economics debate

Economics Economics Questions
1

In a facebook group, I have been arguing with this particular indidivdual about economics. Here is a laydown in which to me..summarizes his views:

Keynes when founding the field of economic studies, made several of his own postulates, and promoted several of Adam Smith’s postulates that are just plain wrong, but are still considered valid and are a large part of the economics brainwashing.

‘The economy gets sticky.’
We know that markets move according to expectation as much as to reality. There is nothing sticky about the economy, and absolutely no logic to this belief. It is just that Keynes’ attempts to manipulate the economy NEVER produced the effect that he was expecting.

‘Banks can reign in inflation by raising interest rates.’
Since central banks have signed onto this idea, there have been many instances of hyperinflation. Currently in Zimbabwe, bank rates are well over 100%, and the inflation rate is well over 1000%. Cash supply is determined by the bank’s profit, and the higher the rate, the more profitable the bank. When they are making more, they can take bigger risks, and make loans they wouldn’t have before. Raising interest rates does not tighten the money supply, but loosens it.

‘Governments can infuse life into an economy with deficit spending.’
Governments can only spend the money they take out of the economy. This notion is an affirmation of the belief that government can spend your money better than you can.

‘Increased productivity will improve profit’
Farms today are about 50 times the productivity of 100 years ago. Yet without government protection/props most farmers would not be able to earn enough to put diesel in their tractors. Prices always fall to the lowest acceptable to any of the competitors… the lowest that any can live on. Increased productivity cannot cause better profits.

‘International trade will improve the economies of all players’
When I read Smith, I tried to discern his logic here. I couldn’t. International traders like international trade, but I cannot see where the benefit is for anyone but the international traders.
America is rich because of the consumer spending of the Americans. When the spending goes outside of the US, it often draws out of the other countries things that the peasants of those countries need. Entire island nations have been completely razed to plant banana, cacao, and/or coffee trees. Then the population have no wild berry growth on which to graze. No wild bushes for cooking fuel. In essence, the country has been raped and pillaged, and the peasants put into perpetual bondage to the plantation master.

‘Wages will rise according to the aggressive productivity of labor’
When labor gets more than they need to live on, they have a much better attitude towards life. With a better attitude, labor is more productive. Labor cannot become more aggressive and productive before they get off of subsistence wages. (Cart/horse reversal)

‘Markets will perform better if left alone.’
And this is the notion that is the crux of the issue. Stagnation is the common state of the market. In stagnation, there is plenty of wealth to go around, it just doesn’t go around. In the natural market, there are the very rich, and the rest of the population lives on subsistence. Without government intervention, a vibrant economy cannot rise out of stagnation. I know that anyone who has been through an economics course fully believes this maxim, but it flies in the face of reality. It is not a truism, it is an idiocy.

Personally, Keynes only founded MACRO economics..not economics itself. That study was founded by the frickin greeks. His second notion somehow suggests that rising interest rates somehow increases the money supply..and assumes people are willing to take out more loans at a higher interest rate(somehow going against the logic of the law of demand). His third notion I don’t argue with(but smith believed the same thing he did). Increased producitivty can cause better profits…if sales and all other things remain equal.

I can go on…but it is too painful to read this. Anybody have their own input on this person’s logic(positive or negative?)

