Friday, July 8, 2011

Krugman and "economic fallacies"

With the job numbers today looking dismal, I figured that the Paul Krugman would call for more borrowing and spending, and he did not disappoint. However, as an added bonus, Krugman also declares certain things to be "economic fallacies," which not only turns upside down any meaning of "economics," but also is built upon that Mother of All Economic Fallacies, the "Fallacy of the Broken Window."

Krugman writes:
One striking example of this rightward shift came in last weekend’s presidential address, in which Mr. Obama had this to say about the economics of the budget: “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”

That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. And last but not least, businesses aren’t holding back because they lack confidence in government policies; they’re holding back because they don’t have enough customers — a problem that would be made worse, not better, by short-term spending cuts.
Notice what Krugman is saying: Government magically can do away with opportunity cost by spending. (Yes, I know, his argument is that government spending will transform "idle resources" and then give the economy "traction" to move on its own.)

Furthermore, he is not listing anything close to an "economic fallacy." Instead, he is dealing with policy issues, while having economic implications, are not economic theories themselves. An "economic fallacy" deals with a violation of either premises or what we might call a "law" of economics.

Perhaps the most famous of the fallacies is about which Frederic Bastiat wrote in "What is seen, and what is not seen" when he described the view that "broken windows" are necessary to keep an economy going:
Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: "It's an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?"

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs' worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.
What Krugman advocates, of course, is something like the "Broken Window Fallacy" (all in the name of claiming that the BWF is a fallacy in itself), for unless government spending via taxation, monetary creation, and borrowing can create wealth where there was none before, government simply is transferring resources or it is blocking the transference of resources from lower-valued to higher-valued uses.

Now, it is true that if government cuts spending, it will create more unemployment in the short run, but to Krugman, there only is a short run. Because the Keynesian viewpoint holds that resources (for economic purposes) are homogeneous, it does not matter where spending is directed, just as long as "new jobs" are created.

Yet, it DOES matter where spending is directed and it is not a fallacy to emphasize that point. For the past three years, the government has engaged in policies of bailouts, "stimulus" spending, new regulations, and throwing huge amounts of money at "green" energy projects, and we are further away from an economic recovery than when we started.

Yes, Krugman can claim that government spending is falling and that the government already is engaging in "austerity." That is nonsense, but nonsense is what prevails in Washington.

189 comments:

Lord Keynes said...

"What Krugman advocates, of course, is something like the "Broken Window Fallacy" (all in the name of claiming that the BWF is a fallacy in itself),"

There is no broken window fallacy.
The resources used are idle.

The existence of idle resources is accepted by Mises, Hayek, Huerta de Soto and Lachmann:

"At times, even on the unhampered market, there are some unemployed workers, unsold consumers’ goods and quantities of unused factors of production, which would not exist under ‘static equilibrium.’ With the revival of business and productive activity, these reserves are in demand right away

Mises, L. von. 2006 [1978]. The Causes of the Economic Crisis and Other Essays Before and After the Great Depression, Ludwig von Mises Institute, Auburn, Ala. p. 110.

Hayek, F. A. von. 1975 [1939]. Profits, Interest and Investment, Augustus M. Kelley Publishers, Clifton, NJ. p. 42, n. 1.

J. Huerta de Soto, 2006. Money, Bank Credit and Economic Cycles (trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala. pp. 265–508.

Lachmann, L. M. 1978. Capital and its Structure, S. Andrews and McMeel, Kansas City. p. 113ff.

These Austrians don't deny reality, do you?

Resources and capital goods are clearly not homogeneous, but they are clearly NOT perfectly heterogeneous either: if this "not homogeneous" argument against government spending were even remotely serious, it would also apply equally to private sector/private investment spending, rendering that impossible too.

Bala said...

"There is no broken window fallacy.
The resources used are idle."

Oh, whatever-Keynesian genius!! All of us Austrian idiots are waiting for the moment of enlightenment when we will realise that having a window and 6 francs is no different from having either the 6 francs or the window. Oh enlightened one! Will you kindly deign to lay it out for us and free us from this prison we have locked ourselves in?

And while you are doing it, will you also explain why this logic should not be extended to breaking down all the shop-windows in town so that more idle resources may be employed. Do also explain why, in order to employ idle resources in the construction sector, the bakery should not be bulldozed (or bombed, for that matter) forcing the baker to rebuild it? And why should we stop at the bakery? Why not destroy entire cities and employ idle resources in rebuilding them?

Sounds like a cool idea. Should we try it out?

Ed said...

"Idle resources"

Love how vague this term is, and used as a major point of refute, Lord Keynes? Funny. Pontificate less, quantify more.

ps. that's structural resource lag, not idle resources you speak of.

zackA89 said...

With all the record debt, deficits, and three wars going on, I would hardly call that Austerity. According to Krugman, I guess the problem is that were just not “spending” enough. For me, it’s the stimulus itself that is the problem, not the cure.

Jonathan M.F Catalan takes apart whole government spending and idle resources argument here, he does a great job:

http://mises.org/daily/5123/Government-Spending-Is-Bad-Economics

Bob Murphy also has a great piece explaining why the rules don’t change during a recession:

http://mises.org/daily/3290

Idle resources or not, it still matters how and where resources are deployed. Since government is not subject to market forces, it does not and cannot posses the necessary market based incentives to guide resources to their most profitable and desirable ends.

Thus, like Anderson said, even with idle resources, government spending just shifts funding from wealth generating activities in the private sector to non wealth generating activities in government. These are non wealth generating activities because they are not in line with consumer preferences.

We don’t employ resources for employments sake because doing so is actually counterproductive and economically harmful. We need to consider where and how resources are employed, and who or what is in a position to ultimately guide those resources to their most profitable ends. Without being subject to the price system and other market forces, government is certainly in no position to make those necessary determinations.

Lord Keynes said...

Ed@July 9, 2011 2:42 AM

"Love how vague this term is, and used as a major point of refute, Lord Keynes?"

Nice shooting of yourself in the foot.

If the term is "vague," you would do better to tell that to Mises, Hayek, Lachmann and particularly de Soto, who not only uses the expression "idle resources" but also assumes such "idle resources" are real.

J. Huerta de Soto, 2006. Money, Bank Credit and Economic Cycles (trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala. p. 440-442; 553.

Lord Keynes said...

"Idle resources or not, it still matters how and where resources are deployed."

LOL.. so now we see the Austrian position falling apart before our eyes.

On the one hand, we have idiots like Bala and Jonathan M.F. Catalan who deny the very concept of "idle resources", and on the other hand the Austrians who accept that term and concept is meaningful (such as Mises, Hayek, Lachmann, de Soto).

In the Murphy article you link to, it is obvious that he accepts"Even on its own terms, the Austrian scenario fails because it is unrealistic. It is absurd to think that the private sector could come up with spending/investment programs that would draw only on unemployed resources. Austrian thinking ignores the complex capital structure of an economy. To build a private scetor bridge requires a lot more than cranes and generic laborers. For example, gasoline will be burned in order to transport the newly employed workers to and from the work site. Nails, screws, steel, lumber, and other resources will be channeled into the new bridge, and at least some of these inputs will be diverted away from other private-sector uses, rather than simply leaving a state of idleness".

The rest of Murphy's article is just the usual load of B.S. drawing on the fantasy of ABCT.

Lord Keynes said...

"Thus, like Anderson said, even with idle resources, government spending just shifts funding from wealth generating activities in the private sector to non wealth generating activities in government. "

This is dependent on the absurd idea that investment demand always equals savings in loanable funds.

It doesn't: businesses have shifting subjective expectations and no amount of funds will induce them to invest if they dont want to. There is NO equilibrium interest rate that clears the loanable funds market either.

Bala said...

"On the one hand, we have idiots like Bala and Jonathan M.F. Catalan who deny the very concept of "idle resources""

Hey genius!! I didn't deny the concept of idle resources. My argument was limited to 'idle hoards of money' which I still maintain is a concept so idiotic that only a completely retarded whatever-Keynesian (sorry about the redundancy) brain could conceive of it and hold it without realising how idiotic it is. What I did deny is the claim that that concept of idle resources has any significance for economic analysis. It is just a passing phase of no import in economic theorising.

p.s. I am trying to read Lorie Tarshis. Pardon me, but I am unable to read it because every time I try, I double up laughing so hard at the stupidity of the entire book that I can't get myself to read it. Thanks for the laughs, in any case.

Lord Keynes said...

I didn't deny the concept of idle resources.

Bravo.

Bob Roddis said...

No normal person believes this Keynesian nonsense. Basically, average people are oblivious to the fact that this idiocy is what guides government and "elite" policy.

Our job is to somehow get average people simply to understand that inflation is a purposeful government policy caused by funny money dilution and not a mysterious force of nature. They won't understand Cantillon effects and the "theft by money dilution" phenomenon until then. But once they do, they will never in a million years buy into this preposterous "alternative universe of Keynesian macro" crap.

The more Krugman (and LK) express their views in such unabiguous detail, the better. The Keynesians have gotten their way mostly through obsfucation and intimidation ("oh, this is just too complicated for you to understand").

All we have to explain to average people is that Keynesians think government finance runs on different rules than household finance, which is preposterous and insane. Average people don't yet understand that all of this debt accumulation was done PURPOSEFULLY pursuant to insane Keynesian precepts. Once they understand that, the game will be over.

Just let Krugman and LK continue their explicit blabbing.

Bala said...

"Bravo."

Dumbass. Read the next line.

Bala said...

"This is dependent on the absurd idea that investment demand always equals savings in loanable funds."

No, genius. It is dependent on the not-so-absurd idea that on the free market, there would be a tendency for investment demand to tend towards savings and for the money rate of interest to tend towards the natural rate of interest. As usual, you do not understand the difference between 'being in equilibrium' and 'tending towards equilibrium'. Excellent display of whatever-Keynesian mental retardation (not that whatever-Keunesians can fail to be mentally retarded).

Bala said...

"This is dependent on the absurd idea that investment demand always equals savings in loanable funds."

No, genius. It is dependent on the not-so-absurd idea that on the free market, there would be a tendency for investment demand to tend towards savings and for the money rate of interest to tend towards the natural rate of interest. As usual, you do not understand the difference between 'being in equilibrium' and 'tending towards equilibrium'. Excellent display of whatever-Keynesian mental retardation (not that whatever-Keunesians can fail to be mentally retarded).

Lord Keynes said...

"It is dependent on the not-so-absurd idea that on the free market, there would be a tendency for investment demand to tend towards savings and for the money rate of interest to tend towards the natural rate of interest."

Ahh, yes. The mythical, non-existent natural rate of interest that exists only in fairy tales.

Also on GDP:

AD = C + I + G + (E-I)

C = consumption
I = investment
G = government spending
E-I = exports minus imports

Here’s one of your absurd comments on a previous post:
Bala@January 31, 2011 9:04 AM
“Adding C and I to call it aggregate demand is nonsense. That’s why all of Keynesian economics is nonsense as well.”


Bala@January 31, 2011 9:14 AM
“… I is spending on investment. It is a different use of current income away from consumption. To lump it with consumption and treat them as a lump is lunacy and only Keynesians who wish to evade the law of scarcity will engage in it.”


By these statements, if you really believe them, you have demonstrated that Austrian economics is nonsense too. Why?

Austrians aggregate the final value of investment, consumption and intermediate goods in their own Austrian aggregate measures of national income/output:

(1) Skousen’s Gross Domestic Output (GDO)
This is an aggregate measure of spending at all stages of production which counts spending (sales or revenues) of firms at all stages of production, not just at the retail level. But when one looks closer Skousen’s GDO, it is just Intermediate Input (II) plus GDP (final output). Skousen objects to GDP because it includes government spending, so his aggregate strips out government spending:

Gross Output = private consumption expenditure + gross investment + trade balance (exports − imports) + spending on intermediate goods.

So now we just have another aggregate of total consumption, total investment, and intermediate input. According to Bala, this is “lunacy.”

Mark Skousen, “Beyond GDP: A Breakthrough in National Income Accounting,” April 2001.

(2) Rothbard’s GPP (Gross Private Product) and PPR (Private Product Remaining).

GPP (Gross Private Product) is just GNP minus income originating in government and government enterprises.

PPR is GPP minus the higher of government expenditures and tax revenues plus interest received.

Robert Batemarco, “GNP, PPR, and the Standard of Living,” Mises Daily, June 23, 2006.

Private Product Remaining, Wikipedia.

Again, all we have are more aggregates of total private consumption and total private investment.

So after all the Austrian garbage complaining about aggregates, the only Austrian measures of national income/output are … aggregates, which aggregate the value of investment and consumption. According to Bala, then, Austrian economics is “lunacy.”

Bala said...

Hey Genius!!

"According to Bala, then, Austrian economics is “lunacy.”"

This would be true if..... and that's a BIG IF...... Austrian Economic Theory were based on these aggregates. The fact is, it isn't. These aggregates are just incidental attempts at measurement. Their validity or the lack of it has no bearing on the underlying theory that is understood as Austrian Economics.

So, genius, you have made a very good fool of yourself by failing to understand what you are talking of. Keep up the good work, retard.

Bala said...

Genius,

"Ahh, yes. The mythical, non-existent natural rate of interest that exists only in fairy tales."

I have dismantled this retarded claim of yours many times over. Your fixation with the attainment of the equilibrium state rather than with the tendency towards equilibrium is showing big time.

Eric said...

W.H. Hutt wrote an entire book called "The Theory of Idle Resources" (available as a free epub from Mises.org if you're interested). No, the Austrians don't deny that idle resources exist. But we do deny that the government must force them out of idleness and doing so would be economically beneficial.

Bob Roddis said...

LK refuses to understand the concept of economic calculation because he is in love with the idea of himself or a fellow elitist as the grand Keynesian overseer of the lowly rabble. He refuses to understand that average people are perfectly capable of solving their own economic problems and that it is essential that they be allowed to do this through the pricing process. He will ignore the fact that he and his elitists are the cause of the problems he claims he wants to cure.

Thus, he is always going to ignore the problems of "the pretext of knowledge". He always does.

Lord Keynes said...

"Thus, he is always going to ignore the problems of "the pretext of knowledge"."

Ah, yes, the knowledge problem that was yet another blow to Hayek’s trade cycle theory.

And the economic calculation problem that also destroys the myth of self-equilibrating markets in which decentralised decision-making by millions of agents under uncertainty, shifting subjective expectations and potentially diverging plans will magically converge to Hayek’s plan/pattern coordination:

“Because of his focus on uncertainty, Lachmann came to doubt that, in a laissez-faire society, entrepreneurs would be able to achieve any consistent meshing of their plans. The economy, instead of possessing a tendency toward equilibrium, was instead likely to careen out of control at nay time. Lachmann thought that the government had a role to play in stabilizing the economic system and increasing the coordination of entrepreneurial plans. We call his position ‘intervention for stability’”
Gene Callahan, Economics for real people: an introduction to the Austrian school, p. 293.


The Rothbardian/anarcho-capitalist/moderate subjectivist wing of the Austrian school is also up s**t creek, owing to the knowledge problem.

Meanwhile, the non-brain-dead branch of Austrians recognises the need for some government “interventions for stability”.

Lord Keynes said...

With the appropriate changes:

Bob Roddis refuses to understand the concept of economic calculation because he is in love with the idea of himself or his fellow elitist anacho-capitalists as the grand Austrian overseers of the lowly rabble. He refuses to understand that average people are perfectly capable of choosing government intervention to solve their economic problems and that it is essential that they be allowed to do this without Austrian lunatics and their anarcho-capitalist rubbish. He will ignore the fact that he and his Austrian elitists with their childish belief in equilibrating markets that magically overcome the knowldge problem are the cause of the problems he claims he wants to cure.

Ed said...

LK,
"Nice shooting of yourself in the foot.

If the term is "vague," you would do better to tell that to Mises, Hayek, Lachmann and particularly de Soto, who not only uses the expression "idle resources" but also assumes such "idle resources" are real."

Ah, but you are the one tenuously connecting the writings of Austrian economists as "proof" of your tenuous claims to there being "idle resources" (which you still contextually refuse to qualify). The operating difference is those men did describe what this term means. Anyone knows that the reaction of the market to any change is not instantaneous nor is it a perfect system where pure efficiency is reached. It is dynamic.

Your posts are exceedingly intelligent, lengthy, and very intellectually dishonest.

Most responses take an element of truth from Austrian perspective, twist it into a beautiful and subtle strawman, and then unceremoniously declared "wrong" by you; with your clumsily pirouettes of multiple postings as proof.

Lord Keynes said...

