Mises Defended From Antal Fekete, Yet Again. High Interest Rates Are Bad.

This is the third consecutive article defending Mises from Fekete’s arguments as publicized recently in The Daily Bell.

The thing is, Fekete is not alone here. Much of what he says is what they teach you in the mainstream. Especially this one, that high interest rates are bad.

Antal Fekete: I am merely pointing out that it is absurd to suggest, as Mises does, that rising interest rates do not increase the marginal productivity of capital, read: render a large amount of existing capital submarginal. In other words, rising interest rates put a lot of producers out of business indiscriminately.

Devil’s Advocate: Man, that Mises really wants us all to starve to death. There he is, putting a lot of producers out of business indiscriminately, getting all their workers laid off, decreasing employment and production, and for what? So some fat cat banker can get a higher interest rate? Dave, we’re taking it to the streets on this one. There will be riots, mark my words. Give me lower interest rates so I can make a living, or give me death!

Smiling Dave: Makes you wonder, is anyone actually paying those high interest rates? Or is everyone going out of business, because they cannot borrow the money to keep on trucking?

DA: Well, of course someone is paying, otherwise, by the laws of supply and demand, the bankers will have to lower the rates. But only the best, most efficient, most profitable businesses can afford a high interest rate. The stumble bums and slobs who don’t know what the public wants, and thus don’t make what the people need, and thus make very little profits, will go out of business. Their workers and factories will be bought up by the efficient ones, and…oh.

SD: And you remember from the previous article [in the section on 100 gold standard] what will happen if we give everybody, even the inefficient, plenty of free, low interest, money.

DA: Dave, I’m beginning to detect a common theme here. let the free market stay free and it will take care of itself. Mess with it, and you make the economy worse off.

SD: Indeed.

More Defense of Mises From Antal Fekete. Quantity Theory of Money and 100% Gold Standard.

I’m going with what Fekete said in The Daily Bell article.

I’ve already written a refutation of his first claim, that Mises was “blind” to Menger’s claim that money is the most marketable commodity, with Menger having “characterized” most marketable as “one for which the spread between the asked price and the bid price increases more slowly than that for any other as ever larger quantities of it are offered in the markets.” I’ve shown that Mises was not blind to the concept of most marketable, and also that most marketable is not “characterized” by what Fekete wrote, not by Menger nor by anyone else.

This humble article will address other reasons Fekete is unhappy with what Mises wrote. All quotes in italics. If it’s not in italics, it’s not a quote, but me having fun or making a point clearer.

1. Quantity Theory Of Money.

The Daily Bell: So what blunders have you found in Mises, Antal?

Fekete: Mises fails to mention that it could happen that no commodity price-increases take place at all in the wake of an increase of the mone. Quantity y supply. Speculators grab the new money that has been created and run with it to the real estate market or to the money market. I can no longer say “no harm done.” Very serious harm is being done if we ignore speculation with regard to QTM, for example, in appraising “open market operations” of central banks, or Keynes’s concept of the “euthanasia of the rentier” through government-suppression of the rate of interest.

Devil’s Advocate: A crushing blow, if you ask me. That blundering Mises forgot all about the existence of the real estate market. Maybe all the new money will go into real estate, like the housing boom we just had. Or maybe it will all go to the money market, meaning it will lent to people, not used to buy commodities at all. I mean seriously, Mises, you forgot that people borrow money?

Smiling Dave: So the real estate market is a huge hole in the ground, and people who run there the newly printed money throw it in that hole, where it disappears forever. And same thing with the money market. When Jones borrows money, he makes a huge bonfire of it, and the money disappears into the Twilight Zone.

DA: No need to mock, Dave. The real estate market is people, and the money market is people. When the real estate market gets the money, and when the money market gets the money, they spend it, eventually, on stuff they need. You know, commodities. I mean, you can’t build a house out of thin air, right. You need raw materials. And the guy who borrows money in the money market has plans for it. He is going to, you know, spend it, else he would not have borrowed it in the first place.

SD: So the new money, even if it runs to the housing or money markets, is eventually spent on stuff?

DA: Of course.

SD: Meaning the new money creates increased demand without a corresponding increased supply?

DA: Of course, and you can be sure that will make prices of things go up, just like the Quantity Theory of Money predic….oh.

SD: I rest my case.

2. 100% Gold Standard.

Daily Bell: You write that the choice of a 100 percent gold standard is a major departure from … Menger’s position… Can you explain?

Antal Fekete:  As concerns Menger’s position, he in his encyclopedic entry Geld dated 1909 explicitly states that the major part of the assets of a commercial bank, as well as that of the central bank, consists of gold bills maturing daily, and only a minor part consists of gold coins. This he considers not only an acceptable practice but, following Adam Smith, also inevitable as the volume of goods moving to the ultimate consumer financed by gold bills and commercial bank credit based on such gold bills is far from being constant. It shows seasonal variations as well as changes in what we may call, borrowing Keynes’s felicitous phrase, the “propensity to consume.” You cannot reconcile the variable demand for commercial credit with the idea of “100 percent gold standard.”