2

I agree–economics started with Thomas Aquinas, and moved on from there. In regards to the specific issues, markets have been proven to be sticky, in part due to difficulties minutely adjusting prices and in part due to really bizarre supply curves in the very short run (one common one being perfectly elastic up to a point, and then perfectly elastic afterward) that differ greatly from supply curves even over a few weeks. Banks can reduce inflation by increasing interest rates, but bad inflation can require absolutely brutal rates, and it is much better to prevent high inflation before it occurs (and it will never occur in a market economy, to my knowledge, except in such instances as Spain and the South American silver mines. Governments can get away with deficit spending in the short run, but they will have to make up for it later. Yes, if the government could accurately predict the economy the year or two in the future that is necessary to get fiscal tuning to work, it would help to smooth out the business cycle caused by an overly-active central bank, but it is best not to let the cycle arise. Improved productivity will increase profits if it takes the form of reducing costs and if there is no increase in supply, but it so happens that any increase in productivity will increase supply in comparable degree, so the only instances where a sector-wide increase in productivity will increase profits is when either the market is not perfectly competitive or there is a limited resource at stake that prevents quantity supplied from increasing (basically, in any instance in which supply is close to perfectly inelastic). The complicating factor is that in a perfectly competitive market an increase in productivity for any one firm would effect their costs without effecting the market price, so it would increase their profit. International trade does help all parties–in the example, assuming that the land was not taken by military force, the natives agreed to sell their land and thus benefited from it. We must keep in mind that all voluntary trade benefits both parties, and little international trade is done with a gun to either party’s head. Productivity can increase without an increase in wages through either a change in work ethic, a change in technology, a change in capital, or a change in education, and either the first or last would increase wages. In contrast, increasing wages to increase productivity is unlikely to work, as wages are generally in equilibrium to begin with. I do not know where he got his notion of markets leading to subsistence wages (Malthus?), but it simply does not work in practice. Witness the fact that interference in the market in the first century of our country was minimal, and wages were far above subsistence by the end of that century. On the other hand, our impression of subsistence has gone up, skewing statistics (I know several people leading happy, normal lives below the government-defined subsistence level, which is primarily a tool created by the government to justify its redistributions.

3

A few brief replies:

First, why does this person debate a subject he is obviously ignorant in? His very first statement is similar to saying “When Ayn Rand invented the study of philosophy…” and should automatically indicate that he knows very little. In all seriousness, people with no training do not argue with doctors about what medicines will do - why do they argue with economists about the economy? He is correct that the economy is not “sticky.”

On the banking question - he’s right to say that banks cannot “reign in inflation by raising interest rates” - if he’s talking about a free economy. In a free economy, those rates got where they are for a reason, and banks raising interest rates are as likely to go out of business as to have an impact on inflation - which wouldn’t exist in a free economy anyway, so the question is moot. For the rest of his comments here, I have no idea what he thinks he’s saying, and I doubt he does either. I think it comes down to something like this :

1-If the bank raises interest rates, it will make a higher profit. (This is false because of competition in a free market, and even in a controlled market like we have the elasticity still isn’t necessarily right to make it true. With loans there are many very very very good substitutes for a loan from Chase.)

2-Banks making a higher profit are able to take more risks. (Why? Has he never heard of derivatives and the capital markets? You can take plenty of risks with no cash at all. Further, if you’re making a high rate of profit, why take more chances when the importance of an increase is lessened? This flies in the face of diminishing marginal return.)

3-Banks making more risks write more loans. (Ok, yes, but so what? Banks have to find customers for loans - and raising interest rates does not make people more likely to take them, after all. If they write risky enough loans, ok…but then the bank goes under in a free market, or even in a controlled market, by his assumptions, there’s less money for that bank to now loan out.)

However, more to the point, in a free world interest would not be an independent variable, but a dependant one. If there is inflation, the interest rate tends to go down. So neither is he right, nor is the view he is quoting correct. The correct understanding is the Austrian Capital Theory.

He’s correct that government spending is bad, but wrong that it’s just “spending the money they take out of the economy” and therefore has no effects. It is harmful.

He then claims that increased productivity will not increase profits. In monetary terms, this might happen - there might be no greater profit. After all, maybe your competitors will also adopt the new technology, and competition will drive down prices as everyone puts out more. On the other hand, you can not put out more, and simply produce the same amount at a lower cost, in which case profits would increase. So, there’s no correct prediction here either way.

International trade is where he really becomes unhinged. International trade benefits only international traders - ok, then trade internationally! I actually don’t know what that particular sentence was supposed to mean, but I can see that he opposes free trade. So what he’s saying is that, while mutually agreed upon trades benefit both parties within an artificial political boundary, this doesn’t happen across an arbitrary political boundary. This is absurd. Just show him the law of comparative advantage and how it is derived.

On wages, again he is talking in bizarre ways. For one, he is assuming that workers can increase wages by increasing productivity - which he denied a few sentences back. Wages don’t have to do with the worker’s sense of life, but rather with the marginal product of labor and how many others are bidding for it. This can be increased in lots of ways - and joy might be one of them, but surely isn’t the only one. The evil employer could always buy a shovel, and the employee will make a lot more holes than he was with his hands, which means his labor will be worth more, so his wage will likely increase. Of course, there will be some leftist standing around to take it away, shouting that it will put people out of work.

