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jmherbener
ParticipantI’m saying that the burden of proof is on the proponent of statistical analysis. He must demonstrate that Mises’s criticisms are incorrect and that statistical analysis of the data of human action renders better understanding of historical events than what Mises called specific understanding. On the latter, look at Mises’s Theory and History:
ParticipantWhen mainstream economists use the phrase rational self interest they usually mean that a person uses suitable means (that’s the rational part) to attain ends that he perceives as beneficial (that’s the self interest part). Adam Smith famously postulated that we owe our supper not to the benevolence of the butcher or baker but to their self interest. In other words, in the market people act to benefit others out of regard for their own benefit.
Mises pointed out that this distinction between self interest and other interest isn’t relevant for the economic theory of human action. All we need is the distinction between the higher value of the chosen alternative and the lower value of the alternative not chosen.
Take a look at the section in Human Action on Rationality and Irrationality, pp. 18-21.
http://library.mises.org/books/Ludwig%20von%20Mises/Human%20Action.pdf
ParticipantI agree with Mises’s criticisms of econometrics. He makes two main points. First, it isn’t possible to formulate economic propositions as mathematical functions because there are no constants in human action. Everything is a variable. So it is a mistake to postulate C = a + bY for example. Second, human action is subject to case probability, which has no numeric expression, and not class probability.
It seems to me that the burden of proof is on those who claim that econometrics renders either theoretical or historical truth.
Here is a recent example of insightful historical analysis without econometrics:
ParticipantHere is an Altman NYT piece on the wealth tax:
http://www.nytimes.com/2012/11/19/opinion/to-reduce-inequality-tax-wealth-not-income.html
He seems to be arguing that inequality of wealth polarizes the social classes and that can lead to reduced productivity. The evidence he cites for this is over the last twenty years wealth inequality has risen dramatically (while income inequality has not) and economic production has stagnated. What he doesn’t admit is the reason that income inequality has not change and wealth inequality has is the Fed induced asset boom. The rich hold much bigger investment portfolios than the middle class or poor and so their wealth explodes during booms and collapses during busts.
Also, he claims people in the middle class would not pay anything under the wealth tax and so they would be in a better position be productive under a wealth tax compared to an income tax. So, he would say that the wealth tax will make the pie bigger than it is with an income tax.
The big mistake in the argument he makes in the NYT piece is his claim that “wealth inequality distorts economic opportunity.” Regardless of a person’s circumstances, his economic opportunities are always greatest if the market is unhampered. Then he is able to buy from sellers who are willing to offer the lowest prices and sell to buyers who are willing offer the highest prices. People in a market live comfortably We all live comfortably because of the capital structure that has been built up over the decades by the saving of capitalists and investing of entrepreneurs. The bulk of the greater productivity rendered by working with capital goods goes to workers, not the capitalists or entrepreneurs. Roughly 70% of National Income goes to labor, 4% to capitalists (interest) and 15% to entrepreneurs (profits):
http://www.gpo.gov/fdsys/pkg/ERP-2012/pdf/ERP-2012-table28.pdf
In 2011 IV quarter at an annualized rate (billions of $):
National Income = 13,430.9
Employee Compensation + Proprietors Income = 8,250 + 1,113.7 = 9,363.7
Corp. Profits = 1,970.1
Interest = 535.7
Rents = 406.3ParticipantHere are a few sources to consult:
Also, James Grant’s book, Money of the Mind.
ParticipantWhat Adam Smith was trying to illustrate with his metaphor of the invisible hand was that it doesn’t matter if businessmen have no intention of helping other people. To succeed in the market and thereby help themselves, they must help others. He softened the view of Bernard Mandeville in his Fable of the Bees in which Mandeville argued that private vice is necessary for provision of the public good. “Greed is a necessary evil” as you put it.
Greed is certainly not a necessary evil in society. The market economy operates fine whatever motives people have. They can be greedy, like Donald Trump, or altruistic, like Mother Teresa. All that is necessary for the market economy to function is that we are able to give each other monetary incentive. Consumers do this by buying or refusing to buy products. Entrepreneurs do this by offering or refusing to offer monetary compensation to acquire producer goods. Monetary incentives, as opposed to barter trade, are necessary for economic calculation, But the motive to pile up money, i.e., greed, is not.
