It’s not about increasing wealth. It’s about stimulating the economy in a recession.
Lol. Then what does it mean to stimulate the economy? That is not an end. What is the purpose of “stimulating the economy” if not to create more wealth - more stuff that people want?
Then it doesn’t validate Keynesianism
Irrelevant. You have not dealt with a single Austrian criticism of stimulating aggregate demand and therefore you cannot claim that it “smooths out the business cycle” in the long time
If it’s inapplicable to our world then it’s not the best policy. You have to show that flawed implementation is better than a non-interventionist policy
If the government spends during a recession through taxation then it will have to spend a great deal in order to get past the tax multiplier, therefore the production structure will rely heavily upon government demand and it will suffer heavily once this is cut off. Therefore the private sector becomes dependent upon the public sector and you’ll just end up back in recession mode after the government spending is cut.
If the government funds its spending through inflating the money supply then ABCT will occur.
Therefore even if enacted in a (realistically) perfect manner there is no fiscal or monetary policy that can really be anti-recession. In the long run we’re all dead, and in the long run you’re gonna have to deal with the business cycle.
Edit
Also, the linked critique of ABCT is flawed in that:
Austrians never claim that people do not make mistakes. Lower interest rates will cause foolish entrepreneurs to seek profit through this sort of investment
If you think that interest rates will rise in the future and that this will make some of your business oppurtunities will become unprofitable (if you understand ABCT) then you have an incentive to invest in longer term projects that you think will be completed before interest rates rise, or which you can withdraw from
Economic theory is divided on what causes business cycles. If economists don’t agree on ABCT then why should business people?
Inflation boosts profit margins and makes people look wealthier than they really are in a way that isn’t neutral. This means that some projects will look more profitable even if you know interest rates will rise.
In short expanding the money supply exasperates all negative aspects of the market economy.
If you want to know more about this then look into the rational expectations critique in De Soto’s treatise on money and business cycles.
To increase employment and smooth out the business cycle.
I never said it did.
Who has presented one?
I never said it was inapplicable. But I’d prefer to focus on theory, i.e. on the question of whether it could work if it was implemented.
That’s a good point. I’ll have to think about that, when I think of a response I’ll post it.
To increase employment and smooth out the business cycle.
Neither of those is an end. Employment is a means to gain wealth. The business cycle is a number on a chart. Wealth is an end, or at least the utility of wealth is an end. So if the point of Keynesianism is not to make my life better, I reject it in favor of economic paradigms that do intend to make my life better.
EDIT
And to clarify, employment does not necessarily create wealth, especially in the short run.
Buzz,
“If you boost demand, you create jobs and smooth out the business cycle.”
And all capital/industrial organization is just a blob that can be moved from place to place then Keynesianism works fine and the whole argument comes down to the shape of the IS-LM curve and the speed at which wages adjust.
Once we bring in realistic assumptions about the economy where capital is specific, takes time to produce, and labor and capital is combined in a specific way then point 4 hits and the way capital is used in combination with labor, the time over which it is produced, and its actual form imply that the direction demand and interest guide production are just as important as the level of demand in general.
This is a real application of microeconomic theory to macroeconomic theory, not the shoddy job the New Classicals do.
When the recession ends then production rises to its old levels and wealth is produced. If you have 10 percent unemployment then that’s a good 8-6 percent of the labor force that’s not creating any wealth. Whatever policy, be it government intervention or laissez-faire that can end the recession will make everyone wealthier. A good thing to note is how we are defining recession.
Buzz has merely demonstrated that he understands neither what wealth is nor what purposeful behavior is for. Nor what welfare means, nor what production is.
Why do people do anything? To satisfy their wants. Wealth increase is increase of the number of wants satisfied by some people without causing wants of other people to be not satisfied. Why? Because preferences are ordinal. Any behavior that decreases wealth is harmful, because it means that fewer preferences are satisfied than otherwise, which is the point of conscious behavior. Nobody ever behaves to intentionally decreases their own wealth, but merely are sometimes their expectations diverge from what actually takes place.
