[bob.murphy.ancap]

I (think I) get what you’re saying, but no, that kind of strategic consideration isn’t involved in Arrow’s Impossibility Theorem. It is assumed that the Social Welfare Ordering really operates on their people’s actual preferences.

[bob.murphy.ancap]

Smith referred to the habit of rulers to debase their coinage, e.g. see

https://www.cato.org/policy-report/julyaugust-2011/deficits-debt-debasement

and

https://fee.org/articles/inflation-money-and-freedom/

But Smith also famously thought the precious metals were “wasteful” in the sense that you had to devote real resources into their production as coins.

[bob.murphy.ancap]

There isn’t voting in the model per se. It is a logical framework, which supposes that people have genuine subjective rankings of all possible outcomes. It is a separate matter to figure out how, in reality, outsiders would extract that information.

So I guess to be consistent with the “rational expectations” revolution (which we cover much later in the course), you would say that the people in Arrow’s model realize they are part of a society and that their individual preferences are being used as inputs for a broader judgment. But they are not allowed to lie about their preferences, if that’s what you’re getting at.

[bob.murphy.ancap]

Yeah sorry for the originally overly optimistic timetable…

[bob.murphy.ancap]

Thanks! You’ve written a lot, and I can’t responsibly respond to most of it without going and (re)reading the material. (And some of the stuff I’ve never read.)

Let me congratulate you on giving me something to ponder, with your two-good case. You’re right, in plain English it seems possible that Jim could overproduce A while Mary overproduces B, even though that is impossible in Walras’ system. So I have to think through whether this is a deep problem, or just a quirk. Either way, you have definitely gotten me to think through this more deeply than I have before.

[bob.murphy.ancap]

Hi,

You have shared a lot of thoughts here. Let me briefly respond like this:

(1) When you ask, “Is there always an equilibrium?” it depends on the framework. For mathematical economists, they have “models” and in the model, there may or may not be equilibrium.

For Austrian economists, there are different categories of equilibria and one of them–the “plain state of rest”–comes to pass all the time. (I think Joe Salerno gets into that stuff in this article: 1994. “Ludwig von Mises’s Monetary Theory in the Light of Modern Monetary Thought.” Review of Austrian Economics 8: 71–115.)

(2) Regarding static/dynamic and electrical engineering: There are some economists who are turning to more sophisticated computer simulations. So rather than build a “tractable” model that can be solved analytically, they just populate a computer simulation with agents following certain rules (like “maximize utility” or “maximize profit”).

There are economists trying to make analogies with physics but I am skeptical of their approach. I think you throw out a lot of knowledge when you treat people as mindless.

[bob.murphy.ancap]

Hi bigqueue, yes sorry we took that free version down.

[bob.murphy.ancap]

I could believe that they think something like, “Our banking and monetary system depend on confidence, and so if we tell everybody things will be fine, then it will be a self-fulfilling prophecy, so we’re not really lying.”

BTW I will answer your other questions but we are about to go on the Contra Cruise.

[bob.murphy.ancap]

Let me paraphrase what you’re asking, to make sure I understood. (Obviously if my paraphrase is wrong, then correct me.) I think you’re saying something like this:

Q: “I understand that someone might be willing to buy a one-year CD that yields only 2%, rather than a 5-year CD yielding an annualized return of 4%, because his money is only tied up for a year in the former asset. But OK, why wouldn’t someone buy the latter asset, hold it just for a year, and then sell it in order to reap the 4% return?”

A: I guess that’s right in the ERE (and if you think that means I said something wrong in my paper, please let me know), but it’s not right in a broader no-arbitrage concept of intertemporal equilibrium. The reason is that short-term interest rates might change in the future.

In particular, suppose you buy your 5-year CD, but that 6 months later interest rates across the yield curve all shift up by 50 percentage points. That means the market value of your CD drops; it is worth a lot less than you paid for it upfront. It’s true that if you hold it to maturity you still earn the contractual 4% annualized on your original investment, but you can’t even “get your money back out” of the thing until close to the maturity date.

So, given this possibility, if you really want to lock in a short-term return, you will keep rolling your money over in short-term CDs.

Does this make sense?

[bob.murphy.ancap]

Heh it’s a fun one, isn’t it? It’s easier to do on a blackboard, but here goes:

Picture a 2-person, 2-good economy. It’s Xavier and Yolinda, and they have apples and bananas. There is no production, just a total of 10 apples and 10 bananas, that can be split between them.