"Ah, but you are the one tenuously connecting the writings of Austrian economists as "proof" of your tenuous claims to there being "idle resources"

You are plainly and stupidly wrong:

Critics of the Austrian theory of the business cycle often argue that the theory is based on the assumption of the full employment of resources, and that therefore the existence of idle resources means credit expansion would not necessarily give rise to their widespread malinvestment. However this criticism is completely unfounded. As Ludwig M. Lachmann has insightfully revealed, the Austrian theory of the business cycle does not start from the assumption of full employment. On
the contrary, almost from the time Mises began formulating the theory of the cycle, in 1928, he started from the premise that at any time a very significant volume of resources could be idle.


Huerta de Soto, J. 2006. Money, Bank Credit and Economic Cycles (trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala. pp. 440-441.

What sense does Huerta de Soto mean by a very significant volume of resources could be idle??

If idle resources means

(1) people ready and willing to work but unable to find work;

(2) capacity utilization rates that are low;

(3) unsold stocks or inventories of commodities/resources that businesses want to sell,

then "idle resources" has EXACTLY the same meaning in these Austrian authors as the way I use it.

Lord Keynes said...

Mises:

"At times, even on the unhampered market, there are some unemployed workers, unsold consumers’ goods and quantities
of unused factors of production, which would not exist under “static equilibrium.”
With the revival of business and
productive activity, these reserves are in demand right away.
However, once they are gone, the increase of the supply of
fiduciary media necessarily leads to disturbances of a special kind.
(Mises, On the Manipulation of Money and Credit, p. 125).

Since static equilribrium is, even according to Mises, a fiction that does not exist in the real world, real world capitalist economies have

unemployed workers = (1) above,

unsold consumers’ goods and quantities = (3) above

and

unused factors of production = (2) above.

In short, idle resources.

Lord Keynes said...

"This would be true if..... and that's a BIG IF...... Austrian Economic Theory were based on these aggregates. The fact is, it isn't."

With no way of calculating any measure of the value of national output, then

(1) ALL talk of laissez faire in the 19th century being "superior" to the Keynesian era (1945-1973) collapses into sheer idiocy, sinc eyou have no way to measure output.

(2) Austrians have NO way of establishing whether their beloved trade cycle theory EVER occurs in the real world, as you have no way of identifying booms or busts.

In short, most of the activity of Austrian economics falls like a house of cards.

Bob Roddis said...

he is in love with the idea of himself or his fellow elitist anacho-capitalists as the grand Austrian overseers of the lowly rabble

That's the nub of the dispute. We need go no further.

There is no role for and no possibility of anyone to be an overseer in a Rothbardian system. We assume the humanity and intelligence of average people. Keynesians assume the stupidity of average people and the need for a direct Keynesian overseer whose edicts are backed up by SWAT teams and drone missiles.

The essence of the Keynesian vision is an elite with the power and authority to initiate force against its victims to make them obey. The Rothbardian system forbids the intitation of force.

Bala said...

"ALL talk of laissez faire in the 19th century being "superior" to the Keynesian era (1945-1973) collapses into sheer idiocy, sinc eyou have no way to measure output."

Genius. You can talk of output in a disaggregated sense. It is clear who the idiot is and that is not me.

"Austrians have NO way of establishing whether their beloved trade cycle theory EVER occurs in the real world, as you have no way of identifying booms or busts."

What a freaking retard!!! Whatever or whoever told you that Austrians identify booms or busts based on aggregate data such as GDP?

"In short, most of the activity of Austrian economics falls like a house of cards."

No. It is your utter vacuity that stands exposed.

Lord Keynes said...

"There is no role for and no possibility of anyone to be an overseer in a Rothbardian system."

If average people wanted a Rothbardian system they could vote to dismantle government.

As it is, not even Ron Paul could get elected.

I repeat:

Bob Roddis refuses to understand that average people are perfectly capable of choosing government intervention to solve their economic problems and that it is essential that they be allowed to do this without Austrian lunatics and their anarcho-capitalist rubbish.

Lord Keynes said...

"You can talk of output in a disaggregated sense. It is clear who the idiot is and that is not me."

In which case, even when considering investment and consumption separately, and not in an aggregated real GDP mesaure, the 1945-1973 era wins hands down: it was superior in terms of real growth.

Bob Roddis said...

Bob Roddis refuses to understand that average people are perfectly capable of choosing government intervention to solve their economic problems and that it is essential that they be allowed to do this without Austrian lunatics and their anarcho-capitalist rubbish.

I suppose that the people will do what they will do. But as long as they are too lazy to think through the absurdities set forth by their Keynesian overlords, they will face further depression and impoverishment.

Lord Keynes said...

"But as long as they are too lazy to think through the absurdities set forth by their Keynesian overlords, they will face further depression and impoverishment. "

= the VERY definition of elitism:

Elitism is the belief or attitude that some individuals, who form an elite — a select group of people with intellect, wealth, specialized training or experience, or other distinctive attributes — are those whose views on a matter are to be taken the most seriously or carry the most weight; whose views and/or actions are most likely to be constructive to society as a whole;

http://en.wikipedia.org/wiki/Elitism

Those poor rabble are just too lazy and stupid to accept Austrian elitist "truth," which is mostly being spread, anyway, by salaried professors and the choosen few over at Mises.org.

Bala said...

"In which case, even when considering investment and consumption separately, and not in an aggregated real GDP mesaure, the 1945-1973 era wins hands down"

Ahhh!!!! And let's forget all the credit expansion that happened. Secondly, even if (please note that I am saying 'EVEN IF') the 1945-73 era wins hands down, it means nothing for the validity of your explanation for the same. All we would then say we know is that there was Keynesian macroeconomic management AND there was general improvement in human well-being, you are in no position to say that the former CAUSED the latter. The strength of any such claim you may make rests on the underlying theory that supports the claim. And on that ground, you don't stand a fraction of a chance. Your whatever-Keynesian 'theories' are utter hogwash.

So, it's time to run back to your echo chamber.

Bob Roddis said...

I suppose that if vast majorities of Muslims support stoning women for the slightest of Islamic infractions, that would make it "OK" because a large enough mob makes everything "OK".

If 89% of the people supported an ongoing Rothbardian system and it failed to work as planned but the people couldn't understand that, you really couldn't criticize it because 89% of the people supported it, right? Whether something works or is truthful is irrelevant so long as a large enough mob supports it.

It's like trying to convince a horde of dope addicts that if they stopped using dope, they would be able to successfully navigate their lives. If 55% disagreed, then we would have proven that being a dope addict is the proper route to take to a successful life.

Straw men and hair-splitting rule the LK world.

Lord Keynes said...

"If 89% of the people supported an ongoing Rothbardian system and it failed to work as planned but the people couldn't understand that, you really couldn't criticize it because 89% of the people supported it, right? "

False. The Rothbardian system falls like a house of cards because the natural rights/law theory used to justify it is a joke.

Just 2 problems:

(1) it commits Hume's "is" from "ought" fallacy, and

(3) G. E. Moore's naturalistic fallacy.

The actual flaws in Rothbard's own reasoning have already been pointed out to you here:

http://edwardfeser.blogspot.com/2009/08/rothbard-as-philosopher.html

David B said...

It's quite obvious that Lord Keynes is now in auto-troll mode. After being thoroughly destroyed in the last comment thread (and the dozens of threads before this), our favorite troll is back.

More Appeals to Authority.
More hilariously crude econometrics.
More straw men.

But it's not all lost.

In the last post, Lord Keynes admitted the following:

1. The banks that engaged in what he termed excessive risky lending used money that was created out of thin air. He listed 4 ways in which banks received money, each of which is derived from what Bob Roddis would sarcastically refer to as Funny Money Dilution. This was, of course, after Lord Keynes denies that there was any money creation. So the contradiction is evident, but I will take his admission that banks received the money from thin air as admission that Bob Roddis was correct.

2. The Federal Reserve had FULL regulatory power over every instrument and loan the banks created. He did not dispute this and instead engaged in the conspiracy theory that Greenspan skulked away with all the regulations in the still of the night.

3. A series of governmental acts exacerbated the crises. Lord Keynes, in fact, listed several of these governmental acts as exhibits to make his case.

So he is learning, slowly. He also learned that I'm his daddy, which was probably new for him.

Now we just need to get him off his kick for Authority. His constant Appeals to Authority are really all he has left. Perhaps like a cornered dog, we should let him have it, as he may get violent without it.

We have seen how he points to real GDP which somehow proves to him that 1973-1981 was a period of higher growth rates than the 1800s. Never mind that the inflation adjusted stock market lost 80% from 1965-1985 (?) (don't have exact dates in front of me). If the real GDP says it was great, then it was great!

We tried to show Lord Keynes how this is a chance to learn. At this point, a thinking man would look at his econometrics and be forced to admit something is terribly wrong. Instead, LK pointed out that serious economists disagreed, and since they are serious, we should bow to their opinion.

For the nth time, I pointed out his Appeal to Authority.

Since he did not respond, I hoped that maybe he was going to reform his analysis. Alas, I guess it is no to be. He is truly on Auto-Troll.

Lord Keynes said...

David B@July 9, 2011 12:21 PM

You are a liar:

"Lord Keynes admitted the following: .... The Federal Reserve had FULL regulatory power over every instrument and loan the banks created."

I admitted no such thing anyway, and that is easily verifiable in the previous comments:

(1)
Do you deny that the Federal Reserve had FULL regulatory power over the banks?

They had regulatory powers, but did NOT exercise the type of regulation they used to, before the 1980s, when they maintained lending standards and minimised debt-fuelled asset bubbles.


(2)
(2) "Do you deny the Federal Reserve had FULL regulatory power?"

Answer: they certianly did NOT have the full regulatory powers they had from 1945-1980s:


Yet another lie:

He did not dispute this and instead engaged in the conspiracy theory that Greenspan skulked away with all the regulations in the still of the night.

False. I said the process by which the effectiveness of pre-1980 regulation was eroded occured over many years.

Your lying suggests to me you're desparate and incapable of any serious counterargument

David B said...

Lord Keynes,

My favorite Auto-Troll, why do you get so angry?

I asked you very clearly if the Fed had FULL regulatory power?

You said, yes.

I didn't ask if they used it. I asked if they had it. You said, yes.

Now, your explanation of why they didn't use it is two fold:

1. Government intervention, despite the fact that none of the laws you listed altered Federal Reserve regulatory power in any way.

and

2. A conspiracy theory about an ex-Randian stealing away all the regulations.

Don't get angry, son. It's all gonna be ok. I am your authority, now.

David B said...

Lord Keynes,

My favorite Auto-Troll, why do you get so angry?

I asked you very clearly if the Fed had FULL regulatory power?

You said, yes.

I didn't ask if they used it. I asked if they had it. You said, yes.

Now, your explanation of why they didn't use it is two fold:

1. Government intervention, despite the fact that none of the laws you listed altered Federal Reserve regulatory power in any way.

and

2. A conspiracy theory about an ex-Randian stealing away all the regulations.

Don't get angry, son. It's all gonna be ok. I am your authority, now.

David B said...

Sorry for the double post.

Lord Keynes said...

"I asked you very clearly if the Fed had FULL regulatory power?

You said, yes."


I said no such thing - and your lies are laughable.

Bob Roddis said...

It's a beautiful hot sunny summer day in Motown. I think we've done sufficient undressing of LK for today. Using historical annecdotes and ignoring how human beings interact in the real world is no method for the establishment of economic principles.

David B said...

Lord "Auto-Troll" Keynes,

Now you are laughing? These swings in emotion cannot be healthy. I strongly recommend that you see a specialist about it.

You did say yes.

1)
Do you deny that the Federal Reserve had FULL regulatory power over the banks?

They had regulatory powers, but did NOT exercise the type of regulation they used to, before the 1980s, when they maintained lending standards and minimised debt-fuelled asset bubbles.

You do not like the inclusion of the word FULL, becase you would like to explain away why they were not used. But I didn't ask if they were used.

So you are again intellectually dishonest.

I'll give you another chance.

Were the Federal Reserve's FULL regulatory powers superceded in any way by any legislation, official directives, or otherwise official documentation that you can present as evidence of a DECREASE IN POWER of the Federal Reserve's regulatory ability?

Is that better?

-Your Daddy

Lord Keynes said...

"Government intervention, despite the fact that none of the laws you listed altered Federal Reserve regulatory power in any way."

Rubbish again.
Just 2 examples:

(3) Commodities Futures Modernization Act (CFMA), 2000
This exempted financial derivatives, including credit default swaps, from regulation.
Only an idiot would claim that this did not alter "regulatory power in any way."

(4) The SEC’s Voluntary Regulation Regime for Investment Banks, 2004-2008
The SEC's Consolidated Supervised Entity (CSE) regime was introduced in 2004. It allowed investment banks to engage in their own net capital requirements in accordance with the standards of the Basel Committee on Banking Supervision. It was voluntarily administered, and the result was that investment banks pushed borrowing ratios to as high as 40 to 1, as in the case of Merrill Lynch.

By allowing a "voluntarily administered" regime the regulators were giving up supervision of capital requirements.

"A conspiracy theory about an ex-Randian stealing away all the regulations."

Again, utter B.S.

The neoclassical/new consensus macroeconomics inspired attacks on the previous system of regulation began long before Greenspan become Fed chairman:

Depository Institutions Deregulation and Monetary Control Act (1980)

Garn–St. Germain Depository Institutions Act (1982)

You are actually the easiest person to refute here.

Anonymous said...

Before calling other people liars, maybe LK should try telling the truth himself. Here's the REAL Bob Murphy quote, which he changed in several places in his third comment (original words changed by LK in bold):

Even on its own terms, Thoma's [a Keynesian economist whom Murphy scenario fails because it is unrealistic. It is absurd to think that the government could come up with spending programs that would draw only on unemployed resources. Keynesian "macro" thinking ignores the complex capital structure of an economy. To build a bridge (as in Thoma's example) requires a lot more than cranes and generic laborers. For example, gasoline will be burned in order to transport the newly employed workers to and from the work site. Nails, screws, steel, lumber, and other resources will be channeled into the new bridge, and at least some of these inputs will be diverted away from other private-sector uses, rather than simply leaving a state of idleness.

Anonymous said...

Oops! That should have been [a Keynesian economist whom Murphy had quoted earlier].

Lord Keynes said...

They had regulatory powers, but did NOT exercise the type of regulation they used to, before the 1980s,

There is no word "full" here, idiot.

Only a complete liar or idiot would claim I agreed with your assertion.

And I made it clear here:

(2) "Do you deny the Federal Reserve had FULL regulatory power?"

Answer: they certianly did NOT have the full regulatory powers they had from 1945-1980s ...

David B said...

Lord "Auto-Troll" Keynes,

From anger to laughter to arrogance in less than 15 minutes. You are serious need of help. I'm actually now concerned for you.

Once again, you offer as evidence government intervention as the reason the the Federal Reserve did not exercise its power.

That's generally something I can agree with, and I want to thank you for pointing out once again that free market principles were not followed.

But that doesn't answer my question.

Did any of these regulations decrease the regulatory power of the Federal Reserve?

Did any of these regulations, for example, explicitly prohibit the Federal Reserve from performing its functions?

- Your Daddy

Lord Keynes said...

Before calling other people liars, maybe LK should try telling the truth himself.

Ah, yes, what happened there is that I forgot, in haste, to put my opening sentences before the quote. You can see my comments are incomplete as the first sentence is not finished:

In the Murphy article you link to, it is obvious that he accepts"Even on its own terms, the Austrian scenario fails because it is unrealistic. It is absurd to think that the private sector could come up with spending/investment programs that would draw only on unemployed resources. Austrian thinking ignores the complex capital structure of an economy. To build a private scetor bridge requires a lot more than cranes and generic laborers. For example, gasoline will be burned in order to transport the newly employed workers to and from the work site. Nails, screws, steel, lumber, and other resources will be channeled into the new bridge, and at least some of these inputs will be diverted away from other private-sector uses, rather than simply leaving a state of idleness".

The opening few sentences should be:

In the Murphy article you link to, it is obvious that he accepts the concept of "idle resources". His argument against government sending would equally apply to private sector spending if we make the requisite changes his argument:

David B said...

Lord "Auto-Troll" Keynes,

Back to anger again. Sheesh, you are a mess.

Answer: they certianly did NOT have the full regulatory powers they had from 1945-1980s ...

