On Keynesian Economics

by Don Boudreaux on March 21, 2009

in Stimulus

In this newspaper op-ed, I express some of my objections to Keynesian economics.

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{ 38 comments }

Arare Litus March 21, 2009 at 9:14 am

Interesting. I did not know that, essentially, stuffing money under the bed was the mechanism Keynesians think underlie problems – I can see this happening in bank run eras, but not really now. I simply assumed they thought that savings were not productively used (i.e. sat in the bank).

"Now suppose that an unusual amount of such economic changes take place at one time. The result will be, and should be, that an unusual amount of economic displacement takes place in the short-run as an unusually large number of workers adjust to the new pattern of consumer demands."

I am not familiar with what metrics are available – but has anyone seen if more of individuals money was "stockpiled" in banks and other savings (gold futures etc)? If this information was available, I would imagine that Keynesians would/should have used this to demonstrate a lack of consumer spending, versus a shift.

Arare Litus March 21, 2009 at 9:23 am

Scratch the gold futures, bad example.

Martin Brock March 21, 2009 at 9:35 am

Why would people strive and take risks only to accumulate pieces of paper that they stuff under their mattresses indefinitely?

This question completely misconstrues "inadequate aggregate demand". "Stuffing money in a mattress" does not create the problem. Buying entitlement to unproductive rents creates the problem. Few people stuff cash in a mattress, but many people buy entitlement to unproductive rents.

Buying entitlement to unproductive rents is no more productive than stuffing money in a mattress, and it entitles the buyer to consume without producing. This entitlement to consume can decrease demand for real resources.

The other side of an productive rent is an obligation to provide goods without a corresponding entitlement to consume goods of comparable value. The absence of this entitlement to consume, on the other side of unproductive rents, is the source of inadequate aggregate demand, not literally stuffing money in a mattress.

If government merely makes itself unobtrusive, entrepreneurs will constantly search for (and find!) new ways to satisfy consumer desires.

If governments never harm or threaten to harm trespassers and never evict tenants paying no rent, perhaps people always find sufficient land to farm, but governments do enforce propriety this way. A theory that simply assumes such a monumentally unrealistic proposition seems unlikely to describe reality.

Also, whatever portions of incomes are not spent today buying consumption goods will be invested in these projects. There will be no problem with total demand being chronically too low.

This statement simply assumes that "projects" attracting "investment" necessarily employ all idle resources. Why would this be true? Is the word "project" like "open sesame"? Does it possess some magical power? I don't understand the mechanisms involved here.

If half the population owns all the land, and if each person in this half of the population is both satisfied by his consumption and obligated, by various contractual and statutory rents, to provide others in the same half of the population everything his land and labor produces, then no one in this half of the population may pay anyone in the second half to produce anything, and no one in the second half may earn entitlement to farm land.

People in the second half of the population have no "marginal value", because they have no energy, because they have no food to eat, because none of them can farm, and they also can't earn money to buy food from the people who do own land to farm, because these people owe all of their money to each other.

That's the "aggregate demand" problem. You don't rebut it. You simply ignore it.

Martin Brock March 21, 2009 at 9:39 am

I did not know that, essentially, stuffing money under the bed was the mechanism Keynesians think underlie problems …

That's because it's not. "Stuffing money in a mattress" is just a popular phrase. It's not literally the "aggregate demand" problem at all.

Adam March 21, 2009 at 9:49 am

My problem with the Keynesian argument has always been that it seems to address a symptom, and not the disease. "Reduced aggregate demand" has always meant to me a reduction in demand for what is currently being produced. Reducing the demand should mean increased demand elsewhere, and not a reduction in toto. By trying to keep demand up where it currently is, Keynesians are fighting "the last war." They should be looking where demand is currently accumulating.

Martin Brock March 21, 2009 at 9:55 am

Reducing the demand should mean increased demand elsewhere, and not a reduction in toto.

Why do you believe this?