He then informs us that economies tend to be stagnant without intervention, without offering us any suggestion as to why this would happen. Stagnation means a lack of trade, which in a free world follows from either absolute ignorance - which companies wouldn’t allow to last - or mutual satisfaction - no one desires to trade. These are very unlikely situations. He then bemoans the distribution of wealth - why is there an a priori right distribution to which we can compare a situation?

A final point - a lot of what he says is based on anecdotal evidence. This is a fallacy since economic laws hold “all else being equal.” This is, for example, we can have an increasing minimum wage and decreasing unemployment if other things are going on that affect unemployment. However, we can say that if the minimum wage is higher, then unemployment is likely higher than it would have been had the minimum wage been abolished, with no other changes taking place.

4

JalanKatz…the guy responded to your post. If you would like to..here is what he said:

there are many very very very good substitutes for a loan from Chase<
Bank credit is cash. There is no good substitutes.
Further, if you’re making a high rate of profit, why take more chances when the importance of an increase is lessened?<
That’s bent. Its like saying ‘Why should business expand when the manager can live comfortably on what they’re making?’
Ok, yes, but so what? Banks have to find customers for loans <
Shown that it has never been a problem.
in a free world interest would not be an independent variable, but a Dependant one. If there is inflation, the interest rate tends to go down.<
Interesting idea. I wonder if he has any evidence of that, or is this just a statement like all the rest that economists make.
He then claims that increased productivity will not increase profits. In monetary terms, this might happen - there might be no greater profit.<
Thank you
He’s correct that government spending is bad, but wrong that it’s just “spending the money they take out of the economy” and therefore has no effects.<
I said negligible. And just stating I am wrong is opinion; not argument.
Just show him the law of comparative advantage and how it is derived.<
Just argue argue argue and don’t read what I tell you. Yeah good advice. He seems not to understand my point at all. Economic activity is based on the region. What goes out of the region is froth.
For one, he is assuming that workers can increase wages by increasing productivity - which he denied a few sentences back.<
And here he seems not to understand my statements at all. Workers cannot work their way to better wages. Business cannot produce their way to better profits. Strong economic growth is wholly dependent on the minimum wage, and the consumer spending that this fosters.
This is, for example, we can have an increasing minimum wage and decreasing unemployment if other things are going on that affect unemployment.<
Like WHAT??? What OTHER things are you guys talking about?
Any recommendations on anything else to present so that they know your view clearly if you believe that article did not suffice?<
Ask THEM where cash comes from.

5

He also made some other comments as well which I didn’t see:

BTW, he didn’t like your first statement of saying “Keynes when founding the field of economic studies…” because he believes this shows that you don’t know anything about economics.<
I’m sure he didn’t. It is a shocking statement. Almost all economists pay lip service to rejection of Keynes, but don’t realize how many of his idiocies they still cling to.
It’s like saying “When Ayn Rand invented the study of philosophy…” <
No, it’s more like talking about Henry VIII’s founding of modern democracy. He’s a villainous character of history whose influence on our lives is wholly denied; yet if not for the genius of his daughter, Elizabeth I, NOTHING of today would be like it is.

I responded with the first notion that most economists do not reject keynes’ philsophy. Secondly, I still said that keynes did not invent any of his ideas. I also spoke of how elizabeth I did not found modern democracy. The constitution was not based upon the teachings of Elizabeth I.

But just to note, this guy is a hater of economics in general. He rejects practically every law in economics. This includes things like the law of supply and demand. Even though he hasn’t really given me a clear explanation on why the law of demand is wrong…when it comes to banking, he does believe people demanding loans is always larger than the amount of loans a bank gives…no matter what the interest rate is. Basically, he says the supply of loans is always lower than the demand for loans..regardless of interest rates.

6

The claim was that there are good substitutes for a loan from Chase. In a free market, the substitute is a loan from HSBC, the neighborhood S&L…Now, in today’s highly cartelized world, this is not the case - but our friend here has no problem with government intervention in the economy, and so isn’t in a good position to argue with the existence of the fed.

