66 Comments »

RE: For example, according to standard microeconomic theory, unless an industry is dominated by tiny firms with small production capacity and all goods sold in that market are exactly the same, there exists a market failure. That is right; according to the economics canon, any product differentiation is “proof” that the market has failed, and only can be set right by outside (read that, government) action.

A large number of small firms with a uniform product will be sufficient to have ‘perfect’ competition, but it isn’t necessary.

At the Graduate School of Business at the University of Chicago and in the Economics dept. at Ohio State we were never taught that product differentiation meant market failure. Further, Harold Demsetz, in a 1968 article – Why Regulate Utilities? showed that the threat of entry is sufficient to get the competitive equilibrium result. Yale Brozen made the point that increasing the Herfindahl index (more concentration) may actually increase competition in a market. There are many more examples.

You appear to have constructed a straw man to beat up on. It is, in my opinion, more accurate to say that many (most?) economists stop thinking like economists when they talk about policy prescriptions that support their political views. The problem is that they never give this disclaimer when expounding to the press.

//James M. Mulcahy
31 December 2008 at 10:27 am

Well put Mr. Anderson! These thoughts reminded me of what George Reisman points out in his textbook \"Capitalism\" pg1: \"The great merit of the Physiocrats was to have identified the existence of natural economic laws(physiocracy means the rule of nature) and, on the basis of their understanding of those laws, to have reached the conclusion that the government should follow a policy of laissez faire, a term which they originated.\"
Just as denying the natural law of gravity can result in some pretty serious bruises (or worse), so denying natural economic laws is going to leave some unpleasant marks on our rapidly socializing society.

//Jeff Teebken
31 December 2008 at 11:33 am

Economics is no more a science than is history. It’s all personal intreptation.

Economic college professors cannot even agree on ideas such as supply and demand, monetary policy or values of goods.

Most of what is presented as economics is political theory. We have yet to come up with a definition of what is an economist. Anyone who has taken a few classes in so-called “economics” is an economist.

Happy New Years to everyone at FEE!

//Norman Gorback
31 December 2008 at 11:37 am

I don’t think it is a straw man, James. You are talking about subtle points made by a very few good professors. The VAST majority of students who take economics in college are taught the market failure nonsense.

//Brent
31 December 2008 at 1:45 pm

Didn’t Keynes author and elenchus (a syllogistic argument that refutes a proposition by proving the direct opposite of its conclusion)of his own body of work? While at Northwood, I remember Larry Reed mentioning it.

Happy New Year FEE! Congratulations Larry from a student of yours living out here in the Bay Area (Calif.)

//William Fionch
31 December 2008 at 8:10 pm

I\’m studying Economics right now, and checking out the Austrian school of thought. I\’ve got to say, the collective blogs I\’ve read have so far done a very poor job of convincing me they know what they\’re talking about. You say this-

>Yet, for all the calculus and the hard-to-comprehend statistical techniques they learn in graduate school and use in their “A” journal papers, many economists do not know economics. They might know academic economics, but they cannot comprehend economic logic, and that makes all of the difference.
Although I realize that this sounds arrogant, nonetheless it is accurate.

Well okay, that\’s a huge statement, considering that Austrian Economists only make up about 1% of accredited economists. Essentially you\’re saying over 90% of the field doesn\’t know what they\’re talking about. But I\’ll give you the benefit of the doubt but you back it up with this-

>For example, according to standard microeconomic theory, unless an industry is dominated by tiny firms with small production capacity and all goods sold in that market are exactly the same, there exists a market failure. That is right; according to the economics canon, any product differentiation is “proof” that the market has failed, and only can be set right by outside (read that, government) action.

\"ANY differentiation is PROOF that the market has FAILED?\" That is an extremely strong statement to make, and a total distortion of the theory of imperfect competition. What you\’re doing is setting up a straw man which you can them lash into without interruption.

Exactly who said that? Where? Who do they speak for? Does \"everybody\" agree with them? Is that really a theory held by the bulk of all \"mainstream\" economists? Are you really saying when presented with that, the average Economist will agree without qualification?

Its easy to conjure up something like that and knock it down. What you have to do is show where this is practiced. Give a real-world example of a industry dominated with tiny firms with equal output, that is seen as ideal, or point out the absence of any.

Better yet, point out an industry where product differentiation exists (most, I would expect), and give a concrete example of steps the government took on the behest of an economist to alter it. If you can, give an example from the past, so that the consequences of played out in history. Give an example of another, in your mind comparable industry that was left alone, and compare how it did. Discuss what you think the difference was in observable terms.

You know, I\’ve been reading Austrian Economists fuming about Paul Krugman\’s Nobel Prize recently. They, as I\’m sure you, see him as a complete and total fraud.

But you know, he does a much better job explaining and illustrating his theories than you do yours. I presume if you\’re keeping a blog, you want your ideas to reach a general audience. If that\’s the case, you should present them in a way that actually persuades the unconverted. Don\’t just fume at the profession. Don\’t just protest that \"they cannot comprehend economic logic\". Lay it all out.

//jjrs
1 January 2009 at 3:10 am

From William Andersen-
“You are correct. Paul Krugman does a great job of explaining his point. So what? The man declares that we can spend our way out of a recession and is clear about it. According to you, that makes his ideas correct: he explains them, which thus means he is right. Unfortunately, that leap in logic does not work. Austrians do a very good job of explaining their theory. By the way, please explain to me why I am wrong, instead of engaging in the ad hominem attacks. Mainstream economic theory holds that if a firm faces a downward-sloping demand curve, that is de facto proof that there is a market failure. You may not like the implication, but that does not mean my point is wrong.”

You seem to think this is about “attacking” you- I’m still not saying you’re wrong. I’m saying you’re doing a very poor job of convincing me you’re right. Indeed, not once in your reply did you even attempt to address any of my completely non-rhetorical questions. Here they are again-

after reading you write-

“according to standard microeconomic theory, unless an industry is dominated by tiny firms with small production capacity and all goods sold in that market are exactly the same, there exists a market failure. That is right; according to the economics canon, any product differentiation is “proof” that the market has failed, and only can be set right by outside (read that, government) action.”

I asked,

“Exactly who said that? Where? Who do they speak for? Does “everybody” agree with them? Is that really a theory held by the bulk of all “mainstream” economists? Are you really saying when presented with that, the average Economist will agree without qualification?”

You still haven’t even tried to answer any of those questions!

You say-

“You are correct. Paul Krugman does a great job of explaining his point. So what? The man declares that we can spend our way out of a recession and is clear about it. According to you, that makes his ideas correct: he explains them, which thus means he is right”

No…but it does he mean he does a far better job persuading other people -a great many other people- that he is right. And according to you, that causes some big problems. Are you up to the job of helping rectify that?

Presumably, you blog because you want to get your message out, have an influence in people’s perspective on events, and further the Austrian school of thought. But as I’m sure you’ll agree, thats been frustrating task for you so far. Every time I read Austrian Economists, I see them fuming about what a total imposter Krugman is, what an all out charlatan he is, with all his “Howlers”. It seems to enrage you that he has influence in the world, and that people you respect do not.

Well let’s see if we can figure out why that is. Look, here’s an example of one of his “howlers”-

“In fact, the true cost of government programs, especially public investment, is much lower now than in more prosperous times. When the economy is booming, public investment competes with the private sector for scarce resources — for skilled construction workers, for capital. But right now many of the workers employed on infrastructure projects would otherwise be unemployed, and the money borrowed to pay for these projects would otherwise sit idle.

And shredding the social safety net at a moment when many more Americans need help isn’t just cruel. It adds to the sense of insecurity that is one important factor driving the economy down.”

Those both look like pretty reasonable propositions. Here is your response…in it’s ENTIRETY!

“Keep these howlers coming, Paul. In hard times like these, we need some good laughs!”

Can you please explain the hole in his reasoning?

You say:

“Unfortunately, that leap in logic does not work. Austrians do a very good job of explaining their theory. ”

After days of looking, I still haven’t seen it. Please enlighten me. A tip though- simply labeling someone else’s argument a “howler” -with literally no explanation as to why it is one- has of yet been unconvincing.

//jjrs
1 January 2009 at 9:05 am

Harvard economist/Bush advisor Mankiw\’s _Macroeconomics_ has a section on banking. It is a description of central banking in the context of govt policy. It is not an explanation of banking in a market. Needless to say, there is no mention of the mostly free 19th century banks. Mankiw is an economic technician, not a scientist. He was recently published in the NYT.

Voters want more with less taxes? Hire KEYNES ECONOBLOAT SERVICE, the economic techs for the problem economy! We inflate money and mimic lower interest rates. The resulting boom-and-bust can easily be blamed on business. Our motto: in the long run our profits are offshore, youre out of office and the voters have forgotten. Remember, the only thing we have to fear is the science of economics.

//Stephen Grossman
1 January 2009 at 3:48 pm

And so Krug Man, from the land of Nobel, spake, “[T]he true cost of government programs, especially public investment, is much lower now than in more prosperous times.”

Is “less prosperous times”
a cost? An asset? Better not mentioned?

//Stephen Grossman
1 January 2009 at 4:15 pm

To address the first of Krugman\’s arguments, he is making assertions about a couple things which I think are wrong.

First he makes a claim about constructions workers saying, \"right now many of the workers employed on infrastructure projects would otherwise be unemployed.\"

Two things, first, how does he know they would otherwise be unemployed?

Second, even if they are currently unemployed, how does he know they will stay unemployed? How long will they be unemployed for?

Most importantly, what happens when the private sector tries to start investing in infrastructure, and the price of labor has gone up and scarce resources are being used for less efficient projects (if you dispute that the federal infrastructure projects for 99 cases out of 100 will be less efficient than private sector, I hope you don\’t call yourself an economist, secondly, we can have a discussion about this too if you do dispute it)

Secondly, Krugman asserts: \"the money borrowed to pay for these projects would otherwise sit idle.\"

How does he know that? Because the market is still panicked and everyone is rushing to T-bills? Why does that make it idle? And we always have to come back to the point, what if market conditions change in the next 6 months? If we launch all the public works and infrastructure spending, there will be little room left for a private sector recovery. This is also known as \"crowding out.\" Friedman talked about this at length.

There, a couple questions Krugman needed to answer and a couple scenarios (whether they are likely or not depends on how optimistic you are) where his policies would lead, if not disastrously crippling economic effects, at least severe crowding out and slowing of economic recovery.

//Paul
1 January 2009 at 10:30 pm

>First he makes a claim about constructions workers saying, “right now many of the workers employed on infrastructure projects would otherwise be unemployed.”

“Two things, first, how does he know they would otherwise be unemployed?”

I’ll tell you precisely how he knows- because in the scenario we’re discussing, this is during a recession or depression. And the unemployment rate would be high.

As he said, the government jobs could pay below what the private sector offered. So if you had a job, you would keep it. If you didn’t, well now you would have one.

“Second, even if they are currently unemployed, how does he know they will stay unemployed? How long will they be unemployed for?”

Do you predict a swift end to this recession? I didnt think anyone claimed that- just whether or not anything should be done about it, or if it was merely curative and a necessary readjustment.

“Most importantly, what happens when the private sector tries to start investing in infrastructure, and the price of labor has gone up and scarce resources are being used for less efficient projects”

Well, under his reasoning, the government is doing this public works project to pick up the slack when the private sector is too wary to invest and credit has dried up and its hard to get a loan, even with very low interest rates (liquidity trap). Under this theory, they would be hiring at low salaries that wouldn’t be feasible if the economy was good and demand for labor was strong.

So under this reasoning, when the economy picked up, lenders became more relaxed giving credit and the private sector began to invest again, 1) Since the Guv paid less to begin with, demand for labor would drive prices up, but the government wouldn’t have to raise wages to compete with the private sector. And 2) since Government would no longer need to pick up the slack, they could just begin to let the public works projects go as the labor supply dried up.

Now, I’m sure you’ll say that this won’t happen in practice, that Obama and the Democrats will just keep the public works projects going as pork. And that’s a fine position to take if you’re a politician.

But it does nothing to explain why the above scenario wouldn’t work…in THEORY. You need a theoretical, logical economic model, which you can then use to predict events and make policy prescriptions. Not the other way around.

>(if you dispute that the federal infrastructure projects for 99 cases out of 100 will be less efficient than private sector, I hope you don\’t call yourself an economist, secondly, we can have a discussion about this too if you do dispute it)

See, I keep seeing this. “Government spending never works, because it doesn’t”. is that literally the economic theory, that elected officials will invariably have hidden agendas, and that therefore public investment will always, inevitably be more expensive, regardless of the circumstances, and that’s just that?

Because as well as that works as a basic political ideology to shake one’s fist at the man, it makes for a pretty lame theory. And a very poor rebuttal of the Krugman proposition above. “HAHAHA! You SAY costs will be cheaper if the Public sector isn’t competing with the private sector for labor and capital, BUT Big goverment spending will ALWAYS cost more! Why? Because everyone with a brain knows it does!!”

//jjrs
1 January 2009 at 10:52 pm

“Now, I’m sure you’ll say that this won’t happen in practice, that Obama and the Democrats will just keep the public works projects going as pork. And that’s a fine position to take if you’re a politician.

But it does nothing to explain why the above scenario wouldn’t work…in THEORY. You need a theoretical, logical economic model, which you can then use to predict events and make policy prescriptions.”

Well, okay. You’re right, I am claiming theoretically as well as practically and so need evidence. But I find it strangely disconcerting you would advocate a THEORY that clearly will not be implemented. What good does the theory do if no politician will carry it out? Couldn’t it in fact do more damage if the politicians misuse a theory?

Now before you say we are leaving the bounds of economics into politics, what do you think about the field of Public Choice? Is that economics or not? Because it is Public Choice ideas and theories I will use to explain why the government is generally less efficient than markets.

Let’s begin with the basic premise of Public Choice, politicians do not change into some kind of superhuman other-considering agents just because they are elected. In fact they respond to incentives and have personal goals just like everyone else.

Obviously that doesn’t mean that they are all corrupt (depending on you definition), but we have to understand what they are motivated by. They are seeking to better the situation of their constituents. They are seeking reelection, they enjoy power and prestige. Now each person values these various objects to different extents, but all those motivations will lead to non-optimal outcomes.

