Smiling Dave has moved!

The old stuff, up to Sep 11, 2012, is all here. But anything after that date [as well all the old stuff] is over here:
http://smilingdavesblog.wordpress.com/

Reason for moving: Don't like Google.

Bill Simmons, learn some economics

Full disclosure: I enjoy Bill Simmons [but for his refusal to call the Thunder by name, a tired joke by now] when he is talking sports. But when he moves into politics or economics the poor fish has a lot to learn.

He has never run a business, as is obvious from his opinion about the NFL referees strike. Bill thinks that we are talking petty cash, so why doesn't the NFL just give in to the refs and be done with it?

Here's the link: http://www.grantland.com/story/_/id/8347893/the-new-quarterbacks-league

Here's the quote:
I mean … there can't possibly be any other explanation for lowballing your officials when they make a pittance compared to your overall profits and the well-being of your players, right? If Starbucks baristas ever went on strike, would Starbucks respond by saying, "Let's just throw homeless people behind the counter" instead of just increasing their pay from $10 an hour to $12?

Lowballing the officials? They make over $5,000.00 for an afternoon's work. I mean, we are talking Tax the Rich territory here. Go after them, Obama. They make 2,000 bucks an hour. Not to mention their pensions and benefits.

Let's have an imaginary dialogue to continue.

Bill: But you make so much money, NFL. Those officials make a pittance compared to your overall profits.

NFL: Bill, have you ever run a business?

Bill: No.

NFL: Then you don't understand how I got so rich in the first place. You will never get anywhere doing business the way you suggest. If you fling your money at all comers just because you have large overall profits, then very soon you won't have large overall profits, but large overall losses. Wealth comes from not wasting your money, Bill.

Bill: What about the well being of your players? Shouldn't the refs get double their salary to make sure the player's well being is preserved?

NFL: Bill, are you on crack now? I mean, if crack was legal. What do you think will happen to the players if I bring in other officials? Will they be beaten and injured by the regular refs for crossing a picket line? Don't you know the unions won't do that to popular, high profile folks like NFL athletes? Or maybe you think the replacement refs not call penalties for roughing the passer. But why won't they?

Bill: But if Starbucks baristas ever went on strike, would Starbucks respond by saying, "Let's just throw homeless people behind the counter" instead of just increasing their pay from $10 an hour to $12?

NFL: Bill, like Smiling Dave pointed out, you have no business experience. How do you know what Starbucks would do? Let's talk about a real world example, not a hypothetical. Walmart's has resisted unions taking over their stores for years, and guess what? Walmart's is doing quite well, thank you.

But let's put that aside. Because you are showing great disrespect and being politically incorrect here, Bill. So unlike you. What have you got against the homeless? Do you want them not to have jobs? Do you think they cannot pour out a cup of coffee? Do you think a Starbucks barista cannot do her job unless she has a PhD and a home with a mortgage? You disappoint me, Billy.

Bill: I have nothing against the homeless. Some of my best friends are homeless. 

NFL: Why am I not surprised? At any rate, you were also disrespectful to the replacement officials, who have been refs for many years in various leagues.

Bill: But look what a shambles they made of the games. Take a look at this link:
http://deadspin.com/5941958/here-are-the-21-worst-replacement-referee-mistakes-from-sunday

NFL: The regular refs aren't exactly competent either, Bill. http://www.provencehome.org/refsuck/pages/waltcoleman.html

http://sports.espn.go.com/nfl/news/story?id=5444048

And, of course, a whole website devoted to NFL refs and their incompetence:
NFL officials, by far the worst in professional sports.

So we are already dealing with the clueless [not the homeless]. And those clueless ones want a 20% raise for the valuable gift of cluelessness they bring to every game.

The more appropriate analogy is this. Would Starbucks replace a barista who regularly spills hot coffee on the customers and then wants a 20% raise?

Bill: Easy for you to say all this. You aren't a fan.

NFL: OK, then, let's hear from a fan:
http://sports.yahoo.com/news/why-nfl-not-referee-demands-fans-212400997--nfl.html

Bill: I'm still not convinced. Let me consult with Dork Elvis.

Dork Elvis: Bill, you gotta do the math.

Dealing with a union means even the worst of the clueless will never be fired for incompetence. The union will fight tooth and nail for his right to make wrong calls week after week. Contrast this with the replacement refs, who are easily given the boot if they mess up.

Bill: You mean like the teachers union and their incompetent teachers?

Dork E: How do you know so much about that?

Bill: Never you mind.

Phi Kappa Sraffa

There is a long debate going on now in the forums over at mises.org, about whether the economist Piero Sraffa demolished the Austrian Business Cycle Theory before it ever got started. Some think it was like the Israeli Air Force destroying the Egyptian planes before they got off the ground, only in 1932 instead of 1967, and that the Egyptians did not get a Nobel Prize in Economics for being sitting ducks, whereas Sraffa's opponent, F.A. Hayek, did.

Those who want to get the major links to this topic need only go right here
to gather some links, and can get more if they get the links cited in those links.

But you, dear reader, aren't here for links. If that were the case, you'd be out golfing. No, you want to see Smiling Dave's humble take on this deep, tangled, intricate matter, and hope he will lay it all out for you in simple language. Fear not, intrepid seekers. Without further ado:

The essence of ABCT is the claim that booms and busts in modern times are caused by money printing by a central bank. [Indeed, even when central banks did not exist and booms and busts occurred, careful research will show that there was some other way the money supply increased, such as when the Spaniards brought in boat loads of gold from South America].

Now big picture, an increase in money supply means someone will be consuming more than he produced, as explained in this humble article [see second question]. Of course this will hurt the economy.


But Mises, and Hayek after him, fleshed out the details, wishing to explain specific patterns that seemed to occur again and again in booms and busts. They found that the key to understanding things down to the fine points is the lowering of the interest rate, which the central bank always seems to be doing when there is a boom and bust.

[EDIT: Just occurred to me that inflation of the money supply does indeed give someone the ability to be parasitic, but there is no guarantee that the parasite will malinvest. He may just consume randomly, or invest wisely.

So that Mises' making the interest rate key to a business cycle is very necessary.]

Obviously, to explain everything based on a low interest rate, one has to have a definition of "low". And their definition was "lower than it should be". Which of course requires a new definition of what an interest rate "should be".  The easy way, that avoids all attacks from Sraffa and the blogger Lord Keynes and everyone else, is to say "whatever it would have been had the central bank not printed all that money".  After all, central banks admit that they have the power to influence interest rates, and that their way of doing so is by printing money. [That's why he's called Helicopter Ben].

But Hayek had a certain fish to fry. [Edit: This has to be fact-checked]. He wanted, for reasons I have not investigated, the central banks to make sure they set the interest rate to the "real, genuine, authentic, natural" one, not one that is too low. Which means Hayek had to go out and find what the real interest rate is.

Nowadays, I think Austrians agree that we'd be better off without any central bank at all. We don't need a central bank to set any interest rate, not the real one and not the phony one. So that we have no need of finding out what the "real" rate is. Suffice to say that it is certainly higher than the one that comes into being after mountains of money printing, and that's enough to explain the ABCT.

In any case, Sraffa told Hayek that there are many different interest rates. Each commodity has a different rate of what it costs now and what it costs to buy a future crop of it, which is an interest rate. So that the central bank cannot set the "real" rate, because there isn't one. Each commodity has a different rate. It's like asking what is the real price of a car. Are you talking about a Jaguar or a jalopy?

Hayek wrote that he has no problem with that, since there is a tendency for all commodities to eventually converge to the same interest rate, and that number they all tend to is the magic number we are looking for, the real interest rate. Mises and Rothbard also made the same assumption as Hayek does, that there is indeed a magic number, albeit one that we may not be able to calculate in practice.

Bob Murphy writes that Hayek did not solve the problem with that explanation, and proposes his own solution. Given my level of understanding, I'll have to go tl;dr on his paper. Huisman also wrote a tl;dr article, apparently proposing 8 possible numbers.

Bottom line, there are two topics going on. First, there is a quest for the holy grail, the elusive magic number which is the real interest rate. Mises and Hayek and Murphy and Huisman and Sraffa and the blogger Lord Keynes are out there slugging it out, either claiming they found the magic number, or claiming it doesn't exist. The whole discussion is way over my head, at least when we get to the writings of the modern Austrians, Murphy and Huisman. But it is a technical topic of theoretical interest for specialists, and has nothing to do with refuting ABCT, as we have already shown and will shortly summarize again.

