I will reprint a review of Keens book from 2003(Review of Austrian Economics), for a variety of reaons mainly that it is not well known.
Steve Keen (2001) Debunking Economics, Annandale, NSW, Australia: Pluto Press,
335 + ix pp., $27.50
Debunking Economics is a bold attempt to shake the foundations of the neoclassical
economic mainstream. Embarking on this review, we had suspected we might find large
areas of agreement with a fellow apostate. However, Keen’s work suffers from many of the
very faults of which he accuses the mainstream. The most troublesome is that Keen’s work
is quite frequently ideologically motivated, even while criticizing neoclassical practitioners
for ideological economics. In the end we find it a brave but flawed effort to dethrone the
current economic orthodoxy.
Methodological Holism Versus Methodological Individualism
Keen demonstrates that many attempts to aggregate quantities applying to individuals, so
as to come up with a measure for “society’s utility” or “society’s indifference curves,” lack
coherence. Fair enough. But the conclusion he draws from that fact is an ideological one.
After pointing out the flaws in certain aggregate measures, Keen says, “society must exist
as an entity in its own right” (p. 40). But that doesn’t follow from his argument; indeed,
we would say Keen hasn’t taken the argument far enough. “Social utility” is a meaningless
concept, period, and so it is not surprising that (as Keen shows) it cannot be calculated from
individual utilities.
“Society” is one of many useful concepts with which individuals comprehend their world.
It is true that there are many aspects of individual experience from which we can usefully abstract a social aspect. But it is purely metaphysical speculation to imagine that an abstraction
from individual experience exists apart from the individual experience itself. (Ironically,
Keen immediately follows the quote above with a criticism of the mainstream for its “unscientific nature.”) As we see it, society is a network of practices, practices whose existence
is entirely dependent upon their being subscribed to by individuals.
Keen goes on to say, “society is something more than the sum of its individual members”
(p. 47). Keen believes that his truism explodes the economist’s traditional “atomistic”
method of focusing on the individual (e.g. p. 261 and p. 306). But this doesn’t follow at
all: All “social” outcomes are the composite of individual actions, even if such actions
are influenced by the existence of others. One does not show the limitations of physics by
pointing out the influence of The Communist Manifesto.
The idea of society as an independent being above and beyond its members is, of course,
a key element in many collectivist ideologies. Keen, in reaching conclusions that do not
follow from the arguments he presents, is letting his ideological slip show.
Mathematical Economics
Keen’s critique of mathematical economics is emblematic of the book as a whole: he
takes many shots at the mainstream, and some of them hit the target. For instance, we
think his suggestion that mathematical economics pursue research in dynamic systems and
simulations is sound.
We especially liked the discussion (pp. 178–183) of dynamic versus static models, and the
example of a dynamic system with multiple, unstable equilibria that nonetheless oscillates in
the neighborhood of those equilibria. We feel this is a good metaphor for the real economy,
which possesses what may be called equilibrating forces—forces that keep the economy
from going too far “awry”—but never actually achieves equilibrium. As Keen puts it, “rather
than equilibrium being where the action is, equilibrium tells you where the model will never
be” (p. 183).
In addition, Keen does a good job in highlighting some of the contradictions at the heart
of the theory of perfect competition. The elementary problem with the theory is that rather
than employing the limit analysis implicit in its equations to examine conditions as perfect
competition is approached, analysis proceeds as if the system were at its limit, leading to
various conundrums.[1]
Keen offers a clever analogy to explain the problem: one can “prove” that the Earth
is flat if one is allowed to treat the tiny local deviations from flatness as non-existent
(p. 86). All of these contiguous, flat segments of the Earth must yield a flat Earth as
well.
In fairness to Keen, we note that he is willing to follow his theorizing even when it
leads him onto ideologically foreign territory. Keen, who clearly sees himself as more
interventionist than his neoclassical colleagues, here attacks an argument for anti-trust
laws. And Keen admits that the neoclassical mainstream follows their own logic to argue
for intervention to control monopolies.
However, in his zeal to attack mainstream economics, Keen often overshoots. After
“debunking” the notion that the production of a firm is constrained by rising marginal
costs, Keen asks what does constrain a firm’s production? Quite oddly, his answer is “rising
marketing and financing costs” (p. 73). But those are rising marginal costs themselves!
Keen has fallen prey to the fallacy, exposed by Mises ([1949] 1998:319), that there is any
important economic difference between “production costs” and “sales costs.”
The Uniqueness of Labor
His ideological bias is epitomized in Keen’s analysis of labor. He repeats the clich´e that
labor is a unique commodity, and is therefore exempt from the traditional laws of supply
and demand (pp. 111–112).
But there is nothing to distinguish the supplier of labor (who ceteris paribus prefers
leisure) from a supplier of wood pulp (who ceteris paribus prefers the beauty of his virgin
forest). The fact that the laborer depends on his wages for sustenance is irrelevant, since all
sellers of commodities use their income to obtain life’s necessities. (After all, couldn’t the
proverbial “bond coupon clipper” claim that she is “forced” to accept whatever interest rate
prevails on the market, since she relies on her coupons to eat, and is therefore also subject
to “exploitation”?)
Keen (2002a) argues that there truly is a difference, since the supply of labor is fixed
at 24 hours per day, while the sellers of other commodities can increase their output. But
this rejoinder relies on the very same assumptions of convenience that Keen ostensibly
abhors. The short-run supply of trees is just as fixed as the short-run supply of labor hours;
the owner of a forest can’t cut down more trees today than are standing on his property.
Furthermore, Keen’s model of labor is every bit as unrealistic as the neoclassical model of
firm production (which Keen ridicules). In truth, a person’s body is a machine that produces
a variable amount of “service,” just as a plot of land can be cultivated intensively to squeeze
more trees out (at future cost). A worker certainly cannot supply 24 hours of labor per day
for any extended period.
We thus see that Keen’s attack on the mainstream, “apologist” belief in wages equaling marginal productivity, is unfounded. Like his orthodox opponents, Keen has used
a simplified model that yields the conclusion (labor is exploited by capitalism) that he
wants.
Heterodox Schools
Keen includes interesting sections on various heterodox schools, including Marxism, evolutionary economics, complexity theory, Post-Keynesian economics, Austrian economics,
and Sraffian economics. He seems to come down on the side of evolutionary economics as
having the most promising future (p. 311).
Keen has an excellent discussion of Marx’s labor theory of value (pp. 278–295), in which
he demonstrates that it is not even internally consistent. However, Keen instead posits a
real-cost theory of value, ignoring the Austrian insight that costs themselves are subjective.
He never addresses the theory of subjective value, but instead baldly states the somewhat
stunning proposition that “the subjective utility of the buyer and seller are irrelevant to the
price” (p. 273). What in the world could Keen mean? If one just drives one’s cost in making
mud pies high enough, one can charge an arbitrarily high price for them?
Keen is not unsympathetic to the Austrian School, but it does not seem to us that he fully
understands it. For instance, Keen gets the posited effect of interest rates on the “roundaboutness” of production backwards. (Keen has later acknowledged that the section is in
error [2002b].) He is also wrong in implying that the Austrians depend on an equilibrium
analysis of returns to factors of production to defend distribution in the market economy.
(In fact, the Austrian analysis of the return to entrepreneurs relies entirely on disequilibrium
conditions.)
Furthermore, Keen’s debunking of the “equilibrium always” view of Say’s Law does not
refute Say’s Law (pp. 189–199), but only an equilibrium-always treatment of it. The work
of Mill et al. (see Hazlitt, [1960] 1995) show that Say’s Law is perfectly sound if seen
as expressing a prevailing tendency in the market economy, rather than as an equilibrium
relationship that always holds true.
Keen concludes that the Austrian school is “too close to its neoclassical cousin to make a
major contribution to reformed economics.” But, in at least one fundamental critique, that
of the limitations of all formal modeling of economic activity, the Austrians are further
from the neoclassicals than any of the other schools Keen discusses.
Despite our criticisms, we are glad Keen wrote the book, and glad that we had the chance
to read and review it. Keen is raising important questions, even if we cannot go along with
him on all of his answers.
[1] By way of illustration: The limit of 1/n as n approaches infinity is zero. But we cannot assume that 1/n iszero, because then we get nonsense like n ∗ 1/n = 0!
References
Hazlitt, H. (Ed.) ([1960] 1995) The Critics of Keynesian Economics. Irvington-on-Hudson, NY: The Foundation for Economic Education.
Keen, S. and Murphy, R. (2002a) E-mail discussion of March 23 archived at: http://maelstrom.stjohns.edu/
CGI/wa.exe?A2=ind0203&L=hayek-l&P=R21116.
Keen, S. (2002b) E-mail discussion of March 18 archived at: http://maelstrom.stjohns.edu/CGI/wa.exe?A2=ind0203&L=hayek-l&P=R13866&D=0&H=0&O=T&T=1.
Mises von, L. ([1949] 1998) Human Action. Auburn, AL: Ludwig von Mises Institute.
Robert P. Murphy
New York University
Gene Callahan
Ludwig von Mises Institute
onsdag 26. desember 2012
mandag 24. desember 2012
Minsky: a Keynesian Sockpuppet
This is a decent post by a former teaching assistant to Minsky, Eric Falkenstein. He sums up why Keynesianism is discredited:
"Economists did not abandon Keynesianism because they are capitalist dupes, rather, it was inconsistent, generated poor models of economic growth, and it neglected the micro economic factors that make all the difference between a North Korea and South Korea: free markets, property rights, decentralized incentives. A Keynesian thought he could steer the economy via two controls, the budget deficit and the Fed Funds rate, and indeed in the short run these are very powerful tools, but in the longer run, rather unimportant." - Minsky a Keynesian Sockpuppet
"Economists did not abandon Keynesianism because they are capitalist dupes, rather, it was inconsistent, generated poor models of economic growth, and it neglected the micro economic factors that make all the difference between a North Korea and South Korea: free markets, property rights, decentralized incentives. A Keynesian thought he could steer the economy via two controls, the budget deficit and the Fed Funds rate, and indeed in the short run these are very powerful tools, but in the longer run, rather unimportant." - Minsky a Keynesian Sockpuppet
Kirzner on Joan Robinson & "Perfect competition"
Post-Keynesian usually make a great deal of and almost set up a false dichotomy of "Post-Keynesianism" vs Neo-classicism, when in reality the view of equilibrating being a process was alot better known pre-Keynesian revolution.
Entrepreneurship was the hallmark feature of classical economists such as Say and others, and many textbooks included this. It was only until the harmful influence of such writers as John Maynard Keynes, Paul Samuelson, Joan Robinson and others that aggregative and the purely British walrasian view of economics dominated completely. They were of course critiquing it, but in critiquing it they went to far and dropped all nuances of different authors.
"AEN: But if a neoclassical economist told his class about Kirzner's theory of entrepreneurship, that would be an improvement.
[Israel] KIRZNER: Certainly, given today's rigid environment. Once, however, I gave a talk on the Austrian view of the market process, and the late Abba Lerner was there. He said that what I was calling the Austrian view is precisely what he had been taught in school and had long accepted. I'm sure it's true. The perfectly competitive model was never dominant in neoclassical economics until E.H. Chamberlin and Joan Robinson brought us imperfect competition. Then, they retroactively attributed perfect competition to those that preceded them."
The book is called "The Economics of Imperfect Competition"(1933) and "The Theory of Monopolistic Competition" (1933).
Entrepreneurship was the hallmark feature of classical economists such as Say and others, and many textbooks included this. It was only until the harmful influence of such writers as John Maynard Keynes, Paul Samuelson, Joan Robinson and others that aggregative and the purely British walrasian view of economics dominated completely. They were of course critiquing it, but in critiquing it they went to far and dropped all nuances of different authors.
"AEN: But if a neoclassical economist told his class about Kirzner's theory of entrepreneurship, that would be an improvement.
[Israel] KIRZNER: Certainly, given today's rigid environment. Once, however, I gave a talk on the Austrian view of the market process, and the late Abba Lerner was there. He said that what I was calling the Austrian view is precisely what he had been taught in school and had long accepted. I'm sure it's true. The perfectly competitive model was never dominant in neoclassical economics until E.H. Chamberlin and Joan Robinson brought us imperfect competition. Then, they retroactively attributed perfect competition to those that preceded them."
