Showing posts with label Austrian Economics. Show all posts
Showing posts with label Austrian Economics. Show all posts
Sunday, October 23, 2011
Tuesday, August 24, 2010
A Response to Alan Harvey's Demand Side Podcast
A Response to Alan Harvey's Demand Side Podcast
by Alex Merced
This is a Response to THIS episode of Alan Harvey's Demand Side Podcast
As an anarcho-capitalist aspiring austrian economist, one may ask why would I bother consuming such media such as the Rachael Maddow Show or Alan Harvey's Demand Side podcast which are the antithesis of my own personal opinions and belief structure. Of course, in order to be effective in debate one must be able to empathize and understand the opposing view or debates end up being a shouting match without any progress towards any consensus.
Much of the time our opinions across many spectrums come from similar values and virtues so a consensus can be achived by merely repositioning an issue in a way to reflect that. When Values and Virtues underlying our opinions on an issue differ greatly then of course conclusions will vary in a non-reconcilable way, so being able to recognize this helps one realize that the current debate is useless that the debate must be shifted a step back to a more fundamental ones of which values, goals, and principles should take priority before moving foward. This is important cause if you and your opponent to agree on the underlying assumptions then you debating two completley different issues.
So listening to the views and ideas of your opponents help identify these important variables in debate. Although aside from this reason while I often disagree with the conclusions Maddow comes to, I do appreciate the research and ability to identify problems or symptoms of other problems even if her insinuated solutions are often worse than the problem. As far as Alan Harvey I can't say the same, he's staunch defender of the Keynesian stronghold and it's amuzing to listen to a show that positions itself to the LEFT of Krugman who is pretty far left as it is.
So what is it I want to respond to? Well in his most recent podcast he was makings some critiques of Reinharts and Rogoffs new book "This Time It's Different". While I'm not here to defend the conclusions of this book, since I have no read the book as of yet I do want to address many of the bizzarre insinuations on behalf of Harvey in his critic.
#1 The Government can Never go Bankrupt
For the most part, to an extent this is true. If a government has control over it's money supply it can always increase the money supply in order to tender it's debts. For example if you can always just print money to make your monthly credit card payments, no matter how much debt you have you won't technically go bankrupt. Although this is not a good thing, cause this means politicians have no incentive to make difficult political decisions and will generally lean towards spending as a solution (which a keynesian would say is good, cause they believe consumption is THE economic driver).
Although this is not the only problem since an ever increasing money supply leads to inflationary pressures and mal-investment as an increased money supply leads to less saving since interest rates drop yet more investment in capital intensive long term projects which will have no consumer base when completed since there is no savings to purchase them (how many high rise condo were planned but never completed in las vegas). So overall even though the government won't go bankrupt this has been little solace for Zimbabwe and their inflationary problem (everyone in Zimbabwe is a Millionaire... but they still can't buy a cup of coffee). Although if you bring up the inflationary argument it leads to Harveys next ridiculous statement...
#2 that for Developed economies there is little relationship with debt from inflation
The argument Alan Harvey is trying to make is that high debt levels have little to do with inflation if the economy is advanced enough. I would disagree that the size of the economy just eliminates the relationship but that it has more ability to mitigate the conditions that lead to dire consequences in the short run. A larger economy with lots of imports and trade deficits such as the US sends it's dollars abroad as the money supply increases, mitigating the supply increase (although this would still devalue the dollar vs other currencies since people are essentially selling off the dollar to buy foreign goods, but it prevents the domestic flood of dollars). So while a large economic importer economy like the US has this mechanism to deal with money supply increases the result of this is that business and industry follows the money abroad (why be in the US if US dollars are going abroad?).
Although if perpetual money supply increases are perceived then foreign exporters will begin to refuse to take dollars cause of expected supply increases, increasing their currency risk. If enough foreigners refused to take dollars there would be nowhere to soak the growing supply of dollars which would be the trigger for hyperinflation. Although we've been able to buy time cause the US is currently the reserve currency of the world so for the time being for foreign exporters will take dollars despite the currency risk but already many countries are divesting from the dollar.
So will the debt essentially lead to overnight price inflation... maybe not but it eventually will and in the meantime we'll just have to watch all our industry leave first.