But Sraffa and LK then move on to a different, second, topic. They claim that if no magic number exists, then it is absurd to say that banks ever lend money at a rate lower than some non existent magic number.

They claim that the Austrians are saying that the winner of the World's Strongest Man contest declared on television is not the world's strongest man in fact, since the Incredible Hulk is stronger. And Sraffa and LK are refuting that by pointing out that there is no Incredible Hulk.

And that's where Sraffa and LK make their big mistake. They are saying that depending on the givens of a particular case, Jaguar or jalopy, you get a different number, and thus there is no one unique number at all. And my humble rebuttal is that there is a unique number, for a given particular situation. [Even though it may be impossible to actually calculate, it's there]. And that number is, given a specific banker and a specific given borrower on a given specific day and all the given specific details of a given specific loan, the rate that would have been set by that specific banker if there was no central bank printing money.

Now I know that some people won't be happy with an economics discussion unless they have some math jargon to chew on. So for them, here is that final paragraph, restated for their pleasure in cumbersome language:

Let A be a given borrower. Let B be a given Banker. Let C be a given loan made on date D with specific details of the loan denoted by E. Define X(A, B, C,D,E) as the interest rate that would have existed absent a central bank. Define Y(A,B,C,D,E) as the interest rate that actually happened, because the central bank printed tons of money. If, for a great many values of A,B,C,D, and E, we have Y<<X [meaning Y is much lower than X], then the conditions exist for a valid ABCT explanation.

Under Center

This one is about sports writing, not economics or psychology.

I am getting very tired of seeing the phrase "under center" constantly when the writer means "playing quarterback". For instance, here's grantland.com: [The Arizona Cardinals] unfortunately have to play either Kevin Kolb or John Skelton under center this season.

Under center? Is there a hole in the ground beneath the center where the QB takes his position?

Probably the phrase comes from this picture:

Here, and in other diagrams of football strategy, the center is represented by the circle in the center, and the circle underneath him is the QB. Hence, under center.

Brilliant? No. it's not. Because if you replace a phrase with another phrase, the new phrase should be more enlightening than the old one, not less. What do we gain by calling the quarterback "that fellow who, in a football strategy diagram exhibited on a wall, is represented by a circle that is drawn underneath the circle represented by the center's circle"? That relationship gives us no info at all about the importance of the quarterback [= all important, not "underneath" anyone], his true relationship to the center [= the center is his flunky, not versa], the connection between the center and the QB in the essential part of the play [=none].

Calling the QB "under center" is like calling the President of the United States "Bootlick to LeBron James and every other athlete he fantasizes about". It misrepresents his true position. The Prez is the more powerful one.

Call the center, if he is ever worth writing about in the first place, the quarterback feeder, but don't call the QB under center.

The phrase is not even catchy. It's boring and misleading, like all the rest of football jargon.

Fullback, halfback, quarterback, what do those absurd words tell us? Nothing. Contrast this with, for example, pitcher, catcher, and first baseman. The pitcher pitches, the catcher catches, the first baseman loiters in the area around first base. What idiot made up these football words?

While we are at it, how about those supposedly informative replays that tell us nothing.

"For you kids watching at home, that one thousandth of one percent that will one day be big enough, strong enough, and athletic enough to be middle linebackers [whatever that is], check out this replay. I've circled Bud Weiser here in yellow. Look at his brilliant play right THERE."

There follows a few seconds of Weiser falling on his face with the ball nowhere in sight.

"See how he cleared the passing lane for Speedy Gonzo, you kids watching at home? Have we explained the subtle intricacies of this game so that you will now enjoy it more? What do you mean, the twenty second shot of our logo before the replay and after it interfered with your watching the actual game? We'll replay that 70 yard pass and the one handed catch for a touchdown, all that stuff you missed, right after these words from a few sponsors.

"What do you  think, Southern Accent Jack? Aren't those kids at home a bunch of whiny brats?"

"Sure are, Jaws. The game of football hasn't made a man of them yet." 

Sadly, most of the silly words used by football talkers came into use way before Smiling Dave was around to point them out. But we can still do something about "under center". It only came into use this preseason. Let's crush it while we still can.

Aggregate demand, from all angles.

1. I've written quite a few times about the almost universal idea in the main stream that the way to end this recession is by spending more money, so that the idle resources [=the unemployed] will finally be hired.

I've rebutted this argument right here: http://smilingdavesblog.blogspot.com/2011/05/rebuttal-to-our-man-blinder.html. The gist of my argument was that the Austrians are right, that there is unemployment because of a combination of two things.

a. People got fired because they were working the wrong jobs in the first place.

b. They do not find new jobs because of govt regulations making them too expensive to be worth hiring again.

2. But one day Dave read Chapter 3 of Keynes' book. He found there a different narrative that he did not address in that article. Unemployment and idle resources happen because there is not enough aggregate demand. Meaning, bottom line, that many many people decided to hoard their money under a mattress.

Dave was shocked. He did not know a single person who did this. On the contrary, everyone he knew had spent every last dime they had, plus was up to their ears in debt. No hoarding was taking place whatsoever. He checked to see if his circle was typical of the USA in general, and sure enough, it was.

Result, a new article laying out his research: http://smilingdavesblog.blogspot.com/2011/08/classic-keynes-and-why-credit-card.html

3. An internet personality, "Lord Keynes", wrote that the problem was not that people are hiding cash under the mattress, but rather are doing something that the real Lord Keynes considered benign, buying stocks with their money instead of spending it on consumer goods. Both myself and the real Lord Keynes did not have the brilliant insight that the internet "Lord Keynes" had.

Well! Smiling Dave could not take this lying down. Out came the keyboard, and the result is the now classic article: http://smilingdavesblog.blogspot.com/2011/06/reddit-buries-ae-continued.html  Don't forget to look at the comments.

4. Dave's never ending quest for knowledge led him to ever more bizarre versions of Keynesian economics. The problem is not money unspent, or used to buy stocks and bonds, but something much more sinister. Nouriel Roubini claimed that the problem is exploitation of the workers. They make stuff, get paid starvation wages, and then there is no one to buy what they made. Mass production only works if the masses can afford to buy what is mass produced. Rip off the masses, and they cannot afford to buy all that mass produced stuff.

Amused, Dave wrote a three part rebuttal to Roubini's thesis. Links:
http://smilingdavesblog.blogspot.com/2011/09/karl-marx-was-right-part-one.html
http://smilingdavesblog.blogspot.com/2011/09/karl-marx-was-right-part-two.html
http://smilingdavesblog.blogspot.com/2011/09/karl-marx-was-right-part-three.html

5. Always one to get to the bottom of things, Smiling Dave delved and delved until he actually found it! Dave, and Dave alone, knows why there is a lack of aggregate demand. And he spells it out right here, in a two part article:
http://smilingdavesblog.blogspot.com/2011/09/our-man-j-b-say-explains-why-we-are-in.html
http://smilingdavesblog.blogspot.com/2011/09/j-b-say-explains-why-we-are-in.html

6. Never one to leave us in the lurch, Dave then explains what we have to do get aggregate demand up and running again.

First, he dismisses the usual heavy handed, harmful, hackneyed solutions:
http://smilingdavesblog.blogspot.com/2011/08/myth-of-aggregate-demand.html

Then, and you may send all contributions to his secret email address in gratitude, Dave tells us what the great economists down through the ages [=Hazlitt] have told us is the key to ending this recession:
http://smilingdavesblog.blogspot.com/2011/08/myth-of-aggregate-demand-part-two.html

Note that an article previously linked to also talks about what another great economist, J.B. Say, had to say about ending our recession. Very eloquent piece:
http://smilingdavesblog.blogspot.com/2011/09/j-b-say-explains-why-we-are-in.html


 

The Veil of Opulence and the Veil of Ignorance.

It's about a New York Times leftist editorial, about how Obama is great and Romney is evil. Full disclosure: I have contempt for both candidates, but more for Obama.

For some reason, I felt sick reading that editorial. The gist is that if only we all took the point of view of the poor, downtrodden, unfortunates in life, who, through no fault of their own, need charity to survive, then we would all agree that Obama's program of tax the rich, of healthcare, and everything else he ever did or will do, is the way to go.

It is only when we, through some perversity of human nature, falsely imagine ourselves rich, that we take the point of view that the rich should not have to support the unfortunate poor as if they were their very own beloved children.

