Wednesday, July 25, 2012

Zero Hedge — Guest Post: Why Listen To Keynes In The First Place?


While we are on the subject of knives coming out....

Read it at Zero Hedge
Guest Post: Why Listen To Keynes In The First Place?
James E. Miller | Ludwig von Mises Institute of Canada

The Great Divide.

35 comments:

Bob Roddis said...

What an outstanding piece by the always excellent James E. Miller. The only thing he forgot to mention was that Keynes was a notorious pedophile.

Mr. Hayek: You’re perfectly right, but I’d like to add one thing. You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you’re doing good to the people in general. The politicians didn’t want to hear anything more than that – to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.

http://www.youtube.com/watch?v=N364sN5E0hQ

Dan Kervick said...

Entertaining quotes from the hysterical radical individualist lunatic Murray Rothbard

Matt Franko said...

"notorious pedophile"

Bob,

Is that in any way similar to a notorious arguriaphile?

rsp,

PS,

" if you outspend your income and run a deficit,"

Shows how Hayek thought "money" was exogenous...

Bob Roddis said...

Rothbard was certainly a nut. What else do you call someone who proposed that people not initiate violence against each other and constantly exposed war for the elite-driven barbarity that it is, funded as it is by fiat funny money. What a horrible man.

Dan Kervick said...

Austrians are obsessed with Keynes's sex life. I guess that's because they live in hysterical fear of having their tightly constricted individual essence violated and invaded.

Unforgiven said...

There was no war before fiat? Amazing!!

Tom Hickey said...

I am sympathetic to criticism of Keynes as providing a way to save capitalism during the Great Depression from the social unrest that threatened to usher socialism into the West. Keynes correctly recognized that without creating a floor for labor, capitalism was risking its own existence. This is precisely what is happening again today, and the trend is rising rather than declining. Neoliberal capitalism as we know it will likely not survive the the next financial crisis, which could occur as soon as tomorrow, even though I don't expect it then. But all the dominoes are lined up and any one of them toppling with topple the others. A liquidationist response will be the death knell of the current order.

I would prefer to see a more radical response than old Keynesianism, along the lines of a civil economy based on relational interest, mutuality and reciprocity in community, rather than so-called "rational" interest of individuals and firms pursuing maximum utility. That is to say, competition needs to be in a context of cooperation and coordination rather than vise versa, value needs to be differentiated from price, and increasing complexity recognized as factor requiring adaptive response through increased coordination, where the return on coordination exceeds the cost of coordinating.

Integral to this is no longer commodifying labor, and recognizing a wider scope in the definition of slavery and indentured servitude.

Moreover, economics is the material life support system of society and is subservient to social needs and goals. The material goal of society is prosperity distributed equitably and for the welfare of the community as whole rather than pursuing growth as an end in itself, along with the gratification of individuals irrespective of social outcomes.

Dan Kervick said...

What exactly is this "capitalism" that Keynes wanted to save, Tom? He was in favor of the euthanasia of the rentier and the socialization of investment. The collection and of rents from privately organized and capital investment are the soul of the capitalist mode of production. So it seems to me that Keynes's proposals are quite bold indeed, even if usually vended under the label of "saving capitalism."

Tom Hickey said...

The essence of it, Dan, is commoditization of labor. Capitalism is based on wage labor being a commodity, the price of which is to be kept as low as possible.

The EZ kerfuffle right now and the austerity pushing the US are basically about wage suppression.

I have friends who are business owners. They understand full well what the game is and hate it but to compete this is what they have to engage in too.

It's an institutional aspect of capitalism and this renders capitalism incompatible with liberal democracy. Capitalism cannot exist as such in a nation of truly free people.

Tom Hickey said...

BTW, capitalism is often conflated with a market economy, and the claim is that they are equivalent terms or else necessary to each others' existence. This is obviously false since markets were widespread long before modern capitalism was ever conceived. Markets,and there are different types of markets, are distributional tools that can be adapted to many uses.

Major_Freedom said...

Free market = capitalism.

If markets exist, so does private property. If private property exists, then so does private ownership of the means of production. If private ownership of the means of production exists, then so does capitalism, since capitalism is by definition private ownership of the means of production.

