[miljacic]

Mr. Herbener, from the text you linked above:

“But to the extent these schools reject the core building blocks of neoclassical economics—as Austrians reject optimization, for example…”

Could you please say a few words on what exactly is this “optimization” that Austrians reject? Thank you.

[miljacic]

Oops, sorry Bharat, I thought no one saw that… on second thought it sounded a bit too smart-alecky, so I removed it. Your reply is very good too, it’s a different perspective.

[miljacic]

It’s all fine.

[miljacic]

Mr McClanahan, thanks to your lectures I made more then a few constructive discussions with various people on the subject of American history, and added another thousand of pages into the general reading queue.

[miljacic]

Give some examples as to what do you mean more concretely. You mean like, computer parts break down faster? In some of technical products, producers have learn to optimize better, so one way to reduce the price is to shorten the lifespan of a computer or a music box. Why would you make a newest laptop work impeccably for 15 years (and they could achieve this easily, if they only wanted it) if after 4-5 years it’s going to be soo obsolete? Anyway, start from there…

[miljacic]

… before prof. Herbener or anyone else replies, since the questions do not seem hard to answer (I think)…

Mr. Josh, if you are an oil company and funds are not saved first, then you should quit your job until more funds are made. If there are no savings in the system (it’s very poor), and so interest is naturally high, you should be doing something else not drill oil, maybe bake bread. If, now, rates get artificially lowered by, effectively, printing money, you will be able to snatch the funds from more currently important tasks (baking bread) into drilling oil.. and that’s bad at this very moment when the system is so poor.. people need bread not oil. The high interest is telling you to feed the people first, not their cars.

A moron who wants to borrow money to build a tanning salon in a tropical climate.. will never get that money from anyone with common sense. But let’s assume he does get it somehow (by being very charming, let’s say, Elvis Presley incarnate). If interest rate is naturally low, then the system is rich, everything is plentiful, so if that money is lost, no big deal. If, however, interest rates are artificially low, the system is poor, people are struggling to survive, and that lost money is a great loss indeed.

Why did (artificial) low interest rates only stimulate home construction and deficit spending, and not the building of factories, oil wells and other more useful things? Because, then, no one knows what is “more useful”. The system is pumped with new money and whoever gets it first will do with it whatever he/she wants without being (quite soon) penalized if the usage is not very efficient one. And what would be really efficient? No one knows because the interest rate is false and conveys no information about reality. Then, also, government may step in and, in various ways, direct this new money into some specific areas, like with “everyone needs to buy a house”. .. then in this areas things bubble up and you get a bubble. But even if the government does not direct things, this new money will gather spontaneously into some random puddles of activity and form the bubble there.

Answers to the rest of the questions go are along these same lines.

[miljacic]

“1) But if there is a large supply of low-skilled labor, then businesses will be able to exploit workers and charge extraordinary low wages, since they know they can find another employee if the person quits.”

First of all, I think, low-skilled labor is always the most abundant of all, their supply will always be the largest of them all. That is because poor, uneducated people have most incentive to create new children. The general argument applies here too: when a system is poor (low capital investment) it has to pay all attention to short-term projects. Only as it gets richer, it gets freed to engage in longer-term projects too. So, poor children are put to good use very early on, and poor families tend to have a lot of them. If this natural process is seriously distorted (by taxation rich–>poor), then the children-making slows down, and the whole society moves toward a slow self extinction by depopulation.

These low-skilled workers will accept jobs/salaries that benefit them. They will not accept salaries below their elementary sustenance… which itself kinda sets a natural “minimal wage law”. If they can not find any jobs to sustain themselves (in the absence of MW law) that very limitation is regulating their numbers in the long run. A poor family may have 5 kids and benefit from their early labor, but will not have 10 kids because some of them could not sustain themselves… its a big self-regulatory feedback loop. The result of this mechanism is that the number of low-skilled workers increases only as much as society gets richer. In other words, poor people benefit A LOT from society getting richer because they can immediately increase their numbers. And what gift is more precious then the gift of very life??!! What do rich people get as society gets richer? One more yacht? One more airplane or a castle? That’s not much in comparison! Poor people, low-wage workers are the biggest beneficiaries of economic progress.

Also, at this point Mises will step in to say that in capitalism there is always need for workers. If governments do not interfere, there is never enough work force. These poor, low-wage, people are still very useful and needed! They WILL be offered wages to sustain themselves, and from then on they can (if ambitious at all) learn through working and climb up slowly, and then create something, if just a little better, for their children, etc.