When politicians vote on infrastructure, they do not run economic calculations project by project, at least not as thoroughly as a private investor. Why? Because they are busy, they have a lot to do and not enough time to do it. Furthermore, and more importantly, they have little to no stake in whether the project produces more benefit than it costs. No one is going to link some sub-optimal fishery, or road, or park with a politician. Especially if there are hundreds of these projects.

So politicians lack the incentives to do find the most efficient projects. They will look first to their constituency and what will make the biggest splash.

But if this is not theoretical enough for deciding upon the inefficiency of government sponsored infrastructure projects, we can look at history too.

The National Road, built in the early 1800s was a disaster. State sponsored and owned rail lines in the mid 1800s didn’t work. For example, Stevens T Mason, governor of MI tried to build rail infrastructure and it failed miserably, almost bankrupting the state. Pennsylvania had similar problems.

We have our modern day “bridge[s] to nowhere”

And of course, we have the failure of Roosevelt’s New Deal to end the Great Depression to show that government cannot spend its way out of recessions or depressions.

Of course that is a broad categorization, but Roosevelt’s public work programs played a large role in undermining economic recovery because it sucked money out of the market to pay for its programs. I cannot see how this policy idea of Krugman’s is substantially different.

//Paul
1 January 2009 at 11:11 pm

Thank you, by using Public Choice theory, you’re the first Austrian-sympathetic person I’ve talked to who’s tried to explain that aspect of their position rationally.

>I find it strangely disconcerting you would advocate a THEORY that clearly will not be implemented. What good does the theory do if no politician will carry it out?

I do not agree that it cannot be implemented. Nor do I agree that it never has been. But I brought up the idea that it wouldn’t out the gate because that’s the road block I usually face when I try to talk about the issue.

Public Choice theory is not economics per se, but it’s fair to bring in to the discussion, and it can tell us some things about why Public Works projects may not be as efficient as Private works projects. Conflicts of interest that can guide policy maker’s decisions include-

-Concerns for a given constituency/state, which may not reflect the concerns/needs of the country as a whole

-Making ties with lobbyists, who they can get contributions from, and who they themselves can become once they leave office

-since they don’t have the same direct profit motive that an entrepreneur has, its easier for them to be lazy about the decisions they make.

Well alright, these are all valid concerns about why a government could have more difficulty doing something efficiently. One decision we could make is that in the face of this, we could simply never have any public works projects. But here’s another idea- if public works projects are undertaken, why not work to minimize these dangers as much as possible?

For example-

-If the theory holds out, the implication would be that it would be a good idea not to localize public spending to pet pork projects for each state, and to organize them federally, and with public scrutiny, to try to get a plan that does benefit the entire nation as much as possible. Plus, its easier for the public and press to monitor a few national plans than it is hundreds of state level pork projects

-Regarding lobbyists, the implication would be that we should make much stricter rules about ties with lobbyists, as much resistance to that idea as I’m sure there would be in congress. For example, as a basic start, people entering an administration could not have private ties to the industries they would oversee in the job. More importantly, there could be a job agreement that bars people that accept public office from ever accepting a job as a lobbyist in the industry they oversaw.

-The third conflict is even trickier to resolve. Perhaps the best way to motivate politicians is by holding them to greater scrutiny for their actions

Now, would doing these things make Public works projects every bit as efficient as private? That’s highly unlikely. But would they help? If carried out, almost certainly.

Its certainly true that there are fundamental advantages to private works over public, and even most liberals will agree that in the long run, it should usually be private. But to emphasize that alone is to ignore that there are good features of public projects. There are arguably some non-exclusive public goods, such as roads, that are difficult to monetize, and best paid for collectively.

And in some cases public works have a muscle that private works can not enjoy. I don’t think anyone would argue that the fighting of World War II would have been more efficient and successful if it had been left up to private industry. Japan currently has a national network of fiber optic cables, provided partly by government funds. The national phone company had some time to make money at premium prices, and then the lines were rented out to private ISPs. You can now get 50-150mbps broadband for $40-50 a month. And it isn’t just the private companies that profit- the government will see a return on its investment, and the country as a whole is now far ahead of the US in broadband. A private entrepeneur will wistfully tell you that an initial expenditure of that kind of capital is difficult for a private business.

As for the instances in which you say Public works have failed- railroads in the 1800′s, the New Deal, etc- I flatly disagree. The US went into debt throughout the 19th century to make large investments in its infrastructure, which transformed it from a basically agrarian nation into the industrialized nation that it is today. While there were certainly bad investments along the way, the vast majority of economists will agree that these investments helped lead the way to the astronomical economic growth the US saw in the following century. The same is true of WWII. It is commonly understood that the war, which was essentially a public works project of enormous proportions, is what finally led the US out of the great depression.

Now, I’m sure you will argue that these (very, very) commonly held views (not just by laypeople, but by over 90% of all accredited economists), are wrong. But to do so, you will have to quote a handful of books in the Austrian school of thought, which, in the opinion of most, are practicing very severe forms of revisionist history. By doing that, you’re living in an Academic echo-chamber of a small group of people who have repeated the same ideas to each other for a long time, and together have convinced themselves that they are givens. But they are not, not to almost anyone outside the Austrian school. Those are enormous claims. To even get started on the absolute basics of what you’re claiming, they require a look at a great deal of data, and the writings of fellow austrians putting their usual spin on it isn’t going to cut it.

//jjrs
2 January 2009 at 9:04 am

Just a few observations from an ecomonic layman:

Several weeks ago Sheldon Richman wrote an article entitled, “Who Needs Evidence” wherein he took issue with Jacob Weisberg’s assertion that libertarians are the cause of our financial problems.

I might be making a bad assumtion but, It seems he(Weisberg) is also condeming economists that have an Austrian School leaning. Although I don’t think they are one in the same(libertarians and Austrian Economists), it seems they are quit compatible.

Mr. Richman is suprised, and rightfully so, that libertarians/Austrian Economists are to blame. Why?

I’ll let Mr. jjrs explain: “…you’re living in an Academic echo-chamber of a small group of people who have repeated the same ideas to each other for a long time, and together have convinced themselves that they are givens…the writings of fellow austrians putting their usual spin on it isn’t going to cut it.”

How is it that such a small group of people can be responsible for so much and for so little?

//D.B. Cooper
2 January 2009 at 11:00 am

Hey jjrs,

I enjoyed your post. You made some good points and laid it out quite clearly. I just want to comment on a couple things and maybe talk about the Great Depression some.

While I think your suggestions for improving the oversight of Congress are theoretically correct, I think there are alternatives which are better.

The problem is that we are asking Congressman to police themselves. So we can imagine a state where this occurs, but that doesn’t mean that it exists in reality. For example, McCain-Feingold, I think, had fairly limited success in reducing the power of campaign financing. The primary reason for this, I think, is that the government has too large of a stake in the market.

Companies lobby and spend tremendous amounts of money because tremendous amounts of money are at stake. The government has the power to raise taxes, impose tariffs, handout subsidies, regulate everything from quality to quantity to type of product, etc. All these decisions have million, or sometimes billion dollar implications for their respective industries. That is why so much money is spent on political campaigns and why companies and individuals will always find loopholes to any campaign finance law. We could keep making them stricter and stricter, or we could fight the root of the problem, and try to reduce the role of the government in the market. Does that make sense? Is that a reasonable assessment?

As to the Great Depression, one quick observation and a question.
First, I think it is interesting and important to note that the average unemployment in 1939 at the end of Roosevelt’s second term was higher than in 1931 when he was elected.

Second, I’m aware that the general consensus is that WWII brought us out of the Great Depression, but I don’t understand exactly why. How does a war produce prosperity? I mean, couldn’t we just build the planes and tanks and then blow them up in the desert ourselves? Why would expending resources pull us out of the Great Depression, especially considering that the New Deal was based upon just that idea. Spend and spend to get to full employment. Draw out all the idle capital and labor through government programs. If it didn’t work well, or at all, during the 30s, why did it work in WWII?

//Paul
2 January 2009 at 2:36 pm

@DB Cooper- I\’d have to see the articles, but offhand I don\’t think it makes any sense to blame libertarians for this mess at all. Libertarians like Ron Paul were pointing out how foolish it was to keep living off borrowed money from the chinese for a long time and saying that the real value of those stocks was worthless before this happened, and rightfully so.

Plus, they weren\’t in power. To say libertarians did it, you\’d have to say the Bush Admin are libertarian. The Bushies were all for big government, just for one that worked for companies they had stock in like Halliburton and Chevron. The were all for \"regulation\" that helped the really rich do well, It was basically the same thing as big government liberals, but regulations that favored some parts of supply side to an unreasonable degree, rather than democrats who some argue favor labor to an unreasonable degree. And that 700B plus bailout? Whether you agree with it or not, libertarian it was not.

Hi Paul, thanks for the discussion. Its nice to get away from politics a while (as much as we\’re all usually paying attention to that), and talk economics. Let me answer as much as I can.

>\"We could keep making them stricter and stricter, or we could fight the root of the problem, and try to reduce the role of the government in the market. Does that make sense? Is that a reasonable assessment?\"

I think it\’s a fair argument, although I don\’t agree with it myself. There\’s certainly no easy answer, and there would obviously be an enormous amount of political resistance to making the federal government cleaner and more accountable. But on the other hand, no matter what you do, if you want change, you will face that opposition. Look at Ron Paul\’s proposed reforms. Those are arguably much more radical, and will arguably face much more opposition from the powers that be still. So why do people rally around him and support him? Are they irrational in oding that? Well, no. They believe in democracy and that they can make a difference in the long run, and so they should. But if you think that something as big as that is feasible in the longrun, does cleaning up the existing system seem less possible, or more?

>\"Second, I’m aware that the general consensus is that WWII brought us out of the Great Depression, but I don’t understand exactly why. How does a war produce prosperity? I mean, couldn’t we just build the planes and tanks and then blow them up in the desert ourselves?\"

This actually gets to the heart of Austrian and Mainstream ideological differences. And its funny you should phrase it that way, because as crazy as it sounds, what you just described was without exaggeration more or less precisely what Keynes proposed.

Now, while his theories still have a big influence on economic policy, (and as I will argue have borne out) it is true that things he have said have since been heavily qualified. But its still useful to examine his basic theory. So first, lets explore that matter by taking a look at the model he devised and was proposing remedies using.

Its important to remember two thing going into this- first, while Keynes is viewed as an influential socialist today, he was actually very much capitalist in his personal life, and made a great fortune by applying his reasoning by playing the stock market. In the 30\’s, support for Marxism was still really strong and communism had yet to be discredited. Some people were saying that the depression proved free markets didn\’t work and that communism was the answer. Keynes wanted to prevent that.

Second, he didn\’t recommend or see necessary those kinds of schemes under ordinary conditions. But remember, he was theorizing in the middle of the great depression when no-one knew what to do.

this is how Keynes characterized the situation-

Suppose unemployment is above 20% People are obviously very concerned about the future and holding on to their money. You, a radio broadcaster, see the opportunity for a fantastic new mass media for this technology. You want to invest in a network of transmitters to bring radio to areas that don\’t have it (or only weak signals). You would like to invest a lot in this, and believe it will pay off.

Only problem- no-one else is biting. You can\’t persuade any producers of consumer goods to pay for your advertisments (which is your whole income model). People are either buying none of their goods, or keeping spending to a minimum. As great as it sounds, the whole idea is newfangled and untested, and those companies are struggling just to keep afloat. They will not buy advertising at a rate that would pay for the investment. And the banks that would loan you the money? Forget about it. They won\’t even go near many relatively safe investments, let alone that.

So what do you do? You do what everyone else is doing- you don\’t invest, and no new jobs are created. In fact, like most companies, you probably lay off existing employees in areas that are losing money in this climate and cut down to whats profitable.

So what you have in that situation is an economic stalemate where things freeze to a halt. Its not a \"mental recession\", either- under self-interest, every actor in that economy has quite rational reasons not to act and make the first move, because the other actors can\’t be expected to act reciprocally.

So what Keynes said was that in that situation, the government, which has access to money, but necessarily a self-interest profit incentive that would rationally discourage them from acting, can step in and take up the slack.

Now obviously, Keynes thought that if you were going to do public works, you might as well do something useful. After all, if you can make work brining electricity to rural areas and farms where it isn\’t currently cost-effective for private industry to do it, perhaps that action could have a positive economic effect in the long run, even if its carried out inefficiently.

But Keynes said that even if there were no useful projects to start, you could help the economy -and this point is very important- <em>even by doing something of no immediate value. <i>

Keynes actually proposed that in the above situation, you could make a diference merely by stuff money in jars and paying people to bury them in the ground. Now to most people, that sounds utterly absurd. But keeping his definition of recession in mind, play out this scenario-

People finally get jobs to bury that money, and other people start going out to dig it up again. Businesses start hiring people to dig it up and investing in bulldozers to do it. Ordinarily they\’d be reticent to start anything, but this is just too good.

people go back in to town after a hard day\’s valueless work and start buying shots. The saloons find themselves ordering more liquor. Laborers even start buying those new radios, which they always wanted but couldn\’t/didn\’t think they could afford before.

And suddenly, you business model doesn\’t look so bad to investors. Sponsors are seeing more sales of consumer goods and have more money to throw around. And since the economy is up, more people have radios, which means a bigger audience. The boom in digging equipment makes construction more feasible. And the economy picks up.

So that is the theory played out. Now lets looks at the reality of what happened in the years immediately following that theory and its popularization.

The war council in the US was downright draconian. many of the planners were remnants of the new deal coalition, and they got a mandate to do things they had never had in the 30\’s. they forced producers of consumer goods (which they wanted to make, and that people actually wanted, even if to a lesser extent during the depression) out of those markets to make items for the war. Car manufacturers started making airplanes instead. Other industry was put into atomic bomb research. Industry began making enormous amounts of ships to send supplies to Europe, and spending enormous amounts of money to improve ports. There was no profit-motive for this. It was during a depression, and the fact that they were all at war made europe awful trade partners, as far as profit went.

To make matters worse from a free-market standpoint, treatment of the troops (basically every able bodied young man) was a gargantuan new deal dressed up in army fatigues. The G.I Bill gave them college educations, and guaranteed mortgages. Think about that- GUARANTEED. Regardless of the individual man\’s ability to hold a job and pay it off. And to top it all off, the US put out utterly huge sums -untold billions- to England and Europe to help them rebuild. And to make matters even worse, still, the old new deal was still in effect, and everyone was being promised social security. No break on that one either.