In the scenario above, the fact that land owned by the first half of the population might produce sufficient food to fuel the productivity of the second half is irrelevant, because the issue is money and obligations to pay money (existing bonds between the people in the first half), not any real potential. The economy I describe exists in a stable but suboptimal configuration, suboptimal in the sense of its total productivity.

A collection of atoms can exist in many different molecular configurations. Each molecular configuration is stable, held together by bonds between the atoms, but different molecular configurations have store different amounts of potential energy. It's like that.

Martin Brock March 21, 2009 at 10:36 am

… entrepreneurs will constantly search for (and find!) new ways to satisfy consumer desires.

Needless to say, many if not most entrepreneurial experiments fail, and investors in these ventures lose money. A high rate of failure of this sort in a rapidly growing economy is inevitable and essential to the success of market organization. Just as evolution by natural selection doesn't operate without death, effective market organization doesn't operate without investors losing lots of money.

But "capitalists" don't like losing money, so they continually demand that states substitute unproductive rents for their losses. We all have our FDIC insured bank accounts, and many of us have pension funds invested in bonds insured by AIG's default swaps, because we're all "capitalists" now.

Martin Brock March 21, 2009 at 10:46 am

Yes, I'm a social Darwinist, but the "persons" that are supposed to "die" in a market economy are corporations, like AIG, not people. People can lose money, but that's no big deal, because money is only an entitlement to consume or invest, and people enact new entitlements continually.

LowcountryJoe March 21, 2009 at 11:08 am

A collection of atoms can exist in many different molecular configurations. Each molecular configuration is stable, held together by bonds between the atoms, but different molecular configurations have store different amounts of potential energy. It's like that.

But isn't it all matter? In other words, wont demand just rebound as the price signals from capital movements begin to work their way through the economy? Sure there's some short-term changes and disruption but in the end, and IF LEFT ALONE, these things work themselves out in a new-look aggregate demand.

Unit March 21, 2009 at 11:33 am

So instead of "the paradox of thrift" it's the "non-paradox of idleness" that we should be talking about: in times of regulatory uncertainty people put plans and expectations on idle. Why? One big reason is that in times govt hyperactivity the total "effective conductance" of information by the price system goes down. In other words people's confidence in price signals decreases and it becomes much harder to make predictions or cost-benefit calculations.

Martin Brock March 21, 2009 at 11:41 am

But isn't it all matter? In other words, won't demand just rebound as the price signals from capital movements begin to work their way through the economy?

Why do you expect one stable configuration spontaneously to rearrange itself into another, more productive configuration? Why would it? Bonds must break for this rearrangement to occur. Breaking a bond requires a force stronger than the bond. What is this force stronger than established propriety?

These days, economic bonds often are temporary. We have 30 year mortgages, but we aren't bound to a homeland by serfdom, and we may sell our mortgaged homes to move toward more productive work. Even if I owe more on a house than its current price, the debt may not long bind me to the house, because foreclosure or bankruptcy may liquidate the bond. We say "liquidate" for this reason. When a solid becomes a liquid, bonds are broken.

The problem occurs when breaking unproductive bonds becomes more costly, in monetary terms, from the point of view of persons accounting for their individual monetary worth, than not breaking the bonds. An economy then "freezes" into some configuration that need not employ all factors optimally and need not employ some factors at all.

Sure there's some short-term changes and disruption but in the end, and IF LEFT ALONE, these things work themselves out in a new-look aggregate demand.

What does "left alone" mean? Does "left alone" mean that I may ignore your forcible right to charge me rent on a parcel of land you own and begin farming the land for my own sustenance? If "left alone" means something else, then you simply ignore the problem, because established bonds of propriety are the problem.

Martin Brock March 21, 2009 at 11:56 am

One big reason is that in times govt hyperactivity the total "effective conductance" of information by the price system goes down.

I agree, but this effect doesn't seem relevant to inadequate aggregate demand. If everyone expects new credit to appear as needed when many idle resources appear, this expectation is part and parcel of the information that economic actors consider. I suppose we are in a "hyperactive" state now, but this fact doesn't imply that "aggregate demand" and "inadequate aggregate demand" are meaningless notions.

