Hi, first post. Long time obsessor over economics and philosophy., but my academic training is in mathematics and ecology. I have a question, I know it is asking a bit much and quite a bit of speculation, but here goes... also, I am going to refer to the US economy, but the question could be generalized to the entire planet, maybe. The idea, is that there is alot of debt today, and the money supply has been inflated quite a bit. Simply put, the question is whether or not debt can increase productivity even if it also devalues currency and thus raises prices. Is there a time lag in the two effects so that productivity can actually increase? Or some other confounding effects that warrant discussion? Of course this is an overly simple question involving a complex system. Another way to phrase the question is this: There is alot of wealth in the US today. No matter how you slice it, Americans consume alot of stuff. This demand for products is tied in to the supply of the products, and thus the productivity of the economy. The hypothetical situation is: instead of having the current government structure, the US is a pure free market from it's founding as a nation (or choose a transition time, say starting in 1950 or so), or at least the US system has very minimal government intervention, say government activity is 1% of the economy rather than 20%. In this free market situation, consider the government to be as close to the libertarian/objectivist ideal as possible. So there is very little taxation, if any, and the money supply (& what is considered currency) is determined largely by the free market rather than by fiat. So all valuation of anything is determined by the market, no minimum wages, no fixed exchange rates, no dollar pegged to a fixed weight of gold (or maybe allow that we have the gold standard). In this hypothetical situation / alternate universe, would productivity or the size of the economy (however you choose to measure it... by sheer magnitude of consumption, GDP, or net biomass of resources transformed into goods... name your measure), be as large as it is today? Maybe the question put even more simply is: Can a pure free market system allow for a primitive society to develop into a complex technological society? If you think regulation is required, can you make the case the regulations today are either too strong or too weak, or just simply out of balance (e.g. we need more regulation of the financial industry, but less regulation of small businesses)? Thanks in advance for any thoughts. Even brainstorming on how better to flush out the question is appreciated.
First off, welcome to the forum!
You raise a lot of good questions. I highly recommend checking out The Ultimate Beginner meta-thread. That's the one-stop place to start. (Be sure to check out the welcome link.) You'll probably want to bookmark it, as it's a major collection of links for things you might want to look into in the future and refer back to.
I'll go ahead and give you some direct response to your inquiries, but I can tell you right now if you're geniunely interested in the answers to this stuff, you'll need to do some reading!
jodiphour:The idea, is that there is alot of debt today, and the money supply has been inflated quite a bit. Simply put, the question is whether or not debt can increase productivity even if it also devalues currency and thus raises prices. Is there a time lag in the two effects so that productivity can actually increase? Or some other confounding effects that warrant discussion? Of course this is an overly simple question involving a complex system.
This is a misleading question. It presupposes that debt requires inflation of the money supply (which leads to a devaluation of the currency), or at least necessarily leads to it. This is not the case.
So to answer your question, yes, it is entirely possible that productivity can be increased through the use of debt financing to increase capacity. This is largely what occured during the period known as the "Gilded Age". You'll often hear people today claim we're not in such bad shape because the US had quite a bit of debt back in those days too. The difference they neglect is that back then, that debt was financing growth in our productive capacity...through manufacturing expansion and other endeavours. More recently our debt has been used for consumption. You might check out Robert Higg's book on the time period (the articles in the links section provide a nice overview.)
Another way to phrase the question is this: There is alot of wealth in the US today. No matter how you slice it, Americans consume alot of stuff.
You're right on both counts...but don't confuse the two. There is a lot of wealth in the US, and Americans do consume a lot of stuff...but don't forget about all the debt you just got through mentioning. A large amount of the consumption Americans enjoy is financed through the borrowing...which means it doesn't all represent actual wealth. Peter Schiff had a famous exchange with Art Laffer on this very subject. (Notice the year of the interview). I'll leave it to you to decide who was using a more sound economic analysis.
This demand for products is tied in to the supply of the products, and thus the productivity of the economy.
Careful there. You're right in that there is a relationship between demand and supply, but you're coming close to making the fallacious Keynesian assertion that demand is the driver of productivity. This is a large part of the root of Keynesian economics, and the basis for an enormous amount of fatally flawed thinking, and therefore, embarassingly wrong forecasts, and dangerously wrong prescriptions.
You can find some discussion and links related to this here.
