Author Archives: lawofmarkets

The productive horse must come before the spending cart

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These are selected comments that followed Per Bylund’s article on the Mises website where he discussed More Spending does not Drive more Employment. I have emphasised those that supported Per’s argument. I will provide a bit of a commentary to see where things are going. I might add that the one and only text that carries all of this at an introductory level is my Free Market Economics now in its third edition.

A discussion on the use of our resource base in maintaining and building capital

Diane Merriam: Maintaining anything is still a cost, so it still needs a market.

Demand equals supply at a given price. Without the price mechanism demand can be infinite and supply zero.

There have been too many cases, when it’s only government involved, that haven’t been far off from that case … think the Bridge to Nowhere :). If maintenance of something *is* going to be done, there’s still a market for getting it done.

The only value available for investment is value that hasn’t been spent on current consumption.

It doesn’t matter how much how many people work, how hard, how much they invest, any of it. If what they produce isn’t what people want at the price it is offered for, it has *no* value. Value is assigned by the purchaser and, even then, only at the time of any specific exchange. You can’t simply put a price tag on something and say that is what it’s worth. If people won’t buy it at that price, then it’s *not* worth the price.

All business decisions are forward looking with no guarantee ever of a positive return

Q: What do you think: “…when business people see a profit opportunity. …” means?

DM: [Businesses] may *think* they see a market opportunity. But more often than not, when a new product or more of an old one actually gets to the market, they find they were wrong.

Q: You should have more faith in our private sector job creators.

DM: I don’t have faith that they will do any better than they already are. The FACT is that most new businesses and even large expansion of existing businesses FAIL. If they could reliably predict what will and won’t sell for how much, they would already be doing it. They can’t. Distortions of the market will make analysis even harder, resulting in even *higher* rates of failures than now.

Value added is what matters most

Q: But if there are people available to work, the business person will hire them and create MORE VALUE.

DM: Again, it doesn’t matter how many people are working. Unless what they produce is worth the price it’s offered at to the final buyers, *no* value was created.

There is *no* demand until *after* something is created. Every investment is a risk because of that very basic fact. And once something is created, there is still no guarantee that people will want to buy it, much less at more than the total cost of making it, or even enough more that a business wants to keep making it.

*Risk* is the defining characteristic of *any* investment. A consumer saying “I want something” means next to nothing economically. Even “I want something particular at less than this price at this specific moment given what else I could buy and also want” says nothing about what that consumer will want tomorrow or what they’re willing to pay for it tomorrow or that something new will not come out such that they don’t want any more of what they bought today afterwards.

Even then you’ve only scratched the surface of risk evaluation. As a business person, it’s not only guessing at what demand might be tomorrow or next year and at what price. What if the minimum wage goes up another 80 or 90%? What if the cost of this or that material needed to make what I produce goes up? If I want to invest my current available savings (or even what I can borrow) in product A, what will that do to my line of product B? What if inflation jumps back up again or interest rates go up? I see all this “new” money floating around and I know that is going to increase inflation and interest rates. By how much? How soon? For how long? I see a lot of cost increases coming down the road and I see that what I earn is going to be worth less than it is now. Can I risk even expanding current production? Can I afford to lose what it’s going to cost?

And even after all that analysis, most new businesses *still* fail.

All production is driven by entrepreneurs and not by those who might buy the product after it has been produced

Q: What about if consumers wave money in front of the noses of the job creatos and say “wakey wakey”

DM: The business owner would look at them and know that *they* are wakey wakey and have no idea what they’re talking about. Business owner looks at what they say they want, then how much they are willing to pay for it, then sees what the potential upside *and* downside is, then looks at costs and what they can afford to invest and what they can afford to lose if it doesn’t work out. By the time it’s all said and done, what people say quite often doesn’t work out in the real world.

The normal progression for business that open simply on the basis of what people say they want is funds invested, attempts made, followed within a year or three by bankruptcy. It’s just not that simple.

“For every complex problem there is an answer that is clear, simple, and wrong.” – H. L. Mencken

Look at the three states, I think it is now, who tried to implement a single payer plan … until they got the dollar figures on what it was actually going to cost, and that was under best case scenarios. All three attempts just quietly went away.

Simply because some people say they want something doesn’t mean it’s the right or affordable thing to make.

Jobs are not created by spending

Phil Miller: “The jobs are created by spending”

Jobs are created by entrepreneurs who take risks to satisfy consumer wants. You can’t have spending unless you have entrepreneurs first taking risks and producing products. You’ve got the cart in front of the horse.

