The Austrians

Anyone who has argued for substantial deficit expenditure to sustain demand and employment levels in the aftermath of the Global Financial Crisis has probably run up against opposition from supporters of the Austrian School. This observation applies as much to orthodox advocates of fiscal stimulus as it does to heterodox economists.

The derision of Austrians tends to be aimed at the supposed inflationary impacts of current fiscal policy settings. Three of their most frequent arguments are:

1. Deficit expenditure, if unmatched by public debt issuance, would expand the “money supply”. This, in turn, would increase the claims on real goods and services, and result – or so it is claimed – in a reduction in the real claim represented by a unit of the currency.

2. Even when deficit expenditure is matched by debt issuance – as it currently is – government spending and taxing diverts resources from “more efficient” private sector activities to “less efficient” private or public sector activities.

3. Deficit expenditure unmatched by public debt issuance is by definition inflationary because inflation for the Austrians is defined as expansion of the money supply, not a persistent rise in the general price level.

In this blog, I want to address these arguments.

“Money Supply” and Claims on Real Output

A preliminary point to note is that the current practice of issuing public debt to match deficit expenditure has no impact on the degree to which fiscal policy alters “claims on real goods and services”, even though the debt issuance does neutralize the impact of fiscal policy on the amount of reserve balances in the system.

When deficit expenditure is matched by debt issuance, as is currently the case, there is an overall increase in net financial assets equal to the amount of the deficit, but no overall change in reserves.

If, instead, deficit expenditure were not matched by debt issuance, there would be an increase in net financial assets equal to the increase in reserves, and also equal to the amount of the deficit.

In either case, the impact on net financial assets would be the same. Under the current practice, the increase in net financial assets is in the form of bonds. In the absence of debt issuance, the increase in net financial assets would be in the form of reserves. Either way, net financial assets – which are a “claim on real output” – would be altered to the same extent, whether debt is issued or not.

But there is something else going on other than just an increase in “claims on real output”. There is also an increase in the amount of real output, provided the deficit expenditure is used to activate production. So real claims and real goods both increase.

Austrians need to explain why net financial assets should be kept too scarce to sustain full employment. That is, what is their basis for determining whether the current amount of net financial assets is “correct”?

It has been pointed out many times in previous blogs that modern monetary theory (MMT) takes a position on this question. It is that fiscal policy should alter net financial assets (“claims”) by an amount just sufficient to enable full employment and non-government net saving desires (for an illustration of this point, see Parable of a Monetary Economy). This policy stance will correspond to a particular change in net financial assets.

The extent to which net financial assets need to be increased can be altered through redistributive policies, and this may well be appropriate, but the point remains that for a given distribution and non-government net saving disposition, there will be a level of deficit expenditure consistent with full employment and price stability.

Deficit Expenditure and “Efficiency”

As for the argument that private markets are efficient and government expenditure causes ‘distortions’, let’s break this down with a simple example to see what is really at stake. Imagine the government gives an extra $100 to an unemployed person and the recipient spends the money at the shops. Suppose – as is clearly the case at present – that the shops (and their suppliers) have sufficient spare capacity to respond to this extra $100 of demand by selling more goods at current prices.

Where is the supposed inefficiency? The shops have supplied output at a price determined by the cost structure and degree of competition within their respective sectors. So there is no necessary impact on cost-efficiency.

What the Austrians call inefficient in this instance is the fact that this $100 has been spent by someone who under private-market conditions would not have possessed the $100. It is really a complaint about distribution, not efficiency.

By calling this a problem of efficiency, the Austrians are really referring to what the neoclassical orthodoxy calls ‘allocative efficiency’ or ‘pareto efficiency’. The argument is that the recipient of the $100, by spending it, will activate production that would not have occurred in a purely free-market economy, and this is supposedly an ‘inefficient’ use of resources.

The argument does not stand up to orthodox analysis of allocative efficiency. It is well established in orthodox theory that once we are outside the world of the ‘first best’ (meaning once there are at least some distortions), the orthodox Theory of the Second Best shows that additional market distortions (e.g. government interventions) do not necessarily reduce allocative efficiency. Once there are at least some distortions – and no orthodox economist would claim an absence of distortions in the real world – the introduction of additional distortions does not, in general, move the economy further away from allocative efficiency, and in fact may move the economy closer toward allocative efficiency.

In other words, it is not valid, on orthodox grounds, to presuppose that in a second-best world an additional distortion will reduce allocative efficiency. Further, it is impossible not to have distortions in the real world because of the presence of what the orthodoxy terms externalities, market failures, public goods, incomplete information, etc. The presence of these problems means that a purely “free-market” economy is not pareto efficient in any case. Since there is no such thing as a first-best world, the market, left to its own devices, is not allocatively efficient, on orthodox grounds.

Now the Austrians, of course, are not orthodox, even though they believe in ‘marginal’ behavior like the orthodoxy. They object to the mathematical analysis used by the orthodoxy, and it is this mathematical work that shows the logical flaws in the notion of an allocatively efficient pure free-market economy. So we can’t really argue with the Austrians directly on these questions, since they object to mathematical logic when applied to models of the economy. Their position is really just an assertion, not an argument.

Even so, the orthodoxy has demonstrated results that shed light on whether the Austrian position on efficiency could really be tenable. Specifically, the orthodoxy has determined the set of highly restrictive conditions that would need to hold for a purely free-market economy to deliver pareto efficiency, and gone on to demonstrate in their Fundamental Theorems of Welfare Economics that if such a first-best world existed, then: (i) any free-market equilibrium outcome would be pareto efficient; and (ii) any desired pareto-efficient outcome could be attained through appropriate lump-sum transfers (redistributions) of income. (It has also been demonstrated that in a first-best world, a command economy could deliver pareto efficiency just as easily as a market economy, since the conditions underpinning a first-best world include perfect information.)