Again, if you look back at Don's 11/22/08 post, you'll find Lerner, Brown and Pepper all agreeing "that the New Deal cannot be described as a Keynesian stimulus program." The article Don links argues that the New Deal was not a "Keynesian stimulus" at all. It may have been hyperactive, but it wasn't Keynesian, not according to Don's article anyway.

Here's the post.

Sam Grove March 21, 2009 at 12:33 pm

I'm sure don remembers that article, as do I.

Is it argued that our participation in WWII constituted a Keynesian stimulus?

Sam Grove March 21, 2009 at 12:36 pm

"Stuffing money in a mattress" does not create the problem. Buying entitlement to unproductive rents creates the problem. Few people stuff cash in a mattress, but many people buy entitlement to unproductive rents.

Regarding economic growth, do these not have similar effect?

Seems to me that latter would be worse than the former.

Would you give some examples of unproductive rents?

Sam Grove March 21, 2009 at 12:37 pm

Ooh, and please contrast with examples of productive rents.

Crusader March 21, 2009 at 1:51 pm

Martin – in the end capitalism is just a fever dream of the far right wing. The fact that so many "capitalists" demand government bailout should put a fork in it forever. Long live Communism!

Crusader March 21, 2009 at 1:52 pm

Productive rents – whatever Martin can make money of!

Martin Brock March 21, 2009 at 2:09 pm

Would you give some examples of unproductive rents?

Various taxes are the quintessential example, but any more literal "rent" can be unproductive. Obviously, I assume a definition of "productive" that isn't simply monetary, i.e. I don't assume that an exchange of money is de facto evidence of "productivity", so the real question here is "what is production"?

For example, any rent a landlord may expect on undeveloped land is an unproductive rent, i.e. this rent doesn't reflect any productivity of the landlord. The rent may reflect productivity of the land, but since the land is undeveloped, the landlord has not contributed to this productivity. He's only entitled to its monetary value.

If a farmer holds title to the land instead, without any obligation to the landlord, then the tenant is entitled to the land's marginal value as well as his own. The original Republicans (like John Fremont) argued for "free land" on the American Frontier in this way. "Free" in this context meant free of unproductive rents.

We've also discussed your right to charge me to cross a parcel of land you own to reach a body of water on the other side, even if the crossing does not harm your crops or otherwise diminish value you add to the land. This crossing is valuable to me, if I must walk further to reach the water otherwise, but the value to me is not produced by you.

You may charge the rent only because you'll shoot me if I take the shorter path without paying you. Thus the value of this rent is not the marginal value of the land or of your labor or of the water. It's the value of your threat to shoot me and little else.

So that's essentially what I mean by "unproductive rent", valuable threats to shoot people.

Martin Brock March 21, 2009 at 2:11 pm

Crusader – Attributing words to Martin that Martin never wrote doesn't make me a "deceitful politician", because I choose to describe myself otherwise.

Martin Brock March 21, 2009 at 2:23 pm

I typically argue here as the eighteenth and nineteenth century liberals argued, as the forebearers of modern "libertarianism" and even "anarcho-capitalism" argued, people like Benjamin Tucker. I always have.

I also understand marginalism. Non-labor resources, like land, are certainly productive, and governing these resources is therefore valuable. People entitled to govern resources can organize the resources more effectively by exchanging titles in a capital market.

That's all well and good, and I'm all for it, but I don't confuse the productivity of a resource with the productivity of its title holder. A theory of economic relationships that conflates the former with the latter can't describe reality well.

Martin Brock March 21, 2009 at 2:32 pm

If a farmer holds title to the land instead, without any obligation to a landlord, then the farmer is entitled to the land's marginal value as well as his own.

vikingvista March 21, 2009 at 4:03 pm

The Keynesian mistake is a misinterpretation of spending. They see that in a healthy economy–a wealth producing economy–there is a lot of spending going on and GDP grows. They therefore assume that to create a healthy economy, all you have to do is spend, and get your GDP calculations to grow (by increasing G).

