This economist's suggestion to fix the economy - from about 4:00 to 5:30 or so - is for the Fed to tolerate more inflation. He says this will happen because demand will increase, and since prices rise, businesses will hire unemployed workers to supply more. Does he realize that if there is a subsequent increase in supply, that a price equilibrium will be established with labor being cut to appropriate levels? I don't see how this is any real solution the economy. Yes, I understand government meddling in the free market is what causes all of these problems. Let the free market do what it does.
http://www.youtube.com/watch?NR=1&v=nzVxmwxHRQg&feature=endscreen
First, I would like an Austrian refutation of this silly argument. My thoughts are below.
This seems to be a very specious argument. He just assumes there will be more demand in the economy. Why? He specifically dismisses defining what inflation is. I have a B.S. Math and Physics Minor. For the last few years, I've been reading more into economics, particularly free market and Austrian. With my mathematical background, it's very important to define terms. If you don't, you're not communicating. There's no meaning there. His argument doesn't mean anything if he doen't define the terms of his argument. To me, inflation is de-valuing the currency, not an increase in price. When the Fed increases the money supply, the currency is worth less because there are more dollars floating around. This is basic economics. If there is inflation, then there is a general price increase because the purchasing power has dropped. The converse is not necessarily true. Prices for particular items can rise for a number of reasons. Higher prices do not imply inflation, according to my uncertain notion of how inflation should be defined.
Not to be dismissive, but I'm not going to listen to the video a) because I don't have time and b) I very much doubt he's introducing any new fallacies I haven't already heard.
In general, one of the big fallacies that is pushed by mainstream economists - but only through implication - is this idea that rising prices is the inevitable consequence of this very nebulous thing called "growth". Nobody ever says what exactly growth is. The fact is that it's easy to see that if the money supply were constant and we define growth to mean increase in non-monetary goods, then prices should be falling.
But there's a Malthusian undercurrent to this argument. It partly appeals to the idea that growth isn't just more stuff, it's also more people. And more people means "more mouths to feed." And more mouths to feed (and clothe and house) means greater demand for stuff, especially food and land. Since the planet isn't getting any bigger, yet human population is continually growing, the fear being promulgated is that we're going to come under increasing scarcity and, hence, increasing prices, which they are then calling inflation.
Again, this argument is fatally flawed because it fails to take into account that each new human born has a marginal effect on human productivity as well as human consumption. The question is whether the marginal productivity of one more human is greater or lesser than his marginal consumption. If greater, then his being born will increase the available pile of stuff and reduce prices. And vice-versa if the marginal consumption of one more human is greater than his marginal productivity. In this very observation lies the answer to all the hand-wringing about overpopulation.
But there's no need to worry. As we approach the population level where marginal productivity of the average person born is roughly equal to his marginal consumption, the costs of raising and feeding such children will become prohibitive and human fertility will decline. In some countries right now, human fertility is so far below replacement levels that the government is actually paying mothers per capita to have children - $30,000 in Germany and $19,000 in Russia as of about a year ago.
And, of course, the idea that the Fed doesn't want to tolerate inflation is laughable. The Fed is basically the sole source of all economy-wide price increases.
Clayton -
Great post Clayton.
Schools are labour camps.
Great to have you back! How's the reading been coming along?
I'll go ahead and embed a full version of the video here, since it's likely that people might not realize what we're dealing with here...it's a CNBC broadcast of a discussion between Peter Schiff and a bunch of typical media morons (some of whom are called "economists"):
So, first of, it should be obvious you have probably one of the more articulate Austrian responses to the false claims given in real time.
I have to love how this black guy whom I've never seen or heard of claims he was predicting the housing bubble. I love it how after something happens everyone's an expert and everyone saw it coming. Also, just as a sidenote, the annoying host of the show who can barely get his words out is this guy, if that tells you anything.
As I've said before, having someone like Schiff involved in the conversation is the really the only way I can bear to watch news talks like this, as at least there is someone there to interject at least some of what I feel like screaming back at the television.
Notice how they largely try to ignore what Schiff says...they don't want to have to address it because, well, they can't. It doesn't jive with their worldview so they just ignore it and continue preaching their nonsense. (Basically the way it works with all leftists).
