Help! My Econ Professor Is a Keynesian

[Steven Douglas]

OK, lets put some numbers on it. Lets say she has 5000 in savings. The inflation tax takes away 100 per year in purchasing power if the inflation rate is 2%. This is still an extremely small part of her budget.

You have no idea how extremely valuable this is to me. I have always thought that the entire challenge of exposing Keynesian manipulations to the economy for what they really are, including the Fed, fractional reserve lending, etc., all hinges on the ability to translate this in a way that educates the people who are most adversely affected by all the perpetual artificial selection of winners and losers. But now it is becoming more clear to me that there are two sides living in isolated bubbles of incredible ignorance from which to develop a plan of attack.

You really have never come close to understanding the realities of living as a lower middle working class prole, or what the very real and positively sweeping effects of inflation are to people in this class. That reminded me of a line from the movie Trading Places, where William Winthorpe III, played by Dan Aykroyd, after getting out jail, says, "Well, if this is indicative of the state of correctional institutions in this country, they might as well let them all out - it's far worse on the inside!"

Right off the bat you wrote, "Let's say she has 5000 in savings." That was an absolute jaw drop for me. If that girl, and millions just like her, ever had 5000 in savings she would consider herself beyond wealthy, because she has never seen that much money at one time in her entire life. For her to save $900 is an enormous feat, as $1K is about the best she can do in one year. This is due, in part, because the probability of events that will drain those savings entirely is pretty massive. Tires go bald, an engine blows, a ticket, fines or surprise fees come due, a visit to the emergency room, - any number of things most people not in her economic class reckon as a very small percentage of their budget are really enormous percentages of her living survival budget. The shock to me is not that this can be forgotten or simply disregarded, but that there is an utter lack of awareness of it in the first place.

You reckoned inflation by how much it might erode her particular savings in one year, with complete disregard for the fact that all of her income was affected. And you threw out 2% as a number?! What charts are you consulting, and where have you been living?

The actual effects of inflation, which the poor and lower working classes feel THE MOST, are not miniscule statistical losses of dollar value in isolation, based on some index. And preemptively - the notion that a doubling of the cost of bread is offset by a halving of the cost and increase in the quality of iPods or anything else unrelated is something I consider a disgustingly disingenuous and intellectually dishonest practice on the parts of those who create indexes like the oft-quoted and highly massaged CPI.

While every dollar that she earns and spends lose a percentage of their statistically massaged value, MASSIVE price increases for things that are absolutely necessary to her survival, are surging up all around her, in a very surreal way, like virtual skyscrapers. An economist can smooth these numbers and average them out. Someone living this, however, cannot. And while these increases in prices normally happen gradually, in small amounts in perpetuity anyway, like tiny earthquakes or minute tremors, as stresses on businesses are relieved, most of the time it is just tantamount to the poor and those on fixed incomes being on a [very artificial] treadmill. They try to keep up, try to keep their heads above water; difficult, but not impossible. But that is not the only way it happens.

The most devastating effects of inflation happens in waves, partly as a result of "sticky prices" that have been held artificially low for years because of competition, for example, in the milder phases of a recession when public consumption goes down, even as inflation continues its ever downward pressure on the value of the dollar. Something must and will give eventually, and once everyone starts raising, prices, corrections happen in massive surges, like giant tsunami producing earthquakes. When that happens, her actual purchasing power is enormously eroded, sometimes overnight - but in giant waves - by 20, 30, 40, and sometimes 50-100% or more. That's part of the sawtooth "equilibrium" that literally drowns the poor, whose artificially leaky boats were already swamped by "normal inflation".

Her rent goes up by 10%, not 2%. Every year. That is an enormous part of her income. The price of gasoline goes up by 30%, not 2%, regardless of the cause - likewise, meat, bread, milk, eggs, butter, all groceries, you name it - nearly everything she requires for survival increases in price, not just in response to, but also in anticipation of, rising costs everywhere.

And she is always the very last to adjust - the "sticky price" sword that cuts both ways and works in reverse, against her and those in her position.

Some might argue, "Well, that's not all attributable to inflation", and they'll only be partially correct. What it really amounts to is the "perpetual expansion" mindset, for which expansion of the currency is at the very root. Please read my signature and address it, if you would. Was Keynes lying, or did he have a lapse of naivete when he wrote that? What did he mean by "debauch" the currency? Precisely how is a currency debauched, and precisely how/why does that involve forces on the "side of destruction"?

Compared to payroll tax of 12.5% on her income, maybe something like 20,000, which would be 2500 dollars. So in all likelihood, her payroll tax burden is something like 25 times as large as her inflation tax burden. So its not just that her tax burden is small relative to government revenue, its small in absolute terms and small relative to her other tax burdens. Its also an extremely small part of her yearly income.

Non-sequitur. I did not bring up other taxes or "government revenue" of any kind, so why mention it when it is not at issue? It has no bearing on the entire focus which is at issue, which is only the effects of inflation, and only as it relates to her "personal economy", which is necessarily affected by all that is going on around her.

