[bob.murphy.ancap]

That’s a great idea, I’ll look into it! We have a mutual friend.

[bob.murphy.ancap]

Hi Kristian,

Thanks for the note. I haven’t talked to Tom about doing another course anytime soon, but I agree something on healthcare economics would be good if we were to consider it.

Hmm that’s a good question but sorry, I can’t think of anything off the top of my head. You might try googling John Goodman and his work on US healthcare economics.

[bob.murphy.ancap]

Hmm sorry to hear about your troubles, can you please email me at rpm@consultingbyrpm.com and I will try to get someone to help?

[bob.murphy.ancap]

Hi Jarred,

Great question. For simplicity let’s assume the underlying “real” exchange ratios are the same, and the only thing changing is the nominal price level. (In the real world you can’t really speak of a price “level.”)

So long as the nominal rate of price deflation is lower than the real interest rate, there’s no problem.

E.g. suppose with stable prices, the market rate of interest would be 5%. Then if prices are dropping by 2% per year, the market rate of interest can simply drop to (about) 3% and everything works out.

Where things get tricky is if the market rate of interest under stable prices would be 5%, but prices are falling at (say) 7%. Generally speaking you can’t have negative nominal interest rates. Rather than lending out $100 in order to get $98 back (which is still a real return of about 5%), people with cash would do better to sit on their $100 which will still be $100 next year.

Even here, this wouldn’t cripple investment, because the prices of higher-order goods could fall, so that people were willing to invest in factors of production in order to sell the output down the road for the expected prices. However, it *could* be tricky to get equilibrium in the market for cash loans, given the numbers I just made up.

If you don’t mind, please read our section about deflation in the context of Bitcoin in this free PDF, and I’d be happy to answer follow-ups.

Note, I am answering a slightly different question from what you asked. In general it’s not impossible for someone to get back enough money to pay back a loan, because cash can turnover multiple times per year. To see why, check out this article.

[bob.murphy.ancap]

(Sorry for the delay in answering John. Again, I didn’t realize this question was pending.)

I will be brief on this first pass, but feel free to ask me for more specifics.

1) Well, I devoted the whole lecture to this, right? 🙂 But if you’re asking for me to boil it down succinctly: I think Say was trying to refute the common explanation that recessions were caused either by a dearth of money, or by a glut of production. So to show why those were simplistic and ultimately unsatisfactory explanations, he demonstrated that when you demand something from a merchant, the ultimate source of your purchasing power is the goods you yourself supply to the market. Also, a world in which everyone produces more stuff is not one of misery, but is actually how material progress is possible. So once you see things that way, you realize it doesn’t work to say a recession is caused because people don’t have enough cash to demand the full output from all the merchants, or because all the merchants produced too much collectively to be sold.

2) This is tricky. The crude version is, “Supply creates its own demand.” So I think a lot of Keynesians, including Keynes himself, took Say to mean something like, “By the very nature of exchange and accounting, everything brought to market must necessarily find a buyer.” I think some have a weaker version of what he meant, and think he was saying something like, “Prices are sufficiently flexible that markets quickly clear and you can’t have a general glut.”

3) The sophisticated Keynesian rebuttal goes something like this: “Say argued that it was impossible for there to be an excess supply in *every* market. By logic, we realize that if there is an excess supply–a glut–on one side of a trade, then there must be excess demand–a shortage–on the other. For example, in a barter economy, if people are trading apples for bananas, then no matter what the price is, you can’t have a glut of both apples *and* bananas. Either you have a glut of apples and a shortage of bananas, or you have vice versa, or you have the market clear for both fruits. But,” the Keynesian continues, “Say made a critical mistake. He forgot that in the modern economy we use money on one side of every exchange. And so his tautology is still obeyed, if we assume there is a glut for every good and service *except* money, while there is a shortage for the money commodity. Then Say’s logic is satisfied, and yet this is what everybody means by a recession where there is a general glut and a deficiency in purchasing power or demand.”

4) Austrians like Rothbard stress that there can’t be an overproduction in general; that’s a sign of opulence, not misery. However, there can be too much produced in some sectors if there is too little produced in others. So this isn’t an issue of a momentary shortage or surplus, but rather reflects the mistaken plans of the past (which don’t reflect consumer preferences etc.). Also, I think many Austrians think prices are flexible enough to make markets clear soon enough, so long as governments and unions don’t interfere.

