I wrote an analysis of the AD-AS model, and I would appreciate any comments. Is there some mistake, something I left out? Is it deserving of a Nobel Prize [= hand me the check, please] , an Ignoble Prize [=tell me why, please] , or merely restating what has already been noted [= link, please]?
Here it is:
The problem, as stated by Keynesian. People want cash so badly that any new cash created by the Fed will just be hoarded away. And the problem with that is that nobody will buy what is being offered and nobody will invest in businesses, meaning they will have no money and will be forced to fire people.
This whole problem is certainly possible if there is just one giant company that makes only one thing. If nobody buys that one thing, you have to fire workers. Since there is only one company, nobody else will hire them, because there is nobody else to do the hiring.
Looking at things in terms of aggregates is only an accurate model for one company making one product. That's exactly what the model is doing. It's saying let's look at everything being made as if it was made by one company, the Aggregate Supplier, making one product, which the Aggregate Demander no longer wants.
But once we break up the model into something that correspond to reality, where there are many companies, each competing with each other for available resources, and that if one company makes more of product A that means another has to make less of product B, the whole situation changes. If, when looking at the numbers, you find that Aggregate Demand is down, you can then ask yourself, down for which particular products? Surely the answer will never be, down for every last thing offered for sale in the market. Even in the worst of recessions, some companies make money.
There will certainly be a demand for some things. The problem is that they cannot increase production because the unprofitable companies were, until now, competing with the productive ones for resources, the most obvious example being workers who were working for the unprofitable companies instead of the profitable ones. This also explains the hoarding. To the extent that people are not spending, it's because they wanted to spend on the good stuff, but not enough of it is being made.
Once we grasp that this is the correct picture of things, the the solution is immediate. Do nothing. As a result, the unprofitable companies will have to let go of the resources and labor they have been taking, and they will be transferred to the profitable ones.
Note that this is a two step process. First, the unprofitable business has to let go of its workers. Only then can they find employment with the profitable companies. The first step is called a recession. Unhampered it will quickly lead to a recovery, which is the second step.
Now, instead of doing nothing, you can try to "end the recession". This would mean making every effort to keep the workers and resources attached to the unprofitable company, and this indeed can be done by artificial means, aka monetary and fiscal "stimulus" of the zombie companies. Basically, this is an elaborate mechanism for imposing slavery on the populace. They work not for themselves, but to keep alive an unprofitable company, since the money to support it has to come from them.
Research has shown that slavery has always failed as an economic system, and explained why [= reluctance on the part of the slaves to work]. Now maybe if you hide from them that they are slaves, they will keep on working enthusiastically. After all, those pyramids got built somehow, right? But it's certainly not the most productive way of running your economy.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Neodoxy,
I have to know what you believe and what you disbelieve in order to debate with you.
Where did you get your economic training? You sound like you have had some formal schooling in economics . Is your theory mainstream economics? Keynesian?
Which part of ABCT do you subscribe to and which part do you doubt?
Not knowing that I have to read between the lines and make some assumptions.
It seems you believe that "bad moods/fear/negative vibes" causes people to change their value scales and save more (or hoard as some like to call it). You feel that this contributes to unemployment. Sounds like a very Keynesian view.
Their argument further goes: "therefoere the government has to step in until there is so called "full employment."
Yes a recession does impact peoples moods, I grant you, yes many tend to spend less and save more I grant you.
What I think we disagree on is which is cause and effect and whether or not it creates mass unemployment.
ABCT and me believe the overstimulation with credit expansion caused the boom. Sooner or later that has to end. So it creates a bust. People loose their jobs and businesses close - I think we both agree here.
THEN their moods change and "animal spirits" or whatever cause them to feel scared- fine so far. But this is a SYMPTOM not the cause of the depression as Keynes says. Yes because there is less credit expansion available, there is a protracted period of market clearing.
What I say is that hoarding or saving has negligible effect on this unemployment. It is the credit contraction that causes it, nothing to do with the act of saving even though they often happen simultaneously and therefore people think they are cause and effect. Mass reallocation as you call it will absolutely cause depression in the areas that get evacuated but by definition it causes stimulus in the recipient areas. Sure there might be a lag period not always instantaneous. The money does not disappear, it goes somewhere at some time.