Q: “Value and wealth are created by entrepreneurs and indeed money if they borrow it.”

PM: Wealth must first be created before it can be borrowed. You can’t borrow something that doesn’t exist.

Understanding the meaning of wealth and wealth creation

DM: Wealth does not equal value. Wealth is nothing but a numerical accounting of the assumed value that a person or business has at their disposal to spend or invest. It’s one of those loose words, along with others like inflation and money, that make it easy to obfuscate economic understanding among the general populace (and even many economists).

Of course entrepreneurs can’t create money. Neither can governments or anyone else. First the value has to be created. *Then* that value can be traded, either directly (as in barter) or indirectly (using an generally accepted form of value storage called money).

You can throw trillions of pieces of paper around and not one job will ever be created. Without the intermediary steps of deferred consumption (savings) and risk taking entrepreneurs you have nothing.

Money, in the formal definition, must be an actual commodity that has value in and of itself. The best commodities to use are durable, have high value per volume, are easily divisible, and do not *need* to be consumed.

Paper currency, when it is a claim on actual money, makes it even easier to use as long as the receiving party trusts that the actual money is and will always be available upon demand. When that convertibility is taken away, a major trust support is lost. Even the value as an intermediary of exchange becomes subject to the whim of the printer. If the printer prints more, then prices have to go up. Which prices go up and by how much can be any mix of end user prices and/or investment vehicles and everything in between. More paper, in and of itself, does not and can not create value.

Production comes first and demand only later

Leopardpm: It is just pure crazy that their are still folks in the world that are so confused as to think that ‘spending’ precedes production or increases demand. All one has to do is reduce the economy down to 1 or 2 folks and see how things work – this strips away the myriad of confusing layers and distractions which seem to plague peoples minds.

These people completely lose their ability to think just because a fiat currency is introduced into the equation, as if it acts as some magical incentive to drive folks all ‘wakey wakey’ in their search for wealth.

It is simply a logical impossibility for spending to drive the economy, no matter what a study may conclude or a person may ‘feel’ should happen…

Entrepreneurs are a breed apart and do not need to be coddled to get them to produce

DM: Entrepreneurs do not need a *good* economic climate, but they do need one that at least makes profit possible. The worse the climate, the worse the returns and therefore the less the growth that investment will result in.

Leopardpm: Suppose you and another person are in a forest and he has an item you desire and you have nothing that he values to trade for it – can you simply ‘spend’ to obtain it, or do you need to produce something first in order to trade for it?

Even though way over-simplified, it still highlights the underlying, fundamental point: someone, somewhere, somehow must first produce something before it can be ‘spent’. Debt can alter the time frame (ie: you could trade a debt for the item, but that debt must either be repaid or any future ability to trade debt will be greatly devalued), but not the principle.

Why do you insist that I am creating a strawman here? This article is about creating employment through spending, and it follows that it also is referring to the greater thought of ‘Spending drives the economy’… my ‘strawman’ is both of these….

“Your claim that there is someone claiming that spending preceeds production is just childish.” You must not get out much – the idea that spending proceeds production and thus is the main driver in the economy is repeated throughout the media and economic circles: “Spending accounts for 70-80% of the economy (or economic growth)” etc… perhaps you are not understanding the concept, or maybe do not hear what is said by the news et al?

Structure of production

Bob Robert: Your failure is in not understanding the structure of production.

In order to be used to build final products, the “capital” machines must be produced. Production precedes consumption.

In order to be used to produce the machines, the “capital” factories must be produced. Production precedes consumption.

In order to be used to build the factories, the “capital” bricks, iron, flywheels, electrical generators, and on and on endlessly (see: I, Pencil) must be produced. Production precedes consumption.

In order to be used to build all those things, the “capital” of individual laborers must be produced. Production precedes consumption.

It’s called “structure of production”, and it is something which both Marx and Keynes ignored utterly.

Summing up

Noah: ” the entrepreneur will employ people before demand is known — in fact, even before demand can be known”

Exactly. Well phrased.

” capital replaces labor (by making it more productive) ”

Which is represented by the “good” form of wealth inequality, since the return on output logically returns to the capital that is increasingly invested in greater proportion than to the labor that is reduced. Both the rich and poor get richer in real terms, but the return on investment/capital (that is replacing labor to increase output) means the rich get richer at a faster pace than the poor get richer.

