Home » Uncategorized » Reddit buries Austrian Economics in a pile of links, they think.

Reddit buries Austrian Economics in a pile of links, they think.

Link is here: http://www.reddit.com/r/Economics/comments/i2y8f/debunking_austrian_economics/

That link provides 26 other links that apparently disprove AE totally.
Well, time to chip away.

Let’s start with this gem, a would-be refutation of Say’s Law written by someone who calls himself, with suitable humility, “Lord Keynes”. To smooth our way in, let’s get to the meat of  the fellow’s argument, whom we shall sometimes call “the blogger”, or “LK”:
Here Say is clear that only production of other commodities provides the money to pay for products…A form of this idea is sometimes encountered on libertarian blogs. For example, one will find Austrians asking questions such as “how could people have money if they hadn’t produced something to exchange for money?”

Sounds like solid common sense. Money doesn’t grow on trees. You only get money if you work for it, work meaning doing something productive that someone else is willing to pay you for.

 But guess what? Say is wrong. Money does grow on trees. The govt prints it, so there. Here’s the quote:

The answer is that without production people would have no commodities (= wealth) for consumption. They might still have money. The premise of such a question is that without prior production there is no money to purchase commodities. This commits Austrians to the view that money is a “produced” commodity. But today we live in a fiat money world. Money is no longer “commodity” money. It is not “produced” in the way that gold and silver are dug out of the ground. Today fractional reserve banking creates money through debt, and open market operations create new money in the form of bank reserves. This is the real world in which we live, and even in Say’s own time fractional reserve banking was creating fiduciary media without prior creation of commodities.

Makes you wonder, did all the Austrians who insist on the correctness of Say’s Law not realize that the dollars in their wallets were not made of gold, but of paper? They must be really dumb to have missed such an obvious refutation, George Washington staring them in the face every time they buy something.

It is true that in Say’s day the money was gold and silver, and that he therefore did not address explicitly the situation where there is fiat money. But does the existence of fiat money change anything in his basic argument?

The answer is provided by Say himself in his writings, only a few paragraphs after what the blogger quoted. Makes you wonder about a guy who refutes Say’s Law without bothering to read it.

Let’s see the context in which Say wrote that commodities, not money, are what truly buy other commodities. We shall sit back and enjoy the maestro speaking. I give you J. B. Say:

It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them. When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is, a consumption brisk enough to quicken sales and keep up prices.

Amazing, isn’t it? Those adventurers sound exactly like John Maynard Keynes. Keynes called it “aggregate demand being scarce”; they called it “money being scarce”. But the underlying idea is exactly the same.


But ask them what peculiar causes and circumstances facilitate the demand for their products, and you will soon perceive that most of them have extremely vague notions of these matters; that their observation of facts is imperfect, and their explanation still more so; that they treat doubtful points as matter of certainty, often pray for what is directly opposite to their interests, and importunately solicit from authority a protection of the most mischievous tendency.

More classical Keynes, straight from the adventurers. What causes the lack of aggregate demand? Animal spirits [=darned if I know], says Keynes. Exactly the same vague notions as the adventurers.

Not only that, they both say the answer is Uncle Sam. The govt must print money or tax or borrow so that it can do the spending, say the various schools of Keynesianism. We must solicit from authority protection, say the adventurers. And Say astutely observes that such solutions are directly opposite to the interests of the citizenry.

Say begins his analysis of what is really going on when there is a recession. He starts with a general principle:
A man who applies his labour to the investing of objects with value by the creation of utility of some sort, can not expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it.

Translated into English, he is saying you cannot sell something unless people can afford to buy it.

And where, asks Say, will they get the money to pay for what you are selling?

Now, of what do these means consist? Of other values of other products, likewise the fruits of industry, capital, and land. Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens a demand for products.

They have to work to get the money. They have to produce something. That’s how they get money, by being productive and getting paid for it.

Say draws many important conclusions from this. Basically, that since you will only be able to sell your wares if other people can afford it, and they will only be able to afford it if they produce something, then if people aren’t buying your stuff you better pray that they start producing things they can sell for money and buy your stuff with. In other words, the cause of a recession is lack of production, and the cure for a recession is increasing production.

Notice how foolish Obama and all the politicians look now when they talk about “creating jobs”. The goal is not to create jobs, it is to increase production. And those two are not the same thing. [Not to get too far off topic, we leave it as an exercise for the reader to figure out what the difference is].