But the savings money employs bankers and bank tellers and accountants and ATM repairmen and mortgage brokers and stock brokers and venture capitalists. It is not left in banks to rot. It is picked up by somebody that has insight in where to use it more efficiently. It creates new businesses or expand old ones that employ new people eventually.
What cause the unemployment to linger is not the mass change in mood but government interference with stimulus, unemployment assistance and minimum wage amongst others.
"Where did you get your economic training? You sound like you have had some formal schooling in economics . Is your theory mainstream economics? Keynesian?"
I'm an Austrian with Keynesian sympathies. I've had about 2 years of formal economic education (kind of). My primary source of economic knowledge comes from thorough readings of Man, Economy, and State, and Human Action, although I've read a number of other works, both Austrian, mainstream, and even some exposure to Marxism.
If I weren't an Austrian I'd be a Keynesian with New Classical (not Neo-Classical) influences. Monetarism is dumb with the exception of the Taylor Rule.
"Which part of ABCT do you subscribe to and which part do you doubt?"
I think that ABCT gives a perfectly intelligent explanation of why business cycles occur, and moreover its nice to see an actual business cycle theory, since realistically on the Austrians, Marxists, and post-Keynesians actually have a theory of why business cycles happen (the traditional Keynesian explanation as well as bubble theory are both non-answers). What I do doubt is the "smoothness" of the Austrian vision of recoveries, as well as the possibility of somewhat circular business cycles. I do think that my aggregate demand argument was actually invoked by Hayek (Mises?) but it seems to have been lost in some of the cheerier modern explanations of the theory
Now once again, I think that you make some good points, but I don't think that you fully appreciate the significance of certain factors, for instance:
"But this is a SYMPTOM not the cause of the depression as Keynes says. Yes because there is less credit expansion available, there is a protracted period of market clearing. What I say is that hoarding or saving has negligible effect on this unemployment."
I've always had a hard time buying that the only affect of the credit contraction is market clearing. There are going to be negative affects even to decent firms, and it isn't always obvious which firms are and are not stable. Furthermore this inevitably incentivizes savings on the part of individuals. You can also get into how susceptible a fractional reserve vs. a full reserve system would be to this, but part of the reason why this isn't as likely to be a problem in a fractional reserve system is exactly because the government itself guarantees deposits, and therefore people don't have to worry as much about bank failure. Nonetheless, a refusal on behalf of banks to lend does decrease overall payroll and increases costs
"Mass reallocation as you call it will absolutely cause depression in the areas that get evacuated but by definition it causes stimulus in the recipient areas. Sure there might be a lag period not always instantaneous. The money does not disappear, it goes somewhere at some time."
I agree, but a decrease in overall demand alters this affect. This is also where the degree of price flexibility greatly affects the length of business cycles, because if banks hold onto their money then it's not circulating, decreases in payroll and employment result and demand for even healthy firms decrease. With increases in uncertainty the affective interest rate might exceed the time preference equilibrium rate which exacerbates the business cycle and then benefits consumer good industries to a disproportional degree. This in turn necessitates additional adjustment and falls in payroll, employment, and demand. Eventually wages have to fall to meet the new payroll and production returns, but I could see the adjustment taking quite a long time.
"But the savings money employs bankers and bank tellers and accountants and ATM repairmen and mortgage brokers and stock brokers and venture capitalists. It is not left in banks to rot. It is picked up by somebody that has insight in where to use it more efficiently. It creates new businesses or expand old ones that employ new people eventually."
Sure it does, that is a version of what's happening now (liquidity trap combined with uncertainty in borrowing). Regardless, you can't argue that credit both contracts and that it is used to employ people.
"What cause the unemployment to linger is not the mass change in mood but government interference with stimulus, unemployment assistance and minimum wage amongst others."
Of course in our day government actions are a much more active cause of recession, uncertainty, and radical changes in demand, however, arguing that unemployment insurance and minimum wages have a large affect on the speed with which recessions ends is dependent on price flexibility and that payroll is very likely to decrease.