#3 Bad Economics Times cause runaway government debt, not the other way around
Once again, on the surface like most Keynesian talking points is very plausible and has a sort of logic to it. The argument that Havey puts forth is that much of thes stimulus spending and deficits wasn't the cause of the 2008 recession but a response to it, which is totally true. Although he tries to pidgeon hole the correlation between government debt and economic difficulties in one direction where the former is caused by the latter. In all reality you have a feedback loop, a viscious cycle.
Government Spending on things like oh say the Iraq War leads to deficits -->
Which Leads to increases in the money supply -->
which leads to lower interest rates -->
which leads to mal-investment -->
which leads to a boom -->
which leads to a bust -->
Government then increases Spending as response... and the cycle begins again....
So yes the current recession wasn't caused by the stimulus but can definetly be tied to Greenspans monetary policy and Bushs deficit spending which sowed the seeds for the mal-investment in the housing sector which allowed for a lack of worker mobility an over commitment of labor in construction which I don't have time to get into. So yes bad economic times can prompt government spending, but government spending can also lead to tough economic times. The answer to this feedback loop is to break the cycle and not spend similar to what was done in the recession of 1920. To anyone who's been following this in depth can see we're making the same mistakes we did in 1929.
Conclusion
At the end of the day Keyensians love to flip-flop causality sometimes just out of the academic challenge of doing so, but if the question is which begets which (production -> consumption) or (consumption -> production) it's easily visible with the following the anology.
(Production -> Consumption)
I baked a cake (production) so now I can eat the cake (consumption)
versus (Consumption -> Production)
I eat the Cake (consumption) so now I can abke a cake
As you can see in the second example the person ate a cake which did not exist, so it's essentially a non-sensical statement since cake MUST be baked first for a cake to be eaten. Consumption is the result of production processes being developed in an economy, although if you focus on getting everyone to consume like Keyensian economics does without disregard if the work people do actually produce (work programs, public sector jobs). Production must occur in order for their to be something to consume and if not then you'll just find people fighting over more fiercly over a shrinking pie in which everyone has developed an insatiable appetite (Imagine an all you can eat buffet that never gets replenished).
Bottom Line... as much as I try to empathize and understand, the flaws in Keynesian Economics are too obvious and too many to ignore.
by Alex Merced
This is a Response to THIS episode of Alan Harvey's Demand Side Podcast
As an anarcho-capitalist aspiring austrian economist, one may ask why would I bother consuming such media such as the Rachael Maddow Show or Alan Harvey's Demand Side podcast which are the antithesis of my own personal opinions and belief structure. Of course, in order to be effective in debate one must be able to empathize and understand the opposing view or debates end up being a shouting match without any progress towards any consensus.
Much of the time our opinions across many spectrums come from similar values and virtues so a consensus can be achived by merely repositioning an issue in a way to reflect that. When Values and Virtues underlying our opinions on an issue differ greatly then of course conclusions will vary in a non-reconcilable way, so being able to recognize this helps one realize that the current debate is useless that the debate must be shifted a step back to a more fundamental ones of which values, goals, and principles should take priority before moving foward. This is important cause if you and your opponent to agree on the underlying assumptions then you debating two completley different issues.
So listening to the views and ideas of your opponents help identify these important variables in debate. Although aside from this reason while I often disagree with the conclusions Maddow comes to, I do appreciate the research and ability to identify problems or symptoms of other problems even if her insinuated solutions are often worse than the problem. As far as Alan Harvey I can't say the same, he's staunch defender of the Keynesian stronghold and it's amuzing to listen to a show that positions itself to the LEFT of Krugman who is pretty far left as it is.
So what is it I want to respond to? Well in his most recent podcast he was makings some critiques of Reinharts and Rogoffs new book "This Time It's Different". While I'm not here to defend the conclusions of this book, since I have no read the book as of yet I do want to address many of the bizzarre insinuations on behalf of Harvey in his critic.
#1 The Government can Never go Bankrupt
For the most part, to an extent this is true. If a government has control over it's money supply it can always increase the money supply in order to tender it's debts. For example if you can always just print money to make your monthly credit card payments, no matter how much debt you have you won't technically go bankrupt. Although this is not a good thing, cause this means politicians have no incentive to make difficult political decisions and will generally lean towards spending as a solution (which a keynesian would say is good, cause they believe consumption is THE economic driver).