Consider historical examples. The fastest growth in the American economy was in the late 19th century. But Americans were certainly less greedy and materialistic back then than now. The fastest growing economy in the world over the last thirty years has been the Chinese. But nobody claims that what happened to spur this grow was massive greed overcoming the Chinese people. Instead, a better performing economy comes as a result of a more market oriented economy.
ParticipantPublic utilities are creatures of the state. It’s unlikely private enterprise would have built them in their current configuration. So it’s not a failure of the market that they cannot operate as a normal business. The same is true of many government supported enterprises, e.g., central banks and fractional-reserve commercial banks.
Here is a brief history of regulation of public utilities.
http://www.nber.org/chapters/c9986.pdf
That issue aside, the unstated premise of your inquiry seems to be that it would be socially harmful if private enterprise resulted in a single seller of a gas or electricity in each local area. But that’s not true. The market doesn’t exist to favor consumers over producers, The market is concerted effort, the attempt of all of us to arrange a division of labor to best satisfy our preferences. If a single enterprise supplies the entire demand for some good profitably, then that arrangement is efficient. Even if one can imagine other arrangements that favor buyers more than sellers or sellers more than buyers,
The way the division of labor might have emerged in power generation within the free market goes as follows. There is a group of capitalists and entrepreneurs who want to build a power generating facility and sell the power to customers in a small community. Currently the customers generate there own power or appeal to other market produced sources of power. For example they chop down trees and burn the wood to heat their homes or they power their lanterns with kerosene produced by a company. To transmit the power produced in the generating facility, the entrepreneurs have to buy land for the facility preferably in the most advantageous location and lay transmission lines to customers’ homes. To do so, they must pay the owners of the land upon which they plan to build and they must pay to obtain permission of the owners of the land upon which they plan to to lay transmission lines. The owners of the land can then negotiate favorable terms for the price of electricity since the power company cannot sell to them without transmission lines.
The same principle would apply today if power generation was privatized. Homeowners would then own the transmission lines on their property and be able to negotiate favorable terms with power companies. If power generation were still enormously profitable, then entrepreneurs would have monetary incentive to develop alternative technologies that could generate power onsite at each house, like hydrogen fuel cell electricity or propane powered heat.
Undoubtedly, if the state had stayed out of power generation, the system would look much differently than it does.
ParticipantThe demand for credit has fallen but the demand for money has risen. This is the tendency in every bust. People borrowed too much during the boom and so their demand for credit declines. At the same time people anticipate a decline the price of assets they acquired during the boom and so their demand to hold money increases. The effect is both low interest rate (from the reduced demand for credit) and low price inflation (from the increased demand to hold money).
As you say, the Fed’s QE1, QE2, and QE3 have been bailouts to financial institutions. The Fed bought their bad assets (or claims to assets) and paid with cash (technically, checking account balances at the Fed). This made the financial institutions both more solvent and more liquid. If banks use their excess reserves as the basis of issuing fiduciary media, then the money stock will explode and serious price inflation will result. But until banks use their excess reserves to increase the supply of credit by issuing more fiduciary media, the conditions in the credit market have not changed.
ParticipantIndeed, that’s correct.
ParticipantThey used the housing market to identify the trigger setting off the financial crisis. This made sense in the recent boom-bust because the government’s fostering of mortgage backed securities channeled the credit expansion into housing. When the MBS market reached a peak it was an accurate indication of the unraveling of the entire financial boom.
ParticipantThe premise shared by both sides of your debate is incorrect. The physical aspects of human action are adjusted to satisfy preferences, not the other way around. We don’t change our preferences (e.g., increase consumption) to invigorate production or change our preferences (e.g., save and invest more) to stimulate economic growth, we arrange production to satisfy our preferences, including our time preferences. The economy is our concerted effort to arrange production in a division of labor to best satisfy our preferences. If our preferences shift toward consumption and away from saving, the market economy will shift production away from building up the capital structure to producing consumer goods more directly to give us what we prefer. If our preferences shift toward saving and away from consumption, the market economy will shift production toward building up the capital structure to give us what we prefer.