If Keynesians smooth over business cycles (which they caused in the first place) by stimulating demand and do this by breaking windows, which decreases wealth because income cannot be spent on other things and must be spent on new windows, plus they are down the capital invested in those old windows, then not only are fewer preferences of consumers satisfied by the recession but now even fewer preferences are satisfied after the fact of windows being broken, despite “demand being stimulated.”
Second, people don’t spend money when producers don’t make what people want. Why the hell should government force people to spend money contrary to their preferences? That’s not Pareto optimal. Also decreases wealth, extent of want-satisfaction.
Then, future income is less than otherwise because capital was consumed and future income is function of present capital. Which mean some future wants now cannot be satisfied, too, now that windows were broken, and this on top of lesser future income due to capital consumption during the boom prior the bust.
How is any of this good from the perspective of consumers? They are the only ones that matter. Production is solely to satisfy wants, not for its own sake. To say otherwise is to transform economics into religion, a meaningless ritual based on superstition and mysticism, where the government behaves like monks burning their belongings for some made up moral “good” as opposed to satisfaction of preferences in this life. And even them, the monks reveal that they actually want to their preferences satisfied: they expect and want infinite happiness of heaven more than the finite satisfaction the real can provide.
Then wealth can never be created in a world of scarcity. Furthermore
If the wealth produced by the end of the recession outstrips the wealth lost by breaking the windows then they Keynesians are perfectly right to want to break windows.
This is dealt with by the collective goods problem. If you believe that consumers hoarding their wealth helps each person, but overall it harms everyone, then the government stepping in would help everyone. Also government intervention, as I have implied, is meant to increase the health and activity of the private sector in producing what consumers want as well.
I think the Keynesian response would be that it is not good to have a large chunk of the population not being able to earn wealth, even though the country as a whole is richer.
Ah, so that’s Hayek’s contention with aggregation, I was having some trouble understanding it previously, it is a good point. I wonder, have Keynesians addressed this criticism?
You’ve just joined Buzz in the realm of economic ignorance and obtained citizenship there. Congratulations.
How do you increase number of wants satisfied without decreasing any wants. Hint. Double benefit to voluntary exchange. Condillac, Gossen, Jevons, Menger … The goods don’t physically change but by virtue of different preferences, which are ordinal, and the exchange, more wants are satisfied in both person than prior to exchange and everything else is the same. A Pareto improvement. That’s actually the only way to increase welfare. Voluntary production using own property and voluntary exchange. Everything else mathematically results in decrease in welfare, unless you say that preferences are not arbitrary, and that want of roses is intrinsically (says who? if so, prove it) better than want of candy.
Second. Now your comment about scarcity …
Jesus. Don’t tell me you’ve joined the Club of Rome? Production is of utility, not matter. It’s done by moving things around, or resisting movement, where necessary, a change of form, while preferences are changing. Mass-energy is conserved, but utility can increase forever if the movements and changes of form correspond to changing preferences. Econ 101. Scarcity is not rarity.
But people only behaved in order to satisfy their preferences whatever they are, based on their expectations of what behavior satisfies more preferences than not acting in that way. Their expectations are often mistaken. They are rational, because they act purposefully, as opposed to acting by reflex. But their rationality is bounded. Despite what a person says, if he or she flexes his or her finger intentionally, then it is because he or she wanted to do it and it gives him or her pleasure or thought it would lead to pleasure some way. To deny that is to deny the existence of conscious behavior, which is both impossible to deny a priori and empirically is known to exist, making the denial untrue and no part of science, which is the pursuit of truth.
There is no such goal, in science: to smooth out business cycles for its own sake. There is the question, in praxeology, does a particular behavior more or less satisfy preferences from the perspective of the one behaving? Physiology investigates how that takes place, and also studies behavior by habit or reflex, which is not conscious, and also how preferences arise.