Although this is not the only problem since an ever increasing money supply leads to inflationary pressures and mal-investment as an increased money supply leads to less saving since interest rates drop yet more investment in capital intensive long term projects which will have no consumer base when completed since there is no savings to purchase them (how many high rise condo were planned but never completed in las vegas). So overall even though the government won't go bankrupt this has been little solace for Zimbabwe and their inflationary problem (everyone in Zimbabwe is a Millionaire... but they still can't buy a cup of coffee). Although if you bring up the inflationary argument it leads to Harveys next ridiculous statement...
#2 that for Developed economies there is little relationship with debt from inflation
The argument Alan Harvey is trying to make is that high debt levels have little to do with inflation if the economy is advanced enough. I would disagree that the size of the economy just eliminates the relationship but that it has more ability to mitigate the conditions that lead to dire consequences in the short run. A larger economy with lots of imports and trade deficits such as the US sends it's dollars abroad as the money supply increases, mitigating the supply increase (although this would still devalue the dollar vs other currencies since people are essentially selling off the dollar to buy foreign goods, but it prevents the domestic flood of dollars). So while a large economic importer economy like the US has this mechanism to deal with money supply increases the result of this is that business and industry follows the money abroad (why be in the US if US dollars are going abroad?).
Although if perpetual money supply increases are perceived then foreign exporters will begin to refuse to take dollars cause of expected supply increases, increasing their currency risk. If enough foreigners refused to take dollars there would be nowhere to soak the growing supply of dollars which would be the trigger for hyperinflation. Although we've been able to buy time cause the US is currently the reserve currency of the world so for the time being for foreign exporters will take dollars despite the currency risk but already many countries are divesting from the dollar.
So will the debt essentially lead to overnight price inflation... maybe not but it eventually will and in the meantime we'll just have to watch all our industry leave first.
#3 Bad Economics Times cause runaway government debt, not the other way around
Once again, on the surface like most Keynesian talking points is very plausible and has a sort of logic to it. The argument that Havey puts forth is that much of thes stimulus spending and deficits wasn't the cause of the 2008 recession but a response to it, which is totally true. Although he tries to pidgeon hole the correlation between government debt and economic difficulties in one direction where the former is caused by the latter. In all reality you have a feedback loop, a viscious cycle.
Government Spending on things like oh say the Iraq War leads to deficits -->
Which Leads to increases in the money supply -->
which leads to lower interest rates -->
which leads to mal-investment -->
which leads to a boom -->
which leads to a bust -->
Government then increases Spending as response... and the cycle begins again....
So yes the current recession wasn't caused by the stimulus but can definetly be tied to Greenspans monetary policy and Bushs deficit spending which sowed the seeds for the mal-investment in the housing sector which allowed for a lack of worker mobility an over commitment of labor in construction which I don't have time to get into. So yes bad economic times can prompt government spending, but government spending can also lead to tough economic times. The answer to this feedback loop is to break the cycle and not spend similar to what was done in the recession of 1920. To anyone who's been following this in depth can see we're making the same mistakes we did in 1929.
Conclusion
At the end of the day Keyensians love to flip-flop causality sometimes just out of the academic challenge of doing so, but if the question is which begets which (production -> consumption) or (consumption -> production) it's easily visible with the following the anology.
(Production -> Consumption)
I baked a cake (production) so now I can eat the cake (consumption)
versus (Consumption -> Production)
I eat the Cake (consumption) so now I can abke a cake
As you can see in the second example the person ate a cake which did not exist, so it's essentially a non-sensical statement since cake MUST be baked first for a cake to be eaten. Consumption is the result of production processes being developed in an economy, although if you focus on getting everyone to consume like Keyensian economics does without disregard if the work people do actually produce (work programs, public sector jobs). Production must occur in order for their to be something to consume and if not then you'll just find people fighting over more fiercly over a shrinking pie in which everyone has developed an insatiable appetite (Imagine an all you can eat buffet that never gets replenished).
Bottom Line... as much as I try to empathize and understand, the flaws in Keynesian Economics are too obvious and too many to ignore.