I never once mentioned the "inflation tax burden" in relation to anything but the effects it has on the whole in terms of her own livelihood, which includes literally all of the other massive perpetually rising cost of living burdens which are heaped on her. That occurs independent of any other government tax burdens (on any level) that she might have to endure - as a result of that "inflation tax burden", the buck of which does not "trickle down", but gathers in massive waves and stops, in part, on her little sandy beach. If you eliminated ALL other tax burdens on her, which I did not bring up and are not at issue, the effects of the "inflation tax burden" on her personal livelihood - her ability to survive - would still be devastating. The reason for that - everyone else on whom she relies for her survival needs are feeling that same exact pressure, only they are MUCH quicker to respond, and pass it onto her in the form of massively rising costs. And she is ALWAYS the last to respond with rising costs of her own.

If we used your example, and pretended that only she felt the effects of inflation, there really would be not that much of a problem. She could lose that 2% of value (on only her savings, no less - somehow the rest of her wages are unaffected), but so long as prices of everything remain the same (i.e., nobody else is affected), then she really could endure that. But that is not how it works, and you do not have to be in her shoes to know that very well.

And you haven't begun to talk about how much government revenue is spent on an average person during their lifetime, its not like the money just goes in a pit somewhere and disappears.

Again, a non-sequitur, but neither have you addressed the possibility of how much government revenue would not have to be spent on the average person who relies upon cash for their livelihood in the absence of inflation, which is not only the result of deficit spending by government. That is only one factor, and not the largest by any means. Fractional reserve lending artificially dilutes/expands the money supply, and is an enormous perpetual contributor to inflation, which is, in part, the reason why I never once brought up government revenue in any other form, even if we accepted (and I do not, but don't want to waste time arguing it now) that all of "the inflation tax" somehow ends up with the Treasury Department as government revenue.

In addition, there's this this called the earned income tax credit which is a negative income tax for the poorest people in society. If she falls below the EITC cutoff, she gets more than one dollar for every dollar she earns, and that extra money comes from the government. The poor have a very low tax burden in today's society.

Yes, and she is aware of it, and takes advantage of it. It is not a "negative income tax" to her, but it does bite into what would have been a much higher tax burden -- and it is still a non-sequitur, because I am not addressing her "tax burden" but rather the effects of inflation, as felt on the aggregate whole, and how that relates to her personal economy.

And you should get her on the phone, and tell her about vanguard and something about how to invest for the future instead of holding it in currency.

You mean that few hundred dollars here and there that she manages to scrape together for medium-sized purchases that you might otherwise consider a small trip for a single purchase at Costco?

What her savings really amounts to in most cases is an emergency fund that buffers her from all that buffets her in real life. Immediate liquidity for the paltry amount (by our reckoning, not hers) is absolutely essential, which pretty much eliminates any "long term vision and planning" for her "currency holdings" (snicker - she'd crack up to learn she had "holdings").

Another implication of your arguments is that it would be disastrous if social security were privatized. If no one knows how to invest their money, they wouldn't be able to save for retirement, regardless of the rate of inflation.

That was a non-sequitur in the absolute. I never once mentioned or even implied a single thing about that insolvent macabre joke called Social Security, let alone did I give thought one about what should/should not be done about it. Furthermore, I didn't even bring up the subject of investments. Only the effects of inflation, and only as they relate to someone who requires and consumes the vast majority of their own personal revenue on SURVIVAL.

And of course I should mention the more than 1 billion people in the world living on under a dollar a day. Some of them would break the law in order and risk their lives to have it as well as your niece. Border controls reduce welfare by many orders of magnitude more than inflation taxes.

Boy, the non-sequiturs are flying high tonight! Well there's an argument in favor of inflationary practices, because it could be worse! I suppose she should be grateful then.

Speaking of delicious apples to rotten non-oranges, I have lived in Mainland China, and have spent time in some of the most impoverished western regions where a little more than a dollar or two a day for wages is not uncommon. But along with that "relative poverty" comes some unusual personal liberties that equate, in many cases, to a better standard of living, at least in terms of what is actually required for survival. But that's a subject for another place and time. I reject the comparison as essentially meaningless, given all the massive differences in all the variables concerned.

And we haven't even gotten into whether positive inflation levels can have any benefits.

Oh, you don't even have to argue that. I absolutely know with utter certainty that it has "benefits". Just not to her.

When I hear "It's the economy, stupid!", my response is, "Whose economy, stupid?"

Its also extremely difficult for firms to cut nominal wages, so positive inflation on average actually reduces wage stickiness.

Yeah, isn't that the rub. You just made an argument against inflation, but only if you view it from the point of view of individuals who rely upon currency and their own personal productivity, and not perpetual debt instruments for their survival. Not "firms". Individuals. Why the preferential treatment of "firms"? You are picking winners and losers in all cases. My niece could actually benefit from a lack-of-inflation through "wage stickiness" alone (which, by even Keynesian theory, is a short-lived phenomenon). That would be beneficial to "her economy", but since that would be "difficult for firms", let us do the reverse instead, as we trade her natural wage stickiness for an artificial price stickiness instead.

I think it is axiomatic that if 'firms' find it difficult to make necessary cuts in nominal wages, they find it even more 'difficult' to make unnecessary cuts in nominal prices.

 

[Elwar]

Economic professor and keynsian is redundant.

 

[ababba]

You have no idea how extremely valuable this is to me. I have always thought that the entire challenge of exposing Keynesian manipulations to the economy for what they really are, including the Fed, fractional reserve lending, etc., all hinges on the ability to translate this in a way that educates the people who are most adversely affected by all the perpetual artificial selection of winners and losers. But now it is becoming more clear to me that there are two sides living in isolated bubbles of incredible ignorance from which to develop a plan of attack.

