Wednesday, December 15, 2010
The criticisms are well-known: she writes about the same subject--marriage--and the same group of people, traveling within the same narrow social circle. These strike me as uncharitable. There is only one Shakespeare, whose imagination could transcend the narrow range of circumstances with which he was familiar. Austen was well aware of her limitations; she wrote beautifully based on what she knew. We cannot be sure she would have written so well had she attempted something outside of her purview.
Like any good novelist, Austen tells the truth. Certain of her characters may lose sense in looking at love and marriage, yet the writer never does. We might expect an unmarried woman--for Austen never married--to be bitter about the institution; alternatively, she might be disdainful over something which she considered beneath her. We find neither. She heartily defends marriage, not through exhaustive asides, but through the characters in her stories.
In The Age of Napoleon Will and Ariel Durant observe, "She perceives that the basic aspect of life is the conscription of the individual into the service of the race; that the crises of government, the conflicts of power, even the cries for social justice are not as fundamental as the repeated, unconscious effort of youth to mature and be used and consumed." (p. 412)
If we use this quote to examine how well our current culture is faring when it comes to the basic aspect of life, we can only conclude that we are doing very badly. This has been a near constant theme of this blog, but I wish to set aside the usual pronouncements of demographic doom to look closer at marriage with the assistance of Miss Austen.
Austen's ideal is clearly love and a good marriage. The former we are to understand as more than a fleeting passion, while the latter comprises a good home and a considerable income so that the wife would not be forced to work. This antipathy toward labor did not stem from laziness or decadence; on the contrary, Austen was Aristotelian in her ethical conception: a certain amount of financial security was required to provide the leisure which made a life of virtue possible. It is true that Austen's characters tend to be fond of balls. But these are irregular and therefore important; they are in full accordance of her conception of the virtuous life.
Unless we are extraordinarily wealthy, this idea is totally foreign to us. For all I know it may be foreign even to them, but it is at least possible for the very rich to live the virtuous life as Austen sees it. The poor can obviously take no part in this vision. Stranger, perhaps, is that the middle class is similarly ill disposed to live thus. Or rather, it would take a radical transformation of habit and behavior to make this a possibility.
While there are some exceptions, for the vast majority of middle class women, the primary objective is not to marry well, but rather to go off to college to obtain a degree so as to obtain a career. At some later point, marriage becomes the desired goal. Yet even if women wished to pursue Austen's route of virtue, it would be virtually impossible to do this, first, because these women still want their careers; and second, because, for all that has changed in the last two hundred years, it's still much more difficult for an aging woman to land a man who possesses the requisite wealth and status. He'd just as soon marry her younger sister.
Austen understood this. While the goal of her female characters is to maintain an ideal marriage, the sensible ones express awareness that the ideal may not come to pass. Since she's sees life as comedic, we don't see her characters end unhappily--this is true of the novels I've read; it may not be true for all of them--but that this possibility exists there can be no doubt.
The idea that men will marry younger women is so well grounded that only a rabid feminist could dispute it. But there is something undeniably cold about facts expressed bluntly. Like any modern heresy, feminism denied the existence of scarcity, and hence, opportunity cost. It preached that one could go to school, have a career, and marry the man of one's dreams--who just happens to be rich. There is no special program to follow; simply follow one's heart and all will work out in the end. This is nonsense, of course. Setting aside years of one's life to attend school and start a career has a real cost; during that time, one cannot be finding a husband. True, one can have a career and a husband, but even this will necessitate some sacrifice, for one or the other goals. Frequently, it seems that the husband finding is put off until later, an excellent illustration of the concept of opportunity cost.
It's true that the cost exists for men, too, but it runs in the other direction. Eight years ago I was a nerd who fiddled with a computer and read too many books. Now I'm a software engineer who still reads too many books but drives a nicer car. The investment in a college education was, for me, a good one--both economically and otherwise. If marriage is not in my near future, my prospects haven't been lowered due to the experience.
It would be false if I insisted that I am viewing this issue dispassionately. While it's true that the sorry state of marriage presents a large problem for society at large, this particular issue effects me at a personal level. Like Austen, I am a defender of marriage as an institution. Unlike Austen, I live at a time when the benefits of marriage are becoming much less clear, at least as far as the man is considered.
For the novelist, it was clear that marriage has the potential to bring the woman a great deal of good. Unhappy marriages were distinctly possible, but divorce was unthinkable, for a variety of reasons, one of which was that even the least propitious of unions still brought the woman some good. (We set aside instances of outright violence; no one credibly claims that the fifty percent divorce rate is due to an epidemic of spousal abuse. )There was also the fact that the woman gave her assent, and therefore bound herself--a notion increasingly alien in our culture of no fault divorce.
The benefits for men were similarly clear. But in this respect we've seen tumultuous changes since Austen's time. Setting aside the comparative qualities of the modern American female, the institution itself has been altered. The marriage is more likely to end in divorce, most initiations of which begin with the woman. The man is thence taken to be raked over the coals, courtesy of the family courts. He is to continue to slave away for his children, without being able to see them when he wishes.
Of course, this isn't the fate of all men. But it does happen, and has been happening at a disconcerting rate; wounded men have begun cropped up on the Internet, counseling younger men to avoid marriage. There are a large number of blogs devoted to the topic of guiding men through the pitfalls of marriage, chiefly through game and avoidance. This phenomenon is too large to be ignored. If the solutions offered fail to satisfy, they nonetheless reveal a deep problem with relations between the sexes.
As a proponent of marriage, I find this trend alarming. If men refuse to marry, society is well nigh doomed. But it is preposterous to simply blame men for not wanting to commit. Until the institution itself is reformed, it is perfectly rational to be suspicious of the raw deal modern marriage offers. As a traditional Catholic, the risk is lowered--traditional Catholics don't believe in divorce. So long as I marry within the fold, so to speak, marriage remains an option; but it is a concern even for me.
It is far from clear if Austen would still wield her pen as a defender of marriage were she alive and writing today. I have my doubts.
Tuesday, December 14, 2010
"In a society where truth becomes treason, we are in big trouble." – Congressman Ron Paul
It is a common misconception that there is little difference between the conservative and the libertarian. While the former is critical of some aspects of government, only the latter is consistent in wishing the State to be severely limited. Conservatives are on solid ground when they criticize the government for its inefficiencies and its propensity to violate the rights of the citizenry. But when it comes to the military, for some reason, these principles—if we can stretch the term to include something which is abandoned so readily—are renounced in favor of a fervent defense of all things Empire.
The latest incident involves Julian Assange, editor of WikiLeaks. Assange has released about 900 formerly secret cables—the 250,000 number which is being reported is false as the rest of the cables are encrypted, and therefore unreadable—which paint a sordid picture of the inner-workings of the American government. Many of the cables are still encrypted, and the sheer enormity of the material has made it difficult to cull the documents for details—though Antiwar.com and Glenn Greenwald, have been doing good work on this front. Nonetheless, conservatives are up in arms over the revelations, which allegedly hurts the mission of "the troops", the sacrosanct symbol of modern conservatism.
Saturday, December 11, 2010
Keynes introduces us to his multiplier: "For in given circumstances a definite ratio, to be called the Multiplier, can be established between income and investment and, subject to certain simplifications, between the total employment and the employment directly employed on investment (which we shall call the primary employment)." We'll see shortly that his idea of investment is not what we might suspect by the term, but more on that in a moment.
Section I: Another term is introduced, the marginal propensity to consume, which is defined as: dCw/dYw. Cw is the consumption in terms of wage-units and Yw is income in term of wage units. As usual, Keynes is doing his best to confuse us. All he's saying here is that man spends some percentage of his income; if I make 50 grand a year and I spend 45 grand, then my marginal propensity to consume is 9/10. Actually, as Keynes defines this in terms of wage unit, we cannot even say this much, but Keynes forgets his own definition and treats this propensity as if it were defined in monetary terms, so we can be forgiven the mistake.
From calculus, we know that the d is supposed to represent a rate of change; this is curious because Keynes tells us that "This quantity [the marginal propensity to consume] is of considerable importance, because it tells us how the next increment of output will have to be divided between consumption and investment." Obviously there is no such law. I can increase my propensity to consume by spending my next paycheck at the casino; I could also decrease it.
