Seems to me they're both right, but I see something perhaps ironic in the Hayek position. Say you set the markets "Free", well, aren't those humans in charge of the free markets likely to be driven by their animal spirits to go and do dumb things which lead to the boom and bust cycles? Sure, Hayek is a voice of reason, but since when has humanity listened to reason all the time?
If we had the monetary system Hayek espoused, then we wouldn't have the rope to hang ourselves with.
Heck, if we simply had had a free market without the government's mortgage purchase moral hazard from hell, we wouldn't be in this mess either, even with our current credit money system.
Also, Hayek's system isn't dependent on AGGREGATE intelligence. Somebody who sees that "person A" is a moron and figures out how to get in there with a better price or product or (fill in the blank), prospers.
Keynes' aggregate indeed ignores human motivation -- no economic growth happens because somebody busts a window... because that eats up funds which would have been used to pay for Something Else...
Jim and Russ, Your comments are why I think there is a ring of truth to both theories. I don't think you can have one without the other. I think both combined explain the real world and it's pluses and negatives very well. The excesses of Keynesian type economics do very well for some while others prosper under the Hayek model. You probably have to use both if you wish to prosper all the time.
Admittedly I'm quite the pessimist, but there is a crapload of human history that says there aren't enough smart people to go around to take advantage of dumb positions in the markets and take over, and further, not everyone thinks logically about what motivates them in a positive way of growth. More often than not, the human motivations are strictly selfish (protectionism for example) even after an industry should die and move on. And if we had a world of truly smart people making logical decisions, I suspect we would be in a much better place than we are now.
You're right that there's much that's true about Keynes's arguments, especially as regards to the velocity of money in the economy, but the flaw that the video mentions, that Hayek harps on, and that Russ points to, is his notion that unproductive labor is OK so long as it occurs is just wrong. The primary virtue of capitalism, and also the source of its distaste in the hearts of compassionate people everywhere, is that it allows failure to occur. When failure is rewarded, as most tyrannies, some socialist governments and the most ardent of Keynsians prefer, this sets up an even bigger nastier failure to follow. But no-one likes to lance the wound when it causes innocents to suffer, hence the pessimism felt by many whose only fault was that their context changed.
If you want to see really good thought in the Keynesian direction, though, you've gotta check out Minsky -- he takes the baton and runs with it properly.
Where Hayek was so smart was his idea that since we're not as smart as we'd like to think, that we should configure our macro-economy with this in mind, so that we can't screw ourselves over. He'd fully agree that folks aren't that bright, but he'd say that it needn't be the cause of periodic distress.
You won't get any arguments from me on your point that stupid things should not be rewarded. Problem is - they are - no matter what you do about it. As long as someone can make a cheap and lazy buck, no matter what the consequences are, they will.
The compassion issue doesn't enter into it in my opinion. Taking care of the poor so they don't drag you down later makes for a smooth stable society. Sure, sometimes the poverty is self-inflicted, but other times its not (lay-off for example - someone else's irrational exuberance that brings down the whole company).
I guess what I'm getting at as I see Keynes argument as much more spot on with real human nature. I like Hayek's position, but the next words out of my mouth are "Good luck with that."
Keynesian economics benefits only one group of people -- that would be a group of people who consistently profit from extremely low interest rates and the perpetuation of high levels of debt. 19th-century-style farmers qualified. Political rent-seekers do now.
EVERYBODY ELSE is screwed by this notion, because they live in environments where cash is meaningful. The farmer is cash-poor to cash-nonexistent 95% of the year -- he doesn't care. The rent-seeker doesn't care, because his salary is determined by political fiat. Everybody else in the economy is harmed by the combination of inflation and debt caused by deficit spending.
Meanwhile, the glass-maker analogy to which I referred is actually a perfect proof of why the Circular Flow theory is simply wrong, precisely because it's in aggregate.
Keynes says: increased aggregate spending = more money circulates in the economy = growth.
Reality says: Property owner suffers a loss. Glassmaker gains at the expense of whoever WOULD have gotten the property-owner's money for some positive purpose (Bastiat). The aggregate spending hasn't increased, it's merely been redirected, while an actual harm has been inflicted, forcing the property owner to spend merely to keep the status quo, rather than expand his business, etc.
Keynes and Hayek can't "both be necessary" because they're fundamentally and utterly contradictory. If either is even partially correct, the other is COMPLETELY incorrect.
Similarly, velocity of money in the economy is ALSO not in and of itself worthwhile, again because *in aggregate* we cannot determine how worthwhile said velocity is.