This isn't rocket science.

Capitalism is based on wage labor being a commodity, the price of which is to be kept as low as possible.

False. Prices are set by supply and demand. They are kept neither as high as possible nor as low as possible. Capitalists cannot unilaterally decrease the price of labor just because they prefer to pay zero, no more than they cannot unilaterally decrease the price of oil just because they prefer to pay zero for oil.

Capitalists compete for labor.

The fact that capitalists prefer to pay zero for labor, is actually IRRELEVANT to the price they have to pay.

The EZ kerfuffle right now and the austerity pushing the US are basically about wage suppression.

What austerity?

Wages, REAL wages, are suppressed by money printing, since money printing typically benefits the wealthy first. By the time the general labor market gets the new money, prices have already risen.

It's a major reason why real wages have stagnated since 1971, the year the last vestiges of the gold standard were abandoned, after decades of gradual growth in real wages.

Contrary to being beneficial to the working class, money printing harms them.

I'd harm your interests too if I could print money for myself and devalue your cash balance and your earnings.

Trixie said...

It's a major reason why real wages have stagnated since 1971, the year the last vestiges of the gold standard were abandoned, after decades of gradual growth in real wages.

That is indeed very true. Strikingly so. What say you Tom? Because there is a part of me that is beginning to believe that the "system" will continue to work only for the .1% at the expense of everyone else.

And now that the Swamp People have amassed so much wealth, and with it power, why would they ever give that up?

Dan Kervick said...

MF there is no alternative to money printing in a growing economy with a growing population. Even to have stable prices in the context of continuous growth you need a continuous influx of new money. It doesn't matter whether the money takes the form of paper currency or shiny pieces of metal. I take it that also on the free banking or private money creation model you prefer, the supply of money constantly increases. My own view is that a fully privatized monetary system would be wildly unstable, with endless speculation and insecurity as a fact of everyday life. People would have to make endless choices about which forms of currency to hold, and those currencies would be subject to unending market fluctuations and routine collapses, wiping out innocent people routinely.

It is true that the system we have now favors the rich because the channels we use for injecting new money operate through powerful private credit systems. It would be better to rely on a combination of fiscal and monetary techniques that gradually spend new money into the economy directly as a portion of public purchases.

paul said...

"…the channels we use for injecting new money operate through powerful private credit systems…"

Much of that money is accumulated by the 1%. The associated liabilities are left with the remaining 99%.

Credit expansion is limited, so this is a limited growth model.

This is the bubble model.

Bob Roddis said...

MF there is no alternative to money printing in a growing economy with a growing population. Even to have stable prices in the context of continuous growth you need a continuous influx of new money.

There is no need for "stable" prices. It's a preposterous concept. Absent "money printing", prices would slowly fall over time as money became scarcer and goods and services became less scarce. Keynesians and MMTs want to prevent prices from falling which would be a boon for the world's poor.

paul said...

"…prices would slowly fall over time as money became scarcer and goods and services became less scarce…"

I'm going to go out on a limb and say this is mathematically impossible in a closed system that has a credit circuit.

Anonymous said...

Keynesians and MMTs want to prevent prices from falling which would be a boon for the world's poor.

Wages are falling as well, therefore the poor remains poor...

Anonymous said...

Tom watch this! Professor Immanuel Wallerstein at Yale on the end of Capitalism.
http://www.youtube.com/watch?v=nLvszWBf6BQ

Leverage said...

"Wages are falling as well, therefore the poor remains poor..."

Not only that, but liabilities nominal quantities (in hands of the 99%) still have the same amounts.

Deflation, in a 'debt-driven' system (and this pretty much implies any human society with relationship, read Graeber), is also theft, as (right) "libertarians" would say about inflation.

Dan Kervick said...

Keynesians and MMTs want to prevent prices from falling which would be a boon for the world's poor.

That's a pretty gross example of "money illusion". Falling prices of goods and services are only good for people if the price of their labor - their wage - is not falling at the same time.

Any significant instability and unpredictability in prices, whether upward or downward, is bad for our economic life since it makes it harder to foresee the future, and to plan any ventures that extend into that future.

