Showing posts with label keynesian economics. Show all posts
Showing posts with label keynesian economics. Show all posts
Thursday, June 16, 2011
University Economics Reminiscent of Rowan and Martin's Laugh-In
Those who were old enough to watch prime-time television in 1973 remember Rowan and Martin's Laugh-In. In the upper clip Goldie Hawn mimics an American economist in explaining time zone differences. The second is a compilation of R&M routines. Rowan was the straight man, Martin the comedian.
American economists are like Rowan and Martin. Monetarists are like Rowan, Keynesians like Martin. Neither are scientists. Scientists are open to falsification of their theories. If evidence disproves a theory, scientists reformulate the theory. Keynesians and monetarists have both seen their theories fail, and both stick to their theories but look for excuses, many of which are as funny as Rowan and Martin routines. They are ideologues, not scientists. Ideologues can be funny.
First, Martin opens the act. Keynesians claim that lack of demand causes depressions so we needed to print lots of money and borrow and give the money to George Soros and other Democratic Party special interests. But demand in 2008 was at record levels. No one was saving. In fact, there had been a lack-of-savings crisis because of excessive credit. But Keynesian theory says that depressions are caused by insufficient demand, too much saving. Like a carpenter who only has a hammer and sees everything as a nail, Keynesians then concluded that there needed to be more credit and more debt. Laugh one. Spending is at record levels, and the banking crisis was caused by insufficient demand. Ha, ha.
The problem of 2000-08 was an incompetently managed financial system, and an incompetently run Federal Reserve Bank. The Fed lent huge amounts of its counterfeit money to people unable to invest it intelligently: banks, Wall Street, hedge funds and big business. The result was the sub-prime and derivatives crises, the products of excessive demand brought about by an immoral and incompetently run financial system. The derivatives investment did not involve too little demand. It involved excessive demand and fraud. By "fraud" I refer to the Federal Reserve Bank's counterfeiting power by which it creates new money and transfers wealth to its privileged and generally incompetent clients. Commercial banking and Wall Street lack the ability to find investments that cause real wealth to grow. They are risk averse and focus on what they perceive as sure bets: real estate and big business lending. Even with the risk aversion, Wall Street's stupidity and greed means that it cannot function without ongoing public subsidy. The financial system is value destroying. It is a failure.
Enter Rown, the monetarist straight man. In 2005, right before his death, Milton Friedman boasted in the pages of The Wall Street Journal of how great a success the 2002-4 monetary expansion under Alan Greenspan and the Bush administration had been. It was, he said, proof of the success of his ideas. It would have been interesting to hear him explain the credit disaster of 2008, which also was entirely due to Friedman's ideas, to Greenspan and to Bush.
Next, Martin, the Keynesian comedian, comes up with an idea. Actually it's the same idea because Keynesians only have one idea. Since excessive credit, bad investment and incompetent management of financial institutions caused an economic crisis, we can still blame the economic problems of 2008 on insufficient demand. (Audience laughs.) Even though the $900 billion given to Soros, organized crime-run construction firms and ACORN did not stimulate the economy, we need to give even more, trillions, to Democratic Party cronies. After all, the fact that the stimulus did not work is proof that it works.
Rowan, the straight man-monetarist, cocks back his head. "Give more money to Soros-like crooks?" You're out of your mind," Rowan says. "No, no, that's big government. I'm for small government. Print more money and give it Lloyd Blankenfein, not Soros. Keynesians are irrational and in favor of big government. Soros is big government. Blankenfein is small government." (Audience laughs, then applauds.)
The definition of science is the willingness to falsify hypotheses. Keynesian ideas have never worked. But Keynesians have creatively cooked up stories to explain the failure of their ideas, such as the claim that the spending of World War II ended the Great Depression. In fact, there had been rationing, suppression of wages, many potential workers killed, four years of military pay to 14 million Americans and massive misallocation of wealth during the war. As well, Europe's and Japan's industrial bases had been destroyed, and the US was a source of supply. Sweden, which also did not suffer damage from the war, saw its economy perform well afterward. That employment grew in the 1940s and '50s after years of frustrated demand, artificially induced economic collapse, and the elimination of most of our international competitors is not proof that borrowing and spending improves the economy. It is simply proof that low wages stimulate demand for workers and that competition is eliminated when competitors bomb each other.
So, dear friend, enjoy the entertainment. Keep voting for Democrats and Republicans who are Keynesians and monetarists, keep printing money and giving it to a failed financial system, keep making yourself poorer and keep destroying innovation. Like Rowan & Martin, the American democracy and the legacy media provide us with a laugh-in.