DA: He got you there, Dave. That quote says right out that Menger did not support a 100% gold standard.

SD: It does?

DA: Sure, Menger talks about gold bills, which means pieces of paper that say the bearer can demand gold from someone. Gotcha!

SD: Where does it say Menger approves of anyone issuing bills for 200 ounces of gold when they only have 100 ounces? Because only that would mean he approves of a less than 100% gold standard.

DA: Ermm, umm, I don’t have access to Menger’s encyclopedic entry Geld dated 1909, it’s not free on the internet. So you will have to take Fekete’s word for it. Just because what he quoted totally fails to prove anything doesn’t mean he’s wrong.

SD: I see.

DA: And what about Fekete’s argument from first principles, that You cannot reconcile the variable demand for commercial credit with the idea of “100 percent gold standard.”

SD: What does that even mean?

DA: Simple. Say that every spring, the farmers want to borrow money to buy seeds and stuff. Then for the rest of the year, they sit back and just don’t borrow money. That makes a huge seasonal difference in the demand for commercial credit. In the spring we need tons of it to give to all those farmers. The rest of the year, we don’t.

SD: And?

DA: Don’t you see? If the money is gold coins, we can’t make and destroy them. You have the same amount all the time. We can’t shift things around based on the seasons. But if the money is paper money, allowing the bearer to demand 200 ounces of gold when we only have 100 ounces, then we are good to go. We issue that paper only in the spring. Then, the rest of the year, we don’t. Problem solved.

SD: I have a better way. It’s called interest rates. When a lot of people want to borrow money, then you charge a higher interest rate. This ensures that only the most productive people actually get the money, because only they can afford the higher interest rate.

DA: So you want the less fortunate farmers to not get any money? You want to kill farming in this country? You want us all to starve?

SD: If without those less efficient farmers we would starve, that means there is a high demand for food, meaning they could afford those higher interest rates, too. Not to mention that we would be hungrier if the less efficient farmers got the money at the expense of the more efficient ones, obviously.

DA: But why be so cruel? Why not just give EVERYBODY, all the farmers, efficient or not, all that low interest money? What are you, stingy?

SD: What will the farmers do with the money they borrow?

DA: Buy seeds and fertilizer and fencing and stuff.

SD: If we allow more unbacked paper money to enter the system, will that act as Harry Potter’s magic wand and create more seeds and fertilizer and fencing and stuff?

DA: Of course not, Dave, don’t be ridiculous. Paper money does not increase the supply of commodities available for to the farmers.

SD: So when all those farmers come to the seed store with their new money, what will happen?

DA: By the laws of supply and demand, the price of those seeds will go up. Only the more efficient farmers will be able to afford….oh.

SD: I rest my case. But notice that you have messed things up for everyone with that new money. Prices of seeds have gone up. The farmers will have to buy less of other things now, thanks to you. You are seriously messing up the economy, Antal Fekete, and for no reason at all.

DA: What about the rest of his arguments against Mises?

SD: Hey, it’s 1300 words already. Time for a break.

The Latest Spin on Austrian Economics: Don’t Look At Me, It’s Menger. Most Marketable Commodity.

Intro: There are some imaginary dialogues here, of living people talking to the dead, the dead responding, fictional characters debating real ones, and such like. To make sure we are all on the same page, actual quotes from actual writings are presented in italics.

Ludwig von Mises is the giant of the Austrian school, but his position on certain economic matters is distasteful to some. The bitcoiners don’t like his regression theorem. Others don’t like his defense of the gold standard. Having failed so far to refute his impeccable arguments, they have decided to appeal to authority. Menger was Mises’s mentor, and Menger disagreed with Mises about money, they claim. That being the case, we’re going with Menger, they say. Today we will look at one of these new fangled theories.

Devil’s Advocate: I’ve been reading their stuff, Dave, and they have you dead to rights. Let me quote from one of the websites:

Daily Bell: What’s the difference between Mises and Menger when it comes to gold?

Antal Fekete: The obvious difference is the apparent blindness of Mises to what Menger sees very clearly that money must be not just a commodity; it must be the most marketable commodity…

Devil’s Advocate: Blind, I say! Blind! That blind old Mises plumb forgot that money is not just a commodity; it is the most marketable commodity.

Mises: Ahem. Here’s what I wrote in Money and Credit:

Whenever a direct exchange seemed out
of the question, each of the parties to a transaction would naturally
endeavour’ to exchange his superfluous commodities, not merely
for more marketable commodities in general, but for the most market-
able commodities; and among these again he would naturally
prefer whichever particular commodity was the most marketable
of all.

And in Human Action:

Money is  a medium of  exchange. It is  the most  marketable good
which  people acquire because  they want to offer  it in later acts of
interpersonal exchange.

Antal Fekete: Ooopsie. Guess I missed at least three places where you said it in black and white. I must have been blind. But it matters not. You, Mises, have no clue what the most marketable commodity means. Let me quote myself:

Menger sees very clearly that money must be not just a commodity; it must be the most marketable commodity, the marginal utility of which is virtually constant.

Devil’s Advocate: Say what?