What they don't seem to realize is that spending is just a way people use to increase their wealth. But having me give up something that I'd rather keep, or take something that I don't want, does not increase my wealth. Spending is not in itself wealth production any more than just "driving" will get you to your destination. You may drive in the wrong direction, which will make you worse off than not driving at all.

And how can the government not drive in the wrong direction? How can they possibly identify the demands of a economy of 100's of millions of individual players, particular at a time when those demands are in transition? And of course, why would they even need to, since those players already know their own demands, and will act on them when it is in their self interest to do so. By spending in defiance of those individuals, government is fighting the transition to the new demand, and doing so at the expense of the economy.

So the paradox of thrift is only a paradox to those who see all spending as interchangeable, without regard to actual wealth creation.

Sam Grove March 21, 2009 at 8:07 pm

You may drive in the wrong direction, which will make you worse off than not driving at all.

Government is guaranteed to drive in the wrong direction as it has to threaten people with guns to make them sacrifice their own preferences.

LowcountryJoe March 22, 2009 at 9:00 am

Why do you expect one stable configuration spontaneously to rearrange itself into another, more productive configuration? Why would it?

Because people pursue their self-interests, that why.

The problem occurs when breaking unproductive bonds becomes more costly, in monetary terms, from the point of view of persons accounting for their individual monetary worth, than not breaking the bonds. An economy then "freezes" into some configuration that need not employ all factors optimally and need not employ some factors at all.

I'll contend that it's always economic and never monetary. Sure, some people will make decisions that others might find irrational, but people will generally choose the most optimal arrangement for THEM, balancing their short-term and long-term self-interests. The employment of factors will occur and reach new equilibriums. I trust the mechanism, don't you?

What does "left alone" mean? Does "left alone" mean that I may ignore your forcible right to charge me rent on a parcel of land you own and begin farming the land for my own sustenance? If "left alone" means something else, then you simply ignore the problem, because established bonds of propriety are the problem.

Left alone to me mean to stop the intervention and central-planning of the economy. And what are you talking about regarding "established bonds of propriety are the problem"? You attempted to explain this before and my eyes just glossed over with your lofty prose. I must say, I have a lot more difficulty reading your comments than i do the posts of most others. Maybe if you approached your posts as though you were having dialog with someone that didn't have your venacular, I'd be able to understand what you try and get at more often [food for thought].

Martin Brock March 22, 2009 at 9:36 am

They therefore assume that to create a healthy economy, all you have to do is spend, and get your GDP calculations to grow (by increasing G).

"They" are your straw men. You aren't actually debating the "aggregate demand" proposition with anyone defending it here. You're only bickering with yourself.

Yours is not the aggregate demand argument. State spending is one approach to inadequate aggregate demand that statesmen, not surprisingly, often champion, but this fact has nothing to do with an economy settling into a stable but suboptimal configuration in which it generates too little demand to fully employ resources.

Spending is not in itself wealth production …

The truth of this assertion did not surprise Keynes and doesn't surprise anyone else with any sense either.

So the paradox of thrift is only a paradox to those who see all spending as interchangeable, without regard to actual wealth creation.

No. If many people "save" by purchasing entitlement to tax revenue, I expect this "saving" to decrease, rather than increase, consumer demand without necessarily increasing the production of anything consumers will ever choose; therefore, this "saving" can depress market demand for labor and other productive resources.

It is possible in theory for state spending to create public goods, like roads that actually increase people's productivity, and also temporarily to create consumer demand lessened by the idling of many resources by some economic shock, like the correction following an inflationary housing bubble.

The problem is that state spending doesn't reliably create public goods, and it more reliably creates unproductive rents. Again, this problem does not invalidate Keynes' notion of "inadequate aggregate demand". It only suggests that state spending is not reliable remedy.

And again, Don himself linked an article, favorably, last November claiming the New Deal was not a properly "Keynesian" stimulus at all.

Martin Brock March 22, 2009 at 9:57 am

Because people pursue their self-interests, that why.