The book is called "The Economics of Imperfect Competition"(1933) and "The Theory of Monopolistic Competition" (1933).
fredag 21. desember 2012
Austrians predicted the Housing Bubble - "Lord Keynes" lies again
The blogger Lord Keynes has attempted to show that Austrians did not predict the housing bubble, that it doesnt matter and that Post-Keynesians predicted it (better or something). In it he employs lies, fallacies and hides information from his readers.
1. Dean Baker recognized the Housing bubble (Fallacy)
That is correct, and even earlier Fred Harrison recognized the housing bubble in 1997. And he is Georgist (meaning a free-marketeer who makes an exception for land). This is fallacy because it is not a proper argument that shows why specific Austrians did not predict the bubble.
This is a fallacy that runs through the whole article, "Austrians didnt predict the housing bubble because other predicted it later or at the same time". And he also refers to these people as ordinary "Keynesians", which is a mislabeling. Minskyites are essentially Austro-Keynesian, whether their political ideology likes it or not.
Anyway, I will critique Dean Bakers analysis later.
2. Socialists recognized a Housing Bubble (Fallacy)
"Now does anyone seriously think that these correct identifications of an asset bubble in housing vindicates the Marxist theory?"
True, but the aforementioned articles linked to by Socialdemocracy21st do not show and nor do the socialist/marxist have a theory that explains how credit causes cycles, so they basically cannot account for this fact.
3. "Identifying a housing bubble after 2003 is not a prediction" (Fallacy):
"It is obvious that Austrians identifying a housing bubble from 2003–2004 onwards should not regarded as having any special predictive power. They were merely identifying an on-going phenomenon. It is, furthermore, notable that when some Austrians identified a housing bubble in the first half of 2002, so too did the Keynesian economist Dean Baker.
We must remember that any “predictions” after 2002 are not even predictions at all: they represent people identifying an existing asset bubble that was becoming worse."
By the same token then, any "predictions" by Keen, Hudson etc. are not "predictions". Furthermore, all predictions after 1997 are also just "identifying an on-going phenomenon" since Harrison had already predicted it.
Anyway this is wrong, what is being predicted is that the housing prices are unsustainable and that an oversupply of houses are building which will lead to a quick drop in housing prices, and trigger an economic recession.
The fact is that it is usually identifying an on-going phenomenon such as a bubble, that is hard to do. Which asset class is bloated ? No, formula or scientific theory exists to accurately predict this.
4. Critique of Ron Pauls predictions (Misinformation)
"
Well, the FED responded by aggressively lowering interest rates, that can postphone recessions and price bubbles from crashing. Instead of the housing market crashing, the stock market bubble collapsed, and basically Ron Paul got the timing wrong. Only the stock market bubble burst.
But here Lord Keynes is deceiving his audience, he ignores the fact that Ron Paul made several predictions on the housing bubble:
"The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing.
Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged overinvestment in housing." - Paul, Ron, 2002. Testimony to U.S. House of Representatives
"The Federal Reserve must stop inflating the currency merely for the purpose of artificially lowering interest rates to perpetuate a financial bubble. This policy allows government and consumer debt to grow beyond sustainable levels, while undermining incentives to save. This in turn undermines capital investment while exaggerating consumption." - The Coming Category 5 Financial Hurricane, Dr. Ron Paul, September 15 2005
"The Fed tries to keep the consumer spending spree going, not through hard work and savings, but by creating artificial wealth in stock markets bubbles and housing bubbles. When these distortions run their course and are discovered, the corrections will be quite painful." - What the Price of Gold is Telling Us, Dr. Ron Paul, April 25 2006
There are almost endless quotes like this, so I will stop here.
Furthermore, Ron Paul focuses on Fannie Mae & Freddie Mac, which in themselves were the biggest bubbles of them all.
5. William Andersons predictions
He shows that Anderson talked about a mini-boom and a stock market bubble. We did have a stock market bubble and a big boom. I agree that Anderson did not pinpoint housing, even though I feel that is a hatchet requirement that "Lord Keynes" addded in.
I take issue with this statement though:
"Unfortunately, it was the deregulated financial sector that was the main cause of the 1990s and 2000s bubbles."
Unfortunately, the existence of the FED, FDIC, and a plethora of federal and state agencies that delineate rules for banks, brokers, stock exchanges etc. preclude anyone from claiming that it is "deregulated".
One can talk about changes in regulation, but not such a sector being deregulated or unregulated.
6. Recognizes correct Austrian predictions but makes bad arguments
He reviews another Ron Paul prediction (4), Gary North prediction (6) whilst not having read it, Hans Sennholz (9). He makes two arguments against these correct predictions, again that Dean Baker has also predicted it and that several of them argue there is a bubble in US treasuries.
Now US treasury rates have not risen, and Post-Keynesians(atleast MMTs and Minskyites) have pretty much staked their theory on them not rising and they did rise immensely in the crisis but have since fallen. A caveat here is that the FED has been supporting that market immensly, so when rates rise we shall see who is really right.
7. His flawed conclusion from this (Misinformation)
"When we review the various alleged Austrian “predictions” of the 2000s housing bubble most of them collapse. Of the eleven claims made, six (54%) do not even identify the housing boom, and certainly do not predict any such thing. Two (18%) identify the bubble, but after Dean Baker did (in August, 2002)."
He has not really shown this, he is simply selectively chosing an arbitrary year to cut off reading predictions.
8. What about after 2003 ? (Lie)
"The Austrians showed no great predictive power in 2003 or afterwards in identifying the bubble and the economic effects of a crash."
This is wrong, here is a list of Austrians articles predicting the housing bubble that Bezemer (himself a follower of Keen) has not even tried to review:
"Paul Kasriel(http://www.ntrs.com/library/econ_research/daily/us/dd040805.pdf /
http://www.ntrs.com/library/econ_research/weekly/us/pc033105.pdf)
Frank Shostak (Housing Bubble: Myth or Reality?) - 2003
James Grant (Un-Real Estate)
Christopher Mayer (The Housing Bubble) - 2004
Robert Wenzel (SUPER ALERT: Dramatic Slowdown In Money Supply Growth /
Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks
Borrowers With Subprime Junk / A Letter to a Friend on the Logic of Real
Estate Investing ) - 2004/2008
Eric Englund (When Will America's Housing Bubble Burst? / Monetizing Envy
and America's Housing Bubble / Houses Are Consumer Durables, Not
Investments)
Stefan Karlsson (America's Unsustainable Boom)
Thorstein Polleit (Sowing the Seeds of the Next Crisis)
Hans Sennholz (The Fed is Culpable)
Mark Thornthon (Housing: Too Good to Be True)
Robert Blumen (Fannie Mae Distorts Markets)
"
So by simply ignoring predictions Bezemer and here "Socialdemocracy21st" reaches the conclusion he wishes. But the picture he paints is even more disingenious, Keen has nowhere predicted the US housing bubble, even though he claims this himself numerous times. I show that here.
9. The claim that "Austrian Business Cycle Theory" does not explain the financial crisis (Lie)
He makes this claim thinly, first be repeating the "natural rate of interest" does not exist and that it does not deal with reckless lending by banks to buy consumer goods and mortgages.
"The Austrian Business Cycle Theory (ABCT) holds that central bank fiat money or fractional reserve banking-induced increases in credit (unbacked by commodity money) drives down the monetary rate of interest, causing it to go below the Wicksellian natural rate of interest. This causes malinvestment in capital goods sectors. However, the unique Wicksellian natural rate of interest does not exist, and is a pure fantasy (see here and here). The ABCT does not explain or deal with reckless lending by banks to people for mortgages or consumer goods, and nothing about financial or real asset bubbles, and nothing about financial crises. "
This is completely wrong, and all major books on the Austrian Business Cycle Theory deals with just these things.
1. The natural rate of interest is the term used by austrians for the interest rate, if all credit creation were backed by prior savings. Such a rate of interest does exist, if and when all loans are backed by prior saving.
I fully admit that the term carries some unfortunate neoclassical baggage, but this has been dropped in all modern expositions(basically all the ones between 1970-2012).
2. He repeats the claim he has made earlier that since Rothbard does not include inflationary credit buying consumer goods, the ABCT does not hold. But the problem is that many Austrians authors, all the way back to Hayek Prices and Production emphasizes durable consumer goods. I have debunked this claim earlier.
In fact in one of the prediction articles mentioned Eric Englund (an Austrian) emphasizes precisely the point that houses bought for consumption are durable consumer goods and not investments. Which makes them particularly bad investments.
Conclusion
Lord Keynes lies and misinforms his readers about the facts, and disingeniously ignores articles that are precise in their description of the problem.
His numbers were by using Dick Bezemers flawed study:
"So in other words eight (72%) of the eleven made accurate predictions about the bubble and crisis and were non-Austrians. The largest group (45%) were actually Heterodox Keynesians."
If one simply adds the Austrians I know of and have checked (and there are more I have not bothered to include), the numbers become slightly different:
1. Post-Keynesian/Minskyites (22 %): Baker, Godley, Keen and Sorenson.
2. Maverick neoclassical (9 %): Roubini and Shiller.
3. Austrians (68 %): Richebächer, Schiff, Paul Kasriel, Frank Shostak, James Grant, Christopher Mayer, Robert Wenzel, Eric Englund, Stefan Karlsson, Thorstein Polleit, Hans Sennholz, Mark Thornthon, Ron Paul and Robert Blumen.
4. Georgist (4,5 %): Fred Harrison, should get more brownie points for being early.
5. Austrian & Post-Keynesian(4,5 %): Janszen
Total: 22
I will count Janszen as part of both camps and thereby improving the numbers for the Post-Keynesians/Minskyites.
And I have not even removed Keen, who hasnt predicted the US housing bubble and the "Great Financial Crisis", and as I said I didnt even add all the Austrians ( such as Faber, Jim Rogers, William White, Gary Shilling etc.)
Given how Dick Bezemers study is flawed when it comes to Keen, I have not even checked and revised the numbers for these other Post-Keynesians either. It is also curious that he has ignored all academic Austrians, and only included finance analysts with a background in Austrian economics.
This picture is even more dismal when one counts the fact that all universities teach Kindleberger/Minsky view of the crisis when they teach about financial crises, and that they teach traditional Neo-Keynesian economics when they teach macro. Almost no universities(three I believe and scattered individuals) taught Austrians prior to 2009, and they made up about less than 1 % of the academic profession according to Mark Thornthon.
I am not of the opinion that one should use lies and deceit, in order to unseat wrongheaded ideas but "Socialdemocracy21st" is more than willing to do so.
1. Dean Baker recognized the Housing bubble (Fallacy)
That is correct, and even earlier Fred Harrison recognized the housing bubble in 1997. And he is Georgist (meaning a free-marketeer who makes an exception for land). This is fallacy because it is not a proper argument that shows why specific Austrians did not predict the bubble.
This is a fallacy that runs through the whole article, "Austrians didnt predict the housing bubble because other predicted it later or at the same time". And he also refers to these people as ordinary "Keynesians", which is a mislabeling. Minskyites are essentially Austro-Keynesian, whether their political ideology likes it or not.
Anyway, I will critique Dean Bakers analysis later.
2. Socialists recognized a Housing Bubble (Fallacy)
"Now does anyone seriously think that these correct identifications of an asset bubble in housing vindicates the Marxist theory?"
True, but the aforementioned articles linked to by Socialdemocracy21st do not show and nor do the socialist/marxist have a theory that explains how credit causes cycles, so they basically cannot account for this fact.
3. "Identifying a housing bubble after 2003 is not a prediction" (Fallacy):
"It is obvious that Austrians identifying a housing bubble from 2003–2004 onwards should not regarded as having any special predictive power. They were merely identifying an on-going phenomenon. It is, furthermore, notable that when some Austrians identified a housing bubble in the first half of 2002, so too did the Keynesian economist Dean Baker.