Fekete: Mises categorically stated that constant marginal utility is contradictory in that it indicates infinite demand. Mises would be right only if interest as an obstruction to infinite demand would not play a part in all this. But it does. Mises ignored the nexus between gold and interest altogether.

…gold was not just ‘a commodity’, but it was ‘the most marketable commodity’, the marginal utility of which was declining more slowly than that of any other. Alternatively, the most marketable commodity could be characterized as one for which the spread between the asked price and the bid price increases more slowly than that for any other as ever larger quantities of it are offered in the markets.

DA: What does all that even mean?

SD: Here’s what Menger says, almost word for word the same as Fekete:

Thirdly, there are commodities for which a lively and well
organized speculation exists that absorbs every portion of the
available quantity of the commodities coming to market at any
time, even though in excess of current requirements.

There are other commodity markets in which speculation is not carried on,
or at least not to the same extent, and in which, if they become
oversupplied with commodities, either prices fall rapidly, or the
commodities brought to market must be taken away unsold.
Goods of the first kind can generally be sold in any quantity actu-
ally available at a given time with little sacrifice in price, while the
owner of a commodity for which no speculation exists can sell
quantities exceeding current requirements only with very severe
losses or not at all.

I gave an example of this last class of commodities earlier
when I cited the marketability of books written for specific
groups of scholars. More important in this regard are commodi-
ties that have no independent use and are wanted only as parts
of other commodities. Whatever the price of watch springs or
the price of pressure gauges for steam engines may be, require-
ments for them are determined almost exactly by the number of
watches or steam engines to be produced, and a considerably larger
quantity of the former goods could not be sold at any price.

On the other hand, gold and silver, and several other commodities
whose narrowly limited available quantities stand opposite almost
unlimited requirements, can be sold in any quantity whatsoever.
There is no doubt that a quantity of gold a thousand times as large
as that presently available, and a quantity of silver a hundred
times as large, would still find buyers if brought to market.

Such increases in the available quantities of these metals would cause
them to fall severely in price, and they would then doubtless be
used by persons of little wealth for utensils and ordinary plate, and
even by poorer people for adornment. But even if they were
brought to market in such enormously increased quantities, it
would not be in vain. They could still be sold. A similar increase,
however, of the best scholarly work, of the most excellent optical
instruments, or even of such important commodities as bread and
meat, would make them literally unsaleable.

From these considerations, it follows that a possessor of gold and silver can very readily
sell any portion of the quantity of these goods available at any
time, in the worst case with a small loss in price. But the sudden
accumulation of most commodities usually leads to a much greater
fall in price, and there is always the possibility that they cannot be
sold at all under such conditions.

DA: There it is, Dave. Exactly what Fekete was saying.

SD: No.

DA: What do you mean, no? It’s all there, the ever larger quantities being offered in the market, everything.

SD: So you think that was Menger defining what most marketable means?

DA: As Fekete said, the most marketable commodity could be characterized as one for which the spread between the asked price and the bid price increases more slowly than that for any other as ever larger quantities of it are offered in the markets.

SD: What does characterize mean?

DA: To describe the character or quality of.

SD: Synonyms for characterize?

DA: define, depict, describe, portray, represent

SD: So you would characterize something by saying “Thirdly….”

DA: Ermm, no.

SD: If you read Menger in context, he is not defining most marketable in that quoted section. He is not even characterizing it.

DA: So what is he doing?

SD: He is assuming you know what most marketable means, and is in the middle of giving a list of causes of something being marketable.

DA: So Fekete is confusing a cause and a characterization? And choosing one of three at that?

SD: Oh, there are more than three. Another one in that list of causes of marketability is how dependent is a sale on who the seller is? Dirty laundry will not be very marketable if a homeless person is trying to sell it, but his gold will still be, making gold more marketable than dirty laundry.

DA: Seriously, Dave, Menger said that?

Menger: I sure did, and here’s the quote:

Some commodities have almost the same marketability in the
hands of every economizing individual. Gold nuggets extracted
from the sands of the Aranyos River by a dirty Transylvanian
gypsy are just as saleable in his hands as in the hands of the owner
of a gold mine, provided the gypsy knows where to find the right
market for his commodity. Gold nuggets can pass through any
number of hands without any decrease whatsoever in marketabil-
ity.

But articles of clothing, bedding, prepared foods, etc., would be
suspect and almost unsaleable, or at any rate of greatly depreci-
ated value, in the hands of the gypsy, even if they had not been
used by him, and even if he had, from the beginning, acquired them
only with the intention of passing them on in exchange. However
saleable commodities of this kind may be in the hands of their pro-
ducers or certain merchants, they lose their marketability altogether,
or at any rate in part, if even a suspicion arises that they have
already been used or only been in unclean hands. They are therefore
not suited in economic exchange to circulation from hand to
hand.

Devil’s Advocate: So Mises is still wrong! Most marketable means you would buy it off a homeless person. That’s what characterizes most marketable!

SD: Devil, don’t you see? Menger is giving us a long list of what makes something more or less marketable. It’s a list of causes. You can’t pick one thing off that list at random and say that’s the definition of most marketable. None of them are the definition. They are all causes.