Now lets look at that scenario from the theoretical standpoint again. Looking at our theories of economics- what will happen in this situation?

Keynesian (today, Mainstream) Economics would dictate that that would/could help jumpstart the economy.

While few would argue that Hitler needed to be stopped, from an economic standpoint, Austrians would argue that a program of that scale and nature would be an unmitigated disaster. You think the New Deal prolonged the depression? If interfering public spending causes/prolongs depressions, the above scenario would logically throw the US into an economic inferno. It would take at least ten years of crushing depression before the free market would even be able to begin to crawl back from that.

So, what happened?

Well, those young men went home and got educated at unprecedented rates. They all took out those mortgages, and since they were guaranteed by a profit-irrational guv, it was safe for indistry to start a hug construction boom to build all the houses. That atomic bomb research paved the way for nuclear power. Europe eventually rebuilt and paid back those loans. And now the US had modernized ports and ships to trade with the modern world.

And the US entered an era of prosperity not only unrivaled in its own history, but in the history of the entire world.

can mainstream economics account for why that happened? Yes. It was predicted in the model. Can the Austrian model? I would say not at all. Even if you want to argue that the private sector could have done all that without the guv\’s help, in the first case, it was still; absolutely wrong in predicting the disaster that *should* have happened. Its on thing to say that the prosperity could have happened despite all those things, but to do that, you have to concede that at the least, all that (utterly obscene) public spending didn\’t hurt. And the model doesn\’t allow for it.

//jjrs
2 January 2009 at 11:14 pm

There are various spokesmen for Austrian economics, as there are for Keneysian or moneterist thought. However mainstream economics has the advantage of a multitude of textbooks over the years. This certainly leads to the impression of a solid foundation. It\’s the sense of consensus and strength in numbers. However, as Michael Crichton has pointed out in another context, consensus is a virtue of politics, not of science. Many of the greatest scientists challenged the consensus, sometimes with the support of their peers. It can be argued that \"consensus\" should never be advanced to defend a position.

Perhaps a fairer competition between schools would be obtained by reading a single text by Keynes, Friedman, and Misses. Absent prejudice based upon the anti-scientific notion of consensus, I think Misses does very well. I read Human Action and was struck my his novel, yet powerful approach to many topics.

Perhaps one of the greatest problems for free market academic economists, and for non-socialist experts in any field, is that once one acknowledges that government lacks a certain role, the demand for ones services declines. It is much better to stoke fear, and offer one\’s services to help solve the \"problem.\"

//Mark Glenn
3 January 2009 at 12:59 am

Would burying Keynsians in the ground and then paying private business to dig them up cause prosperity?

//Stephen Grossman
3 January 2009 at 10:03 am

“Would burying Keynsians in the ground and then paying private business to dig them up cause prosperity?”

See, that kind of thing is not going to get you anywhere. You can take potshots at the other side, or you can lay out your reasoning step by step, and try to persuade people and spread the ideas of Austrian Economics.

If you want to further your ideas, take that little parable about the town that buried money and re-tell it, to reflect your understanding of reality, and depict what the logical consequences would be, and how they play out. And no deus ex machina either- if you’re working with a model, you can’t just throw in a slimy politician that embezzles the public funds. Stick to the rational consequences of the actions and demonstrate how it plays out.

//jjrs
3 January 2009 at 6:59 pm

My humor about Keynsian consumptiomism is a supplement, not a substitute, for science. Humor can have a rational function. And the inflationary crisis is so bad that humor is a welcome relief.

//Stephen Grossman
4 January 2009 at 11:59 am

Who sees the largest role for government, and hence for economists, in managing the economy? That’s easy. In descending order: Keynesians, moneterists, Austrians. Which schools of thought have been best represented in Government and academia. That’s easy. In descending order: Keynesians, moneterists, Austrians. In a surprise finding, we discover that we get what that which is rewarded.

Laissez faire et laissez passer, le monde va de lui même (Let do and let pass, the world goes on by itself) is an early defense of market freedom. I\’ve seen it described as a liberal view. Clearly this is classical liberalism, not modern liberalism. It is curious that liberal means not liberal, on this and on many other topics. Perhaps George Orwell had some insights on this phenomenon.

Laissez faire was advanced by Adam Smith and other classical liberal economists. He saw spontaneous order in the market place. Those schools of thought most inclined to see and accept the spontaneous order markets are, in descending order, Austrian, Chicago (moneterist), Keynesian.

After Smith and the economics profession promoted the idea of spontaneous order, the idea was picked up by Charles Darwin and Alfred Wallace. Evolution is the idea of spontaneous order in nature. A consistent approach would be to accept (or reject) spontaneous order everywhere. So one might expect academia accept laissez faire economics and evolution (or to reject both). Curiously this has not been the case. Evolution is enshrined by many as a fact; while free markets (laissez faire) is viewed my many, perhaps like freedom itself, as a risky scheme.

On their merits, the idea that intelligent humans serving each other bilaterally in a highly interrelated economy should succeed beyond their expectation (synergy) seems more plausibly than the idea that reproduction errors combined with natural selection should give us all the complex diversity of life that we see. On their merits, the modern acceptance of evolution and distaste for laissez faire is perplexing to me.

The two topics are treated differently in high school. Evolution is taught uncritically. Economics is seldom taught in high school. When it is taught, the idea of laissez faire is merely touched upon. One reason I mention high school is that most Americans go to high school. If you want to indoctrinate a generation, it makes sense to do so in high school.

It may be that spontaneous order in markets and spontaneous order in evolution tend to support different agendas and world views.

Acceptance of spontaneous order in markets greatly reduces the role of government. It is consistent with individual freedom, charitable giving, and even an individual relationship to God. It is hard for people to trust that things will work out in an undirected economy. People who have faith in God find may find it easier to live without government control. After all, they believe someone is in control.

Religion can take or leave evolution. However, atheism demands evolution. There are some non-believers who accept spontaneous order in the economy. But, as said before, it is hard for people to trust that things will work out in an undirected economy. Lacking a faith in God as a final backstop, many turn to a God surrogate, and that is government. I think this seen in its most extreme form in communism. It advanced the most extreme government control, and it was formally atheistic.

There are large cultural forces at play in society. These seem to favor a faith in government, not freedom and free markets. America’s early history was a time of great faith in freedom, free markets, and God. It was a time when people spoke of “the sanctity of property” and felt no need to explain themselves.

//Mark Glenn
5 January 2009 at 11:18 am

JJRS,

Thanks for contributing. This is a very interesting discussion. However, you seem to be searching for the “right” or clear explanation, and I will take my best shot.

Where does the government get the money?

There you go. That is it in a nutshell. Where do they get the money? If they had a pot of cash set aside, or released gold reserves or something, I would bow to your point of view. We both know that is not the case. So, where do they get the money?

1. Tax it away from productive (ie high wage) individuals and entities
2. Borrow it from productive individuals and entities
3. Inlfate the money supply and take it from everyone

You tell me which method would not have negative effects? All would, and all would be more negative than the positive created. And how do I know that? Becuase if the positive was worth it, the money would already be going there.

Using force does not make the nation rich. It can only prolong the downturn, preventing the proper adjustments from taking place.

Whenever considering a government action, ALWAYS ask, “Where will they get they money?” Then decide is taking it by force is really the road to prosperity.

G-

Lastly, FEE, please add a “spellcheck” on this. I am a God-awful speller.

//Gerard
5 January 2009 at 1:34 pm

MarkGlenn,

Thank you for the comments about evolution, economics, and spontaneous order. I\’m happy to learn that at least one other person views these topics in a similar light.

As for the Austrian/Keynesian debate…I find the Austrian theory of the business cycle to be much more compelling. And it\’s in line with what most of the founders of the US intended.

//Nate
5 January 2009 at 1:35 pm

One more thought:

I don’t know about you, but my money is never idle. I wouldn’t really know what that would look like, since I don’t keep cash under the bed. If someone has a definition of “idle” money I would love to hear it.

Cheers-

//Gerard
5 January 2009 at 1:37 pm

I was thinking if a good way to explain the difference between a tax cut and a spending increase to illustrate the point.

Imagine at the end of the year, the boss decides to reward the employees for their hard work and dedication. So he decides to buy each a 1500.00 watch. Nice, but not all employees will need a new watch. If he offered them a cash bonus of 1500.00, that would be much better, as they would all spend it the way they see fit. They would all be better off. But let’s say the boss decides the watch is the way to go. And on top of that, deducts 100.00 from each employee over the next 15 months. Well, that is no bonus at all.

Now imagine that the boss decided that the top paid employees would contribute most of the money for the watches, and the bottom employees paid nothing. The lower employees would think the boss is swell. They got a nice watch, but the upper employees would have been the ones who paid for it.

Now, let’s take it further, and let’s say the person making this decision does not even work at the company, that no one at the company wants a watch, the boss is against it, and the employees would rather keep the cash. Now you have a government stimulus package. The outsider will tell the lower level employees that he is their hero because he gave them a watch they did not want, he will tell the higher paid employees they need to pay their fair share, and he will say that the boss is ripping them all off.

When I hear people like Krugman commenting on how I drive on WPA roads, I feel like he is pointing out how nice my watch is. Of course, if it was provided by the state, it probably keeps lousy time to boot.

That is why a stimulus package doesn’t work. It is a fraud that relies on you being mystified by the pretty watch, and not realize that it was purchased by the magician picking your pocket.

G-

//Gerard
5 January 2009 at 8:00 pm

Thanks, Bill Finch, for your comment and for remaining true to the principles of liberty in the 30 years since I had you as a student!

Larry Reed

//Lawrence W. Reed
5 January 2009 at 8:30 pm

@MarkGlenn-

“Laissez faire et laissez passer, le monde va de lui même (Let do and let pass, the world goes on by itself) is an early defense of market freedom. I\’ve seen it described as a liberal view. Clearly this is classical liberalism, not modern liberalism. It is curious that liberal means not liberal, on this and on many other topics. Perhaps George Orwell had some insights on this phenomenon.”

The confusion comes from the “liberal” being taken to mean both as “favorable to progress and new ideas” (as opposed to conservatives who are seen as wanting to traditional values), and liberal as in freedom to do whatever you want, which modern liberals DO want, at least socially (freedom to marry another man, etc. The term libertarianism is still safe for the idea of freedom to do what you want, so long as it doesn’t interfere on the rights of anyone else (which is arguably what government does, which makes it anti-libertarian.

“Laissez faire was advanced by Adam Smith and other classical liberal economists. He saw spontaneous order in the market place…Evolution is enshrined by many as a fact; while free markets (laissez faire) is viewed my many, perhaps like freedom itself, as a risky scheme…On their merits, the modern acceptance of evolution and distaste for laissez faire is perplexing to me.”

The idea here is that government intervention in the economy and evolution are contradicting ideas, and mutually exclusive, as if believing in one and not the other is intellectually muddled. But if we’re going back to Adam Smith and the Wealth of Nations, its important to look at his beliefs. In that very same book Smith advocated-

-The need for government to provide public education
-the need for laws that prevent price collusion in industry (basically, theorizing the need for what became anti-trust laws
-Government imposed limits on interest rates, to stop predatory lending
-Occasionally approved tariffs to protect burgeoning industries.

there’s this idea right now that you’re FOR free markets, or AGAINST them. But it’s not that strict. If you can’t even rely on Adam Smith to be 100% free market all the time, why drag anyone else over the coals for doing it?

“Acceptance of spontaneous order in markets greatly reduces the role of government. It is consistent with individual freedom, charitable giving, and even an individual relationship to God. It is hard for people to trust that things will work out in an undirected economy. People who have faith in God find may find it easier to live without government control. After all, they believe someone is in control.”

Well basically, what you’re saying is that if Keynesian economists had more faith in God, they’d have an easier time putting their faith in free markets.

I actually don’t doubt that that’s true. But if you want to treat Economics as a science, or even just a serious field of study “faith” that it will work has nothing to do with it. You shouldn’t need a leap of faith to demonstrate it works. Should should be able to demonstrate that it does logically, and demonstrate that it works historically.

//jjrs
6 January 2009 at 1:07 am

@Gerard-

“Lastly, FEE, please add a “spellcheck” on this. I am a God-awful speller.\"

Switch to Firefox! Automatic spell checker.

“Where does the government get the money? There you go. That is it in a nutshell. Where do they get the money? If they had a pot of cash set aside, or released gold reserves or something, I would bow to your point of view. We both know that is not the case. So, where do they get the money?”

This is a huge question that has been pondered and disputed a lot over the past hundred years. It goes way back to exactly what money is, and what value anything has as a currency, be it paper printed from a given country or even a colorful piece of metal that people like to use to make jewelery (Bit which as Smith pointed out, could not possibly be more useless in terms of practical value).

Milton Friedman, who at least used to be considered a more laissez-faire economist, basically saw recessions as a shortage of money, and advocated that governments just print more if one loomed. Friedman wasn\’t stupid- he understood full well that paper has no value, particularly if you just keep making more and more of it (which according to the laws of supply and demand, makes it less and less valuable as more and more becomes available).

Perhaps the best way I can describe it is that he, along with many other economists before and since. Don\’t really see money as something you fight for, compete against other people for and horde when you get (as the mercantilism did in their quests for accumulating gold), but rather, a circulatory system for the trade and transacations in the economy

Now, he understood the limits of this. He had an excellent story about what would happen money just rained from the sky. Would everyone live in luxury? No. You\’d go to the dentist to try to get a filling, and he\’d laugh because he\’d have $300 just on his front lawn. Why should he do work just to get 300 from you? The only way you would be able to get him to work would be to offer him far more, and eventually, the whole economy would restabilize, just at astronomical prices. The same trade system would reassert itself within the town, just with higher numbers on all the prices.

So he knew as well as anyone that if it was done too much it would lead to inflation, as it certainly does. But he believed it worked in the short-term, as there’s a lag between the inflow and the system readjusting and coming back to the same equilibrium, at higher prices. And that jolt can do a lot in the short-term if a recession is looming. The 1987 crisis, when there was a stockmarket crash worse than 1929, a recession was avoided by pumping money into the system. In all fairness, Friedman’s theory has taken a hit this year. The fed is printing tremendous amounts of money right now, and things haven’t bounced back. So there’s obviously an upper limit to how effective this is. And I agree the fed can’t simply print its way out of this one as they have in the past, perhaps especially when people catch on to what the government is up to.

Here’s the best model/true story I can think to illustrate it. This actually happened.