We must remember that any “predictions” after 2002 are not even predictions at all: they represent people identifying an existing asset bubble that was becoming worse."
By the same token then, any "predictions" by Keen, Hudson etc. are not "predictions". Furthermore, all predictions after 1997 are also just "identifying an on-going phenomenon" since Harrison had already predicted it.
Anyway this is wrong, what is being predicted is that the housing prices are unsustainable and that an oversupply of houses are building which will lead to a quick drop in housing prices, and trigger an economic recession.
The fact is that it is usually identifying an on-going phenomenon such as a bubble, that is hard to do. Which asset class is bloated ? No, formula or scientific theory exists to accurately predict this.
4. Critique of Ron Pauls predictions (Misinformation)
"
the housing market has been grossly distorted. We can soon expect a major downward correction in the housing industry, prompted by rising interest rates.”Yet it is obvious that Paul is here thinking of a correction of existing 2000 housing prices, not a massive 2000s bubble in real estate and a financial crisis in 2008. The word “soon” strongly suggests Paul was expecting the correction in the next year or two after 2000, as from 1999–2000 the Fed had raised the Federal Funds rate and was widely expected to raise it further in 2000, owing to the dot.com boom. This speech shows no prediction of the 2000s housing bubble."
Well, the FED responded by aggressively lowering interest rates, that can postphone recessions and price bubbles from crashing. Instead of the housing market crashing, the stock market bubble collapsed, and basically Ron Paul got the timing wrong. Only the stock market bubble burst.
But here Lord Keynes is deceiving his audience, he ignores the fact that Ron Paul made several predictions on the housing bubble:
"The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing.
Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged overinvestment in housing." - Paul, Ron, 2002. Testimony to U.S. House of Representatives
"The Federal Reserve must stop inflating the currency merely for the purpose of artificially lowering interest rates to perpetuate a financial bubble. This policy allows government and consumer debt to grow beyond sustainable levels, while undermining incentives to save. This in turn undermines capital investment while exaggerating consumption." - The Coming Category 5 Financial Hurricane, Dr. Ron Paul, September 15 2005
"The Fed tries to keep the consumer spending spree going, not through hard work and savings, but by creating artificial wealth in stock markets bubbles and housing bubbles. When these distortions run their course and are discovered, the corrections will be quite painful." - What the Price of Gold is Telling Us, Dr. Ron Paul, April 25 2006
There are almost endless quotes like this, so I will stop here.
Furthermore, Ron Paul focuses on Fannie Mae & Freddie Mac, which in themselves were the biggest bubbles of them all.
5. William Andersons predictions
He shows that Anderson talked about a mini-boom and a stock market bubble. We did have a stock market bubble and a big boom. I agree that Anderson did not pinpoint housing, even though I feel that is a hatchet requirement that "Lord Keynes" addded in.
I take issue with this statement though:
"Unfortunately, it was the deregulated financial sector that was the main cause of the 1990s and 2000s bubbles."
Unfortunately, the existence of the FED, FDIC, and a plethora of federal and state agencies that delineate rules for banks, brokers, stock exchanges etc. preclude anyone from claiming that it is "deregulated".
One can talk about changes in regulation, but not such a sector being deregulated or unregulated.
6. Recognizes correct Austrian predictions but makes bad arguments
He reviews another Ron Paul prediction (4), Gary North prediction (6) whilst not having read it, Hans Sennholz (9). He makes two arguments against these correct predictions, again that Dean Baker has also predicted it and that several of them argue there is a bubble in US treasuries.
Now US treasury rates have not risen, and Post-Keynesians(atleast MMTs and Minskyites) have pretty much staked their theory on them not rising and they did rise immensely in the crisis but have since fallen. A caveat here is that the FED has been supporting that market immensly, so when rates rise we shall see who is really right.
7. His flawed conclusion from this (Misinformation)
"When we review the various alleged Austrian “predictions” of the 2000s housing bubble most of them collapse. Of the eleven claims made, six (54%) do not even identify the housing boom, and certainly do not predict any such thing. Two (18%) identify the bubble, but after Dean Baker did (in August, 2002)."
He has not really shown this, he is simply selectively chosing an arbitrary year to cut off reading predictions.
8. What about after 2003 ? (Lie)
"The Austrians showed no great predictive power in 2003 or afterwards in identifying the bubble and the economic effects of a crash."
This is wrong, here is a list of Austrians articles predicting the housing bubble that Bezemer (himself a follower of Keen) has not even tried to review:
"Paul Kasriel(http://www.ntrs.com/library/econ_research/daily/us/dd040805.pdf /
http://www.ntrs.com/library/econ_research/weekly/us/pc033105.pdf)
Frank Shostak (Housing Bubble: Myth or Reality?) - 2003
James Grant (Un-Real Estate)
Christopher Mayer (The Housing Bubble) - 2004
Robert Wenzel (SUPER ALERT: Dramatic Slowdown In Money Supply Growth /
Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks
Borrowers With Subprime Junk / A Letter to a Friend on the Logic of Real
Estate Investing ) - 2004/2008
Eric Englund (When Will America's Housing Bubble Burst? / Monetizing Envy
and America's Housing Bubble / Houses Are Consumer Durables, Not
Investments)
Stefan Karlsson (America's Unsustainable Boom)
Thorstein Polleit (Sowing the Seeds of the Next Crisis)
Hans Sennholz (The Fed is Culpable)
Mark Thornthon (Housing: Too Good to Be True)
Robert Blumen (Fannie Mae Distorts Markets)
"
So by simply ignoring predictions Bezemer and here "Socialdemocracy21st" reaches the conclusion he wishes. But the picture he paints is even more disingenious, Keen has nowhere predicted the US housing bubble, even though he claims this himself numerous times. I show that here.
9. The claim that "Austrian Business Cycle Theory" does not explain the financial crisis (Lie)
He makes this claim thinly, first be repeating the "natural rate of interest" does not exist and that it does not deal with reckless lending by banks to buy consumer goods and mortgages.
"The Austrian Business Cycle Theory (ABCT) holds that central bank fiat money or fractional reserve banking-induced increases in credit (unbacked by commodity money) drives down the monetary rate of interest, causing it to go below the Wicksellian natural rate of interest. This causes malinvestment in capital goods sectors. However, the unique Wicksellian natural rate of interest does not exist, and is a pure fantasy (see here and here). The ABCT does not explain or deal with reckless lending by banks to people for mortgages or consumer goods, and nothing about financial or real asset bubbles, and nothing about financial crises. "
This is completely wrong, and all major books on the Austrian Business Cycle Theory deals with just these things.
1. The natural rate of interest is the term used by austrians for the interest rate, if all credit creation were backed by prior savings. Such a rate of interest does exist, if and when all loans are backed by prior saving.
I fully admit that the term carries some unfortunate neoclassical baggage, but this has been dropped in all modern expositions(basically all the ones between 1970-2012).
2. He repeats the claim he has made earlier that since Rothbard does not include inflationary credit buying consumer goods, the ABCT does not hold. But the problem is that many Austrians authors, all the way back to Hayek Prices and Production emphasizes durable consumer goods. I have debunked this claim earlier.
In fact in one of the prediction articles mentioned Eric Englund (an Austrian) emphasizes precisely the point that houses bought for consumption are durable consumer goods and not investments. Which makes them particularly bad investments.
Conclusion
Lord Keynes lies and misinforms his readers about the facts, and disingeniously ignores articles that are precise in their description of the problem.
His numbers were by using Dick Bezemers flawed study:
"So in other words eight (72%) of the eleven made accurate predictions about the bubble and crisis and were non-Austrians. The largest group (45%) were actually Heterodox Keynesians."
If one simply adds the Austrians I know of and have checked (and there are more I have not bothered to include), the numbers become slightly different:
1. Post-Keynesian/Minskyites (22 %): Baker, Godley, Keen and Sorenson.
2. Maverick neoclassical (9 %): Roubini and Shiller.
3. Austrians (68 %): Richebächer, Schiff, Paul Kasriel, Frank Shostak, James Grant, Christopher Mayer, Robert Wenzel, Eric Englund, Stefan Karlsson, Thorstein Polleit, Hans Sennholz, Mark Thornthon, Ron Paul and Robert Blumen.
4. Georgist (4,5 %): Fred Harrison, should get more brownie points for being early.
5. Austrian & Post-Keynesian(4,5 %): Janszen
Total: 22
I will count Janszen as part of both camps and thereby improving the numbers for the Post-Keynesians/Minskyites.
And I have not even removed Keen, who hasnt predicted the US housing bubble and the "Great Financial Crisis", and as I said I didnt even add all the Austrians ( such as Faber, Jim Rogers, William White, Gary Shilling etc.)
Given how Dick Bezemers study is flawed when it comes to Keen, I have not even checked and revised the numbers for these other Post-Keynesians either. It is also curious that he has ignored all academic Austrians, and only included finance analysts with a background in Austrian economics.
This picture is even more dismal when one counts the fact that all universities teach Kindleberger/Minsky view of the crisis when they teach about financial crises, and that they teach traditional Neo-Keynesian economics when they teach macro. Almost no universities(three I believe and scattered individuals) taught Austrians prior to 2009, and they made up about less than 1 % of the academic profession according to Mark Thornthon.
I am not of the opinion that one should use lies and deceit, in order to unseat wrongheaded ideas but "Socialdemocracy21st" is more than willing to do so.
Did Keen predict the US housing bubble ? - Dick Bezemers flawed study
I believe that Keens model of the business cycle is basically correct (though some of his interpretation is wrong) and that is simply because it is a rehashing of the Austrian Business Cycle Theory in Keynesian language.
So it doesnt matter to me whether Keen has accurately forecast the global financial crisis or not, if his view of the cycle is correct (and it basically is correct with some caveat to that).
But the dishonest blogger "Lord Keynes"/"Socialdemocracy21st" has made a blog input(several in fact), which I demolish completely here, claiming that Austrians did not in fact predict the housing bubble. Instead he selectively quotes articles until 2003 and when they do predict it properly he simply dismisses them.
But more importantly here, he uses Dick Bezemers study (a post-keynesian) to prove that Keen predicted the US housing bubble and worldwide financial crisis more correct or better or something like that. Similiarly does Unlearningecon, another post-keynesian blogger. But this claim is wrong.
Keen has never predicted the US housing bubble (EDIT: Unlearningecon has pointed me to his debtwatch reports and in april 2007 he starts showing graphs of US debt levels and even though he does not "predict" anything specific, I will accept this is an indication that he was showing that the US would have private credit contraction, but the Bezemer study is still flawed). He has predicted an Australian housing bubble in the article Dick Bezemer refers to. Here is the name: "The lily & the pond".
Here is what Dick Bezemer quotes from him:
"Long before we manage to reverse the current rise in debt, the economy
will be in a recession. On current data, we may already be in one.” (2006)" - Stephen Keen
But here Keen is talking about Australia, and that has not happened yet (5 years, soon 6). His "aggregate demand+change in debt" model has failed to predict accurately. According to post-keynesian methodology this makes the model, unscientific.
I have asked Dick Bezemer whether he has analyzed the following Austrian articles which predict a housing bubble and financial crisis:
"Paul Kasriel
He has not responded yet.
Keen also repeatedly uses this study(in his book[1], website and journal article), and has nothing else to show to (EDIT: He can show to his theory and his graphs of US debts as indications that he understands the problem, but if kept to the same standard "Socialdemocracy21st" holds Austrians to, he hasnt in fact predicted anything correctly).
[1] Debunking Economics, 2011.
So it doesnt matter to me whether Keen has accurately forecast the global financial crisis or not, if his view of the cycle is correct (and it basically is correct with some caveat to that).
But the dishonest blogger "Lord Keynes"/"Socialdemocracy21st" has made a blog input(several in fact), which I demolish completely here, claiming that Austrians did not in fact predict the housing bubble. Instead he selectively quotes articles until 2003 and when they do predict it properly he simply dismisses them.
But more importantly here, he uses Dick Bezemers study (a post-keynesian) to prove that Keen predicted the US housing bubble and worldwide financial crisis more correct or better or something like that. Similiarly does Unlearningecon, another post-keynesian blogger. But this claim is wrong.
