Permanent Keynesian Refutation Thread

Miscellaneous General
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I must have missed the significance of this part. Increased production can refer to an increase in value or the satisfaction of a want or need. But you cannot assume that this is with respect to the majority. It is with respect to the observer or perspective undefined.

So when Hazlitt says “taxes discourage production,” what does he mean? Is he merely saying that they only discourage the satisfaction his wants? His argument doesn’t have much use for me, in that case.

that would not be productive from the perspective of the beaten person. Nor from an objective observers standpoint, as the beaten individual suffered a loss of strength in his physical structure and now requires more calories, protein, and time to regain his original state. Net loss is observed.

How are you calculating the gain of the beaters versus the loss of the beaten to conclude that there is a net loss?

production as “satisfaction of wants or needs” cannot be value neutral because values are defined as that which is sought after, which is basically the same as saying that “values are wanted or needed” or “production = increase in value.” whose values?

If I say that you value the works of Ludwig von Mises, I am making a descriptive and not a normative statement. That’s what I mean. We should be able to talk about productivity without including our own values–of course productivity involves the values of the participants.

Compulsory exchange cannot lead to profit on both sides because if there was profit on both sides, the exchange would be voluntary, making compulsion superfluous. One person can profit from compulsory exchange, this occurs at the expense of the compelled party. Of course that party will necessarily have a different hierarchy of values at every moment for the rest of concious existence, so it is certainly possible for him to reevaluate the compulsory exchange and believe that it was in his best interest, just like the strongarm robber can reevaluate his spoils and decide that it was a waste of time to steal a blender.

First of all, I wasn’t talking about profit on both sides. I admit that taxation might be only profitable to those doing the taxation and not those being taxed (although the vast majority of people do pay their taxes voluntarily).

Second, I want to make sure we are on the same page as to what profit means. Suppose I come home one day and find that my friends have entered my house without my consent and have thrown me a surprise birthday party. This makes me happy, but it violated my property rights and didn’t involve any sort of choice on my part. Would you still say that I have profited from this scenario? If yes, then profit has nothing to do with my voluntary choices. If no, then profit is not necessarily desirable in every situation.

different governments exist for different purposes. Assignment of “rightful purpose” as a third party is a subjective valuation.

But every business exists for the same purpose (i.e. profit)?

The most intersubjectively valid assignment of purpose would be defined in the government’s charter or foundational document. The state is simply a group of people who possess social sanction to threaten or initiate force. The problem with your question is that government does not have shareholders per se. Ownership functions are shared between three overlapping groups, voters, taxpayers, and agents. This creates conflict of interest.

Ownership functions in a business are shared between shareholders, managers, and employees. How does this not create the same conflict of interest?

singular powers are powers that are not held by plural members of a community. The state has a monopoly on socially sanctioned force within a defined area that encompasses other community members. The firm has the “singular powers” of a property owner on its own property, as does every other member of the community. This is not singular, it is pluralistic. If one firm had the power to dictate the extent of property rights in a geographic area encompassing the property of other community members that would be a state.

If whatever I make at a firm becomes the property of the firm, is the firm dictating my property rights?

Only if the company was the only actor with the sanction to use violence to protect its property rights.

What if the company is the only actor with property? When you go to work, the whole world around you is owned by a single entity. I don’t see how in practice this is much different than a state.

I mentioned 20% because you mentioned it. Robbers take whatever they take. They do not have to take all the money in the bank to “maximize” their profit. They might have time preference. They might know that, historically, robberies that do not take all that is available are less likely to be investigated. Perhaps this robber considers being the subject of an investigation to be a loss of psychic profit.

I meant that you seemed to imply that a robber wouldn’t want to be efficient at his business (i.e. robbing).

Efficiency presupposes a clearly defined goal and scarce resources. “efficiency” refers to the achievement of ends while conserving scarce resources. If you want to generate electricity for the market, a nuclear explosion is extremely inefficient, for it represents wasted energy. If you want to scatter fallout across the region, an atomic explosion is efficient, for it represents energy being put to use.

You said, “but unless you envision govt somehow taking an active role in making business more efficient or somesuch.” Then perhaps the government is making the business more efficient for the ends of the government. In the same way, a corporation makes a subsidiary more efficient for the ends of the parent company.

Compare any taxation scheme with any business’s accounts. Why is club soda consumption tax 34%? It’s an arbitary number that was picked for political reasons. Why is the cost of a widget $400? it’s because that is the empirically discovered intersection between supply and demand, including the effect of supply and demand on the manufacturing process. When a business owner sets a price “at random” she is making an estimate as to the production factors and supply and demand at that point in time. It might appear somewhat arbitrary if it was not the product of a rigorous process but it is not arbitrary. People do not operate successful businesses based on whim. The interested parties determine the price through their own actions executed according to subjective values.

I think many taxes are applied according to the principles that you mention. Most large cities, for example, have high taxes whereas small town have lower taxes. Can we really say this difference is “arbitrary”? Similarly some states maintain low corporate taxes to attract business. Why do cigarettes have higher taxes? They contribute to higher social costs, such as medical costs, which government often has to pay (this is especially true where there is universal healthcare). And do businesses really never operate on “whim”? Why does my company force me to wear a suit to work? Why must I bear this arbitrary expense in order to work there? You are really going to need to present some more evidence on this point.

I do not see the utility of this one.

Why not? Don’t you think it’s necessary to control for other variables?

Your basis for comparison will be small because they operate COMPLETELY differently.

Well, that’s what I’d like to be able to demonstrate. Can you show me how they operate completely differently? Keynes Island seems pretty close to how modern states operate. Are you suggesting that a business owned island (Hazlitt Island) would operate differently? How would you see it operating?

this is somewhat odd and arbitrary. Businesses do not seek to provide “standard functions of government.” they seek profit, and will only provide functions that the owners/board of directors believe to be profitable.

