Cafe Hayek - Latest Comments in Keynesianism?

Re: Keynesianism?

andy — Mon, 22 Dec 2008 04:59:43 -0000

There was never a time when gold itself was money,

Actually there was. There probably was not time when ONLY gold was money, but I would argue that this depends on the definition of money. It seems to me that old Greece used mostly only silver as money.

Rather, the demand for gold relative to demand for other goods must be stable for this monetary system to be stable, because the price of gold is fixed.

I love it when calling '33.1g of gold' '1 ounce' is called price fixing :-))

Banknotes under a gold standard do not represent gold.

...

A dollar "bill" is this sort of promissory note, not a warehouse receipt for banked gold.

Actually banknote under gold standard is ENTITLEMENT on the gold. The bank is legally obliged to exchange the banknote for gold upon request. And it is non-sequitur - from the notion that it is a promissory note does NOT follow that it is not represent gold.

This surge drives down the price of goods securing banknotes, because these prices vary relative to the price of gold while the price of gold is fixed.

I mostly agree with your conclusions, but not with your arguments. The term "price" denotes "exchange ratio". Thus the price of 1 shoe can be 0.5 ounce of gold, 15g of gold, 2 ounces of silver, 1kg of oranges etc. Or, the price of gold can be explained as 2 shoes, 4 ounces of silver, 2kg of oranges etc.

Can you explain which price, i.e. exchange ratio, is "fixed"?

Re: Keynesianism?

Marcus — Mon, 22 Dec 2008 04:34:36 -0000

"If I'm a banker and you're a depositor of gold in my bank, I'm not bankrupt when you present banknotes for gold and I don't have sufficient gold on hand. I'm insolvent in this scenario but not necessarily bankrupt..."

You have it backwards. You are bankrupt but you are not necessarily insolvent.

You are bankrupt because your cash flows cannot meet you current obligations.

You may still be solvent if your assets exceed your liabilities.

Your problem is one of liquidity. Your assets are illiquid. You have to pay the depositor now but it takes time to sell a loan to another bank to raise the cash to pay the depositor with.

Re: Keynesianism?

Martin Brock — Mon, 22 Dec 2008 02:38:27 -0000

Most monetary conservative types prefer that money be gold coinage & weights because the amount of gold is deemed on a relative par with the amount of goods & services in circulation ...

This conception of a gold standard completely misconstrues the idea. There was never a time when gold itself was money, and the quantity of gold is not presumed proportionate to the quantity of other goods under a gold standard. Rather, the demand for gold relative to demand for other goods must be stable for this monetary system to be stable, because the price of gold is fixed. Demand is not simply a matter of quantity. Scarcity alone does not imply value. My shit is scarce, but I don't expect to make my fortune packaging Martin's Shit. Maybe if a could package Elvis' Shit ...

Banknotes under a gold standard do not represent gold. They represent all sorts of assets, particularly land and houses. The notes may promise redemption in gold, because these other assets have a value relative to the value of gold and may be exchanged for gold. A dollar "bill" is this sort of promissory note, not a warehouse receipt for banked gold. Selgin discusses free banking under a gold standard in a recent econtalk.

(Gold mining would create inflation but makes the return on gold mining less worthwhile (thus avoiding hyperinflation) and deflation makes gold more valuable restarting the gold mining process).

Gold mining is not the primary force behind inflation under a gold standard. Excessive extension of credit is the problem, with or without a gold standard. Creditors promise more gold than assets are really worth in the final analysis. These assets are not simply the bank notes that creditors circulate. They're the land and houses and other assets securing the banks' extensions of credit.

If I'm a banker and you're a depositor of gold in my bank, I'm not bankrupt when you present banknotes for gold and I don't have sufficient gold on hand. I'm insolvent in this scenario but not necessarily bankrupt, because I can call a loan and sell its collateral to raise the gold for you, or I can sell a performing loan with sound collateral to another bank and raise the gold for you this way. I'm bankrupt only when all of the assets securing all of my banknotes aren't worth the face value, in gold, of the notes.