Using some math, Keynes tells us that: "we can write ΔYw = kΔIw, where 1 - (1/k) is equal to the marginal propensity to consume." He then proceeds: "Let us call k the investment multiplier. It tells us that, when there is an increment of aggregate investment, income will increase by an amount which is k times the increment of investment."
It's not immediately clear what he's done here. As Iw stands for investment, he's simply written the same equation a bit differently. In my previous example, we noted that my marginal propensity to consume is 9/10; using this, as well as the amount of wage units I spend on consumption, we can arrive at my income. Keynes is doing something similar with his multiplier by using the amount of money I invest--5 grand--and, using the multiplier, arriving at my income. The precise importance of the multiplier escapes me. Keynes can do math, but he's a lousy economist.
Not only is the multiplier worthless, it's also essentially arbitrary. Hazlitt points this out in The Failure of the New Economics, but we could make any division we wish and then create a multiplier based on this division. Let us say that I spend 50 a year on socks. The sock multiplier is then 1000. We can now use this fact to stimulate the economy through "investment" in socks by the government.
If the marginal propensity to consume is 1, then the multiplier becomes infinite. If the people in an economy never save at all, it will only be necessary for the government to invest the smallest amount and full employment shall reign. Here again we see Keynes's preposterous hatred of the saver rear its ugly head.
Just what happens when the savings rate becomes negative is anyone's guess. I suppose the multiplier becomes negative and any "investment" undertaken by the government hurts the employment rolls. At last, truth can be extracted from something Keynes has said.
Section III: The multiplier is an idea Keynes took from someone named Kahn. But his multiplier is different as it deals with employment. No matter. Keynes can make the necessary assumption to ensure that these will actually be the same. Whether or not these assumptions are well founded is irrelevant, since the idea of the multiplier is patently absurd.
Keynes writes: "It follows, therefore, that, if the consumption psychology of the community is such that they will choose to consume, e.g., nine-tenths of an increment of income, then the multiplier k is 10; and the total employment caused by (e.g.) increased public works will be ten times the primary employment provided by the public works themselves, assuming no reduction of investment in other directions." Since the marginal propensity to consume can be measured, we need only use it to find the "multiplier", after which the government knows how much to "invest" to bring the economy to full employment. If our multiplier is 10, and there are 10 million works unemployed, if the government employs the first million, the private sector will pick up the slack for the other nine.
A few points here. First, it's important that Keynes offers no conditions as to what sort of investment need occur. Presumably, full employment can be restored whether the unemployed are set to work digging holes in the ground--and filling them up again--or helping build roads. Only an ignoramus would be concerned with what is being produced; the important thing is to get people up and consuming.
Second, Keynes doesn't tell us whence this investment will come. If the money comes from taxes, this may cause a reduction in the propensity to consume, thereby decreasing the multiplier--according to Keynes. If the money comes from the printing pressed of the central bank, we would expect inflation, although he tells us that: "When full employment is reached, any attempt to increase investment still further will set up a tendency in money-prices to rise without limit, irrespective of the marginal propensity to consume; i.e. we shall have reached a state of true inflation." We'll deal with his definition of inflation later; for now, we note that it can only apply if full employment has been reached; and then it occurs suddenly all at once.
Third, we should be able to verify whether or not this works. And we see that Keynes does try to do this a bit later.
Section III: Keynes clarifies that the multiplier may not always take full effect: "If, therefore, we wish to apply the above without qualification to the effect of (eg.) increased public works, we have to assume that there is no offset through decreased investment in other directions,-and also, of course, no associated change in the propensity of the community to consume." He then goes on the sketch out some of the reasons, but as an implementation of Keynesian policies never seems to produce anything akin to the multiplier effect, I think it clear that government investment causes so many disparate changes in the economy as a whole that we can't possibly list them all. Keynes's theory assumes that government may act in a vacuum, but we know that every economic action undertaken produces innumerable effects on the other economic actors.
Section IV: I don't find anything worthy of especial comment in this section.
Section V: Using the little data available, Keynes can attempt to verify his theory. "Taken in conjunction with estimates of national income these [numbers] suggest, for what they are worth, both a lower figure and a more stable figure for the investment multiplier than I should have expected. If single years are taken in isolation, the results look rather wild. But if they are grouped in pairs, the multiplier seems to have been less than 3 and probably fairly stable in the neighbourhood of 2.5. This suggests a marginal propensity to consume not exceeding 6o to 70 per cent. — a figure quite plausible for the boom, but surprisingly, and, in my judgment, improbably low for the slump." In other words, the marginal propensity to consume has absolutely no relation to employment numbers. Don't think that the inability of the data to confirm his theory would slow Keynes down for a bit. Not in the least.
Section VI: Here we have a rhetorical aside, and a reminder that Keynes can be a clear an engaging writer when he takes the time to do so. Unfortunately, the subject of this section is an attack on gold. Since gold is and has been a valuable commodity for the purposes of economic exchange, I have little doubt that it will continue to be useful to humans for quite awhile, certainly longer than our fiat currency. It shall outlast the influence of Keynes himself.
(i) To build up a reserve against unforeseen contingencies;
(ii) To provide for an anticipated future relation between the income and the needs of the individual or his family different from that which exists in the present, as, for example, in relation to old age, family education, or the maintenance of dependents;
(iii) To enjoy interest and appreciation, i.e. because a larger real consumption at a later date is preferred to a smaller immediate consumption;
(iv) To enjoy a gradually increasing expenditure, since it gratifies a common instinct to look forward to a gradually improving standard of life rather than the contrary, even though the capacity for enjoyment may be diminishing;
(v) To enjoy a sense of independence and the power to do things, though without a clear idea or definite intention of specific action;
(vi) To secure a masse de manoeuvre to carry out speculative or business projects;
(vii) To bequeath a fortune;
(viii) To satisfy pure miserliness, i.e. unreasonable but insistent inhibitions against acts of expenditure as such.
There are two things to note here. First, the list is essentially arbitrary. We could very easily come up with other reasons a man may not spend his money, or we could combine some of the reasons Keynes gives to reduce his list from eight to a more manageable number. Second, Keynes leaves off an important reason, namely that the currency is deflating; by refraining from spending, the consumer hopes to get a better deal in the near future. It's very clear that Keynes frowns upon this sort of behavior, but there are a variety of reasons a man may refrain from spending, many of them quite rational.
He also offers some reasons industry accumulates savings, but I don't see how this this list is of much importance, so I'll skip over it.
However, a bit further down we find this tidbit:
Corresponding to these motives which favour the withholding of a part of income from consumption, there are also operative at times motives which lead to an excess of consumption over income. Several of the motives towards positive saving catalogued above as affecting individuals have their intended counterpart in negative saving at a later date, as, for example, with saving to provide for family needs or old age. Unemployment relief financed by borrowing is best regarded as negative saving.
We can see here an adumbration of Keynes's solution to the unemployment problem. But it's worth noting that while consumption can be greater than income, it can only do so at the cost of savings. When the government cuts checks for the unemployed, if the money came via taxation, the taxpayers are financing this consumption; if the money came via printing by the central bank, anyone who uses the currency finances this consumption through the degradation of the currency brought about by inflation.
In a credit based economy, it may seem as if we can increase consumption beyond income, but this is only apparent. We'll cover this in further detail when we discuss the "multiplier", but the key point is that consumption requires production. It does not matter how much money is doled out for the purposes of consumption, if there have been no goods produced for the consumers to purchase. But more on this later.
Section II: Keynes has not yet given us his definition or theory of interest. This will be covered later in the book. But he does offer us this explanation:
The influence of changes in the rate of interest on the amount actually saved is of paramount importance, but is in the opposite direction to that usually supposed. For even if the attraction of the larger future income to be earned from a higher rate of interest has the effect of diminishing the propensity to consume, nevertheless we can be certain that a rise in the rate of interest will have the effect of reducing the amount actually saved. For aggregate saving is governed by aggregate investment; a rise in the rate of interest (unless it is offset by a corresponding change in the demand-schedule for investment) will diminish investment; hence a rise in the rate of interest must have the effect of reducing incomes to a level at which saving is decreased in the same measure as investment. Since incomes will decrease by a greater absolute amount than investment, it is, indeed, true that, when the rate of interest rises, the rate of consumption will decrease. But this does not mean that there will be a wider margin for saving. On the contrary, saving and spending will both decrease.
