I was browsing through some blog posts from keynesians and they were arguing that there is not enough demand in the economy to get business' to invest and to encourage growth. This is an argument that i encounter a lot. They argue that money should either be redistributed from the wealthy to poorer people (i.e. taxes) who are more likely to spend it due to a higher marginal propensity to consume, raise demand in the economy and hence encourage investment. How would you respond to this argument? Is there not some truth in it?
There's neither trickle up, nor trickle down. Lack of demand or lack of spending is not what causes the lack of prosperity and the lack of productivity growth in a society/economy. Prosperity (productivity) grows only through capital (savings) formation via postponed consumption. Stealing from a minority who had built up capital (savings) through postponing consumption, and handing it out to a majority who had not postponed (saved) any consumption (much worse, had consumed far more than they could ever produce or save in their lifetimes) so they could consume it, only eats up capital and destroys the prospects for prosperity (productivity) growth.
The current problem with the developed world economies is not the lack of money that governments should steal -- or central banks print -- and give it to the profligate masses. The problem is that these masses have not been postponing consumption (saving capital) for generations. Neither Obama, nor Keynes, nor Helicopter Ben can "save" the masses from paying the piper who's knocking at the door this very minute.
The Bomb19:I was browsing through some blog posts from keynesians and they were arguing that there is not enough demand in the economy to get business' to invest and to encourage growth. This is an argument that i encounter a lot. They argue that money should either be redistributed from the wealthy to poorer people (i.e. taxes) who are more likely to spend it due to a higher marginal propensity to consume, raise demand in the economy and hence encourage investment. How would you respond to this argument? Is there not some truth in it?
No, that's a ridiculous idea. Essentially they are saying that we are poor because we lack money. They think if we save money we forgo wealth creation and if we spend money we "put it into the economy". But the opposite is the case. If money is saved it is loaned out to entrepreneurs and businessmen who make us richer. If money is spent it is used up for immediate consumption. It's like eating the grain you had saved for sowing next year, you get a "free" lunch now but it will cost you dearly in the near future. So all the state does when redistributing income to people with a higher propensity to consume is to eliminate economic growth.
but what do you say to people who argue that if there are not enough people consuming e.g. buying cars then there is no incentive for entrepeneurs to invest? What incentive is there for a firm to invest in a recession when there simply isn't the demand for their products?
This is the core disagreement between Keynesians and Austrians and you will find a lot of material about this very question on this place. Just look into Austrian refutations of demand side economics. There's really no easy way to explain it in one post, so I'll just say that when there's a recession people aren't supposed to buy cars, because we don't have enough resources to build them. There is no demand because we should be spending our recourses on other stuff. If the government stimulated demand back into the car industry it would bid away resources from more pressing uses.
The Bomb19: but what do you say to people who argue that if there are not enough people consuming e.g. buying cars then there is no incentive for entrepeneurs to invest? What incentive is there for a firm to invest in a recession when there simply isn't the demand for their products?
Ask yourself this simple question. If the problem (of lack of prosperity/productivity growth) is so easily solved by simply "stimulating" consumption, why don't central banks simply write $1million checks and send them to every man, woman, and child so they can go out and spend them? Wouldn't that be a splendid incentive for entrepreneurs to "invest"? And what exactly would these entrepreneurs "invest"? Why, "money" and "credit" created out of thin air, of course.
In a Keynesian Disneyworld, both consumers can (must!) consume and entrepreneurs can (must!) invest "money" or "credit" created out of thin air. In an Austrian world, entrepreneurs cannot invest non-existent capital. i.e. capital which is not a reflection of someone's earned profit/income whose consumption has been postponed.
but what do you say to people who argue that if there are not enough people consuming e.g. buying cars then there is no incentive for entrepeneurs to invest?
1. The Problem: Entrepeneurs have no incentive to invest.
Proposed Solution:Tax those entrepeneurs heavily if they do invest.
Duh.
2. If there are not "enough" people buying cars, then we should stop making cars for a while and make what people want instead.
After all, every business would like to sell a thousand times more than it does at present. So shall we just open the yellow pages and say we need to somehow help every business listed there sell a thousand times more than it does, because right now they are not "enough" people consuming their product?
Maybe we need to appoint an "investment czar" to decide which of those businesses, all clamoring that they do not have "enough" customers, should get the money taxed away from the rich. He might decide that a deserving green energy company like Solyndra should get the moolah.
Hey, while we are at it, maybe we should invest in the porn industry. They also want more customers. President Obama could visit a porn studio, like he visited Solyndra, and tell the porn stars that they are the future of America and what make this country great.
The point is that after you tax the rich, someone has to decide who gets the money. And their decision will be a political one, not an economic one. Meaning the money will be wasted.
The real decision should be left to the person whose money it is in the first place. And if you think [incorrectly] that he is not spending enough, why not just make a spending law, that he has to spend a certain percent of his income? Why steal it from him?
What incentive is there for a firm to invest in a recession when there simply isn't the demand for their products?
What incentive is there for a firm to invest in a recession if they are precisely the "rich" who are going to be taxed if they do?
