In today's Wall Street Journal, Dick Armey very nicely explains why Washington needs less Keynes and more Hayek. Here's a key paragraph:
Keynes's thinking was a decisive departure from classical economics,
because arbitrary "macro" constructs like aggregate demand had no basis
in the microeconomic science of human action. As Hayek observed, "some
of the most orthodox disciples of Keynes appear consistently to have
thrown overboard all the traditional theory of price determination and
of distribution, all that used to be the backbone of economic theory,
and in consequence, in my opinion, to have ceased to understand any
economics."
because arbitrary "macro" constructs like aggregate demand had no basis
in the microeconomic science of human action. As Hayek observed, "some
of the most orthodox disciples of Keynes appear consistently to have
thrown overboard all the traditional theory of price determination and
of distribution, all that used to be the backbone of economic theory,
and in consequence, in my opinion, to have ceased to understand any
economics."
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I wish Dick Armey would have run for President.
He is not perfect, but I think he is a much better standard bearer for Libertarians than Ron Paul.
Armey; "fiscal child abuse"
Exactly.
The answer to the question is simple: Its a religion.
What do Keynesians view to be drivers of aggregate demand in the short run? In the long run? I'm asking not to make a point, but because I don't know. Any clarification would be appreciated.
Aggregate demand was always there. In reality, the entitlements of bondholders are largely arbitrary promises about the distribution of future revenue secured by statesmen, just as a labor union's contract is such a promise, just as a master's title to his slave is such a promise.
It can happen, and does happen, that statesmen promise to secure more entitlement to consume than resources securing bonds and other contracts can generate without the statesmen's promise. The solution to this problem is bankruptcy (dissolving contracts, including the contracts of labor unions as well as bond holders).
When statesmen promise this security, organizations can generate revenue, less the entitlement of bond holders and other title holders, insufficient to employ idle resources (or even to employ current resources). To deny this possibility is to assert that titular "owners" of "non-human" resources can simply entitle themselves and bondholders (the two often being the same) to any consumption agreeable to both, thus making the consumption of every other factor of production essentially arbitrary and reducible to subsistence.
Reflexive apologists for the entitlements of nominal "capitalists" simply ignore this fact. Armey simply ignores the fact while pretending some commonality with "classical economists" that doesn't actually exist. Adam Smith doesn't argue so in reality.
That said, I don't advocate the "Keynesian" stimulus package, and I don't know that Keynes would advocate it either. I don't advocate it, because, like Roberts, I don't expect it to generate real wealth satisfying real market demands.
The fact remains that aggregate demand can be insufficient to employ idle resources. This fact is a separate issue, and simply lowering wages alone doesn't address this problem, unless setting wages is simply an arbitrary entitlement of other factors and wages thus may fall to subsistence.
In other words, if 10% of the labor force is unemployed, and if this 10% is free to organize itself to compete with the remaining 90%, wages need not fall. New organizations of labor may instead drive existing, over-leveraged organizations into bankruptcy, thus depriving bond holders, rather than laborers, of their entitlement to consume.
In a monetized economy, this freedom requires credit, and no law of classical economics implies that reinvested profits can provide this credit, because these profits need not exist, having been sold to finance the consumption of bond holders and other factors instead.
In a freer economy, the collateral securing the required credit is not some other capital but is the idle labor itself. To deny this possibility is to deny that labor itself has any real value, which is precisely what the nominal "capitalists" (masters of capital including the Bushniks and Obamatrons commanding its organization from D.C. and Soviet apparatchiks commanding it from Moscow) presume when they reduce the setting of wages to their own arbitrary entitlement.
The vague statements you're attributing to Hayek will not do a bit of good.
Mises hit the nail on the head. I don't have his statement right before me, but it was to the effect that even saving money in a mattress would merely force prices downward and the purchasing power of the money remaining in circulation upward.
There's no substitute for saying just that.
Why vague, general, and completely ineffective pronouncements when plain and devastating logic is right at hand?
People don't "save money" in mattresses. They don't literally "save" anything. They purchase promissory notes. A promissory note can offer no assurance of any real production, and even if it does, the sellers of promissory notes can promise every bit of the marginal product of every available resource other than some idle factor of production, like unemployed labor.
If this idle factor has little or no marginal value apart from other, already fully leveraged resources, then the factor is fundamentally unemployed and unemployable within the contractual constraints binding other resources. Lowering wages needn't make them employable.
For example, if GM's management makes some incredibly excessive concession to the UAW, GM's growth can grind to a halt as UAW workers consume every spare dime of GM's revenue. If GM effectively monopolizes auto production in its market, then the growth of auto production also grinds to halt. Lowering other wages has no effect on this predicament, because the UAW's wages won't fall.