Tuesday, April 7, 2009
America Is No Longer A Moral Nation
Americans remember that their nation was "conceived in liberty" but tend to forget that liberty was based on morality. Morality is not the same thing as charity. A thief can donate his booty to charity, but he is not moral. Aristotle argued that there are moral as well as intellectual virtues. The moral virtues in Aristotle's view were justice, temperance, prudence and courage. Morality, then, depends on justice. Justice means that each producer receives a fair return, and that no producer receives an unearned return.
The Founding Fathers' morality was linked to the Aristotelian philosophy. Liberty in the sense that it once existed in America depended on justice. This was the underlying assumption of John Locke's Second Treatise on Government on which the Declaration of Independence and the Constitution were based. Governments are formed for the just reason of protecting life, liberty and property from violence.
The morality of justice is in turn dependent upon truth. For without a willingness to examine the truth justice is not possible. One cannot receive a fair reward if one is not willing to truthfully examine the contribution one has made.
Ever since the beginning of the Republic a sizable contingent of Americans fought the idea of justice. These Americans wanted the public to subsidize them. The way that they were to be subsidized was through the power to create paper money.
Because of the inherent morality of the 19th century American public, the public rejected this attack on moral values. In 1836 President Andrew Jackson abolished the Second Bank of the United States, the precursor of today's Federal Reserve Bank. The American people of 1836 were too moral to tolerate the fraud associated with the central bank.
In the 1930s John Maynard Keynes proposed an economic system whose foundation is the commission of fraud. Employees would be fooled into accepting lower wages through inflation. The nation's universities would be called into service to perpetuate the fraud by claiming non-existent economic expertise that justified the fraud. The media, already controlled by banking and Wall Street interests, were also called into service of the fraud.
The American people could no longer call themselves moral. For the people did not oppose the fraudulent issuance of bank notes. They did not oppose the transfer of wealth from productive labor to speculator and banker because they were afraid. They were afraid of deprivation because the mass media told them to be afraid. They feared for their security. They trusted experts whose motives were corrupt and whose ideas were merely warmed over and elaborated versions of the same claims that banks had made previously.
America stopped being a moral nation. It could no longer claim justice as the foundation of its ideology. And where justice dies, freedom is sure to follow.
A little dishonesty and a small decline in morality are likely to be followed by ever greater lapses. A little cheating is observed, and then someone does a little more. America has become a nation governed by immoral people. Its economy no longer encourages productivity. Its ethical base has deteriorated. Instead of justice, its ideology is theft. Wal-Mart is excoriated for reducing costs. Goldman Sachs is subsidized for stealing and reducing Americans' standards of living.
A nation that has rejected morality and has rejected justice is sure to deteriorate into the kind of nation that favors charity and stealing. Such a society existed in Europe in the Middle Ages. The socialist economy will see decline to the primitive backwardness of the Soviet Union and pre-Tudor England.
The Founding Fathers' morality was linked to the Aristotelian philosophy. Liberty in the sense that it once existed in America depended on justice. This was the underlying assumption of John Locke's Second Treatise on Government on which the Declaration of Independence and the Constitution were based. Governments are formed for the just reason of protecting life, liberty and property from violence.
The morality of justice is in turn dependent upon truth. For without a willingness to examine the truth justice is not possible. One cannot receive a fair reward if one is not willing to truthfully examine the contribution one has made.
Ever since the beginning of the Republic a sizable contingent of Americans fought the idea of justice. These Americans wanted the public to subsidize them. The way that they were to be subsidized was through the power to create paper money.
Because of the inherent morality of the 19th century American public, the public rejected this attack on moral values. In 1836 President Andrew Jackson abolished the Second Bank of the United States, the precursor of today's Federal Reserve Bank. The American people of 1836 were too moral to tolerate the fraud associated with the central bank.
In the 1930s John Maynard Keynes proposed an economic system whose foundation is the commission of fraud. Employees would be fooled into accepting lower wages through inflation. The nation's universities would be called into service to perpetuate the fraud by claiming non-existent economic expertise that justified the fraud. The media, already controlled by banking and Wall Street interests, were also called into service of the fraud.
The American people could no longer call themselves moral. For the people did not oppose the fraudulent issuance of bank notes. They did not oppose the transfer of wealth from productive labor to speculator and banker because they were afraid. They were afraid of deprivation because the mass media told them to be afraid. They feared for their security. They trusted experts whose motives were corrupt and whose ideas were merely warmed over and elaborated versions of the same claims that banks had made previously.
America stopped being a moral nation. It could no longer claim justice as the foundation of its ideology. And where justice dies, freedom is sure to follow.