So, in a first-best world, any initial distribution of income is consistent with pareto efficiency. That means it would be possible, in a first-best world, to impose lump-sum taxes (e.g. property taxes, tolls, poll taxes) and lump-sum transfers and then let the market economy deliver pareto efficiency.

These findings make clear that the Austrian argument about the supposed efficiency benefits of private markets (which they merely assert without proof) really reduce to an assertion about income distribution. On the one hand, it is invalid to argue that non-lump-sum transfers (i.e. distortions) inevitably reduce efficiency once we are not in a first-best world (which we are not, and never can be). This is a lesson of the theory of the second best. On the other hand, it is equally invalid to argue that the status quo distribution would be more efficient than any other distribution if we were in a first-best world, since any distribution would be compatible with pareto efficiency. This is a lesson of the fundamental theorems of welfare economics.

The Austrians dislike redistribution. That’s all. Nothing in their position pertaining to efficiency holds up to logical scrutiny.

They also appear to dislike full employment. Otherwise, why would they think that a level of net financial assets too scarce to sustain full-employment output is appropriate, and that attempts to expand net financial assets to enable full-employment output constitutes inflation?

It makes no sense to assert that no expansion of net financial assets is appropriate if such an expansion enables not only more “claims” on real goods, but more “real goods”.

Here, the Austrians rely on another assertion that has been shown to be without basis on mathematical (logical) grounds. They think a pure free-market economy will automatically deliver full employment through wage and price adjustments. There is no basis for this claim, as the orthodox participants in the capital debates openly admitted. Further work by orthodox general equilibrium theorists has revealed many more problems with the claim of an automatic tendency to full employment. (For more on this topic, see Nobel-nomics and Unemployment is a Government Policy Choice.)

Again, Austrians are left in the position of having to reject mathematical analysis (including of the orthodoxy) and clinging to an assertion about market economies that they have not been able to establish on logical grounds. They have not demonstrated – and cannot demonstrate (because the mathematics shows it is impossible to demonstrate) – an automatic tendency to full employment in a purely free-market economy.

In sum, the Austrians wish to keep the level of net financial assets at a level insufficient to enable full-employment output. There reasons cannot be defended on the grounds of pareto efficiency or a supposed automatic tendency to full employment. They are left with a complaint about the redistributive effects of deficit expenditure. In that case, they should be throwing their energies into arguing why one distribution of income is more justifiable than another, even if it coincides with less output and employment and, quite possibly, lower ‘allocative efficiency’.

The Expansion of the “Money Supply” as “Inflation”

The notion that an expansion of the money supply constitutes inflation, in and of itself, is an Austrian definition. It is not anybody else’s definition. For everybody else, inflation means a persistent rise in the general price level (i.e. an increase in the weighted average of all prices).

But let’s consider the Austrian definition of inflation as an expansion of the money supply. If the concern is with the impact on “claims on real goods”, I have responded above. The definition is misleading, in that respect, because the amount of “real goods” can change along with the amount of “claims on real goods”.

If, in contrast, the ultimate concern is with the effect of changes in the money supply on the general price level (i.e. the change in the “claim on real goods” represented in one dollar), then the definition would only be useful to the extent that changes in the money supply were more or less synonymous with proportional changes in the general price level.

The former concern is what bothers the Austrians, and has already been considered in preceding sections. The latter concern is more likely to trouble non-Austrians. In the past, this concern was held by the so-called quantity theorists.

Money supply in the quantity theory referred to currency plus deposits. It excluded reserves, which were part of the so-called money base but not part of the money supply. Quantity theorists claimed that the central bank could reliably control the money supply through its control of reserves, based on the notion of a stable money multiplier.

More specifically, the quantity theorists argued that by adjusting reserves, the central bank could achieve a predictable, multiplied change in the money supply; i.e. they argued that M = mB, where M was the money supply (currency plus deposits), B was the money base (currency plus reserves), and m was a stable multiple (the money multiplier).

We know that no such stable relationship holds, especially under current circumstances, because:

a) The velocity of money (the amount of times on average a unit of money is used in transactions in a given period), and hence the so-called money multiplier, are highly unstable. For example, velocity collapsed with the onset of the Global Financial Crisis. See this link for charts. When velocity collapses, a given money supply is used less for expenditures, and upward pressure on the general price level is reduced.

b) We are nowhere near full employment and full capacity, so even if an expansion in the money supply could be engineered by the central bank through reserve manipulation (and the velocity of money did not collapse at the same time), the additional demand would impact on real output, not just prices. Again, an increase in the money supply enables an increase in real output, not just “claims” on real output.

c) The central bank cannot control the money supply exogenously, since (i) it is private banks who determine credit creation on criteria that have nothing to do with possessing prior reserves, and (ii) the so-called money multiplier is unstable. The central bank can only attempt to influence the demand for credit through its choice of interest-rate target and then supply whatever level of reserves is required to maintain that interest rate. The money supply adjusts endogenously to money demand through the credit creation of the private banks.

In terms of the quantity equation, MV = PY, the quantity theorists assumed a full-employment equilibrium situation in which M (the money supply) was exogenous, V (velocity) was stable and determined by real factors, and Y (real output) was at the full-employment level and hence at its maximum. Under those three assumptions, an exogenous change in M would cause an equiproportionate change in P (the general price level). As has already been discussed, the quantity theorists then made a further assumption that M was a predictable and stable multiple of the money base, B, and that the central bank was free to choose whatever level of B it wanted, irrespective of interest-rate targeting imperatives, supposedly ensuring that the money supply was exogenously controllable. (For more discussion of the quantity theory, see Misplaced Faith in Quantitative Easing.)