Assume their preferences are such that each person always wants more of either good, but also prefers variety.

Now suppose Xavier has 10 apples and 10 bananas, while Yolinda has 0 apples and 0 bananas. This is Pareto optimal. You can’t make Xavier happier because he has all the goods already. And if you make Yolinda happier, you necessarily hurt Xavier. So since it’s impossible to make one person better off without hurting the other, the original allocation is Pareto optimal.

Now consider a different allocation, where Xavier start with 9 apples and 1 banana, while Yolinda has 1 apple and 9 bananas. It’s plausible that this is *not* Pareto optimal, because I said they like variety. E.g. we can imagine their preferences are such that if Xavier trades away 4 of his starting apples in exchange for 4 bananas from Yolinda, that they are both getting more utility (or end up with a preferable combination of goods).

So, I hope you find it plausible that this 2nd allocation I’ve described–where Xavier starts with 9 apples and 1 banana, while Yolinda starts with 1 apple and 9 bananas–is Pareto suboptimal.

Now, imagine we move from this 2nd allocation to the 1st allocation (the one where Xavier has everything). We’ve moved from a Pareto suboptimal to a Pareto optimal allocation, and yet in doing so we made Yolinda worse off, because now she has nothing.

[bob.murphy.ancap]

Yikes, either I am losing my sense of humor or there are too many obnoxious libertarians on Twitter. I actually thought you were serious at first! The egg was on my face, so to speak.

[bob.murphy.ancap]

Sorry for the delay, I didn’t realize you had asked this. (Unfortunately I have to manually check; the system doesn’t alert me when a new topic starts.)

I’m not trying to dodge your questions, but I think I spelled out the whole idea in Part IV of this paper, and it would probably be simpler for you to read that. If you still have questions, I can follow up.

[bob.murphy.ancap]

Thanks for the question, Mark.

Like MichaelSouth alluded to, this is tricky because it’s not simply a matter of refraining from murder (let’s stipulate that that’s what is is), but if you have an unwilling mother, you run into some problems. E.g. what if there’s a pregnant woman who is a chain smoker and drinks whiskey every night? Should she be forcibly restrained for 9 months? It’s a lot trickier than a rule saying, “If you murder someone else you go to jail.”

I guess I have two main ways of responding to your concern:

(A) I don’t think it’s useful to contrast an “ideal minarchism” with an “ideal an-capism,” since I don’t think an “ideal minarchism” is stable. So if you’re saying you want a State that has the power to tax, monopolize judicial rulings, etc., so long as it limits itself to things you consider to be defense of life and property, I think that’s being very naive.

(B) The ultimate moral principle you seem to be espousing is this: “I, Mark, plus lots of other religious people, think abortion is murder. But plenty of other people don’t. If we voluntarily fund law enforcement efforts, I am worried there will not be enough money devoted to punishing abortions. Therefore, I think it is moral for us to take money from the other people against their will and use it to stop abortions, even though they wouldn’t voluntarily spend what I agree is their money that way.”

I realize those aren’t the words you used, but isn’t that basically what you are saying? If so, no, I don’t think that is morally defensible, even though I agree with you that abortion is the killing of a human.

[bob.murphy.ancap]

Hi Daniel,

I am sorry for the delay.

I am intrigued by your Version A vs. Version B, and I’m willing to entertain the notion that that is a good way to think about it. (To repeat, the way I have been thinking about it says that Say’s analysis is very important, so I disagree with you that my approach turns his contribution into a trivial thing.)

However, where I simply cannot follow you, is when you argue that JS Mill wasn’t himself promoting what you think is a 20th century distortion. So, I’m willing to suspend judgment on the question of whether JS Mill, 20th century economists, and me in my lecture, did violence to Say’s contribution, but when you’re trying to tell me I’m wrong for thinking JS Mill said what he said, I have to disagree. I mean, can you at least see how you are the one making a difficult claim? It sure seems like I found a quote from Mill saying exactly what you had denied his position was.

At this point I don’t think I can carry this particular argument much further. If I get Kates’s book, is your view his? I.e. if I want to see someone make your Version A versus Version B case, does Kates do it in his book?

[bob.murphy.ancap]

Hi Daniel,

Before I turn to your enumerated remaining points of disagreement, let me first restate my general take on all of this:

==> Say himself was exploding the common “man on the street” explanation for recessions. Someone who has not first thought through the matter as a classical economist would (in which you typically abstract away from money), would benefit greatly from this. To think about the fact that, say, a doubling of all production would mean we were richer, and not that we were impoverished, is obviously a good first step. It shows how silly the typical businessman’s complaint about a “scarcity of money” is.

