Help! My Econ Professor Is a Keynesian

[Ben Bernanke]

Yep, although I'm not surprised. He's actually a nice guy, and I have gotten him to talk favorably about Austrian views like sound money before. He is not familiar with the Austrian school or business cycle theory, though he has said he has read Hayek and liked him. Ultimately though, he is an avowed follower of Keynes, and a huge believer in me....err Bernanke. I was hoping some of you could give me some talking points to bring up in class. We are now exclusively covering demand side economics and it is starting to drive me crazy, haha. I'm fairly educated on Austrian economics, having read Hayek, some Mises (and Mises.org!) and of course Ron Paul, but I would really like some outside help, particularly when it comes to all the equations and models that aren't really presented in Austrian thought.

Last class we talked about the Keynesian cross, and how this revolutionized economics. Next we will be talking about the IS-LM mode (IS stands for investment and saving, LM for money and liquidity), which builds on the Keynesian Cross. A major part of the lecture will be on monetary stimulus. For those of you more familiar with Keynesian theory than I, what would be some good non-argumentative questions to raise or points to bring up?

Oh I found this interesting...the guy who wrote the textbook, N. Gregory Mankiw, was Bush's former economic adviser and is now the the adviser to Mitt Romeny. So one more strike against Mittens.

[MJU1983]

Here's a tip: don't piss off your professor, suffer through his class and move-on. :)

This is a fun exchange:


http://www.youtube.com/watch?v=NwWoY3OuBYA

[ClayTrainor]

Last class we talked about the Keynesian cross, and how this revolutionized economics. Next we will be talking about the IS-LM mode (IS stands for investment and saving, LM for money and liquidity), which builds on the Keynesian Cross. A major part of the lecture will be on monetary stimulus. For those of you more familiar with Keynesian theory than I, what would be some good non-argumentative questions to raise or points to bring up?

This is the first I've heard of the Keynesian Cross so I am of no use to ya yet, but I'm sure the folks at Mises.org are. FWIW, not sure if you've stumbled on this yet but I just did a search and found this article that may be of some use...

The Self-Defeat of the Keynesian Cross (http://mises.org/daily/4552)



Oh I found this interesting...the guy who wrote the textbook, N. Gregory Mankiw, was Bush's former economic adviser and is now the the adviser to Mitt Romeny. So one more strike against Mittens.

Haha, yea. I remember Romney mentioning Mankiw in his list of advisors in the last debate.

[Ben Bernanke]

Here's a tip: don't piss off your professor, suffer through his class and move-on. :)

This is a fun exchange:



Ah, I've watched that before. Very interesting indeed. And good tip, lol. I've definitely held back on my criticisms as I don't want to jeopardize my grade. He is friendly and open to discussion, and I have brought up Austrian thought. It's just sometimes very hard to do without basically flat out telling him he's dead wrong in front of class, which is NOT something I want to do. However I do think it is important that my peers hear the other side of the coin, which I try to show when I can.


This is the first I've heard of the Keynesian Cross so I am of no use to ya yet, but I'm sure the folks at Mises.org are. FWIW, not sure if you've stumbled on this yet but I just did a search and found this article that may be of some use...

The Self-Defeat of the Keynesian Cross (http://mises.org/daily/4552)



Haha, yea. I remember Romney mentioning Mankiw in his list of advisors in the last debate.

Thank you, that was a great article, very useful to what we are talking about.

[ababba]

The only assumptions in IS-LM are that investment depends negatively on interest rates, consumption is an increasing function of disposable income and money demand depends on the cost of holding money (nominal interest rate) and your transactions demand for currency (real GDP).

Its an amazing model for such simple assumptions that we would all agree to. Try to approach it without preconceived notions about whether it is correct or not. The critiques are much more subtle than you think.

[Ben Bernanke]

Thank you, good advice. Just by looking ahead, it seems as the IS-LM model will be used to justify monetary stimulus though, at least it is in the book. I will find out shortly.

[erowe1]

..

[Seraphim]

If one is a fan of Hayek, but an avowed follower of Keynes, one must have layer upon layer of cognitive dissonance rifling through ones brain.

It's almost as silly as saying you are a fan of Communism, but you are an unapologetic Capitalist.

[low preference guy]

If one is a fan of Hayek, but an avowed follower of Keynes, one must have layer upon layer of cognitive dissonance rifling through ones brain.

If you pick and choose it isn't so hard. Hoppe wrote a good article (http://www.economicpolicyjournal.com/2011/10/truth-about-mises-versus-hayek.html)about Hayek's views, quoting from "The Road to Serfdom".


According to Hayek, government is "necessary" to fulfill the following tasks: not merely for "law enforcement" and "defense against external enemies" but "in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market." (Because at all times an infinite number of goods and services exist that the market does not provide, Hayek hands government a blank check.)

Among these goods and services are "protection against violence, epidemics, or such natural forces as floods and avalanches, but also many of the amenities which make life in modern cities tolerable, most roads … the provision of standards of measure, and of many kinds of information ranging from land registers, maps and statistics to the certification of the quality of some goods or services offered in the market."

Additional government functions include "the assurance of a certain minimum income for everyone"; government should "distribute its expenditure over time in such a manner that it will step in when private investment flags"; it should finance schools and research as well as enforce "building regulations, pure food laws, the certification of certain professions, the restrictions on the sale of certain dangerous goods (such as arms, explosives, poisons and drugs), as well as some safety and health regulations for the processes of production; and the provision of such public institutions as theaters, sports grounds, etc."; and it should make use of the power of "eminent domain" to enhance the "public good."

Moreover, it generally holds that "there is some reason to believe that with the increase in general wealth and of the density of population, the share of all needs that can be satisfied only by collective action will continue to grow."

Further, government should implement an extensive system of compulsory insurance ("coercion intended to forestall greater coercion"), public, subsidized housing is a possible government task, and likewise "city planning" and "zoning" are considered appropriate government functions — provided that "the sum of the gains exceed the sum of the losses." And lastly, "the provision of amenities of or opportunities for recreation, or the preservation of natural beauty or of historical sites or scientific interest … Natural parks, nature-reservations, etc." are legitimate government tasks.

So I think that isn't too hard. Being a fan of Mises and Keynes though would be a lot harder.

[No Free Beer]

Hayek wasn't for a minimum wage...

[low preference guy]

Hayek wasn't for a minimum wage...

minimum income =\= minimum wage

[Diurdi]

My macroecon prof likes Thomas Sowell and Milton friedman. I guess I'm pretty lucky lol.

[enoch150]

If I was going to argue with someone who I was sure knew a lot more than me, I'd avoid challenging him directly on his strengths. I wouldn't discuss the correctness of Keynesian or Austrian economics, but rather the morality of them. You'd have to pick your moments. It's not something that could be done on any given class day.

[Steven Douglas]

If I was going to argue with someone who I was sure knew a lot more than me, I'd avoid challenging him directly on his strengths. I wouldn't discuss the correctness of Keynesian or Austrian economics, but rather the morality of them. You'd have to pick your moments. It's not something that could be done on any given class day.

Actually, an appeal to what he feels are his strengths could be a good thing. He could do exactly what he's doing here, only in reverse; tell the prof that he knows some Miseans who are attacking Keynesian Economics as we know it today (NOT Keynes), and ask for some tips on how to respond to them, or exploit their weaknesses. Now that could be interesting. ;)

[Frederick B]

You'd have to pick your moments....
I learned this this lesson the hard way.

In elementary school I had a reading problem, the solution was reading small print like in world news magazines etc. Later in high school, I had an old professor who wanted to impress his students about his knowledge about little-known American history. Well, I answered almost all his trivia questions and added more information about them than he apparently new... soon he was not accepting my verbal answers in class, but seconds later he would say the same answer! also he started grading my written reports with D's.
My problem was: I didn't know when to stop, lacked compassion for him and had to drop the class.

Back on the subject:
Its fine to have a few decisions with your professor, never-never trap him into a corner.

[Travlyr]

Yep, although I'm not surprised. He's actually a nice guy, and I have gotten him to talk favorably about Austrian views like sound money before. He is not familiar with the Austrian school or business cycle theory, though he has said he has read Hayek and liked him. Ultimately though, he is an avowed follower of Keynes, and a huge believer in me....err Bernanke. I was hoping some of you could give me some talking points to bring up in class. We are now exclusively covering demand side economics and it is starting to drive me crazy, haha. I'm fairly educated on Austrian economics, having read Hayek, some Mises (and Mises.org!) and of course Ron Paul, but I would really like some outside help, particularly when it comes to all the equations and models that aren't really presented in Austrian thought.

Last class we talked about the Keynesian cross, and how this revolutionized economics. Next we will be talking about the IS-LM mode (IS stands for investment and saving, LM for money and liquidity), which builds on the Keynesian Cross. A major part of the lecture will be on monetary stimulus. For those of you more familiar with Keynesian theory than I, what would be some good non-argumentative questions to raise or points to bring up?

Oh I found this interesting...the guy who wrote the textbook, N. Gregory Mankiw, was Bush's former economic adviser and is now the the adviser to Mitt Romeny. So one more strike against Mittens.
Well Mr. Bernanke, I happen to firmly believe that Gary North is the Austrian Economist as evidenced by his work as he describes in the following debate, and that you could learn a great deal from Mr. North. Walter Block working for the State University must mix Austrian & Keynesian Economics because, although he considers himself an Austrian, Keynesian is what the State Institution mandates. Getting a degree in Keynesian Economics is 20th century indoctrination. Gary makes an excellent point in the debate that the Austrian market is growing rapidly now. Go to 29:43 to learn what you should say to your professor. Actually the entire debate is worth watching if you have the time.


Here's a tip: don't piss off your professor, suffer through his class and move-on. :)

This is a fun exchange:


http://www.youtube.com/watch?v=NwWoY3OuBYA

[musicmax]

1. Identify another student in the class whom you believe thinks as you do.
2. Say "Hey man, you don't believe that Keynesian claptrap either, do you?"
3. When they express their agreement with you, tell them "I'm planning on questioning Professor Douchebag tomorrow; if he starts giving me a hard time will you back me up?"
4. Crush it.
5. If you don't have the stones to speak up in a silly little class, drop out of school and go live under a bridge. Seriously.

[mczerone]

Thank you, good advice. Just by looking ahead, it seems as the IS-LM model will be used to justify monetary stimulus though, at least it is in the book. I will find out shortly.

Ask "If you believe setting low interest rates helps the economy, why aren't you personally lending out all of your money at low or negative rates?"

If it's good enough for a policy prescription, it should be good enough for him personally, right?

[Seraphim]

This is a reliable means of debunking someone. Put your money where your mouth is. Simple.


Ask "If you believe setting low interest rates helps the economy, why aren't you personally lending out all of your money at low or negative rates?"

If it's good enough for a policy prescription, it should be good enough for him personally, right?

[ababba]

Ask "If you believe setting low interest rates helps the economy, why aren't you personally lending out all of your money at low or negative rates?"

If it's good enough for a policy prescription, it should be good enough for him personally, right?

This is one of the most incorrect things I've heard about economics in years. You hear these fallacies all the time, that anything good for public policy is good for an individual. Its a bad principle in general. Lets take taxes as an example. I might be perfectly willing to pay 25% of my income to the government in exchange for some goods and services if everyone else agrees to do the same thing, but not be willing to do it if nobody else contributes. This is just common sense. I might be willing to contribute 1/100 of the cost for a park but not pay for the entire park myself. There is nothing inconsistent about wanting the government to do something and not be willing to do it by yourself.

Now lets talk about the case of interest rates. The Fed doesn't just set interest rates. They change the money supply and interest rates adjust endogenously. What that means is that these are equilibrium real interest rates. People in the free market are willing to borrow and lend at these real interest rates. In a low interest rate environment, everyone that loans out money still chooses to loan that money out and the interest rate clears the market.

The professor shouldn't lend his money out at lower interest rates than he would like. He doesn't have to. There are people in the marketplace that voluntarily choose to do it. Obviously the benefit to the economy is distributed to the other 300 million people and he only gets a tiny fraction of it while bearing the entire cost of choosing to loan his money out at lower than he would like. Now if everyone else did it, he may think its a good idea. He may not think its a good idea. What people miss is that these models like IS-LM don't directly make policy recommendations, they just tell you what is likely to happen in response to a given policy.

Every modern Keynesian model would say that the Fed cannot control the average real interest rate, and can only control cyclical fluctuations in real interest rates. As a result, the concept of artificially low interest rates doesn't even make sense in these models.

[ababba]

The difference between your professor and the people trying to critique your professor in this thread is that the people in this thread see economics as inseparable from policy. Your professor most likely sees economics as a descriptive science. How you think about which economic models are correct certainly affects views about policy, but the notion that Keynesian economics means government intervention is a fantasy. Keynesian economics is sticky prices and a liquidity trap. Its not government intervention.

[mczerone]

This is one of the most incorrect things I've heard about economics in years. You hear these fallacies all the time, that anything good for public policy is good for an individual. Its a bad principle in general. Lets take taxes as an example. I might be perfectly willing to pay 25% of my income to the government in exchange for some goods and services if everyone else agrees to do the same thing, but not be willing to do it if nobody else contributes. This is just common sense. I might be willing to contribute 1/100 of the cost for a park but not pay for the entire park myself. There is nothing inconsistent about wanting the government to do something and not be willing to do it by yourself.

Now lets talk about the case of interest rates. The Fed doesn't just set interest rates. They change the money supply and interest rates adjust endogenously. What that means is that these are equilibrium real interest rates. People in the free market are willing to borrow and lend at these real interest rates. In a low interest rate environment, everyone that loans out money still chooses to loan that money out and the interest rate clears the market.

I understand the marginal effects of individual action vs. group action. But what is the govt? You seem to describe it as some "all powerful policy setter" that can determine the new "equilibrium".