Here's a list of Federal Reserve regulatory powers as of 2009:

Among the Fed's functions as of 2009 are the regulation of

Bank holding companies
State-chartered banks
Foreign branches of member banks
Edge and agreement corporations
US state-licensed branches, agencies, and representative offices of foreign banks
Nonbanking activities of foreign banks
National banks (with the Comptroller of the Currency)
Savings banks (with the Office of Thrift Supervision)
Nonbank subsidiaries of bank holding companies
Thrift holding companies
Financial reporting
Accounting policies of banks
Business "continuity" in case of an economic emergency
Consumer-protection laws
Securities dealings of banks
Information technology used by banks
Foreign investments of banks
Foreign lending by banks
Branch banking
Bank mergers and acquisitions
Who may own a bank
Capital "adequacy standards"
Extensions of credit for the purchase of securities
Equal-opportunity lending
Mortgage disclosure information
Reserve requirements
Electronic-funds transfers
Interbank liabilities
Community Reinvestment Act subprime lending requirements
All international banking operations
Consumer leasing
Privacy of consumer financial information
Payments on demand deposits
"Fair credit" reporting
Transactions between member banks and their affiliates
Truth in lending
Truth in savings

Which regulatory powers were stripped from the Federal Reserve?

Did they more powers than this in the 1950s, for example?

Lord Keynes said...

You already had 2 major ones:

(1) Commodities Futures Modernization Act (CFMA), 2000
This exempted financial derivatives, including credit default swaps, from regulation.

(2) The SEC’s Voluntary Regulation Regime for Investment Banks, 2004-2008

David B said...

Lord "Auto-Troll" Keynes,

Here's more.

On the childish view that the SEC was somehow engaged in de-regulation (by getting bigger and more regulatory!):

The paperback version of the 2000 SEC Guidelines: Rules and Regulations weighs 3 pounds:
http://www.amazon.com/2000-Sec-Guidelines-Regulations-Supplement/dp/0791339866/ref=sr_1_4?s=books&ie=UTF8&qid=1310231599&sr=1-4

Here's the 2009 edition:
http://www.amazon.com/SEC-Guidelines-Regulations-Through-December/dp/B001TQ32QI/ref=sr_1_1?s=books&ie=UTF8&qid=1310231778&sr=1-1

Look any smaller to you?

David B said...

Lord "Auto-Troll" Keynes,

(1) Commodities Futures Modernization Act (CFMA), 2000
This exempted financial derivatives, including credit default swaps, from regulation.


Exempted them from regulation from whom? From the Federal Reserve? Or from the SEC?

This of course brings up a second point of why the SEC, which was not beholden to an ex-Randian, was allowing a banking cartel to regulate itself.

In 2000, the president was a Progressive (Bush did not take office until January 2001.)

So next you will have to explain to me why the last Progressive president - a strong believer in regulation - allowed the regulators to stop regulating.

David B said...

Lord "Auto-Troll" Keynes,

The CFMA, if I remember, reassigned whcih agencies have oversight. It did not eliminate it. But I have to find the reference, and when I return you will be shown to be wrong yet again.

Back in a few, my son.

David B said...

http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000

the major dealers of those products (banks and securities firms) would continue to have their dealings in OTC derivatives supervised by their federal regulators under general “safety and soundness” standards. The Commodity Futures Trading Commission's desire to have “Functional regulation” of the market was also rejected. Instead, the CFTC would continue to do “entity-based supervision of OTC derivatives dealers.”

I love how this type of re-shuffling of the deck is characterized as de-regulation. De-regulation is the removal of government intervention in the market, marked most significantly by the repealing of an existing regulation and its replacement with nothing.

This deck shuffling is typical interventionist nonsense, brought to you by a Progressive President and his wall street backers.

This is Lord Keynes conceptualization of the free market, when his president plays a crooked game, gets everyone burned, and the house of cards crumbles.

Intellectual dishonesty at its finest.

Lord Keynes said...

"On the childish view that the SEC was somehow engaged in de-regulation " ...

You have failed to even understand what I wrote: it was the system of regulation and its effects, not the number of actual regulations we are talking about.

Yes, the number of regulations might have been smaller in the 1940s, and larger in the 2000s: but that is a red herring.

You had a highly effective system back then. And ineffective one from the 1980s-2000s.

David B said...

Lord "Auto-Troll" Keynes,

So it's not the size, it's how you use it?

So then, do we have a correlation between big government and ineffective regulations?

Are you willing to admit that big government might have even a causal relationship with ineffective regulation?

Anonymous said...

Thanks Bala!

Now we have a new vague Austrian term - "tending toward equilibrium."

Maybe Bala will start to recognize sub-optimal equilibria, multiple equilibria, and off-path equilibria which would make him a Neo-Classicist or a Kenyesian.

When the fantasy of Austrianism fails, it is slippery slope back to "normal" economics.

Anonymous said...

Good point David B. Even though you are being sarcastic, it is how you use regulations, not the size that matters. Maybe take that insight into your personal life.

Would you also be willing to admit that free markets in the absence of perfect information will also lead to ineffective regulation?

David B said...

Anon,

Would you also be willing to admit that free markets in the absence of perfect information will also lead to ineffective regulation?

That's a bizarre question. Markets are humans exchanging goods and services according to their subjective value scales.

No one in a market, or in a command economy, has perfect information. No such thing exists.

Since no one will ever have perfect information in any scenario, why in the world would you make it a criteria for regulation? With such a criteria, any intervention could be justified.

I'm sure you didn't think up the idea of perfect information in markets. It's a neoclassical construct taught by Robinson/Samuelson/etc.

I can't for the life of me figure out why anyone found the critique of "the lack of perfect information" compelling. No one in human history has had perfect information, and we've made it pretty far, so obviously it's not a pre-requisite for human's exchanging goods and services.

Anonymous said...

Your right, we have made it very far with imperfect information - through the creation of binding institutions and government. Read your Douglass North.

David B said...

Anon,

through the creation of binding institutions and government.

Logical fallacy
http://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc

It also doesn't hold historically, as James C. Scott recently showed, many non-state peoples even in recent times were far better off economically and socially than their state bound neighbors.

http://www.amazon.com/Art-Not-Being-Governed-Anarchist/dp/0300169175/ref=sr_1_1?s=books&ie=UTF8&qid=1310241555&sr=1-1

Now they are all refugees, unfortunately.

Anonymous said...

Why is that a logical fallacy? Because something does not hold up all the time?

And James Scott writes about peasant societies (The Moral Economy of the Peasant), and authoritarian settings (Weapons of the Weak; Domination and the Arts of Resistance).

Scott would no doubt agree that democratic welfare states and progressive economics have made people much better off.

David B said...

Anon,

Post Hoc Ergo Propter Hoc is a logical fallacy of causation. It is often employed as follows:

We are wealthier today than we were in 1912. In 1913, the Federal Reserve was created. Therefore, we are wealthier today because the Federal Reserve was created.

Do you see any logical problems with this kind of reasoning.

I can tell already you are about to employ the same line of reasoning to defend the redistribution state, so let's make sure you understand the logical fallacy first.

And before we get to that..... please don't even start if you're one of those fake Progressives that supports Obama while simultaneously saying you are anti-war, anti-corporation, and pro-civil liberties. I want to make sure this conversation is worth my time.

Anonymous said...

I perfectly understand what a logical fallacy is, but you can't just throw it around at everything. That is just a cop out from any argument.

Sequence and correlation does not mean causation, but often it does. Especially if it is supported by causal arguments, evidence, and logic.

For example, Douglass North's thesis is that coordination dilemmas, due to problems of information, were solved by the creation of institutions such as registries, courts, and property rights. There is not just sequence there, but a causal argument.

Get your head out of your A@# for goodness sake!

Anonymous said...

And with the federal reserve, the Austrian position is always that we would have been better off had the Federal Reserve not been created, which is a logical fallacy on its own right and relies completely on a hypothetical and extremely difficult to assess counter-factual.

If only Cleopatra's nose had been smaller....The world would have been different today.

David B said...

Sequence and correlation does not mean causation, but often it does.

Define "often."

Especially if it is supported by causal arguments, evidence, and logic.

Did you offer any of that to support your statement?

For example, Douglass North's thesis is that coordination dilemmas, due to problems of information, were solved by the creation of institutions such as registries, courts, and property rights.

They likely played a big part, but you are assuming that stateless societies do not have those things, which is false.

A state is the coercive form of government, the collection revenue by force without consent.

A stateless society can have all of those things. Property rights are defended by property owners. In North America, for example, property owners defended their property perfectly fine (against everyone except the ever expanding coercive state) well before the USA become a tax eating monster. Courts and registries can, and have been, elements of stateless societies.

So yes, a big time logical fallacy has been committed.

Get your head out of your A@# for goodness sake!

Like Lord Keynes, it appears you get emotional when you find out your argument is rather weak.

And with the federal reserve, the Austrian position is always that we would have been better off had the Federal Reserve not been created, which is a logical fallacy on its own right and relies completely on a hypothetical and extremely difficult to assess counter-factual.

Boring. Do I really want to spend the next 20 posts talking about the Federal Reserve again? Not unless you can be a little more creative and original.

Rob said...

Lord Keynes = argument from authority. Yawn.

Anonymous said...

Great David...

Welcome to the real world - a world of states. I am sure that the modern economy (industrial, technological, financial, global, etc...) would do just fine without the state. Or maybe, it was only possible because of the state?

Of course, we could go back to the agrarian economy....

States, like all former forms of social order are in fact coercive. You, as most Austrians, always fail to note the regime-type - democracy. You can't get rid of coercion - you can mitigate it. Now of course you probably conflate the capacity of the modern democratic state to tax with the totalitarian state's capacity to imprison, torture, and silently execute you. Same thing right?

Anonymous said...

Great David...

Welcome to the real world - a world of states. I am sure that the modern economy (industrial, technological, financial, global, etc...) would do just fine without the state. Or maybe, it was only possible because of the state?

Of course, we could go back to the agrarian economy....

States, like all former forms of social order are in fact coercive. You, as most Austrians, always fail to note the regime-type - democracy. You can't get rid of coercion - you can mitigate it. Now of course you probably conflate the capacity of the modern democratic state to tax with the totalitarian state's capacity to imprison, torture, and silently execute you. Same thing right?

JG said...

Ed and Bala,

In a normal economic climate savings, spending and investment will operate in such a way that government efforts to increase aggregate demand are not necessary. All of the Austrian apologists I've read seem to use a normal economic climate as a given in their examples and they proceed from that point. However, I have yet to read or hear an Austrian supporter offer a serious response to the question of what happens in an abnormal economic climate where everyone saves at the same time and spending/investment disappears.

What was the Austrian recommendation in 2008 when credit markets dried up and liquidity disappeared? The Keynesian response from a monetary point of view was to increase the money supply through various actions of the Fed, and from the fiscal persepective the response was to replace private demand with public sector stimulus.

But when I search for an Austrian response to that recent crisis I hear no recommendations, no serious policy positions, just a chorus of complaints criticizing they Keynesian responses without offering up an alternative.

My questions is this: if Keynesian fiscal stimulus and monetary expansion are anaethema to Austrian theory then what is the Austrian counter proposal for action during times of credit crisis and shrinking liquidity? Do Austrians even have any serious suggestions for such crises? If there is a serious answer to this question I would like to hear it. If not, then I invite you to consider the option that maybe Keynes should be given more respect here than he's been getting.

David B said...

JG,

if Keynesian fiscal stimulus and monetary expansion are anaethema to Austrian theory then what is the Austrian counter proposal for action during times of credit crisis and shrinking liquidity? Do Austrians even have any serious suggestions for such crises?

Regards the boom, Austrian advice is to stop creating them through easy money policies, monetary expansion, et al.

Regards the bust, once you have a boom you can't stop the inevitable bust. You can't legislate away or stimulate away reality.

Regards action to take, in simple terms, it's a question of who plans for who(whom?) Do you want more planning from the people that got us into this mess (government/central bank/mainstream econ) or do you want planning from the bottom up? Planning from people who want to learn how to serve one another...

That's the simple short answer. There are many, many books, journals, and articles on these topics. You can find the more detailed analysis of Austrian Business Cycle Theory and other significant Austrian School ideas through a Google search or through www.mises.org.

Anonymous said...

Vague as usual David....

Don't create bubbles through money expansion. Great advice. Of course it does not coincide with underlying causes of the housing boom.

As for your solution - the usual false choice between centralized planning vs. anarcho-capitalism instead of recognizing the mixed system we live under. And, there is no realistic solution to anything in what you wrote. At least Keynesian's have an idea (fiscal expansion).

David B said...

Anon,

Nice comeback. Wake me when you make an argument or show any comprehension of Austrian School theory or liberty.

I'm sorry your original arguments turned out to be so weak. You're just going to have to step up your game, fella.

Anonymous said...

Usual throwback - You and Bob Roddis should start a club. The "You Just Don't Get Austrian Principles" club. I'll be here in the real world waiting for your return from fantasy land.

zackA89 said...

No, the Keynesian “idea” of “stimulus” is just more of what helped created the problem to begin with. Fiscal stimulus does damage to the economy and is not a viable solution. More stimulus delays the recovery by simply diverting resources away from profitable lines of production that are consistent with consumer demand to wasteful government ventures.

More stimulus also impairs the pricing process which disrupts the necessary economic calculation that is needed in order to have a genuine and sustainable economic recovery. Stimulus is not a “good idea.”

Rather, the capital and labor tied up in the malinvestments needs to be freed up and reallocated into more profitable and sustainable lines of production by entrepreneurs who are subject to market forces. This needs to happen in order to have a strong and viable economy. Fiscal and monetary stimulus simply delays and disrupts this necessary reconfiguration process. In other words, the government must stop stimulating in order for the economy to grow in a sustainable fashion.

Since the government is not subject to market forces and does not obtain its revenue voluntarily it simply has no ability whatsoever to guide resources to their most desired ends. Government has no ability to accurately access whether or not its actions are economical or productive for that matter because it lacks the proper market based incentives that allow private sector individuals to create vast amounts of wealth. Basically, government can’t really make any sense of what it does.

Spending for the sake of spending, and employing resources simply for the sake of employing them is economically harmful and does damage to the economy. It overlooks the fact that the capital structure is heterogeneous, and it really does matter how and where resources are employed, not just that they are employed.

Again, because it lacks proper market based incentives, government cannot and really shouldn’t even try to determine how resources should be employed. Any attempt that the government takes at trying to “stimulate” these resources simply undermines the ability of private individuals to do it in the free market who actually have incentives to satisfy consumer demand.

And yes, artificial stimulus did play a large role in inflating the housing bubble. There was no phantom “deregulation” in effect. Sorry.

These statists just keep coming don’t they. Unfortunately, they do not realize they suffer from the knowledge problem which renders all their economic central planning and stimulus obsolete in my mind. Central planning, during a recession or not, cannot be a substitute for millions of market participants trading and exchanging with each other for mutual benefit.

David B said...

zackA89,

I think it's great that they keep coming back. But unlike LK, this anonymous one is just too boring and unoriginal to spark my interest.

Excellent writeup, btw.

Anonymous said...

Broken record Zack. Broken record. Get you head out of your ideological A$* and face economic reality, rather than a priori abstract theory.

No doubt that stimulus impacts economic calculation but there are two big assumptions there - 1) That in the absence of stimulus economies will self-correct and 2) That free markets will always produce efficient outcomes.

In the real world there are idle resources, not just "mal-invested" ones. The collapse of the housing bubble (and lets put the discussion of its cause aside for now) had serious impacts on all sectors of the economy. Consumers are paying down debt and holding back on spending, which is causing businesses to cut on inventories and employment to satisfy share-holders, all the while as interest rates are at their lower bound. Correspondingly (and Austrians still have not responded to this) - interest rates on 10-years bonds are still low, despite the growth in deficit spending on stimulus and income security.

So yes, we distort economic calculation in the short-term when the basis of economic calculation is already distorted due to the depression. The long-term costs are highly debatable - there is no confidence fairy, and those spent resources can be recuperated later down the road.

Now toy with a counterfactual - what would the US economy look like without the "stimulus" or TARP? Would banking have collapsed? Would unemployment have been 7% now or 13%? Ask yourself that question seriously.

Free markets do not always clear to the most efficient outcome either (imperfect information, manipulation, economies of scale, externalities etc etc etc).

So you present a false ideological choice - the totalitarian central-planning state vs. the anarcho-libertarian utopia that worked pretty well for agrarian societies. In the real world the economy is mixed.

The government has done very poorly at directing resources at times, and very well at others. But so has the free market. For instance, the government is pretty good at directing resources for war-making, or for national infrastructure that are essentially natural monopolies.

It can also address inefficiencies in the price mechanism due to the problem of information transmission and myopic consumers. Yes, sometimes "central planner" know better than millions of consumers. Consumers would buy a $1 hamburger, even though we all know that price does nor reflect the true cost of a $1 hamburger (both economically, environmentally, health-wise, and socially). Millions of consumers do not always coincide on the best outcome, and sometimes that has tragic results.

But that is the real world - a world of constant negotiation between what should be left to the market and what should be regulated. Austrians just engage in a world of "what should" be, which will always remain a fantasy and unpractical for the real economy. Your not going to get rid of government or society anytime soon.

