Tuesday, November 9, 2010

Why No Hyperinflation?

As I have commented before, a number of economists and commentators (and not just Austrians) have been loose with making predictions of hyperinflation, yet we don't see that happening in the real world. However, at the same time, we cannot ignore the fact that prices of a lot of things are going up -- and not just the price of gold, Krugman's "barbaric relic" comments notwithstanding. (Yeah, I know that line came from Keynes, but Krugman used it this week, too.)

In a blog post today, Krugman once again gloats about inflation, or the lack thereof, but then goes off on a weird tangent, talking about "grocery inflation." Now, I cannot recall in any of my grad classes there being a term called "grocery inflation," and being that the average grocery store has thousands of items, with some going up in price and other things not.

Nonetheless, especially in the aftermath of the voyage of the QE2, we have seen prices of commodities go up and, no, I believe Krugman is wrong when he goes off on the "commodity prices are volatile" tangent. No doubt, Krugman dismisses the run-up in gold and silver prices (not to mention oil, which is getting close to $90 a barrel in my last check.)

There also are some other issues here, and one has to remember that when Krugman and I speak of inflation, it is as though we were speaking different languages. Krugman's approach is purely macro-speak, with inflation being the measure of a particular index, i.e., the Consumer Price Index (CPI), the GDP Deflator, or something similar. (That is where he gets "grocery inflation," I guess.)

Austrians are more fundamental when it comes to inflation. To us, inflation is a situation in which the value of money falls relative to the goods for which it is used to purchase. In other words, inflation to us is a monetary phenomenon, not a price phenomenon. Instead, increases in prices reflect inflation (the loss of value of money), as when money loses value relative to other goods, more money then is needed to fulfill transactions.

Now, according to Keynesians, this is foolish, since to them, money is nothing more than a quantity variable. They may have an inkling of why money exists in the first place, but they are much more interested in aggregate variables, and certainly not anything that might smack of a marginal utility theory of money.

That being said, I will once again invoke the hated (by Keynesians) Say's Law to point out that while money facilitates trade, it is not by itself wealth, only a measure of wealth. Money is subject to the laws of economics, even if Paul Krugman doesn't believe it.

Now, there is no doubt that the U.S. Dollar is losing ground overseas, and if we really were in a period of deflation, as Krugman claims, then the dollar would be gaining strength, not losing it. (Deflation occurs when the value of money relative to goods it is used to purchase increases, and that clearly is not happening.) We are seeing asset prices such as housing fall, but those prices need to fall because they were out of kilter with everything else.

(Yes, that means people like me who are homeowners and probably swimming in negative equity have to live with it. The bank gets my house payment every month, and I just consider it to be something akin to a rent payment. I don't like it, but that is the way it is.)

I want to come back to this whole "deflation" issue soon enough, but now want to deal with how new money comes into our economic system. Remember, the Fed mostly has piled up new reserves in banks, raising (actually, spiking) the monetary base. However, a monetary base in the form of bank reserves is a lot different than new money actually floating about in the economy.

When we think of hyperinflation, we think of places like Weimar Germany in 1923 or Argentina and Bolivia in the 1970s and 1980s, or Chile during Allende's three-year rule from 1970 to 1973. In Chile's case the government seized a number of private businesses, mines, and factories, and then directly printed money to pay the workers. (More "proof" that government is not "revenue-constrained," I guess.)

When the government seized the factories, it tripled the wages of workers, but the political organizing and other moves actually lowered workplace productivity. At the same time, the government threw up new tariffs and trade barriers, so people soon were awash in money, but little else.

During that period when inflation got to about 1,000 percent, people got out of money if they could, using items like tobacco, auto parts, and other hard goods that they could use to barter. In Bolivia, where there were (and are) a large number of state-owned enterprises, workers in the mid-1980s would be paid twice a day. They would rush to the streets and trade their money with tourists for dollars or other hard currencies, and then the tourists quickly would spend the money.

That is very, very difficult to happen in our economy. Even during the last big inflation of the late 1970s and early 1980s, the new money came in through the bank lending process. Government workers were not paid with newly-printed dollars, nor did they rush out into the streets to trade for pesos.

What happens at a time when businesses are not borrowing for long-term projects, as is the case today? This is what Milton Friedman called "pushing on a string," or what Paul Krugman calls a "liquidity trap."

Is there a way for the current situation to bust into hyperinflation? Obviously, I certainly hope not, as I and my family would go down like everyone else. Certainly, one can see the problems that would arise if the Fed were to directly purchase large amounts of U.S. Treasuries on the primary market to finance the government's borrowing, as it would not take long to see how this transmission device would inject a lot of new money into the economy and certainly would result in much higher prices over time.

There is one more issue, and that is the claims by Krugman that we are falling into "deflation." Frankly, I don't see it. Prices for consumer goods, not to mention food and other commodities, are going up, not down. Yes, the value of those assets that were highly-inflated during the bubble are going down, but that is a good thing (even if my own house is included in this "good thing"). I use that term not because it makes everyone happy, but rather because factor prices need to get into balance, and the government's "stimulus," bailouts, and attempts to build a "recovery" by pouring money into "green energy" are only making the situation worse.

No, we are not about to burst into the holocaust of inflation as we saw in Latin America or recently Zimbabwe, but neither are we falling into deflation as Krugman says. Instead, we are going to muddle along until someone in power learns that one cannot subsidize an economy into prosperity.

94 comments:

Desolation Jones said...

Krugman hasn't claimed we have deflation. He's saying the rate of inflating is falling towards deflation. In other words, we have disinflation that will eventually turn into deflation if the trend continues. Inflation is still with us, but the rate is falling rather than going up.

AP Lerner said...

“Now, there is no doubt that the U.S. Dollar is losing ground overseas, and if we really were in a period of deflation, as Krugman claims, then the dollar would be gaining strength not losing it. (Deflation occurs when the value of money relative to goods it is used to purchase increases, and that clearly is not happening.) ”

If there is such a low demand for dollars, then why is the 5 yr. treasury at 1%? Here's another free prediction for the folks on this blog: be ready for the dollar rally.

“That is very, very difficult to happen in our economy.”

Hey hey..admiting you and Shciff were wrong about hyperinflation. Good job.

“Certainly, one can see the problems that would arise if the Fed were to directly purchase large amounts of U.S. Treasuries on the primary market to finance the government's borrowing, as it would not take long to see how this transmission device would inject a lot of new money into the economy and certainly would result in much higher prices over time.”

You should really understand a topic before criticizing it. Except, if you admitted you did not understand how the monetary system operated, then you would realize that much of what you and all Austrians have to say on inflation and monetary operations is all wrong, and you need to continue to support the Austrian ideology at all times. Please read this very carefully. You’ll learn something.

http://pragcap.com/mechanics-qe-transaction

“There is one more issue, and that is the claims by Krugman that we are falling into "deflation." Frankly, I don't see it. Prices for consumer goods, not to mention food and other commodities, are going up, not down.”