Obviously they don’t seek to provide standard government functions because they exist within government. But if they existed outside of it, they would have to protect their property in some way, would they not? Currently government does that for them. I don’t mean that they need to provide the services that government currently provides for society, but that they have to provide the services the government currently provides for the business. So Hazlitt Island would need some sort of private security force in place of a government police force.

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So when Hazlitt says “taxes discourage production,” what does he mean? Is he merely saying that they only discourage the satisfaction his wants? His argument doesn’t have much use for me, in that case.>>>>

ultimately, taxes discourage the satisfaction of everyone’s wants, because they cause resources to be misallocated. In the short term, the taxes do produce values for some people, but those people do not have to produce value for other people and so net loss is realized. Of course if someone values the event of someone else’s loss, then production in that case becomes zero-sum over the short term. Net loss still occurs because they would be happier concentrating on their own profit, but they may not realize this.

How are you calculating the gain of the beaters versus the loss of the beaten to conclude that there is a net loss?>>>>

caloric expenditure and tissue damage.

If I say that you value the works of Ludwig von Mises, I am making a descriptive and not a normative statement. That’s what I mean. We should be able to talk about productivity without including our own values–of course productivity involves the values of the participants.>>>>

If an observer values the entropic heat death of the universe, would he consider worldwide atomic holocaust to be productive or destructive?

First of all, I wasn’t talking about profit on both sides. I admit that taxation might be only profitable to those doing the taxation and not those being taxed (although the vast majority of people do pay their taxes voluntarily).>>>>

then consider the robbery. The robbers gained and the robbee suffered a loss. The division of the spoils among two people halves the gain, and nothing is done to offset the compound loss of the robbee. You, as a disinterested observer, consider this productive?

Second, I want to make sure we are on the same page as to what profit means. Suppose I come home one day and find that my friends have entered my house without my consent and have thrown me a surprise birthday party. This makes me happy, but it violated my property rights and didn’t involve any sort of choice on my part. Would you still say that I have profited from this scenario? If yes, then profit has nothing to do with my voluntary choices. If no, then profit is not necessarily desirable in every situation.>>>>

you did not mention your valuation of the birthday party. The entire question hinges upon whether you grant post facto sanction to the entry into your home. If you are glad to have received the party, you profited, and your rights were not violated. If you were not glad to receive the party, you did not profit, and your rights were violated. your friends would owe you reparations.

But every business exists for the same purpose (i.e. profit)?>>>>

that is correct. Every business that has ever existed was created for the purpose of the owner’s profit. Before you start listing alleged counterexamples, consider that financial profit is a subset of psychic profit. Businesses exist for psychic profit.

Ownership functions in a business are shared between shareholders, managers, and employees. How does this not create the same conflict of interest?>>>>

ownership functions in a business are not shared. They are the sole province of the owners, and may be delegated or retained at will. The same cannot be said for the equivalent functions in the state.

If whatever I make at a firm becomes the property of the firm, is the firm dictating my property rights?>>>>

assuming that you are speaking as an employee, you do not own the products of your labor when you sell your labor to an employer. The employment relationship is an ongoing voluntary transaction where an employee exchanges work for compensation.

When you get a job at burger king making sandwiches, you do not make and sell sandwiches. You sell your labor to someone who (delegates authority to a representative who) tells you what labors to perform.

What if the company is the only actor with property? When you go to work, the whole world around you is owned by a single entity. I don’t see how in practice this is much different than a state.>>>>

can you give me a real world example? This is certainly not the case where I live.

If the company is the only one in your universe with property then who are they exchanging with?

I meant that you seemed to imply that a robber wouldn’t want to be efficient at his business (i.e. robbing).>>>>

I still do not see where you get this from. Robbers have plenty of reason to be efficient. The loss occurs on the other end of the transaction. In a voluntary transaction, the parties each exchange a lesser value for a greater value. Both profit. In an involuntary exchange, the aggressor exchanges a lesser value for a greater value and hence profits. The other party is forced to give up a greater value for a lesser value and hence loss is realized.

You said, “but unless you envision govt somehow taking an active role in making business more efficient or somesuch.” Then perhaps the government is making the business more efficient for the ends of the government.>>>>

How do you envision the government taking an active role in making the business more efficient? By collecting taxes or something else?

I think many taxes are applied according to the principles that you mention. Most large cities, for example, have high taxes whereas small town have lower taxes.>>>>

It is hard for me to see how this could be. Profit is the output function of a business process, the size of the profit is a direct result of the business process. Taxes are assessed according to formulae. When a business becomes more productive and efficient, profits go up. When a business becomes less productive and efficient, profits go down. When an authority decides how to assess tax, the tax is assessed according to that formula. This is the very definition of arbitrary.

Can we really say this difference is “arbitrary”? Similarly some states maintain low corporate taxes to attract business.>>>>

that is an arbitrary decision by the state. It is not an outcome of the productive process, but imposed onto the productive process. This fits the definition of “arbitrary.”

Why do cigarettes have higher taxes? They contribute to higher social costs, such as medical costs, which government often has to pay (this is especially true where there is universal healthcare).>>>>

that is philosophically arbitrary. Cigarettes have higher taxes because they are imposed by authorities. Cigarettes do not have higher taxes because they “produce more.”