No, it’s a matter of degree - risky loans would not increase simply because the bank is already making money. The manager comparison isn’t apt since oftentimes managers make salaries.

Economics is a deductive science, not an empirical one. Suppose we have a case of inflation, i.e. an increase in the supply of money. What is the impact on the price of any good of an increase in quantity supplied?

Then why do things go out of the region? Two options - the things are simply stolen, which is not what anyone means by free trade, or the people living in the region disagree with you. After all, they don’t ship things out because they’re generous - they ship things out because they receive something in return. If I engage in a trade with you, and both of us agree to the trade, we both prefer what we receive to what we give up. This doesn’t fail to hold simply because you put up an arbitrary political boundary. Finally, the alternative to free trade is to produce in every region what the people want to consume. So, if you wish to consume something which is not possible within the bounds of the resources in your region, or which not enough people desire in your region to make it profitable - too bad. So now we have, say, a surplus of rice in China, and people in America desiring rice - but you wish to deny them that trade. How kind of you.

So we start by paying the worker more than marginal product - i.e. more than he’s worth. Then we expect the worker to spend on current consumption, and rely on this consumption to spur economic growth. If that works - rather than simply either putting the business out of business or the worker out of work - why not raise it to $100/hour, or $1000/hour? Then we can really have strong economic growth. There is something odd in the assumption (from one who claims to reject Keynes, no less) that economic growth depends on current consumption, and that saving is detrimental to economic growth. Where does investment capital come from?

What other things? Does he assume economics takes place in a vacuum? There are real innovations going on in technology, and there are changes in consumer preferences and saving preferences, as well as time preferences. These things all impact the economy.

People have different initial endowments, and regions have different resources. This leads to trade via barter. Barter trades are inhibited by the need for a double coincidence of wants, and as a result, people begin to engage in trades where they don’t desire what is received, but know others want it, and they can trade it away later. Out of this grows a free-market commodity currency. The government then issues a paper substitute redeemable in the commodity - and then finishes the scam by cutting off redeemability. The paper money is called cash.

7

The guy is a whiny moron. I do not know why you’re wasting time on him. Once someone has been explained the law of demand and still does not understand it (or rejects it), they have shown that they have little more brains than an ape.Sort of like discussing evolution with creationists…

8

As of now, he has not fully responded to your comment. He only looked at your cash comment, and said basically that you believed that paper money was created from the government.

To him, cash is created from credit. An increase in the cash supply basically means an increase in debt. This is how money is created. The feds have very little to do with this increase, since he believes all cash comes from the “local bank.”

Oh yes, also, he believes the exact opposite of the conventional wisdom of economics. He first believes lower interest rates will cause DEFLATION in the sense that banks will less likely make out loans in turn…lowering the cash supply. Higher interest rates will make banks make more loans..increasing the cash supply. He shows this through the effects of hyperinflation…that the countries with high inflation…also have high bank rates.

9

That’s all fine and dandy, but he’s ignoring demand. Higher interest rates mean loans are more expensive to take out, and vice-versa.

10

“So we start by paying the worker more than marginal product - i.e. more than he’s worth. Then we expect the worker to spend on current consumption, and rely on this consumption to spur economic growth. If that works - rather than simply either putting the business out of business or the worker out of work - why not raise it to $100/hour, or $1000/hour? Then we can really have strong economic growth. There is something odd in the assumption (from one who claims to reject Keynes, no less) that economic growth depends on current consumption, and that saving is detrimental to economic growth. Where does investment capital come from?”

I really wanted to comment on this because the guy actually believes this to be true. He believes the wage should be half the GDP.

His formula for determining what minimum wage should be:

We’ve been through this. 1/2 GDP per capita or 1/4 average earnings.

He believes the “optimal” minimum wage would be half the GDP…or how we calculated it…every person would make over $80,000 a year. To him, this would create an ideal economy.

Here is what he says:

“The average man’s production is worth nearly twice what he is paid, but competition on the product prohibits pay that is near reflective of the work’s real value.”

Basically, as one person comments…the labor theory of value. He says the optimum is the median wage = the means production.