You really have never come close to understanding the realities of living as a lower middle working class prole, or what the very real and positively sweeping effects of inflation are to people in this class. That reminded me of a line from the movie Trading Places, where William Winthorpe III, played by Dan Aykroyd, after getting out jail, says, "Well, if this is indicative of the state of correctional institutions in this country, they might as well let them all out - it's far worse on the inside!"

Right off the bat you wrote, "Let's say she has 5000 in savings." That was an absolute jaw drop for me. If that girl, and millions just like her, ever had 5000 in savings she would consider herself beyond wealthy, because she has never seen that much money at one time in her entire life. For her to save $900 is an enormous feat, as $1K is about the best she can do in one year. This is due, in part, because the probability of events that will drain those savings entirely is pretty massive. Tires go bald, an engine blows, a ticket, fines or surprise fees come due, a visit to the emergency room, - any number of things most people not in her economic class reckon as a very small percentage of their budget are really enormous percentages of her living survival budget. The shock to me is not that this can be forgotten or simply disregarded, but that there is an utter lack of awareness of it in the first place.

You reckoned inflation by how much it might erode her particular savings in one year, with complete disregard for the fact that all of her income was affected. And you threw out 2% as a number?! What charts are you consulting, and where have you been living?

The actual effects of inflation, which the poor and lower working classes feel THE MOST, are not miniscule statistical losses of dollar value in isolation, based on some index. And preemptively - the notion that a doubling of the cost of bread is offset by a halving of the cost and increase in the quality of iPods or anything else unrelated is something I consider a disgustingly disingenuous and intellectually dishonest practice on the parts of those who create indexes like the oft-quoted and highly massaged CPI.

While every dollar that she earns and spends lose a percentage of their statistically massaged value, MASSIVE price increases for things that are absolutely necessary to her survival, are surging up all around her, in a very surreal way, like virtual skyscrapers. An economist can smooth these numbers and average them out. Someone living this, however, cannot. And while these increases in prices normally happen gradually, in small amounts in perpetuity anyway, like tiny earthquakes or minute tremors, as stresses on businesses are relieved, most of the time it is just tantamount to the poor and those on fixed incomes being on a [very artificial] treadmill. They try to keep up, try to keep their heads above water; difficult, but not impossible. But that is not the only way it happens.

The most devastating effects of inflation happens in waves, partly as a result of "sticky prices" that have been held artificially low for years because of competition, for example, in the milder phases of a recession when public consumption goes down, even as inflation continues its ever downward pressure on the value of the dollar. Something must and will give eventually, and once everyone starts raising, prices, corrections happen in massive surges, like giant tsunami producing earthquakes. When that happens, her actual purchasing power is enormously eroded, sometimes overnight - but in giant waves - by 20, 30, 40, and sometimes 50-100% or more. That's part of the sawtooth "equilibrium" that literally drowns the poor, whose artificially leaky boats were already swamped by "normal inflation".

Her rent goes up by 10%, not 2%. Every year. That is an enormous part of her income. The price of gasoline goes up by 30%, not 2%, regardless of the cause - likewise, meat, bread, milk, eggs, butter, all groceries, you name it - nearly everything she requires for survival increases in price, not just in response to, but also in anticipation of, rising costs everywhere.

And she is always the very last to adjust - the "sticky price" sword that cuts both ways and works in reverse, against her and those in her position.

Some might argue, "Well, that's not all attributable to inflation", and they'll only be partially correct. What it really amounts to is the "perpetual expansion" mindset, for which expansion of the currency is at the very root. Please read my signature and address it, if you would. Was Keynes lying, or did he have a lapse of naivete when he wrote that? What did he mean by "debauch" the currency? Precisely how is a currency debauched, and precisely how/why does that involve forces on the "side of destruction"?



Non-sequitur. I did not bring up other taxes or "government revenue" of any kind, so why mention it when it is not at issue? It has no bearing on the entire focus which is at issue, which is only the effects of inflation, and only as it relates to her "personal economy", which is necessarily affected by all that is going on around her.

I never once mentioned the "inflation tax burden" in relation to anything but the effects it has on the whole in terms of her own livelihood, which includes literally all of the other massive perpetually rising cost of living burdens which are heaped on her. That occurs independent of any other government tax burdens (on any level) that she might have to endure - as a result of that "inflation tax burden", the buck of which does not "trickle down", but gathers in massive waves and stops, in part, on her little sandy beach. If you eliminated ALL other tax burdens on her, which I did not bring up and are not at issue, the effects of the "inflation tax burden" on her personal livelihood - her ability to survive - would still be devastating. The reason for that - everyone else on whom she relies for her survival needs are feeling that same exact pressure, only they are MUCH quicker to respond, and pass it onto her in the form of massively rising costs. And she is ALWAYS the last to respond with rising costs of her own.

If we used your example, and pretended that only she felt the effects of inflation, there really would be not that much of a problem. She could lose that 2% of value (on only her savings, no less - somehow the rest of her wages are unaffected), but so long as prices of everything remain the same (i.e., nobody else is affected), then she really could endure that. But that is not how it works, and you do not have to be in her shoes to know that very well.