That's a non-sequitur. Your statement hardly addresses the question.

I'll contend that it's always economic and never monetary.

What does this contention mean?

Sure, some people will make decisions that others might find irrational, but people will generally choose the most optimal arrangement for THEM, …

Right. Individuals make decisions optimizing their own consumption/accumulation, but these individual arrangements do not translate to an aggregate in which all resources are fully employed.

For example, I grow corn and you raise cattle. I promise all of my excess corn (that I don't consume myself) to you while you promise all of your excess beef to me, and we both agree that between the two of us, we own all of the land fit for growing corn or beef, and we credibly threaten to shoot anyone disagreeing with us.

We make these contractual agreements without considering the benefits that Don might add to our configuration of resources, if only we'd exchange some of our corn and beef for something he might produce, but once we've sealed our contracts, they have the force of law, and we can't easily change them.

You might object that contracts can be modified, but in reality, the network of contractual obligation is complex and involves far more than two people.

I owe people money that I've never met and will never meet, because I have a mortgage. The person who sat across from me when I signed the mortgage was not my creditor, only some representative of some corporation aggregating many creditors, and this
corporate aggregation then sold my mortgage to another corporation that further aggregated the obligation with other mortgages and default swaps and other obligations, and the other corporation resold my obligation, bound up in this package with other obligations to some third corporation.

I can give you another example from my personal experience as well, involving my purchase of a contract from a trust created and administrated by the state of Alabama guaranteeing my children college tuition in the state university system. I bought three of these Prepaid Affordable College Tuition (PACT) contracts over fifteen years ago.

Now, the financial meltdown has busted the trust, but there will be no quick resolution of its obligations, because courts will hear many different claims by purchasers of the 48,000 contracts sold to date, and the trustees of the system will search for credit to finance the trust's short term obligations, and this credit will further complicate the conflicting claims for assets held by the trust.

Martin Brock March 22, 2009 at 10:33 am

Left alone to me mean to stop the intervention and central-planning of the economy. And what are you talking about regarding "established bonds of propriety are the problem"? You attempted to explain this before and my eyes just glossed over with your lofty prose.

You completely ignore the question with this nonsense about "lofty prose". I asked a very straightforward question. You even quote the question but don't answer it. Here it is again.

"Does 'left alone' mean that I may ignore your forcible right to charge me rent on a parcel of land you own and begin farming the land for my own sustenance?"

Does 'left alone' mean that statesmen are not enforcing your claim to a right to charge me rent on some parcel of land? Yes or no? It's a simple question. Are you advocating that statesmen not enforce this right? Is the forcible imposition of your claim "intervention", or do you label this particular forcible imposition differently?

Again, I am not an anarchist. I want states forcibly imposing property rights, but I don't deny that I want this forcible imposition, and I don't pretend that some particular system of property that I advocate is "naturally right" and sacrosanct and necessarily organizes resources just perfectly, because I'm not incredibly arrogant in this way.

Sam Grove March 22, 2009 at 11:07 am

Martin, you may cross my property as you please as long as you promise to assume all risks for doing so. In that case, we don't even have to call it my property.

I can't believe you trusted the state of Alabama. You won't be making that mistake a gain.

vikingvista March 22, 2009 at 1:37 pm

"State spending is one approach to inadequate aggregate demand that statesmen, not surprisingly, often champion, but this fact has nothing to do with an economy settling into a stable but suboptimal configuration in which it generates too little demand to fully employ resources."

TOTALLY wrong. The ostensibly stable "inadequate" demand is THE REASON Keynesians employ state spending and it is THE PROBLEM their state spending is supposed to fix. In addition, to the extent that such a stable configuration can occur, it is Keynesian forced misallocation of resources that is one of THE CAUSES of the stability of that situation.

Your declaration that a particular level of demand is "inadequate" is also misleading. It may be inadequate to maintain a particular misallocation, but more than adequate, if left free, to effect a transformation to a wealth-producing allocation.

If Keynesians wanted to do some good, instead of confusing the signals and preventing the dust from settling after a realization, they would find a way to avoid a misguided growth of demand from even starting.