In all seriousness, do you do any fundamental research or do you just assume the world will play out according to Says? Try opening up an earnings report from any number of consumer product companies, and you’ll see the slow grind of deflation. Google Wal-Mart, and see the troubles they are having passing higher input costs on. Google Safe-Way. Look at the massive decreases in automobile prices over the last few years. Advertising pricing? Lower. Google Sprint, AT&T, Verizon, and see the price war going on the wireless market as costs are rising. This is what the slow grind to deflation looks like.

William L. Anderson said...

If the demand for dollars were as high as you claim, then it would be doing better on overseas currency markets. Second, Krugman has been claiming we are in deflation, and that any rise in commodity prices is an anomaly, which only reflects the natural volatility of the commodity markets, not a trend of inflation.

As for the transmission mechanism of money, I think Austrians, including me, understand it quite well. This "Austrians don't understand money" line is getting old. Please explain to me how money ONLY can be defined as a quantity variable.

Furthermore, are the critics claiming that money is not subject to the law of marginal utility? That money is a special, "magical" item that is shrouded in mystery and only can be properly unleashed through a government monopoly?

Daniel Hewitt said...

The chart Krugman posted is misleading. It shows the growth rates of each index, then concludes that they are not that different. But increases in grocery prices are higher (on average) across the entire period, meaning that the indices are indeed diverging over time.

In a comment I posted to his blog, I left this link.

Core CPI vs. Food CPI over the last 10 years
http://tinyurl.com/3y6gro8

Anonymous said...

I have read this blog for months, and I have never seen Prof. Anderson claim hyperinflation is coming AP. Also Krugman has claimed we are in dis inflation and could see deflation next year.
http://krugman.blogs.nytimes.com/2010/05/14/flation/

Bala said...

AP Lerner,

"If there is such a low demand for dollars, then why is the 5 yr. treasury at 1%?"

Oh!! Is interest rate determined by demand for and supply of money?

You had also said this.

"Please read this very carefully. You’ll learn something."

Let me now take a point (rather, a key claim) made in that article you suggested that we (Austrians) read for an education.

"The point here is that from an operational perspective the Fed is not really altering the money supply."

This statement seems patently false to me unless you can convince me otherwise. Prior to the injection, the bank had 50 units of money. Now it has 90. So, at that level, there is an addition of 40 units of money in the system.

However, the real reason I call this statement false is that this is not where the process ends. There are 2 steps. Firstly, the cash reserves enable the bank to borrow from the Fed. On top of this doubly increased cash reserve, the bank can now pyramid a massive amount of credit, creating equally massive amount of money in the form of demand deposits.

Assuming a 35% reserve ratio for the Fed with the bank and 10% for the bank itself, that means that 40 units of additional money has the potential to become 40*29 or 1,160 units of money. The net potential for addition is therefore at least 1120 (assuming 40 were just "swapped" as claimed in the article) units of money.

Tell me why I am wrong (apart from telling me that the numbers are a tad different).

AP Lerner said...

“If the demand for dollars were as high as you claim, then it would be doing better on overseas currency markets.”

False. So because a bunch of traders bid up the Euro vs. the USD you think this says more about inflation than what the treasury and TIPS markets is telling us? You should probably spend some time on an FX desk at some point. Also, I think you tend to confuse real and nominal returns in FX rates.

Here’s another free prediction for you: the USD on a trade weighted basis is going to move higher dramatically.

“that any rise in commodity prices is an anomaly, which only reflects the natural volatility of the commodity markets, not a trend of inflation.”

Actually, he said the higher commodity prices are due to higher demand in emerging markets, not an anomaly. And higher commodity prices only lead to domestic inflation if the higher input cost can be passed on to the consumer. And no, higher prices at the gas pump is not broad based inflation if demand for other goods and services are being displaced. That’s called demand destruction, not inflation. There is zero evidence of these higher input costs being passed along to consumers. Again, please see Wal Mart, Safe Way, Arcelermital, etc earnings reports if you do not believe the CPI measures. The fundamentals are on my side; we are about to see a corporate margin squeeze if real demand does not pick up. You would think after the Japan experience and what we have done in the US the last few years academics would have given up on this ‘inflation is always a monetary phenomena’ nonsense. Of course, these are the same folks that take Says Law as the gospel and are more interested in pushing a political agenda then economic thought.

“This "Austrians don't understand money" line is getting old.”

What gets old is the lack of understanding on this topic. When you claim the Fed buying treasury bonds adds money to the economy, it shows you do not understand the topic. Again, see the link I posted.

“This statement seems patently false to me unless you can convince me otherwise. Prior to the injection, the bank had 50 units of money. Now it has 90”

Keep reading the link. The bank increases money to 90, but treasury bonds fall to 40. Treasury bonds are just a longer duration, interest bearing form of money. The net supply of financial assets has not changed, thus, no increase in the money supply. Quantitative easing is a big asset swap. That is all. It adds exactly zero financial assets to the economy. Again, look at the bank balance sheet on the link. As I have said before, QE is a DEFLATIONARY policy since it takes income out of the private sector.

“On top of this doubly increased cash reserve, the bank can now pyramid a massive amount of credit, creating equally massive amount of money in the form of demand deposits”

False. The banking system is never reserve constrained so an increase in reserves will never “pyramid a massive amount of credit”. The money multiplier is a myth.

http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

Remember, loans create deposits. The banking system is capital constrained, not reserve constrained. Many ‘Austrians’ make the same rookie mistake of confusing reserves with capital.

Anonymous said...

The only Austrian I can think of who wasn't screaming hyperinflation was Mish. Just like AP Lerner, Mish understands the money multiplier is a myth and banks aren't reserved constrained, but capital constrained.

http://globaleconomicanalysis.blogspot.com/2009/12/fictional-reserve-lending-and-myth-of.html

Bala said...

AP Lerner,

Empirical evidence, that too from a Fed report, should convince me, should it? Quite interesting. Quite similar to the argument I am having with someone else, empirical evidence proves nothing. To base a refutation of a theory on empirical evidence is to fail to have any understanding of the role of empirical evidence in the development of theories and the recognition of causality. That brings me to the other important point that data can show correlation but correlation does not mean causation.

Finally, I am unable to accept the statement that a 5 year treasury is a "different form of money". Money is a medium of exchange and a promise to give a certain amount of money 5 years later (with or without interest) is NOT money. This seems to be a deliberate distortion of the very concept "money" with the aim of giving credence to dubious concepts.

Lord Keynes said...

As I have commented before, a number of economists and commentators (and not just Austrians) have been loose with making predictions of hyperinflation, yet we don't see that happening in the real world.

An admission of the hapless failure of Austrian predictions of hyperinflation at last! Remember these comedians:

Marc Faber with Peter Schiff – Hyperinflation In The United States A 100% Certainty
http://www.youtube.com/watch?v=6zwe9VpiKck

the lack thereof, but then goes off on a weird tangent, talking about "grocery inflation."

He’s talking about price rises as measured by the CPI, which you yourself admit later on the post.

In other words, inflation to us is a monetary phenomenon, not a price phenomenon. Instead, increases in prices reflect inflation

And increasing the money supply will not always cause an increase in the level of prices, because the inflation rate and changes in the level of prices also depend very much on real factors, as well as monetary ones
You could have a rising money stock and price deflation, as in Japan in the 2000s.