An example of this might be the current stock market, where traders flip stocks back and forth every few *seconds* looking to squeeze millions of tiny sub-penny profits into an actual gain. That's velocity... but it's a velocity that does nothing but transfer a small amount of wealth from one owner to another without any productive (growth) value whatsoever.
Russ, I think I understand what you're saying, but let me ask if you mean "correct" to mean the right way the economy should be run, or correct to mean that the two theories/models explain how things really work.
I'm looking at this through the eyes of a scientist in that these two trains of thought are models. They're not absolutes just as we don't have a unifying theory of everything in physics, we don't have a unifying theory of economics. Therefore I see Hayek as probably how we SHOULD be doing things, but Keynes as a more accurate representation of how the real world works. Sure, the economic model of Keynes may not be the best way, but I believe it accurately shows how the current economy works. Once you know how the economy works, you can either work within that system to profit and grow (and it's obvious you can, although maybe not in the best of ways) even if the Hayek model may be the better way to go.
I see Hayek as excellent in theory, but difficult to put into practice (within my rudimentary understanding so far). I also see Hayek contradictory in that if you make a market free, it will not go in the sensible direction, it will go to the Keynes type model. So you in fact have to control the economy (a la China) to get a Hayek model to work. There is no way you'll get people to not choose the easy path unless you make them.
So to go back here. I think I see what you're saying, but I think Hayek and Keynes are different models; while they may not be able to exist at the same time, both can explain how an economy works for good or for ill. We (the US) are obviously in a Keynesian model, but I think China is a controlled Hayek model and maybe, just maybe, that control of the market (not at all free) is why they're growing so damn fast.
You're positing that Hayek is in the former camp, and Keynes in the latter.
That's not so. Hayek's is a description, and a vastly more accurate one, of how things really work -- c.f. my description of the Glassmaker's Fallacy.
If anything, it is the KEYNESIAN theory that is the set of prescriptions, as it argues for constant intervention into the markets. Hayek's position is to avoid those interventions and "let the markets do what they do without giving in to the temptation to run the printing presses for easy credit."
Therefore, a market left alone CANNOT go into the Keynesian model. By definition. To believe that possible is to be fundamentally misunderstanding them from the beginning.
Keynes says "markets are inherently volatile, so we must consistently intervene in order to keep aggregate demand (i.e., overall spending) high."
Keynes' theory is attractive to political rent-seekers and others who wish to say "hey, we can afford, X,Y, and Z too!," on the theory that the resulting deficits and inflation are meaningless. The problem with this is that it is a gold-clad recipe for creating a "bubble." Which must eventually burst.
Where we get into trouble is that when the Keynesians refer to the Great Crash of '29 as a non-correcting bubble justifying their theory, they are practicing bad history -- the bubble was problematic, yes. And it burst, to the delight of bankers in London and Paris. But the Smoot-Hawley Tariffs, passed at the same time, did IMMENSE structural damage to the global economy, effectively destroying an era of widespread international trade by kicking off a huge multinational trade war, in the process directly resulting in the collapse of the Weimar Republic, etcetera.
It was the destruction of that global market that caused the real damage of the Great Depression, not the (overdue) Wall Street Crash, and real prosperity didn't return until that market was re-established (roughly about 1954), in spite of two decades of hardcore Keynesian economic policies and the biggest war the US had ever seen and spent money on. No amount of spending and policies designed to increase policies could be effective until ACTUAL markets were slowly and painfully rebuilt.
Indeed, the stock bubble preceding 1929 happened precisely because the shiny new Fed had instituted a loose-dollar inflationary policy, priming the pump in an attempt to make it easier to get credit. This was because several of the "sick industries" (which had overdeveloped in WWI on gov't subsidy and/or were growing obsolete) were having tremendous difficulty gaining capital.
Rather than businesses using said capital to expand, as was the hope, what instead happened, just like Texan real estate in the 70s, the tech bubble in the 90s, and the real-estate bubble of the 00s, was an immense round of speculation and flipping in the stock market, with too much money -- most of it illusory!!-- chasing too few actual assets.
The collapse of that bubble in and of itself was both overdue and harmless -- it merely returned prices to 1927/1928 levels. It was only well into the next year in '30 or so that the tariffs kicked in and dropped the economy straight off a cliff.
This was not widely understood at the time, but is now, which is why you heard that "don't create a trade war during a recession" speeches from both sides of the political aisle while the bank bailouts were being debated -- the groups suggesting that widespread protectionism was the cure were shouted down, and rapidly.