In this hypothetical situation / alternate universe, would productivity or the size of the economy (however you choose to measure it... by sheer magnitude of consumption, GDP, or net biomass of resources transformed into goods... name your measure), be as large as it is today?
It sounds like your basic question is, without a parasitical State siphoning away the wealth of the people by force, would the economy that those people make up be larger/ more prosperous/ more productive? Absolutely. I would also add "more peaceful."
Maybe the question put even more simply is: Can a pure free market system allow for a primitive society to develop into a complex technological society?
Absolutely. Quite the contrary to what you have been led to believe, having a State does not help this process at all. It can do nothing but distort and hinder this process.
It's virtually impossible to imagine what a free society would look like and how much more advanced it would be, but just to get an idea, think about your (stereo)typical African tribe in the jungle, and compare it to the wealthiest, most advanced areas of the US. Then multiply by some non-1 whole number and you'll be on the right track. In other words, if there existed a free society on Earth, it would look alien to us.
If you think regulation is required, can you make the case the regulations today are either too strong or too weak, or just simply out of balance (e.g. we need more regulation of the financial industry, but less regulation of small businesses)?
One assumes by "regulation" you mean "State mandates". The answer is no. There is no need for a State at all.
Feel free to follow up with any questions you might have. The more specific you are, the easier it will be to recommend the best resources to aid you.
Once again, welcome
Thanks for the thorough reply, it will take a while to digest all that!
Disclosure.. you would probably consider me a Keynesian - I don't consider myself one... but I am trying hard to see the flaws in my own understanding - or I am just trying to formulate my own understanding at least!
===
So is borrowing for consumption is bad, but borrowing for production is good? If so, why is this? In the world of supply and demand, what good is one without the other? Can supply stimulate demand and not vice versa? Also, given some allocation of wealth: if the govt takes wealth from one source and gives it to another, why is that necessarily bad? If the wealth was just sitting, say in paper investments, and the govt takes that and gives it to someone who will develop resources or spend it on purchases, is that necessarily bad (ignoring all moral implications -- just purely in terms of volume of economic activity, or deveopment of raw materials into products)? Or is there a reason why "sitting paper investments" (which may of course be used for future economic activity) are better than forced using of that economic power now? Isn't it at least possible (if not realized in our current history), that forced reallocation of wealth can have beneficial effects, at least over some time-scale?
The way I am reading your concerns,
It may be best to ditch thinking of the economy as a "thing", and more of a process of action. To think of markets as "failing", being "technological, or reachining equalibrium, or whatever is simply a conformation bias or a narration fallacy. Economics can not predict the future.
That said:
I would say the appreciation of how complex things emerge and where complexities are, and how they can be addressed is a key Austrian concern. Particularly with Hayek and Lachmann.
"As in a kaleidoscope, the constellation of forces operating in the system as a whole is ever changing." - Ludwig Lachmann
"When A Man Dies A World Goes Out of Existence" - GLS Shackle
Simply put, the question is whether or not debt can increase productivity even if it also devalues currency and thus raises prices.
You have to separate debt from inflation even though, at least in our current system, the two seem to be intrinsically bound. Debt is not inherently inflationary and yes it can elevate productivity. In fact, debt is the main source of productivity gains (the whole point of a financial system, where savings takes the form of loanable funds which yield productive capital investment).
There is alot of wealth in the US today. No matter how you slice it, Americans consume alot of stuff. This demand for products is tied in to the supply of the products, and thus the productivity of the economy.
Supply is demand. In order to consume something it must first be produced. Our desires are limitted solely by our preferences and our purchasing power (i.e., what we produce [supply]).
Real GDP would undoubtedly be much higher but the real virtue of a free market is that the massive misallocation of resources towards ultimately untenable and/or (relatively) inefficient endeavors, which basically defines our current system, would be severely diminished.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
So is borrowing for consumption is bad, but borrowing for production is good?
Borrowing for consumption is good if the consumer can actually bid it away from "productive" endeavors without regretting his/her decision to do so. In other words, if the consumer values those loanbale funds more than the producer, then those loans (consumer credits) are, for lack of a better term, "good." Additionally, borrowing for production is bad if, for example, the interest rate is arbitrarily suppressed below the equilibrium or "natural level" and that producer bids away loanable funds from more capable producers/investments (thus yielding malinvestments).