In reality, none of these assumptions hold. The central bank cannot exogenously control the money supply, and even if it could, this would not necessarily control the general price level. Further, any expansion in the money supply would not necessarily increase “claims on real output” more than proportionately to the increase in “real output” itself.

38 thoughts on “The Austrians

  1. Excellent post Peter! BTW Leder is back after a short hiatus to argue his austrian views.

  2. Hi, Peter – (JfC here) – I like your blog! I wish my field (divorce) was more blog-friendly, but we run too big a risk of getting sued for any advice we put out there. Anyway, it’s good to get my brain working again, and economics certainly does that.

  3. Lol…I guess I was a little late with that observation. I got home from work to two pages of new debate. He’s clearly out of his depth and you’re making him look silly. I find it endlessly entertaining! Anyway, looking forward to see what comments the day has brought and maybe looking forward to adding a few posts as things at work and at home are much more sedate. See you in the fray!

    P.S.
    I see Ted has worn you down as well. I keep typing up and deleting responses to his inane comments. I must keep reminding myself, Don’t feed the trolls!

  4. Hi, John. Welcome! I’ve enjoyed reading your thoughts at America’s Debate. I’m guessing you must have a good background in economics as well as your other fields of study? Otherwise, you are a very quick study. Anyway, it’s really good to see you here.

    brinn, are you saying Ted is only being mischievous!?!? 🙂

    I was thinking of easing up on the specific side discussion with Leder, as I get the impression he will keep responding no matter what, and persisting down that line might bog down the overall debate. Also, John’s last few responses deal with Leder’s position very effectively, as far as I’m concerned. There’s no need to convince Leder. Other readers will have read enough of the opposing arguments to arrive at their own positions.

  5. Peter – I’ve been debating Leder for 3 years, and he sticks to his Austrian guns no matter what – and those threads, no matter where they start, invariably end in the same way. On the other hand, until Brinn started this thread, Leder has been about the only contributor who purports to have any knowledge at all about economics (I had a science background before law), so I don’t think he has really respected his opponents. For instance, I’ve never seen him humbly ask for anyone’s take on Austrian stuff until today, when he asked for yours. But I stronly suggest you start a new thread if you want to go reply to that. That’s why I didn’t answer his last post – we were getting off of Brinn’s subject and on the Austrian train.

  6. Thanks for the background, John. I think you’re right that it threatens to sidetrack the discussion.

    Obviously I disagree with the Austrians, but I think the Austrian economists who are publishing in refereed journals, etc., should be taken seriously. They are no more heterodox than MMT. At one time they were considered to be part of the neoclassical orthodoxy.

    I liked that Leder linked to a decent source to represent his point of view.

    Cheers.

  7. Today I saw this post interspersed with the rest of the America’s Debate discussion, I had to double check I wasn’t seeing things. I hadn’t paid Leder much attention after welcoming MMN and Hobbes was it – to MMT?

    I noticed Ted was a left over and possibly Dingo but Leder had escaped my notice.

    I borrowed the discussion for a relatively new and humming along Australian Forum – http://dailywire.com.au/index.php?/topic/23-what-is-so-bad-about-the-deficit/ but no one is biting.

  8. I see their position as

    ‘Just because we aren’t on a gold standard doesn’t mean we are not supposed to act and argue as if we were.’

    In fact, our former fed chairman greenspan once said much of his success could be attributed to the fact he acted as if we were on a gold standard, or something like that.

  9. “Austrians need to explain why net financial assets (whether in the form of high-powered money or other financial assets) should be kept too scarce to sustain full employment. That is, what is their basis for determining whether the current amount of net financial assets is “correct”?”

    Because full employment is and never will be a goal. Employment is a means to an end. We don’t want jobs for the sake of jobs. We want productive jobs in profitable industries that reflect the actual preferences of consumers. We can quibble about the terminology used when you say “net financial assets” but it is wrong to say that it is “scarce.” The market adjusts for this via the price mechanism.

    ” It is that fiscal policy should alter net financial assets (“claims”) by an amount just sufficient to enable full employment and non-government net saving desires (for an illustration of this point, see Parable of a Monetary Economy). This policy stance will correspond to a particular change in net financial assets.”

    And here is your issue. You combine your monetary theory with a keynesian macro which is faulty. First there is the question of how any politician/central banker could “know” what amount of net financial assets to increase in order to enable full employment. Second, there are the long term effects of creating employment in unprofitable industries that cannot be sustained through normal market operations and will need to be bailed out again or require further monetary inflation.

    “Imagine the government gives an extra $100 to an unemployed person and the recipient spends the money at the shops. Suppose – as is clearly the case at present – that the shops (and their suppliers) have sufficient spare capacity to respond to this extra $100 of demand by selling more goods at current prices.
    Where is the supposed inefficiency?”

    The inefficiency comes from the cognitive dissonance that the government either taxed the money in the first place (substituting the demand of the earner for that of the welfare recipient) or as MMT guys like to do, they just printed it up – which robs everyone else of their purchasing power.

    I think we can agree that in the real world that there are a scarce number of resources. The way in which those resources are used for production depends on actual consumer preferences and the manner in which those preferences are expressed – demand. If you create a bunch of money and give it to any old person – then they are going to consume resources without the requisite production that makes economic exchange beneficial. Allow me to further elaborate.