Notice how at 10:32 (in the embedded version in this post) the host tries to pull the "well, it hasn't happened yet, so you must be wrong" thing, and Peter says "it's going to happen" and the idiot throws in "it has not happened yet...." right as he transitions to something else (a 'something else' which of course, just happens to be an attempt to peg Schiff's argument as partisan. Where have I seen that before?). I want Schiff to just interject one of these days and be like "That's like me saying 'everyone is going to die someday', and then come back to me tomorrow and say 'look, I'm not dead. Guess that means you're wrong.' You may not be able to time it exactly right, but I promise it's going to happen."
You also have to love the way the moron from the NAACP(? this is what we've been reduced to?) keeps rolling his eyes at Schiff.
As for your OP, I'm not exactly sure what you're asking. You seem to understand what the flaws are. He's simply making the textbook Keynesian argument about aggregate demand driving the economy. Here's a couple of recent threads on this:
Why Doesn't Stimulus Work?
The Multiplier Effect
Good points. The answer for the overpopulation nutjobs is always population control and death. Didn't Ted Turner says the most sustainable population number is 500 million? Also, falling prices were the norm in the economy until the Fed was created.
By the way, I'm sure you've seen this argument too. At about 13:40, this arrogant Congressman says to Schiff that we tried it "his way" until about the nineteen-teens and we've done pretty well since then.
http://www.youtube.com/watch?v=UvMGHzB37lo
John James,
Great answer by Friedman! He's probably my favorite economist. I'm currently reading Basic Economics by Thomas Sowell. I find it much easier to read books if I have a hardcopy. I'm in front of the computer enough already. Haha. What should I buy of Friedman?
Something that is ubiquitous with these people is government being the panacea. They're statists who are antithetical to the notions of individual liberty and economic freedom.
Schiff distinguishes between desire and demand. It's an important nuance. I have desire for a lot things. However, I don't have demand for it unless I have the purchasing power. I want a Corvette, but I cannot afford one right now. I have no demand for it. I have to first be productive in order to have demand.
Also, what's most important is that when you have a producer you automatically have a consumer. They're both embodied in the same person. When new products are created, they create demand in the economy. Hence, production is key and consumption is a reaction to production. In order to be a consumer, I have to first be a producer.
shackleford:John James, Great answer by Friedman! He's probably my favorite economist.
Great answer by Friedman! He's probably my favorite economist.
Which? Are you talking about the link in the link in the link I gave...here? You really followed the link chain, huh?
I'm currently reading Basic Economics by Thomas Sowell. I find it much easier to read books if I have a hardcopy. I'm in front of the computer enough already. Haha. What should I buy of Friedman?
Yeah, Sowell is pretty good. Basic Economics is good, as well as his follow up Applied Economics. Frieman's Capitalism and Freedom is usually the recommended default standard. His Free to Choose is also good, but you might get more out of the TV series it was basically a print version of.
However, it must be noted that Friedman was a monetarist, and therefore much of his recommendations for banking and monetary policy are flawed. As general free market economists, adherents of the Chicago School are good about most areas, but differ greatly from Austrians in some important areas. (For some resources on these differences, see here.)
I would say you'd definitely get a lot out of Friedman's lectures and conversations. The way he formulates arguments and the responses he offers to common statist questions are excellent. You'll gain not only from hearing the arguments presented, but also from his style and delivery. Friedman was a master conversationalist and debater, and I think everyone can stand to learn from him in this respect.
Indeed it was this clip that really pushed me into my own journey. I would say Friedman is probably the closest thing to Ron Paul as far as having a philosophical impact on the masses and bringing the ideas of freedom into the limelight.
But as far as books go, I think your time would better spent with other material. I'm not saying you wouldn't get anything out of reading Friedman, and if you have any inclination at all to do so, by all means do it...but if you're really just interested in learning good economics, there are plenty of other superior resources available. (And of course everyone's time is limited, and books are decent-size time commitment.)
