Many Keynesians argue that in order to stimulate the economy you must increase consumption. There methods of doing so result in a decrease in investment. They argue that without an increase in consumption, investment will naturally not take place because people will not demand goods. One of the biggest fears for buisness in this currect economic climate is lack of sales and this has led to the calling of more government intervention (e.g stimulus, government work progects, ect.). They argue that when profit from consumption resumes then investment will enter the economy. How would an Austrian respond to " If entrepreneurs are not recieving profit let alone enough revenue to maintain their business; why would the private sector make the risky but necessary investments to help the economy recover!!!"
If you weren’t able to attend and missed the live stream, Peter Klein gave a talk that speaks to this issue quite well at the Mises Circle in Houston this past weekend. Be on the lookout for that. They’ve already started uploading the lectures from the high school seminar from the day before to the YouTube channel.
For now though, this might help as well…
First of all, the way the terms are used here, it’s like saying “If women are dying every day, why would the human race bother eating and drinking the necessary things to stay alive!!!”
As you can probably see, “women” is not “all women”, just as “entrepreneurs” is not “all entrepreneurs”…and “the private sector” doing something is just as meaningless as talking about “the human race” doing something. “The private sector”, “the economy”, “the human race”…these are all abstract concepts of groups of individual people.
Remember…
“Only the individual thinks. Only the individual reasons. Only the individual acts.”
When people use aggregate terms like that and talk as though an entire non-entity “does” something, it’s a good sign they’re getting something wrong. (Not unlike when people say “Germany attacked France.”)
That being said, ironically your original question is a decent one. If the politicians in government are going to say “we’re going to make it impossible for you to earn a profit”…or “we’re going to demonize you for being successful”…or “we’re possibly going to change the rules such that you won’t be able to do business anymore, but only if we feel like it”…why would an entrepreneur or business owner take on new risk and investment? They likely wouldn’t. And that’s largely what we see. It’s called “regime uncertainty”, and it’s one of the most devastating environments for economic recovery, growth, and prosperity. In fact, many economists agree creating such an environment is one of the most damaging things the bureaucrats can do.
The market is quite flexible. People are creative and inventive. Ingenuity and industriousness is everywhere. We can and do usually find a way to get things done pretty much despite any law that may hamper legitimate commerce. This is largely the reason so much progress has occurred despite such a growth of government and encroachment into our lives.
But when the rules are in limbo…when no one really knows what they’re going to be, even in the next year or six months…there’s no way to plan. There’s no way to actually invest, because for all you know the Congress and President will change those rules next week…and something that was profitable this week, won’t be by the end of the month…or worse…it’ll be illegal.
Of course few people are going to be able (or even want) to make long term plans in an environment like that. So what do the wise people do? They hang back…wait on the sidelines and keep their chips close to their cuff until the water clears a bit. (Of course, if you’re a political entrepreneur, as opposed to a market one, you’ll be making backroom deals and writing legislation to make sure the rules end up in your favor…and against your competitors.)
I haven’t watched the video, because I am not in the environment to do so right now so I do not know if it would cover my question. But, what would the difference be between the Austrian view of recovering through a recession or the growth through demand/consumption view? What are the fallacies of the notion that economic capacity can be reached through increasing consumption? And it still seems reasonable to me that as demand declines investors (not all) will be less likely to invest. I understand that investment creates production which creates demand, but an economic recession that brings down demand would potentially destroy incentives to invest, because projects will less likely be profitable.
Yes check out the video.
But you just said it…demand comes from production. Without production, there is no demand. You can’t demand anything without first producing something. Again, as I pointed out in a previous thread of yours, in economics the term “demand” implies a means to acquire the good. Before you can acquire/consume a good, it must first be produced…either you produce it yourself and then consume it, or you produce something else and trade for it. Either way, you can’t demand anything without first having produced something.
Once again, there’s two concepts there…
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you can’t consume anything that hasn’t been produced
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you can’t (economically) “demand” anything without having produced something [ruling out force, fraud, and coercion, of course]
In other words: Production comes before consumption.
Furthermore, dude, seriously. This is virtually the same concept you were questioning 6 months ago. And a month before that. Perhaps you STILL need to go through the resources that were suggested to you (that you claimed you went through and were going to come back with a response…but never did.)