    Lets say that there was an island economy with 5 people in it. Four people have different productive jobs (one picks coconuts, one raises pigs, one fishes, and one gathers fire wood). And the fifth person has a printing press and a gun. Now the fifth guy says that the money he prints will be considered currency on the island – and he uses his gun to enforce this law. So the other four guys go out and toil and labor gathering goods and the fifth guy just sits around with his printing press handing out paper currency like it was nothing, buying up all of the goods that these guys produce. Now in this economy – would you say that the production of the four laborers DEPENDED on the fifth guy consuming their goods? Of course not. The consumer of these goods, DEPENDS on the producers. And because the fifth guy does not produce anything but rather just has his printing press – he is a parasite on the economy. If one day the four laborers decided to smash the fifth guy’s printing press to pieces, they would still produce. But the production they create will not be distorted by the leech who does nothing but orders everyone around to use his currency.

    “The presence of these problems means that a purely “free-market” economy is not pareto efficient in any case.”

    Which doesn’t matter since it is a non sequitur to suggest that the government is better equipped to allocate resources or is immune from the supposed deficiencies of the market.

    “These findings make clear that the Austrian argument about the supposed efficiency benefits of private markets (which they merely assert without proof) really reduce to an assertion about income distribution.”

    First of all, it is a moral argument. Theft in all circumstances is wrong. That you call it “redistribution” doesn’t change what is actually happening – a direct transfer from one person to another. Second, even if you could prove that there is no net loss of efficiency (which I dispute) – you only look at the short term effects and pay not attention to the long term consequences and effects on incentives. If you continue to extract taxes or increase the money supply to redistribute money – then you producers will plan for such an instance and change their behavior. Third, the efficiency assertion rests on the axiom that the profit motive will produce greater efficiency than the political whims of politicians. Entrepreneurs seeking profits means that entrepreneurs seek to utilize resources in a manner that the public actually wants. If the entrepreneur fails and the public doesn’t want his product, he goes bankrupt and the resources are reallocated. If he is successful, then that is the public determining that his business has value. The government has no profit/loss mechanism so there is no way for the government to determine that what they are doing is efficient or useful. Furthermore, that isn’t even the intention of government actors. Their intentions rely on maintaining political power – which includes paying off rents to special interests in exchange for votes and contributions.

    “Again, an increase in the money supply enables an increase in real output, not just “claims” on real output.”

    No it doesn’t. Where is this assertion backed up by any evidence? If this were true, then the cure for poverty is so ridiculously easy that it doesn’t even require people to manage. We don’t need a government fiscal policy. We don’t need a monetary policy. We just need one guy or a computer in every country to adjust the money supply. The point is that increasing the availability of paper money in an economy does not increase real output. Because of your keynesian macro, you confuse money with demand. Well Money=! demand. Demand comes from production. Your demand is a representation of the value that you have put into an economy. If you and I are car dealers and I sell double the amount of cars that you do, I receive double the commission. That means I can demand double the goods and services.

  10. Stephen, I saw you on the Americadebate thread (which I am still reading, boy, is it long…) and I want to note a couple of things:
    1) Peter showed that your assertions about market outcomes being superior to mixed (govt+market) outcomes are not based on incontrovertible mathematical logic but rather on a set of beliefs and intuitions, such as saying that because the markets have profit/loss mechanisms they are superior. The last couldn’t be proved mathematically, while it could be countered with another article of faith such as since our government is a (however flawed) representative of the will of the people it is superior (at least in some circumstances) to markets. Again, you could argue against this article of faith with your criticism of government, but you’d not be doing so from an irrefutable mathematical ground as you seem to think you are.
    2) The proper answer is probably (as usually is the case) somewhere in the middle. The govt cannot provide all the answers and neither can the market. It takes a combination of the two and in fact there can be infinite number of such possible combinations that achieve Pareto efficiency or some approximation whereof. Any strict dogma is likely to be wrong.
    3) You keep saying taxes are theft. This is a dogmatic statement, again. By your virtue of being a citizen of the state you enjoy many things that you take for granted. Such as for example the protection of the armed forces. You need to pay for that (ex post, as MMT suggests, as opposed to ex ante as most currently think) with taxes. This is not a theft unless you (a) move to another planet; (b) propose a better alternative to govt. provided services. Now, we know you prefer (b) but again, this is on dogmatic grounds since you won’t be able to prove that all services could be better provided by the markets and in fact there is plenty of evidence to the contrary. So, stop saying it is theft. It is rather an involuntary purchase of services that you do have to make as a member of the society. You ave your vote to try to change that.

  11. “Peter showed that your assertions about market outcomes being superior to mixed (govt+market) outcomes are not based on incontrovertible mathematical logic but rather on a set of beliefs and intuitions, such as saying that because the markets have profit/loss mechanisms they are superior.”

    The point is that there is no way to determine that government distribution is using resources efficiently. Zero. In the market, if a person utilizes resources inefficiently, then they will take a loss and their operations cease. The government has no such restraint. It can continue to run a useless program forever without any regard to an actual budget. In fact, even if a program is determined to be harmful by a majority of people, the program still cannot be repealed because such programs have large special interest groups who fight and lobby to protect it.

    “The last couldn’t be proved mathematically, while it could be countered with another article of faith such as since our government is a (however flawed) representative of the will of the people it is superior (at least in some circumstances) to markets.”