Gold works for this purpose, not because it's so much in demand but because it's not so much in demand. Most people have little need for gold as a practical matter. In fact, gold is more practically useful today than it was when it was a standard of value. Bank runs occur when demand for gold surges. This surge drives down the price of goods securing banknotes, because these prices vary relative to the price of gold while the price of gold is fixed. Increasing demand for gold cannot raise the price of gold, so it must drive down the price of everything else.

Re: Keynesianism?

andy — Mon, 22 Dec 2008 01:58:14 -0000

Tom, I always thought about the idea, if there is some positive effect in the fact, that the government can guarantee the debt by making assurance that it can coerce at least somebody in the economy vs. private sector where you cannot do it (i.e. the debtor can default). This argument might work when government debt levels are low (not current situation), however the negative counter-effect is moral hazard. In order to achive similar result without moral hazard a law can be changed to allow debt-slavery - this would have the same effect.

As of the "credit multiplicator", I am not quite sure how does it relate to Keynessianism. Can you explain it further?

Re: Keynesianism?

Gil — Mon, 22 Dec 2008 01:54:11 -0000

I think I get what M. Brock means - I believe he is trying to say money isn't supposed to be a commodity unto itself rather it's supposed to be a measure as to what various good & services are worth so people can make informed trades. Most monetary conservative types prefer that money be gold coinage & weights because the amount of gold is deemed on a relative par with the amount of goods & services in circulation (Gold mining would create inflation but makes the return on gold mining less worthwhile (thus avoiding hyperinflation) and deflation makes gold more valuable restarting the gold mining process).

Re: Keynesianism?

Tom — Mon, 22 Dec 2008 00:36:26 -0000

Isn't his criticism weakened by the ability for Government to borrow funds externally (from other countries)?

Also, in response to the money multiplier criticisms above: if I put my savings in my bank account - I still make my consumption decisions based on my total wealth. The banks loan the money and the person who borrows the money spends the money as if it were theirs... Hence my money has been used in consumption decisions more than once... Isn't that a multiplier?

Re: Keynesianism?

andy — Sun, 21 Dec 2008 23:11:00 -0000

I have to conclude that it does not work in the real world because this assumption is true in the real world.

... is not true...

Re: Keynesianism?

andy — Sun, 21 Dec 2008 23:08:51 -0000

Martin...

Here you simply ignore the hypothesis. We fixed everything about our transactions. I'm contractually obliged to pay you every dime of profit on my production of widgets for whatever gidgets you produce and vice versa. We're a contractually closed, proprietarian system.

...

Keynes doesn't assume that prices cannot fall, but he argues that falling price alone is not sufficient to employ idle resources.

You may not assume price fixing, but you assume some weird "product fixing".... That's actually not that much different.... First, that is even more stringent than simple price-fixing, second do you think such arrangement exists in the real world? Could you show me real world example?

No. The total amount of money doesn't buy more if all accounting entries fall, because your bank account is an accounting entry.

Sure, the bank account is accounting entry FOR THE MONEY. Therefore if prices of other things fail, the accounting entry for the money does not change, therefore I have more money, therefore higher aggregate demand. Should you argue otherwise, please, post a countreexample with full double-entry accounting entries with bank balances.

The value of your bonds falls. The value of your gold falls. Even the value of your FRNs can fall. We just substitute new notes, FRN2s, for your old FRNs, and your $10 FRN is worth $5 in FRN2s.

That's some hypothetical Harry Potter's world, isn't it? Yes, my wage falls. However you DID NOT substitute my $10 FRN for $5, it is still $10 FRN!! And precisely because all prices in the economy fell, I can buy twice as much compared to situation if they did not fell. Therefore the aggregate demand DID go up.

For this purpose, Don and Russ require monetary credit that others entitled to spend money cannot extend to them, because the others have exhausted their entitlement to spend and extend credit on one another.

Again, you assume that everyone else (except Don and Russ) is contractually obliged to everyone else (except Don and Russ) to exchange all their production with them. Why would they do that?

