William L. Anderson, “Is it Austerity, or Reality?,” May 23, 2011.Anderson pretty much demonstrates to us all how little he understands about Keynesian economics. He asserts that
“Keynesians really believe that spending money is what creates wealth, and that governments can create wealth out of thin air simply by cranking up the spending.”It’s no wonder Austrian economics will never be taken seriously by voters or governments.
Money is (1) means of payment, (2) unit of account, (3) medium of exchange and (4) store of value, and, when it is spent by (1) government in a Keynesian stimulus or (2) by private businesses or individuals, this spending creates the demand that causes the private sector to create wealth (i.e., commodities we consume), either by increasing production through using unutilized capacity or by new capital goods investment. When government employs people directly, these workers will still buy whatever commodities they desire to satisfy their wants, and, if they don’t want commodity a, b, or c, the producers of those commodities will go bankrupt. Malinvestments will clear even in a Keynesian system.
Just as in private transactions, money is a means by which these things are facilitated. Keynesian stimulus is about getting the private sector to create wealth by increasing capacity utilization and using idle resources (including labour), just as private investment, bank credit, and payment of wages to workers by a business can create the private spending that does the same thing.
Post Keynesians are also well aware that the capital stock is heterogeneous and not perfectly malleable. In fact, the Post Keynesians had a massive debate with the neoclassicals in the 1950s and 1960s called the Cambridge capital controversy, and were arguing precisely that capital goods are not homogenous. They won that debate, but the neoclassicals typically acted like nothing had happened.
William L. Anderson (in his comments section) in response to my earlier comment asks:
“By the way, why didn’t this [sc. Keynesian stimulus] work in Argentina or Zimbabwe?”I am not quite sure what period he is talking about in Argentina, but, as for Zimbabwe, that was hit by massive output contraction after 2000, because of Mugabe’s disastrous land reforms (and natural disasters contracted output too), and, if Anderson knew anything about Keynesian economics, he would know in those circumstances, a demand contraction, not some huge, ridiculously large stimulus, is necessary, as is carefully explained by Bill Mitchell to the unenlightened:
“Zimbabwe for Hyperventilators 101,” Billyblog, July 29th, 2009.You don’t stimulate an economy when its capacity to produce output has been severely diminished or damaged, or external supply shocks mean you cannot obtain the necessary factor inputs for production. Nor do you stimulate a booming economy. That is a basic Keynesian policy.
Anderson’s rather feeble question demonstrates that in fact he has no proper understanding of Keynesian economics. No big surprises there: it’s a common failing of Austrian ideologues, and Robert P. Murphy is in the same boat too.
Keynesian stimulus is about getting the private sector to create wealth by increasing capacity utilization and using idle resources (including labour), just as private investment, bank credit, and payment of wages to workers by a business can create the private spending that does the same thing.
ReplyDeleteThe problem with your formulation, among other things, is that:
1. Those "idle resources" don't belong to you. They belong to someone else.
2. The owners of those resources know better than you do how to utilize their resources for their own plans, lives and enjoyment. The resources are probably idle for a good reason (not that it is any of your business).
3. All that "stimulus" might accomplish in theory or in fact is to surreptitiously steal purchasing power from others who actually have a constitutional and moral right to that purchasing power and transfer it extra-judicially and without due process to others who have no right to it. They will then use it to artificially bid up prices unreflective of actually savings and time preferences.
4. By artificially lowering the interest rate, the most important price signal of them all, you critically impair long term economic calculation which results in unsustainable malinvestments which will eventually fail, bailouts or no bailouts. This causes the very unemployment of capital and people that is the object of your obsessive compulsion.
5. Since there is no tendency to unemployment or instability in a truly free market, you are trying to solve a problem that does not exist and your solutions are the cause of the problem.
We understand you perfectly.
"Those "idle resources" don't belong to you. They belong to someone else.
ReplyDelete2. The owners of those resources know better than you do how to utilize their resources for their own plans, lives and enjoyment."
Bizarre red herring. That "I" don't own them is irrelevant. The owners of those resources freely give them in exchange for money. Capitalism is about making a profit. Workers want to work. Businesses want a return.
When was the last time producers' refused, in any significant numbers, to take money from a government stimulus?? Care to give me any examples?
Doesn't happen.
"All that "stimulus" might accomplish in theory or in fact is to surreptitiously steal purchasing power from others who actually have a constitutional and moral right to that purchasing power and transfer it extra-judicially and without due process to others who have no right to it."
Your theory of inflation is flawed:
http://socialdemocracy21stcentury.blogspot.com/2010/07/quantity-theory-of-money-critique.html
In these circumstances, with excess capacity and idle resources, the main effect of stimulus is to increase production and employment, not simply inflation.
And if this comes back to morality, your natural rights/natural law ethics is a farce. Anyone who rejects natural rights has no reason to accept such arguments.
"By artificially lowering the interest rate, the most important price signal of them all, you critically impair long term economic calculation"
ABCT is a myth. There is no such thing as a "natural interest" rate.
"Since there is no tendency to unemployment or instability in a truly free market,"
Again: whether there is or not (and it is easy to demonstrate there will be involuntary unemployment given money with a store of value function in such an economy), this fantasy Austrian world of capitalism does not exist, has never existed, and debates about what it would be like are mere ivory tower games.
Meanwhile, real economists are concerned with real world capitalism and how it works, not your mythological world.
