The debate between demand-siders (Keynesians and one aspect of monetarists) and supply-siders (Austrians and other aspects of monetarists) is on-going. (Note that I here use the term "supply-siders" broadly, to encompass not only those persons who emphasize cuts in marginal tax-rates as a means of promoting economic growth, but those who — regardless of their stand on taxes — emphasize that microeconomic conditions are paramount.) The differences are not easy to resolve.
Keynesianism has three public-relations advantages over supply-side economics. First, it is instinctively appealing to business people — indeed, to anyone who makes a living by selling goods or services (including labor). If demand for any firm's output or worker's services were higher, that firm or worker could sell more without lowering prices and would, therefore, likely be better off. When demand falls, on the other hand, either output or prices or both fall.
Demand is good, and business downturns can be 'cured' by raising demand. What's true for the individual firm and worker, it is concluded, must therefore be true for the economy as a whole.
It is no small irony that that conclusion results from the commission of the fallacy of composition.
Second, Keynesianism naturally appeals to politicians who then naturally talk as if it is valid.
Third, Keynesianism — and, more generally, all macroeconomics done using aggregates such as (Y=C+I+nX+G) — lends itself rather readily to empirical analysis. It's relatively easy to get data on aggregate demand, international-trade flows, and government spending.
Whether these data mean much, or even what they mean to the extent that they have meaning, are open questions – as are questions about the significance or meaning of any observed or measured regularities between these aggregates.
The ability to write letters on a board in the form of an equation, to give those letters names that seem to correspond to some imaginable economic things, and to assemble quantitative data on those things, is not necessarily good science.
For reasons explained in the link below, and simply because I very much doubt that, say, Europe's secularly high rates of unemployment could be reduced by raising aggregate demand, I doubt that Keynesianism is good science.
I encourage all of you who haven't read Hayek's 1974 Nobel Prize lecture — "The Pretense of Knowledge" — to do so now. It's free. It's wise. It's vital.
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Great post.
Don't you sometimes question if we should even be arguing against Keynes and his top-down, growth for growth sakes, short-term strategy. Said differently, such education is not something you can necessarily teach but must be learned through experience.
For we can not argue that economic evolution is true progressive education and Darwin's science would conclude that the fittest system will eventually win out. In other words, "microeconomic conditions are paramount".
Those letters on the board may be science, but without the letters "F" "O" "O" "D", it ain't the science of economics.
Hayek's criticism of Empirical/Statistical/Mathematical Economics can be entirely applied to GlobalWarming Alarmism. Both are pseudo sciences at their best.
Hoover was an Engineer and so am I, yet I have not pretense that I or anyone else can punch in few keys, or press a button, or pull a lever and make the economy dance to any tune.
The polar ice caps are melting at an alarming rate. If you edit out the word "alarming" please replace it with "catastophic." The heavily over-populated coastal cities are in danger of flooding in the near future that will make what happened in New Orleans seem like a cakewalk by comparison. My father used to explain the reason he was too cheap to buy air conditioning for his car was by calling an 107 degree day in the shade "pleasantly warm" as sweat poured from his brow. Who was my dad kidding, and who are you?
Interesting point about macroeconomics being built on a foundation of JMK's statistical constructs.
People want answers to macro questions though, and will listen to anyone who claims to have them. I fear that as long as "supply siders" lack a quantiative way of describing the macro economy, Keynsian ideas will remain influential.
Is anyone familiar with the work being on agent based models and complex systems theory? It seems to be a promising way to use micro theory in a macro context…
When you get to say anything you want, and ignore the role of prices, that is neither economics nor science.
Thinking about Keynesian demand side theory sounds like the ultimate free lunch … why doesn’t the government just take every single dollar that is out there right now (as if it is all hanging off a tree) and spend it all themselves? That would mean that our current $14 trillion GDP would turn into $21 trillion! And then simply rinse and repeat, and whala … we get $31.5 trillion … before you know it, we’ll all be infinitely rich. Sadly, this sort of rubbish passes for good economics in the year 2009.