Keen has never predicted the US housing bubble (EDIT: Unlearningecon has pointed me to his debtwatch reports and in april 2007 he starts showing graphs of US debt levels and even though he does not "predict" anything specific, I will accept this is an indication that he was showing that the US would have private credit contraction, but the Bezemer study is still flawed). He has predicted an Australian housing bubble in the article Dick Bezemer refers to. Here is the name: "The lily & the pond".
Here is what Dick Bezemer quotes from him:
"Long before we manage to reverse the current rise in debt, the economy
will be in a recession. On current data, we may already be in one.” (2006)" - Stephen Keen
But here Keen is talking about Australia, and that has not happened yet (5 years, soon 6). His "aggregate demand+change in debt" model has failed to predict accurately. According to post-keynesian methodology this makes the model, unscientific.
I have asked Dick Bezemer whether he has analyzed the following Austrian articles which predict a housing bubble and financial crisis:
"Paul Kasriel
(http://www.ntrs.com/library/econ_research/daily/us/dd040805.pdf / http://www.ntrs.com/library/econ_research/weekly/us/pc033105.pdf) Frank Shostak (Housing Bubble: Myth or Reality?) - 2003 James Grant (Un-Real Estate) Christopher Mayer (The Housing Bubble) - 2004 Robert Wenzel (SUPER ALERT: Dramatic Slowdown In Money Supply Growth / Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks Borrowers With Subprime Junk / A Letter to a Friend on the Logic of Real Estate Investing ) - 2004/2008 Eric Englund (When Will America's Housing Bubble Burst? / Monetizing Envy and America's Housing Bubble / Houses Are Consumer Durables, Not Investments) Stefan Karlsson (America's Unsustainable Boom) Thorstein Polleit (Sowing the Seeds of the Next Crisis) Hans Sennholz (The Fed is Culpable) Mark Thornthon (Housing: Too Good to Be True) Robert Blumen (Fannie Mae Distorts Markets)"
He has not responded yet.
Keen also repeatedly uses this study(in his book[1], website and journal article), and has nothing else to show to (EDIT: He can show to his theory and his graphs of US debts as indications that he understands the problem, but if kept to the same standard "Socialdemocracy21st" holds Austrians to, he hasnt in fact predicted anything correctly).
[1] Debunking Economics, 2011.
Why was Hayek given the Nobel Prize ?
Socialdemocracy21st has another baseless, pretty much mudslinging blogpost claiming that Hayek "didnt" deserve the prize".
He claims two things:
1) That ABCT developed by Hayek is completely wrong (even though basically a watered down version is the Minsky business cycle theory, only 50 years late)
"It is astonishing that one of the two main reasons given for Hayek’s Nobel Memorial Prize was his business cycle theory: for this was precisely that part of his research program that was a clear failure. Hayek never succeeded in creating a monetary theory of the trade cycle that evaded the serious criticisms his opponents levelled against it, which included the non-existence of the Wicksellian natural rate of interest, the role of subjective expectations, and the questionable role of general equilibrium theory in his theory. "
These claims are endlessly recycled on this webpage, so I thought I might critique them shortly.
1) The wicksellian natural rate is simply a representation for what would be the interest rate if no unbacked credit creation took place, or more easily understood if all monies were a commodity.
The fact that there exist no 1 interest rate, does not concern this.
Neither does the fact that futures prices differ, as that has to do with the demand and supply schedules for each product (grains, shares etc.). No "futures" market existed for gold under the gold standard, and gold was the common medium of exchange. Interest rates in a pure gold standard, is thereby the "natural rate".
I admit that the notion of a natural rate as inaccurate modern expositions of the theory, but it does not take away from the essence of the theory.
2) Subjective expectations is not really a useful term. All action is foreward looking, and all goals are subjective. This is basic Austrian ideas, and thereby all actions regarding saving, investment and spending are ALWAYS foreword looking.
3) General equilibrium is used, unfortunately in Hayeks exposition. But that is in Prices and Production, when he was a visiting professor in England trying to teach neoclassically trained economists the Austrian Business Cycle Theory.
Furthermore, he is trying to show how the slump is what is experienced in trying to go from one point, boom phase, to another point, the bust.
The Economic Settings of 1973-74
In over 40 years, the Keynesians led by men like Kaldor, Hansen, Samuelson and Lerner had taught the world that credit expansion was positive as long as one "controlled" price-inflation.
Furthermore they had vigirously attacked the gold and proposed exchanging it for the government paper money. Their Frankenstein was the supposedly "eternal" Bretton Woods System.
After Nixon closed the gold window to avoid devaluation or honest default, largely as a necessity for his upcoming reelection, the world was led precisely into a pure fiat money system. Nixon, had also in the heat of the moment imposed price controls which was mainly advocated by Keynesians and Marxists.
The resulting social chaos made it seem the world was on the verge of breakdown. Furthermore, the enormous boost given to credit expansion and resulting price inflation that the economy contracted and had quickly resulted in a worldwide financial crash in a classical Austrian fashion.
Most Keynesian economists had their models of public control of employment etc. completely shattered and there seemed to be an opening for wheening of the socialist economics of John Maynard Keynes.
The Professor of Economics at Lund University, Ingemar Ståhl, was well-versed in Wicksellian theory and Hayekian business cycle theory. He sat on the board of Nobel Prize in Economic Science and believed he needed to get the Austrian perspective into circulation. Therefore he pushed for and achieved a consensus to award him the prize, given that the worldwide crisis illustrated clearly the correctness of Austrian Business Cycle Theory.
Added: Paul Samuelson also seems to confirm my story:
"Hayek was the seventh to receive the Bank of Sweden’s new Nobel Prize in economics. In my judgment his was a worthy choice. And yet in the 1974 senior common rooms of Harvard and MIT, the majority of the inhabitants there seemed not to even know the name of this new laureate. (By contrast, the following year when I was in Stockholm to celebrate the 75th anniversary of the original five Nobel Prizes, it was my vague impression that the Royal Swedish Academy electors paid greater deference to Hayek than to their own native son Myrdal."
Philip Plikington(supposedly a journalist) and Socialdemocracy launch straight into an attack on Hayek, trying to make him out as a political hack. But in fact it was Myrdal who was the political hack, necessary to avoid the Swedish socialist authorities vicious attacks on a "reactionary"(marxist term for anyone opposing socialism). Because in fact it was very dangerous to be a free-marketeer pre-1980 carriere wise, alot more than being a marxist professor in the US.
Conclusion
Hayek was awarded the prize, because his (ABCT) perspective on the causes of the cycle was shown to be spectacularly correct and because the Keynesian framework was shown to be spectacularly incorrect.
He claims two things:
1) That ABCT developed by Hayek is completely wrong (even though basically a watered down version is the Minsky business cycle theory, only 50 years late)
"It is astonishing that one of the two main reasons given for Hayek’s Nobel Memorial Prize was his business cycle theory: for this was precisely that part of his research program that was a clear failure. Hayek never succeeded in creating a monetary theory of the trade cycle that evaded the serious criticisms his opponents levelled against it, which included the non-existence of the Wicksellian natural rate of interest, the role of subjective expectations, and the questionable role of general equilibrium theory in his theory. "
These claims are endlessly recycled on this webpage, so I thought I might critique them shortly.
1) The wicksellian natural rate is simply a representation for what would be the interest rate if no unbacked credit creation took place, or more easily understood if all monies were a commodity.
The fact that there exist no 1 interest rate, does not concern this.
Neither does the fact that futures prices differ, as that has to do with the demand and supply schedules for each product (grains, shares etc.). No "futures" market existed for gold under the gold standard, and gold was the common medium of exchange. Interest rates in a pure gold standard, is thereby the "natural rate".
I admit that the notion of a natural rate as inaccurate modern expositions of the theory, but it does not take away from the essence of the theory.
2) Subjective expectations is not really a useful term. All action is foreward looking, and all goals are subjective. This is basic Austrian ideas, and thereby all actions regarding saving, investment and spending are ALWAYS foreword looking.
3) General equilibrium is used, unfortunately in Hayeks exposition. But that is in Prices and Production, when he was a visiting professor in England trying to teach neoclassically trained economists the Austrian Business Cycle Theory.
Furthermore, he is trying to show how the slump is what is experienced in trying to go from one point, boom phase, to another point, the bust.
The Economic Settings of 1973-74
In over 40 years, the Keynesians led by men like Kaldor, Hansen, Samuelson and Lerner had taught the world that credit expansion was positive as long as one "controlled" price-inflation.
Furthermore they had vigirously attacked the gold and proposed exchanging it for the government paper money. Their Frankenstein was the supposedly "eternal" Bretton Woods System.
After Nixon closed the gold window to avoid devaluation or honest default, largely as a necessity for his upcoming reelection, the world was led precisely into a pure fiat money system. Nixon, had also in the heat of the moment imposed price controls which was mainly advocated by Keynesians and Marxists.
The resulting social chaos made it seem the world was on the verge of breakdown. Furthermore, the enormous boost given to credit expansion and resulting price inflation that the economy contracted and had quickly resulted in a worldwide financial crash in a classical Austrian fashion.
Most Keynesian economists had their models of public control of employment etc. completely shattered and there seemed to be an opening for wheening of the socialist economics of John Maynard Keynes.
The Professor of Economics at Lund University, Ingemar Ståhl, was well-versed in Wicksellian theory and Hayekian business cycle theory. He sat on the board of Nobel Prize in Economic Science and believed he needed to get the Austrian perspective into circulation. Therefore he pushed for and achieved a consensus to award him the prize, given that the worldwide crisis illustrated clearly the correctness of Austrian Business Cycle Theory.
Added: Paul Samuelson also seems to confirm my story:
"Hayek was the seventh to receive the Bank of Sweden’s new Nobel Prize in economics. In my judgment his was a worthy choice. And yet in the 1974 senior common rooms of Harvard and MIT, the majority of the inhabitants there seemed not to even know the name of this new laureate. (By contrast, the following year when I was in Stockholm to celebrate the 75th anniversary of the original five Nobel Prizes, it was my vague impression that the Royal Swedish Academy electors paid greater deference to Hayek than to their own native son Myrdal."
Philip Plikington(supposedly a journalist) and Socialdemocracy launch straight into an attack on Hayek, trying to make him out as a political hack. But in fact it was Myrdal who was the political hack, necessary to avoid the Swedish socialist authorities vicious attacks on a "reactionary"(marxist term for anyone opposing socialism). Because in fact it was very dangerous to be a free-marketeer pre-1980 carriere wise, alot more than being a marxist professor in the US.
Conclusion
Hayek was awarded the prize, because his (ABCT) perspective on the causes of the cycle was shown to be spectacularly correct and because the Keynesian framework was shown to be spectacularly incorrect.
tirsdag 11. desember 2012
Quick reply to a Marxist
I think Marxists should have been extinct in 1950. Not at least after 1990, but oh well unions must have some excuse for their exploitation.
A Marxist called, Zak Drabzyk has tried to critique Hoppe`s class theory.
Some fallacies in Drabzyk argumentation:
"The only way to understand why a person acts is to understand the environment which shapes that action. Thus, time preference can only be seen as a valid explanation if you presume the legitimacy of private ownership."
No, time preference requires presuming time exists. Time would still be scarce in a communist or propertyless society, and people would prefer things sooner rather than later.
"The material conditions of depravity that pressure the laborer to sell his labor-power do not affect the capitalist who owns the means of production (aside from the obvious duty of a capitalist being to produce and sell commodities). The capitalist class is the sole class with any feasible sense of flexibility as they exclusively access the means by which one may subsist. Therefore the statement that “After all, he could also decide not to sell his labor services to the capitalist and then reap the “full value” of his output himself” is utterly nonsensical."
The point is, Zak, that the material "conditions"(I need food, housing, a car etc but they are scarce) arise out of nature not imposed scarcity. Furthermore the whole point is, Marx, tried to claim that because the capitalist didnt physically labor, then he is given an exploitative share. But the worker, could have done manual labor (as many do) directly for customers and thereby reap the "full reward". He would have to be an entrepreneur and worker at the same time (many people, again, exist in this position).
