construction of a house is not an investment in a higher order capital good. This is the direct production of a consumer durable.

Even construction companies that invested in extra capital goods were not necessarily creating "higher-order" capital goods at all. These goods are used for direct production of a consumer durable.

Not to mention, as you explained to you on the Mises blog, because of inflation houses have obtained a quasi-capital good status.

Houses are not "quasi-capital goods", they are just second hand assets in an asset bubble.

Different thing. No amount of special pleading will change that fact.

Many bought them them as an investment - to sell at a higher price at a later date

House flipping (assuming you are living in the house) is just asset price speculation, not investment in higher order capital goods.
What commodity is the house being used to produce by the flipper? None.
He sells it as a consumer durable to someone else.

More desperate nonsense.

Richard said...

LK,

ABCT references malinvestments in capital goods than would otherwise take place, not just in longer production processes than those that currently exist. Here's Rothbard;

"Some critics charge that not all net investment goes to lengthening the structure—that new investments might duplicate pre-existing processes. This criticism misfires, how- ever, because our theory does not assume that net saving must be invested in an actually longer process in some specific line of production. A longer production structure can just as well be achieved by a shift from consumption to investment that will lengthen the aggregate production structure by greater investment in already existing longer processes, accompanied by less investment in existing shorter processes. Thus, in the case of Crusoe mentioned above, suppose that Crusoe now invests in a second net, which will permit him to catch a total of 150 fish a day. The structure of production is now length- ened even though the second net may be no more productive than the first." (MES w/P&M, Scholar's Edition p. 543)

If additional production projects are engaged in the overall structure of production is lengthened. They need not be longer than projects that already exist.

I am not sure what you mean by 'special pleading'. I am not making an exception to the definition of a capital good by saying that people bought houses as investments, not just for consumption.

A house flipper is speculating - exactly - they are not buying the house for consumption. They are buying it because they believe they can sell at a higher price (and in so doing, lengthen the total structure of production). And, many home buyers bought houses not only to live in, but because they believed they could sell the house later at a higher price. Speculators are producers, they buy believing that, due to future demand, they can sell at a higher price. A speculator is part of a production process.

And, what about my comment regarding Rothbard and consumer loans vs. producer loans and projects. Any response?

Lord Keynes said...

If additional production projects are engaged in the overall structure of production is lengthened. They need not be longer than projects that already exist.

Utterly irrelevant.
People buying houses to live in and/or flip on secondary markets from NINJA or liars loans are NOT engaging in production. The produce no commodity. They sell the asset. That asset (the house) is not capital good.

A house flipper is speculating - exactly - they are not buying the house for consumption. They are buying it because they believe they can sell at a higher

Yes, he is speculating on asset prices.

(and in so doing, lengthen the total structure of production).

Nope. No production involved here.

And, many home buyers bought houses not only to live in, but because they believed they could sell the house later at a higher price. Speculators are producers, they buy believing that, due to future demand, they can sell at a higher price

Speculators are not producers - they ALREADY own a commodity or asset and speculate on its price. This has got nothing to do with production.

Robert said...

That asset (the house) is not capital good.

But people are behaving like it is due to the artificial credit.

Jonathan M.F. Catalán said...

All goods, whether capital or consumer, are consumed during the process of their use (broadly speaking—hang with me, here). George Reisman, in Capitalism, explains three forms of consumption;

1. Productive consumption: Consumption of goods meant for the production of more goods. For example, flour may be productively consumed to produce bread. This is otherwise known as an investment.

2. Reproductive consumption: Consumption of goods meant for the production of another one of the same good, in the same quantity.

3. Unproductive consumption: Consumption meant simply for the satiation of a hedonistic demand. Consumed for pleasure, rather than for further production.

I have come to believe that the line between these forms of consumption is difficult to define, and have come to argue in favor of a dynamic view of the nature of economic goods, economic production, and economic wealth. For example, how does one come to decide whether the consumption of $_quantity_of_food_X is necessary for further production or is a luxury? Obviously, there is a line distinguishing the two, but it is difficult to pinpoint (and depends on the market agent in question).

By extension, there is a less abstract point to be made. That is, a house can act both as a consumer and capital good (as defined above, where the former is used for unproductive consumption and the latter is used for reproductive and productive consumption). To some degree, the house is meant to satiate pleasurable demands, and in other ways, a house is a capital good, meant to make an individual more productive.