WOW Austrian with Keynesian tendencies- no wonder it feels like herding cats when I debate you. So at least I know I cannot assume you agree with my Austrian version automatically.
OK in my opinion. one of the biggest difference between Keynes and Austrians is; Keynesians believe we are the government, the government is us, society is us and society is the government. Therefore when "we" have to do something, Keynesians automatically imply government. Somehow the state must make sure "healthy" businesses survive and make sure things "run smoothly" etc.
Clearly Austrians don't see themselves as "the state", but individual actors that have to put up with what the state is doing..
You say you find it hard to believe that the ONLY thing that happens is that the market clears. Its not an "only" thing, it is a huge horrible all encompasing thing....So you think that my theory doesn't believe recessions impact so called "healthy or decent" businesses. Sure they do! It affects all businesses to some extent, but mostly the marginal ones of whatever kind, it just doesn't care if you classify them as "healthy" or "sick" or decent or bad- there is no such thing. There are only businesses with a desired product and ones without it.(when all the crack addicts die, even the decent doctors will make less money and have fewer patients). Market clearing is market clearing. It does not play favorites Only the market will tell who will and won't survive, we cant.
You make it sound that I claim that credit expands and contracts at the same time. I think that is because you think of fractional reserve banks and inflation caused by the government the same as you think of the moves made by individual actors.
The government stimulated the mortgage industry with counterfeit money like crazy and the banks further expanded that counterfeit money like crazy. That is like winning a lottery and creating histeria and delusions of grandeur.
When they stop, those jobs go away and even other salaries drop because big daddy is no longer throwing gas on the fire. In the meantime real life people shuffle their honest money around like you said by reallocating. That is just like taking money out of your left pocket and putting it in your right pocket- it does not make you richer or poorer. PRIVATE saving pays for some alternative jobs- but I am not claiming it will be the equivalent of a government stimulus, only that it is not the dragging effect people think. You have to examine these two acts differently.
The crash happened because the government sources of run-amok credit dries up (Regardless of what individuals are doing) Neither I nor the ABCT claims that there will be no credit markets left in the free enterprise system. I just made that point because I don't believe saving or hoarding is a bad or harmful thing or leads to longer or further unemployment - it does not. I am not claiming that it alone will be the saving grace of the recovery. You say you find it hard to believe that the only effect of the contraction is market clearing. That seems to apply to any business that used to be popular and is now less so because of people's value scales, not just the good ones. ALL factors have to make a correction to clear the market. And yes prices and salaries will have to drop because the government is no longer feeding the beast, not because people save or hoard..
But remember you only perceive them as dropping because you compare them to what they were at the hight of the crack cocaine crazed boom. If you compare prices and wages to what they were in maybe 2002 before the crack boom- and now, there is not such a huge drop. People have just been brainwashed to expect different.
I don't exactly believe the ABCT promises a smooth recovery or a fast recovery, just faster than if there is government interference. and multiple government interference piled on top of each other has a huge compounding negative effect on the recovery.
Personally I believe that one of the biggest factors determining the length of recovery depends on what industries the boom was in. How long it will take factories to retool or actors to reeducate and redirect themselves. In the recent real estate boom there were millions of people employed by the banking and mortgage industries. Their skills are useless elsewhere.The money these people spent made other industries that they frequented also overexpand (even the ones you call decent businesses- they were puffed up because of wrong signals.They could not hire fast enough so now these out of work employees cannot just step out from being a mortgage salesman and become something completely different. Non skilled jobs are already filled so they have to gain skills but it takes time to watch the market to even start guessing at which industries will be worth pursuing.
"OK in my opinion. one of the biggest difference between Keynes and Austrians is; Keynesians believe we are the government, the government is us, society is us and society is the government. Therefore when "we" have to do something, Keynesians automatically imply government. Somehow the state must make sure "healthy" businesses survive and make sure things "run smoothly" etc."