However, a monetary base in the form of bank reserves is a lot different than new money actually floating about in the economy.

Congratulations. You’ve realised that base money supply increases do NOT necessarily cause price inflation unless the money is spent into the economy.
This is why predictions of hyperinflation are all absurd – there is no reason why all this money will be injected into the economy by banks at all when business confidence is low, demand is limited, and banks themselves are wary of lending.

As for Bala’s statement:

Quite similar to the argument I am having with someone else, empirical evidence proves nothing. To base a refutation of a theory on empirical evidence is to fail to have any understanding of the role of empirical evidence in the development of theories and the recognition of causality

“Empirical evidence proves nothing” – priceless.

If I say that “US unemployment is high relative to the late 2000s, and I examine the empirical evidence which indeed shows this, then the empirical evidence proves nothing??

Bala said...

"If I say that “US unemployment is high relative to the late 2000s, and I examine the empirical evidence which indeed shows this, then the empirical evidence proves nothing??"

ROFLMAO. O Great One! Please explain what this bit of data/empiricala evidence "proves". I would be truly enlightened.

Bala said...

LK,

"And increasing the money supply will not always cause an increase in the level of prices"

Looks like no one ever taught you the concept of "relative prices". Incidentally, what is "price level"?

David in Qatar said...

AP Lerner,
You really don't know why interest rates on tbills are so low? I'll give you a hint, look at who is buying them.

Now, go ahead and explain to us how market forces work when the primary dealers are required by the Fed to make sure every bond issue is successful no matter what.

Because we all know in the world of Chartalism, involuntary exchange is the core premise.

Keynesianism, Chartalism, MMT, they all fall apart once you remove the coercive agent that forces taxpayers into involuntary exchanges.

You can sum up your entire economic theory with those two words: involuntary exchange.

Finally, I want to thank you for your repeated trolling of this and other Austrian sites. The level of ignorance you display is amusing, but not useful. It's the fact that you have crystallized the difference between your economic theories and the Austrian School. I now fully understand that only the Austrian School has an economic theory that holds true under the conditions of voluntary exchange for mutual benefit. Every other theory must use a coercive agent. That's too bad.

Another Anonymous said...

To base a refutation of a theory on empirical evidence is to fail to have any understanding of the role of empirical evidence in the development of theories and the recognition of causality Sure, if the theory is purely abstract, a mathematical or philosophical exercise. Theories are refutable by empirical evidence to the exact extent they are meant to be applied to the empirical world. If you reject Earth-evidence as merely empirical, you are by that token saying your theories don't apply to Earth, but to planet Austria, I guess. Fine, but most people are interested in Earth-economics.

Lord Keynes said...

Another Anonymous,
You are completely correct.

Bala's comment:

Please explain what this bit of data/empirical evidence "proves"

A synthetic proposition is one whose truth is determined a posteriori (by experience/empirical evidence):

E.g.,

(1) It is raining in Manhattan (New York, US) now (Wednesday, 10 November, 9:50pm, Wednesday (EST).

(2) Elephants (normal, uninjured individuals of the modern species of large land mammals in the two genera Elephas and Loxodonta of the family Elephantidae) have four legs.

(3) US unemployment (as measured by U6) is higher today (Wednesday, 10 November, 2010) than the rate from 1996-2000.

The truth of All these propositions can ONLY be established by empirical evidence.

I assume you might know basic logic.

David in Qatar said...

LK,

I notice you ignored the relationshiop of empirical evidence of causality.

Why don't you try again?

David in Qatar said...

"relationship of empirical evidence of causality."

....relationship of empirical evidence and causality....

Lord Keynes said...

I notice you ignored the relationshiop of empirical evidence of causality.

That's because the issue of causality is NOT relevant to the examples I gave.

Why don't you try again?

LOL..
You deny that the truth of synthetic propositions is established a posteriori??

US unemployment (as measured by U6) is higher today (Wednesday, 10 November, 2010) than the rate from 1996-2000.

Is that true or false? And if true, how?

David in Qatar said...

LK,

Don't assume anything about me. Thank you.

Very specifically, the point above concerned empirical evidence and causality. Your response, while accurate, does not address the point.

So, for the second time (at least with me), what is the relationship between empirical evidence and causality?

Lord Keynes said...

the point above concerned empirical evidence and causality.

No, it didn't - that was only one of the ridiculous claims he made.

Bala's statement is here broken down:

Empirical evidence, that too from a Fed report, should convince me, should it? Quite interesting. Quite similar to the argument I am having with someone else, empirical evidence proves nothing.

There is no reference to causality in this statemnt, and you know it.

Bala says "empirical evidence proves nothing"! What kind of rubbish is this?? You think we NEVER have good grounds via empirical evidence for the truth of synthetic propositions?

The next statement:

To base a refutation of a theory on empirical evidence is to fail to have any understanding of the role of empirical evidence in the development of theories and the recognition of causality.

Any argument that is a priori (= deduction) and that has synthetic propositions as premises must have those synthetic propositions tested by empirical evidence.

Induction itself relies on empirical evidence or empirical data and can be used to form hypotheses that make predictions that are themselves falsifiable by empirical evidence too.

Empirical evidence can be used to BOTH draw correlations AND argue for causality. Saying that you don't have evidence for causality just by evidence of correlation is
well known.

E.g., empirical data shows a correlation between infection by the Clostridium tetani bacteria
and the symptoms of tetanus.

Additional empirical evidence about the neurotoxin tetanospasmin secreted by this bacteria and what it does to the human nervous system provides strong evidence that this is the causal mechanism by which infection by Clostridium tetani bacteria causes
tetanus.

Bala's final statement:

That brings me to the other important point that data can show correlation but correlation does not mean causation.

Yeah, we know. ADDITIONAL empirical evidence can show causation and the mechanism of causation.

You say:

Your response, while accurate,...

So you are not disputing the accuracy of my statements above. excellent.

David in Qatar said...

LK,

Thanks for the recap of the conversation you had with another person.

I'm asking you for the third time, what is the relationship between empirical evidence and causality?

Bala said...

Another Anonymous,

"Sure, if the theory is purely abstract, a mathematical or philosophical exercise."

Economics is a purely abstract, theoretical science based on the axiom that man acts. It takes into consideration incontrovertible aspects (e.g., scarcity) of the world we live in and uses reasoning to understand the implications and consequences of human action.

"Theories are refutable by empirical evidence to the exact extent they are meant to be applied to the empirical world"

Wrong. Theories can never be refuted by empirical evidence. The way to refute a theory is to find errors in reasoning or to demonstrate that its axioms and/or subsidiary propositions are false.

LK,

Ah!!! The (in)famous "analytic-synthetic dichotomy" rearing it's ugly head in this discussion too, is it?

When you say "Elephants have 4 legs", I hope you understand that the word "elephants" stands for the concept "elephant" and not for a particular representative member of the species labelled "elephants". In that case, the concept "elephant" already subsumes all the known and yet to be discovered attributes of the members of the species "elephants".

