Can the Free Market Stay Free?

Keynesian Critique: is excess capacity a real problem?

Dismantling Keynesian Economics: Savings, Investment, Consumption, and Income

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.

Labor Economics #1 - Sticky Wages

Labor Economics #1 - Sticky Wages
by Alex Merced


The next few posts I'll be writing will be a series on some aspects of labor economics which will mainly center around wages and upward mobility. In this initial part of the series I'm going to address one of the main Keynesian buzzwords, "Sticky Wages".

 John Maynard Keyes (read "Where Keynes went Wrong") makes the admission that it's plausible that an economy can self correct by allowing all prices to adjust downwards if the money supply is reduced for whatever reasons, but contends that there is a problem cause wages are "sticky" so this would make it difficult for businesses to adjust their inventories and prices to maintain the current labor supply since wages won't fall in line with everything else so unemployment ensues. This unemployment will then cause further contraction of the monetary supply causing the economy to just spiral downwards as Keyenes expounds on ideas first proposed by Irving Fisher which really are just echoes of antiquated mercantilist thinking.

 What I contend is not to deny that wages move slower than the prices of consumer goods, but if anything this should be a reason to want deflation not inflation. First let's look at the structure of production to explore why wages would move slower in either direction.

Let's say my structure of production looks like so...

Labor+Materials+Tools = Consumer Good

Deflation Scenario

So if the Demand for the consumer good increases I have three choices on where I can costs in this simplified scenario. For many reasons I may try to cut costs as much as possible in Materials and Tools since they are homogenous instead of giving up my trained skilled labor which is heterogenous. I may still have to ask my labor to take some level of a cut in pay but only after I exausted my ability to lower the other prices. So essentially I may have been able to cut my costs enough to get a drop in price in the good of 10% yet from cutting costs elsewhere only had to cut labor costs by 5%.

So if this is going on across the economy essentially laborers will have gotten an effective pay raise cause goods have dropped in price more than their wages did. Given if you look at editorials in times like 1870's or late 1830's when you had this sort deflation without massive unemployment (actual growth in the 1870's) going on, yet psycoligically many people felt things were bad cause they saw the nominal numbers going down so there is something to be said for the psycological state of people.

Inflation Scenario

So let's say the demand for my goods has increased cause the money supply has grown for whatever reasons. Since demand is increasing all over the economy, the demand for the same materials and tools I use will increase over different industries and firms that use those same tools. This widespread demand increase will cause an increase in the price of my materials and tools which I'll have to pass on to the consumer yet this increase will be larger than any raise I may give to my laborers in a attempt to prevent too much of an increase in the final goods price that would effect it's demand.

So basically due to increases in costs primarily in capital goods the price of the good has gone up 10% and wages went up 5% which if this is a widepread phenomena results a pay cut for the laborer. Again, psycologically they feel good cause they see their nominal wages going up without realizing their real wages are going down. This is essentially the story in any bubble or boom, except due to problems with CPI calculations inflation is usually understated.

Conclusion

If sticky wages are a real phenomena then deflation would be the much better environment for real wages and for the laborer. Although what is usally proposed by Keynesians and other types of leftist is to push for more inflation which actually hurts real wages yet psycologically breeds consent of the labor class since they only think in nominal terms. In order to have the benefits of deflation yet without the psycological pessimism, it would be a proper use of an economic figurehead such as a president to explain this phenomena to manage expectations and sentiment.

Keynesian Fried Chicken

Hello,

My Name is John Maynard Keynes and here at KFC we've spent a few minutes studying the health orthodoxy which has always taught people to eat less and exercise more. I have come to realize that while this makes perfect sense, it results in a "Paradox of Health". What happens is that since you eat less, you have less calories to burn so you exercise less. If you exercise less you have less energy you need to replenish so you eat even less. The natural conclusion is that your eating habits will spiral down till you eat nothing, starve... and die.

So If this is the case then we need to make sure your eating habits are spiraling up. The major tragedy in todays society preventing this is the calorie counts on food products, because producers apparently in my imagination will generally produce foods with calorie counts too high for people to eat, so we should make the calorie count on all products 0 (despite the actual calorie count), this will encourage people to eat more since they will be less pre-occupied by calories. Of course lowering the calorie count will only go so far since peoples stomachs can only expand so much today.