What’s the problem, if this system is actually allowed to work (which it increasingly is not) under limited credit expansion? Unlimited credit expansion means ONLY the rich get richer, at least in nominal terms.

“the Keynesian avalanche”

What a wonderful phrase! This is very good article in the realm of those that show production/supply is primary over consumption/demand (rather than the other way around, as the the Keynesian avalanche led many to believe.

Perhaps too scattered as all such conversations are but an interesting and quite high level discussion.

The twentieth century’s most influential philosopher has passed away

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The twentieth century’s most influential philosopher has passed away at 91. I remember when The Playboy Philosophy was being serialised in the magazine. I especially recall passing one of the many episodes around maths class, all of us thinking if only a world like this could come to pass. And you know what, it did come to pass and more comprehensively than anyone could have imagined, but by then I was no longer 14 years old. It has done endless harm to both men and women, making the stability of the family now all but unachievable, and added a new dimension to human unhappiness. It has now come down to where the only freedom for many is sexual freedom, but that apparently is good enough for them.

For those of us who only read the mag for the articles, let me bring this to your attention if you haven’t read it before: Donald Trump’s Playboy Interview. You can see why he’s president while also seeing that he, too, is from that era long ago before the Playboy Philosophy became the foundation and point of origin for Third Wave Feminism.

Crony capitalism in action

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A Keynesian stimulus is nothing other than a way for our elites to reward each other with other people’s money. This is a story that ought to lay bare what you need to know about public sector spending where the pretence is made that the stimulus is to help those at the bottom of the income pile. Here is the reality: Most Americans Still Worse Off Than Before Recession, Fed Finds.

Newly released income and wealth data from the Federal Reserve Board’s triennial Survey of Consumer Finances show that America’s richest families enjoyed gains in income and net worth over the last decade. Not part of the top 10 percent? Then your income probably fell. The data show that families ranked in the highest percentile saw an income gain of $16,300 from 2007 to 2016. Those below are still making less money.

A government has very poor judgement on what is value adding for a community but is absolutely perfect in being able to reward their friends.

RMIT is the George Mason of the South

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It was certainly never intended that way but the School of Economics, Finance and Marketing at RMIT has become one of the great free market universities of the world. This has been posted at Instapundit just today following the post you see below on The Blockchain Economy:

INTERNET 4.0: Chris Berg (Australia’s free speech champion), Sinclair Davidson (of Catallaxy Files fame), and Jason Potts have put together The Blockchain Economy: A beginner’s guide to institutional cryptoeconomics. If they’re right, regulators and taxmen have a lot to fear.

And allow me to add myself into this equation. I presented my paper on Tuesday on “Classical Economic Theory Explained” which discussed the many many many things wrong with Keynesian macro – that is, all of modern macro – that the classics got right. And while the number of people who get this is quite small at the moment it is not quite zero and the numbers are growing. Therefore, let me refer you to this paper by Per Bylund More Spending Does Not Drive More Employment in which the following passage may be found:

Economists prior to the Keynesian avalanche, which contemporary Say’s Law scholar Steve Kates argues was all about dismissing the organic view of the market economy, had the same understanding of the economy as Mises. What drives the economy is not demand or spending, but entrepreneurship and production.

Indeed, JS Mill famously notes that “Demand for commodities is not demand for labour” in his fourth fundamental proposition on capital. While this statement is subject to much debate and most modern economists cannot make sense of it, it is in effect very straight-forward if one recognizes the role of entrepreneurs.

And if you want to want to read about Mill’s Fourth Proposition, you can go here. This was its first defence in more than a century but as said by Leslie Stephen in 1876, “it is the best test of a sound economist”.

Two consecutive posts at Lucianne

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‘White Plague’: France on track for Muslim majority as native European populations dwindle
Washington Times, by Rowan Scarborough Original Article
Posted By: Ribicon- 9/26/2017 10:16:01 PM Post Reply
Within 40 years, given current demographic trends, the white population in France and the rest of old Europe will recede, creating a Muslim majority, a French researcher says. Charles Gave, an economist, fund manager and political commentator, published his conclusions this month on the webpage of his think tank, Institute des Libertes. He writes of the “disappearance of the European populations” as native populations shrink and Muslims continue to exhibit a robust fertility rate. Mr. Gave, president of Gavekal Research, acknowledges that his decidedly unpolitically correct view may bring him scorn and possibly censorship. The political left generally protects Islam