Obviously, the same thing happens if GM's management sells an incredible lot of its revenue to bond holders. Pretending that only a labor contract can have this effect is nonsense on its face, but that's essentially what you do when you say that "bidding down wages" is the solution to this problem.
Martin,
See my response to this under Relative Prices as Aggregages, below.
Question from a novice:
What is all this hub-bub over "idle resources"?
Isn't saving for a rainy day prudent?
Isn't that one of the most basic instincts of humans trying to preserve their livelihood and protect themselves during time of scarcity?
Think of Joseph saving grain in the Bible for days of famine.
As an investor, there is must prudence in "keeping your powder dry" until it becomes most advantageous to employ your limited capital.
Where Keynesians see idle resources, I see prescient decision making.
Martin,
Since apparently the discussion has shifted to this thread, here, reposted, is my statement from below:
If something is keeping buyers and sellers apart, it isn't the market, for it is nothing but buyers and sellers.
Whatever is keeping them apart, it could only be something outside the market.
Were there nothing outside it keeping buyers and sellers apart, you might well wonder what, in the market itself, was doing so.
But, when you have a state, the very purpose of which is to come between them, why look beyond it for the source of the problem?
Why look at the market, of all places, at the buyers and sellers themselves? Why wouldn't they come together, combining their unused resources, their land and labor, to their mutual benefit, if free to do so?
I think that the Republicans should let the Democrats have as big a "stimulus" as they want. If it works in turning the economy around then you need to change the name of your blog to Cafe Keynes. If it fails as you predict then you may see, at long last, the resurrection of Hayek and the end of Keynesianism and big government and its proponents. A stimulus package is going to be passed one way or the other, so what's a few hundred billion more going to hurt if it results in Hayek winning the debate with Keynes from their respective graves and changing the world. That's what Obama promised "change." Let him have it, and stop trying to prevent it.
Martin,
Looking a little more closely at your statement, it appears that you are assuming a relative oversupply of labor and undersupply of land.
Granted that, in such a circumstance, some of the supply of labor must be unemployed.
But that isn't our circumstance. It is just the opposite. Labor is the scarcest factor of production, and will not go unemployed in a free market.
Armpit, one stimulus packages after another has been passed for over a year. If one doesn't work ( which is always the case ), they always call it too small and call for another one.
With or without stimulus, economy will come back. With stimulus, it is highly likely to be later than without stimulus.
That's what Obama promised "change." Let him have it, and stop trying to prevent it.
Hey, Strumpit: Do you understand in the slightest that Obama was elected PRESIDENT and NOT KING, DICTATOR, SECRETARY GENERAL OR GRAND POOBAH?
Your civic illiteracy is appalling.
Yeah, Trumpit, try this one;
President Bush wanted the war in Iraq, and the Congress even approved it, so let him have it and stop trying to prevent it.
Martin,
Let's go over your statement in detail.
You wrote,
"People don't 'save money' in mattresses."
Whether they do or don't, that is the simplest way to look at things, and where your analysis must begin. For, before you can understand the complexities of saving, you must understand it in its simplest, purest form, even if it's only imaginary.
You wrote,
"They don't literally 'save' anything. They purchase promissory notes."
But that is not like the purchase of cars and condominiums. It is the deferment of present for the sake of future consumption, and literally saving resources, credit and purchasing power.
You wrote,
"A promissory note can offer no assurance of any real production."
What can? All productive effort is subject to failure. Does that mean that we shouldn't allow private individuals to make the effort, at their own risk, but only a Keynesian state, at everyone's risk?
Next, what you said, in effect, was that labor would be unemployed if it was oversupplied relative to the supply of land.
That's true. If you had billions of people crowded onto a tiny desert island, some of them would have to get off.
But, as things are now, it is not land but labor that is the scarcer factor of production, and will not be left unemployed in a free market. For, to maximize the profitable use of their land, its owners must employ all of the available labor.
There are at least two pre-conditions of this, savings and equilibrium, full employment, market wages.
It is not the market but Keynesian "economics" that militates against them, and not the market but Keynesian "economics" that must eliminated for them to be implemented, and for production and full employment to proceed.
Still looking for an answer to my novice query:
When did "saving" become an evil?
Isn't it beneficial to protect assets in times of volatility?
A commander keeps his powder dry for the battle.
A person trapped in a blizzard rations his food.
How is this not prudent?
Stephen,
It's not the individual doing the saving that is the problem, it is the fear that everyone is going to be saving. A good analogy would be people on a boat. When the people mingling hither and dither, there is no problem. If everyone on a boat suddenly ran to one side, you fear the boat capsizing.
If everyone starts saving, then people are going to spend less money, there will be less money circulating in the economy, and…who knows really.