So, the moment you start your sentence with the statement "Elephants", the point that we are talking of 4-legged creatures is automatically implied. It does not require verification. The statement "Elephants have 4 legs" is a tautology that is no different from saying "A particular species of 4-legged animals has 4 legs".

So much for your fabled "analytic-synthetic dichotomy". Incidentally, what are concepts and how do human beings form concepts? It appears that you have no clue on either of these. No wonder you still think the "analytic-synthetic dichotomy" makes sense.

I know my logic. That you don't is something I have already demonstrated by exposing your repeated erroneous interpretation of the word "only". Looks like you have not just missed some classes of Logic 101 but you have also been indoctrinated sufficiently in false dichotomies.

And finally, as David in Qatar has already asked you twice, could you please explain how empirical evidence helps establish causality?

Lord Keynes said...

I'm asking you for the third time, what is the relationship between empirical evidence and causality?

The relationship?
It's what I just said: empirical evidence can ALSO be used to make the case for causality or causal relationships, by showing exactly what those causal mechanisms are.

E.g., in the case of Australia's economic growth in 2009 and its relationship to the government stimulus, the causal relationship between government spending and economic growth is demonstrated by a sectoral breakdown of the empirical data on growth and how state spending by area produced growth in those areas:

http://www.debtdeflation.com/blogs/2010/08/18/giving-the-bird-to-the-stimulus/

You think no one in the social sciences ever uses empirical data to establish causality?

Bala said...

LK,

"Any argument that is a priori (= deduction) and that has synthetic propositions as premises must have those synthetic propositions tested by empirical evidence."

And I have asked you many times over to refute the "synthetic propositions" and you have miserably failed to do so. You have just been repeating your fallacious notions ad nauseum.

Bala said...

LK,

"in the case of Australia's economic growth in 2009 and its relationship to the government stimulus, the causal relationship between government spending and economic growth is demonstrated by a sectoral breakdown of the empirical data on growth and how state spending by area produced growth in those areas:"

Wrong. Causal relationship can only be established by a sound theory. Anything like what you have described is no different from a black magician claiming that throwing a couple of virgins into a volcano causes rain to fall.

"You think no one in the social sciences ever uses empirical data to establish causality?"

No. But when they do so without a sound theory, they are just shooting in the dark and pretending to be intellectually superior to the black magician described above.

"empirical evidence can ALSO be used to make the case for causality or causal relationships, by showing exactly what those causal mechanisms are"

Empirical evidence can NEVER show the exact causal relationships. Only a theory can.

David in Qatar said...

LK,

"empirical evidence can ALSO be used to make the case for causality or causal relationships, by showing exactly what those causal mechanisms are."

Ok, so just to be clear, your argument is that empirical evidence makes the case for causality. But you won't go as far to say that it proves causal relationshiops?

I don't what to proceed until I am certain of your position, so please be as clear as possible.

David in Qatar said...

don't what to proceed

don't want to preceed until....

Bala said...

LK,

Good example of clostridium tetani and tetanus. I can understand how these things work in the natural world where the subjects of the study are inanimate objects that react involuntarily as per their nature in a repetitive and predictable manner.

Could you now show how it works in a social science like economics where the subject of the study is man?

Bala said...

LK,

Thanks for demonstrating what I accused you of suffering from - Physics envy.

Anonymous said...

Wrong. Causal relationship can only be established by a sound theory.

Without reference to empirical data, theory could not even be formulated.

Empirical evidence can NEVER show the exact causal relationships. Only a theory can.

This is about as laughable as you can get.
If I have a theory that the appearance of comets in the sky cause recession, you think the empirical data cannot be used to falsify the theory??

Lord Keynes

Anonymous said...

And I have asked you many times over to refute the "synthetic propositions" and you have miserably failed to do so.

Oh really??
You clearly forget the debate we had about the case for comparative advantage which relies on assumptions that are synthetic propositions and that no longer apply to the modern world.
Oh wait! You got totally destroyed in that debate, so it may have slipped your mind.

Lord Keynes

Bala said...

Anonymous,

"If I have a theory that the appearance of comets in the sky cause recession, you think the empirical data cannot be used to falsify the theory??"

Probably. I would first ask you for the theory that explains the causality. If your theory does not (which in this case would surely be the case), I would dismiss your theory on the grounds that it is logically unsound. No empirical evidence is even required.

"Without reference to empirical data, theory could not even be formulated."

Please note that I am not saying that empirical data are completely irrelevant to the acquisition of knowledge. I am just saying that their proper role is not one of validating or invalidating theories.

"This is about as laughable as you can get."

Your statements are the ones that are truly laughable. You seem to imply that the "throw a couple of virgins into the volcano to cause rain" theory is valid if empirical evidence suggests that it is.

Anonymous said...

And in your comment above:

The way to refute a theory is to find errors in reasoning or to demonstrate that its axioms and/or subsidiary propositions are false.

you refute yourself again.

Any "subsidiary propositions" that are synthetic must be tested by empirical evidence. By saying that this can "refute a theory" you laughably contradict yourself.

Bala said...

LK,

"You clearly forget the debate we had about the case for comparative advantage which relies on assumptions that are synthetic propositions and that no longer apply to the modern world."

And you seem to forget that I explained that this does not refute the Law of Comparative Advantage itself but only its applicability in the current circumstances.

And keep dreaming that you destroyed me in that debate. You made a royal jackass of yourself and in fairly elaborate fashion at that.

Anonymous said...

Probably. I would first ask you for the theory that explains the causality. If your theory does not (which in this case would surely be the case), I would dismiss your theory on the grounds that it is logically unsound.

Which all requires empirical evidence!!!

Lord Keynes (also last comment is mine as well).

Bala said...

LK,

It looks like you have switched to posting as "Anonymous". The very point that you are trying to hide says a lot.

Bala said...

LK (or is it anonymous?),

"Any "subsidiary propositions" that are synthetic must be tested by empirical evidence. By saying that this can "refute a theory" you laughably contradict yourself."

If a theory says "in the presence of institutional factors that restrict mobility of factors....." and no such institutional factors exist at a point in time, that does not refute the theory itself. It only says that the consequences predicted by the theory may not occur.

Continue to expose yourself to more ridicule and scorn. I am enjoying it.

David in Qatar said...

LK,

I was hoping to debate you on your terms. But I need to be precise about your position before I can go any further. I know it's late back in the States, and your debate with Bala appears to occupy your time. Clearly you two have a history and no intention of ever resolving it. Perhaps this will have to wait for another day.

Lord Keynes said...

It looks like you have switched to posting as "Anonymous". The very point that you are trying to hide says a lot.

No, I just happened to be at a computer away from my normal office.

And that is why (if you bother to look above) I signed myself as "Lord Keynes" in those comments. Idiot.

When you say "Elephants have 4 legs", I hope you understand that the word "elephants" stands for the concept "elephant" and not for a particular representative member of the species labelled "elephants"

No, it doesn't. The discovery of animals we call elephants was an empirical one. The proposition elephants have 4 legs is synthetic, not analytic.

Lord Keynes said...

Another priceless gem from you:

So much for your fabled "analytic-synthetic dichotomy". Incidentally, what are concepts and how do human beings form concepts?