A little dishonesty and a small decline in morality are likely to be followed by ever greater lapses. A little cheating is observed, and then someone does a little more. America has become a nation governed by immoral people. Its economy no longer encourages productivity. Its ethical base has deteriorated. Instead of justice, its ideology is theft. Wal-Mart is excoriated for reducing costs. Goldman Sachs is subsidized for stealing and reducing Americans' standards of living.
A nation that has rejected morality and has rejected justice is sure to deteriorate into the kind of nation that favors charity and stealing. Such a society existed in Europe in the Middle Ages. The socialist economy will see decline to the primitive backwardness of the Soviet Union and pre-Tudor England.
Thursday, March 26, 2009
The Man Behind the Curtain Is...Barack Obama
My blog "The Man Behind the Curtain Is...Barack Obama" appears on the Republican Liberty Caucus Blog.
>We all remember the scene in the movie version of Frank Baum’s Wonderful Wizard of Oz when Toto pulls the curtain aside and the Wizard turns out to be none other than the snake oil salesman from Kansas. In William Leach’s wonderful history of consumerism, Land of Desire*, Leach points out that Baum was one of the earliest store window designers for Wannamaker’s Department Store in Philadelphia and that Baum’s American fairy tale was an allegory for the concept of consumerism. The snake oil salesman was the Wizard of consumerism who could grant everyone their dreams.
Within a few decades of Baum’s publication of Wonderful Wizard of Oz American politics took a particular turn. A snake oil of illusory democracy and equality were sold to the American public by a series of Wizards who managed to transfer increasing quantities of wealth to Wall Street and the banking industry while, at the same time, convincing Americans that they were doing so in the interest of the poor and middle class.
Americans have traveled the Yellow Brick Road for more than seventy years while the snake oil has done its work. During that time, both conservatives and “liberals” have played their part. The conservatives, keying off the social Darwinism of the late 19th century, have claimed that “liberals” are soft on the poor and do not recognize the importance of incentives. They pretend to libertarian views on government, but when push comes to shove conservatives advocate a key role for big government in the form of Soviet-style central planning by the barbaric relic known as the Federal Reserve Bank. The “liberals” say that the conservatives are greedy and indifferent to income inequality. Both sides agree that big government is needed and neither questions the Federal Reserve Bank’s existence.
The faux debate has left open an opportunity for the RLC: a benign libertarianism where freedom works in favor of the poor; government serves to oppress them; and freedom (as opposed to border fences or wealth transfers) provides the opportunity for achievement. This is the authentic American dream that both conservatives like Sean Hannity and “liberals” like Paul Krugman have deserted.
The use of illusion is fundamental to Keynesian economics and its argument for Soviet-style planning by Fed economists. On page 8 of his General Theory of Employment, Interest, and Money Keynes writes:
Read the whole thing here.
>We all remember the scene in the movie version of Frank Baum’s Wonderful Wizard of Oz when Toto pulls the curtain aside and the Wizard turns out to be none other than the snake oil salesman from Kansas. In William Leach’s wonderful history of consumerism, Land of Desire*, Leach points out that Baum was one of the earliest store window designers for Wannamaker’s Department Store in Philadelphia and that Baum’s American fairy tale was an allegory for the concept of consumerism. The snake oil salesman was the Wizard of consumerism who could grant everyone their dreams.
Within a few decades of Baum’s publication of Wonderful Wizard of Oz American politics took a particular turn. A snake oil of illusory democracy and equality were sold to the American public by a series of Wizards who managed to transfer increasing quantities of wealth to Wall Street and the banking industry while, at the same time, convincing Americans that they were doing so in the interest of the poor and middle class.
Americans have traveled the Yellow Brick Road for more than seventy years while the snake oil has done its work. During that time, both conservatives and “liberals” have played their part. The conservatives, keying off the social Darwinism of the late 19th century, have claimed that “liberals” are soft on the poor and do not recognize the importance of incentives. They pretend to libertarian views on government, but when push comes to shove conservatives advocate a key role for big government in the form of Soviet-style central planning by the barbaric relic known as the Federal Reserve Bank. The “liberals” say that the conservatives are greedy and indifferent to income inequality. Both sides agree that big government is needed and neither questions the Federal Reserve Bank’s existence.
The faux debate has left open an opportunity for the RLC: a benign libertarianism where freedom works in favor of the poor; government serves to oppress them; and freedom (as opposed to border fences or wealth transfers) provides the opportunity for achievement. This is the authentic American dream that both conservatives like Sean Hannity and “liberals” like Paul Krugman have deserted.
