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You are correct in your criticisms of the video. The heart of the multiplier story, as you correctly point out, is that an initial “push” to the economy from either investment or government expenditure draws in previously idle resources into economic activity and thereby raises output or real income by a multiplier, the size of which is determined by the marginal propensity to consume.
So the video starts off with an incorrect premise, largely because it ignores the interaction between an initial increase in expenditure via stimulus and how that has a snowballing effect on income via the consumption function.
I believe Callahan is broadly correct. The key point he is making in his criticism is that Rothbard ignores the inter-relationship between R and V (in his example), which would be akin to ignoring the interaction between C and I in the Keynesian multiplier story. That interaction between C and I, whereby an initial increase in I translates into an increase in Y which in turn leads to an increase in C in accordance with the consumption function is indeed vital to the multiplier story.
I also agree with you that we can ignore the malice in Callahan’s argument regarding Rothbard’s motivations!
I apologize for the tardiness of my response. Let me take your points in order. Regarding the claim that Keynes was a great speculator, I agree more with Hunter Lewis. Keynes met with both success and failure as a speculator and wasn’t, to the best of my knowledge, consistently successful enough to be classified as a “great speculator.” For more on Keynes’ experiences as a speculator as well as other aspects of Keynes’ life I would recommend Robert Skidelsky’s biography.
As far as the question of the rationality of markets goes, I believe Ferguson is correct when he claims that markets are not perfectly efficient or rational. In other words, given the endemic uncertainty that characterizes our world, entrepreneurs often make errors. After all, that is why we witness the phenomenon of monetary losses, which are a reflection of incorrect guesses or predictions of entrepreneurs. I do not, however, agree with the conclusion that Ferguson draws from this premise. The fact that entrepreneurs make erroneous judgements does not imply that that there must be boom and bust cycles on the market. In fact, the market possesses an inherent error correction mechanism – the profit-loss system – that rewards the successful entrepreneurs and penalizes the unsuccessful ones. This ensures that at any given moment in time the most able or the entrepreneurs that have been most successful in the past are the ones that allocate resources. Moreover, under normal circumstances some entrepreneurs make mistakes whereas others succeed. Business cycles, however, result from a cluster of entrepreneurial errors, i.e., many entrepreneurs making the same kind of errors simultaneously, a phenomenon that is a result of a subversion of the profit loss system, not a result of the existence of losses.February 5, 2014 at 9:43 am in reply to: Lecture 19. profits higher than satisfactory level #21148
You are correct in your interpretation. At the equilibrium level of GDP, i.e., when income equals realized expenditure, entrepreneurs earn a “satisfactory rate of profit.” However, if total realized expenditure outstrips income earned during a given period, then the profits that entrepreneurs earn exceeds this base, satisfactory rate and this induces them to expand output until that rate is restored, thereby bringing about equality between income and expenditure (when they expand output they employ more people, thereby expanding income and this process continues until income rises to equal realized expenditure).
Consider the following scenario: The quantity of money in circulation in an economy doubles and yet there is no increase in the price level. Would this empirical evidence make an economist doubt the fact that an increase in the money supply leads to a rise in prices? Certainly not; the economist would just point out that in obtaining the said evidence, all else has not been held equal. Thus, money demand might have risen along with this increase in money supply, or the quantity of goods produced might have risen as well. Taking all the effects together, one can explain the stable price level despite the rise in the money supply.
The case of empirical evidence regarding the minimum wage not reducing employment is similar in nature.
Conclusions like these are some of the unfortunate consequences of an indiscriminate use of aggregates in economic theorizing. There is no “labor market” that exists in any economy; instead, there are many different labor markets employing workers who differ in their skills and other qualities. It follows, as Dr. Herbener states, that there is no “aggregate labor productivity” that determines “the real wage rate.”
Such fallacious reasoning based on imaginary aggregates is one of the most unfortunate consequences of the Keynesian Revolution. For more on this see p. 15-24 in “Tiger By the Tail,” a collection of Hayek’s writings, where he talks about the misuse of aggregates in Keynesian Macroeconomics:
1. The minimum wage does not lead to unemployment due to a substitution of machinery for labor. No doubt this does occur in some instances after the imposition of a minimum wage, but it represents a reaction on the part of the entrepreneurs to maintain their original rate of profit despite the hike in their costs of production. Moreover, this need not be the only reaction of entrepreneurs to a hike in their costs of production. Indeed, in certain sectors of the economy the imposition of a minimum wage might lead to entrepreneurs quitting those sectors, if there is no viable way to maintain the rate of profit via factor substitutions. Plus, note that businesses cannot just pass on these increased costs via hikes in the price of the product. The latter is in turn determined by the prevailing demand and supply conditions in the product market and can only be raised at the expense of reduced profits for the firm.
