Keynes on Inflation

by Don Boudreaux on June 5, 2009

in Inflation

On this day in 1883 John Maynard Keynes was born.  (And in something of an irony, it is also the day listed as Adam Smith's birthday, for it is the day he was baptized in the year of his birth, 1723.)

Here's one of Keynes's keenest insights, from pages 220-233 of The Economic Consequences of the Peace (1919):

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.  By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.  The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.  Those to whom the system brings windfalls . . . become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat.  As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless.
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Martin Brock June 5, 2009 at 8:19 am

Wait a minute … I thought Keynes never saw an inflationary expenditure he didn't like … and also worshiped Satan.

MnM June 5, 2009 at 8:41 am

…and murdered puppies.

Russ Wood June 5, 2009 at 8:46 am

Keynes is too widely respected and followed to have been a bufoon. His error is the same as many men, great and small: They stray outside of their happy zone. Just because one has a great understanding of inflation does not mean they are experts on fiscal policy. See Art Laffer for the reverse example today.

Daniel Kuehn June 5, 2009 at 8:51 am

Martin Brock -

RE: "Wait a minute … I thought Keynes never saw an inflationary expenditure he didn't like … and also worshiped Satan."

One would think so if they read about Keynes in the popular press but never actually read Keynes!

Excellent post Don. I don't know if I've ever read this piece in it's entirety – you usually only see the first sentence. The second sentence is very illuminating – nice emphasis on "arbitrarily". Even to the extent that deficits are advocated by Keynes later, and the extent to which deficits risk erring on the side of inflation – that risk is taken by (thoughtful) Keynesians with an understanding of the distortionary effects of the inflation. Keynes demonstrates that understanding here.

Also good for everyone who may see a contradiction here to keep in mind is that Keynes was refering to a full scale monetization of German reparations – which did occur, leading to the events of 1923 and the revision of the reparations demand in 1924. In other words – he was not thinking of the occasional large budget deficit when he wrote this.

Daniel Kuehn June 5, 2009 at 8:54 am

Another good piece from Keynes on inflation from his letter to President Roosevelt, for anyone that's interested. I think it's entirely keeping with The Economic Consequences of the Peace:

"The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor."

SaulOhio June 5, 2009 at 9:06 am

I guess it was his mistakes that, unfortunately, have had the greatest influence. Probably because belief in those particular mistaken ideas is beneficial to the statists.

Adam June 5, 2009 at 9:18 am

I wish Keynes had lived long enough to see what the misinterpretations of his views had wrought. His later writing point to what his views would have been. I firmly believe that he would have been a Miltonesque monetarist had he lived to at least 1949. What a different world we would be in (theoretically speaking.)

Randy June 5, 2009 at 9:19 am

SaulOhio,

Agreed. Politicians use economists… and scientists… and everyone else…

A politician's words are one half aggression and the other half rationalization. Don't listen to what they say, observe what they do.

Daniel Kuehn June 5, 2009 at 9:26 am

Adam -
RE: "I wish Keynes had lived long enough to see what the misinterpretations of his views had wrought… I firmly believe that he would have been a Miltonesque monetarist had he lived to at least 1949."

I agree, but would clarify that I think for the most part the misinterpreters are politicians, NOT economists. That's a huge difference that's important to make. People who call themselves "Keynesians" today don't buy everything in the General Theory, and they're really talking about a modern Keynesian synthesis that's been refined by the data and tempered by the monetarist critique. They also have a great deal of respect for most of what Friedman wrote. When they depart from Friedman, it's usually on deregulation issues – not the basic points of his macroeconomics and consumption theory.

So I think you're right – but it's really the politicians who advocated a perpetual demand management (and I'm sure more than a few economists who encouraged them) that deserve more censure than the bulk of the economists who call themselves Keynesian.

Daniel Kuehn June 5, 2009 at 9:46 am

RE: "And in something of an irony, it is also the day listed as Adam Smith's birthday, for it is the day he was baptized in the year of his birth, 1723."

So I just caught this one!

An irony? It doesn't seem so ironic to me. Providential and prophetic, perhaps – but not ironic at all ;-)

MnM June 5, 2009 at 9:48 am

I have difficulty seeing the irony, too. I wonder if he meant "coincidental"?