This is probably a reason why Jesús Huerta de Soto considers durable consumer goods to be capital goods, for all intents and purposes.

I'm not sure of what use this post to be. From the looks of it, it seems as if Lord Keynes is more interested in insulting and demeaning Austrians, rather than provide an argument in his own words.

In any case, Austrian business cycle theory is one of sustained intertemporal disequilibrium. It is meant to describe cycles which include industrial booms and consequent busts, not general capital deaccumulation (capital deaccumulation, or general economic decline, can occur without a preceding industrial boom, if the level of investment isn't high enough to sustain the ongoing rate of consumption).

Jonathan M.F. Catalán said...

Despite my criticism, I think Lord Keynes does bring some valid points. I will try to elucidate the following in a blog post of mine, but perhaps the present recession is not a product of a lengthened structure of production (or, perhaps it is to some extent), but perhaps we should also look at the widened stages of production (that is, the increase in production directly related to the goods being produced in that particular stage - including consumption goods).

Housing, however you look at it, is either a consumer good or a low stage capital good (well, depending on its use). The majority of capital-good production (lumber, nails, et cetera) can be said to represent a widening of that particular stage of production (and themselves may represent new stages; this is the confusion brought about by a dynamic capital theory).

The present recessions, like all recessions, have more to do than with the previous credit expansion. Relative price inflation and intertemporal miscoordination may have caused it, but there is no doubt that there are secondary factors which may cause the recession to lengthen or get worse. A large portion of the present recession is financial in nature, and represents the scope of the poor loans made, and so this must be studied in conjunction with the notion that the recession may not have been caused by a dramatic lengthening of the structure of production (just a dramatic widening).

Lord Keynes said...

large portion of the present recession is financial in nature, and represents the scope of the poor loans made

Poor or reckless lending by creditors is a fundamental factor - this is related to the highly dysfunctional system of financial regulation in the US, and in many other countries since the advent of the neoliberal era (about 1980 onwards).
Contrast the US with Canada where a reasonably effective system of financial regulation still existed - Canada escaped mass bank failures, its banks were largely prevented from making destabilizing sub-prime loans, and they did not load up on topic CDOs etc.

Jonathan M.F. Catalán said...

Believe it or not, no Austrian really disputes the extremely general notion that the present recession was a product of reckless lending, and represents a fundamental issue with our present credit organization system (banking system).

Furthermore, expansive monetary policy may not necessarily lead to a boom-bust cycle. Look at Venezuela, which has heavy inflation, yet no boom-bust (just rampant capital deaccumulation).

The Austrian theory of the business cycle has more to do with monetary theory. It is a theory based on extensive monetary theory (namely Wicksell's I believe, with additional insight by Mises) and capital theory (before Hayek, based mostly on that of Böhm-Bawerk).

N. G. Zax said...

To me, Krugman's funniest line in the whole piece is: "Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang."

Sure, why doesn't USG just unilaterally cancel ALL consumer debt, mortgages, credit cards, everything. I bet you'd really get some "traction" then!

To which they would say, "Don't be silly, we agree that would be bad. We will, instead find the *correct* level of debt forgiveness which will give the economy "traction" yet won't cause lenders to stop lending or people to think that they can just load up on debt and count on someone else to bail them out after they've had their fun." [Ooops- too late]

I am thankful every day that we have such all-seeing experts to guide us!

People are worried about another Great Depression. With "religious leaders" like Krugman leading the way, we should be worried about another Dark Ages.

Inquisitor said...

Lord Keynes is a troll. I'd ignore him. He's had his contentions torn to shreds in past, yet he repeats them over and over and over, like a religious quack trying to sell his idiotic gospel in the hopes that someone might be ignorant enough of Austrian econ to buy into his appeals to questionable authority. :)

Inquisitor said...

BTW, for anyone with half a brain, who understands how the subjective theory of value and orders of production (again, subjectively ascertained based on the actor's purposes), it should be evident why it matters not that houses are not an ordinary "capital" good but in this capacity, as durable consumers goods, sensitive to interest rate alterations, were the focus of the bubble. Now LK is free to trot out as many out-of-context/outright idiotic quotes as he pleases, but he cannot and will not grapple with Austrian theory on its own terms, only to stamp his feet and insist "houses are not a commodity". Says who? You? They certainly can be if the owner intends to resell it speculatively (and before you whine, ALL action is speculative, so there's no arbitrary divorcing this from the possibility of a house being a commodity.)