In any case, to see why such “multiplier” effects are nonsensical (ignoring for now the 800 pound gorilla that is called “opportunity costs’), let’s write down a simple national income identity that ignores investment and international trade. Without loss of generality we can express national income (Y) as the sum of household consumption (C) and government spending (G):
Y = C + G
If we believe that consumers spend 75% of their additional income, then C can be rewritten as 0.75Y. Substituting into the equation above we get:
Y = 0.75Y + G
And with some simple algebra you will find that:
Y = 4G
Every dollar of government spending results in $4 of increased income! The Keynesian free-lunch.
To see why this is nonsense, let’s just write down another identity that has to be true:
Y = Y(Wintercow) + Y(Everybody else)
If the total income in this economy is $10 trillion, and Wintercow’s income is $50,000, then we know that:
Y(Everybody else) = 0.999999995 x Y
And substituting this into the above, and doing a little algebra, you get:
Y = 200,000,000 x Y(Wintercow)
So, according to the same identity, every dollar spent by Wintercow would generate $200 million of additional income! The ultimate free lunch, no?
Pop quiz time … what is wrong then, with the national income accounts and the Keynesian multiplier?
I've worn out two copies of Human Action, but couldn't wade through that whole piece by Hayek.
If you want to save the world, you're going to have to do better than that.
Funny. I find Human Action to be unreadable.
“I've worn out two copies of Human Action, but couldn't wade through that whole piece by Hayek.”
That’s like saying I conquered “War and Peace” only to find “Everybody Poops” a challenge—not to equate either with Mises and Hayek (both of whom I hold in the highest regard) with either.
I think it is more than strange to believe that when the government buys 2 TV sets, the government gets 2 TV's and someone else gets one for free. A great deal. But, it is entirely due to miscounting transactions as being wealth.
If Obama (via Keynes) is correct, that there is a 1.5 spending multiplier, that $100 in government spending produces $150 in wealth, then we should all benefit from counterfeiting.
Let's Counterfeit Our Way to Wealth
Where have I gone wrong? Where has Obama and Keynes gone wrong?
I think that Keynesian ideas will remain influential as long as they tell politicians that they can fix things. Any philosophy which puts government in the driver's seat will always have sway.
You mean "ice cap" since the south pole hasn't been shrinking, but growing. And even the north pole ice cap has been growing for the past two years.
The IPCC's worst case prediction is 59 cm in the next 100 years (down from 88 the prior report). Methinks you have your switch set to hyperbole.
Rising or falling GDP is consistent with many different interpretations, and contradicts very few. In other words, it does not say much, it is uninformative, it is logically weak.
Unfortunately, many people suppose they can derive a great deal of useful information from GDP. Blinded by their own assumptions, and bereft of sufficient imagination. They suppose that only one interpretation is possible, that the evidence "speaks for itself", and that they are conducting "real science".
And even the north pole ice cap has been growing for the past two years.
Not to forget that north pole cap is floating and therefore does not affect sea levels.
Perhaps Keynesianism should be referred to as political economics. The presumption is that the government manages the economy, there is a credit/currency monopoly, and that economic activity is the purpose of said management.
For the same weight, volume of ice is about 8% higher than the volume of water. So melting ice will actually bring down the see levels.
sea level
Keynes is right in the short run, but the Austrians think “what next”?
Start at full employment, and “animal spirits” cut investment. If prices-wages are sticky downward, then you have a multiplier of 4 if consumers save 25% of income. Example: I falls by 2, so Y falls by 8.
Let the INITIAL full-employment data be: C=70, I=10, and G=20. If I falls by 2, the RECESSION data must be: C=64, I=8, and G=20.
The Keynesian fix is to increase G by 2, and we are back at full employment. But now C=70, I=8, and G=22.
Note that G is a flow, and the Austrians say you can’t do this over and over. Over time G will just get bigger and bigger.
This must be so because if I were to increase by 2 at full employment, prices-wages rise (they are not sticky upward), so I must crowd out C and not G during a BOOM phase. Thus, when I rises after the first Keynesian fix, we have C=68, I=10, G=22.
Another recession comes along, and the Keynesians fix it by moving G to 24. I stays at 10, so C=66. There is a boom, and I moves to 12, C to 64, and G stays at 24.
Repeat the business cycle, and … C=64, I=10, G=26. And so on, and so forth. C keeps going down, I stays where it is, and G keeps going up.