Say draws four conclusions from his earlier principle. His very first has the answer to our blogger’s supposed refutation:

From this important truth may be deduced the following important conclusions:

 
1. That, in every community the more numerous are the producers, and the more various their productions, the more prompt, numerous, and extensive are the markets for those productions; and, by a natural consequence, the more profitable are they to the producers; for price rises with the demand.

Like we said, increase production and everyone gets richer. And now, 170 years before the blogger wrote his silliness, comes a refutation of it:

But this advantage is to be derived from real production alone, and not from a forced circulation of products; for a value once created is not augmented in its passage from one hand to another, nor by being seized and expended by the government, instead of by an individual. The man, that lives upon the productions of other people, originates no demand for those productions; he merely puts himself in the place of the producer, to the great injury of production, as we shall presently see. 

In simple English, an economy has two kinds of people in it. There are the productive ones, and the parasites. [Even a Marxist would agree with this, though he may differ as to who is the parasite and who the producer]. The productive people produce. The parasites take things without paying for them.

One kind of parasite universally despised is the counterfeiter. He makes pretend money and gives it to people in exchange for what they produced. I think the blogger will agree that Say knew about counterfeiters. When a counterfeiter goes to the store to buy stuff, would the blogger say he is increasing aggregate demand, and that his counterfeiting thus benefits the economy?

“Of course not,” replies the blogger [as I put words into his mouth]. “Increasing aggregate demand means you give something worthwhile to the seller, not counterfeit money.”

“And what if someone came into a store with real money on which he had rubbed a secret acid, which would make the money melt away in a few months right in the wallet of the seller?”

“That’s as bad as the counterfeiter. Increasing aggregate demand means giving the seller fair price for his goods, not taking them away and giving nothing in return.”

“And if the acid made not only the money he gave the seller disappear, but half the money in the seller’s wallet as well, would that increase aggregate demand? Would that end the recession? Is that the cure poor misguided Say and modern Austrians had no clue about?”

“Of course not,” says the blogger. “Such a thing does only harm. One has to agree with Say about that.”

“But when the govt prints new fiat money, and the banks create new money through fractional reserve banking, and all the other things you mentioned in your blog, those things cause inflation. Meaning the new money is indeed tainted with an acid that will destroy all the money that everyone has in their wallets. Fiat money exactly fits the description of what Say was talking about. Take a look again:

…a value once created is not augmented in its passage from one hand to another, nor by being seized and expended by the government, instead of by an individual. The man, that lives upon the productions of other people, originates no demand for those productions; he merely puts himself in the place of the producer, to the great injury of production…

In other words, if you got your money by printing it, you are just being a parasite. You haven’t produced anything that people can use. You have merely printed up a license to take other people’s produce in exchange for nothing.

Say stated that you only get to take someones product by producing something in return. Claiming fiat money refutes Say’s principle is saying theft refutes his principle.

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2 Comments

  1. Lord Keynes says:

    I am not sure why you call me "Cynicus Economicus". He is a blogger on a totally different blog, but anyway:"It is true that in Say's day the money was gold and silver, and that he therefore did not address explicitly the situation where there is fiat money.In Say's time, there was ALSO fractional reserve banking creating fiduciary media unbacked by commdity money, that was nevertheless accepted by the community a means of payments and medium of exchange – so the difficulty remains. Money IS created endogenously by real world capitalism."Animal spirits [=darned if I know], says Keynes. Exactly the same vague notions as the adventurers"Animal spirits is essentially an irrelevant term used by Keynes' describe why we act. You can dispense with it TOTALLY and still have his fundamental insight: that because of uncertainty (thatis non-calculable) we have subjective expectations. This idea is also held by the Austrian radical sujectivists who follow Ludwig Lachmann. That is why the investment is subject to instability and fluctuation, why investment will not necessasrily equal loanable funds supply.""But when the govt prints new fiat money, and the banks create new money through fractional reserve banking, and all the other things you mentioned in your blog, those things cause inflation."(1) large deficits matched $for$ by bond issues are not creating new money.(2) in an economy in a recession or depression, it is PRECISELY when there are significant idle resources, unused capacity at plants and factories, idle labour and available resources.Keynesian stimulus is about getting the private sector to create wealth by increasing capacity utilization and using idle resources (including labour), just as private investment, private bank credit, and private payment of wages to workers by businesses would do the same thing if there was a recession.You make the same mistake as Anderson:http://socialdemocracy21stcentury.blogspot.com/2011/05/william-l-anderson-flunks-keynesian.html

    Like

  2. Smiling Dave says:

    Thank you for commenting, LK. I'll devote a whole post to your comment here, watch for it. In the meantime, I'll edit the previous blogs to credit you, not Cynicus.

    Like

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