But it's just another actor WITHIN the market. The only difference between the Federal Reserve and some investor's club is that WE DON'T GET TO OPT OUT of the Federal Reserve system. Whatever they say has the coerced backing of every person using FRNs.


The professor shouldn't lend his money out at lower interest rates than he would like. He doesn't have to. There are people in the marketplace that voluntarily choose to do it. Obviously the benefit to the economy is distributed to the other 300 million people and he only gets a tiny fraction of it while bearing the entire cost of choosing to loan his money out at lower than he would like. Now if everyone else did it, he may think its a good idea. He may not think its a good idea. What people miss is that these models like IS-LM don't directly make policy recommendations, they just tell you what is likely to happen in response to a given policy.

And if he does or doesn't, lets let him. The Federal Reserve doesn't give a flying heap what this economics professor or that would do, individually or with cohorts.

Lastly, IS-LM and other econometric truisms don't at all analyze the responses to policy. They don't look to changes in incentives, behaviors, or value judgements of well being of the individuals in a society. They, from the start, abstract away from individuals acting as independent thinkers in a market and towards treating money and commodities as perfect fluids and atomistic particle flows.

I applaud you paying attention and memorizing your Econ 302, but the attack on my question was unwarranted. I understand what you are saying, and my question was meant to illicit from this professor a line of thought - not be an actual recommendation for action.

[ababba]

I understand the marginal effects of individual action vs. group action. But what is the govt? You seem to describe it as some "all powerful policy setter" that can determine the new "equilibrium".

But it's just another actor WITHIN the market. The only difference between the Federal Reserve and some investor's club is that WE DON'T GET TO OPT OUT of the Federal Reserve system. Whatever they say has the coerced backing of every person using FRNs.



And if he does or doesn't, lets let him. The Federal Reserve doesn't give a flying heap what this economics professor or that would do, individually or with cohorts.

Lastly, IS-LM and other econometric truisms don't at all analyze the responses to policy. They don't look to changes in incentives, behaviors, or value judgements of well being of the individuals in a society. They, from the start, abstract away from individuals acting as independent thinkers in a market and towards treating money and commodities as perfect fluids and atomistic particle flows.

I applaud you paying attention and memorizing your Econ 302, but the attack on my question was unwarranted. I understand what you are saying, and my question was meant to illicit from this professor a line of thought - not be an actual recommendation for action.

So to summarize, now you are saying you understand why your argument was illogical but now you are trying to critique central planning in general. Um, that was exactly the other point I was just trying to make. The professor sees his job mostly as one of positive economics, trying to teach people how the world will respond to different shocks. This is different than normative economics, which is about determining the correct policy responses. Of course good positive economics is necessary for good normative economics, but positive economics is important in its own right. It seems idiotic to critique good positive economics because it has bad normative implications you don't like. You should say why the economics doesn't describe the world accurately.

Your other point was of course the Lucas critique, which hopefully every economics class at least mentions at some point. Its the idea that any empirical relationship you estimate between data will change if government changes policies because people change their expectations and beliefs in response to government actions. I would hope every Macro course in the country would at least mention the Lucas critique.

[mainstream economist]

Yep, although I'm not surprised. He's actually a nice guy, and I have gotten him to talk favorably about Austrian views like sound money before. He is not familiar with the Austrian school or business cycle theory, though he has said he has read Hayek and liked him. Ultimately though, he is an avowed follower of Keynes, and a huge believer in me....err Bernanke. I was hoping some of you could give me some talking points to bring up in class. We are now exclusively covering demand side economics and it is starting to drive me crazy, haha. I'm fairly educated on Austrian economics, having read Hayek, some Mises (and Mises.org!) and of course Ron Paul, but I would really like some outside help, particularly when it comes to all the equations and models that aren't really presented in Austrian thought.

Last class we talked about the Keynesian cross, and how this revolutionized economics. Next we will be talking about the IS-LM mode (IS stands for investment and saving, LM for money and liquidity), which builds on the Keynesian Cross. A major part of the lecture will be on monetary stimulus. For those of you more familiar with Keynesian theory than I, what would be some good non-argumentative questions to raise or points to bring up?

Oh I found this interesting...the guy who wrote the textbook, N. Gregory Mankiw, was Bush's former economic adviser and is now the the adviser to Mitt Romeny. So one more strike against Mittens.

I sympathize with you, but what is the goal you wish to accomplish by challenging the professor?

1) Do you aim to change the professor's opinions and have him renounce his Keynesian views? Reasonable prediction: It will NEVER happen.
2) Do you aim to change your classmates' opinions by defeating your professor's arguments in their eyes? Reasonable prediction: Possibly, but the professor will have time to argue his counterpoints and he has an air of authority that you do not have. Your classmates may resent you for interrupting the class since they will be tested on the professor's views and not on yours. You may be able to achieve more by targeting them individually after class.
3) Do you want to help Dr. Paul win the nomination? Reasonable prediction: You might make more of an impact by joining the Phone From Home program or donating to the campaign.

I beg you, please try the Phone From Home program if you have not done so already.

Also, if you just want to raise some questions about what the professor is teaching without trying to defeat him, I suggest asking the following question:

Q) What logical argument can be made in favor using aggregate demand curves for macroeconomic analysis (as is the case in the Keynesian cross models) when the Sonnenschein-Mantel-Debreu Theorem (http://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2%80%93Debreu_theorem ) has conclusively proven that individual demand functions cannot be aggregated in an analytically tractable way except under extremely restrictive assumptions?
A) The real answer is that no such logical argument can be made. If the professor does not concede at least that point immediately, then just say "I am not convinced, but thank you for taking the time to answer" and don't argue the point any further with him. You will have more success talking to your classmates later. Also, Phone From Home!!

Challenging professors is NEVER a good idea. Not because they are always right, but because they will never admit that their course material is wrong unless you are talking about typos and the like.

[low preference guy]

My advice to the OP: Do what you think is right, not what other people tell you. Both challenging the proof or not doing it can be right.

[ababba]

Q) What logical argument can be made in favor using aggregate demand curves for macroeconomic analysis (as is the case in the Keynesian cross models) when the Sonnenschein-Mantel-Debreu Theorem (http://en.wikipedia.org/wiki/Sonnenschein%E2%80%93Mantel%E2%80%93Debreu_theorem ) has conclusively proven that individual demand functions cannot be aggregated in an analytically tractable way except under extremely restrictive assumptions?
A) The real answer is that no such logical argument can be made. If the professor does not concede at least that point immediately, then just say "I am not convinced, but thank you for taking the time to answer" and don't argue the point any further with him. You will have more success talking to your classmates later. Also, Phone From Home!!

.

AD comes from the quantity equation MV=PY and is a truism, if M and V are fixed there is a trade off between P and Y. You don't need to aggregate individual demand to get AD.

[mainstream economist]

AD comes from the quantity equation MV=PY and is a truism, if M and V are fixed there is a trade off between P and Y. You don't need to aggregate individual demand to get AD.

A truism is something that is self-evident and clearly true. I object to the characterization of AD as a truism. AD always exists in real life. As long as there are a finite number of people on earth, the hypothetical sum of their demand functions always exists. The real question is what is the form of that AD and whether the assumptions about that form and the assumptions that are used to derive that form are reasonable. One way to examine whether those assumptions are reasonable is to examine what assumptions on individual demands are needed for the aggregate demand to take the desired form (since it is the case that the equation "AD=sum of individual demands" should hold in all economic models, Keynesian or otherwise).

MV=PY is an accounting equation and nothing more. Making the leap of deriving AD from MV=PY carries hidden aggregate behavioral assumptions about the endogenous relationships between variables (P and V in particular).

Of course, then there is also the derivation of aggregate demand from Keynes' own writings on the Mises.org link that was posted earlier. It clearly carries with it aggregate behavioral assumptions not justified from first principles of individual action. For example, what assumptions on individual demand functions must one make in order to guarantee that their sum will be an aggregate demand function that implies a constant marginal propensity to consume regardless of income level? Are those assumptions actually reasonable under closer examination?

We haven't even entered the realm of questioning whether it is reasonable to aggregate goods into one generic final output good (but that is a different sort of aggregation).

Macroeconomics as we know it is a minefield of convenient hidden assumptions upon closer examination.

[ababba]

A truism is something that is self-evident and clearly true. I object to the characterization of AD as a truism. AD always exists in real life. As long as there are a finite number of people on earth, the hypothetical sum of their demand functions always exists. The real question is what is the form of that AD and whether the assumptions about that form and the assumptions that are used to derive that form are reasonable. One way to examine whether those assumptions are reasonable is to examine what assumptions on individual demands are needed for the aggregate demand to take the desired form (since it is the case that the equation "AD=sum of individual demands" should hold in all economic models, Keynesian or otherwise).

MV=PY is an accounting equation and nothing more. Making the leap of deriving AD from MV=PY carries hidden aggregate behavioral assumptions about the endogenous relationships between variables (P and V in particular).

Of course, then there is also the derivation of aggregate demand from Keynes' own writings on the Mises.org link that was posted earlier. It clearly carries with it aggregate behavioral assumptions not justified from first principles of individual action. For example, what assumptions on individual demand functions must one make in order to guarantee that their sum will be an aggregate demand function that implies a constant marginal propensity to consume regardless of income level? Are those assumptions actually reasonable under closer examination?

We haven't even entered the realm of questioning whether it is reasonable to aggregate goods into one generic final output good (but that is a different sort of aggregation).

Macroeconomics as we know it is a minefield of convenient hidden assumptions upon closer examination.

The truism is if the quantity equation is an accounting identity, then there is a negative relationship between P and Y for a fixed MV. This is just math. Thus, I can do analysis of real GDP Y without worrying about aggregation theorems. As long as goods can all be denominated in the same currency units this works.

Most Macro models are not literally true, they are just simplified mathematical approximations to something important that people want to model. They are not exact but can still highlight something important about the economy.

[Steven Douglas]

...the notion that Keynesian economics means government intervention is a fantasy. Keynesian economics is sticky prices and a liquidity trap. Its not government intervention.

Does the Federal Reserve engage in intervention of any kind? If so, would not the Federal Reserve Act of 1913 (and all subsequent modifications) count as Keynesian intervention by proxy? Or is this the owner of the dog he turned loose long ago not accountable?

What am I missing?

[mainstream economist]

The truism is if the quantity equation is an accounting identity, then there is a negative relationship between P and Y for a fixed MV. This is just math. Thus, I can do analysis of real GDP Y without worrying about aggregation theorems. As long as goods can all be denominated in the same currency units this works.

Most Macro models are not literally true, they are just simplified mathematical approximations to something important that people want to model. They are not exact but can still highlight something important about the economy.

Do we actually disagree? Maybe we are just parsing things differently. That is always a possibility.

Fixed MV is not a good assumption to make if you think that there's any reason for MV to be jointly determined along with other variables. For example, consider V as a function of (P,Y), say V=z(P,Y). Now everything breaks down. It would be hard to even derive a downward sloping demand curve without assumptions about z. You do have to worry about aggregation theorems because you need to think about what is a reasonable shape for the function z. If you assume something about the shape of the function z, you have to worry about whether that is too strong of an implicit assumption on the preferences it is aggregating.

The problem with macro models is not that they are not literally true. All micro models are not literally true either. The problem with macro models is that they make too many assumptions and many of them are not even explicitly stated. I do not dispute that we can still learn some things from macro models (mostly economic intuition), but I do not think that what we can learn from them is enough to engineer the economy.

[anaconda]

Here's one I'd like to know:

The Keynesian Cross assumes that investment, I, is exogenous to the model. Classical economics says that government spending, G, is completely negated by reductions in consumption, C, and private investment, resulting in a complete wash (known as "crowding out"), and therefore no advantage for government borrowing/spending whatsoever.

So my question for the teacher would be: Why is Keynes asking us to suspend the classical notion that crowding out does not negate government spending completely?

[ababba]

Here's one I'd like to know:

The Keynesian Cross assumes that investment, I, is exogenous to the model. Classical economics says that government spending, G, is completely negated by reductions in consumption, C, and private investment, resulting in a complete wash (known as "crowding out"), and therefore no advantage for government borrowing/spending whatsoever.

So my question for the teacher would be: Why is Keynes asking us to suspend the classical notion that crowding out does not negate government spending completely?

I'm not sure where you got the assumption but investment isn't exogenous in IS-LM (depends negatively on the real interest rate) and the Keynesian cross doesn't involve investment, it is based on actual and planned expenditures, and it is used to demonstrate the multiplier.

[ababba]

Do we actually disagree? Maybe we are just parsing things differently. That is always a possibility.

Fixed MV is not a good assumption to make if you think that there's any reason for MV to be jointly determined along with other variables. For example, consider V as a function of (P,Y), say V=z(P,Y). Now everything breaks down. It would be hard to even derive a downward sloping demand curve without assumptions about z. You do have to worry about aggregation theorems because you need to think about what is a reasonable shape for the function z. If you assume something about the shape of the function z, you have to worry about whether that is too strong of an implicit assumption on the preferences it is aggregating.

The problem with macro models is not that they are not literally true. All micro models are not literally true either. The problem with macro models is that they make too many assumptions and many of them are not even explicitly stated. I do not dispute that we can still learn some things from macro models (mostly economic intuition), but I do not think that what we can learn from them is enough to engineer the economy.

When I draw a demand curve in Micro I never assume that the things that shift the demand curve are independent from price and quantity, that seems like a really obvious bad assumption for any form of a demand curve. It doesn't affect our ability to draw a demand curve, it may make thinking about shifts in the curve a more complicated process.

What is the AD/AS model supposed to do? Its supposed to tell us something about what happens to output in the price level in response to monetary expansion or a change in inflation expectations. It can to a pretty good job of this even if we don't understand the exact functional forms for V as long as an increase in M raises MV and as long as the change in inflation expectations doesn't change V in such a way that it offsets the shift in the AS. Thinking about fiscal policy here is a high level question that most courses wouldn't cover, which is why they do IS-LM.