The problem with Hayek, and why it's so unpopular, is that it returns economics to being the "dismal science," which is fundamentally staid and unsexy. Bubbles still occur, but they occur because people allow their better judgment to fail them and overinvest -- usually new industries prior to their "shakeout and consolidation" phases. But because the money chasing the resources is real, the bubbles tend to be fewer and smaller, rather than what we have now, which is the Fed, from Greenspan to now, constantly trying to create economic growth by monkeying with the currency, and sending the economy into a CONSTANT boom-bust cycle, which does immense damage in the mean time.
Which begs the question, then, "well, if the Keynesian stuff DID get us out of the Great Depression when those markets re-emerged, why not stick with them?"
Again, the ACTUAL history points out something significantly different, which isn't widely understood -- particularly by today's labor movement.
In the 40s and 50s, the world's industrial powers were essentially bombed into the Stone Age. We were literally the only major (capitalist) industrial power which hadn't been completely and totally wrecked. So for the space of about a generation, we were the suppliers of industrial products to almost the entire world.
That was an unnatural position, which created further unnatural ideas that were doomed to die a slow and painful death in the '60s and '70s, such as the notion that unskilled or semi-skilled labor could earn a middle or even upper-middle-class salary. Unions could ask for -- and received!! -- pretty much whatever they wanted, because, having no meaningful competitors, the suppliers just passed on the costs.
Then, gradually, "made in Japan" stopped meaning "cheap crap that breaks in four days" and started meaning "we're kicking your sclerotic economic asses." To this day the US labor movement, has neither come to grips with the fact that globalization and widespread international commerce is the norm, rather than the exception, and has never recovered in the private sector as a result, thriving only among rent-seekers in government. (The California Flaming Train Wreck of Madness(tm) being an excellent example.)
Ultimately, running the printing presses and tossing money into peoples' hands that way creates no economic growth, because you're devaluing the currency in the process -- you can add water to beer while passing it around, but the actual amount of beer remains the same.
The difference being that everybody has money but feels like they're constantly falling behind... which they are. And both political parties are guilty of it.
That's why Mister Lemur screams so loudly about how the books are cooked, and why Greenspan-era politicos refuse to actually publish the m4 (the REAL cost-of-living index, allowing no ersatz subtitutes, which during the Bush era ceased to even be published): if they did, there'd be a riot in the streets by morning, and Washington's flaming ruins would fall into the Atlantic.
1. Growth is good. 2. Credit expansion (easy money, inflation, currency devaluation) is NOT growth, because the "fake money" has no backing in reality -- no actual value. This pseudo-growth is a bubble that eventually must and will collapse. 3. Real Economic Growth and mere Credit Expansion are thus fundamentally separate creatures. 4. Economic figures that do not distinguish between the two are fundamentally misleading and give a false picture of what's occurring. China looks like a worldbeater now... but only if you ignore that a vast % of its economic growth is actually the result of credit expansion -- the Chinese are coming due for a HUGE bubble to burst, which they will kick down the road just like California has, for as long as the Party can manage to do so... which will actually make the problem worse when it actually does implode.
#5: Once you understand this, you start to be an economic Killjoy like Mister Lemur, and will soon find yourself posting graphs and telling all your friends to get out of debt as fast as you possibly can. :D
Hey, I'm not a killjoy! Just, erm... eat your vegetables. Yeah, that's it. :o)
To also answer Axl: you're right, that the Keynesian model is followed more often, for reasons Russ cited above (except it's M3, not M4: see http://www.nowandfutures.com/key_stats.html ), in spite of the fact that almost all economists decry it as false. The fact is that Keynes was correct that in the short run the synthetic demand will keep the ship afloat, but "everybody knows" that the debt incurred becomes even worse down the road. The politicians don't care because they don't need a chair 'til the music stops, and by then they have their cushy federal retirements and speaking gigs to look forward to (but no-one thinks they're CORRECT).
The oddest thing is that Minsky's theory of market instability is completely correct, even though he's a Keysian. Most folks ignore him because he believes in public works projects as an employer of last resort sorta like the Fed, which would be as disastrous as any communist work program you care to name.
There is a case to be made that the market intercession, were it done with CASH, not credit, might be OK. But governments allocate cash towards constituencies instead of hoarding it, so this isn't likely to generate any empirical data.
I really wish the three of us were in a room discussing this - I'm getting greatly enlightened here.
I see a lot more clearly what both of you are saying, but is it perhaps impossible to have a Hayek ecomony without direct control of the market? I swear it's like you would need an enlightened despot to hold the line on those set of rules so that everyone else would follow them. Even both of you point out it's damn easy to slip into the Keynes model. So maybe Keynes is what humanity is want to do and Hayek is what humanity should do. So now I see irony in Keynes position: control the market and you can avoid a Keynes model.