The author is Benjamin Hale, an assistant professor of philosophy and environmental studies at the University of Colorado, Boulder, and a co-editor of the journal Ethics, Policy & Environment.

 He looks like this: 

Note that he has no clue about economics. He knows about philosophy. He knows about the environment. He knows about shaving his head. But he does not know anything about economics. [As will be amply shown later].

We will leave aside the philosophical and moral questions for the moment, and, for the sake of argument, accept all his assumptions. The role of the President is to make sure the poor get what they need so badly, and if that means taxing the rich to give to the poor, so be it.

The question now becomes, will Obama's plans actually work? Will the poor be better off if we follow his schemes? This is an economic question, and one that Benjamin Hale totally ignores. Austrian Economics argues that all of Obama's plans will leave the poor worse off than before. Obviously, poor Benjamin Hale does not know anything about economics, or he would have addressed this point.

He would have written, "Though we all want the poor to be taken care of, Obama's foolish programs will leave them worse off than ever. Vote for Romney as the slightly lesser of these two evils. Better yet, write in Ron Paul."

One humble blog cannot go into all the details of the horrific harm to the poor [not to mention the rich and the middle class] from all of Obama's insane programs. Thankfully, that work has been done for us over at Mises.org.

But I can paint you a little picture of what the future holds under Comrade Obama. Go look at Greece and Spain and basically all of Europe, as it crumbles step by step from exactly what Obama wants to institute here.

Greece and Spain's problems stem from one fact. The govt was incredibly generous to everyone. Until it ran out of money. Now they are all worse off than if they would have all actually worked for a living, instead of being supported by Big Brother.  

That's exactly what will happen here. Of course, here the problem will be compounded many times over, because the govt, in addition to throwing a few crumbs to the poor, throws bit fat banquets to itself. They do this by printing digital money and spending it. Over at mises.org, you can learn why this impoverishes the country.

Bottom line, philosophy and baldness and black plastic eyeglasses are all very nice, but they do not qualify one to preach an economic position. To do that, you have to actually understand economics.

Mises' Calculation Problem, in Simple Language, Part Three.

Welcome back, faithful readers. Let's talk a little more about Mises' Calculation Problem. Even though we have laid out the argument in full in the previous two articles [here and here], we want to go into the nitty gritty a bit more.

The heart of Mises' argument is that

1. There are no prices for the means of production under Socialism. [Obvious].
2. With no prices for means of production, they will be wasted. [Deep stuff, which we will go into a bit more in this humble article].

Let's look a bit more at how things work in a free market. Mr A is a successful businessman. He comes up with a great new idea, say laptops that glow in the dark. He does his market research, and finds that customers will pay an extra 50 bucks for a glow-in-the-dark laptop. [Yes, I am making this all up, and I'm going to make up all the prices involved, too.]

So he opens up his catalogue of Shines in the Dark Plastics, and he is very surprised to find that that stuff is pricey. In fact, it will cost him 60 bucks per laptop to coat them. He will not make any more money on those planned shine-in-the-dark laptops, in fact he will lose 10 bucks per laptop.

Not wanting his dream of great fortune to go up in smoke, he calls up Mr B, CEO of Shines in the Dark Plastics, and asks him for a discount. "I can't do it," says Mr B. Mr C is buying up all my stuff like there's no tomorrow, and paying full price. So he's going to get it all, unless you outbid him. I certainly can't give you a discount."

Intrigued at this point, Mr A calls up Mr C. "How can you possibly afford to pay B's outrageous prices for his Shine in the Dark Plastic™?"

"Simple," says C. "I make glow in the dark skeletons, and people love them. Every Halloween they pay a cool hundred bucks per skeleton. Sixty bucks for the plastic, a few more for other expenses, and I make about twenty dollars a skeleton. And it's become a tradition to buy a new skeleton every year. I'm a rich man."

Mr A hangs up indignantly, and decides to move to a Socialist country, where he thinks he might have better luck. Comrade Marx, leader of the country, welcomes the talented and experienced Mr A with open arms, and appoints him head of a newly opened laptop factory, with carte blanche to do as he pleases.

"This is more like it," says Mr A, rubbing his hands together. "To each according to his needs. Well, my factory needs some Glow in the Dark Plastic, and Comrade Plastic, who runs the factory that makes the stuff, has agreed to give me as much as I want."

The glow-in-the-dark laptops hit the shelves. People are pretty pleased with the cute little novelty laptops, which sell at a very reasonable price, until Halloween comes around. They go to their shops to get some skeletons, but there are none on the shelves. When word leaks out about what happened, that all the plastic went to coating their laptops, they go home disappointed, cursing their stupid laptops, and look yearningly over the border at Freemarketville's homes, all gloriously decorated with shiny, scary, skeletons.

You see what happened. The free market, with its price system, made sure that the shiny plastic was used for what people wanted most. The Socialist country, by contrast, had no clue about how to use its supply of glow-in-the-dark plastic.

Of course, this story is not just about novelty plastic. The exact same thing will happen to all the resources at the Socialist country's disposal. Lacking a price system, they will have absolutely no idea how best to use them. Result: Suffering for all.

Mises' Calculation Problem, in Simple Language, Part Two.

Part one is Here.

We'll slide into Part Two by pointing out some deep mysteries of prices and profits. Let's take them one at a time:

Price. Why does something, a laptop, say, cost what it does, no more and no less? The answer is pretty obvious. The price is whatever the market will bear, meaning the more somebody wants that laptop, the more he is willing to pay for it. And a person wants that laptop because it of some use to him, whether for business or for entertainment purposes.

Now Marxists will say that the price of an object depends on the amount of labor put into making it. Old time economists will say it depends on the costs of making it. We won't go into that for now, because even the most stubborn Marxist and old time economist will agree that if a lot of labor and a lot of cost went into making a piece of garbage, nobody will buy it. So that satisfying the desires of the customer is certainly a consideration in what the final price is.

OK, so we'll go with that for now. The price of an object depends [partly or exclusively] on how much happiness it gives the buyer.

Profit. The Marxist will claim that profits come from ripping off the worker and paying him less than he deserves. We won't go into that for now, because even the most stubborn Marxist will agree that if you sell something for less than it cost you to make it, there won't be a profit. And the more you can lower the costs of production, the greater your profit will be.  So that making something the most inexpensive way possible, the way that uses the least resources, the least means of production [that still gives you a product that the customer is happy with] is the most profitable way.

OK, we'll go with that for now. A bigger profit means you have made the customer happy using up the least amount of resources. And if you did not make a profit, that means you used up a lot of resources [high cost of production] to give the customer very little satisfaction [because we see he will only pay a paltry sum for it]. It makes him happy, but not THAT happy. In fact, if the resources were used to make something profitable instead of the expensive boondoggle that it did make, that means the customer would be made more happy, meaning the resources were used in a useful way and not a wasteful way.

OK, say the Socialists. We get that. Maximizing profit means making best use of the country's resources. A loss instead of a profit means the country's resources were wasted. So we, too, will maximize profit and minimize costs of production. So where's the doom?

The doom, says Mises, is staring you right in the face. Because how are you going to measure your profits, and your costs of production? One person [=the govt] owns all resources, meaning there is no buying and selling of resources, because one person owns them all already. If there is no buying and selling of resources, there can be no known price for them. If there are no known prices for resources, and thus no way of knowing what is the most efficient use of resources, no way of knowing if you are wasting your resources or using them wisely, you are doomed.

Here the Socialsts turn a little pale. They try to force a ghastly looking sickly smile on their stunned faces. Maybe we'll be lucky? Maybe, of the many hundreds of thousands of possible combinations of resources, we'll hit on one that is profitable [if we had a way of measuring it]. Hey, people win lottery tickets, at odds of ten million to one, all the time. Maybe we'll get lucky, too.

You are doomed, says Mises.

[The best is yet to come. Make sure you look at Part Three].

Mises' Calculation Problem, in Simple Language.

Mises' Calculation Problem is the name for a problem Mises claimed will exist in any Socialist or Communist country that will spell the inevitable economic doom of that country.

Many have criticized Communism and Socialism from the psychological side. Why will anyone work if they don't get paid? How will you find the angels to run the country and not be cruel dictators? The Communists reply was a pretty lame one, that Socialism will breed a New Man, one free of the free market mentality, which is all about selfishness. Thanks to the fresh air of Socialism throughout the land, men will from the very cradle, or maybe after a few years of schooling, understand that selfishness is bad, and will live to serve their fellow men.