DA: So bottom line, Mises and Menger are in agreement?

SD: Sure are. Bottom line, a money is what almost everyone covets, what almost everyone will accept as payment for their cow, and the reason they will use it as money is because it is the most marketable good, meaning the one easiest to sell [as is clear from that last Menger quote]. What makes a thing easy to sell? Many factors, which Menger lists with great charm, all of which make sense and are easy to understand, all of which Mises agreed with, none of which contradict anything Mises wrote.

 

The Trouble With Game Theory.

The question, does game theory work, is two fold.

First, does game theory predict how people will actually behave? The answer is a resounding no.

And what was their boo-boo? The very same one as permeates all econometrics, as opposed to Austrian Economics.

Everyone realizes that economic reality is very complex. It’s about complicated people in complicated situations. So something has to be “ignored” when analyzing a situation.

But what should we ignore? Here’s where AE and the mainstream part ways. AE says we should keep the human, since economics is about humans acting, and simplify the situation. Thus the famous ceteris parebis assumption that permeates AE.

But the mainstream decided that the very first thing to go has to be the “human” part of human beings. Real people are just too messy and complicated to understand. So let’s replace them with zombies and call that economics.

And that’s exactly where game theory has failed and continues to fail. It predicts how zombies will behave in a given situation, but somehow real people stubbornly insist on acting like real people, not like zombies.

From as far back as the 1950s, when game theory
was in its infancy, researchers wanted to investi-
gate the extent to which the exciting new theorems
and models they were developing could predict
actual behavior. Merrill Flood conducted one of the most famous early
experiments to investigate this question.2
This work introduced the prisoner’s dilemma,
now regarded as one
of the most important formal games
in the game theory canon.

The most important game in the whole canon. Surely the most important game in the whole canon will, you know, actually tell us something?

Surely our simplification of replacing people, who are complicated, with homo gamicus, who is simple, has not thrown out the baby with the bath? We, the brilliant game theorists, can’t be that stupid, can we?

The test was made. Real people replaced the “models”.

So, what did they do?
Well, they didn’t choose to follow the
prescriptions of game theory, which
in this case points to mutual defec-
tion in every round of the game. In
fact, mutual cooperation occurred
nearly two-thirds of the time…

In other words, out of 100 predictions, the most important game in the whole canon was dead wrong 67 times.
Guys, you are taking tests now in school. What would your teachers say if you got 67 out of 100 questions dead wrong?

“Why these poor grades in psychology, son?”
“I dunno, Professor Mises. I studied the zombies on The Walking Dead, and based all my theories on how they did things.”
“No wonder you failed, you dope.”

This happened in 1950. Being the brilliant folks that they were, they realized, eventually, that something was amiss. Research was begun.
A pair of game theorists won a Nobel Prize for stating the obvious:

Their starting point
was the observation that expected
utility theory doesn’t predict how
people make decisions in practice.

Duh.

And when did they win this prize? 1951? A year after the great fiasco described above? Nopers.
It took fifty two full years for things to sink in. That Nobel Prize was awarded in 2002.
And they still haven’t realized what the problem really is.

Much work remains on reconciling the theoretical models and solutions of game theory with observed
human behavior.

Imagine if the student, who got a grade of 33 on his test, told the prof something like that.

“Much work remains on reconciling the acts of the zombies on the Walking Dead with observed human behavior.”

So much for the first part of the question, does game theory work. Does it predict anything at all? The answer is a resounding horse laugh, or in academic doubletalk, much work remains on reconciling things.

Now for the second aspect of the question does game theory work. Forget about those dummies in the real world. Who cares what they do? Is game theory a reliable guide for what we should do if we were placed, say, in the prisoner’s dilemma? Maybe everyone else, who doesn’t follow game theory, is losing out, but we smart ones who know game theory will do much better than them.

Again, they are making the exact same mistake, conflating their stupid models with, you know, reality.

The first point to make here is that
often, game-theoretic models are ap-
plied in entirely inappropriate circum-
stances. Such models are predicated
on a host of assumptions—some that
are easily justifiable, others that are
perhaps harder to justify.

But they did have two spectacular successes, they think.

The UK govt auctioned off rights to use certain electromagnetic frequencies to cell phone companies.
This happened …in the first half of 2000…the peak of the
dot-com boom, when wild speculative investment was made in IT and
telecommunications technology…

The peak of the dot-com boom. Wild speculative investments. I wonder what happened? Did these companies overpay, perhaps?

They sure did, to the tune of 34 billion dollars. The govt had hired game theorists to set up the rules of the auction, and they are taking all the credit.
Was the fact that this was the peak of the dot-com boom relevant, when wild speculative investments were made in cell phone technology? Did it have anything to do with these results? Nope, say the game theorists. That was a “coincidence”.

Uh huh.

The second spectacular result happened in Los Angeles World Airports (LAX). Game theorists came up with a model of when to search people who might want to blow up the airport, and guess what? It works. Nobody has blown up anything at LAX.

“You mean the prisons are full of terrorists now, that the game theorists have nabbed?”
“No, I mean nothing happened at all. It doesn’t get any better than that, right? Plus one for game theory. Total proof that we outsmarted the hoards of terrorists out there.”