What you're really talking about is modern liberalism, but this is generally an adequate explanation of the Keynesian disposition. Keynesians tend to assume that the government is generally positive and a relatively efficient institution, but even if this is false then their world vision can still be generally true. Almost all liberal economists are Keynesians, but not Keynesians are necessarily liberal, nor is this built into the system. I feel that Austrians tend to unfairly lump in all liberal economic policy with Keynesianism, when they are separate things.
"it just doesn't care if you classify them as "healthy" or "sick" or decent or bad- there is no such thing. There are only businesses with a desired product and ones without it.(when all the crack addicts die, even the decent doctors will make less money and have fewer patients). Market clearing is market clearing. It does not play favorites Only the market will tell who will and won't survive, we cant."
I think that your analogy is a little unclear here, but nonetheless the market ultimately does dictate who and who doesn't survive, but this doesn't mean that under all conditions it is who "should" survive if we use this term in the sense of satisfying consumer desires, since short run spending and price trends in recessions may be very different than their long term post-recessionary counterparts.
When I was talking about FRB I meant that people in the modern day are much more likely to stick their savings in a bank for a rainy day than they are to stick it under the mattress. This is in large part because of FDIC and governments making it clear that banks won't fail. Now if we had a 100% system then this wouldn't matter as much because all banks wouldn't be facing the chronic threat of crumbling at the smallest sign of trouble, but because no one thinks banks will fail they still trust banks with their money. One could interpret this as a government coming in and fixing a problem that it already made. Nonetheless, if we know that savings go into banks, not into mattresses, then the matter becomes different because either banks can sit on the money until conditions improve, or the bank can lend out the money and aggregate payroll won't fall.
"I just made that point because I don't believe saving or hoarding is a bad or harmful thing or leads to longer or further unemployment - it does not"
Why?
"And yes prices and salaries will have to drop because the government is no longer feeding the beast, not because people save or hoard.."
Why would this cause a fall in wages and prices? Popped bubbles should deflate, and the original factors should fall in value, but this should be made up by an increase in the prices of goods in the later stages of production. Cutting off government spending shouldn't cause aggregate prices to fall, merely the rate of price increases in the economy should fall and the price structure as a whole should be rearranged.
"If you compare prices and wages to what they were in maybe 2002 before the crack boom- and now, there is not such a huge drop. People have just been brainwashed to expect different."
Your first sentence is necessarily inconsistent with your claims. Prices rises in the economy as a whole without a partial degradation of the production structure (a leftward shift in AS) or because of an increase in the effective money supply. Therefore, since the money supply as a whole has not shrunk, you have to be saying that hoarding does indeed occur and is a major part of what happens in a recession. If the money supply was made permanently stable in 2007 then the money supply would still be much larger than in 2002. It would take several years for prices in general to fall to their approximate 2002 level as supply-side deflation occurred. Your second point here is a very important one to explain how the government has prevented price flexibility.
"I don't exactly believe the ABCT promises a smooth recovery or a fast recovery, just faster than if there is government interference. and multiple government interference piled on top of each other has a huge compounding negative effect on the recovery."
I agree with the latter statement and I disagree with the former. Mises and Hayek were unclear as to the speed of recovery, but I feel like modern Austrians, particularly people like Tom Woods argue that in a free market recessions would end very rapidly. Rothbard also appears to have shared a similar level of optimism. I've also never heard an Austrian economist talk about something of the circular pressure I addressed in my previous post.
"In the recent real estate boom there were millions of people employed by the banking and mortgage industries. Their skills are useless elsewhere.The money these people spent made other industries that they frequented also overexpand (even the ones you call decent businesses- they were puffed up because of wrong signals.They could not hire fast enough so now these out of work employees cannot just step out from being a mortgage salesman and become something completely different. Non skilled jobs are already filled so they have to gain skills but it takes time to watch the market to even start guessing at which industries will be worth pursuing."
Hmm... While I actually don't think that this would affect the rate of recovery, but this would actually be a reasonable way to describe why wages would need to fall without resorting to changes in the effective money supply.