AS is a curve with much more ridiculous assumptions. Like if you tried to explain Calvo pricing to someone they would laugh you out of the room.

[Steven Douglas]

ababba, in case you missed it from the last page:


...the notion that Keynesian economics means government intervention is a fantasy. Keynesian economics is sticky prices and a liquidity trap. Its not government intervention.

Does the Federal Reserve engage in intervention of any kind? If so, would not the Federal Reserve Act of 1913 (and all subsequent modifications) count as Keynesian government intervention by proxy? Or is this a case where the owner of the dog he turned loose long ago believes he has washed his hands and is no longer accountable for anything it does?

What am I missing?

This was not asked rhetorically, I really am curious as to your take on it, and would like to be corrected if I am wrong, or missing something.

[mainstream economist]

It can to a pretty good job of this even if we don't understand the exact functional forms for V as long as an increase in M raises MV and as long as the change in inflation expectations doesn't change V in such a way that it offsets the shift in the AS.

Summary: "It can do a pretty job if we assume X, Y, and Z." I agree.

It sounds to me that we are not disagreeing on the main point. We just seem to differ on our feelings about this. I feel that we have to take seriously the logical implications of X, Y, Z on individual demands. You seem not to agree on that point. I'll chalk that up to a difference in philosophy. We wouldn't be the first people on earth to have that disagreement.

[libertybrewcity]

transfer to George Mason. A very Austrianish econ program. Three active libertarian groups and plenty of liberty-minded people. I have a RP sign on my window and people knock it on it nearly everyday asking about him!

[anaconda]

I'm not sure where you got the assumption but investment isn't exogenous in IS-LM (depends negatively on the real interest rate) and the Keynesian cross doesn't involve investment, it is based on actual and planned expenditures, and it is used to demonstrate the multiplier.

Was not talking about IS-LM. Was talking about Keynesian Cross. Keynesian cross depicts an "aggregate expenditure" line (C+I+G) intersecting with the 45 degree line (where spending = income). "I" (investment) is most definitely included in the Keynesian aggregate expenditure line. But it is considered to be determined outside the model ("exogenous"), and therefore unaffected by an increase in G. My question is how and why Keynes assumes that an increase in G doesn't simultaneously diminish both I and C equally, as the classical school suggests.

See last sentence in second paragraph:

http://www.george.irvin.com/MASD1/session4.htm

[Steven Douglas]

ababba, could I at least have a reason, however brief (you can even insult me if you would like, I won't take it personally), as to why there was no response to my questions? Even if you found them not worthy of a response, for whatever reason, would you at least state this for the record?

[RobHino]

I thought this was a great lecture, and it includes models to explain the Austrian Theory. The introduction is about 5 minutes long. You could recreate the models in this video. And then in an after class scheduled discussion, you could say you're having a hard time understanding how they compare to the Keynesian models from his lecture.

http://www.youtube.com/watch?v=zhoFOyy7rbo

[ababba]

ababba, could I at least have a reason, however brief (you can even insult me if you would like, I won't take it personally), as to why there was no response to my questions? Even if you found them not worthy of a response, for whatever reason, would you at least state this for the record?

I was out of town for a day, didn't check the forum.

The Fed engages in government intervention. Keynesian economics does not equal government intervention. It is sticky prices and a liquidity trap. It is a positive description of how economies work not a normative description of what policy should be. Your question doesn't make any sense.

[ababba]

Was not talking about IS-LM. Was talking about Keynesian Cross. Keynesian cross depicts an "aggregate expenditure" line (C+I+G) intersecting with the 45 degree line (where spending = income). "I" (investment) is most definitely included in the Keynesian aggregate expenditure line. But it is considered to be determined outside the model ("exogenous"), and therefore unaffected by an increase in G. My question is how and why Keynes assumes that an increase in G doesn't simultaneously diminish both I and C equally, as the classical school suggests.

See last sentence in second paragraph:

http://www.george.irvin.com/MASD1/session4.htm

I'm on board with what you are describing now, thanks for clarifying. I don't think the assumption is that investment is exogenous but just that it doesn't depend on output (or maybe more precisely the deviation of output from the natural rate). In the treatment of the Keynesian cross I saw, the cross was used to derive the IS curve. A single Keynesian cross diagram applies to a fixed interest rate, then you shift the interest rate and the equilibrium output shifts as well and you use this relationship to trace out the IS curve. The reason why the change in the interest rate shifts the C+I+G line is because higher interest rates lower investment. The model assumes that the only endogenous variable that impacts investment is the real interest rate.

[PierzStyx]

If you pick and choose it isn't so hard. Hoppe wrote a good article (http://www.economicpolicyjournal.com/2011/10/truth-about-mises-versus-hayek.html)about Hayek's views, quoting from "The Road to Serfdom".



So I think that isn't too hard. Being a fan of Mises and Keynes though would be a lot harder.


I do think it is relevant to point out that in latter years Hayek renounced his earlier belief that government could legitimately provide any welfare-type service. My edition of The Road To Serfdom, the most recent one, has all the author's notes and introductions in it form the previous publications. It is in one of those he makes the statement that he had changed his mind. Its an excellent work but if you read his later works you can see how it was an early work in an expanding intellect. The Fatal Conceit is a much stronger defense of Austrian Economics and renouncement of any type of socialistic tendencies in government.

[low preference guy]

I do think it is relevant to point out that in latter years Hayek renounced his earlier belief that government could legitimately provide any welfare-type service.

Thanks. I didn't know that.

[RobHino]

This is one of the most incorrect things I've heard about economics in years. You hear these fallacies all the time, that anything good for public policy is good for an individual. Its a bad principle in general. Lets take taxes as an example. I might be perfectly willing to pay 25% of my income to the government in exchange for some goods and services if everyone else agrees to do the same thing, but not be willing to do it if nobody else contributes. This is just common sense. I might be willing to contribute 1/100 of the cost for a park but not pay for the entire park myself. There is nothing inconsistent about wanting the government to do something and not be willing to do it by yourself.

I think your argument is a little skewed because as individuals we can't tax someone else, but we can lend our own money out. So your example, in my opinion, is invalid. There is a little inconsistency in not stealing personally, but allowing government to do so. The point being made seems logical....if someone generally believes that lower interest rates are a positive for the benefit of everyone, would that same someone have the same feeling with his own money?


Now lets talk about the case of interest rates. The Fed doesn't just set interest rates. They change the money supply and interest rates adjust endogenously. What that means is that these are equilibrium real interest rates. People in the free market are willing to borrow and lend at these real interest rates. In a low interest rate environment, everyone that loans out money still chooses to loan that money out and the interest rate clears the market.

You're correct about the Fed not directly increase interest rates, but you admit they control the money supply. I'm not sure the term "equilibrium real interest rates" is justified. "Equilibrium" yes due to natural laws of supply and demand of money, but not "real". How can they be real if they're fixed at near zero percent since 2009? To suggest interest rates are just produced from within, independent of the money supply, is not a fair assessment. http://www.moneycafe.com/library/fedfundsrate.htm

[ababba]

I think your argument is a little skewed because as individuals we can't tax someone else, but we can lend our own money out. So your example, in my opinion, is invalid. There is a little inconsistency in not stealing personally, but allowing government to do so. The point being made seems logical....if someone generally believes that lower interest rates are a positive for the benefit of everyone, would that same someone have the same feeling with his own money?

In both cases the question to me comes down to whether a rational person can be consistent if they would like everyone to do something but not be willing to do it unilaterally. The principle to me is the same. You can volunteer extra revenue for the government just like you can volunteer to lend money at below market interest rates.



You're correct about the Fed not directly increase interest rates, but you admit they control the money supply. I'm not sure the term "equilibrium real interest rates" is justified. "Equilibrium" yes due to natural laws of supply and demand of money, but not "real". How can they be real if they're fixed at near zero percent since 2009? To suggest interest rates are just produced from within, independent of the money supply, is not a fair assessment. http://www.moneycafe.com/library/fedfundsrate.htm

Does the supply of loanable funds equal the demand for loanable funds at this interest rate? Yes, so this is a market equilibrium. In the case where the price of rent is held at a floor, demand for apartments is greater than supply. This disparity doesn't exist in the market for loanable funds. As argued countless times, interest rates vary all the time even in an economy with no government intervention. This can include periods of extremely low real interest rates, so there is nothing inconsistent about a free market with low interest rates, its just wrong to assume that. The only way to know that interest rates were low relative to the alternative case without government intervention would be to know what the economy would look like without government intervention. If you have a model of the economy this good, it has certain implications for policy that people aren't internalizing.

[anaconda]

I'm on board with what you are describing now, thanks for clarifying. I don't think the assumption is that investment is exogenous but just that it doesn't depend on output (or maybe more precisely the deviation of output from the natural rate). In the treatment of the Keynesian cross I saw, the cross was used to derive the IS curve. A single Keynesian cross diagram applies to a fixed interest rate, then you shift the interest rate and the equilibrium output shifts as well and you use this relationship to trace out the IS curve. The reason why the change in the interest rate shifts the C+I+G line is because higher interest rates lower investment. The model assumes that the only endogenous variable that impacts investment is the real interest rate.

Again, I was originally referring only to the Keynesian cross diagram, and my question for the OP's professor was why the aggregate expenditure line shifts up with an increase in G, in light of the classical theory that G "crowds out" I and C in an amount exactly equal to G. Interest rates are not part of the Keynesian cross model.

[ababba]

Again, I was originally referring only to the Keynesian cross diagram, and my question for the OP's professor was why the aggregate expenditure line shifts up with an increase in G, in light of the classical theory that G "crowds out" I and C in an amount exactly equal to G. Interest rates are not part of the Keynesian cross model.

That is only for a fixed interest rate, which is part of the implicit assumptions in the Keynesian cross. In the full Keynesian model, crowding out happens precisely because the increase in output after a shift in IS raises the interest rate and lowers investment. Investment is only exogenous if the real interest rate is fixed. This is obviously a bad assumption but it can be used to see how the trade off between interest rates and output represent by the IS curve shifts.

[anaconda]

That is only for a fixed interest rate, which is part of the implicit assumptions in the Keynesian cross. In the full Keynesian model, crowding out happens precisely because the increase in output after a shift in IS raises the interest rate and lowers investment. Investment is only exogenous if the real interest rate is fixed. This is obviously a bad assumption but it can be used to see how the trade off between interest rates and output represent by the IS curve shifts.

The interest rate increases due to the government competing for loanable funds. The crowding out occurs for two reasons: 1) households divert their income from consumption into savings due to the more attractive higher interest rates. And 2) firms invest less due the the higher cost of borrowing. A classical school graphical analysis of this shows that the reduction in household consumption and private investment exactly equal the amount of government deficit spending. For a net zero gain. My suggested question for the professor, once again, is why we should believe that an increase in G should shift the aggregate expenditure line upward in the Keynesian cross diagram.

[Steven Douglas]

The Fed engages in government intervention. Keynesian economics does not equal government intervention. It is sticky prices and a liquidity trap. It is a positive description of how economies work not a normative description of what policy should be. Your question doesn't make any sense.

Well, let me expound a little with some needed context, in the hopes that my question might make more sense.

Keynesian economics purports to be positive and non-normative, but I view this as a very bold claim, as it assumes that whatever philosophies and a priori assumptions Keynes proposed, which necessary included value judgments and normative assertions, somehow play no role in any positive descriptions that are later yielded by Keynesian mechanics.

Keynesian economics is not only descriptive but predictive, which, in many cases, has the effect of being "self-prescriptive". For the sake of illustration, I posit that Keynesian economists are to the economic policy makers of every stripe as a navigator is to a pilot. If I am the Keynesian navigator and I say, "If you do X, you will be safer than if you do Y, which will place your craft at risk." And I even proceed to quantify this for the pilot, using one of my navigation models. Note that as a navigator, I have not told the pilot what he "should" do. I have only given information that is strictly descriptive and predictive, not normative. The decision to act remains at all times firmly in the hands of the pilot. As a simple navigator, so the reasoning goes, I don't even have a single control in front of me, how could I exercise control? That is the fallacy. The lie, even, of the "strictly positive" Keynesian economists. The reality is that the pilot relies very heavily - even exclusively in most cases, on everything that I tell him, and assuming the pilot's objective is to survive, his only logical and reasonable choice, based on the limited information I have given him, is to do X, and avoid Y.

Keynesian economists say, in effect, that "We merely describe the terrain, and attempt to predict various outcomes, based in part on actions and policies that are observed and placed into our models." In other words, the Keynesians are the "Scientific Oracle" upon which the vast majority of policy-makers, and indeed the vast majority of the modern banking world, relies in one form or another. This is a virtual monopoly of influence - and therefore very much a form of control.

The problem I see with Keynesians referring to themselves as positivists who are somehow insulated from all things normative is that they assume no responsibility for the accuracy or correctness of their assumptions, descriptions, models, etc., that very much influence global economic policies.

Take the so-called Paradox of Thrift, central to Keynesian Economics, as but one example. It does not emphatically offer a normative "should" or "ought", but it does predict, using the simple Keynesian multiplier model, that increases in savings may be harmful to an economy (with multiple euphemistic tautologies which make essentially the same claim). Regardless of the degree to which the Paradox of Savings/Thrift serves as an reliable predictor, and regardless how well accepted it may be in its myriad forms by Keynesians, it is not a universal law, but more of an axiom which Keynesians believe to be self-evident based on a simple multiplier model. I think it can be safely argued that this is self-prescriptive, with a normative assertion implied, since it is understood that anything which a reasonable and prudent person believes may be "harmful" will be actively discouraged, while anything that avoids harm will be actively encouraged.

So there it is - my first, but slowly evolving two cents, for whatever it is worth, that calls into question the ubiquitous claim that Keynesian economics is somehow strictly positive. I see the washing of the hands, but I don't see clean hands. The Keynesian handprint is on virtually everything - albeit always by proxy.

