Tuesday, June 28, 2011

Uh, Mr. Clinton, didn't loan guarantees help get us into trouble in the first place?

One of the great things about reading the editorial page of the New York Times is that it tends to be Bad Idea Central, and while Paul Krugman seems to be the official Leader of Bad Ideas, nonetheless the enthusiasm for Krugmanesque ideas has spread across mainstream journalism and the political classes.

To make matters even better, Roger Cohen's recent column, "America, Awaken," not only is chock full of Really Bad Ideas, but then links an article by none other than Bill Clinton on how to restore the economy. A two for one deal! Is this a great country, or what?!?

Alas, neither person has a clue on how to deal with the present crisis, although at least Clinton does advocate cutting corporate tax rates. Nonetheless, one good point does not negate the other stuff, as a centerpiece of Clinton's proposed "recovery" plan is the issuance of "loan guarantees" to the banks. I'm not kidding.

First, let us look at what Cohen wants: (1) An "energy policy" that continues to throw even more dollars after "green" energy initiatives that not only are boondoggles but also are gobbling up resources and giving nothing in return but expensive and inferior fuels and electricity; (2) An "industrial policy" that he believes will force American companies to do more politically-correct "investing."

Like so many at the Grey Lady, Cohen is like the people in the crowd in the Frederic Bastiat story of the "Broken Window Fallacy," in which the onlookers claim a boy who broke a baker's window is a public benefactor because the glazier will have employment fixing the window. In other words, Cohen, like the Bastiat characters, views only what can be seen and has no idea as to what is not seen. He writes:
One of Clinton’s energy ideas related to the cash incentive Obama had offered for start-up green companies. America moved in the past few years, the former president noted, from having less than 2 percent of the world market in manufacturing high-powered batteries for hybrid or all-electric cars to 20 percent, with 30 new battery plants built or under construction. Then — wait for it — Republicans in Congress wouldn’t extend the plan because they viewed it as a “spending program” rather than a tax cut.

This is madness, the ne plus ultra of American politicians betraying the American people. As Clinton noted, “We could get lots of manufacturing jobs in the same way” — that is, combining green energy and industrial policy.
What Cohen does not say is that NONE of these companies can make it on its own in even a relatively free market. Instead, taxpayers are forced to cover the perennial losses that these firms will make. And Cohen truly believes that this is the way to a recovery.

The "madness" is not in pulling the plug on these subsidized ventures; the real madness is thinking that government can subsidize us into economic recovery.

Then there is Bill Clinton. I would urge readers to look over all the points, but I want to deal with the loan guarantee issue. Clinton writes:
Before the last presidential election, I tried for a year to get both Congress and the administration to deal with the fact that the banks weren’t lending because they were still jittery about the economy, and worried about the regulators coming down on them for bad loans still on the books. It’s not much better now. Banks still have more than $2 trillion in cash uncommitted to loans.

So I suggested that the federal government set aside—not spend—$15 billion of the TARP money and create a loan-guarantee program that would work exactly the way the Small Business Administration does. Basically, the bank lends money to a business after the federal government guarantees 75 percent of it. Let’s say that the SBA fund has about a 20-to-1 loan-to-capital ratio, and it’s never come anywhere near bankruptcy. If we capitalized this more conservatively at 10-to-1, we could guarantee $150 billion in loans and create more than a million jobs. We should start with buildings we know will stay in use: most state and local government buildings, schools, university structures, hospitals, theaters, and concert halls. We could include private commercial buildings with no debt. Even if many are strapped for cash, allowing the costs of the retrofits to be paid only from utility savings means the building owners won’t be out any cash. It’s a “just say yes” system.
Here is the problem: Clinton is demanding that banks lend for projects that are NOT going to help lead a recovery, but simply will reward people who are politically-connected. In other words, taxpayers will be on the hook (once again)for money lent to political entrepreneurs. I'm sure that Ben Bernanke will stand behind everything with his checkbook from the Fed.

Yes, subsidies, tax-financed and tax-guaranteed loans. That will fix everything.

88 comments:

Lord Keynes said...

"What Cohen does not say is that NONE of these companies can make it on its own in even a relatively free market. Instead, taxpayers are forced to cover the perennial losses that these firms will make."

The early producers of computers could never have made it on their own without government subsidies and government contracts. Yet the modern computer ONLY exists in its advanced form, because of decades of R&D that occurred when it was largely confined to the public sector:

“Transistors were developed in a private laboratory, Bell Labs, but it was a monopoly. There was no market and there was no consumer choice. Since it was a government-supported monopoly, they could charge monopoly prices, which is in effect a tax. As long as they had the monopoly, Bell Labs was a very good lab. They did all sorts of things at public expense. As soon as it was deregulated, Bell Labs went down the tubes.

Quite apart from that, Bell Labs was using state-generated wartime technology. Furthermore, they had nobody to sell the transistors to. For about ten years, the only market for high-quality transistors was the government, just like computers. During that period they were able to develop the technology, the scale, the marketing skills so that finally they could break into the market system.”

David Barsamian and Noam Chomsky, Propaganda and the public mind: conversations with Noam Chomsky, p. 18.


And the development of modern computers also occurred in Japan, where this happened by direct Japanese government industrial policy through their Ministry of International Trade and Industry (MITI):

“The real success of Japanese producers, American industry sources conclude, came only after the mid-1970s. [The Ministry of International Trade and Industry] targeted the computer and telecommunications markets as central to Japan’s future. Establishing a national goal to lead in those industries, the government offered substantial incentives to encourage R&D and investment, besides restricting foreign access to Japanese markets.”
Competitive edge: the semiconductor industry in the U.S. and Japan, p. 17.

The Japanese industrial policy was so succesful that America semiconductor manufacturers were getting slaughtered by the Japanese by the 1980s.

Lots of other modern advanced technologies had much the same history.

Congratulations, Anderson, you’re presented an Austrian argument for severely retarding technological innovation in the modern world.

João Marcus said...

The early producers of computers could never have made it on their own without government subsidies and government contracts.

Ah, the good, old Polyanna theory of history. Computers wouldn't have made it on their own without the government because, well, that's the way it happened, so, it couldn't have happened any other way!

See, if was an engineer, everything I could ever achieve in my life would only be possible because, well, I'm an engineer. Had I chosen otherwise, like begin a computer programmer, I would't be able to buy a car, because... oh, well, I can't go back in time and test my theory, so it must be true.

Lord Keynes said...

"Computers wouldn't have made it on their own without the government because, well, that's the way it happened, so, it couldn't have happened any other way! "

= red herring.

No one said that computers would never have developed in the complete absense of government intervention: the point is THIS is the way they developed in the real world.

They are as advanced and sophisticated today as they are through decades of govenrment intervention.

Bell labs would never have been able to develop what it did ex nihilo.

Anonymous said...

Like talking to a dog.

Tel said...

Quite apart from that, Bell Labs was using state-generated wartime technology. Furthermore, they had nobody to sell the transistors to. For about ten years, the only market for high-quality transistors was the government, just like computers.

This is, quite frankly, complete rubbish. For starters, Bell Labs immediately started putting together audio amplifiers built out of transistors. These amplifiers had a number of advantages over valves because they used less power, did not take time to warm up, and vacuum tubes were downright unreliable. Remember that Bell fundamentally sold audio communication services (i.e. telephones) so they had a pretty major interest in audio amplifiers.

They also sold transistors to the new startup company Sony in Japan (and ultimately licensed their transistor design to the Japanese). Sony was no government charity case, they were a garage startup selling transistor radios to the public as early as 1955 (that's a fully commercial product only 8 years after the first prototype transistor was made out of paper clips and razor blades).

And the development of modern computers also occurred in Japan, where this happened by direct Japanese government industrial policy through their Ministry of International Trade and Industry (MITI)

Show me the great advances in computing that came out of Japan.

Yes they have done some great stuff in the entertainment industry, they make excellent cameras, they contributed towards the Compact Disc, but all of that MITI emphasis on computers never translated into a world-leading position. Hard drives are made in either Singapore (or China under license), memory is made in Korea, and the USA is a clear leader in CPU / GPU design. Japan is an excellent place to buy a car.