For some reason, there is a great fear that everyone is deleveraging, paying off their outstanding debts. As if money that winds up with Citibank's consumer credit department will just disappear down the rabbit hole. I don't get that one either.
Xmas, You wrote,
"If everyone starts saving, then people are going to spend less money, there will be less money circulating in the economy, and…who knows really."
But even saving money in a mattress would merely force prices downward and the purchasing power of the money remaining in cirulation upward. So, tho less money, there would be no less purchasing power, spending, and employment. For all of the money saved is, in effect, lent to the spenders.
Disclaimer: I think there are points of Keynesian theory (IS-LM, AD, etc) which are very useful in situational economic analysis.
Keynes was a statistician, and a pretty good one, too. But many (most?) statisticians are like accountants: boxbrains. They have to organize things into neat boxes or buckets, and when something doesn’t fit according to their paradigm, they throw it out, not suspecting that it is actually their paradigm which is incorrect.
Hayekian analysis is much more robust in situations such as present conditions, recognizing the complexity and emergent order of multivariate economic structures. As Mr. Armey observes:
Nothing in any of Keynes' work addresses this fundamental problem.
I think it is incredibly encouraging that this was published.
Here is Niall Ferguson’s take:
More:
Entire article here.
I think some of Professor Ferguson’s analysis above is quite naïve, but the idea is generally correct. The problem with much of it, as we constantly rail against on this blog, is that once government gets its foot in the door, it’s really difficult to dislodge.
And the correct term for state-controlled banks is “financial zombies.”
I'm not sure what you're trying to say about saving, so I don't know whether the "mattress" metaphor makes any sense, but I do know that real saving (or investment) is not at all like putting money in a mattress.
Saving extends credit, because savers typically expect to earn a yield. Saving can't defer a current entitlement to consume with certainty. It can only accumulate promises of future entitlement, and these promises are necessarily uncertain.
Holding a commodity like gold is more like the common notion of "saving", but holding gold earns no yield, and if we all tried to hold gold for this purpose, the price of gold would inflate incredibly.
This "saving" is more like stuffing money in a mattress and is something like the purchase of a car or a condo, except that cars and condos are not commodities and can depreciate even if kept in "like new" condition. Occasionally, they can also appreciate, but real appreciation of something like a car is unlikely, because cars continually improve. Some cars become valuable antiques but most only become inferior cars.
A promissory note is only as valuable as the marginal value of real assets backing it. If these assets depreciate, the promissory note loses value. If the assets are illusory, the promise is illusory.
I don't understand "Keynesian state". Keynes didn't advocate a state in which private individuals make no effort at their own risk, and neither do I, quite the contrary. I very much want the buyers of promissory notes to lose their nominal "savings" if sellers can't deliver on their promises without considerable protection from the state.
I'm not a knee-jerk defender of Keynes, but "inadequate aggregate demand" is not the nonsense that his detractors suppose. Central committees commanding extensions of credit is not the best solution to this problem, but the problem can exist. It's not just a political ploy to rationalize state spending.
No. That's not what I said. I said that labor would be unemployed if a group of land owners, creditors and laborers arrange contractually that all entitlement to consume products of the land and labor belongs to members of the group and arranges this entitlement so that no member of the group, after exercising his entitlement to consume and paying his creditors, has any remaining entitlement.
If two people agree to divide all of the fruit of an island, however large, no fruit remains for anyone else, regardless of how much fruit the two people can produce on the island. Contractual obligations are not real restrictions on productivity. They're only contractual obligations.
A bond is only a contract, not a real asset, and money is only a record of entitlement to consume. Money is not a real asset either. Bonds between productive resources can organize the resources in a suboptimal configuration, in terms of potential productivity, just as a dynamic system can exist in a stable state with lower energy than some other stable state with higher energy.
Diamond and graphite are very different substances, one very hard and the other very soft, even though both are made entirely of carbon. The arrangement of the carbon molecules and the bonds between them makes all the difference.
I agree that labor is scarce compared with the looming demand for it, so the aggregate demand problem is all the more dire. We want this labor productively employed, and it simply isn't true that any contractual arrangement of economic resources necessarily employs these resources without any exogenous influences.
Owners of the land may not be entitled to employ all of the available labor. Maybe GM could improve its profitability by hiring some additional laborers to add components to its automotive products, but it can't hire these laborers, because it's contractually obligated to provide costly health insurance benefits to its current employees as well as a legion of pensioners. It simply has no cash to spare for to hire the new laborers.
GM might borrow from some other organization to make the investment, hoping to repay the credit with the increased productivity, but this option is available only if other organizations have spare cash to invest. What if they don't? What if they're all in the same boat?
Keynesian economics is a theory of market capitalism. State spending as a remedy for inadequate aggregate demand is not. It's a political remedy for a problem that Keynes purports to describe theoretically, and it may be a perfectly awful remedy, but that's a separate issue.