Lame as that sounds to me and to anyone familiar with the human condition, one cannot refute it with cold logic. Maybe Socialism will change the world. Who can prove otherwise [emphasis on "prove"]?

But Mises came along and claimed he had found proof, logical step by step mathematical proof, that even if all men were angels from the get go, even if they were all-wise and all-generous without a selfish or stupid bone in their body, Socialism and Communism were doomed. And the doom would be because they would be incredibly wasteful  in ways that it would be impossible to stop, from the one feature of Socialism that is its very definition. In other words, a Socialist country would throw all its wealth, all its food, all its clothing, all its housing, all its everything, into the sea, where it could never be retrieved. [Well not exactly. But it would be so wasteful of what it has, on such a grand scale, that the results would be the same as if they had tossed everything into the sea].

Pretty bold statement, no? But apparently Socialists who read his proof were stunned. He's right! What do we do now? Of course, after a while, they found a way. They just straw manned his argument to death. And you can find as many articles as you want on the internet refuting, supposedly, Mises' argument. All of them have no clue what the argument was, either from ignorance or by design, and disprove something else instead. Mises' argument stands triumphant, as the lucky readers of this humble blog will find out right now.

The very definition of Socialism is that all the means of production belong to the gov't. Spin it any way you want to, that they belong to everybody, or to nobody, or to the gov't, but the important point is that there is no buying and selling of means of production. Nobody can buy or sell steel or coal or a factory, because it is illegal for anyone to own them. That would be Capitalism, if a private person owned any means of production whatsoever and could do with it as he pleased.

OK, say the Socialists. Fair enough. That is indeed the very essence of Socialism. But so what? Where's the doom?

The doom, say Mises, is that if you are not allowed to buy and sell stuff, then, obviously, you cannot put a price tag on them. A price for something comes when a buyer and a seller do some preliminary haggling, and then agree on a price.

OK, say the Socialists. Fair enough. You cannot make up a price and pretend it has meaning, we admit that. That's why every time there is a govt decreed price for something, as in wage and price controls that were imposed on various countries at various times by their gov't, there was always a black market. Meaning there were huge numbers of people who did not accept the gov't phony price, and set up a different price behind the gov'ts back. Fine. We agree that if you can't buy and sell stuff, there is no such thing as a price. But so what? Where's the doom?

The doom, say Mises, is that if you have no price for the means of production, then you have no idea of costs when you make something. Even if you have prices for the final product, say $100 for an iPhone, if you don't have prices for the components of the iPhone, the things that went into making the iPhone, then you do not know if you have made a profit.

OK, say the Socialists. That's true. If there are no prices for the means of production, then the manufacturer cannot know if he made a profit. But that is so Capitalist. We Socialists are not about profit. We are about for each according to his needs. Looking for profits is what got the world into the mess it is in now, with all that greed running wild. Agreed, if the govt owns all means of production, there is no way of knowing if a manufacturer is making a so-called profit. But so what? Where's the doom?

The doom, say Mises, will be explained in Smiling Dave's very next article.

Smiling Dave Hits the Big Time.

Lo and behold, our humble blog has been chosen one of the Top 40 Austrian Economics Blogs by no less than the prestigious Commodity HQ website. After all, anyone who recognises that we are in top 40 must be prestigious, right?

Not only that, we have more visitors thanks to their recognition. Here is what they said about Smiling Dave's blog, coming in at number 35 out of 40:

Smiling Dave: Certainly one of the more entertaining economics blogs as the tagline promises to offer “gentle sarcasm”.

To make my cup runneth over totally, I found that someone from Baku, Azerbaijan has put my humble blog on his Рекоммендую [= recommended, for those of you who don't speak Azerbaijanian] list. Our humble blog's influence is spreading to all corners of the Earth.

Keep 'em coming. And to you, my enemies, I say,  "Grovel before me in the dust. Come back when you make top 40 and are recommended by an Azerbaijanian."

Woo hoooooooooo. 

Why So Many Do Not Understand AE.

Ever since I've posted links to this humble blog over at reddit, I have been pleased to see many new comments here. Thank you all for gracing the blog with your presence.

Enriched by the interactions with these new readers, backed by experiences over the mises.org forum, and by reading many anti-AE articles as well as youtube videos attacking AE, I begin to see a pattern. I think I now understand why so many have a hard time with AE.

Let us think back to high school. What was the most difficult course there? Even those who are adept at math might say they found the hardest time with high school geometry.

And what was so hard about it? For one thing, you could not toss together a string of buzzwords and get a passing grade. Faced with a proposition, you had to actually prove it, step by step, justifying each step with support.

The proof had to obey the strict rules of logic, too. You could not say Pythagoras was wrong because he is long dead, hopelessly outdated, a member of the bourgeoisie, or did not have an internet connection. That didn't cut it. You had to address the idea, not the man.

And when you addressed the idea, you had to show exactly why the idea is wrong. At what line of a proof is there a mistake, and what is the mistake, exactly? 

Many people had no clue in high school geometry. They, of course, will also have no clue about AE, because the structure of AE is similar to that of geometry. It is composed of statements backed up by step by step logical proofs.

Even those who excelled in geometry often found that the kind of thinking that went on in geometry class was never used in the real world, as seen on TV. No politician, for example, ever discusses an issue using logic. Instead they use every kind of argument that would have guaranteed them an F in geometry class. I imagine many college courses work the same way. One learns that tossing together buzzwords will earn one respect, and that actually thinking things through earns one failure, if one reaches conclusions disliked by the teacher.

Thus, the role model of proper thinking, seen only in geometry class, was drowned out by a flood of role models that did not use logical thinking. Pretty sad, pretty pathetic, but pretty common.

So guys, I welcome all comments. But don't be surprised if my reply will be that you please show me exactly where the flaw lies in my thinking, and why it is a flaw. No more of this "Mises is dead and did not have an internet connection, so he must be wrong" stuff. Get used to logical thinking. Be liberated.

Bitcoin, all in one place.

I've written 8 times about bitcoin, and why it is doomed to never be a currency.

1. http://smilingdavesblog.blogspot.com/2011/06/bitcoin-takes-beating.html Explains Mises' Regression Theorem, and why bitcoins violate it.

2. http://smilingdavesblog.blogspot.com/2011/06/bitcoin-and-bitclothing.html Explains that just as clothing made out of bitcoins is absurd, so is money made out of bitcoins.

3. http://smilingdavesblog.blogspot.com/2011/07/bitcoin-yet-again-in-simple-language.html Gets to the very essence, in a few short words, of why bitcoin will never be a currency. The comments here are especially enlightening.

4. http://smilingdavesblog.blogspot.com/2011/09/bitcoin-we-hardly-knew-yeh.html Graphs bitcoins decline from $30 to $5 in a few short months. Recently it has climbed back to about $10. Time will tell.

5.  http://smilingdavesblog.blogspot.com/2011/12/bitcoin-and-mises-regression-theorem.html Summarizes someones claim that bitcoin is compatible with Mises' Regression Theorem, and shows him wrong.

6. http://smilingdavesblog.blogspot.com/2011/12/was-mises-regression-theorem-mere.html Summarizes a claim that bitcoin is compatible with the regression theorem because the regression theorem is just summarizing history, and proves that claim wrong.

7. http://smilingdavesblog.blogspot.com/2011/12/one-more-detail-about-bitcoin.html Summarizes the claim that although Mises' theorem apparently shows bitcoin is not a currency, yet in reality bitcoin already is a currency as we speak. And so Mises' theorem is proven incorrect by the real world. Refutes this claim.

8. http://smilingdavesblog.blogspot.com/2012/07/bitcoin-and-intrinsic-value.html
Explains the concept of intrinsic value, its two meanings depending on the context in which it used, why bitcoin has no intrinsic value, and gives a vivid image of how to determine with ease whether something has intrinsic value.

Bryan Caplan, All in One Place.

I wrote seven articles about Caplan's famous Why I am Not an Austrian Economist.
Here are the links to them all.