The minimum wage leads to unemployment because, given the underlying demand and supply schedules (that represent the prevailing maximum buying prices on the part of the buyers and the minimum selling prices of the sellers), an imposition of a wage rate above the market clearing level will lead to fewer workers being hired. This holds true for any and all segments of the labor market; manufacturing and service segments, skilled and unskilled segments. The only way the minimum wage will not lead to unemployment is if the market clearing wage is above the proposed minimum wage rate (Tom Cruise, for instance, is unaffected by the prevailing minimum wage rate).
2. Regarding the argument that the imposition of a minimum wage would lead to increased spending (assuming that the marginal propensity to consume of workers is higher than that of the employers), your brother is right in noting that this is an argument that Keynesians often make to support their claim that the imposition or a hike in the minimum wage rate would stimulate the economy.
This argument, however, erroneously assumes that there is an aggregated market for “labor” out there in the economy. This, of course, is not the case and is just another manifestation of the misuse of aggregates by Keynesians. On the market there exist a number of labor markets. The minimum wage would affect some of these markets, and would lead to a reduction in the number of workers hired in these markets. This, in turn, would lead to a reduction in demand on the part of the fired/unemployed workers for other goods and services. These markets would now witness a decline in demand. If prices are propped up above market clearing levels in these markets, then more unemployment results.
This cumulative process is best explained by William Hutt. See his “Significance of Price Flexibility” (available online on mises.org) and his book “A Rehabilitation of Say’s Law (also available online). For a simple summary of his argument see the following short piece by Richard Ebeling:
If you also complete the course on Keynes you would have covered a significant part of the material that wold be covered in an intermediate macroeconomics course (at the undergraduate level).
I would urge you to read Rothbard’s treatment of economic growth in Man, Economy and State in order to gain a thorough understanding of ABCT. Once you understand how the process of inter-temporal coordination occurs on the market, i.e., how entrepreneurs respond to changes in time preferences and allocate resources in a temporal pattern that yields the right consumer goods at the right time, a distortion of this process (which is what ABCT is in essence) will be easy to grasp. The relevant material in MES is Ch. 6 (on the rate of interest) and p. 517-527 in ch. 8.
In answer to your initial question, I would agree with Prof. Herbener in stressing that scarcity is a purely quantitative phenomenon, in the sense that a given stock of a particular means is scarce if the available amount of it is insufficient to satisfy all the wants that could be satisfied with it. So, if you have 1000 pails of water in your possession and can potentially utilize 2000 pails of water to satisfy various ends, then a particular quantity of water (say, 500 pails) is a scarce good because the satisfaction of certain ends are dependent on your having the water in your possession. In other words, if you lose the 500 pails you must endure some loss of satisfaction.
However,, if the available supply of the means is more than sufficient to satisfy all your ends (so if, for example, you have not 1000 but 2500 pails of water in your possession), then water is no longer scarce in that losing an amount of water that is less than 500 pails does not involve any loss of satisfaction. For a detailed analysis of the nature of scarcity along these lines see Menger’s Principles (Chapters 2 and 3) and Bohm Bawerk’s Positive Theory of Capital (Book 3, Chapters 1-3).
Regarding your follow up question, I would argue that what Mises is trying to say is that we do not make any choices with respect to a good that is not scarce. Thus, we do not allocate units of goods that are useful but available in abundance (in the sense outlined above) amongst ends or purposes. We do not, for instance, allocate a breath of air to the purpose of breathing and not to some other use, since we do not give up any other ends in using that amount of air to satisfy the end of acquiring oxygen. The stock of air available is so abundant that we can waste a breath or in fact a roomful of air and not face any potential loss of satisfaction because this does not impair our ability to satisfy wants in the least.
Similarly, in your example you are not engaging in choice with respect to those boards. You are not allocating them to one purpose or end (exercising) in preference to other ends that could also be satisfied using them (if the boards were not as durable as posited in your example you would still be engaging in inter-temporal choice with respect to them, i.e., using the boards now would entail not using them to satisfy the same end in the future). That is what Mises means when says that there is no action with respect to those elements of man’s environment that are not scarce.