[ababba]

The interest rate increases due to the government competing for loanable funds. The crowding out occurs for two reasons: 1) households divert their income from consumption into savings due to the more attractive higher interest rates. And 2) firms invest less due the the higher cost of borrowing. A classical school graphical analysis of this shows that the reduction in household consumption and private investment exactly equal the amount of government deficit spending. For a net zero gain. My suggested question for the professor, once again, is why we should believe that an increase in G should shift the aggregate expenditure line upward in the Keynesian cross diagram.

Its a good question, and one that shows a deeper understanding of the material so you should definitely talk about with the professor about it. The Keynesian cross diagram is basically done without the two assumptions you talk about above. That's I always think about it more as a building block than a model in itself. Its designed to graphically demonstrate the multiplier. The Mankiw book doesn't work with assumption (1) for most of the text, and there are a lot of good reasons why changes in interest rates have ambiguous effects on consumption from Microeconomics.

It is still a useful diagram if you put it in an IS-LM context because it tells you how big the horizontal shift in the IS curve is. That is, its somewhat important to know how much output would shift if interest rates did not change at all and then how much output would shift if crowding out happened so you can see the effects of crowding out. You need the full IS-LM model to see this. The classical model results are equivalent to a vertical LM curve, which is equivalent to saying that money demand does not depend on the opportunity cost holding money or interest rates. If the LM curve is not vertical, crowding out is less than full in the model.

[ababba]

Well, let me expound a little with some needed context, in the hopes that my question might make more sense.

Keynesian economics purports to be positive and non-normative, but I view this as a very bold claim, as it assumes that whatever philosophies and a priori assumptions Keynes proposed, which necessary included value judgments and normative assertions, somehow play no role in any positive descriptions that are later yielded by Keynesian mechanics.

Keynesian economics is not only descriptive but predictive, which, in many cases, has the effect of being "self-prescriptive". For the sake of illustration, I posit that Keynesian economists are to the economic policy makers of every stripe as a navigator is to a pilot. If I am the Keynesian navigator and I say, "If you do X, you will be safer than if you do Y, which will place your craft at risk." And I even proceed to quantify this for the pilot, using one of my navigation models. Note that as a navigator, I have not told the pilot what he "should" do. I have only given information that is strictly descriptive and predictive, not normative. The decision to act remains at all times firmly in the hands of the pilot. As a simple navigator, so the reasoning goes, I don't even have a single control in front of me, how could I exercise control? That is the fallacy. The lie, even, of the "strictly positive" Keynesian economists. The reality is that the pilot relies very heavily - even exclusively in most cases, on everything that I tell him, and assuming the pilot's objective is to survive, his only logical and reasonable choice, based on the limited information I have given him, is to do X, and avoid Y.

Keynesian economists say, in effect, that "We merely describe the terrain, and attempt to predict various outcomes, based in part on actions and policies that are observed and placed into our models." In other words, the Keynesians are the "Scientific Oracle" upon which the vast majority of policy-makers, and indeed the vast majority of the modern banking world, relies in one form or another. This is a virtual monopoly of influence - and therefore very much a form of control.

The problem I see with Keynesians referring to themselves as positivists who are somehow insulated from all things normative is that they assume no responsibility for the accuracy or correctness of their assumptions, descriptions, models, etc., that very much influence global economic policies.

Take the so-called Paradox of Thrift, central to Keynesian Economics, as but one example. It does not emphatically offer a normative "should" or "ought", but it does predict, using the simple Keynesian multiplier model, that increases in savings may be harmful to an economy (with multiple euphemistic tautologies which make essentially the same claim). Regardless of the degree to which the Paradox of Savings/Thrift serves as an reliable predictor, and regardless how well accepted it may be in its myriad forms by Keynesians, it is not a universal law, but more of an axiom which Keynesians believe to be self-evident based on a simple multiplier model. I think it can be safely argued that this is self-prescriptive, with a normative assertion implied, since it is understood that anything which a reasonable and prudent person believes may be "harmful" will be actively discouraged, while anything that avoids harm will be actively encouraged.

So there it is - my first, but slowly evolving two cents, for whatever it is worth, that calls into question the ubiquitous claim that Keynesian economics is somehow strictly positive. I see the washing of the hands, but I don't see clean hands. The Keynesian handprint is on virtually everything - albeit always by proxy.

I think this is an interesting response but now we would need to talk some about the philosophy of logic and argument. My view of this discussion is that you should try to find your opponents best argument for their position and criticize that. The best arguments for the Keynesian framework are positive, based on extended periods of sticky prices and recessions near the zero lower bound on nominal interest rates. Regardless of the motivations for developing the model, if its not true, you can criticize the logical pieces that make up the puzzle. Someone can misread a treasure map and still stumble on the treasure chest by accident. The only question should be whether you in fact have found a gold chest or not.

[Mashedtaders]

All of your econ profs will be Keynesians. Just ignore them but try to learn the points to their argument so you can get a new perspective and then counter their arguments in the future.

[Steven Douglas]

I think this is an interesting response but now we would need to talk some about the philosophy of logic and argument. My view of this discussion is that you should try to find your opponents best argument for their position and criticize that. The best arguments for the Keynesian framework are positive, based on extended periods of sticky prices and recessions near the zero lower bound on nominal interest rates. Regardless of the motivations for developing the model, if its not true, you can criticize the logical pieces that make up the puzzle. Someone can misread a treasure map and still stumble on the treasure chest by accident. The only question should be whether you in fact have found a gold chest or not.

Actually, I am more interested in fundamentally accurate readings than misreadings, and not as a map to find "special" treasure - for myself or anyone else. Sticky prices, liquidity traps, and recessions near the zero lower bound on nominal interest rates are only a part of the broad picture, or scope of economics, which in a Keynesian framework necessarily attempts to describe and predict human activity. My attempt now is to focus on a smaller, perhaps even insignificant, part of the economy, and in terms that are neither normative nor scientifically controversial, but which are fully comprehensible within even a Keynesian framework.

Take, for example, those who already have a chest, like a single mother and waitress who has savings in the form of a coffee can on her fridge that is stuffed full of hard-earned crumpled fiat notes, but finds a gaping wound every time her own chest is opened, in the form of real value that has been invisibly siphoned, without her knowledge or consent, generally speaking, and is irrevocably lost.

I can trace this, quite accurately and predictably, to a certain Keynesian Paradox of Thrift, which was postulated and accepted, a priori and axiomatically by Keynesian economists, which was fed into a simple multiplier model, which in turn suggested that the human activity of placing currency into a coffee can (aka "savings" - aka "private accumulation of capital") might be harmful to "the economy" (whatever "economy" means - certainly not hers).

What I can also state, positively and not in a way that is normative, is that the continual, irreversible decrease in the value of this particular woman's personal economy (if such a thing as "her economy" can even be said to exist, let alone be acknowledged as meaningful), happened based on other human activity that was entirely predictable, but moreover caused by, reliance upon that same Keynesian model.

Now, whatever the waitress in my example or anyone else thinks should/ought to be done about this is entirely normative, of course, and therefore for others to decide. I am approaching this with a Keynesian mindset, as I merely attempt to describe in positive terms precisely what is happening, and in a way that illustrates that while I do question the validity of the Paradox of Thrift, that does not mean that I am in disagreement with Keynesian models that very much predicted what I described above.

Which is why I am not interested in so much in motivations for developing a model, or even challenging the accuracy of the results, so much as I would like to document, coldly, rationally, precisely what is caused by reliance upon that model, and was entirely predictable using that same model.

And stuff and such...

[ababba]

Actually, I am more interested in fundamentally accurate readings than misreadings, and not as a map to find "special" treasure - for myself or anyone else. Sticky prices, liquidity traps, and recessions near the zero lower bound on nominal interest rates are only a part of the broad picture, or scope of economics, which in a Keynesian framework necessarily attempts to describe and predict human activity. My attempt now is to focus on a smaller, perhaps even insignificant, part of the economy, and in terms that are neither normative nor scientifically controversial, but which are fully comprehensible within even a Keynesian framework.

Take, for example, those who already have a chest, like a single mother and waitress who has savings in the form of a coffee can on her fridge that is stuffed full of hard-earned crumpled fiat notes, but finds a gaping wound every time her own chest is opened, in the form of real value that has been invisibly siphoned, without her knowledge or consent, generally speaking, and is irrevocably lost.

I can trace this, quite accurately and predictably, to a certain Keynesian Paradox of Thrift, which was postulated and accepted, a priori and axiomatically by Keynesian economists, which was fed into a simple multiplier model, which in turn suggested that the human activity of placing currency into a coffee can (aka "savings" - aka "private accumulation of capital") might be harmful to "the economy" (whatever "economy" means - certainly not hers).

What I can also state, positively and not in a way that is normative, is that the continual, irreversible decrease in the value of this particular woman's personal economy (if such a thing as "her economy" can even be said to exist, let alone be acknowledged as meaningful), happened based on other human activity that was entirely predictable, but moreover caused by, reliance upon that same Keynesian model.

Now, whatever the waitress in my example or anyone else thinks should/ought to be done about this is entirely normative, of course, and therefore for others to decide. I am approaching this with a Keynesian mindset, as I merely attempt to describe in positive terms precisely what is happening, and in a way that illustrates that while I do question the validity of the Paradox of Thrift, that does not mean that I am in disagreement with Keynesian models that very much predicted what I described above.

Which is why I am not interested in so much in motivations for developing a model, or even challenging the accuracy of the results, so much as I would like to document, coldly, rationally, precisely what is caused by reliance upon that model, and was entirely predictable using that same model.

And stuff and such...

I think the first point is that she can invest the money in bonds or money market mutual funds and earn a rate of return greater than inflation over long periods of time.

On the other hand I recognize that some people are stupid and might not understand this. Inflation is a tax on holdings of currency. However, this tax is an extremely small fraction of government revenue, it is dwarfed by payroll taxes, income taxes and capital gains taxes. This is because most money is not held in the form of currency but invested in assets that earn a nonzero rate of return. In addition, from a positive perspective, the biggest holders of currency are foreigners and criminals, two groups that would seem like the groups we should place the greatest marginal tax burden on for various reasons.

If you agree that taxation at all is justified, then you have to ask what the distribution of the tax system is. This isn't something you do in isolation. For instance, the payroll tax is regressive because it is capped. But because income tax is progressive enough, the entire tax system is progressive. As a result, the waitress, even including the inflation tax, is paying a very small proportion of the total tax burden relative to her income. She spends most of her money instead of saving it and doesn't face any capital gains or inheritance taxes. She probably has a substantial amount of debt, and surprisingly high inflation helps her in that respect.

Mainstream economists don't really think about savings the way you are describing in your caricature. In my mind, they think about it as a trade-off between the long-run and the short-run. They have models of the economy in the long-run like the Solow model and they recognize that an increase in the savings rate increases living standards. However, in order to do this, you have to give up consumption today in order to make the sacrifice and invest for the future. The average Keynesian economist in academia wants to increase the savings rate in the United States but not necessarily overnight. They only favor fiscal stimulus when monetary stimulus has become ineffective, and many believe this is when nominal interest rates are zero. The paradox of thrift is something that they think you should keep in mind but by no means definitive. The baseline Keynesian model is really only a model of short run fluctuations. You need some way of weighing short-run versus long-run objectives to think about policy. However, there are times when fiscal stimulus doesn't raise interest rates and crowd out private investment, and that it something important to consider when thinking about policy.

[Steven Douglas]

Firstly, thank you for the time you took to respond.

The example I used, which could be any number of millions of people in the U.S., happens to be an adopted niece of mine. So we can explore her anecdotal specifics, and just talk about it, human to human.


I think the first point is that she can invest the money in bonds or money market mutual funds and earn a rate of return greater than inflation over long periods of time.

My niece, like so millions just like her, has no comprehension of what you just wrote and take for granted as useful knowledge. Perhaps that is part of the treasure map you were talking about. But it does not apply to her, because you are talking to her from an isolated bubble that she simply does not, and likely never will, comprehend. It is not part of her world, part of her lexicon, part of her mode of thinking. In fact, she can't even tell you what inflation is - not even so much as "is that when prices go up all the time?" Not even that far.

Her education level goes no higher than a GED, so she is ignorant of many things, but far from stupid. Wisdom and intelligence are not the same things, and one does necessarily follow the other, as I would stack her raw, innate wisdom against any number of intellectuals I know, but are complete and utter fools in their own ways. A lot of people are truly too stupid to realize this, but my niece is hardly exceptional. Functionally semi-literate, she could be easily classified as the classic lower middle "working" class American proletariat. Some really daft bigots might even refer to her as a trailer court queen. Nevertheless, a giant swath of very, very hard working Americans are squarely in this same category.

She is extremely frugal, and tries to save for medium sized purchases, but otherwise lives from paycheck to paycheck. Her mother was on welfare for much of her life, but she is absolutely death on welfare for herself. She is almost debt free, mainly because she has never had any credit extended to her to begin with, but also because her mother is very anti-credit. "Don't let nobody rip you off, Honey, you pay cash for everything, and own everything you own outright." I said almost debt-free because she is making payments on an emergency room visit totaling just over $300.

Her crappy little used car was paid for with cash that she had saved, partly because of what her mother taught her, and partly because she doesn't know any other way. But it belongs to her. Kind of. In reality, license fees, inspection fees, mandatory insurance, etc., all of which drain a significant part of her earnings, and which totals more than the value of her car each year, the one that she ostensibly "owns", makes it more of a rental. And that's just the beginning of her story, that I won't belabor, except to say that it is not exceptional.

I posit that she is one of the unintended consequences of the Paradox of Thrift and how it has been applied in this land where money itself is now reckoned only as another form of debt (with straight faces no less). She is paddling frantically upstream on the edge of the Keynesian waterfall where the disappearing middle class go to die when they "are too stupid" to realize what wonderful alternatives were available to them - if they only knew.


Inflation is a tax on holdings of currency. However, this tax is an extremely small fraction of government revenue...