Based on this theory, a reduction in the rate of interest would increase both saving and spending, much to the benefit of the economy as a whole. There is a good deal of empirical evidence which suggests that this is absurd, but let us take a theoretical view of interest to determine if Keynes is wrong.
In a free market, the interest rate is determined through borrowers and lenders. The former wish for this rate to be low, while the latter desire that this rate be high. If an economy has many savers, the borrower will have little trouble attaining a low interest rate, as the lenders will compete amongst themselves to secure an interest payment. Contrariwise, if the economy has many borrowers, the savers will be able to attain a higher rate of interest, as the borrowers will have to compete amongst themselves to secure a loan. Thus an increase in savings tends to lower the interest rate, while a decrease in savings tends to raise it, precisely the opposite of what Keynes claims.
Of course, a low interest rate is a signal that now would be a good time to secure a loan; this has the tendency to create borrowers, thereby increasing the interest rate. While the interest rate will naturally fluctuate through the coordination of borrowers and lenders, this doesn't discount the manner in which incentives direct the interest rate.
Since this chapter was short, I will try to put up a post on the next chapter later this weekend.
Tuesday, December 07, 2010
(I) A change in the wage-unit - Keynes argues that consumption is more a function of real income than of money-income, and because of this changes in the wage unit lead to changes in consumption. He continues that, "we have already allowed for changes in the wage-unit by defining the propensity to consume in terms of income measured in terms of wage-units." Thus, any effect a change in wages has on the propensity to consume has already been imputed in the definition.
(II) A change in the difference between income and net income - It is important to recall Keynes' distinction between income and net income for this section. If we look back to chapter VI, we see that Keynes defines income as the "excess of the value of his finished output sold during the period over his prime cost." Net income - according to Keynes - is the portion of income available for consumption, or income adjusted for the factors outlined in the discussion of chapter VI (i.e. windfall loss and supplementary cost). Given these definitions, Keynes continues that there exists a stable relationship between the two, so any change in income usually corresponds to a change in net income based on this relationship. However, if net income increases and is not reflected in a change in income, this will affect the propensity to consume. This seems to make sense, if a normally reckless spender sees a decrease in his net income he may become more frugal. Practically, this is rarely seen as the obscene amount of debt in our society shows profligate people will spend money whether or not they possess the means to do so.
(III) Windfall changes in capital-values not allowed for in calculating net income - Keynes believes this factor to be much more important in modifying the propensity to consume than the previous one, because it is not related to income by some stable function. Keynes writes, "the consumption of the wealth-owning class may be extremely susceptible to unforeseen changes in the money-value of its wealth." Keynes is arguing that when the wealthy - he is not specific on what it means to be a part of the wealth-owning class - reap an unforeseen increase in money, they will strongly alter the propensity to consume in the short run. This also is susceptible to a practical criticism, as Eric has pointed out previously our Father would be highly unlikely to increase his spending if he won the lottery.
(IV) Changes in the rate of time-discounting, i.e. in the ratio of exchange between present goods and future goods - In fewer words, Keynes is discussing the effect of the interest rate on the propensity to consume. Keynes argues that in the short term any change in the interest rate will be highly unlikely to change the propensity to consume, but any long term change in the interest rate is capable of altering societal habits and ultimately affecting the propensity to consume. Since the interest rate affects investment decisions, it seems to follow that when people increase investment current consumption will fall. There will always be people who will consume almost all of their income no matter what the interest rate, and others who will favor saving and investment no matter how low the interest rate. Thus, individual have their own time preference which is reflected in the interest rate, but to say that this leads to a connection between the interest rate and society's propensity to consume - a term that has very little meaning - is a stretch.
(V) Changes in fiscal policy - This is a fairly simple point. When the government intervenes in the economy and people's lives through taxation, it is going to affect the amount of income individuals can devote to consumption. If a portion of your income is seized by the government every year, you are obviously not going to be able to buy an PS3 with that money. Keynes reveals his fondness for government intervention when he states, "If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes, its effect in increasing the propensity to consume is, of course, all the greater." Just take money from the productive and give it to the poor to spend on consumer goods and the economy will grow forever.
(VI) Changes in expectations of the relation between the present and future level of income - Keynes, briefly states that although this factor may affect individual propensities to consume, it will most likely average out for the community as a whole.
After discussing these six objective factors, Keynes argues that the propensity to consume is a fairly stable function. Given that changes in the wage-unit are already imputed in the calculation of the propensity to consume, the factors exerting the most influence are windfall changes in capital values, long term and significant changes in the interest rate, and fiscal policy.
In the next section, Keynes looks past the factors which affect the propensity to consume in order to determine the shape and behavior of the function as a whole. His first conclusion is that as income increases, the gap between consumption and income widens. This is an observable fact, as a certain portion of one's income must be spent on the essentials, food, shelter, clothing, etc. If these comprise 95% of one's income their is little room for saving, especially if they buy the new big screen tv. Conversely, if these essentials comprise 10% of a man's income he will have room to consume luxuries as well as save a large portion of his income.
In the last section, Keynes steps away from the propensity to consume in order to look at investment because net income is equal to consumption plus net investment. Changes in investment patterns can cause a change in consumption, thus relating back to the propensity to consume in the end. Keynes goes into an empirical analysis of investment in the United States from 1925-1933 and Great Britain from 1928-1931. In the U.S. net capital formation falls from $23,021 to $1,237 in 1932. Until 1929, net capital investment remained at or above $23,000. According to Keynes, the problem is that "the deduction for entrepreneur's repairs, maintenance, depreciation and depletion remained at a high figure even at the bottom of the slump." This leads to a heavy drag on the propensity to consume even under conditions when the public is ready to consume a large portion of its income. Keynes is blatantly wrong in his analysis of the Great Depression, neglecting the fact that the majority of the capital invested during the 1920s was not real savings and thus created the bubble that led to the bust. I will refrain from a discussion of business cycle theory for the time being, but it is interesting to note Keynes' analysis of the time.
Keynes goes on to postulate that "financial prudence" - saving money for future use - lowers aggregate demand and harms employment. He continues with the claim that there must be "sufficient unemployment to keep us so poor that our consumption falls short of our income by no more than the equivalent of the physical provision for future consumption which it pays to produce today." I fail to see the logic in the popularity of an economist who believes the only way to avoid economic problems is to keep everyone poor. Keynes believes that if we get too rich, we will increase savings and investment until we have built all "the houses and roads and town halls and electric grids" that will ever be needed. What then are we to do? I think Keynes problem is that he does not begin his analysis from the point of view of the individual, as Mises demonstrated is essential to economic analysis. If we build all the roads, the consumers will demand better roads. Consumers will always look to better themselves, and entrepreneurs will always exist to satisfy those demands.
Sunday, December 05, 2010
"It is terrible to contemplate how few politicians are hanged." - G.K. Chesterton
I run the risk of being thought sensational for starting a column with such an egregious quote. Good citizens are to know that the death of any public official, however mundane, is to be regarded as a tragedy. No matter the mistakes our leaders may have made—for it is to be understood that these morally superior beings could never commit crimes—we are to weep dutifully should they let slip this mortal coil. To argue for hanging outright is a far graver offense—probably treasonous.
The whole of the argument against punishing politicians depends on never applying the law to those who enforce it. Whether it's policemen who go free after shooting innocent people, or corrupt Congressmen who refuse to pay the taxes which fund their pet programs, authority is seldom held to the same standard imposed on the rest of us. This is very telling, for it demonstrates very clearly that, while the powers that be expect the peasantry to adhere to every jot and tittle of the law, they view themselves as above it.
If the object of the rulers was to instill virtue in the citizenry through the vehicle of law, it would be incumbent upon them to demonstrate respect by following the law themselves. Indeed, a case can be made that our leaders should be held to an even higher standard. For while the disinclination of the citizenry to follow a particular law can be altered through stricter penalties, once let the politicians ignore a law and it will become acceptable for it to be ignored in perpetuity.