To add to what Professor Herbener has said in answer to your questions:
It is vital to keep in mind that the entire production structure/ stages of production construct employed by Rothbard is essentially prospective or forward looking in nature. It is an analytical tool to emphasize and analyze the fact that the available stocks of the factors of production (higher order goods) can be allocated in different temporal patterns, i.e., they can be allocated to produce a stream of consumer goods in the near future (say, two years hence) or they can be allocated to yield such a stream of consumer goods in the remoter future (say, six years later).
In Rothbard’s use of it in MES he makes the simplifying assumption that the factors available for allocation consist only of stocks of “original factors,” i.e., land and labor. This pool of factors is allocated in a certain temporal pattern, producing capital goods along the way, to finally yield a stream of consumer goods. It therefore follows that the highest stage involves the use of only land and labor and the payment of only wages and rent.
In the real world, as you correctly note, the available pool of factors includes not only land and labor but also durable capital goods produced in the past. Not only the available labor and land but also the available durable capital goods “carried over” from production activities in the past are allocated in a certain temporal pattern by the decisions of the various entrepreneurs. It thus follows that in this real world the highest stages of production would involve the use of such factors as well. Making this change to the analysis, however, does not invalidate any of the conclusions derived by Rothbard. His assumption is merely a simplifying one that keeps the analysis tractable.
This question could be best answered by considering the imaginary case of Robinson Crusoe, who finds himself shipwrecked on an island. He needs food and therefore decides to fish. The shortest/ quickest way for him to acquire fish would be to fish with his bare hands. Constructing a raft and a net and thereby increasing his productivity in catching fish involves an inter-temporal trade off – he needs to give up fish in the present (or nearer future) so as to obtain fish in the future (or remoter future). To avail of this productivity increase he needs to overcome his time preference and save and invest. Let’s assume he does that, so that he now has a raft and a net to fish. Now the shortest way to acquire fish is to use the raft and the net, given that these capital goods have been produced in the past and are available.
Now assume that Robinson decides to produce another raft and another net; he wants to ensure that he has these goods to fish when his current raft and net become unusable due to the inevitable depreciation that they will undergo. The production of this new raft and net represents that same inter-temporal choice that the production of he first set involved. Robinson now has to allocate some of his labor time that he could have used to fish with the raft and the net that he already owns (or that he could have enjoyed in the form of leisure) to the production of a raft and a net that will be available for use only in the remoter future.
The case in an economy practicing the division of labor is similar. If one firm in the fishing industry is using a raft and a net whereas the other fishermen are fishing with their bare hands, the use of resources to produce more rafts and nets involves a lengthening of the existing production structure.
In addition to the references provided by Dr. Herbener you might also want to look at pages 487-498 from Human Action where Mises provides an excellent analysis of the benefits derived by the developing countries from the international capital market and how the presence of these markets actually lifts the living standards of the citizens of these poorer countries.
That is a very interesting question. Yes, it is true that the policies advocated by Keynes and the Keynesians benefits those in power. After all, it is increased expenditure on the part of the government that is supposed to be the elixir that lifts the economy out of a chronic recession. Which politician wouldn’t love that piece of advice?!
Nevertheless, it would be wrong to conclude that Keynesianism is popular only because of political propaganda. Most economists who espouse Keynesianism do so because they sincerely believe that those policy conclusions will help economies recover from recession and thus benefit people who have lost their jobs and are suffering financially.
So if you are looking for the reason that the vision of Keynes is so popular, you must look beyond vested interests and study the underlying economic theory. It is essential to understand the underlying Keynesian theoretical framework, isolate the flaws in it and then try to investigate why economic theorists are swayed by those faulty arguments. It is ultimately because the ideas of Keynes have won the battle over the ideas of his critics that the doctrines espoused by him and his followers are so popular.
In addition to what Dr. Herbener said in response to your question over in the Austrian Economics forum I would add that a lot of the prosperity of the 1950s was the result of extensive deregulation undertaken in the aftermath of WW II. On this see Robert Higgs’ article “Wartime Prosperity? A Reassessment of the US Economy in the 1940s” (available online at independent.org) and the article titled “The Great Depression of 1946” by Vedder and Galloway (available on mises.org).
For an account of how the free market emerged despite the regulations and restrictions of the guilds and without the backing of the state (which in most cases took the side of the guilds) see Rothbard’s History of Economic Thought Volume I, Chapters 7-11.