My mind is still grappling with the debt/cash issue though. Like with matter/energy, you shouldn't be able to create it from nothing. And yet it has been done. If capital were truly a constant thing, we'd still have the same amount of capital moving around that we had at the dawn of civilization, but that's clearly not the case. So the question I grapple with is this: when does that imaginary cash slipped into the system become real? When someone believes it to be real or when the rules of the game change? What I mean is that what is backing up cash vs. debt that makes it real? For all we know, the debt were financing through China is being paid for with imaginary Chinese value. No briefcases of cash exchanged hands, no shipments of gold were made; it's a supposed trust agreement of perceived value. So if the value of capital is perception, how can it be measured such that one can say what capital one really has, and therefore, what they could really pay back if someone came to collect?
Maybe I'm not making sense here, but I'm still struggling with what decides the value of capital? You can't measure it exactly - it's subjective isn't it?
A market without intervention would by definition slip into Hayeckian mode, because it'd be forced into "moral hazard" with no relief.
Imaginary cash slipped into the system NEVER becomes real. However, since we're REQUIRED BY LAW to accept payment in those dollars, it flies.
That's why your wackos in the wilderness screaming about the Fed are screaming -- and in this case, they're right. Because the funny-money must be accepted, we wind up with inflation and lots of it. Inflation is effectively a hidden and pernicious tax which always punishes the poorest the worst.
The value of capital, like the value of everything else, is based on demand.
If I understand what you're asking, the "imaginary cash" is real immediately, as the money that's lent into existence is deposited and treated no differently than actual currency (as an aside, I've speculated over a dual-money system where cash and credit are different currencies with a floating exchange rate) -- what happens is that price changes in the market are gradual. It takes a while for the monetary dilution (aka, inflation) to be realized in price increases.
Russ's right about the Federal Reserve Notes, though (which are not technically dollars: only Congress may issue those) -- the really pernicious thing is that we can't say "sorry, you can't give me a tax return of ten dollars; you've diluted your dollars and have to give me 13 dollars instead", so the increase in money becomes mandatory.
Starting to understand better now....I need more time to digest all this but the inflationary comment of one day you have 10, but you go in the next day to pay a bill and now its 13 dollars but you still only have 10 to pay with. That I get. The rest (Hayek vs. Keynes) I'm going to have to dwell on more. Especially in regards to the comment that the Keynes model we're in now is a road to ruin.
Thanks to both of you for taking the time to explain.
Actually that's the opposite of what I meant: what I meant was you're owed 10 dollars one day (let's say, for a fancy cake). A week later the money supply has been diluted, and those ten dollars are now worth less, so it would require $13 dollars for the new cake to get the same economic value for it, but, they fudge the inflation numbers by looking at price effects, so you still only get $10, which is less than your cake is now actually worth. Thus inflation (easier understood as dilution) steals from all market participants -- it's a form of legal counterfeiting that benefits only the first user of the money.
Well, I think I get it. You owe me $10 for something that cost me $9 to make. But unless I can now charge you $13 based upon your math above, I still only make $1 profit. You still have $10, I get $10, it's no change.
If the cost of the items to make the item I'm selling go up and I can't pass the cost along to the customer, then I lose. But if my currency and your currency go down at the same time, I'm no poorer and neither are you.
I'm not seeing what you're saying here. I can understand if the currency I'm holding gets devalued from day to day, but if both people in the transaction are devalued at the same time, and provided what it cost me to make the item is unchanged, then nothing has changed at all.
Things don't devalue at the same time: you don't make that cake with time-n dollars, you made it with time-(n-1) dollars, which were worth more, and, hence, your $10 paid your suppliers more than your customer's $10 is paying you.
A valid point. Although I suppose the rate of devaluation is important here in that if I'm living to dollar to dollar, the rate of devaluation may not be noticeable (I'm spending before it has a chance to devalue).
True -- inflation only really matters if you have a savings or retirement account, and also for those who can't increase their earnings to compensate for price increases.
Especially that latter group -- if they're under salary pressure of any kind (and most of the working class is due to automation), it's a quick trip to miseryville(tm)
The irony is that for the longest time since they were *promised* pensions through their unions, they were perfectly happy to destroy the retirement savings of the middle class....
31 comments:
Yeah, if you see, I'm in the comments on this one -- at least on the npr site. I intend to use this in class.
What comments? NPR?
Seems to me they're both right, but I see something perhaps ironic in the Hayek position.