Saturday, August 7, 2010
Summarizing Jorg Guido Hulsmann's Lecture on Deflation
Summarizing Jorg Guido Hulsmann's Lecture on Deflation
by Alex Merced
Listen to his Mises U Lecture on Deflation
One of my favorite topics and debates is the Inflation/Deflation debate, of Hulsmann has written extensively about putting him in my top 5 misesians (Murphy, Block, Woods, Hulsmann, and Salerno). This year his lecture was recorded much better than last years, so I was able to gleem much more of the finer points. Ok so let's sum up his argument about why growth can occur during deflation...
Three Examples Of This Good Deflation in the US:
1839-1843: Had Deflation in which unemployment remained near full employment
1870's: Where you had sustained deflation, and the most steady and robust growth in American History
1920's: Where the country went into recession, and allowing it deflate led to a speedy recovery unlike 1929.
(NOTE: In his lecture Hulsmann consciously decided to stick to the current mainstream definition of deflation as drops in the price level, not the typical austrian definition as a drop in the money supply, there is a difference.)
How do Prices Drop from Productivity Gains:
A pully system makes accomplishing a task easier by extending the distance of which I must exert force. So for example to pick something up 3ft I may have to use a force of 10, but if I use a pully and pull 10ft worth of string and only need to use a force of 3, so now with a force of 10 I can pull the block up 9.3ft. As you can see, by extending the distance the productivity has increases, and the structure of production works the same.
For Example Let's Use Hulsmanns Example of the Farmer
Structure One - The Farmer Plows the Field by Hand
Structure Two - Someone Raises the Horse -> The Farmer Uses the Horse to Plow the Field
Structure Three - Someone Mines Steel -> Someone Assembles Parts from Steel -> Someone Assembles the Parts into a Tractor -> The Farmer Uses the Tractor to Plow the Field
So looking at these three it should be obvious structure one would be the most expensive structure of production. In this scenario the farmer would either lose a lot of time plowing the fields himself, or money having to hire many worker to plow for him, so the end good would be more expensive. Although, in structure three, the farmer may be able to plow the whole field by himself in little time with the tractor so his goods would be cheaper. So as the structure of production grows, production becomes more productive, which means the goods can be cheaper, this is the kinda of productivity based price deflation we see in technology all the time.
Next Point: What if deflation occurs cause changes in the supply or demand for money? (IE people want to save more)
In an Equity Based Economy (people + businesses pay cash, little to no debt in the economy) - Producers who do not anticipate the price deflation with lose money when they can't sell their goods at the previous market price. In order not to lose money again the producer will renegotiate the costs up the structure of production making the whole structure nominally cheaper to adjust to the deflation to maintain the same profit margins. If the producer does anticipate, he may stay out of the market to not lose money and wait till some people have in order to negotiate the costs of structure of production. At the end of the day, after adjusting the structure the producer and all the higher stages of production will still have a similar margin of profit after adjusting.
In a Debt Based Economy (people+ businesses incur debt to purchase goods) - This is more painful since the debt's nominal value doesn't automatically go down with prices, so it's difficult to service the debt on the slimmer profits. Although, just like the structures of production, if the lender and borrower both want to continue on they'll renegotiate the principal (original money lent) of the loan probably at a higher rate of interest so it can be serviced in the equilibrium price level. Although not all lenders have the foresight to renegotiate so there will be a period of massive bankruptcy of borrowers and lenders purging the non-sustainable debt leaving the economy with a sustainable foundation. In the end though, new market entrants will surface with the lower costs of business to continue the structure of the production.
Final Point: Why do the elites and powerful fight so hard against deflation?
People need resources to gain power, those who are most powerful and elite in society more than likely have incurred lots of debt in the process of attaining that power. If deflation takes hold, while it doesn't change the overall structure of the economy it does ravage the elites and powerful as they go bankrupt not being able to maintain their large debts, and brings upon a proverbial political power shift to those who saved and acted responsibly under their reign of power.
Conclusion
Not only does deflation not destroy an economy, it actually can make it more robust as seen by historical evidence linked to at the the top. Deflation truly threatens the elite who's policies and reign causes the massive inflation that the deflation corrects, so it plays a very healthy role in making sure young fresh responsible people move up the power ladder while the old corrupt irresponsible power of old is punished for their mis-use of power and leverage.