A group of young couples on Capitol Hill decided to start a babysitting co-op. They wanted an equal exchange of sharing, but the record keeping was a problem. So every couple got a couple coupons. babysit once, you get one, get a babysitter, give one.

The only problem was that with only 2, you didn\’t want to just waste them on anything. You wanted to save them for when you really needed them. So you probably didn’t want to just pop out to a new movie. So people tended to sit on them.

But here’s the thing, it was hard to earn them, too. Because other couples were thinking the same thing, and the few chances to babysit would get snapped up by someone else quickly. And so most couples sat at home miserable, wishing they had more chances to go out, not realizing that the other couples were doing the exact same thing. essentially, they had entered a babysitting recession. They couldn’t horde coupons for teh future, because there weren’t any going around to get.

They had a meeting about what to do. Some lawyers in the group wanted to make a rule that would require couples to go out at least twice a month (talk about government interference). the economists had a different idea, though it was more controversial to most people. Do you know how they solved the problem?

They just gave everyone more coupons.

Now that people had more, they were more free about giving away the ones they had. And with every coupon that got spent freely, an opportunity to earn one arose. And soon the baby-sitting economy was booming, and everyone was going out and babysitting.

The moral of the story is that they didn’t solve the problem by lowering taxes. They didn’t solve it by getting government out of their lives. They didn’t even solve it through the glory of the free market. They just put more tokens in circulation. Yeah, the tokens have no value if they\’re just “created”. But in and of themselves they have no value anyway.

Now there are catches, as there are to everything in life. Put too many coupons out there, and people won\’t want to babysit, because it’ll seem like too much of a pain for less than two (in other words, inflation- and this actually happened to them later when they pushed their luck). But you get the point.

//jjrs
6 January 2009 at 2:41 am

“When I hear people like Krugman commenting on how I drive on WPA roads, I feel like he is pointing out how nice my watch is. Of course, if it was provided by the state, it probably keeps lousy time to boot. That is why a stimulus package doesn’t work. It is a fraud that relies on you being mystified by the pretty watch, and not realize that it was purchased by the magician picking your pocket.”

If you want to talk about social entitlements like social security, or a new library, you can make that analogy.

But the point of a economic stimulus package isn’t to give you a watch. A stimulus package can be a war, or just blowing up those and tanks and airplanes in the desert. It doesn’t have to give anyone anything directly. That’s the whole point. Though if you get a watch out of it incidentally or better yet, a new computer for your work desk that lets you do more, that’s at least a side benefit of sorts.

//jjrs
6 January 2009 at 3:00 am

JJRS,

Sorry, I can’t help you. If you don’t know what money is, and you think a war is a stimulus…I can’t counter that level of illogic.

But I’ll offer you a deal. I will come over and burn your house down, as a stimulus to your local economy. Think about all the construction workers that will be put to work rebuilding your house. That would be great. And on top of that, you can come work for me. I will pay you in Confederate dollars, which are philosophically money to someone I am sure.

I am not an economist, and thank God. I am a banker and I have to know what money is. Sorry for being a little snippy, but that was the whole point of this article. You have demonstrated the exact lack of economic logic that the author complained about.

On top of that, I have spent way to much time today explaining why someone cannot borrow money, that banks don’t work that way despite what the press says. I am a little tired.

Also, thanks for the spelling tip. I am using Safari and I hope my spelling is better.

//Gerard
6 January 2009 at 4:48 pm

JJRS:

Baby-sitting question. If the government gives us more dollars, which I suppose is analogous to your coupons, where do they get them? Do they just print more? and if so, why not give everyone a million dollars so we can all be millionaires?

Let that one roll around for a while, coupon guy. If you economist friends printed, say, a thousand coupons for each couple, they would become worthless since all the couples would have more coupons then there were people to babysit. But dollars are divisible. The couples could have solved the problem by lower the price of baby-sitting to .25 coupons. If the coupons were like money, they would have found their own equilibrium. they were, in essence, victims of price fixing: one coupon, one night, no one can sell for less. That is why they got stuck. It is the same reason apartments don’t turn over in rent controlled neighborhoods.

A recession is a misallocation of resources. It is if everyone got a thousand coupons and started making plans for every night of the year, and then came to realize that their plans could not be kept. there were simply not enough couples. The recession is everyone calling back and making cancelations, which will continue until they get back into equilibrium.

To take your story one step further, they could have also salved their problem through increased productivity, by sharing baby-sitting with one couple taking several couples’ children at a time, but that is another story.

//Gerard
6 January 2009 at 4:59 pm

Hi Gerard, sorry to hear you no longer want to discuss it. But a few points-

>”But I’ll offer you a deal. I will come over and burn your house down, as a stimulus to your local economy.”

Well, even in analogy, that’s a pretty aggressive way to make your point. I have no desire to burn your house down. But yeah, as destructive as it would be, that would be an example.

“you think a war is a stimulus…I can’t counter that level of illogic. ”

World War II. See above.

When someone points out that even a war can be a stimulus, the common reaction is, you fascist, war mongering pig. That’s a disgusting thing to even think”

Now granted, a war is the most destructive, counter-productive stimulus you can get. But that’s not the point. The point is the mechanism of stimulus. If you’re focusing on the war, and the obviously extremely negative consequences that would prevent any sane or decent person from using it as a stimulus, that makes you a good human being. But as far as the mechanism of the stimulus goes, you’re missing the point.

“And on top of that, you can come work for me. I will pay you in Confederate dollars, which are philosophically money to someone I am sure.”

You know that that’s a specious argument. Nobody accepts them as money. But if you can find enough people that will accept them in exchange for all the goods and services I want? Well then yes, absolutely I will take them.

“Sorry for being a little snippy, but that was the whole point of this article. You have demonstrated the exact lack of economic logic that the author complained about.”

Basically, you have a number of basic, common sense principles that you feel are ignored in the modern world.

I understand those points. Then I’m saying. “okay, I understand that. But suppose this?”

You know, i actually worked in banking myself. Now, you may not agree with me. I’ll give you the benefit of the doubt that you understand what I’m saying. But do you really chalk this up to ME not understanding YOU? No chance that I do, and just don’t agree? Be careful about assuming that other people just don’t understand. It’s a dangerously effective way of cutting yourself off from other people’s perspectives and opinions

//jjrs
6 January 2009 at 6:35 pm

“Baby-sitting question. If the government gives us more dollars, which I suppose is analogous to your coupons, where do they get them? Do they just print more? and if so, why not give everyone a million dollars so we can all be millionaires? Let that one roll around for a while, coupon guy.”

I did let it roll over, and in fact discussed the inflation that rolled around when they pushed their luck. They tried to print more still, and then it didn’t seem worth anyone’s time to babysit for less than 2 coupons. That was essentially inflation, and then they were right back where they started.

But I already wrote about that. I also wrote about how Milton Friedman, who came up with the whole money-pumping idea in the first place, and his story about what would happen if you just dropped money from the sky. He came up with the same conclusion you did….about 70 years ago. And I wrote about it in the posts above. But I guess you didn’t read them, or ignored them.

So tell me again, this is a matter of ME not understanding YOU? Hey, at least I read what you write. Why not do the same for me?

//jjrs
6 January 2009 at 6:43 pm

jjrs,

Your babysitting example is highly flawed. You point out that there was actual demand for the “currency” coupons. This is flawed since it doesn’t actually compare to a proper medium of exchange. It was an imperfect medium of exchange, since it could not be earned or purchased other than through babysitting nor could it be produced by another means. Had people been allowed to purchase/earn the coupons through other means (without the supply being locked), you would not have needed to print more coupons without them being earned. People wanted them but couldn’t get them because a viable market of exchange to supply them didn’t readily exist due to what is effectively a price control/legal tender laws.

The one thing you did show in the example, is that price control interventionism doesn’t work. So the gov’t (group of couples) had to tweak it to get it to work and in the process overreached and caused it to come crashing down. In theory, if the gov’t had omniscience they would be able to set the correct amount of coupon supply to equal the real demand and then tweak the supply as the real demand fluctuated with people’s schedules and life changes. But they couldn’t get done for a small group of people for one service, let alone accurately set it for an entire economy and a plethora of goods and services. No one possesses omniscience.

A monetary supply if it is to alleviate the boom/bust cycle must be subject to the market forces of supply and demand. Whereby a change in the amount of the good demanded will cause a corresponding change to the supply. When gov’t adjusts the supply while trying to divine the true amount demanded, it is mearly guessing at best and at worst is engaging in manipulation to benefit certain groups at the expense of others in the marketplace.

Let’s use multiple mediums of exchange, for example, gold and silver. Gold in the economy is used for multiple purposes as a component in electronics, jewelry, and could be a medium of exchange also. So if more currency is demanded by the market to be circulated, gold will become more valuable as its demand increase outpaces the supply. Over time, more production will be brought on line to mine more gold, perhaps there will be less use of gold in jewelry. At some point, golds scarcity will lead to the need for an additional medium of exchange for lower valued items. We could make smaller gold coins. However, this would only last so long, since there are practical limits to the size of extremely small coins. As the practical limits are reached the use of silver would become the medium of exchange for buying lower priced goods for which gold was too valuable to easily break down to a smaller physical unit. Thereby, the marketplace will regulate the supply of gold and silver as mediums of exchange all by itself, based on the will of the consumers as a whole.

Keynes stimulating effect is only needed because the gov’t mismatched the needed supply for the real demand of the currency in the first place. Furthermore, once the stimulus of additional supply passes the intersection point of real demand, it sets up the next boom/bust.

//AC
7 January 2009 at 12:35 am

First of all, while it makes a good model, it’s not just an example…this was real! The group could obviously have bought babysitting a commercial service, but they trusted each other to take care of each others kids, and the exchanging the favor was more important than anything else. The coupons were essentially the “money”, counters exchanged for goods and services. Let’s look at what you’re saying.

“You point out that there was actual demand for the “currency” coupons.”

Well, yes. As there is a demand for money in the form of credit. Or as there is demand for currency in a recession when people are hoarding it, and all trying to save and accumulate a stockpile. Remember, the coupon itself is valueless, people want the service it can be exchanged for. If money is scarce people hold onto it.

“This is flawed since it doesn’t actually compare to a proper medium of exchange. It was an imperfect medium of exchange, since it could not be earned or purchased other than through babysitting nor could it be produced by another means.”

Well, it absolutely can be produced by another means. Brad can print out more on his laser printer. That’s the point.

If the currency was comparable to gold, and you could find coupons in the ground, and someone hit the jackpot and found thousands, well then you would have inflation, just as you do when the people decide to print more. Only you have much less control over the process. remember, gold may have a utility other than as a currency. In the co-op, they don’t want another commodity. They just want babysitting from one another, and the coupons keep track of who’s sitting and who’s going out. That’s it. That’s the whole point.

As for you can’t earn or purchase them through other goods or services, what difference does it make if the economy has one possible good or service exchanged with the currency, or several? You’re still stuck with a limited currency that you’re holding onto because its hard to come by, and that shortage slows both circulation, which lets couples go out, and lowers the opportunities to work to earn them. You COULD trade with a variety of items (diamonds, rubies, gold, etc), but then what you’re really doing isn’t use of a currency so much as just trade with other items of equal value. That’s fine, but its barter. Its not use of a uniform currency.

So again, this was a real co-op, not a hypothetical. But it serves as a model with a currency and single service being exchanged, to show us a how the quantity of a currency can affect trade.

Now, you can argue real life is different. You can say, “well, don’t use a paper currency with no inherent value”. Use other valuables as exchange instead”. But that’s not the question- in 1987, when the stock market crash happened, the currency wasn’t backed by gold.

You may dispute that, too. But first, demonstrate monetary policy doesn’t work in the lab. You’re in the babysitting co-op. They want babysitting for babysitting. What do you suggest they do?

//jjrs
7 January 2009 at 2:28 am

“A monetary supply if it is to alleviate the boom/bust cycle must be subject to the market forces of supply and demand. Whereby a change in the amount of the good demanded will cause a corresponding change to the supply. When gov’t adjusts the supply while trying to divine the true amount demanded, it is mearly guessing at best and at worst is engaging in manipulation to benefit certain groups at the expense of others in the marketplace.”

Now, Friedman agreed with this. He likened it to a house with a slow thermostat. The furnace blows hot air until the house warms up. A thermometer in the thermostat senses this, and the heat turns off. When the temp falls to a certain level, the hear starts again.

The problem is, there’s usually a lag between the temperature taking and the heat activation, if the thermostat is in a distant room for example. That’s why in a lot of houses, the heat will be on full blast, then cut out and get cold, etc. Friedman said it was futile to try to predict every tick in the market, and that by the time new money got out in most circumstances, the state of the economy would often be different, and the fed could do more harm than good, overheating the economy at some times, freezing it up at others.

But two things to be said- first of all, as the economy becomes more productive, more “wealth”, in the meaningful sense of homes, services, etc, is made. But the paper money supply remains static without a fed. There’s more real “wealth”, but not as many dollars to symbolize it and aid its circulation. And second, in drastic measures, when a recession or worse looms -and there are ways governments can monitor that over several financial quarters- an inflow of cash can stop a freeze up of liquidity.

Now, its been pointed out that instead of that, you could just split the dollars. For example, as you said with gold, make smaller and smaller coins.

However, this is quantitatively the same thing as printing more money. I’m doubling the amount of units; you’re splitting them in half to create twice as many. But we’re essentially doing the same thing.

So what’s the difference?

The difference is essentially psychological. Another way to end a recession is for everyone to lower their prices. for example, in the babysitting analogy, they could work for half a coupon.

People don’t like this. It drives them crazy if they’re selling goods for “half” what they used to, even if that money buys just as many goods and services as the “higher” price did in the past. Inflation can be a way of adjusting prices without lowering people’s salaries nominally. It is often a way to adjust wages when the supply of labor is so high that demand goes down, and businesses no longer need to pay more for a given service (e.g- used to be lots of web designers, now they’re a dime a dozen. greater supply equals lower demand/prices). If they reduced wages, there would be an uproar. So they just let inflation run its course, and dont raise wages to match, as they do with jobs where skill is scarcer. Might sound bad, but its essentially supply/demand.

//jjrs
7 January 2009 at 9:19 am

JJRS,

I like your debate style and thought, but you still are incorrect.