Say you set the markets "Free", well, aren't those humans in charge of the free markets likely to be driven by their animal spirits to go and do dumb things which lead to the boom and bust cycles?
Sure, Hayek is a voice of reason, but since when has humanity listened to reason all the time?
If we had the monetary system Hayek espoused, then we wouldn't have the rope to hang ourselves with.
Heck, if we simply had had a free market without the government's mortgage purchase moral hazard from hell, we wouldn't be in this mess either, even with our current credit money system.
Also, Hayek's system isn't dependent on AGGREGATE intelligence. Somebody who sees that "person A" is a moron and figures out how to get in there with a better price or product or (fill in the blank), prospers.
Keynes' aggregate indeed ignores human motivation -- no economic growth happens because somebody busts a window... because that eats up funds which would have been used to pay for Something Else...
Jim and Russ,
Your comments are why I think there is a ring of truth to both theories. I don't think you can have one without the other. I think both combined explain the real world and it's pluses and negatives very well. The excesses of Keynesian type economics do very well for some while others prosper under the Hayek model. You probably have to use both if you wish to prosper all the time.
Admittedly I'm quite the pessimist, but there is a crapload of human history that says there aren't enough smart people to go around to take advantage of dumb positions in the markets and take over, and further, not everyone thinks logically about what motivates them in a positive way of growth. More often than not, the human motivations are strictly selfish (protectionism for example) even after an industry should die and move on. And if we had a world of truly smart people making logical decisions, I suspect we would be in a much better place than we are now.
You're right that there's much that's true about Keynes's arguments, especially as regards to the velocity of money in the economy, but the flaw that the video mentions, that Hayek harps on, and that Russ points to, is his notion that unproductive labor is OK so long as it occurs is just wrong. The primary virtue of capitalism, and also the source of its distaste in the hearts of compassionate people everywhere, is that it allows failure to occur. When failure is rewarded, as most tyrannies, some socialist governments and the most ardent of Keynsians prefer, this sets up an even bigger nastier failure to follow. But no-one likes to lance the wound when it causes innocents to suffer, hence the pessimism felt by many whose only fault was that their context changed.
If you want to see really good thought in the Keynesian direction, though, you've gotta check out Minsky -- he takes the baton and runs with it properly.
Where Hayek was so smart was his idea that since we're not as smart as we'd like to think, that we should configure our macro-economy with this in mind, so that we can't screw ourselves over. He'd fully agree that folks aren't that bright, but he'd say that it needn't be the cause of periodic distress.
You won't get any arguments from me on your point that stupid things should not be rewarded. Problem is - they are - no matter what you do about it. As long as someone can make a cheap and lazy buck, no matter what the consequences are, they will.
The compassion issue doesn't enter into it in my opinion. Taking care of the poor so they don't drag you down later makes for a smooth stable society. Sure, sometimes the poverty is self-inflicted, but other times its not (lay-off for example - someone else's irrational exuberance that brings down the whole company).
I guess what I'm getting at as I see Keynes argument as much more spot on with real human nature. I like Hayek's position, but the next words out of my mouth are "Good luck with that."
Actually, Jim's really soft-soaping this one.
Keynesian economics benefits only one group of people -- that would be a group of people who consistently profit from extremely low interest rates and the perpetuation of high levels of debt. 19th-century-style farmers qualified. Political rent-seekers do now.
EVERYBODY ELSE is screwed by this notion, because they live in environments where cash is meaningful. The farmer is cash-poor to cash-nonexistent 95% of the year -- he doesn't care. The rent-seeker doesn't care, because his salary is determined by political fiat. Everybody else in the economy is harmed by the combination of inflation and debt caused by deficit spending.
Meanwhile, the glass-maker analogy to which I referred is actually a perfect proof of why the Circular Flow theory is simply wrong, precisely because it's in aggregate.
Keynes says: increased aggregate spending = more money circulates in the economy = growth.
Reality says: Property owner suffers a loss. Glassmaker gains at the expense of whoever WOULD have gotten the property-owner's money for some positive purpose (Bastiat). The aggregate spending hasn't increased, it's merely been redirected, while an actual harm has been inflicted, forcing the property owner to spend merely to keep the status quo, rather than expand his business, etc.
Keynes and Hayek can't "both be necessary" because they're fundamentally and utterly contradictory. If either is even partially correct, the other is COMPLETELY incorrect.
Similarly, velocity of money in the economy is ALSO not in and of itself worthwhile, again because *in aggregate* we cannot determine how worthwhile said velocity is.