What's more, the Japanese economy is based around the Zaibatsu concept, which is not a direct equivalent to anything in the Western world (being a combination of dynastic family connections, financial banking power and industrial base). The government influence of MITI was never a power unto itself, but a power that operated through the Zaibatsu system, making it something akin to corporatism but not directly comparable with the direction that Western economies have taken.

Sony corp is much closer to the Western model, and is generally thought of as operating outside the Zaibatsu system, although Wikipedia lists them under Mitsui because of their banking connections.

Tel said...

No one said that computers would never have developed in the complete absense of government intervention: the point is THIS is the way they developed in the real world.

No it ain't the way it happened.

Governments spent a lot and delivered a little. Private business spent a little and that's where most of the historic breakthroughs came from.

Because of their military connections, and tax powers, governments can always spend money, no one questions that. However, their approach is inevitably brute force, not creative insight. Private companies with small teams willing to take risks and explore new directions inevitably deliver the breakthroughs (well many of those teams fail without trace, but we don't write history about the failures).

Lord Keynes said...

"they contributed towards the Compact Disc, but all of that MITI emphasis on computers never translated into a world-leading position."

Did you even read my statement?: “The Japanese industrial policy was so successful that America semiconductor manufacturers were getting slaughtered by the Japanese by the 1980s”.
Get it??
That is easily confirmed:

William R. Nester, American industrial policy: free or managed markets?, p. 115.

This was the result of industrial policy.

Lord Keynes said...

Private business spent a little and that's where most of the historic breakthroughs came from.

(1) Bell labs was standing on the shoulders of others: they would never have been able to develop what it did ex nihilo.

(2) Before the 1980s, Bell labs was reliant on a government-supported monopoly:

"For Bell Labs to operate as before to advance science, Bell Labs had to be funded by an organization, such as the American government, that was not worried about profits and competition. In the monopoly days, the people of the USA were funding Bell Labs by a tax in the form of higher telephone rates."
Narain Gehani, Bell Labs: life in the crown jewel, p.222.


Dont give me this rubbish about "private business" as if this some competitive organisation on a free market.

(3) Their early products were profitable because they had a reliable market from government purchases.

American Patriot said...

Tell 'em, Tel. LK forgot that when he is talking about computers, etc., he is talking about subjects that are up your alley.
--
Typical progressive non-solutions by Clinton. If these guys had their way, we would have a 5-year plan like the Soviets (and other planned economies) had.

All we hear is B.S. from likes of LK here that without government subsidies, there would be little to no innovation (pointing usually to internet as their example). It is beyond absurd. Then, likes of Will talk about sectors like pharma benefitting from government research, tax breaks, etc.

Well, that is exactly the progressive game. Burden the private sector to no end with regulations and a complex tax code then make up for it by further complicating the tax code by adding special tax breaks, etc. That way companies can survive, yet progressives have the ready made argument that all these companies (be it pharma, oil, etc) are either subsidized or benefit from government somehow.

Hey, a novel idea. Why don't we just have a free market capitalist system where we reduce cost of doing business (lower taxes and less regulations) and let the companies survive or fail on their own merits? LOL!

Lord Keynes said...

The free market AT&T:

"As a result of a combination of regulatory actions by government and actions by AT&T, the firm eventually gained what most regard as monopoly status. In 1907, AT&T president Theodore Vail made it known that he was pursuing a goal of "One Policy, One System, Universal Service." AT&T began purchasing competitors, which attracted the attention of antitrust regulators. To avoid antitrust action, in a deal with the government, Vail agreed to the Kingsbury Commitment of 1913...

In 1925, AT&T created a new unit called Bell Telephone Laboratories, commonly known as Bell Labs. This research and development unit proved highly successful, pioneering, among other things, radio astronomy, the transistor, the photovoltaic cell, the Unix operating system, and the C programming language.


http://en.wikipedia.org/wiki/American_Telephone_%26_Telegraph

Don't make me laugh.
It wasn't until 1982 that the govenrment supported monopoly started to end.

Also:

"Bell Labs was a creation of a government sponsored monopoly with price and profit controls, what would these days be called "socialism" but back in the day was called "pragmatic."

AT&T and the Bell System were granted the ability to operate as a monopoly by the federal government in return for guaranteeing telephone access for rural areas at affordable prices and caps on the amount of profits they could make ....
The second part of this were the profit caps. Any profits over a certain generous amount were to be turned over to the federal government, but the bosses at AT&T didn't want to make those payments so they reinvested those dollars in the business. That meant good salaries, good benefits, good working conditions, scholarships for kids, long vacations, etc.

It also meant the greatest pure research facility in the world, known as the Bell Labs. Many of the greatest minds in the world were brought together in New Jersey -- Murray Hill, Morristown, Holmdel, Princeton, etc. -- to solve intractable problems facing science, communications and manufacturing."


http://ptalker2.blogspot.com/2011/01/remembering-bell-labs.html

Daniel Hewitt said...

Economic resources were extracted from the private sector in order to create the new products. LK's argument is not unsimilar to the broken window fallacy - that the value of these new products is greater than the value of what the extracted resources could have created if they were not confiscated in the first place.

This is not unique to progressives. Conservatives would also argue that the benefits to the consumer that the military industrial complex provides (GPS for example) outweigh the massive costs to society of funding the MIC.

Bob Roddis said...

Without the introduction of the Fed which made possible WWI with its slaughter and controls, without the Fed induced Great Depression and without WWII with its slaughter and controls we would have never been able to voluntarily invent ANYTHING. Right? I mean, it's a well known fact that government SWAT teams (who ultimately enforce the statist diktat) are the primary cause of both genius and prosperty.

Everyone knows that, right?

Lord Keynes said...

Daniel Hewitt @June 29, 2011 10:17 AM

"LK's argument is not unsimilar to the broken window fallacy - that the value of these new products is greater than the value of what the extracted resources could have created if they were not confiscated in the first place."

So, unlike others here, you don't dispute the massive government involvemnet in the development of the computer?

"these new products is greater than the value of what the extracted resources could have created"

Since you have NO way of knowing what could "have been created," this argument cuts both ways: you assume, without evidence, that the private sector would have created of something of greater value.

Bob Roddis said...

LK can make these silly arguments with a straight face because he meticulously and purposefully avoids comprehending the basic concept of economic calculation. He does not want to get it and he sure as heck doesn't get it.

Lord Keynes said...

Bob Roddis @June 29, 2011 10:41 AM

Without the introduction of the Fed ..., without the Fed induced Great Depression and without WWII with its slaughter and controls we would have never been able to voluntarily invent ANYTHING.

= straw man

"I mean, it's a well known fact that government SWAT teams (who ultimately enforce the statist diktat) are the primary cause of both genius and prosperty."

Incoherent rubbish. And possible appeal to emotion fallacy.

Bob Roddis said...

The part of the counterfactual that LK will not understand is what is and has been lost due to the statist policies he loves, the Keynesian-induced poverty and controls and the Keynesian-subsidized mass slaughters.

Anyway, I'd willingly go back to vacuum tube radios and no PCs in exchange for no wars and no depressions. But it's absurd to think we wouldn't have discovered the various technological improvements in any event without statist aids.

Since you have NO way of knowing what could "have been created," this argument cuts both ways: you assume, without evidence, that the private sector would have created of something of greater value.

Maybe LK is slowly discovering the nature of human existence after all.

In a 1975, Hayek stated:

“The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured."

AKA - No one can predict the future. And no one has sufficient information to plan the economy.

Lord Keynes said...

"LK can make these silly arguments with a straight face because he meticulously and purposefully avoids comprehending the basic concept of economic calculation."

You're a broken record player.

The economic calculation problem of Mises and Hayek is problem for central planning under non-market socialism, not a modern capitalist mixed economy where the VAST majority of production is done privately.

And if you're talking about ABCT, I understand the alleged economic calculation problems perfectly well, thanks: but the theory Of ABCT is rubbish.

Lord Keynes said...

"“The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure."

LOL.. the mythical equilibrium structure dependent on the Wicksellian natural interest rate and fictitious monetary equilibrium.

Bob Roddis said...

The economic calculation problem applies to all people at all times. It can even impair and limit the size of firms in the private sector where their size inhibits the pricing of factors of production.