So again, there's nothing inherently good/bad about either consumer/producer credit. Both can be good and bad depending on the circumstance.
Also, given some allocation of wealth: if the govt takes wealth from one source and gives it to another, why is that necessarily bad?
It's not necessarily bad; the government may get extremely lucky and reallocate those resources towards a truly warranted and efficient endeavor, the same way that I might, at least theoretically, hit a bulls-eye with a dart, blind-folded, from a distance of 200 meters. The reason why I don't support government reallocation is because the government lacks the necessary mechanisms for efficient economic calculation/coordination (namely the price mechanism and the profit/loss constraint).
If the wealth was just sitting, say in paper investments, and the govt takes that and gives it to someone who will develop resources or spend it on purchases, is that necessarily bad (ignoring all moral implications -- just purely in terms of volume of economic activity, or deveopment of raw materials into products)?
Wealth doesn't just "sit." Those "paper investments" (using your terminology here) are funding real capital investments which increase the productivity of labor and therefore real wages/national income. Now, there are times where resources are "idle" (such as labor, for example), but they're idle for a reason. Typically because there are systemic structural imbalances which need to remedied. In such a situation, redirecting those resources back to their previous employments would constitute a net loss.
Thanks for the replies everyone! However, can someone explain it in a more "basic" way without too many assumptions?
The situation: The govt takes weatlh ("value", money, etc) from one party and gives it to another party.
The question: Why is this much much ("blind throwing of a dart") more likely to be less "productive" than just leaving the wealth with the party who originally held it?
I think I know where the discussion goes. However, I'd like it to not become throwing around hypotheticals and assumptions. Can you explain it, say, in terms of "first principles" (e.g. action axiom), or something like that?
If we restrict ourselves to pure unbiased reasoning, it seems clear that the govt can increase productivity in a somewhat capitalist sense of the term. If a govt can print up a bunch of worthless paper money and convince everyone that it has a value it doesn't, and this influences people to engage in "production", then it can obviously result in a situation with more "productivity" than one with a more limited supply of money. If everything is based on human behavior and action, then isn't it evident from history that human action can be influenced in this way?
However, I'd like to see the strongest possible refutation of this from an Austrian perspective.
Thanks for the replies everyone! However, can someone explain it in a more "basic" way without too many assumptions? The situation: The govt takes weatlh ("value", money, etc) from one party and gives it to another party. The question: Why is this much much ("blind throwing of a dart") more likely to be less "productive" than just leaving the wealth with the party who originally held it?
Actually, this is much less bad than some of the other things government does with its revenues. It is much preferable that the government take from some and give to others than that the government take its revenues and launch a war because the economic output is simply wasted, it's as if you took all that money, built massive suburban developments, then just lit them on fire. Fueling aircraft carrier fleets, dropping bombs, deploying troops around the world is a lot like taking all the time and resources that went into those activities and using them to dig ditches in the desert and fill them back in (note that armies have been known to actually "employ" their soldiers in such useless activities to "keep them busy", that is, to keep the troops from being idle and starting trouble).
But returning to the question of redistribution, imagine that the government took money from people randomly and distributed it to others randomly. I think it's obvious that this is of no net social benefit even if it was completely costless. So, there are two factors here: the government must get the money from the people who will be least hurt by losing it (no matter what, the people we take from will be hurt) to the people who will be most benefited by receiving it and it must do so at a low cost.
Does the government actually succeed in doing this? The data clearly say no despite the fact that the government tries (or says it tries, at any rate) to do exactly this. The operating costs of the government are exploding at an insane rate while the rich are paying less taxes than ever and the cost-of-living is rising while unemployment among the young and the poor is rising. As it turns out, these effects are actually predictable from economic theory.
I think I know where the discussion goes. However, I'd like it to not become throwing around hypotheticals and assumptions. Can you explain it, say, in terms of "first principles" (e.g. action axiom), or something like that? If we restrict ourselves to pure unbiased reasoning, it seems clear that the govt can increase productivity in a somewhat capitalist sense of the term. If a govt can print up a bunch of worthless paper money and convince everyone that it has a value it doesn't, and this influences people to engage in "production", then it can obviously result in a situation with more "productivity" than one with a more limited supply of money. If everything is based on human behavior and action, then isn't it evident from history that human action can be influenced in this way? However, I'd like to see the strongest possible refutation of this from an Austrian perspective.