In hanging politicians it can be difficult to know where to start. But then the reverse problem emerges: so many politicians are guilty of heinous crimes that we'll need more rope. Let us begin with the former Commander-in-Chief, that evil man, George W. Bush. It is to the eternal shame of the American people that we elected him, not once, but twice. In his recent book, which is selling like Mein Kampf, but which really ought to be compared to the non-existent memoirs of Commodus, he discusses his handling of the war in Iraq. This disastrous foreign policy misadventure has been written about incessantly over the last several years; there is no need to rehash the arguments against the war, or the paucity of the evidence which led us to undertake it.
But it is worth dwelling on the fact that no senior official has suffered appreciably for this nightmare foisted upon the American and Iraqi people. Oh, it's possible a few of them have consciences, and therefore lose sleep over the lives they've helped destroy; but no external punishment has been exacted, save to a few peons at Guantanamo. If starting a war under false pretenses isn't grounds for hanging, I'm not sure what is. Surely someone should be held responsible for the death and destruction. If a private citizen committed vigilante justice against a sex offender, he would still be tried, and it would require a sympathetic jury to acquit him for a righteous act. But start a war in which trillions of dollars are spent fruitlessly and thousands upon thousands die, and you get a nice little book tour.
Likewise with the current president. Republican rhetoric about Obama is so overwrought as to almost cause one to pity the man. The crucial thing to remember about Barry is that, like Bush, he's out of his depth. Bush was able to hide his shallowness through a team of Machiavellian advisors. Not so Barry, who is a clown surrounded by lesser clowns. Nowhere is this more evident than in the continuation of the wars in Afghanistan and Iraq. There is no rationale offered by the administration for the further shedding of blood. The wars continue because ending them might be politically disastrous; such is the banality of evil of which Hannah Arendt wrote. People die because hope-and-change lacks the courage to alter the State's policy of warfare. The failure to try Bush and his administration means that Obama will never be tried for his complicity in the crimes against the Afghani and Iraqi people.
Hanging a president would be an excellent precedent and a notable step towards the day when it becomes possible that an honorable man is elected to that position. But there are other criminals besides presidents. There is, for instance, Congress, who has been complicit in the Bush/Obama wars. There is also John Pistole, the head of the TSA, whose goons molest children to protect us from the terrorists. His TSA flunkies, who participate in this blatant violation of our rights as citizens, should be tried as well. Nuremberg made it clear that following orders is not an excuse for committing crime. Fondling children is criminal, and TSA agents should be punished accordingly.
No doubt my argument will be seen as a radical one. Yet it's worth pondering how radical it truly is. Why should it be seen as extreme that politicians are held responsible for their actions? Why is it that they are only to be punished by the ballot box—that is, with a nice book deal and a job as a lobbyist, in other words, never punished at all? Why do we tolerate behavior from state officials which would be deemed unconscionable if done by ordinary citizens?
These questions have powerful ramifications, because they illustrate how far a once free people has been willing to acquiesce in government misrule. It has become quite obvious that the politicians have no fear of ever being held accountable by the citizenry. Until they are made to realize that the law does in fact apply to them, they will act as if it does not. A trial would go along way toward reminding them of this fact. And a nice hanging would reinforce the lesson to the most obdurate of rulers.
Tuesday, November 30, 2010
As such, I've started extracting some of my money from one of the banks. It will be interesting to see how many days of consecutive withdrawals from the ATM before I am contacted by one of the banking heads. Updates to follow.
Saturday, November 27, 2010
"The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd." – Alexis de Tocqueville, Democracy in America
Perhaps nowhere was the Frenchman so prescient as in his chapter titled "What Sort Of Despotism Democratic Nations Have To Fear." He did not expect a single tyrannical overlord, whose reach was violent but limited. Rather, he envisaged an overarching bureaucracy which would instill docility into the people by severely restricting the range of acceptable actions.
The sterling example of the soft despotism facing Americans is the policy of the TSA. With the advent of the new porno-scanners, documentation of abuse by government thugs began to trickle out over the Internet. At first, it was just libertarian sites; my inclination to write about the matter was suppressed out of a belief that the procedures would be tolerated, albeit begrudgingly, by a formerly free people. But when the stories began to appear on the Drudge Report, it became clear that I was wrong: this story had legs. The TSA had over-reached and now faced the prospect of revolt.
Tuesday, November 23, 2010
"The expectation of a general progressive upward movement of all prices does not bring about intensified production and improvement in well-being. It results in the "flight to real values," in the crack-up boom and the complete breakdown of the monetary system." – Ludwig von Mises, Human Action
As a principled non-voter, I watched with amusement as liberals writhed in agony while conservatives rejoiced during another "historic" election. The following day, Ben Bernanke revealed to all how little Congress—and, by extension, if only in theory, the people—has to do with the goings on in Washington. Helicopter Ben felt that inflation was too low; we thus risked deflation, which he believes is the worst thing that could ever happen to an economy. He was insisting on another round of quantitative easing, which is not something one does after consuming too much Taco Bell, but is a fancy of way of saying that he was going to print some money. Since the two trillion he quantitatively eased two years ago was so effective at leaving the country mired in recession, he figured another six hundred billion should do the trick.
The Federal Reserve operates in near total secrecy—ostensibly to prevent the politicization of monetary policy—but we know that in the latest round, William C. Dudley, president of the Federal Reserve Bank of New York, bought treasury bonds from Goldman Sachs, which charges a higher rate than the Fed would receive if it bought the treasury bonds from the treasury. The confusion is cleared up when one realizes that Dudley worked for Goldman Sachs from 1986 to 2007. Just think of Dudley as the banking equivalent of Dick Cheney, granting fat contracts to his pals at Haliburton.
Sunday, November 14, 2010
"Now civilizations, I believe, come to birth and proceed to grow by successfully responding to successive challenges. They break down and go to pieces if and when a challenge confronts them which they fail to meet." – Arnold J. Toynbee, Civilization on Trial
Thus speaks the master historian. The challenge which now faces the west is neither political nor economic: it is spiritual. This is not to say that there are no political or economic problems. But these are secondary; they are also inexorably tied to the west’s existential crisis. To put the matter bluntly, the West has lost faith in itself. Like the noble pagans Dante meets in limbo, "without hope we live on in desire."
Historians like Toynbee have read widely, seeking to find, if not laws, at least general principles by which civilization must abide if it wishes to preserve itself. But we need not be historians to realize that the bare minimum a people must do in order to survive is to birth another generation of children and raise them to adulthood. Whether or not these in turn will prove capable of whatever challenges that civilization faces is a matter of speculation. We need only concern ourselves with the fact that another generation is brought into existence. In this most essential mission, the nations of the west are failing spectacularly, as each nation in Europe, as well as Canada and the United States, has a birth rate below replacement level. The west is dying.
Monday, November 08, 2010
"The Pledge [to America] puts forth a clear plan to end the current uncertainty, starting with stopping all looming tax hikes so that small businesses can get back to creating jobs. This is followed by a blueprint for fiscal sanity that begins with cutting spending to pre-"stimulus," pre-bailout levels, a move that will save taxpayers $100 billion in the first year alone." – John Boehner, Why You Should Vote For Republicans
Thus wrote the new republican majority leader on the eve of the election which propelled him and his party out of the political wilderness and back into some semblance of power. It would have been better to have written nothing at all. When it comes to fiscal responsibility, the republicans are no different from the democrats, as these statements prove. Boehner’s party is as serious about reducing government as Pelosi’s was sincere about ending the wars.
Tuesday’s election was about one man: Barack Obama. Voters were unimpressed with the first two years of his term—during which the economy tanked, deficits grew boundlessly, and billions were meted out to those with political connections, without appreciably reducing unemployment—and they sought to take it out on his party. Whether or not this is fair is beside the point. Whatever further legislative plans are up his sleeve, the president must now contend with a house dominated by republicans.
Sunday, November 07, 2010
Fair enough. He then explains how, although savings and investment are equal--he states that they are identical, though in not so many words, in the previous chapter--an apparent inequality may come about: "Thus the differences of usage arise either out of the definition of Investment or out of that of Income."
Section II: He then defines investment for us: "In popular usage it is common to mean by this the purchase of an asset, old or new, by an individual or a corporation. Occasionally, the term might be restricted to the purchase of an asset on the Stock Exchange. But we speak just as readily of investing, for example, in a house, or in a machine, or in a stock of finished or unfinished goods..." Disinvestment is thus the opposite, namely, the selling of an investment.