But hey, let’s be fair. We normal people may think a score of 33 out of 100 is a total flop, but it only looks that way.

Game theory can work under both its descriptive
and normative interpretations, although it might often appear that it
doesn’t.

“Professor, I could have gotten a perfect score on that test, although it often may appear that I didn’t.”

Source: An Oxford Professor of Computer Science.

Why Bitcoin Is Not Even An Economic Good, Much Less Money Or A Medium of Exchange.

There has never been anything quite like bitcoin here on Earth. The mania has died down somewhat, ever since mtgox.com kicked the bucket, but bitcoin is still going strong at about $500 a coin. But the confusion and misunderstanding of basic Austrian Economics that bitcoin has exposed is even deeper than Smiling Dave himself suspected.

We have written many times about why bitcoin violates the regression theorem, about why it violates Their’s Law, why it violates Gresham’s Law, about how all money similar to bitcoin has died a painful death, and why it has died. But only recently has it occured to me and my good pal, Devil’s Advocate, that bitcoin is not even an economic good.

Devil’s Advocate: What’s an economic good?

Smiling Dave: It’s the opposite of what wikipedia calls a free good. Here’s wikipedia on goods:

Some things are useful, but not scarce enough to have monetary value, such as the Earth’s atmosphere, these are referred to as ‘free goods‘.

DA: So bitcoin is a free good? Dave, those puppies go for 500 bucks each! They are anything but free.

SD: Not only are they free, what Mises described as “not an economic good”, they are not scarce either.

DA: Dave, have you bumped your head or something? There are only 10 million bitcoins in the world, and over six billion humans alive now. Not even one bitcoin for every six thousand people. I call that scarce.

SD: First, let’s make sure we agree on something. To be a money or a medium of exchange, a thing has to be scarce, right?

DA: Of course, even the bitcoiners admit that. When they sing the praises of bitcoin, the first thing they mention is how it is scarce and thus can be a money.

SD: Allow me to quote an intricate piece of reasoning from Human Action, Chapter 7, Section 2. Mises there is deep in the middle of a subtle argument, deriving the Law of Diminishing Returns from sheer logic. Jeeves himself could have learned something from him.

He is talking about a product P, which requires two inputs, B and C, to be produced. He discusses what would be the situation if any amount of B were enough to produce P:

…if it were possible to compensate any decrease in B by a corresponding increase in C in such a way that P remains unchanged, the physical power of production proper to B would be unlimited and B would not be considered as scarce and as an economic good. It would be of no importance for acting man whether the supply of B available were greater or smaller. Even an infinitesimal quantity of B would be sufficient for the production of any quantity of P, provided the supply of C is large enough. On the other hand, an increase in the quantity of B available could not increase the output of P if the supply of C does not increase. The total return of the process would be imputed to C; B could not be an economic good.

A thing rendering such unlimited services is, for instance, the knowledge of the causal relation implied. The formula, the recipe, that teaches us how to prepare coffee, provided it is known, renders unlimited services. It does not lose anything from its capacity to produce however often it is used; its productive power is inexhaustible; it is therefore not an economic good. Acting man is never faced with a situation in which he must choose between the use-value of a known formula and any other useful thing.

With bitcoins, B stands for bitcoin, C stands for price of a bitcoin, and P stands for the product you want to buy with the bitcoins. The argument goes through word for word.

Since this is an advanced topic, I am not going to walk the reader through it, as I usually do. Read the section in HA. Study it, mull over it, understand it. Then you will see that the exact same thing applies to bitcoin. If you need help, read my humble article Proof Positive That Bitcoin Is A Bubble. It explains why any amount of bitcoin gets the job done, exactly like Item B in Mises’s analysis.

Conclusion: Just like Item B that Mises wrote about, Bitcoin is not “scarce” in the technical sense used by economists, and it is not an economic good. So if it is not scarce, and not an economic good, then of course it cannot possibly be a money or a medium of exchange.

DA: But Dave, look at all the money it costs. Look at all the things people buy with it.

SD: Devil, reditt.com has a whole section devoted to Idiots Fighting Things. Now they can open a new section, Idiots Buying Things, with the bitcoin markets leading the way. Because by the very first principles of economics, bitcoin is, and I mean this in the technical sense of the words, a folly, a bubble, a mania. They have happened many times, manias, and bitcoin is the latest.

DA: Don’t forget, dear reader, to look up Bitcoin All in One Place on Dave’s humble blog for more about this mania.

 

Smiling Dave Teaches Mankind How To Go To The Bathroom.

Devil’s Advocate: You are going to lose a lot of dignity with this one, Dave.

Smiling Dave: My loyal readers deserve the very best quality of life.

It is well known that Western toilets are not ergonomically ideal for the use they are designed for. That’s why Dave is here to guide you on how to make things as easy as possible for those who need this info.

Step One. How To Sit Down.

Make sure you move yourself as far to the rear of the seat as possible.

If you find yourself thinking, “Any further back and I will soil the seat,” that’s the right place.

Step Two. Footwork.