The ABCT is a mere corollary of the problems of economic calculation faced by fundamentally ignorant acting humans in the real and mean cruel world.

Since you do not at all understand the concept of economic calculation, you cannot begin to understand the ABCT or the obvious problems inherent in your broken-record statist proposals.

A thousand of your footnotes isn't going to rescue you from your ignorance about economic calculation.

Anonymous said...

"Without the introduction of the Fed ..., without the Fed induced Great Depression and without WWII with its slaughter and controls we would have never been able to voluntarily invent ANYTHING.

= straw man"

= avoiding the argument

Daniel Hewitt said...

LK,

So, unlike others here, you don't dispute the massive government involvemnet in the development of the computer?

No, I don't dispute government intervention.

you assume, without evidence, that the private sector would have created of something of greater value.

Fair point, and my response is that in order to justify (in utilitarian terns) the confiscation of property against the will of the owners, the burden of proof should fall on the ones who wish to do the taking (or have it done on their behalf).

Bob Roddis said...

LK denies the concept of “the natural rate” of interest because he has to. He just does. Just because.

Let’s imagine someone who has found a bunch of gold bricks in the desert. They are very heavy. This person has sufficient water so that he has the ability to walk back to civilization by carrying enough water. The more of the heavy gold he carries, the less water he can carry but let’s suppose he gets to keep whatever he carries. Based upon reality (which cannot really be known in advance), there is a reality-based limit to the amount of gold that can be safely carried without the guy running out of water and dying. Let’s call that “the natural rate”. We won’t get a handle on that until someone just goes out and does it. After a while, taking into account who died and who made it with so much gold and water, we might understand better “the natural rate” .

The concept of the natural rate of interest is similar but it is much more complicated and certainly unknowable by any individual human without omniscience. It would take into account all information about the universe including the desires and wants of all individuals and their own personal time preferences. The gold example is mostly a question of physics and anatomy, not the changing tastes and whims of people. The natural rate is the rate that people will tend towards in the real world but people are inherently ignorant. The pricing process provides the most information to people so that they might conduct their affairs despite their inherent state of ignorance. Socialism and Keynesianism do not comprehend at all the problems of knowledge in society which are at the core of Austrian thought. The Keynesians clearly do not understand how their hare-brained schemes distort economic calculation as seriously as those of the Marxists although in a different manner.

LK purposefully fails to understand the simple and self evident concepts of the natural rate of interest and economic calculation. He imagines that the private sector folks who are too dumb to voluntarily organize themselves in order to invent a computer are at the same time smart enough to select their overseers who might extract resources from them via SWAT teams to forcibly fund the even smarter guys who might invent the computer. And LK knows who these people are a priori. Just cuz.

Lord Keynes said...

"The economic calculation problem applies to all people at all times…"

Yes, it is problem for those who believe in dynamic equilibrating markets and mythical Austrian plan/pattern co-ordination too! As Mises admited,

"The static state can dispense with economic calculation. For here the same events in economic life are ever recurring; and if we assume that the first disposition of the static socialist economy follows on the basis of the final state of the competitive economy, we might at all events conceive of a socialist production system which is rationally controlled from an economic point of view."

Mises, Economic calculation in the Socialist Commonwealth, p. 16.

But as Mises admits such static/equilibrium states are imaginary. But transitioning from one equilibrium state to another is stupidly the heart of Hayekian ABCT, and it assumes static equilibrium theory, and that all markets clear, partly by assuming away uncertainty and assuming perfect foresight:

“As we have just seen, by the middle of the 1930s, problems with [Hayek’s] static equilibrium theory had become ever more evident, as questions of the role of expectations came to the fore and, and, with them, the recognition that earlier models had assumed perfect foresight”
Bruce Caldwell, Hayek's Challenge: An Intellectual Biography of F.A. Hayek, 224.

….
“Hayek’s changing assessment of the importance of equilibrium theory has some consequences for our story. The most telling of these concerns Hayek’s trade cycle theory, a paradigmatic example of equilibrium theory, one that Witt (1997, 48) describes as ‘an impressive example of allied price theoretical reasoning that may even delight a Chicago equilibrium economist.’ But, as Witt goes on to observe, if one rejects the usefulness of equilibrium analysis, then Hayek’s step-by-set story of how the cycle unfolds, one in which ‘each single stage necessarily had to be followed by the next one’ (46), can no longer be maintained. Witt concludes that Hayek’s cycle theory may well be incompatible with his later theory of spontaneous orders, a concern that others have voiced”
Bruce Caldwell, Hayek's Challenge: An Intellectual Biography of F.A. Hayek, 228


By dragging up this economic calculation problem, you’ve brought up yet another problem with Hayek’s ABCT.

Bala said...

"you’ve brought up yet another problem with Hayek’s ABCT."

Yeah!! Just like all the other 'problems' which have already been shown to be utter nonsense coming from a well-rotted brain. Every objection you have come up with has been sufficiently demolished and torn to shreds. It's echo chamber time, mate.

libertarian neocon said...

Cohen wants an "industrial policy"? The last time I heard people talking about that seriously was 1989 when everyone was saying how Japan has one, shouldn't we have one too? How did that work out for them? Bridges to nowhere, nuclear plants on fault lines, and two lost decades.

Lord Keynes said...

"LK purposefully fails to understand the simple and self evident concepts of the natural rate of interest"

Simple and self evident concept?
As already pointed out before, there is NO uniqiue Wicksellian natural rate of interest in a growing monetary or barter economy. Period.
Hayek accpted that too, but never properly explained how a monetary rate can equal multiple rates.

This is one of the reasons why economists in the 1930s were not convinced by ABCT rubbish.

Bob Roddis said...

As I have said before, LK is like a free book of review questions for taking the bar exam.

But he simply rejects and will always reject basic Austrian truths about real world like the natural rate of interest and economic calculation which he fails to understand due either to stupidly or intentional, purposeful ignorance. Based upon his research skills, I don't think it's due to stupidity.

I take this as big win for the Austrians because the statists have fired their best shots which amount to ignoring or mangling basic Austrian concepts. They have nothing. We win again.

Bala said...

"Hayek accpted that too, but never properly explained how a monetary rate can equal multiple rates."

You moron!! It is not about being 'equal' but 'being in equilibrium with'. That means giving no further room for arbitrage opportunities. Why is this simple point so difficult for you to comprehend? Are you that retarded? But then how will you answer that question given that you are indeed very, very retarded.

"This is one of the reasons why economists in the 1930s were not convinced by ABCT rubbish."

Oh!! Economists, were they? Who is an economist? What is economics? Silly me!!! Why do I expect an economic chronicler to answer these difficult questions?

João Marcus said...

No one said that computers would never have developed in the complete absense of government intervention: the point is THIS is the way they developed in the real world.

Really? You said: "The early producers of computers could never have made it on their own without government subsidies and government contracts." You say early producers would never have made it without the government.

Major_Freedom said...

Lord Keynes:



The early producers of computers could never have made it on their own without government subsidies and government contracts. Yet the modern computer ONLY exists in its advanced form, because of decades of R&D that occurred when it was largely confined to the public sector:

No, modern computers exists today ONLY because of private investment and private R&D. Ethernet, routers, switches, ISPs, computer production, all of these took place in the private market.

The fact that the basic ARPANET packet switching technology was financed by government, does not mean that the private market could never have figured it out, and it does not mean the government is responsible for the internet today.

And the development of modern computers also occurred in Japan, where this happened by direct Japanese government industrial policy through their Ministry of International Trade and Industry (MITI):

The Japanese industrial policy was so succesful that America semiconductor manufacturers were getting slaughtered by the Japanese by the 1980s.

Lots of other modern advanced technologies had much the same history.

Congratulations, Anderson, you’re presented an Austrian argument for severely retarding technological innovation in the modern world.

Congrats you anti-economics simpleton. You just made opportunity costs magically disappear with the spewing of this statist verbal diarrhea.

No one said that computers would never have developed in the complete absense of government intervention: the point is THIS is the way they developed in the real world.

Red herring.

No one said history did not occur.

They are as advanced and sophisticated today as they are through decades of govenrment intervention.