1. http://smilingdavesblog.blogspot.com/2011/05/partial-refutation-of-brian-caplan.html

2. http://smilingdavesblog.blogspot.com/2011/05/more-on-caplan.html

3. http://smilingdavesblog.blogspot.com/2011/05/caplan-and-continuity.html

4. http://smilingdavesblog.blogspot.com/2011/05/caplan-and-welfare-economics.html

5. http://smilingdavesblog.blogspot.com/2011/05/more-on-caplan-and-welfare-economics.html

6. http://smilingdavesblog.blogspot.com/2011/05/concluding-blog-about-caplan-and.html

7. http://smilingdavesblog.blogspot.com/2011/05/caplan-on-public-goods.html

The careful reader will note something very interesting. I'm pointing out very elementary mistakes in logic. But Caplan makes them. And yet his paper is widely praised on the internet as the very best refutation of AE that exists. That should tell you something.

Go ahead, read the articles, see for yourself. They are in non technical language, simply laid out.

Broken Window, Part two.

Part one is here.

Without further ado, we take a look at the attack on the Broken Window Fallacy posted recently at mises.org.

The gist of his argument is that if we accept the assumptions of Keynesians, that people are unemployed because those with money to spend are hoarding their cash instead of spending it, and also accept that lowering wages is hard to do, then breaking a few windows is a great way to end unemployment. Break those windows, and the hoarders will be forced to open their miserly wallets and hire the unemployed to fix those windows, and at the going wage, too.

Here's what he says:

The Broken Window Fallacy, in its basic state necessitates that the money which would be spent on the broken window, would otherwise have been spent on something else, either invested on producer's goods or spent on consumer's goods.

What he means here is that the fallacy is usually presented like this: Mr A gets his window broken by a vandal. Cost of repair, a hundred bucks. Some say that this is a good thing for the economy, because it creates jobs. The glazier now has employment, repairing the window.

This is a fallacy, say Austrian Economists, because had the window not been broken, Mr A would have spent the hundred bucks on something else, say a new suit. So yes, the glazier gained a job, but the tailor lost a job.

However, if we grant the usual Keynesian assumption that money is merely hoarded during a recession and prices are sticky, then this is no longer the case. If there is a large amount of unemployment, and a high amount of uncertainty then Peter would likely have hoarded a great deal of his money rather than spending it on a window.

The poster at mises.org thinks he has found a flaw in this reasoning. What if Mr A is a hoarder? Then those hundred bucks will never be spent at the tailor's [Note for sticklers: The poster got his story confused, talking about spending money on windows that were not broken. He means spending it at the tailor's]. So that the only way to get Mr A to spend the money and increase employment and end the recession is to break his stupid window, forcing him to spend those hundred bucks hiring the glazier:

If he does spend on the window then his consumption has increased, and the window repair person will also spend a portion of that money, thusly [sic] boosting the economy from what it would have been.

One broken window and a lot of money is spent. Consumption is increased. The economy is "boosted".

In fact, the more windows you break, the better:
If we assume this on a mass scale, then unemployment will be reduced and output would increase from an increase in general demand, from many broken windows.

Bottom line, break tons of windows and you increase spending from those miserly hoarders, you increase consumption, you increase employment, you increase output, you increase general demand, you boost the economy. Gimme a high five, bro. We have done it all; we have saved the world.

The poster assures us there is no possible rebuttal to this argument:
So for once and for all, the broken window fallacy in and of itself cannot even touch Keynesianism by itself, and it does not apply during a recession.

Let's introduce Devil's Advocate [=DA] again, as he talks to Smiling Dave [=SD].

DA: He sure cooked your goose this time, Dave. Admit it, you never even thought about hoarders.

SD: You Devil, you forgot about Part One, where we discussed parasitic jobs.

DA: What do you mean? The glazier is being productive, fixing the window.

SD: Sure after it is broken, he is being productive. But we are talking about something different. The question is, is the economy better off before the window was broken, or after? So let's look at this way. The window is there, the money is hoarded, the glazier is unemployed. The poster at mises.org claims we are better off breaking the window, so that the glazier can fix it.

DA: You're darn tootin.

SD: I have a better idea. Why not cut out the middle man and have the glazier both break the window and fix it? Why wait for Hurricane Katrina or the gov't to break those windows? That will give the glazier even more employment.

DA: Great idea, Dave. You might win a Nobel Prize for this.

SD: Well. I'm about to win two Nobel Prizes. Why not save everyone a lot of bother by this simple expedient. The gov't will send letters to all the people saying "You have 5 windows in your house. The economy will be improved if they are all broken and then fixed. To save you the inconvenience of having your windows actually broken with the attendant health hazards, we hereby legally declare that your window has been broken by a hurricane, and that Sam Glazier has fixed them to exactly as they were before. You now owe Sam Glazier $100 per window. Thank you for improving the economy."

DA: But, Dave that's a parasitic job like no other!  

SD: Exactly. And it is just as parasitic if the govt breaks the window. And the loss to the economy is the same if a hurricane breaks it and it is fixed by the glazier as when the glazier does nothing and gets his gov't check.

Broken Windows.

Someone over at the mises.org forum came up with a critique of the Broken Window Fallacy, and how it does not apply in the real world.

You see the broken window fallacy quite often on TV. For example, right after Hurricane Katrina, some dude claimed that New Orleans would now be in better economic shape than ever, since all the destruction caused by the hurricane would have to be fixed, meaning there would be more jobs.

Indeed, the heart of the fallacy is one that is almost universal, come to think of it. When any politician talks about fixing our miserable economy, what does he talk about? Jobs. That's it. Never once is there any mention of increasing production. It's all about jobs.

Now from a politician's point of view, that makes a lot of sense. More jobs means more votes. More production doesn't mean anything, to him, because products don't vote.

And the broken window fallacy pretends that this is an economic truth, as well. Better to have more jobs and fewer products than more products and fewer jobs. Put that way, it sounds pretty feasible, even humane and moral.

Time to bring in our old friend, Devil's Advocate[=DA] , and have a dialogue between him and Smiling Dave [=SD].

DA: Well, what do you have to say for yourself, wicked Smiling Dave, you heartless thing oriented person. Aren't people's lives more important than a few baubles? Isn't "more jobs" a superior goal to "more production"? Do you want everyone to starve to death while more useless trinkets are made?

SD: Say I gave everyone a job at the post office. Everyone. What would happen?

DA: What a silly question. We would run out of food and clothing and everything else very quickly. Everyone would get a paycheck and spend it on what they want, but no new things would be made. When I said we need more jobs, I didn't mean moving people from productive into parasitic jobs.I meant moving people from off their couch and off the streets into dignified employment.

SD: Is working in the post office the kind of dignified employment you are talking about?

DA: Why not? Indoors, nice pay, good pension, doing something useful.

SD: If it's so great, why doesn't the post office hire all these people right now?

DA: Because the post office is losing money as it is, and hiring more people means it will lose even more money.

SD: Another way of saying those jobs are parasitic. The new employees get pay checks, but do not produce anything in return, at least not enough to cover the cost of hiring them. Meaning they get to eat for free. Nice for them, but not very nice for whoever is feeding them. In fact it's not very nice for the economy as a whole, meaning for everyone, because what the parasites eat is not replaced. After they spend their pay checks, there is less for everyone else.

Moving people from unemployment to a parasitic job is almost as bad for the economy as moving them from productive jobs to parasitic jobs. In both cases, there is less and less to go round for everyone. 

DA: Ok, Mr Smartypants, then what is the answer for all those unemployed people? You want them to just starve?

SD: Of course not. I want them to get productive jobs. Jobs in which what they take away from the general stockpile of goodies is constantly replaced by the work they do. And, of course, that is truly dignified labor. Where your work benefits humanity, as opposed to hurting humanity.

DA: And just who are you do decide which job is productive and which one isn't?
Do you think you are smarter than the brilliant President Obama, who created jobs at Solyndra to the tune of half a billion bucks, only to have the company go bankrupt in a few months?

SD: What do you think I am, a central planner, a Soviet Comissar? The free market will decide, of course.

DA: And what if the free market decides there are no productive jobs for these people?

SD: Then the gov't will have to lower the huge expense of hiring people, so that their jobs will become productive, meaning worth the money the employer has to spend on them.

DA: What if the gov't is too stubborn or too afraid to change the laws?

SD: Then we will have chronic high unemployment, like they do in Europe.

DA: Then shouldn't we give them free money?

SD: Sure, if you want to destroy the economy, meaning make everyone poorer and poorer because more is consumed than produced.

DA: And what has all this to do with the broken window fallacy, and that brilliant article over at mises.org?

SD: It's an intro. The hour is getting late, this article is getting long. But the takeaway is that more jobs means nothing. More productive jobs means something. And that if our pool of resources is lessened by a job, that job is parasitic and should not exist. Simple math. Take away more from a pile than you put in, and the pile gets smaller. Tune in for part two next time.