For example, you and I own all of the arable land.

That's great. Therefore I can hire Don, I will be able to grow more crops and I can pay him in specie. Where's the problem? I can even pay Don in money instead of you and HE will buy something from you. I don't see a problem?

"Price" suggests a value measured in the bits of entitlement called "money".

Money is NOT entitlement. If you claim otherwise, please show me what money entitles me to.

I did that, but you simply ignored the explanation with pointless nitpicking like "two people exchanging only with one another don't need money."

Your example show some weird situation of a group of people that somehow closed a contract that they will exchange all their production with themselves. Therefore, by definition, they will not be able to exchange anything with anybody outside of the group. If the Keynes theory relies on this assumption, I have to conclude that it does not work in the real world because this assumption is true in the real world. I am the counterexample to your claim - I am not contractually obliged to spend any of my profit to anybody else in any group.

Re: Keynesianism?

Sam Grove — Sun, 21 Dec 2008 18:49:55 -0000

Another problem with government doing this:

In the private sector, experiments in business often fail and that is necessary to the proper functioning of the market.

When the government is involved, it goes to great lengths to avoid failure, the appearance of failure, or admission of failure.

Re: Keynesianism?

Martin Brock — Sun, 21 Dec 2008 16:46:33 -0000

Maybe 'fallacies' is too strong of a word. I apologize.

Accepted.

Re: Keynesianism?

Martin Brock — Sun, 21 Dec 2008 16:41:41 -0000

Your bank account is a bond you've sold to a bank's borrowers.

Correction: Your bank account is a bond you've bought from a bank's borrowers.

Re: Keynesianism?

Martin Brock — Sun, 21 Dec 2008 16:32:25 -0000

Anyway, what you suppose is that I exchange all my production with you. We don't need any money for that.

A million people don't need money to exchange produce either, but we are discussing monetized exchange here, and the principle is the same if three or more of us exchange.

Unless I decide that I don't want to buy from you and start buying from Russ. Why shouldn't I? Did we fix the price?

Here you simply ignore the hypothesis. We fixed everything about our transactions. I'm contractually obliged to pay you every dime of profit on my production of widgets for whatever gidgets you produce and vice versa. We're a contractually closed, proprietarian system.

Other things equal that's nonsense. If you have constant amount of money in the economy and all prices fall together it means, that the total amount of money held will buy MORE which obviously leads to higher aggregate demand.

No. The total amount of money doesn't buy more if all accounting entries fall, because your bank account is an accounting entry. Your bank account is a bond you've sold to a bank's borrowers. When all prices fall, the price of your bond falls.

In your example, if I used $10 to exchange the widgets with you, if we lowered the price at half, I would need only $5 to transact with you and I could easily use the remaining $5 to buy something from Russ and Don.

All prices fall, so after the fall, you no longer own anything valued at $10. You own something valued at $5 and may exchange it for something worth $5, i.e. your real buying power is precisely the same. You want to imagine that your "money" has a fixed buying power as prices fall, but that's not what happens when all prices fall simultaneously. Your wage falls. The value of your bonds falls. The value of your gold falls. Even the value of your FRNs can fall. We just substitute new notes, FRN2s, for your old FRNs, and your $10 FRN is worth $5 in FRN2s.

We don't need the money either - ...

Here again, you simply ignore the point. Keynes' point is that lowering the price of Russ and Don's labor needn't automatically generate demand for their labor if "demand" is defined in monetary terms, because everyone entitled to spend money may not have enough entitlement to spare, even if Don and Russ will work for subsistence.

In this scenario, Don and Russ want to produce for one another, thus becoming entitled to spend money on one another's produce. For this purpose, Don and Russ require monetary credit that others entitled to spend money cannot extend to them, because the others have exhausted their entitlement to spend and extend credit on one another.

... and because their prices in your example are irrelevant to "our" prices, they can freely set the price of their widgets to 0.001 of price of widget I am asking you to pay and everything will work OK.