Which means other advancements and other sophistications elsewhere in the economy did not take place on account of that government intervention. Humans in peace are just adapting to the governmental violence.

The fact that a thief can influence peaceful humans developing more sophisticated security technology, does not mean that theft is responsible for that technology.

Bell labs would never have been able to develop what it did ex nihilo.

You just contradicted yourself. Before you said:

"No one said that computers would never have developed in the complete absense of government intervention: the point is THIS is the way they developed in the real world."

Now you are saying

"Bell labs would never have been able to develop what it did ex nihilo."

Idiot.

“The Japanese industrial policy was so successful that America semiconductor manufacturers were getting slaughtered by the Japanese by the 1980s”.

The Japanese industrial policy was not successful, if you understand that success and failure are individualistic concepts. While the Japanese government was "succeeding" in taking money from some citizens, and giving it to other citizens, they were generating success in one area, and generating failure in other areas. You are again ignoring opportunity costs because you don't think like an economist. You are only focusing on what is seen. You are not considering what is not seen.

You are committing the broken window fallacy over and over again.

zackA89 said...

The way I see it is this. You have to consider the bot successes, AND the losses of these government funded projects/research. Unfortuantley, statists never like to consider the failings of government and weigh it against any alleged "successes", as if these successes could have never happend in the absence of the benevolent state.

In other words, government could fund 100 projects. Say 5 pan out, but what about the other 95 that don’t pan out? Just because government funded 5 projects that panned out does that mean it should continue to fund projects in perpetuity, and divert resources out of the private sector that could have been put to use more productively? Or even, the technology that came about because of the funding somehow would not have happened in the private sector?

Basically, you can’t just point out the projects that government funded that panned out; you also have to consider the projects that government funded, not just projects, but other government ventures that turned out to be disasters and never panned out.

Consider all the resources, labor and capital, that were ultimately destroyed in those wasteful government ventures that could have been put to use more productively in the private sector producing goods and services that increasing our standard of living.

See in the private sector, bad ideas are weeded out by the competitive nature of the market place through profit and loss. In government, bad ideas continue in perpetuity which ultimately drains scarce resources out of the private sector and away from profitable ventures.

At the end of the day, just because the government funded a project that led to a breakthrough in technology does not mean government is wonderful, smart, or even competent for that matter, and just because it threw money at a good idea does not mean it should always try to do more in the future.

Anyway, the funding necessary to finance these projects comes from the wealth producing private sector. It starts with the private sector, without a productive wealth producing private sector, government would have never been able to extract the necessary revenue in order to finance these projects.


For me, regardless of whatever alleged “good” government does, it’s still all about the private sector, which I feel is what takes these breakthroughs in technology to the next level by developing them, improving them, and making them available and accessible to the general public.

Major_Freedom said...

Lord Keynes:

Simple and self evident concept?
As already pointed out before, there is NO uniqiue Wicksellian natural rate of interest in a growing monetary or barter economy. Period.


No Austrian claimed there IS one either.

Hayek accpted that too, but never properly explained how a monetary rate can equal multiple rates.

He did properly explain it.

"Mr. Sraffa denies that the possibility of a divergence between the equilibrium rate of interest and the actual rate is a peculiar characteristic of a money economy. And he thinks that 'if money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might, at any moment, be as many "natural" rates of interest as there are commodities, though they would not be equilibrium rates.' I think it would be truer to say that, in this situation, there would be no single rate which, applied to all commodities, would satisfy the conditions of equilibrium rates, but there might, at any moment, be as many 'natural' rates of interest as there are commodities, all of which would be equilibrium rates; and which would all be the combined result of the factors affecting the present and future supply of the individual commodities, and of the factors usually regarded as determining the rate of interest. There can, for example, be very little doubt that the 'natural' rate of interest on a loan of strawberries from July to January will even be negative, while for loans of most other commodities over the same period it will be positive." -- F. A. Hayek (1932)

The same way a normal curve is a single concept, but contains many different single point values, is the way natural interest can contain many different point values of interest rates.

Sraffa's response to Hayek:

"Dr. Hayek now acknowledges the multiplicity of the 'natural' rates, but he has nothing more to say on this specific point than that they 'all would be equilibrium rates'. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates."-- Piero Sraffa (1932b)

This is a false characterization of what Hayek just said. Hayek's "policy maxim" is not that all banks should adopt a single rate for their loans, just that they should, for each loan, adopt a rate that is consistent with the natural rate on that loan. In the absence of a central bank injecting new money into the loan market, which reduces the rates on loans, the tendency would be for borrowers and lenders to set nominal rates equal to natural rates. But with a central bank, borrowers and lenders will diverge and persist in diverging rates away from the natural rates, causing the business cycle.

Sraffa's "criticism" of Hayek is semantics, not substance.

Lord Keynes said...

>As already pointed out before, >there is NO uniqiue Wicksellian >natural rate of interest in a >growing monetary or barter economy. >Period.

"No Austrian claimed there IS one either."

You really make it too simple:

“Wicksell distinguishes between the natural rate of interest (natürliche Kapitalzins), or the rate of interest that would be determined by supply and demand if actual capital goods were lent without the mediation of money, and the money rate of interest (Geldzins), or the rate of interest that is demanded and paid for loans in money or money substitutes. The money rate of interest and the natural rate of interest need not necessarily coincide .."

Mises, L. von, 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala. p. 355.

"[Mises] surely made use of the natural and market rate concepts, developing Wicksell's analysis of the upward price spiral caused by a too low market rate into a theory of the business cycle."
Horwitz, S. 2000. Microfoundations and Macroeconomics: An Austrian Perspective, Routledge, London and New York. p. 77.

This the whole point of the Hayek recognised the exietnce of multiple rates not a unique natural rate:

"Dr. Hayek now acknowledges the multiplicity of the 'natural' rates, but he has nothing more to say on this specific point than that they 'all would be equilibrium rates'. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates."

Sraffa, P. 1932b. "A Rejoinder", Economic Journal 42 (June): 249-251.

Bob Roddis said...

The "debate" over the "natural rate of interst" and economic calculation concerns issues of knowledge by ignorant real-world human beings. The Keynesians' mechanical, anti-human, anti-reality and technocratic based "system" collapses because it based upon the absurd idea that average people are too stupid to manage their own affairs but are simultaneously smart enough to choose LK and his ilk as their slavemasters.

The examination of those issues is the debate they do not want to have and will refuse to have.

Further, LK misses the whole point of the "natural rate". Whatever the underlying reality, the only way to discover it is through the pricing process in the market whether there is one rate or a million natural rates. Humans must live in harmony with reality of which they are inherently ignorant. It's not that complicated.

Major_Freedom said...

Lord Keynes:

You really make it too simple:

“Wicksell distinguishes between the natural rate of interest (natürliche Kapitalzins), or the rate of interest that would be determined by supply and demand if actual capital goods were lent without the mediation of money, and the money rate of interest (Geldzins), or the rate of interest that is demanded and paid for loans in money or money substitutes. The money rate of interest and the natural rate of interest need not necessarily coincide .."


That is not Mises claiming that every individual has the same natural interest rate. That is Mises saying that the natural rate of interest, which changes for each individual as they change their valuations, need not coincide with the nominal rates on loans.

Again you keep mischaracterizing what Mises and Hayek wrote.

Bob Roddis said...

Tom Woods explored in detail the problems induced by statist subsidies in “The Neglected Costs of the Warfare State: An Austrian Tribute to Seymour Melman”:

http://mises.org/journals/scholar/woods2.pdf

Major_Freedom said...

Lord Keynes:

This the whole point of the Hayek recognised the exietnce of multiple rates not a unique natural rate:

The existence of multiple natural rates of interest does not in any way represent the slightest criticism against ABCT.

Instead of the rates on loans tending towards 4%, 5%, 6% on various loans, as they would in the free market, they instead, through the central bank, tend towards 2%, 3%, 4%, thus generating the business cycle (consumption version or production version, or both)

Tel said...

You want to talk about US semiconductor fabrication "getting slaughtered by the Japanese"?

Wikipedia has a list of the first CPUs that used 90 nanometer technology:

2004 - Intel (US), 2004 - AMD (US), 2005 - IBM (US), 2005 - VIA (Taiwan), 2007 - Godson (China), 2010 MCST (Russia).