Lift your heels off the ground as high as you can, keeping your toes on the ground. No, you don’t get off the seat to do this. Just the bottoms of your feet go up, nothing else.

Step Three: Upper Body Positioning.

Keeping yourself firmly planted on the seat, lower your shoulders as much as you can. The flexible will actually touch their knees with their shoulders; the rest of us will do our best.

Convenient Checklist:

1. Back in the seat?

2. On your tippy toes?

3. Shoulders touching knees?

4. Still seated?

5. All systems go!

Reply to an Article.

The Article.

The concise reply:

1. Liquidity [look it up] is only possible in an economy that has cash, but media of exchange emerge in barter economies [which have no cash] as well.

2. You showed that wide demand does not imply marketable. But I am claiming marketable implies wide demand. Not the same thing. Just the opposite, in fact.

3. Menger’s definition of “saleable” is not relevant to Mises when he talks about the regression theorem. Mises is talking about a barter economy [as well as a cash economy]. In barter economies, there is no cash price for things, because there is no cash.

 

My Spending Is Your Income Fallacy, Part Two.

Loyal readers may have seen my previous article, where a blogger lays out his thinking about a cliche you see all over the mainstream, that “My Spending Is Your Income” is some profound wisdom to which we need to erect monuments.

I pointed out that Hayek won a Nobel Prize for refuting just that fallacy, but the author was unhappy, and asked me to refute him directly.

Always one to please, Smiling Dave will now address his article point by point. The author has already admitted I summarized him correctly, when he wrote me, “So after detailing my blog post and my full argument at the very end all you do is shrug…”

You know my methods by now. he gets Italics, I get the regular font. All Italics are actual quotes.

1…if there was one simple lesson that I wished everyone knew about economics… that could explain the essential core…it would be: “My spending is your income”. This simple point, properly understood, explains everything you need to know…

Yes, my spending is your income. I agree. But that does not mean every single problem that attacks my income is always your lack of spending.

Devil’s Advocate: I don’t get it, Dave. If he’s right, he’s right, and you just admitted he’s right. My spending IS your income.

SD: Devil if you don’t eat, you will die.

DA: True dat, but so what?

SD: Therefore, anyone who is dead must have died because he did not eat enough.

DA: Now wait just a minute, Dave. None of your sophistry, please. Not eating is only one cause of death. But there are many hundreds of others.

SD: Same thing here. My not spending is only one cause of you not having income. But there are many hundreds of others.

DA: If all you have is a hammer, everything looks like a nail. All this fellow knows about is spending, so all problems in the economy look to him like a lack of spending.

SD: Precisely. Let’s quote some more:

2…we are all interconnected and dependent on each other to spend money and buy each other’s goods.

SD: True. If you do not eat, you will die.

3…if I decide to stop spending money and instead save it, that means some shop is going to suffer a decline in business. If it is steep enough, they may even have to lay some people off. Hence, what seems like being frugal and responsible on my behalf by saving money, if followed by enough people, hurts the overall economy and costs jobs.

No. Big, big, huge mistake. Wrong in so many ways.

First of all, saving money does not harm the economy at all. I can either copy and paste why not from a previous article, or link to it. I’ll link to it: https://smilingdavesblog.wordpress.com/2013/02/14/how-mises-dismissed-that-whole-keynesian-thing-with-a-decisive-one-liner/ 

and its continuation: https://smilingdavesblog.wordpress.com/2013/06/24/where-will-the-money-come-from-to-replace-hoarded-money/

So that’s one reason he is wrong. Businesses do not suffer at all if people save.

But there is a second. The reality is that consumers never “stop spending”, certainly not in the 21st century. Maybe in Bizzaro World, but not on Earth. Have a look here: https://smilingdavesblog.wordpress.com/2011/08/24/classic-keynes-and-why-the-credit-card-refutes-him/

and also here: https://smilingdavesblog.wordpress.com/2013/01/23/summary-of-keynes-theory-and-the-flaws-in-it-that-any-layman-can-spot-a-mile-away/ [In particular, read the part where Samuelson starts talking].

And there is a third flaw as well. Not only is saving not a bad thing, it is also a great thing. Because nowadays people who save do not stuff money under their mattresses, but put them in banks. And banks then lend them to businesses, who can use the money to expand and be more productive. Roger Garrison has pointed out a huge theoretical blunder in Keynes’s model of the economy, that Keynes assumes spending and production can both increase at the same time, that indeed they always go hand in hand. The poor soul never understood the concept now taught in Econ 101, of the Production Possibilty Frontier. You can either consume more or invest more, but not both at the same time. You cannot invest except to the degree you stop consuming, and vice versa. Because investment means taking existing resources, not consuming them, but instead making more means of production out of them.

DA: That kinda make sense, actually. If you eat everything up, where will you have what it takes to expand your production machinery?

SD: In the previous article, we wrote that the blogger’s argument is a non sequitor. Now we have shown that not only is it a non sequitor, but that it is positively wrong. Saving money is not bad for the economy, it is good for the economy.