And while you’re at it, perhaps these will help too.
For probably the fifth time…no one can help you if you’re not willing to help yourself.
JJ, I understand the concept that merely increasing demand will not help grow the economy because it only redistributes resources throughout the economy, so in essence no wealth or growth takes place. I also wanted to know more fallacies about this argument because that is pretty much what I know that your only rearanging resources. But, my new question is Austrians believe that the way to get out of these situations is through increase in production which increases demand etc. which I agree with because the private sector utilizes resources a lot better than government. So, $2 million going to people who are basically digging holes and filling them back up will increase demand but won’t grow the economy, unlike say starting a new business which the private sector would do. So, I understand that growth comes from production no need for help there. But, how would you respond to someone saying “people are LESS LIKELY to invest in a bad economy because the risk is too high and many jobs and businesses are being lost.” I am going to go back to those links that were posted in my previous thread and watch the video and see if I remember something or something clicks.
how would you respond to someone saying “people are LESS LIKELY to invest in a bad economy because the risk is too high and many jobs and businesses are being lost.”
I’d respond that they are right.
Now the question becomes, how do we turn the economy from bad to good?
All govt intervention will turn the economy from bad to worse, not bad to good.
One may ask, why is this so, but you already wrote the answer.
Basically what Dave said. You already have the answer. I think part of your problem is this:
This is not necessarily true. You seem to be focused on “what is something that needs to be done”, only so that you might have a positive response to some central planner who asks that question (which of course is leading…as it implies there is some central planning that needs to occur, or at least, that there is something that could be dictated to create better conditions.) You’re still thinking in “C+I+T+G” aggregates, and that if you simply increase this one, and fiddle with that one, everything works out.
The video only frames things in those terms to show that even on their own merits the Keynesian arguments fail.
In reality, the only thing that “needs to be done” is to allow the market to function. Resources have been miscalculated, and production structures need to reorganize. Notice I didn’t say “structures need to be reorganized”.
Again, “All rational action is economic. All economic activity is rational action. All rational action is in the first place individual action. Only the individual thinks. Only the individual reasons. Only the individual acts.”
Action = rational action = economic activity = individual action
Maybe it will help you to forget about why the market works for a while, and just rest on the fact that anything the government does makes it worse. It doesn’t matter if the free market isn’t as perfect as the planners want to envision the world to be…the economist asks “compared to what?”. You keep asking “but what about if a lot of investors won’t invest?” If it helps you, just say “so what.” Anything you try to do will only make it worse.
No matter what happens, there is literally nothing the government can do to improve or make things better (on the whole or in the long run). The only thing central planners and their guns can do is hamper that market process…threaten people, kill people, throw them in cages, expropriate from some and give to others. This above all else is the point. People will always try to argue that point and point to some supposed “good” the government has done, or recall an example of someone or some group that has benefitted from government intervention. But of course this does nothing to refute the point. Blowing up a hospital and happening to kill one or two people who actually wished to die does not mean the deed was good, moral, ethical, or even beneficial. Something being good for some does not mean it is “good period.”
There are two parts to every action…Ce qu’on voit et ce qu’on ne voit pas
Desire (consumption) tells you why the economy exists. Production tells you why it grows.
Remember that “demand” is not simply an impulse to want something.
To create demand for a good, you must first have the resources to trade for that good.
A homeless person without any money whatsoever may crave for apple products or food, but if they do not have the money to buy them, they do not create demand.
Hence that is why producing, and then taking the fruits of your labor/land/capital, and exchanging it creates demand.
Alright I’m back. So, I looked at some of the links which were very helpful. Basically, what I was looking for was how exactly production would be stimulated in a recession. I learned that during recession demand is lowered and in result wages come down (from less demand for labor), prices come down, and interest rates come down. In other words, an environment somewhat business friendly is created. Entreprenuers now have access of cheap capital and labor in order to make cheap products. Since prices come down (along with wages) people are still able to afford products even though their wages were slashed. A couple months later potential is reached. Thank-you everyone who contributed to this thread.
Continuing what I said earlier about dumbing it down…Hoppe takes it even farther…
Here’s my input:
The question: How is it that the economy can return to normal spending patterns when there isn’t adequate demand for the consumer goods produced in the first place. There are some awkward aspects of investment here, but this is the essence of the question.