Nothing in Hayek's work addresses it either, because there is no "free market" in which no one is ever "made to do what seems appropriate to somebody else". Actual capital markets are places where people exchange rights to make others do what seems appropriate to them.
"But many (most?) statisticians are like accountants: boxbrains. They have to organize things into neat boxes or buckets, and when something doesn’t fit according to their paradigm, they throw it out, not suspecting that it is actually their paradigm which is incorrect."
Sir, you need get out more. I think (MBA Accounting, licensed CPA) I can speak with authority, your stereotype is about as enlightened as a KKK rally, or "church service" presided over by Jeremiah Wright.
Although your statement might apply to some FASB/IASB board members or Big 4 partners, the vast majority of accountants are nothing like the crap you wrote.
Hey. Dick Armey stole those Hayek quotes right off my "Taking Hayek Seriously" blog.
Thank Dick.
Meh. What don't some here call a spade a spade about what they think and say Keynesian is really nothing more than 'Socialism-lite' and Keynes advocates taxes for make-work prodecures so the wealth is spread around more 'fairly'.
Wow, he's describing Smugman to a T.
Can I say "Smugman" or will that get me banned for being impolite?
Martin, you write too much and say too little. Please tighten up your writing if you expect us to read your comments.
Martin,
It may be my fault, but I don't see any point to the things you're saying.
You're telling us a lot of things we all know, that there is uncertainty in life, cartels exclude outsiders, price goes up as demand goes up, and obligations that can't be met are worthless.
And somehow this is all supposed to lead to the conclusion that the Keynesian idea of inadquate aggregate demand makes sense.
I don't see how the conclusion follows from the premises.
As Keynes saw it, saving withdrew money from circulation, and, with less money, there was less purchasing, demand, and employment.
His critics usually say, in response, that the money is saved in banks, and that the banks, lending it out, keep it in circulation.
But you would be sure to point out the possibility that the banks might just sit on the money, or that the savers wouldn't entrust it to them in the first place, and would save it, as I had suggested, in a mattress, or, as you might better understand, in a teapot, or a hole in the ground.
My point was that even saving it in a mattress, or teapot, or hole in the ground, or wherever you might feel more comfortable with it, would merely force prices downward and the purchasing power of the money remaining in circulation upward. So, though less money in circulation, there would be just as much purchasing power and demand, just at lower prices. For, all of the purchasing power saved would, in effect, be lent to the spenders.
Keynes based his entire economic theory on the "broken windows" fallacy. That is anti-economics and dangerous, not far removed from simple war-mongering.
My point is that "aggregate demand" is a meaningful notion and that aggregate demand can be inadequate to employ idle resources in a capitalist economy with complex, interacting contractual contraints on money, interest and employment.
No. I'm telling you about aggregate demand in a capital market with no exogenous source of credit and possible constraints on employing idle resources. It's not just that obligations that can't be met are worthless. The requirement that all obligations be met can leave some resources unemployed and unemployable for want of adequate credit.
It does make sense. You don't dispute it. You just write "doesn't make sense" as though these words alone are sufficient to establish the fact.
If "saving money" is stuffing it in a mattress, as you say, then saving money doesn withdraw money from circulation, but "saving money" is not stuffing it in a mattress. I emphasize this point repeatedly, but you don't seem to comprehend me.
Holding gold does withdraw money from circulation. Under a gold standard, as in Keynes day, holding gold withdraws a lot of money from circulation, because money is not simply gold under a gold standard. Money is notes promising gold, and the quantity of these notes far exceeds the quantity of gold.
This fact is not simply a consequence of "fractional reserve bankers" defrauding the public by claiming falsely to possess gold that then don't possess. Banknotes under a gold standard don't represent banked gold. They represent the value of all sorts of things, like houses, valued relative to gold. So if I own a house worth 1000 ounces of gold and gold trades for $100 an ounce, I may issue notes promising $100,000 even though I have only the house and no gold. I don't have 1000 ounces of gold, but I have a house worth 1000 ounces of gold.
In this scenario, when lots of people want to hold gold, people issuing these notes then are compelled to sell all sorts of things to obtain the required gold, but there isn't enough gold. This happens because the price of gold is fixed in some monetary unit, like the dollar, but the price of other things is not fixed.
No. That's just simplistic political rhetoric. Keynes was well aware that banks lend deposits. You aren't describing Keynes' credible critics here. You're describing a lot of stuff repeated by people, who know little of Keynes' work, bickering with their own straw men.
No. My words are clearly on the record. I say nothing about banks "sitting on" any money. I say nothing about people stuffing money in a mattresses. I repeatedly emphasize the opposite. I say that money is credit fundamentally, that gold is not money at all, that money under a gold standard is promissory notes, that promissory notes are contractual obligations and not real productive assets, that contractual obligations can bind resources into all sorts of suboptimal configurations in terms of their potential productivity.