John June 5, 2009 at 9:49 am

Even a broken clock is right twice a day.

vidyohs June 5, 2009 at 11:10 am

Here is an entertaining little tidbit that pretty much sums up the way socialist government and nut jobs like Gore view "we the people".

http://www.chron.com/apps/comics/showComic.mpl?date=2009/6/5&name=Non_Sequitur_pan

For those incapable of imagination, just put yourself in the place of the pony.

Shakes June 5, 2009 at 11:35 am

Lew Rockwell is reporting that they have arrested the makers of the Liberty Dollar.

1933 they made owning gold illegal and confiscated it from people.

At times it appears that the government has contempt for people trying to avoid the inflation by using stores of value other than Federal Reserve Notes.

I wonder if it is possible to have somthing like the Argentine economic crisis and the inflation that comes with. That is a fear of mine. Inflation can cause so much distruction.

Daniel Kuehn June 5, 2009 at 11:50 am

Shakes -
Nice job distorting the story. They weren't arrested for trying to avoid inflation by using other stores of value – they were arrested for defrauding their customers by making false claims about the "Liberty Dollar", which seems to have been just shy of counterfeiting.

If you want to avoid inflation, buy gold – don't open your own mint and tell people it's the same as a Federal Reserve Note.

Adam June 5, 2009 at 12:01 pm

@Daniel

Having purchased some Liberty Dollars, I don't see what you're saying. The Liberty Dollar was never presented as anything other than a silver certificate in lieu of a federal reserve note, not the equivalent of it. They were shut down for challenging the orthodoxy, nothing more.

Daniel Kuehn June 5, 2009 at 12:14 pm

Adam -
They may not have made a good case – I have absolutely no idea. My point is it wasn't out of "contempt for people trying to avoid the inflation by using stores of value other than Federal Reserve Notes" as Shakes said. People do this all the time, and it is viewed as an integral market mechanism for avoiding inflation. I don't know if the DOJ made a good case or not, but the point is that at least in how these were marketed to some people (maybe not you), this bordered on fraud and counterfeiting. That's a whole different story than the ridiculous idea that the government is concerned about people going for other stores of value.

MnM June 5, 2009 at 12:34 pm

Adam seems to be right. I didn't read the whole thing but here is an article on the Liberty Dollar.

Greg Ransom June 5, 2009 at 12:37 pm

This is the Keynes who was a hero to central Europeans like Friedrich Hayek …

Daniel Kuehn June 5, 2009 at 12:45 pm

MnM -
Read the second paragraph of the link. Read about von NotHaus's own lawsuit against the government about halfway down! In what way is Adam right? Even von NotHaus recognizes that the issue is whether Liberty Dollars are purporting to be legal tender. Again, I have no idea if the DOJ has a solid case or a bogus case, but concerns about other stores of value have zero to do with this case (which is what Shakes originally said, not Adam).

MnM June 5, 2009 at 1:41 pm

In 2006 the U.S. Mint issued a press release stating that prosecutors at the Justice Department had determined that using Liberty Dollars as circulating money is a federal crime. The press release also stated that the “Liberty Dollars” are meant to compete with the circulating coinage (currency) of the United States and such competition consequently is a criminal act. The Justice Department also stated that the Liberty Dollar was confusingly similar to actual U.S. currency, and the language used on NORFED's website was deceptive.

The Liberty Dollar organization responded to the Mint's press release by stating that "[t]he Liberty Dollar never has claimed to be, does not claim to be, is not, and does not purport to be, legal tender."

They didn't make any false claims and there was no counterfeiting.

Daniel Kuehn June 5, 2009 at 1:58 pm

MnM -
To repeat for the third time – I have no way of knowing how solid the DOJ case is.

The point is, they're not prosecuting them for offering an alternative store of value. Any seller of gold, and currency dealer, indeed any inflation indexed bond offers this possibility. You don't see the FBI raiding these people.

As I said to Adam, I have no idea what the Liberty Dollar people told him. And as I also said, I think my disagreement is more with Shakes than Adam.