Anonymous said...

David - nothing is more boring than your statement -

"Do you want more planning from the people that got us into this mess (government/central bank/mainstream econ) or do you want planning from the bottom up? Planning from people who want to learn how to serve one another... "

Utter ideological nonsense. You would not know real central planning if it hit you in the head.

David B said...

Anon,

Utter ideological nonsense

If you had said utter praxeological nonsense, I would have given you 10 points and considered responding.

zackA89 said...

@anon

In the absence of stimulus, the economy can self correct and the episode in the early 20’s shows that in the absence of intervention and Keynesian stimulus. It has and it can. When you say the economy cant self correct what you are effectively are saying is that millions of market participants who have incentives to satisfy each other’s preferences are too dense to sort of whatever problem there is in the economy voluntarily, and that somehow benevolent wise Keynesian planners somehow posses the necessary information to “correct” the economy by “stimulating” it back into prosperity through the use of force. People in the private sector are too stupid, but the Keynesian central planners are smart. I have heard this argument time and time again and there is no evidence to support it whatsoever. Men are not angels.

Such effective planning is impossible. The information necessary to do that can not be possessed by real life ignorant humans in government. The state obtains its revenues through force. The free market does it voluntarily. That should tell you everything you need to know right there about which entity produces outcomes that are more consistent with consumer demand.

The market does not always produce efficient outcomes. Nothing does. But that does not mean government can either, or that government can solve alleged “inefficiencies” by intervention or stimulus. The information necessary do to so cannot be known by government officials. Ever.

Government spending cannot target these idle resources efficiently. It is not even economically desirable for the government to shift funding away from wealth generating activities in the free market to target these “idle resources”. There is no free lunch. Opportunity costs exist in a recession, even with idle resources. These resources are idle for a reason. They represent malinvestments where capital and labor were misallocated into these sectors during the phony boom years. The capital and labor tied up in these idle resources do not need to be stimulated back into use simply for the sake of employing them; rather, private individuals need to use the price system to reallocate these resources to ends that are more in tune with consumer preferences. You don’t employ resources for the sake of employing them. That is economically harmful. It really does matter how and where they are employed, not just that they are employed.

The yield is low because the Fed is such a huge buyer in the bond market and its balance sheet contains record levels of U.S treasuries. We also benefit from being the world reserve currency.

Distorting EC is harmful in any term really by delaying recovery and preventing a sustainable economy from emerging where resources are channeled into more desirable ends. EC was distorted because of artificially low interest rates, monetary stimulus, government spending, and disrupting the pricing process altogether. Doing more of that will make it worse. So we shouldn’t.

In the short term maybe things would have been worse, but I would argue that the economy would have recovered quicker absent the stimulus or tarp. Both those interventions delayed the recovery, prolonged the recession, and set us up for another crisis.

Information is always imperfect. Government meddling makes this worse, and certainly in no way shape or form mitigates this problem. Markets can clear if you let them. We currently are not.

Central planners are planning in the dark with imperfect information. At least in the private sector people have incentives to trade with each other for mutual benefit voluntarily. This leads to more efficient outcomes more times than not. And if it doesn’t that does not mean government should or even can intervene to “fix” the problem as if actors cant resolve the problem voluntarily in the free market. Because they can and usually do, if you let them, but unfortunately, we don’t.

We can and should try to minimize the role government plays in society and the economy.

David B said...

zack,

In the absence of stimulus, the economy can self correct and the episode in the early 20’s shows that in the absence of intervention and Keynesian stimulus.

There was the Great Depression of 1946 that never happened, even though Keynesian economists predicted disaster after the removal of government war spending. It turned, they couldn't have been any more wrong as 1946 ended being one of the best years in the history of the American economy.

Here's a good piece on that, if you haven't already read it:

http://mises.org/journals/rae/pdf/RAE5_2_1.pdf

The title is ironic, as the authors know full that the Keynesian predictions of disaster never came true :)

David B said...

There was also the Great Depression of 1946...

Another good writeup, btw! Glad someone has the time and patience today.

Anonymous said...

Yes, your right - sometimes millions of people make irrational decisions and "wise-men" or "central planners" do know better. Your faith in the crowd is just as naive as a communist's complete faith in the state.

The question is not only would the economy self-correct, but at what cost? In this case there was also the real chance of complete financial collapse. In the real world, leaders are faced with decisions and not abstract principles - do we risk collapse or rescue the banks?

Idle Resources do not equal malinvestments. Austrians seem stuck on this point. The malinvestment was the housing market. The idle resources are spread throughout the depressed economy. No one is budging - creating a viscous circle of austerity. Only government can step in to prop up the economy and prevent greater damage.

Opportunity costs are not paid simultaneously either, nor are they always equivalent. I take a vacation and miss wages in addition to the cost of my vacation. That is the opportunity cost of my vacation. But, I pay for that over time, not immediately and the benefit I derive from my vacation might make me more productive in the future so that the actual loss in wages in mitigated.

The thrust of your argument rests on this statement - "The market does not always produce efficient outcomes. Nothing does. But that does not mean government can either, or that government can solve alleged “inefficiencies” by intervention or stimulus. The information necessary do to so cannot be known by government officials. Ever. "

First, you admit that markets are not always efficient (I would argue that they rarely are). But again, the capacity to do anything perfectly is inhibited by the knowledge problem - if you are striving for perfection, which I am not. Free markets and limited market guidance (which is distinct from central planning) both fail to achieve this perfection. That is why we have a mixed economy, and a democratic system which makes us a far cry from a Totalitarian Centrally-Planned State.

In the real world we are not divided in to Market=Good and Government=Bad based on ideology (or the false god) that is praxeology), but into pragmatic decisions based on the best available information.

July 10, 2011 5:50 PM

David B said...

Idle Resources do not equal malinvestments. Austrians seem stuck on this point. The malinvestment was the housing market. The idle resources are spread throughout the depressed economy. No one is budging - creating a viscous circle of austerity. Only government can step in to prop up the economy and prevent greater damage

False. In every downturn, including this one, some sectors are doing well and some sectors are doing poorly.

Which means that "spending" has an opportunity cost. Removing resources from the healthy sectors to bail out firms in the unhealthy ones creates the following:

1. Crappy firms still alive in unhealthy sectors.
2. Good firms in healthy sectors now left with less cash.

Not smart.

Now, if you weren't using clumsy aggregates you would see the micro differences between the sectors. But if just look at consumption or investment as a whole, it will appear that every sector in the economy is unhealthy.

Anonymous said...

Of course some are doing better now, but that is not the same as clearing malinvestments.

In 2009 the only two sectors that actually grew were finance/insurance and mining.

In 2010 nearly every sector except construction improved, most notably in durable-goods, retail, professional and business service, and technology.

Employment has increased in nearly every sector except government (where it has declined), manufacturing (which has flattened) and construction (which has declined).

David B. said...

Of course some are doing better now

Nope. Not my point. Some were doing better than others during the bust.

There were healthy sectors and unhealthy sectors in 2007 and 2008.

So the fiscal stimulus merely took money from healthy sectors and healthy firms and gave it to unhealthy firms.

A couple points more off the top of my head, just to have fun and throw it out there:

1. In 70 years, the Soviet Union did not close a single enterprise. They were all too big to fail. Mimicking their worst economic ideas is really dumb no matter how you try to rationalize it.

2. The government may or may not be shedding jobs (I hope they are - fewer parasites), but they are certainly not spending any less money. No need to paint this as some kind of cycle of austerity. No one is buying that except the hardcore shills.

3. The private sector lost 6-7 million jobs during the crash. Adding a million or two over the next three years is nothing to pat yourself on the back for. It's like being happy you came in 2nd to last in the special olympics. You're still retarded and you're not even good at it.

4. The history of economies that don't rely on government/fiscal/Keynesian stimulus shows private sector employment recovery usually occuring in 18 months. In fact, this was too long for Keynes. He whined about it in one of his earlier books that it was too long to wait (don't have the ref offhand, so don't believe it if you don't want.)

5. Keynesians have the most atrocious record of prediction. Whether it is 1929 (Keynes himself), 1946, 1965, 1971, 1987, 1999, or 2006, they have been on the wrong side of every major move, up or down.

That's enough for now.

zackA89 said...

The “crowd” in the private sector can produce better outcomes and can make better decisions than central planners is because they are subject to market forces like profit and loss that incentivize them to satisfy consumer demand at a low cost. They also use the price system and can engage in meaningful economic calculation in ways the government simply cannot.

This is why crowd is not just as na├»ve as central planners. It is very easy to see, and I don’t understand why you can’t make the difference between free voluntary planning and state coerced planning and how the former leads to better economic outcomes than the latter.

In the free market, transactions are voluntary, meaning that businesses can only make a profit if they accurately forecast consumer preferences. They obtain their revenue voluntarily. The difference is that government uses force. It obtains its revenue through coercion, and is not subject to market forces in the same way the “crowd” is.

For whatever reason, I don’t understand why you don’t get that the “crowd” has market based incentives, is voluntary, and uses the price system to guide resources to their most desirable ends, and why this is optimal over government planning/force. The incentives to be productive and thus produce wealth are in the free market and government is not subject to them. Plain and simple. That is the difference.

As housing prices rose due to the fed induced housing bubble, people used their houses as personal ATM’s to live beyond their means. This means they bought things that they otherwise wouldn’t have been able to afford absent the housing bubble. So the malinvestments are spread throughout the economy, not just in housing or housing related sectors. Basically, the whole economy was on an unsustainable trajectory during the bubble where the spending and investment patters were not justified by market fundamentals.

Attempting to target idle resources and propping an unsustainable economy with government spending does harm to the economy by delaying recovery, impairing the pricing system thereby making economic calculation increasingly difficult at a time when it is most needed.

I am arguing that nothing is perfect and that government can’t make things more perfect or less bad by intervention or stimulus. In fact, those government actions tend to worsen the situation. I am suggesting that if there is a market “failure” that individual market participants can resolve the problem voluntarily and that it does not require the state to use force.

For me, markets are efficient when they are left alone by government and central planners and it is government that is rarely efficient. Post office and Amtrak are good examples. If you understood the difference between voluntarily market planning and state coerced planning and how EC and the price system play a vital role in that difference not to mention how those two factors are impaired by stimulus you would understand.

Anyway you look at it, we would be much better off with less stimulus and less government overall in the economy.

zackA89 said...

Yes David B, I am aware that Keynesians were predicting a recession after WWII if we drastically cut government spending. That is a good article.

We cut government spending, and there was no recession in fact there was an economic boom. This is because the cut in government spending freed up resources which allowed the private sector to reallocate them from producing war necessitates to goods that were in tune with consumer preferences.

They were warning of a depression because of the alleged job losses resulting from the cuts in government spending. What they didn’t get and still don’t get is why jobs are not ends in and of themselves and why it really matters how the labor is employed, not just that it is employed for the sake of employment. The composition of labor is what’s important in terms of labor being employed in profitable lines of production, not just that it is employed.

The actual goods and services are what people want; labor is a factor of production and an input in the wealth creation process but is not the end goal. The wealth is the end goal. More “jobs” does not mean more wealth. Wealth comes from savings, investment, and production, not “jobs” supported by government spending.

So if people lose their job making bombs, that’s not the end of the world and certainly won’t cause a depression if the capital and labor going into the bombs is reallocated into another sector that is consistent with consumer demand.

Tom Woods explains why there was no depression in 1946 here about 13:30 in.

http://www.youtube.com/watch?v=6XbG6aIUlog

Bob Roddis said...

I would think that the appropriate response by a Keynesian to the charge that they do not understand Austrian concepts is to demonstrate an understanding of Austrian concepts. Duh.

Is that so wrong?

We wait for decades and decades......

Bob Roddis said...

I was unaware until today the W.H. Hutt’s takedown of Keynes in his book “The Theory of Idle Resources” was available online. Hunter Lewis, author of the recent book “Where Keynes Went Wrong”, sums up basic Austrian concepts and the idiocy of Keynesian concepts on page X of the new introduction:

The underlying problem here is that, contra Keynes, we do not want employment for its own sake. It is a means, not an end. What we want is a productive economy, and government stimulus gives us, as Henry Hazlitt has said, “unbalanced production, misdirected production, production of the wrong things. . ., [all of which lead inexorably] to unemployment
and mal-employment.”

In speaking of optimal versus sub-optimal employment, Hutt, the master logician, was drawing a logical distinction between quality and quantity. This is an inconvenient distinction for Keynesian-derived macro-economists; there is no way to fit quality into their equations. But in economics, as in life as a whole, quality is even more important than
quantity.

This is especially true in investment. Keynes said that any investment is better than no investment. Indeed, in the absence of his indefinable state of full employment, he thought that any spending, whether consumption or investment, was better than no spending. This is why government must keep printing money: the resulting reduction in interest rates should encourage more and more investment and spending.

There are many reasons why this is nonsense, but it suffices to recall that interest rates are a price. Like currencies, they are “big prices,” which affect the entire economy. The chief purpose of prices in a market system is to send signals about what consumers want and about the relative availability or scarcity of resources. When government intervenes to reduce interest rates, it therefore disables the price signaling system, which in turn leads investors to make decisions which, in the long run, turn out to be bad decisions, like the overdoing of technology in the 1990s bubble or the overdoing of housing in the 2000s, bad decisions which eventually lead, not to employment, but to massive unemployment.


http://mises.org/books/theory_of_idle_resources_hutt.pdf

So when we tell you cement-headed Keynesians (excuse the redundancy) that you do not understand Austrian concepts, you now have a new opportunity to prove us wrong. But you won’t even try.

Anonymous said...

Again, utterly naive and totally distant from the way actual economies work.

" I don’t understand why you can’t make the difference between free voluntary planning and state coerced planning and how the former leads to better economic outcomes than the latter."

Because I DO! You, on the other hand, don't make the distinction between a democratic mixed economy and a Totalitarian Centrally Planned State.

"In the free market, transactions are voluntary, meaning that businesses can only make a profit if they accurately forecast consumer preferences."

Again, you are assuming that everything is a tradable market good subject to perfect competition. Sometimes business are price-setters rather than price-takers (monopolies/oligopolies). Sometimes the pricing mechanism does not reflect the true cost of a good because of myopic consumers and informational gaps. And god-forbid that sometimes the profit motive gets so out of hand that producers manipulate consumers.

Anonymous said...

"I don’t understand why you don’t get that the “crowd” has market based incentives, is voluntary, and uses the price system to guide resources to their most desirable ends, and why this is optimal over government planning/force."

I do get it, but there are many assumptions there! First, just because government is not subject to the same market incentives, does not mean that there are no incentives (accountability, elections, mission) that could lead to a sub-perfect outcome. Second, both are known to fail and produce sub-perfect outcomes. Third, you equate all government coercion as if it were equally repressive. Again, a democratic taxing state is not the same as a Totalitarian Repressive Centrally-Planned State.

"I am suggesting that if there is a market “failure” that individual market participants can resolve the problem voluntarily and that it does not require the state to use force."

Good to see you recognize that the magical market does not always work, and relies on enormous assumptions that get increasingly difficult to satisfy the more complex the economy gets. Of course, the market has already failed in your example and the coordination and start-up costs of any solution to market failure are most often too much for the private sector to bear. The Chuyahoga river was on fire multiple times for crying out loud!

"markets are efficient when they are left alone by government and central planners and it is government that is rarely efficient. Post office and Amtrak are good examples."

The usual two examples thrown out by armchair libertarians. Again, assumptions. First, you assume that private enterprise could have (and should have)undertaken these tasks with the same level of service and price. Second, you are measuring the efficacy of public services according to standards of private business - a subsidized model is not going to be economically efficient, but might nonetheless be necessary. Third, just because something is less efficient today, does not mean it never was. I mean, its not like a private business has every lingered on without making a profit (Kodak?)

The USPS has been around since 1775, delivering mail at affordable prices to millions of Americans. It was never clear that a private enterprise had the capacity to undertake that then, or that it should. Amtrak is similarly a mixed bag - providing the most energy efficient mode of transportation to millions of Americans at a time when private rail was going out of business.

You fail to mention other examples of government planning - the FDIC, the TVA, the Interstate Highway System, etc... And you would be hard pressed to find much that is centrally owned and operated in the US. The government's involvement is largely through taxation and subsidies (normal government activity in a mixed economy) rather than direct ownership and quota setting (which is central planning). But again, these distinctions are lost on the ideologically polarized.

And BTW - I don't own a home or have any credit card debt. When the recession hit I lost half my equity and stopped spending. Am I a mal-invested resource?

JG said...

Zack,

You're not answering the question, you're just reciting more scripture from the Mises website.