Listen to his Mises U Lecture on Deflation
One of my favorite topics and debates is the Inflation/Deflation debate, of Hulsmann has written extensively about putting him in my top 5 misesians (Murphy, Block, Woods, Hulsmann, and Salerno). This year his lecture was recorded much better than last years, so I was able to gleem much more of the finer points. Ok so let's sum up his argument about why growth can occur during deflation...
Three Examples Of This Good Deflation in the US:
1839-1843: Had Deflation in which unemployment remained near full employment
1870's: Where you had sustained deflation, and the most steady and robust growth in American History
1920's: Where the country went into recession, and allowing it deflate led to a speedy recovery unlike 1929.
(NOTE: In his lecture Hulsmann consciously decided to stick to the current mainstream definition of deflation as drops in the price level, not the typical austrian definition as a drop in the money supply, there is a difference.)
How do Prices Drop from Productivity Gains:
A pully system makes accomplishing a task easier by extending the distance of which I must exert force. So for example to pick something up 3ft I may have to use a force of 10, but if I use a pully and pull 10ft worth of string and only need to use a force of 3, so now with a force of 10 I can pull the block up 9.3ft. As you can see, by extending the distance the productivity has increases, and the structure of production works the same.
For Example Let's Use Hulsmanns Example of the Farmer
Structure One - The Farmer Plows the Field by Hand
Structure Two - Someone Raises the Horse -> The Farmer Uses the Horse to Plow the Field
Structure Three - Someone Mines Steel -> Someone Assembles Parts from Steel -> Someone Assembles the Parts into a Tractor -> The Farmer Uses the Tractor to Plow the Field
So looking at these three it should be obvious structure one would be the most expensive structure of production. In this scenario the farmer would either lose a lot of time plowing the fields himself, or money having to hire many worker to plow for him, so the end good would be more expensive. Although, in structure three, the farmer may be able to plow the whole field by himself in little time with the tractor so his goods would be cheaper. So as the structure of production grows, production becomes more productive, which means the goods can be cheaper, this is the kinda of productivity based price deflation we see in technology all the time.
Next Point: What if deflation occurs cause changes in the supply or demand for money? (IE people want to save more)
In an Equity Based Economy (people + businesses pay cash, little to no debt in the economy) - Producers who do not anticipate the price deflation with lose money when they can't sell their goods at the previous market price. In order not to lose money again the producer will renegotiate the costs up the structure of production making the whole structure nominally cheaper to adjust to the deflation to maintain the same profit margins. If the producer does anticipate, he may stay out of the market to not lose money and wait till some people have in order to negotiate the costs of structure of production. At the end of the day, after adjusting the structure the producer and all the higher stages of production will still have a similar margin of profit after adjusting.
In a Debt Based Economy (people+ businesses incur debt to purchase goods) - This is more painful since the debt's nominal value doesn't automatically go down with prices, so it's difficult to service the debt on the slimmer profits. Although, just like the structures of production, if the lender and borrower both want to continue on they'll renegotiate the principal (original money lent) of the loan probably at a higher rate of interest so it can be serviced in the equilibrium price level. Although not all lenders have the foresight to renegotiate so there will be a period of massive bankruptcy of borrowers and lenders purging the non-sustainable debt leaving the economy with a sustainable foundation. In the end though, new market entrants will surface with the lower costs of business to continue the structure of the production.
Final Point: Why do the elites and powerful fight so hard against deflation?
People need resources to gain power, those who are most powerful and elite in society more than likely have incurred lots of debt in the process of attaining that power. If deflation takes hold, while it doesn't change the overall structure of the economy it does ravage the elites and powerful as they go bankrupt not being able to maintain their large debts, and brings upon a proverbial political power shift to those who saved and acted responsibly under their reign of power.
Conclusion
Not only does deflation not destroy an economy, it actually can make it more robust as seen by historical evidence linked to at the the top. Deflation truly threatens the elite who's policies and reign causes the massive inflation that the deflation corrects, so it plays a very healthy role in making sure young fresh responsible people move up the power ladder while the old corrupt irresponsible power of old is punished for their mis-use of power and leverage.
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