11

Ask him how he determines, objectively, what a man’s work is worth, and to do so noncircularly.

12

Ok, he says this to me:

“It took forever to convince you that the ‘captita’ in GDP/capita meant the entire population, including those too young or old to work. So the average worker would be worth nearly double that figure. 1/2 the GDP/capita would be about 1/4 the real worth of the average man’s work, and THAT is where the minimum wage should be. We’ve been through all this.”

He was correct in saying that the GDP takes account for the entire population…which includes people too young or old to work. So basically, he says the average worker is worth double the GDP. He simply assumes that half of the population does not work. Through the calculations..he simply doubles the GDP…and divides it by the population of the US. I checked it by taking 13 trillion(current GDP) doubling that..and dividing by 300,000,000. I get 86,000 a year. He says the true worth of every individual should be this much a year. This is what to him..SHOULD be the true minimum wage.

13

He is thick as a brick, but nevermind that. Ask him to provide statistical evidence for his case. I find it utterly implausible that half the population does not work. He also did not answer the question I had posed, which was: what objectively determines one’s labour’s worth? If he makes recourse to the LTV he must ground it or drop it.

Also, explain the concept of marginal revenue product to him - the MRPW is the only “fair” wage there is.

14

I feel this is the only post I can respond to, because of his views about banking. Let me provide what he believes:

  1. Money creation comes from loans. The more loans/investments that happen in the economy, the more pressure that the cash supply needs to be increased. From this, I have concluded that every loan causes inflation…since inflation is caused by an increase in the cash supply.

Here is what he said about the cash supply:

“The cash supply is more a barometer on the economy than an engine for the economy. As I told you the very first exchange that we had on cash supply, increasing activity in the economy puts expansive pressure on the cash supply. People buying, businesses expanding, goods being produced all present borrowing opportunities. Conversely, when the cash supply is shrinking, it strongly indicates a slowdown of economic activity.”

So basically, he says increasing prices is a sign of a healthy economy. When prices are decreasing…it shows a sign that economic turmoil is underway.

  1. Here, he describes the loan process:

Bank accounts do not come from exchange certificates. Exchange certificates are a representation of a bank account. Bank accounts come from loans.
You borrow 10,000 for a new car. Bank A gives you a draft that the dealership takes to bank B and pays his salesman by check 1000 to bank C. The salesman owes you twenty bucks and he draws it out of bank C to give to you to put into bank A. Now bank B has an account of 9,000, bank C has an account of 980 and bank A has an account of 20 and it all balances on your 10,000 loan. Bank A owes B 10,000, bank B owes 1000 to bank C and bank C owes 20 to bank A. The loan of A to C, of the $20 debt is a bit complicated, through the Feds, but it is all there. You can make your own money. just write a few $10 checks to cash, and go to the bank and have them certified, and you can spend them like $10 bills.
The debts to the bank balances the credits granted by the bank. How much paper the Fed puts into the system means nothing.
Without the use of bank credit, there would be no cash. There would be no cash registers. Either carry your bag of gold, or strap it to your goat, because you’re not going to be buying anything with paper.

15

Given a fixed money supply, if the cost of producing goods falls (e.g. by more roundabout production processes), the amount that that money can buy will have effectively increased. Thus, assuming a fixed money supply vis-a-vis falling prices will mean an increase in wealth. So his logic is wrongheaded. Falling prices are usually a signal of more roundabout production procedures.

16

I decided to post back and I found the root of the problem. It is his view on what is defined as “money.” According to my understanding, money is simply a medium of exchange. This can come in many forms, whether it is seashells, cigarettes, gold, or even paper. To him, money only comes from borrowing. The more a country borrows, the more money it has.

Here is what he said:

“Hard goods are not money. An exchanging of gold for cows does not use an exchange medium. You might like to see gold as being a medium, but it isn’t. It is an exchangeable hard good.”

Of course, it is hard to tell with this simple situation. We need to know more. Is the gold easy to exchange for products elsewhere?

I also asked him if there was a sign of less debt in the economy, he tells me that is a sign of slowing economic activity..therefore, the economy is in trouble if debt is falling.

17

Money is, by definition, a medium of exchange. When gold is used as such it is money. There is no more to it than that.