Right...
Example:

(1) It was raining in Manhattan (New York, US) on Wednesday, 10 November, 9:50pm (EST).

True or false?
Let's see your tortuous, embarrassing attempts to try and "prove" that statement is analytic.

Lord Keynes said...

And while we are about it, let’s actually “test” your own statement about synthetic /analytic distinction.

On why acquisition of knowledge about animal traits is “a posteriori” and why the statement “dogs/cats etc have four legs” is synthetic and contingent:

The Big Questions: A Short Introduction to Philosophy, p. 8

In contrast, the statement:

“Quadrupeds have four legs” would be analytic.

A brief history of philosophy: from Socrates to Derrida, p. 79

Lord Keynes said...

Ok, so just to be clear, your argument is that empirical evidence makes the case for causality. But you won't go as far to say that it proves causal relationships?

What do you mean by "proves"?
Empirical evidence can be used to argue the case for causal mechanisms (e.g., A causes B) by showing HOW these causal mechanisms actually happen. This will be an inductive argument: and of course, as every one knows, the inferences you draw from induction are only probable, not 100% certain. If you mean by "proves",
that it is 100% certain, of course you don't get certain proof, you get an inference that is highly probable.

If your hypotheses can make predictions, and they pass the test of falsification again and again, then you have additional empirical evidence supporting your theory.

Denying the role of empirical evidence in the inductive process or in establishing the truth of synthetic propositions used in the argument is ridiculous.

Lord Keynes said...

Another error:

In that case, the concept "elephant" already subsumes all the known and yet to be discovered attributes of the members of the species "elephants".

No, doesn't.
All facts about elephants are contingent, not necessary.
All information about them attained in the past or that will be attained in the future are a posteriori, not a priori.

Another Anonymous said...

Be serious Bala. Think for a second, try to say true things that kindergartners know, rather than play word games and recite absurd dogma. Though that is pretty much a preoccupation of professional logicians, the most illogical people there are. :)

Austrian econ has many of the hallmarks of a fringe cult - inventing silly new words like catallactics and praxeology, ponderous and empty methodological dogma, etc. but I think there is more to it than that. There is some worth to it, despite its comical pretensions. Anyways, one could make the same criticisms and more of all of economics in comparison to any of the healthier sciences - which is practically all of them, including po-mo deconstructionism.

"Theories are refutable by empirical evidence to the exact extent they are meant to be applied to the empirical world"

Wrong. Theories can never be refuted by empirical evidence. The way to refute a theory is to find errors in reasoning or to demonstrate that its axioms and/or subsidiary propositions are false.

As I said, if they are not meant to be empirical theories. If they are meant to be empirical theories, part of the (meta)theory is: "My axioms apply to this 'empirical world', call it EARTH." If you have "empirical evidence" - true statements about EARTH in EARTH-language, and they are not consistent with your theory, that, right there is the demonstration that the "axioms and/or subsidiary propositions are false" on EARTH.

If your axioms are logically consistent, they might apply to another "world" but not EARTH.

A historically important example: Euclid's first four postulates (actually more are needed for modern precision iirc, but skip that) were thought by many to imply the fifth, about parallel lines. But after Saccheri people saw that points and great circles on spheres satisfied the first four, but not the fifth (take it in the form that through any point there is a unique line parallel to a given line.) Then all 5 postulates/axioms don't apply to the sphere, which has no parallel lines - any two great circles intersect. So any point/line pair results in an "empirical" refutation of the fifth postulate. So Euclidean Geometry doesn't apply to the surface of a sphere, is "empirically" refuted as a theory of spherical geometry.

In mathematics or mathematical logic, there are two ways of disproving something - showing it leads to a logical contradiction, or exhibiting a counterexample. The formal equivalence of a syntactic, proof-theoretic approach you claim is the only one and the semantic, model theoretic approach is called Godel's Completeness Theorem.

Economics is a purely abstract, theoretical science based on the axiom that man acts. It's a free interweb. You can call that "Economics" ; Most people would call that a version of "Austrian Economics", and say that Economics is a social, political, applied science, rather than a "pure" one. Both approaches have their philosophical problems, but practical people realize that treating it as an applied science, where we do not know all the "axioms", rather than a purely deductive one, is the more productive thing to do.

Petar said...

That Lord Keynes cannot comprehend the mere fact that syntetic a-priori propositions are supposed to be addressed on a-priori level is quite revealing of his idiotic ignorance.

Frankly, this is an utter disgrace to whoever teached you philosophy.

As said...

It's hilarious to see LK trying to disprove “correlation doesn't mean causation.”

Lord Keynes said...

That Lord Keynes cannot comprehend the mere fact that syntetic a-priori propositions are supposed to be addressed on a-priori level is quite revealing of his idiotic ignorance.

The argument above had nothing to do with synthetic a priori propositions - the very existence of which, anyway, is disputed in modern analytic philosophy.

Try again.

Petar said...

It had everything to do with them actually. Of course, you are trying to slip out of it because that fundamentally refutes your whole thesis about the necessity to empirically test them.

Anyway, I guess that those so - called philosophers are, of course, willing to dispute mathematics also. Wouldn't surprise me as they have somehow forgotten important lessons taught by another Austrian disciple in a different discipline.

I guess you ry again.

Lord Keynes said...

It's hilarious to see LK trying to disprove “correlation doesn't mean causation.”

Your statement is muddled nonsense.
I admit that specific evidence of correction does not prove causation. Additional empirical evidence showing the mechanisms of causation are necessary to show that A causes B.

Petar said...

It should say "you try again" at the end of the last post.

Lord Keynes said...

It had everything to do with them actually.

No, it didn't.
If you deny the existence of synthetic propositions, then you flunk logic 101.

Lord Keynes said...

Correction

I admit that specific evidence of correction

to

I admit that specific evidence of correlation

Petar said...

"If you deny the existence of synthetic propositions, then you flunk logic 101."

And where did I say that exactly? Frankly, you have absolutely nothing but faulty logic and straw man arguments. Pathetic.

Lord Keynes said...

And where did I say that exactly?

So now you don't dispute the facts above I made about synthetic propositions and how empirical evidence must be used to validate such propositions?

Well done.

Petar said...

Them again, you try to put words in my mouth I did not say. You are a complete sophist, which also means by necessity that you are a pathetic fool as well.

On the contrary, I dispute your remarks (they are not facts in any possible meaning of the word) because everything you were talking about is seen by Austrians as syntetic a-priori propositions. And until behavioural economics actually does something that proves that this issues are not synthetic a-posteriori and not synthetic a-priori, the only thing you can do without making a complete fool of yourself is to shut up.

Petar said...

The comment above should have been written "are synthetic a-posteriori", not "are not synthetic a-posteriori".

Lord Keynes said...

Here we go:

I dispute your remarks (they are not facts in any possible meaning of the word) because everything you were talking about is seen by Austrians as syntetic a-priori propositions.


Proposition 1:

The United Kingdon today (Thursday, 11 November 2010, 10:36 p.m. GMT) uses a fiat money system.

Is that a synthetic, analytic or synthetic a priori proposition?