An example of this might be the current stock market, where traders flip stocks back and forth every few *seconds* looking to squeeze millions of tiny sub-penny profits into an actual gain. That's velocity... but it's a velocity that does nothing but transfer a small amount of wealth from one owner to another without any productive (growth) value whatsoever.
Russ,
I think I understand what you're saying, but let me ask if you mean "correct" to mean the right way the economy should be run, or correct to mean that the two theories/models explain how things really work.
I'm looking at this through the eyes of a scientist in that these two trains of thought are models. They're not absolutes just as we don't have a unifying theory of everything in physics, we don't have a unifying theory of economics. Therefore I see Hayek as probably how we SHOULD be doing things, but Keynes as a more accurate representation of how the real world works. Sure, the economic model of Keynes may not be the best way, but I believe it accurately shows how the current economy works. Once you know how the economy works, you can either work within that system to profit and grow (and it's obvious you can, although maybe not in the best of ways) even if the Hayek model may be the better way to go.
I see Hayek as excellent in theory, but difficult to put into practice (within my rudimentary understanding so far). I also see Hayek contradictory in that if you make a market free, it will not go in the sensible direction, it will go to the Keynes type model. So you in fact have to control the economy (a la China) to get a Hayek model to work. There is no way you'll get people to not choose the easy path unless you make them.
So to go back here. I think I see what you're saying, but I think Hayek and Keynes are different models; while they may not be able to exist at the same time, both can explain how an economy works for good or for ill. We (the US) are obviously in a Keynesian model, but I think China is a controlled Hayek model and maybe, just maybe, that control of the market (not at all free) is why they're growing so damn fast.
Or so I think anyway.
You're positing that Hayek is in the former camp, and Keynes in the latter.
That's not so. Hayek's is a description, and a vastly more accurate one, of how things really work -- c.f. my description of the Glassmaker's Fallacy.
If anything, it is the KEYNESIAN theory that is the set of prescriptions, as it argues for constant intervention into the markets. Hayek's position is to avoid those interventions and "let the markets do what they do without giving in to the temptation to run the printing presses for easy credit."
Therefore, a market left alone CANNOT go into the Keynesian model. By definition. To believe that possible is to be fundamentally misunderstanding them from the beginning.
Keynes says "markets are inherently volatile, so we must consistently intervene in order to keep aggregate demand (i.e., overall spending) high."
Keynes' theory is attractive to political rent-seekers and others who wish to say "hey, we can afford, X,Y, and Z too!," on the theory that the resulting deficits and inflation are meaningless. The problem with this is that it is a gold-clad recipe for creating a "bubble." Which must eventually burst.
Where we get into trouble is that when the Keynesians refer to the Great Crash of '29 as a non-correcting bubble justifying their theory, they are practicing bad history -- the bubble was problematic, yes. And it burst, to the delight of bankers in London and Paris. But the Smoot-Hawley Tariffs, passed at the same time, did IMMENSE structural damage to the global economy, effectively destroying an era of widespread international trade by kicking off a huge multinational trade war, in the process directly resulting in the collapse of the Weimar Republic, etcetera.
It was the destruction of that global market that caused the real damage of the Great Depression, not the (overdue) Wall Street Crash, and real prosperity didn't return until that market was re-established (roughly about 1954), in spite of two decades of hardcore Keynesian economic policies and the biggest war the US had ever seen and spent money on. No amount of spending and policies designed to increase policies could be effective until ACTUAL markets were slowly and painfully rebuilt.
Indeed, the stock bubble preceding 1929 happened precisely because the shiny new Fed had instituted a loose-dollar inflationary policy, priming the pump in an attempt to make it easier to get credit. This was because several of the "sick industries" (which had overdeveloped in WWI on gov't subsidy and/or were growing obsolete) were having tremendous difficulty gaining capital.
Rather than businesses using said capital to expand, as was the hope, what instead happened, just like Texan real estate in the 70s, the tech bubble in the 90s, and the real-estate bubble of the 00s, was an immense round of speculation and flipping in the stock market, with too much money -- most of it illusory!!-- chasing too few actual assets.
The collapse of that bubble in and of itself was both overdue and harmless -- it merely returned prices to 1927/1928 levels. It was only well into the next year in '30 or so that the tariffs kicked in and dropped the economy straight off a cliff.
This was not widely understood at the time, but is now, which is why you heard that "don't create a trade war during a recession" speeches from both sides of the political aisle while the bank bailouts were being debated -- the groups suggesting that widespread protectionism was the cure were shouted down, and rapidly.