So let's have a quick check who was first to demonstrate 45 nanometer technology (from Wikipedia):

2004 - TSMC (Taiwan), 2006 - Intel (US), 2006 - AMD (US), 2006 - Texas Instruments (US), 2006 - UMC (Taiwan), 2007 - Matsushita (Japan).

Let's have a look at who first demonstrated 32 nanometer technology:

2005 - TSMC (Taiwan), 2006 - IMEC (Belgium), 2006 - IBM (US), 2007 Intel (US), 2007 - Samsung (Korea), 2008 - IM Flash Technologies (US)

How is it that the "slaughtered" US technology companies can continue to lead the world in new developments? The actual manufacturing often happens in Malaysia, Philippines, Mexico, Singapore, China, etc. but manufacturing is a mechanical process, a complex process but not ground breaking.

Anonymous said...

Does anyone find it ironic that someone would write on a website that technological advancement would have been setback without the aid of government? That is, considering that the Internet is currently the shining star of economic advancement, and has reached this status with the least government regulation of any industry.

Unfortunately the government is now mettling with the Internet in the form of censorship, net-neutrality, and patents for every idea under the sun. I have been a computer programmer and techno-geek for almost two decades. In the case of patents, most of the opinions I've seen expressed by other geeks (Keynesian or otherwise) would agree that this form of government regulation is causing setbacks in the arena of technological advancement.

Anonymous said...

Lord Cash Bottles:
"The early producers of computers could never have made it on their own without government subsidies and government contracts. Yet the modern computer ONLY exists in its advanced form, because of decades of R&D that occurred when it was largely confined to the public sector"

One could better argue that absent the State and its interference (monopolies, regs, taxes, and other burdens) mankind would have had computers and an form of internet by 1900.
Consider the human capital damaged or destroyed by the State's numerous and endless wars. How many Edisons and Teslas left their minds or bodies on the battlefields?
What might have been done with the capital destroyed both indirectly or directly by State warfare? The statists always mistake the fool's gold of the 'Broken Window Fallacy' for the real item.

Tel said...

Quote from above:

One could better argue that absent the State and its interference (monopolies, regs, taxes, and other burdens) mankind would have had computers and an form of internet by 1900.

There's a long history of government monopolising communications by supressing any alternative options, and it was generally done to block dissent. To quote from Governing the postal service By J. Gregory Sidak (available on Google books):

Under Queen Elizabeth, efforts were made to establish the post as a government monopoly. Popish plots and the like were in the air and treasonable correspondence could, it seemed, be more easily limited by government agents concentrated in a single system of communication. As said in a Parliament report, "With respect to correspondence conveyed by messengers other than our own, the Monarches viewed it with great suspicion .... The frequency of disputed successions to the Crown, and the contant jealousy entertained of the Court of Rome, will assist in explaining their desire to prevent such correspondence."

It is generally known that under Queen Elizabeth, private mail was secretly opened for inspection by the same government post office. Some things never change with Obama offering retrospective immunity to telcos who got caught engaging in illegal spying in the USA.

Mind you, if you want to see the problem of government research in a nice neat nutshell, just look at this advertisement offering research grants:

http://jonova.s3.amazonaws.com/photos/government/climate-change-grants.gif

Bob Roddis said...

On his blog, LK ignores the million dollar question from me:

Of course ignorant humans can make mistakes beyond those which are the result of distortions induced by funny money. The problem you ignore is explaining how the folks running the SWAT teams have better knowledge and insight than average folks in the voluntary sector.

http://tinyurl.com/3j68xk9

Response:

Why would decentralised decision making by millions of agents under uncertainty and diverging subjective expectations overcome the knowledge problem?

The answer: they don't, and there is no tendency to general equilibrium or even the plan/pattern coordination, argued by Lachmann:
[quote omitted here-you can read it on the blog]

Bala answers the question in further comments: Make the wrong move and you’ll be living in a cardboard box.

Let reality be your guide.

Jim said...

Mr Anderson,

I noticed this post by Mr Krugman on his blog:

http://krugman.blogs.nytimes.com/2011/06/30/wrong-to-be-right-2/


I'm not sure, but it sounds like he is criticizing free trade. He doesn't directly say he opposes, but he implies it strongly numerous times.

Is it possible that Paul Krugman has changed positions and now opposes free trade, ignoring all the world has learned about economics in the past 300 years?

Anonymous said...

I'm noticing that the Krugman Keynesian Klan has neglected to mention that we've refinanced our country into, as Mr. Schiff would call it, the "mother of all ARMs". Basically, rolling longer term treasuries into ultra short term ones (either from foreign central banks, these offshore ghost accounts - possibly FedReserve backed, and directly vis-a-vis QE2). How do you think this will play out Dr. Andersen? Could you consider writing a piece on this sometime?

What? said...

LK is offering yet another if the commonly held fallacies of any belief system: the pretense of knowledge.

He/she uses a lot (impressively so!) of TL/DR posts to make points that can only be made via obfuscation and misdirection.

To assume that a group of individuals with the right education(tm), the right connections(tm), and the right knowledge(tm) to simultaneously predict the actions of millions of individual actors AND choose the economic policies that raise net benefit higher than free market interactions is simply nonsense.

Using one example of tranipsistor development as "proof" of State superiority to any market process is patently dishonest, but to continue to find logical fallacies in anyone else's responses while refusing to debate the issue is the greatest fallacy of all.

João Marcus said...

"What?", you should also mention that the "group of individuals with the right education(tm), the right connections(tm), and the right knowledge(tm)" should also properly adapt to a world that's constantly changing in many ways, and the group should also be composed of dust fairies that won't abuse such immense power over the country.

JG said...

I'm new to this blog but I've read enough to notice the following pattern:

1) The author of this blog opens with a provocative statement

2) Critics will point out a short-coming or omitted fact from that provocative statement

3) The author rarely, if ever, bothers to respond to the initial criticism. Instead, he waits for his attack dogs to jump on the critic with their angry, condescending and often hostile comments.

4) The initial critics spend their time countering angry sound-bites from the peanut gallery and the author of the blog avoids having to answer the critics points.

If this blogger wants to be taken seriously he should stop hiding behind the loudmouth bobble-heads who post here and start answering criticism himself. Otherwise, this blog is not really a forum for ideas as much as a wall for him to spray graffiti on.

libertarian89 said...

So this character “JG” shows up and tries to give us a seminar on how to “properly” run a blog, as if his opinion somehow matters? As if we need to take advice from this all knowing wise JG character?

I’m sure Mr. Anderson does not have time to respond to every little comment about his blog postings. However, he does occasionally respond to comments.

He does not wait for “attack dogs”, rather, there are many Austrian proponents who are independent thinkers on this blog who respond to comments put forth by statists/Keynesians who rarely display even the slightest familiarity with basic Austrian concepts on a blog that critiques Krugman from an Austrian perspective.

Seems to me like JG is the loudmouth bobblehead coming on this blog, probably without any understanding of Austrian economics, trying to lecture people about how to play “nice” and blog “properly.” Give me a break.

JG said...

Thank you for proving my point. Instead of the author of this blog bothering to respond to his critics we get another pompous blow-hard offering more hot air.

libertarian89 said...

Instead of demonstrating some understanding of basic Austrian concepts, much less apply them to the discussion, we get some pompous chest thumping blow hards like JG coming in here lecturing us on how to “blog properly” as if he were in any position to do that. Thanks for the advice.

We respond to critics plenty. That’s what this blog is about. We respond to Keynesian/statist who try to bamboozle people with their aggregate demand management schemes.

Bala said...

"Thank you for proving my point. Instead of the author of this blog bothering to respond to his critics we get another pompous blow-hard offering more hot air."

That's hilarious. It's amazing that you fail to realise that you are behaving like a spoilt child who wants to have his way. It is up to the author of a blog whether, when and how to respond to comments/criticism. It's probably a choice that he just opens up issues which he prefers to let others discuss. Demanding that he comes over and spends time answering every critic, especially when they happen to be ones like LK and AP (who just keep writing utter nonsense), is nothing more than saying "Give me my toffee right now or I'll hold my breath till I turn blue".