"However, to suggest that capitalism somehow uniquely proposes mutual benefit compared to previous property relations, is ridiculous. Capitalist property relations are mutual only insofar as they allow the capitalist to prosper and provide the worker with subsistence, paid piecemeal."
Two things. Why do free-market economies (not the current West) tend to have rising wages ?
Why not simply "piecemeal" ie. a the least the capitalist has to pay ?
Why are all Hong Kong workers (prior to labor legislation) being paid higher wages than in many other countries(socialist countries and even western countries) ?
Simple, reason is as the capitalist and worker all want as much as possible for as little as possible. The choice(and thereby preferences) each has in choosing each other(that is absent in slavery, feudalism, socialism) creates the lower and higher limit for wages.
He backs this up with quoting Engels:
" The individual proletarian, property as it were of the entire bourgeois class which buys his labor only when someone has need of it, has no secure existence. This existence is assured only to the class as a whole.” – Friedrich Engels, Principles of Communism"
Well, the capitalist engaging in business is also only secured existence if someones buys his product.
On capitalism:
"The truth is much different. The entire system of capitalism is based on a social context, an interrelated conundrum of values and productive units. In fact, exchange value, the locomotive of market interaction, is dependent on society as it is a social expression. This is because the exchange value of commodities is impossible to determine unless contrasted against other commodities."
And where do these exchange values of commodities themselves arise ?
Out of the "subjective valuation", which is largely conclusively proven by the Austrian School (that is why Hoppe does not justify subjectivism in the evaluation of goods).
"Genuine social ownership seeks to empower the worker by including him in a direct control over the product of his labor and the fixed capital he employs."
How can he reasonable own "fixed capital" that he has not produced, bought or not been voluntarily given ? Only through aggression and violence, against person and property.
"as if the property barons of today not only obtained their power through socio-economic coercion (I mean contractual agreement) but also through their own personal saving, producing, or homesteading. Such a nonsensical interpretation of capitalist accumulation really draws Mr. Hoppe’s perspective into question."
Several famous capitalists and many more (unknown) entrepreneurs , have personally produced, saved themselves into wealth. You are not arguing here, you are simply stating things contrary to fact.
"Admitting that the same bourgeois, drawn here as distinguished from the ruling class, are indeed the ruling class, would be catastrophic to Austrian theory. This is, however, the historical truth on the matter. "
The average businessman, is not part of the ruling class. But rather its victims. That is, historical fact. In fact as the state, and its marxist apologists, have been enlarged, the ruling classes domain have been enlarged at the expense of other entrepreneurs.
"The state serves to protect the interests of the capitalist class, not exploit them. A quick reading of US Presidential history will make that very clear. Even small business interests are not exactly pitted against those of the state. Many small business owners enjoy a predictable rate of profit and market stability. The state through its suppressive functions helps maintain both a constant pool of uneducated and unemployed persons, as well as a stable market environment with minimal competition. All the factors necessary for a moderately successful capitalist enterprise."
A quick reading of European tax and regulation history makes clear that, the state serves to exploit producers. Usually for the benefit of the ruling class, of idle non-capitalists (kings, politicians, corporatists, unionists).
Most, small business owners have seen unprecedent inflation, taxation etc. and cannot be said to enjoy a predictable rate of profit. Furthermore, new restrictions enter everyday (Obama for instance has created several thousands of laws the last six months).
"This[need for property protection] is why even the petit bourgeois anarcho-capitalist still supports private institutions of violence such as ‘private defense forces’ against none such institutions at all. This is because they recognize, subconsciously perhaps, the need for a violent and suppressive tool which can essentially mimic most of the functions of the modern state; only then more tailored to their preference. "
Austrian anarco-capitalists recognize that people want and need as a service, self-defense against criminal aggressors. If they do not want such a service, they are free to defend themselves or even to establish some kind of "undefended" society.
"Perhaps this is only my rudimentary understanding of modern economics speaking, but for something to be produced, must not there be a demand for it? The demand is clear and present, and my analysis has shown that this demand comes precisely from the propertied classes."
People with property have not demanded a ruling class or a state, but rather have been and are attacked by it, and constantly brainwashed by it (usually with marxist propaganda).
Secondly, no. Supply enables demand. You do have a poor understanding of economics.
"The disagreement I will draw is with the denial of the tendency for the rate of profit to fall. The tendency for the rate of profit to fall is a critical measure of understanding the internal contradictions within capitalism and attempting to denounce it in a brief conclusion did Hoppe no good. Without anymore analysis, allow me to cite some empirical evidence to the contrary:"
The Austrian Business Cycle Theory (See for example, "Money, Bank Credit and Economic Cycles"), also presupposes falling profit rate in the contractionary phase of the cycle.
But the graph shown, is not an example of "clean capitalism", that Marx, and Zak want to critique.
I do not think anything written here, has been able to bring Zak to the conclusion he comes to and in particular he has not been able to debunk the classical liberal/libertarian class theory that preceded Marx.
A Marxist called, Zak Drabzyk has tried to critique Hoppe`s class theory.
Some fallacies in Drabzyk argumentation:
"The only way to understand why a person acts is to understand the environment which shapes that action. Thus, time preference can only be seen as a valid explanation if you presume the legitimacy of private ownership."
No, time preference requires presuming time exists. Time would still be scarce in a communist or propertyless society, and people would prefer things sooner rather than later.
"The material conditions of depravity that pressure the laborer to sell his labor-power do not affect the capitalist who owns the means of production (aside from the obvious duty of a capitalist being to produce and sell commodities). The capitalist class is the sole class with any feasible sense of flexibility as they exclusively access the means by which one may subsist. Therefore the statement that “After all, he could also decide not to sell his labor services to the capitalist and then reap the “full value” of his output himself” is utterly nonsensical."
The point is, Zak, that the material "conditions"(I need food, housing, a car etc but they are scarce) arise out of nature not imposed scarcity. Furthermore the whole point is, Marx, tried to claim that because the capitalist didnt physically labor, then he is given an exploitative share. But the worker, could have done manual labor (as many do) directly for customers and thereby reap the "full reward". He would have to be an entrepreneur and worker at the same time (many people, again, exist in this position).
"However, to suggest that capitalism somehow uniquely proposes mutual benefit compared to previous property relations, is ridiculous. Capitalist property relations are mutual only insofar as they allow the capitalist to prosper and provide the worker with subsistence, paid piecemeal."
Two things. Why do free-market economies (not the current West) tend to have rising wages ?
Why not simply "piecemeal" ie. a the least the capitalist has to pay ?
Why are all Hong Kong workers (prior to labor legislation) being paid higher wages than in many other countries(socialist countries and even western countries) ?
Simple, reason is as the capitalist and worker all want as much as possible for as little as possible. The choice(and thereby preferences) each has in choosing each other(that is absent in slavery, feudalism, socialism) creates the lower and higher limit for wages.
He backs this up with quoting Engels:
" The individual proletarian, property as it were of the entire bourgeois class which buys his labor only when someone has need of it, has no secure existence. This existence is assured only to the class as a whole.” – Friedrich Engels, Principles of Communism"
Well, the capitalist engaging in business is also only secured existence if someones buys his product.
On capitalism:
"The truth is much different. The entire system of capitalism is based on a social context, an interrelated conundrum of values and productive units. In fact, exchange value, the locomotive of market interaction, is dependent on society as it is a social expression. This is because the exchange value of commodities is impossible to determine unless contrasted against other commodities."
And where do these exchange values of commodities themselves arise ?
Out of the "subjective valuation", which is largely conclusively proven by the Austrian School (that is why Hoppe does not justify subjectivism in the evaluation of goods).
"Genuine social ownership seeks to empower the worker by including him in a direct control over the product of his labor and the fixed capital he employs."
How can he reasonable own "fixed capital" that he has not produced, bought or not been voluntarily given ? Only through aggression and violence, against person and property.
"as if the property barons of today not only obtained their power through socio-economic coercion (I mean contractual agreement) but also through their own personal saving, producing, or homesteading. Such a nonsensical interpretation of capitalist accumulation really draws Mr. Hoppe’s perspective into question."
Several famous capitalists and many more (unknown) entrepreneurs , have personally produced, saved themselves into wealth. You are not arguing here, you are simply stating things contrary to fact.
"Admitting that the same bourgeois, drawn here as distinguished from the ruling class, are indeed the ruling class, would be catastrophic to Austrian theory. This is, however, the historical truth on the matter. "
The average businessman, is not part of the ruling class. But rather its victims. That is, historical fact. In fact as the state, and its marxist apologists, have been enlarged, the ruling classes domain have been enlarged at the expense of other entrepreneurs.
"The state serves to protect the interests of the capitalist class, not exploit them. A quick reading of US Presidential history will make that very clear. Even small business interests are not exactly pitted against those of the state. Many small business owners enjoy a predictable rate of profit and market stability. The state through its suppressive functions helps maintain both a constant pool of uneducated and unemployed persons, as well as a stable market environment with minimal competition. All the factors necessary for a moderately successful capitalist enterprise."
A quick reading of European tax and regulation history makes clear that, the state serves to exploit producers. Usually for the benefit of the ruling class, of idle non-capitalists (kings, politicians, corporatists, unionists).
Most, small business owners have seen unprecedent inflation, taxation etc. and cannot be said to enjoy a predictable rate of profit. Furthermore, new restrictions enter everyday (Obama for instance has created several thousands of laws the last six months).
"This[need for property protection] is why even the petit bourgeois anarcho-capitalist still supports private institutions of violence such as ‘private defense forces’ against none such institutions at all. This is because they recognize, subconsciously perhaps, the need for a violent and suppressive tool which can essentially mimic most of the functions of the modern state; only then more tailored to their preference. "
Austrian anarco-capitalists recognize that people want and need as a service, self-defense against criminal aggressors. If they do not want such a service, they are free to defend themselves or even to establish some kind of "undefended" society.
"Perhaps this is only my rudimentary understanding of modern economics speaking, but for something to be produced, must not there be a demand for it? The demand is clear and present, and my analysis has shown that this demand comes precisely from the propertied classes."
People with property have not demanded a ruling class or a state, but rather have been and are attacked by it, and constantly brainwashed by it (usually with marxist propaganda).
Secondly, no. Supply enables demand. You do have a poor understanding of economics.
"The disagreement I will draw is with the denial of the tendency for the rate of profit to fall. The tendency for the rate of profit to fall is a critical measure of understanding the internal contradictions within capitalism and attempting to denounce it in a brief conclusion did Hoppe no good. Without anymore analysis, allow me to cite some empirical evidence to the contrary:"
The Austrian Business Cycle Theory (See for example, "Money, Bank Credit and Economic Cycles"), also presupposes falling profit rate in the contractionary phase of the cycle.
But the graph shown, is not an example of "clean capitalism", that Marx, and Zak want to critique.
I do not think anything written here, has been able to bring Zak to the conclusion he comes to and in particular he has not been able to debunk the classical liberal/libertarian class theory that preceded Marx.
torsdag 6. desember 2012
Keen on Says Law & Austrians
Keen claims in Debunking Economics that Austrians believe in Says Law, wrongly, because they fail to consider credit in their analysis.
Quoting Keen:
"The Says Law/Walras Law fallacy of ignoring the role of credit is the foundations of the neoclassical (and Austrian) argument that general gluts and depressions are impossible, and that all crises are really sectoral imbalances which can be corrected by price adjustments alone. Once this fallacy is removed, depressions or "general gluts" (and general booms) are possible, and the contraction of credit plays a key role in them." p. 220 Debunking Economics(2011)
There are other references as well.
This is completely wrong.
Let me now quote "Money, Bank Credit and Economic Cycles" by Jesus Huerta de Soto (1997):
Quoting Keen:
"The Says Law/Walras Law fallacy of ignoring the role of credit is the foundations of the neoclassical (and Austrian) argument that general gluts and depressions are impossible, and that all crises are really sectoral imbalances which can be corrected by price adjustments alone. Once this fallacy is removed, depressions or "general gluts" (and general booms) are possible, and the contraction of credit plays a key role in them." p. 220 Debunking Economics(2011)
There are other references as well.