We move on:

4. This is not to say that we should never save, but rather that excessive saving is damaging.

That does not hold water. All savings, according to you, should be bad, because all savings causes losses of income. Your spending is my income, remember? Why is it a good thing to kill some income?

Guys, I tire. The rest of the blogger’s article is riddled with mistakes as well, all of which I have covered on my blog many times, and are discussed at mises.org. All the seeker of truth need do is mosey over to mises.org, or do a search here for Keynes, or for J.B. Say. I only wrote what I did so far to make the blogger happy, because he wanted me to address his argument explicitly.

 

 

The “My Spending Is Your Income” Fallacy.

Some people so love that line. Here’s a blogger speaking:

1…if there was one simple lesson that I wished everyone knew about economics… that could explain the essential core…it would be: “My spending is your income”. This simple point, properly understood, explains everything you need to know…

And why is this the magic key to understanding? Because:

2…we are all interconnected and dependent on each other to spend money and buy each other’s goods.

So?

3…if I decide to stop spending money and instead save it, that means some shop is going to suffer a decline in business. If it is steep enough, they may even have to lay some people off. Hence, what seems like being frugal and responsible on my behalf by saving money, if followed by enough people, hurts the overall economy and costs jobs.

So nobody should ever save, ever?

4. This is not to say that we should never save, but rather that excessive saving is damaging.

How damaging?

5…recessions and unemployment. If for some reason a group of people stop spending, the some businesses will suffer a decline in sales. If this decline is large enough then they will have to fire staff and may even close themselves. This has a knock on effect as these redundant workers now have less money and therefore spend less, thereby reducing someone else’s income…The economy slips into a downward spiral…

And what’s the solution?

6. If the recession is caused by less spending causing lower income and uncertainty, then the solution is to boost spending and confidence.

Who will do all this spending?

7. It would be madness for a consumer to go on a spending spree…and…what business is going to invest in this economic climate?

Who can “save” us then, by not saving?

8 …the only one left is the government.

And of course the promises the govt makes are important, too. They give us confidence.

9…if the government guarantees no further cutbacks and launches a program of large spending, then this will reduce the uncertainty in the economy.

Now that everybody is certain, what then?

10. Consumers will no longer hoard money and delay expenses but will return to normal spending patterns. Businesses in turn will expand to meet this demand and thus boost the economy.

But is it good for the govt to have such a huge debt?

11…it will have to be paid back, but that is an action for the boom when the economy is doing well.

And that’s why minimum wage laws are so great:

12…a higher minimum wage leads to increased expense but also increased sales.

What about reducing govt spending on all sorts of programs?

13…proposals to cut social welfare, pensions, raise student fees, introduce a property tax, water charges or any form of tax hike or cutback…all suffer from the same fault that they will leave less money in people’s pockets which will only make the recession worse.

And the epic conclusion:

14. “My spending is your income”.

There should be monuments built with this slogan,

it should be hoisted onto walls

and tattooed onto economists.

Devil’s Advocate. I for one am totally convinced, Dave. My spending is your income. Nobody can deny that.

Smiling Dave: It’s like saying gasoline is what runs the car.

Devil’s Advocate: Well, that’s true, too.

SD: So if a car breaks down, we should put in more and more gasoline until the car starts running.

DA: Now, Dave, you know better than that. Gasoline is but one component, albeit a vital one, for the car to run. But that doesn’t mean every problem can be solved by putting in more gas. I mean, if the gas tank has a leak, putting in more gas won’t really do anything. And most of the time, the problem is not at all related to the amount of gas in the tank, but something else entirely.

SD: What if the car is on fire? Surely pouring on more gas will help that, no?

DA: Are you mad, Dave? The whole car could explode if you do that!

SD: Then what has to be done?

DA: I’d take it in to an expert mechanic I trust and have him look it over.

SD: Exactly. And our expert economics mechanics, Mises and Hayek, proved that recessions and unemployment are not caused by “not enough spending”, ever. BTW, Hayek won a Nobel Prize for it.

DA:  But you agree there is less spending, right?

SD: Yep. But that’s a byproduct, not a cause.

That whole article is flawed from start to finish, because he is “curing” the wrong disease. You know what happens when a patient takes a strong pill that is not related to his ailment.

DA: He drops dead.

So where can one go to understand what really causes recessions and unemployment, and how to cure them?

SD: Good old mises.org. So much material there. And of course my humble blog. You could also do worse than get a free internet copy of Hazlitt’s Economics in One Lesson.

[LATER] DA: Ha, Dave, you can’t hide this time. The author of the article has written a comment here demolishing your whole article. And I quote in full:

Hang on. So after detailing my blog post and my full argument at the very end all you do is shrug and say Hayek and Mises disagreed and that’s all I need. That’s it? You don’t try and address my argument you just say Austrians disagree and throw in a plug for Mises.org. Even by your standards this is a very poor and lazy effort.

SD: My reply:

The burden of proof is on you, to show that lack of spending is the problem, not the symptom. I mean if you are ready to massively distort the economy with scads of govt spending, you need to make a good case, not a mere assertion.

Put another way, you are arguing thus:

1. My spending is your income.
2. Therefore, if you don’t have income, the only possible reason is my lack of spending.

Non sequitor.