Again, a non-sequitur, but neither have you addressed the possibility of how much government revenue would not have to be spent on the average person who relies upon cash for their livelihood in the absence of inflation, which is not only the result of deficit spending by government. That is only one factor, and not the largest by any means. Fractional reserve lending artificially dilutes/expands the money supply, and is an enormous perpetual contributor to inflation, which is, in part, the reason why I never once brought up government revenue in any other form, even if we accepted (and I do not, but don't want to waste time arguing it now) that all of "the inflation tax" somehow ends up with the Treasury Department as government revenue.



Yes, and she is aware of it, and takes advantage of it. It is not a "negative income tax" to her, but it does bite into what would have been a much higher tax burden -- and it is still a non-sequitur, because I am not addressing her "tax burden" but rather the effects of inflation, as felt on the aggregate whole, and how that relates to her personal economy.



You mean that few hundred dollars here and there that she manages to scrape together for medium-sized purchases that you might otherwise consider a small trip for a single purchase at Costco?

What her savings really amounts to in most cases is an emergency fund that buffers her from all that buffets her in real life. Immediate liquidity for the paltry amount (by our reckoning, not hers) is absolutely essential, which pretty much eliminates any "long term vision and planning" for her "currency holdings" (snicker - she'd crack up to learn she had "holdings").



That was a non-sequitur in the absolute. I never once mentioned or even implied a single thing about that insolvent macabre joke called Social Security, let alone did I give thought one about what should/should not be done about it. Furthermore, I didn't even bring up the subject of investments. Only the effects of inflation, and only as they relate to someone who requires and consumes the vast majority of their own personal revenue on SURVIVAL.



Boy, the non-sequiturs are flying high tonight! Well there's an argument in favor of inflationary practices, because it could be worse! I suppose she should be grateful then.

Speaking of delicious apples to rotten non-oranges, I have lived in Mainland China, and have spent time in some of the most impoverished western regions where a little more than a dollar or two a day for wages is not uncommon. But along with that "relative poverty" comes some unusual personal liberties that equate, in many cases, to a better standard of living, at least in terms of what is actually required for survival. But that's a subject for another place and time. I reject the comparison as essentially meaningless, given all the massive differences in all the variables concerned.



Oh, you don't even have to argue that. I absolutely know with utter certainty that it has "benefits". Just not to her.

When I hear "It's the economy, stupid!", my response is, "Whose economy, stupid?"


Yeah, isn't that the rub. You just made an argument against inflation, but only if you view it from the point of view of individuals who rely upon currency and their own personal productivity, and not perpetual debt instruments for their survival. Not "firms". Individuals. Why the preferential treatment of "firms"? You are picking winners and losers in all cases. My niece could actually benefit from a lack-of-inflation through "wage stickiness" alone (which, by even Keynesian theory, is a short-lived phenomenon). That would be beneficial to "her economy", but since that would be "difficult for firms", let us do the reverse instead, as we trade her natural wage stickiness for an artificial price stickiness instead.

I think it is axiomatic that if 'firms' find it difficult to make necessary cuts in nominal wages, they find it even more 'difficult' to make unnecessary cuts in nominal prices.

Honestly, I'm not a big fan of the ad hominem or appeals to emotion so I'm going to try to stick to logic. I don't like the personal insults and incorrect assumptions you make about my life, but I'm happy to ignore them if you are happy to stop making them.

So the original reason I went with 5K savings, is because it was a very conservative assumption for what I was trying to demonstrate. Its clear to me that the inflation tax is extremely small both as a percentage of her income and a percentage of her total tax burden. You are trying to act like less than 100 dollars a year is a catastrophic tax on this person and its just not true. I used a high number to prove that its small no matter what. Your response to that is weird, saying that she has less savings. OK well then the cost of inflation is much less than 100 dollars a year, maybe 20 dollars a year. So then your basing your economic theories off this 20 dollar a year cost, makes it even less intelligent.

So then you go into a series of arguments about inflation statistics and real incomes. I think the government statistics are accurate at what they are supposed to be measuring. CPI urban does a reasonable job measuring the cost of living of an average urban consumer. Measuring this is obviously difficult and not perfect but many of the potential biases are overestimates rather than underestimates.

You focus on a few data points, instead of all goods in an illogical way. If monetary creation generates increases in prices, you would expect, in the long-run, those increases to have an evenly distributed affect on all goods. If the price of one good increases 10% in a year and another decreases 6% in a year, its hard to say that both of those changes were caused by changing money supplies. Its very easy to say that the 2% average increase is caused by the changing money supply and the differences between the two goods are caused by other factors outside the scope of monetary policy. Prices of goods fluctuate around all the time relative to each other regardless of what monetary regime we are in.

You also diminish substitution as an important phenomena for low income individuals, which I think is a basic misunderstanding of Microeconomics. Substitution is always possible. For example, in the case of gasoline, as prices rise people substitute towards more fuel efficient cars, bicycles or public transportation. If you don't have a city with public trans, people can move to a city that has public transportation. In the case of food, prices never increase at the same rate for different types of foods. If you have flexibility in your diet, you can substitute towards things that are becoming less expensive.

I also have a sense that you just tend to pick out a few data points. Gas prices have both increased and decreased dramatically in different periods over the last 50 years and we recognize that a big chunk of its is global demand and opec price controls. Monetary policy is a second order thing when thinking about the variance of gas prices.