Tom Hickey said...

The actual reason the the real wage deteriorated after 1971 is disputable and to claim that a correlation with something accounts for it is illogical in that a transmission mechanism is lacking. The transmission mechanism is clear is seems to me, and that is the time when the bargaining power of labor began to decline through wage suppression.

Employers will point out that this cannot be the full story because the real wage is not all there is to compensation. labor compensation = wages + benefits, and aggregate compensation remained constant. So while wages did decline, benefits rose as much or more.

Jose Guilherme said...

"Absent "money printing", prices would slowly fall over time as money became scarcer and goods and services became less scarce".

Except if the supply of gold or silver increases. This could happen via discovery of new sources (see Spanish in Potosí in the 1500s) or permanent trade surpluses (importing gold or silver).

So, no. Even in the absence o so-called money printing there would be no guarantee of falling prices.

Anonymous said...

Keynes wasn't a pedophile BTW.

Anonymous said...

Bah. Bah and fie. That's what I say to the notion that we were on a gold standard before the end of Bretton Woods.

That's not a gold standard. A gold standard requires convertibility and the subordination of monetary policy to the purpose of access to gold.

In reality, it was a near-global dollar standard. The only real difference between then and now are floating exchange rates and generally reduced capital controls. The actually gold standard died during the Depression that it helped create, and it never came back.

Drawing a correlation between the collapse of Bretton Woods and real wages in the United States is spurious unless you can clearly show the causal mechanism at play. It's not inflation - during the period of most profound wage stagnation, inflation was lower on average than during Bretton Woods.

Major_Freedom said...

Dan Kervick:

MF there is no alternative to money printing in a growing economy with a growing population.

Yes there is Dan. Please don't conflate your not being able to think creatively or innovatively, that there are no other options.

People engaged in trade and used money without any government monopoly over money in the past, and they can do it again with even superior management and outcomes than our current system. Government monopolizing money is not a "progressive" movement that is an "improvement", nor one step "closer" to "Utopia", so that you can say "Oh free market in money? That's "old"! We're moving towards centralization because that's the path to prosperity and advancement."

Centralization is the path towards impoverishment, even if millions of people truly believe otherwise. Both theory and history have borne out that centralization is the path towards poverty and oppression, not prosperity and freedom. No doubt, many, many, many people view government advancement, and the resulting centralization, as steps towards prosperity. It's ultimately a product of the declining quality of philosophy over the last 200 years. Humanity has experienced long periods of philosophical stagnation before, so it's not like the last 200 years can be claimed as progress ipso facto because it is more recent. The decline in philosophy has led to support for centralization, and, very importantly, state education. It is state education that has disarmed children from questioning authority and thinking as independently and creatively as they otherwise could. They grow up loving big brother.

Back to the main point however, economies do NOT need inflation in order to grow. You are completely ignoring the fact that growth on the basis of falling capital goods prices, as more are produced via technology and previous capital accumulation, can take place. Money is a medium of exchange. As goods outpace the growth of money, it just makes the monetary unit more valuable. The falling prices on the basis of productivity is a healthy deflation, because it doesn't accompany falling aggregate profits.

Major_Freedom said...

Dan Kervick:


Even to have stable prices in the context of continuous growth you need a continuous influx of new money.

We don't need stable prices either. We can have falling prices.

My own view is that a fully privatized monetary system would be wildly unstable, with endless speculation and insecurity as a fact of everyday life.

I disagree. I think there is far more currency speculation with fiat money than there is with a free market in money (that will almost certainly be precious metals based). Gold speculation can only go so far.

People would have to make endless choices about which forms of currency to hold, and those currencies would be subject to unending market fluctuations and routine collapses, wiping out innocent people routinely.

This isn't true. A free market in money production can settle on one or a couple commodities that are durable, divisible, homogeneous, and highly valued per unit weight/volume. Money production can remain open, yet most people come to settle upon a few alternatives. We can have a free market in PC operating systems, and yet most people can settle on those offered by one or two companies.

It is true that the system we have now favors the rich because the channels we use for injecting new money operate through powerful private credit systems.