If C and G were perfect substitutes, there is nothing wrong with C=0, and G=90. But we know they are not. C is supposed to be private goods, and G public goods for the Keynesian model to even begin to make sense. Since food is a private good, C=0 is starvation city. Keynes was perfectly correct: in the long run we die! Either that or we’re under a centrally planned economy.
Conclusions:
1. The Austrians have a point. The only way to stop the “nonsense” is to make the price mechanism work.
2. The Austrians are wrong for railing against a particular Keynesian fix. When times are bad, a one-time Keynesian fix is OK.
What’s an empirical test for all this? Look at countries where G has crowded out C, and ask if that country is in good shape. The extreme case today is Zimbabwe, where inflation in annual percentage points is in the billions! Why that high an inflation rate? C is at subsistence, and no one else will lend to government, so money needs to be printed in ever-increasing amounts.
Human Action consists of two parts, the economics itself and the epistemology of it, that is, how to think about it.
I couldn't get the epistemology at first, but sensing that there was something to it, persisted, and, the second time through it, I got it.
I never could get it from Hayek's Studies in Philosophy, Politics, and Economics, never had the feeling that there was really anything to it, and, when I asked Murray Rothbard about it, he said he felt the same way about it.
While Hayek certainly wrote a lot of great stuff, I feel that, as an economist, he was a pale shadow of Mises.
I doubt that "Y=C+I+nX+G" is very meaningful, but I also doubt that "aggregate demand" is meaningless, because I don't confuse "aggregate demand" with "Y" in this simple formulation. This simplistic, linear equation is not the important insight in Keynes' notion of "aggregate demand".
Keynes' important insight is that monetary "demand" does not necessarily find a level employing resources at their full (or potential) marginal value to maximize output as classical economics suggests.
The classical approach clearly presumes monetary "demand", because the classical laws of supply and demand suppose an equilibrium in terms of a monetary price; however, a capital market with only endogenous credit (extended solely from the profits of existing capital) does not employ all resources at their full value. It couldn't possibly, because credit must precede the existence of profits generated by this value.
Furthermore, entitlement to consume is not simply a matter of productivity in fact. Authorities over capital (and not only the most central authorities in a state planning apparatus) can and will promise themselves more of this entitlement than their own productivity warrants, leaving little profit for reinvestment. State employment regardless of market demand, with its secure health and pension benefits, are an example of this promise but are not the only example. GM's costly employee benefits as well as the enviable bonuses of FNMA executives and other financiers are in the same category.
This result is not simply a consequence of labor unions demanding benefits. Labor unions may demand these benefits only insofar as they exercise the authority of proprietors. Proprietors generally will exercise the same authority, and corporate executives will exercise the authority even if they nominally are not the "proprietors" but only represent the diffuse proprietary rights of corporate shareholders. In reality, these "rights" are about as meaningful as my "right" to "govern myself" in our nominally "democratic" biannual plebiscites.
It makes no difference that proprietors slow the growth of their own productive organizations this way, because their competitors do the same, and when they've driven their organizations into bankruptcy, their proprietarian successors do the same. Human beings are always human beings, not the "rational profit seekers" of some imaginary economic theory.
Having said that, I do not advocate the "stimulus" package, because this sort of "stimulus" doesn't actually address the problem of inadequate aggregate demand in a way that employs idle labor at its greatest marginal value. It only employs labor as central planners want it employed. We could discuss other alternatives, but as long as we pretend that the classical assumptions are correct, we won't, and since the classical assumptions are not correct, we simply assume ourselves out of the real discussion entirely.
From Hayek the Enigma, by Bettina Bien Greaves, a review of Hayek's Journey: The Mind of Friedrich Hayek, by Alan Ebenstein, Liberty magazine, April 2005.
"In the course of rubbing shoulders with relatively mainstream economists in England and the United States, Hayek had become 'considerably more integrated with the rest of economic academia, at least with respect to practical policy and personal comity….While he did not backtrack from his fundamental analyses, he countenanced and even advocated that activist monetary policies could be appropriate policy and that even public works might have a role to play in evening out the vagaries of the business cycle'….In 'The Road to Serfdom,' he even advocated 'a comprehensive system of social insurance.' When Leonard Read, president of the Foundation for Economic Education, questioned him about this, Hayek's response was, as relayed to me by Read: 'I didn't want to be thought a complete kook.' The phrasing was undoubtedly Read's; Hayek's language was more formal."