But that would be an exercise in suicidal introspection for them as they would come to realize that it is their own policies that often CREATE that disasterous misallocation.

LowcountryJoe March 22, 2009 at 6:21 pm

"Does 'left alone' mean that I may ignore your forcible right to charge me rent on a parcel of land you own and begin farming the land for my own sustenance?"

No! If I own the land, I will kick you off of it when you fail to pay me my rent. Does that answer your question now?

Does 'left alone' mean that statesmen are not enforcing your claim to a right to charge me rent on some parcel of land? Yes or no?

That's not what I meant by being left alone. If you read what I had written, it means that I would like to see politicians stop intervening in the economy and stop centrally planning it. This does not include, for me, judges enforcing contracts and property rights. Why you cannot separate the two leaves me confused as to why you cannot/won't.

It's a simple question.

And I thought that I answered it pretty well. But somehow you have this deep desire to make it more complex than it has to be.

Are you advocating that statesmen not enforce this right?

I am not advocating that they don't. Where do you get this from?

Is the forcible imposition of your claim "intervention", or do you label this particular forcible imposition differently?

Differently. It should have been obvious. Now I guess I'll just wait for the "gotcha" moment that you have in store for me.

Now, in regard to you post on Mar 21, 2009 @ 9:55:54 AM when you responed to Adam, "Why do you believe this?" Why don't you believe that? Why don't you believe that people in the economy won't establish a new demand once the price signals have adjusted to reflect the new economic realities? Don't you trust the market to correct and find new equilibriums?

Kevin March 22, 2009 at 6:53 pm

Martin the people who do not vocalize objections to all the state interventions you do aren't necessarily ignoring the problem. They may just disagree with you about what is and is not productive.

The only "problem" with the established bonds of propriety is that some of the bonds do not deploy resources efficiently because they entitle people to unproductive rents. I observe most of the people who you say "ignore" the problem making relatively persuasive arguments against the persistence of certain entitlements to unproductive rents. I suspect, as you note above, that the break comes in the lack of a common understanding of the meaning of "unproductive," or the meaning of "production."

Also, as Don has posted here before, the emergent "law" is not necessarily statutory or contractual. It is certainly, in practice, ambiguous regarding the kind of undeveloped land that you employ in your rhetoric to describe an unproductive rent. I raise this not because I think your rhetoric is weak (I actually think it's clear and convincing) but as part of my objection to your accusation of others of ignoring a problem when it is not clear at all that anyone does.

That people attack specific unproductive rents without taking the time to attack all unproductive rents is not evidence that anyone is ignoring anything. In my opinion, it is just evidence that people are limiting the use of their rhetorical energies to topics that they expect to find easy agreement about what "unproductive" and "rents" mean.

Daniel Kuehn March 23, 2009 at 6:44 am

More picking on specific words in Don's post that I think mischaracterize the whole endeavor:

Why do you say: "one of its fundamental flaws is the assumption that private citizens 'routinely' spend too little".

Do you think Keynes really argued that this is a routine occurence? Do you really think that current proponents of Keynesian stimulus advocate this as business as usual? It seems like you assume your conclusions about how crazy Keynesianism is if you promote that idea.

Sam Grove March 23, 2009 at 11:56 am

Is there no distinction between what Keynes argued and "Keynesian economics"?

Martin Brock March 23, 2009 at 10:35 pm

Martin, you may cross my property as you please as long as you promise to assume all risks for doing so. In that case, we don't even have to call it my property.

If these risks include your gun, then you, at least, have answered the question I pose above. If you don't expect the state or anyone with the authority of the state to defend your claim, then you do eschew this "intervention", and the land is not your "property". It's more like your natural "territory" in the sense of instinctive territoriality.

This territoriality does work as an organizational force. It does organize resources as we see them organized in the state of nature, but the state of nature is not what we typically call "proper". It's disingenuous also to argue that I may expect the artificial economic organization that we associate with modern "capitalism" under the circumstances.