Although Keynes seems to be aware of this, the distinction between goods to be consumed and those to be resold--investments--is very blurry. I don't see that it changes his definitions.
On a graver note, it is obvious that, according to these definitions, savings does not equal investment. I have some cash in my wallet, and I have money in a checking account. Neither of those could be construed as investments, according to Keynes's definition, though both are assuredly savings.
Continuing, he writes: "Investment, thus defined, includes, therefore, the increment of capital equipment, whether it consists of fixed capital, working capital or liquid capital; and the significant differences of definition (apart from the distinction between investment and net investment) are due to the exclusion from investment of one or more of these categories."
Unless I missed something, Keynes does not include liquid capital in his definition of investment. So by his own standard, the equality fails. Or, I should say, by one of his standards, it fails. There is still much confusion in trying to understand what Keynes means by his terms.
In this section, Keynes mentions the Austrian school, with which he was probably familiar from his time spent with his friend F. A. Hayek. But if he was aware of the school's existence, he demonstrates that he did not appreciate the importance its adherents laid on the role savings plays in the accumulation of capital: "The statement, for example, that capital formation occurs when there is a lengthening of the period of production does not much advance matters."
Section III: Keynes introduces us to the term "normal profit", which I do not see defined. He claims that this accounts for the discrepancy between income and savings which he postulated in one of his previous books. But the problem is far bigger than that.
We've constantly referred to the confusing nature of Keynes's prose. Here's a prime example: "As I now think, the volume of employment (and consequently of output and real income) is fixed by the entrepreneur under the motive of seeking to maximise its present and prospective profits (the allowance for user cost being determined by his view as to the use of equipment which will maximise his return from it over its whole life); whilst the volume of employment which will maximise his profit depends on the aggregate demand function given by his expectations of the sum of the proceeds resulting from consumption and investment respectively on various hypotheses."
If anyone can explain what that may mean, I would be indebted to you. I am wholly unable to extract value from this section, so I move onward.
Section IV: We come to the concept of "forced savings." The general idea here is clear: something alters the purchasing power of the wage-unit, thereby increasing savings. Keynes, of course, connects it, with the help of his confusing terminology, to the coordinated efforts of entrepreneurs to maximize employment, but this need not concern us.
While it is true, in a certain sense, that if the purchasing power of the currency were to rise due to a general reduction in prices, this would be "forced savings", this is misleading. For one, there is no compulsion: the consumer may divest himself of these forced savings by purchasing items. For another, if a consumer can suddenly get the things he desires for a cheaper price, this is a glorious thing. It need not be given a negative connotation.
On the other hand, if the purchasing power of the currency is falling, due to inflationary policies of a central bank, the consumer finds his savings reduced. This is truly compulsory, and cannot be easily avoided. It's telling that Keynes doesn't focus on that which is truly forced--what Ron Paul calls the inflation tax.
Keynes is rightly critical of the concept of forced savings--which evidently stems from Bentham: "Thus “forced saving” has no meaning until we have specified some standard rate of saving." We may chuckle to ourselves, since this rejoinder occurs shortly after Keynes uses "normal profit" without defining it. For some reason, too, he thinks that "forced savings" only pertain to an economy in full employment. Since it is essentially a monetary phenomenon--at least insofar as inflation is concerned--I am not sure why this is the case.
Section V: Keynes struggles to understand the purpose of a bank: "It is supposed that a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no saving corresponds."
This is basically true of our current system, but there is no reason a bank must loan the money depositors leave in their checking accounts. In fact, as I pointed out in a recent column, the demand deposits which comprise checking accounts must not be invested or else the bank will not be able to make good on withdrawal demands.
Keynes offers a reasonable statement, which is nonetheless false: "It follows that the aggregate saving of the first individual and of others taken together must necessarily be equal to the amount of current new investment." Since we have a fractional reserve banking system, every dollar which is deposited in a bank is lent out--ten times or more--to borrowers. This is the "money multiplier" effect. It explains why the banks are so hosed whenever a bubble bursts. It is, in fact, the cause of the bubble in first place--though an inflationary central bank is a necessary prerequisite. Even if you reject the Austrian explanation for the business cycle, it must be admitted that Keynes is wrong here.
He examines the consequences of credit expansion by the banks. "It is also true that the grant of the bank-credit will set up three tendencies (1) for output to increase, (2) for the marginal product to rise in value in terms of the wage-unit (which in conditions of decreasing return must necessarily accompany an increase of output), and (3) for the wage-unit to rise in terms of money (since this is a frequent concomitant of better employment)..."
Let us take these one at a time. The first is generally true; the expanded credit will fuel investment, especially in a particular sector. In other words, there would be a boom, say, in housing. But while output may rise in one sector, it will not necessarily rise uniformly; some sectors may even see a reduction in output.
This tendency to think only in aggregates harms Keynes's second point. During the housing bubble, the marginal product of homes was rising in terms of the wage unit; but this did not hold true of every good in the economy. Computers were falling in prices, both absolutely as well as relative to the wage-unit.
The third is not completely false, but it is mostly so. Certainly, some people saw an increase of income in real terms during the housing boom--real estate agents, for instance. However, since the creation of credit was not backed by savings, these increases were offset by decreases in other sectors. Moreover, much of this production was malinvestment; we did not need so many houses in Vegas. This impoverishes people and leads to a reduction in wages. Keynes is right to an extent, but only ephemerally, and in the short term. In the long run, bubbles pop.
Keynes asserts that "the reactions of the amount of [the individual's] consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself." We shall see if he proves this at a later point, and leave off for now.
Sunday, October 31, 2010
"Don’t tell me what delusion he entertains regarding God, or what mountebank he follows in politics, or what he springs from, or what he submits to from his wife. Simply tell me how he makes his living. It is the safest and surest of all known tests. A man who gets his board and lodging on this ball in an ignominious way is inevitably an ignominious man." – H. L. Mencken, "The Slave"
It is a plain fact that those who work for a living feel contempt for those who do not. Attempts to replace the Gospel with progressive propaganda have led us to believe that this is somehow unchristian. Yet the Bible is clear that those who do not work ought not to eat. There were exceptions to this rule—most notably widows and orphans—but St. Paul is clear that able-bodied men were to earn their keep.
Alas, in America of today, the number of workers is dwindling. Evidently unaware that the recession is over, Bloomberg reports: "The number of Americans receiving food stamps rose to a record 41.8 million in July." If forty million of one’s citizens cannot work to feed themselves without the State pilfering from those who can, one’s nation is neither free, nor healthy.
Friday, October 29, 2010
User cost: Keynes defines user cost as the "sacrifice of value involved in the production of A" (finished output sold to consumers). This cost is made up of the value foregone by choosing to produce and sell A, as well as any output purchased from other entrepreneurs. He does not specify whether this "finished output" is higher order goods which the entrepreneur will use to produce lower order goods, or if these are consumption purchases by the entrepreneur. I do not see why Keynes includes a discussion of user cost, for it has little use to economic analysis. Whatever higher order goods an entrepreneur purchases he will combine with his labor and capital to create a lower order good. Also, the value forgone when producing output only matters to each individual entrepreneur when making a decision on what and how much to produce. Economists can say little if anything more on the matter.
Factor cost: Keynes defines the factor cost of A as "the amount paid out by the entrepreneur to the other factors of production in return for their services." These other factors of service not being specified, but assumed to be the owners of land and labor. Keynes goes on to say the difference between output and factor costs is equal to aggregate income. Keynes calls this difference the entrepreneur's profit, but he neglects to adjust for interest and the entrepreneur's own wage. Profits and losses are the markets way of informing people which businesses are best satisfying consumer desires, but only if profits are properly define. Keynes prefers to equate profit to income, when profits are really an excess over what the entrepreneur makes due to a wage and interest. Only under this Austrian definition of profits can they be useful in guiding firms to swiftly satisfy consumer desires.
Supplementary cost: Keynes writes that a change in market values, wastage due to time, or destruction due to a catastrophe are supplementary costs. I do not see the significance of these costs, changes in market values and wastage due to time should be anticipated by entrepreneurs, that is part of what makes them entrepreneurs. Catastrophes are insurable risks, and as such should not affect output - and employment because that is Keynes' focus - because the cost is covered by insurance.