The responses:
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The problem is legitimate but the government cannot act because it will only make things worse. The only reason that has been given is regime uncertainty.
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Say’s Law. We must produce before we can consume, therefore stimulating demand won’t help the economy to recover
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The price level and interest rate will fall and this will pave the way for recovery.
My feelings on the responses:
- Regime uncertainty is a good, and refreshingly Austrian criticism of government intervention. With this said, by itself it cannot be used to criticize Keynesian theory in the way that it has been described. It is important to see that regime uncertainty applies to changes in government spending patterns and the interest rate. These will inherently change as a result of government spending patterns. Some industries will be harmed and others will be helped. The general propensity to consume and the multiplier are also important here.
Smart Keynesians (especially ones who learned anything from Friedman) understand that government changing rules and regulatory procedures brings about negative consequences. Keynesian theory is really only a macroeconomic theory as well, so it doesn’t prescribe much in the way of what would cause regime uncertainty if we don’t take spending changes into consideration.
- While Say’s Law does have its uses, I find this line of though as uncompelling in this context exactly because if we think of it like this: “Production creates demand”, yet production will not occur without anticipated demand, and so we end in something of a chicken and the egg situation. However, we can look at this from the perspective that real or anticipated demand will create production, or that production will create some sort of future demand. Both work.
For this reason I think that this line of argument is fallacious in concluding to claim that stimulating demand in effective to bringing about economic recovery. Firms function to make money. If the demand isn’t there then they won’t produce.
- This is the most classical argument within economics. Wage and price flexibility are essential for economic recovery in the absence of government intervention. The problem that one runs into is then the very fact that Keynesians assume that wages and prices aren’t flexible. The largest intellectual failure in economics today is that the evidence usually drawn to back up that conclusion is drawn from nations where Keynesianism and government are widespread. This means that wages and prices aren’t flexible downward exactly because no one expects them to be.
Edit
Also, the Hoppe video gives the most childish example of Austrian logic. It doesn’t pose any serious problem and if Krugman couldn’t answer that question then he’s an idiot, because any true economist should be able to at least explain how an increase in the money supply could increase wealth, regardless of whether or not it does given the real conditions of the world.
Edit’
It’s important to note that Keynesianism arose as a reaction to the classical economic theory of perfect price flexibility. The classical economists (according to the modern mainstream narrative) thought that prices were perfectly flexible and would adjust rapidly to the point where a recession was supposedly impossile to the point that the government couldn’t even increase overall demand because the interest rate and wages would naturally adjust to the point that all changes in spending would be perfectly crowded out. Keynesianism was a reaction to these radical and simplistic assumptions about the degree of price flexibility that didn’t explain real world conditions
Neo,
- There are other problems with govt interventions besides regime uncertainty. All the govt can do is redistribute, openly [taxes] or deviously [inflation]. Neither of these things increases production in the economy as a whole.
Did you not read my article that quotes Keynesian research that propensity to consume function is fictional? Be not fooled by the light hearted toine of the article. The economic content is serious.
- It’s not a chicken and egg situation. [I confess I was unclear about this for a good while, but my eyes have been opened, praise the All Mighty.]
Production will not occur without anticipated demand, yes. But demand [=ability of a hungry person to buy bread] will not occur without actual previous production on the part of the hungry person. If you have no money, you cannot buy anything. In addition, without actual previous production of bread, there is no bread. In other words, production has to physically precede demand in time. Demand does not have to physically preceed production. It’s enough for the producer to think the demand will be there later, after production, and that’s good enough for him.
Put another way, production has to precede demand in the Real Universe we live in. Demand has to precede production, not in time, and not in the real world, but in the imagination of one person. If one person, the manufacturer, imagines there will be demand some day in the future, that’s fine.
How does this relate to getting out of a recession? Simple. Assume there is a lack of demand, for whatever reason. Since demand has two components, we’ll talk about both of them. If there is no demand because there is no desire to buy, then redistributing wealth so that the money is handed over to people who want to buy will only work once. Say a pizza shop doesn’t sell enough pizza to stay open. If the govt takes the money from people who don’t like pizza, and gives it to unemployed people who do, what will happen? The ones who actually earned the money still don’t like pizza. They still won’t buy it. The unemployed will use the money they got to buy a pizza. But after they spend it, who will buy the second round of pizzas next week? No one.