I absolutely love that frank acknowledgment of something that is not obvious or understood by MOST Americans - not just those in my niece's class.

Furthermore, I love the fact that you followed it with how it relates in proportion to "government revenue" - not "her" revenue, which is an entirely different story when one considers the real, albeit entirely relative value of each and every fiat dollar that manages to make it into her coffee can (literally - Maxwell House even).

When inflation taxes her "holdings of currency", it is insignificant only to government revenue - not to her. To her it is taxing her very means of survival. How her pitiful "contribution" might be "dwarfed by payroll taxes, income taxes and capital gains taxes" is a slap in her face, because there isn't even an acknowledgment or mention of the impact on her - unless you reckon her through your eyes, based not on who she is, but what you imagine her to be.


This is because most money is not held in the form of currency but invested in assets that earn a nonzero rate of return. In addition, from a positive perspective, the biggest holders of currency are foreigners and criminals, two groups that would seem like the groups we should place the greatest marginal tax burden on for various reasons.

Ah. See, Shelly? Look on the bright side of why you are being taxed without your knowledge or consent, and without any representation or recourse whatsoever - in perpetuity, no less: Why, most people only need to survive on a fraction of their money, and the rest isn't saved, because it would be taxed out of existence if it was saved, in much the same way your money is. Silly you for not knowing that, but the bright side is that at least it is also a tax on foreigners and criminals who "should" be taxed for hanging onto cash. Sorry that you had to be in the same class as foreigners and criminals, but take one for the team anyway, it's better for "the economy".


If you agree that taxation at all is justified, then you have to ask what the distribution of the tax system is. This isn't something you do in isolation. For instance, the payroll tax is regressive because it is capped. But because income tax is progressive enough, the entire tax system is progressive. As a result, the waitress, even including the inflation tax, is paying a very small proportion of the total tax burden relative to her income.

Once again, you are viewing this from a "relative contribution", and only from a government revenue POV, without a single ounce of regard to the fact that this "currency holding tax" does not go to the government. It is a tax without representation siphoned by a private entity that holds a monopoly on the issue of the currency which she is obliged by law to accept as payment. The value that was siphoned from her inures, ultimately and primarily to the benefit of all the institutions involved in the inflationary chain of transactions, beginning with the private Federal Reserve. The relative significance of the size of her 'mandatory' contribution depends entirely on whose perspective you view it from. To the Fed, nothing. To the government, NADA. To the commercial banks - zip. That is, when you look at just her. But to her, it is life and survival itself. And I am absolutely certain, based on all your assumptions, that you have never, ever walked in her shoes.


She spends most of her money instead of saving it and doesn't face any capital gains or inheritance taxes. She probably has a substantial amount of debt, and surprisingly high inflation helps her in that respect.

She does spend most of her money instead of saving it, because she must in order to live. But when it comes to savings, and she does save, she is a warrior in my mind. I would stack her money management skills against a thousand corrupt, super-intelligent fools with advanced degrees in all the corporate mega-bailout-whores in my country. She wasn't responsible for any of that, and her "contribution" to all of that can only be considered "insignificant" if you view from a perspective other than hers.


Mainstream economists don't really think about savings the way you are describing in your caricature.

I am fully aware of that. Private accumulation of capital has been an economist taboo for so long that it is difficult to conceive of a society that where such capital actually competes head-to-head (rather than being taxed out of existence) with inflationary credit from a fractional reserve lending system controlled by a central bank, in our "money-only-equals-debt" Mainstream Keynesian mindset.

Yeah, Shelly would make you a mean cup of coffee. On her. But she wouldn't understand a word we talking about. It is, I firmly believe, why the Keynesian system, and particular the Fed, has survived for nearly a hundred years without a violent uprising and a lot of people being lined up and shot. Because if she and everyone in her position could be made to understand, in strictly positive terms, precisely what policies and theories have been accepted by the mainstream and implemented - and what their effects have been on her and others like her - NOT from a government or Economy Statist point of view, but on their lives, their labors, their savings and and their ability to survive: Heaven help everyone in their path.

[2_Thumbs_Up]

The only assumptions in IS-LM are that investment depends negatively on interest rates, consumption is an increasing function of disposable income and money demand depends on the cost of holding money (nominal interest rate) and your transactions demand for currency (real GDP).

Its an amazing model for such simple assumptions that we would all agree to. Try to approach it without preconceived notions about whether it is correct or not. The critiques are much more subtle than you think.
The assumptions are wrong, most importantly the first one. At any point in time, the amount of real capital is fixed, and thus it does not change with changes in the interest rate. The only thing changes in the interest rate can achieve is to reallocate the capital, which does not equal more investment, but just other investments. Austrians call these malinvestments.

[airborne373]

Tell your communist filth professor that slavery is over.

Not very diplomatic of me? How diplomatic should a slave be to his slave master?

[Thrashertm]

Yep, although I'm not surprised. He's actually a nice guy, and I have gotten him to talk favorably about Austrian views like sound money before. He is not familiar with the Austrian school or business cycle theory, though he has said he has read Hayek and liked him. Ultimately though, he is an avowed follower of Keynes, and a huge believer in me....err Bernanke. I was hoping some of you could give me some talking points to bring up in class. We are now exclusively covering demand side economics and it is starting to drive me crazy, haha. I'm fairly educated on Austrian economics, having read Hayek, some Mises (and Mises.org!) and of course Ron Paul, but I would really like some outside help, particularly when it comes to all the equations and models that aren't really presented in Austrian thought.

Last class we talked about the Keynesian cross, and how this revolutionized economics. Next we will be talking about the IS-LM mode (IS stands for investment and saving, LM for money and liquidity), which builds on the Keynesian Cross. A major part of the lecture will be on monetary stimulus. For those of you more familiar with Keynesian theory than I, what would be some good non-argumentative questions to raise or points to bring up?

Oh I found this interesting...the guy who wrote the textbook, N. Gregory Mankiw, was Bush's former economic adviser and is now the the adviser to Mitt Romeny. So one more strike against Mittens.

If you are going to confront the prof, I suggest doing so in his private office hours, and use the socratic method. http://www.youtube.com/watch?v=UjbPZAMked0 That is, position your stance as confusion with his points, instead of you flat out disagreeing with him. By doing this in his office hours, you won't be challenging him in front of the whole class, thus threatening his ego.

[ababba]

The assumptions are wrong, most importantly the first one. At any point in time, the amount of real capital is fixed, and thus it does not change with changes in the interest rate. The only thing changes in the interest rate can achieve is to reallocate the capital, which does not equal more investment, but just other investments. Austrians call these malinvestments.

Well in a years time I can build a new machine, so no capital is not fixed.

[ababba]

Firstly, thank you for the time you took to respond.

The example I used, which could be any number of millions of people in the U.S., happens to be an adopted niece of mine. So we can explore her anecdotal specifics, and just talk about it, human to human.



My niece, like so millions just like her, has no comprehension of what you just wrote and take for granted as useful knowledge. Perhaps that is part of the treasure map you were talking about. But it does not apply to her, because you are talking to her from an isolated bubble that she simply does not, and likely never will, comprehend. It is not part of her world, part of her lexicon, part of her mode of thinking. In fact, she can't even tell you what inflation is - not even so much as "is that when prices go up all the time?" Not even that far.

Her education level goes no higher than a GED, so she is ignorant of many things, but far from stupid. Wisdom and intelligence are not the same things, and one does necessarily follow the other, as I would stack her raw, innate wisdom against any number of intellectuals I know, but are complete and utter fools in their own ways. A lot of people are truly too stupid to realize this, but my niece is hardly exceptional. Functionally semi-literate, she could be easily classified as the classic lower middle "working" class American proletariat. Some really daft bigots might even refer to her as a trailer court queen. Nevertheless, a giant swath of very, very hard working Americans are squarely in this same category.

She is extremely frugal, and tries to save for medium sized purchases, but otherwise lives from paycheck to paycheck. Her mother was on welfare for much of her life, but she is absolutely death on welfare for herself. She is almost debt free, mainly because she has never had any credit extended to her to begin with, but also because her mother is very anti-credit. "Don't let nobody rip you off, Honey, you pay cash for everything, and own everything you own outright." I said almost debt-free because she is making payments on an emergency room visit totaling just over $300.

Her crappy little used car was paid for with cash that she had saved, partly because of what her mother taught her, and partly because she doesn't know any other way. But it belongs to her. Kind of. In reality, license fees, inspection fees, mandatory insurance, etc., all of which drain a significant part of her earnings, and which totals more than the value of her car each year, the one that she ostensibly "owns", makes it more of a rental. And that's just the beginning of her story, that I won't belabor, except to say that it is not exceptional.

I posit that she is one of the unintended consequences of the Paradox of Thrift and how it has been applied in this land where money itself is now reckoned only as another form of debt (with straight faces no less). She is paddling frantically upstream on the edge of the Keynesian waterfall where the disappearing middle class go to die when they "are too stupid" to realize what wonderful alternatives were available to them - if they only knew.



I absolutely love that frank acknowledgment of something that is not obvious or understood by MOST Americans - not just those in my niece's class.

Furthermore, I love the fact that you followed it with how it relates in proportion to "government revenue" - not "her" revenue, which is an entirely different story when one considers the real, albeit entirely relative value of each and every fiat dollar that manages to make it into her coffee can (literally - Maxwell House even).

When inflation taxes her "holdings of currency", it is insignificant only to government revenue - not to her. To her it is taxing her very means of survival. How her pitiful "contribution" might be "dwarfed by payroll taxes, income taxes and capital gains taxes" is a slap in her face, because there isn't even an acknowledgment or mention of the impact on her - unless you reckon her through your eyes, based not on who she is, but what you imagine her to be.



Ah. See, Shelly? Look on the bright side of why you are being taxed without your knowledge or consent, and without any representation or recourse whatsoever - in perpetuity, no less: Why, most people only need to survive on a fraction of their money, and the rest isn't saved, because it would be taxed out of existence if it was saved, in much the same way your money is. Silly you for not knowing that, but the bright side is that at least it is also a tax on foreigners and criminals who "should" be taxed for hanging onto cash. Sorry that you had to be in the same class as foreigners and criminals, but take one for the team anyway, it's better for "the economy".



Once again, you are viewing this from a "relative contribution", and only from a government revenue POV, without a single ounce of regard to the fact that this "currency holding tax" does not go to the government. It is a tax without representation siphoned by a private entity that holds a monopoly on the issue of the currency which she is obliged by law to accept as payment. The value that was siphoned from her inures, ultimately and primarily to the benefit of all the institutions involved in the inflationary chain of transactions, beginning with the private Federal Reserve. The relative significance of the size of her 'mandatory' contribution depends entirely on whose perspective you view it from. To the Fed, nothing. To the government, NADA. To the commercial banks - zip. That is, when you look at just her. But to her, it is life and survival itself. And I am absolutely certain, based on all your assumptions, that you have never, ever walked in her shoes.



She does spend most of her money instead of saving it, because she must in order to live. But when it comes to savings, and she does save, she is a warrior in my mind. I would stack her money management skills against a thousand corrupt, super-intelligent fools with advanced degrees in all the corporate mega-bailout-whores in my country. She wasn't responsible for any of that, and her "contribution" to all of that can only be considered "insignificant" if you view from a perspective other than hers.



I am fully aware of that. Private accumulation of capital has been an economist taboo for so long that it is difficult to conceive of a society that where such capital actually competes head-to-head (rather than being taxed out of existence) with inflationary credit from a fractional reserve lending system controlled by a central bank, in our "money-only-equals-debt" Mainstream Keynesian mindset.

Yeah, Shelly would make you a mean cup of coffee. On her. But she wouldn't understand a word we talking about. It is, I firmly believe, why the Keynesian system, and particular the Fed, has survived for nearly a hundred years without a violent uprising and a lot of people being lined up and shot. Because if she and everyone in her position could be made to understand, in strictly positive terms, precisely what policies and theories have been accepted by the mainstream and implemented - and what their effects have been on her and others like her - NOT from a government or Economy Statist point of view, but on their lives, their labors, their savings and and their ability to survive: Heaven help everyone in their path.

OK, lets put some numbers on it. Lets say she has 5000 in savings. The inflation tax takes away 100 per year in purchasing power if the inflation rate is 2%. This is still an extremely small part of her budget. Compared to payroll tax of 12.5% on her income, maybe something like 20,000, which would be 2500 dollars. So in all likelihood, her payroll tax burden is something like 25 times as large as her inflation tax burden. So its not just that her tax burden is small relative to government revenue, its small in absolute terms and small relative to her other tax burdens. Its also an extremely small part of her yearly income. And you haven't begun to talk about how much government revenue is spent on an average person during their lifetime, its not like the money just goes in a pit somewhere and disappears.

In addition, there's this this called the earned income tax credit which is a negative income tax for the poorest people in society. If she falls below the EITC cutoff, she gets more than one dollar for every dollar she earns, and that extra money comes from the government. The poor have a very low tax burden in today's society.

And you should get her on the phone, and tell her about vanguard and something about how to invest for the future instead of holding it in currency.

The inflation revenue does go to the government because the Fed buys Tbills with the money and then retires them.

Another implication of your arguments is that it would be disastrous if social security were privatized. If no one knows how to invest their money, they wouldn't be able to save for retirement, regardless of the rate of inflation.

And of course I should mention the more than 1 billion people in the world living on under a dollar a day. Some of them would break the law in order and risk their lives to have it as well as your niece. Border controls reduce welfare by many orders of magnitude more than inflation taxes.

And we haven't even gotten into whether positive inflation levels can have any benefits. In my mind, it lessons the probability of ever hitting the zero lower bound, and one bad recession like we are at right now more than usual is worse than 100 years of 2% inflation in welfare terms. Its also extremely difficult for firms to cut nominal wages, so positive inflation on average actually reduces wage stickiness.