But the question is: at what cost? Imagine the government used its entire $4T budget to buy nothing but SUVs. Obviously, the auto-makers would be thrilled by this policy. It would certainly spur immense productivity in the car market, including tons of innovations, safety improvements and on and on. But these are the seen effects. Where would all those resources be pulled from? Why, from all the uses they would otherwise have been put to. All the steel and glass and rubber and labor that goes into manufacturing these SUVs is not going to its prior uses, the producers in those industries having been priced out by the immense buying power of SUV-makers. This is pushing it to the extreme to illustrate the point - the fact that government spending entails economic activity is irrelevant and to laud it as some kind of "stimulus" is to ignore the unseen costs of that stimulus.
Clayton -
From the OP:
The amount of regulation is neither here nor there. The trouble with the Repub/Dem debate over "how much" regulation is the assumption that regulation is like a dial and if it is just tuned to the right number of regulations/regulators, why, the economy will abound!
The problem is that government regulation monopolizes the market for certification (consumer reporting). This leads to a stasis in the art. The desire for a competitive market in reputability assessment, certification, consumer reporting, etc. is to a) eradicate conflicts-of-interest (you can't lobby "the market") and b) to engender efficiency and innovation to meet consumer demand in these markets.
the billion dollar bombs are somewhat productive as the employees of the military industrial companies consume plenty. Of course, it is an interesting speculation as to what those individuals would do for a living if there were no military industrial complex!
No, that's the whole point, the billions of dollars spent on bombs are completely wasted. The fact that everyone kept busy building bombs is kept from doing something else means that the prices of all the things they would otherwise have been working on are higher (due to lower supply of labor in those industries). Labor is no different than raw materials in this regard.
I might disagree somewhat with your innefficiency charge. Of course, we have to be pretty explicit with how we make our cases. I know I looked into food welfare programs once, and the overhead was actually quite low relative to the benefits paid out. I'd be willing to guess that many welfare programs have a similar cost structure. So where the inefficiency lies and what that exactly means has to be explained.
No, you're defining the terms too narrowly. The government consumes roughly half of the national product. The two big, big justifications of government revenue are "welfare" and "defense." If we divide the cost of government in half, attributing 50% to the one and 50% to the other justification, that means that about 25% of the national product is spent on welfare (including things that contribute to welfare, such as roads, environment, etc.) In other words, the real cost of the government is all the things that the government manages to justify spending money on, not just the Women-Infants-Children program.
To focus only on the payroll of the Human Services division as the "true overhead cost" of government welfare is to massively undercount. The government manages to justify all kinds of spending on the basic argument that it's "for the public good" "helps the poor" and so on. All those programs represent the true cost to us. In other words, "welfare" costs us about $2T a year. We get some roads, power lines, poverty programs, etc. in return. I'm pretty sure we're getting bilked.
I think there is a general point to be made, that govt programs essentially aim to create current consumption at the expense of future consumption.
Any program that causes capital consumption does this but I don't think the Keynesian theory is claiming this, I think the Keynesian theory is that during a slump there are "unused capital resources" which could be put to use again simply through government sloshing cash into the economy. It's not a completely insane argument. After all, just before the downturn, what were all those people who are now unemployed doing? If their employers just had cash to pay those people again, couldn't they all just 'get back to work'? The problem is that the theory fails to really appreciate the import of entrepreneurial prediction (entrepreneurs predicting lean times ahead will cut costs, including labor) and the role of time in restructuring an economy.
Of course, there are alot of variables.
That is one of the primary criticisms of Austrians on mainstream economics - there are just too many variables. The economic models - as a result of the required simplifications - don't describe what people actually do, that is, they don't describe the actual data, they describe idealized data-sets that never occur in the real world. Imagine if meteorologists modeled the Earth as a perfect sphere with a uniform surface (no mountains or oceans) and surrounded by an ideal gas and then tried to claim that this model is an "idealization" of the real Earth. It has no relation to the real Earth whatsoever, not even a passing resemblance! This is the fallacy of homo economicus. It's of absolutely no use because whatever conclusions can be drawn from models of the behavior of homo economicus are completely fictitious and have no relationship to the real economy or even a passing resemblance to it. The actual data cannot be made to fit in the homo economicus model.
I am wondering is if there is a feature of human behavior that warrants the necessity of regulation.