I recently offered a couple of lists for recommended reading here and here, but more recently I compiled a bit more of a categorized list for someone that I'll reproduce here:
Basically you can just pick from whatever category you're interested in, and go down the list in that category until you're ready to jump to a new category. Then you can jump back and pick up where you left off in each list as you move around from subject to subject.:
For general economics:
Lessons for the Young Economist (available for free download)
Economics in One Lesson (available for free download)
How an Economy Grows and Why it Crashes
Economics for Real People (available for free download)
For politics:
(in this order)
The Revolution: A Manifesto
Beyond Democracy & Anatomy of the State
The Law
For a New Liberty
Liberty Defined
Money and Banking:
The Politically Incorrect Guide to the Great Depression and the New Deal
The Creature from Jekyll Island
The Case Against the Fed
America's Great Depression
The Mystery of Banking
general Capitalism/history:
The Politically Incorrect Guide to Capitalism
How Capitalism Saved America
The Case for Legalizing Capitalism
In Defense of Global Capitalism
For more, be sure to check out the "reading lists" link toward the bottom of The Ultimate Beginner meta-thread.
Something that is ubiquitous with these people is government being the panacea. They're statists who are antithetical to the notions of individual liberty and economic freedom. Schiff distinguishes between desire and demand. It's an important nuance. I have desire for a lot things. However, I don't have demand for it unless I have the purchasing power. I want a Corvette, but I cannot afford one right now. I have no demand for it. I have to first be productive in order to have demand. Also, what's most important is that when you have a producer you automatically have a consumer. They're both embodied in the same person. When new products are created, they create demand in the economy. Hence, production is key and consumption is a reaction to production. In order to be a consumer, I have to first be a producer.
Very good! You've been doin some reading
For more on this you can refer to
Say's Law
Tax Cuts Create Jobs??
It's in the "Three questions from a clueless high school student" thread. He answers the question from the guy suggesting we give money to government workers to consume to create growth. I actually read Applied Economics first and have yet to read Economic Facts and Fallacies. I watched several clips of Free to Choose. I liked it. Sowell, in his younger days of course, debated Piven in one episode. I'll be on the lookout for Capitalism and Freedom. Let me play devil's advocate here for a second. I'm trying to really understand the Keynesian aggregate demand argument. Generally speaking, yes, it is true that in order for me to be a consumer, I first have to be a producer, unless I make or grow everything I need or want myself. That's not the case in our economy. Consumer and producer are both embodied in one person. However, it seems that economic growth is a more complicated matter. Economic "growth" can occur if I create and produce a new product that people want, e.g. iPhone, iPod, iPad, etc. My production has created desire and demand. This can be extended to making products available to new markets locally, regionally, nationally, internationally, etc. Let's say a technological, operational, managerial or other improvement allows me to increase my productivity and reduce my cost of production allowing me to lower the price and sell to more people. I would say these scenarios are the preponderance of what economic growth is. On the other hand, let's say more people start buying my product at its current market price. Immediately, the rate at which my product sells increases. This could prompt me to hire additional workers to provide more products, if it makes sense on the margin. Of course, this depends on productivity and so forth. Would this not be a case where increased consumption could lead to real economic growth? On a side note, I don't think increased consumption implies higher prices. Demand is when consumers are willing to pay higher prices for a product. In this situation, demand may not have changed. It may just be that consumers, for whatever reason, just changed their spending distribution.
shackleford:Generally speaking, yes, it is true that in order for me to be a consumer, I first have to be a producer, unless I make or grow everything I need or want myself.
If you make or grow everything you need or want yourself...wouldn't that make you a...producer?
That's not the case in our economy. Consumer and producer are both embodied in one person.
I don't know what this means. Obviously everyone is a consumer. If you do not consume, you don't exist for very long. Literally. Consumption cannot occur without production. And of course in general this means if you do not produce, you have no means to consume.
The only ways to consume without producing are either unscrupulous (which for a large percentage of those things means they're illegal), or through charity. In other words, the only way this doesn't apply to you is if you violate the NAP and/or property rights, or if you're a mooch.
So by and large, almost everyone is a consumer and producer. Even thieves and moochers are productive sometimes. So I don't quite see your point here. In fact, your statements don't even make sense together. You first say "it is true that in order for me to be a consumer, I first have to be a producer"...and then immediately after that you claim "That's not the case in our economy. Consumer and producer are both embodied in one person."
How is "you have to be a producer to be a consumer" not the case in an economy where "consumer and producer are both embodied in one person"?