Please, learn some (excuse my language) fucking economics, not Keynes's la-la-land fantasy dreaming.

Anonymous said...

Notice by the way that Palmer is engaging in his typical brain-addled histrionics. He addues NO argument or evidence to back his claims and does nothing to deal with Wood's substantive arguments. Maybe he's LK?

Richard said...

Jonathan,

I certainly agree with your comments regarding the Austrian position on reckless lending. Lord Keynes has (rightly) stated that, according to Rothbard, if such ‘reckless lending’ confined itself to the consumer loan market, then ABCT says we would not see a boom and bust. He has criticized Austrians for claiming ABCT applies to the current recession because the ‘housing boom’ is just such a case – an expansion of credit that went to buying consumer goods (homes). I, and others, have argued that this is not the case, and that ABCT does explain the current recession (or, at least, is not refuted by it).

You mentioned Reisman. Back in 2001 he gave a lecture on Monetary Reform. During the Q&A session he made the case that, due to inflation, homes have come to be seen as quasi-capital goods and that this has caused capital mis-allocation. (@ about 40 min). You may find this useful for your blog post?

http://mises.org/mp3/MU2001/MU31.mp3

Jonathan M.F. Catalán said...

Thanks Richard. I'll be sure to listen to it. The topic isn't new; both Böhm-Bawerk and Hayek dealt with durable consumer goods.

Jonathan M.F. Catalán said...

In case anybody cares to read: http://www.economicthought.net/2010/11/revisiting-capital-theory/

Bob Roddis said...

Also, because of inflation, homes had become a store of value, further distorting the price, investment and capital structure. (It would be nice if the populace would bother to understand the simple cause of inflation).

Again, while there is room to dispute how Austrian theory plays out under various scenarios, the basic problem of economic calculation under the socialist/Keynesian regimes is always present.

Anonymous said...

At the very least, all land, including the land a house sits on is a higher order capital good.

Mike Cheel said...

How come the Keynes folks aren't really disputing much of what Bill has said? There is a lot more to this article than this one statement that most of the posts are disputing? If everyone should share in everyone's debt, kindly let me know in these comments and I will arrange a pay pal for any of you folks who want to help me pay for my house which is totally underwater. I could use the relief since no one else wants to help me with my debt that has not lost any value. This will enable me to spend my money on other stuff which will help kick start the economy right?

Lord Keynes said...

not grapple with Austrian theory on its own terms, only to stamp his feet and insist "houses are not a commodity"

Shooting yourself in the foot again?
Houses ARE a commodity, which is what I have always said: they are a consumer durable.
They are not a capital good, unless they are rented out.

Richard said...

LK,

What is the difference between buying a house to rent out and buying a house to sell later for a profit? How is the former a capital good purchase, but the latter a consumer good purchase?

Lord Keynes said...

What is the difference between buying a house to rent out and buying a house to sell later for a profit?

Massive difference.
If you buy a house to live in and then "flip", you are a speculator on asset prices.

You are NOT producing a commodity for exchange when you live in your house. What commodity is the house producing for exchange while you live in it and wait for its price to rise???
NONE. Therefore it is not a capital good.


Even when you sell it, you are not "producing" any commodity at all.

The house ALREADY is a second hand commodity, which is sold on a secondary market for money.

You produce no commodity with the house, even when you sell.

The house might a capital good to the real estate agent, but it isn't to you.

Jonathan M.F. Catalán said...

Capital goods don't necessarily need to produce more economic goods in an economy as a whole. For example, let's take the following relationship: butcher - meat packer - restaurant - customer.

In this simple, non-dynamic example, the meat is a capital-good until it is purchased by the customer, assuming that the customer consumes it for his own pleasure (rather than for further production). Despite the fact that no greater amount of physical steaks were produced by the restaurant, it is still considered a capital good because it is still used productively by the restaurant itself (it is increasing the restaurant's wealth).

There are three classifications for goods:

1. Capital goods.
2. Consumer goods.
3. Money.

At not point is there a fourth category, "nothing".

Shawn Ritenour said...

So Krugman says:

"Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity."

He again we find one of Krugman's grand blind spots. He simply will not allow for downward price adjustments to equilibrate markets.