It is clear who the pompous blowhard is between the two of us. It's not me.

JG said...

And no, this isn't my way of saying "play nice", it's me calling him out for being a coward and going silent every time someone points out a hole in his arguments.

Hey Anderson, if you're so confident in your theories why not answer when Lord Keynes or myself or anyone else who isn't part of your Libertarian cheering crowd refutes your ideas? I doubt it's because you're so busy because you have time to post a new thousand-word rant about Krugman almost every day.

Ed said...

JG,

Would YOU care to refute the issues discussed in the article? You instead drop in to complain about people getting into heated debate and refuse to address the discussion directly.

Why don't you take some of your own advice? I recall anyone espousing anything but party line for Keynesianism or government involvement in the market getting much worse treatment from your ilk on any myriad of other blogs/comments/discussions.

I am continuously floored by the intellectual dishonesty from the religious partisans. Not all of us are "libertarians" or conservatives or tea partiers or whatever dengration you would like to paint us as. Many of us are people that are simply tired of failed economics being forced on all of us under the pretense of "the right people are in charge now".
Krugman has advocated for most of his solutions using the most basic of economic fallacies, "the broken window fallacy". A fallacy that has been debunked since the 1800s, but somehow refuses to die due to the machinations and manipulation of data and facts by neo-keynesians.

Either be consistent and honest about your positions, or return to the echo chamber you are apparently more comfortable in and leave this blog if it vexes you so!!

Bala said...

"when Lord Keynes or myself or anyone else who isn't part of your Libertarian cheering crowd refutes your ideas?"

LK?????? ROFLMFAO....

You call THAT economic chronicler's rants a refutation? You really mean THAT guy who has not understood the most elementary concepts in economics and does not even understand what economics is has refuted what Prof. Anderson has said?

Frankly, that says volumes about how much of economics you understand yourself. Good way to expose your own complete ignorance.

p.s. Incidentally, I have personally torn apart every 'refutation' that LK has come up with. I have exposed him, including on his own blog, as an economic ignoramus who is just intent on party propaganda. Try refuting that, if you mean what you say.

p.p.s. - Demanding that Prof. Anderson replies to puerile rants IS juvenile behaviour.

p.p.p.s - I care a rat's arse what you think of me. I care 2 hoots for the opinions for whatever-Keynesian tools and trolls.

p.p.p.p.s - LK has a good echo chamber for you. Try that for size. His idiotic rants must be the right fit for people like you.

JG said...

P.S.

That last paragraph about sparing us from rants was directed as a general comment to everyone, it was not directly addressed at you, Ed. Your response was the most thoughtful out of all of the comments I've read here so far. I'd hate for you to take offense when none was meant.

P.P.S.
That comment WAS directed at you, Bala. You argue like a petulant child.

Bala said...

"That comment WAS directed at you, Bala."

Oh!! Why am I not surprised???? ROFL

"You argue like a petulant child."

And all you whatever-Keynesians don't argue. You just rant on and on, impervious to the fact that your arguments are being torn to shreds. Incidentally, I said this

"p.p.p.s - I care a rat's arse what you think of me. I care 2 hoots for the opinions for whatever-Keynesian tools and trolls"

specifically to address comments like your recent ones.

JG said...

Ed,

I actually have refuted the arguments in a number of articles on this blog but the author hasn't responded to any of them. However, I have received many replies from what appear to be knee-jerk Libertarian types who just spew anger at anyone who dares question their beliefs.

But you do make one good point, and that is nobody wants to hear me complain just to complain so I'll offer up something meatier. I'll use your example of the broken window fallacy as my example of a problem I see with Austrian theory.

In the broken window fallacy the problem is that a shopkeeper must pay money to replace a broken window, money that he would have otherwise had to spend on other goods like food, clothing, or whatever. It's a zero-sum game with the glazier benefiting at the expense of some other would be vendor in the economy. The point that Austrians like to make here is that the overall economy hasn't grown, the breaking of the window just reallocated wealth from party to another. There is a big assumption behind such thought, and that assumption is that the shopkeeper would have spent that money of something else other had his window not been broken. In a normal economic environment that would be the case. However, during times of economic contraction and especially in times of credit crisis such an assumption does not hold true. During the credit crisis at the beginning of the most recent recession that shopkeeper hoarded his money due to uncertainty. His money sat under his mattress and it did not slosh around the economy. By breaking the proverbial glass window with Keynesian stimulus the glazier is not benefiting at the expense of some other vendor the shopkeeper would have spent that money on because that money would have remained dormant under the shopkeeper's mattress. During times of crisis glass breaking moves the logjam, it fills the void of the lost economic activity, it does not replace one source of demand with another. It does crowd out the private sector so much as substitute for it in its absence. It may be true that to pay the glazier the money must be raised by taxes imposed on others but that is true of anything the government spends money on, if you have larger issue with taxation in general then that is a separate conversation but then you're no longer talking about the broken window fallacy.

JG said...

The point being made here, the point that Krugman makes in his column and that seems to be lost on most Austrians, is that Keynesian stimulus is not meant to be standard operating procedure for normal economic conditions, it is meant as a temporaty emergency measure to be taken during times of recession and credit contraction. Which brings us to my problem with Austrian theory in general: Austrian theory assumes too many things. It assumes a functioning banking sector. It assumes liquity and access to credit. It assumes a predictable and normal consumer spending response to price changes even in times of abnormal employment conditions. It assumes predictable responses in savings behavior to interest rate declines even though savings habits are driven by more than just the yield on those savings. None of these assumptions were valid during 2008-2009 and they were not valid during the Great Depression.

The purpose of this blog is to defend and promote Austrian economic theory. Well here you are, a valid critique of that theory that deserves a thoughtful response. I'm waiting for the author to defend his beliefs. And if he can't or won't do that then I invite anyone else to explain to me why I'm wrong, and by explain I mean address the concerns I've mentioned here and not just spew bile aimlessly.

JG said...

P.S.

Bala, way to contribute nothing to the conversation. Keep up the good work.

Bala said...

JG,

Your error is most obvious. You said

"His money sat under his mattress and it did not slosh around the economy."

This is fundamentally erroneous because it assumes that the only proper role for money is to be sloshing around in the economy. Money in cash-balances is also another role of money which you are ignoring in the process.

"By breaking the proverbial glass window with Keynesian stimulus the glazier is not benefiting at the expense of some other vendor the shopkeeper would have spent that money on because that money would have remained dormant under the shopkeeper's mattress."

Many errors out here. Firstly, the important point is that before the glass was broken, the baker had a glass pane and the money he had in his cash balance but after the glass pane is broken, he can have only one of them. In effect, he is made poorer by the breaking of the glass. The glazier thus benefits at the expense of the baker.

Secondly, money lying in the baker's cash balance is not really 'dormant'. No unit of money is ever 'dormant'. It firstly serves the useful (to its holder) purpose of managing uncertainty. Secondly, money that 'suddenly' stays in the baker's cash balance serves the important role of improving the purchasing power of every other unit of the money. Thus, the claim that the money is 'idle' and hence not serving any economic purpose is fundamentally false. Once you realise that the notion of 'dormant' money is false, it is easy to understand the Broken Window Fallacy better.

Thirdly, the increasing purchasing power of the money manifests itself as a fall in the prices of goods and services. Falling prices are an essential requirement to address the excess of supply over demand. That leads to market clearing at a price lower than the earlier prices at which supply outstripped demand.

p.s. Until this post, you were not contributing anything to the discussion either

Scott D said...

Jim,

The article you linked nearly made me laugh out loud. Krugman's argument there is essentially: Free trade? Bah, does nothing for us. See, it'll change this value and this value here, but other than that, nothing happens at all.

It's hard to believe that even a committed statist and Keynesian like Krugman could think that. I'm starting to think he really is that dumb.

JG said...

Bala,

You're making two mistakes here:

1) The broken window analogy isn't really advocating the destruction of physical assets so that they can be rebuilt (like military spending that ulimately goes towards destroying other assets). It's a metaphor for an external event that triggers spending and usually takes the form of future investments (new bridges, highways, airports, etc.) that actually generate future wealth.