Bob Dylan's Gates of Eden.

No economics in this article. Smiling Dave is a well rounded guy. He likes poetry. He likes hot dogs. So here are SD's thoughts on the song Gates of Eden, by Dylan. Warning: Not for the faint of heart. Dylan in his depressed moods can really paint a black picture of life.

I like Bob Dylan. I read a bit about this song on the internet, on Wikipedia and on songmeanings.net. So here's my take on it, enlightened by the above sources.
Oh, and here are the lyrics: http://www.lyricinterpretations.com/Bob-Dylan/Gates-of-Eden. Read them first, then come back here.

The general theme of the song is that life sucks, and then you die. To understand what he means by the Gates of Eden, think about Santa Claus. I think all adults have stopped believing in Santa Claus at some point in their lives. So if someone tells you "Only Santa Claus can get you that", he of course means, "You can't have it, sucker." Same thing with Gates of Eden. There is no Eden, implies Dylan by his tone of voice when mentioning it. And when he ends each stanza with "The things you want are only inside the Gates of Eden", he means forget about ever having them.

But there is an added twist to it. When you tell an adult "Go ask Santa Claus for that", you are talking to someone who already knows there is no Santa Claus, and has gotten over the pain of that discovery. But Dylan is doing three things when he says that something is only inside the Gates of Eden.

First, he tells us that, in his opinion, there is no Eden, no Paradise, no magic place either in this life or the next, where everyone lives happily ever after. And his cynical tone of voice, filled with emotion, tells us that this revelation is still fresh with him, and still hurts.

Second he tells us in each stanza that some important thing we are struggling to realize in our lives, be it discovering the truth or achieving some economic utopia or satisfying love, has no hope of being fulfilled. There is no afterlife, and there is no hope of making this life significantly better, either. Life sucks, and then you die.

Thirdly, he wraps this dual message up in the pleasant little postscript that you are a fool for ever imagining otherwise. Go ask Santa Claus for it, you fool who believes in Santa Claus.

The song, stanza by stanza, mocks every important quest people may have in their lives. Fugeddaboutit.   

I want to elaborate on one valuable that he mentions, love. Here are the lines:

At dawn my lover comes to me
And tells me of her dreams
With no attempts to shovel the glimpse
Into the ditch of what each one means.

He has a lover, they share a bed, they are close enough to tell each other their dreams at the romantic break of dawn. What could possibly be wrong with this picture?

My personal take is that nothing is wrong, if you know that love won't solve all your problems. Life goes on, with all it's occasional suckiness, yes, but it is made more pleasant by having a loving relationship. But let's see what Dylan has to say.

He says that each dream has a meaning. And he calls that meaning a ditch.  I think he is saying here that a dream is the tip of an iceberg. Beneath the dream lies its meaning, a vast world as deep as the dreamer's very personality, very soul. He calls it a ditch as opposed to, say, a deep well, because this is a cynical black song, so everything has to have a black description. It's not a well, it's a ditch.

His lover makes no attempts to fill the ditch, meaning to understand her deeper self, the self not satisfied with watching Gossip Girl and chewing bubble gum. She had a glimpse of her depths when she had her dream, but the shallow girl just let it slide, and did not take advantage of the opportunity to plumb her depths and find out about herself and share this discovery with her lover.

That's the problem with love. It can only go so deep. The girl in Bob's bed didn't even try, but even if she did it wouldn't have changed much. Ultimately we are individuals, and we cannot share our deepest selves with anyone. That's just the way it is, and it hurts.

Ouch. Bob has cast his magic spell, and writing this has put me in a black mood. OK, guys, let's all snap out of it. Bob only showed us one side of the picture. Life doesn't totally suck.


 

Bitcoin and Intrinsic Value.

Someone at the Mises Forum asked me to explain about intrinsic value, and how it applies to bitcoin. Without further ado:

To sum up what is happening with intrinsic value. It is one of those phrases whose meaning changes depending on the context.

1. When Austrians say nothing has intrinsic value, that all value is subjective, they are speaking in a certain context. The discussion there centers about the question, why does bread cost a dollar a pound? What makes it worth exactly a dollar?

The old way of thinking was that there was some mystical entity hidden in the loaf of bread that made it worth a dollar. That's what they meant when they were discussing the intrinsic value of a loaf of bread. There were those who thought that the mystical entity inside the bread is "cost of production". Others thought that the mystical entity is "amount of socially necessary labor put into the loaf".

The Austrian conclusion is that there is no mystical entity, no intrinsic value. The price, the value, of the bread comes from something outside the bread, mainly, from the potential customer who is willing to pay a dollar for it. In other words, its value is subjective, not intrinsic.

That is one context in which intrinsic value is used, and in that context, there is no such thing as intrinsic value.

2. The other context in which the phrase is used is when discussing the value of money. In the article in my blog, Bitcoin Takes a Beating, I quote and explain Mises at length on this subject. Mises analyzed the value of money, say of a gold coin, as being made up of two elements.

The first value comes from answering the question, "What could Robinson Crusoe do with it?" Crusoe had nobody on his island to buy from or sell to, so the gold coin had no use as money. But it did have some use. He could use it for jewelry, if he was vain. He could use it as a component of his computer chips, or whatever.

OK, now Crusoe comes off the island back to civilization. He finds that everything has a price pretty much as he valued things on the island, except for one thing. His gold coin, he finds, is worth much more than he thought. "Why are people setting such a high value on something of so limited a use?" he wonders. Then he finds out that gold is the coin of the realm. Aha, that explains it. It has a use in civilization it never had on the island. You can easily buy stuff with it, anything from everyone. That is a useful feature, that increases the usefulness, and thus the price, of gold.

So those are the two sources of value that money has. Mises gave those values clumsy names, industrial value for the first, and exchange value for the second. As time went on, people [including Mises himself and other respected Austrians, as I have quoted at length somewhere in these forums] instinctively starting calling that first value, that Robinson Crusoe had for it when alone on the island, its "intrinsic value".

Now one can readily understand why someone who wrote in the forum that bitcoin has "intrinsic value, as money", was being quite amusing, like a clown falling off a bicycle. Intrinsic value is what it has on the island, and there it has no use as money.

[Note that in this context, intrinsic value is also subjective, because the two concepts are not contradictory.  Whereas in the first context a subjective value and an intrinsic value cannot be the same. If you grasp these last statements, you now understand the two meanings of intrinsic value.]

Mises' Regression Theorem states and proves that a money cannot have that second value, what Crusoe saw off the island back in civilization, unless it first has intrinsic value, meaning that Crusoe had a use for it on the island. In the article Bitcoin Takes a Beating, I explain his reasoning at length.

Since bitcoin is totally useless on the island, obviously, then by the Regression Theorem it will remain useless off the island. The bitcoin crowd howls at this obvious statement, trying to find some flaw. The most common thing they try is saying that we see it has some value, just go to mtgox.com. So Mises must be wrong.

The second thing they try is to say that bitcoin has some magical property that excludes it from the Regression Theorem, which was only talking about non magical objects. I've addressed both these arguments many times.

Is the Economy an Ecosystem?

Or maybe it's a feedback loop. Or a circle of life.

Nick Hanauer thinks it's all of the above in his TED rejected lecture, with the driving force behind the whole ecosystem [that's what he called it on the June 13, 2012 edition of schiffradio.com, tossing in lions and zebras] being the consumer.

Same thing if it's a feedback loop, or a "circle of life" [his words]. What sets the loop going is the consumer. The producer is just a little squirrel.

Here's the squirrel quote:
So when businesspeople take credit for creating jobs, it's a little like squirrels taking credit for creating evolution. In fact, it's the other way around.

And here's where he gives the consumer all the credit:

I have started or helped start, dozens of businesses and initially hired lots of people. But if no one could have afforded to buy what we had to sell, my businesses would all have failed and all those jobs would have evaporated.

That's why I can say with confidence that rich people don't create jobs, nor do businesses, large or small. What does lead to more employment is a "circle of life" like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me.

Peter Schiff asked him if any ole consumer creates these virtuous circles of life, even one with no job whose sole income is a welfare check. Absolutely, replied Nick.

Let's give IR [=Interested Reader] the floor, and SD [=Smiling Dave] will help him out.

IR: Sounds pretty convincing, no?

SD: It is indeed true that if nobody is buying there will be no companies. It is also true that we have a symbiotic relationship between the producer and the consumer, each one benefiting the other.