One might argue that the pizza owner, seeing new demand for pizza, will hire the unemployed guy to make still more pizzas per week, say X more, thus ensuring there is demand. But it won’t work, because who will eat the X new pizzas? After all, the unemployed guy was satiated with the old number of pizzas per week, before X more were made.
You see the problem. If nobody wants pizzas, they still won’t even after redistribution. So constant redistributions are needed. In other words, the recession has not been cured. Rather two groups, the pizza stores, and the unemployed, are living parasitically off some productive person.
There is another problem. The productive person will have less to spend on what he used to spend, thus reducing demand somewhere else. Now you may argue that no, he will keep on spending exactlly as he used to. The only thing that will change is that he will stop hoarding. If he used to spend $90 and hoard $10, we just take his $10 and now all his money will be spent. But that might not be the case, and is indeed unlikely. He will probaly spend $81 and hoard $9, same old 10% of his income going to hoarding, or as he calls it, saving up for old age or emergency. Who knows? he might even spend only $80 and save the full $10 that he did until now. meaning nothing was solved.
TLDR version: If the problem is lack of interest in what is being made, that will not change by redistribution. If, howevrm the focus is on increasing production, meaning removing obstacles govts make to hamper production, then production will happen. And it will be of the right things, because businessmen know what their customers want [absent govt meddling that ruins their ability to know, see ABCT].
Let’s move on to the other part of demand, sheer lack of purchasing power to buy anything. People are hungry for bread, but have no money to pay for it. Once again, redistribution will not increase that, but will only shuffle the money from one person to another. The hungry will get money for bread, but that very same money is taken away from someone else. Total purchasing power is not increased by moving from hand to hand.
What will increase total purchasing power? Only one thing. Every individual who produces something useful increases his purchasing power, because he can trade what he produced for bread. The key here is that demand, ability to purchase, has to be preceded in time by production on the part of the demander. There is no ther way. One cannot magically create demand from scratch.
Production, on the other hand, does not have to be preceded in time by demand. People don’t have to buy something before it is made for it to get made. It’s enough to know they will buy it after it is made.
There is one more thing to think about. Keynes assumed lack of demand will not be, at least in the first stage of a recession, because of lack of purchasing power. Rather he thought the problem will be…
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…lack of desire to buy anything…
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…because people are just too rich for their own good, and all their consumer wants are satisfied with a mere portion of their paycheck…
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…and because profitable investment possibilities will be exhausted in a wealthy economy.
I think all 3 assumptions are refuted by reality.
Say agreed recession will cause [not be caused by] lack of demand. But he meant a decline in purchasing power. Given that he is right, [and I think most people will agree that they have too little purchasing power, not so much that they have nothing to do but hoard their money], that the thing we are after is increasing purchasing power, then the only way is by doing that thing which actually is a prerequisite for increased purchasing power, increased production.
I was indeed building upon something you had noted in this thread. My contribution was elaborating the flaw in the chicken and egg argument.
Dave,
- While I think that just saying it is as simple as redistribution is somewhat simplifying the issue, I generally agree. I was simply saying that a criticism of Keynesianism should be more extensive than just regime uncertainty which was a large part of what has occurred on this thread. The ultimate failure of government is that it is government, and it’s dumb.
I also don’t really see where in the article you refute MPC as such. You seem to make it clear by quoting this:
“He demonstrated that, while national income rose greatly during that period, standards of living rose correspondingly, and the great bulk of the increase in income went into consumption. Saving, as measured by real investment remained a constant fraction of income, with an apparent moderate tendency in the twenties (on which he does not insist) for consumption to increase relative to income”
Yet this would seem to only to imply that the MPC (I prefer the idea of the “general” propensity to consume because it’s not mechanistic and stupid like the idea everyone will spend and save a fixed portion of their income). However, if the above is indeed true then wouldn’t this just make fiscal policy more effective because it would lead to a (generally) higher multiplier? You claim that Keynesians swept Keynes’ idea that the rich spend less “under the rug”, and yet this would make it seem like they should have just refuted it with research like that used above.