The very line you quote reinforces everything I've said.

seca June 5, 2009 at 1:59 pm

I'm not very familiar with Keynes. It seems like he believed in government while not being a socialist.

If he didn't like inflation, something still had to give.

To borrow? Then how do you pay for the debt? Is the economy supposed to catch up eventually thus increasing revenue? If yes, why the fuss?

Daniel Kuehn June 5, 2009 at 2:36 pm

seca -
RE: "I'm not very familiar with Keynes. It seems like he believed in government while not being a socialist."

Be careful… you're making way too much sense and approaching this issue with far too much rationality and nuance. If you don't watch it, someone is going to call you a statist.

MnM June 5, 2009 at 2:43 pm

Jesus Christ, Daniel. I'm not arguing with you. I was supporting Adam's assertion. Calm down.

K Ackermann June 5, 2009 at 2:46 pm

and also worshiped Satan.

…and murdered puppies.

LOL!

I heard he told his own daughter the reason she got her period was because she must have done something that made God hate her.

Jeff Crichton June 5, 2009 at 2:53 pm

Where is the disconnect then between this quote and the policies his theories purports to support? Maybe the problem is on the politicians and establishment economists who interpret his writings? I have not read his General Theory, any help?

seca June 5, 2009 at 2:59 pm

DK

I don't know that he had any ideology at all.

I just find him very hard to understand and I would very much appreciate (as a lay person) some clarification on his spending theory because something's got to give and the money will have to come from somewhere and government does not generate money so it cannot come from government.

So if you have the answer I would appreciate it. (Please no graphs, charts and a whole bunch of numbers. Also, nothing rhetorical and facetious. Thanks)

They're taking it from somewhere. Where?

seca June 5, 2009 at 2:59 pm

DK

I don't know that he had any ideology at all.

I just find him very hard to understand and I would very much appreciate (as a lay person) some clarification on his spending theory because something's got to give and the money will have to come from somewhere and government does not generate money so it cannot come from government.

So if you have the answer I would appreciate it. (Please no graphs, charts and a whole bunch of numbers. Also, nothing rhetorical and facetious. Thanks)

They're taking it from somewhere. Where?

MnM June 5, 2009 at 3:05 pm

K Ackermann,

Was that before or after he told her that Santa wasn't real?

It is also my understanding that he made a hobby of stealing crutches and canes from disabled orphans…but I can't confirm it.

Daniel Kuehn June 5, 2009 at 3:06 pm

RE: "Jesus Christ, Daniel. I'm not arguing with you. I was supporting Adam's assertion. Calm down. "

Don't tell me to calm down – I was the one telling you that the disagreement was with Shakes and not with Adam and that nobody was really challenging what Adam was claiming!

Jeff Chriton -
RE: "Where is the disconnect then between this quote and the policies his theories purports to support?"

There isn't one. This is quite consistent with what he advocated through the 30s.

MnM June 5, 2009 at 3:19 pm

Don't tell me to calm down – I was the one telling you that the disagreement was with Shakes and not with Adam and that nobody was really challenging what Adam was claiming!

Daniel, this is ridiculous. You're inferring (incorrectly) that I'm defending Adam against some challenge (made by you, ostensibly). I wasn't arguing with you. I wasn't arguing with Shakes. I only posted to support Adam's assertion. Is there anything about that you don't understand?

Believe it or not, my posts aren't always directed at you, and are not always in disagreement with you.

Daniel Kuehn June 5, 2009 at 3:40 pm

seca -
When the government runs deficits it borrows money from the people – in those days largely citizens, but these days internationally as well. Keynes's insight was that in a sharp recession, savings may be so excessive that they outstrip planned investment. Planned investment may be deprressed for a variety of reasons: (1.) a bubble bursts and nobody wants to invest because the utilization of existing capacity is so low, (2.) unemployment is very high so nobody wants to consume anything, so why invest in more productive equipment, and (3.) deflation encourages producers to delay their investments (all three of those should sound pretty familiar).

OK, fine. But we know that when supply of savings outstrips demand for investment, the price of savings drop and the market equilibrates – right? Why does the government need to deficit spend. Well, not quite. Interest rates (we think) can't go below zero (some people dispute this, actually – but let's just assume it's more or less true). If prices CAN'T drop than you have excess savings pooling up that don't have anywhere to go, and investment still stays sluggish. OK, but again – why is this bad? Why the need for deficit spending?