JJRS Quote:
\"If the currency was comparable to gold, and you could find coupons in the ground, and someone hit the jackpot and found thousands, well then you would have inflation, just as you do when the people decide to print more. Only you have much less control over the process. remember, gold may have a utility other than as a currency. In the co-op, they don’t want another commodity. They just want babysitting from one another, and the coupons keep track of who’s sitting and who’s going out. That’s it. That’s the whole point.\"

Gold is valuable since you can\’t just go \"find\" it in the ground. It has to be mined and there is a real cost associated with this that is much greater than printing paper. Regarding babysitting co-op, since they don\’t want another commodity in their co-op (i.e. legal tender laws) they have instituted a price control. Someone incorrectly determined the amount of coupons to create in the first place, and then didn\’t let it fluctuate with actual demand for the coupons. It worked when they got closer to the actual real demand by increasing the supply of coupons. Then they got greedy and wrecked it. Now losing babysitting services from members in the co-op is not as big a problem since it could be found elsewhere. Try it with food and you\’ll incur starvation, i.e. Soviet Union.

Concerning using smaller sizes of gold coins.
JJRS Quote:
\"However, this is quantitatively the same thing as printing more money. I’m doubling the amount of units; you’re splitting them in half to create twice as many. But we’re essentially doing the same thing.

So what’s the difference?\"

Answer
The difference is that the total amount of gold is the same, just used in smaller coins. By printing more money, you\’ve increased the total amount denominated. Those who receive the new money first get the biggest impact before the market rebalances prices. If increasing the money supply was all that was needed, just give people the paper stock and let them print out their own US Dollar currency. My printer won\’t print gold.

Now, as economic and technological progress occurs, it will be more cost effective to gain additional money stock (i.e. gold/silver) and thereby the money supply growth will actually grow as a result of real economic progress, not smoke and mirrors fed policy. And by the way, this would make it cheaper over time for savers to live, i.e. in retirement.

As to your point concerning people hording money in a recession. People will only hold it for so long. At the point their debt load is paid down far enough and that they desire new goods, the \"horded\" money will make its way back into the system.

What you clearly don\’t want to acknowledge is that the intervention of the gov\’t in the market in the first place causes the recession to be deeper by increasing the boom phase and later policies during the crash, i.e. tariffs, increased taxes, propping up industries that the market is not interested in, etc. that excerbate the time it takes to finish the rebalancing.

In a truly free market, downturns will occur due to any number of reasons, i.e. bad crop years, changes in demand preferences of the consumers, fluctuations in size of labor force due to demographic changes, and on and on. However, in a truly free market, the recessions will be more shallow and quick. The reason: gov\’t does not produce wealth.

One last point about your babysitting example. I wonder what would\’ve happened if some people got the increased coupon supply and the other couples had to babysit to get them. If all the coupons were handed out in equal proportion to what coupons they already held, then no inequity was created. It would be the same as a company performing a 2 for 1 stock split with its shareholders. However, consider if only the shareholders on the Board received the 2 for 1 split while the other shareholders got nothing. The non-Board shareholders\’ stock just declined by half. This is the same problem as printing money. It\’s stealing from those didn\’t receive the extra printed money.

In short JJRS you advocate stealing.

//AC
7 January 2009 at 2:39 pm

Thanks AC.

JRS, didn’t say I wouldn’t talk more, just done for the night. Also, I am not concerned about you understanding me. I am concerned about you understanding the underlying economic logic.

Here is a useful exercise. Remove money from the equation. Money is simply a commodity that we use as a medium of exchange. $20 worth of cookies has the same value as $20 in money as $20 in cable tv service. The money just facilitates the exchange. When you have a war, you take value and blow it up. That is not a logical stimulus.

Besides, if war and deficit spending were a stimulus, we would be doing fine right no, with 500 billion in deficit spending and two wars. But I think all us us recognize that the war is a drain on the economy, not a boost.

G-

//Gerard
7 January 2009 at 6:01 pm

@AC

“I like your debate style and thought, but you still are incorrect.”

Well we can agree to disagree At any rate its interesting to discuss!

“Regarding babysitting co-op, since they don\’t want another commodity in their co-op (i.e. legal tender laws) they have instituted a price control. Someone incorrectly determined the amount of coupons to create in the first place, and then didn\’t let it fluctuate with actual demand for the coupons. It worked when they got closer to the actual real demand by increasing the supply of coupons. ”

Well with this, I totally agree. But here’s the point- the correct amount of coupons will change over time due to a number of factors

Suppose 5 more couples enter the co-op. The common sense thing to do would be to give them a coupon each as they came in. I don’t think anybody would consider that “cheating” or manufacturing fake wealth- those coupons just represent the services they’ll exchange. If you don’t expand the monetary base as the population/economy grows, liquidity will dry up and there’ll be a scarcity of “money”

So extrapolate that to the real economy- the population grows at a steady rate, and Friedman recommended expanding the monetary base by a couple percent every year to keep up with it. (except in extraordinary circumstances, he cautioned against the fed overdoing it and trying to yank the supply back and forth to control the economy for the same reason you suggested, which is that itll likely do more harm than good, because of the lag between when they find out about an issue -usually already 6-12 months later- and when the changes take effect -at least another 6 months, by which point circumstances will have changed anyway).

“Answer
The difference is that the total amount of gold is the same, just used in smaller coins. By printing more money, you\’ve increased the total amount denominated. Those who receive the new money first get the biggest impact before the market rebalances prices.

If increasing the money supply was all that was needed, just give people the paper stock and let them print out their own US Dollar currency. My printer won\’t print gold.”

Okay, a couple issues there. One is who gets the “new” money and how. The fed buys bonds from banks, which it pays for with newly created money. The reasoning for this has been that banks control liquidity and credit, allowing people to get loans for houses, and expansion of business. Its easy to feel cynical about that today. But picture the world of “its a wonderful life” when each little town had one little bank, and jimmy stewart couldnt give everyone their money back during the bank run, because paul had it, and stan. Then it makes a lot of sense why the fed chose that outlet.

Now, the banks are getting a free ride right now, I agree. They make loans to people that likely wont be able to pay, because in the back of their mind they know that if it goes bad, the fed will bail them out anyway. Heads they win, tails, the taxpayers lose.

This is precisely why the guvs that instituted things like deposit insurance also wanted regulations on who banks can lend to. The idea being, “look, we’ll bail you out in hard times, but don’t bring those times upon yourself. If you want our support, loan responsibly”

The Bush admin slashed a lot of regulations, which Im sure you supported. But what he DIDNT do was cut off the aid! So now you had the worst of both liberal and conservative worlds- big handouts with no accountability.

“Now, as economic and technological progress occurs, it will be more cost effective to gain additional money stock (i.e. gold/silver) and thereby the money supply growth will actually grow as a result of real economic progress, not smoke and mirrors fed policy. And by the way, this would make it cheaper over time for savers to live, i.e. in retirement.”

Well, you don’t really know how its going to go. Technology could wind up providing people with more gold than they’ll ever need. For example, I’ve heard that there’s actually a huge glut of diamonds, and that a cartel holds back the supply to keep them a luxury item. True or not it brings up a point.

Let me put it this way- suppose a country strikes oil, more oil than the world has ever seen and enough to last several hundred more years. Are they bringing something of value to the world economy, that they can trade and prosper from?

Now here’s an interesting hypothetical question. Now suppose a country strikes gold, a huge amount, 10 times more than exists on the planet. So much that it becomes as easy to get gold for a ring as steel (you never know, it could happen). Are they bringing something of value to the world economy, that they can trade and prosper from?

“As to your point concerning people hording money in a recession. People will only hold it for so long. At the point their debt load is paid down far enough and that they desire new goods, the \"horded\" money will make its way back into the system.”

Tell that to Japan. The average savings rate is 20,000 dollars (as opposed to the US, which can have an average savings rate in the minuses as they rack up credit card debt). They have almost no debt. The prime rate is around 0. But everyone holds onto their cards, no-one wants to go first. In some ways Japan is very stable, but its been in and out of recessions for 16 years, and never sees more than 1% growth (its in a recession right now).

One argument is they should just print more money. It wont glut supply, because supply is actually low on the free market -everyone hides it away. And actually, on the international market inflation would help them. The yen is stronger than the dollar now which means they make a lot less on car exports.

“What you clearly don\’t want to acknowledge is that the intervention of the gov\’t in the market in the first place causes the recession to be deeper by increasing the boom phase and later policies during the crash, i.e. tariffs, increased taxes, propping up industries that the market is not interested in, etc. that excerbate the time it takes to finish the rebalancing. In a truly free market, downturns will occur due to any number of reasons, i.e. bad crop years, changes in demand preferences of the consumers, fluctuations in size of labor force due to demographic changes, and on and on. However, in a truly free market, the recessions will be more shallow and quick. The reason: gov\’t does not produce wealth.”

It seems like a lot of new theory rests on the idea that recessions are the governments fault and that of the fed. If youre just looking at the 20th century, that might make sense.

What that ignores is that recessions and depressions go back far further than any central bank, or even the concept of one. The 1800s and 1700s had some awful recessions. We’re not talking about the unemployment rates rising a couple percent and everyone panicking, we’re talking about famines, freeze ups, shut downs. Stuff people today cant even imagine. True, in the long run they worked out…but in the long run, we’re all dead. In some cases you had decades of miserable conditions before things grew through the ashes.

The reality is, recessions have been much less severe in modern times. The last century has been an absolute explosion in prosperity.

“One last point about your babysitting example. I wonder what would\’ve happened if some people got the increased coupon supply and the other couples had to babysit to get them. If all the coupons were handed out in equal proportion to what coupons they already held, then no inequity was created. It would be the same as a company performing a 2 for 1 stock split with its shareholders. However, consider if only the shareholders on the Board received the 2 for 1 split while the other shareholders got nothing. The non-Board shareholders\’ stock just declined by half. This is the same problem as printing money. It\’s stealing from those didn\’t receive the extra printed money. In short JJRS you advocate stealing.”

That is the sticking point- if you DO increase the monetary base, who gets it? How?

Here’s one idea. I don’t doubt you’ll disagree strongly, but perhaps we can agree that at the very least, it beats just handing citibank $200B. If unemployment is very high in a recession, and a lot of labor capacity is just sitting going unused (and willing to work relatively cheaply), and If the government was going to expand the base anyway, why not do it by hiring people to put down fiber optic cables, which it can then rent out to private industry at prices determined by the free market? That way the money leaks out to citizens rather than bankers. Basically, its the same as keynes’ digging money in the ground, but this way, at the very least, the US gets improvements in its net infrastructure that would help bring it up to par with other advanced nations. Perhaps inefficiently, but it would beat a war.

Again, I don’t doubt you’ll disagree with that, and the detailed reasons why would lead us on a huge tangent. But can we least agree it makes more sense than a handout to firms that by all rights should be going bankrupt due to their incompetence?

//jjrs
7 January 2009 at 6:36 pm

JJRS,

Giving coupons to new entrants of babysitting group is a way to attract members, but doing so diminishes the value of the babysitting members current coupon holdings. It is the same as if you gave new shareholders one free share of stock. If you started with a company worth $100 and 10 shares outstanding, that would make each share worth $10. Attract 10 more shareholders by giving out 1 share to each for a total of 10 more shares, now each share is only worth $5 ($100 / 20 shares). The company is still only worth $100 total. It\’s the same with the babysitting co-op.

About a sudden increase in the gold supply due to a large deposit being found and creating inflation in a gold based economy, I\’ll take that risk over politically motivated persons having the power to arbitrarily change the money supply at will. It is after all in the gov\’ts best interest to create as much inflation as can be tolerated by the citizenry. Why is it in the gov\’ts interest? Because gov\’t is the largest debtor. Every time the gov\’t increases the money supply by issuing a treasury bond to the Fed, and then spends that money, every person who didn\’t get the use of that money first has been robbed.

Japan has a whole lot of other problems which are coloring the savings and interest rate issues. One of them is the demographics of the society. Japan has a relatively \"old\" population on average. This is one of their biggest causes of their current malaise. Stagnate productivity and you will stagnate the economy. But if the relative standard of living is extremely high, then the stagnated economy isn\’t so bad. Until more individuals enter the Japanese economy or productivity increases through some other means, it will remain that way.

Recessions have been less extreme in modern times due to the level of productivity we\’ve reached (since you are gauging recessions by famine). We don\’t starve because we\’ve got an enormous ability to produce incredibly large amounts of food. This has been developed by human ingenuity in concert with free markets rewarding people who are more productive. In centuries past, gov\’ts through kings, tyrants, wars, and other methods robbed their people, kept them as slaves, serfs, etc. So yes, compared to 1000 years ago, we are living in much greater freedom. And if this freedom we currently enjoy has led to this kind of prosperity, why don\’t we increase our freedoms further by unshackling us from further gov\’t intervention. The fed isn\’t the first to use monetary inflation to rob people. In the late 18th century France tried it and created a mess. But I can go back even further. Their are examples in the bible whereby hebrew rulers were changing the weights and measures of the shekel (monetary unit based on weight of gold) and it is recorded as being condemned by God as robbery, which it was. So even people several thousand years ago saw the folly of monetary manipulation.

As for your Keynesian stimulus of laborers getting gov\’t dollars to build infrastructure projects, stealing is still stealing. It may be more bang for the stolen buck, I will grant you that. But wouldn\’t it be a better solution for gov\’t to halt its mad spending spree, pay off its debt, and keep a relatively small savings in reserve for use of any Keynesian pump priming should they choose to use it in the future. Kinda like having a strategic petroleum reserve. I know that what I\’ve written above is pure fantasy, but from a planning/theory basis it illustrates a better position.

I do acknowledge that recessions have been in existence since humanity has been trading goods. Many reasons for those recessions, i.e. bad harvest, natural disasters, too much herd movement (think buying or saving frenzies), a large invading army destroying everyone\’s property/capital. Needless to say, I completely agree with you that recessions are not solely caused by flawed monetary policy.

I will go further and state that markets are not perfectly efficient. There are timing differences that cause shortages and gluts, changes in demand preferences, etc. But what I will say is that federal reserve policy, by intervening with the money supply often increases the money supply too far, creating too many dollars chasing too few goods a boom sets in and then a bust. A completely free market economy will not create a utopia, but it is preferable to interventionist gov\’t policies.

I have failed to mention this earlier, but thank you JJRS for a civil debate/discourse.