This is completely wrong.
Let me now quote "Money, Bank Credit and Economic Cycles" by Jesus Huerta de Soto (1997):
"John Maynard Keynes begins his book, The General Theory,
by condemning Say’s law as one of the fundamental principles
upon which the classical analysis rests. Nonetheless Keynes
overlooked the fact that the analysis carried out by Austrian
School theorists (Mises and Hayek) had already revealed that
processes of credit and monetary expansion ultimately distort
the productive structure and create a situation in which the
supply of capital goods and consumer goods and services no
longer corresponds with economic agents’ demand for them.
In other words a temporal maladjustment in the economic system results.53
In fact the entire Austrian theory of the economic cycle merely explains why,
under certain circumstances, and as a consequence of credit expansion, Say’s law
under certain circumstances, and as a consequence of credit expansion, Say’s law
repeatedly fails to hold true."
onsdag 14. november 2012
More nonsense on ABCT by Lord Keynes
In a blogpost, the enthusiast for the current social order "Lord Keynes" makes a bold statement. He claims that the Austrian Business Cycle Theory which states that excessive credit creation leads to overconsumption and mailinvestment does not explain the 2007-2009 financial crisis.
Here is the most important of the summary:
"After this, Rothbard (2004 [1962]: 996–1004) expounds ABCT in its usual form. But his footnote has profound significance: “[to] the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” In other words, the mechanisms causing recession or depression as postulated by his version of ABCT did not occur if the money is mainly loaned to consumers! ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree."
This view of spending on consumer spending has been held by some Austrians. But most Austrians, even dating back to Hayeks formulation have not formulated in this way. The most updated and comprehensive forumlation of Austrian Business Cycle Theory has been done by Jesus Huerta de Soto in his 1997 book "Money, Bank Credit and Economic Cycles" and he addresses this very point several time.
Let me add a quote to show the jist of his reasoning:
"It is first necessary to point out that most consumer credit is extended by banks to households for the purchase of durable consumer goods. We have already established that durable consumer goods are actually true capital goods which permit the rendering of direct consumer services over a very prolonged period of time. Therefore from an economic standpoint, the granting of loans to finance durable consumer goods is indistinguishable from the direct granting of loans to the capital-intensive stages furthest from consumption. In fact an easing of credit terms and a decline in interest rates will provoke, among other effects, an increase in the quantity, quality and duration of socalled “durable consumer goods,” which will simultaneously require a widening and lengthening of the productive stages involved, especially those furthest from consumption." - page 406
He also quotes confirmation from Hayeks "Prices and Production" and Machlups "Stock Market, Credit and Capital Formation" to illustrate what earlier Austrians have claimed.
Another lie and misinformation Lord Keynes debunked, I will surely return with more :)
Here is the most important of the summary:
"After this, Rothbard (2004 [1962]: 996–1004) expounds ABCT in its usual form. But his footnote has profound significance: “[to] the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” In other words, the mechanisms causing recession or depression as postulated by his version of ABCT did not occur if the money is mainly loaned to consumers! ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree."
This view of spending on consumer spending has been held by some Austrians. But most Austrians, even dating back to Hayeks formulation have not formulated in this way. The most updated and comprehensive forumlation of Austrian Business Cycle Theory has been done by Jesus Huerta de Soto in his 1997 book "Money, Bank Credit and Economic Cycles" and he addresses this very point several time.
Let me add a quote to show the jist of his reasoning:
"It is first necessary to point out that most consumer credit is extended by banks to households for the purchase of durable consumer goods. We have already established that durable consumer goods are actually true capital goods which permit the rendering of direct consumer services over a very prolonged period of time. Therefore from an economic standpoint, the granting of loans to finance durable consumer goods is indistinguishable from the direct granting of loans to the capital-intensive stages furthest from consumption. In fact an easing of credit terms and a decline in interest rates will provoke, among other effects, an increase in the quantity, quality and duration of socalled “durable consumer goods,” which will simultaneously require a widening and lengthening of the productive stages involved, especially those furthest from consumption." - page 406
He also quotes confirmation from Hayeks "Prices and Production" and Machlups "Stock Market, Credit and Capital Formation" to illustrate what earlier Austrians have claimed.
Another lie and misinformation Lord Keynes debunked, I will surely return with more :)
mandag 12. november 2012
Keen on "deregulation of schools"
Steve Keen is angry that schools are "deregulating". What does this "deregulating" consist of ?
"Government regulation used to require universities to set a minimum entry standard to apply for entry to courses based on performance at the final school exam (now known as an “Australian Tertiary Admission Rank” or ATAR). Deregulation of the sector means that this is now optional, and two major universities in my region – the University of NSW and Sydney University – have responded by letting students apply for a course regardless of their anticipated performance at high school." - Keen
Well, it consists of government universities allocating funding after where students choose to study, with....government funding.
This is a peculiar sort of deregulation, one often favored by so-called "neo-liberals". It might be summed up as the police departement deregulating by asking the victims of police brutality: tazer or stick ?
But this is not to be, Keen goes along with the claims of neo-liberals (or right wing social-democrats) that they are enacting market deregulation and constructs his whole flawed argument around it.
The change in practices has resulted in the university wanting to shut down the economics departement. Cheers! As Sudha Shenoy once remarked:
"I’m prepared to say that nearly every economics department in the world could be shut down without having an ill-effect on the world of ideas."
To be fair, this is probably directed more towards the Neo-Keynesian, New-Classical paradigm usually taught for the last 50-60 years.
Anyway, carrying on with Keen
"You might argue that this is just a knee-jerk reaction by bureaucrats who lack the nous that entrepreneurial managers of private universities might have. The latter could see through the change in policy, and anticipate that numbers will have to improve: the Sandstones don’t have the capacity to take all applicants, so once the actual high school results are known, they’ll fill their lecture theatres to the rafters with high-achieving students, and send rejection letters to the rest."
Translation: You might notice my whole argument is flawed and that talking about government managers actions as failures of "market deregulation". By "lacking nous" he is misconstruing the promoters of private education as claiming entrepreneurs are better at adjusting to the decision of bureaucrats, than bureaucrats. This is of course not the private enterprise position.
"There’s a modicum of truth in that argument, but even if universities were run by far-sighted entrepreneurs rather than cautious bureaucratic bean-counters, this move from a regulated to an unregulated market would still have reduced competition."
Alright why ?
"Firstly, the Sandstones will increase their share of the market. By squeezing every last available student into their lecture halls, their higher capacity utilisation will reduce the share available to the other universities. Secondly, even a privately run university would be squeezed – especially if its activities were partly debt-financed (as they inevitably would be). Not reacting to a downturn in demand by cutting back on capacity would court bankruptcy."
Again, this just presumes the whole question in mind. If Australians didnt pay tax for Keens and other bloated salaries to circle jerk over statictics and pontificate on all sorts of nonsense like "gender roles", "ecological philosophy", macroeconomics etc. Then the universities would be private and talking about...
"The latter[non-elite universities] could see through the change in policy"
...policy would be nonsensical. There would be no policy.
"The best economic model of this conundrum – that a less regulated market can be less competitive and less diverse – was developed by hotelling."
Of course it can. If Bureaucrats decide that there should be 200 different subjects taught in a university, making it even necessary to invent subjects people do not want to take (like economics at UWS) then there would be more than in a private market . But these excess subjects would be waste, they would be an unnecessary use of scarce resources (i know, know, keynesians dont believe in scarcity).
"Imagine a beach with an even distribution of bathers: where is the best spot for an ice-cream shop to set up business? The simple answer is right in the middle of the beach: that maximises the market (the less people have to walk, the more likely they are to buy an ice-cream) and it suits customers too – they have the shortest possible walk to get an ice-cream."
No, they do not have the shortest possible walk. The people at each far end, now has a longer way to walk then if the ice-cream shop was closer. If this matters to them, then an entrepreneur could make more money by establishing one on the far end of the beach.
"But what if there were two ice-cream vendors? Socially, the best situation would be for one to locate one-third of the way along the beach, and the other two-thirds along it. That way, they each get half the market, and customers only have to walk a maximum of one-sixth of the beach’s length to buy an ice-cream. That’s a great improvement over a maximum walk of half of the beach.
However, if one of the vendors moves closer to the other vendor, he will increase his market share at the other’s expense (if consumers don’t differentiate between them). At the extreme, one vendor can capture 67 per cent of the market by moving right next to the other vendor: he will get 100 per cent of the purchasers from two-thirds of the beach."
And then it would be profitably for the other vendor to move past him and capture this bigger share of the market again.
"If left to free competition, both vendors would end up right in the middle of the beach – forcing customers to have to walk up to 50 per cent of the beach to get an ice-cream – and the vendors would still split the customers 50:50."
This is a nonsensical declaration. The vendors could perhaps make more money by moving closer to the right, simply because this might entice more people who do not want to walk "50 percent of the beach", but who would buy if they just had to walk "15 percent of the beach".
"You’d get a socially and economically better outcome if vendors were regulated, and required to set up some minimum distance apart from each other: people would have to walk less, and ice-cream sales would rise because of the shorter walk to get an ice-cream."
If ice-cream vendors were regulated, that would put an additional barrier and contigency in ADDITION to profitability on whether a ice-cream vendor should be set up. There is no reason to presume that this would get better economically, and social outcomes. This is also not considering that government regulators have no profitability to care about, if they regulate too much and stop vendors they do not personally lose money and their employer does not either. This also goes the other way around.
As analogy, the profitability of paying people like Keen to construct pseudo-scientific arguments to justify government control over people lives is not measureable. When the government then decides to cut him out because of their own folly, he is enraged and wants to blame "market deregulation".
"“if it ain’t broke, don’t fix it”. Governments have “fixed” higher education so many times now that it’s well and truly broken. Rather than attempting to improve complex systems that they clearly don’t understand, politicians and bureaucrats should respect what has evolved over time"
Right, Keens try to play himself off as a critic of government. The fact is that this "evolution" was also simply enacted by government diktats, and if this earlier evolution was made on the same basis as he is critiquing, then he should accept the evolution towards a "economics"-less University of Western Sydney.
And hopefully a real market deregulation in the form of fully private universities, as was the norm long time until governments decided to "fix" higher education.
I also thinks this reveals why most economists are left-leaning social-democrats, unionists or right-wing social-democrats. Its sheer self-interest,they want to keep their unproductive jobs as propagandists for government and central-banking and their high salaries, government pensions etc.
"Government regulation used to require universities to set a minimum entry standard to apply for entry to courses based on performance at the final school exam (now known as an “Australian Tertiary Admission Rank” or ATAR). Deregulation of the sector means that this is now optional, and two major universities in my region – the University of NSW and Sydney University – have responded by letting students apply for a course regardless of their anticipated performance at high school." - Keen
Well, it consists of government universities allocating funding after where students choose to study, with....government funding.
This is a peculiar sort of deregulation, one often favored by so-called "neo-liberals". It might be summed up as the police departement deregulating by asking the victims of police brutality: tazer or stick ?
But this is not to be, Keen goes along with the claims of neo-liberals (or right wing social-democrats) that they are enacting market deregulation and constructs his whole flawed argument around it.
The change in practices has resulted in the university wanting to shut down the economics departement. Cheers! As Sudha Shenoy once remarked:
"I’m prepared to say that nearly every economics department in the world could be shut down without having an ill-effect on the world of ideas."
To be fair, this is probably directed more towards the Neo-Keynesian, New-Classical paradigm usually taught for the last 50-60 years.
Anyway, carrying on with Keen
"You might argue that this is just a knee-jerk reaction by bureaucrats who lack the nous that entrepreneurial managers of private universities might have. The latter could see through the change in policy, and anticipate that numbers will have to improve: the Sandstones don’t have the capacity to take all applicants, so once the actual high school results are known, they’ll fill their lecture theatres to the rafters with high-achieving students, and send rejection letters to the rest."