And do businesses really never operate on “whim”? Why does my company force me to wear a suit to work? Why must I bear this arbitrary expense in order to work there? You are really going to need to present some more evidence on this point.>>>>

your company does not force you to wear anything, unless your company is a state (which is notorious for forcing people to wear certain garments for arbitrary reasons). Employment at your company has certain requirements that contribute to the production process. If the process were not productive, or if you felt that the paycheck was not worth the psychic loss you experience by wearing a suit, you would not be there, which represents profit. As it is now, you choose to profit by wearing a suit and collecting a paycheck, and the company profits by employing fools on hills wearing suits. The market eliminates unprofitable whims. If an idea originated as a whim, and showed profit, its reason for still being applied is the profit. Therefore the decision to continue the behavior is based on profit and not whim. This feedback cycle is more or less absent in coercive interactions.

Why not? Don’t you think it’s necessary to control for other variables?>>>>

I consider certain of those variables to be essential components of the entities under discussion. For example, companies and states do not generally exist at the same scale. By conflating them and eliminating those variables it becomes harder to see the essential differences.

Well, that’s what I’d like to be able to demonstrate. Can you show me how they operate completely differently? Keynes Island seems pretty close to how modern states operate. Are you suggesting that a business owned island (Hazlitt Island) would operate differently? How would you see it operating?>>>>

It would operate however was most psychically profitable for the owners. If it were acting as a business, in order to make financial profit, hazlitt island would have to satisfy the needs of its customers and employees. If it decided it was better to use the threat of violence to make the transactions more profitable, that profit would come at the expense of the employees and customers, and we would call it a state.

Obviously they don’t seek to provide standard government functions because they exist within government. But if they existed outside of it, they would have to protect their property in some way, would they not? Currently government does that for them.>>>>

actually businesses already have to protect their property. Hence the locks on the doors, the cameras, the fences and security guards. Not to mention the private investigators and the private courts.

I don’t mean that they need to provide the services that government currently provides for society, but that they have to provide the services the government currently provides for the business. So Hazlitt Island would need some sort of private security force in place of a government police force.>>>>

Since every business already pays for its own security through private measures such as physical security, alarms, cameras, and security guards, I think we can agree on this. What other services were you thinking of?

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If I say that you value the works of Ludwig von Mises, I am making a descriptive and not a normative statement. That’s what I mean. We should be able to talk about productivity without including our own values–of course productivity involves the values of the participants.>>>>

I think this deserves a better answer but I was having trouble formulating it at the time.

I simply do not think it is possible to evaluate the notions of “production” or “efficiency” in a descriptive sense, without reference to a value system. Things are always being conserved and produced. This is why the randists say that life is the ultimate standard of value, because people do not like to say that death is good. But when people die, open space is “produced” and resources to sustain life are “conserved.”

So I guess the question at hand is do you want to talk about satisfying the wants and needs of the majority, or the wants and needs of everybody? Are you a majoritarian or an egalitarian? I will accept your selection arguendo.

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You generate good debate, FOTH.

One thing I think needs considering is the fact that the window fixer would never be needed if windows didn’t break. In your example, the doctor starved because the town didn’t need a doctor, but what if he simply found a new profession?

War generates a great amount of need, but it wastes resources fixing broken things instead of using resources to make new things. The baker only needed a new window because his last one was broken.

If one less suit gets made, that means that one less suit is demanded, which frees the tailor to do other things.

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Human desires are infinite, and resources are scarce. Destruction for the purpose of increasing demand just means wasted productivity. The criteria that needs to be met is satisfication of consumer demand.

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Jack McCloskey said:

Define Keynesianism.

Keynesian isn’t just a pejorative term for all the economics you don’t like. You can’t refute something you haven’t defined.

If you mean the conept of sticky wages, that will be impossible to disprove theoretically. Sticky wages are an empirically based assumption and so would need to be countered with evidence.

If you mean fiscal stimulus as a way to relieve falling aggregate demand, that has already been discredited by almost the entire economics community, despite what certain public figures would like to have you believe. Most New Keynesians don’t believe in fiscal stimulus.

The only other aspect of Keynesianism I can think of that still gets mentioned is the liquidity trap, which relates to barriers on monetary policy. If anything, this idea should be championed here.

Is the red correct? Isn’t the severe deflation that occured during the 1920-21 recession not empirical evidence against the Keynesian argument of sticky wages?

Sorry if this has been brought up already but there is a lot in this thread to read through.

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Sorry Malachi, I was busy and away from this site for awhile and lost track of our discussion. I think it was becoming unproductive anyway, so I don’t think I will reply to you points directly, unless you really feel I need to address certain ones. I plan to write some more posts that will hopefully clarify the points I’ve been making and also extend them into new areas.

You generate good debate, FOTH.

Thanks. I hope this debate has at least allowed us to gain a better understanding of our positions even if it has not changed them. I know it has for me. I continued the broken window debate here. I feel like I’ve talked the issue to death at this point and don’t really feel like resurrecting that particular aspect of the debate. You might find that I’ve answered your points in that thread. Here’s how I concluded that discussion:

Part of the problem is that what constitutes creation vs. destruction is in no way neutral. In order to make wood for construction, one must destroy a tree. If destruction of property necessarily means that wealth is destroyed, then cutting down a tree necessarily destroys wealth. But if nothing can be destroyed, then how can wealth be created? Isn’t it rather more relative than that? Isn’t it possible to destroy the “wealth” of those who enjoy hinking in a forest preserve by chopping it down while at the same time creating wealth for those who get to live in houses made from that wood?

Perhaps the thing I find most troubling about Hazlitt’s argument is not that he uses it to explain instances where poverty has followed property destruction, but rather that he uses it to explain away instances where the reverse seems to be true. He says, “look, all of the empirical evidence leads you to think that World War II got us out of the Great Depression. But look! I have one highly idealized example that proves that it’s not true!”

(Whether WWII really did get us out of the Depression or not, I don’t wish to address. I merely assert that such an example that Hazlitt presents is insufficient for drawing such conclusions.)

