Economics Questions

Re: Consumption and productivity in a free market

Esuric — Fri, 06 Jul 2012 02:11:48 GMT

That a voluntary interaction makes both parties better off is completely false.

It makes both parties better off before the fact, and since individuals are most likely to know what they themselves want, then it is, at least relatively speaking, efficient (though of course it isn't perfect). In other words, you are more likely to know what you want than anyone else (including, and especially some government official).

People voluntarily make bad decisions all the time, and realize that a different decision would have made them better off.

And this is precisely the point: the maket is an emergent, evolutionary dynamic process, where individuals learn through a continuous process of trial and error. This is a major element of AE.

(2) Declaring something as voluntary as opposed to involuntary is not black and white.

Sure it is. People like to equivocate in oder to defend their untenable and incoherent positions.

It is well known that misleading advertizing is knowingly used.

This is the sort of equivocation I was just referring to. How does persuasion eliminate the possibility of voluntary action? You are conflating persuasion with coercion.

Values are indeed subjective, but there are also what we might call, objective, parts of values as well. For example, gold may be $1500 an ounce and I may disagree with that and not be willing to pay any price for gold, but that doesn't take away the fact that gold actually has a broadly recognized value in society.

You cannot aggregate value because value is an ordinal ranking which, by definition, cannot be summated. Also, do not confuse value with prices; prices are determined by the interplay of subjective values, at the margin on the market, but they are two distinct phenomena. Prices, though, are indeed objective.

It's important to distinguish such elements in order to avoid confusion.

Re: Consumption and productivity in a free market

vive la insurrection — Thu, 05 Jul 2012 23:37:07 GMT

) That a voluntary interaction makes both parties better off is completely false.

What if we changed this sentiment to "there is nothing that can be said one way or the other about such a transaction". We are not capable of calling it "good" or "bad"

Consider the use of marketing to influence people's decisions to buy products which do not live up to expectations as created by the advert. It is well known that misleading advertizing is knowingly used.

This would have more to do with legal and contract theory, rather than economic theory. And in the sense, if you are a Keynesian - I have no idea how a large federalized bureacracy is really all that desirable a place to live. That of course is an aesthetic though.

Re: Consumption and productivity in a free market

jodiphour — Thu, 05 Jul 2012 22:03:14 GMT

Values/preferences are subjective and they are not amenable to aggregation. They are also exclusively revealed through action. Voluntary (inter)actions reflect the subjective valuations of each participant in the economy. Each voluntary exchange makes both parties better off and, as such, is the "atom" of wealth creation (satisfaction of wants). ]

I think this is where I see one of the fundamental problems with the Austrian view.

(1) That a voluntary interaction makes both parties better off is completely false. People voluntarily make bad decisions all the time, and realize that a different decision would have made them better off. Of course you could argue that the bad decision was necessary to learn the lesson and therefore they are better off for it, but this is not a strictly relevant point to the discussion at hand.

(2) Declaring something as voluntary as opposed to involuntary is not black and white. Consider the use of marketing to influence people's decisions to buy products which do not live up to expectations as created by the advert. It is well known that misleading advertizing is knowingly used. We might call the decisions to buy those products voluntary, but we also know that the quantity sold would be less is the advertising was not misleading. So is the decision truly voluntary? I think it is grayer than we think.

That values being subjective and therefore not amenable to agregation... I don't think I totally buy either. Values are indeed subjective, but there are also what we might call, objective, parts of values as well. For example, gold may be $1500 an ounce and I may disagree with that and not be willing to pay any price for gold, but that doesn't take away the fact that gold actually has a broadly recognized value in society. So for the govt to force each citizen to buy some gold would not necessarily be a waste of money. Even though a particular citizen does not value that gold, they will still be able to exchange it at some point for something they do value.

It seems reasonable, that even though values are subjective on some level, we can still take a measure of the distribution of values at a particular time and ascribe something we might call aggregate value to the group. The rejection of statistics by Austrians is very unattractive...

Re: Consumption and productivity in a free market

z1235 — Thu, 05 Jul 2012 17:34:54 GMT

MMMark:

I suggest that production might be more aptly described as the "atom" of wealth creation, since it must occur prior to voluntary exchange.

But since atoms, like individuals, also interact for mutual enrichment, I suggest that voluntary exchange might be the "molecule" of wealth creation.

"Agent X producing" is wealth creation only to the extent that it is agent X's voluntary exchange of one (pre-production) state of affairs for another (post-production), or as Mises calls it, an autistic exchange. Agent X "producing" an empty hole in the ground then "producing" a filled out one while being paid with money stolen at the point of a gun is neither an atom nor a molecule of wealth creation. Only voluntary (inter)actions -- as reflections of every agent's subjective valuations/preferences -- can be the fundamental particles of wealth creation.

Re: Consumption and productivity in a free market

MMMark — Thu, 05 Jul 2012 17:12:44 GMT

Thurs. 12/07/05 12:12 EDT
.post #204

z1235:
Voluntary (inter)actions reflect the subjective valuations of each participant in the economy. Each voluntary exchange makes both parties better off and, as such, is the "atom" of wealth creation (satisfaction of wants).

To your felicitous metaphor, I offer a slight revision:

I suggest that production might be more aptly described as the "atom" of wealth creation, since it must occur prior to voluntary exchange.

But since individuals, like atoms, also interact for mutual enrichment, I suggest that voluntary exchange might be the "molecule" of wealth creation.

Re: Consumption and productivity in a free market

z1235 — Thu, 05 Jul 2012 04:37:01 GMT

jodiphour:
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?

Values/preferences are subjective and they are not amenable to aggregation. They are also exclusively revealed through action. Voluntary (inter)actions reflect the subjective valuations of each participant in the economy. Each voluntary exchange makes both parties better off and, as such, is the "atom" of wealth creation (satisfaction of wants).