I’m sorry if there’s another important part of this argument that I missed or if I’m misinterpreting the above. If so, can you either point me to where in the article you provide a further criticism or can you restate your argument here?
- I’m going to start by saying that I am rather flaky on Say’s law. I’ve never understood exactly why it was the linchpin of classical macro, nor do I understand why it is referenced so much today. My understanding may be flawed. Now let’s move on to my response:
Now I think that for the first possibility (no one wants what is produced) that you make a perfectly fine case for why increasing income of those who want the generally undesired good is impossible to maintain (let alone that it’s impossible to actually implement).
However for the other case I think that your argument leaves something to be desired. If we start of with your claim that production originally creates demand, then that is perfectly true. So sure, we have determined that the egg originally created the chicken, but which creates which now that we have a fowl population in place? Well chickens create eggs and eggs create chickens, they’re both there and each creates the other. In the capitalist economy where their has historically always been a significant amount production, a surplus of demand over production will just spur more production.
You make a good point about how it is very difficult to increase purchasing power through fiscal policy, however here’s a scenario using classical Keynesian argumentation. DISCLAIMER: For the love of god I am playing devil’s advocate to prove a point. No one attack me personally as being a Keynesian.
For this to work then we assume sticky wages. Without inflexible prices a recession cannot persist long in the first place and Say’s law is irrelevant to the issue one way or another because all prices will adjust to stimulate both demand and production
If we assume that some portion of income is not spent by individuals then we find that if the government increases taxes will increase total spending, because so long as the government spends the full value of the tax increase then eventually individuals receive the same amount of income back and demand for labor in general will increase. If the government does this enough then employment begins to pick up and people start spending more spontaneously.
In this theoretical example demand has created supply.
There is also the possibility of monetary policy increasing demand in general. This increase in demand with stationary prices will revitalize employment and demand. So long as prices are stationary then this will occur. The problem is once again that the government will fuck this up, such spending (especially fiscally) shifts a lot of production towards government sponsored demand. In the real world prices are reasonably flexible and so this will crowd out some spending, credit expansion has poor long term effects, the real multiplier and spending effects are not obvious and will vary, and so on. Nonetheless, the possibility that the government could solve “GDP recessions” should be clear.
Thank you for your considered response.
JJ,
Do you want something?
Was that not obvious? I thought it was made pretty clear what I (and probably Professor Hoppe) would just love to have you school us ignorant boobs on.
Neo,
Forgive me if this reply is repititious. The hour is late, the fingers type freely.
- Say’s law is important because accepting it means denying all of Keynesianism in all its flavors. Because one of the corrolaries of the law, to quote Say, is:
The same principle leads to the conclusion, that the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.
That’s why Keynes worked so hard to discredit Say. Ultimately, he could only do it by constructing a straw man.
- …but which creates which now that we have a fowl population in place? Well chickens create eggs and eggs create chickens, they’re both there and each creates the other.
The thing is production creates demand in the sense that if you have no eggs, you cannot make an omelet. The ability for Mr A to demand only comes about after, and directly because, Mr A did some work, meaning produced. He then gets paid for his production, and with the money he can go out and buy things, i.e. demand. So to increase demand you must increase production, what other way is there?
But when we say demand creates production that is a very different kind of creation. Mr A can produce today even if nobody can demand anything today. Demand does not have to actually exist at the time of production. Mr A can bake a cake even when no one is hungry, and even when no one can afford to buy his cake. All we need for Mr A to produce is for him to think that at some point in the future, when his cake is finally baked, someone will want to buy and will be able to afford it.
So if we are to tackle the problem of lack of demand, we must do it by making it possible for people who cannot demand now to be productive so that they can demand.
- …a surplus of demand over production will just spur more production.
Say’s law proves that there cannot ever be a surplus of deamnd over production. Even Keynes admits that. His only quibble was that demand might be less than production in the aggregate, or so he thought.
- I think I showed why I disagree with your scenario of the govt increasing aggregate demand permanently. If the problem was that people have no use for what is being made, and that’s why the manufacturers had to lay off workers, then as soon as the govt stops pumping in money, the intial situation will return. If the problem is that the manufacturers lack purchasing power, and we have to give it to them, that can only be done by taking away purchasing power from someone else. So that aggregate purchasing power is not increased by govt taxing or spending.