Edit
On further consideration I'm having trouble seeing why prices wouldn't fall in aggregate as a result of the business cycle... On one hand it's a fact that prices will fall if the utility of a good changes. During a bust the utilities or the derived demand for many goods goes down and therefore prices must fall, however on the other hand new goods rise in price with the rise in the interest rate... I think that perhaps the overoptimism and excess profits caused by recessions might explain this. Prices are bid up, not just to what they would be if originary interest justified the artificial rate, but also past this to a certain degree. This could inflate prices in general and necessitate a fall in the price level... Nonetheless, I think that your assertion that prices in 2008 when the bubble burst should have fallen to to approximately what they were when (at absolute minimum) the money supply was only four fifths of what it was in that year is really overstating things.
I really enjoy sparring with you but again.,it's like trying to corner a jellyfish.
It's like I am talking German and you are talking French and we can forever correct each others grammar.
In my opinion it is intellectually impossible or inconsistent to be Austrian with Keynesian tendencies. You say you accept the ABCT but you use Keynes against me when I argue it. Are you well enough versed with ABCT because in it it handles Keynes. If you think Keynes is right, then you have to think Austrians are wrong and tell me where and we can chat.
If you think Keynes is wrong about the business cycle then you cannot dispute my arguments with Keynesian angle questions.
I thought I made an argument why saving does not cause unemployment but you disagree on Keynesian grounds and you keep bringing up the "money circulating" point
So as I see it this is a sticking point. None of our arguments herafter will hold until we get past that.
As I understand it the Keynesians believe that -money has to circulate to keep the economy moving and that hoarding somehow takes money out of circulation and therefore shrinks the economy.
I thought we were on level ground as far as ABCT but apparently not
I do not ascribe to the "money circulating" argument so I find it hard to defend myself against a fallacy in my mind.
I believe saving contributes to the economy. I dispute that it takes it out of circulation. As I see it Austrians believe it is not possible to take money out of circulation by saving.
Then tell me what you believe and don't believe and then I will be able to defend my position.
Albert,
You're making some very dangerous errors here.
First of all, I haven't changed my argument, my argument is the same as it was with my first post, it's just not the argument or worldview you're used to seeing. You're not trying to herd cats or catch a jellyfish, you're trying to see a mouse when you're really looking at a dog. Secondly the way that you're looking at things is a black and white view of the world where there is a neat box of "austrianism" and "Keynesianism". Not only is this viewpoint inaccurate, but it's restrictive to your intellectual growth and a real understanding of the world. Economic schools are not entirely contradictory, both Keynesianism and Austrianism agree, for instance, that an increase in the supply of loanable funds will (usually) decrease the interest rate. Some aspects of the schools, Austrianism's methodological individualism and Keynesian aggregation, are contradictory, but this doesn't mean that every insight and aspect of these things are mutually exclusive. Austrianism, while skeptical of Keynesian animal spirits, nowhere contradicts that some investors will use inaccurate and superfluous information in making investment decisions, indeed this viewpoint can be wholly integrated into AE, but it can never eclipse the fact that most entrepreneurs and investors employ decent reasoning skills when investing and are reasonably capable at their work.
The neo-classical synthesis, the greatest economic paradigm shift that has ever occurred, came about by fusing Austrian, classical, and a variety of other insights into a single school. You can be an Austrian and still appreciate and find some truth in the work of Milton Friedman, and so I think it's clear that saying Austrianism and Keynesianism are necessarily exclusive in every way is not only closed minded, but it may also cause one to lose track of some valuable insights that might otherwise have been gleaned.
"I believe saving contributes to the economy. I dispute that it takes it out of circulation. As I see it Austrians believe it is not possible to take money out of circulation by saving."
Here's the chain of causality (and yes, this is pure Austrian taken straight out of Rothbard if it makes you happy):
At any point and time there is a ratio between investment and consumption, as individuals choose to consume more this decreases the amount of money that is invested and shifts the productive structure towards a shorter and a less capital intensive shape. In the long run this causes capital consumption and decreases living standards, shrinking the overall productive capacity of the economy, but in the short run consumers are able to reap the bounty of old capital accumulation through consuming this capital and instead of accumulating or "sustaining" the capital supply, all production can be used to produce current goods. If the opposite occurs and people invest more then they sacrifice a portion of their living standards in the short run, and the production structure becomes more focused on producing things in the future, the structure becomes longer and more capital intensive. In the long run this causes the productive capacity of the economy to grow and living standards increase.