"In reviewing 'The Constitution of Liberty,' Hayek's friend and mentor, Ludwig von Mises, praised Hayek for his 'brilliant exposition of the meaning of liberty…Unfortunately, the third part of Professor Hayek's book is rather disappointing. Here the author tries to distinguish between socialism and the Welfare State…(H)e thinks that the Welfare State is under certain conditions compatible with liberty…Professor Hayek has misjudged the character of the Welfare State.'"
But, later, as Ebenstein observed, "Hayek the classical liberal became Hayek the libertarian."
I also recall a discussion on television between Hayek and Buckley in which the main emphasis was on the morality of interventionist policies, which was a strange position for an economist.
From my own essay, The Purest Amateur:
"I know of no contribution of his (Hayek's) to economics that he didn't get from Mises. The idea for which he is most noted is that the market is a process of knowledge discovery. But what isn't? The knowledge discovered by the market is that of prices; and the price system was discovered long before Hayek.
I suspect that he was the more acceptable because Mises was the truer economist and greater threat to academic empire building and ethical grandstanding. Hayek's concessions to mathematics, moralizing, and even interventionism were not necessarily to his discredit. But neither did they make him a better man than Mises, just a better union man, and more congenial to delusional liberals and libertarians alike.
But however he did it, he succeeded where Mises failed. Mises changed Hayek, but Hayek changed the world."
From Hayek the Enigma, by Bettina Bien Greaves, a review of Hayek's Journey: The Mind of Friedrich Hayek, by Alan Ebenstein, Liberty magazine, April 2005.
"In the course of rubbing shoulders with relatively mainstream economists in England and the United States, Hayek had become 'considerably more integrated with the rest of economic academia, at least with respect to practical policy and personal comity….While he did not backtrack from his fundamental analyses, he countenanced and even advocated that activist monetary policies could be appropriate policy and that even public works might have a role to play in evening out the vagaries of the business cycle'….In 'The Road to Serfdom,' he even advocated 'a comprehensive system of social insurance.' When Leonard Read, president of the Foundation for Economic Education, questioned him about this, Hayek's response was, as relayed to me by Read: 'I didn't want to be thought a complete kook.' The phrasing was undoubtedly Read's; Hayek's language was more formal."
"In reviewing 'The Constitution of Liberty,' Hayek's friend and mentor, Ludwig von Mises, praised Hayek for his 'brilliant exposition of the meaning of liberty…Unfortunately, the third part of Professor Hayek's book is rather disappointing. Here the author tries to distinguish between socialism and the Welfare State…(H)e thinks that the Welfare State is under certain conditions compatible with liberty…Professor Hayek has misjudged the character of the Welfare State.'"
But, later, as Ebenstein observed, "Hayek the classical liberal became Hayek the libertarian."
I also recall a discussion on television between Hayek and Buckley in which the main emphasis was on the morality of interventionist policies, which was a strange position for an economist.
From my own essay, The Purest Amateur:
"I know of no contribution of his (Hayek's) to economics that he didn't get from Mises. The idea for which he is most noted is that the market is a process of knowledge discovery. But what isn't? The knowledge discovered by the market is that of prices; and the price system was discovered long before Hayek.
I suspect that he was the more acceptable because Mises was the truer economist and greater threat to academic empire building and ethical grandstanding. Hayek's concessions to mathematics, moralizing, and even interventionism were not necessarily to his discredit. But neither did they make him a better man than Mises, just a better union man, and more congenial to delusional liberals and libertarians alike.
But however he did it, he succeeded where Mises failed. Mises changed Hayek, but Hayek changed the world."
I didn't attempt to wade through Martin Brock's posting above, because he has already agreed that there was no basis to Keynesian "economics," that saving did not cause depressions, and that inflation was not an appropriate policy.
I recently taught a survey class in economics; part of the course description was that both micro and macro would be surveyed. I hadn't taught macro in many years, and I was casting about for a way to do it better than I had in the past; somehow I "googled" into Roger Garrison's capital based powerpoint. I subsequently checked his book out of our library. Because Keynesian macro appears to be so dangerously useful to politicians who seek to expand the role of government, I made sure my students learned some of its more obvious deficiencies. I then pivoted to Garrison's approach to provide them with an alternative. Garrison's book and powerpoint are resources that facilitate a compare and contrast with Keynesianism. If I have to teach macro again, I would again take this kind of approach.