The problem with your above question is that it attempts to compare the aggregate "productivity" (wealth, aggregate satisfaction of wants) between two different states of the economy -- an impossible task. Would an outcome whereby everyone was paid to do 100 push-ups a day, be more "productive" than an outcome whereby 20% of the population refused to work for less than $4/hr and chose leisure instead (i.e. were "unemployed")? Sure, if you define productivity as "aggregate push-ups done per day", then the former would be more "productive" than the latter. So what?

About the "correct level of regulation". What I am wondering is if there is a feature of human behavior that warrants the necessity of regulation.

Again, values are subjective and your "warrants" above has no meaning. Of course, if you subjectively value a lot of order and structure, then perhaps putting 7 billion people in prison may be "warranted". If you subjectively value a lot of peace and quiet, then perhaps poisoning the 7 billion may be more "warranted", instead.

What feature of human behavior could possibly exist that would "warrant" the necessity of one group of humans to regulate another? What state of affairs would be brought about by such "regulation" and whose subjective valuations/preferences would it be reflecting the most?

Re: Consumption and productivity in a free market

MMMark — Thu, 05 Jul 2012 02:14:04 GMT

Wed. 12/07/04 21:13 EDT
.post #202

Another way to answer your question is to try this thought experiment:

Imagine the Total Redistributive State, the purpose of which is to make everyone, everywhere, at all times, financially equal.

Incomes must be equal.
Net worth must be equal.
Profits and losses must be equal.

The state has the power to transfer money between bank accounts instantaneously and without notice or even permission.
It can sell your property if it becomes "overvalued" and redistribute the proceeds.
No pay raises allowed. Everyone is paid an equal salary, no matter what his job is.
If you win the lottery, proceeds are immediately distributed evenly throughout the population.
If you make a bad investment and lose half your net worth, your bank account is "topped up" within a few minutes, by the state.

And so on. Total financial equality, every minute, 24/7.

Do you think this is likely to lead to a greater degree of overall wealth in the society than would result by simply allowing people to control their own wealth?

If "no," then what is the argument that some degree of redistribution between 100% and 0% is likely to?

Re: Consumption and productivity in a free market

jodiphour — Thu, 05 Jul 2012 01:39:44 GMT

Your internet/tech standards discussion is a convincing one, and not something I've heard brought up before. However, even that isn't "pure" as it is quite tainted with the hands of govt, and it's history of technological development. I'll look into it more. Thanks for the info on that!

I'm still not sure building bombs is a complete waste, at least in economic terms. I guess it gets into the whole dig and refill holes issue. If people are willing to work digging and refilling holes, then that is probably better than them getting paid to sit idle. At the least, they will get good at earth moving... and create demand for shovels. Now if digging and refilling the holes takes labor away from another industry, then that is obviously bad. But this is not necessarily the case. It is the caricatured case which does not represent reality.

Of course, one need not look far to see evidence of the govt affecting prices or demand (re: war propaganda). But I don't see what the point of that was. Of course govt can remove resources from other uses, does anyone deny this? But what I see being denied here is that not ALL govt action is a net drain on the economy and society in general. Of course, it depends on your perspective, and in the grand scheme everything is a net zero on the universe.

Re: Consumption and productivity in a free market

MMMark — Thu, 05 Jul 2012 00:52:00 GMT

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.

Re: Consumption and productivity in a free market

John James — Wed, 04 Jul 2012 20:52:46 GMT

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.

Re: Consumption and productivity in a free market

Clayton — Wed, 04 Jul 2012 20:33:40 GMT

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 -

Re: Consumption and productivity in a free market

jodiphour — Wed, 04 Jul 2012 18:33:15 GMT

That seems to be a more clear answer, Clayton. Thanks for that.

I might restate a point as... that's all the govt does is redistribute wealth. Of course, as you noted, some of that redistribution is for the purposes of destroying wealth through war. But aside from billion dollar bombs and dead soldiers, most of the destruction is elsewhere. Of course, 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!

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.

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. The degree of success might depend partly on how far out the future consumption would have been. In other words, forcing savings to be spent now is probably ok for "productivity" if the savings otherwise would not have been spent until a generation or two down the line on consumptive activities of equal or lessor "value". It would probably be bad if the govt forced savings to be spent now rather than next year or on less productive activities. Of course, there are alot of variables.

About the "correct level of regulation". What I am wondering is if there is a feature of human behavior that warrants the necessity of regulation. Some may think it is at the level of the 1776 US federal govt, some may think it needs to be complete authoritarian control. I would argue that it simply depends on the circumstances. Authoritarian control would not have done so well in 1776 if only simply due to the impracticality of enforcing that control over a vast empty landscape. One thing that can be argued for anarchy though, is that it is at least, the simplest governing policy! It will achieve its goals with 100% accuracy! Of course, that is only because there are no goals and no govt! And, I imagine the smaller the govt, the easier it is to achieve whatever regulatory goals it has. Maybe this brings up an important point, that the goals of govt regulation need to be realistically within its means of enforcement.

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.

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.

ok, that's a lot of stream of consciousness. If you've read this far, I am already in a debt of gratitude to you for entertaining it that much. I appreciate your thoughts, regardless of how much I may disagree with them. If there is anything I hold sacred it is freedome to think and trade in the market of ideas!

Re: Consumption and productivity in a free market

Clayton — Wed, 04 Jul 2012 06:19:26 GMT

From the OP:

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)?

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.

Clayton -

Re: Consumption and productivity in a free market

Clayton — Wed, 04 Jul 2012 05:39:17 GMT

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 -

Re: Consumption and productivity in a free market

jodiphour — Wed, 04 Jul 2012 04:47:00 GMT

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.