With this in mind we can make up arbitrary numbers for the consumption to investment ratio to exemplify this point. If we start of with a consumption to investment ratio of 50:50, where half of all dollars are being used in consumption and half are being used in investment, then we see that when consumption increases by 5 then we get 55:45. The economy now favors consumption more than it did. When hoarding occurs and money is taken out of circulation, the money actually being used in the economy (if it is taken out evenly) will look like 47.5:47.5. This necessitates that deflation occur within the economy and, after prices adjust, the economy will look the same in real terms as it did before. If it comes disproportionately out of consumption, however, 50:45, then deflation as a whole must occur since the monetary unit is now worth less than it previously was, but when prices adjust downwards, we see that investment is now favored, not as heavily as if consumers had moved money from consumption to investment, but real money available for investment is still there.
Thusly we see that putting money out of circulation, either by decreasing the money supply or by hoarding money (plain savings) causes deflation. Anything other than this viewpoint contradicts the quantity theory of money. I think you might be confused as to what "in circulation" means. "In circulation" is an admittedly arbitrary term meaning when money is being actively used to purchase things. There is, of course, a time lag between when the money is saved and when prices fall, but if the money supply was constant now, and you shoved half the money supply under your mattress, I doubt that prices wouldn't adjust downwards given a few years of half the purchasing ability of the economy. Nonetheless, it's obvious that there's nothing contradictory about the view that plain savings cause deflation and the idea that plain savings is good for the economy.
1. I have read Rothbard's theoretical chapters in "America's Great Depression" and his chapters on the business cycle in "Man, Economy, and State". Therefore I have no reason to believe that the pamphlet in question will help me to understand the Rothbardian or the Austrian position.
3. Mises and Rothbard both agree that the phenomenon occurs and they both embrace it.
No, Neo, thanks for keeping up the chat.
Like I said before I find most of what you say well thought out and useful. Many of our arguments are the same thing seen from a different angle.
I am not saying you are WRONG, I do not say that you changed your argument, I just cannot argue if we use different criteria.
I agree ALL economists have to use some arguments and some assumptions in common.
Nobody is totally wrong on everything (and for that matter totally right on everything either) It is an evolving discipline. But there are certain narrow areas like ABCT and Hoarding ... where some factions go 180 degrees opposite each other. It is very important to examine this because depending on where you sit, the solutions are miles apart. And it is impossible to be on the north pole and the southpole at the same time.
And my point is we cannot compare opinions if we play out of opposite rulebooks.
Otherwise what repeatedly happens is we read the same paragraph and interpret it opposite because we use different definitions. Until we can find some common definitions we agree on, the conversation goes nowhere.
So with respect let me try and show you where I come from in your terms
So from Human Action chapter XVII LvM
Every piece of money is owned by one of the members of the market economy. The transfer of money from the control of one actor into that of another is temporally immediate and continuous. There is no fraction of time in between in which the money is not a part of an individual's or a firm's cash holding, but just in "circulation."[2] It is unsound to distinguish between circulating and idle money. It is no less faulty to distinguish between circulating money and hoarded money. What is called hoarding is a height of cash holding which — according to the personal opinion of an observer — exceeds what is deemed normal and adequate. However, hoarding is cash holding. Hoarded money is still money and it serves in the hoards the same purposes which it serves in cash holdings called normal. He who hoards money believes that some special conditions make it expedient to accumulate a cash holding which exceeds the amount he himself would keep under different conditions, or other people keep, or an economist censuring his action considers appropriate. That he acts in this way influences the configuration of the demand for money in the same way in which every "normal" demand influences it.