The question is this: what do you do when everyone saves at the same time? What is the policy response when panic causes everyone to save at the same time and not lend out or spend money? The Keynesians have an answer to this question, do you?

I've raised this question now three times on this blog and nobody has offered up a response, except for David whose answer was essentially, don't get into a credit crisis/panic in the first place.

Roddis,

Since you're the resident expert on Austrian theory why don't you educate us and tell us how Lord Mises would answer my question?

zackA89 said...

I’m glad to see you realize that magical benevolent wise overlords can’t solve our problems and not only lack the necessary information to “fix, plan or stimulate” and economy, but have no means of acquiring that information because they are not subject to market forces. And no, there is no substitute for the price system.

If it is necessary, it would be funded voluntarily. If there is legitimate consumer demand, the requisite labor and capital would be allocated in order to fund it. Many public services used to be privately financed in an efficient and productive manner. It can and has happened.

These government agencies run in the red and represent a net drag on society. They always go to congress to get additional funding, and unlike private businesses, their funding come from the tax payers so they can never go bankrupt. In the private sector if you run you operation in the red, you go out of business (that is if you are not bailed out by gov’t) and the resources tied up in your firm are reallocated toward more profitable ends.

Sure I believe you. But you probably lost your equity because the value of your home was going up because of the Fed induced bubble. This made you feel wealthier than you probably were. When the bust ensued, prices began to fall back down to reality and the inflated value of your home came down.

It fell down because it was artificially high to begin with because of the inflationary fed induced housing bubble. You yourself are not a malinvested resource, but are suffering because there are so many malinvestments on the market. The houses that are empty, or built larger than the homeowner could afford represent malinvestments.

Bob, i dont know if these Keynesians will ever learn these concepts much less apply them to the discussion.

zackA89 said...

Assuming benevolent government planners who have absolutely no incentive to economize on resources or satisfy consumer demand in an efficient manner can plan, control, and stimulate an economy into prosperity is completely out of touch with reality and has been eviscerated and blown up by Austrians for decades upon decades.

Just because it is a “Democratic mixed economy” does not mean it is somehow absolved from being to the knowledge problem. Mixed economies that use monetary and fiscal stimulus still distort the price system and impair economic calculation which leads to malinvested resources. Mixed or not, the problems that intervention and stimulus create still exist.

Monopolies exist because government protects big business and limits entry by imposing regulations and taxes on firms that make it difficult to compete with bigger firms. That is government intervention. It does damage to the economy. As long as government influence is kept out of the picture, one can only obtain a profit voluntarily. You can’t use a gun to force someone to purchase your product. But government does use guns force people to finance things they otherwise likely wouldn’t have funded absent the tax. God forbid government planners get out of hand.

The vital signals consumers convey through the price system are what allow private sector market agents to guide resources to their most profitable ends. These vital signals that are necessary to satisfy consumer demand in an efficient and timely manner cannot be used by government.

No amount of accountability, election, or mission, can be a substitute for the information that the price system conveys to profit seeking entrepreneurs. Government coercion forces individuals to do things they otherwise wouldn’t do, as if the government knows right over the individual. You can deny that that’s repressive if you want.

zackA89 said...

JG I answered it in detail on the june 28th post. Go read.
BTW I have a bachelor degree and have studied Keynesian economics.

The more of it I learned, the more disgusted I became with it and the more it pushed me toward the Austrian school. I think for myself and am not “recruiting scripture from the Mises institute.” I have learned and am continuing to learn economics grounded in both schools of thought.

Seems to me like Anon and JG and our other resident statists are just regurgitating the same old Keynesian nonsense we have debunked and refuted time and time again. They just keep coming don’t they.

burkll13 said...

"First, you assume that private enterprise could have (and should have)undertaken these tasks with the same level of service and price. Second, you are measuring the efficacy of public services according to standards of private business - a subsidized model is not going to be economically efficient, but might nonetheless be necessary"

http://en.wikipedia.org/wiki/American_Letter_Mail_Company

First, im not so sure he was making that assumption as much as you made that assumption and attributed it to him. i see you doing that a lot. Second, even if he was, its not an outrageous assumption considering there was a great example of that very situation happening before the ALMC was muscled out of the market. Third, what is the point of having a USPS anymore, other than adding shedding credit card offers to my daily chore list? its an outdated model and would be long gone if it had been subject to real market signals.

The government's involvement is largely through taxation and subsidies (normal government activity in a mixed economy) rather than direct ownership and quota setting (which is central planning)

the pretense of taxation and subsidization is direct ownership.

When the recession hit I lost half my equity and stopped spending. Am I a mal-invested resource?

yes, you malinvested, but you may have made "good" decisions with bad information. thats the result of the boom distorting proper market signals.

David B. said...

When the recession hit I lost half my equity and stopped spending. Am I a mal-invested resource?

ROFL, this one is a tremendously silly little troll. Yes, YOU (and just you, no one else) is a malinvested resource. In fact, Mises dedicates an entire passage to you personally in Human Action. You weren't even born yet. That's how good Mises was.

Anonymous said...

"efficient manner can plan, control, and stimulate an economy into prosperity "

There in a nutshell is the problem in your analysis. Keynesians seek neither to plan and control, nor do they seek to do so to prosperity.

They (and neo-classicists)seek to address the inefficiencies of the market economy in ways that private citizens cannot do on their own.

The knowledge problem does not have to imply inaction, it simply means imperfect action. I prefer to act on the best information possible rather than assume that millions of people will coordinate to the most efficient outcome all the time. Again, given the choice most people would buy the $1 hamburger with no thought of the consequence.

You also still reject that there can ever be any other incentive but the profit incentive, or that the profit incentive cannot lead to rational/irrational exuberance given the impossibility of ever having perfect information and fully cognitive human actors.

Why is it that Austrians never seem to get that the modern economics is not about Centrally Planning Everything, but about limited government action? The choice is not price-based "free" markets versus "Bolshevism." And yes, democracy matters, especially when you start talking about coercion.

BTW. I clearly stated that I did not own a home. And you made my point - Malinvestments in housing have severe repercussions on the entire economy that do not simply need to wait for housing to clear to recover. Its called a viscous circle.

Bala said...

JG,

"You're not answering the question, you're just reciting more scripture from the Mises website."

No. He has answered it perfectly well. You are the one failing to read and/or understand.

"The question is this: what do you do when everyone saves at the same time?"

Do nothing. Actually, it is not even "Do nothing". It is "Stop meddling". Get the grubby whatever-Keynesian hands off the market. Let people who wish to save save. Leave them alone. Let interest rates rise. Let credit shrink. Let businesses dependent on artificially low interest rates fail. Don't backstop them with robbed or stolen money.

"What is the policy response when panic causes everyone to save at the same time and not lend out or spend money?"

The proper policy response is to withdraw the prior intervention that caused the panic in the first place.

"The Keynesians have an answer to this question"

And we know that that answer is the most economically unsound answer ever possible. It is an answer that has no theoretical backing whatsoever. It is just an equivalent of saying "Throw 2 virgins in the volcano and we will get rain". That makes it easy for the whatever-Keynesian. If it rains, he can say "See? I was right. My prescription worked". If it doesn't rain, he could just as easily say "Hey!! I am sure they weren't virgins in the first place. Go get me two more".

"do you?"

Oh, we do! We do!! Stop government meddling in the economy. End the fed. End the government monopoly on the production of money. Stop preventing a free market in money from emerging. Roll back the myriad other government interventions in the economy that CAUSE the panics and crises in the first place.

zackA89 said...

Good contributions from David B and Bala. A lot of my work has already been done. I think most of us Austrians are on the same page here.

Keynesians do in fact seek to manipulate the economy out of recession through fiscal and monetary stimulus as if they had the necessary information to do such a thing. They don’t and they can’t. The government cannot address these alleged “inefficiencies,” the market can work them out voluntarily.

Market participants will use the price system to guide resources to their most desirable ends. There is no need to use force, as if it was even possible to use force to solve these alleged “inefficiencies.”

The force will make it worse and often times the violent force on the behalf of government is the cause of the problem to begin with. We can solve problems voluntarily in the market place. It can and has happened before.

The millions of people who interact with each other voluntarily in the market place by exchanging goods and services for mutual benefit are better suited to make the best use out of the information as opposed to government who does not have market based incentives and does not care in any way shape or form about whether or not what their doing makes economic sense. The incentives the make the best use of the information, and to ultimately deal with the notion of imperfect information lay within the private sector and not with government.

The idea is that this imperfect information notion that you speak of can best be addressed by the market. The government makes this imperfect information scenario worse. The individual market participants can sort through and make the best of this information using the pricing process and can engage in economic calculation in ways that government cannot. Government intervention disrupts this process. It is not that complicated.

The choice is over whether you want planning done in the private sector or the government sector. I choose the sector (the private sector) that has the proper incentives to plan in a way that is in conjunction with consumer preferences as opposed to the sector (government) who uses violent force to fund activities that likely would not have been funded in a free market.

Market forces vs. non market forces. More times than not, market forces will produce a more efficient and desirable outcome than government who is flying blind when it comes to satisfying consumer demand.

You can blame the fed induced housing bubble for that. That’s Keynesianism at its finest. That’s why I detest it so much. It really is the source of our problems.

Lord Keynes said...

"Regards the bust, once you have a boom you can't stop the inevitable bust. You can't legislate away or stimulate away reality."

There is NO consistent "Austrian" position on what to do in the bust.

Austrians like Hayek and I suspect Lachmann urged monetary intervention to prevent "secondary deflation".
Hayek:

“There is no doubt, and in this I agree with Milton Friedman, that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation! So, once again, a badly programmed monetary policy prolonged the depression”

Pizano, D. 2009. Conversations with Great Economists, Jorge Pinto Books Inc., New York. p. 13

http://socialdemocracy21stcentury.blogspot.com/2011/01/hayek-on-secondary-deflation.html

http://socialdemocracy21stcentury.blogspot.com/2011/07/ludwig-lachmann-on-government.html

Greg Ransom also argues that Hayek supported some fiscal policy actions.

Bala said...

LK,

Good attempts at arguing by appeal to authority. Incidentally, in the second comment on this thread, I tore apart your idiotic claim that there is no Broken Window Fallacy. Care to address that? Or are you going to be steadfast in being evasive?

Lord Keynes said...

"Good attempts at arguing by appeal to authority"

There is no appeal to authority.

My statement is: "There is NO consistent "Austrian" position on what to do in the bust."

And what follows is the evidence that backs that up, idiot.

Lord Keynes said...

"Keynesians have the most atrocious record of prediction. .... etc"

Austrians have the most atrocious record of prediction, whether it was the brainless idiots predicting hyperinlfation in 2009 or Mises the hapless cultist in 1931:

“In September 1931, Ursula Hicks (wife of John Hicks) was attending Mises’ seminar in Vienna when England suddenly announced it was going off the gold exchange standard. Mises predicted the British pound would be worthless within a week, which never happened. Thereafter, Mises always expressed deep skepticism about the ability of economists to forecast.”

Skousen, M. 2009. The Making of Modern Economics: The Lives and Ideas of the Great Thinkers (2nd edn.), M.E. Sharpe, Armonk, N.Y. p. 286, n. 2.

Bob Roddis said...

The essence of the Misesian outlook is that one never really knows exactly why anyone does anything or what really motivates anyone. The only thing we really know is the price that was paid for something and/or the terms of past exchanges. The essence of the ABCT was and is that people are unaware of what is really happening under FRB or a funny money regime, and those essential prices become misleading.

Regarding his 1931 prediction, Mises failed to understand and remember that most people haven't a clue about the nature of nor the history of money and there were about to be further misled in a variation of the ABCT manner with Britain going off the gold standard.

Basically, the centuries of using notes as receipts for specie had the effect of making people forget that it was the specie, not the notes, that were the money. We're still there.

I find LK's attacks on Mises and Hayek pathetic. Here are these two little guys in the 1930s standing athwart these hordes of evil Keynesians, New Dealers, fire-bombers, Nazis, Stalinists and every other lying murderous statist gang all by themselves with no internet and no help and Mises being a Jew chased by Nazis and in the tens of thousands of pages they wrote, they make a little mistake here and there.

LK will surely find it.

Bala said...

LK,

"There is no appeal to authority."

No. There is. And you are either an idiot because you don't even realise that you were arguing by appeal to authority or a troll who just wants to repeat his nonsense ad nauseum just to cause others to nauseate.

"And what follows is the evidence that backs that up, idiot."

No, you retard. That sort of claim is not to be backed up with 'evidence' but with ARGUMENTS that lay out the Austrian position starting from Austrian premises, thus demonstrating that there is no consistent 'Austrian position' on what to do about/in the bust.

What you have done is to pull (out of your behind) statements by a couple of Austrian economists (very reputed and respected though they may be in Austrian circles) that express their assessment of what should or could be done in the bust. By no stretch of imagination (except that of retarded whatever-Keynesian brains) can this be called an 'Austrian position'.

How retarded you are is obvious in the way you consistently fail to understand the difference between Austrian positions and the opinions held by PARTICULAR Austrians. Since you have only parroted the opinions of a couple of people that are respected by Austrians for their contributions to the development of the Austrian school of thought in economics, you are, as I accused you, guilty of arguing by appeal to authority.

Anonymous said...

Frostburg State University. Is that in the Ivy League? Maybe they added a 9th school. It says here you are an Assistant Professor. Does that mean you have tenure? Do you think Krugman's endowed chair and full professorship pays more than your job? Do you think his blog and his regular op-eds in the New York Times reach a few more people thank your blog? Thanks for playing though, Bill.

Bob Roddis said...

Another great book that I just learned is online is “The Failure of the New Economics” by Henry Hazlitt. It’s an almost line by line refutation and mocking of Keynes wacky and dishonest scribblings in “The General Theory”. On pages 379-380, Hazlitt writes:

How, then, would Keynes force down interest rates and even the return to the entrepreneur and still get his saving, investment, and production? What he really has in mind, apparently, is seizing the money through taxation and creating forced "investment" through the government. Does my assumption go too far? Then listen to this:

“Though this state of affairs [just about enough return to cover cost of capital replacement] would be quite compatible with some measure of individualism, yet it would mean the [380] euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power o£ the capitalist to exploit the scarcity-value of capital” (pp. 375-576).

For the light it throws on the heart of Keynes's message and on the popularity of his ideas among leftists, this sentence is one of the most revealing in the book. Notice how patronizingly individualism (i.e., individual liberty) is treated. Keynes would graciously allow "some measure of" it. But he insists on "the euthanasia of the rentier." Euthanasia means painless death. That is, the death of the rentier would be painless to Keynes. There is an old proverb that if you want to hang a dog you must first call him mad. If you want to knock a man down you should first give him a
bad name. So Keynes uses the French rentier as a smear word. The rentier is the terrible fellow who saves a little money and puts it in a savings bank. Or he buys a bond of United States Steel, and uses his cumulative oppressive power as a capitalist to exploit the U. S. Steel Corporation. All this is demagogy and claptrap. It differs from the Marxist brand only in technical detail.


http://mises.org/resources/3655/Failure-of-the-New-Economics

This puts into a nice and proper context Keynes’ own introduction to the Nazi German edition of “The General Theory”:

The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.

Lord Keynes said...

"What you have done is to pull (out of your behind) statements by a couple of Austrian economists (very reputed and respected though they may be in Austrian circles) that express their assessment of what should or could be done in the bust. By no stretch of imagination (except that of retarded whatever-Keynesian brains) can this be called an 'Austrian position'."

LOL... "Very reputed and respected" Austrians who take a clear view on an economic issue can "by no stretch of imagination ... be called an 'Austrian position".

You win the prize for most stupid statement of the year.

Bob Roddis said...

Frostburg State University. Is that in the Ivy League?

Tom Woods went to Columbia and Harvard. Bob Murphy got his PhD from NYU. I suppose that makes them irrefutable, right?

You miserable loathsome slug.

Bala said...

"You win the prize for most stupid statement of the year."

You retard. Those are the positions of PARTICULAR Austrians. It is clear how badly cooked your whatever-Keynesian brains are (if you still have anything in the shape of a brain left inside your thick skull). That you provide no argument to justify your idiotic statement is testimony to the extent of your mental retardation.

Bob Roddis said...

If Keynesians would stop causing booms and busts, we wouldn't have to worry about how to cure them. Curing a bust can be problematic in a situation where a bust could conceivably make the populace go nuts and support Nazis (which is always a possibility under a Keynesian regime).

The Keynesians are like terror bombers who blow up a bomb containing small sharp metal pieces at a nursery school and then laugh at the doctors as they debate the best way to extract the shrapnel from the bodies of the toddlers who managed to survive.

Bala said...

