Sunday, July 22, 2012

Austrians Mangle Business Uncertainty

I recommend this post at the ThinkMarkets blog for the Austrian view of uncertainty:
Chidem Kurdas, “Uncertainty and the Keynesians,” ThinkMarkets, July 20, 2012.
The argument of this post is flawed for the following reasons:
(1) Keynesians do not ignore uncertainty, and the heterodox Keynesians, above all, have developed Keynes’s ideas on uncertainty to a very great extent (e.g., G. L. S. Shackle and Paul Davidson).

(2) The implied Austrian belief that having the government “do nothing” would decrease uncertainty, and restore business confidence, is both ridiculous and risible. A “do nothing” policy in 2008 would have collapsed the financial system, caused millions to lose their savings, induced a depression, and shocked business expectations to an extent far greater than any “regime uncertainty” caused by the Obama administration.

(3) Whatever uncertainty is caused by the factors Kurdas lists (Obamacare, regulatory explosion, giant budget deficits, anti-business rhetoric and threats of increasing taxes) – and no doubt to some business people these things are a matter of concern – would be overcome by sufficient aggregate demand and a surge in demand for the products of business.

Paul Davidson has recently addressed this very issue:
“Recently I went to a well-known restaurant in Evanston, Illinois. ... But the night I was there, it was less than half full. I asked the manager if he would he hire more waiters and chefs if his taxes were reduced and/or government removed the existing regulations controlling the way his restaurant could operate. His answer was that even if his taxes were reduced and regulations eliminated, he would only hire more staff if more customers came in for dinner. On the other hand, if there were twice as many customers for dinners than there were on this night (and there were many more customers before the recession began in 2007) he would gladly double the number of workers he employed even if his taxes were not reduced or regulations changed.

That’s how things work in the Real World. This simple case illustrates clearly that entrepreneurs will have confidence to expand and hire more workers only if they find the market demand for their products and services strong and growing.”

Paul Davidson, “Restoring Trust in the American Economy: The Real World v. The Confidence Fairy,”, July 11, 2012.
This is the reality of business confidence – Austrian fairy tales of “evil” government notwithstanding.


  1. You could have cited the work of Dr. Michael Emmett Brady to bolster your argument, Lord Keynes.

    Remember that working paper by Dr. Michael Emmett Brady that you wrote a post about and Daniel Kuehn then shared on his website? Perhaps you ought to revisit that link.

  2. Abolish the private debt. Debts that can't be repaid won't be repaid. As long as consumers are drowning in it, the economy will suffer a lack of aggregate demand.

    "Whatever uncertainty is caused by the factors Kurdas lists (Obamacare, regulatory explosion, giant budget deficits, anti-business rhetoric and threats of increasing taxes) – and no doubt to some business people these things are a matter of concern..."

    None of these things technically increase uncertainty, in the Keynesian sense. Uncertainty is always with us. If anything, what these things may do is make expectations about the future slightly more pessimistic and dreary, thereby lowering investment demand.

  3. This post is highlights why Keynesians believe in the myth that aggregate demand is the source of employment.

    They commit the fallacy of composition.

    While it is true that a single restaurant is entirely dependent on consumers, and that a restaurant owner may not hire new workers unless there is an increase in nominal demand for his output, it doesn't follow from this that economy wide employment is dependent on aggregate demand. In the aggregate, competition between producers offsets, and consumers are actually fully dependent on producers.

    The restaurant's output is an alternative for what consumers can spend their money on. It is a flawed reasoning to believe that can "add up" all the alternative nominal demands for individual firm output, and believe that one can increase productivity and employment by increasing this number via inflation.

    Consumers themselves are for the most part workers themselves. They can't spend more money unless they earn more money, and they can't earn more money unless there is more savings from those who pay wages, which means those who pay wages have to consume less and invest more.

    It is not final spending that pays wages, for wages are paid PRIOR to output being sold. Imagine a car that takes 1 year from raw materials in the Earth, to finished product in the showroom. Wages are paid PRIOR to this car being ready for sale. Wages are not financed out of the sale of the car. Wages are financed out of savings.

    Spending for the restaurant's output doesn't come directly from the central bank nor the Treasury. Neither the central bank nor the Treasury acts as the entire economy's consumers. They do not increase everyone's incomes at the same time at the same rate.

    A restaurant owner has already made investments in the past, and those investments are either earn a profit or incur a loss. If taxes on corporate profits fell, and the restaurant owner has more cash after taxes, then they have more money to spend on their own consumption, or, what's more likely, they will devote a portion of it to additional investment. Maybe a new oven, or some other cost cutting measure. Or, the restaurant owner might even invest in something outside the restaurant itself, like corporate bonds that are needed for companies that WANT more capital because they cannot keep up with the demand.

    It is no gain to the working class even if instead of the owner hoarding $0.99 and investing just $0.01 for every additional $1.00 he earns after taxes, due to tax cuts, that the state taxes the $1.00 and spends it all. For the difference is a loss of $0.01 in investment. This loss cannot be made up for by government spending, because government spending does not produce wealth, whereas private investment does produce wealth.

    It is not spending per se that benefits people. It is the type of spending, and it is spending constrained to voluntary means of money acquisition and payment.

    If the government spent less money and taxed people less money, then the people would have more money to spend in the total aggregate spending.

    1. Yes, in any economy which is dependent on Supply and Demand, in tandem and simultaneously, both Demand and Supply matters.

      Says is Supply-only. That's idiotic too, and that is where most modern economic theory was tilted, for the particular reason of dissing "Labor" or even the idea that work plays any role in creating wealth.

      In that world, a hedge fund profiting $1M on an interest rate swaps bet or a company profiting $1M on making and selling something, these are equally "wealth creators", even if the former is doing nothing but using leverage to amplify purely financial bets.

      If Car Company(s) builds cars, that will create some Aggregate Demand via payrolls. But if cars sit unsold on lots, for any reason but in particular if aggregate workers have insufficient aggregate income or savings or insufficient aggregate credit to buy those cars, then those cars represent LOSSES to Car Company(s).

      This is why Henry Ford increased wages. He was not "Marxist" nor short-sighted. Ford expected that Ford workers would be (a) able to buy cars and (b) would be loyal to buying the cars they built.

      If the Govt TAXES less OUT of the economy, which is consistent with MMT, then the aggregate economy would have MORE net financial assets and more cash flow, more demand.

      If the Govt also spends less INTO the economy, then the aggregate economy has LESS net financial assets and less cash flow, less demand.

      That's pretty much arithmetic, about NET financial assets, while ignoring the role of Banks which create and issue credit out of "thin air". Banks can and certainly DO expand the supply of money in circulation, while they do not increase *net* financial assets or savings.

      More savings CAN mean that investors will buy corporate bonds for expansion. But bank lending is unrelated to customer Savings or the balance of Reserve accounts. Banks don't create loans out of Reserve balances.