5) So long as prices and wages are flexible, it shouldn’t matter for very long. In the 19th century prices would collapse after a boom/bust, workers would get laid off, but then nominal wage rates would collapse too. So employers would hire workers once their wage rates fell back in line with the lower prices of the final product.

6) I think my answer to 4) helps here?

7) I don’t think so. And what you are talking about is really just a micro phenomenon for a particular market, having to do with elasticities, if I understand you. In general, supply and demand jointly “determine” prices. Also, from the Austrian perspective, even supply curves are really just the flip side of demand curves. Everything is ultimately drive by subjective preferences. (You can search the PDF of Rothbard’s ME&S for “reservation demand” if you don’t know what I’m talking about.)

[bob.murphy.ancap]

I don’t really know too much about this, to be honest John. This paper summarizes Adam Smith’s discussion, and it sounds right to me. I.e. I think the classical economists would discuss population growth pretty mechanically, citing the impact of various factors on it but without having an overarching narrative the way Malthus did.

[bob.murphy.ancap]

(Again, sorry about the delay.)

This is a really interesting question. The concepts of “the higher physical productivity of roundabout processes” and that of “economies of scale” are definitely different things in terms of definitions, but you might be right that in practice, they have significant overlap.

They’re not identical, however. I think you might be right that any example of economies of scale would involve greater roundaboutness, but the reverse doesn’t hold. I can devote the same total number of labor hours to Direct Process A, which yields x units of output, as I do to Roundabout Process A, which yields (say) 2x units of output. So that wouldn’t be an example of economies of scale, because economies of scale says that when you increase the amount of inputs, the output rises more than proportionally. Yet in this case, the amount of input stayed the same, I just changed the degree of roundaboutness.

Now regarding the other main part of your question: There is the element of selection. People would already have chosen the most physically productive methods to produce their desired outputs, *except* in cases where they didn’t want to wait for a longer process to come to fruition. So in the original equilibrium, it will necessarily be the case that if the person is willing to wait longer, he can adopt a longer, more roundabout process that is more physically productive.

BB just assumes as an empirical fact that there always exist more roundabout processes that have a higher physical productivity (per unit input). But to repeat myself, at any point in time, humans have exploited the most productive processes they know of, that deliver the product in an acceptable timeframe. So on the margin, any *more* productive process *not* in use, is lying idle because it requires too long of a wait.

I spell this stuff out better in the first chapter of my dissertation.

[bob.murphy.ancap]

Sorry about the delay in answering this; I didn’t realize there was a pending question.

Let me clarify one thing about these types of examples, and tell me if this solves your problem. (I’m happy to continue discussing with you until you see it.) And of course, obviously I’m not trying to say, “I, Bob Murphy, endorse this plan of having the government own all the roads and achieving a social optimum via taxation.” Rather, I just want to make sure you see the logic of it, from the Pigovian perspective.

If any individual motorist takes the nice road and pays the toll, then total revenues go up by the toll amount. Let’s say it’s $10. Then, at the end of the period, the government sends everybody a lump-sum check that equally divides up the total revenue collected.

So if there are (say) 10 total people in the community, then the motorist would think, “If I pay this $10 toll, at the end of the month my check from the government will be $1 higher than it otherwise would have been, so effectively I’m only paying $9 to take this nice road right now.”

But of course there are more than 10 total people. Suppose there are (say) 1,000 people. Then in that case, the extra $10 in toll receipts gets divided up over 1,000 people, so everybody’s check that month goes up by one penny, if the motorist takes the nice road. So the motorist would think, “In reality, instead of costing me $10, this road is really only costing me $9.99.”

And then, if there are 10,000 total people in the community who get those checks, then the marginal cost to any motorist of taking the toll road is $9.999, etc.

So the idea is, people’s decisions about the toll road only have a very slight impact on how much they get in a lump-sum rebate check from the government. With a large enough community, the individuals can treat those lump-sum checks as “given,” even though in the aggregate the total amount rebated must equal the total amount collected in tolls.

Once you’ve digested this clarification, see if my discussion makes sense. If not, I’m happy to keep working with you, but it seemed the above clarification was the thing you needed?

[bob.murphy.ancap]

Good questions, Justin, and even self-described Austrians today would give different answers. So, for starters, check out my recent article on this stuff.