The problem with Hayek, and why it's so unpopular, is that it returns economics to being the "dismal science," which is fundamentally staid and unsexy. Bubbles still occur, but they occur because people allow their better judgment to fail them and overinvest -- usually new industries prior to their "shakeout and consolidation" phases. But because the money chasing the resources is real, the bubbles tend to be fewer and smaller, rather than what we have now, which is the Fed, from Greenspan to now, constantly trying to create economic growth by monkeying with the currency, and sending the economy into a CONSTANT boom-bust cycle, which does immense damage in the mean time.
...and politicians know that it's easier to get elected by saying "let's spend money and party!" than it is by saying "eat your vegetables."
Which begs the question, then, "well, if the Keynesian stuff DID get us out of the Great Depression when those markets re-emerged, why not stick with them?"
Again, the ACTUAL history points out something significantly different, which isn't widely understood -- particularly by today's labor movement.
In the 40s and 50s, the world's industrial powers were essentially bombed into the Stone Age. We were literally the only major (capitalist) industrial power which hadn't been completely and totally wrecked. So for the space of about a generation, we were the suppliers of industrial products to almost the entire world.
That was an unnatural position, which created further unnatural ideas that were doomed to die a slow and painful death in the '60s and '70s, such as the notion that unskilled or semi-skilled labor could earn a middle or even upper-middle-class salary. Unions could ask for -- and received!! -- pretty much whatever they wanted, because, having no meaningful competitors, the suppliers just passed on the costs.
Then, gradually, "made in Japan" stopped meaning "cheap crap that breaks in four days" and started meaning "we're kicking your sclerotic economic asses." To this day the US labor movement, has neither come to grips with the fact that globalization and widespread international commerce is the norm, rather than the exception, and has never recovered in the private sector as a result, thriving only among rent-seekers in government. (The California Flaming Train Wreck of Madness(tm) being an excellent example.)
Ultimately, running the printing presses and tossing money into peoples' hands that way creates no economic growth, because you're devaluing the currency in the process -- you can add water to beer while passing it around, but the actual amount of beer remains the same.
The difference being that everybody has money but feels like they're constantly falling behind... which they are. And both political parties are guilty of it.
That's why Mister Lemur screams so loudly about how the books are cooked, and why Greenspan-era politicos refuse to actually publish the m4 (the REAL cost-of-living index, allowing no ersatz subtitutes, which during the Bush era ceased to even be published): if they did, there'd be a riot in the streets by morning, and Washington's flaming ruins would fall into the Atlantic.
So: let me sum up.
1. Growth is good.
2. Credit expansion (easy money, inflation, currency devaluation) is NOT growth, because the "fake money" has no backing in reality -- no actual value. This pseudo-growth is a bubble that eventually must and will collapse.
3. Real Economic Growth and mere Credit Expansion are thus fundamentally separate creatures.
4. Economic figures that do not distinguish between the two are fundamentally misleading and give a false picture of what's occurring. China looks like a worldbeater now... but only if you ignore that a vast % of its economic growth is actually the result of credit expansion -- the Chinese are coming due for a HUGE bubble to burst, which they will kick down the road just like California has, for as long as the Party can manage to do so... which will actually make the problem worse when it actually does implode.
#5: Once you understand this, you start to be an economic Killjoy like Mister Lemur, and will soon find yourself posting graphs and telling all your friends to get out of debt as fast as you possibly can. :D
Hey, I'm not a killjoy! Just, erm... eat your vegetables. Yeah, that's it. :o)
To also answer Axl: you're right, that the Keynesian model is followed more often, for reasons Russ cited above (except it's M3, not M4: see http://www.nowandfutures.com/key_stats.html ), in spite of the fact that almost all economists decry it as false. The fact is that Keynes was correct that in the short run the synthetic demand will keep the ship afloat, but "everybody knows" that the debt incurred becomes even worse down the road. The politicians don't care because they don't need a chair 'til the music stops, and by then they have their cushy federal retirements and speaking gigs to look forward to (but no-one thinks they're CORRECT).
The oddest thing is that Minsky's theory of market instability is completely correct, even though he's a Keysian. Most folks ignore him because he believes in public works projects as an employer of last resort sorta like the Fed, which would be as disastrous as any communist work program you care to name.
There is a case to be made that the market intercession, were it done with CASH, not credit, might be OK. But governments allocate cash towards constituencies instead of hoarding it, so this isn't likely to generate any empirical data.
I really wish the three of us were in a room discussing this - I'm getting greatly enlightened here.