No. They aren't so free. You simply ignore the hypothesis here. It's not true as a matter of fact that people may simply set the price of their produce at any level they choose. They must profit.

It's absurd to think that a hundred million Mexicans could cross the U.S. border and immediately be employed entirely from extensions of credit by U.S. citizens lending the value of their own resources. U.S. citizens don't possess sufficient resources for this purpose. The Mexicans would bring most of the valuable resources to be financed with them, i.e. they would bring their own labor, as your ancestors and mine did.

What exactly impedes them?

The monopoly right I mentioned impedes them. Armed men threaten to shoot them. For example, you and I own all of the arable land. We're content to eat only what we grow between us, leaving the rest of the land in its natural state, and we shoot trespassers. We might also hold patents on the production of particular goods and be content to produce these goods only for one another.

I thought that the whole Keynessianism was BASED upon the idea that wages/prices are not flexibile downwards?

No. Keynes doesn't assume that prices cannot fall, but he argues that falling price alone is not sufficient to employ idle resources. "Price" suggests a value measured in the bits of entitlement called "money". Naturally, Don and Russ (and any number of other people) may produce for one another's consumption through barter, if they have sufficient access to natural resources, but Keynes doesn't address barter in a natural state.

Can you explain why sufficiently low prices wouldn't cure the problem?

I did that, but you simply ignored the explanation with pointless nitpicking like "two people exchanging only with one another don't need money."

Re: Keynesianism?

brotio — Sun, 21 Dec 2008 16:28:04 -0000

Vidyohs,

Thanks for the link. Interesting, indeed.

The article states that the UAW is averse to such efficiency in the US. Instead, they're after such innovations as Card Check (so that they'll know whose knees to break after the election), which Mierduck defends as necessary for prosperity.

Re: Keynesianism?

Martin Brock — Sun, 21 Dec 2008 15:43:45 -0000

Martin, you have an incredible talent for camouflaging your fallacies inside of a lot of irrelevant rhetoric.

Says nothing.

Electronic money cannot be doubled any more than gold (or gold receipts) can. Period.

Ignores an obvious, physically as well as economically meaningful distinction between a good and a number symbolizing the demand for a good relative to other goods.

Re: Keynesianism?

vidyohs — Sun, 21 Dec 2008 14:56:08 -0000

Folks, check this out. Is the same Ford Motor Company that is crying for a bailout?

http://info.detnews.com/vid...

You will find it interesting.

Re: Keynesianism?

Jacob Oost — Sun, 21 Dec 2008 14:35:03 -0000

We're getting away from what was discussed in the video. Namely, when the government decides to just spend on infrastructure and other stuff to "stimulate the economy," then it will invariably pay more than it ought to on some things, spend less than it ought to on others, buy stuff it doesn't need, and not buy stuff it badly needs.

They're not spending their own money, so there's no incentive to spend wisely with it. More to the point, they simply have no way of knowing which kind of spending will be most effective. Will the economy be better if it buys steel from Pennsylvania or from Kentucky? Or from abroad? Should it buy more concrete and less steel? Which option most "stimulates" economic growth?

They simply *can't* know, which is why government spending with the sole purpose of stimulating the economy (or scratching their campaign donors' backs) won't work. ALL GOVERNMENT SPENDING SHOULD BE ON A NEED-TO-BUY BASIS. Not for stimulatory purposes.

Re: Keynesianism?

Marcus — Sun, 21 Dec 2008 14:10:50 -0000

To my claim that government prints money, you said "No". Now you admit that government prints money in the form of FRNs. So the argument has shifted from the absolute to a percentage.

Well perhaps we misunderstood one another. The discussion in this thread is Keynesianism. When Keynes talks about deficit spending he isn't talking about cranking the printing press and pumping out more physical dollar bills (though it is often referred to figuratively as 'cranking the press').

When Obama comes out with his trillion dollar 'fiscal stimulus', it'll be funded through bonds.

If we misunderstood one another than for my part in that I apologize.

Re: Keynesianism?

