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In addition to the reference provided by Dr. Herbener I would also look at the following works for a refutation both of the labor theory of value and its logical implications (all references below are to the works of Eugen von Bohm Bawerk – Mises’ teacher and the foremost critic of Marxism in the second half of the nineteenth century):

1. For a critique of the fact that prices of commodities reflect the amount of labor time that went into producing them see Bohm Bawerk’s Capital and Interest (Book V1, Chapter 3 on Marx) available online on mises.org.

2. See the same source for an excellent critique of Marx’s theory of interest/profit that follows logically from an adoption of the labor theory of value (this is Marx’s Theory of Surplus Value).

3. Then see Bohm Bawerk’s Karl Marx and the Close of his System, also available online on mises.org.
In this work he critiques another logical implication that Marx deduces from the labor theory of value, namely, that the rate of profit should be higher in certain industries as compared to others depending upon how labor or capital intensive they are.

These two works together constitute a withering demolition of the Marxian system.

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Central planning definitely does suffer from the problem of information gathering. Hayek called this the “knowledge problem” and argued that this problem made socialism practically impossible. If you wish to familiarize yourself with Hayek’s critique of central planning see his edited book – Collectivist Economic Planning, available for free on Mises.org.

The same problem can apply to decisions regarding how to spend huge sums of money in a fiscal stimulus program. And this, coupled with the problems of perverse incentives that plague all bureaucracies (given that their activities are not guided by the profit loss system – on this see Mises’ Bureaucracy also available on mises.org) will cause delays and inefficiencies in the execution of any government program including major public works projects funded by fiscal stimulus.

Whether or not this delay is sufficiently long enough that the actual expenditure of stimulus money occurs only after the economy has recovered from a recession and is in its expansionary phase is an empirical question that will only be answered by analyzing the relevant data. I have so far never come across such an argument – most empirical studies on the effectiveness of fiscal stimulus take it for granted that the acceleration in government spending caused by a recession actually takes place during these recessions and not after recovery.

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Patricia,
My apologies for this delayed response to your questions. Yes, your questions are pertinent. All central banks create money and this money finds its way into many different sectors of the economy. Which sectors are affected in any specific time period and country are questions that can be answered only after detailed historical inquiry.
For an enhanced understanding of the process by which central banks create money in a fractional reserve banking system I would recommend Rothbard’s Mystery of Banking, especially chapters 6-11. A solid understanding of this process is necessary for obtaining a grasp of what is going on in the various sectors of the economy.
For answering questions related to the banking sector a good place to start would be David Stockman’s recent work – The Great Transformation.

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Sheyboer,

That is an excellent question. The pre-Keynesian beleif that chronic and sustained unemployment is not a market phenomenon was based on Say’s Law. One of the primary goals of Keynes’ General Theory was, of course, to critique Say’s Law and therefore to prove that the free market could and does often generate periods of widespread unemployment.

In the process of critiquing Say’s Law, however, Keynes “straw-manned” it, i.e., he caricatured what economists before him believed was the content of the law and then proceeded to criticize this caricature. Unfortunately, many economists just adopted Keynes’ rendition of the Law as the correct and true one and completely forgot about what the pre-Keynesian economists actually said and believed.

Thus, the history of interpretation regarding Say’s Law is rather tortured. The best source to understand what the pre-Keynesians actually believed is found in the work of Steven Kates, especially his work titled “Say’s Law and the Keynesian Revolution.”

I urge you to read Kates’ book if you are interested in this topic as well as the book by William Hutt titled “Say’s Law: A Re-statement” that is available for free on mises.org. Hutt’s work re-states Say’s Law and improves on the formulations of the pre-Keynesians. While this book is a vital and important contribution to economics, it is rather difficult to understand at first, so you may have to persevere!

Austrian business cycle theory provides an understanding of why a boom turns into a bust. It does not, however, provide an explicit theory of why the bust turns into a recession, i.e., a period of chronic unemployment.

GP Manish

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Sheyboer,

A Keynesian would respond to the points that you raise by saying the following:

1. When there is a situation of large-scale unemployment of resources, every dollar that the government appropriates would not have been spent by the private sector. In fact, it is precisely because the private sector does not spend enough that we have a situation of widespread and sustained unemployment. The government needs to step in and spend the money because the private sector is refusing or is unable to do so. There are psychological factors holding back the amount of expenditure in the private sector and so there is no way that private sector expenditure can increase without help from the outside. So the government has to step in.

2. This is precisely why the government is not really competing with the private sector for resources when it spends money. Given the lack of private sector expenditure, the unemployed resources would not have found any employment were it not for government expenditure.

3. In a scenario of high unemployment one should not care about how resources are allocated. The key is to ensure that the resources find a source of employment, which they will find only if there is more expenditure. And this expenditure is not forthcoming from the private sector due to certain psychological factors.

A criticism of Keynes must try and pick apart his theory of why unemployment arises in the first place. If one accepts his theory of unemployment as being caused by a lack of expenditure forthcoming from the private economy due to certain psychological factors, one essentially has already accepted defeat!

GP Manish

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