I’ve found some sources that make the same points I was trying to make at the beginning of the thread (before even the Hazlitt discussion). I’d like to quote these and expand on those original thoughts concerning economizing vs. rationing. But first, I’d like to raise some issues regarding another chapter in the Hazlitt book.

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As a reminder, I’d like to say once again that I am not advocating for what Hazlitt is arguing against, in this case price fixing. Rather I am illustrating the absurdities of Hazlitt’s arguments. I do not mean to rule out the possibility of other legitimate reasons for opposing price fixing. Personally, I’m not sure I support markets at all, so there is little reason for me to support price fixing.

What Rent Control Does

Therefore, it is contended, the government, by forbidding increases in rents, protects tenants from extortion and exploitation without doing any real harm to landlords and without discouraging new construction.

This argument is defective even on the assumption that the rent control will not long remain in effect. It overlooks an immediate consequence. If landlords are allowed to raise rents to reflect a monetary inflation and the true conditions of supply and demand, individual tenants will economize by taking less space. This will allow others to share the accommodations that are in short supply. The same amount of housing will shelter more people, until the shortage is relieved.

Rent control, however, encourages wasteful use of space. It discriminates in favor of those who already occupy houses or apartments in a particular city or region at the expense of those who find themselves on the outside. Permitting rents to rise to the free market level allows all tenants or would-be tenants equal opportunity to bid for space. Under conditions of monetary inflation or real housing shortage, rents would rise just as surely if landlords were not allowed to set an asking price, but were allowed merely to accept the highest competitive bids of tenants.

Hazlitt assumes a priori that forcing rent below the market level will lead to a housing shortage. But is this really a safe assumption? He argues that higher rents will lead to more people sharing space. But is it not possible for the opposite to occur? Let me give an example, suppose there are 10 houses that could be potentially subdivided into three units each—a total of 30 units. There 30 families seeking housing. Twenty of these families are poor and can only afford to spend $1000 a month each on rent. The other 10 families are rich and are willing to spend $4000 a month on rent for the entire house. Thus the landlords could rent the 10 houses at $1333 per unit. Since the 20 poor families can’t afford that, they would go homeless while each rich family got an entire house to themselves.

Now suppose the government implemented price controls and set the maximum price for a housing unit at $1000 per month. A number of scenarios are possible. If the poor families got to the houses first, filling two units in each house, and the rich were forced to take the third unit in each house, then all 30 families might find housing. On the other hand, if the rich got to them first, you would end up with the same result as the first scenario with 20 homeless families. More likely the result would be something in between, which would nevertheless from the goal of housing the most families, be better than a scenario without price controls.

But Hazlitt also claims that price fixing has a negative impact on the construction of new homes:

The effects of rent control become worse the longer the rent control continues. New housing is not built because there is no incentive to build it. With the increase in building costs (commonly as a result of inflation), the old level of rents will not yield a profit.

So Hazlitt’s argument seems to be that landlords can no longer make a profit because the costs of buildings are fixed and because their rents can’t rise to their “natural” level. We need only go back a couple chapters (How the Price System Works) to observe how Hazlitt himself demolishes his own argument:

Prices are fixed through the relationship of supply and demand and in turn affect supply and demand. When people want more of an article, they offer more for it. The price goes up. This increases the profits of those who make the article. Because it is now more profitable to make that article than others, the people already in the business expand their production of it, and more people are attracted to the business. This increased supply then reduces the price and reduces the profit margin, until the profit margin on that article once more falls to the general level of profits (relative risks considered) in other industries. Or the demand for that article may fall; or the supply of it may be increased to such a point that its price drops to a level where there is less profit in making it than in making other articles; or perhaps there is an actual loss in making it. In this case the “marginal” producers, that is, the producers who are least efficient, or whose costs of production are highest, will be driven out of business altogether. The product will now be made only by the more efficient producers who operate on lower costs. The supply of that commodity will also drop, or will at least cease to expand.

This process is the origin of the belief that prices are determined by costs of production. The doctrine, stated in this form, is not true. Prices are determined by supply and demand, and demand is determined by how intensely people want a commodity and what they have to offer in exchange for it. It is true that supply is in part determined by costs of production. What a commodity has cost to produce in the past cannot determine its value. That will depend on the present relationship of supply and demand. But the expectations of businessmen concerning what a commodity will cost to produce in the future, and what its future price will be, will determine how much of it will be made. This will affect future supply. There is therefore a constant tendency for the price of a commodity and its marginal cost of production to equal each other, but not because that marginal cost of production directly determines the price.

So then what effect does the imposition of price controls have on supply and demand? Let’s take the same families in our previous scenario and assume that there are no houses currently vacant. The effective demand before price controls would then be $60,000 ($20,000 for the poor, $40,000 for the rich). After the price controls, the effective demand would drop to $50,000 ($20,000 for the poor, $30,000 for the rich). Since the landlords will no longer be making as much money as they were before, their demand for building materials will also drop. And what does Hazlitt say a drop in demand does to a commodity? It decreases its price. So if the price of building materials drops due to the drop in demand from the landlords, then it doesn’t seem possible for Hazlitt to conclude in the rent chapter that their profit rate would fall due to price fixing. What a commodity has cost to produce in the past cannot determine its value. That will depend on the present relationship of supply and demand. In other words, we cannot assume that the price of building materials will remain constant if the demand for them drops. According to Hazlitt, the price of the materials will fall even if that means the suppliers of the materials take a loss. If the price of building materials drops, then the landlords could still make a profit.