2) Money is dormant when it is saved, for the purposes of this conversation. Yes, it gives the saver a sense of security but that doesn't generate economic activity. Money is not an end unto itself, it's just a facilitator of goods and services, which represent true wealth. When those goods and services are not being produced then true wealth is not being created not matter how much cash is stashed under your mattress. In a microeconomic view this is fine because today's saving is tomorrow's investment capital but from the macroeconomic view when everyone saves at the same time true wealth generation comes to a halt. Keynesian stimulus in times of crisis helps to get the cycle moving again until such time as a recovery becomes self sustaining. It is during times of crisis when Keynesians advocate the action of government stimulus while Austrians propose the inaction of austerity and paralysis.

zackA89 said...

JG, all you “arguments” you are putting forth have been debunked, refuted, and dealt with by many commentators on this blog. You offer no new criticisms. It’s the same old nonsense.

You are underestimating the important role that savings plays in an economy. And yes, it still plays a role during a recession when there are alleged “idle resources”

Savings does in fact generate economic activity. Savings is the most crucial component in creating economic growth, and thus promoting general economic activity. Real economic growth comes when people refrain from spending in the present in order to save for the future which allows the accumulated savings to be channeled into capital investments that produce real wealth. Thus, savings is necessary for capital accumulation which promotes economic growth by increasing productivity and output.

No, if everyone just “saved” now that would not necessarily mean the economy would come to a halt. The production structure would shift to favor future consumption over the present. This would mean that as people illustrated their desire for future consumption over the present by saving more, entrepreneurs would use this lengthening of the time preference as a signal to invest in long term capital investments. All that would mean is that individual time preference would shift, so the structure of production would also shift.

No, Keynesian stimulus delays recovery and actually damages the economy. During the boom years, artificially low interest rates misallocate resources into unsustainable lines of production that only appear profitable during the boom. When the boom phase inevitably ends, the malinvestments reveal themselves.

The capital and labor tied up in these malinvestments needs to shift into more profitable and sustainable lines of production that are consistent with consumer demand. All government spending and stimulus does is delay and prevent the necessary reconfiguration process that the economy desperately needs after it was previously misconfigured and distorted by artificially low interest rates.

Entrepreneurs will engage in economic calculation and use the price system to guide resources to more profitable ends. Economic calculation and the price system that need to function properly in order to have a legitimate recovery and real economic growth are fatally impaired by Keynesian stimulus.

Since government is not subject to market forces like profit and loss, and obtains its revenues through coercion, there is no way for it to determine whether or not its expenditures are consistent with real consumer demand. Thus, all government spending does is shift resources away from profitable ends into the government to ultimately squander.

Thats why most Austrians dont like "stimulus," most of us think it is the cause of our problems, not the cure.

ekeyra said...

JG

You come here, rant and rave how the author does not address your "refutations", and then trot out this inane argument that the broken window fallacy somehow changes when an economy contracts instead of expands. No wonder noone feels the need to respond to your bullshit.

Also characterizing people saving money as "stuffing it under their mattress" went out of style with alchohol prohibition and flapper girls. Maybe you should update your economic knowledge and then someone will care what you have to say beyond completely shredding your asinine theories.

Tel said...

Quote from JG:

Keynesian stimulus is not meant to be standard operating procedure for normal economic conditions, it is meant as a temporaty emergency measure to be taken during times of recession and credit contraction.


So in response, I'd just like to ask how many years the US government has run a deficit in the last 20 years or so? What about the artificially low interest rates going back right through Alan Greenspan's watch?

"temporary emergency" ?!?

Wayne said...

zackA89,

"Savings does in fact generate economic activity. Savings is the most crucial component in creating economic growth, and thus promoting general economic activity. Real economic growth comes when people refrain from spending in the present in order to save for the future which allows the accumulated savings to be channeled into capital investments that produce real wealth. Thus, savings is necessary for capital accumulation which promotes economic growth by increasing productivity and output."

Savings is "the most crucial component of economic growth?" What about profits? Without a steady stream of profits, you will run down your savings hoard until you have nothing. Don't get me wrong savings is still important. It acts as a form of safe leverage, amplifying future profits, and helping to make consumption easier in the future. Saving is a secondary virtue, but not the primary virtue. Yes earning and investment comes BEFORE saving you guys! Think about it, if you go all the way back to stone age tribesmen building spears, their own primitive 'capital goods" how can you talk about saving if its done ex nihilo? The process you are describing of refraining from present consumption and gratification in order to provide for the future, is called INVESTMENT, not saving. Saving is the stuff we earn, in the form of capital goods, money, or durable consumer goods not immediately consumed, but how can we speak of that before we speak of earnings? So its earning,investment and profits that drive savings,far more than the other way around.

Ed said...

JG,

Your statement: "1) The broken window analogy isn't really advocating the destruction of physical assets so that they can be rebuilt (like military spending that ulimately goes towards destroying other assets). It's a metaphor for an external event that triggers spending and usually takes the form of future investments (new bridges, highways, airports, etc.) that actually generate future wealth. "

Is inaccurate. The fallacy is based off the destruction of currently functioning infrastructure and the associated cost the owner/responsible party must pay to repair it. This causes a loss of resources for the owner and reduces his net benefit and the potential societal net benefit as a result of his not being able to reinvest those resources into improvement. It destroys investment.

The danger of this fallacy, as Krugman and neo-keyneisans advocate (remeber Krugman in 2001 said 9/11 could be a boon to economic growth), is they assume that "the right people"(tm) somehow have this magical knowledge and understanding of economic causality that no one else has. This hubris of knowledge results in inefficient allocation of resources, distortions of price signals by disrupting supply and demand, and the overall reduction in net benefits for the short term stimulus of cherry-picked actors.

Do you honestly think a small group of career academics ankhd lawyers can order an economy better than millions of individual actors working in concert to produce economic output?

I am reminded of Animal Farm, where snowball assures the animals that all of them are created equal, and should majestic their own decisions. Except they might make the wrong decisions, and then "where would we be?"

Ed said...

I apologize for the many typographical errors. I am typing on a iPad and it seems to think certain words I type should be other words...

zackA89 said...

Wayne I disagree. Without savings, there is no investment. Because without savings, there really is no capital. Savings is what constitutes the pool of real funding in which real investments can be made and thus profits realized.
Yes profits are important, but savings are the building block of economic growth. Savings adds to the pool of real funding, which allow for these capital investments to take place. When you refrain from engaging in present consumption in order to consume in the future that is saving. What you do with those savings in terms of investing in something that increases your productivity of labor is an investment.

I believe Mises touches on that here: http://mises.org/efandi/ch4.asp

Ed said...

Zacka89,

I agree with Wayne. Investment dies come from savings, but those savings come from surpluses (profits). Saving is impossible in a deficit situation or break even point.

Ed said...

*does come

Wayne said...

zackA89,

"John" is studying finance at MIT He graduates at the top of his class and a month later gets a job at Citadel working for Ken Griffin paying him a percentage earned when trading profitably.a year later he pulls in a million. the the total burden of taxes where he lives (in a high tax state is 40% of the $600,000 that remains. He saves 10% of that income. A year later a financial crisis hits . Griffin gets hit hard. He has no choice but to lay of dozens of people, even good traders, with unemployment insurance set at one year before it expires and his savings he has $83,000 to live on before he finds a job paying him a similar salary, or he has to adjust his future consumption patterns, in the meantime, he is living off and running down his savings. If he finds a job paying him less, say as a stockbroker at a government protected bank paying him $100,000 and saves the same percenatge, he'll find that in ABSOLUTE terms, his savings are less, even if he saved the same fraction 10%. So you see earning comes BEFORE saving, and funds it.


I think I''l know how you'll respond. the funds That Ken Griffin managed came from people's savings. Which is true, except for the fact that those savings came from earnings, if you do the thought experiment, all the way back to the stone age. you'll find that production profit and earnings come FIRST. If you define savings as refraining from consumption, than you run into a problem How can you speak of consuming ANYTHING before there are earnings to consume?

I apologize for my long winded rant, but to summarize earning come first, and yes saving is important and accumulates capital, but that's the proximate cause of capital accumulation, the ultimate cause of CAPITAL CREATION is earnings

zackA89 said...