Trump cuts Obama’s refugee target in half, takes more Christians than Muslims
Washington Times, by Stephen Dinan Original Article
Posted By: Ribicon- 9/26/2017 10:15:57 PM Post Reply
President Trump, in just eight months in office, has succeeded in upending U.S. refugee policy, cutting by more than half the 110,000-refugee target that the Obama administration had bequeathed him and dramatically shifting the demographics of who is accepted. Gone is President Obama’s overwhelming focus on Muslims, and particularly on Syrians fleeing a civil war that his administration facilitated. Under Mr. Trump, the rate of Syrian refugees has been cut by more than 80 percent, and Christians have overtaken Muslims in total refugees resettled. “It’s impossible to escape the clear message that there’s a new sheriff in town,” said Matthew

Capitalism and ignorance

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From Three wild speculations from amateur quantitative macrohistory but there is nothing wild about the diagram other than how ignorant most people are about what it shows.

In How big a deal was the Industrial Revolution?, I looked for measures (or proxy measures) of human well-being / empowerment for which we have “decent” scholarly estimates of the global average going back thousands of years. For reasons elaborated at some length in the full report, I ended up going with:

Physical health, as measured by life expectancy at birth.

Economic well-being, as measured by GDP per capita (PPP) and percent of people living in extreme poverty.

Energy capture, in kilocalories per person per day.

Technological empowerment, as measured by war-making capacity.

Political freedom to live the kind of life one wants to live, as measured by percent of people living in a democracy.

Two million years of “human” history where the only tools were made of stone, and then a bronze age, iron age, industrial revolution and now us.

We now have morons [who call themselves “progressives”!] trying to take us back in time to just where I don’t know, perhaps 1890, maybe 1920, but certainly to a time of greater poverty and fewer chances in life. The diagram is only for us because most of those trying to kill off our carbon-based energy sources would be too thick to understand any of it since the basis for their entire ideological view of the world is a hatred for the capitalist system that has transformed the human race.

Kick ’em in the other knee

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There was a time in my own lifetime that a chant like this was as smutty and dirty as it was possible to be. But times do change.

Rah rah ree
Kick ’em in the knee
Rah rah ruts
Kick ’em in the other knee

More important, what has truly changed is who is the President of the United States. From the very first moment last season when the first player took a knee, as they say, while the Star Spangled Banner was being played and no one did a thing, I never watched another game again until the Superbowl and then only because it was Tom Brady.

You may think this is trivia and beneath the dignity of a president, but this is exactly why he was elected. And while it’s politics, since anything of this kind done by a president is politics, it is also his natural instinct to be disgusted by those who have lined up with the players who have refused to stand for their national anthem.

NFL Owners ‘Unity’ with Players Might Be Short-Lived…
Trump lauds ‘great anger’ after fan boos…
ESPN Becomes CNN…
STEELERS QB REGRETS…
Major sponsors tiptoe around controversy…
Car Dealer Pulls Ads Featuring BRONCOS Star…
Player Accused Of Spitting On Fan…
Stadium worker quits…
PATRIOTS ‘sorry’ for charging $4.50 for tap water…
Protests at Olympics?
Congresswoman Kneels During House Floor Speech…
WSJ: The Politicization of Everything…
LIMBAUGH: THRILL OF NFL GONE…

From the last one:

One of the most premier Never Trumpers throughout the 2015-16 campaign was Rich Lowry, National Review Online. He wrote and filed a piece yesterday called, “Why Trump Is President,” and his Alabama speech Friday night and his comments on the NFL is what Rich Lowry now realizes is why Trump is president. It isn’t complicated. You have a man who is very clear in his love for the country, his love of its traditions and his appreciation for it.

And on the other side you have people who are willing to portray themselves as not, whether they know it or not. There’s no way Trump loses in this. You may think so, but there’s no way he does. There’s no way the NFL wins, if this continues as it is. The ratings are down last night. The early returns — we don’t have, of course, all the metered markets, the overnights. Some of them are in. But they were down, and it’s not insignificant, the numbers that are down.

This is not a sideshow, it is the real thing. This is how we take back our culture from the barbarians inside the gate. And no one but PDT could even have taken this burden on, never mind brought it off.