I'm not comfortable with your> mattress metaphor at all. I make this point repeatedly.
Right. And forcing prices down leaves long-term debtors bankrupt, because their contractual obligation to pay principal and interest in nominal monetary units doesn't fall with the price of their collateral. If I borrow for 30 years to buy a house trading for $100,000, and if the price of my house then falls to $50,000 in five years, and if I have not other assets, I'll default, because I still owe most of the $100,000, but the house is worth half as much.
No. With less nominal value of real resources, I have less nominal profit on assets I've leveraged. I have just as much real profit. My land produces just as much corn today as it produced last year and the year before, but the corn trades for fewer dollars in the market, so I have fewer dollars to pay my creditors, but I owe just as many dollars this year as I owed last year and the year before, because the quantity of dollars I owe is a fixed, contractual obligation. I may not be bankrupt, but my capacity to demand other goods with valued in dollars has fallen.
You assume that all prices fall and all fall proportionately, but this assumption is simply false. The price of my debt, assuming I don't sink into bankruptcy and remain able to pay it, does not fall, because this price is a fixed contractual obligation. Your simple, linear assumption is a problem with classical theory that Keynes addresses. A real economy is not just a lot of simple, linear, independent demand curves.
No. He didn't. The talk of digging holes only to refill them is not Keynesian. It's a caricature of Keynes. He may have believed that paying people to dig holes that other people refill is better than watching them starve. So do I, but that's a far cry from advocating the broken window fallacy. Keynes was not Rush Limbaugh's moronic, political straw man. He understood that profitable organizations add value, and he wanted resources organized profitably.
The last comment above addresses seanooski rather than dg lesvic.
To Martin Brock and dg lesvic….
I think you're both right in ways.
Martin, what you are arguing for is simply the existence of sticky prices. Contracts make prices of good, services, and factors of production sticky. Of course they do. That doesn't mean though that the concept of "aggregate demand" makes sense.
The AD-AS model treats aggregate demand and supply like a conventional micro-economic model. Those models though have underpinnings in marginalism. AD-AS has no such underpinnings. It is a spurious application of a micro concept to a macro concept. It's an abuse of concept, when a microeconomist talks about demand that is like a physicist talking about energy. When a Keynesian macro-economist talks about aggregate demand it is like a spiritual healer talking about energy. Talking about sticky prices is much more sensible.
Also, note Martin that you are bringing the future into the problem formulation. If you do that then how can it be modeled by a supply-demand model which is inherently concerned with only the short run.
Perhaps the issue isn't Keynes so much as Keynesians.
But in the example above, a farmer's demand does fall with a falling price of corn, because he receives the new, lower price for corn he sells but pays for the land's capacity to grow corn at the old price. He does in fact have less entitlement to demand other things, even if all other prices (other than monetary debts) fall commensurate with the falling price of corn.
If many other factors of production are leveraged similarly, effective demand for many goods can fall. Falling prices don't solve this problem as classical economics suggests. Falling prices are the source of the problem, or fixed obligations to creditors are the source, as you wish. These fixed obligations to creditors are not imaginary.
I agree that this treatment is simplistic. So is the conventional, micro-economic model for that matter. The classical supply and demand curves are the sort of simple, linear, independent, "all else held constant" analysis that Roberts discusses in recent episodes of econtalk.
I don't defend these simplistic, quasi-mathematical analyses, but a capitalist economy can become "stuck" in a stable but sub-optimal configuration that does not employ all productive resources, precisely because the simple supply/demand/price models don't describe it well. This condition is what I mean by "insufficient aggregate demand", not any simple diagram.
You're very kind to the microeconomists. I've studied a little economics and a lot of physics and mathematics, and I don't see how "demand" is much like energy. Many nominal "libertarians" seem to understand money like energy, like it obeys some kind of conservation principle, but this idea is nonsense. Money is promissory notes, a record of value and expectations of value. It is created and destroyed continuously, as people make promises and either keep or fail to keep them. It obeys no conservation principle.
This statement may be true of many economists, particularly economists advocating political spending programs, but that political economists talk this way is no evidence that Keynes' notion of "aggregate demand" and its effect on employment is nonsense.
Physicists and mathematicians also say silly things about quantum mechanics and the incompleteness theorem, but quantum mechanics and the incompleteness theorem are not silly notions for this reason.
Boudreaux himself recently linked an article, favorably, stating that the New Deal was not a properly "Keynesian" stimulus, yet the New Deal is the quintessential "Keynesian stimulus" in popular political rhetoric.
The two notions are related.
Of course, I am. We're discussing money and credit (or money, interest and employment). Credit is all about the future.