About the idea of real wages, I believe in a free market, not marxist theories of wage determination. I believe real wages are linked to productivity. You hear this time and time again in the forum that somehow inflation erodes real wages. This misses the point that in a competitive market equilibrium, workers earn close to their marginal productivity. Decreases in real wages are often linked to decreases in productivity. On the other hand, a lot of people have done work showing that real wages for many groups are stagnating and linked this of course to productivity because that's what determines wages.

As I said before, the effects of inflation on this person are tiny. The people affected most are foreigners and criminals, the people that hold large amounts of wealth in the form of currency.

You know if gas prices went up 30% a year for 10 years how much prices would have gone up? They would be 13 times higher. That's how I know that you are just making numbers up, because gas prices aren't 13 times higher than they were 10 years ago.

For everything you say is a non-sequituir, here is the connection. We have to be able to put numbers down to determine the affects of various things. I think determining the magnitude of certain things is important. Numbers themselves aren't that useful but comparing them to something is important. In this case, the inflation tax is less than 1/25 of her total tax burden and less than 1/200 of her yearly income. Its small and its important to recognize that so we don't have people trying to argue that its a central thing.

And then there was some sort of vague argument about the inevitable hyperinflation which I don't buy, but we'll have to wait and see who is right about that.

 

[ababba]

Yeah, isn't that the rub. You just made an argument against inflation, but only if you view it from the point of view of individuals who rely upon currency and their own personal productivity, and not perpetual debt instruments for their survival. Not "firms". Individuals. Why the preferential treatment of "firms"? You are picking winners and losers in all cases. My niece could actually benefit from a lack-of-inflation through "wage stickiness" alone (which, by even Keynesian theory, is a short-lived phenomenon). That would be beneficial to "her economy", but since that would be "difficult for firms", let us do the reverse instead, as we trade her natural wage stickiness for an artificial price stickiness instead.

I think it is axiomatic that if 'firms' find it difficult to make necessary cuts in nominal wages, they find it even more 'difficult' to make unnecessary cuts in nominal prices.

So what does wage stickiness mean? It means 95 percent of people have slightly higher wages in the short term and 5% of people are unemployed when they wouldn't have been before. Now think about what you are saying again and think about whether your niece wants to role a 20 sided dice for this one.

 

[2_Thumbs_Up]

Well in a years time I can build a new machine, so no capital is not fixed.

It takes capital to create capital. With a lower interest rate capital is actually diverted from creating new capital goods towards creating consumption goods. So a lower interest rate actually means we will have less capital goods in the future.

You also didn't read my post properly. I said at any point in time. In this very moment the amount of capital is fixed. And the amount will be the same regardless of what the interest rate is. Lowering the interest rate does not create real capital goods and thus cannot create real investments. The interest rate only affects what happens with the capital currently in existance. The interest rate allocates resources to fit with comsumers time preference.

 

[ababba]

It takes capital to create capital. With a lower interest rate capital is actually diverted from creating new capital goods towards creating consumption goods. So a lower interest rate actually means we will have less capital goods in the future.

You also didn't read my post properly. I said at any point in time. In this very moment the amount of capital is fixed. And the amount will be the same regardless of what the interest rate is. Lowering the interest rate does not create real capital goods and thus cannot create real investments. The interest rate only affects what happens with the capital currently in existance. The interest rate allocates resources to fit with comsumers time preference.

OK, let me ask you a question. The moment everyone learned that Lehman brothers was bankrupt, was capital the same the second before the news and the second after the news or was there a discrete jump in capital?

I know you said at any point in time, but its not a useful distinction if we are modelling the amount of goods or investment in a year.

Honestly, lower interest rates do not have to increase consumption. A basic Micro analysis of income and substitution affects would say the sign could go either way. You get the negative relationship between investment and interest rates from a standard NPV calculation.

 

[Steven Douglas]

You are trying to act like less than 100 dollars a year is a catastrophic tax on this person and its just not true. I used a high number to prove that its small no matter what. Your response to that is weird, saying that she has less savings.

If you asked me, "Why is she unable to save more", I would point you to my previous post, which explained it in detail without pointing to any tax on currency holdings. Her inability to save more is not being laid at the doorstep of this tax. She is low income. If you eliminated all taxes from her and society, she would still be low income. That much would not somehow fundamentally change, even though the dynamics (all of which are moot) would dramatically change.

Are we at least straight on that much?

Furthermore, if you think I am arguing that something "oughta be done about her low income status", you misunderstand my position and points entirely.

About the idea of real wages, I believe in a free market, not marxist theories of wage determination.

For the record, you are not conversing with a Marxist. I believe in a much freer market than you do, of that I am quite certain. From what I have read, I deduce that you are more of a 'statist', in terms of economics, than a Marxist. I don't want to call it Fascist, because that word has been misused so much and has ad hominem connotations, but the effect really is the same for anyone who reckons economic theory in terms of "what is good for the economy", as if "the economy" really was an entity for which "good", "bad", "harmful", etc., can somehow apply, without being both nebulous and normative. You appear to believe in, and have no problem with (correct me if I am wrong), artificial market controls, so long as they are not Marxist in origin, and that, to you, can be accurately referred to as a "free" market economy.