The use of illusion is fundamental to Keynesian economics and its argument for Soviet-style planning by Fed economists. On page 8 of his General Theory of Employment, Interest, and Money Keynes writes:
Read the whole thing here.
Wednesday, November 26, 2008
How Federal Reserve Policy Has Reduced Wages
The economists who have been managing the money supply since the 1930s have generally followed a low interest rate policy in order to stimulate employment. When the Fed introduces extra money into circulation interest rates fall. This in turn stimulates economic activity because it is cheap to borrow. The additional economic activity results in hiring, and employment increases and unemployment decreases. This is the pattern that has motivated the Federal Reserve Bank's officially-induced inflation since the 1930s.
However, the long run effects of low interest rates may be opposite to the short run effects. There are strategic as well as stimulative effects of easy money.
The economic historian TS Ashton notices this in his little book The Industrial Revolution: 1760-1830.* Ashton notes that the course of innovation in 18th century Great Britain tended to respond to the availability of labor. Early innovation focused on harnessing the forces of nature. The success of this early innovation led to increasing population. But in the 1730s and '40s labor was still scarce and capital abundant, so:
"attention was centered on labour-saving mechanisms, such as those of Kay and Paul in the textile industries; and the search continued until in the 'sixties and 'seventies it culminated in the appliances of Hargreaves, Arkwright and Crompton. By this time the nature of the economic problem was changing: population was beginning to press on resources. The quickening of the pace of enclosure and the breaking in of the waste were the outcome of a growing demand for food; Watt's first engine and the Duke's canals were the answer to a problem set by a shortage of coal...Towards the end of the century and later, when rates of interest were moving up, some (though by no means all) of the inventors turned their minds to capital-saving ends. The newer types of engine of Bull and Trevithick and the newer ways of transmitting power, dispensed with much costly equipment...It would be dangerous, however, to press these generalizations far. There was often a lag of years between an invention and its application, and it was this last, rather than the discovery itself, that was influenced by such things as a growing shortage of materials or a change in the supply of labor or capital."
Taking Ashton at his word that the effects of policies are often approximate and long term, what would be the long as opposed to the short run effects of artificially stimulating the amount of available capital, i.e., the Federal Reserve Bank's artificially increasing the amount of money?
In the short run, in which the ratio of labor to capital is constant, demand for labor will naturally increase in proportion to the increased capital due to the Fed's monetary expansion. In the short run, the production function is constant, so the increased supply of capital increases labor demand.
In the long run, however, the production function is no longer constant. Production and innovation will focus on cost saving with respect to the relatively most expensive resources. Since capital has been made artificially cheap, the cost saving on which industry focuses becomes, because of Fed policy, finding new methods to save on labor costs. Capital investment focuses on saving labor through new machinery or alternative uses of capital such as plant relocation.
This, rather than enhanced transportation and reduced trade impediment may explain the relocation of plants overseas. General Motors, for example, has moved the majority of its plants to Mexico yet still complains about labor costs with respect to the slim percentage of remaining US employees. It costs money to move plants overseas. The learning required to competently manage a foreign plant is significant. Errors with respect to cultural differences, misunderstanding of legal systems, political risk, transportation costs (themselves reflecting capital costs) all amount to non-labor costs that are financed through reductions in capital costs.
Thus, over the long run, the Federal Reserve Bank effectively increases firms' strategic focus on capital investment by reducing the cost of capital. This has the perverse effect of reducing labor demand while increasing firms' profitability. This in turn leads to a two-tier economy in which technological workers who benefit from employment in excessively capital intensive firms earn super-normal wages while a large number are excluded because excessive capital investment has made their services redundant.
Traditional macro-economic models do not assume change in technology due to monetary policy. But firms have moved plants overseas because Fed policy has reduced the cost of doing so because it has increased the advantage of utilizing capital over labor (because it reduces capital costs). Strategically planning firms shift their production functions to invest more in labor-replacing capital investment. This reduces wages over the long term even as it stimulates labor demand over the short term. The labor-stimulating effects of new money are reduced over the long term, and like a drug addiction, the amount of money needed to achieve full employment increases at an increasing rate.
Thus, Keynesian policy in the long run produces results that differ from those in the short run. If this is so, we would expect to see higher wages from Keynesian policies from the 1940s to the 1960s, and lower wages from the same policies thereafter. This is what has occurred. However, rather than question their own assumptions, Keynesian economists seek elaborate, often illogical excuses in areas like blaming trade, income and capital gains tax policy and free market processes for declining real wages. This in turn leads them to advocate further capital investment and injections of money that stimulate labor demand in the short run but add to further replacement of labor by capital investment in the long run. Perhaps this is what futurists refer to as a coming "singularity", the ultimate replacement of human agency with machinery because of super-acceleration of technological advance.