Even if earnings or profits come before savings that does not mean that profits and earnings are somehow more important to economic growth than saving.

I still feel saving is the most crucial component to economic growth. Adding to the pool of real funding by forgoing present consumption allows savings to be channeled into capital investments that produce real wealth.

If the investment turns out to be in conjunction with consumer desires, then a profit is realized. It is only if the investment turns out to produce a good or provide a service that satisfies consumer preferences is a profit realized. The profit comes after the capital investment financed by real savings.

You don’t necessarily have to have earnings or profits to save, you can acquire goods in nature that can allow you to free up time to do other things that are more productive. The acquisition of goods could be considered a profit or an earning, but nonetheless savings is still very important in the wealth creation process. Peter Schiff’s book how an economy crashes and why it grows explains this.
http://mises.org/daily/4796

Quibbling over what the most crucial component of economic growth for me is pointless and useless. For me, its savings and adding to the the pool of real funding. This funding is what facilitates potentially profitable investments to take place.

Wayne said...

oh and zack,
I forgot to mention when you said
"Even if earnings or profits come before savings that does not mean that profits and earnings are somehow more important to economic growth than saving. "
you are wrong because saving is a dependant variable, its means if you want to save, it depends on something else, namely profits, which depends on investment of human capital, intellectual energy, and other productive factors.
If in order to achieve value y, you need value x, it follows that value x is more important than value y, If in order to achieve x u need w, than w is more important, and so on, in a infinite regress, the least dependent variables and values are more important than the more dependent and marginal variables

Bala said...

Wayne,

I'll start by saying that you are wrong. Let me now explain.

'Income' is the wrong term to use. 'Production' is the right term to use. It is 'production' that is at the base of it all. Production is the application of labour to nature to churn out consumers' goods for consumption. Saving is the forsaking of consumption in the present in favour of consumption in the future.

Saving is the fundamental prerequisite for man to increase his output of consumers' goods and thus attain a state of greater well-being. Saving enables the application of labour in more roundabout methods of production that alone can increase the output of consumers' goods. Without saving, man will continue to live at his current level of consumption or in fact fall to a lower level of consumption as his existing stock of capital goods wears off in the process of churning out consumers' goods.

Your 'infinite regress' stops at the point in time where man had to apply his labour to just the means found in raw nature to produce his first capital goods.

Hence, your claim that 'income' is the basis of it all is incorrect. It is 'production'.

Wayne said...

“You don’t necessarily have to have earnings or profits to save, you can acquire goods in nature that can allow you to free up time to do other things that are more productive. The acquisition of goods could be considered a profit or an earning, but nonetheless savings is still very important in the wealth creation process. “
I never said saving was not important. And the acquisition of goods in nature is called earning, hust like you said.

“Quibbling over what the most crucial component of economic growth for me is pointless and useless.” It really isn’t useless. Dramatically different ways of looking at things come when you realize that earning is more important and comes before saving. Let me ask you this, who would you rather be a hedge fund manger who saves 1% of his after tax $68 million income, or a civil engineer who saves 10% of his 40,000 dollar income. If you say the engineer, than I pity you “For me, its savings and adding to the the pool of real funding.” (We are entitled to are own opinions but not to our own facts zack) “This funding is what facilitates potentially profitable investments to take place” This funding leverages and amplifies the future earning potential or a firm or a person, but does not constrain that person or firm’s initial ability to earn money. Warren Buffet compounded his wealth by re-investing his savings again and again, but even he had to work certain jobs to create that original savings pool.

Wayne said...

Bala,

I apologize for being unspecific,mea culpa I was using income, in the vaguest possible since, from fiat money now, to gold in the 19th century, to nuts and berries for tribesmen in the stone age. Yes , production is the starting point of it all. and what you said about saving all true! I never said saving was unimportant, all i implied was saving in absolute terms is a function of income, which is itself a function of production to profitably satisfy consumer desires.

zackA89 said...

Right production is very important no doubt, I still think quibbling over what comes first is not really that important to fight over.

Production is the focal point of economic growth, but in order to increase their productivity, one must save. Not just personal savings, but collectively society must save in order to add to the pool of real funding in which profitable investments can legitimately be financed that produce real wealth.

So savings is crucial in creating economic growth, increasing productivity, and sustaining it in the long term. Production, savings, capital, and investment are all important. Government spending, funny money dilution, and other forms of "stimulus" undermine those key elements.

Unfortunately, the Keynesians have declared a war on savings when there are “idle resource”, but recession or not, savings are still important and necessary for a strong economy.

JG said...

Zack,

Your position illustrates what is wrong with Austrian ideas in general. Yes, savings in necessary for future investment. No kidding, it doesn't take a rocket scientist to recite something like this. But what happens when panic grips an economy and everyone saves at the same time? How are otherwise solvent busiesses able to obtain the financing to run their operations when liquidity disappears because savings replaces investment? These are the questiosn that Austrians cannot answer because their theory is "do nothing, the market will solve itself"....only it doesn't. The Great Depression is what happens when liquidity dies and everyone replaces investment with savings and money is stashed under the mattress.

When Austrian theory can find a coherent response to these issues then I will stop thinking of Austrian theory as a childish outgrowth of simplistic libertarian dogma.

zackA89 said...

Austrians have coherent responses to these issues. Maybe you just aren’t listening, or haven’t been exposed to them yet. For me JG, it’s the statism you advocate and the insistence that magic bureaucrats can solve our problems that is the simplistic childish dogma.

Even in a recession, savings is necessary for economic growth and recovery. During the boom years, people spent way too much and invested in unsustainable lines of production because of cheap credit and artificially low interest rates. Now that the bust has ensued, people need to rebuild their savings and deleverage in order to put the economy on a sustainable trajectory.

People don’t just save all at once. Different people have different preferences, and no one would deliberately stop spending on consumer goods and go hungry. However if people cut back on spending in the present, all that would mean is a lengthening of time preference. This would signal that people value future consumption over the present. This in turn would indicate to entrepeneuers that they should invest in more long term capital projects. Basically, if individuals in the present cut back on consumption in the present, that would represent a lengthening of time preference thus a lengthening of the structure of production. Resources would simply shift from producing consumer goods to more long term capital goods. No need for a recession, just a readjustment of the structure of production. That is the Austrian Response.

People don’t stuff money under the mattress when they save. That’s nonsense. The great depression did not happen because “liquidity” died. Actually, the fed lower rates and pumped in reserves into the system providing “liquidity” and the depression still happened anyway.

It was government intervention and monetary stimulus that caused the depression and it was Keynesianism and government intervention that prolonged it. In 1921, without Keynesianism, the economy recovered in about a year. I guess the economy can self correct and recover in the absence of Keynesianism. Because it did.

When Keynesians find a response to how the pricing system and economic calculation are distorted by funny money dilution and government spending and why this is in fact problematic I will stop thinking Keynesianism is stop statist left wing dogma.

Anthony Lima said...

This is rich! Lord Keynes is telling us that the monopoly AT&T facing a little criticism from regulators set up a lab that "innovated" stuff!
Sure they innovated! They had to. All the other competing companies were gobbled up by the government created/supported monopoly. That's a lot to give up for a little innovating. The entire US tele-communication system under one company and they poop out a few inventions? Next, we'll get to here the story of how the post office invented email.

Anthony Lima said...

There is no mixed system. The government plays by the rules of the market in all its dealings. The government employees do not understand how the market works. This is why governments observe depressions without knowing how to get out of them.
Markets are suppressed when people are oppressed but that does not change the rules or expunge economic law.

Anthony Lima said...

He also thinks utility calculation will show how much more productive statism is.

Anthony Lima said...

One thing you have you to understand about Paul Krugman- he always leaves himself wiggle room. So he'll never just come out and say something.

Anthony Lima said...

Plenty of competent commenters HAVE answered the criticisms but in the statist world there has to be a 'leader.'

Anthony Lima said...

If stimulus works in bad times why does it not also work in good times? Oh, it does work both times but we don't need it in good times. We can identify the good times, I suppose?
Keep in mind that government creates a disaster, which of course it can't explain? -then uses that disaster to grow larger in a lame attempt to fix the problem. When really all it's doing is making everyone worse off.

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