Saying there is no basis to "Keynesian economics" because saving does not cause depressions and inflation is not an appropriate policy is like saying that there is no basis to "Friedmanian economics" for these reasons, since Friedman's economics implies neither.
You might also say that there is no basis for Newtonian physics because Newton didn't anticipate Einstein, but that would be a gross over-generalization too.
There is a basis to Keynes' claim that inadequate demand can create unemployment. I've discussed the necessity of credit to create this demand and why monetary credit doesn't simply materialize miraculously but requires some monetary authority to create it.
Spending directly by a state's most central authorities is only one method of generating this demand and is not the method I favor, because I want resources organized profitably and the state is not a profitable organization.
Gold bankers issuing promissory notes for gold are one example of this authority, but these notes do not represent banked gold and are not limited to a supply of banked gold. Fixing the price of gold this way can be an unstable monetary policy, because changes in the demand for gold then cannot change the price but must instead change all other prices systemically.
These assertions do not imply the truth of every word Keynes every wrote or anything else about "Keynesian economics" more generally.
Since Keynes accepted most classical, market economics, denying "Keynesian economics" generally is denying most classical economics.
I suppose a little inflation is a reasonable policy, but I can't tell you how to limit a monetary authority like the Fed/Treasury to a little inflation.
What do you mean by inadequate demand? Inadequare compared to what? We produce a lot of sh!+ on a daily basis that has no demand. Will that cause unemployment?
Martin,
Apparently your Keynesian "economics" is like the cat with nine lives.
How many times must we kill it?
Once again, we're talking about unemployment. That’s all.
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, for they can’t 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 the shortage of capital.
There is only one thing you can do about that. Ignoring Keynes altogether, restrict consumption and save.
Does your Keynesian "economics" have any more lives?
Of course inadequate demand creates unemployment. But demand is only inadequate at a price above whatever clears the market. Throwing money at the problem will just perpetuate an unsustainable growth path.
Interest rates need to rise, not fall. More cheap credit will allow more of the same mistakes to continue. The stock of resources available to invest is that which is produced but not consumed, and that stock needs to be replenished. Printing credit without producing new resources to invest will only promote more malinvestment. People need to save again, and require the incentive of high interest rates to do so.
A little inflation is not a reasonable policy. Central banks create inflation by expanding the supply of credit, but in the long run credit must be defaulted on or repaid–either way, the net change the money supply is zero. If credit enables good investments, then deflation will occur. Falling prices would then signal increases in productivity, that is, the falling cost of goods and services.
For a central bank to maintain a little inflation, it needs to expand the credit supply at an ever growing rate. In the long the policy is unsustainable; it will inevitably create ever bigger booms and busts until a major collapse occurs.
Oil Shock,
Inadequate demand creates a surplus. The minimum wage is a clear of example of inadequate demand at a legislated price. Because there is a lag in market's response to changing conditions, demand for labour may be temporarily inadequate at prevailing prices to clear the market. Presumably that is what Martin means.
When one industries' prices and profits fall, resources, like labour, can be reallocated to other ends. Although the transition may be dificult and upsetting to those involved, it is important to long term prosperity that such changes occur. But when many industries’ prices and profits fall, it is called "deflation". Feared by governments like medieval villagers feared passing comets, it spurs sudden, paniced, and bizarre reactions. Rather than allowing resources to be reallocated (usually purging rampant malinvestment from the economy), they rush to "stabilise prices" and "maintain confidence" and "stimulate the economy".
Lee Kelly,
Did I ever criticize you?
Shame on me!
"The polar ice caps are melting at an alarming rate. If you edit out the word "alarming" please replace it with "catastophic." The heavily over-populated coastal cities are in danger of flooding in the near future that will make what happened in New Orleans seem like a cakewalk by comparison."
Who cares? The coasts are full of Leftards, most of whom will sit there and wait for Uncle Sugar to rescue them.
Those with an IQ above a stump (ie; those who aren't socialists) have the brains to leave.