The Oz has become the local propaganda arm of the North Koreans

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The central point is that North Korea is developing nuclear weapons and a delivery system that can land them in the United States. Other than let them go on forever developing these armaments and the ICBMs to go with them, what should be done? No one really knows, but the primary response has to be to take this threat seriously, as something really dangerous that has to be dealt with. So what do we find at The Australian today. First this: Inside nuclear North Korea. Never mind the vacuous text, here’s the photo that comes with the story:

Very sweet. Then there is the foreign policy sage, Greg Sheridan: Kim Jong-un and Donald Trump enter sick dynamic. So this is what Greg finally says which is about as fatuous and inane as possible.

Any way you slice it, when nuclear-armed states are making bellicose threats against each other, the world is confronting an extremely dangerous moment.

You don’t say? Look, Greg, who is making the threats and who is trying to work out what to do on our behalf? If you have a suggestion on what to do, put it on the table. Otherwise, why don’t you start by pointing out that if nuclear weapons begin to fly we will be at the other end, and in the meantime just shut up.

I thought it was just me

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John Cochrane is to me one of the modern superstars of economics, a deep thinker with a genuine ability to see things that others miss. He is also about as well known as anyone in the profession, which is why I was surprised to find he is amongst the mortals when trying to get his papers published. This is from A paper, and publishing which is about his own trials in getting things through the publications mill.

Even at my point in life, the moment of publishing an academic paper is a one to celebrate, and a moment to reflect. . . .

Today’s thoughts, though, are about the state of academic publication.

I wrote the paper in the spring and summer of 2013, posted it to the internet, and started giving talks. Here’s the story of its publication:

September 2013. Submitted to AER; NBER and SSRN working papers issued. Blog post.
June 2014. Rejected from AER. 3 good referee reports and thoughtful editor report.
October 2014. Submit revision to QJE.
December 2014. Rejected from QJE. 3 more thoughtful referee reports and editor report.
January 2015. Submit revision to JME.
April 2016. Revise and resubmit from JME. 3 detailed referee reports and long and thoughtful editor report.
June 2016. Send revision to JME
July 2017. Accept with minor revisions from JME. Many (good) comments from editor
August 2017. Final revision to JME
September 2017. Proofs, publication online.
December 2017. Published.

This is about typical. Most of my papers are rejected at 2-3 journals before they find a home, and 3-5 years from first submission to publication is also typical. It’s typical for academic publishing in general. . . .

Once accepted, my paper sped through the JME. Another year or two in the pipeline between acceptance and publication is typical.

His conclusion is that the paper is better today than it originally was – it has now been “perfected” – but the reason for having even started the paper four years ago has disappeared. It also eats into one’s time like nothing on earth.

Such perfection comes at a big cost, in the time of editors and referees, my time, and most of all the cost that the conversation has now moved on.

The sum length of nine referee reports, four reports by three editors, is much longer than the paper. Each one did a serious job, and clearly spent at least a day or two reading the paper and writing thoughtful comments. Moreover, though the reports were excellent, past the first three they by and large made the same points. Was all this effort really worthwhile? I think below on how to economize on referee time.

What a fantastic waste of effort by so many over so long for so little. But I do like this particular suggestion because it creates an incentive structure for both the referee and the author of the original paper.

Journals should be the forum where competing views are hashed out.

They should be part of the “process of formalizing well argued different points of views — not refereeing “the truth.” We dont know the truth. But hopefully get closer to it by arguing. [In public, and in the journals] The neverending refereeing [and editing and publishing] process is shutting down the conversation.”

When I read well argued papers that I disagree with, I tend to write “I disagree with just about everything in this paper. But it’s a well-argued case for a common point of view. If my devastating report does not convince the author, the paper should be published, and I should write up my objections as a response paper.”

I take the pain of referees’ reports as just the way it is. But maybe it doesn’t have to be the way it is after all.

BTW if you are interested, here is the paper John has just published which will be online till November 9: The new-Keynesian liquidity trap. What an amazing effort for a paper I would never read under any circumstances – I could barely read the abstract. But then we would have to go into the value of most articles in most journals, and that is a very different story indeed. And if you don’t believe me, here is the abstract:

Many new-Keynesian models produce a deep recession with deflation at the zero bound. These models also make unusual policy predictions: Useless government spending, technical regress, capital destruction, and forward guidance can raise output. Moreover, these predictions are larger as prices become less sticky and as changes are expected further in the future. I show that these predictions are strongly affected by equilibrium selection. For the same interest-rate path, equilibria that bound initial jumps predict mild inflation, small output variation, negative multipliers, small effects of far-off expectations and a smooth frictionless limit. Fiscal policy considerations suggest the latter equilibria.

And now, according to John, none of it matters in the slightest anyway at all.