I see a lot more clearly what both of you are saying, but is it perhaps impossible to have a Hayek ecomony without direct control of the market? I swear it's like you would need an enlightened despot to hold the line on those set of rules so that everyone else would follow them. Even both of you point out it's damn easy to slip into the Keynes model. So maybe Keynes is what humanity is want to do and Hayek is what humanity should do. So now I see irony in Keynes position: control the market and you can avoid a Keynes model.
My mind is still grappling with the debt/cash issue though. Like with matter/energy, you shouldn't be able to create it from nothing. And yet it has been done. If capital were truly a constant thing, we'd still have the same amount of capital moving around that we had at the dawn of civilization, but that's clearly not the case. So the question I grapple with is this: when does that imaginary cash slipped into the system become real? When someone believes it to be real or when the rules of the game change? What I mean is that what is backing up cash vs. debt that makes it real? For all we know, the debt were financing through China is being paid for with imaginary Chinese value. No briefcases of cash exchanged hands, no shipments of gold were made; it's a supposed trust agreement of perceived value. So if the value of capital is perception, how can it be measured such that one can say what capital one really has, and therefore, what they could really pay back if someone came to collect?
Maybe I'm not making sense here, but I'm still struggling with what decides the value of capital? You can't measure it exactly - it's subjective isn't it?
A market without intervention would by definition slip into Hayeckian mode, because it'd be forced into "moral hazard" with no relief.
Imaginary cash slipped into the system NEVER becomes real. However, since we're REQUIRED BY LAW to accept payment in those dollars, it flies.
That's why your wackos in the wilderness screaming about the Fed are screaming -- and in this case, they're right. Because the funny-money must be accepted, we wind up with inflation and lots of it. Inflation is effectively a hidden and pernicious tax which always punishes the poorest the worst.
The value of capital, like the value of everything else, is based on demand.
If I understand what you're asking, the "imaginary cash" is real immediately, as the money that's lent into existence is deposited and treated no differently than actual currency (as an aside, I've speculated over a dual-money system where cash and credit are different currencies with a floating exchange rate) -- what happens is that price changes in the market are gradual. It takes a while for the monetary dilution (aka, inflation) to be realized in price increases.
Russ's right about the Federal Reserve Notes, though (which are not technically dollars: only Congress may issue those) -- the really pernicious thing is that we can't say "sorry, you can't give me a tax return of ten dollars; you've diluted your dollars and have to give me 13 dollars instead", so the increase in money becomes mandatory.
Starting to understand better now....I need more time to digest all this but the inflationary comment of one day you have 10, but you go in the next day to pay a bill and now its 13 dollars but you still only have 10 to pay with. That I get. The rest (Hayek vs. Keynes) I'm going to have to dwell on more. Especially in regards to the comment that the Keynes model we're in now is a road to ruin.
Thanks to both of you for taking the time to explain.
Actually that's the opposite of what I meant: what I meant was you're owed 10 dollars one day (let's say, for a fancy cake). A week later the money supply has been diluted, and those ten dollars are now worth less, so it would require $13 dollars for the new cake to get the same economic value for it, but, they fudge the inflation numbers by looking at price effects, so you still only get $10, which is less than your cake is now actually worth. Thus inflation (easier understood as dilution) steals from all market participants -- it's a form of legal counterfeiting that benefits only the first user of the money.
Well, I think I get it.
You owe me $10 for something that cost me $9 to make. But unless I can now charge you $13 based upon your math above, I still only make $1 profit. You still have $10, I get $10, it's no change.
If the cost of the items to make the item I'm selling go up and I can't pass the cost along to the customer, then I lose. But if my currency and your currency go down at the same time, I'm no poorer and neither are you.
I'm not seeing what you're saying here. I can understand if the currency I'm holding gets devalued from day to day, but if both people in the transaction are devalued at the same time, and provided what it cost me to make the item is unchanged, then nothing has changed at all.
Things don't devalue at the same time: you don't make that cake with time-n dollars, you made it with time-(n-1) dollars, which were worth more, and, hence, your $10 paid your suppliers more than your customer's $10 is paying you.
A valid point. Although I suppose the rate of devaluation is important here in that if I'm living to dollar to dollar, the rate of devaluation may not be noticeable (I'm spending before it has a chance to devalue).
Much much more to think about. Thanks.
True -- inflation only really matters if you have a savings or retirement account, and also for those who can't increase their earnings to compensate for price increases.
Especially that latter group -- if they're under salary pressure of any kind (and most of the working class is due to automation), it's a quick trip to miseryville(tm)
The irony is that for the longest time since they were *promised* pensions through their unions, they were perfectly happy to destroy the retirement savings of the middle class....
Post a Comment