Sam Grove — Sun, 21 Dec 2008 13:56:00 -0000

I have no idea, but i was thinking of FRNs and not other types of money.

Why FRNs? Because they are the legal tender most people are familiar with.

I understand there are a vast array of credit instruments, we even create personal instruments by writing checks.

To my claim that government prints money, you said "No". Now you admit that government prints money in the form of FRNs. So the argument has shifted from the absolute to a percentage.

Who may issue legal tender?

Re: Keynesianism?

Marcus — Sun, 21 Dec 2008 13:36:20 -0000

Who prints Federal Reserve Notes that are commonly known as money?

The Treasury.

Now, I have a question for you.

What percent of the money supply is Federal Reserve Notes?

Re: Keynesianism?

Sam Grove — Sun, 21 Dec 2008 11:30:07 -0000

Who prints Federal Reserve Notes that are commonly known as money?

Re: Keynesianism?

Randy — Sun, 21 Dec 2008 10:44:17 -0000

Martin,

"The best evidence [of value] is a free consumer's decision to exchange the value of his labor for the value of other labor in a free market."

Actually, that's the only possible evidence of value. As the state cannot produce such evidence, it has no evidence. It has only propaganda. Keynesianism is just part of the propaganda.

Re: Keynesianism?

andy — Sun, 21 Dec 2008 10:10:12 -0000

Suppose you and I are the only two factors in an economy.

...

In this scenario, Don and Russ appear looking for work. Who employs them?

In this scenario there is no Don and no Russ, because you supposed that I and you are the only productive factors :) Anyway, what you suppose is that I exchange all my production with you. We don't need any money for that.

Even if Russ and Don will work for a penny an hour, we can't still can't employ them.

Unless I decide that I don't want to buy from you and start buying from Russ. Why shouldn't I? Did we fix the price?

If all prices fall together, bidding down prices needn't create any new demand.

Other things equal that's nonsense. If you have constant amount of money in the economy and all prices fall together it means, that the total amount of money held will buy MORE which obviously leads to higher aggregate demand.

In your example, if I used $10 to exchange the widgets with you, if we lowered the price at half, I would need only $5 to transact with you and I could easily use the remaining $5 to buy something from Russ and Don.

They only need it to buy things from one another, as we do.

We don't need the money either - and because their prices in your example are irrelevant to "our" prices, they can freely set the price of their widgets to 0.001 of price of widget I am asking you to pay and everything will work OK.

A more likely impediment to Russ and Don's productive organization is some monopoly right impeding Russ and Don from producing for one another what you and I already produce for each other.

What exactly impedes them?

flexible prices...That's precisely the definitive proposition that Keynes disputes in his General Theory.

I thought that the whole Keynessianism was BASED upon the idea that wages/prices are not flexibile downwards? Can you explain why sufficiently low prices wouldn't cure the problem?

Re: Keynesianism?

Marcus — Sun, 21 Dec 2008 10:09:01 -0000

"Martin, you have an incredible talent for camouflaging your fallacies inside of a lot of irrelevant rhetoric."

Maybe 'fallacies' is too strong of a word. I apologize.

I think we largely agree and most of our disagreement is with semantics largely resulting from two different points of view on the same subject.

Re: Keynesianism?

Marcus — Sun, 21 Dec 2008 09:49:19 -0000

"Excuse me, the government PRINTS money out of PAPER via the Dept. of Treasury."

No, they print bonds. Which they sell on the market. Banks buy up a lot of those bonds to hold as capital. They turn around and sell some of them to the Fed when the Fed has an expansive monetary policy. But the Fed is hardly the only buyer of U.S. bonds. There's an entire world market for them.

In fact, right now, the demand of U.S. treasuries is so high that that demand (and not the Fed) has driven treasury yields right down to zero.

Re: Keynesianism?

Sam Grove — Sun, 21 Dec 2008 09:28:15 -0000

No, the government cannot and that's the point.

Excuse me, the government PRINTS money out of PAPER via the Dept. of Treasury.