Now imagine being able to legally produce your own gold money (if gold became generally accepted in a free market in money). You're no longer at the whims of monopoly money printers. No matter how rich anyone gets, they could not produce money faster than they can mine it, which will have to earn the going rate of profit because if it's too low in gold mining relative to other more valued goods, then investments will be made in goods, not more gold!

It would be better to rely on a combination of fiscal and monetary techniques that gradually spend new money into the economy directly as a portion of public purchases.

That's what we have now. It's isn't working as well as it could if money production were open to competition.

Imagine the difference between food production being monopolized by the state, and food production being open to everyone. Only a fool would believe the former would have superior outcomes.

Major_Freedom said...

Anonymous:

The actually gold standard died during the Depression that it helped create, and it never came back.

The Depression wasn't caused by a gold standard. It was caused by movements away from it.

The market collapsed in 1929 because of non-gold standard inflation during the 1920s. The inevitable correction was prolonged because of the New Deal and other government interventions.

Major_Freedom said...

Paul:

"…prices would slowly fall over time as money became scarcer and goods and services became less scarce…"

I'm going to go out on a limb and say this is mathematically impossible in a closed system that has a credit circuit.

I am going to go out even further and say we don't need credit expansion unbacked by prior real savings in a closed system.

Total money spending can be fixed. Total investment in nominal terms can be fixed. All "nominal" demand-type variables (not prices) can be fixed, and REAL growth can occur indefinitely.

Capital accumulation can take place on the basis of a high enough investment to consumption spending ratio, even in a "closed" system.

Major_Freedom said...

Dan Kervick:

"Keynesians and MMTs want to prevent prices from falling which would be a boon for the world's poor."

That's a pretty gross example of "money illusion". Falling prices of goods and services are only good for people if the price of their labor - their wage - is not falling at the same time.

You're denying the context. If falling prices occur on the basis of higher labor productivity and output, then wages need not keep falling. Even if nominal wages did fall as more workers came into the workforce, it would only reduce unit business costs, which leads to lower prices all the more. Wages cannot keep falling to bare subsistence while capitalists reap all the gains, because capitalists have to compete for labor by supply and demand.

Any significant instability and unpredictability in prices, whether upward or downward, is bad for our economic life since it makes it harder to foresee the future, and to plan any ventures that extend into that future.

Inflation generates stock market bubbles, real estate bubbles, asset bubbles, commodities bubbles, and what I think is occurring right now, bond bubbles and education bubbles.

Interest rates and prices are much harder to predict when the money supply depends on the subjective whims of central bankers. Predictions are easier to make the more decentralized the item of prediction becomes.

Ask any investor if it easier to predict the rate of precious metals production next year, or what Bernanke will do next year. It's not even close. It's much easier to predict the collective output of many individual producers who operate in competition, than it is to predict a single person's behavior, which ultimately depends on his own whim, away from domestic competition.

Major_Freedom said...

Jose Guilherme:

"Absent "money printing", prices would slowly fall over time as money became scarcer and goods and services became less scarce".

Except if the supply of gold or silver increases. This could happen via discovery of new sources (see Spanish in Potosí in the 1500s) or permanent trade surpluses (importing gold or silver).

Even if the supply of precious metals increases, prices will still fall as a rule. There are exceptions of course, for example you had to go back 500 years to find a significant enough example to mention. Which basically proves the above argument right.

So, no. Even in the absence o so-called money printing there would be no guarantee of falling prices.

Nobody said it was a "guarantee". Prices will gradually fall over time, even with exceptions included, because such examples will again be followed by falling prices.

You have to put things into proper context and perspective. If it's between hundreds of examples of fiat money hyperinflation, and a time 500 years ago when there was a fluke gold inflation, then it's clear "which side wins" here.

Trixie:

"It's a major reason why real wages have stagnated since 1971, the year the last vestiges of the gold standard were abandoned, after decades of gradual growth in real wages."

That is indeed very true. Strikingly so. What say you Tom? Because there is a part of me that is beginning to believe that the "system" will continue to work only for the .1% at the expense of everyone else.