Petar said...

And exactly who in this topic ever disputed the fact that this is a syntethic a-posteriori proposition that is empirically testable?

The mere fact that you make a fool of yourself by pretending to not get which of your remarks I was talking about is staggering. You really are quite pathetic.

Would've expect that from a guy who spends a lot of time writing lengthy comments on a blog of people who find him ridiculous. Guess that us normal people have better things to do that to chat with trolls.

Have a bad night.

Anonymous said...

Coming from a outsiders perspective LK has been much more civil throughout the various debates. There really is no need to call him pathetic every other sentence it just makes you look like a ass. I think that a return to civil discourse would make this debate much more interesting. Also LK what do you do for a living if you do not mind me asking?

Lord Keynes said...

And exactly who in this topic ever disputed the fact that this is a synthethic a-posteriori proposition that is empirically testable?

If you recognise this, good for you.
If I want to formulate a hypothesis about how, say, our modern monetary systems work, then such accurate synthetic propositions would be the starting point, and the hypothesis could make predictions also empirically testable or at least falsifiable (a la Popper).

Such a hypothesis could be falsified if its predictions were refuted.

Lord Keynes said...

And to answer your other question:

And exactly who in this topic ever disputed the fact that this is a syntethic a-posteriori proposition that is empirically testable?

Maybe you should have read the thread properly.
Check out this gem from Bala:

"If I say that “US unemployment is high relative to the late 2000s, and I examine the empirical evidence which indeed shows this, then the empirical evidence proves nothing??"

ROFLMAO. O Great One! Please explain what this bit of data/empiricala evidence "proves". I would be truly enlightened.

Anonymous said...

@2:48 anonymous: From the standpoint of another outsider who has probably been here longer AND has actually read LK's blog, people here are being alot nicer than they should be. LK has been nothing but condescending, arrogant, and insulting to everyone around him. It's a common trait among post keynesians. Hell, the way they regularly refer to new keynesians is to call them 'bastard keynesians'.

Add to that the fact that LK has never made a single irrefutable point, and he's just blowing hot air. Seriously, stalk the comments of his blog. Then, count the number of times he uses an argument here that has been refuted in the comments of his blog. Make sure to note the time. He'll often make the point here long after it's been refuted in his own blog. That can leave only one conclusion. He's a sophist, a man who's motivated by a desire not to find truth, but to win as many arguments as possible. Truth is irrelevant to him. The reptilian part of his brain is in full swing as he lies, cheats, and trumpets the same ling refuted ideas in the name of defending his "school", sweating with apprehension, hoping that maybe a few people are just ignorant enough that they won't notice the man behind the curtain.

LK, you are the quintessential fool. I hope that you manage to deceive yourself until you die. If not, then I hope you have enough time left to come to terms with what you've done. I sincerely hope that you're just a troll, and I've simply fallen victim to poe's law. You're a truly depressing individual, assuming your collectivist brain doesn't view the label individual as an insult.

Lord Keynes said...

From the standpoint of another outsider who has probably been here longer AND has actually read LK's blog,.... etc etc

Well done! An entire comment that is one long ad hominem fallacy.

Add to that the fact that LK has never made a single irrefutable point

!!
So you don't believe in the existence of synthetic propositions? That their truth is known a posteriori (by experience/empirical evidence).

If you do, then your statement is nonsense. If you don't, your knowledge of logic is deeply defective.

Keep up the good work.

Anonymous said...

@LK: Sorry, but I never said that your points were wrong because you were a fool. Simply that you were a fool. It's only a fallacy if I insist that your arguments were wrong due to a flaw in your character rather than the merits of the argument. I said that your behavior patterns pointed to a flaw in your character. No more, no less.

Make sure you know what the fallacy is before you accuse someone of making it. They might have a better understanding of it than someone who just glanced at the wikipedia article. I guess that's to be expected. You seem to bet on the ignorance of your target audience, and fail repeatedly.

Anonymous said...

Lord Keynes,

I guess the other guy beat me to it, but he's right. An ad hominem fallacy is a logical fallacy involving the evaluation of an argument based on the personal qualities of the person promoting it. I.e., Hitler believed in gravity, Hitler was a crazy and evil man, therefore gravity is false. Another good example of an ad hominem would be something like this- Mises was one of the influential voices in the Austrian School of economics. Certain quote-mined statements of Mises could be massaged to be a support of fascism. Fascism is evil. Therefore, the Austrian school of economics is wrong. You know, the fallacy that permeates through your last 3 blog posts. =P

Lord Keynes said...

Mises was one of the influential voices in the Austrian School of economics. Certain quote-mined statements of Mises could be massaged to be a support of fascism. Fascism is evil. Therefore, the Austrian school of economics is wrong. You know, the fallacy that permeates through your last 3 blog posts.

LOL.. Totally wrong.
I did NOT dismiss Mises' economics or Austrian economics because of Mises' positive remarks about fascism. Read the actual post:

Now does all this prove that Mises’s extreme free market economics are wrong, merely on the basis of his contemptibly stupid views on fascism? Of course not. To argue so would be an unsound ad hominem argument, as invalid as the lazy Austrian ad hominem attacks on Keynes ... But it certainly does not reflect well on Mises’s personal opinions and the morality and consistency of his political views.

http://socialdemocracy21stcentury.blogspot.com/2010/10/mises-on-fascism-in-1927-embarrassment.html

Looks like you commit the straw man fallacy yourself.

Lord Keynes said...

And also only the last post on my blog was devoted to Mises: the other 2 before it have nothing to do with Mises at all!
Looks like you didn't even read them.

Anonymous said...

@LordKeynes: Strange that, after you had been thoroughly beaten in your previous posts, you post an entry attempting to conflate mises with fascism. Now, I'm not saying you beat your wife. However, we don't know that for sure, do we? And I certainly wouldn't imply anything about your character with such a statement.

See what you did there?

Lord Keynes said...

you post an entry attempting to conflate mises with fascism

Wrong again. It does not "conflate Mises with fascism". It points out his erroneous predictions about the future reputation of fascism and his hypocrisy.
These certainly reflect badly on Mises' intelligence and moral character - but says nothing about the truth of his economic ideas.

Try again.

Anonymous said...

'It points out his erroneous predictions about the future reputation of fascism and his hypocrisy.'

Correction: 'I quote-mined the hell out of Mises in some vain attempt to discredit him after having my ass shredded in the comments section of my last several posts. Maybe if I continuously lie and say that I'm just making a petty shot at an imagined flaw of Mises' view of fascism, maybe people won't see this for the immature hack-job it really is.'

Fixed it for you.

Bala said...

LK,

"I admit that specific evidence of correction does not prove causation."

Ah!!!! Something is happening at long last.

"Additional empirical evidence showing the mechanisms of causation are necessary to show that A causes B."

But then even this "additional" empirical evidence would still be empirical evidence, wouldn't it? Then how can it show causation? Further, how being "necessary" suffice as a proof of causality?

You still don't get it and your claim that facts can refute theories is still to be supported with arguments.

I would like to see your refutation of the statement "correlation does not imply causation". It sure is amusing. Please dish it out ASAP. I just can't wait for it.