@Bob Roddis
ReplyDelete1/2) The resources are idle because in aggregate people choose to save their income instead of consuming/investing it. The producers *didn't* decide to keep their production capacity idle, they just didn't find buyers in the economy.
3) A budget deficit by definition creates new money. Thus it does not steal from any pre-existing money stock but rather adds to it. Inflation is very difficult to occur in a demand deficient economy. If you had a factory with a production capacity of 100, it was used at 60 and a government stimulus allowed you (through increased people income and consumption) to increase production to 80 do you really think that that increase would be accompanied by an increase in prices? When all of your under-capacity competitors would be anxious to gain a market share?
4) In the modern banking world the central bank always sets the interest (price), since it does not have any real control on the quantity of bank reserves.
5) That would require that somehow 100% flexible prices/wages would drive consumers to stop saving and consume/invest all their income. That's really not how modern economies work, especially because of the way money is created and destroyed.
There is no such thing as a "natural interest" rate.
ReplyDeleteSuch rates would be the rates people would charge to loan money when not under a threat of force when loaning out their own savings, whatever they might me. Of course there is such a thing. Why isn't there such a thing? We wouldn't know what those rates might be until they are actually charged in a transaction. That would make them real and "natural".
There is no such "thing" as "aggregate demand". You statists simply refuse to analyze human activity as voluntary on the one hand or the result of hostile force and/or fraud on the other, the Rothbardian test. That is because unsophisticated people understand the difference quite well and would see what a nest of theft and fraud the Keynesian program is. It's better for the Keynesian to ALWAYS deflect attention from such a direct challenge which would make clear for the public exactly what is being done to them.
I see you have shifted away from your silly arguments above to new ones.
ReplyDelete'There is no such "thing" as "aggregate demand".'
If there is no such thing as aggregate demand, then there is no such thing as Say's law.
Aggregate demand as meaningful concept is presupposed by Say's law.
So you pay a high price for this nonsense denial of the concept.
“Such rates would be the rates people would charge to loan money when not under a threat of force when loaning out their own savings, whatever they might me. Of course there is such a thing. Why isn't there such a thing? We wouldn't know what those rates might be until they are actually charged in a transaction. That would make them real and "natural".
ReplyDeleteWhat makes that natural – what is the defining characteristic? Stop pulling the naturalistic fallacy. Is the rate of interest natural when there isn’t an occasional boost in the marginal efficiency of capital? W/O a government intervening doesn’t mean without coercion and distortion or any sort of artificialness. This argument is on the level of the recently failed doomsday prediction – you appeal to ignorance ontological leap that there exists such thing as a “natural rate.”
@Bob Roddis
ReplyDeleteThat's not how the modern banking system works. You imagine a loanable funds market where depositors and borrowers 'auction' for the interest rate. We have a fractional banking system, new loads, create new deposits, not the other way around (even the Fed would tell you that the money multiplier does not exist). Investment creates it's own saving.
The money supply is completely flexible and changes all the time. The Fed does not target a quantity of reserves but rather a price (federal funds rate) and stands ready to provide all the necessary amounts to the banking system. Not doing so would risk interbank transactions failing.
Lastly, budget deficits are not funded from pre-existing deposits, they create new deposits and on aggregate, budget deficits require an overdraft from the Fed (which is actually provided to the buyers of government securities).
Sometimes these Austrians sound a lot like they want a Soviet state.
ReplyDelete"There is no such "thing" as "aggregate demand"."
This, to me, sounds like a refusal of the basic functionality of demand. Because if there is demand, there is also a quantity of it and that means you can aggregate all demand in an economy.
But they love supply. That's pretty much how the Soviet was.
Denying the existence of demand is pretty much denying the existence of a market.
//HarPe
Here's what an Austrian has to say on aggregate demand. "Say's law is pretty simple: aggregate demand is aggregate supply. Perhaps it makes sense to distinguish between supply and demand at the microeconomic level, because all indirect exchanges are exchanges of units of goods against units of money. But it does not make sense to do so at the macro level, where indirect exchanges are complete — meaning that those who received units of money either exchanged them against the units of the goods they desired or added them to their cash balances, thus modifying the purchasing power of money and the monetary value of all goods." - Jeremie T.A. Rostan
Delete“Keynesians really believe that spending money is what creates wealth, and that governments can create wealth out of thin air simply by cranking up the spending.” is what Anderson stated.
ReplyDeleteNow, you state "Money is (1) means of payment, (2) unit of account, (3) medium of exchange and (4) store of value, and, when it is spent by (1) government in a Keynesian stimulus or (2) by private businesses or individuals, this spending creates the demand that causes the private sector to create wealth (i.e., commodities we consume), either by increasing production through using unutilized capacity or by new capital goods investment."
So isn't Anderson right? That's exactly what you're stating. Why deny it? In addition, money is a commodity as well as a means of exchange and unit of account.
You say - 'When government employs people directly, these workers will still buy whatever commodities they desire to satisfy their wants, and, if they don’t want commodity a, b, or c, the producers of those commodities will go bankrupt. Malinvestments will clear even in a Keynesian system. '
ReplyDeleteThe government employing people to do work which the market is not demanding is the malinvestment !
When you say - 'Malinvestments will clear even in a Keynesian system.' , it basically shows u don't even understand what malinvestment is . It would not be wrong to say that u have flunked Economics -101.