JPIrving,
"I fear that as long as "supply siders" lack a quantiative way of describing the macro economy, Keynsian ideas will remain influential."
Psychology may hold the key. It seems to me that a "recession" happens when aggregate businesses, forward thinkers by nature, foresee a coming downturn and take action to manage it. Running a business isn't just about producing stuff and selling it. Its also about seizing on opportunities and avoiding potential problems – i.e., timing. Aggregate businesses over correct when they foresee a downturn because it is in their interest to over correct – to conserve and wait for more opportune times. Can this be quantified? Maybe. We'd have to start with the input factors. World events, media, politics, word of mouth, what else?
Current,
If you're reading, I've addressed your last post in "Is Keynesian Economics Really Economics?".
Lee Kelly,
While I defer to you, because you have done a much better job at this than I, I would add just this thought.
As has been said many times here, since the recession is a curative process, purging th economy of bad investments, keeping it from hitting bottom keeps it from starting back up again, prolonging and deepening the agony, and turning a recession into a depression.
And now we're rushing to another. Empowering the public sector to "bail out" the private is just giving the bull in the China shop more China to break. Since it had nothing it had not taken from the private, it could not support but only undermine it. Throwing good money after bad, and keeping prices from falling to the market clearing levels at which recovery could begin, our macro-masters could only spend and meddle our way, not to prosperity, but into the poor house, the hardships of the Thirties and horrors of the Forties all over again.
P.S. Why focus on supply rather that demand? Because people always want to demand, but they don't always want to supply. The risk is on the supply side.
Inadequate to fully employ resources, particularly labor. People must feed, clothe and house themselves at least, and I want them to produce in exchange for this consumption.
Compared to the productive capacity of the resources.
Creating shit without demand seems a waste of resources. I'd rather employ these resources to produce things with demand. This employment requires credit for reasons I've discussed, and the profit generated by resources already employed isn't necessarily sufficient for reasons I've discussed.
In fact, resources already employed needn't generate any profit at all, precisely because we produce all of this shit with no demand. We also produce lots of shit for people simply entitled to consume it without producing anything in exchange, including the people producing the shit without demand.
There is no debate. The Keynsians have won, and we are simply whistling past the graveyard arguing the finer points of Hayekian philosophy amongst ourselves. Meanwhile the muirducks laugh and mock us.
oil shock,
As long as the iceberg density is less than or equal to the surrounding water, it will (under gravity) displace its MASS of water, regardless of the iceberg's density. Replace a floating 10 ton iceberg with 10 tons of water, and water level will not change no matter what the dimensions of the iceberg.
It is submerged objects (such as under gravity when object density exceeds that of water) that displace their volume in water.
Martin,
How many times must we go over the same ground?
You have already acknowledged that there is a relative oversupply of land and undersupply of labor, and that the owners of land must employ all of the available labor in order to maximize the profitable use of their land.
If all that is lacking is credit, it can not be created out of thin air, but only by a reversal of the Keynesian prescription, by restricting consumption and saving.
If those having done so do not wish to extend the credit they have earned, it is because the rate of interest is too low. The market would then bid up the rate until it was high enough. If there was no rate high enough, it was because conditions were not conducive to investment, and the likely was not of a return but a loss on it, and a squandering of resources.
Is that what you want?
Taxation would take the credit from those who have earned and would husband it and give it to those who have not earned it and would squander it.
Is that what you want?
Inflation would only create the illusion of credit, and the misallocation of resources, from productive to non-productive uses.
Is that what you want?
A cat has nine lives.
Is that what you want?
Yes I guess there is no global warming nor our we in a recession….hmmmmmsssssiiiighhhhhh!
Until one of us stops?
Owners of the land (non-human capital generally) are not necessarily entitled to employ all of the available labor to maximize its profitable use. Simply owning the land does not imply this entitlement. The owners may owe too many taxes for example.
If you mean a forcible reversal of consumption and saving, with an abrogation of contracts and reorganization even of productive organizations that are not bankrupt, this deflationary approach might work in principle, but it's not a pretty picture, so I prefer another approach when demand is inadequate.
All the money circulating through the economy now was created at some point, mostly by extending credit. Why stop extending credit this way now? Why deflate now? Because you already have a stash of money and want its spending power only to increase?