Lord Keynes said...

But then even this "additional" empirical evidence would still be empirical evidence, wouldn't it?

That is what I just said: empirical evidence DEMONSTRATING the mechanisms of causation.

Then how can it show causation?

Precisely as I said, by identifying the mechanisms by which A causes B.

If there is a correlation between smoking and higher rates of cancer in smokers by higher frequencies of cancer than in non-smokers, then you have correlation.

But the evidence showing how toxins in tobacco cause human cells to become carcinogenic provide the additional necessary empirical evidence for the causal mechanisms by which tobacco causes higher frequencies of cancer in humans.

You still don't get it and your claim that facts can refute theories is still to be supported with arguments.

Oh my god..
E.g.,
A man has a theory that the moon is made of green cheese. Astronauts go to the moon, and after intense investigations of its surface on many sites and different areas and deep drilling and testing find only rock and dust.
They have now discovered a synthetic, contingent fact about the moon, and you think it would not refute the "green cheese" theory?

Lord Keynes said...

Correction:
how toxins in tobacco cause human cells to become carcinogenic

to

how carcinogenic toxins in tobacco cause human cells to become cancerous

Bala said...

LK,

Hilarious.

"A man has a theory that the moon is made of green cheese."

This is not a theory. ROFLMAO.

Bala said...

LK,

"Precisely as I said, by identifying the mechanisms by which A causes B."

How can it "identify" the mechanisms by which A causes B?

"empirical evidence DEMONSTRATING the mechanisms of causation"

Empirical evidence CANNOT demonstrate the mechanisms of causation.

All this apart, you are yet to get over your Physics envy. Please answer how all this is valid in the social sciences where the subject of the study is acting man and not a lump of lifeless rock like the moon.

Bala said...

LK,

Throw 2 more virgins in the volcano. It may still rain. Maybe the rain gods are still miffed that you took this long to realise this.

Bala said...

LK,

Let me take your moon example further. Take the axioms or the subsidiary assumptions of Austrian Economic theory and show them to be false in the same manner as your scientists showed that the moon IS NOT made of green cheese?

I have asked for this many times before but never got a proper answer. Your potshot at the Law of Comparative Advantage has already been shown to be misdirected. Try something better this time around.

Bala said...

LK,

One last point till you give an argument. My statament

"You still don't get it and your claim that facts can refute theories is still to be supported with arguments."

was made in the context of theories in the social sciences. That you repeatedly respond with instances in the natural sciences is extremely revealing of the extent and depth of your Physics envy.

Lord Keynes said...

Take the axioms or the subsidiary assumptions of Austrian Economic theory and show them to be false in the same manner as your scientists showed that the moon IS NOT made of green cheese?

Already did in the case of comparative advantage.

The theory is based on false subsidiary axioms, so its inferences are also false when applied to the real world.

Your potshot at the Law of Comparative Advantage has already been shown to be misdirected.

Keep dreaming.

was made in the context of theories in the social sciences.

And there are any number of examples:

(1) History
In history, empirical data consists of surviving written sources and archaeological evidence, etc, that is used in a process of induction to test theories. E.g., we have a theory that there was a Roman occupation of Britain from 43 AD onwards - the empirical data proving this is massive archaeological remains and ancient sources which speak of the occupation of the island.
By contrast, someone might have the "theory" that the Romans invaded and occupied Ireland - but the empirical evidence does not support this theory and induction using empirical evidence can be used to falsify it.

(2) Economics
Milton Friedman's version of the quantity theory of money uses the
Cambridge Cash Balance equation:

M = kd PY

M = quantity of money;
kd = demand to hold money per unit of money income.
P = average price of the transactions.
Y = the volume of all transactions that enter into the value of national income (goods and services).

Thus Friedman and other monetarists argue that there is a direct, proportional relationship between the money supply and the inflation rate or price level.

Empirical evidence refutes there theory (De Grauwe, P. and Polan, M. 2005. “Is Inflation Always and Everywhere a Monetary
Phenomenon.” Scandinavian Journal of Economics 107: 239–259.)

Monetarists also require 2 assumptions for their theory to work in the real world: that are M and P are causally related, if kd and Y are constant.

But empirical evidence shows clearly that kd and Y are NOT constant.

Y changes as employment and economic activity rises and falls, and kd like velocity of money is unstable is subject to shocks and moves pro-cyclically (Leo, P. 2005. “Why does the Velocity of Money move Pro-cyclically?” International Review of Applied Economics 19.1: 119–135.).

Too bad you lose in argument yet again.

Bala said...

LK,

Your attack on the Law of Comparative Advantage is ill-directed because it is a law that explains the consequences of a particular condition. It does not make a claim that the condition should always exist.

Let me illustrate the utter stupidity of your attack.

Imagine that I give a condition "If A, then B" and you turn around and say "Condition A is not satisfied. Hence the condition 'If A, then B' is invalid". It is interesting that too much of Keynesian gobbledygook can turn a human brain into jelly.

Your attempt at using History is so laughable that words fail me to describe its stupidity. The empirical data does not "prove" the historical theory. It can only give a certain degree of credibility to the theory. It makes the theory more "plausible".

And finally, it does not require empirical evidence to show the utter idiocy of the Cambridge Cash Balance Equation. An understanding of the inherent unsoundness of the terms involved is sufficient to show that it is a very refined form of stupidity. In fact, you are precisely the kind of fool who, if the data were to "corroborate" it, would swallow the economic pigswill that this equation is.

Anonymous said...

LK,

Further, there is a fundamental difference between theories in History and theories in Economics.

Theories in History are an attempt to put together the story of "what was" based on available knowledge of "what is" and "what was". Where information is available in bits and pieces, Historians try to reconcile the bits with each other. Facts can have a role to play because History is basically an attempt to present facts.

Economics, on the other hand, is a science that identifies causal relationships. Causal relationships never "exist". They are all mental constructs that explain how different aspects of reality influence each other. Empirical evidence can only throw up the need to identify causal relationships. Unless it shows that the underlying axioms or subsidiary assumptions are wrong, empirical evidence cannot refute a theory of a causal relationship. Of course, the best way to refute a theory is to attack its logic.

But then how is a person who does not understand the difference between "if" and "only if" conditions to ever find errors in others' logic?

Bala (from my phone. Apologies on that count)

Lord Keynes said...

Your statement 1:

The empirical data does not "prove" the historical theory.

Your statement 2:

Theories in History are an attempt to put together the story of "what was" based on available knowledge of "what is" and "what was". Where information is available in bits and pieces, Historians try to reconcile the bits with each other. Facts can have a role to play because History is basically an attempt to present facts.

You contradict yourself so flagrantly it is laughable.

This muddled nonsense is nothing less than admission that my statements about history are correct.

Bala said...

LK,

Is this debate about History or Economics? How about addressing the point that your approach to Economics is a lot worse than muddles nonsense?

You are yet to explain how the statement "correlation does not impliy causation" is wrong and hence have failed to justify your attempt to negate Austrian Economic Theories with data.

I have said enough to show that your attack on the Law of Comparative Advantage reflects a complete lack of logic on your part. How about addressing it?