//AC
8 January 2009 at 12:35 am

Thanks for the debate. Too often, I find these kinds of discussions veer into politics. Which is interesting too of course, but that’s not the same thing as economics. Its interesting just to hash over the logic of a given action, the way two people would try to work out a puzzle, without political agendas in the background driving the argument.

“Giving coupons to new entrants of babysitting group is a way to attract members, but doing so diminishes the value of the babysitting members current coupon holdings. It is the same as if you gave new shareholders one free share of stock. If you started with a company worth $100 and 10 shares outstanding, that would make each share worth $10. Attract 10 more shareholders by giving out 1 share to each for a total of 10 more shares, now each share is only worth $5 ($100 / 20 shares). The company is still only worth $100 total. It\’s the same with the babysitting co-op.”

This model is far too simple to include the concepts of stocks, splits, or even companies. We’re talking about an economy of ten couples, with one coupon per person, and a single service in the whole economy. There’s no company in the analogy. The coupons are the currency, not stock. You’re not holding it as an investment and hoping to see it raise in value, its just a counter of how much you’ve babysat.

The point of giving coupons as people enter isn’t to pay anyone off or make something for nothing, its just to keep the monetary base in line with the size of the economy. Earlier you pointed out that not enough coupons had been made in the first place. True. So what *is* “not enough”? What *is* “too much”?

Not enough- scarce, so no one wants to spend them, and no-one goes out, which in turn lessens the chances to earn them (recession)
Too many- No one wants to babysit (work), because they already have so many it doesn’t seem worth their while, and want two for the trouble. (inflation)

At first, there was one coupon per person. That turned out to be not enough. eventually they settled on two per person. So what’s the formula?

“Right” amount of coupons = 40
Number of people in the economy= 20
coupons per person = 2

Okay, agreed. So lets keep it at 40, and not mess with the money supply.

But wait…what happens if over the course of the following year, 10 more couples join the co-op, and in keeping with no monetary policy?

“Right” amount of coupons = 40
Number of people in the economy = 40
coupons per person = 1

We’re back down to 1 again- the exact ratio that caused the recession in the first place, when we had the “wrong” number!

So as you can see, the “right” amount is a moving target. If its done in proportion, Growing the base of coupons along with the labor in the babysitting economy doesn’t lower the value of the existing coupons, it keeps it the same.

“About a sudden increase in the gold supply due to a large deposit being found and creating inflation in a gold based economy, I\’ll take that risk over politically motivated persons having the power to arbitrarily change the money supply at will. ”

See, this is where I think economics ends and differing values between people (politics) begins. In my personal case, I’d rather a person to arbitrarily control it than mother fate. I can vote a person out of office, or at least contribute to political and social pressure on them. I can’t do that with the weather, or the geology of land that may or may not have gold.

But again, that’s a personal value, and not one everyone will agree with. And politics is all about those fundamentally irresolvable differences. Do you want prefect safety at the expense of freedom, or perfect freedom at the expense of safety? The security and familiarity of imperfect tradition, or the chance of something great through innovation, at the risk of something worse?

Most people can come to a general agreement, but no two people will answer all those philosophical questions the same. Its personal priorities.

//jjrs
8 January 2009 at 6:40 am

@Gerard:

“Besides, if war and deficit spending were a stimulus, we would be doing fine right no, with 500 billion in deficit spending and two wars. But I think all us us recognize that the war is a drain on the economy, not a boost.”

Before I go any further with this, I want to say how much it pains me to even talk about the Iraq war. I was vehemently opposed to it from the start. I knew from the international press that Iraq was not a credible threat to its neighbors. i knew the sanctions of the previous ten years had stripped it of any power. And I thought it was the height of hypocrisy that Donald Rumsfeld was demonizing Hussein for gassing the kurds when it was he himself that had sold him the chemicals in the 80′s. They didn’t care about freedom, just getting the oil.

That, and payola for corporations they were in the tank with. Like Halliburton. Their drives make 100,000 a year doing the same work as the troops. They do things like laundry, but at astonomical prices, that the free market would never stand, and bankrupt the taxpayer in the process. The whole thing is a disgusting sham.

But that said-

The US economy has been running on fumes for the past few years, and many observers saw it coming from years and years back. The real question is what kept it going for as long as it did, like Wile E Coyote running off a cliff without falling.

2 things. One, which most people recognize, was the housing bubble- people selling each other houses at ridiculously inflated prices with money borrowed from the chinese.

And the other was the Iraq war.

God knows I don’t want to use it as an example of anything I support. Keynes advocated public spending only in an emergency, when the economy was frozen. He never advocated it as something to be done for fun under regular circumstances, particularly not a war.

Bush bankrupted the country with that garbage in relatively good times by raising government spending to astronomical heights even as he cut taxes. And the results of that stimulus will be far outweighed by the depression it will help bring on. And yes, I fully realize the irony in suggesting that the economy may need to be saved by government spending, when it was spending like that that helped cause the situation in the first place. If I had to think of one example that reinforced the Austrian Economics argument that government creates recessions, I could not think of a more perfect, textbook example than the era of George Bush and the Iraq war.

//jjrs
8 January 2009 at 7:17 am

jjrs
I certainly have not had time to read your voluminous posts and all their responses. I did check your last one however. You are certainly wrong about the Iraq war. It sounds like you have a case of Bush derangement syndrome. It has driven you to illogic and inconsistency on many topics, including economics.

“I fully realize the irony in suggesting that the economy may need to be saved by government spending, when it was spending like that that helped cause the situation in the first place.”

This makes no sense at all from a Keynesian demand management standpoint. From a Keynesian standpoint, which I understand is your standpoint, we should all be thanking President Bush for reducing taxes and fighting the Iraq war. It’s funny but I haven’t heard Keynesians thanking President Bush about this over the last eight years.

If one thinks world war II brought us out of the great depression, then one could reasonably think that the Iraq war stopped one. Perhaps now is the time to ratchet up the war on terror and to increase defense spending in general. Our helicopter pilots are younger than the helicopters they fly. Hit to kill technology is very difficult to achieve in missile defense, but well worth the effort. There are so many weapon programs that deserve to be funded. Now is the time. Of course, President Bush was wise to cut taxes to preemptively stop a recession. Just for starters, President Obama should work with Congress to make President Bush’s tax cut permanent.

“If I had to think of one example that reinforced the Austrian Economics argument that government creates recessions, I could not think of a more perfect, textbook example than the era of George Bush and the Iraq war.”

I’m glad you found a use for Austrian economics. Just this once? Or, is it whenever it suits your politics?

//Chessexpert
8 January 2009 at 10:20 am

The co-op coupons are actually very similar to stock where the stock gives the shareholder a claim to the equity or value/net worth of the company. My stock example does not try to complicate the situation with an exchange whereby the stock is openly traded. Think of it as a closely held corporation not traded on an exchange and you will see the direct similarity. The co-op coupons are similar to stock and they give you a claim to the equity of the group, it’s a claim on future human services. The simplicity of a stock split is that you exchange 1 share for 2 (or some other multiple). The total value of the company is still constant immediately before and after the split, same as in the babysitting co-op. If the company gives out new stock to others (not current shareholders), it dilutes the value of current shareholders’ holdings. Should the co-op give out coupons to individuals not in the co-op or disproportionately to a segment of co-op participants, it dilutes the value of those who didn’t receive the additional coupons.

In your example, there is a further problem that would arise as add’l people join. At some point, the group will become less homogenous. Some couples will have 4, 5, 6, or 7 children. That may be worth 2 coupons to others with 2 children who would provide babysitting services. This would change the demand for coupons as well. So your 2 coupons per person would not be optimal when a lack homogenaity reaches a critical mass, i.e. too many 7 children couples compared with 2 children couples. Who’s going to be in-charge of setting the coupon levels then? If you give extra coupons for those with more children, you’ll drive out those with less and attract couples with more children. Or if you price fix the service in favor of couples with more children, you’ll drive out the couples with fewer children. Now if you let a free market work and allow the value of the coupon to fluctuate (or the price of each babysitting session-based on number of children watched for a given duration) you will indeed reach an equilibrium each time new entrants arrive or the make-up of the group changes or demand preferences change.

Introduce a further lack of homogenaity, i.e. age differences in children watched, duration of time watched, and the degree of their good/bad behavior. How about children with special dietary requirements, medical needs, etc. As the market becomes more diverse, you will need a pricing system that can adjust based upon those realities.

The problem with the babysitting co-op where no one wanted to babysit was due to the price of the babysitting being fixed and not allowed to fluctuate with the total supply of coupons and coupon demand. The price was not in line with the supply of coupons and demand for services. And the coupons were not very divisible as would be a better medium of exchange, i.e. divisble quantities of gold; not unless you would allow cut in half coupons (half off sale – bad joke, couldn’t resist). The co-op price fixed babysitting at 1 coupon per session and fixed the total coupon supply as well. Indeed, the “right” amount of coupons will always change, unless you allow the price to fluctuate (supply & demand) which would cause the coupon values to fluctuate. The babysitting co-op actually created an imperfect medium of exchange and further compounded the problem by price fixing the service.

Now that I’ve ridiculously expanded your babysitting example. Let me get back to why your coupon supply increase worked in the first place. It worked because the price was fixed and you guessed the actual value of the service by changing the coupon supply to equal 1 babysitting session for 1 coupon, it reflected economic reality. Once the coupon supply was expanded beyond the actual value, inflation ensued and 1 babysitting session was worth more than 1 coupon.

So how would new babysitting co-op members enter in a completely free market system? A new member would perform services to enter and would receive a coupon. As members entered, the ratio of coupons in circulation to members would decrease as you noted earlier. However, if the price of the babysitting was allowed to fluctuate, you would see the price of babysitting go down from 1 coupon to .8 coupons, to .7, and so on until you would reach .5 coupons when the co-op population doubled. Why does this happen? By adding additional co-op members and holding the coupon supply constant, it increases the value of each coupon (because of increasing coupon demand), and thereby lowering the price of each service. For the co-op however, the price was fixed relative to each coupon.

About someone “controlling” the supply. Yes, this is where politics begins…along with the stealing. Stealing is still wrong. Under our Constitution it is a violation of private property rights, and also immoral.

About differences in philosophy, yes there are some people who believe stealing is wrong and others who believe it is ok if it benefits them and then there is the vast majority who have no idea that current fed inflationary monetary policy is indeed stealing.

By the way, I really like your babysitting example. It should be in a textbook, if it isn’t already. Also, would I be correct in guessing that you were a participant in the co-op, and that you came up with or helped to come up with the idea of increasing the coupon supply?

Furthermore, I hope all of those babysitting co-op members reported the value of the services earned by each member on their tax returns. Bartering of services is a taxable transaction. It is income earned by the one providing the babysitting services.

AC

//AC
8 January 2009 at 9:19 pm

“The co-op coupons are actually very similar to stock where the stock gives the shareholder a claim to the equity or value/net worth of the company. My stock example does not try to complicate the situation with an exchange whereby the stock is openly traded. ”

I’m not saying you can’t give me a good explanation of stock splits, or the dilution of existing stock. But first, its still not analogous to the situation. Its not a company (ie, a group of people trading with a larger public). They are, in and of themselves, the entire economy. There’s nobody else to compete with.

“Think of it as a closely held corporation not traded on an exchange and you will see the direct similarity.”

Okay, so in this analogy, the couples are shareholders and the coupons are stocks. So in the same analogy, who are the employees? Who are the customers they sell to? The same people. It just doesn’t work. The coupons are currency, not stock. Its a different concept.

“So how would new babysitting co-op members enter in a completely free market system? A new member would perform services to enter and would receive a coupon. As members entered, the ratio of coupons in circulation to members would decrease as you noted earlier. However, if the price of the babysitting was allowed to fluctuate, you would see the price of babysitting go down from 1 coupon to .8 coupons, to .7, and so on until you would reach .5 coupons when the co-op population doubled. Why does this happen? By adding additional co-op members and holding the coupon supply constant, it increases the value of each coupon (because of increasing coupon demand), and thereby lowering the price of each service. For the co-op however, the price was fixed relative to each coupon.”

Basically, what would happen is coupons would be so scarce, people would become willing to work for less than one. This is essentially price reduction, And it is one way an economy can get out of recession, by lowering prices on one another in order to coax sales. But it takes a long time for people to agree to do this. And you need to go through a complete freeze up (recession) before it will happen.

But why wait for that to happen? Yes, the economy will readjust to the new prices and a new equilibrium…eventually. But in the real world, that will amount to several years of freeze-up before prices fall. This is precisely why monetarism is used when liquidity becomes scarce, to keep away recessions. No, I absolutely agree adding 2% money to the economy doesn’t ADD value, or make anyone richer. All it does is keep things flowing at the same rate, and smooths out the bumps. Its not a matter of wealth. Its just circulation, like blood in a body.

“Should the co-op give out coupons to individuals not in the co-op or disproportionately to a segment of co-op participants, it dilutes the value of those who didn’t receive the additional coupons.”

If you do it proportional to population growth, it doesn’t hurt the value at all. It just keeps it consistent. This much I’ll give you- it certainly prevents the coupons you hold from becoming MORE valuable, as coupons become scarcer and the demand rises. But again, it’s not stock or an investment property. That’s just going to create scarcity. Is that why we work, to cause deflation on our economy’s currency? granted, it gives our saving more buying power, as people become willing to work for half a coupon. But that’s a pretty weird way of generating “wealth”. And you have to cause a recession to do it.

Here’s an important question- how are your efforts and work making the coupons more valuable when other people enter the economy? It’s not. The only reason they’re worth more is because there’s more people out there working for them, which creates scarcity and raises demand. Its not due to anything you did.

“In your example, there is a further problem that would arise as add’l people join. At some point, the group will become less homogenous. Some couples will have 4, 5, 6, or 7 children. That may be worth 2 coupons to others with 2 children who would provide babysitting services. This would change the demand for coupons as well. So your 2 coupons per person would not be optimal when a lack homogenaity reaches a critical mass, i.e. too many 7 children couples compared with 2 children couples.”

This is an interesting problem. I doubt anyone would have 7 kids, or even 5. But yeah, what will eventually happen is someone will have 4 noisy kids that no-one wants to babysit. If they’re really, really bad, when the mother calls the other couple will pass on doing it and earning a coupon. Eventually people will complain to her that with four kids that are poorly behaved, its worth 2 coupons, at least. And she might start to agree.

That fits the model fine. Basically, you just have a tough job that pays more. Things in the real world things cost different amounts, and some jobs pay more than others.