[Steven Douglas]

OK, lets put some numbers on it. Lets say she has 5000 in savings. The inflation tax takes away 100 per year in purchasing power if the inflation rate is 2%. This is still an extremely small part of her budget.

You have no idea how extremely valuable this is to me. I have always thought that the entire challenge of exposing Keynesian manipulations to the economy for what they really are, including the Fed, fractional reserve lending, etc., all hinges on the ability to translate this in a way that educates the people who are most adversely affected by all the perpetual artificial selection of winners and losers. But now it is becoming more clear to me that there are two sides living in isolated bubbles of incredible ignorance from which to develop a plan of attack.

You really have never come close to understanding the realities of living as a lower middle working class prole, or what the very real and positively sweeping effects of inflation are to people in this class. That reminded me of a line from the movie Trading Places, where William Winthorpe III, played by Dan Aykroyd, after getting out jail, says, "Well, if this is indicative of the state of correctional institutions in this country, they might as well let them all out - it's far worse on the inside!"

Right off the bat you wrote, "Let's say she has 5000 in savings." That was an absolute jaw drop for me. If that girl, and millions just like her, ever had 5000 in savings she would consider herself beyond wealthy, because she has never seen that much money at one time in her entire life. For her to save $900 is an enormous feat, as $1K is about the best she can do in one year. This is due, in part, because the probability of events that will drain those savings entirely is pretty massive. Tires go bald, an engine blows, a ticket, fines or surprise fees come due, a visit to the emergency room, - any number of things most people not in her economic class reckon as a very small percentage of their budget are really enormous percentages of her living survival budget. The shock to me is not that this can be forgotten or simply disregarded, but that there is an utter lack of awareness of it in the first place.

You reckoned inflation by how much it might erode her particular savings in one year, with complete disregard for the fact that all of her income was affected. And you threw out 2% as a number?! What charts are you consulting, and where have you been living?

The actual effects of inflation, which the poor and lower working classes feel THE MOST, are not miniscule statistical losses of dollar value in isolation, based on some index. And preemptively - the notion that a doubling of the cost of bread is offset by a halving of the cost and increase in the quality of iPods or anything else unrelated is something I consider a disgustingly disingenuous and intellectually dishonest practice on the parts of those who create indexes like the oft-quoted and highly massaged CPI.

While every dollar that she earns and spends lose a percentage of their statistically massaged value, MASSIVE price increases for things that are absolutely necessary to her survival, are surging up all around her, in a very surreal way, like virtual skyscrapers. An economist can smooth these numbers and average them out. Someone living this, however, cannot. And while these increases in prices normally happen gradually, in small amounts in perpetuity anyway, like tiny earthquakes or minute tremors, as stresses on businesses are relieved, most of the time it is just tantamount to the poor and those on fixed incomes being on a [very artificial] treadmill. They try to keep up, try to keep their heads above water; difficult, but not impossible. But that is not the only way it happens.

The most devastating effects of inflation happens in waves, partly as a result of "sticky prices" that have been held artificially low for years because of competition, for example, in the milder phases of a recession when public consumption goes down, even as inflation continues its ever downward pressure on the value of the dollar. Something must and will give eventually, and once everyone starts raising, prices, corrections happen in massive surges, like giant tsunami producing earthquakes. When that happens, her actual purchasing power is enormously eroded, sometimes overnight - but in giant waves - by 20, 30, 40, and sometimes 50-100% or more. That's part of the sawtooth "equilibrium" that literally drowns the poor, whose artificially leaky boats were already swamped by "normal inflation".

Her rent goes up by 10%, not 2%. Every year. That is an enormous part of her income. The price of gasoline goes up by 30%, not 2%, regardless of the cause - likewise, meat, bread, milk, eggs, butter, all groceries, you name it - nearly everything she requires for survival increases in price, not just in response to, but also in anticipation of, rising costs everywhere.

And she is always the very last to adjust - the "sticky price" sword that cuts both ways and works in reverse, against her and those in her position.

Some might argue, "Well, that's not all attributable to inflation", and they'll only be partially correct. What it really amounts to is the "perpetual expansion" mindset, for which expansion of the currency is at the very root. Please read my signature and address it, if you would. Was Keynes lying, or did he have a lapse of naivete when he wrote that? What did he mean by "debauch" the currency? Precisely how is a currency debauched, and precisely how/why does that involve forces on the "side of destruction"?


Compared to payroll tax of 12.5% on her income, maybe something like 20,000, which would be 2500 dollars. So in all likelihood, her payroll tax burden is something like 25 times as large as her inflation tax burden. So its not just that her tax burden is small relative to government revenue, its small in absolute terms and small relative to her other tax burdens. Its also an extremely small part of her yearly income.


Non-sequitur. I did not bring up other taxes or "government revenue" of any kind, so why mention it when it is not at issue? It has no bearing on the entire focus which is at issue, which is only the effects of inflation, and only as it relates to her "personal economy", which is necessarily affected by all that is going on around her.

I never once mentioned the "inflation tax burden" in relation to anything but the effects it has on the whole in terms of her own livelihood, which includes literally all of the other massive perpetually rising cost of living burdens which are heaped on her. That occurs independent of any other government tax burdens (on any level) that she might have to endure - as a result of that "inflation tax burden", the buck of which does not "trickle down", but gathers in massive waves and stops, in part, on her little sandy beach. If you eliminated ALL other tax burdens on her, which I did not bring up and are not at issue, the effects of the "inflation tax burden" on her personal livelihood - her ability to survive - would still be devastating. The reason for that - everyone else on whom she relies for her survival needs are feeling that same exact pressure, only they are MUCH quicker to respond, and pass it onto her in the form of massively rising costs. And she is ALWAYS the last to respond with rising costs of her own.

If we used your example, and pretended that only she felt the effects of inflation, there really would be not that much of a problem. She could lose that 2% of value (on only her savings, no less - somehow the rest of her wages are unaffected), but so long as prices of everything remain the same (i.e., nobody else is affected), then she really could endure that. But that is not how it works, and you do not have to be in her shoes to know that very well.


And you haven't begun to talk about how much government revenue is spent on an average person during their lifetime, its not like the money just goes in a pit somewhere and disappears.

Again, a non-sequitur, but neither have you addressed the possibility of how much government revenue would not have to be spent on the average person who relies upon cash for their livelihood in the absence of inflation, which is not only the result of deficit spending by government. That is only one factor, and not the largest by any means. Fractional reserve lending artificially dilutes/expands the money supply, and is an enormous perpetual contributor to inflation, which is, in part, the reason why I never once brought up government revenue in any other form, even if we accepted (and I do not, but don't want to waste time arguing it now) that all of "the inflation tax" somehow ends up with the Treasury Department as government revenue.


In addition, there's this this called the earned income tax credit which is a negative income tax for the poorest people in society. If she falls below the EITC cutoff, she gets more than one dollar for every dollar she earns, and that extra money comes from the government. The poor have a very low tax burden in today's society.

Yes, and she is aware of it, and takes advantage of it. It is not a "negative income tax" to her, but it does bite into what would have been a much higher tax burden -- and it is still a non-sequitur, because I am not addressing her "tax burden" but rather the effects of inflation, as felt on the aggregate whole, and how that relates to her personal economy.


And you should get her on the phone, and tell her about vanguard and something about how to invest for the future instead of holding it in currency.

You mean that few hundred dollars here and there that she manages to scrape together for medium-sized purchases that you might otherwise consider a small trip for a single purchase at Costco?

What her savings really amounts to in most cases is an emergency fund that buffers her from all that buffets her in real life. Immediate liquidity for the paltry amount (by our reckoning, not hers) is absolutely essential, which pretty much eliminates any "long term vision and planning" for her "currency holdings" (snicker - she'd crack up to learn she had "holdings").


Another implication of your arguments is that it would be disastrous if social security were privatized. If no one knows how to invest their money, they wouldn't be able to save for retirement, regardless of the rate of inflation.

That was a non-sequitur in the absolute. I never once mentioned or even implied a single thing about that insolvent macabre joke called Social Security, let alone did I give thought one about what should/should not be done about it. Furthermore, I didn't even bring up the subject of investments. Only the effects of inflation, and only as they relate to someone who requires and consumes the vast majority of their own personal revenue on SURVIVAL.


And of course I should mention the more than 1 billion people in the world living on under a dollar a day. Some of them would break the law in order and risk their lives to have it as well as your niece. Border controls reduce welfare by many orders of magnitude more than inflation taxes.

Boy, the non-sequiturs are flying high tonight! Well there's an argument in favor of inflationary practices, because it could be worse! I suppose she should be grateful then.

Speaking of delicious apples to rotten non-oranges, I have lived in Mainland China, and have spent time in some of the most impoverished western regions where a little more than a dollar or two a day for wages is not uncommon. But along with that "relative poverty" comes some unusual personal liberties that equate, in many cases, to a better standard of living, at least in terms of what is actually required for survival. But that's a subject for another place and time. I reject the comparison as essentially meaningless, given all the massive differences in all the variables concerned.


And we haven't even gotten into whether positive inflation levels can have any benefits.

Oh, you don't even have to argue that. I absolutely know with utter certainty that it has "benefits". Just not to her.

When I hear "It's the economy, stupid!", my response is, "Whose economy, stupid?"


Its also extremely difficult for firms to cut nominal wages, so positive inflation on average actually reduces wage stickiness.

Yeah, isn't that the rub. You just made an argument against inflation, but only if you view it from the point of view of individuals who rely upon currency and their own personal productivity, and not perpetual debt instruments for their survival. Not "firms". Individuals. Why the preferential treatment of "firms"? You are picking winners and losers in all cases. My niece could actually benefit from a lack-of-inflation through "wage stickiness" alone (which, by even Keynesian theory, is a short-lived phenomenon). That would be beneficial to "her economy", but since that would be "difficult for firms", let us do the reverse instead, as we trade her natural wage stickiness for an artificial price stickiness instead.

I think it is axiomatic that if 'firms' find it difficult to make necessary cuts in nominal wages, they find it even more 'difficult' to make unnecessary cuts in nominal prices.

[Elwar]

Economic professor and keynsian is redundant.

[ababba]

You have no idea how extremely valuable this is to me. I have always thought that the entire challenge of exposing Keynesian manipulations to the economy for what they really are, including the Fed, fractional reserve lending, etc., all hinges on the ability to translate this in a way that educates the people who are most adversely affected by all the perpetual artificial selection of winners and losers. But now it is becoming more clear to me that there are two sides living in isolated bubbles of incredible ignorance from which to develop a plan of attack.

You really have never come close to understanding the realities of living as a lower middle working class prole, or what the very real and positively sweeping effects of inflation are to people in this class. That reminded me of a line from the movie Trading Places, where William Winthorpe III, played by Dan Aykroyd, after getting out jail, says, "Well, if this is indicative of the state of correctional institutions in this country, they might as well let them all out - it's far worse on the inside!"

Right off the bat you wrote, "Let's say she has 5000 in savings." That was an absolute jaw drop for me. If that girl, and millions just like her, ever had 5000 in savings she would consider herself beyond wealthy, because she has never seen that much money at one time in her entire life. For her to save $900 is an enormous feat, as $1K is about the best she can do in one year. This is due, in part, because the probability of events that will drain those savings entirely is pretty massive. Tires go bald, an engine blows, a ticket, fines or surprise fees come due, a visit to the emergency room, - any number of things most people not in her economic class reckon as a very small percentage of their budget are really enormous percentages of her living survival budget. The shock to me is not that this can be forgotten or simply disregarded, but that there is an utter lack of awareness of it in the first place.

You reckoned inflation by how much it might erode her particular savings in one year, with complete disregard for the fact that all of her income was affected. And you threw out 2% as a number?! What charts are you consulting, and where have you been living?

The actual effects of inflation, which the poor and lower working classes feel THE MOST, are not miniscule statistical losses of dollar value in isolation, based on some index. And preemptively - the notion that a doubling of the cost of bread is offset by a halving of the cost and increase in the quality of iPods or anything else unrelated is something I consider a disgustingly disingenuous and intellectually dishonest practice on the parts of those who create indexes like the oft-quoted and highly massaged CPI.

While every dollar that she earns and spends lose a percentage of their statistically massaged value, MASSIVE price increases for things that are absolutely necessary to her survival, are surging up all around her, in a very surreal way, like virtual skyscrapers. An economist can smooth these numbers and average them out. Someone living this, however, cannot. And while these increases in prices normally happen gradually, in small amounts in perpetuity anyway, like tiny earthquakes or minute tremors, as stresses on businesses are relieved, most of the time it is just tantamount to the poor and those on fixed incomes being on a [very artificial] treadmill. They try to keep up, try to keep their heads above water; difficult, but not impossible. But that is not the only way it happens.

The most devastating effects of inflation happens in waves, partly as a result of "sticky prices" that have been held artificially low for years because of competition, for example, in the milder phases of a recession when public consumption goes down, even as inflation continues its ever downward pressure on the value of the dollar. Something must and will give eventually, and once everyone starts raising, prices, corrections happen in massive surges, like giant tsunami producing earthquakes. When that happens, her actual purchasing power is enormously eroded, sometimes overnight - but in giant waves - by 20, 30, 40, and sometimes 50-100% or more. That's part of the sawtooth "equilibrium" that literally drowns the poor, whose artificially leaky boats were already swamped by "normal inflation".

Her rent goes up by 10%, not 2%. Every year. That is an enormous part of her income. The price of gasoline goes up by 30%, not 2%, regardless of the cause - likewise, meat, bread, milk, eggs, butter, all groceries, you name it - nearly everything she requires for survival increases in price, not just in response to, but also in anticipation of, rising costs everywhere.

And she is always the very last to adjust - the "sticky price" sword that cuts both ways and works in reverse, against her and those in her position.

Some might argue, "Well, that's not all attributable to inflation", and they'll only be partially correct. What it really amounts to is the "perpetual expansion" mindset, for which expansion of the currency is at the very root. Please read my signature and address it, if you would. Was Keynes lying, or did he have a lapse of naivete when he wrote that? What did he mean by "debauch" the currency? Precisely how is a currency debauched, and precisely how/why does that involve forces on the "side of destruction"?