"LOL... "Very reputed and respected" Austrians who take a clear view on an economic issue can "by no stretch of imagination ... be called an 'Austrian position"."

Once again, you retard. These are the positions of particular Austrians and not Austrian positions. It is only for you retarded and brain-dead whatever-Keynesians that whatever your lord and master said is the gospel.

Lord Keynes said...

'These are the positions of particular Austrians and not Austrian positions"

Bravo!! In other words, after all your ramblings, you just confirm my original proposition:

There is NO consistent "Austrian" position on what to do in the bust.

Bala said...

"Bravo!! In other words, after all your ramblings, you just confirm my original proposition:"

Nonsense, you retard of the lowest order!! I just said that what you said is not an Austrian position. That a couple of Austrians had positions that differ from those of each other and from those of other Austrians does not mean that there is no consistent Austrian position. To do that, you have to first lay out the Austrian position and NOT the positions of particular Austrians.

So, the only one rambling is you, the retarded whatever-Keynesian imbecile.

Bala said...

LK,

And retard that you are, it is not surprising that you miss the real Austrian position on what to do ABOUT the bust - Don't CAUSE it.

But then, how is a retarded whatever-Keynesian ever to understand something this simple and straightforward.

American Patriot said...

The only reason resources are idle at times is because of 'inefficiencies' created by government policies.

Like water finding its course, resources fins their most efficient use if there is no interference from the government in the way of taxes and regulations.

Take capital; why are businesses that are sitting on $2 trillion not investing? Because they have no confidence in the government and cannot see the immediate future clearly. We know this for a fact because they say so in surveys done by the NFIB and the Chamber of Commerce. So, no matter what the government does, they only compound the situation.

Like water seeking its course, government has to get out of business' way. Until that happens, nothing will change. No business investment = high unemployment = low consumer confidence = no business investment

It is a cycle. That is why supply side actions that include permanent fiscal incentives as well as regulatory relief are sorely needed.

Lord Keynes said...

"Because they have no confidence in the government and cannot see the immediate future clearly. "

LOL.. So Reagan's massive deficits, his cuts in interest rates in 1982, and increased spending with the tax cuts caused business to have no confidence in his administration?

Anonymous said...

Usual bala hype - always shifting the terms of the debate ("that's not what I meant!").

First it was from "reaching equilibrium" to "tending toward equilibrium" and now the opinions of prominent Austrian economists cannot be considered the enigmatic "Austrian Position."

But heck, Krugman is just a run of the mill Keyensian right?


@ Bob Roddis - I think the other anon was simply showing what real "appeal to authority" looks like and not some made-up Bala bats@(!

Anonymous said...

"These are the positions of particular Austrians and not Austrian positions."

A three-year old could understand the problem with this statement.

Anonymous said...

"The only reason resources are idle at times is because of 'inefficiencies' created by government policies."

So in the absence of government policy millions of individual consumers and producers would always converge on an equilibrium and have perfect information, no transactional friction, or myopic behavior? Oh, and we would have the same modern, technological, financial, and global economy and not still be Agrarian?

Pleasssse.

"Take capital; why are businesses that are sitting on $2 trillion not investing? Because they have no confidence in the government and cannot see the immediate future clearly."

Righhht. The confidence fairy. Wonder why the interest rate on 10-year treasuries are still around 3%? Could it also be that millions of Americans are out of work, equities have still not been rebuilt and no one is spending?

If only resources (and information) were like water and consumers were all perfectly rational and cognitive. In the real world however...

American Patriot said...

Reagan's massive deficits (averaging $167 billion per year during his 8 years compared to well over a trillion now)? You mean the Democrat controlled congress'?

Reagan era government revenues doubled during his 8 years. Net, inflation adjusted increase in revenues was over 50%. If the congress spent like a drunk sailor, what does that have to do with anything?

What is your point about business not having confidence in his administration? There was never a crisis of confidence in government those days. If you are going to make allegations, be more clear.

Anonymous said...

BS AP. That is a cop-out (It was a democrat controlled congress), and still makes LK's point that it did not result in any crisis of confidence in his administration.

Deficit spending is the point. You are making an argument about confidence today, but fail to see how prior examples matter. I would not expect any more from you though with your bumper sticker economics.

American Patriot said...

You got it with your second paragraph, Anonymous. I know that free market concept is a stranger to you collectivists, but that is how things work because there are natural rewards and punishments built in to the system and through the trial and error process, the markets perfect themselves.

Now, don't twist my words and give me an extreme case. There is always a proper role for sensible regulations. I have no objection to saying that you cannot sell dog meat as ground beef. If you want to sell dog meat, you have to market it as dog meat.

Regarding confidence, do you or Krugman know better than those who are refusing to invest? I know you guys are the elitists but that goes beyond the pale.
You have no idea how many small sized businesses do not want to expand to escape Obamacare mandates, do you?

Regarding consumer spending, the following graph should tell you that the current levels is no reason to be not investing (look at it historically). If it was, we would have been in a continuous depression for most of the past two decades.
http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard/ConsumerSpending-PCE.asp

zackA89 said...

I wouldn’t credit the state with playing any role in developing the type of economy you just described anon. I would credit the free market which has developed this economy to be what it is in spite of government intervention and not because of it. T

here are idle resrouces during recessions and during boom years and the years in between. Just because they may or may not exist from time to time, does not mean government should shift funding away from profitable lines of production to “stimulate” these idle resources back into employment for the sake of employment. That is economically harmful.

Yields are low because of all the securities the Fed has bought and continues to buy. The U.S is also the world reserve currency and benefits from having the flight to safety trade into our bond market when there is global unrest. I don’t think we will enjoy that luxury in perpetuity.

Consumers are rational and cognitive? Maybe, and maybe not. Who cares though, just leave them alone and let them make their own choices in the marketplace with respect to private property rights.

Government cant alleviate this alleged problem with humans. Are the humans in government also rational and cognitive, or “myopic?” or are they super humans with god like powers that can fix this “information problem” or can make consumer less “myopic” or “cognitive”? Normal market actors are dumb, but the government officials in charge of alleviating the short comings of this “problem” are smart enough to “fix” it with some type of intervention.

Statists really amuse me.

Oh and bob that comment from Hutt's the theory of idle resources is awsome, with respect to quality and quantity. I would recomend JG, Anon, and LK to go check out that quote a few comments back.

American Patriot said...

"(It was a democrat controlled congress), and still makes LK's point that it did not result in any crisis of confidence in his administration."

Because businesses knew that no run away regulations and executive orders with the power of laws would be undermining them. All those come from the exec branch.
One of the 4 pillars of his economic policy was reducing government regulations, and though it could have been better, deregulation did happen in certain areas (banking, transportation, and energy among others)

Deficits in an era when total debt was not as crushing and pending problems of entitlements not as immediate, impacted the economy far less as far as confidence goes.

American Patriot said...

..And, btw, as zack says if the Fed was not creating money from thin air to buy treasuries, there is no telling what the bond yields would be.

zackA89 said...

Right AP. Look at the Fed's balance sheet. Record size I believe. That may have something to do with the low yields. Just maybe.

Lord Keynes said...

"Regarding consumer spending, the following graph should tell you that the current levels is no reason to be not investing (look at it historically)"

LOL.. your graph shows the exact oppositive of what you say: flat and subdued monthly consumer spending growth, lower than in earlier boom periods.

http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard/ConsumerSpending-PCE.asp

American Patriot said...

LK

PCE has been in negative territory only twice in the past 2 plus years. Look at all the negatives before.
Consumers lack confidence but are meverthless spending, otherwise not only the graph would look different but we'd be in a depression.

Look at the 1990s carefully and take note of the negatives months.

American Patriot said...

Here Anonymous, just for you, fresh off the printer:

Today, we are rolling out the results of our latest quarterly Small Business Outlook Survey — and the results aren’t much better.

In fact, a commanding 64% of respondents said they have no plans to hire in the next year, underscoring the stalled unemployment numbers and bleak economic forecast. 84% think our country is on the wrong track.

JG said...

Bala,

Thank you. You are correct in that the Austrian answer to credit crises is to do nothing. And that's never the acceptable response to a crisis. If your model can't handle the inevitable crises that arise then your model isn't worth the paper that it's written on.

Zack,

You're a child. I piss on your undergrad degree, bragging about a bachelor's degree is like bragging that you graduated middle school. And it certainly doesn't excuse your inability to answer a direct question or respond to challenges to your ideology. You haven't answered my question, you've only pontificated about the supposed virtues of your Austrian religion. Come back when you develop some reasoning skills instead of regurgitating nonsense that you've read on the Mises blog.

zackA89 said...

I was not bragging at all. Just suggesting that I have studied both schools and am entitled to give my opinion on them whether you agree with it or not. I think for myself thank you.

I have answered your question. Mises and other Austrians answered it decades and decades ago. It has been answered time and time again you just choose not to listen for whatever reason.

Statism is the religion and ideology. Come back when you can think for yourself and actually read for yourself what your opposition thinks instead of regurgitating the same old statist Keynesian nonsense that has been completley eviscerated and outright debunked for decades.

You act as if no one has answered your question, as if you have some brilliant new objection that is unanswered. People have answered it already. Its old news.

If you had any intellectual courage you would go read and understand basic Austrian concepts which would allow you to answer your own question instead of name call which only shows how ignorant you are about a school of thought which you are attempting to critique.

Anonymous said...

Those darn statists, collectivists, statists, Keynesian, communists, Bolsheviks, statists. You always misrepresent or don't understand what us Austrians really mean (even though we can never agree on what we really mean). We have basic concepts that the collectivsits/facsists don't really get (not because they disagree with our fundamental premises).

Zack, you have dabbled in, not studied economics. Your rhetoric and language is just evidence to me that you see the world in a polarized an ideological sense, rather than the way the world really is. Keep the utopia going, I'm going to stay here in the real world of states, governments, taxes, subsidies, regulations, democracies, inefficiencies, imperfection, and political choice.

Anonymous said...

AP, do you actually read what you post! LMFAO!

What was the #1 concern? Economic Uncertainty! What was the last concern? High Taxes!

Strangely, while most small business think the economy is on the wrong track (which might also be due in their opinion to Republican intransigence) a majority of small businesses think their own business is doing fine!

Most people say economic uncertainty and lack of sales are impeding business, not uncertainty about what Washington will do next. Most people say that the debt and deficit are a concern in the long-term, but not the short-term.

Read through it (http://www.uschambersmallbusinessnation.com/docs/US-Chamber-of-Commerce-Summit-Presentation-from-Harris-Interactive.pdf). Even a report from the Chamber of Commerce - which has a serious framing issue makes my point.

Get off your bumper sticker economics.

Tel said...

Quote from JG:

Thank you. You are correct in that the Austrian answer to credit crises is to do nothing. And that's never the acceptable response to a crisis. If your model can't handle the inevitable crises that arise then your model isn't worth the paper that it's written on.


Remember the rule: never let a good crisis go to waste!

There's no better time than a crisis to permanently take away the liberties of the people, and setup the machinery of authoritarianism.

American Patriot said...

I should be the one LMFAO

You progs are like a fish out of water when interpreting anything to do with entrepreneurs. Just pathetic.

Econ on the wrong track is due to one reason and one reason only: the Democrat stranglehold on the economy.
Last time I looked, NFIB and the Chamber are much more ardent supporters of the Reps than Dems.
Of course, you are too pathetic to realize that.

Debt, deficit, tax uncertainty, and regulations are all stated time after time by members as their concern.

Small businesses (which those organizations represent overwhelmingly, are not progressive policy supporters. Under your statist policies, they would disappear and only the crony capitalist giants would thrive.

zackA89 said...

Anon I disagree. I have studied economics and am continuing to study economics in different schools of thought. Learning is a lifelong process. I am critical of anyone or any party that I believe engages in harmful economic policy that could be Dems, Repubs, or whoever else.

It’s the economics and policies of the statists that are at the root of our problems. The intervention and stimulus is the problem not the cure. It’s the statists who seek to create a utopia with government intervention. Its folks like myself who realize government can’t make things more perfect or less imperfect through intervention or stimulus. The information necessary do to so can’t be possessed by government bureaucrats.

I would like reduce the role government plays in society and the economy. I think we would be better off because of it. In the real world, we can minimize government and its interference in our lives.

Anonymous said...

AP - Can you read?!

Even the Chamber of Commerce - which is known as a right-leaning organizations, and whose small business survey is really poorly written - still does not support your point.

You just merely asserted that economic uncertainty was due to democrats - yet that is no where in that report. In fact, if you think of democrats as those who are in favor of more taxes and regulations - those two items appear on the bottom of most small business's list, while lack of sales is right up there!

Of course debt and deficit is mentioned, and nearly every progressive or democrat will tell you that these are serious issues no one doubts that. Interestingly, the survey says that most people fear the long-term impact, rather than the short-term impact of deficit spending.

So there - you just made yourself look like an idiot again. But god forbid you challenge your narrative.

Anonymous said...

"The intervention and stimulus is the problem not the cure. It’s the statists who seek to create a utopia with government intervention. Its folks like myself who realize government can’t make things more perfect or less imperfect through intervention or stimulus. The information necessary do to so can’t be possessed by government bureaucrats."

There you go again Zack like a broken record. If you are indeed still learning (instead of just a member of an economic "club" that makes you feel superior to others), you would realize that "Perfection" is never the goal of government intervention.

The lack of perfect information is not the same as the inability to make informed judgments to direct economic policy. The $1 hamburger Zack...the $1 hamburger.

Stop using words like "statist" since you clearly do not understand what they mean. Start reading some history in addition to Mises.

zackA89 said...

I did not join the econ club at my college. Not sure what that even matters.

I use the term statist to describe any individual (democrat or republican) who seeks to initiate force into what otherwise would be a peaceful voluntary exchange under the guise that the force will somehow do some good. It won’t and it can’t. Keynesians, inflationist, and interventionalists are in my eyes, statists.

People who think the state can somehow solve, or even mitigate alleged “problems” that in all likelihood they created in the first place are statists.

People can pay whatever they want for hamburgers if they think it’s a good deal. I don’t think that story illustrates anything relevant whatsoever. Nor is that somehow an indicment against the price system or the market in general, and by NO means is a justifcation for state intervention.

Never said perfection was the goal. But government intervention certainly does not make things “better” more “perfect” closer to being “perfect” not does intervention mitigate the alleged problem of “imperfect information” in fact, intervention and stimulus disrupt the market’s ability to make the best use of the available information. Voluntary market actors have the proper incentives to make the best use of the available information in ways that government simply cannot.

Government can’t know what’s better or good because the information necessary to determine that can’t be held by non market actors who can obtain their revenue through coercion and are not subject to market forces. I don’t know why you don’t get that.

American Patriot said...

Zack is exactly right in calling your kind statiss....dead on!

Anyone who advocates government confiscation of private property for any other reason than the enumerated powers granted to federal government as intended by the founding fathers, is a statist.

Make your case if you disagree.

Bala said...

JG,

Looks like you read very selectively.

"You are correct in that the Austrian answer to credit crises is to do nothing."

If you read 2 more sentences after I said 'Do nothing', you would have noticed that I spoke of stopping the very meddling that is CAUSING the boom-bust cycle. So, the Austrian prescription as I put it across is not exactly 'Do nothing' but 'Stop the meddling'.

"And that's never the acceptable response to a crisis."

Very important point. "Acceptable" to whom?

"If your model can't handle the inevitable crises that arise"

Aaahhhhhh!! There you go horribly wrong in good whatever-Keynesian style. Firstly, crises are not inevitable. They are only inevitable once the choice has been made to intervene in the market. They are not inevitable because ceasing intervention will abolish the business cycle as we know it.

"then your model isn't worth the paper that it's written on."

Actually, it is worth the gold bricks on which you etch it. It tells us the way out of the plague that is the business cycle. It tells us the way to abolish the painful bust, thus eliminating immense human suffering.

Bala said...

"A three-year old could understand the problem with this statement."

O Genius! Please lay it out for this idiot. I am waiting for deliverance from my prison of ignorance and incompetence!!!

"Usual bala hype - always shifting the terms of the debate ("that's not what I meant!")."

Yeah!! I should instead let retards like you and LK keep creating straw men and spin false arguments. Pointing out the fundamental errors in their claims is shifting the terms of the debate. I agree.

What a typical whatever-Keynesian retard!!!

Bala said...

JG,

I said

"Very important point. "Acceptable" to whom?"

but forgot to add another important question - By what yardstick are we judging an option for action as "acceptable" or otherwise?

Bala said...

"Get off your bumper sticker economics."

And you please try to start taking economics. I don't know if you whatever-Keynesians can ever do it, but I guess there is no harm in asking.

Anonymous said...

Sorry bala, I had to pick myself up from the floor from laughing so hard.

