Sunday, October 31, 2010

Weekly Column - 10/30/2010

This week's column:

"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

Keynes - The General Theory - Chapter VI

In Chapter VI Keynes attempts to define income, saving and investment in order to further develop his general theory. Keynes' discussion of income involves the different costs which affect income, so I will break up my analysis of his writings according to each different cost.

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

Weekly Column - 10/23/2010

This week's column:

"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

Weekly Column - 10/16/2010

This week's column:

“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

Keynes - The General Theory - Chapter V

Section I: In this chapter, Keynes deals with the role expectation plays for the entrepreneur. He offers some sensible advice, but also puts things in such a way that they are liable to be misunderstood. He also introduces distinctions and terminology without necessity.

For instance:

“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

Weekly Column - 10/09/2010

This week's column:

"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

Keynes - The General Theory - Chapter IV

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.

Weekly Column - 10/02/2010

Due to a mistake which was, for once, not my own, no column was published last week. We've returned to normal, so here's this week's column:

"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.