“By the way, I really like your babysitting example. It should be in a textbook, if it isn’t already. Also, would I be correct in guessing that you were a participant in the co-op, and that you came up with or helped to come up with the idea of increasing the coupon supply?”

I really like it too. Its fun to play around with, no matter what conclusions you draw. But I didn’t have anything to do with it. It was run by some capitol hill types in the late 70′s, and one of the economists in the co-op, richard sweeney, saw it as a great analogy for parts of the economy and published a paper about it.

I think it just might be in at least one major textbook, because there’s a certain nobel prize winning economist who writes undergrad texts, and he just loves the story. You might have heard of him- it’s none other than Austrian Economist punching bag Paul Krugman! http://www.slate.com/id/2202165/

say what you want about his politics, he’s a pretty smart guy.

//jjrs
9 January 2009 at 3:02 am

“The co-op coupons are actually very similar to stock where the stock gives the shareholder a claim to the equity or value/net worth of the company. My stock example does not try to complicate the situation with an exchange whereby the stock is openly traded. ”

I’m not saying you can’t give me a good explanation of stock splits, or the dilution of existing stock. But first, its still not analogous to the situation. Its not a company (ie, a group of people trading with a larger public). They are, in and of themselves, the entire economy. There’s nobody else to compete with.

“Think of it as a closely held corporation not traded on an exchange and you will see the direct similarity.”

Okay, so in this analogy, the couples are shareholders and the coupons are stocks. So in the same analogy, who are the employees? Who are the customers they sell to? The same people. It just doesn’t work. The coupons are currency, not stock. Its a different concept.

“So how would new babysitting co-op members enter in a completely free market system? A new member would perform services to enter and would receive a coupon. As members entered, the ratio of coupons in circulation to members would decrease as you noted earlier. However, if the price of the babysitting was allowed to fluctuate, you would see the price of babysitting go down from 1 coupon to .8 coupons, to .7, and so on until you would reach .5 coupons when the co-op population doubled. Why does this happen? By adding additional co-op members and holding the coupon supply constant, it increases the value of each coupon (because of increasing coupon demand), and thereby lowering the price of each service. For the co-op however, the price was fixed relative to each coupon.”

Basically, what would happen is coupons would be so scarce, people would become willing to work for less than one. This is essentially price reduction, And it is one way an economy can get out of recession, by lowering prices on one another in order to coax sales. But it takes a long time for people to agree to do this. And you need to go through a complete freeze up (recession) before it will happen.

But why wait for that to happen? Yes, the economy will readjust to the new prices and a new equilibrium…eventually. But in the real world, that will amount to several years of freeze-up before prices fall. This is precisely why monetarism is used when liquidity becomes scarce, to keep away recessions. No, I absolutely agree adding 2% money to the economy doesn’t ADD value, or make anyone richer. All it does is keep things flowing at the same rate, and smooths out the bumps. Its not a matter of wealth. Its just circulation, like blood in a body.

“Should the co-op give out coupons to individuals not in the co-op or disproportionately to a segment of co-op participants, it dilutes the value of those who didn’t receive the additional coupons.”

If you do it proportional to population growth, it doesn’t hurt the value at all. It just keeps it consistent. This much I’ll give you- it certainly prevents the coupons you hold from becoming MORE valuable, as coupons become scarcer and the demand rises. But again, it’s not stock or an investment property. That’s just going to create scarcity. Is that why we work, to cause deflation on our economy’s currency? granted, it gives our saving more buying power, as people become willing to work for half a coupon. But that’s a pretty weird way of generating “wealth”. And you have to cause a recession to do it.

Here’s an important question- how are your efforts and work making the coupons more valuable when other people enter the economy? It’s not. The only reason they’re worth more is because there’s more people out there working for them, which creates scarcity and raises demand. Its not due to anything you did.

“In your example, there is a further problem that would arise as add’l people join. At some point, the group will become less homogenous. Some couples will have 4, 5, 6, or 7 children. That may be worth 2 coupons to others with 2 children who would provide babysitting services. This would change the demand for coupons as well. So your 2 coupons per person would not be optimal when a lack homogenaity reaches a critical mass, i.e. too many 7 children couples compared with 2 children couples.”

This is an interesting problem. I doubt anyone would have 7 kids, or even 5. But yeah, what will eventually happen is someone will have 4 noisy kids that no-one wants to babysit. If they’re really, really bad, when the mother calls the other couple will pass on doing it and earning a coupon. Eventually people will complain to her that with four kids that are poorly behaved, its worth 2 coupons, at least. And she might start to agree.

That fits the model fine. Basically, you just have a tough job that pays more. Things in the real world things cost different amounts, and some jobs pay more than others.

“By the way, I really like your babysitting example. It should be in a textbook, if it isn’t already. Also, would I be correct in guessing that you were a participant in the co-op, and that you came up with or helped to come up with the idea of increasing the coupon supply?”

I really like it too. Its fun to play around with, no matter what conclusions you draw. But I didn’t have anything to do with it. It was run by some capitol hill types in the late 70’s, and one of the economists in the co-op, richard sweeney, saw it as a great analogy for parts of the economy and published a paper about it.

I think it just might be in at least one major textbook, because there’s a certain nobel prize winning economist who writes undergrad texts, and he just loves the story. You might have heard of him- it’s none other than Austrian Economist punching bag Paul Krugman! Say what you want about his politics, he’s a pretty smart guy.

Edit- link removed

//jjrs
9 January 2009 at 3:36 am

“Laissez faire et laissez passer, le monde va de lui même (Let do and let pass, the world goes on by itself) is an early defense of market freedom. I’ve seen it described as a liberal view. Clearly this is classical liberalism, not modern liberalism. It is curious that liberal means not liberal, on this and on many other topics. Perhaps George Orwell had some insights on this phenomenon.”
Mark Glenn

The confusion comes from the “liberal” being taken to mean both as “favorable to progress and new ideas” (as opposed to conservatives who are seen as wanting to traditional values), and liberal as in freedom to do whatever you want, which modern liberals DO want, at least socially (freedom to marry another man, etc.)
jjrs

On economics matters, modern liberalism is American style socialism: tax, spend, regulate. It is very far removed from laissez faire and classical liberalism.

I think conservatism, from Burke to the present, is an effort to preserve western civilization. Western civilization was under attack in the terror of the French revolution, and the attacks have continued in various forms to the present. American conservatism generally embraces the free market, and does so in the full realization that markets are the greatest agent for favorable change the world has ever seen. Classical liberalism, libertarianism, and modern conservatism have much in common.

—-

But if we’re going back to Adam Smith and the Wealth of Nations, its important to look at his beliefs. …
If you can’t even rely on Adam Smith to be 100% free market all the time, why drag anyone else over the coals for doing it?
jjrs

I don’t think I dragged anyone over coals. It is important to realize that Adam Smith does not provide the limit on free market support. It’s wrong to paint him as either an extremist, or as the extreme. Economists have gone further than Adam Smith in their support of economic freedom and laissez faire. Friedman advanced vouchers for education. William J. Baumol argued that potential competition may be all that you need, even if there is a monopoly. I consider Mises to be a greater and more consistent supporter of the invisible hand that guides free markets. Compared to Adam Smith, 16th century Spanish scholastics may have had a superior understanding of market value and done a better job of rejecting the erroneous labor theory of value (later advanced by Karl Marx).

However, Adam Smith was generally an ardent and effective advocate for laissez faire, a major component of classical liberalism.

—-

The idea here is that government intervention in the economy and evolution are contradicting ideas, and mutually exclusive, as if believing in one and not the other is intellectually muddled.
jjrs

The invisible hand and evolution are two theories of spontaneous order. One can accept both, reject both, accept the first but not the second, or accept the second but not the first. If one rejects the idea that a good order can arise spontaneously, then one should reject both theories. If one believes a good order can arise spontaneously, then one should at least consider laissez faire and evolution.

—-

But if you want to treat Economics as a science, or even just a serious field of study “faith” that it will work has nothing to do with it.
jjrs

Perhaps. However, many liberal/socialist economists put their faith in government – often without even realizing it. It seems people must believe in something.

//Mark Glenn
11 January 2009 at 4:02 pm

I think it’s important to keep in mind that for all the focus on government interventions into free markets, the world is currently more capitalist than it has ever been in history. just 70 years ago the verdict was still out about which was ideal, capitalism or Marxism. Liberals tried to use the great depression as a justification for scrapping the whole system.

Since that time, the iron curtain has fallen, China is building new factories daily, and its difficult to find a liberal anywhere that wants true marxism. The ideological war is basically over.

Its also important to remember that in all those cold war years, when the US and the USSR were trying to spread their respective economic systems throughout the world, what type of capitalism won out? By the end of WWII when the race began, the US already had a federal reserve dictating monetary policy. Already had social security. Already had welfare. Already had progressive taxation, which in fact was much worse than it is today (at one point I believe the top rate was around 80 or 90%!). People talk about Obama making the US a socialist state, but the truth is his tax rates for the rich will still be much lower than they were under any President after the depression and before Ronald Reagan.

The point being, capitalism has won. Today you sell your skills on the free market, and get paid according to supply and demand. No-one really questions this. Even hard-core liberals want at least an 80% free market solution. What we’re arguing about now is the details around the edges. Its easy to get so focused on those details that we mistake them for the whole picture, but they’re not.

“I think conservatism, from Burke to the present, is an effort to preserve western civilization. Western civilization was under attack in the terror of the French revolution”

Wait a second…the french revolution brought democracy to France! It was directly inspired by the American revolution! That’s what the statue of liberty is all about.

In the 1770′s, “preserving western civilization” meant supressing the insurgents trying to overthrow the monarchies. Those people were the ultimate radicals, the ultimate progressives. But America is founded on those ideas. I would argue that the idea of democracy and representative government is even more fundamental to modern western society than capitalism itself.

And that just goes to show – “the old, right way” is a moving target. Some social forces pull toward tradition, some toward change. Sometimes the vanguards of tradition have the right idea. I would argue that during those revolutions, it was the radicals and progressives that got it right.

The invisible hand and evolution are two theories of spontaneous order. One can accept both, reject both, accept the first but not the second, or accept the second but not the first. If one rejects the idea that a good order can arise spontaneously, then one should reject both theories. If one believes a good order can arise spontaneously, then one should at least consider laissez faire and evolution.

Well, just because you believe in the forces of spontaneous order doesn’t mean you won’t have an interest in changing your own fortunes within it, or those of the people around you.

Evolution says survival of the fittest, that the weak will die and the race will be stronger. But actually, the reason there are so many hemophiliacs in the population is because we use modern medical science to keep them alive. In doing so, we essentially “cheat” evolution. People still need glasses and contacts. In earlier times, people with very poor vision would have trouble finding work and having children, and would gradually die off. Now people with poor vision continue having kids at the same rate as everyone else; if they have contacts, we don’t even know who they are. We could have taken the hard road by refusing them contacts and letting them gradually die off…but why?

The same way you can use technology and medical science to blunten the harsher elements of evolution, you can blunten the harsher elements of free markets.

In the 1890′s in Britain, before there was any social safety net, you could see raw capitalism at work. If someone was rendered blind and had no family to support him, they had no choice but to live in the streets and beg until they died of starvation. If a child is able to mine, than have them work in coal mines from the age of 6, 16 hours a day. That brought more labor to a company and improved their chances of survival against competitors. Indeed, it was these very conditions that outraged people like Marx and made them want a whole reform.

In the end, a compromise was reached, with the advent of labor laws that prevent exploitation of workers, and a safety net for people that become crippled. Much in the same way we don’t want hemophiliacs to die and use science, we don’t want to see people die the second they outlive their usefulness. But these adjustments don’t change the overall understanding of spontaneous order.

—-

But if you want to treat Economics as a science, or even just a serious field of study “faith” that it will work has nothing to do with it.
jjrs

Perhaps. However, many liberal/socialist economists put their faith in government – often without even realizing it. It seems people must believe in something.

Agreed. But its a spiritual question and one of faith generally.

//jjrs
11 January 2009 at 9:13 pm

I think conservatism, from Burke to the present, is an effort to preserve western civilization.
Mark Glenn

Wait a second…the french revolution brought democracy to France!
jjrs

Burke opposed royal efforts to suppress the American Revolution. He called for more liberties for the people of India and Ireland. But he also objected strongly to the French revolution. Not all revolutions are the same. It’s been said of the French revolution that it started with the beheading of a king, and ended with the coronation of an emperor; it was not effective. It was marked by “the reign of terror,” which included ample use ot the guillotine, the murder of priests, the rape of nuns, and the murder of approximately two hundred thousand people. I will suggest that, by comparison, what we had was an Anglo-American evolution.

——

In the 1890′s in Britain, before there was any social safety net, you could see raw capitalism at work. If someone was rendered blind and had no family to support him, they had no choice but to live in the streets and beg until they died of starvation.
jjrs

One shouldn’t be surprised to see a stark contrast between today and a time more than 100 years ago. Granted Dickensian tales can be written for either time. But free markets have made us much more prosperous in the last one hundred and ten years. We have less real poverty and we can afford more charity.

Before public charities, there were many more private charities. The former have crowed out the latter. Why give if its the government’s job? Interesting topics are the extent of crowding out, and the relative effectiveness of public and private charities. The government’s “war on poverty” was a failure that did great harm. I don’t know enough to assess the more modest public welfare efforts of today.

——

Well, just because you believe in the forces of spontaneous order doesn’t mean you won’t have an interest in changing your own fortunes within it, or those of the people around you.
jjr

Of course! Our favorable spontaneous order occurs because people are trying to better themselves and others. Millions of people strive daily – that is what it is all about. Many of their actions and interactions are effectively coordinated by prices. This intelligent industry is the heart of our economic system. I suspect that our more effective charities rely on intelligent discretionary giving, rather than upon the law.

I’m not suggesting that other people are lazy. But I am suggesting that there are times and places that lack adequate incentives for intelligent effort. Consider words from the Soviet era: the government pretends to pay us and we pretend to work. Consider American slavery, where slaves played dumb and minimally productive for the master, while slyly improving their own lot. Consider German Jewish physicists developing the atomic bomb for America. Consider starvation in Zimbabwe, once known as the breadbasket of Africa. Consider starvation in the Plymouth colony during a time of communal farming, and their subsequent plenty with private plots. Consider capital flight from countries that tax too much, are hostile to business, or who debauch their currency. Consider the effect of over regulation. Consider each of the FEE articles on the depression. Ways to reduce individual freedom, hamper free markets, and reduce prosperity are legion. It is sad to say, but sometimes the actions that harm the economy have support from some or all of the following: the press, the intellectuals, the politicians, and the general public.