I can't, and I don't model it so. I know a bit about mathematical modeling, but I haven't modeled anything very precisely here.
Martin Brock: "So if I own a house worth 1000 ounces of gold and gold trades for $100 an ounce, I may issue notes promising $100,000 even though I have only the house and no gold. I don't have 1000 ounces of gold, but I have a house worth 1000 ounces of gold."
No. In a full-reserve system a note issuer must always have a full-reserve. Having an asset doesn't count.
Let's say you have a house that trades for 1000 ounces of gold. You may write a note saying "I promise to pay the bearer on demand 49 Abbeyvale Street Bromley" if that is you own that property. You may not however write "I promise to pay the bearer on demand 1000 ounces of gold" because you don't own such a quantity of gold. You have no reserve. The fact that you own an asset with the same value clearly makes no difference.
Even in a fractional reserve system what you describe is fraud.
Martin Brock: "The requirement that all obligations be met can leave some resources unemployed and unemployable for want of adequate credit."
Everyone agrees that contracts must be met. C'est la vie. However the next part does not follow. The cause though, as you yourself have argued is contract stickiness not lack of credit. What you – and other post-keynesians – must show is that inflating credit can make resources that were unemployed employable in a truly useful way. It is trivially true that they can be employed and a new boom stimulated. What Keynesians have not shown is that Hayek was wrong in saying that this sort of boom causes a subsequent bust due to misallocation of capital.
What full reserve system? You're discussing a Rothbardian fairy tale here. Real gold standards didn't operate this way. See the episode of econtalk titled "Selgin on Free Banking". When Keynes theorized about "money, employment and interest" in the thirties, he wasn't theorizing about Rothbard's utopia.
I have no idea how a "full-reserve system" would work, but I imagine it wouldn't work well at all. At the very least, gold backed notes wouldn't be the principal form of money. The entire world's supply of gold wouldn't fill a large swimming pool. Forcibly limiting the money supply this way is insane.
In a full-reserve system, if an ounce of gold trades for three ounces of silver, how do you prevent a man with three ounces of silver from issuing a note promising an ounce gold? Do you shoot him or throw him in jail? Why would you do that?
Nonsense. "Fraud" is a legal term with a precise, legal meaning, and what I describe is not fraud as a matter of fact.
No. Bankruptcy courts can and should abrogate contracts in various circumstances, and even if they don't, contracts often are not met as a matter of fact, because we can't squeeze blood from a stone.
Credit is a contract.
The only way to employ idle resources "usefully", in my way of thinking, is first to employ them and then to measure the utility of the employment via the market. The "proof" of utility is profit, so we extend credit to organize factors profitably. If an organization profits ultimately, it persists. If not, it dissolves. Then we extend more credit to reorganize the factors differently. These organizations are fundamentally experimental, subject to dissolution at any time. They can never be anything else.
No. Simply employing idle resources does not generate a "boom". W.W. II was not a boom for example. It was a period of considerable contraction of valuable production as measured by markets. Nominal "production" commanded by states increased, but that's not the same thing at all.
Since the Bushniks expanded the least productive sectors of our economy, like the military and health care for the elderly, incredibly, I'm hardly surprised that we suffer malinvestment at this point. We need to cease much of this spending and begin more experiments in profitable organization. These experiments are the only way to grow production satisfying free markets.
Booms and busts happen continuously in various sectors of the economy. If unprofitable organization does not dissolve and decay, more profitable organization cannot blossom in the fertile soil left by the decay. Obviously, the largest unprofitable organization of them all is the Federal government of the U.S.
Martin,
You wrote,
"…aggregate demand can be inadequate to employ idle resources in a capitalist economy with complex, interacting contractual contraints on money, interest and employment."
A depression is defined by only one idle resource, labor. If some of the land and some of the capital were unemployed, while labor was fully employed, there would be no depression, just a rising price of labor.
If some of the labor was unemployed while all of the land was employed, that would simply mean that there was an oversupply of labor relative to the supply of land.
That isn't the fault of the capitalist system, and there's nothing that Keynesian policies can do about it. Printing more money will not create more land.
If all of the capital was employed, while some of the land and labor were unemployed, the problem for land and labor is not saving but the lack of saving.
So I'm still waiting for you to tell me how saving could cause a depression, and printing more money could get us out of it.
But, let's look closer at that "other than monetary debts" part. What we are suggesting here is that in general businesses receive less for their goods. But they continue to pay the same rents. Clearly if this is generally true then it is the rentier who gains. The rentier has higher purchasing power and can demand more. That is Pigou's argument.
That said, if Pigou was wrong then I mostly agree with what you said. That does not mean though that we can sensibly talk about "aggregate demand". That we can add something up doesn't mean that the expression we produce is useful.