Keynes pointed out that these excess savings can actually be quite destructive and lead to a stable high-unemployment equilibrium where consumption is depressed, further depressing production and investment. The point is, though, there is a great deal of underutilized capacity in that sort of economy – with both human and capital resources being underutilized. Government spending, which utilizes those excess savings, is an attempt to break out of that vicious cycle of a deflationary, high-unemployment, sub-optimal equilibrium.

So – where do they get the money? Excess savings.

Why is it necessary? Because although markets are wonderful things, they can get caught in unnecessarily destructive sub-optimal equilibriums that needlessly destroy productive capacity (uncreative destruction, to borrow and adjust a phrase of Schumpeter's).

I may not have explained that perfectly – so I'd ask that you wouldn't evaluate Keynes based on my explanation. But think of it as a good first attempt. I'd also encourage you to read Keynes's General Theory. There is some math, but not much at all. It's a little stodgy because of the Victorian style, but a very good, accessible, smooth read – and the advantage of the Victorian style is that it's got a lot of interesting dry British wit in it, and some funny thought experiments.

Daniel Kuehn June 5, 2009 at 3:46 pm

MnM -
RE: "I wasn't arguing with you. I wasn't arguing with Shakes. I only posted to support Adam's assertion. Is there anything about that you don't understand?"

Good Lord MnM! I never said you were!!!!

RE: "Believe it or not, my posts aren't always directed at you, and are not always in disagreement with you. "

You flatter yourself by assuming I perceive it this way. Can I not respond to your post and reiterate a point I made about the Liberty Dollars in a discussion with Adam without you assuming I'm arguing with you? I'm suggesting that your link butresses my engagement with Adam and Shakes. I have no idea what you think of the points I was making, because you never engaged my points, only Adams. You are conjuring up a conflict between you and me where there is none (well… I suppose there is now ;-) ).

MnM June 5, 2009 at 4:15 pm

Sooo, you only responded to me to repeat yourself? Okaaaay.

Daniel Kuehn June 5, 2009 at 5:15 pm

MnM -
No need for excessive vowels :)

You put up the link to support Adam's point that the Liberty Bonds had a degree of turth in advertising. I piggy-backed on that when I saw that it also detailed the reasons for the FBI raid – which supported my point with Adam and Shakes. Was that wrong of me? I'm sorry if it was. I was a little vague on what part of Adam's statement you were refering to when you first said "Adam is right", but you did clear that up in your next response, and either way this didn't have to be a heated exchange! Even though I continued to challenge Adam and Shakes, I never intended to challenge you.

You say that I'm the one that thinks everyone is arguing with me.

What I see is that every time I raise a point and piggy back off of other people's points they think I'm trying to pick a fight! I assure you MnM – I wasn't trying anything of the sort.

DAVE June 5, 2009 at 5:31 pm

So basically we have a problem where people aren't spending which leads to this whole cycle with unemployment at the end of it which in turn leads to less spending etc. so if we increase employment, people will spend which will allow businesses to hire and the cycle unravels, life gets back to normal and everyone lives happily ever after until the next time anyway.

So the government is basically doing open heart surgery where they artificially keep the blood running through the patient until they get the heart back in place with the new pipe fittings and all.

Here's where I get lost.

A. Why not just cut taxes and people will automatically have more money to spend?

B. Why the projects? If we need to jumpstart the economy just write generous checks to anyone who needs it and let them go and spend it. (It's free money, so they no doubt will.) What's the point in creating what is essentially a pretend economy with jobs that a natural economy would not support? Just to save on administrative costs, if nothing else.

C. If people are not spending isn't that signaling something? Why do we ignore it? Why should the same market activity that is discouraging private spending encourage public spending? ?(It's like as if they know something we don't)

D. You said "Why is it necessary? Because although markets are wonderful things, they can get caught in unnecessarily destructive sub-optimal equilibriums that needlessly destroy productive capacity".