    Represenatives do NOT represent the will of the people – that is the whole point. The market represents the will of the people because everyone engages in the market. Market transactions are simple scientific empirical data of mutual trade preference. Non occurring market transactions are simple scientific empirical data of the absence of mutual preference to trade. The reason that political power is relied upon is exactly because such actions go AGAINST the will of the people. If the people were willing to engage in it freely – it wouldn’t need the state.

    “You keep saying taxes are theft. This is a dogmatic statement, again. ”

    A straight transfer of wealth from one person to another is the definition of theft. There is no other way to describe it. Taxes collected in pursuance to constitutionally delegated powers need not be considered theft.

    “Now, we know you prefer (b) but again, this is on dogmatic grounds since you won’t be able to prove that all services could be better provided by the markets and in fact there is plenty of evidence to the contrary”

    But you are missing the whole point of a free society! Here is an excerpt from one of my posts on AD: Let’s say that there is a Cabinet level agency called the Department of Family Affairs. The purpose of this department was to decide who everyone was going to marry. The government would match people up and those people would have to get married. Then some insane person comes a long and argues that people should choose who they want to marry without the government telling them. People like you would be saying – well then who is Mary going to marry? Who is George going to marry? Who am I going to marry? And I would respond that I don’t have a damn clue. But that’s the friggin point! The point is that you would be free to choose who you want to marry. The solutions would arise through people coming to voluntary arrangements. Just because you can’t imagine how everyone can get married on their own, doesn’t mean that it can’t work. I feel like I am a smart guy – but I won’t pretend to say that I know the workings of every market and every conceivable scenario that a future entrepreneur will undertake to make our lives better. If I did know – then I would be conceding the point to you that it was even possible for any single person to have such knowledge! Then you could just put me in charge.

  12. Stephen, seems I talked right past you, since you still employ your beliefs (which might not be my beliefs) to argue your points. This is fine – you, after all, trying to convince us of your point of view. But you seem to think that you are doing it from an irrefutable logics ground while this is not the case. When you say “the point is that there is no way to determine that government distribution is using resources efficiently. Zero. In the market, if a person utilizes resources inefficiently, then they will take a loss and their operations cease. The government has no such restraint” this is an article of faith. The same for The reason that political power is relied upon is exactly because such actions go AGAINST the will of the people. If the people were willing to engage in it freely – it wouldn’t need the state” Again, all fine as long as you don’t pretend that it is the logic that makes your reasoning superior to ours as opposed to your conception of the reality.
    By the way, from what I gather you’re an anarchist. Am I correct?

  13. In some examples government meddling is wrong and in some it is necessary. You seem to think that everything could be better decided by the markets. Many seem to believe otherwise. Not a lot who believe everything should be decided by the government, and you correctly point to the failures of the socialist block economies. You just make an additional step that since government fails in some circumstances it will fail in all or almost all circumstances.

  14. You are trying to pass off the point that “sometimes government works, sometimes it doesn’t” as a moderate, reasonable position just because it is in the middle of what you arbitrarily set up as the two extremes. There is logic and then there is the absence of logic. It was said in the comments in another post that the problem with Austrian economics is that it makes humans out to be a market like cattle (or something to that effect). This argument baffles me as here we have people arguing about mathematical equations. It appears to me that Austrian economists are the only ones who look at people as individuals – motivated, purposeful, independent actors who represent their preferences through their actions. That is not looking at them like cattle.

    You attempt to engage in some sort of relativism when you say that it is my conception of reality in where we find our disagreements. If there is a problem with my conceptions – please point them out and then we can discuss them specifically. It is of no use furthering the debate on other topics if you are telling me the sky is really green.

  15. Stephen, there were examples brought up which showed that govt. involvement can be superior to market-decided outcomes. Then you come and deny the examples on the grounds that they only “seem” superior because if they really were, then the market would’ve decided them by itself (due to its superior -in your view – decision mechanism). See what Peterc said about unemployment.
    Or suppose I say that the government right now needs to employ all laid-off construction workers in weatherizing homes which will help ameliorate and deal with adverse effects of climate change. I say the market on its own will not do it (so, in my view they fail). You’d counter with some combination of:
    1) if the market won’t do it then it is a waste of money
    2) the govt. doing it will be wasteful as any other thing the govt. does
    3) the is no climate change so this is a waste to begin with.
    and maybe others.
    Boom, the debate just reduced to political and scientific beliefs. I have my logic, you’ll have yours. Do you even see what I am saying?
    What about my point on taxes being what you pay for being a citizen?
    What about my question whether you’re an anarchist?

  16. “Stephen, there were examples brought up which showed that govt. involvement can be superior to market-decided outcomes. ”

    What examples? And even if you bring up a single example, you would still be engaging in a broken window fallacy. The question isn’t whether something is useful or has utility. It might be useful to learn how to shoot a bow and arrow from a helicopter at night. The question is the marginal utility – the utility versus all of the other possible projects that the resources could have been used for. Profit/loss provides such a mechanism. You have not provided a mechanism – you have just said what you “feel” or “think”. I do not need to rely on my own subjective feelings to tell you if a company is profitable or not. It either is or it isn’t. It is not possible for me to look at the ledger of a bankrupt company and say – oh well the expenses exceed the revenue, but I don’t think the company is bankrupt. It either is or it isn’t.

    If you have a mechanism that is universally applicable, then please provide it.

    “Boom, the debate just reduced to political and scientific beliefs.”

    It doesn’t have to if we focus on the specific fallacies in your economic reasoning. First of all, it is impossible for the government to target ONLY laid off construction workers and ONLY “idle” resources. Inevitably, people that are already employed and resources that are being put to other uses will be diverted to whatever government project you come up with. Second, the distortion caused by the government directed activity decreases the supply of said labor and commodities, and raising the price. So if you use steel or clay or rubber or lumber weatherizing homes, that is resources that cannot be used for other purposes.