Yes.
However this doesn't justify the whole aggregate demand argument, without which the term has no meaning.
Well, why not. You need a whole theory to show that.
You've missed my point. The micro-economic supply-demand model is certainly an simplistic one. However it flows directly from marginalist first principles. Also, it is frequently demonstrated in practice.
The AD-AS curve has no similar underpinning. A Keynesian cannot explain how the AD curve or AS curve comes into being.
Then why do you use those words? I don't think that "aggregate demand" is really a demand like other sorts of demand. So, I don't call it a demand. I think that makes sense.
This is what I meant when I said:
"When a Keynesian macro-economist talks about aggregate demand it is like a spiritual healer talking about energy."
If a healer of some sort give a person a massage that may make them feel better, it may improve their health too. That though doesn't mean that the healer is correct to say that the massage involves transfer of some sort of energy or chi.
The same sort of thing is true of Keynesian macro. Prices are sticky. Short term booms may be engineered by giving everyone a real-wage cut using stimulus or money-printing. This though does not mean that everything that Keynesian economists say about this process is correct, it is not.
Of course money is not like energy. It is of course conserved in some cases.
Like all good controversy there is truth on both sides. Keynes himself considered the "balanced budget multiplier" to be valid. So, every $ spent on the government budget produces one extra $ of GDP. Later Keynesians believe this to be an illusion. From the point of view of some Keynesians the New Deal was a stimulus but not from the p.o.v. of others.
But the terms you use are inseparable from a mathematical model.
You can't say "aggregate demand" falls without the model which describes what it is. Otherwise you just have to say what is observed which is that prices are sticky and recessions happen.
Martin,
About Keynes and the "broken window" fallacy:
The Wall Street Journal, Jan. 8, 2009, recalled that “During a 1934 dinner..after one economist carefully removed a towel from a stack to dry his hands, Mr. Keynes swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.”
If not a broken window, then a dirty towel fallacy.
Martin,
Profit is the outcome of only one thing, anticipating the future better than others, whether intentionally or accidentally. If everyone anticipated it as well as everyone else, there would be no profit or loss.
There might still be economic return and gain, but not profit. The return to labor per se is not profit but wages. The return to capital is not profit but interest.
Profit is just anticipating the future better than others, and loss the failure to do so. There is always profit and loss, some who anticipate the future better and some not so well. But there is not always depression. So you cannot explain it by profit and loss, nor by saving.
DG,
My "who knows really" is meant to capture the fact that we won't know what will happen if everyone starts saving. You present a compelling case that the money still in circulation becomes more valuable, but, I'm just throwing this out there, economics does contain a bit of psychology and sociology.
If the mood of the masses is that spending is bad and saving is good, then all of the news about retailers suffering because spending is down will just reinforce that feeling. Eventually, people will realize that there is a bunch of stuff out there that's cheap (houses, cars, cases of the good Ramen noodles) and that should start turning things the other way.
I'd also say that I'm presenting a case against the stimulus with that last paragraph. The cheap stuff won't come if things don't die and release their stagnant assets.
dg lesvic:
Technically, I suppose a "depression" is defined by falling output, but if the human population peaks and then declines, this definition needs revision.
As a practical, political matter, unemployed human beings are the idle resources demanding reorganization.
If enough non-human capital were unemployed, this could be true. All of Mars is unemployed, but this unemployment seems inconsequential. Fully employed labor does not imply inflation, because labor has a marginal value. Trying to "stimulate growth" when labor is already fully employed at its marginal value is a good way to inflate wages and other prices. I do worry about this problem when statesmen declare a "recession".
I'm not concerned with the "fault" of the "capitalist system". I'm not a politician assigning blame to my partisan rivals.
Extending credit is not supposed to create land. It's supposed to entitle the credited to organize idle factors of production. Money is entitlement to consume or invest, to bid for consumer goods or capital goods.
I nowhere ever suggest that saving is a problem; however, if "saving" is holding gold, this particular "saving" can contract credit under a gold standard.
I don't ordinarily call this desire to hold gold "saving", because I associate "saving" with "investment", and I associate "investment" with organizing resources to add value. Holding gold is the consumption of a durable commodity that doesn't add any real value to it. If you buy gold bullion to coin it or to fabricate integrated circuits with it, that's investment.
If you "save" simply by accumulating entitlement to tax revenue, like Treasury notes, I don't call that "investment" either.
Sigh. I have never, anywhere, ever suggested that saving could cause a depression, so I have no idea why you expect me to defend this proposition. I'm not obliged to defend any proposition that you attribute to me. It's your proposition, so why don't you defend it?
If "print more money" is another way of saying "entitle someone to organize idle resources seeking profit", then I do advocate this path to recovery. Do you advocate something else?