There is an even more striking observation we can make from this example. Austrians proudly profess their love for the price system and how producers are able to operate by paying attention only to changes in prices. Thus, the actions of the landlords are determined solely by the fact that the effective demand equals $50,000. It doesn’t matter why the effective demand is $50,000. What if we suppose that the change in demand occurs “naturally” within the market without government intervention? Let’s say the rich—due to poor investments or unexpected expenses, for example—are no longer able to spend $4000 a month on housing. Instead, they can now only afford $3000 a month. Thus, the landlords are presented with exactly the same information—there is an effective demand of $50,000 at $1000 per unit. If the landlords cannot produce sufficient housing because the government has reduced their profits by reducing demand, then they would be equally incapable of producing sufficient housing if “natural” factors reduced demand. If the market cannot provide housing units at $1000 a piece to 30 families with the price controls in place, then why should we suppose that it could provide housing units at $1000 a piece to 20 families absent the price controls? Thus, if the argument that Hazlitt makes in the rent chapter proves that the government is incapable of solving housing shortages, it only does so because it proves the market itself is incapable of solving housing shortages.

Looking back at the rent chapter, we note that Hazlitt also makes a point about inflation: With the increase in building costs (commonly as a result of inflation), the old level of rents will not yield a profit. So not only is Hazlitt claiming that the decrease in demand for buildings wouldn’t lead to lower prices, but that it wouldn’t even stop the inflation. Somehow we would have decreasing demand and increasing prices—a complete contradiction of Hazlitt’s entire price theory! When it suits his fancy, Hazlitt just assumes that inflation increases regularly for no apparent reason. Perhaps he tacitly even admits the validity of the Marxian and Keynesian views on the matter (we’ll come back to Hazlitt’s theory of inflation later).

Now let’s look at another curious argument Hazlitt makes:

Because of low fixed rents in old buildings, the tenants already in them, and legally protected against rent increases, are encouraged to use space wastefully, whether or not their families have grown smaller. This concentrates the immediate pressure of new demand on the relatively few new buildings. It tends to force rents in them, at the beginning, to a higher level than they would have reached in a wholly free market.

Look closely. What is Hazlitt implying? By wasteful, he seems to imply at first that the bigger the space and the smaller the family, the more wasteful it is. If he does not mean this, then why does he add “whether or not their families have grown smaller”? So let’s assume for a minute that this is what he means. So let’s say there is a family of two parents and four kids. After a while, the kids move out and now only the parents live in the apartment. There are other families in need of housing, so the parents are then using space “wastefully.” The problem is that because of the price fixing, the parents aren’t forced to move out. In a free market, on the other hand, this wouldn’t happen. Because once your kids move out, your landlord raises your rent…err…wait a minute…what the hell is Hazlitt talking about? The price of rent has nothing to do with the size of the family. If anything the landlord would decrease the rent if there were less people living there—encouraging wastefulness. Surely Hazlitt can’t be this stupid.

So what does Hazlitt really have in mind when he says “wastefully”? He means simply this: someone getting something they couldn’t afford in a “free” market. So let’s reverse the scenario. A couple without children moves into a spacious apartment. As they have kids and take on additional expenses their landlord decides to raise the rent. The government could step in and fix the price so that they don’t have to move out. However, according to Hazlitt they would all of a sudden be using the space wastefully. So instead we could let the market take its course. The family is forced to move out and must now cram into a much smaller apartment. Meanwhile, a couple without kids and the expenses that go with them move into the old spacious apartment. Hooray! We now have an efficient use of space!

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Hazlitt assumes a priori that forcing rent below the market level will lead to a housing shortage. But is this really a safe assumption? He argues that higher rents will lead to more people sharing space. But is it not possible for the opposite to occur? Let me give an example, suppose there are 10 houses that could be potentially subdivided into three units each—a total of 30 units. There 30 families seeking housing. Twenty of these families are poor and can only afford to spend $1000 a month each on rent. The other 10 families are rich and are willing to spend $4000 a month on rent for the entire house. Thus the landlords could rent the 10 houses at $1333 per unit. Since the 20 poor families can’t afford that, they would go homeless while each rich family got an entire house to themselves.

Now suppose the government implemented price controls and set the maximum price for a housing unit at $1000 per month. A number of scenarios are possible. If the poor families got to the houses first, filling two units in each house, and the rich were forced to take the third unit in each house, then all 30 families might find housing. On the other hand, if the rich got to them first, you would end up with the same result as the first scenario with 20 homeless families. More likely the result would be something in between, which would nevertheless from the goal of housing the most families, be better than a scenario without price controls.

But Hazlitt also claims that price fixing has a negative impact on the construction of new homes:

Except in your example, FOUR poor families can afford the house as well.

So Hazlitt’s argument seems to be that landlords can no longer make a profit because the costs of buildings are fixed and because their rents can’t rise to their “natural” level. We need only go back a couple chapters (How the Price System Works) to observe how Hazlitt himself demolishes his own argument:

Utter crap. Read him again: If you fix the price of housing at x, but the expenses of building/maintaining housing becomes higher than x, then profit from housing becomes impossible. When you can’t make a profit from a venture, you either keep hitting your head against the wall and go bankrupt, or you leave the business. If you can’t get that, you shouldn’t even be able to read.

If you’re selling banana milkshakes at 50 cents a pop, but the cost of making them rises to a dollar each (because the price of bananas went up), then no amount of price-fixing the cost of milkshakes at 50 cents will make the venture profitable. Duh.
You think you’ve punched a hole in Hazlitts reasoning by saying “Ah, but shouldn’t the magical market forces see that you’re not buying bananas and therefore the price of bananas should go down?”, but you’ve just shown that you have very little understanding of him whatsoever.
Why should the price of bananas go down just because banana milkshake makers can no longer purchase bananas for production? Do you really think the only people in the economy who use bananas are the milkshake makers?
What about the banana sandwich makers? They’ve simply upped the price of their product, since it’s price isn’t fixed, and it’s still selling fine. So all the milkshake makers go into the sandwich business and there is no more banana milkshake.