Keynesians do NOT, in fact, think that breaking windows decreases welfare. They imagine it increases welfare. They imagine smoothing business cycles by stimulating demand once they are already caused increases welfare. Science shows this to be false, no more no less. Nobody ever consciously produces at cost what they do not want except by mistake. That’s what it means to be conscious. Nobody tries to smooth business cycles if they don’t belief that doing so increases, not decreases wealth. Of course, their belief may be wrong and contrary to their own preferences when actually done, but that called bounded rationally, like that of the monks.
I think the Keynesian response would be that it is not good to have a large chunk of the population not being able to earn wealth, even though the country as a whole is richer.
Wow, so we aren’t even in the realm of economics anymore. We are in the realm of ethics. Lets just be honest, your goal is not to maximize the wealth of a nation, but to redistribute wealth as you (Keynesians) see fit.
So your original objection is not that the Hazlitt is wrong about economics, but that you don’t agree with his morals. He doesn’t endorse aggression, as you do.
A Keynesian would argue that by smoothing out the business cylce you make the economy more stable and thus more predictable for investers. Therefore, more successful investments are made and the economy becomes wealthier. The increase in wealth, according to a Keynesian, does not come about due to the government spending but to the increased ability of private investers to embark on projects without fear of economic crisis; i.e. increased private investement, not public.
Keynes never advocated destruction of capital as the best way to end a recession just like doctors don’t usually advocate chemotherapy at the first opportunity. He did say it would work and even encouraged it, I remember reading a passsage once where Keynes advocated destroying some city or other in a sort of hypothetical way (it may have been during wartime). I’m afraid that I cannot quote the passage and I only know the book I found it in: “the making of modern economics” by Mark Skousen. I’m sorry but that’s the most I can remember
OK, thanks. I will try and get hold of the book and see if I can figure out the context of what Keynes said. I have heard in the past that Keynes noted how war could in theory boost an economy and bring it out of a slump, but his whole point was not that war is good, but that if government spending could be used in wartime to boost an economy then it could also work in peacetime. So he did not advocate waging war (breaking windows), far from it, he advocated the utilising war-time economic policies in a way that was peaceful and non-destructive. Of course, you can argue that counter-cyclical fiscal policy ultimately does break windows via misallocations etc, but it is not true to say that Keynes was aiming at breaking the windows.
@Buzz & Consumariat
Stability may be gained by smoothing out production by increasing demand for windows by breaking them; but that whole line of production is contrary to preferences of consumers in the first place. To stabilize and make it continuation predictable, through use of force to redistribute spending, some line of production in order for investors to know that it shall not be lose money and then invest more scarce resources into it DOES NOT after all, result in more wealth later, IF THAT LINE OF PRODUCTION WAS CONTRARY TO PREFERENCES OF CONSUMERS IN THE FIRST PLACE.
Making one state of production a steady state increases stability, true; but if that state is made steady by continuous and predictable injection of force, is contrary to preferences of consumers, because it is production of things consumers don’t want and want other things instead, then not only does the use of force cause fewer wants to be satisfied than otherwise (otherwise no force would have been required – they would have done it voluntarily) but stability in that case does not increase satisfaction of wants, it decreases it, and the longer the state of production is prevented from changing, the fewer wants shall be satisfied over time. Rather instability, in this case, change of state at first opportunity for behavior, would increase wealth.
Stability independent of what is being made a steady state cannot increase wealth, because continuation of a state of affairs contrary to preferences of consumers can be predicable and stable if violence is used by government but it would be continuous decrease in wealth, not increase. Only stability of states of production desired by consumers can increase wealth. And consumers demonstrate which states of production satisfy them more than others by their voluntary buying choices at specific moments of time.
So the idea that Keynesians are decreasing want satisfaction to later increase it by increasing stability of production by smoothing out business cycles is false. The longer an investment chain is preserved that does not satisfy wants of consumers as much as another is preserved by redistribution or violence, the greater the DECREASE in welfare of consumers. Instability, at that moment, not stability, is what would increase welfare.
@Buzz
If you declare that Keynesians are trying to smooth over business cycles for its own sake, not trying to increase wealth, and disregarding the necessary fact that this is not what they are doing, then in that case, in the words of one eminent mathematician, they “start with a basic error and conclude by giving wrong solutions to trivial problems.”