Windfall loss: Keynes defines windfall loss as supplementary costs which are unforeseen. For example, a particularly exceptional catastrophe would be considered a windfall loss. The main point Keynes makes is that "although the windfall loss (or gain) enters into his decisions, it does enter into them on the same scale - a given windfall loss does not have the same effect as an equal supplementary cost." I found myself wondering why Keynes believed these similar costs affected someone differently, but he never explained it further. I do not think that this fact could be empirically or theoretically proven, but I may be wrong.
Keynes ends his discussion on income by stating this definition of income is different that his definition in his Treatise on Money. He then goes on to take a quick look at saving and investment, concluding that saving is equal to investment. From that he makes the argument that the propensity to consume is essentially the inverse of the propensity to save, and he will use the former in all further discussions. Since we already discussed propensity to consume, and its inherent flaws, I will end the discussion here.
This chapter was by far the most confusing yet, and it appears he is simply defining income, saving and investment in a manner that best fits his general theory. As opposed to Rothbard's Man, Economy, and State which starts from a simple axiom and proceeds to develop theory from there, it almost seems as if Keynes has his theory already in mind and uses these chapters to make it viable.
Monday, October 25, 2010
"No, but you…you… you’re thinking of this place all wrong. As if I had the money back in a safe. The, the money’s not here. Well, your money’s in Joe’s house… that’s right next to yours. And in the Kennedy House, and Mrs. Macklin’s house, and, and a hundred others." – George Bailey, It’s A Wonderful Life
I do not wish to speak ill of one of my favorite films. But an appreciation for the fraudulent nature of fractional reserve banking has altered my perception of at least this one scene. In striving to stave off a bank run, George Bailey was forthright with his customers, but he mislead them nonetheless. For his customers did not run on the banks to retrieve their savings—or time deposits—but their demand deposits, what we call checking. George falsely assumed that these two disparate functions were one and the same.
To understand the proper role of banking, we have to set aside anything we think we might know about it. The first function of a bank is to securely store money; rather than lug it around at all times, a customer would pay a small storage fee to relieve himself of this burden. His money would sit idly in a vault; it would thus not collect interest, but it would be available to him on demand. This runs counter to our ideas of banking, but it makes practical sense: if I deposit money in a bank, I wish to be able to withdraw this money at any time. This can only be ensured if the money is actually in the bank, rather than being lent out to someone else.
Monday, October 18, 2010
“For most people, anarchy is a disturbing word, suggesting chaos, violence, antinomianism — things they hope the state can control or prevent.” – Joe Sobran, The Reluctant Anarchist
The late Joe Sobran was correct about the shortcomings of using a misunderstood word. Hans-Hermann Hoppe, whom Sobran credits with finishing his conversion, prefers the term natural order, but this also requires a lengthy explanation. For now, it seems that anarchists will have to firmly elucidate their opposition to aggressive force.
This is important, because it is this opposition which constitutes the real difference between violent anarchists and those who wish to replace the State with a system of voluntary association. The anarchists of yesteryear were assassins, eliminating the heads of state under the naïve belief that the State itself would fade away without its figurehead. Modern anarchists, at least those influenced by Sobran and Hoppe, know full well that the State cannot be replaced so easily. Moreover, the State is force; to meet it on its own terms is to grant legitimacy to its coercive nature, something anarchists would never do. The State will fall, not in a paroxysm of violence, but by the withdrawal of citizens who refuse to accept the coercive apparatus and return to cooperative means to meet human needs.
Thursday, October 14, 2010
“The first type [of expectation] is concerned with the price which a manufacturer can expect to get for his “finished” output at the time when he commits himself to starting the process which will produce it; output being “finished” (from the point of view of the manufacturer) when it is ready to be used or to be sold to a second party. The second type is concerned with what the entrepreneur can hope to earn in the shape of future returns if he purchases (or, perhaps, manufactures) “finished” output as an addition to his capital equipment. We may call the former short-term expectation and the latter long-term expectation.”
The concept is clear enough: a manufacturer expects to sell a certain good; he expects the addition of capital—for instance, a new machine for his shop—to increase production. The reason why these expectations merit distinctions as short-term or long-term escapes me.
Keynes writes: “The actually realised results of the production and sale of output will only be relevant to employment in so far as they cause a modification of subsequent expectations.” This is correct, but he gives too little attention to “actually realized results”. True, expectations are ever-changing, but what really alters employment are not fluctuations in expectation—which are far smaller than Keynes implies; it's not as if a manufacturer changes the goods he produces on a daily basis—but the disparity between expectations and reality. In other words, small changes in plans of production will alter employment little compared to the realization that produced goods cannot be sold profitably on the market. In his exuberance to emphasize expectation, he under-emphasizes the importance of actual results.
Section II: Little is added in this section, so I leave it without comment.
Saturday, October 09, 2010
"We will fix the number of citizens at 5040, to which the number of houses and portions of land shall correspond." – Plato, Laws
We hear much of the benefits of democracy, but the most striking aspect of the representative system of the American republic may be its sheer size. One searches in vain through the annals of political philosophy for a recommendation of running a representative system with a large number of people—let alone with near universal suffrage. Indeed, until Thomas Hobbes’s decidedly anti-democratic Leviathan was published in 1651, the consensus was that the State should be, if not limited in power, at least restricted to lord it over a small number of citizens.
Thus Plato keeps his Republic small, while in the Laws, he sets an explicit limit to the number of citizens. Aristotle neither recommends democracy nor the totalitarianism of Plato; but while he deigns to give an exact number of citizens, the state is to be kept contained, so that the citizens will know each other, and that, should there be a democratic aspect to the state, those with suffrage may be gathered in a single place to deliberate its functions. Even Rousseau, who advocated government by the general will, probably had Geneva—a small state with limited suffrage—firmly in mind while writing his book On the Social Contract.
Tuesday, October 05, 2010
Section I: Keynes uses the first section to outline the purpose of the next four chapters; which comprise Book II: Definitions and Ideas. It is "an attempt to clear up certain perplexities which have no peculiar or exclusive relevance to the problems which it is our special purpose to examine." I am not entirely sure why Keynes felt the need to devote four chapters to issues which are not integral to the General Theory, but hopefully they will not be completely void of use. The rest of Chapter four is devoted to the choice of units in economic analysis.
Section II: Keynes begins by claiming “the units, in terms of which economists commonly work, are unsatisfactory,” and this “can be illustrated by the concepts of National Dividend, the stock of real capital and the general price level.” Keynes breaks down his analysis of each of the three concepts, so I will do the same:
(1) The National Dividend, according to Marshall and Pigou, measures the volume of current output or real income and not the value of output or money income. Keynes argues that it would be fallacious to use the National Dividend to erect a quantitative science, “it is a grave objection to this definition for such a purpose that the community’s output of goods and services is a non-homogeneous complex which cannot be measured.” I have no quarrel with Keynes’ argument here, as I too believe the National Dividend is not quantifiable, and should not be used in economic analysis.
(2) Keynes continues that it is even more difficult to calculate the stock of capital equipment, “for we have to find some basis for a quantitative comparison between the new items of equipment produced during the period and the old items which have perished.” This is a reasonable disagreement, because not only does a firm change their stock of capital but as the equipment wears down it can become less productive. He continues to critique Pigou’s argument for using net addition to capital equipment to determine National Dividend, by claiming – correctly – that “since this deduction is not a deduction in terms of money, he is involved in assuming that there can be a change in physical quantity, although there has been no physical change; i.e. he is covertly introducing changes in value .” Keynes’ critique receives bonus points when he cites Hayek’s criticism of Pigou’s argument.
(3) The last concept is the general price level, which Keynes attacks in similar fashion to the previous two. Keynes, when describing the “conundrums” caused by these concepts, makes a particularly fine point when he writes, they “have no relevance to the casual sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary.” He goes on to say that the proper place for such concepts as National Dividend or the price level is statistical and historical analysis.