Translation: You might notice my whole argument is flawed and that talking about government managers actions as failures of "market deregulation". By "lacking nous" he is misconstruing the promoters of private education as claiming entrepreneurs are better at adjusting to the decision of bureaucrats, than bureaucrats. This is of course not the private enterprise position.
"There’s a modicum of truth in that argument, but even if universities were run by far-sighted entrepreneurs rather than cautious bureaucratic bean-counters, this move from a regulated to an unregulated market would still have reduced competition."
Alright why ?
"Firstly, the Sandstones will increase their share of the market. By squeezing every last available student into their lecture halls, their higher capacity utilisation will reduce the share available to the other universities. Secondly, even a privately run university would be squeezed – especially if its activities were partly debt-financed (as they inevitably would be). Not reacting to a downturn in demand by cutting back on capacity would court bankruptcy."
Again, this just presumes the whole question in mind. If Australians didnt pay tax for Keens and other bloated salaries to circle jerk over statictics and pontificate on all sorts of nonsense like "gender roles", "ecological philosophy", macroeconomics etc. Then the universities would be private and talking about...
"The latter[non-elite universities] could see through the change in policy"
...policy would be nonsensical. There would be no policy.
"The best economic model of this conundrum – that a less regulated market can be less competitive and less diverse – was developed by hotelling."
Of course it can. If Bureaucrats decide that there should be 200 different subjects taught in a university, making it even necessary to invent subjects people do not want to take (like economics at UWS) then there would be more than in a private market . But these excess subjects would be waste, they would be an unnecessary use of scarce resources (i know, know, keynesians dont believe in scarcity).
"Imagine a beach with an even distribution of bathers: where is the best spot for an ice-cream shop to set up business? The simple answer is right in the middle of the beach: that maximises the market (the less people have to walk, the more likely they are to buy an ice-cream) and it suits customers too – they have the shortest possible walk to get an ice-cream."
No, they do not have the shortest possible walk. The people at each far end, now has a longer way to walk then if the ice-cream shop was closer. If this matters to them, then an entrepreneur could make more money by establishing one on the far end of the beach.
"But what if there were two ice-cream vendors? Socially, the best situation would be for one to locate one-third of the way along the beach, and the other two-thirds along it. That way, they each get half the market, and customers only have to walk a maximum of one-sixth of the beach’s length to buy an ice-cream. That’s a great improvement over a maximum walk of half of the beach.
However, if one of the vendors moves closer to the other vendor, he will increase his market share at the other’s expense (if consumers don’t differentiate between them). At the extreme, one vendor can capture 67 per cent of the market by moving right next to the other vendor: he will get 100 per cent of the purchasers from two-thirds of the beach."
And then it would be profitably for the other vendor to move past him and capture this bigger share of the market again.
"If left to free competition, both vendors would end up right in the middle of the beach – forcing customers to have to walk up to 50 per cent of the beach to get an ice-cream – and the vendors would still split the customers 50:50."
This is a nonsensical declaration. The vendors could perhaps make more money by moving closer to the right, simply because this might entice more people who do not want to walk "50 percent of the beach", but who would buy if they just had to walk "15 percent of the beach".
"You’d get a socially and economically better outcome if vendors were regulated, and required to set up some minimum distance apart from each other: people would have to walk less, and ice-cream sales would rise because of the shorter walk to get an ice-cream."
If ice-cream vendors were regulated, that would put an additional barrier and contigency in ADDITION to profitability on whether a ice-cream vendor should be set up. There is no reason to presume that this would get better economically, and social outcomes. This is also not considering that government regulators have no profitability to care about, if they regulate too much and stop vendors they do not personally lose money and their employer does not either. This also goes the other way around.
As analogy, the profitability of paying people like Keen to construct pseudo-scientific arguments to justify government control over people lives is not measureable. When the government then decides to cut him out because of their own folly, he is enraged and wants to blame "market deregulation".
"“if it ain’t broke, don’t fix it”. Governments have “fixed” higher education so many times now that it’s well and truly broken. Rather than attempting to improve complex systems that they clearly don’t understand, politicians and bureaucrats should respect what has evolved over time"
Right, Keens try to play himself off as a critic of government. The fact is that this "evolution" was also simply enacted by government diktats, and if this earlier evolution was made on the same basis as he is critiquing, then he should accept the evolution towards a "economics"-less University of Western Sydney.
And hopefully a real market deregulation in the form of fully private universities, as was the norm long time until governments decided to "fix" higher education.
I also thinks this reveals why most economists are left-leaning social-democrats, unionists or right-wing social-democrats. Its sheer self-interest,they want to keep their unproductive jobs as propagandists for government and central-banking and their high salaries, government pensions etc.
A Critique of Azizonomics on Misesian Methodology
Upfront I will concede that Austrian methodology, and the notion of a logic of human action ie. "Praxeology" seemed strange and very wacky to me in the beginning. I was pretty comfortable with the idea that economics is counterfactual and other positions taken by Mises and Rothbard, but the view of theory and history was probably the hardest to cast off.
I admit, I was bitten a bit by "scientism", wanting or believing science should be predictive. And even today, I might disagree with some beliefs of modern austrians and specifically LvMI staff. Still these are largely minor disagreements and I feel that I have something to say about this piece by Azizonomics(Who has produced some great work, like this graph).
"No, it is not universal or complete[theorising based on data], and therefore building a perfect predictive model is not possible, but that is not the point. If I want to know how the corn price in the USA moved during the first half of the twentieth century, the data is accessible. If I want to know the rate of GDP growth in Ghana in 2009, the data is accessible. If I want to know the crime rate in France, the data is accessible."
Already here Aziz is on shaky grounds.
The GDP measures certain things, and in certain institutional arrangements (usually in a totalitarian society like the modern West it measures most activity). But there is also alot that it does not measure, and it cannot even know if this is accurate.
The bureaucrats at the statistical departement might even be changing methodologies to sooth their employers: the state. Or they might measure price-increases correctly, in fact this is impossible and thereby any reliance on GDP makes the whole point rather moot. Is the GDP rising because prices are rising or because people are wealthier ? There is no scientific way to decide.
And here is the point, Aziz concedes that its not universal or complete. But Austrians are looking for economic laws, they are essentially interested in constructing universally correct knowledge.
So playing with statistics because they exist is fine, but that does not qualify as science.
"This is completely wrongheaded. All human thought and action is derived from experience; Mises’ ideas were filtered from his life, filtered from his experience. That is an empirical fact for Mises lived, Mises breathed, Mises experienced, Mises thought. Nothing Mises or his fellow praxeologists have written can be independent of that — it was all ultimately derived from human experience. And considering the Austrian focus on subjectivity it is bizarre that Mises and his followers’ economic paradigm is wrapped around the elimination of experience and subjectivity from economic thought."
1. Rothbard did philosophically ground praxeology in experience
2. Mises point is not that he has not experienced, but that it was a-priori because human being could not conceive of it otherwise.
3. It is not the elimination of experience or subjectivity that is desired. It is theory that must be based on logical cohesion and factual assumptions. Experience guides the economist in what they want to study (would Mises or any other Austrian be interested in money or socialism, if they did not have some experience that made this relevant to them ?). Subjectivity is also important, but not in theory. The theory cannot be subjective in regards to validity, but human desires, needs and valuations are subjective.
Much as it shocks the modern mind, positivism is bunk (In fact, in opposition to Mises I believe it to be bunk in natural sciences as well). Said in another way, the data can never guide Aziz, because implicitly he must have some theory of what GDP is or what "price" is in the example of corn prices.
"If I make a deductive prediction about the future, it is essential that I refer to data to determine whether or not my prediction has been correct."
This is correct. But we are not attempting to establish deductive predictions about the future, but deductive truths about reality that are valid. Whether "the end of Bretton Woods" followed increase income disparity is of course an empirical question. But the heart of the matter is, does more inflationary monetary arrangements or rather does inflation increase income disparity ? And the Austrian deductive answer to this is : YES.
No, analysis of Bretton Woods can confirm or disconfirm this hypothesis. If magic machines were invented five years after the collapse of the "gold-link" of Bretton Woods that provided every family with a 5 $ "make any product out of CO2" then income disparity might not have increased due to the extreme abundance everyone would experience. But this would not disprove the logical claim or its validity, only countering the logic by pointing out its faulty assumptions or incorrect logical step at some point will do.
"This is elementary stuff. Deduction is important — indeed, it is a critical part of forming a hypothesis — but deductions are confirmed and denied not by logic, but by the shape of the evidence. In rejecting modelling — which has produced fallacious work like DSGE and RBCT, but also some relatively successful models like those of Minsky and Keen — praxeologists have made the mistake of rejecting empiricism entirely. This has confined their methods to a grainier simulation; that of their own verbal logic."
I thought this was funny, because Minsky was precisely ignored by mainstream economists for developing his theory by verbal logic. Bad logic or assumptions several places, but still.
"Praxeologists claim that praxeology does not make predictions about the future, and that any predictions made by praxeologists are not praxeological predictions, but instead are being made in a praxeologist’s capacity as an economic historian. But this is a moot point; all predictions about the future are deductive. Unless predictions are being made using an alien framework (e.g. a neoclassical or Keynesian model) what else is the praxeologist using but the verbal and deductive methodology of praxeology?"
The "what else" is data or information. The praxeologist is applying the theoretical framework onto certain data, and then the derived beliefs (precisely because it is contigent upon data) about the future are not a necessary logic of action ie. praxeological. Or rather, the praxeologist does not imagine that statements about the future can or are categorically in the same category as "the subjective value theory" or "the law of demand".
"Of those economists who predicted the 2008 crisis, a significant number were Austrians:"
I should do a post on that list, that comes from Steve Keen(I know, i know, he didnt create it). Its disingenious and skewed towards Post-Keynesians.
"But these predictive failures were symptomatic of deduction-oriented reasoning; Miseseans who forewarned of imminent hyperinflation over-focused on their deduction that a tripling of the monetary base would produce huge inflation"
"Misesians" who forewarned imminent crack-up boom should read Mises definition of inflation, it takes into account the demand for money and Rothbards "America`s Great Depression" details the phenomenon of excess reserves in the Great Depression.
Furthermore, one can reasonably wonder what kind of inflation we have had since 2009. The claim that we have had deflation or even 2-3 % inflation is based a "general price level" or "price index" which is meaningless.
"As Menger — the Father of Austrianism, who favoured a mixture of deductive and empirical methods"
I have yet to read Menger translated book "Investigations into the Methods of Social Sciences", so I will reserve judgement on this.
I can however conclude that Aziz fails to knock down apriori-deductive method, although that would have been an awesome achievement in just a blogpost.
I admit, I was bitten a bit by "scientism", wanting or believing science should be predictive. And even today, I might disagree with some beliefs of modern austrians and specifically LvMI staff. Still these are largely minor disagreements and I feel that I have something to say about this piece by Azizonomics(Who has produced some great work, like this graph).
"No, it is not universal or complete[theorising based on data], and therefore building a perfect predictive model is not possible, but that is not the point. If I want to know how the corn price in the USA moved during the first half of the twentieth century, the data is accessible. If I want to know the rate of GDP growth in Ghana in 2009, the data is accessible. If I want to know the crime rate in France, the data is accessible."
Already here Aziz is on shaky grounds.
The GDP measures certain things, and in certain institutional arrangements (usually in a totalitarian society like the modern West it measures most activity). But there is also alot that it does not measure, and it cannot even know if this is accurate.
The bureaucrats at the statistical departement might even be changing methodologies to sooth their employers: the state. Or they might measure price-increases correctly, in fact this is impossible and thereby any reliance on GDP makes the whole point rather moot. Is the GDP rising because prices are rising or because people are wealthier ? There is no scientific way to decide.
And here is the point, Aziz concedes that its not universal or complete. But Austrians are looking for economic laws, they are essentially interested in constructing universally correct knowledge.
So playing with statistics because they exist is fine, but that does not qualify as science.
"This is completely wrongheaded. All human thought and action is derived from experience; Mises’ ideas were filtered from his life, filtered from his experience. That is an empirical fact for Mises lived, Mises breathed, Mises experienced, Mises thought. Nothing Mises or his fellow praxeologists have written can be independent of that — it was all ultimately derived from human experience. And considering the Austrian focus on subjectivity it is bizarre that Mises and his followers’ economic paradigm is wrapped around the elimination of experience and subjectivity from economic thought."