No, Buzz cannot possibly want to decrease wealth. Despite what he says, he must either really believe that it increases wealth, or he believes, like he claims Keynesians do, that some preferences are BETTER intrinsically than others, and hence that income must be redistributed by redistribution of spending by breaking windows, despite decrease in welfare, that some people OUGHT to have their preferences satisfied AT EXPENSE of other people, that is, without a Pareto improvement, that some people OUGHT to have their wealth increased instead of other people.
Physiology shows this as nonsense, since preferences are arbitrary, and there is no such thing as RIGHT people and RIGHT preferences.
That’s not quite ethics. Hazlitt does not admit violence because it prevents division of labor and prevents voluntary exchange, both of which result in ALL wants, whatever they are, being less satisfied than otherwise. This is a scientific statement because it is invariant to change of preferences. (see Mises Human Action)
Ethics begins after that fact, by deriving implications of non-aggression. Morals on the other hand, which is what Buzz really is declaring, are arbitrary because merely conditioned and derived from preferences. (This was clear to Mises too)
Finally, the chemotherapy metaphor is totally inappropriate. Chemo is painful, but if NOT DONE, results in death by cancer, which chemo sometimes kills while damaging the rest of the body, thereby saving life. If redistribution of income IS NOT done, nothing happens, except that welfare increases as investment chains that are contrary to preferences of consumers are terminated.
Breaking windows to “stimulate demand” and increase stability of investment chains already contrary to consumer preferences is nothing like chemo and does not ultimately increase welfare, and because it does not, is a wrong solution to a problem that is not merely trivial but irrelevant.
But no one is advocating the breaking of windows. A more accurate analogy would be that Keynesians propose maintaining or fixing windows that would otherwise fall into disrepair because nobody is tending to them. Once again, it may be true that this is a misallocation, and it may or may not be true that it does not satisfy any preference for those windows, but Keynesianism is most certainly not about breaking them.
The story about a brave adventurer whose name was K.
Consumers don’t want MORE apples, having that amount they hold now. They want MORE LCD screens. The boom, by credit expansion and non-symmetric flows of money and money substitutes caused more apples to be produced, which is how the situtation is now where it is: credit expansion stopped and thats when the apple market went bust, and people who produce apples want to buy LCDs too, but have no income, having sold nothing.
Keynes and pals start invading people’s refrigerators and fruit bowls and ruining people’s apples. (See, they stole them, and then shoved them you know where one after another – for temporary storage inaccessible to rightful owners of apples – and later dumped them into the nearest river). And why? In order to get people to continuously replace apples and in turn “stabilize” the investment chains ultimately producing apples. That is, instead of people purchasing other things or waiting until apple producers go bankrupt and new producers appear to make LCDs.
Result: all people are even less satisfied than at the beginning of the recession, including apple producers, because things they want to buy are STILL not being produced and want satisfaction is being foregone for an even longer time, but apples producers are slightly less unhappy than otherwise because part of other people’s income was forcfully redistributed their way, and on top of that, all other people are slightly more unhappy, because their apples were ruined, plus future income is less than otherwise because some capital was consumed above and beyond that wasted in apple production during the boom by being wasted on further apple production during the bust and by waste of existing apples. But at least the business cycle has been smoothed out and apple production is stable, and can be predicted to continue into the distant future, since government will use force to make sure everyone buy apples instead of doing anything else.
And every person is unhappy. Even more so than otherwise. And Keynes and friends are very busy in the laudable act of shoving apples up their … The government gives them honors for their pains and pays them too. In fact, they are heroes of socialist labor :_ ) … oh what sacrifices they make for the greater good …
The end.
“You’ve just joined Buzz in the realm of economic ignorance and obtained citizenship there. Congratulations.”
I’m writing about capital theory and integrating Keynesian, classical, public choice, and Austrian theory on this thread. I think that there’s a good chance that I’m that ignorant.