You really can't see the utter stupidity in saying that the position of prominent Austrians is in now way THE Austrian position?

Back to your parent's house bala.

Bala said...

Genius,

"You really can't see the utter stupidity in saying that the position of prominent Austrians is in now way THE Austrian position?"

It might surprise you to know that Austrian Economics is not a religion led by messiahs and followed by sheep that take the messaiah's words as the gospel truth.

That you engage in argument by intimidation makes it clear what a low-down jerk you are.

"Back to your parent's house bala."

And when are you sending your wife/girlfriend over to check out on..... you know what.

Retard!!!

p.s. How about laying out the 'Austrian position' to show me what a fool I am? Or is it that all you know is to create straw-men (following in the footsteps of your lord and master) and make a fool of yourself?

Anonymous said...

"How about laying out the 'Austrian position' to show me what a fool I am?"

Ha ha ha! The internal contradictions are just too much. Your not a "religion," but then persistently claim that there is some "Austrian Position." Is there an Austrian Position? Or is it just a series of bumper stickers "stop the meddling" "The way out of busts is to avoid booms!" "Away with the Fed!"

I especially liked your shift from an economics based on equilibriums (which should always exist in your Austrian fantasy land) to "tending" toward equilibrium - what the hell does that even mean!? And do you even realize the implications of that statement?

I engage in the same level of intimidation that an idiotic moron with low self-esteem like yourself (who probably lives in his parent's basement) dishes out on a daily basis here and on LK's blog. A little thin-skinned aren't we?

Bala said...

"Is there an Austrian Position? Or is it just a series of bumper stickers "stop the meddling" "The way out of busts is to avoid booms!" "Away with the Fed!""

Yes genius! Incidentally, these are not bumper stickers. They may be so for whatever-Keynesian retards like yourself, but they are backed by a sound theoretical foundation. That you do not know or understand it but instead prefer to spill your whatever-Keynesian puke all over only shows you for a retard whose brain has been fully cooked by years of immersion in whatever-Keynesian gobbledygook.

"I especially liked your shift from an economics based on equilibriums (which should always exist in your Austrian fantasy land) to "tending" toward equilibrium - what the hell does that even mean!?"

You retard!! You think I am going to explain it to a jerk like you? Read "Human Action" for yourself and find out. I have better things to do than educate jerks.

"A little thin-skinned aren't we?"

No. I just like giving it back. It's fun.

Bala said...

Ok jerk!! Read the section on the Evenly Rotating Economy and you may still get enlightened.

Bala said...

"I especially liked your shift from an economics based on equilibriums (which should always exist in your Austrian fantasy land) to "tending" toward equilibrium"

No, you jerk. That was not a shift. It was one more straw-man argument that LK was touting and which I identified. That you see it as a shift shows you for the economic ignoramus you are.

Or should I just watch while you and your entire whatever-Keynesian ilk spin straw-men into 'wonderful' arguments?

You just demonstrated that mental retardation and being a whatever-Keynesian go hand-in-hand!!!

Lord Keynes said...

More evidence on why there is no "consensus" Austrian position on intervention or even Keynesianism:

"Policies based on Keynesian macro-economic recipes might have succeeded (had they then been tried) in 1932 and did succeed in 1940 because it so happened that at the bottom of the Great Depression as well as during the Second World War all sectors of the economy were equally affected. In 1932 any kind of additional spending on whatever kind of goods would have had a favourable effect on incomes because there was unemployment everywhere, as well as idle capital equipment and surplus stocks of raw materials. During the war the situation was exactly the opposite, but precisely for this reason the same recipes, but with opposite sign, applied. With millions of men and women in the armed forces everything, not merely labour, was scarce and any reduction in demand anywhere welcome."

Lachmann, L. M. 1973. Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and its Consequences, Institute of Economic Affairs. p. 50.

According to Lachmann, Keynesian might veyr work in situations with high unemployment, idle capital equipment and surplus
stocks of raw materials.

Anonymous said...

Is there an actual response in there bala, or are you caught in your own drivel?

Bala said...

"Is there an actual response in there bala, or are you caught in your own drivel?"

Looks like you still aren't reading, you retard. Think (I know it is difficult for whatever-Keynesians t think, what with their retarded brains being fully cooked) while you read and you may still understand whether or not there is an 'actual response' in there or not.

On a simpler note, look who's talking. ROFLMFAO

Anonymous said...

Nice,

" Austrian Economics is not a religion led by messiahs and followed by sheep"

But then you must,

"Read "Human Action" for yourself and find out" [which I have]

Bala said...

"But then you must,

"Read "Human Action" for yourself and find out" [which I have]"

So, how does this even imply that Austrian Economics is a religion led by messiahs and followed by sheep?

"[which I have]"

Or so you think. Oops... I forgot that you cannot think. You need a functional brain to do so. Whatever-Keynesians lack that. So let me correct myself.

You imagine.... Oops once again. Even imagining requires a functioning brain. Let me try again.

You fantasise.... Oh no!!! I just can't seem to get it right. I think I am beginning to understand why you couldn't comprehend the arguments presented in that book.

p.s. Arguments based on a strong foundation do not constitute religious dogma, you see!

Sam said...

I'm still waiting for any one of the anons to present any type of economic argument other than ad hominem attacks. At least LK attempts to make arguments.

JG said...

Bala, in resonse to your comments:

"Firstly, crises are not inevitable. They are only inevitable once the choice has been made to intervene in the market. They are not inevitable because ceasing intervention will abolish the business cycle as we know it."

Since when is this true? For as long as Capitalism has existed, economies have been subject to booms and bust regardless of how much or how little government intervention has happened.

This idea that government intervention is the source of all problems is based on little more than the opinions of people who don't like being told they must pay their taxes or refrain from polluting.

zackA89 said...

That is not true booms are busts are created by intervention in the market place and the artificial lowering of the interest rate. Governments can do that, and sometimes private banks engaged in credit expansion. Tampering with the interest rate will cause problems anyway you look at it.
Before we started meddling with the economy, pre fed, pre Keynesian economics, recession were not nearly as long or painful, and were dubbed “panics” because they were short in duration.

1921 should illustrate that the economy can recover without government intervention or Keynesian stimulus.

If the market somehow “fails” for whatever reason, it does not follow that government should, or even is capable of “solving” it through intervening. Private actors can work things out voluntarily in the market.

Initiating force into the equation through government intervention often disrupts the market’s ability to self correct.
We would be better off with a lot less government intervention, planning, and stimulus. Just saying.

Bala said...

JG,



It's called Austrian Business Cycle Theory. It is a theory of the causes of the business cycle. The sum and substance of the theory is that the business is not a characteristic of a capitalist system. It explains that business cycles are caused by the artificial depression of the interest rate below the level dictated by the time preferences of the people constituting the market by expanding credit way beyond the available pool of genuine savings and making the latter possible through a commensurate monetary inflation. It is the easy availability of credit at low rates of interest that (as ABCT explains) is responsible for the boom which (as ABCT once again explains) inevitably ends in the catastrophic bust that we are familiar with.



If you haven't read up on ABCT, I suggest you do. A couple of reads that I found useful to understand this in greater detail are



1. http://mises.org/books/economic_depressions_rothbard.pdf



2. http://mises.org/books/mysteryofbanking.pdf



3. http://mises.orf/books/monetarytheory.pdf



Of course, others may suggest other books, but these are my suggestions.

JG said...

Bala,

As reasonable as that logic sounds, there are two big problems with it. First, it assumes that interest rate movements are the primary factor driving business decisions. Second, it cannot explain historical instances when booms and busts that happened in the absence of low interest rates.

1) It assumes that businesses are blindly reacting to interest rates as though that was the primary driver of their decisions, which is simply not true. There are far bigger influences that impact investment and business decisions that outweigh interest rate considerations. Yes, there often is a chase for yield that results from low interest rates but bubbles in real estate, technology stocks or tulips did not happen because it became cheap to borrow and buy crappy assets. Booms and busts reflect many factors such as problems of agency (real estate securitization), overestimating the impact of disruptive technology (internet boom of early 2000's) or simply the herd mentality of investor psychology (17th century tulip prices in Holland). The ABCT fails to consider any of these variables and reduces a complex web of variables into an overly simple, one-for-one equation that says low rates = booms = future busts. The complexity of the real world overwhelms the simplicity of the ABCT model, rendering it meangingless.

2) ABCT cannot explain instances of severe booms and busts that happened before the establishment of the Federal Reserve, or any other body that could intervene to keep interest rates low. The 19th century saw many booms, busts and panics and none of them could be blamed on the Fed keeping rates low because the Fed didn't exist.

zackA89 said...

JG your arguments against ABCT are petty and pathetic and outright laughable. ABCT can and does explain pre fed booms. Not to mention your arguments have been dealt with and refuted by Austrians for decades upon decades.

What’s even funnier is you act as if you objections are something new when they are not. No business cycle theory is perfect, but ABCT is invariably superior to the nonsensical Keynesians notions of “under consumption or “overproduction.” If anything Keynesian models are much more simplistic than ABCT. Also, having a complex world does not render ABCT obsolete, it renders state intervention, government planning and stimulus obsolete.

Rothbard has your number. So does Tom Woods.

http://mises.org/daily/3127/Economic-Depressions-Their-Cause-and-Cure

http://www.youtube.com/watch?v=91OIBnrjzLU

Our work has already been done. These statists have nothing. Nor have they ever.

JG said...

Zack,

For the last time, saying your side is superior and not bothering to explain why doesn't impress anyone. If you want people to view as anything more than an opinionated child then stop repeating things you read on the Mises blog like some sort of parrot and start defending your ideas yourself.

zackA89 said...

I have explained my ideas time and time again but to no avail. Maybe Rothbard or Woods could do the trick this time. If you're interested in why I think your ideas are wrong, read the brief article or watch the video. You may learn a thing or too.

Through my studies, ABCT to me makes the most sense to me. I believe the Keynesian story of underconsumption and overproductions are fallacious, oversimplified, and outright nonsensical. ABCT is a much more rich and detailed explanation of the business cycle that incorporates human action, subjective valuation, the price system, and capital theory all together. That is why it appeals to me.

Sounds like you’re the one parroting Keynesian objections from whatever source (don’t even care) and regurgitating them as if no one has ever dealt with them before. People have.

JG said...

No Zack, you haven't explained anything. You've repeated ideas that you've read on the Mises blog, and then when I refute them you just dismiss my arguments by stating that someone else has addressed that. That's not debating, that's being a parrot.

And I'm sure that ABCT does appeal to you for the same reason that it appeals to so many others: it's simple and easy to understand. But that doesn't make it true. Being able to sum up your entire theory in a single sentence isn't a good thing. It's usually a sign that it's not a very deep theory to begin with.

JG said...

Another reason ABCT appeals to you is that it probably matches well with your political views. It's no surprise that the biggest supporters of ABCT overwhelmingly hold conservative political views. You're selecting the economic philosophy that matches up best with your political philosophy and that bias is more than likely the real reason why ABCT appeals to you so much.

zackA89 said...

Not at all my views have changed throughout the years on a wide range of issues. Started of a neo con, pro war (embarrassed to admit it), then turned more “constitutional conservative” like AP, and then upon further reading, studying, and learning, slowly because an Austrian in the Rothbardian tradition.

Just because you think a theory is too “simple” does not make it wrong. No theory is supposed to perfectly explain everything in precise detail, but ABCT is much more rich and detailed than the Keynesian explanation that you can sum up what, two words? Not to mention it completely neglects acting man, the price system, economic calculation, and the capital structure. Those elements make ABCT appealing to me.

You have spent time trying desperately to criticize ABCT but no avail. You haven’t even made a dent in it. I’m pointing out that every “critique” you have made and objection you have put forth has been addressed, debunked, and refuted for years. Just because I don’t feel like sitting here and typing out essays on the internet is not an admission that I can’t “debate” you, or that I have nothing to say. It’s just people have said it better than I can say it.

What’s even more surprising is you have not offered any business cycle theory of your own. I would probably bet you’re a Keynesian statist of some type, and think for whatever reason central planners are capable of possessing the knowledge necessary to “plan” “stimulate” or “steer” an economy out of a recession and into prosperity. No evidence exists to support the Keynesian story nor is it supported by any sound logic or reason. Its completely and utterly nonsensical. It’s been eviscerated and torn to shreds by Austrians and non Austrians for years. You should read “the failure of new economics” by Hazlitt, for starters.

If anything, the fact the world is so complex should make ABCT all that much more relevant, and render any economic theory that suggests government can plan, stimulate, or control an economy completely obsolete.

JG said...

And yet, after that rant, you never bothered to address the two big holes in the ABCT that I pointed out earlier. I'm still waiting for you to get around to addresses those holes...and by address I don't mean saying "someone else covered that".

zackA89 said...

Again, I don’t even recognize these as “holes” whatsoever. There just empty critiques with no substance really.

Just because the interest rate may or may not be the “main driver” of business decisions does not negate the fact that when interest rates are artificially lowered below their market level (either from a central bank or done by commercial banks themselves), false signals are sent to business people who take these false signals and allocate resources in lines of production that do not turn out to be profitable over time. Nor does making this objection somehow refute ABCT, and the importance that interest rates play in coordinating the structure of production over time and that by manipulating them, you will in fact get distortions, malinvestments, booms, and busts.

With regards to Holland, like I said, you need to be aware that the critiques you are making have already been addressed. If you are going to critique anything, you need to understand what your opposition stance is. You clearly do not. Doug French has your number.

“The price of tulips only served as a manifestation of the end result of a government policy that expanded the quantity of money and thus fostered an environment for speculation and malinvestment.”

Read the full article here:

http://mises.org/daily/2564

ABCT CAN in fact explain the boom and busts that happened before the Fed came into existence. There is vast literature and videos on this topic. When the interest rate is lowered below its market level, it will give rise to the boom and bust cycle. It does not matter if central banks do this, or commercial banks are giving out more notes than they can reedem. In other words, banks, before the Fed existed, expanded credit beyond the pool of real savings which artificially lowered the interest rates and ignited the boom and bust phase. They did this under the guise that it created prosperity for the economy, as nominal prices and incomes rose, as well as the bank profit.

JG said...

"...when interest rates are artificially lowered below their market level (either from a central bank or done by commercial banks themselves), false signals are sent to business people who take these false signals and allocate resources in lines of production that do not turn out to be profitable over time."

You're talking about interest rates as though they are the driver behind the economy...they're not. They represent one input among scores of inputs that affect incentives in the larger economy. Saying that business people base their decisions mainly on interest rates is like saying that car buyers base their choice of what car to buy solely on the price of gasoline. It's a factor, but hardly a primary factor driving consumer behavior. And certainly not worthy of its own "Gasoline Price Theory of Car Purchasing".

"When the interest rate is lowered below its market level, it will give rise to the boom and bust cycle."

Repeating this over and over doesn't make it true. The price of savings vis-a-vis interest rates is NOT the only or even the main driver of business choices. Your narrow focus on interest rates ignores every other cause of the business cycle. You're ignoring the role of disruptive technology (railroads in the 19th century, internet in the 20th century) and the role of other incentives (the problem of agency in securitization that accompanied the real estate boom) and you're in denial about the impact of investor psychology (low rates are not why Facebook is valued at 100 times earnings) You're wearing blinders because to acknowledge these other variables means you have to look beyond the ABCT, and you're either unwilling or unable to do that.

zackA89 said...

I don’t know why you think repeating over and over again that interest rates are not the main driver in business decisions somehow refutes, negates, or debunks ABCT. It does not. Not in any way shape or form. ABCT is a theory that tells us why when credit or money is artificially increased or expanded it causes malinvestments and boom and busts. The essence of it is that interest rates really mean something; they send signals to business people about what the preferences of consumers are. This gives entrepreneurs the information to engage in economic calculation. When you tamper or distort those vital price signals, thus interfere with the crucial information that they convey, you fatally impair the ability for people to engage in effective economic calculation and allocate resources to their most profitable ends. Price, interest rates, profits, they all really mean something in an economy. Problems do in fact occur when you meddle with them.

The technology bubble in the late 90’s was caused by cheap credit and artificially low rates on the behalf of Greenspan’s Fed. It was not some random arbitrary thing that just “happened.” Technology is not disruptive in any way shape or form. That’s complete nonsense to attribute “technology” to somehow “causing” bubbles. There have been great and vast technological expansions throughout history without causing any bubbles. If other expansions and developments in technology didn’t cause any bubbles, certainly there is no reason to believe the railroad or the internet did. That’s foolishness. We should welcome technological expansions, and not blame them for causing bubbles.