Maybe you float on this stack of cash, but my kids aren't in the green boat with you, so I'm not interested. I don't want hyperinflation, and I do fear it, but I don't want protracted deflation either. I want my kids to find new employment quickly in situations like this one, not after years of protracted wrangling among established proprietors in bankruptcy courts and legislatures.
No. Simply raising interest rates need not increase the utilization of idle resources. In fact, the opposite is true. At some point, the higher the rate, the less resources are utilized.
There needn't be any rate high enough.
If conditions are not conducive to investment because many people are simply entitled to consume the yield of capital unproductively, and the capital thus generates insufficient profits to reinvest, we need to change this predicament by stripping people of these entitlements, hopefully without violent insurrection to overthrow the established state entirely.
Here again, you're simply ignoring the fact that people not simply entitled to their consumption may not have sufficient liquidity to save. If sufficient savings don't exist, the interest rate makes no difference, and it simply isn't true that anyone may choose any combination of consumption and savings he wants at any given time, because established contractual obligations prevent it. I can't choose to stop consuming my mortgaged house and save the mortgage payment instead unless I first pay off the mortgage by selling the house and then find a place to live rent free.
I want sufficient credit to employ resources fully. That doesn't mean zero unemployment, but it certainly doesn't mean 10% unemployment either.
I don't want the credit extended by central authorities through taxation, but I'm not interested in talk of who has "earned" what and how God will not be happy if any title ever changes again. That's just a lot of simple nonsense.
You "earned" whatever you own as monetary authorities extended credit in the past. This monetary system has gone on ages, long before the Fed existed. Precisely how it should go on is debatable. A gold standard is one option, but there has never been a "full-reserve" gold standard and there could never be one without a draconian state to enforce it.
No. The credit is as real as the expected productivity of the reorganized resources. What matters is the utility of this organization, not the source of the money. If you personally wish not to deposit cash in a bank when the interest rate on demand deposits is so low, you may purchase gold or silver or real estate or corporate shares or anything else you like instead, even local labor to produce something of value hoping to profit in the marketplace. If don't want to do that, stuff your money in a mattress. It makes no difference to me.
The Fed-Treasury complex may be on its last legs. I don't know about that, and it's irrelevant to any point I've made. I can tell you specifically which reforms I advocate, and I don't advocate what you call "Keynesian stimulus", but I don't therefore imagine that every word Keynes ever wrote was mistaken. As Boudreaux himself seems to acknowledge in a recent post, even the New Deal wasn't a "Keynesian" stimulus in the sense of Keynes himself. Most of the pundits with "Keynesian" on their lips have no clue what Keynes said about anything.
If I were lord of the United States, we'd have a Federal government a small fraction of its current size, but we'd still have adequate credit when resources are idle to maintain stable prices at least, if not a small rate of inflation, because I don't want your purchasing power continually to increase simply because you hold cash. If you want increased purchasing power, buy something with marginal value and work to invest it fruitfully, and stop whining about your lost entitlements.
"The Pretense of Knowledge"
Torture for the dyslexic. Brilliantly literate people like this Mr. Hayek who can write words and string them together so eloquently to explain that something that sounds grand in its complexity may indeed be nothing more then snake oil try my attention shortened brain to no end. But alas several reads and re-reads over… followed by a round or two of espresso… and several more reads and I see his own fallacy… the very one he describes too eloquently is the same trap to which he falls into himself. If only I could express myself as well. If only the words could flow as well and neatly from my thought I would certainly bring his argument to its knees… but alas I will try… my poor writing doing a disservice to the truth of his error… but I will try.
First, for argument sake , though I do not believe it so, I will concede that economics is not science. I will concede that society is TOO complex too measure , define and predict.
Hayek claims,"To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm."
He must realize this rule applies to himself and his knowledge or lack there of as well. But I suggest he goes on to exempt himself from his own rule.
Hayek claims, " But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces….
On what grounds can Hayek claim that the proletariat rising up against their seen oppressor the bourgeoisie as NOT part of the emergent order of society?
Hayek, " We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based…
Yes , indeed, please take your own words to heart. Please don't pretend YOU know how best to order society. Please do not pretend that economy encompasses all that is society.