Economic "growth" can occur if I create and produce a new product that people want, e.g. iPhone, iPod, iPad, etc. My production has created desire and demand.
I'm surprised the guy who just got through saying "If you don't define your terms, you're not communicating," talks about "economic growth" without telling us what that means.
shackleford:On the other hand, let's say more people start buying my product at its current market price. Immediately, the rate at which my product sells increases. This could prompt me to hire additional workers to provide more products, if it makes sense on the margin. Of course, this depends on productivity and so forth. Would this not be a case where increased consumption could lead to real economic growth?
Where is the demand coming from? Without some increase productivity, increased sales of your product would necessarily mean decreased sales of other products, would it not? Otherwise, where are all the resources necessary to purchase your product coming from?
And if all we're talking about is a situation in which people stop buying product A so that they can buy more of your product, where does the "growth" come in?
How exactly does scooping water out of one end of the pool and pouring it back in at the other end lead to a higher water level?
On a side note, I don't think increased consumption implies higher prices. Demand is when consumers are willing to pay higher prices for a product.
No, "demand" is "the relationship between various hypothetical market prices for a good or service, and the total number of units that consumers want to purchase at each hypothetical price."
Yes and no. When I'm using the terms consumer and producer, I'm referring to such participants in the free market economy. If you grow or produce everything you want or need and do not participate in the economy, then you are not really relevant insofar as your activity has no measurable impact on someone else's activities in the economy. You're right. I put together the post a bit hastily. Let me clarify a bit. If you are a producer, then you are a consumer. Everyone is a consumer. The converse is not true, however. In some cases, you can be a consumer without being a producer. Yes, for there to be consumption there must first be production. Sorry, I was a bit vague there with that sentence. I just meant that no one in our economy is entirely self-sufficient. However, I'm sure there are more than a few people who are "off the grid" and provide everything for themselves. That's the point of my post. What's a good definition for economic growth? I threw out some ideas of what I think economic growth can be considered. No. Increased sales of my product would not necessarily mean decreased sales of other products. Some people do not spend all of their paycheck and instead save some of it. It's possible they could spend a little more of their income but not at the expense of another product. At the production level, with increased sales, I would require additional materials for my product, but that does not mean it has to come at the expensive of another product if the market can compensate. I think that makes sense. Sorry, I meant to say "increased demand is when consumers are willing to pay higher prices for a product." Clearly, it's an incomplete definition. Do Austrian economic terms differ markedly from mainstream? I'm kind of in the middle of trying to learn rigorous economic lexicon.
It would be helpful if you would use the quote function. Learn how here.
shackleford:That's the point of my post. What's a good definition for economic growth? I threw out some ideas of what I think economic growth can be considered.
What were they? I must have missed them.
No. Increased sales of my product would not necessarily mean decreased sales of other products. Some people do not spend all of their paycheck and instead save some of it. It's possible they could spend a little more of their income but not at the expense of another product. At the production level, with increased sales, I would require additional materials for my product, but that does not mean it has to come at the expensive of another product if the market can compensate. I think that makes sense.
On a micro level, maybe. But in the aggregate, you're just shuffling resources around. Unless every single person in this economy of yours is holding every single penny of their savings under their mattress, your scenario is not accurate.
Do Austrian economic terms differ markedly from mainstream? I'm kind of in the middle of trying to learn rigorous economic lexicon.
It depends on the topic. Most microeconomic terms are defined the same way. One of the most salient differences is inflation.
I highly recommend Lessons for the Young Economist or How an Economy Grows and Why it Crashes. They will help you greatly.
John James: What were they? I must have missed them.
I thought it was clear - the production of new goods or services, the expansion of new good or services into new markets, and increased productivity. I then asked if increased consumption leading to the creation of a new job should be considered growth. What's the Austrian definition of economic growth?
John James: On a micro level, maybe. But in the aggregate, you're just shuffling resources around. Unless every single person in this economy of yours is holding every single penny of their savings under their mattress, your scenario is not accurate.
I'm not following. On the aggregate, some will stop buying product A at the expense of product B, and some will simply increase their spending habits without necesarily being more productive themselves. Of course, this means that they do not already spend all of their income.
John James: It depends on the topic. Most microeconomic terms are defined the same way. One of the most salient differences is inflation. I highly recommend Lessons for the Young Economist or How an Economy Grows and Why it Crashes. They will help you greatly.