“How do you increase number of wants satisfied without decreasing any wants. Hint. Double benefit to voluntary exchange. Condillac, Gossen, Jevons, Menger …”
You’re still increasing the wants of others in the market economy. By consuming good C consumers of good C have taken away from labor that could have been used to produce B. Therefore this does not meet the criteria of your original quoted statement
I really don’t even know what you’re talking about for the rest of the post. I’m not talking about ending the business cycle for the sake of ending the business cycle, I’m talking about ending the business cycle for the sake of consumers within society. Otherwise you should have no problem with the recession persisting for all time.
@ Neodoxy.
Revisit what exchange is.
A and B hold X and Y. A gives X to B. B gives Y to A. A is happier and so is B, otherwise they wouldn’t do it. Nothing else changed.
Want-satisfaction in the entire nation increased with certainty.
Nothing is being taken away. They already have these quantities of things. There, the condition is satisfied. It’s called a Pareto improvement. Your theory is that Pareto improvements don’t exist and exchange is theft. That’s not Keynesianism or Austrianism, that’s … it has a name … Marxism.
All other foregone opportunities were already taken into account.
As far as production, that is produced whatever gives greatest profits. Namely, whatever people are willing to exchange most of other things for. Things that have greater costs (foregone opportunities) yield lower profits when used. Thus, iteratively, costs ARE MINIMUM. Which is how X and Y were produced. And once produced, their exchange is a Pareto improvement above. It hurts nobody but benefit both sides in any exchange of surplus quantities X and Y where sides have different preferences.
Why exchange them? Because presumably A and B were involved in division of labor which is more productive per input than isolated labor in making anything whatsoever. So they ended up with more of each than either desired but could realize the gains by exchanging them.
–Gossen
“A and B hold X and Y. A gives X to B. B gives Y to A. A is happier and so is B, otherwise they wouldn’t do it. Nothing else changed.”
Person C can still be worse off becuase if B had not exchanged with A then C would have been able to exchange with A at his critical price.
The sad thing is that we can’t even determine whether or not socialism, even in the presence of the inability to calculate, would make people better or worse off.
At any rate, this discussion is entirely pedantic.
People who want to produce things other people don’t want to buy are not hurt by those other consumers buying other things they actually want and thus not trading with them. Those other people have done nothing to them physically. They have merely not associated with them. They forego the pleasure from the goods gotten in trade they could have made had they produced something else, but they did what they personally wanted to do, and nobody had taken anything from them. In order to hurt them, they must take something from them. Now if violence force is initiated, then somebody is hurt, because they forego what would have been possible had violent force not been applied to them.
Costs are already minimized in the above procedure. That nobody wants to trade with people who don’t offer anything to trade from perspective of other people is not a cost additional to those people who produced the useless things. They cannot benefit other people by trading with them, and if all the people who produced more useful things disappeared, people would still not trade with them. They’d wait until these people decided to actually produce something useful. Costs are already as low as they can be considering the whole system. And no person’s preferences are considered more important than any other person’s preferences, so redistribution of costs cannot possibly improve welfare, which is the want-satisfaction of society.
One man’s gain is not another man’s loss. Because gain and production is of utility, not matter-energy which is conserved. If production had to be of matter or gains during exchange had to be material neither production nor growth of gain over time would be possible; but useless material is no gain and nobody foregoes opportunities to make material into useless form, and so gain and production cannot be material. One person is not hurt additionally (suffers additional foregoing of pleasure) by another person increasing production or by trading with other people, except where initiation of force, e.g. through legal tender laws and inflation or credit expansion, redistribution, takes place between them originating with that other person. That is because additional utility is created, that did not exist to be distributed otherwise.
There is no additional cost placed on people who do not produce what other people want because they want to trade for things other people have and without people buying their products they cannot. They cannot use violence to change the situation lest they break division of labor which requires peace and causes the remainder of their wants forever to be worse satisfied than is possible in division of labor.