Santa Claus,
You wrote:
"My 'who knows really' is meant to capture the fact that we won't know what will happen if everyone starts saving."
What will happen is that there will be more capital for investment.
If you're anxious to end the suffering of retailers, you should let things hit bottom and bounce back up again as quickly as possible. All of the efforts to keep things from hitting bottom just prolong and deepen the agony.
I've resurrected your full quote above so we can talk about it properly. What you discussed above is a system of gold-backed money. Like the sort that was employed in the UK in Keyne's day. You don't understand how that system works. It is *not* free-banking.
In Britain at that time only banks were permitted to issue banknotes. Other organizations could not legally do so. Those banks could only issue banknotes against their gold reserves. They could not issue money against any sort of asset. If they issued a note saying "I promise to pay the bearer on demand the sum of £100" without backing for that in gold then the Bank of England would put them out of business. The same is true of most other gold standards.
I explained this is context of a full-reserve system, but it is just as true of practical fractional-reserve systems.
That doesn't remove the basic problem of contracts that you are talking about.
Yes. But that doesn't settle the issue. Why does encouraging one sort of contract solve the problem?
This is a simplistic way of looking at the problem of Capital. Usefulness cannot unambiguously be demonstrated by profit.
When the government perform a deficit-spending project or issue money they change the nature of profit.
Read the Austrian books on capital. They explain how it is possible for an enterprise that does not do anything useful to be profitable if the interest rate is low enough.
Well, I agree with you. However, what you are saying here is that the Ricardian aggregates – GDP etc – do not give an accurate picture.
When I say it is easy to create a boom what I mean is that it is easy to manufacture a high GDP figure or high GDP/capita figure. (Much easier than using monetary policy, in Ireland where I live it is done by low-balling the population figures).
Once you recognize this though you cannot claim what you have above, that a profitable business is necessarily a socially useful one. Is Halliburton useful? Probably only parts of it.
Martin,
You wrote,
"Sigh. I have never, anywhere, ever suggested that saving could cause a depression."
I'm glad we agree on that. Now let's see if there's anything else we still disagree about. You furthermore wrote,
"If 'print more money' is another way of saying 'entitle someone to organize idle resources seeking profit', then I do advocate this path to recovery. Do you advocate something else?"
What resource is idle, why is it idle, and why is inflation an appropriate solution to the problem?
No it isn't. Printing more money is printing more money. Saying it is "entitling someone to organize idle resources seeking profit" requires much more justification.
You are close here to John Law's fallacy.
If a profitable enterprise can be constructed then the "supply of money" is irrelevant. The entrepreneur does not need money, he or she needs assets and loans. These can be denominated in money but they are not money.
To say that they cannot be put in place because there is not enough money is false. It is as George Selgin once said like saying "How could I possibly measure this elephant, I don't have enough millimetres".
What matters here is the rate of interest, which is another matter altogether.
"Printing more money" can mean any number of things. Like I said, if it means "entitling someone to organize idle resources seeking profit", then I advocate this approach to employing idle resources.
Now, if you'd like me to describe more specifically how credit might be extended this way, as opposed to handing a trillion bucks to a handful of corporate officers at the top of a massive, established credit bureaucracy, I'll take a stab at that too. I've already suggested it in another thread.
I'm not close to any idea you attribute to me, and neither is John Law, but if you'll specify what you mean here, we can discuss it.
I haven't said anything about "the supply of money", but profitable organization does not spring miraculously from the void in a free capital market. Human actors exercise authority to organize resources profitably. This authority must exist, and in a thoroughly monetized economy, the authority takes the form of money. Ideally, persons exercising this authority lose it if they fail to profit, because their failure to profit signals a lack of the knowledge of how to profit. Someone possessing this knowledge today may not possess it tomorrow.
Of course, real assets are not money. Money is an accounting device. In a capital market, money accounts for the holder's entitlement to obtain authority over real assets. If I'm already entitled to govern real assets, I may not need money to obtain authority over more assets in order to profit. That's true enough. It's also beside any point I'm making.
If many idle resources lie around, then people holding this authority, if any, presumably don't know how to exercise it; otherwise, they would. It's also possible that no one effectively holds the authority. No one may have any entitlement to organize resources that isn't already fully exercised.
But they don't just fall magically into place. Organizing resources profitably is itself a costly process. For example, if I don't already possess particular resources I need, searching for them is costly.
Of course, money is like a measuring device and not like the things measured. I've made this point explicitly myself several times in this forum. Money measures the holder's entitlement to demand resources, at prices established by the market. That's why we call it supply and "demand".
Labor is idle for example. It's idle because it isn't integrated effectively into a profitable organization. I nowhere ever suggest that inflation is an appropriate solution to the problem. I say that extending credit can be.