Where the economy is concerned, I am decidedly anarchistic (and I trust that you understand the meaning of that word in economic, not common usage, terms). I am as vehemently opposed to Marxist theories of wage determination as I would be to any other theories of wage determination which involves the establishment of a governing body of authority with the power to exert artificial force based on an underlying set of governing assumptions. Market dynamics which are manipulated by fiat, in a way that tilts playing fields and artificially determines winners and losers, regardless of its good intentions toward "the economy", can never be accurately expressed as a 'free' market. Else, let's just call a pile of dog crap a rose, given that at least it smells better than wet cat poop.

In a truly free market, wages compete freely like everything else. People are hired, not hired, fired, just as businesses of all kinds rise and fall on their own merits. That is perfectly natural, and there is nothing inherently "wrong" with any of that which requires artificial intervention. That wages can be described in terms of market forces is true, but if they are determined thereby, via any external governing force, then nominal wages can not be considered as freely competing in a "free" market, because somebody, somewhere jumped in with a normative assumption, and made it 'less than free' - regardless of the rationale, which cannot be anything other than normative (toward something, even if it is "the economy" - an anti-libertarian statist position).

I have no problem with free market competition, of both capital and labor, including the concept of winners and losers...so long as they are not artificially determined, deliberately or inadvertently, on the basis of any theory. There is no way to out-clever this principle, any violation of which makes the market something other than 'free'. And that includes that wonderful Fed - that "Supreme Court of Finance" that prints money for Libya.

Oh, and the phenomena of sticky prices and the liquidity trap - I do not view those from the lens of an unfree market where credit and capital are artificially created via some counterfeit wealth-siphoning mechanism - like a central bank that oversees fractional reserve lending. Those are crimes in my normative, subjective mind. I do believe in property rights, I do believe in sound money that is not defined as debt. I do not believe that the only way that an economy can exist, let alone thrive, is on the basis of "elastic" currency or credit, let alone a monopolistic fiat currency that ever-expands.

You also diminish substitution as an important phenomena for low income individuals, which I think is a basic misunderstanding of Microeconomics. Substitution is always possible. For example, in the case of gasoline, as prices rise people substitute towards more fuel efficient cars, bicycles or public transportation. If you don't have a city with public trans, people can move to a city that has public transportation. In the case of food, prices never increase at the same rate for different types of foods. If you have flexibility in your diet, you can substitute towards things that are becoming less expensive.

I don't diminish free substitution as an important phenomena for anyone, let alone low income individuals. The ability to make substitutions, forced or otherwise, for all individuals, is the core basis of a free market principle at work at the individual level in any economy, regardless of the governing assumptions of any theory by which it operates.

She can substitute hamburger for steak, and dog food for hamburger if she would like, or felt it was ultimately necessary. Like anybody in any economy can, and does anyway. In China, in North Korea - anywhere on Earth. So what? Is that a rationale of some kind? I fail to see the point you were trying to make.

To the extent that the ability to make free substitutions are channeled, promoted, prohibited or otherwise manipulated by law, however, that market cannot be said to be 'free'. For example, there is one thing she cannot substitute, and that is her medium of exchange. That is a forbidden substitution, based on theoretical assumptions and consequent manipulations and controls that tax and otherwise penalize such substitutions out of the realm of what is economically feasible.

A fiat currency is but one example of a "forced substitution" (a MUCH more powerful phenomenon than mere substitution), no differently than State banks which were taxed literally out of existence so that they would not be in a position to compete with federal banks. That is anything but a 'free' market.

Without the Forced Substitution of a fiat currency, the value of her crumpled fiat dollars, when freely substituted by sound specie in a non-artificially expanding currency economy, could actually, in time, gain in value. But even if it only retained its value, it could, in time, become an actual private accumulation of real capital - real wealth from real productivity that did not rely upon artificial debt instruments, which could, in time, fuel the economy in a way that really is free.

As of now however:

"In the first place, the vast expenditures of the war, the inflation of prices, and the depreciation of currency, leading up to a complete instability of the unit of value, have made us lose all sense of number and magnitude in matters of finance. What we believed to be the limits of possibility have been so enormously exceeded, and those who founded their expectations on the past have been so often wrong, that the man in the street is now prepared to believe anything which is told him with some show of authority, and the larger the figure the more readily he swallows it."
- The Economic Consequences of the Peace, by John Maynard Keynes, pg. 100

 

[ababba]

If you asked me, "Why is she unable to save more", I would point you to my previous post, which explained it in detail without pointing to any tax on currency holdings. Her inability to save more is not being laid at the doorstep of this tax. She is low income. If you eliminated all taxes from her and society, she would still be low income. That much would not somehow fundamentally change, even though the dynamics (all of which are moot) would dramatically change.

Are we at least straight on that much?

Furthermore, if you think I am arguing that something "oughta be done about her low income status", you misunderstand my position and points entirely.



For the record, you are not conversing with a Marxist. I believe in a much freer market than you do, of that I am quite certain. From what I have read, I deduce that you are more of a 'statist', in terms of economics, than a Marxist. I don't want to call it Fascist, because that word has been misused so much and has ad hominem connotations, but the effect really is the same for anyone who reckons economic theory in terms of "what is good for the economy", as if "the economy" really was an entity for which "good", "bad", "harmful", etc., can somehow apply, without being both nebulous and normative. You appear to believe in, and have no problem with (correct me if I am wrong), artificial market controls, so long as they are not Marxist in origin, and that, to you, can be accurately referred to as a "free" market economy.