Trixie,

"Welcome, to the real world."

And now that the Swamp People have amassed so much wealth, and with it power, why would they ever give that up?

A little off topic, but this is what Marxists believe will spontaneously transform into stateless Utopia according to the mysterious "materialist dialectic" allegedly inherent in nature that serves as an inevitable path that humans MUST travel down according to "choice" over time. We can stop for a while, but our "calling" requires us to make certain choices in line with the drive towards ever more centralization, until the maximum depravity and oppression exists, and out of the chaos, out of the ashes, pure communism with man become man.

This philosophy might not be so popular among academic philosophers, but among the masses, I see how this philosophy shapes their entire worldview.

Tom Hickey said...

Well, the empirical test will be when Thiel & cohort get their islands up and running. Then will have a model to work with.

However, scaling that model to larger society may not be simple due to the increasing complexity of larger society and global society as whole. The only way that could work as far as I can see is eliminationism aka social Darwinism. Might able to be done incrementally tho.

Complicating the matter seems to be climate change. Leaving aside causation, if the earth is in a period of warming or cooling, then this will affect the availability of real resources. That would change the game significantly.

I do think that Major Freedom's point, as well as Roger's, is well-taken. A lot of groups exploring options using networking and open source to quickly disseminate successful ideas is the way to address complexity.

Bucky Fuller had proposed govt funding groups of about 1000 experts in various field, like Bell Labs, and turn their creativity loose. He projected that the cost of this would be dwarfed by return, based on historical experience wrt R&D.

A chief problem that libertarians of the right and left see is that especially since Rome, the model for govt has been chiefly the military, hierarchical, authoritarian model. In both the Christendom and Islam that followed, the military model was integrated with a theological model, giving authority a divine basis.

The military model was divorced from the theological model under capitalism and applied to the firm, especially the modern corporation. Corporations actively recruit out of the military. I was recruited while I was an officer in the Navy, for example, although I choose to exercise my veterans benefits and when to grad school on getting out.

Political models of this type are creating a huge drag. Thankfully, the digital revolution is creating some space for at least some to break out out this bind. This is not a left-right thing, either, although most of the action I see is on the left at present.

Tom Hickey said...

Ask any investor if it easier to predict the rate of precious metals production next year, or what Bernanke will do next year. It's not even close. It's much easier to predict the collective output of many individual producers who operate in competition, than it is to predict a single person's behavior, which ultimately depends on his own whim, away from domestic competition.

And gold price is largely determined by the action of central banks in the market, since they are the big players.

Major_Freedom said...

And gold price is largely determined by the action of central banks in the market, since they are the big players.

Speculations on the price of gold is mostly speculations on the dollar, so it's really speculating what Bernanke will do.

In a free market where gold is money, then speculating on gold would be speculating on the production of gold, not the price of gold. The price of gold in a gold standard is not a very good way to understand it, for gold money means gold is the standard, not dollars. It would be like asking "What is the price for a $1 Federal Reserve note?" Well, in a US dollar standard, it is itself, namely $1.

The price of an ounce gold in a free market gold standard is therefore itself, namely 1 ounce of gold.

Central banks can only affect the price of gold in fiat paper money terms. They can't directly affect the supply of gold, since they aren't gold miners. They could only indirectly affect it, by depreciating the dollar so fast that increased gold production becomes more profitable and attracts investment.

Your attempt to paint a free market gold standard as being just as capable of manipulation by big banker players as is the dollar in a fiat standard, fails.

Tom Hickey said...

Your attempt to paint a free market gold standard as being just as capable of manipulation by big banker players as is the dollar in a fiat standard, fails.

I am just saying how the actual gold market works right now.

I'll deal with a free market gold standard if and when it happens.

Major_Freedom said...

I am just saying how the actual gold market works right now.

Fair enough. But it's still easier to predict the worldwide production of gold than it is to predict Bernanke's actions. This is because the production of gold, unlike the production of dollars, is decentralized and is managed by multiple players in competition.

That is the central point I am making. I have far less ability to predict what a single man, Bernanke, will decide, than I do predicting what thousands of producers of gold will collectively produce.