Maybe we are talking about some scenario where working people have just enough to buy what is made, and want it, but there is a pool of unemployed who cannot buy anything. And no one will hire them, because wages are too high and will not go down ever. This would be Keynes scenario of a frozen situation where the economy is not in equlibrium [= full employment]. So if the govt put in an order for more cheese, the cheesemakers would hire the unemployed to make cheese, even though they are asking for too much money, and every day they work is a net loss for their boss. I don’t understand how this is possible.
Now I think about it, if wages are sticky and too high, that means by definition of “too high” that someone who employs the unemployed at the wage they insist on will lose money every day they are working for him. How can all the taxes and govt spending in the world change that, or convince the employer to hire people so that he can lose money every day?
I always heard that Keynes solution to sticky wages was to print money to reduce the purchasing power of the currency, and thus reduce the real wages [= purchasing power] of labor, even though they will stay the same nominally. I grant that I am not familiar with the intricacies of his proposals. Did he have some ideas of how to convince employers to lose money willingly?
- Once again, how can monetary policy, meaning changes in the money supply, even if done perfectly with no corruption, increase demand in general? Demand can only come to Mr A if he does work, if he is productive. How does printing money make him produce anything? And if the idea is to move purchasing power around, that can only happen once. I see I’m just repeating my arguments here.
Dave,
I will respond to you tomorrow, but in the meantime I would like to point out that 3 and 6 are perfectly good numbers. There’s no need to skip over the poor digits like that!
JJ,
Sorry, I was under the impression that anything we don’t explicitly outline doesn’t actually matter.
Anyway, my biggest problem with the question, disregarding anything to do with economic theory is that the question is asked in a way that is meant to to obscure, demean, and ridicule while at the same time obscuring truth.
“How [can] a piece of paper make society richer?” The way in which this is asked is akin to:
How is it that small led pellets flying around can harm people?
How can someone in a big white building in Washington change the lives of hundreds of millions of human beings by signing a piece of paper?
Or let’s even apply this manipulated question to Austrian theory
How can a piece of paper destroy societies wealth? How can printing off some green bills destroy an economy made up of billions of people, investors, heavy machinery, and advanced methods of assessing probability possibly touch the wealth of society?
Yet this is exactly what ABCT says.
Let’s alter Hoppe’s sentence a little bit to realize the true magnitude of the question:
“How is it that by altering the supply of the universal medium of exchange that acts as the very causal mechanism for all exchanges in a capitalist economy and indirectly determines the entire alignment and usage of machinery, labor, and land, that wealth can be created”?
Once again, without actually even looking at the economics of this, the above quote sounds a thousand times more plausible than what Hoppe said. Hoppe’s statement is the kind of anti-economic and anti-thought statement that is more common among the polemicists of the left than real economists.
Now let’s move on to why the statement iself is foolish using a brief economic analysis:
All I have to do is to answer the “can” in that sentence, so let’s use the same extreme scenario I have been referencing for a while now. Let’s say prices and wages are perfectly inflexible downwards. Demand is currently not high enough to support many projects that would be supported if wages and prices were flexible. The only thing that occurred to bring about this state of affairs was a sudden decrease in consumer spending which ended up in layoffs and caused further spending decreases.
Therefore production, income, and capital growth are all less than they could be, or that they would be if demand picked back up to its previous levels. Society is less wealthy than it could be.
The government increases the money supply. This increases demand for goods in general and increases capital growth, income, and current production. Wealth has increased. Printing paper has made society richer.
The implausibility of this argument is irrelevant, I just answered Hoppe’s question much more genuinely and at a much higher intellectual caliber than Hans himself asked it.
Have I properly “schooled” you “ignorant boobs”?
It’s really not very complicated. You can sit around all day being hungry and wanting shelter. Nothing gets done until you get up and produce stuff. When your productivity exceeds your personal consumption, the economy grows. That’s why redistributing money from producers to indolent Obama supporters is more harmful for the economy than if they were broke and didn’t consume. They’re destroying wealth that everyone else has created without contributing through their own productivity. The goal is to increase one’s standard of living. That happens with more productivity, not consumption.