REMEMBER: No preferences are considered better or worse, are themselves preferred, the one relative another, so redistribution where costs are already minimal cannot be suggested to increase welfare. They are all arbitrary and determined by life history up to that point and (a bit of) genetics. Like in relativity, where no coordinate system or frame of reference is better or worse than any other.
All other things equal, when A and B trade X and Y and they both gain. More wants are satisfied and no satisfaction of wants is foregone in order to do this. That’s why people trade. You say, C was not traded with, because he or she had Z, and so this hurt C, since C wanted X. Now Y was more valuable to A than Z, so A traded with B and not C. This you say hurt C. But C is not hurt. C decided, on his or her own, to make Z instead of Y. And neither A nor B initiated violence to force C to make Z. Thus C did what he or she wanted, taking the costs into account already, first of all, or C was mistaken.
(F) Fact: No preferences themselves are preferred, all considered equally valid because equally arbitrary. (1) To force A to trade with C instead of B would create additional costs or foregone opportunities in addition to C wasting resources to make Z, namely, A and B would be hurt and cost of the initiation of force would have to be added to costs of production, so that fewer wants are satisfied, costs are total greater, and the assumption is made that preferences of C are more important than preferences of A or B. (2) If A and B to trade and C to be left with Z would leave costs as minimal AS PHYSICALLY POSSIBLE and welfare as maximum with no preferences being preferred.
C suffers costs due to scarcity; but so do A and B. (2) is the minimum cost maximum welfare output of the natural system permitted by SCARCITY, but because of (F), no deviation from (2) to (1) would increase welfare.
To force a deviation from (2) to (1) requires contradicting (F), because the intervention to make that deviation has its own additional costs (violence, which breaks division of labor), plus number of wants in society satisfied decreases going from (2) to (1). Hence welfare is greater in case (2) than in (1). Welfare is greater in case (1) instead of case (2) if and only if (F) is false and if, hypothetically, violence did not contradiction division of labor, which is not true, since division of labor depends on cooperation, is a kind of cooperation.
C actually prefers A to trade with B, because C cannot use violence to improve his or her position. In other words, C is not hurt in case (2) if (F) is true; only if (F) is not true is C hurt. You cannot hurt somebody by NOT doing anything to or for them at cost to yourself if (F) is true. There is no foregone opportunity to C when A and B trade amongst themselves because for C to use violence against A or B is less preferred than to not use violence to intervene.
But why can’t C initiate violence and so improve his or her welfare? He or she can get rid of B and then A will trade with C, right? C cannot be hurt by existence of B, because C cannot initiate violence to increase his or her own preferences. C has other preferences besides want of X over Z. If C initiates violence, then division of labor is interrupted since it requires peace and trade and money for rational calculation, but division of labor is more productive to satisfaction of every want, whatever it is, compared to isolated labor. To initiate violence to get X, C will forego every other possible satisfaction, and that is greater cost than doing nothing while A trades with B and not C. Therefore C does not forego any next best opportunity by letting A and B trade instead of initiating violence, because to initiate violence would result in even fewer preferences of C being satisfied (not to mention fewer preferences of A and B being satisfied).
Therefore, A and B gain by trade without hurting anyone.
Remember: violence => breakdown of division of labor, which is peaceful activity, since it requires indexing of capital goods by money and is cooperation, competition to best satisfy each other’s wants, not fighting.
C has no opportunity of A trading with C which is then foregone when A trades with B, because A won’t trade with C unless C uses violence, which would later result in fewest possible wants of C being satisfied. Nor welfare of the group greater when C uses violence, but less, because of (F).
EDIT: wow that’s long. Gotta use that in some paper, but its all been said before.
You are mixing up your counterfactuals. C cannot be better or worse off than before as his state did not change. Choices may have been reduced, but as long as his state has not changed, he is not better or worse off than before. It is true that C may have been better off had A traded with him instead of B, but possible futures don’t matter to actual welfare. What matters is the actual path pursued. It’s true that more choices can put you in a better position to improve your welfare, but the existence of more choices doesn’t mean that your actual welfare has changed one way or the other. The only way that you can change your actual welfare one way or the other is by acting.