Non-sequitur. I did not bring up other taxes or "government revenue" of any kind, so why mention it when it is not at issue? It has no bearing on the entire focus which is at issue, which is only the effects of inflation, and only as it relates to her "personal economy", which is necessarily affected by all that is going on around her.

I never once mentioned the "inflation tax burden" in relation to anything but the effects it has on the whole in terms of her own livelihood, which includes literally all of the other massive perpetually rising cost of living burdens which are heaped on her. That occurs independent of any other government tax burdens (on any level) that she might have to endure - as a result of that "inflation tax burden", the buck of which does not "trickle down", but gathers in massive waves and stops, in part, on her little sandy beach. If you eliminated ALL other tax burdens on her, which I did not bring up and are not at issue, the effects of the "inflation tax burden" on her personal livelihood - her ability to survive - would still be devastating. The reason for that - everyone else on whom she relies for her survival needs are feeling that same exact pressure, only they are MUCH quicker to respond, and pass it onto her in the form of massively rising costs. And she is ALWAYS the last to respond with rising costs of her own.

If we used your example, and pretended that only she felt the effects of inflation, there really would be not that much of a problem. She could lose that 2% of value (on only her savings, no less - somehow the rest of her wages are unaffected), but so long as prices of everything remain the same (i.e., nobody else is affected), then she really could endure that. But that is not how it works, and you do not have to be in her shoes to know that very well.



Again, a non-sequitur, but neither have you addressed the possibility of how much government revenue would not have to be spent on the average person who relies upon cash for their livelihood in the absence of inflation, which is not only the result of deficit spending by government. That is only one factor, and not the largest by any means. Fractional reserve lending artificially dilutes/expands the money supply, and is an enormous perpetual contributor to inflation, which is, in part, the reason why I never once brought up government revenue in any other form, even if we accepted (and I do not, but don't want to waste time arguing it now) that all of "the inflation tax" somehow ends up with the Treasury Department as government revenue.



Yes, and she is aware of it, and takes advantage of it. It is not a "negative income tax" to her, but it does bite into what would have been a much higher tax burden -- and it is still a non-sequitur, because I am not addressing her "tax burden" but rather the effects of inflation, as felt on the aggregate whole, and how that relates to her personal economy.



You mean that few hundred dollars here and there that she manages to scrape together for medium-sized purchases that you might otherwise consider a small trip for a single purchase at Costco?

What her savings really amounts to in most cases is an emergency fund that buffers her from all that buffets her in real life. Immediate liquidity for the paltry amount (by our reckoning, not hers) is absolutely essential, which pretty much eliminates any "long term vision and planning" for her "currency holdings" (snicker - she'd crack up to learn she had "holdings").



That was a non-sequitur in the absolute. I never once mentioned or even implied a single thing about that insolvent macabre joke called Social Security, let alone did I give thought one about what should/should not be done about it. Furthermore, I didn't even bring up the subject of investments. Only the effects of inflation, and only as they relate to someone who requires and consumes the vast majority of their own personal revenue on SURVIVAL.



Boy, the non-sequiturs are flying high tonight! Well there's an argument in favor of inflationary practices, because it could be worse! I suppose she should be grateful then.

Speaking of delicious apples to rotten non-oranges, I have lived in Mainland China, and have spent time in some of the most impoverished western regions where a little more than a dollar or two a day for wages is not uncommon. But along with that "relative poverty" comes some unusual personal liberties that equate, in many cases, to a better standard of living, at least in terms of what is actually required for survival. But that's a subject for another place and time. I reject the comparison as essentially meaningless, given all the massive differences in all the variables concerned.



Oh, you don't even have to argue that. I absolutely know with utter certainty that it has "benefits". Just not to her.

When I hear "It's the economy, stupid!", my response is, "Whose economy, stupid?"


Yeah, isn't that the rub. You just made an argument against inflation, but only if you view it from the point of view of individuals who rely upon currency and their own personal productivity, and not perpetual debt instruments for their survival. Not "firms". Individuals. Why the preferential treatment of "firms"? You are picking winners and losers in all cases. My niece could actually benefit from a lack-of-inflation through "wage stickiness" alone (which, by even Keynesian theory, is a short-lived phenomenon). That would be beneficial to "her economy", but since that would be "difficult for firms", let us do the reverse instead, as we trade her natural wage stickiness for an artificial price stickiness instead.

I think it is axiomatic that if 'firms' find it difficult to make necessary cuts in nominal wages, they find it even more 'difficult' to make unnecessary cuts in nominal prices.

Honestly, I'm not a big fan of the ad hominem or appeals to emotion so I'm going to try to stick to logic. I don't like the personal insults and incorrect assumptions you make about my life, but I'm happy to ignore them if you are happy to stop making them.

So the original reason I went with 5K savings, is because it was a very conservative assumption for what I was trying to demonstrate. Its clear to me that the inflation tax is extremely small both as a percentage of her income and a percentage of her total tax burden. You are trying to act like less than 100 dollars a year is a catastrophic tax on this person and its just not true. I used a high number to prove that its small no matter what. Your response to that is weird, saying that she has less savings. OK well then the cost of inflation is much less than 100 dollars a year, maybe 20 dollars a year. So then your basing your economic theories off this 20 dollar a year cost, makes it even less intelligent.

So then you go into a series of arguments about inflation statistics and real incomes. I think the government statistics are accurate at what they are supposed to be measuring. CPI urban does a reasonable job measuring the cost of living of an average urban consumer. Measuring this is obviously difficult and not perfect but many of the potential biases are overestimates rather than underestimates.

You focus on a few data points, instead of all goods in an illogical way. If monetary creation generates increases in prices, you would expect, in the long-run, those increases to have an evenly distributed affect on all goods. If the price of one good increases 10% in a year and another decreases 6% in a year, its hard to say that both of those changes were caused by changing money supplies. Its very easy to say that the 2% average increase is caused by the changing money supply and the differences between the two goods are caused by other factors outside the scope of monetary policy. Prices of goods fluctuate around all the time relative to each other regardless of what monetary regime we are in.

You also diminish substitution as an important phenomena for low income individuals, which I think is a basic misunderstanding of Microeconomics. Substitution is always possible. For example, in the case of gasoline, as prices rise people substitute towards more fuel efficient cars, bicycles or public transportation. If you don't have a city with public trans, people can move to a city that has public transportation. In the case of food, prices never increase at the same rate for different types of foods. If you have flexibility in your diet, you can substitute towards things that are becoming less expensive.

I also have a sense that you just tend to pick out a few data points. Gas prices have both increased and decreased dramatically in different periods over the last 50 years and we recognize that a big chunk of its is global demand and opec price controls. Monetary policy is a second order thing when thinking about the variance of gas prices.

About the idea of real wages, I believe in a free market, not marxist theories of wage determination. I believe real wages are linked to productivity. You hear this time and time again in the forum that somehow inflation erodes real wages. This misses the point that in a competitive market equilibrium, workers earn close to their marginal productivity. Decreases in real wages are often linked to decreases in productivity. On the other hand, a lot of people have done work showing that real wages for many groups are stagnating and linked this of course to productivity because that's what determines wages.

As I said before, the effects of inflation on this person are tiny. The people affected most are foreigners and criminals, the people that hold large amounts of wealth in the form of currency.

You know if gas prices went up 30% a year for 10 years how much prices would have gone up? They would be 13 times higher. That's how I know that you are just making numbers up, because gas prices aren't 13 times higher than they were 10 years ago.

For everything you say is a non-sequituir, here is the connection. We have to be able to put numbers down to determine the affects of various things. I think determining the magnitude of certain things is important. Numbers themselves aren't that useful but comparing them to something is important. In this case, the inflation tax is less than 1/25 of her total tax burden and less than 1/200 of her yearly income. Its small and its important to recognize that so we don't have people trying to argue that its a central thing.

And then there was some sort of vague argument about the inevitable hyperinflation which I don't buy, but we'll have to wait and see who is right about that.

[ababba]

Yeah, isn't that the rub. You just made an argument against inflation, but only if you view it from the point of view of individuals who rely upon currency and their own personal productivity, and not perpetual debt instruments for their survival. Not "firms". Individuals. Why the preferential treatment of "firms"? You are picking winners and losers in all cases. My niece could actually benefit from a lack-of-inflation through "wage stickiness" alone (which, by even Keynesian theory, is a short-lived phenomenon). That would be beneficial to "her economy", but since that would be "difficult for firms", let us do the reverse instead, as we trade her natural wage stickiness for an artificial price stickiness instead.

I think it is axiomatic that if 'firms' find it difficult to make necessary cuts in nominal wages, they find it even more 'difficult' to make unnecessary cuts in nominal prices.

So what does wage stickiness mean? It means 95 percent of people have slightly higher wages in the short term and 5% of people are unemployed when they wouldn't have been before. Now think about what you are saying again and think about whether your niece wants to role a 20 sided dice for this one.

[2_Thumbs_Up]

Well in a years time I can build a new machine, so no capital is not fixed.

It takes capital to create capital. With a lower interest rate capital is actually diverted from creating new capital goods towards creating consumption goods. So a lower interest rate actually means we will have less capital goods in the future.

You also didn't read my post properly. I said at any point in time. In this very moment the amount of capital is fixed. And the amount will be the same regardless of what the interest rate is. Lowering the interest rate does not create real capital goods and thus cannot create real investments. The interest rate only affects what happens with the capital currently in existance. The interest rate allocates resources to fit with comsumers time preference.

[ababba]

It takes capital to create capital. With a lower interest rate capital is actually diverted from creating new capital goods towards creating consumption goods. So a lower interest rate actually means we will have less capital goods in the future.

You also didn't read my post properly. I said at any point in time. In this very moment the amount of capital is fixed. And the amount will be the same regardless of what the interest rate is. Lowering the interest rate does not create real capital goods and thus cannot create real investments. The interest rate only affects what happens with the capital currently in existance. The interest rate allocates resources to fit with comsumers time preference.

OK, let me ask you a question. The moment everyone learned that Lehman brothers was bankrupt, was capital the same the second before the news and the second after the news or was there a discrete jump in capital?

I know you said at any point in time, but its not a useful distinction if we are modelling the amount of goods or investment in a year.

Honestly, lower interest rates do not have to increase consumption. A basic Micro analysis of income and substitution affects would say the sign could go either way. You get the negative relationship between investment and interest rates from a standard NPV calculation.

[Steven Douglas]

You are trying to act like less than 100 dollars a year is a catastrophic tax on this person and its just not true. I used a high number to prove that its small no matter what. Your response to that is weird, saying that she has less savings.

If you asked me, "Why is she unable to save more", I would point you to my previous post, which explained it in detail without pointing to any tax on currency holdings. Her inability to save more is not being laid at the doorstep of this tax. She is low income. If you eliminated all taxes from her and society, she would still be low income. That much would not somehow fundamentally change, even though the dynamics (all of which are moot) would dramatically change.

Are we at least straight on that much?

Furthermore, if you think I am arguing that something "oughta be done about her low income status", you misunderstand my position and points entirely.


About the idea of real wages, I believe in a free market, not marxist theories of wage determination.

For the record, you are not conversing with a Marxist. I believe in a much freer market than you do, of that I am quite certain. From what I have read, I deduce that you are more of a 'statist', in terms of economics, than a Marxist. I don't want to call it Fascist, because that word has been misused so much and has ad hominem connotations, but the effect really is the same for anyone who reckons economic theory in terms of "what is good for the economy", as if "the economy" really was an entity for which "good", "bad", "harmful", etc., can somehow apply, without being both nebulous and normative. You appear to believe in, and have no problem with (correct me if I am wrong), artificial market controls, so long as they are not Marxist in origin, and that, to you, can be accurately referred to as a "free" market economy.

Where the economy is concerned, I am decidedly anarchistic (and I trust that you understand the meaning of that word in economic, not common usage, terms). I am as vehemently opposed to Marxist theories of wage determination as I would be to any other theories of wage determination which involves the establishment of a governing body of authority with the power to exert artificial force based on an underlying set of governing assumptions. Market dynamics which are manipulated by fiat, in a way that tilts playing fields and artificially determines winners and losers, regardless of its good intentions toward "the economy", can never be accurately expressed as a 'free' market. Else, let's just call a pile of dog crap a rose, given that at least it smells better than wet cat poop.

In a truly free market, wages compete freely like everything else. People are hired, not hired, fired, just as businesses of all kinds rise and fall on their own merits. That is perfectly natural, and there is nothing inherently "wrong" with any of that which requires artificial intervention. That wages can be described in terms of market forces is true, but if they are determined thereby, via any external governing force, then nominal wages can not be considered as freely competing in a "free" market, because somebody, somewhere jumped in with a normative assumption, and made it 'less than free' - regardless of the rationale, which cannot be anything other than normative (toward something, even if it is "the economy" - an anti-libertarian statist position).

I have no problem with free market competition, of both capital and labor, including the concept of winners and losers...so long as they are not artificially determined, deliberately or inadvertently, on the basis of any theory. There is no way to out-clever this principle, any violation of which makes the market something other than 'free'. And that includes that wonderful Fed - that "Supreme Court of Finance" that prints money for Libya.

Oh, and the phenomena of sticky prices and the liquidity trap - I do not view those from the lens of an unfree market where credit and capital are artificially created via some counterfeit wealth-siphoning mechanism - like a central bank that oversees fractional reserve lending. Those are crimes in my normative, subjective mind. I do believe in property rights, I do believe in sound money that is not defined as debt. I do not believe that the only way that an economy can exist, let alone thrive, is on the basis of "elastic" currency or credit, let alone a monopolistic fiat currency that ever-expands.