I can't believe you trusted the state of Alabama. You won't be making that mistake again.

I don't know yet to what extent Alabama will meet PACT obligations, but people have suffered similar losses in other "investments". I avoided some of this loss myself last year by holding entitlement to tax revenue (special Treasury securities available only to Federal employees [former in my case] in the Federal Employees Thrift Savings Plan), but of course, holding these securities was "trusting the state" to an even greater degree.

These securities hold their nominal value only because the state ultimately threatens to shoot you if you don't acknowledge my entitlement to consume your produce (or pay my debts to you) using the money flowing from them, i.e. they hold nominal value by imposing rents as defined above. I held them anyway, but as I did, I profited monetarily by threatening to shoot you and everyone else around me.

I don't call these threats "good", but I won't deny them either. We're all addicted to this drunkenness these days, and the first step toward recovery must be honesty with ourselves at least.

Martin Brock March 23, 2009 at 11:08 pm

"Does 'left alone' mean that I may ignore your forcible right to charge me rent on a parcel of land you own and begin farming the land for my own sustenance?"

No! If I own the land, I will kick you off of it when you fail to pay me my rent. Does that answer your question now?

No. That doesn't answer the question. "I will kick you off" does not imply that you would call upon statesmen to enforce your claim of ownership. If you defend this claim only by your own force, then you don't assume state intervention between us; otherwise, you do.

Does 'left alone' mean that statesmen are not enforcing your claim to a right to charge me rent on some parcel of land? Yes or no?

That's not what I meant by being left alone.

Fine. So "left alone" does not mean "no state intervention". It means state intervention to defend some claim that you've already established with the state. That's what I thought.

But "aggregate demand" is all about demanding what these claims, already established with state, entitle you to demand. Monetary "demand" is about legal tender, because legal tender is what "money" describes in reality. Why should entitlement to demand things, secured by statesmen, necessarily always be sufficient to employ all resources? Why can't statesmen impose rules without this effect?

This does not include, for me, judges enforcing contracts and property rights. Why you cannot separate the two leaves me confused as to why you cannot/won't.

Because judges apply standards, and standards apply regardless of any agreement between you and me, because authorities more central than you and I will enforce them. In other words, your judge enforcing contracts and property rights is a statesman, so again, you aren't advocating "no state interference". You're advocating state interference defending your established demands. You concede yourself that this "demand" is about entitlements established by judges enforcing what statesmen call "property". That's my point.

Don't you trust the market to correct and find new equilibriums?

We aren't discussing "the market". We're discussing "property". Property is not the market. Property is what we're entitled to exchange in a market. Why should these entitlements always lead to full employment of resources? In reality, they don't. Sometimes, I'm entitled to employ a few resources, and you're entitled to employ a few, but all of these entitlements just don't add up to full employment at more than starvation wages.

That's the "aggregate demand" problem. It's about who is entitled to employ productive resources and how their obligations direct them to deliver products of these resources to others for consumption.

Martin Brock March 23, 2009 at 11:47 pm

TOTALLY wrong. The ostensibly stable "inadequate" demand is THE REASON Keynesians employ state spending and it is THE PROBLEM their state spending is supposed to fix.

I never deny that statesmen (who you label "Keynesians") employ state spending for this purpose. I explicitly concede this point.

That statesmen want to spend money is not the "aggregate demand" problem. State expenditure is their "solution" to the problem.

The "aggregate demand" problem is that statesmen don't entitle others to spend money.

In addition, to the extent that such a stable configuration can occur, it is Keynesian forced misallocation of resources that is one of THE CAUSES of the stability of that situation.

No. These stable configurations occurred long before Keynes existed, and Keynes is not the force holding a stable configuration together. Established bonds of propriety hold a stable configuration together. These bonds exist in a nominally "socialist" state as much as any other. In state socialism, highly central planners hold the proprietary rights.

It may be inadequate to maintain a particular misallocation, but more than adequate, if left free, to effect a transformation to a wealth-producing allocation.