Also, perhaps some of us merely have a passion for the truth. Perhaps some of us have a passion for economic theory that recognizes, oh I don't know, human action, scarcity, the fact that more money does not equal more wealth, and that malinvested capital must be liquidated if we are to proceed to real prosperity.

Another Anonymous said...

How come the Keynes folks aren't really disputing much of what Bill has said? Here goes. But some of what Prof Anderson has said is incomprehensible or crazy.

E.g. Ridicule against someone eats breakfast so he can go to work, and then goes to work so he can eat breakfast.

What is wrong with eating breakfast? Or working? If you stop doing either one, the other becomes less likely. If Prof A eats at the college cafeteria, and his department pays him in cash, wouldn't that be a circular flow, part of the economy? Israel Kirzner's moronic ridicule is like ridiculing the idea that the Sun rises in the East. There is nothing wrong with circular logic. If the circle is "virtuous" it is called "consistency", and is a hallmark of truth. It is only when the circle is vicious that we have a contradiction.

So there you have it. There WERE no malinvestments. All of the assets created in the boom have exactly the same value that they had before the crash occurred. This has nothing to do with what Krugman says. He is calling for debt relief. Things like unemployment insurance, the government helping homeowners instead of banksters (or even better, the government guaranteeing a job to anyone.) Things that would keep the real economy going. Sensible people are all for market forces downsizing the profligate financial sector - the biggest and most useless malinvestment of all. But human beings are not malinvestments. The government has an infinite amount of dollars. It knows this when it is a question of bailing out its Wall Street masters, but not when Main Street, the real economy, comes asking.

Bala said...

Jonathan M.F. Catalan,

That's a nice way of explaining it. However, the same point has been explained to LK in the past. As I have understood him, he does not want to understand this point. That is the real problem. He fails to see that his notion that "a house is a consumer good because the buyer lives in it" is completely incorrect.

As you rightly pointed out, any good may be a higher order good or a consumers' good. LK's repeated failing is to draw the distinction ex-post. He completely fails to understand the situation ex-ante.

A person "investing" in a house, meaning buying a house with the intention of selling it again", ex-ante sees the house as a way-station on the route to getting money that can then be exchanged for consumer goods. This analysis alone qualifies the house thus bought for this purpose a higher-order good. That he also occupies the house till he sells it is an ex-post condition. Even if ex-ante, he planned to occupy it till the re-sale, the aim of buying, i.e., re-sale, is what should decide the status of the house as being a higher order good.

To take another example that I have already given to LK, if I buy toothpaste for personal consumption, I am buying a consumers' good. If I buy the same toothpaste to provide to the customers of my hotel during their stay, I am buying a higher order good.

This is a pretty simple point but LK has no willingness to understand it. He just wants to repeat his meaningless notions. That's what makes him a troll.

Lord Keynes said...

A person "investing" in a house, meaning buying a house with the intention of selling it again", ex-ante sees the house as a way-station on the route to getting money that can then be exchanged for consumer goods

Wrong in every way.

Selling an asset second hand is NOT production of a commodity. The house is not - and cannot be - a capital good in such circumstances.
The house produces no commodity itself - it IS a consumer durable itself, and gets sold second hand.

Asset speculation is not production of commodities and never will be.

Lord Keynes said...

Despite the fact that no greater amount of physical steaks were produced by the restaurant

An utterly invalid analogy.

The restaurant IS producing a commodity - meals prepared with labour using food inputs to be consumed by the diners.

The house flipper "produces" no commodity. Asset speculation on the house is totally different.

Richard said...

LK,

If a buy a 'used' house and then rent it out, what commodity have I produced?

Lord Keynes said...

If a buy a 'used' house and then rent it out, what commodity have I produced?

Renting is a different matter.
In that case the house is a capital good producing accommodation - but hardly a higher order one.

And of course it wasn't such people who caused the sub-prime meltdown, but sub-prime mortgage holders who were owner-occupiers.

But a house bought by an owner occupier from a subprime loan is a durable consumer good and an asset.

The house is used to produce no commodity – it is not a capital good.

Even the person who flips it is selling an asset on a secondary market.

If the house was bought to rent out to other people, it is a capital good.