Hayek, "He will therefore have to use what knowledge he can achieve…… to cultivate a growth by providing the appropriate environment,…"
So apparently HE knows enough to give us the right prescriptions for "societal growth" while the peasant who's children labored 15 hours a day should have no say in how things are ordered?
Hayek, "The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society"
All do respect Mr. Hayek, man's striving to control and plan and order society IS part of the emergent order of society. As you said this is not science its too complex to pull one part out from any other… social democracy is the current state of the emergent social evolution of human society. If economics is not science then to attempt to pull it out from the rest of the endeavor of studying human society is indeed likely to result in, as you say, "to do more harm than good".
Good point. I stand corrected.
Inadequare demand is a strawman argument. Demand is always unlimited. The reason why I live at the level that I do, is not due to a lack of demand on my part, instead it is due to a lack of wherewithal to pay for it. My wherewithal comes from my level of production. As a Software Professional, when I go to a store and buy something, in effect, I am trading a little bit of software. Money creates illusions that deludes Keynesians into thinking that they can create these meaningless aggregates.
Lee Kelly,
Totally agree.
Lee Kelly and Michael Smith should post more often. You guys have good talent to express ideas clearly and patience to do long posts if needed. we all benefit from it.
Muirgeo,
It is not just your inability to translate thoughts into sentences. I think there is a strong inability to comprehend. You sound as confused as ever.
"All do respect Mr. Hayek, man's striving to control and plan and order society IS part of the emergent order of society."
You obviously haven't understood emergent theory.
The idea is that order emerges without control. To label a "planned" or "controlled" society to emergent theory is a contradiction in terms.
IOW, the insight that there is emergent order does not suggest that such realization gives one the ability to direct the emergence of the order in a specific manner. The attempt to direct the emergence does become part of the emergence, but not predictably in any specificity.
This is a particular issue for those that ignore the unseen.
Lee Kelly:
Hayek says something similar in the Nobel lecture.
"We have indeed good reason to believe that unemployment indicates that the structure of relative prices and wages has been distorted (usually by monopolistic or governmental price fixing), and that to restore equality between the demand and the supply of labour in all sectors changes of relative prices and some transfers of labour will be necessary."
He's wordy here, and he can't resist a political presumption (that could be true), so I'll paraphrase. He says,
"Unemployment indicates that relative prices and wages are distorted and that restored demand for labour requires price changes and transfers of labour."
He doesn't say how these price changes and transfers of labor occur, and he doesn't suggest any inevitability of the changes. He only says that restored demand for labor requires them.
Hayek suggests that "monopolistic or governmental price fixing" distorts the relative prices and wages so as to limit demand for labor, and I agree, but "monopolistic or governmental price fixing" covers a lot of territory.
For example, if banknotes promising gold are legal tender, a gold standard itself is governmental price fixing. After all, a gold standard is simply a state decree that banks shall exchange banknotes for gold at an established price, like so many dollars per ounce of gold.
When demand for gold spikes under this standard, as when persons must pay more taxes in notes promising gold, the price of gold may not rise; therefore, by the laws of supply and demand, other prices must fall. Other prices fall as gold bankers demand the sale of collateral by calling in loans. This deflation is the simplest "systemic" effect of unwinding credit.
But direct taxes aren't the only rents payable in a legal tender than can distort demand. Contractual obligations of proprietors to one another can have the same effect. After all, these obligations are simply decrees of authorities over capital, like the taxes.
If corporate officers contractually obligate a corporation to provide tenured employees (including themselves) retirement at 55 with enviable pension benefits, the employees technically "earn" the benefits, but if the corporation becomes unprofitable, the "earnings" were only an illusion. If the corporation never becomes unprofitable because it effectively monopolizes some essential good, the benefits differ little from a tax imposed on consumers of the essential good.
Hayek is aware of this fact, because he writes "monopolistic or governmental price fixing" to make the distinction. In my way of thinking, a "private sector" organization effectively empowered to fix a price is "governmental", but that's only a matter of semantics.
OK Martin, this is it, your last life, a fight to the death. But I have to go out for a bit, so enjoy your repreive, while you can. But prepare yourself. The end is near.
DG (the Grim Reaper) Lesvic
And I'd like to bury Muirgeo's sorry ass, too, but you can't keep a good zombie down.
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