I mean, it’s like arguing:
1. If you don’t eat, you will die.
2. Therefore if anyone dies it’s because he did not eat enough.

P.S. Don’t forget to see part two, where we analyze the blogger’s arguments at greater length.

Deep Stuff About Fiat Money.

Let’s begin with a comment anarcholibertarian made about my article Four Valuable Lessons From Actually reading the Regression Theorem.

Our buddy David Kramer made a comment about this article which I am also wondering about. He says:

“’4. Fiat money has a yesterday, and thus does not violate the regression theorem.’

If by ‘fiat’ he means the paper FRNs [= Federal reserve Notes] which forcefully/fraudulently replaced U.S. Gold and Silver certificates (which, in and of themselves, REPRESENTED something of value and were not the valued commodity itself), he’s wrong.”

Could it be that government force is the only reason why the dollar is in general use? What would happen if the government told everyone to use a random token or they will be shot? I’m thinking that it will be volatile in price, since no one knows how much 1 token is worth compared to 100 tokens, but it would still be in general use out of fear. I’m still reading through your bitcoin articles, so if you have already answered this, just point me in the right direction if you please.

Good stuff. Here’s my reply:

It’s only lately that I’ve come to understand some deep stuff about fiat money. So here is what I know.

A. Kramer’s argument is not with me, but with Mises, whom I quote extensively in the beginning of the article. A slow careful reading shows that Mises is talking exactly about FRN’s when he writes:

The other possible case is that in which coins that once circulated as commodity money are transformed into fiat money by cessation of free coinage (either because there was no further minting at all or because minting was continued only on behalf of the Treasury), no obligation of conversion being de jure or de facto assumed by anybody, and nobody having any grounds for hoping that such an obligation ever would be assumed by anybody. Here the starting point for the valuation lies in the objective exchange value of the coins at the time of the cessation of free coinage.

The situation he describes is that of a country whose money is coins. One day, the govt says it will no longer make any coins, only fiat [=intrinsically worthless] money, not redeemable for anything. And he goes on to say that the reg. thm is satisfied.

That’s my appeal to authority. And the logic behind it is impeccable, as well. What’s the basic question the reg thm asks? In a word, it’s “How does a person know the purchasing power of this new money?” How does he know how many apples the grocer will give him, how many books amazon.com will give him, etc etc etc?
Mises has a simple answer. For commodity money, he knows he will get at least its value as a commodity, the commodity price. For a newly introduced fiat money, he assumes it will get him the same stuff that the old commodity money of the same name used to buy. A silver dollar bought me a gallon of gas? Then this new paper dollar will probably get me the same thing. A dollar is a dollar. I imagine that historically, this has been the case as well.

In short, the reg thm asks, “What number?” and for fiat money, even FRNs, we have an answer. Same number as the old money.

B. This is what I knew at first. Then I found Mises writing in Money and Credit that when a govt in the old days tried to debase the coinage by making the coins only partially gold, their purchasing power instantly dropped to be worth only the amount of gold they actually still contained. Which led me to ask myself, “Isn’t going from a silver dollar to a paper dollar the ultimate debasing of the coin? I mean, instead of making only 90% silver, the way the kings in the old days debased the coinage, they are making a new “coin” with zero percent silver.”

How does that not contradict what Mises wrote in Money and Credit, the very same book, about fiat money being just fine and satisfying the reg. thm?

My answer is that yes, fiat money satisfies the theoretical problem posed by the regression theorem, for the reason above, but it has another, different, more serious problem. People will drop it like a hot potato as soon as they get a chance. “Yes, there is a number that can be assigned to it, but who wants this garbage, if I have a choice?” I wrote about this at length, quoting Mises and explaining his arguments, in my humble article, The Kickstart Fallacy.

Maybe Kramer had this other problem in mind when he said I was wrong about FRNs.

C. So why is fiat money accepted at all? I think the only possible answer is because of some kind of violence, or threat of violence. Why did that not work for the old kings, but did work for FDR and for all modern countries today?

I’m not sure. Here are some guesses.

Peter Schiff says that modern fiat currency has a twisted kind of “intrinsic value” [= value besides trading it for goods and services], in that you need some of it on hand to pay your taxes. Maybe in the old days you could still pay in geese and chickens if you had no cash, and that’s why the old kings failed.

Maybe in the old days there were no legal tender laws. In the Kickstart Fallacy article I appealed to Thier’s Law at one point, which distinguishes between a country with legal tender laws and one without.

Both those theories will need a lot of historical research to see if they are consistent with the facts, research I am totally unfit to do.

A final guess is that maybe it takes some time, maybe depending on the size of the country or some other factor, for the debasement to take place. In other words, we know the dollar and all fiat currencies are constantly losing value. Usually this is attributed to inflation of the money supply, and of course that is correct. But maybe there is another force at work, that exists even with a constant money supply, mainly the Law of Debasement, we may call it, that says money will eventually sink to the purchasing power it has as a commodity.

D. For the repercussions of all this to bitcoin, I refer you to the Kickstart Fallacy article.

For most of my stuff on bitcoin, see https://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/

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