    “I have my logic, you’ll have yours. Do you even see what I am saying?”

    I see what you are saying but it is a cop out. It is not a question of different logics – it is a question of fact and fiction. You make a claim that A will lead to B. It either does or it doesn’t.

    “What about my point on taxes being what you pay for being a citizen?”

    Taxes are supposed to be levied to finance the legitimate powers of the federal government which can be found in the US Constitution Article I Section 8. If as a citizen, I am obligated to pay taxes to the state – isn’t the state obligated to keep to its constitutionally mandated powers?

    “What about my question whether you’re an anarchist?”

    I don’t consider myself an anarchist. I consider myself a constitutionalist. If the federal government kept to its constitutionally mandated powers – we wouldn’t be having these discussions. Its powers would be small and the resources it commands would be limited.

  17. “If you have a mechanism that is universally applicable, then please provide it.”

    Democracy, for all its flaws. Pointing out the flaws is legitimate but it is missing the forest for the trees. First, no system is without flaws (again, “the second best”). Second, if your problem with democracy is the corrupt process (you have the list: politicians lie etc.) then I’ll quote what you said in another thread of free markets: “then your qualm isn’t with democracy, it is with bad policy.” In other words, you allow for imperfections in the markets due to bad policy, then you should allow for imperfections int he democratic process due to bad policy (such as our electoral system, for example.)

    “Inevitably, people that are already employed and resources that are being put to other uses will be diverted to whatever government project you come up with. ”

    If the displacement is small enough, I’ll consider the marginal benefit to be still worth it, given that I care about global warming ad the market failed to fix the problem on its own (in my eyes.) Other votes will have a different take (hopefully, the rising see levels don’t drown us all 😉 ) and will vote on this. With all the inefficiencies of the voting process.

    “If the federal government kept to its constitutionally mandated powers – we wouldn’t be having these discussions.”

    Funny, who exactly decided on those constitutional powers (which we suppose for a second are unambigously accepted by all the participants in the same manner)? Was it markets? Or was it some sort of the democratic process? Why not scrap the Constitution and let the markets decide on the new course of events, given that their decision mechanism is better?

  18. “Democracy, for all its flaws.”

    That doesn’t answer my question. I asked what mechanism you use to determine if resources are being used efficiently. You said democracy. Democracy is a way for resources to be distributed – but that has nothing to do with whether it is being used efficiently or not. There is no equivalent to profit/loss in democracy – aside from the laundry list of other differences.

    “Funny, who exactly decided on those constitutional powers (which we suppose for a second are unambigously accepted by all the participants in the same manner)? Was it markets? Or was it some sort of the democratic process? Why not scrap the Constitution and let the markets decide on the new course of events, given that their decision mechanism is better?”

    Is this seriously your line of reasoning? We are talking about economics – the efficient use and distribution of resources. One can have a government that does not interfere in the market process. I do not have to submit to your false choice of rampant interventionism and complete anarchy.

  19. “but that has nothing to do with whether it is being used efficiently or not. There is no equivalent to profit/loss in democracy”

    Yes there is – it is just that you decided that profit-loss is the only play in town that you fail to see this. Profit/loss-wise a lot of things we’re doing are not worth it. Such as caring for the elderly – why the hell keep those leeches if they are not productive anymore. But voters decide on things given profit/loss, yes, that too, just like the markets, but also according to their beliefs about the efficiency of use outside of the means of the market mechanisms (and other things.) When I say I care about global warming, it is also because doing something now would be more efficient (not only in money terms) than later, and as I perceive it the markets fail to “price” that in.
    Another example. Internet was born as from a DARPA project. I am sure a lot of DARPA projects go nowhere. I used to be into Quantum Computing at some time. DARPA unloaded some money on this. There is very little (actually, none) ROI to us from this so far. It could be that there will never be. That the nature of research – the returns are very uncertain. It also could happen that in 5 years some guy will build a quantum computer with DARPA money and this revolutionizes everything. Regardless, the Internet is an example of a successful ROI from DARPA. Can you even estimate the value of internet to the humanity? What market would’ve been able to price that in?

    “One can have a government that does not interfere in the market process.”

    Stop. What about the army? You need to be taxed to pay for it – correct? This is interference in the market process and even a theft by your definition. Army is constitutional, so, you just allowed a democratic process to interfere with pure market decisions.

  20. Sorry for the bad formating. The boldface should have been applied only to “outside”.

  21. Actually, progressing further in the thread, I see other people used arguments similar to mine (such as about utility of research), and I can see Leder’s (Stephen’s) replies. So, no need for you to address these points if you don’t feel like that.
    We’re back to the idea that market decision mechanism is better because it involves everybody voting with their wallets. Which is an article of faith.

  22. “Profit/loss-wise a lot of things we’re doing are not worth it.”

    Now you’re getting it.

    “Such as caring for the elderly”

    The elderly can care for themselves! They had an entire lifetime of savings and credit to care for their futures. The SS system in the US redistributes wealth from the young and poor to the old and wealthy. It is easily the most regressive tax that exists. Furthermore, it is a bankrupt program that will only pile on the fiscal misery.

    “But voters decide on things given profit/loss, yes, that too, just like the markets, but also according to their beliefs about the efficiency of use outside of the means of the market mechanisms (and other things.)”