But as you can see perfectly well in Figure 3 of this book (Brookings Papers on Economic Activity: Fall 2008, p. 81 and also p. 83), loans to non-owner-occupiers did not significantly rise in 2000s housing bubble and in fact stayed flat.
Another Austrian myth destroyed.

Bala said...

LK,

" Selling an asset second hand is NOT production of a commodity. The house is not - and cannot be - a capital good in such circumstances. "

This hides the fallacious assumption that only something that goes to "produce" a "commodity" is a capital good. So it is you who are in error.

I have pointed this out many times over but you insist on repeating your fallacious notions over and over again.

Bala said...

LK,

Your entire distinction between primary and secondary markets is fallacious. There is only 1 market.

Jonathan M.F. Catalán said...

Lord Keynes,

Again, there are three types of economic goods:

1. Capital goods.
2. Consumer goods.
3. Money.

Housing is not money. Housing is not a consumer good until it is consumed for pleasure. Therefore it must be a capital good.

"The restaurant IS producing a commodity - meals prepared with labour using food inputs to be consumed by the diners."

And what is development? (i.e. improvements to the house to raise its value, et ceera)

Jonathan M.F. Catalán said...

Who takes out a loan to pay rent?

Lord Keynes said...

This hides the fallacious assumption that only something that goes to "produce" a "commodity" is a capital good.

Congratulations!
Since the very definition of a capital good is a "good intended for use in production of other goods and services for exchange, rather than for final consumption", you have just destroyed yourself completely by denying that basic definition. You have emptied the the term "capital goods" of all meaning!!

Lord Keynes said...

Again, there are three types of economic goods:

1. Capital goods.
2. Consumer goods.
3. Money.


I assume you are not seriously saying money is a commodity, and therefore is wealth??


Housing is not a consumer good until it is consumed for pleasure.

And what do you think the person living in it is doing (whether as an owner occupier or owner-occupier with the intention of flipping it)??

The people who got Liars' loans and NINJA loans and who defaulted were LIVING in their houses, and "consuming" them.

Bala said...

LK,

You are hilarious. "Stock-in-trade" is also a higher order good. No "new" commodity is being produced by the "stock-in-trade", but it is still a higher order good. That's what JMFC's example showed. You still don't get it.

Bala said...

" And what do you think the person living in it is doing (whether as an owner occupier or owner-occupier with the intention of flipping it)?? "

Holding it as "stock-in-trade" until the re-sale. In the meantime, they were minimising costs by using the house as well since in any case, it will be treated as a used house.

" The people who got Liars' loans and NINJA loans and who defaulted were LIVING in their houses, and "consuming" them. "

Another point just struck me. The house is technically not theirs. It is theirs only when they repay the loan. Until then, the lender has a claim on it proportionate to the extent of unpaid loan.

This basically means that the house was the capital of the "lender". Even if the buyer was not treating it as a higher order good, the lender was very much treating it thus. Hence, you are all the more in error.

Lord Keynes said...

Stock-in-trade" is also a higher order good.

To a business that sells commodities, like retailers.
A house flipper is not in the "business" of selling houses at all. The real estate agent is.
The house owner is an asset speculator.

No "new" commodity is being produced by the "stock-in-trade", but it is still a higher order good.

And it is being used in a BUSINESS, say, like Walmart.

A person with a house bought from a NINJA loan (and even one who wants to "flip" it) is no business whatsoever.

Lord Keynes said...

It is theirs only when they repay the loan. Until then, the lender has a claim on it proportionate to the extent of unpaid loan.

It is legally theirs with full ownership rights when they repay the loan, but the lender only has claim if they don't make payments.

jason h said...

A house increases the productivity of the occupants, much like tools increase the productivity of a laborer.

It is a shelter and a secure warehouse for personal belongings. Is a warehouse not a capital good?

Imagine how much time and labor is saved not having to carry all of one's belongings everywhere. Also, think of the time saved not rebuilding a shelter everyday.

A house is very much a good used in the production of other goods-namely the occupants labor.

Bala said...

LK,

A "house-flipper", by very definition, is in the business of buying houses and selling them later when the price is (hopefully) higher. To say otherwise is to deny the meaning of the term "house-flipper". The real-estate agent is the "facilitator", not the seller.

Even an "asset speculator" is a person holding goods with the main intent of selling them again. So, the "asset" they hold is very much a higher order good.