If the price of bananas fall to such a level that banana milkshakes become profitable again will you see a resurgence in the banana milkshake business.

You’re not doing physics here. The universe, and by extension the market, does not consist of 2 perfectly spherical entities that only affect each-other and have no friction.

If the landlords cannot produce sufficient housing because the government has reduced their profits by reducing demand, then they would be equally incapable of producing sufficient housing if “natural” factors reduced demand.

AND THEY ARE! If the cost of supplying housing rises above what the demand for housing will allow due to scarcity of resources(building material); ie, people won’t be willing to pay the high rents, then it will be impossible for landlords to produce sufficient housing.
If all electricity production failed at the same time today, the demand for it would still remain constant. A plant could employ a million people to generate electricity with bicycle generators, but the price would come out at like a hundred thousand dollars per kwh, so even though demand is as high as usual, noone would be able to afford it, which means it would be improfitable, which means suppliers couldn’t do it. Why the hell isn’t there 100% global employment right now? Apparently supply and demand doesn’t mean jack shit, so everyone should be able to tie poop to a stick and sell it at a profit.

If the market cannot provide housing units at $1000 a piece to 30 families with the price controls in place, then why should we suppose that it could provide housing units at $1000 a piece to 20 families absent the price controls?

You cannot be this stupid. What is this I don’t even…

Look closely. What is Hazlitt implying? By wasteful, he seems to imply at first that the bigger the space and the smaller the family, the more wasteful it is.

The problem is that because of the price fixing, the parents aren’t forced to move out. In a free market, on the other hand, this wouldn’t happen. Because once your kids move out, your landlord raises your rent…err…wait a minute…what the hell is Hazlitt talking about?

He’s talking economics. You’re talking shit.

The price of rent has nothing to do with the size of the family. If anything the landlord would decrease the rent if there were less people living there—encouraging wastefulness. Surely Hazlitt can’t be this stupid.

It takes a special kind of idiot to make one statement and then contradict it the next sentence.

So what does Hazlitt really have in mind when he says “wastefully”? He means simply this: someone getting something they couldn’t afford in a “free” market.

WRONG.

So let’s reverse the scenario. A couple without children moves into a spacious apartment. As they have kids and take on additional expenses their landlord decides to raise the rent. The government could step in and fix the price so that they don’t have to move out.

OR they could pay the price that the market has set.

However, according to Hazlitt they would all of a sudden be using the space wastefully. So instead we could let the market take its course. The family is forced to move out and must now cram into a much smaller apartment.

OR they find an even BIGGER apartment at a lower price. OR they find the same size apartment at the same price. OR they find a slightly smaller apartment at a lower or equivalent price.

Meanwhile, a couple without kids and the expenses that go with them move into the old spacious apartment. Hooray! We now have an efficient use of space!

Let’s see here, one family is living in closer quarters. So yes, that’s more efficient use of space. Another two-person family who used to live in a mansion are now living in a largish apartment, so that’s also a more efficient use of space. So I guess you’ve just proven Hazlitt right.

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Except in your example, FOUR poor families can afford the house as well.

No, in my example, a maximum of three families are allowed in a house. This is not too unreasonable of an assumption. My landlord limits the number of people that can live in my apartment.

You think you’ve punched a hole in Hazlitts reasoning by saying “Ah, but shouldn’t the magical market forces see that you’re not buying bananas and therefore the price of bananas should go down?”, but you’ve just shown that you have very little understanding of him whatsoever.
Why should the price of bananas go down just because banana milkshake makers can no longer purchase bananas for production? Do you really think the only people in the economy who use bananas are the milkshake makers?

So prices do not in fact go down when demand goes down? If half of the banana buyers are milkshake makers, the price of bananas will not go down at all if the milkshake makers stop buying them? I wouldn’t necessarily disagree, but I feel that Hazlitt would.

What about the banana sandwich makers? They’ve simply upped the price of their product, since it’s price isn’t fixed, and it’s still selling fine. So all the milkshake makers go into the sandwich business and there is no more banana milkshake.

How do you know that it would still sell fine with an increased price?

AND THEY ARE! If the cost of supplying housing rises above what the demand for housing will allow due to scarcity of resources(building material); ie, people won’t be willing to pay the high rents, then it will be impossible for landlords to produce sufficient housing.
If all electricity production failed at the same time today, the demand for it would still remain constant. A plant could employ a million people to generate electricity with bicycle generators, but the price would come out at like a hundred thousand dollars per kwh, so even though demand is as high as usual, noone would be able to afford it, which means it would be improfitable, which means suppliers couldn’t do it. Why the hell isn’t there 100% global employment right now? Apparently supply and demand doesn’t mean jack shit, so everyone should be able to tie poop to a stick and sell it at a profit.

I agree. This means that Hazlitt doesn’t really say anything here about the essential differences between a free market and government regulated one.

You cannot be this stupid. What is this I don’t even…

Judging by your apparent tendency towards knee-jerk reaction, you probably misunderstand me.

He’s talking economics. You’re talking shit.

In this case, they happen to be the same thing.

It takes a special kind of idiot to make one statement and then contradict it the next sentence.

Good thing I didn’t do that since I said “if anything…” To clarify, I am not aware of landlords charging rent based on family size. However, if I found out they did, I would expect it to be according to the latter principle.

WRONG.

RIGHT.

OR they could pay the price that the market has set.

If they have enough money to.

OR they find an even BIGGER apartment at a lower price. OR they find the same size apartment at the same price. OR they find a slightly smaller apartment at a lower or equivalent price.

Same could be said with price fixing.