*T.S. Ashton, The Industrial Revolution 1760-1830. London: Oxford University Press, 1948, p. 91.
However, the long run effects of low interest rates may be opposite to the short run effects. There are strategic as well as stimulative effects of easy money.
The economic historian TS Ashton notices this in his little book The Industrial Revolution: 1760-1830.* Ashton notes that the course of innovation in 18th century Great Britain tended to respond to the availability of labor. Early innovation focused on harnessing the forces of nature. The success of this early innovation led to increasing population. But in the 1730s and '40s labor was still scarce and capital abundant, so:
"attention was centered on labour-saving mechanisms, such as those of Kay and Paul in the textile industries; and the search continued until in the 'sixties and 'seventies it culminated in the appliances of Hargreaves, Arkwright and Crompton. By this time the nature of the economic problem was changing: population was beginning to press on resources. The quickening of the pace of enclosure and the breaking in of the waste were the outcome of a growing demand for food; Watt's first engine and the Duke's canals were the answer to a problem set by a shortage of coal...Towards the end of the century and later, when rates of interest were moving up, some (though by no means all) of the inventors turned their minds to capital-saving ends. The newer types of engine of Bull and Trevithick and the newer ways of transmitting power, dispensed with much costly equipment...It would be dangerous, however, to press these generalizations far. There was often a lag of years between an invention and its application, and it was this last, rather than the discovery itself, that was influenced by such things as a growing shortage of materials or a change in the supply of labor or capital."
Taking Ashton at his word that the effects of policies are often approximate and long term, what would be the long as opposed to the short run effects of artificially stimulating the amount of available capital, i.e., the Federal Reserve Bank's artificially increasing the amount of money?
In the short run, in which the ratio of labor to capital is constant, demand for labor will naturally increase in proportion to the increased capital due to the Fed's monetary expansion. In the short run, the production function is constant, so the increased supply of capital increases labor demand.
In the long run, however, the production function is no longer constant. Production and innovation will focus on cost saving with respect to the relatively most expensive resources. Since capital has been made artificially cheap, the cost saving on which industry focuses becomes, because of Fed policy, finding new methods to save on labor costs. Capital investment focuses on saving labor through new machinery or alternative uses of capital such as plant relocation.
This, rather than enhanced transportation and reduced trade impediment may explain the relocation of plants overseas. General Motors, for example, has moved the majority of its plants to Mexico yet still complains about labor costs with respect to the slim percentage of remaining US employees. It costs money to move plants overseas. The learning required to competently manage a foreign plant is significant. Errors with respect to cultural differences, misunderstanding of legal systems, political risk, transportation costs (themselves reflecting capital costs) all amount to non-labor costs that are financed through reductions in capital costs.
Thus, over the long run, the Federal Reserve Bank effectively increases firms' strategic focus on capital investment by reducing the cost of capital. This has the perverse effect of reducing labor demand while increasing firms' profitability. This in turn leads to a two-tier economy in which technological workers who benefit from employment in excessively capital intensive firms earn super-normal wages while a large number are excluded because excessive capital investment has made their services redundant.
Traditional macro-economic models do not assume change in technology due to monetary policy. But firms have moved plants overseas because Fed policy has reduced the cost of doing so because it has increased the advantage of utilizing capital over labor (because it reduces capital costs). Strategically planning firms shift their production functions to invest more in labor-replacing capital investment. This reduces wages over the long term even as it stimulates labor demand over the short term. The labor-stimulating effects of new money are reduced over the long term, and like a drug addiction, the amount of money needed to achieve full employment increases at an increasing rate.
Thus, Keynesian policy in the long run produces results that differ from those in the short run. If this is so, we would expect to see higher wages from Keynesian policies from the 1940s to the 1960s, and lower wages from the same policies thereafter. This is what has occurred. However, rather than question their own assumptions, Keynesian economists seek elaborate, often illogical excuses in areas like blaming trade, income and capital gains tax policy and free market processes for declining real wages. This in turn leads them to advocate further capital investment and injections of money that stimulate labor demand in the short run but add to further replacement of labor by capital investment in the long run. Perhaps this is what futurists refer to as a coming "singularity", the ultimate replacement of human agency with machinery because of super-acceleration of technological advance.
*T.S. Ashton, The Industrial Revolution 1760-1830. London: Oxford University Press, 1948, p. 91.
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