I think the best way for me to give a first response to your question (besides pointing you to that article) is to just list a bunch of statements that I think are correct (but some other Austrians might disagree):

==> Hayek thought he was elaborating on Mises’ critique of socialism. He didn’t think he was backtracking or conceding anything.

==> Lange and the other market socialists thought Hayek was conceding that Mises’ original claim was too strong. Rather than socialist calculation being impossible even in principle–as Mises had claimed–they took Hayek to be backing off and now saying it was only impossible in practice.

==> Austrians like Murray Rothbard and Joe Salerno think that there really was a huge difference between the Misesian “calculation problem” and the Hayekian “knowledge problem,” whereas Austrians like Israel Kirzner and Pete Boettke think they are two sides of the same coin.

==> A lot of people say things like “At first the economics profession said the Austrians lost the debate, but after the fall of the USSR, people realize Mises was right.” I guess I’m happy anytime someone admits he was wrong, but this actually doesn’t make sense to me. In my understanding of it, Mises wasn’t making a prediction about the viability of a socialist political regime. He was instead claiming that from Day One a truly socialist society would not be able to engage in economic calculation.

[bob.murphy.ancap]

I think I agree with most of your comment, bigqueue. On a car being an “investment,” it depends what you’re holding as the counterfactual. E.g. if someone “has to” go to X for work, and without a car the best (all things considered) method is to take the bus, then you could evaluate buying a car in light of that.

It would probably turn out that the car had a negative ROI in purely monetary terms (since the car payments each month are higher than the bus fare), but still you could figure that stuff in, to calculate how much of the car’s monetary expense was investment, and how much was consumption. E.g. if the person were able to earn more income in some of the extra time that having the car afforded (since less time spent on the bus), then that might matter.

Or in the extreme, if someone wouldn’t be able to take a higher-paying job without getting a car, then in that kind of scenario a basic car would be an investment, while getting a nicer car would be partly consumption and partly investment.

[bob.murphy.ancap]

Hi bigqueue,

Yes I understand your perspective. What I thought was interesting is that the early models of “chaotic systems” (what’s called “chaos theory”) were deterministic. It’s just that slight perturbations in the initial parameters made the output fly off in “unpredictable” directions.

I think the first example of this was indeed a set of equations that were supposed to model weather. Anyway, the story is covered in James Gleick’s book *Chaos*.

[bob.murphy.ancap]

Hi John,

As you can imagine, Marx wrote a bunch of stuff, ranging from the theoretical analysis of a market economy to the (alleged) historical laws showcasing the impending socialism to practical proposals in the meantime, to make things better for workers. I do not claim to be an expert on his thought.

In some places, Marx argues that socialism/communism won’t come until capitalism has been completely developed and then falls away because of its internal contradictions. This is why Mises says that to be consistent, Marxists should embrace laissez-faire.

However, as I’m sure you know, in the Communist Manifesto, Marx & Engels give a laundry list of State interventions into the economy (many of which we already have!).

I found this article saying that Marx apparently chided another socialist of his day, for arguing that raising the pay of workers would reduce employment. Marx (assuming the author is correctly paraphrasing him) argued that it was more complicated than that, and so perhaps Marx would support minimum wage laws.

I don’t think we can argue that Greece is socialist/communist. I am more sympathetic to the claim that Venezuela is, since the government there (under Chavez and Maduro) has taken so much control of the economy. If you refer to the tweet I mentioned in the other thread, I also show that Venezuela is literally the 2nd from bottom in Heritage Foundation’s latest ranking of Economic Freedom.

[bob.murphy.ancap]

Hi John,

People on the right (referring to “socialist welfare states in Europe”) are partly responsible for this myth too, but it’s really crazy for Bernie (or Ocasio-Cortez) to be citing Denmark et al. as examples of socialism at work. I actually had a tweet on this just today, showing how Denmark and Sweden rank higher on Heritage Foundation’s Economic Freedom Index than the U.S. does.

[bob.murphy.ancap]

OK great! Let me know if you have any further questions.

[bob.murphy.ancap]

pacopasa,

I’ll let DJ speak for himself, but my hunch is that he isn’t denying the obvious proposition that “Production must precede exchange.” Rather, I think he is arguing that modern-day fans of Say are conceding too much / distorting his message when they try to “fix” it with truisms that make Say sound simplistic.

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