Section III: In this section, Keynes attempts to justify the use of two units when developing his general theory: quantities of money-value and quantities of employment. Keynes argues that on every occasion, entrepreneurs are concerned with how much they should work their given stock of capital equipment. My qualm with this statement is that capital is not fixed for an entrepreneur; they have the choice of increasing their stock of capital equipment through saving and investment. Obviously in the immediate future capital will be fixed, but it is dangerous to assume this is the only decision entrepreneurs are concerned with. From this claim, Keynes continues that when there is an increase in aggregate output, this must be due to firms employing more labor to work their given stock of capital equipment. Thus, Keynes avoids using National Dividend to represent output by claiming, “for purposes of description or rough comparison, we wish to speak of an increase of output, we must rely on the general presumption that the amount of employment associated with a given capital equipment will be a satisfactory index if the amount of resultant output.” This is an interesting statement, for in critiques above Keynes would have taken Pigou to task for relying on “general presumptions” and a “satisfactory index.” Furthermore, we know that economics as a subdivision of praxeology derives economic analysis from certain axioms, not general presumptions.
Section IV: This section is a maze of mathematical equations and functions which Keynes attempts to use to rewrite his aggregate supply function in terms of employment and money, his fundamental units. He comes to the conclusion that:
The ordinary supply curve, p = (Zr + Ur(Nr))/Or = (φr(Nr) + Ur(Nr)) /ψr(Nr)
φr(Nr) = the expected proceeds (net of user cost), depending on some employment level, Nr
Ur(Nr) = the expected user cost, depending on some level of employment, Nr
ψr(Nr) = the level of output, depending on some level of employment, Nr
Keynes entire reasoning for this complex and confusing equation is so that, “we can aggregate the Nr’s in a way in which we cannot aggregate the Or’s, since ∑Or is not numerical quantity.” Essentially, Keynes used Section II to refute the argument that net output can be used in economic analysis, but then claims here that if you use a mathematical formula dependent on employment that represents net output, everything is fine. This is unfortunate because not only are the Greek symbols and equations confusing, they focus on the aggregate when all economic action is taken by individuals.
"As long as the amount of money coming in the front end of the pipe maintains a rough balance with the money paid out, the system can continue forever." – U.S. Social Security Administration
What economist Walter Williams rightly calls "The National Ponzi Scheme" is not doing well. The system is dependent, as he says, on "expanding the pool of suckers." That pool is drying up. He wrote his article in February of 2009, noting that Social Security was expected to pay out more than it took in sometime in 2016. He was much too optimistic. It is 2010, and that point has been reached.
As David Schepp from Daily Finance reports: "The nation’s Social Security system will pay out more than it takes in this year and next, as aging baby boomers begin entering retirement." The economic recession—which has officially ended, but which unofficially remains very much in force—has reduced the base from which the government can seize funds. Proponents of the scheme point out that once the recovery gains momentum, tax receipts will increase, allowing Social Security to bounce back into the black. After all, the fund dipped into the red during the Carter administration, so we can’t argue that a spell of economic woes demonstrates the untenability of Social Security.
Thursday, September 30, 2010
There are a number of problems with these equations. First, while there is a general relationship between the number of people employed and the "aggregate supply price", this is not a mathematical function, such that any increase in N would lead to an increase in Z. Hiring a certain individual would cost more than hiring another individual; again, different individuals do different amounts of work. By giving equations, Keynes leads the reader to believe that a certainty exists where there isn't one. It follows that any attempt to combine an equation which is nothing more than a vague relationship will lead to problems.
In addition to the problem with treating N as an aggregate, there is a larger problem with the second equation. D represents "the proceeds which entrepreneurs expect to receive"; but the expectations of entrepreneurs are of less importance than what actually occurs. If the expectations are high, but these expectations are unwarranted--say, if contractors were employing a large number of men to build real estate in 2007--the economy may nonetheless be in very serious trouble. In fact, a large variance between expectation and reality is a reasonable definition for a recession. Unless Keynes has another equation to track reality, I don't see how this second equation will help him.
In what is becoming routine for him, Keynes lays into "the classical theory" in this section: "The classical theory assumes, in other words, that the aggregate demand price (or proceeds) always accommodates itself to the aggregate supply price; so that, whatever the value of N may be, the proceeds D assume a value equal to the aggregate supply price Z which corresponds to N. " Now, you'll have to correct me if I'm wrong on this, but the assumption of the classical theory is full employment in equilibrium. In other words, there is only one value for N. This is not to say that full employment always exists; the economy is a series of moving parts, so equilibrium is always changing. Hence, even the smoothest running economy will have frictional unemployment. Keynes seems to think that none of his predecessors were aware of this.
Another general point: Keynes often speaks in such a way as to confuse the reader about the real relationship between two things. For instance, he writes: "For entrepreneurs will endeavour to fix the amount of employment at the level which they expect to maximise the excess of the proceeds over the factor cost." But no entrepreneur actually thinks this way. Instead, he asks himself if he can afford to hire an individual at a certain cost,; if he expects that the prospective employee will offer him more value than this salary, he hires the man. He doesn't concern himself with the amount of employment in the economy.
Section II: Here we come to the heart of the general theory, though it is presented sketchily as most terms have not yet been defined--which Keynes readily admits. We'll take a look at his list of points one by one:
1) In a given situation of technique, resources and costs, income (both money-income and real income) depends on the volume of employment N.
So long as we remember that N is made up individuals, and therefore, aggregation is of limited utility, I see nothing wrong here.
(2) The relationship between the community’s income and what it can be expected to spend on consumption, designated by D1, will depend on the psychological characteristic of the community, which we shall call its propensity to consume. That is to say, consumption will depend on the level of aggregate income and, therefore, on the level of employment N, except when there is some change in the propensity to consume.
Again, Keynes is aggregating. The propensity to consume--which could just as easily have been called the propensity to save, as the relationship is precisely inverse--is a characteristic of an individual. Hence, despite the fact that Americans are up to their eyeballs in debt, our father is a notorious cheapskate. Also, the propensity to consume varies widely, even among individuals. There is nothing to prevent Scrooge from collecting his horde of gold coins to buy a Christmas goose for Bob Crachit.
(3) The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand.
This one is a bit strange. I guess Keynes is saying that entrepreneurs depend on a certain amount of investment--so as to borrow funds to produce capital goods--and a certain amount of consumption--so as to purchase consumer goods. But the individual entrepreneur is less concerned with this ratio than is with whether or not he can sell his product. Apple isn't worried that Americans are tightening their belts; they're confident that the various iThings will sell.
(4) Since D1 + D2 = D = φ(N), where φ is the aggregate supply function, and since, as we have seen in (2) above, D1 is a function of N, which we may write χ(N), depending on the propensity to consume, it follows that φ(N) - χ(N) = D2.
Substitutions don't work if you're not dealing with actual equalities. Since these are relationships, but not explicit function, they cannot be combined mathematically. The Greek letters he uses, seemingly at random, only adds the confusion.
(5) Hence the volume of employment in equilibrium depends on (i) the aggregate supply function, φ, (ii) the propensity to consume, χ, and (iii) the volume of investment, D2. This is the essence of the General Theory of Employment.
Hopefully he states this more explicitly later, because I can't get myself to remember what the the Greek letters are supposed to represent.
(6) For every value of N there is a corresponding marginal productivity of labour in the wage-goods industries; and it is this which determines the real wage. (5) is, therefore, subject to the condition that N cannot exceed the value which reduces the real wage to equality with the marginal disutility of labour. This means that not all changes in D are compatible with our temporary assumption that money-wages are constant. Thus it will be essential to a full statement of our theory to dispense with this assumption.
Again, each individual decides if a change in D requires him to alter his employment status. We'll see what happens when he gets into the changes in money-wages.
(7) On the classical theory, according to which D = φ(N) for all values of N, the volume of employment is in neutral equilibrium for all values of N less than its maximum value; so that the forces of competition between entrepreneurs may be expected to push it to this maximum value. Only at this point, on the classical theory, can there be stable equilibrium.
I'm not sure what Keynes means by "neutral equilibrium". If N does not square with full employment--setting aside those voluntarily unemployed, for n less than N--we are not in a state of equilibrium at all.