Let’s see here, one family is living in closer quarters. So yes, that’s more efficient use of space. Another two-person family who used to live in a mansion are now living in a largish apartment, so that’s also a more efficient use of space. So I guess you’ve just proven Hazlitt right.

Not sure how you concluded the couple used to live in a mansion. But anyway, your formula seems to be that a lot of people in a small space and a few people in a large space equals an efficient use of space. I suppose it wouldn’t be very crazy to support an inefficient use of space in that case.

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excel, please stop with the insults. Spend some time on the forum and you will see that your tone is way out of line.

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I was told recently that austerity causes a death spiral, because it disincentivizes spending, and encourages saving, which retards the consumer spending that is needed to pick up the economy. When people’s benefits are cut, they aren’t willing to spend as much, so businesses suffer.

The person I was talking to then said that more spending is the answer during a downturn, not less. It doesn’t even need to be useful spending; even hiring people to paint trees blue would give them jobs, and this would give them money to spend at businesses. Yes, the money must come from somewhere, but if it comes from tax money that would have been spent on something else anyway, then there’s no loss; only a gain.

So, the idea is that cutting programs kills the economy because the circulation of wealth grinds to a halt, whereas forcibly redistributing wealth is like a starter motor which gets the engine going again.

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My comments in bold:

I was told recently that austerity causes a death spiral,

No, as we shall see.

because it disincentivizes spending, and encourages saving,

True. Which is exactly what we need. If we save, we underconsume, meaning we have resources available to be made into tools to increase production, which equals increased wealth [by that portion of Say’s Law that all economists agree to].

which retards the consumer spending

True.

that is needed to pick up the economy.

False. The question is, why did spending drop suddenly in the fisrt place? [Ask this of whoever told you this whole spiel about austerity=death spiral]. Was it a mere whim on the part of the masses, who foolishly do what is bad for them at times? Nope, that is not the reason.

The reason, teaches Austrian Economics, is that tons of money was invested mistakenly on things people did not really want in the first place.

Obviously, if that is the problem, the solution is for all the people working at making unwanted stuff to be fired and find jobs making useful stuff. Think about it. If you are running a company and you are paying twenty people to cut paper dolls and toss them in the trash, this will hurt your business. The only possible fix is to get them to work in some productive way.

When people’s benefits are cut, they aren’t willing to spend as much,

Benefits? Meaning money they get without working? Where does that money come from? Does it grow on trees? [Again, ask this of the guy who told you his fairytale about austerity being death].

Research this site and you will find that the money has to come at the expense of someone else. Meaning A cannot spend as much because his money is being given to B to spend. So how does this increase spending?

Not to mention that the problem is not lack of spending in the first place, as pointed out earlier.

so businesses suffer.

Businesses aren’t in trouble because people don’t spend, people don’t spend because businesses are in trouble. Meaning they have been making stuff nobody wants.

The person I was talking to then said that more spending is the answer during a downturn, not less.

If the problem is wasted resources, as AE claims [for otherwise why did spending suddenly stop, see above], then the resources have to be replenished, right? This can only be doen by underconsumption and saving, not by spending more and wasting more resources.

It doesn’t even need to be useful spending; even hiring people to paint trees blue would give them jobs, and this would give them money to spend at businesses.

Hiring people? Who will hire someone to paint trees blue? If you ran a business, would you hire someone to do that? Obviously not, because you run a business for profit, and painting trees blue wil lose money for you, not make money for you. Meaning you will have to lay off orther people because you are no longer as profitable.

So your friend must mean by “hiring” that the govt will give money to people to paint trees blue. Again, this does not increase spending [=the govt has to take the money from someone else to give to the tree painters]. Not to mention that this wastes resources [blue paint, workers] and our problem is wasted resources in the first place. Wasting more will not help, obviously, but make things worse.

Yes, the money must come from somewhere, but if it comes from tax money that would have been spent on something else anyway, then there’s no loss; only a gain.

What does this mean? Do you mean that the taxpayer would have spent it on something else? Then how does taking his money away increase spending and result in a gain? Do you mean the govt would have spent it something else, say a war, but now will spend that same tax money on blue trees? First of all, that is not how govt works. It never diverts funds from existing projects, just taxes more. Second, even if that were the case, what happens to all the workers in the war industry who will now be fired? The new spending is offset by the warriors spending less, dollar for dollar. How is there a gain?

So, the idea is that cutting programs kills the economy because the circulation of wealth grinds to a halt,

Circulation of wealth? What does this even mean? Maybe you are talking about circulation of money, meaning people are spending less. See all of the above for refutation.

whereas forcibly redistributing wealth

So taking people’s money away by force is good for the economy? Actually, it has horrific consequences.

And again, why is taking A’s spending money away and giving it to B going to increase spending? [Ask this of yourinstuctor].

Was this a person who knows anything about economics who told you this?

is like a starter motor which gets the engine going again.

Reasoning by analogy. No, it’s like the vampire sucking the blood out of the economy to weaken it further.

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Stimulus does not work. (link)

Did stimulus-funded projects hire the unemployed or the already employed? Our surveys indicate a near-tie on this question. Of the 277 respondents hired after January 31, 2009, 42.1 percent had been unemployed immediately beforehand and 47.3 percent had come directly from another job. Of the rest, 4.1 percent had been out of the labor force, and 6.5 percent had been in school. Thus, the weight of the evidence suggests that ARRA did an enormous amount of “job shifting” rather than “job creating.” There is evidence of the latter, but, under Keynesian reasoning, every worker hired away from another job reflects some weakening of the stimulus. We saw this “worker poaching” tendency in our interviews as well. (page 8 of the document)

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Was this a person who knows anything about economics who told you this?

No. Just a standard liberal.