from
What has Government Done To Our Money- Rothbard
9. The Problem of “Hoarding” What’s wrong with people who hoard up gold in their cellar and don’t let it circulate in the economy? Nothing. All it means is that the demand for money (to hold) increases, so prices of goods will fall, purchasing power rises. No benefit or loss to society occurs. Moreover, it is not irrational to hoard money. Money is not only useful in a present exchange but also in an expected and preferred future exchange and so hoarding confers that benefit to the owner. People keep cash balances because of uncertainty of the future: 1. if we knew exactly how much money we were gonna use, then there is no need for cash balances, 2. if we expect money to become worth more, we’d want to stock up on it now. Total cash balance is always equal to total supply since all money must be owned. If there was no uncertainty nobody would be willing to hold cash, price of money would fall and thus of other goods will rise infinitely causing monetary breakdown. This also means that the idea of money ‘circulating’ is a misleading metaphor. The only thing that takes place is transfers from one cash balance to another’s. Unlike changes in the supply of money, changes in the demand for money do confer social benefits, for they satisfy a public desire for either a higher or lower proportion of cash balances to the work done by cash How can an increase in demand for money be satisfied if changes in supply stays the same? If people value cash balances more highly, then demand for money increases and prices of goods fall, so the same total sum of cash balances confers a higher “real” balance, i.e. higher in proportion to the prices of goods.
I think you identified a key sticking point. We define "circulation" differently
Let's get consensus on that and then reevaluate our arguments in baby steps
It looks to me that you define "the economy" as that portion that is used on consumer goods, and you define money that is used in that realm as "circulating".
and therefore you believe money taken out to hoard or save is now "out of circulation." and will shrink the money supply and cause prices to fall or the value of money to rise within this "consumer goods" field. We use a similar quantity theory of money.
If I accept your definitions then your argument is sound- I just try to tell you I define it differently.
I define the economy (which I call the MARKET economy) as the whole darn shebang. It includes your version which is buying and selling of consumer goods (I call that the consumer goods economy), it includes money in checking accounts, savings accounts and money in investment.
So in my world it is impossible to take it out of circulation unless you burn it. I have no use for the term "in circulation" in my world all money is always in circulation.. some circulate slow, some circulate fast.
When you hoard or you save or you invest (synonyms in my world) you move it from the one area to another. it is a re allocation within the larger market economy. It is moving it from your left pocket to your right pocket.It is not out of circulation it just serves a different purpose.
So when money is taken out of consumption(what you call circulation) as your example describes, it does cause deflation locally in those areas that are narrowly directly affected (I don't see the economy as a large wholistic single entity but many small ones) I think you believe correctly it will cause some unemployment in those particular areas- I grant you that.
Some other areas of the consumption economy are left untouched.
But because it is not burned it is "invested" somewhere else in my definition of "the economy" where it has an opposite effect. It causes immediate employment in the investment industry and it causes future employment as in your capital goods quote from Rothbard above It might cause a lengthening of the production cycle but on net, it does not contribute to unemployment.To me it is all a wash overall.
from your post:
"If the opposite occurs and people invest more then they sacrifice a portion of their living standards in the short run, and the production structure becomes more focused on producing things in the future, the structure becomes longer and more capital intensive. In the long run this causes the productive capacity of the economy to grow and living standards increase."
Any disagreements?
Our views allign much more harmoniously than I thought they did. It appears that we only have one area of disagreement which I will get to below. However, I feel inclined to tell you why I define my terms the way that I do:
The economy: A continuous process of production and exchange in response to man's values that relate to the physical world
The money supply: All money that exists within the market economy
Circulation: The process of spending money. Money can be said to be out of circulation after not being spent for an arbitrary period of time that causes a fall in demand.
While these definitions may not be perfect, I see that it is valuable to distinguish between money that is in and out of circulation because it helps to indicate shifts in the value of money caused by non-governmental means that may otherwise be overlooked. My analysis is far easier if I say "money is circulating", rather than explaining what I mean every time. I also don't deny that hoards serve a purpose in the economy, although I do believe it to be a collective goods problem (it makes sense for everyone to hoard, but if there was less hoarding there would be less of a need for hoarding because fewer people would be laid off).
As for our the only real thing I saw that I disagreed with was this:
"it does not contribute to unemployment.To me it is all a wash overall."