1. So even Keynes would agree that left alone, the market would in the long run get itself out of the mess it created – it's just that right now this is needless and unnecessary? So all this infusion of (other peoples) money is just to fix what is really (while painful) a short term problem?

2. Does this mean that with government constantly directing resources and smoothing over the rough spots, markets (while performing well below peak due to constraints) would never fail?

E. "So – where do they get the money? Excess savings." How?

DAVE June 5, 2009 at 5:37 pm

thaa lst one was addressed to Daniel K

DAVE June 5, 2009 at 5:38 pm

let me do this again:

That last one was addressed to Daniel K.

Sam Grove June 5, 2009 at 7:21 pm

Oops, I put this in the wrong place:

I don't know enough about the liberty Dollar case to comment, but I will hold to the possibility that the DOJ may be "overstating" its case.

I know someone who worked in the DOJ; spent months with a coworker researching and writing a 23 page report on crime.

The report was submitted to higher ups, and of the original report, only half a dozen sentences were retained after editing.

johnleemk June 5, 2009 at 9:49 pm

DK:

Excellent quote on the quantity theory! One thing that constantly irritates me about a lot of online economic discussions is that left liberals and vulgar Austrians (i.e. Ron Paulites — or Paultards if you're less charitable), who dominate the discussion, use this antiquated conception of the quantity theory. Keynes's point here is dead-on, and no serious economist can actually consider the amount of money in circulation to be the only meaningful variable. There are some good reasons to be critical of the Fed and central banking, but most left liberals and vulgar Austrians seem woefully and wholly ignorant of them, and base their senseless critiques on this fallacy Keynes points out.

K Ackermann June 6, 2009 at 6:15 am

DAVE, I answer your questions below. You may have already considered some of them and rejected them. If so, tell me what I missed.

A. Why not just cut taxes and people will automatically have more money to spend?

Not if they don't have jobs. For those that do have jobs, it is then all about expectations. A tax cut stands a far greater chance of being saved then spent in a climate of uncertainty.

Have you changed your spending habits this recession?

B. Why the projects? If we need to jump start the economy just write generous checks to anyone who needs it and let them go and spend it. (It's free money, so they no doubt will.) What's the point in creating what is essentially a pretend economy with jobs that a natural economy would not support? Just to save on administrative costs, if nothing else.

Those without jobs are likely to pay down debt with the check. If the debt is to a bank, then it does nothing for the economy.

Unless the government promises another check behind the first one, people with jobs will take the windfall and sock it away. Nervous people save their nuts.

Plus, even if the work is contrived, it still hopefully does something that needs to be done. It also distributes the cash in a way the economy is set up for.

C. If people are not spending isn't that signaling something? Why do we ignore it? Why should the same market activity that is discouraging private spending encourage public spending? ?(It's like as if they know something we don't)

The usual answer is fearful expectations cause people to save, but because this is a recession and a credit crisis, there are fewer people who have to means to spend.

D. You said "Why is it necessary? Because although markets are wonderful things, they can get caught in unnecessarily destructive sub-optimal equilibriums that needlessly destroy productive capacity".

A part of it is psychological. The paradox of thrift is in effect. If you are not familiar with the term, it's worth looking up.


1. So even Keynes would agree that left alone, the market would in the long run get itself out of the mess it created – it's just that right now this is needless and unnecessary? So all this infusion of (other peoples) money is just to fix what is really (while painful) a short term problem?

Also look up Japan's Lost Decade. Not for the correct solution, but to get an idea on how long this can go one.

Also see the very bad depression, which, for some reason, is called The Great Depression. I have no idea what was so great about it.

2. Does this mean that with government constantly directing resources and smoothing over the rough spots, markets (while performing well below peak due to constraints) would never fail?

It's economies that fail. The market is responding beautifully to a shitty economy right now.

There are many debates over what the government can and cannot do. My personal belief is that some market signals travel very slow – too slow to be left as an emergent behavior. Sometimes the signals can be induced or made to travel faster.

In a broad sense, anything the government has provided that the free market has not is, in essence, bypassing the organic signaling process.

The larger the item or service, the slower the signal travels (or the faster it dies).

The government beat private enterprise in starting a space program, because a space program was not economically viable for a company or even a consortium to invest in.