(8) When employment increases, D1 will increase, but not by so much as D; since when our income increases our consumption increases also, but not by so much. The key to our practical problem is to be found in this psychological law. For it follows from this that the greater the volume of employment the greater will be the gap between the aggregate supply price (Z) of the corresponding output and the sum (D1) which the entrepreneurs can expect to get back out of the expenditure of consumers. Hence, if there is no change in the propensity to consume, employment cannot increase, unless at the same time D2 is increasing so as to fill the increasing gap between Z and D1. Thus — except on the special assumptions of the classical theory according to which there is some force in operation which, when employment increases, always causes D2 to increase sufficiently to fill the widening gap between Z and D1 — the economic system may find itself in stable equilibrium with N at a level below full employment, namely at the level given by the intersection of the aggregate demand function with the aggregate supply function.
The psychological law which Keynes observes sounds right, but it is not binding, and it is therefore not a law. It might seem reasonable that if I get a raise, I won't go out and spend all of it, but there is nothing to prevent me from doing so. I can, in fact, take the raise and spend that amount plus some of my savings--though if I was a good Keynesian, I'm not sure how much savings I would have. Hence anything which depends on this "law" holding true at all times will go awry should individuals not conform their behavior with the so-called law.
Regarding Keynes conclusion, it would be useful to attack the problem from a different direction. I'm not certain this could be done praxeologically, but at least theoretically, one could demonstrate that, despite a variance of savings rate--i.e. the propensity to consume--different rates of employment are possible. This seems to be the big take away here: if the propensity to consume isn't high enough--or low enough?--unemployment will result. I can't seem to find what that rate should be, so if you could point that out, I'd be grateful.
Section III: The rhetoric in this section is scurrilous. I've commented before on how poorly written the General Theory has been, but here, Keynes shines. He doesn't so much offer an argument, however, so I'll end my summary here.
This is arguably the most important chapter in the book, so please point out anything you think I may have missed or glossed over.
Monday, September 27, 2010
Section IV: Keynes uses this chapter to define involuntary unemployment. He writes, "Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relative to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment." At best, this describes frictional unemployment. If, as Keynes claims, the aggregate supply and the aggregate demand would be greater than the current condition the excess demand will employ the extra supply. Keynes' "problem" of involuntary unemployment is at worst a short-run case.
He goes on to argue that if the classical theory only applies to full unemployment, "it is fallacious to apply it to the problems of involuntary unemployment - if there be such a thing (and who will deny it?)" Considering Keynes wrote this during the Great Depression I doubt many of the thousands of unemployed would deny it, but that does not make it correct. Rather than making a case for involuntary unemployment, and arguing it against the classical theory, Keynes would rather appeal to people's emotions.
Section V: Keynes continues his discussion of wages and employment in this section. He argues that with a given organization, equipment, and technique, real wages and the volume of output are correlated. From this correlation he claims, "an increase in employment can only occur to the accompaniment of a decline on the rate of real wages." He continues, "if employment increases, then, in the short period, the reward per unit of labour in terms of wage-goods must, in general, decline and profits increase." This is not necessarily true, for if an entrepreneur increases employment he will pay the new workers according to the output he expects them to contribute. If he is wrong, and the worker contributes less than he believed, the entrepreneur will experience losses. One must not forget that employment is a voluntary agreement among two parties, and the only law governing their wage is each parties individual value scale.
Keynes ends this section with a claim that is essential to his theory, "a willingness on the part of labour to accept lower money-wages is not necessarily a remedy for unemployment." This is the basis for the Keynesian belief that the government must intervene via inflation to stop involuntary unemployment. Yet, inflation affects the entire economy, including prices, while allowing flexible wage rates only affects certain sectors of the economy. Surely, it is more efficient and less distortive to allow wages to fall and clear the market for a particular labor factor than to inflate prices throughout the economy.
Section VI: In this section Keynes tackles the classical theorists belief that supply creates its own demand. He quotes from both J.S. Mill and Marshall, but one point from Marshall is of particular importance, "He is said to spend when he seeks to obtain present enjoyment from the services and commodities of his which he purchases. He is said to save when he causes the labour and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future." This is consistent with the Austrian view that all economic activity revolves around satisfying the desires of the consumer; either now or in the future. Keynes disagrees with this belief, and claims that there is no link between decisions to abstain from present consumption and decisions to provide for future consumption. Unfortunately for Keynes, time preference clearly provides the link between present and future consumption decisions.
Section VII: In the final section of this chapter, Keynes outlines the three assumptions of the classical theory that he has purportedly refuted.
Wednesday, September 22, 2010
I'm not terribly familiar with the literature, but there are reasons to believe that this statement is not true. Whatever Keynes's ability as an economist, he often speaks as if he has a deep familiarity with divergent economic thought even when it is not the case. The problem is a real one, which is why Keynes was not the first to address it.
Continuing, Keynes gives two postulates upon which is based the "classical theory of employment." To wit:
1) The wage is equal to the marginal product of labour
My research tells me that this first postulate is an accurate summary of the classical position. However, this is not consistent with Austrian teaching, under which the wage is that which is agreed upon by the employer and the employee. There is no real equality; instead, the employee works for a wage which he prefers--both to other wage offers as well as the prospect of remaining idle--while the employer pays this wage because he prefers dispensing with this money in exchange for which he expects certain work from his employee.
The explanation offered by Keynes serves only to muddy the waters.
Onto the second postulate:
2) The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment
I'm honestly not sure what this means or why Keynes thought it was necessary. If you've defined your equality above, I'm not sure what this second postulate gives you. I may be missing something here.
Keynes uses a trichotomy to classify unemployment: frictional, voluntary, and involuntary. Yet frictional unemployment can be either, so I don't think it's a very helpful distinction. Nonetheless, Keynes proposes to look into involuntary employment and how it may come about.
He uses some more unhelpful terminology in this section by dividing goods into wage-goods and non-wage-goods. I can't think of any non-wage-goods. Further research suggests that by wage-goods, Keynes means consumer goods. I'm not sure why he felt need to introduce strange terminology--though in fairness these terms come from Pigou.
Section II: Keynes postulates: "that within a certain range the demand of labour is for a minimum money-wage and not for a minimum real wage." This is interesting, but not surprising. I'm certain a fair number of employees would accept a pay cut if they could find no other work; this number would be more substantial without generous unemployment benefits. When this wage reduction occurs clandestinely through inflation--for this is the primary cause of a reduction in real wages--it makes sense that people would tolerate this as well. There is a point at which people will seek employment elsewhere or cease working entirely; but it is not one penny less per hour as Keynes seems to think classical economists thought.
Keynes tells us: "It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing." Unfortunately, he does not tell us why it is implausible. Murray Rothbard makes a good case in his book, America's Great Depression, that the refusal of the partnership of big business and government to let wages fall exacerbated the depression. It would certainly seem reasonable to argue that allowing wages to fall would have created more employment.
He also writes: "It would be interesting to see the results of a statistical enquiry into the actual relationship between changes in money-wages and changes in real wages." His argument is empirical, so it would behoove him to take the time to accumulate some data, so as to see if his theory is reasonable. Keynes fails to do the necessary research here.
Continuing: "The traditional theory maintains, in short, that the wage bargains between the entrepreneurs and the workers determine the real wage ; so that, assuming free competition amongst employers and no restrictive combination amongst workers, the latter can, if they wish, bring their real wages into conformity with the marginal disutility of the amount of employment offered by the employers at that wage." Note the italics. Barring interference from the State--as for instance, raising the minimum wage would disallow laborers from working for less than the minimum--this is sound.
Then Keynes starts to get muddled by looking at the forest and forgetting that it is comprised of trees: "The classical conclusions are intended, it must be remembered, to apply to the whole body of labour and do not mean merely that a single individual can get employment by accepting a cut in money-wages which his fellows refuse." There is no such law which applies to the body of labor. All action occurs with individuals, and, to be more specific, at the margins. Employers do not say, "we shall raise employment by some quantity today" but rather ask, "shall we hire this person?" It is foolish to speak otherwise.
More: "To sum up: there are two objections to the second postulate of the classical theory." We have explained the problems with the first, so we'll move to the second: "There may exist no expedient by which labour as a whole can reduce its real wage to a given figure by making revised money bargains with the entrepreneurs. This will be our contention." Again, labor does not act as a whole. Individual laborers may seek alternative employment should a change in conditions prove undesirable to them. I don't see how this can be disputed.