Look at the example from above, poor families having lot of children… even the labor of a small child can be put to good use – a child can benefit more then what it costs, and still have a nice family and a childhood to be proud of later on!! Mises was so right, there is never enough workforce.

MW law messes this huge complex mesh of feedback loops and information dynamics in many ways.

Finally, and I don’t know why people often forget this – working is therapeutic. Existential struggle, trying to make ends meet for your family, having ones ego shattered by too much expectation etc etc – all this struggle is very healthy and invigorating. At the end, when a person does manage to survive against the odds and provide for a family – this is so rewarding and satisfying and something one can be truly proud of. MW messes even with this by gluing people to welfare.

“2) Well, if they can’t get hired for the minimum wage, that’s what welfare is for.”
Well, if they can’t live normally for being repeatedly struck on the head with a hammer each time they regain consciousness, that’s what universal health care is for.

Wouldn’t it be more fair to at least give them a choice – either to work below MW in the hope of getting some skills and then moving on, or to live on welfare and be stuck there and rot?

“He seems to think if the minimum wage is repealed then all wages will drop across the board, not just wages that are set at minimum wage, because employee’s and employers need a bench mark to set their wages, so he says.”

The simple truth is that if MW is dropped, wages across the board will effectively increase simply because it’s good for the economy, and a better economy rewards across the board.

Employers do not have the freedom to play with their wages according to MW level, as long as they have to compete for workers. If there is some sort of monopoly, a cartel, that’s a different subject. If, upon dropping MW, ALL employers in concert, like a gigantic cartel, would decrease wages then yes, wages would go down. But for that they don’t need MW.. if they can organize in such way they can do it tomorrow. That situation would be insanely unstable – a single employer could increase his wages, and the whole cartel would come crashing down as workers would flock to that guy. Every single employer could only dream that that would actually happen, and that he be the one to benefit from such tremendous stupidity of everybody else. So this will never happen.

[miljacic]

Once I had to reason with a decently smart guy (engineer at a very prominent institution) about minimum wage. It was comical to see how his mind shut off and would not accept elementary reasoning… and how he tried to come up with a bunch of wild and creative excuses and gimmicks until we just had to quit. He kinda got it that what I was saying was kinda… right, but… it just couldn’t be so!

At another time I talked with another very, very intelligent young person (soon getting his technical PhD) about some basic economics and things eventually got totally stuck… and finally I realized, and he said so, that he is absolutely certain that ANY economic exchange between two parties consists of an exploiter and an exploitee. Someone is always exploited and humiliated but has to accept the exchange because… bad living circumstances are forcing him to be used and abused. At this point it was HOPELESS to continue. I was speechless.

And these two cases were not only smart but a very, very nice and genuinely kind people. So… what to say? Is intellectual mind a tool of truth or a tool of falsehood?

Talking economics with someone unprepared is walking barefoot over fire. No matter what you say you’re gonna get it.

[miljacic]

sorengaard, you wanted something simple so the model I put up was for the purpose of simplicity.. a “toy model”, meaning that it omits many aspects of reality and just focuses on some aspects.

The zero sum is connected with the savings aspect, the one I mentioned to be ignored in the model, so yes, the model corresponds to zero sum. If you want to break out of zero sum game you have to save, and then use that saving to create a new, improved reality.

If economy is nothing but zero sum game then here’s the question: how come anything was ever created? How come we are not living anymore like prehistoric people? If it was zero-sum, we’d still be like that, nothing new would happen. Even before that, how come we became people and are not bacteria anymore, if it was all zero-sum? Even before that, how come bacteria is not a cosmic dust anymore?

Obviously, we world evolves and changes all the time, so zero-sum is just one part of economic reality, and not a very happy part when it happens… for example, work of a thief is a zero sum game: a thief plus a legitimate owner have the same total amount of wealth before and after the theft.

Anyway, without saving everything gets stuck as it is. And sure, money is mostly just a bookkeeping device of all this progress… I think that theoretically, a particular society could progress from a prehistoric stage to todays stage with its money supply being totally constant, one and the same. Underneath all the flow of the numerically same amount of money, the society would slowly grow, improve in every way, have more babies, etc etc… using one day’s savings (unconsumed products) as the basis for creating something new the next day.

[miljacic]

This is how I see it… to keep things extremely simple lets assume that nothing else changes but one company’s wages and the amount of products. It’s a gross oversimplification, a toy model, but still useful (I think).