IR: Everything he says seems right. So does his conclusion follow, that the businessman is just a squirrel, and the welfare couch potato is the creator of jobs? It sounds very fishy to me. I mean, my hero is supposed to be the fat slob who does nothing? But I'm a beginner in clear thinking, Dave. Help me out. What's his mistake?

SD: He's got two huge mistakes. Let's start with the one that is more obvious, then we'll dig deeper for the more basic one that will blow him out of the water.

IR cocks his ear at this point.

SD: Here's the obvious one. Let's look at a "circle of life" we see every day, an automobile tire. Is one part of the tire more important than the other? Can we say only the left side of the tire sets everything in motion, and the right side is just a squirrel?

IR: But without the consumer there is no business.

SD: True, that's the left side of the tire. And without the businessman making things there is nothing to consume. No house, no furniture, nothing. In fact--

IR: OK, Dave, I get it. No need to go on. But what about the ecosystem analogy? There are lions and there are zebras. The zebras eat the grass, the lions eat the zebras.

SD: Well, I do have a question. Where do new zebras come from after the original ones are eaten? Where does new grass come from after the zebras eat some?

IR: I never thought about that, but I see two possibilities. The first is that the jungle is so huge that there is an endless supply of grass and zebras, so there is never any shortage.

SD: True, but that certainly does not describe any economy in the human world. We have only a finite amount of stuff. If all the cellphone factories close down, there will be a shortage of cellphones. If all the clothing factories close, there will not be any new clothes. The things we have wear out, and new people are born who need things, and we have to constantly replenish our stock of everything. We do not have an endless supply of consumer goods.

IR: OK, so we live in a jungle that is not infinite. I give you that. But I have another answer for where the grass and zebras come from. Mother Nature is doing Her thing. It happens by itself. The grass grows from the sunlight, the zebras grow from reproduction. Ah, Nature, how generous you are!

SD: Look around in your house. Do any of the things there come spontaneously from the bounty of nature? Does you air conditioning, your washing machine, your car, anything really, just grow by itself?

IR: Well, my food, maybe.

SD: Unattended, there would not be enough food to support all the billions of living people. Most of them would starve, and we would be left with the small amount of people that existed in cavemen times. There just wouldn't be enough food any more.

IR: I'm not sure where you are going with this. OK, so an economy is not exactly like a lion-zebra-grass circle of life. They get free grass and free zebras that grow spontaneously; we have to actually make our things. But so what? 

SD: So everything. That is the deeper, more basic flaw in his whole theory. The fat slob who does nothing is consuming [=burning up, destroying, making more scarce] our supply of stuff, and doing nothing to replenish it. If Hanauer has his way, the great store of wealth we have built up over centuries will just be dissipated. Giving people free money to take what they want and give nothing in return is not a Circle of Life, it is a Noose of Death, that will slowly get tighter and tighter around our necks.

IR: I don't get it. Are you saying nobody should consume anything? Should we just make stuff and never use it?

SD: Of course not. What I am saying is that the fellow who sets in motion the virtuous circle of a thriving economy is the one who makes sure we don't run out of things, the producer, the businessman, the entrepreneur. And yes, of course it is a symbiotic relationship. We reward him and encourage him for giving us what we need by paying for what we take from him. But let us remember that the producer is the engine, and the consumer the caboose.

IR: What about the other stuff Hanauer says in that speech? The stuff about the rich having so much money they could never spend it all on t-shirts?

SD: C'mon IR, we have discussed that many times. He is repeating Keynes' argument about hoarding. Do a search on this site for "hoarding".
  


 

About Comments

I love getting comments about how great my stuff is, of course.
But sadly, I usually am unable to reply, for technical reasons.

Bottom line: Keep 'em coming, but don't expect a reply. My apologies.

Also, If I don't answer a rebuttal to an article, doesn't mean I don't have one.
Smiling Dave prides himself on the quality of his readership. You must have some brains if you got here in the first place. So I leave it to the reader to sort out who is right.

Thanks to all 5,000 of you for dropping by.

All about Greed.

Hard to find a more thorough smackdown of Greed, and how it is responsible for all our current woes, than right here:

'Greed is the Beginning of Everything' from Der Spiegel.

Trouble is, it's all wrong. The article is too long to quote in full, so Smiling Dave will just quote snippets and critique. To get the full relish and juice of my wonderful rebuttal, I humbly suggest you read the Spiegel article first, or maybe side by side.

[Originally, I wrote is as a reply to someone on redditt, so the style is that of addressing him, as opposed to you, dear reader. But I'm sure that will not be a problem.]

Without further ado, Smiling Dave's comments on the article:

The very title is a big mistake. It's not greed, but the desire to improve ones lot in life for oneself and for ones family. Or is he opposed to that?

The beginning is just hot air and moralizing. The first half-way serious sentence is, "One can expand the supply of goods and the purchasing power needed to acquire them. That's the hedonistic program, which we have chosen since the days of the Greeks and Romans, but which threatens to fall apart in the debt crisis. The monetization of our society has strengthened the illusion that all the things we desire are within our reach."

He's saying the debt crisis is making the ancient system of increasing the supply of goods and of purchasing power fall apart. Rubbish. The debt crisis is the direct result of NOT increasing the supply of goods. If the modern Greeks, for example, had produced more goods, they would not be in debt in the first place.

Not sure what he means by the monetization of our society. I doubt he means the ever increasing printing of digital money , but if he does mean that, he would be right. It does give some people illusory wealth.

Next he goes on to how wonderfully better off we all will be if only we had a lot less of everything. Not sure how he knows everyone feels the same way.

Then Speigel makes the ridiculous comment that, "SPIEGEL: The debts of Western countries haven't grown in the last 30 or 40 years as a result of need, but of abundance."

We had so much stuff we couldn't afford to pay for it all, and had to go into debt to have it? This contradicts that portion of Say's Law that all economists agree to.

"Man has a need for fairness and, therefore, for a fair distribution of wealth."
Dangerous words. Luckily, he preceded this by saying that most people can be trusted give charity without coercion [though he did not relaize that is what he was saying] when he declared that, "Only a truly egomaniacal person can live happily in a society in which he is the only rich one."

"He [=Adam Smith] clearly distanced himself from his contemporary Bernard Mandeville and his theory that private vices generate public advantages, and that the general welfare stems from the self-interest of the individual." I call BS. Prove this absurd statement.

Then Spiegel has his only intellignet thought of the night, though he doesn't realize it, when he says, "If the invisible hand of the market alone were capable of transforming self-interest into the common good, we wouldn't need government regulation at all." You got it. That's so right. The premise is true, as is the conclusion.

"The interdependence between capital and the state became obvious during the crisis. The financial system would have collapsed without government help..." False. Some banks would have gone bankrupt, yes, as they deserved to and had to. They were kept alive at the expense of everyone else [=the taxpayer] impoverishing the country and keeping incompetents at the helm of our financial institutions.

This whole piece is just propaganda. The point is that we need the govt to save us from our greed, and that less of everything is good for your soul, so get ready for it.

"Regulation may be a loaded concept, so let's talk about coordination instead. " This is meant to be serious economics? Calling something by its real name is unpleasant, so let's call it something else.

Suddenly, the article takes a decided turn for the better. I am stunned. Look at these sound Austrian statements:

"Instead of maximizing the gross domestic product, the goal should be to minimize debt." YES!

"In a free-market democracy, politicians should be deprived of the right and the authority to incur debt, just as they have already lost the right to print money." YES! [though of course, only a handful of politicians have lost the right to print money, with many retaining that "right"].

Then he goes on to some more nonsense, winding up with a few real idiocies:

"An economic policy that only pursues growth will always lead to debt."
Actually, the economic policy that pursues growth is one of hands off and let the free market be free. It is false that it will always lead into debt. They are unrelated. Debt is when the govt or when individuals borrows money. What has this to do with economic growth?

Of course, profitable businesses also borrow money, but always with the assumption on their part and the banks' part that the business will be able to repay the debt, since the money will be used to increase profits. But this is not a bad thing.

More moralizing to finish the article off.
Bottom line: He clearly has no understanding of basic economics.

The Chinese are ruining us with their unfair tricks, says Dick Morris.

I'm just going to copy two posts from the mises.org forum. The first quotes one Dick Morris. The second is my reply to said Morris.

