DG (the Grim Reaper) Lesvic

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.

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.

This is a particular issue for those that ignore the unseen.

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.

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.

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.

It is submerged objects (such as under gravity when object density exceeds that of water) that displace their volume in water.

Good point. I stand corrected.

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".

How many times must we go over the same ground?

Until one of us stops?

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.

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 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 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.

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.

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.

The market would then bid up the rate until it was high enough.

There needn't be any rate 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.

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.

Is that what you want?

I want sufficient credit to employ resources fully. That doesn't mean zero unemployment, but it certainly doesn't mean 10% unemployment either.

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.

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.

Inflation would only create the illusion of credit, and the misallocation of resources, from productive to non-productive uses.

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.

A cat has nine lives.

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.

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?

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.

What do you mean by inadequate demand?

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.

Inadequate compared to what?

Compared to the productive capacity of the resources.

We produce a lot of sh!+ on a daily basis that has no demand. Will that cause unemployment?

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.

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.

If you're reading, I've addressed your last post in "Is Keynesian Economics Really Economics?".