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It's easy to refute an argument if you first misrepresent it. William Keizer
Last time I checked, that's the point of the market. Your question is like asking "But how will people make fuzzy rugs if no one wants them?" To which the answer is "If people don't want them, why make them? Seems like malinvestment"
No. His argument is that people do want the fuzzy rugs (and cars) -- they just don't have the "money" with which to buy them. So government should steal from the ones with savings (capital) -- or central banks should print -- and give them "money" so they can spend/consume it. The Austrian answer to this is that merely (1) wanting something and (2) having a government to steal (or central banks to print) the money for you to spend on it is not how prosperity and productivity growth is created and maintained. It's how capital base is depleted and everyone is made poorer.
what incentive is there for a firm to invest in a recession if they are precisely the rich who are being taxed
So how exactly does the market recover from a recession? Look at the current situation, business investment is at an all time low. People are paying off their debts, they aren't spending money. Where will future economic growth come from if the middle class have no money to buy products with? Let's take a hypothetical scenario. An increase in income tax on the top 1% will not strip them of all their assets or decrease business investment to 0% all of a sudden. That's just a ploy used by Fox to argue against any kind of tax on Bill O'Reilly. Of course i know that it is the wealthy who 'invest' and create economic growth in the long run, but arguing that any sort of tax increase at all will suddenly cause massive market distortions is ludicrous.
I have yet to receive an answer to the question.
The Bomb19: So how exactly does the market recover from a recession? Look at the current situation, business investment is at an all time low. People are paying off their debts, they aren't spending money. Where will future economic growth come from if the middle class have no money to buy products with? Let's take a hypothetical scenario. An increase in income tax on the top 1% will not strip them of all their assets or decrease business investment to 0% all of a sudden. That's just a ploy used by Fox to argue against any kind of tax on Bill O'Reilly. Of course i know that it is the wealthy who 'invest' and create economic growth in the long run, but arguing that any sort of tax increase at all will suddenly cause massive market distortions is ludicrous. I have yet to receive an answer to the question.
The bust is an inevitable consequence of the boom during which capital has been misallocated and the structure of production has been distorted beyond repair. In the current case, we're talking about a multi-decade long mega-boom of centrally planned subsidization of both consumption and production, neither of which could have been supported at such levels without "money" and "credit" created out of thin air. The market will recover when malinvestments are purged out of the system, ownership of assets gets transferred into (financially) healthy hands, consumers re-learn how to save (postpone consumption) so that entrepreneurs have real capital to invest toward meeting this postponed (future) consumption demand. Real capital can not be created by Helicopter Ben printing green notes, nor by Obama stealing it from group A and giving it to group B to buy their votes.
Your question about "solving" your predicament is like asking your doctor how you could "recover" from decades of eating three burgers & fries a day and not excercising (against his advice), so you could run sub-10sec 100m dash by next week. Well, the answer would most definitely not be to increase your dose to eating FOUR burgers & fries a day, even though just a "tiny" increase of a single burger a day may not necessarily kill you by tomorrow.
So how exactly does the market recover from a recession?
By removing the hindrances to people being productive. This includes govt regulations and taxes, minimum wage laws, and support of unions being violent.
The idea is that a recession is ultimately wasted resources. These resources are wasted by govt intervention, be it printing money, taxing, and the things mentioned above. They all cause resources to be wasted, both material resources and labor. When the wasting is stopped, and the hindrances to being productive are removed, when savings are allowed to take place which will result in capital accumalation [=increased usefullness of labor]. the recession will end. As long as the wastefullness continues, so will the recession.
Look at the current situation, business investment is at an all time low.
So you recommend the beatings to continue until moral improves.
People are paying off their debts, they aren't spending money.
Which is exactly what a person in debt should be doing.
Where will future economic growth come from if the middle class have no money to buy products with?\
I detect an assumption that "buying products" is what causes economic growth, which is confusing the engine with the caboose. Buying products is the reward of economic growth. Economic growth is caused by increased productivity. Forgive me if I'm wrong, but you sound like you have not learned true [=Austrian] economics, but are trapped in the misleading clutches of Keynesianism.
Let's take a hypothetical scenario. An increase in income tax on the top 1% will not strip them of all their assets or decrease business investment to 0% all of a sudden.
That's like saying if I punch someone in the head it is not going to kill him, so he therefore can still be my friend. But punching him in the head decreases, not increases, his likelihood of being my friend. Similarly, taxing someones profits decreases the likelihood of him wanting to waste his efforts on feeding someone else.
Again, once we grasp that the problem is lack of production and productivity, then we will realize that just reshuffling the money around will not increase production or productivity. Only loosening the chokehold on him will allow the entrepeneur to function.
I fail to see the logic of the following thinking:
1. We have to give Mr A an incentive to invest more, not less. [=agreed].
2. If we give him a disincentive to invest, he will invest less, but will not cease investing completely. [=agreed].
3. Therefore we should give him an incentive not to invest, which will make him somehow invest more. [= hopefully you see where this is absurd].
4. Anyone who disagrees with the above is just using a ploy on Fox and Bill O'Reilly. [=hopefully you have studied enough logic to know the name of this fallacy].
Of course i know that it is the wealthy who 'invest' and create economic growth in the long run, but arguing that any sort of tax increase at all will suddenly cause massive market distortions is ludicrous.
This is known as a straw man argument. The massive market distortions already exist. The q is what steps need be taken to get rid of them. It should be obvious [see fisticuffs example above] that increasing the distortion, however slightly, will do nothing to decrease it.
Good luck to you.