"Left free" is the panacea we're trying to pin down here. I don't see many resources "left free" in reality. I see resources bound by established propriety. A "bound" resource is "not free" by definition. "Freeing" involves breaking "bonds".

In the present "crisis", I want all of these banks holding all of these "toxic" bonds now to fail. I want the bound resources free to reorganize, but statesmen now busily arrange proprieties to protect established proprietors, and in the process they threaten further to limit aggregate demand.

Producing wealth is not equivalent to producing sufficient wealth and distributing it so as to employ all available resources.

If Keynesians wanted to do some good, instead of confusing the signals and preventing the dust from settling after a realization, they would find a way to avoid a misguided growth of demand from even starting.

Keynes' theory starts with inadequate aggregate demand, because he developed the theory after observing it. The people you call "Keynesians" are statesmen who want to spend money, but statesmen spending money are not the people called "Keynesians" by economists referenced in the article Don linked favorably in November. That's my problem with your usage here.

Was the "war on terror" a "Keynesian" stimulus" in your way of thinking? This "war" actually preceded the "crisis" we're observing now, right? The Obamatron's "stimulus package" didn't precede the "crisis". This spending hasn't even occurred yet. It's only contemplated by legislation hardly enacted.

As I've written repeatedly, I don't support the Obama "stimulus". I instead want lots of dubious promises broken. I want AIG to declare bankruptcy, and I want your pension fund, if you have one, to write you a letter informing you that you won't be receiving pension checks you anticipate, or I want AIG itself writing you a letter informing you that your AIG annuity will deliver less income than you expect, and I want your bank to write you a letter informing you that money you thought you had in a savings account doesn't exist anymore, and so on.

I want you then to realize that you need to produce more in your lifetime than you've already produced in order to live longer than you've already lived, and I want you then to look around for other people who also wish to be more productive, and I want you to arrange your resources synergistically with theirs. You'll want increase "aggregate demand" for these resources. Of course, you and others need monetary credit for this purpose, because your future products require monetary valuation.

Martin Brock March 23, 2009 at 11:50 pm

You'll then increase "aggregate demand" for these resources.

Martin Brock March 24, 2009 at 12:12 am

The only "problem" with the established bonds of propriety is that some of the bonds do not deploy resources efficiently because they entitle people to unproductive rents.

I wouldn't say "only", but I essentially agree with your assertion here.

Also, as Don has posted here before, the emergent "law" is not necessarily statutory or contractual.

I agree that "laws" emerge this way, but statutes and common contract law (which is more than simply the enforcement of agreements) are part of the environment in which the further "laws" emerge, so I don't regard these laws as "natural". Common patterns of behavior emerged in feudal Europe and in the Soviet Union too.

If the Soviet Union had persisted long enough, something more "market like" might have emerged even within the confines of the "command economcy", but it would have been a unique development and certainly not what Rothbard imagines. Furthermore, Rothbard's "full reserve" gold standard could ever emerge without an authoritarian state, because historical gold standards didn't operate as Rothbard imagined at all.

Rothbard's system requires a central authority (essentially Rothbard himself) commanding people not to issue promissory notes for gold assuming that assets other than gold can be exchanged for gold at current rates. This Rothbardian central planner commands his "full reserve gold standard" by labeling these promissory notes "fraudulent" and threatening to shoot the people issuing them.

So while I really am very much a libertarian of the utilitarian-minarchist school, I can't take the "natural rights" school very seriously. I'm not sure Don is a Rothbardian, but his approach seems more like Lysander Spooner's than mine. He may correct me if he wants, of course.

That people attack specific unproductive rents without taking the time to attack all unproductive rents is not evidence that anyone is ignoring anything.

When I say that someone ignores something, I try to be specific. I follow up with further specification what I say is ignored. The point is to pin down more precisely what we're discussing ambiguously, like what "state intervention" means vs. "left free".

"Leaving free" means that you don't get money you thought you'd get from some financial institution, like a bank where you've made a deposit or an insurance company that sold you an annuity or someone living in a house mortgaged to you. Let's be honest about this.

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