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Rafi
12-01-2011, 03:30 PM
My attempt to digest the whole economic argument into a case study. What do you guys think?

http://settlersofsamaria.org/keynesian-hubris-man-as-an-economic-god/

Here’s the difference between Keynesian economics and Austrian economics illustrated by example. Austrian economics believes mistakes (money put in the wrong place, aka “malinvestment) have to be paid for by loss of that money. Government, or man, cannot stop the loss of money by mistakes being made. For Austrians, money is real, like gold or silver. Paper money is only representative of gold or silver that exists somewhere, and therefore cannot be wasted on buying mistakes.

Keynesian economics believes that mistakes (money put in the wrong place or “malinvestment”) can be bought by government so no one loses money. Money is created by government by the word of government and paper money represents nothing. Government, therefore, can fix any mistake at any price, and man becomes God of the economy.

Let’s do a case study. Let’s say you need $10. So you sell a piece of paper, a bond, a contract, for $10 to someone that says you owe him$11 one year from now. You now have a $1 deficit and he has $11 in the form of a piece of paper, or a bond, that says you owe him $11 in a year. Let’s say you take his $10, invest it in a business in the private sector that produces, I don’t know, a revolutionary kind of cheese. The business succeeds and gives you back $12 from your original $10, selling the cheese for $15. Then you take that money the cheese company gave you, give $11 of it back to the guy you owe $11 to, and you’re up $1, he’s up $1, the cheese company is up $3, and the cheese people can make their cheese thanks to your $10 investment. Everyone wins. The new money is printed up for the Keynesian, the gold or silver is taken out of reserve for the Austrian. In such a case, the Keynesian is actually better off, because he doesn’t have to find actual gold to back up the new dollars created by the good investment in cheese. If every investment worked out, Keynesian economics would be a great system. Unfortunately, reality does not work this way.

Now, let us suppose that you borrow $10 from a guy who is expecting $11 back in the same way. You take that $10 and hire (purchase) a guy who sits at a government desk filling out unnecessary forms. This is called a “government job” in the “public sector”. He produces no wealth, no cheese he can sell for more money, and just eats up your $10. Now you still owe $11 to the bondholder, but you have nothing. Keynes says, “Print up $12!” So you print it, give $11 to the bondholder, and pocket $1. Well, it looks like everyone wins, but nothing was actually created, so it now takes more money to buy the things that the bondholder was going to buy with his $11 because there are less things of value in the world and more “money” to buy those less things with. He now really only has $9.

The Austrian, in such a case, says that the bondholder should lose his $10 instead of be paid $11 in money off the presses. This keeps the money supply constant, and it requires people to pay for their mistakes and try not to repeat them again.

Since there are mistakes made in this world, those mistakes must be paid for, whether in inflation or loss of investment. Keynes runs to the presses at this point, so all the mistakes made in the world are paid for by ordinary people whose money is affected when the government prints money to paper over mistakes.

If Austrian economics ran the world, the people who made the mistakes would take all the losses, and the people who saved money would be unaffected.

Once government pays for all mistakes, or “bails you out” then people become more encouraged to continue making mistakes. The more mistakes made, the less value there is on the planet, and the more poor people there are. Keynes just spreads the pain around to everyone, 99% of whom do not deserve the pain because they didn’t make the mistake.

Austrian economics clears debt whenever it cannot be paid and takes small losses as they come. Those who made the mistakes are wiped out and must start over, and the rest of society keeps building and creating wealth.

Keynes covers up all mistakes by printing the money to make it look like the mistake doesn’t matter. Keynes hopes to pay for the mistakes through “growth” meaning Keynesians hope that at some point, people will make much less mistakes and eventually pay for the mistakes made in the past by making really good investments in the future. But train people to rely on government to print money in response to mistakes, and they won’t ever make good decisions to pay for past mistakes. So debt goes up and up and up and governments need more and more and more money to cover up the mistakes until at some point, money itself is not trusted as a medium of exchange.