For the most part, it still isn't, even though society has reaped large rewards from the space program. Think weather and communications satellites.

E. "So – where do they get the money? Excess savings." How?

At first, the government gets it by deficit spending. Eventually, it has to be accounted for. This can happen by raising taxes, or, if the spending stimulated the economy, that will generate extra tax receipts without raising taxes.

In crude terms, money circulates as follows:

In normal market operations, the Treasury issues bonds, notes, and t-bills to dealers (banks) for them to sell. If we had a balanced budget, the only customer the dealers would need is the Fed. The Fed buys the paper from the banks, and that is how cash gets into the economy. The Fed, in theory, holds the paper to maturity, when it is then retired. In the meantime, economic activity spreads the money from the banks all through the economy. This activity is taxed, with the taxes flowing back to the Treasury. If the amount that comes back is the same as the amount of bonds the Treasury issued, then the budget balances.

The specifics are much more complicated, and involve varying time frames (hence the different bond durations), and fractional reserve lending multiplies the purchasing power of the new money through loans.

I hope that helped, and if it's wrong, someone will correct it.

Daniel Kuehn June 6, 2009 at 9:40 am

DAVE -
I only have time to respond selectively, but you numbered your points so this should be easy:

A: We do cut taxes, that is absolutely Keynesian, and it was done in this stimulus. One extremely well documented caveat is that only a portion of tax cuts are spent, which makes them a much weaker stimulus. Their advantage is you can get them out very quickly.

B: See above. Also, projects like roads utilize existing industrial capacity, rather than just letting it sit and depreciate. It's not just labor that is underutilized – it is capital as well. And so long as capital is underutilized, planned investment won't match savings. Also – there's good argument in this case that there are things that have been underinvested in for a long time.

C. The point is a substantial portion of the fall in aggregate demand is due to the feedback loops between deflation, unemployment, the underutilization of capital. You're right – in periods of weak consumption, fiscal stimulus is not really called for.

D. I don't know exactly what Keynes would say to this question, but the thrust of Keynesianism is that there are multiple equilibriums and the economy can fall into a sub-optimal equilibrium by the process I described above. I would guess Keynes would say that eventually you could get out of it, but as KA states, Japan was in one for almost a decade – as was the US in the 1930s. And these are the two best examples of where all the preconditions that Keynes described existed. So it seems like you could be at the sub-optimal equilibrium for quite a while. And yes – this is differentiated from short recessions caused by exogenous shocks – which DON'T merit a Keynesian response.

D2: Of course not. It's still a crude mechanism and Keynes never seemed to advocate constant "demand management" – at least my reading of Keynes didn't. The point is to knock the economy out of the occassional sub-optimal equilibrium, not to eliminate the busniess cycle. "Cyclical smoothing" is a good way of explaining it for these rare deflationary recessions, but I think anyone who wants to or thinks they can end the business cycle is fooling themselves. Plus you wouldn't want to – you want that creative destruction. I suppose you could think of it like this – we need to go through periods of Schumpeter's creative destruction, but Keynes explained to us how to deal with periods of uncreative destruction.

E: They issue bonds, either to savers directly or (more common these days) to institutional investors that hold individual's savings.

Daniel Kuehn June 6, 2009 at 9:45 am

johnleemk -
I heartily, heartily agree with you. The Fed fetishism is what bothers me most about the Paulites/Austrians (well, that and there rejection of empiricism which is even more bizarre in my mind, although thankfully less strictly adhered to then the Fed fetishism). Austrianism also has some awesome stuff to offer – especially with respect to capital structure, the price mechanism, and information.

PQ = MV is good as far as it goes. I don't think that's especially controversial. People just forget that it's not steady state. Q is ALWAYS changing, and V moves, but not excessively – which means that M and P are always going to be in a balancing act. That's just the way it is – there's nothing nefarious about it.

Sam Grove June 6, 2009 at 10:10 am

B: See above. Also, projects like roads utilize existing industrial capacity, rather than just letting it sit and depreciate. It's not just labor that is underutilized – it is capital as well.

Doesn't it depend on why capital is underutilized?