This is only true if prices are flexible. The demand falls for a large variety of goods (I agree that some are unaffected). The amount of money circulating is not enough to pay back labor that is employed in current quantities. All prices must fall to match the new price level. Where prices do not fall unemployment results. If prices were perfectly flexible then this phenomenon would not cause unemployment. Since they aren't, it must. This is where I sympathize with Keynes, although as I've stated, I don't think that this as originally as "Keynesian" a position as it might at first seem. This does not mean that the Keynesian prescription of stimulus and inflation will solve the problem (or even if it were to solve "this problem" it does not mean that it doesn't create other, more severe problems). A significant increase in plain savings must result in a significant fall in wages, whether this only be large fall in a small number of areas or a small fall in many.
This is quite a good discussion. You should post here more often.
Good we found some common ground. Now understanding that you do not necessarily want the government to do a Keynesian stimulus but you still have issues about unemployment in certain areas,
We can narrow the discussion to:
1. Does savings cause net unemployment
2. What to do about it
We cannot answer 2 till we agree on 1
I think you and I are the only two reading this thread anymore. Lets start a new thread about "Does saving or "hoarding" lead to unemployment?
Maybe more people will participate
I think you and I are the only two reading this thread anymore.
You never know. Yesterday I saw that 2 members of the forum were online, but over 8,000 other people were lurking. Think of us as a TV show. There a few actors, but a huge viewing audience.
Frankly I think that anyone interested in this discussion on these forums would be taking part. As far as I can tell there are only a handful of people on these forums who are really all that interested in talking about more advanced economic issues. What I've been really surprised about is that gravy hasn't taken part in this thread thusfar, since he's usually keen on these sorts of issues.
Anyway, my thesis here for a while has that any significant decrease in aggregate expenditure (for the sake of argument we'll just say that all savings come from consumption) necessitates a fall in wages. Since wages cannot be perfectly flexible, some unemployment will result. Recessions are a particularly bad time for this to happen since this increases unemployment and further decreases demand and increases uncertainty.
Because you make Keynesian statements that I probably don't get I am going to insist you justify them. (also because I cannot always tell which Keynesian thoughts you agree and disagree with.)
The first three thoughts I want to pick apart are:
1.How can you prove that "savings" by individual actors are "significant" enough to actually influence the economy as a whole
(by your own definition you said we leave out the impact of fractional reserve banks for now to narrow down on that part of the recovery not controlled by government, also you cannot use this current recession as an example of significance (unless you give me actual numbers) because the banks expanded the mortgage industry by trillions upon trillions of dollars - that WAS significant in causing massive unemployment, what numbers do you have for personal savings in comparison)
2."significant decrease in aggregate expenditure necessitates a fall in wages"
3."Since wages cannot be perfectly flexible, some unemployment will result"
So in
1. my question is clear
2. Prove to me that significant decrease in expenditure ALWAYS necessitates an overall fall in wages. You already know I am going to argue that private savings might be negligible compared to the effect of banks contracting, because banks have the hidden power of compounding credit expansion)
The economy is HUGE. Contractions, like those caused by savings NEVER hit the whole economy all at once. It hits certain sectors worse while other sectors might be booming. Especially in crony capitalism, these advantages are usually channeled to the government's favorite businesses (the banks right now) After a lag period why do they not just get employed elsewhere? I already conceded in previous posts that savings in a specific sector probably affects that sector but not the others the "aggregate economy" is too huge I think we both agree it would be terrible to try and prop up those sectors against the wishes of the market. Or have you lost faith in the ability of the market to choose its own winners?
There have been contractions in sectors as long as free makets have existed- nothing wrong with that - the market always adjusts.
Its a similar argument as Hazlet refutes when he took on the anti industrialists who claimed that machines were taking away jobs- why don't they create new jobs in the building, servicing and managing of machines?(Like in the old hand knitted sweater industry in England, when the horseless carraige was invented it was devastating to the horse drawn carraige industry but it created the automobile industry, when the refigerator was invented it killed the ice vendors overnight, but "on aggregate" it washed out ..... if it was interfered with by bailing out or propping up the old sectors, it would have increased uncertainty and punished the new industries)
3. WHY can wages not be perfectly flexible? Surely a worker would rather take lower pay in a recession than be out of work?