" And it is being used in a BUSINESS, say, like Walmart. "

And you fail to understand the business of Walmart and hence of the home-flipper or the NINJA loan taker. Walmart buys a good from the supplier and transforms it into a different good. To put it more explicitly, transporting a good through space and time makes it a different good. Wheat in Kansas is not the same as wheat in LA. A house in June 2008 is different from a house in 2010, even if it is the same house.

At the same point in time, there are new and used houses on sale in the market. They all enter the same market for houses. There is no distinct "primary market" and "secondary market". The sellers of the new and used houses compete with each other for customers.

The house-flipper and the NINJA loan takers were therefore stocking up on houses in 2006 (say) to produce houses-for-sale in 2008. Of course these were sure to be treated as used houses, but then why would someone not do it if the value loss due to consumption for 2 years is dwarfed by the rise in nominal value due to inflation?

House-flippers, NINJA loan takers and sub-prime borrowers, therefore, were treating a house as a "stock-in-trade" or a higher order good. Any other treatment is fallacious.

Bala said...

" It is legally theirs with full ownership rights when they repay the loan, but the lender only has claim if they don't make payments. "

That's precisely the point. You own only what you have paid for. The day you default, you lose ownership. The lender can repossess the property, sell it and recover THEIR capital. Get it?

This treatment is true for ALL durables bought on a loan.

Lord Keynes said...

The house-flipper and the NINJA loan takers were therefore stocking up on houses in 2006 (say) to produce houses-for-sale in 2008.

No, the NINJA loan takers AREN'T necessarily doing that at all.

You miss the point time and time again.

These people have bought a house with a NINJA loan and they want to live in it and see its price rise, but they don't want to sell it - they want to own it and consume it.

Bala said...

" These people have bought a house with a NINJA loan and they want to live in it and see its price rise, but they don't want to sell it - they want to own it and consume it. "

But the house was never theirs in the first place!! They were consuming someone else's (the lender's) capital. Why is this so difficult to understand?

Bala said...

LK,

The point simply is that EVEN IF the sub-prime borrowers and NINJA loan takers genuinely wanted to live in the house, the co-owner of the house, i.e., the lender, was treating it as a higher order good. So, your argument is totally erroneous.

Lord Keynes said...

The point simply is that EVEN IF the sub-prime borrowers and NINJA loan takers genuinely wanted to live in the house, the co-owner of the house, i.e., the lender, was treating it as a higher order good.

Utterly WRONG.

The lender lends money, and gets a return from the interest rate charged to the borrower.

You think money is a commodity and that it is wealth???
That the house "produces" money??

Money is NOT a commodity.

Bala said...

LK,

You are the one who is wrong. "Lending", in this case is an act of offering a present good (money) for a future good (the services that the house would render in the future). By paying money to the SELLER of the house, the lender becomes a co-owner of the house. Note that the money is given not to the buyer but to the seller. The mortgage document is nothing more than the lender's title to fractional ownership of the house to the extent of the loan made.

For instance, if I buy a house with a 10% down-payment, the house is 10% mine and 90% the property of the lender. In fact, the lender has a stronger claim to ownership than the buyer does, which is why he has first lien on the house in the first place and can possess and sell it in the event of default from the buyer's side.

Interest on the house is in fact nothing more than rent for the use of property that belongs to the lender. As the borrower repays the principal over a period of time, the fraction of ownership that lies in the hands of the lender diminishes by the extent of the principal repaid. That is why interest (rent) is calculated only on the amount of the loan (ownership of the house by the lender) outstanding.

In fact, my explanation above fits very well with the Austrian theory of capital in the fact that rent is treated as nothing more than interest income. So, I now know all the more for sure why you are wrong.

And thanks for helping me understand Austrian Economics better. Addressing your fallacious notions is making me dig deeper and find explanations that convince me even more than ever before. Once again, thanks for helping me learn. Talking to you has been worth it.

Bala said...

LK,

Once again, you reveal your lack of understanding of the concept "money". That which is "money" has to first of all be a "commodity" already in demand in the society in which it now serves as money. This is what the regression theorem is all about.

So, when you say "money is not a commodity", you are revealing your economic ignorance.

p.s. You are probably getting misled by the fact that what seems to serve the role of money today, i.e., fiat money, is not exactly a commodity. That is why I personally never call it "money". Doing so would give a modicum of credence to your ridiculous arguments. Fiat money is not "money". It is a gun masquerading as "money". You are free to fool yourself as much as you want. Don't expect me to play that game.