None of these variables affect bubbles. The bubble activity must be financed somehow or another. The speculative activity has to be funded somehow. The way bubbles are financed is through money expansion, cheap credit and artificially low interest rates. Without those fundamental causal factors, there are not bubbles because the stuff necessary to finance them has to come from somewhere and it is created out of thin air by banks and the Fed. If it wasn’t, you would see prices dramatically fall in another sector of the economy if the price in the bubble related sector was rapidly increasing.
Once again you have swung and missed.

JG said...

You're right. Human beings are unthinking robots that blindly react to changes in interest rates like molecules of water reacting to changes in temperature. There are no such things as externalities or incentives. How silly of me to think otherwise.

zackA89 said...

Never said that. False price signals and artificially low interest rates are at the center of the problem. How people react to them in terms of what externalities or incentives exist will dictate how the bubble may manifest itself throughout the economy. Those externalities or incentives are not the cause of the problem. They may dictate how it is played out over time, but without the artificial credit expansion, there is no bubble because the stuff necessary to finance it has to come from somewhere.

You’re not silly to think otherwise. You just misunderstand the cause of the problem with the effects. Keep in mind that prices, not just interest rates, are also manipulated because of artificial credit expansion and loose monetary policy. The entire capital and investment structure of the economy is distorted, so much more damage is done through credit expansion than just an artificially lowering of the interest rates.

Bala said...

JG,

"Human beings are unthinking robots that blindly react to changes in interest rates "

This is where you are wrong. Changes in interest rates are not isolated phenomena. They happen with two possible sets of two other necessarily attendant phenomena

1. A decrease in demand for consumers' goods (due to forsaking of consumption in the present) and an increase in the gross savings available for investment.
2. An increase in the credit expanded beyond the available pool of savings and an increase in the money supply in the form of fiduciary media.

In either case, entrepreneurs would benefit by driving their investments towards stages of production remoter from the stage of consumption. The difference between the 2 scenarios I have highlighted above is that while in the first, the lengthening of the structure of production is sustainable as people have really preferred future consumption to present consumption and hence will have the savings to spend on the future production of consumers' goods when it hits the market, in the second, the lengthening of the structure of production is unsustainable because at the time the increased future output of consumers' goods hit the market, consumers are not ready t consume them as they have not made provisions for the same by failing to save.

This intertemporal discoordination happens not because of a reflexive reaction on the part of producers to a change in the interest rate alone but a reaction to the change in interest rate accompanied by an increase in the supply of loanable funds and either a forsaking of consumption in the present or an increase in the supply of money. The cause of the intertemporal discoordination, i.e., the lengthening of the production structure too is a result of the same combination of factors.

Once you drop your obsession with the notion that ABCT posits that human beings are blindly reacting to changes in 1 quantity, i.e., interest rate, it might be easier to understand what it is all about.

Bala said...

JG,

Let me explain one more point Zack made. He said

"False price signals and artificially low interest rates are at the center of the problem."

I have already explained the part about artificially low interest rates. As for the 'false price signals', they are of two kinds

In case the increase in the gross savings is made by genuine forsaking of consumption on the part of consumers,

1. there is a drop (in the short-term) in the demand for consumers' goods. This drop in demand results in downward pressure on the prices of consumers' goods, a factor that puts pressure on prices of factors as well as returns to capital down the production structure.
2. a drop in the rate of interest rates, ceteris paribus, raises the prices of durable capital goods. This makes more roundabout methods of production more attractive.

The combination drives factors of production towards higher stages of production, lengthening the structure of production.

In contrast, when credit is expanded through corresponding monetary inflation, there is
1. no drop in the demand for consumers' goods in the present (and hence no fall in the prices of factors) leading some entrepreneurs to read it as a signal to continue churning out consumers' goods at the present rate
2. an increase in the prices of capital goods making it attractive to invest the expanded credit in remoter stages of production thus lengthening the structure of production.
3. An increase in the prices of factors (or at least a failure to fall to the levels they would have attained sans the credit injection through credit expansion)

This combination is the 'false price signal' that Zack is talking of. Clearly, this false price signal is a result of interest rate manipulation accompanied by credit expansion and is the factor responsible for the malinvestment of the boom. Hope this clarifies.

burkll13 said...

@ Bala -
that explanation just further proves just how simple ABCT really is. It certainly isnt as complex as C + I + G + X − M = Y

zackA89 said...

Thats a good explanation of what i meant by that bala. Thanks.

JG said...

Bala,

You're still assuming that consumption and saving are primarily driven by the price of savings (interest rates) without establishing that this assumption is valid in the first place.

"a drop in the rate of interest rates, ceteris paribus, raises the prices of durable capital goods."

Ceteris Paribus does not apply, all other things are never equal. You're assuming that a drop in interest rates results in an increase in demand for goods and services. The underlying cause being that the yield on savings becomes so low that consumption becomes more attractive than savings. Even in a normal (i.e. non-recessionary) climate this assumption ignores bigger factors (employment rates being among the biggest) that eclipse the impact of low rates on consumption. And in the current non-normal climate that relationship becomes even less relevant. Keynes recognized that savings and consumption habits during recessions were driven by employment rather than interest rates, the employed will save during a recession (due to uncertainty) no matter how low rates are and the unemployed will draw down savings to live no matter how high rates might be. That's why economic activity can continue to drop during times of low interest rates (like today) and continue to climb when rates are high (the late 1990's).

I'm not saying rates are irrelevant, I'm saying that they're so low on the pecking order of factors that drive consumption that they shouldn't be placed at the center of any business cycle theory.

Bala said...

JG,

"You're still assuming that consumption and saving are primarily driven by the price of savings (interest rates) without establishing that this assumption is valid in the first place."

No. I am assuming no such thing. I said that the choice between consumption and saving is driven completely by individual time preference which manifests itself as the consumption/savings ratio of the individual which further translates into the societal consumption/savings ratio. My point is that what you call the 'price of savings', i.e., interest rate, is driven by individual time preferences and not the other way. Time preference is a category of human action and to deny that time preference exists is to deny that man acts. Hence, I think you are assuming things I never mentioned or even implied.

"You're assuming that a drop in interest rates results in an increase in demand for goods and services."

Not at all. You are still getting it horribly wrong. I am saying that an initial FALL in the demand for consumers' goods results in an increase in the supply of loanable funds and a consequent drop in the rate of interest in the loanable funds market. I am saying that the loanable funds market is a part and only a part of the larger present-future goods market of which the entire system of production too is a part.

"The underlying cause being that the yield on savings becomes so low that consumption becomes more attractive than savings."

False again. The underlying cause for a drop in the interest rate is a sufficient lowering of the time preferences of such a large number of individuals that the societal time preference falls as well.

In the case where interest rates are artificially lowered by FRB or Central Bank interest rate manipulation, while on the one hand people have not reduced consumption, interest rates which should remain right where they are fall with no connect with the actual societal time preference. So, it is not that low interest rates CAUSE higher consumption but that interest rates fall WITHOUT a prior fall in consumption. This is made possible by the manipulation of the interest rates by the system of money and banking.

"I'm not saying rates are irrelevant, I'm saying that they're so low on the pecking order of factors that drive consumption that they shouldn't be placed at the center of any business cycle theory."

And as you would see from my explanation above, I am not saying rates are "central" in the sense that they really CAUSE particular behaviour but that they are a signal that indicate the direction the consumption/savings ratio is headed. My point is that malinvestment is caused when the societal time preference and the money rate of interest pull in opposite directions.

JG said...

Bala,

Okay, so you're saying that by tampering with interest rates the market will lose a natural signal of where consumer demand really is. Artificially low rates will send a "false signal" that will distort the market's perception where demand really is. Is this what you're saying? If so then you're saying that the market is being tricked by low interest rates into miscalculating demand of goods and therefore overproducing supplies, which leads to booms, and then setting up for a correction, which represents the later bust.

This argument makes little sense because it assumes businesses use a proxy for consumer demand (interst rates) as their primary measure of demand, instead of say, their actual sales volume. Any "false signal" that low rates may cause would quickly be contradicted by actual sales figures and the market would adjust its production to match those sales volumes.

Bala said...

JG,

"Okay, so you're saying that by tampering with interest rates the market will lose a natural signal of where consumer demand really is."

No.

"Artificially low rates will send a "false signal" that will distort the market's perception where demand really is."

No

"If so then you're saying that the market is being tricked by low interest rates into miscalculating demand of goods and therefore overproducing supplies, which leads to booms, and then setting up for a correction, which represents the later bust. "

No.

"This argument makes little sense because it assumes businesses use a proxy for consumer demand (interst rates) as their primary measure of demand, instead of say, their actual sales volume."

An argument like that makes little sense to me too, except that I wonder from where you came to the conclusion that I have made such an argument.

"Any "false signal" that low rates may cause would quickly be contradicted by actual sales figures and the market would adjust its production to match those sales volumes."

And in this final statement, you reveal how and how badly you have misunderstood my argument.

It is not the 'demand' or the 'market perception of where the demand lies' that gets distorted. It is prices. On one side, there is no drop in demand for consumers' goods. This is simply because people have not saved, i.e., decided to forsake consumption in the present. On the other side, expanded credit is injected into the structure of production, raising the level of gross savings invested in the production structure while simultaneously driving the rate of interest down thus sending upwards the prices of capital goods in remoter stages of production. The latter is simply because the capital value of the capital goods is nothing more than the discounted present value of the future services of the future services of the capital good, a number that increases as the interest rate goes down.

This injected credit combined with the rising capital values of capital goods makes the remoter stages of production attractive places to invest in. The credit thus flows into lengthening the structure of production on the one side while on the other, the base of the Hayekian triangle remains as wide as it was originally as there is no reduction in spending on consumers' goods.

This lengthening of the production structure without a reduction in the consumption of consumers' goods takes the economy beyond the PPF and makes it unstable. However, rising capital values of capital goods along with continuing consumption of consumers' goods gives an illusion of prosperity leading to even greater malinvestments.

So, it is not false signals on demand that cause the malinvestments of the boom but false price signals created by interest rate depression and credit expansion.

JG said...

Maybe this is where I seem to be losing you:

"...expanded credit is injected into the structure of production, raising the level of gross savings invested in the production structure..."

Explain why the presence of extra cash in the economy must be applied to increased production of any one particular product. Why must surplus cash be deployed at all? I don't see how the mere presence of extra funds translates into increased production of any one product beyond the demand that was already there. I also don't see the mechanism whereby extra liquidity results in higher prices (unless demand itself has been affected by the additional funds, but you said earlier that that's not what you were saying).

The only mechanism that I could think up that would explain how the presence of extra cash in the economy could result in a change in prices would be if demand itself was increased (by way of discouraging saving). But you say above that this is not the scenario that you're desribing. If demand is unchanged then what is driving the change in price?

Explain to me how the mere presence of additional cash, which is nothing more than a veil for underlying goods and services, results in changes to prices for goods and services if underlying demand for those products has not been affected.

zackA89 said...

Im sure Bala can explain better than I can but I will try and take a stab at it.

If there is additional cash resulting from credit expansion, then people will use that cash to bid up the prices of goods and services to higher levels than they otherwise would be had there not been “additional cash.” This distorts the price system by duping people into believing that this extra demand is sustainable or even justified by market fundamentals. This extra demand that is bidding up the price of goods and service is not the result of economic growth, but the result of “additional cash.”

In other words, people are bidding on scare resources without adding to the pool of final goods and services. This completely distorts the pricing system. The extra pent up demand resulting from the additional cash may lead entrepreneurs to channel additional resources into those areas of production where there is phony pent up demand. This results in malinvestments and unemployment once the money and credit stops or even slows down.

Basically, absent credit expansion and “additional cash” the price and investment structure would be more in tune with consumer preferences. Manipulating interest rates is still a recipe for disaster.

Bala am I on point here?

Bala said...

JG,

I'll answer your questions but not in the order you have asked them. I'll answer them in the order of their relevance to other questions.

First, you asked

"If demand is unchanged then what is driving the change in price?"

A more basic question the answer to which is important in seeking the answer to this question is 'What is price and what are the factors that drive the price of a good?'. However, the answer to this question cannot be satisfactorily found as long as you carry misconceptions such as this

"Explain to me how the mere presence of additional cash, which is nothing more than a veil for underlying goods and services, results in changes to prices for goods and services if underlying demand for those products has not been affected."

in your mind. Money is NOT a mere veil for underlying goods and services. The proper way to understand money is as a commodity that has its own price that is driven by the demand for and the supply of the money commodity. This further means that the price of money moves with changes in the demand for and supply of money. Like for every other commodity, if the supply of money increases with demand remaining the same, the price of money falls while if supply of money decreases with demand for money remaining the same, the price of money rises.

The price of money, however, is not a single quantity but an array of prices based on its exchange ratios with different goods against which it exchanges. The price of money is nothing more than the reciprocal of the money prices of the goods and services that are exchanged for the money commodity. It can also be understood as the purchasing power of a unit of the money commodity, i.e., the quantity of the purchase good that can be obtained for a unit of the money commodity.

Another important point to remember is that all money at any point in time belongs to someone and every unit of money chases the particular goods that the possessor of the money unit wishes to exchange it for.

What all this means is that if the supply of money increases, the prices of the particular goods that this money 'chases' go up because the purchasing power (or price) of the money unit has fallen as a result of an increase in the supply of the money commodity. So, when money is injected into the production system by expanding credit, it inflates the prices of the factors of production that it chases.

This effect is doubly worse in the case of durable capital goods whose prices are determined by two factors - the pricing of their unit services and the interest rate. While an increase in money supply puts upward pressure on the pricing of their unit services, a fall in the interest rate puts even further upward pressure on their prices. This is simply because of the simple fact that the capital value of a durable capital good is just the discounted net present value of the future incomes generated by sale of the unit services of the durable capital good. This capital value increases as discount rate falls.

Thus does an injection of money into the production system affect prices of factors of production. However, you ask a more basic question which I shall answer next.

Bala said...

JG,

You asked

"Explain why the presence of extra cash in the economy must be applied to increased production of any one particular product. Why must surplus cash be deployed at all?"

This is another fundamental error of yours. We are not talking of surplus cash that exists somewhere but which is mysteriously applied to increased production of some products. We are talking of the injection of credit into the production system in the form of loans to producers. We are talking of CREATION of the surplus money THROUGH the expanding of credit to producers. Credit expansion and monetary inflation are two sides of the same coin.

This is the essence of the system of FRB which has now become infinitely worse in the form of the modern monetary system. Very simply put, the banking system creates money at the tap of a key by creating an 'asset' (the expanded credit) on the one hand and creating a 'liability' (the demand deposit that it credits with the newly created money) on the other. This is the heart of the mechanism of credit expansion and monetary inflation. Banks these days do not direct excess cash as credit. They conjure up the cash out of thin air in order to make the loans and profit from it.

So, to answer your question, there is no other way than for the surplus cash to result in an increased production of particular goods because it is indeed created for the sole purpose of being loaned out to producers of those very goods.

Once again, hope this clarifies.

Bala said...

Zack,

Spot on :)

JG said...

Zack,

"If there is additional cash resulting from credit expansion, then people will use that cash to bid up the prices of goods and services to higher levels than they otherwise would be had there not been additional cash.”

Does this really happen? Over the past 3 years the Fed has been dumping liquidity onto the banking system and prices for most assets have stagnated or declined (aside from energy prices, which are driven by factors beyond monetary policy). There is more cash in the system today than ever before but yet there are no new price bubbles. Additional cash in the system can only bid up prices if the demand was already there. Additional cash in the absense of additional demand is like pouring gasoline on a match that hasn't been ignited.

Bala,

"Like for every other commodity, if the supply of money increases with demand remaining the same, the price of money falls while if supply of money decreases with demand for money remaining the same, the price of money rises."

But money is NOT like every other commodity. Its price is not the only or even the main determinant of the demand for money. Hoarding causes demand to rise even in the presence of low interest rates. Savings will be drawn down and spent during booms times even when interest rates are high. Money is not like every other commodity, it's demand is driven by other factors that have nothing to do with the "price" of money. So, how then can you base a model such as the ABCT on the premise that money will behave in the same price sensitive manner like any other commodity when it's demand is so strongly driven by factors that have nothing to do with its price or supply?

zackA89 said...

I’m saying if the credit expansion results in additional cash being lent out by banks, then what I said will happen. Keep in mind that loose monetary policy pushes down the dollar on the forex thus resulting in higher commodity prices quoted in dollars. That is what we are currently seeing with things like oil, gold, and even silver, among other commodities. So they are influenced by monetary policy, and artificial credit expansion can have an influence on the domestic price structure even if the money has not been lent out by the banks. The only assets that have declined in value have been housing and real estate because they previously were bid up to artificially high levels during the boom.

Nothing you said even puts a dent in ABCT. What else is new. ABCT is not that complicated and explaining it time and time again is just redundant.