One part of company’s money goes into making stuff, the other goes to wages to buy stuff.

[The rest of the money goes to savings but in this simple model that doesn’t change either so we’ll ignore it.]

If you artificially increase wages that means you have less money to make stuff. So yes, Wonka’s workers will have more money and will come to him to buy candy but there will be no candy because it couldn’t have been made. Society has less candy.

We could also think of the extreme case, resulting in immediate arrest of activity: ALL the money goes to wages and nothing is ever made.

This is for Wonka being a single company. If you want Wonka to stand for ALL the companies in a country at the same time, then it’s hard for me to distinguish between money for wages and money for production, because everything is someone’s wage.. if a particular company spends money into production that is actually wages for workers in other companies… if Wonka wants to make more candy it has to buy sugar so that’s wages to sugar-factory and truck-company workers. In that case, increasing wages for ALL these workers simply means disturbing the cooperation between companies – truck company won’t have trucks because it gave it money to its worker’s wages, sugar company will have no sugar etc etc.

All I wrote here is too simplistic, but you asked for something quick and easy to snap back at your liberal friend… who cannot see that if you increase the wages artificially that money has to come from somewhere else where it has a serious, important role to play and you can’t just take it away. The effect is, in the long run, you hurt and distort and confuse the production and society ends up with less.

[miljacic]

This is how the difference was explained to us children in primary/secondary school, in our Socialist country at that time…

Communism is the Ideal that our society is striving to achieve. It’s the social setup with “from everyone according to their capacities, to everyone according to their needs”. Such system would, for example, not need money because everything would be fully-fully determined by the state, and life would be easy, efficient, free and beautiful. Man would be maximally free from harsh realities of physical living such as hunger, disease, crime, etc. Daily grind of having to go to work would be much lighter and the hours minimal and short, everything being made so efficient, so everyone would have plenty of time to do whatever one pleases, like personal development through art, sports, hobbies, or just leisure. To make it short, it would be as blissful living for every single individual in the society as theoretically possible to achieve, ever. In other words Communism is the pure, perfect, utmost Socialism.

Now, the real life “Socialism” is a necessary preliminary stage of Communism. In Socialism, the society slowly rearranges itself, slowly evolving towards the ideal (Communism), as it takes a lot of time to achieve that Ideal.. people being simply stubborn and ignorant, and stuck with their old ways. So, in Socialism we still have money, some limited markets, the State not involved in everything yet, etc, etc. And it’s not fixed, but is changing, constantly getting better and better… on its happy march towards the Ideal.

So, Communism is pure perfection, the one and only, like absolute zero temperature in physics. Socialisms are many and evolving and having to compromise with previous social orders and traditions, and so each country has its own, depending on how far they got with the process of State absorbing every social process into itself.

[miljacic]

I think I see where you’re going. So, the underlying assumption in ‘broken window’ is that the object (soon to be destroyed) is beneficial for the economy therefore it is NOT good to destroy it. For example a window in the original story is a good thing, serving its purpose well.

Counterexample would be something harmful to the economy, for example, expired food. If one buys it and eats it, will get sick or die. Therefore – it is good to destroy it, yes. The world will be better off if a piece of rotten meat on the supermarket shelf is removed and ‘destroyed’.

But in his classic book H.Hazlit implicitly talks about this case too. If I remember well he talks about a factory being destroyed by bombs in the war. And yes, there is a possibility that it was ‘good’ to destroy it – if it became obsolete in a natural, free-market way, just before the bombing. In that case the owner should actually be grateful to the enemy army because he didn’t have to pay anything to put the building down – it was a highly improbable stroke of luck that destruction came just at the right moment.

So, yes, ‘broken window’ works only in the case when something beneficial was destroyed/removed. If it is beneficial, it is bad to destroy it, no matter what verbal jugglery some commentator might try to use.

In your case, these jobs were bad to begin with, so it’s good to remove/destroy them, and ‘broken window’ theme does not directly apply.

[miljacic]

Hmm, but nothing is broken, that is, obviously destroyed. Broken window fallacy, applied to war, usually says that war (obvious destruction) itself is good for the economy because as buildings are smashed, people are hired to build new, better ones.

So – it was good to destroy those buildings. That’s the ‘broken window’ thing, the ‘it is good to destroy’.

[miljacic]

Paperback starts at $18.33, so that’s OK if all one wants is the content itself.

[miljacic]

Thanks SOLiberty! Rothbard wrote so many books it’s hard to just sit down and read them all without some guidance. I’m reading this one next.

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