Lord Keynes said...

For instance, if I buy a house with a 10% down-payment, the house is 10% mine and 90% the property of the lender. In fact, the lender has a stronger claim to ownership than the buyer does, which is why he has first lien on the house in the first place and can possess and sell it in the event of default from the buyer's side

Only *in the event of default* does he exercise any real ownership rights.
The house is in fact in practice being consumed by the mortgage holder as a consumer durable and he also holds it as an asset. Again it’s not a capital good. You really think the mortgage holder cannot sell the house as his asset?

You are probably getting misled by the fact that what seems to serve the role of money today, i.e., fiat money, is not exactly a commodity.

Not *exactly* a commodity?? LOL.
Money is no longer a commodity: that is a fact of life, and your whole argument depends on treating modern fiat money as if it’s a commodity – an utterly illogical Austrian fantasy that does not apply to the real world.

Bala said...

LK,

" Only *in the event of default* does he exercise any real ownership rights. "

That's because repayment as per schedule means that rent and principal are being paid as per the agreement originally reached. The terms of ownership sharing and of transfer of ownership from the lender to the buyer are being met when payment is prompt. So the lender has no need or locus standi to go in for repossession. None of this negates the point that the house is co-owned by the lender and the buyer.

" The house is in fact in practice being consumed by the mortgage holder as a consumer durable and he also holds it as an asset. "

Yes. The mortgage holder IS "consuming" the house. However, he is consuming only HIS portion of ownership and where he is consuming a portion of the lender's ownership, he is paying a rent (interest).

In fact, the lower the down-payment, the more the house is the property of the lender that has been rented out to the buyer.

" Again it’s not a capital good. "

Wrong again. The lender being a co-owner who has rented it out to the buyer, his fraction of the house is a higher order good. He uses his fraction of ownership to provide a part of the shelter that the buyer gets and gets rent (interest) in exchange for that). So, the house is indeed a higher order good that produces the commodity "shelter" and earns "rent".

" You really think the mortgage holder cannot sell the house as his asset? "

No. But the mortgage holder cannot sell the entire house as HIS asset. If he has paid 10% of the principal as down payment and instalments put together, he sells only 10% of the house as his asset. The remainder is the lender's asset being sold and the money thus raised therefore goes to the lender and not to the current mortgage holder.

" Money is no longer a commodity "

I never said it is. Looks like you have failed to read what I said. To repeat, I said that what is being treated as money today is not exactly a commodity. If, in conjunction with this, you read my other statement that only a commodity can become "money", it is possible (through reasoning) to figure out that I am saying that that which serves the function of money today (fiat money) is not money. At the same time, because it performs the roles of money in the economic system, proper economic analysis has to treat it as a money equivalent. Adding to this analysis the characteristics that make it non-money helps us Austrians understand what causes all the economic ills of today, especially inflation, credit expansion and the business cycle.

" your whole argument depends on treating modern fiat money as if it’s a commodity "

No. It is because fiat money performs the same roles in the economy that money proper does that sound economics will have to treat it as a money equivalent.

" an utterly illogical Austrian fantasy that does not apply to the real world "

What's illogical is you and your arguments.

Bala said...

LK,

Small correction. When the mortgage holder sells the house, he gets 10% of the original buying price plus the appreciation in value while the lender gets his 90% of the original buying price.

Lord Keynes said...

Yes. The mortgage holder IS "consuming" the house. However, he is consuming only HIS portion of ownership and where he is consuming a portion of the lender's ownership, he is paying a rent

This is a distinction without a difference.

And even the interest payment does NOT pay for the "consumption" of the remaining % of the house, it pays the lender a return on his money loan, pure and simple. The interest is the price of money, not some "rent" for 70% of the house.

Bala said...

LK,

The reason you do not get the difference is that you have no theory of capital.

And don't tell me no one ever told you that except for the first appropriators of a plot of land earns only interest income! If you buy a house and let it out for "rent", the "rent" you get is "interest income". If a lender takes partial ownership in a house and gets "interest" on loan outstanding, the "interest" he gets is the rent on his fraction of ownership.

So, interest pays for the consumption of the house, except that it does not pay for the consumption of the remaining % of the house. Actually, it pays for the consumption for the period till the next instalment becomes due.