Where the economy is concerned, I am decidedly anarchistic (and I trust that you understand the meaning of that word in economic, not common usage, terms). I am as vehemently opposed to Marxist theories of wage determination as I would be to any other theories of wage determination which involves the establishment of a governing body of authority with the power to exert artificial force based on an underlying set of governing assumptions. Market dynamics which are manipulated by fiat, in a way that tilts playing fields and artificially determines winners and losers, regardless of its good intentions toward "the economy", can never be accurately expressed as a 'free' market. Else, let's just call a pile of dog crap a rose, given that at least it smells better than wet cat poop.

In a truly free market, wages compete freely like everything else. That wages can be described in terms of market forces is true, but if they are determined thereby, via any external governing force, then nominal wages can not be considered as freely competing in a "free" market, because somebody, somewhere jumped in with a normative assumption, and made it 'less than free' - regardless of the rationale, which cannot be anything other than normative (toward something, even if it is "the economy" - an anti-libertarian statist position).

I have no problem with free market competition, of both capital and labor, including the concept of winners and losers...so long as they are not artificially determined, deliberately or inadvertently, on the basis of any theory. There is no way to out-clever this principle, any violation of which makes the market something other than 'free'. And that includes that wonderful Fed - that "Supreme Court of Finance" that prints money for Libya.

Oh, and the phenomena of sticky prices and the liquidity trap - I do not view those from the lens of an unfree market where credit and capital are artificially created via some counterfeit wealth-siphoning mechanism - like a central bank that oversees fractional reserve lending. Those are crimes in my normative, subjective mind. I do believe in property rights, I do believe in sound money that is not defined as debt. I do not believe that the only way that an economy can exist, let alone thrive, is on the basis of "elastic" currency or credit, let alone a monopolistic fiat currency that ever-expands.



I don't diminish free substitution as an important phenomena for anyone, let alone low income individuals. The ability to make substitutions, forced or otherwise, for all individuals, is the core basis of a free market principle at work at the individual level in any economy, regardless of the governing assumptions of any theory by which it operates.

She can substitute hamburger for steak, and dog food for hamburger if she would like, or felt it was ultimately necessary. Like anybody in any economy can, and does anyway. So what? Is that a rationale of some kind? I fail to see the point you were trying to make.

To the extent that the ability to make free substitutions are channeled, promoted, prohibited or otherwise manipulated by law, however, that market cannot be said to be 'free'. For example, there is one thing she cannot substitute, and that is her medium of exchange. That is a forbidden substitution, based on theoretical assumptions and consequent manipulations and controls that tax and otherwise penalize such substitutions out of the realm of what is economically feasible.

A fiat currency is but one example of a "forced substitution" (a MUCH more powerful phenomenon than mere substitution), no differently than State banks which were taxed literally out of existence so that they would not be in a position to compete with federal banks. That is anything but a 'free' market.

Without the Forced Substitution of a fiat currency, the value of her crumpled fiat dollars, when freely substituted by sound specie in a non-artificially expanding currency economy, could actually, in time, gain in value. But even if it only retained its value, it could, in time, become an actual private accumulation of real capital - real wealth from real productivity that did not rely upon artificial debt instruments, which could, in time, fuel the economy in a way that really is free.

As of now however:

I don't think you got the point about marxist theories of wages. They tend to view wages as determined by a struggle between owners of capital and owners of labor. A free market economist would say that labor earns its marginal product in a competitive market. The two views are obviously not consistent. The idea that inflation affects real wages is more on the marxist side of things because it doesn't recognize competitive market forces. Marginal product of labor equals real wage. The idea that higher inflation lowers real wages is ridiculous for a free market person to be arguing.

You were trying to say that CPI is understated because of substitution corrections and low income people don't substitute. I was just saying that is clearly wrong, everyone substitutes. The person that decides to purchase 2 apples and 0 oranges after the price of oranges doubles isn't experiencing 50% inflation even if they were initially consuming 1 apple and 1 orange. The increase in their fruit basket price index is less than 50%. It doesn't matter whether she substitutes from steak to hamburger or hamburger to steak, inflation statistics with a fixed basket will be biased in either case.

And I'm trying to keep it a positive economics discussion for the most part. I can talk about what the affects of each policy is without taking a position on which policy is best.

 

[Steven Douglas]

I don't think you got the point about marxist theories of wages. They tend to view wages as determined by a struggle between owners of capital and owners of labor. A free market economist would say that labor earns its marginal product in a competitive market. The two views are obviously not consistent. The idea that inflation affects real wages is more on the marxist side of things because it doesn't recognize competitive market forces. Marginal product of labor equals real wage. The idea that higher inflation lowers real wages is ridiculous for a free market person to be arguing.

I caught it. Artificial decrees to the contrary notwithstanding, labor does earn its marginal product on a competitive market, and can be likened to a perishable commodity, one that competes on the open market with any other like commodity.

The Marxist "labor vs. capital" struggle is strictly protectionist, and anti-free-substitution. They want their normative "fair share"...of artificial manipulations and protections from free market competition, no differently than so many non-free-market-protectionist capitalists exercise in our so-called "free market" economy (which I will argue is anything but).

Let's expand this, however, and look at it from a different, but completely related, perspective.