In this case, the government should get directly involved and take any food beyond what people can eat today and give it to people who have room in their stomach. Of course, you might wonder, "what will people eat tomorrow if people eat all the food today?", well who cares about tomorrow you might be dead then.

Now this policy will cause massive growth in peoples stomach meaning people will be able to eat more and there will be less the government needs to take and redistribute... but in the occasion that a massive starvation occurs, it is governments job to eat any foods that's left for the people because if they don't eat it, the paradox of health will take hold.

What causes people to change their eating habits, it's their animal spirits taking hold, either the pig who can eat eat eat or the Camel who can survive long period of time without eating cause of storing food in it's humps. We must make sure through stimulating eating by low calorie counts and redistributing food that the pig spirit remains.

Now many have criticized me as a hypocrite since I've been eating relatively little, and my refrigerator is filled with food. Some claim that I have only made these theories to justify the government taking food from some to feed my posse of musicians and artists who I have random orgies with since they can't find food for themselves. Remember, ignore them, cause if you don't listen to me the world will die of starvation.

Sincerely,

John Maynard Keynes

Where Supply Side and Demand Side Economics Went Wrong

Individualism, Creativity, and Innovation

Individualism, Creativity, and Innovation
by Alex Merced

Premise 1: That creativity comes from tapping into your inner child

 Kids say the darndest things don't they? It's this innocent nature that we admire in kids, when they are young before society begins socializing, limits, values, artificial barriers in their minds. Even then, during their adolescents they typically rebel against many of these constructs until one day the fight becomes to much and "they grow up". It's when one loses the ability to think beyond the barriers given to you that creativity dissapears and only your ability to see what is seeable is there, and you lose the ability to see what is not there.

Think of all the people you consider creative, arn't they generally playful and childlike and then think of all the frumpy people you consider an "adult" and put their creativity into perspective. So in economics the idea of seeing the unseen is called "opportunity cost", the unseen costs of every action you take. To be able to appreciate opportunity cost you must have this childlike nature to see beyond the barriers given by society, you must be creative.

This is why I feel I see such a stark difference from when I see Austrian economist who are generally very light-hearted and humorous versus Keynesians who are usually more cynical and serious. Yet, it's the Austrians who are more equipped to see the unseen opportunity costs, and realize what could have been to look to the future to see what could be. Keyensians, on the other hand focus on only known results to draw conclusions, and only draw self-destructing solutions based on actions that have "visible" results even if the results don't accomplish anything.
(For example, deficit spending has the visible result of increasing GDP but it doesn't fundamentally fix the real, unseen problem of diverting capital).

Another place I noticed this was on a recent interview with Ron Paul on Hardball where the serious and cynical Chris Matthew interviews the optimistic and light-hearted Ron Paul and discusses how Paul remind Matthews of his childhood hero, Barry Goldwater, but then he grew up. This was a sad and depressing statement that shows that at some point he gave in to the barriers that society imposes and became an "adult", while Ron Paul was able to this day in his 70's retain that childlike innocense that allows children to see things for what they are not how society wants them to be.

Do an experiment, give the facts to a child on a issue, and ask for their response.







Premise # 2: Collectivism kills Creativity, while Individualism births it

Creativity must come from an individual with little barriers of the mind as possible, although to think in groups and collectives as done in a collectivist framework would mean imposing more barriers in order define yourself into this "Collective". To see why this would be the case watch this video on the difference between Individualism and Collectivism:









Premise # 3: Innovation comes from Creativity

Innovation results from finding news way to do the same things, which will results in needing less time and resources to survive and spend more time on leisure and personal interests which is a true increase in the standard of life which can be numerically measured. Although innovation requires two things:

1) Investment: These Innovations require capital to develop and distribute, without investment there is no way to develop the most useful innovations.

2) Creativity: You can have all the capital for investment but if there is no ideas to invest in, it's useless, so you need creative people to see the unknown whcih can be developed.

So creativity is pivotal in the process of Innovation, so creating a individualist framework for inviduals to grow up with actually would increase the rate of Innovation and increase the quality of life of these individuals who use these innovations.


Premise # 4: Government Destroys Innovation

Government with it's coercive monopoly on violence accomplishes two things that destroy innovation:

1) They destroy investment through taxation and borrowing which puts incredible constraints on the available investment capital.

2) They destroy creativity by imposing values of the ruling class on society, and creating standards that only impose even more barriers of the mind.

Without creativity and invesment, innovation can occur and this only hurts individuals in their pursuit to impove their individual lives.