Your Keynesian rubbish is visible in your meaningless statement "interest is the price of money". You Keynesians (post or otherwise) do not get "interest". You just proved it.

Bala said...

LK,

Oops. Change the 2nd statement to

"And don't tell me no one ever told you that except for the first appropriators of a plot of land, no one else earns pure rent and that every subsequent buyer after the first appropriator earns only interest income!"

Mike Cheel said...

Hey I am still waiting for volunteers from the Keynes folks to help me pay my mortgage and therefore help kick start the economy. Let the wealth distribution start at home!

Also, the dictionary defines capital as assets available for use in the production of further assets. I just thought I would put that out there.

Mike Cheel said...

I meant let the wealth REdistribution start at home before I get attacked by the good Keynes folks here for misrepresenting their ideas!

Lord Keynes said...

So, interest pays for the consumption of the house, except that it does not pay for the consumption of the remaining % of the house.

And yet again the idea that the house is a capital good to the owner-occupier is exposed as nonsense.

You are conceding that the house is a consumer durable to the debtor/mortgage holder.

ABCT posits loans made to borrowers in business for higher-order capital goods, not consumer durable houses for owner-occupiers.

And even a mortgage made to a person who wants to rent the house out does not mean the house is a higher-order capital good. The house is lower order capital good to the owner producing a direct commodity in the form of accommodation to the person who rents it.

No higher order capital good means ABCT is irrelevant.

Bala said...

LK,

Firstly, I have pointed out clearly that none of the categories of people you are talking of is an "owner-occupier". If a person has made a 10% down payment, only 10% of the house is HIS. The remainder is the property of the lender let out to him on condition that he pays rent (interest). That makes the 90% a higher order good.

Even this 10% delivers its services (provision of shelter) only over a very long period of time. At any point in time, a house is a combination of a present good and a future good.

Even to the mortgage holder, the proper way of understanding whether the house is being bought more for "provision of shelter" or as "stock-in-trade" can be properly understood ONLY ex-ante. Your repeated insistence on the phrase "owner-occupier" in very unintelligent and completely misses the mark because it is ex-post analysis. This repeated error shows that you just don't get economics.

And it takes a very high level of foolishness and naivete to claim that a person with no means to pay, now or in the future, ex-ante bought the house for the provision of shelter.

This makes the 10% also a higher order good.

Thus, 100% of the house is, ex-ante, a higher order good.

And your repeated refusal to grapple with the concept of co-ownership reveals your dishonesty. Your warped concepts of interest have also exposed your complete inadequacy to deal with concepts related to capital. You are a good example of the completely ignorant and foolish Keynesian who considers voodoo as proper economics.

LK - I have demolished every line of attack you have launched. I am amazed that you think that by repeating your fallacies many times over, you will somehow win this argument.

Bala said...

" ABCT posits loans made to borrowers in business for higher-order capital goods, not consumer durable houses for owner-occupiers. "

ROFLMAO

That's a wonderful caricature of ABCT. You seem to be insistent on demonstrating how priceless you are, as a comedian of course. This is not what ABCT is all about.

As I understand it, ABCT says that credit expansion beyond the available pool of investible savings, made possible through interest rate depression creates an unsustainable boom that, by its very nature, ends up in an equally huge bust.

The words "borrowers in business" does not find a place in a proper statement of ABCT. You are following the time-honoured Keynesian technique of setting up straw-men, demolishing them and then claiming to have demolished the original idea. Keep up the "good" work. You will soon discredit yourself completely.

Richard said...

LK,

ABCT does not require malinvestment in capital goods of a higher order than those already employed. Here is that quote again, from Rothbard.

"Some critics charge that not all net investment goes to lengthening the structure—that new investments might duplicate pre-existing processes. This criticism misfires, how- ever, because our theory does not assume that net saving must be invested in an actually longer process in some specific line of production. A longer production structure can just as well be achieved by a shift from consumption to investment that will lengthen the aggregate production structure by greater investment in already existing longer processes, accompanied by less investment in existing shorter processes. Thus, in the case of Crusoe mentioned above, suppose that Crusoe now invests in a second net, which will permit him to catch a total of 150 fish a day. The structure of production is now length- ened even though the second net may be no more productive than the first." (MES w/P&M, Scholar's Edition p. 543)