At some point along the way, the big piling mistake that the Keynesians keep piling and piling overflows, and all the pain stored up in that giant pile (aka a “keynesian bubble”) is released in one big wave leading to absolute disaster.

We just saw a bout of “global easing” by central banks (read: money printers) around the world. That means they’re printing more money to paper over the mistakes. The markets skyrocketed because now there’s more money to put into the system. But that money represents no new created wealth at all. It’s just existing wealth more diluted.

At a certain dilution, it just loses all meaning. And that’s when the crash happens. No one knows what dilution is the tipping point. But it’s getting closer, fast.

Unknown.User
12-01-2011, 03:44 PM
Rather than argue over the merits of whether or not in principle the government should intervene in economic affairs, ask a less controversial question.

When the Federal Reserve enacts policy, it does so under the assumptions:
1. There exists an economic problem which can be corrected through enactment of policy.
2. The policy which will correct the initial problem will not source any further problems.
3. Should the policy no longer be needed, it can be undone.

There are several issues we should have with those assumptions.
1. Firstly, what does it mean for there to be an economic problem? Every economic situation invariably benefits some and harms others. Which group of people should be protected against "economic problems" and which should not?
2. Secondly, the law of unintended consequences states that we can usually never fully understand the effect of a policy will have until it is enacted. The unintended problems that arise from a policy may then need to be addressed by further policies resulting in a vicious cycle of patchwork.
3. Thirdly, it is always easier to enact policy than to remove it. The historical context in which policies are enacted is quickly forgotten and rather than risk destabilizing systems policy makers leave policies in place and build on top of them.

"More than any other American, Friedman, who won the Nobel Prize in economics in 1976, clearly warned the world about the unintended consequences of big government."

http://www.newsmax.com/Stossel/MiltonFriedman-PBS-FreetoChoose-FoxBusiness/2010/06/09/id/361492

Travlyr
12-01-2011, 04:11 PM
Keynesian - Counterfeiting is dishonest. Counterfeiting is impossible to maintain without a monopoly. Therefore counterfeiters must seek and destroy all competitors using violent means of initiating aggression for imprisonment or death. That is the economy we have as we know it. It is based on perpetual debt. That has been our economy since the counterfeiters took over the economy with the Federal Reserve Act of 1913.
Milton Friedman was a total obfuscation actor and a very good one at that.

Austrian - Sound money is honest. Sound money is acquired through competition and therefore is mostly peaceful and productive. Many of our ancestors enjoyed peace and prosperity through a vibrant laissez-faire free-market economy because they did not have to face the violent counterfeiters on an everyday basis. Sound money is based on assets.
Ludwig von Mises was a truth teller and a very good one at that.

Unknown.User
12-01-2011, 05:34 PM
"Milton Friedman was a total obfuscation actor and a very good one at that."
-Travlyr

I must disagree with you on this point. Having listened to many speeches and debates involving Friedman I was left with the impression that he is a very deep thinker. He may come off as confusing initially since he often attempts to present supporting arguments for both sides of a debate, however he does so to emphasis that one position is capable of either countering or at least withstanding the message of the other position.

Ron Paul on Milton Friedman:
"Milton Friedman was a strong advocate of economic liberty who opposed government intervention in both the purely economic and broader social spheres of our society. He believed not only in laissez-faire capitalism, but also the larger cause of individual liberty in the political sense."

http://www.lewrockwell.com/paul/paul352.html

Travlyr
12-01-2011, 08:48 PM
Milton Friedman for most of his career was a supporter of the Federal Reserve System. Since he was a privileged insider during much of his career, then he may not have understood just how horrible the central bank is to people who are not insiders. That is why I called him an obfuscation actor. Milton Friedman was a very intelligent man, great speaker, and highly influential, so it is too bad that his legacy was one of tyranny rather than liberty.

joshnorris14
12-01-2011, 08:52 PM
Doesn't touch on business cycle theory nearly enough. That's the clearest empirical evidence we have that Keynesian economics fails.