    Which doesn’t matter. Just because the few people who actually vote (and then actually vote with the majority) get what they want says NOTHING about the efficiency of their decision. Again, it is not my OPINION if a company is bankrupt. If their expenses exceed their revenue – it is an objective fact that they are bankrupt. You have no universally applicable paradigm. You rely on what you think and feel. Yet there is no feedback mechanism in place to tell you if you are wrong or right. Bad programs can continue indefinitely if the public believes they are good. In the free market – such a thing is not possible since the feedback is immediate.

    “When I say I care about global warming, it is also because doing something now would be more efficient (not only in money terms) than later, and as I perceive it the markets fail to “price” that in.”

    In what way do markets fail to “price” that in?

    “Internet was born as from a DARPA project.”

    lol really? DARPA has a $3.2 billion budget. The 2012 budget is $3.7 TRILLION. Furthermore, DARPA didn’t create the “internet”. It created a primitive communications program. It wasn’t until the technology was open for commercial use that it exploded in usefulness and innovation.

    “Stop. What about the army? You need to be taxed to pay for it – correct? This is interference in the market process and even a theft by your definition. Army is constitutional, so, you just allowed a democratic process to interfere with pure market decisions.”

    See? This is where your arguments get ridiculous. We are talking about economic exchanges and economic activity. Then you throw out “what about the army!*@&^” and that is supposed to stump me? Your attempt to justify government intervention in markets is to provide an example of non-market activity?

    “We’re back to the idea that market decision mechanism is better because it involves everybody voting with their wallets. Which is an article of faith.”

    That doesn’t make any sense. You can’t have “faith” in the market. The market is a process. It is like saying you have faith that you bought a ham sandwich today. You either did or you didn’t. Prices are empirical evidence of mutual trade preference! YOU are the one acting on faith. You talk in terms of faith because it is you who needs to have faith in politicians and bureaucrats to plan economic activity directly. The market is just decentralized planning by every individual.

  23. “Then you throw out “what about the army!*@&^” and that is supposed to stump me?”

    No one is out to stump you, Stephen. But you see my point -why won’t you reply? You cannot separate economic activity totaly, can you. You need to be taxed to have army, so, here we have a “leakage” into the economic activity. Explain why is it OK for the democratic process to decide that we should tax to have an army, but it is not OK for the same democratic process to decide we should tax to have Social Security.

  24. “Explain why is it OK for the democratic process to decide that we should tax to have an army, but it is not OK for the same democratic process to decide we should tax to have Social Security.”

    See US Constitution.

  25. “And how did US constitution come about? Free markets?”

    What does this have to do with government intervention in economic matters. NOTHING. It was created by politicians – great, now what did you prove? NOTHING.

    You have brought up red herrings and taken us on wild tangents all because you can’t defend your own economic theories.

  26. Am I being thick?
    1) You allow taxes that pay for army (an intervention by the govt in economic matters since the govt takes money from you)
    2) You don’t allow taxes that pay for SS (again, an intervention by the govt in economic matters)
    3) (1) is different from (2) how?
    What am I missing, Stephen? I am not being facetious or anything – please, explain your line of reasoning.

  27. “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

    The preamble to the US Constitution establishes the US as a welfare state. This is an essential aspect of many individual MMT’ers policy proposals based on public purpose. It is also at the heart of MMT’s goal of achieving full employment and price stability.

  28. “3) (1) is different from (2) how?
    What am I missing, Stephen? I am not being facetious or anything – please, explain your line of reasoning.”

    US Constitution. Read it.

    But without getting technical on the actual powers of the federal government that you seemingly care little about – one deals with economic activity – one does not. National defense is not akin to subsidizing sugar no matter how much you want it to be.

  29. Tom Hickey,

    “The preamble to the US Constitution establishes the US as a welfare state.”

    That is so absurd that it defies words. Based on the writings of both federalists and anti-federalists – that interpretation is nowhere near what they meant. Have you ever read the Constitutional Ratifying Conventions, particularly Virginia? This point was brought up specifically. The federalists made it clear that to make such an interpretation of the general welfare clause was idiocy. It would be carte blanche to give the Congress the power to legislate on absolutely everything. It would invalidate the very purpose of having a Constitution in the first place! All that clause means is that when Congress taxes in pursuance of its ENUMERATED POWERS, that it must do so in the GENERAL welfare and not to the welfare of any individual or group.

    “This is an essential aspect of many individual MMT’ers policy proposals based on public purpose.”

    I realize that MMT policy proposals require unlimited legislative power.

    “It is also at the heart of MMT’s goal of achieving full employment and price stability.”

    Neither of which can be achieved by the keynesian macro that you employ.

  30. Stephen, I am trying not to loose patience. “US Constitution. Read it.” But US Constitution comes about as a result of a democratic process, the latter being rejected by YOU as a process with which to regulate economic activity because it lacks the profit/loss feedback. So, we’re back to square one:

    – Democratic process gives us Constitution that requires you to give up money to pay for the army
    – Same democratic process gives us a law that requires you to pay taxes to pay for SS
    – Stephen: “I reject the second because it is (a) unconstitutional; (b) because it is interferes with economic activity
    Peter: (a) says who? you? prove it. not with words but within a system that is set up by the same democratic process set up by the same Constitution. Fact: it hasn’t been proven unconstitutional within the process – bad luck for you. (b) that’s also bad luck for you, since the law still stands.
    In other wards, if your departing point is that anything having to do with economic activity has to be validated by free markets, then taxation to pay for the army fails the test, since it is set up by the Constitution, which in itself is not validated by the free markets.
    Phew, I don’t know if I can explain it any better.