1. Rothbard did philosophically ground praxeology in experience
2. Mises point is not that he has not experienced, but that it was a-priori because human being could not conceive of it otherwise.
3. It is not the elimination of experience or subjectivity that is desired. It is theory that must be based on logical cohesion and factual assumptions. Experience guides the economist in what they want to study (would Mises or any other Austrian be interested in money or socialism, if they did not have some experience that made this relevant to them ?). Subjectivity is also important, but not in theory. The theory cannot be subjective in regards to validity, but human desires, needs and valuations are subjective.
Much as it shocks the modern mind, positivism is bunk (In fact, in opposition to Mises I believe it to be bunk in natural sciences as well). Said in another way, the data can never guide Aziz, because implicitly he must have some theory of what GDP is or what "price" is in the example of corn prices.
"If I make a deductive prediction about the future, it is essential that I refer to data to determine whether or not my prediction has been correct."
This is correct. But we are not attempting to establish deductive predictions about the future, but deductive truths about reality that are valid. Whether "the end of Bretton Woods" followed increase income disparity is of course an empirical question. But the heart of the matter is, does more inflationary monetary arrangements or rather does inflation increase income disparity ? And the Austrian deductive answer to this is : YES.
No, analysis of Bretton Woods can confirm or disconfirm this hypothesis. If magic machines were invented five years after the collapse of the "gold-link" of Bretton Woods that provided every family with a 5 $ "make any product out of CO2" then income disparity might not have increased due to the extreme abundance everyone would experience. But this would not disprove the logical claim or its validity, only countering the logic by pointing out its faulty assumptions or incorrect logical step at some point will do.
"This is elementary stuff. Deduction is important — indeed, it is a critical part of forming a hypothesis — but deductions are confirmed and denied not by logic, but by the shape of the evidence. In rejecting modelling — which has produced fallacious work like DSGE and RBCT, but also some relatively successful models like those of Minsky and Keen — praxeologists have made the mistake of rejecting empiricism entirely. This has confined their methods to a grainier simulation; that of their own verbal logic."
I thought this was funny, because Minsky was precisely ignored by mainstream economists for developing his theory by verbal logic. Bad logic or assumptions several places, but still.
"Praxeologists claim that praxeology does not make predictions about the future, and that any predictions made by praxeologists are not praxeological predictions, but instead are being made in a praxeologist’s capacity as an economic historian. But this is a moot point; all predictions about the future are deductive. Unless predictions are being made using an alien framework (e.g. a neoclassical or Keynesian model) what else is the praxeologist using but the verbal and deductive methodology of praxeology?"
The "what else" is data or information. The praxeologist is applying the theoretical framework onto certain data, and then the derived beliefs (precisely because it is contigent upon data) about the future are not a necessary logic of action ie. praxeological. Or rather, the praxeologist does not imagine that statements about the future can or are categorically in the same category as "the subjective value theory" or "the law of demand".
"Of those economists who predicted the 2008 crisis, a significant number were Austrians:"
I should do a post on that list, that comes from Steve Keen(I know, i know, he didnt create it). Its disingenious and skewed towards Post-Keynesians.
"But these predictive failures were symptomatic of deduction-oriented reasoning; Miseseans who forewarned of imminent hyperinflation over-focused on their deduction that a tripling of the monetary base would produce huge inflation"
"Misesians" who forewarned imminent crack-up boom should read Mises definition of inflation, it takes into account the demand for money and Rothbards "America`s Great Depression" details the phenomenon of excess reserves in the Great Depression.
Furthermore, one can reasonably wonder what kind of inflation we have had since 2009. The claim that we have had deflation or even 2-3 % inflation is based a "general price level" or "price index" which is meaningless.
"As Menger — the Father of Austrianism, who favoured a mixture of deductive and empirical methods"
I have yet to read Menger translated book "Investigations into the Methods of Social Sciences", so I will reserve judgement on this.
I can however conclude that Aziz fails to knock down apriori-deductive method, although that would have been an awesome achievement in just a blogpost.
Steve Keen mistakes on ABCT and the Austrians
I will here outline some very basic mistakes in Steve Keens book “Debunking Economics” where he assess shortly the Austrian School and particularly his attempt to address Austrian Business Cycle Theory.
Confusion over ABCT
Steve Keen claims that the Austrian business cycle theory is one that attempts to explain the business cycle by the fact that the central bank lowers interest rates. This is a mistake, as the ABCT is a theory that explains the business cycle as a consequence of an expansion money and credit affecting relative prices and leading to capital and resource misallocation. The discernible difference between monetary and credit expansion that must lead to capital misallocation and what must not, is dependent upon the amount of savings that can counteract or allow for the expansion. There is no clear macro-aggregate or measureable aggregate statistical number that can be computed to necessarily reveal this, but it can and often is reflected in the amount of savings not increasing (or decreasing) while money and credit is expanding.
If the ABCT was simply a theory of how central banks can create booms-and-busts, then it would not be a theory that could explain why business cycle occurs before central banking. But that was precisely what it was and the reason it was thought out. This is why Mises(1949) places business fluctuations under the analysis of a market economy and not an interventionist regime.
Lets now quote Steve Keen in his first reference to ABCT:
“and the latter[the Austrian School economists] because of their familiarity with Hayek`s argument about the impact of interest rates being held too low by government policy.” (p. 326)
The ABCT in fact lays the casual factor again on artificial increases of credit or rather increases not corresponding to an relative increase in voluntary savings.
Had Steve Keen consulted one or more of the dozens of articles by Austrians scholars in the run up to the financial crisis predicting the crisis, the focus is expressly on money, credit growth and the interest rate policy that encouraged it. Indeed this is why for example Jesus Huerta de Soto locates the start of the boom in 1992 and the expansionary monetary policy that did not end until 2007, and not with Greenspan interest rate cuts in 2001 although that was an extension of the policy.
This can be produced both in a free fractional reserve banking system and in a highly regulated central banking system such as today. It can also be produced by financial participants that engage in maturity mismatching. What the central bank can do, even without actively inflating is to guarantee that the banks can themselves inflate by extending loans and being backstopped by the central bank. That is the raison d’être of the central banks and the reasons almost all Austrians would cherish its demise in an attempt to avoid/limit business cycles and other ill-effects of inflation.
The fact though is that the central banks actively target goals to accomplish a certain amount of inflation that is to be achieved through credit growth and often actively encourage credit expansion.
If one read the listed material of Austrian authors on the business cycle by Steve Keen such as Murray Rothbard(Americas Great Depression) this would be absolutely clear and the comments above almost completely unnecessary, I only bring them up because all these considerations are ignored and certain arguments against ABCT is formed that are wrong in the light of these considerations.
They are:
“they argue that the current system of state money means that the money supply is entirely exogenous, and under the control of the state authorities” (p.447)
If the monetary supply is completely “endogenous” as the Post Keynesians like to hold, the current monetary easing should not be expected to be able increase prices at all, as deleveraging and deflation is the goal either way. If the Austrians are right the monetary expansion that has taken place if continued will again lead either to higher price-inflation or credit growth.
Furthermore this presumes that Austrians hold that monetary growth under the current system can only take place via an increase in base money, or reserves. This is far from the case, but the ability, willingness and in fact expansion of base money of the central bank encourages the commercial banks to extend further credit with their legal granted monopolies and guarantees of being saved by the central bank should they find themselves in need of money. This is then a false accusation and indicates yet again that Keen seems to be unaware or unlearned of the position he is critiquing.
“…private banks and other credit-generating institutions largely force the state`s hand. Thus the money supply is largely endogenously determined by the market economy, rather than imposed upon it exogenously by the state.”(p. 447)
“empirical…supports post-Keynesians rather than Austrians on this point. Statistical evidence about the leads and lags between state-determined component of money supply and broad credit shows that the latter “leads” the former” (p. 447)
“If the Austrians were correct, state money creation would instead precede private credit creation.” (p. 447)
There is also the strange notion of statistically “proving” this by appealing to what follows of the these two aggregates, focusing on these two aggregates misses the whole institutional set up and ignores the fundamental aggression against private property and its natural restrictions on bank credit expansion that have been detailed in the works of Austrian economists since Mises and by classical authors before him.
None of these elements are discussed, thus leaving an important economic and legal aspect of banking practices out of the analysis. To claim that private banks “force” the state hands is simply presuming his conclusion and assuming away any guilt on the central bank for constantly expanding the supply of money. Lobbying, demanding and appealing for the monetary policy which benefits them the banks certainly do. But that does not warrant Keens label of it “forcing the state hands”. A follow-up question to that statement then is, what would the banks do if the state did not have a monopoly over money? There would be no hands to force, and they would have to go bankrupt as they should. And they would also be aware of this.
Furthermore if all banks are compelled by government edict to be a member of the state bank, and all deposits with them insured to what extent are they private?
This would at least not meet the definition of private in any other field and this seems to mere rhetoric by followers of the socialistic "Post-Keynesian" school.
If it has any importance at all, it seems to be more of the debate between the various current mainstream schools of thought and not the Austrian theory of money and banking. Austrians do not claim that all expansion of money is actively engineered by the central bank, as I have stated it can simply backstop their members and leave it to them, the problem is of course the only way any trust is placed in that backstopping is because of the monopoly over the supply of cash or "base money".
This claim is seems even more ridiculous and thinly based once one recognises the fact that in the financial crisis of 2007-08, if the government edict interest rates were removed and market rates were allowed to form or by simply keeping the interest rates up the market participants would have deflated severely the broad money and credit aggregates thar Keen focuses on. It was in fact the actions of the central bank in the US and around the world which kept this from happening and thus illustrates the erroneous nature of his claims.
“monetarism also provides an evocative counter-example.” (p. 447)
To envoke monetarism as a counter-example also seems to be completely missing the point and misleading. No Austrian has only fought against an expansion of base money, but an expansion of broad money. The fact that Austrians all are against an expansion of the supply of base money, does not equate them to monetarists who also want to limit the supply of base money. Secondly, the fact that the current central banking system failed to keep credit growth from growing is no surprise.
It is precisely the reason why Austrians focuses on getting rid of central banking, and advocate 100 % market commodity money. The classical Austrian position that Keen completely ignores in his argument against them and the only true form of endogenous market money would be the money chosen under freedom of contract.
Some last comments
“a non evolutionary attitude towards both the existence of the state…the state was simply imposed from outside as an alien artifact”
“This is certainly one way to consider to the growth of the welfare state….an equally tenable argument…evolved as a response to the failure of the pure market system during the Great Depression”
These comments appear as a weakness of the Austrians, but it is more of a weakness and misleading description by Steve Keen. The existence of the state is seen as evolutionary by rothbardians, as state rulers and the nature of their justifications and the choice of state leaders, and the peoples convictions and interactions has changed. But if by evolutionary it means that the state will or must naturally arise, then this is of course an anathema to the Rothbardian view of the state.
Secondly, it is weak because it confuses the state as an institution with the welfare state. As if the growth of state argued against is only in the form of the welfare state.
Thirdly, it is downright dishonest to label the period before or during the Great Depression as a pure market economy. Especially to a group of scholars who locate the problem of business cycles with fractional-reserve banking, government meddling with money and credit, in its worse form central banking and fiat money. As central banking in America was established in late 1913, the history of events is more fitting with the Austrian detest of central planning in money, banking and finance simply broadening out the business cycle and exacerbating it. It is in fact the Post-Keynesians and in general the economic professions admiration for central planning in this arena which is an anathema both in the historical examples and the basic theory of a dynamic/equilibrium market economy. To say that they are equally tenable is just a statement, and in contradiction with the historical facts around government intervention in the early 20th century.
I get the sense that Steve Keen has simply attempted to fill his “Alternative schools of thought”-chapter on the Austrians with something, while actually not investigating the literature. Anyhow, the above comments are only certain observations and a more general critique of the Minsky approach to business cycles and other concepts in Keens “Keynesian” economics will be investigated and discussed in the future.
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