//Mark Glenn
12 January 2009 at 11:19 am

>[Mark Glenn] conservatism, from Burke to the present, is an effort to preserve western civilization.

West Civ is rational, based on the Greek discovery of
natural causes, scientific method and the moral virtue
of independent judgment. This was a rejection of the
conservatism that was the only culture that existed until the West. America was Western but has decayed into liberalism and, now, conservatism. Modern
conservatism is a sophisticated rejection of man’s mind, unlike traditional conservatism’s ignorance of man’s mind. Conservatism is the mindless submission to the arbitrary, unprincipled, concrete rules of one’s tribal ancestors. Conservatives reject the liberal rejection of tradition. Conservatives don’t recognize a rational alternative to tradition. See Aristotle and Ayn Rand.

//Stephen Grossman
14 January 2009 at 12:54 pm

That was just about the poorest description of Conservatism I could imagine. Are you aware of the pitfalls of rationalism as seen in the French Revolution? Don’t flaunt your rationalism that must be based upon certain pre-suppositions that are chosen based upon your personal tastes and preferences. It’s not as simple as you seem to think it is.

//Paul
14 January 2009 at 5:22 pm

Stephen Grossman, Paul, and anyone else who is interested. Thanks for the considering the meaning of conservatism.

I was taught that one could define a term with words, or by pointing. I think most of us think of word definitions, often through a single sentence. However as children growing up, we learn the meaning of many words through pointing. Nor is this always a bad practice for adults.

As a child I was accustomed to the house cat and the family dog. I remember going to the zoo, pointing at the large carnivores, and saying “dog.” The grownups corrected me and said “cat.” It took a few instances before I accepted that some large carnivores, leopards, tigers, and lions were indeed cats. With practice, I could see that they looked like cats, even though they were closer in size to my dog than to my cat.

So it may be with terms like liberal and conservative. Each of these terms can be given verbal definitions. But it also helps to point to the people who are considered to be liberal or conservative.

I looked up the term laissez faire and the definition described it as economic liberalism. Yet laissez faire is a term that I do not associate with Ted Kennedy or other modern liberals. Over the years, I have read many authors who distinguished between classical liberals and modern liberals. I think this distinction should be reaffirmed.

Rush Limbaugh has told the story of a caller who was an economist. The caller described his views and Rush said “you’re a conservative.” But the caller, thinking of classical liberalism, disagreed and said “I’m a liberal.” Semantic problems are the worst kind.

Burke has been credited as the founder of conservatism. I tend to associate Ronald Reagan, Rush Limbaugh, Thomas Sowell, and Walter Williams with conservatism. I think all these individuals consider themselves to be conservative also. This is messy business as some others claim the label, yet have significantly different views. Pat Buchanan provides an example. Although I tend to like Pat Buchanan the person, I often disagree with his reasoning and conclusions. The Republican party is often associated with conservatism. It is considered good politics to keep “social conservative” and “economic conservative” factions together.

I have The Libertarian Reader edited by David Boaz, The Portable Conservative Reader edited by Russell Kirk (Viking press), and The Portable Enlightenment Reader edited by Issac Kramnick (Viking press). I consider myself conservative, but I don’t think I am at odds with the bulk of the writings found in any of these readers. They tend to value the rights of the individual and to value free markets.

I did not buy The Portable Socialist Reader (Viking press) and could not find a Liberal Reader – perhaps the socialist reader sufficed.

Ayn Rand has been mentioned. I have read some of her work. She certainly has a strong focus on the individual and rejects socialism by any name. She believes strongly in morality. So far so good. I consider her atheism to be a personal matter. I’m sure that in her world, every person would be free to choose. Bravo again.

//Mark Glenn
14 January 2009 at 7:31 pm

I just remembered that I have The Essential Neoconservative Reader. The forward says the term was created by critics, and that some writers who are included in the volume might not consider themselves to be neo-conservatives. Many writers were on the left but moved right because of the topic of communism, or through maturation. This reader includes relatively modern authors only: Irving Kristol, Daniel Moynihan, George Gilder, Jeane Kirkpatrck, Thomas Sowell and others.

I also consider Hayek and Mises to be conservatives.

I’m cool to the term “neoconservative” for two reasons. It was developed by critics. We have too many poorly, or inconsistently defined terms already.

//Mark Glenn
14 January 2009 at 8:26 pm

Paul:
That was just about the poorest description of Conservatism I could imagine. Are you aware of the pitfalls of rationalism as seen in the French Revolution? Don’t flaunt your rationalism that must be based upon certain pre-suppositions that are chosen based upon your personal tastes and preferences. It’s not as simple as you seem to think it is.
————————-
A conservative conserves his society’s traditions independent of a rational judgment of them. His mindlessness will gradually reject any rationality
in the traditions. Thus compassionate and neo- conservatism with their altruism and socialism.
Capitalism is the politics and economics of rational
selfishness. See Rand’s _Capitalism_.

Reason is perception-based, eg, building a house. Rationalism is emotion-based, eg, the arsonist who burns down the house, telling himself that he must destroy other people before they destroy him. The French Rev was based on Cartesian rationalism. The US Rev was based on Aristotelian reason.

//Stephen Grossman
15 January 2009 at 11:24 am

“A conservative conserves his society’s traditions independent of a rational judgment of them.”

Stephen Grossman

This seems like an idealization, presumably from Ayn Rand. By that definition, most conservatives are not conservative. According to the definition, the following individuals, often considered to be conservative, are not conservative at all: Edmund Burke, John Adams, George Washington, Whitaker Chambers, Ludwig Von Mises, Winston Churchill, Henry Regnery, William F. Buckley, Ronald Reagan, Mike Reagan, Phyllis Schlafly, Irving Kristol, George Will, George Gilder, Thomas Sowell, Walter Williams, David Horowitz, John Lott, Dinesh D’Souza, David Keene, Edwin J. Feulner, Rush Limbaugh, Ann Coulter, Brent Bozell, Jed Babin, Dennis Prager, Mark Skousen, Senator Jeff Sessions, Governor Sarah Palin. This is not the big tent approach, or even the small tent approach. Is anyone in the tent?

There can be merit to a definition even if only one person uses it. After all, a new definition starts with one person who defines. But I wouldn’t insist on a definition that hardly anyone uses, even if it comes from my favorite thinker.

//Mark Glenn
15 January 2009 at 12:50 pm

Sorry to butt in, but I thought you guys might find this interesting. Someone has been scanning the minds of “conservatives” and “liberals”, and found that there actually are fundamental differences in their values and what is important to them (actually, you can make an argument looking at it that conservative values are more “balanced”).

Once you see the roots of the those respective values and priorities, the terms become much clearer. It changed my thinking, because after seeing it I realized that while there may be certain issues where one side is right and the other is wrong, a lot of the time disputes between conservatives and liberals just stem from what’s important to them.

just take this link and add double-u double-u double-u-
ted.com/index.php/talks/jonathan_haidt_on_the_moral_mind.html

//jjrs
15 January 2009 at 7:05 pm

>>“A conservative conserves his society’s traditions independent of a rational judgment of them.”

>This seems like an idealization

Definitions are the observation-based, contextually basic properties of a concept, ie, they are objective. They are neither subjective nor ideal (mystical). See Ayn Rand’s _Intro. to Objectivism_, which builds on Aristotle.

American conservatives are typically conservative Pragmatists with no absolutes, no principles, no ideology and no consistency. They typically hold their conservatism as a loosely and non-basically defined, shifting jumble of concretes held together by emotional association. This can be deceiving when attempting a definition. Conservatism is a logical category
that these people will typically accept only randomly and partly, usually
rejecting any consistency as extreme. See Rand’s “Obituary of Conservatism” in her _Capitalism_.

//Stephen Grossman
17 January 2009 at 8:38 pm

I think Thomas Woods\’ Meltdown is the best book on economics in the past few years, and will convince \"jjrs\" and others of the Austrian view.

It is very well-written, non-repetitive, does not use partisan politics or focus on the short-term to the exclusion of the long-term, and explains the mechanics behind government intrusions in the economy.

Too often Austrian economics is presented in \"sectarian\" ways, like \"Austrian economics\" vs \"Krugman economics\" vs. \"Friedman economics\" vs \"Keynesian economics\". To observers, that makes them all sound like they\’re nothing more than mere opinions.

I have tried without success to convince a liberal friend of mine that bailouts are wrong. He agreed with me when they were Bush bailouts, but disagrees with me, now that they\’re Obama bailouts. Isn\’t that a little hypocritical?

He claims that economic pundits and politicians, and people like myself, are \"flying blind\" and don\’t know what\’s happening in the economy. I try to tell him, no, I\’m not flying blind — what\’s happening was predictable, and can be logically deduced from a set of self-evident axioms (a deductive system that Mises dubbed praxeology).

He then claims \"but that oversimplifies the real world\", begging the question. Of course free markets don\’t exist right now as we\’d like. They\’re getting unfreer by the day it seems. But that does not refute the axioms or their predictions in the face of current economic circumstances.

He then says he rejects \"rational choice\" that these axioms assume. Now we\’re getting deep into philosophy, and what it means to \"be rational\". On the one hand you can take the normative view that \"rational\" means observing and acting empirically according to science, and behaving consistently with an \"ideal thinking subject\", but in that case, a subject value system must be driving the observer and his judgments of the person\’s rationality, because science alone is not enough. On the other hand you can say, like the Austrians do, that action must be rational by definition. His position, based on cognitive psychology, is something else which he has yet to define but which makes frequent references to Kahneman and Tversky\’s research. None of that, in my mind, refutes the axioms and deductions of Austrian economics.

Read Woods\’ book. I bought almost a dozen copies for all of my friends, both left and right (plus one libertarian). If that book won\’t convince you of the causes and solutions to the current crises, I don\’t know what will.

//Lee Killough
16 February 2009 at 11:53 am

AOdhZw usyztfnahpya, [url=http://skovwfzlrsfz.com/]skovwfzlrsfz[/url], [link=http://fvhxhgwgxzbr.com/]fvhxhgwgxzbr[/link], http://ptgohjafcsbn.com/

//vdbnauaohla
24 April 2009 at 2:32 am

Nice site! Thanks for the great post

//credit card
24 April 2009 at 4:19 am

Buy zyrtec

//Buy-zyrtec
2 April 2010 at 12:25 am

increasing amoxicillin dosage during or adidas 2g ultra basketball shoe or axils of the scales or ultra t6 chrome wheels 17 or after accutane

//increasing-amoxicill
2 April 2010 at 12:26 am

Md Consuitatlon Alprazoam or Adderall Tolerance And Bontril or Compost Pails or Aone Ultra Mp3 To Cd Burner or Doma Exhaust

//Md-Consuitatlon-Alpr
3 April 2010 at 9:52 pm

News. Today

//Feldene
14 October 2010 at 7:20 am

jjjs,

Are you suggesting the general consensus among economists is that our build up to WW II helped get the U.S out of recession?
U.S. private companies exported $BILLIONS$ in military aid for by the Allies. America continued to enjoy the economic boom associated with the rebuilding of an entire continent plus much of Asia in the DECADES following WWII.
The government CAN NOT take credit for the Tech Boom, media boom, etc etc. The NUMBER ONE factor going into the success of America is the lack of taxes allowing for cheap energy. Cheap oil…..Cheap money (falsely low interest rates) only fuels bubbles soon to end as the money get’s more expensive. Eventually all of the cash printing will rear it’s mistakes openly in the form of inflation. As inflation increases, so will interest rates for both T Bills and bank loans. The market always forces out the lies in the end.
Government intervention can be blamed FOR the housing market at least as much as deregulation could ever begin to have caused it. Read the CRA, and tell me if that along with ACORN’s previous agenda of obtaining Home Mortgages for Welfare recipients is a good idea (They boasted handing out over 1 Trillion in home mortgages to people in need (poorer people who couldn’t afford them). Cheap money fueled the housing bubble and as the government is losing it’s ability to adequately regulate without choking off the mortgage industry, the solution in reality had actually been the problem.

//Mateo Sumeo
3 March 2011 at 9:16 pm

During a recession it is more important than ever to take the following advice from an old physician….Above all else, do no harm.

It might seem like a painless idea to bury cash in bottles then allow private citizens to dig them up. But does everyone get the opportunity to dig them up and if so, doesn’t the currency suffer serious inflation if all anyone has to do is go dig up free cash. Who would mow? Who would cook hamburgers? If we don’t allow everyone, is that equal protection under the law?
The point is, the system can’t be just. Under Obama’s stimulus plan, only people who happened to already own construction companies benefited from it. Now that sounds a lot like Trickle Down Economics it’s only that everyone doesn’t get to enjoy it, only wealthy construction company owners get to. We would actually be lucky if any actual NEW jobs were even handed out. Most companies here in California didn’t hire anybody as they were already hired out to capacity. There’s no point in hiring more people if you don’t have the machinery for them to run. Sure, some people got jobs and it helped some people but at $550,000 per job at the President’s BEST estimate, is it possible it did more damage to the economy than it has helped?

//Mateo Sumeo
3 March 2011 at 9:35 pm

Have your say!

The Naughty Mr. Hazlitt

In digging through the archives at the Foundation for Economic Education, one comes across a variety of correspondences, from the ... Go to blog

Contra-IP

My article “Patent Nonsense,” which makes the libertarian case against “intellectual property,” was published and posted by The American Conservative magazine. ... Go to blog

Capitalism, Corporatism, and the Freed Market

The system that most immediately threatens individual liberty is corporatism. ... Go to blog

• Ft. Lauderdale, FL (02.21.2012)
  Liberty and Character, a talk by Lawrence W. Reed
  
• Ft. Lauderdale, FL (02.22.2012)
  “My Favorite President,” a talk by Lawrence W. Reed
  
• Irvington, NY (03.03.2012)
  Evening at FEE presents “Why Marxism,” a lecture by Professor C. Bradley Thompson
  
• Kennesaw, GA (03.14.2012)
  Burt Folsom to Speak at Kennesaw State University on Global Economics
  
• Atlanta, GA (04.02.2012)
  Spring Break with FEE