Take California, there's plenty of work to be done on roads, but CALTRANS is now citing fiscal emergency.

Why? Because CA has already spent so much money and incurred large obligations (pensions, etc.).

Sure, the Federal gov't can hand CA a bunch of dough, but that will have to result in higher federal debt which will have to be taxed from people later, which will put a crimp in spending, etc.

IOW, this allocation of resources seems to be moving fiscal problems around temporally.

The problem with political management of resources is that a lot of people seem to accept it as a substitute for production.

Sam Grove June 6, 2009 at 10:30 am

My personal belief is that some market signals travel very slow – too slow to be left as an emergent behavior.

Can you elucidate or is it a suspicion that you have?

The government beat private enterprise in starting a space program, because a space program was not economically viable for a company or even a consortium to invest in.

I think this is another belief that cannot be substantiated.

For one thing, when the government does something it tends to cost more, often a lot more, than when that something is done in the private sector, so when you assert that a business or a consortium couldn't come up with the resources to get into space, I assume you mean that they couldn't afford to pay what the government paid for it.

Two, once the government took over space exploration, all the talent and resources that could be directed that way became attached to government funding. Now the aerospace industry has become invested in government contracts, and STILL, the government's space activities are not profitable.

Of course, the government is a non-profit entity which is why so many people favor government management of resources.

Three, and of course I mustn't fail to point out that the resources that the government commanded for its space program are resources that were made available in and by the private sector. By taking command of these resources, the government reduces the ability of the private sector to make PROFITABLE investments in utilization of the high frontier.

I might also mention that the government's interest in space is largely military in nature, which means lucrative contracts for the MIC.

Sam Grove June 6, 2009 at 10:31 am

Daniel, you seem to view the FED as a right and necessary thing. Yes?

K Ackermann June 6, 2009 at 12:59 pm

I think this is another belief that cannot be substantiated

It really can be substantiated. The government clearly beat private industry to space.

The government also built libraries in every town, and the highways connecting cities. It paved the way for the internet and railroads, and it dug canals that cut through continents. It harnessed mighty rivers, and it funded the cure for polio, and it funded the discovery of DNA, and it put electricity in every nook and cranny of the country. It funds a large number of university programs, research labs, and teaching hospitals.

It does this because private capital has a tendency to address ROI, which is not the be-all, end-all of our potential.

For every cured disease, and every weather satellite, there are a long string of expensive failures. The fact that the government partially, or in total, made these things a reality before they emerged from the free market does not automatically make them inefficient when you take into consideration the time premium.

Market efficiency and emergent behavior are gross characteristics, they are not laws. The very existence of bubbles proves the market is capable of misdirecting resources all on its own.

There are times when it is advantageous to command the economy, such as during wartime, or economic crisis. There are also benficial services that do not do well in a for-profit model. Libraries are an example of that, as is theoretical research.

How would you value a weather satellite?

Daniel Kuehn June 6, 2009 at 2:38 pm

Sam -
RE: "IOW, this allocation of resources seems to be moving fiscal problems around temporally."

Yes – exactly. Move the spending to rough economic times and paying the bill to better economic times and times when the economy is substantially larger than it is now by virtue of steady economic growth.

Re: "The problem with political management of resources is that a lot of people seem to accept it as a substitute for production."

I know of nobody in this country that accepts this substitution. Can you name one? I can't think of one.

Re: "Daniel, you seem to view the FED as a right and necessary thing. Yes?"

Not only right and necessary, but civilized and necessary for the maintenance of freedom in modern society.

Daniel Kuehn June 6, 2009 at 2:41 pm

K Ackermann -
Here here!

Regarding ROI – not only is it not the be-all and end-all, it also reflects a very select group of people's discount rate. Even if we were to require the government to take an ROI approach (which I think makes a fair amount of sense), the point is society acting as a whole has a lower discount rate and less externalities associated with it's decision making than the market does.

This doesn't make me or (I imagine) K Ackermann) an enemy of the market by any stretch of the imagination, despite the distortions that go on here sometimes. It simply suggests that not everything is appropriately provided by the market.

As someone said on the socialism discussion – capitalism is a tool. You use the right tool for the right job – you don't just assume it works for every job.

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