Well, I think the answer to that is... of course! But who says it has to be government regulation? Why can't regulation be administered through reputations agencies, private certifiers/assessors, etc? Underwriters Laboratory is a frequently cited example.
Back to the point, the idea is that if some regulation is required by human behavior as a species (meaning that it seems to be part of the natural evolution of human society), then there must be levels of too little and too much regulation. Of course, as a biological individual, no external regulation is required for basic persistence, but in order for a society to function, some regulation seems to naturally come into being. Of course one might argue that it could all be voluntary, but it simply isn't and never has been. At least it never has been in the past several thousands of years, and never for a technologically advanced society.
I think the word "regulation" is somewhat problematic because a regulation can be anything from what type of binary encoding is used on what radio frequencies to what sort of financial instruments can be traded.
There can be no doubt that technical regulation/certification is an inherent part of any sophisticated economy. However, I would argue that allowing any association between this kind of regulation and government leads directly to predictable and undesirable results. Let's take computer technology standards committees, for example. The corporations that form these committees are giant behemoths in large part because of the cartelizing effect of IP law. When they get together and form standards committees it is often hailed as a form of "free market" regulation. In reality, it is not. It is quasi-state regulation and its purpose is to create collusion and freeze non-members of the standards committee out of the market. The standards that come out of these committees are invariably massive and conforming to them requires a very high up-front capital expenditure precisely because of their detail and complexity. Just take a gander at the USB 3.0 specification to get the idea of what I'm talking about - it gives the tax code a run for its money!
True free-market standards, however, are actually much more rigorous and unforgiving and compliance is much more uniform across the market. Examples could include things like ASCII text, UTF-8 encoding, UART communication (in contrast to USB) many of the open image formats, and so on. Compliance of market products to these open standards is absolute. Nobody writes a UTF-8 text editor that "interprets UTF-8 slightly differently" from other UTF-8 text editors... to do so would be market suicide, no one would even consider using your editor, no matter how nice it was in every other way. There is no sense in which non-compliance is even possible.
But what, really, makes digital technology fundamentally different as a category of human action from financial trading? I don't see any fundamental difference; both are means which humans apply in the hope of attaining their ends. I see no reason to believe that "open source financial standards" would be any less superior to the government-administered ones than open-source technology standards are over their semi-proprietary "standards committee" ones. So this idea that we need government involvement in "regulating" the market is, I think, the opposite of reality - government involvement actually decreases cooperation, decreases conformance to standards, decreases competition (its primary purpose!) and so on.
Your point about unseen costs is important too. I may not understand exactly what you meant, but it seems to be pointing to what I just referred to as "future consumption"... that is the unseen cost. We can never know how that money would have been spent if it were not taken as tax. When you discuss it in terms of pulling resources from prior uses, I think that hinges on the assumption of prior uses. If all that glass and rubber wasn't being used, then the point is mute. Free market does not mean that resources never sit idle.
Actually, in an ultimate sense, yes, it does mean precisely that. If nothing else, the cost of extracting those "idle" resources must increase because now there are less labor and capital resources available for that use than before. In the real economy, everything affects everything else. Clayton -
Clayton:No, that's the whole point, the billions of dollars spent on bombs are completely wasted. The fact that everyone kept busy building bombs is kept from doing something else means that the prices of all the things they would otherwise have been working on are higher (due to lower supply of labor in those industries). Labor is no different than raw materials in this regard.
If you need real world evidence, have a look at what was plastered everywhere during The War.
Wednesday, July 04, 2012 19:51 EDT.post #200 jodiphour:However, can someone explain it in a more "basic" way without too many assumptions?The situation: The govt takes weatlh ("value", money, etc) from one party and gives it to another party.The question: Why is this much much ("blind throwing of a dart") more likely to be less "productive" than just leaving the wealth with the party who originally held it?One answer:Because redistribution of wealth is productive not at all;it is simply robbery of wealth already produced.Production increases the overall supply of wealth; redistribution does not.That is the most basic explanation I can muster.
jodiphour:However, can someone explain it in a more "basic" way without too many assumptions?The situation: The govt takes weatlh ("value", money, etc) from one party and gives it to another party.The question: Why is this much much ("blind throwing of a dart") more likely to be less "productive" than just leaving the wealth with the party who originally held it?