  31. “But US Constitution comes about as a result of a democratic process, the latter being rejected by YOU as a process with which to regulate economic activity because it lacks the profit/loss feedback. So, we’re back to square one:”

    How are we back at square one? One thing regards political activity and another thing regards economic activity. You are somehow trying to make the connection that because the constitution enumerates a power to fund an army that it somehow supports the idea that the government should manage the economy? You seem to be conflating two different things. 1) Does the government have the power to do X? 2) Should government do X?

    National defense is appropriated via democratic means. That is legal via the constitution. Government management of the economy is completely different. National defense is not an economic activity. Trying to equate the two by saying “Well, we use democratic means to fund an army therefore its ok to use democratic means to plan economic activity” is a complete non sequitur.

    “Peter: (a) says who? you? prove it. not with words but within a system that is set up by the same democratic process set up by the same Constitution.”

    Article I, Section 8.

    “Fact: it hasn’t been proven unconstitutional within the process – bad luck for you. (b) that’s also bad luck for you, since the law still stands.”

    The President at the time threatened to pack the Federal Court to strong arm his proposals through. The Supreme Court (a Federal branch) upheld a Federal law – big surprise.

    “In other wards, if your departing point is that anything having to do with economic activity has to be validated by free markets, then taxation to pay for the army fails the test, since it is set up by the Constitution, which in itself is not validated by the free markets. Phew, I don’t know if I can explain it any better.”

    So what is your point??? This is what I have been asking you this whole time. The Constitution was created by political representatives. In that document it enumerated federal powers. Raising an army is one of them. WHAT DOES THAT HAVE TO DO WITH GOVERNMENT MANAGING ECONOMIC ACTIVITY?

    This is what I am talking about. Where at one point we are discussing the economic logic behind MMT and keynesian v austrian macro – the debate devolves to where now you are trying to prove that because the army is raised by the democratic process that it means economic activity can be managed by the democratic process. That is a giant, gaping non sequitur which ignores the very definition and very purpose of a free market.

    Ironically, you forecaster such a devolution earlier when I responded it wouldn’t happen if we stuck to the economic points. Yet here we are you trying to show me something I already know and trying to make a connection that doesn’t make any sense.

  32. Sorry, Stephan, promoting the general welfare is part of the US Constitution, regardless of what some people thought of it at the time.

  33. “Sorry, Stephan, promoting the general welfare is part of the US Constitution, regardless of what some people thought of it at the time.”

    In pursuance to its constitutionally enumerated powers. To argue that this single clause gives Congress carte blanche to legislate on anything and everything requires a real case of cognitive dissonance of American history. Why would they even bother writing and passing a Constitution? Why wouldn’t they just say Congress can do whatever it wants as long as it believes it is doing so in the general welfare?

    Has there EVER been a dictator or regime in history that claimed its actions were contrary to the general welfare???

  34. How you can separate and classify some activity as strictly economic and some as not? Taxation by itself – regardless of what it is used for – is an economic activity. How is military less an economic activity than research into diseases or space exploration? Is it because, say, research “crowds out” private research and diverts resources? Guess what, army crowds out private armies and diverts resources too. Army participates in wars that I do not approve, diverts precious resources and affects our economy to a much larger extent than any welfare program.
    Let me play devil’s advocate here:
    Peter D: I declare that I don’t want the Govt. to steal money from me to pay for the army. I want a private run army paid for by only those who use its services.
    Stephen: but the Constitution etc.
    Peter D: why should I abide by the Constitution?
    Stephen: this is our founding document.
    Peter D: so what? Has it been vetted by the markets? If I allow a document that came about as a result of the flawed democratic process to steal money from my pocket to pay for army that I do not want, why wouldn’t I allow the same democratic process to steal money from me for SS? Where do we stop? Let me out.

  35. “Providing for the welfare of the general public is a basic goal of government. The preamble to the U.S. Constitution cites promotion of the general welfare as a primary reason for the creation of the Constitution. Promotion of the general welfare is also a stated purpose in state constitutions and statutes. The concept has sparked controversy only as a result of its inclusion in the body of the U.S. Constitution.

    “The first clause of Article I, Section 8, reads, “The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.” This clause, called the General Welfare Clause or the Spending Power Clause, does not grant Congress the power to legislate for the general welfare of the country; that is a power reserved to the states through the Tenth Amendment. Rather, it merely allows Congress to spend federal money for the general welfare. The principle underlying this distinction—the limitation of federal power—eventually inspired the only important disagreement over the meaning of the clause.

    “According to James Madison, the clause authorized Congress to spend money, but only to carry out the powers and duties specifically enumerated in the subsequent clauses of Article I, Section 8, and elsewhere in the Constitution, not to meet the seemingly infinite needs of the general welfare. Alexander Hamilton maintained that the clause granted Congress the power to spend without limitation for the general welfare of the nation. The winner of this debate [Hamilton] was not declared for 150 years….”

    “In United States v. Butler, 56 S. Ct. 312, 297 U.S. 1, 80 L. Ed. 477 (1936),…”

    http://legal-dictionary.thefreedictionary.com/General+Welfare

  36. “the actual powers of the federal government that you seemingly care little about”

    Just for the record, Stephen, I am very much on your side here regarding the powers of the federal government. I abhor Obama’s record on civil liberties no less than Bush’ (even more so since many like myself mistakenly believed him to be “better” somehow), I abhor the fact that we only have a choice of bad and worse to send to Washington and I agree that our democratic process is broken. Ron Paul kicks ass of almost any Democrat besides a couple here and there when it comes to civil liberties. That said, I recognize we are in the world of “second best” (or nth best) and I also see that despite short term despair, the process still manages to produce progress over time. Some advances, some retreats, but overall I see it as progress.

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