Or are you happy to be an economic historian.

p.s. - Historians do not develop "theories". They come up with plausible "stories". History is nothing more than a collection of stories and not of theories. Go find an ocean to drown in.

Lord Keynes said...

Historians do not develop "theories". They come up with plausible "stories".

LOL!! Oh my god.
The theory of how, say, the Romans build the Colosseum based on the empirical data (the actual ruins) is just a "story"??

Bala said...

LK,

"The theory of how, say, the Romans build the Colosseum based on the empirical data (the actual ruins) is just a "story"??"

Yes. It is the story of how the Romans built the Colosseum. All history is stories.

Bala said...

LK,

How about addressing the attack on your economics? I mean the part where I showed that you are talking drivel in the name of economics?

Lord Keynes said...

It is the story of how the Romans built the Colosseum. All history is stories.

And is the "story" (1) based on and verified by empirical evidence, or (2) just a idea divorced from reality that someone thought up like novel?

If it is (1), your "story" is the same as a theory verified by empirical evidence. So get nowhere here.

If (2) you are saying history is tantamount to fiction.

Bala said...

LK,

Could we please cut out the discussion of history and come to the one on economics? Specifically, could you address the point that you (like all Keynesians of all stripes) are just an economic historian? Could you please address the argument that explains that your attempts at economics are nothing short of drivel?

Lord Keynes said...

Your attack on the Law of Comparative Advantage is ill-directed because it is a law

It isn't a "law" at all.
The whole concept of law as used in the natural sciences is not valid when you describe economic "principles" that can be freely violated by the subjective wishes of humans or not even relevant to the real world at all because the starting assumptions don't apply.

Newton's laws of motion are indeed natural laws; comparative advantage is not.

You accuse other people of having "physics envy", then use the concept yourself.

Ricardo's argument for comparative advantage is a theory of why free trade for real world people is mutually beneficial to them, and relies on assumptions about the real world in order to work.

When those assumptions do not apply in the real world, then the theory is refuted.

And as is well known now even when his original theory is highly flawed because Ricardo does not take account of what a national produces

Ricardo wrote the book Principles of Political Economy and Taxation in 1817. In free trade theory, it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage.

But this idea is utterly absurd. It does matter what you produce. The basis of a modern First World economy is manufacturing and high-value added industries. In a world in which it is cheaper to buy these good from overseas, a Third World country will never industrialize.

Lord Keynes said...

See also:

[the pre-conditions for] David Ricardo’s 200-year-old theory are no longer present in the modern world. Moreover, the latest work in trade theory, Global Trade and Conflicting National Interests (MIT Press, 2000), by Ralph E. Gomory and William J. Baumol, shows that the case for free trade was incorrect from the beginning …. A number of competent economists have taken [Classical] free-trade theory to the cleaners … Professor Robert E. Prasch, in a 1996 article in the Review of Political Economy, demonstrates fundamental problems with the theory. Professor Ron Baiman at DePaul University has shown that Ricardo’s theory is “mathematically overdetermined and therefore generally unsolvable.”

Paul Craig Roberts, “The Problem of Free Trade,” Counterpunch 16.2, Jan. 16-31, (2009).

See also:

Prasch, R. E. 1996. “Reassessing the Theory of Comparative Advantage,” Review of Political Economy 8.1: 37–56.

Gomory, R. E. and Baumol, W. J. 2000. Global Trade and Conflicting National Interests, MIT Press, Cambridge, Mass.

Bala said...

LK,

"The whole concept of law as used in the natural sciences is not valid when you describe economic "principles" that can be freely violated by the subjective wishes of humans or not even relevant to the real world at all because the starting assumptions don't apply."

This is truly moronic and laughable. Your most obvious foolishness is to try to compare the "laws" of economics with the "laws" of economics. Your second foolishness is to claim that economic laws can be violated by the subjective wishes of human beings. Just as I may jump off cliff in an attempt to violate the law of gravitation but can only fall down and break my bones in doing so, so too may I violate the laws of economics but can only end up poorer than I would be if I had followed them. In either case, it is the working of the law that I am trying to violate that leaves me worse off than I expected to be. Your third foolishness is to claim that the starting assumptions of a theory like the Law of Comparative Advantage are not true. There are still a fair number of barriers between nations. Immigration laws and restrictions on free flow of capitl are just 2 examples. Even if these are removed, the very fact that land cannot be moved around and that different plots of land will always have different utility to acting men validates the starting assumptions of the Law of Comparative Advantage. Not all factors are not free to move across national borders or geographical regions. Land at the foothills of the Himalayas will always be land at the foothills of the Himalayas.

So, the only thing invalid out here is your argument.

" In free trade theory, it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage."

This is even more hilarious. It is not "as long as....." but "because you will end up being better off by producing that which gives you a comparative advantage than by producing that which gives you a comparative disadvantage".

The real absurdity is the nature of your objection. The real irritant in this discussion is your deliberate refusal to grapple with "if" and "only if" statements and your repeated (moronic) insistence that a condition "If A, then B" is invalidated because condition A is not satisfied.

It is clear that the only thing you are capable of is economic history. Go back to chronicling, you story teller. My only request is that you do it honestly (something i am afraid you are incapable of doing).

Lord Keynes said...

Just as I may jump off cliff in an attempt to violate the law of gravitation but can only fall down and break my bones in doing so, so too may I violate the laws of economics but can only end up poorer than I would be if I had followed them.

An utterly stupid analogy.

If you jump in the air in an attempt to violate the law of gravity and fly, you fall back to the earth immediately.

By contrast, many nations have radically violated the principle of free trade, and grown rich by protecting manufacturing industries through infant industry protectionism, e.g., the US and Germany in the 19th century, and after WWII, South Korea, Taiwan, Japan.

In fact, the US was one of the most protectionist nations on earth in the 19th century, pursuing strong infant industry protection and high growth:

Trade liberalisation and the poverty of nations, p. 42

Bala said...

LK,

I see you attempting an interesting play on the word "immediately". That's not going anywhere. Economic laws take their own sweet time to work. Don't blow the victory bugle too soon.

That apart, it is good to see that you have taken my advice and gone back to chronicling.

JB Hickock said...

Call me a cynic, but I'd bet my bottom dollar that Krugman's safe is chock full of gold. I don't think he believes half of what he spews. My view is that he's just another sociopathic establishment hack that knows which way his bread is buttered.

Nevertheless, if gold is such a "barbaric relic," why aren't all of Krugman's fellow uber-geniuses dumping all of theirs into the ocean in order to rescue mankind from it? Surely the rich folks that agree with Krugman can put on a great protest for all the world to see, thus setting an example, and saving us from the anachronistic scourge of gold. I propose a reading of Bryant's famous Cross of Gold speech and a ritualized drowning ceremony by all the gold owners that agree with Kruggie Wuggie.

I'm sure "World Dump Your Gold In The Ocean Day" would be a big hit. Have Bono and the gang write a song for it a la "We Are The World." Maybe they could also tie it into their endless climate change hoax. After all, extracting and refining gold produces Co2, and that's utterly evil.