You also diminish substitution as an important phenomena for low income individuals, which I think is a basic misunderstanding of Microeconomics. Substitution is always possible. For example, in the case of gasoline, as prices rise people substitute towards more fuel efficient cars, bicycles or public transportation. If you don't have a city with public trans, people can move to a city that has public transportation. In the case of food, prices never increase at the same rate for different types of foods. If you have flexibility in your diet, you can substitute towards things that are becoming less expensive.

I don't diminish free substitution as an important phenomena for anyone, let alone low income individuals. The ability to make substitutions, forced or otherwise, for all individuals, is the core basis of a free market principle at work at the individual level in any economy, regardless of the governing assumptions of any theory by which it operates.

She can substitute hamburger for steak, and dog food for hamburger if she would like, or felt it was ultimately necessary. Like anybody in any economy can, and does anyway. In China, in North Korea - anywhere on Earth. So what? Is that a rationale of some kind? I fail to see the point you were trying to make.

To the extent that the ability to make free substitutions are channeled, promoted, prohibited or otherwise manipulated by law, however, that market cannot be said to be 'free'. For example, there is one thing she cannot substitute, and that is her medium of exchange. That is a forbidden substitution, based on theoretical assumptions and consequent manipulations and controls that tax and otherwise penalize such substitutions out of the realm of what is economically feasible.

A fiat currency is but one example of a "forced substitution" (a MUCH more powerful phenomenon than mere substitution), no differently than State banks which were taxed literally out of existence so that they would not be in a position to compete with federal banks. That is anything but a 'free' market.

Without the Forced Substitution of a fiat currency, the value of her crumpled fiat dollars, when freely substituted by sound specie in a non-artificially expanding currency economy, could actually, in time, gain in value. But even if it only retained its value, it could, in time, become an actual private accumulation of real capital - real wealth from real productivity that did not rely upon artificial debt instruments, which could, in time, fuel the economy in a way that really is free.

As of now however:


"In the first place, the vast expenditures of the war, the inflation of prices, and the depreciation of currency, leading up to a complete instability of the unit of value, have made us lose all sense of number and magnitude in matters of finance. What we believed to be the limits of possibility have been so enormously exceeded, and those who founded their expectations on the past have been so often wrong, that the man in the street is now prepared to believe anything which is told him with some show of authority, and the larger the figure the more readily he swallows it."
- The Economic Consequences of the Peace, by John Maynard Keynes, pg. 100

[ababba]

If you asked me, "Why is she unable to save more", I would point you to my previous post, which explained it in detail without pointing to any tax on currency holdings. Her inability to save more is not being laid at the doorstep of this tax. She is low income. If you eliminated all taxes from her and society, she would still be low income. That much would not somehow fundamentally change, even though the dynamics (all of which are moot) would dramatically change.

Are we at least straight on that much?

Furthermore, if you think I am arguing that something "oughta be done about her low income status", you misunderstand my position and points entirely.



For the record, you are not conversing with a Marxist. I believe in a much freer market than you do, of that I am quite certain. From what I have read, I deduce that you are more of a 'statist', in terms of economics, than a Marxist. I don't want to call it Fascist, because that word has been misused so much and has ad hominem connotations, but the effect really is the same for anyone who reckons economic theory in terms of "what is good for the economy", as if "the economy" really was an entity for which "good", "bad", "harmful", etc., can somehow apply, without being both nebulous and normative. You appear to believe in, and have no problem with (correct me if I am wrong), artificial market controls, so long as they are not Marxist in origin, and that, to you, can be accurately referred to as a "free" market economy.

Where the economy is concerned, I am decidedly anarchistic (and I trust that you understand the meaning of that word in economic, not common usage, terms). I am as vehemently opposed to Marxist theories of wage determination as I would be to any other theories of wage determination which involves the establishment of a governing body of authority with the power to exert artificial force based on an underlying set of governing assumptions. Market dynamics which are manipulated by fiat, in a way that tilts playing fields and artificially determines winners and losers, regardless of its good intentions toward "the economy", can never be accurately expressed as a 'free' market. Else, let's just call a pile of dog crap a rose, given that at least it smells better than wet cat poop.

In a truly free market, wages compete freely like everything else. That wages can be described in terms of market forces is true, but if they are determined thereby, via any external governing force, then nominal wages can not be considered as freely competing in a "free" market, because somebody, somewhere jumped in with a normative assumption, and made it 'less than free' - regardless of the rationale, which cannot be anything other than normative (toward something, even if it is "the economy" - an anti-libertarian statist position).

I have no problem with free market competition, of both capital and labor, including the concept of winners and losers...so long as they are not artificially determined, deliberately or inadvertently, on the basis of any theory. There is no way to out-clever this principle, any violation of which makes the market something other than 'free'. And that includes that wonderful Fed - that "Supreme Court of Finance" that prints money for Libya.

Oh, and the phenomena of sticky prices and the liquidity trap - I do not view those from the lens of an unfree market where credit and capital are artificially created via some counterfeit wealth-siphoning mechanism - like a central bank that oversees fractional reserve lending. Those are crimes in my normative, subjective mind. I do believe in property rights, I do believe in sound money that is not defined as debt. I do not believe that the only way that an economy can exist, let alone thrive, is on the basis of "elastic" currency or credit, let alone a monopolistic fiat currency that ever-expands.



I don't diminish free substitution as an important phenomena for anyone, let alone low income individuals. The ability to make substitutions, forced or otherwise, for all individuals, is the core basis of a free market principle at work at the individual level in any economy, regardless of the governing assumptions of any theory by which it operates.

She can substitute hamburger for steak, and dog food for hamburger if she would like, or felt it was ultimately necessary. Like anybody in any economy can, and does anyway. So what? Is that a rationale of some kind? I fail to see the point you were trying to make.

To the extent that the ability to make free substitutions are channeled, promoted, prohibited or otherwise manipulated by law, however, that market cannot be said to be 'free'. For example, there is one thing she cannot substitute, and that is her medium of exchange. That is a forbidden substitution, based on theoretical assumptions and consequent manipulations and controls that tax and otherwise penalize such substitutions out of the realm of what is economically feasible.

A fiat currency is but one example of a "forced substitution" (a MUCH more powerful phenomenon than mere substitution), no differently than State banks which were taxed literally out of existence so that they would not be in a position to compete with federal banks. That is anything but a 'free' market.

Without the Forced Substitution of a fiat currency, the value of her crumpled fiat dollars, when freely substituted by sound specie in a non-artificially expanding currency economy, could actually, in time, gain in value. But even if it only retained its value, it could, in time, become an actual private accumulation of real capital - real wealth from real productivity that did not rely upon artificial debt instruments, which could, in time, fuel the economy in a way that really is free.

As of now however:

I don't think you got the point about marxist theories of wages. They tend to view wages as determined by a struggle between owners of capital and owners of labor. A free market economist would say that labor earns its marginal product in a competitive market. The two views are obviously not consistent. The idea that inflation affects real wages is more on the marxist side of things because it doesn't recognize competitive market forces. Marginal product of labor equals real wage. The idea that higher inflation lowers real wages is ridiculous for a free market person to be arguing.

You were trying to say that CPI is understated because of substitution corrections and low income people don't substitute. I was just saying that is clearly wrong, everyone substitutes. The person that decides to purchase 2 apples and 0 oranges after the price of oranges doubles isn't experiencing 50% inflation even if they were initially consuming 1 apple and 1 orange. The increase in their fruit basket price index is less than 50%. It doesn't matter whether she substitutes from steak to hamburger or hamburger to steak, inflation statistics with a fixed basket will be biased in either case.

And I'm trying to keep it a positive economics discussion for the most part. I can talk about what the affects of each policy is without taking a position on which policy is best.

[Steven Douglas]

I don't think you got the point about marxist theories of wages. They tend to view wages as determined by a struggle between owners of capital and owners of labor. A free market economist would say that labor earns its marginal product in a competitive market. The two views are obviously not consistent. The idea that inflation affects real wages is more on the marxist side of things because it doesn't recognize competitive market forces. Marginal product of labor equals real wage. The idea that higher inflation lowers real wages is ridiculous for a free market person to be arguing.

I caught it. Artificial decrees to the contrary notwithstanding, labor does earn its marginal product on a competitive market, and can be likened to a perishable commodity, one that competes on the open market with any other like commodity.

The Marxist "labor vs. capital" struggle is strictly protectionist, and anti-free-substitution. They want their normative "fair share"...of artificial manipulations and protections from free market competition, no differently than so many non-free-market-protectionist capitalists exercise in our so-called "free market" economy (which I will argue is anything but).

Let's expand this, however, and look at it from a different, but completely related, perspective.

Many people have no difficulty realizing that Fascism vs. Socialism is a false choice. Those opposed to socialism can quickly point out that there are alternatives. However, most will fall into the trap of examining only the differences between these two. As such, they are often mistaken for opposites, and summarily placed on opposing ends of a false choice spectrum, without realizing that what these ideologies have in common, and fully agree upon as valid principles, is far more important than what distinguishes them from one another.

SOCIALIST/PROGRESSIVE: The state should intervene and control everything for the gud uv da peephole...
FASCIST/STATIST: The state should intervene and control everything for the good of the team....
CHORUS: "...and that's why liberty, individual property and freedom of choice do not exist as rights, except as limited and governed by the above."

In this context, it is very clear that these are not at all on opposite sides of one very important spectrum where other [unnamed] opposites exist on the other side. They are actually one and the same in principle, despite their stated motives. In both cases, the State must intervene, ostensibly "for the good of something", winners and losers will be artificially and subjectively determined on that basis, and fundamental rights exist only as qualified and reckoned by those very subjective governing assumptions of motive and intent.

This leads me to one of the core problems that I see with our so-called "free market" economy, and what I see as the grave fallacy of statist economists, who really, honestly believe that they are for "a free market", because their motives, intents, and a priori assumptions serve as a rationale for massive state-sanctioned controls and interventions, and only because they believe that they are "good for the economy", without realizing that this is really no different, in principle, than what socialists want to do, only from a different spigot, and for differently stated reasons.

That is PRECISELY the brilliance of the Fed design, I believe, and one of the secrets to its longevity, as it is so vociferously defended, from the left and the right, by people of absolutely opposing political ideologies.

ALL AD HOMINEM: (not attacks on you, just positive interpretations of motives)

PROGRESSIVE: The Fed should intervene because property rights do not exist anyway, the collective wealth of the world belongs to the collective peephole, and the ability to tax, invisibly and without consent or representation, is fundamental to, and essential for, the advancement of progressive collectivist ideals.
STATIST: The Fed should intervene because without an elastic debt mechanism, in the form of a counterfeit currency that is funded by value which is siphoned from the public wealth at large, we would be required to risk our own capital, and the private accumulation of capital outside the banking system would eventually grow so large that it would compete with, and therefore be a threat to, banking's greatest profit channels, if not existence.
CHORUS: "...and that's why liberty, individual property and freedom of choice do not exist as rights, except as limited and governed by the above."

The irony of it is this little Mexican Standoff: Deficit spending and fractional reserve lending both slop from a "common" wealth trough. So long as the well is flush, and the sheep are not shorn so deeply as to nick their skins, all is well, and the market is always allowed time to reach equilibrium. However, the capacity of the wealth-siphoning machine is not infinite, and sometimes one side cannot act without affecting the other in ways that are palpable. When taken to extremes, insanely out of control deficit spending really does interfere with the ability, long and short term, to further expand credit. And vice versa, out of control expansion of the money supply through commercial credit can interfere with the government's ability to engage in both deficit spending (and taxing, for that matter).

In short, while some are both Progressive and Statist in their thinking, most lean firmly on one side or the other. Most of these would like to keep the Fed machine going, in some form or another, while amputating, or severely curtailing, the part that interferes most with what they believe is its most "logical" (appropriate) purpose.

Many Progressives would, if they could, eliminate the commercial bank's siphoning side altogether, reasoning that this can be handled by government at a much cheaper costs with much greater control, and in a way that is "answerable to da peephole". In other words, make the Fed truly Federal (because, doncha know, privatization is evil anyway - we tried that and it didn't work)...yada yada, heard it all a million times.

Many Statists would, if they could, eliminate the government's siphoning side altogether, reasoning that deficit spending is damaging to the economy, and interferes with the free market. The government should establish a budget and live within that budget. If it wants to increase revenue, it can do so by substitution - i.e., normal channels, like raising and lowering taxes, changing laws, loopholes and regulations that are more favorable to commerce...yada yada, heard it all a million times...

And you know what? I predict that this standoff will not last indefinitely - that the Progressive side will win - as the statist's monster goes global without the statists. Why do I believe that? The Progressive side, history has proved, can cause catastrophic damage to the entire system, and when that happens, people don't turn to bankrupt entities, which they always thought were corrupt anyway, for help. They turn to government - even if they think that government is completely corrupt.

[ababba]

I caught it. Artificial decrees to the contrary notwithstanding, labor does earn its marginal product on a competitive market, and can be likened to a perishable commodity, one that competes on the open market with any other like commodity.



Wait so you are saying there are a bunch of people out there earning below their marginal product and no firms want to hire them at higher wages? Why are firms so stupid in your interpretation?

[Steven Douglas]

Wait so you are saying there are a bunch of people out there earning below their marginal product and no firms want to hire them at higher wages? Why are firms so stupid in your interpretation?

I know, go figure. Brain farts?

[ababba]

I know, go figure. Brain farts?

I was wondering how you can believe that and still believe markets are competitive. That wasn't really an explanation.

[MJU1983]

Tom Woods just posted this:


I offer some advice when it comes to sitting in a mainstream economics classroom.

Reader Asks: How to Challenge My Professor? | TomWoods.com (http://www.tomwoods.com/blog/reader-asks-how-to-challenge-my-professor/)

[MJU1983]

This video was posted as a comment:


http://www.youtube.com/watch?v=6e_8H7E3cTo
http://www.youtube.com/watch?v=6e_8H7E3cTo

[Becker]

Is he explicitly Keynesian, or just pro-status quo, anti-"theory only"?