==> JS Mill and other free-market economists since have appreciated the great wisdom of what Say wrote, and still think it’s critical for the layperson to read it as Say intended. But then they get really anal with it and say, “OK, if you are talking about a barter economy, then it is mathematically true. If you’re talking about a monetary economy, then in principle we could have a glut of all commodities and a shortage of money, but that would be due to prices not adjusting for some reason. Say was aware of all of this, and I still don’t think you need government deficit spending to boost AD, because why won’t prices just adjust?”

==> However, someone who wanted to disparage Say’s Law could say “Duh it just assumes away the problem. Of course we’re dealing with a monetary economy and prices/wages are sticky for various reasons.” I think this is a very unfair response, which (a) gives too much credit to the original “man on the street” diagnosis of recessions and (b) is bad policy advice, because the Phillips Curve will simply shift once you pump in more money.

Now on to your three points. I’ll handle them out of order.

“3) Whether the best defense of the Law of Markets is the mathematically-demonstrable equality between (ex post) aggregate supply and demand in a barter economy, with necessary modifications to allow for money”

It depends what you mean by “best defense.” Someone who has been trained in economics can think in terms of various markets for goods, and so yes I would have to couch Say’s Law in that framework to show how it is still true (with flexible prices).

But if you mean, “When I first explain Say’s Law to a regular person,” then I give the historical context and quote Say himself. I.e. just what I did in the lecture.

“1) Whether Mill interpreted Say’s analysis as only being necessarily true in a barter economy”

Yes, of course he did. He said so explicitly in “Some Unsettled Questions…”:

============[QUOTE FROM JS MILL BEGINS]===========
<i>There can never, it is said, be a want of buyers for all commodities; because whoever offers a commodity for sale, desires to obtain a commodity in exchange for it, and is therefore a buyer by the mere fact of his being a seller. The sellers and the buyers, for all commodities taken together, must, by the metaphysical necessity of the case, be an exact equipoise to each other; and if there be more sellers than buyers of one thing, there must be more buyers than sellers for another.

II.70
This argument is evidently founded on the supposition of a state of barter; and, on that supposition, it is perfectly incontestable. When two persons perform an act of barter, each of them is at once a seller and a buyer. He cannot sell without buying. Unless he chooses to buy some other person’s commodity, he does not sell his own.

II.71
If, however, we suppose that money is used, these propositions cease to be exactly true. It must be admitted that no person desires money for its own sake, (unless some very rare cases of misers be an exception,) and that he who sells his commodity, receiving money in exchange, does so with the intention of buying with that same money some other commodity. Interchange by means of money is therefore, as has been often observed, ultimately nothing but barter. But there is this difference—that in the case of barter, the selling and the buying are simultaneously confounded in one operation; you sell what you have, and buy what you want, by one indivisible act, and you cannot do the one without doing the other. Now the effect of the employment of money, and even the utility of it, is, that it enables this one act of interchange to be divided into two separate acts or operations; one of which may be performed now, and the other a year hence, or whenever it shall be most convenient. Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells; and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another. The buying and selling being now separated, it may very well occur, that there may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible. This is always actually the case, in those periods which are described as periods of general excess. And no one, after sufficient explanation, will contest the possibility of general excess, in this sense of the word. The state of things which we have just described, and which is of no uncommon occurrence, amounts to it.</i>
===============[QUOTE FROM JS MILL ENDS]==============

So I don’t know how you can deny that JS Mill did in fact make that concession (if that’s what you want to call it), which is why even sympathetic people like Thomas Sowell said he did.

Now to be sure, in full context, JS Mill isn’t throwing Say under the bus. Rather, he’s trying to show that the fans and critics of Say’s Law ultimately agree on the facts of the matter of a recession, and he’s trying to show why they are talking past each other.

“2) Whether such an interpretation is in any way justified”

This is ambiguous. If you mean, “Was Say thinking in terms of a Walrasian model and assumed that the money commodity was just like any other?” then no, of course not.

But if you mean, “Are we allowed to think about individual markets clearing, to test whether it is literally impossible in a monetary economy to have a general glut in everything but money coupled with a shortage of money?” well why can’t we? That is consistent with modern Misesian price theory.

I think it helps isolate exactly what the difference is between Say and his critics.

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