My understanding is that inflation is an increase in the money supply. That seems to be the correct definition. An increase in prices because of the lower purchasing power is a consequence of the increased money supply.
shackleford:What's the Austrian definition of economic growth?
I'm not sure there is such a thing.
In the real world, most savings are held in savings and loan institutions (mostly banks). This institutions act as a middle man, essentially allowing the savings of the economy to be borrowed by entrepreneurs who would utilize this financial capital and turn it into capital equipment to increase productive capacity.
This means, that just becase someone has "saved" his money, it doesn't necessarily mean that money is not getting spent in the economy by someone else. Again, unless every single person in this economy of yours is holding every single penny of their savings under their mattress, your scenario is not accurate.
Once again I highly recommend How an Economy Grows and Why it Crashes. At least the first 100 pages. Please read it?
My understanding is that inflation is an increase in the money supply. That seems to be the correct definition.
Don't tell that to anyone with Captain Picard in their avatar.
But on that note, it's evident you didn't look at any of the links on inflation that are provided at the post I linked you to. So instead I'll just suggest you go visit Wikipedia and look up the term "inflation" and tell me what you find. Then, just for fun, go ahead and edit the Wikipedia article to reflect the "correct definition" as you have given it here. You might even cite a few sources to corroborate. Wait 5 minutes and then tell me what happens.
John James: shackleford:What's the Austrian definition of economic growth? I'm not sure there is such a thing. I'm not following. On the aggregate, some will stop buying product A at the expense of product B, and some will simply increase their spending habits without necesarily being more productive themselves. Of course, this means that they do not already spend all of their income. In the real world, most savings are held in savings and loan institutions (mostly banks). This institutions act as a middle man, essentially allowing the savings of the economy to be borrowed by entrepreneurs who would utilize this financial capital and turn it into capital equipment to increase productive capacity. This means, that just becase someone has "saved" his money, it doesn't necessarily mean that money is not getting spent in the economy by someone else. Again, unless every single person in this economy of yours is holding every single penny of their savings under their mattress, your scenario is not accurate. Once again I highly recommend How an Economy Grows and Why it Crashes. At least the first 100 pages. Please read it? My understanding is that inflation is an increase in the money supply. That seems to be the correct definition. Don't tell that to anyone with Captain Picard in their avatar. But on that note, it's evident you didn't look at any of the links on inflation that are provided at the post I linked you to. So instead I'll just suggest you go visit Wikipedia and look up the term "inflation" and tell me what you find. Then, just for fun, go ahead and edit the Wikipedia article to reflect the "correct definition" as you have given it here. You might even cite a few sources to corroborate. Wait 5 minutes and then tell me what happens.
So, there's no Austrian defintion of economic growth? Do YOU have a definition of economic growth?
The hell I didn't read any of it.
In determining the best measure of inflation, we should remember the words of Ludwig von Mises. Mises refers to the "level" of prices as "inappropriate" and "untenable" because "changes in the purchasing power of money must necessarily affect the prices of different commodities and services at different times and to different extents." He goes on to say, "The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place. These index numbers are at best crude and inaccurate illustrations of changes which have occurred. 2
According to Mises, inflation (deflation) is defined as increases (decreases) in the supply of fiat paper money by government, not changes in the prices of individual goods and services. According to this definition, the cost of living and declining purchasing power of the dollar have been extraordinarily and un-necessarily high in modern times. If we use the monetary base (funds on deposit by the Federal Reserve) as a measure of fiat money, the money supply has increased 141 percent since the 1982-84 base period. If we use a broader definition, M2 (coins, currency, checking accounts, and money market funds), the money supply has increased 75 percent. Either way, monetary inflation has been significantly higher than the CPI's 60 percent. Perhaps increases in the money supply should be used as a better gauge of inflation. But it wouldn't make Washington happy - it would mean less tax revenue and higher Social Security checks.
The word ‘inflation’ originally applied solely to the quantity of money It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean ‘a rise in prices’ is to deflect attention away from the real cause of inflation and the real cure for it.
Milton Friedman famously summarized his research by declaring, “Inflation is always and everywhere a monetary phenomenon.”