I think his standpoint was that because the current crisis is primarily one involving private debt (even if government policy caused the environment in which that debt was encrued), imposing austerity just means that the people who were dependant on social welfare will spend less, and therefore there is less chance for businesses to grow their way out of their debt.

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…imposing austerity just means that the people who were dependant on social welfare will spend less,…

Key word here is “just”. It means a lot more than “just” that. It means in addition that all the A’s whose money was taken away to give to all the B’s until now will get to keep their money. So that dollar for dollar, there will be the exact same amount of money to spend. The only difference is who gets to spend it. Until now people who did not work or earn the money got to spend it [=politicians and their pals]. Now people who actually worked and earned the money will get to spend it. This is of course a tremendous boon to any economy.

and therefore there is less chance for businesses to grow their way out of their debt.

Besides the fact already noted that there is not less money at all, there is another key mistake here, the assumption that people spending money will let businesses “grow their way” out of their debt.

A business can only “grow” if it has the resources to “grow”. Increased consumption depletes the pool of resources avilable for growth. In other words, you can either eat the chicken [=consume] or keep it around [=underconsume] to lay eggs and produce more chickens [=“grow”].

Just repeating the gist of the earlier post. Have a look at the various goodies avilable on this site that explain it more.

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Davies et al. recently published an interesting paper.

Here are some key passages :

Theoretical models typically rely on the logic of Occam’s Razor and employ the fewest possible variables to explain outcomes.

… none assesses directly the information problem people in government face when trying to determine what is really going on. Nor do the models typically adjust for the lags between the recognition of a serious economic problem by, say, White House officials, and actions taken by Congress and then approved by the president.
Even more perplexing, the elegant models used to explain and predict stimulus effects do not consistently account for decisions by monetary authorities that may either support or confound stimulus policy actions developed by the executive and legislative branches of government. And finally, as good as the information obtained may be and as well coordinated as political decision making can be, most models cannot adjust for fiscal actions that may be taken across the 50 states.

Economists’ ability to measure unambiguously the effect on GDP growth or employment growth of increases in government spending requires a precise identification of how the nation’s economic engine is operating in the absence of the increased spending. At the same time, GDP growth may itself induce government spending, and this effect has to be accounted for somehow. In addition, all forces that might affect GDP growth must be held constant while assessing the effect of government spending.

But the economic engine is operated by millions of unrelated decision makers whose expectations regarding government spending may affect how they will react to increases or decreases, especially when those expenditure changes are well advertised in advance.

…

However, if Keynesian theory held, we should also expect to see a positive relationship between government spending now and economic growth in the future.

Reality does not reflect this theory. Figure 12 shows the relationship between changes in federal spending and real per capita economic growth one year in the future. The relationship appears to be negative, though it is statistically indistinguishable from a flat trend line.

It is possible that it takes more than a year for government spending to affect the economy. Comparing changes in federal spending to economic growth two years later reveals a slightly positive relationship, but again the relationship is statistically indistinguishable from a flat trend line (figure 13). Extending the time horizon out as far as 10 years reveals relationships between government spending and economic growth that are sometimes slightly positive (for 2-, 3-, and 9-year horizons) and sometimes slightly negative (for 1-, 4-, 5-, 6-, 7-, 8-, and 10-year horizons), but always statistically zero.
A counterargument is that what really matters is the relationship between stimulus spending and economic growth during recessions.
If we restrict our vision to recessions only (the red dots in figures 11–13), the same story emerges. There is no significant relationship between changes in government spending during recessions and economic growth at any point from one to 10 years later.

One could argue that because of a persistent baseline growth in per capita GDP, changes in federal spending should be compared to changes in per capita GDP growth. That comparison yields the same absence of results as do the previous comparisons. Figures 14 and 15 show the contemporaneous and one-year lagged relationships.

Figure 16 confirms the observation in figure 15 that stimulus spending is destabilizing because it continues to accelerate after the recession has begun to subside. It also confirms the suspicion among some economists that big government politicians do not believe in Keynes but judiciously quote him to justify expanding the government’s control over the economy.

And the nail in the coffin. John Maynard Keynes, toward the end of his life, wrote :

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.

And this one (september 2011) is of interest :

Did stimulus-funded projects hire the unemployed or the already employed? Our surveys indicate a near-tie on this question. Of the 277 respondents hired after January 31, 2009, 42.1 percent had been unemployed immediately beforehand and 47.3 percent had come directly from another job. Of the rest, 4.1 percent had been out of the labor force, and 6.5 percent had been in school. Thus, the weight of the evidence suggests that ARRA did an enormous amount of “job shifting” rather than “job creating.” There is evidence of the latter, but, under Keynesian reasoning, every worker hired away from another job reflects some weakening of the stimulus.

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If ARRA wasn’t supposed to create jobs, then why did it?

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If ARRA wasn’t supposed to create jobs, then why did it?

Do you mean the reverse, If WAS , why DIDN’T it?

In any case, the whole multiplier thing is a myth.

If we accept that Adam Smith’s insight that the very definition of wealth is the goods produced, then a recession means lack of goods produced.
If we accept Say’s Law, then the reason for a lack of goods produced is never because of a lack of spending.

If we accept Mises’ insight, then the real reason for a lack of goods produced is malinvestment [=wasted resources]. [Pretty obvious put that way, no?]

So what good is spending money to create jobs? Obviously, those jobs would not have existed absent govt spending, or there would have been no need to spend the govt money to create them. And jobs that would not have been created means those jobs are not productive, else someone would have hired someone to be creative and make money.

So how long can a non-productive job last? Only as long as govt money is being pumped into it, exactly like a zombie on life support.

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It’s still nice to have job, though.

Many of these “non-productive” jobs were created in infrastructure, research, and education.