The problem of the boom and bust is that the monetary inflation and credit expansion of the boom generate a build up of the capital structure that does not satisfy our time preferences. During the bust (i.e., right now), the question is how to economize the transition of the distorted capital structure into the form that best satisfies our preferences. The basic answer is to let entrepreneurs alone to do their task. This task will be made easier if people lower their time preferences. By saving and investing more, they give entrepreneurs command over more resources to make the transition and less liquidation overall will need to be done if time preferences stay lower. The entrepreneurs’ task will be made more difficult if people increase their consumption because they will command fewer resources to make the transition and more liquidation will need to be done if time preferences stay higher.
The problem with the argument that consumption spending determines investment spending through the interconnectedness of production through the capital structure (instead of saving determining investment spending via time preferences) is that it ignores time. Mining company entrepreneurs must spend now to buy inputs to produce iron, then, steel companies must spend in the near future to buy the iron and other inputs, then, auto companies must spend in the later future to buy the steel and other inputs, then, consumers spend in the even later future to buy the autos. Obviously consumption today can only generate revenue in the future for producers. But, the goods must already have been produced to be bought and paid for by consumers. Therefore, producers must have saved and invested in the past to produce the goods sold today and must be saving and investing today to produce the goods which will be sold in the future. In a market economy the inter-temporal dimension of production is account for through the time market,
ParticipantDemand for credit has collapsed, which is not unusual during a bust. Both consumers and entrepreneurs take on too much debt during the boom and pay it down during the bust.
Interest rates move down if either demand declines or supply increases. You can tell the difference between the two cases because a decline in demand will reduce the quantity of the good traded (in this case present money lent) while an increase in supply will increase the quantity of the good traded. Since both the interest rate and the quantity of credit have declined, we know that demand for credit fell.,
The banks did an asset swap with the Fed during the crisis. They sold mortgage backed securities to the Fed in exchange for reserves (bank accounts at the Fed that pay interest). Reserves serve as the basis for issuing fiduciary media. Banks have, so far, been content to hold reserves and not issue more fiduciary media by creating new credit. This is in part because the prospects for the loans will not pay high enough interest rates to compensate them for putting risky assets back on their balance sheets. There is some evidence, however, that bank credit may be thawing, in which case we’ll get to see if Bernanke’s tools work to restrain monetary inflation.
ParticipantWhat industries are most affected vary from one cycle to the next. It depends on historical factors contingent to each cycle. It was radio in the 1920s, computers in the 1960s, dot.coms in the 1990s, housing in the 2000s. Historical work gives an account of the contingent factors.
Take a look at Tom Woods’s book, Meltdown.
The primary cause of business cycles is monetary inflation and credit expansion generated by a government supported money and banking system characterized by central banks and fractional-reserve commercial banks. Yes, the entire capital structure is distorted by monetary inflation and credit expansion. At the height of the bust, 15 million people were unemployed. the majority of them did not have jobs building houses before the bust. BLS data show that employment in construction and extraction occupations was around 5% of all employment in the U.S. in 2011.
http://www.bls.gov/cps/cpsaat09.pdf
Census Bureau data show that new single family house construction is only around 1/5 of total construction spending in the economy and total construction is a small part of overall production.
https://www.census.gov/construction/c30/pdf/privsahist.pdf
Housing construction is a small fraction of all production in the economy. Housing was a conspicuous, but not major, part of the recent boom-bust. In every cycle, the press draws our attention to a signature industry. By doing so, it draws our attention away from the more important aspects of the cycle.
ParticipantKirzner wrote no general treatise on economics. Instead, his writings tend to be topical. His most well-known work, for example, is on entrepreneurship. So, unless you have an deeper interest in the topics he addresses, Kirzner isn’t the best source for being introduced to Austrian economics.
Joe Salerno discusses Kirzner in the context of the Austrian school:
ParticipantHere are a few articles on Greenspan that try to explain his views.
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