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...
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?!!!!!!?!!!!!!
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.
EmbraceLiberty: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.
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...
1) you can't consume anything that hasn't been produced
2) 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.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
EmbraceLiberty: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.
Basically what Dave said. You already have the answer. I think part of your problem is this:
Austrians believe that the way to get out of these situations is through increase in production which increases demand etc.
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.
“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence.""The sweetest of minds can harbor the harshest of men.”
http://voluntaryistreader.wordpress.org
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:
1. 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.
2. Say's Law. We must produce before we can consume, therefore stimulating demand won't help the economy to recover
3. The price level and interest rate will fall and this will pave the way for recovery.
My feelings on the responses:
1. 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.
2. 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.
3. 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,
1. 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.
2. 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...
1. ...lack of desire to buy anything...
2. ...because people are just too rich for their own good, and all their consumer wants are satisfied with a mere portion of their paycheck...
3. ...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.
Neodoxy: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.
Oh this ought to be good.
Smiling Dave: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.
Hmm. Where have I heard that before.
I was indeed building upon something you had noted in this thread. My contribution was elaborating the flaw in the chicken and egg argument.