Many people have no difficulty realizing that Fascism vs. Socialism is a false choice. Those opposed to socialism can quickly point out that there are alternatives. However, most will fall into the trap of examining only the differences between these two. As such, they are often mistaken for opposites, and summarily placed on opposing ends of a false choice spectrum, without realizing that what these ideologies have in common, and fully agree upon as valid principles, is far more important than what distinguishes them from one another.

SOCIALIST/PROGRESSIVE: The state should intervene and control everything for the gud uv da peephole...
FASCIST/STATIST: The state should intervene and control everything for the good of the team....
CHORUS: "...and that's why liberty, individual property and freedom of choice do not exist as rights, except as limited and governed by the above."

In this context, it is very clear that these are not at all on opposite sides of one very important spectrum where other [unnamed] opposites exist on the other side. They are actually one and the same in principle, despite their stated motives. In both cases, the State must intervene, ostensibly "for the good of something", winners and losers will be artificially and subjectively determined on that basis, and fundamental rights exist only as qualified and reckoned by those very subjective governing assumptions of motive and intent.

This leads me to one of the core problems that I see with our so-called "free market" economy, and what I see as the grave fallacy of statist economists, who really, honestly believe that they are for "a free market", because their motives, intents, and a priori assumptions serve as a rationale for massive state-sanctioned controls and interventions, and only because they believe that they are "good for the economy", without realizing that this is really no different, in principle, than what socialists want to do, only from a different spigot, and for differently stated reasons.

That is PRECISELY the brilliance of the Fed design, I believe, and one of the secrets to its longevity, as it is so vociferously defended, from the left and the right, by people of absolutely opposing political ideologies.

ALL AD HOMINEM: (not attacks on you, just positive interpretations of motives)

PROGRESSIVE: The Fed should intervene because property rights do not exist anyway, the collective wealth of the world belongs to the collective peephole, and the ability to tax, invisibly and without consent or representation, is fundamental to, and essential for, the advancement of progressive collectivist ideals.
STATIST: The Fed should intervene because without an elastic debt mechanism, in the form of a counterfeit currency that is funded by value which is siphoned from the public wealth at large, we would be required to risk our own capital, and the private accumulation of capital outside the banking system would eventually grow so large that it would compete with, and therefore be a threat to, banking's greatest profit channels, if not existence.
CHORUS: "...and that's why liberty, individual property and freedom of choice do not exist as rights, except as limited and governed by the above."

The irony of it is this little Mexican Standoff: Deficit spending and fractional reserve lending both slop from a "common" wealth trough. So long as the well is flush, and the sheep are not shorn so deeply as to nick their skins, all is well, and the market is always allowed time to reach equilibrium. However, the capacity of the wealth-siphoning machine is not infinite, and sometimes one side cannot act without affecting the other in ways that are palpable. When taken to extremes, insanely out of control deficit spending really does interfere with the ability, long and short term, to further expand credit. And vice versa, out of control expansion of the money supply through commercial credit can interfere with the government's ability to engage in both deficit spending (and taxing, for that matter).

In short, while some are both Progressive and Statist in their thinking, most lean firmly on one side or the other. Most of these would like to keep the Fed machine going, in some form or another, while amputating, or severely curtailing, the part that interferes most with what they believe is its most "logical" (appropriate) purpose.

Many Progressives would, if they could, eliminate the commercial bank's siphoning side altogether, reasoning that this can be handled by government at a much cheaper costs with much greater control, and in a way that is "answerable to da peephole". In other words, make the Fed truly Federal (because, doncha know, privatization is evil anyway - we tried that and it didn't work)...yada yada, heard it all a million times.

Many Statists would, if they could, eliminate the government's siphoning side altogether, reasoning that deficit spending is damaging to the economy, and interferes with the free market. The government should establish a budget and live within that budget. If it wants to increase revenue, it can do so by substitution - i.e., normal channels, like raising and lowering taxes, changing laws, loopholes and regulations that are more favorable to commerce...yada yada, heard it all a million times...

And you know what? I predict that this standoff will not last indefinitely - that the Progressive side will win - as the statist's monster goes global without the statists. Why do I believe that? The Progressive side, history has proved, can cause catastrophic damage to the entire system, and when that happens, people don't turn to bankrupt entities, which they always thought were corrupt anyway, for help. They turn to government - even if they think that government is completely corrupt.

 

[ababba]

I caught it. Artificial decrees to the contrary notwithstanding, labor does earn its marginal product on a competitive market, and can be likened to a perishable commodity, one that competes on the open market with any other like commodity.

Wait so you are saying there are a bunch of people out there earning below their marginal product and no firms want to hire them at higher wages? Why are firms so stupid in your interpretation?

 

[Steven Douglas]

Wait so you are saying there are a bunch of people out there earning below their marginal product and no firms want to hire them at higher wages? Why are firms so stupid in your interpretation?

I know, go figure. Brain farts?

 

[ababba]

I know, go figure. Brain farts?

I was wondering how you can believe that and still believe markets are competitive. That wasn't really an explanation.

 

[MJU1983]

Tom Woods just posted this:

I offer some advice when it comes to sitting in a mainstream economics classroom.

Reader Asks: How to Challenge My Professor? | TomWoods.com

 

[MJU1983]

This video was posted as a comment:


http://www.youtube.com/watch?v=6e_8H7E3cTo

 

[Becker]

Is he explicitly Keynesian, or just pro-status quo, anti-"theory only"?