You have the floor, Dick:

The Chinese lend us money because they have to. They buy dollars to make our currency artificially expensive and theirs’ commensurately cheap. With their currency manipulation, our products are 40% more costly in their markets and theirs’ are 40% cheaper in our stores, fueling the imbalance of trade. Once they own the dollars, what are they going to do with them? The only safe thing is to buy U.S. Treasury notes, hence they “lend” us money. If they stopped buying dollars and acquiring an unfair trade advantage over us, we wouldn’t need them to keep lending us money, our economy would be thriving.

We cannot sit by complacently and let China rob us blind, hacking our technology, our military secrets, and our power grid. We need a president who will stand up for America.

[source: http://www.dickmorris.com/china-has-hacked-our-electric-power-grid-read-about-it-in-screwed/#more-8845]

And my reply, where I requote Morris line by line in italics, and comment in normal font: [BTW, here is a fine article that elaborates on the relevant ideas: http://mises.org/rothbard/protectionism.asp. For a general understanding of imports and exports [which Mr. Morris clearly lacks] have a look at my humble article, "Imports and Exports, Which One is Good" ]

The Chinese lend us money because they have to.

As he will explain, I imagine.

They buy dollars to make our currency artificially expensive

1. Erm, who is selling those dollars to China? We are. Are they pointing a gun to our heads? No. So we must be doing it because there is some advantage for us.

Now what could that advantage be? Why on Earth would you, dear reader, sell your dollars and get Chinese money in return? After all, the only thing you can do with Chinese money is buy Chinese goods. You know, the stuff that is being sold in every store in the USA, the stuff that fills every room of your house. In other words, the Chinese only "buy dollars" when we buy their stuff.

So don't attack the Chinese for their "buying dollars". Thank them for being foolish enough to agree to be paid in useless dollars for their valuable stuff which we no longer make ourselves.

2. Also, what do you mean by a dollar which is "artificially high"? You are complaining that our dollar has more purchasing power than it "should have"?

and theirs’ commensurately cheap.

Which is, of course, a great free gift to us. We get to buy those Chinese goodies much cheaper than we would otherwise. The Chinese govt prints so much moolah that their money goes down in value compared to the dollar, letting us get a nice discount on their stuff.

With their currency manipulation, our products are 40% more costly in their markets and theirs’ are 40% cheaper in our stores,

Not sure where he got those numbers. But really, what do we even make that they would buy if it was 40% cheaper? I mean, are our exports to other countries so huge? Is it only those sly Chinese that sell us more than we sell them?
As Wikipedia says,"...the EU is the largest trading partner of the US with $367.8 billion worth of EU goods going to the US and $268.6 billion of US goods going to the EU..." For a deficit of a cool 100 billion bucks. We also have a deficit with Mexico of 65 billion, with Japan of 62 billion, with Cananda of 35 billion, with Saudia Arabia and Venezuala of 30 billion each, with Taiwan, India, and South Korea of about 14 billion each. Our biggest trade surplus is with tiny Singapore, a piddling 12 billion bucks. We do only 50 billion of annual trade with them anyway, compared to 600 billion with the EU, where we have that 100 billion dollar deficit.

So guys, we have a trade deficit with everyone, more or less, not just China. Kind of hard to blame the Chinese for the whole world not buying our stuff.

fueling the imbalance of trade.

Spoken like a true Mercantilist, making an imbalance of trade sound like something evil. Mr. Morris, it's just the opposite. They are giving their stuff away to us for free. Mr Morris, do you buy only from the USA, and boycott Chinese goods, to do your part to balance our trade? Do you pay 40% more for your things, out of patriotism? Or do you think, when it comes to your own wallet, that the USA is best served if its citizens pay less for their needs?

Once they own the dollars, what are they going to do with them? The only safe thing is to buy U.S. Treasury notes, hence they “lend” us money.

This is true, but for the word "safe". Treasury notes are a disaster waiting to happen, in fact a disaster already happening. The dollar is losing value at 10% a year [look in the supermarket and at the gas station and at your insurance and medical bills], and the interest on those Treasuries is piddling. The Chinese are losing money as we speak, every second they hold on to those Treasuries. 

Note the quotation marks Mr Morris put around the word "lend". It's an old Soviet trick, to mock something by putting quotes around it, when there is nothing to mock. Yes, they are indeed lending the US govt money when they buy Treasuries. No quotation marks.

If they stopped buying dollars

They aren't buying dollars. We are buying their products, and they are doing us a big favor by accepting our worthless money in payment.

and acquiring an unfair trade advantage over us,

Unfair? What do you mean by unfair? Are they doing something we aren't? Does the US govt sit idly by and not print money? The accurate description is that the Chinese are doing us a HUGE favor, making sure we get their products dirt cheap. Or would you rather pay 40% more for everything?

we wouldn’t need them to keep lending us money,

Let me get this straight. Say you have trouble making ends meet. You have huge credit card debt. In an inspired moment, you realize, "If only the stores charged me 40% more for everything, then I could pay off all my debts."

our economy would be thriving.

Poor soul, you have no clue as to what makes an economy thrive. Hint: Expensive prices for imports is not the answer.

We cannot sit by complacently and let China rob us blind,

This is a new one. When a store sells stuff at a 40% discount, it is robbing the customers blind.

hacking our technology, our military secrets, and our power grid.

All these claims are either unsubstantiated, or from very unreliable sources [=US govt hacks].

We need a president who will stand up for America.

Glad we agree on that. But you can only stand up for America if you know what America needs.

Imagine a poor little old lady [=the USA] who is having a hard time paying her bills. Her young heroic son, Dick, assures her he will stand up for her and set things right.

"Well Momma, I went to the supermarket and the electric company and all the places you owe money to, and I stood up for you."

"Oh, thank you son. Will they give me a senior citizens' discount?"

"No, Mamma, I got you something much better. They will charge you 40% more."

Marx's refutation of Say's Law [Thank you, Steve Keen].

Poor J. B. Say! The great luminary, Karl Marx, devoted some time to refute him. Who can withstand the fiery blasts from that old dragon?

I find reading Marx unpleasant. Such hatred, such projection in the Freudian sense, such venom. Luckily, we don't have to read ole Marx himself, because the good Steve Keen has graced us with his explication of how Marx has relegated Say's Law "to the dustbin of the history of economic thought". Meaning tossed the thing in the garbage.

If you don't know what Says' Law is, you can either do a search on this very site for my previous articles about it, or rely on Steve Keen's concise and accurate summary. Yes, Keen understood Say's Law, as did Marx. But they both thought they found a flaw in it.

First, the link to Keen's article:
http://www.debtdeflation.com/blogs/wp-content/uploads/papers/KeenNudgeNudgeWinkWinkSayNoMore.pdf

Now for a short introductory remark. That Say's Law is true even when people are "hoarding" money has been shown very nicely by Hazlitt and Rothbard and Mill, quoted at length in earlier articles here. A search will show you where they are. The point of this article is to show how Steve Keen's article is a total mess, making absurd assumptions and statements. And the point of that is to have fun. 

Now for the gist of his argument: Say was 100% correct in a barter economy, where people make things either to use themselves or to trade for other things. But sadly, with the appearance of money, some people do not make things to use, or to trade for useful objects, but to make more and more money. They make a chair, say, and sell it. They use the money from the sale to make more chairs, and more chairs, and more chairs, all for the goal of having more money to stash under their mattress.

Say assumed explicitly that the goal of making money is to ultimately buy something with it. How naive he was, writes Marx. Say did not understand that there exists a type of person who makes money for its own sake, to just fill his house with gold coins and dollar bills, never to be spent.

You see the problem. This fellow who makes chairs and keeps the cash is basically flooding the market with chairs, and taking little to nothing out of the market in return [except for cash]. If we have enough of these guys doing the same thing, the market will be flooded not only with chairs, but with all kinds of other stuff. Thus a general glut is not only possible, but inevitable, if there are enough of those kind of people around.

Marx and Keen even have a formula to describe this process M->C-> M+. Which means converting Money [M] to Chairs [C] to More Money [M+].

Here's the quote from Marx [get your barf bag ready]:

The expansion of value, which is the objective basis or main-spring of the
circulation M-C-M, becomes his subjective aim, and it is only is so far as the
appropriation of ever more and more wealth in the abstract becomes the sole
motive of his operations, that he functions as a capitalist . . . Use-values must
therefore never be looked upon as the real aim of the capitalist. Neither must the
profit on any single transaction. The restless never-ending process of profit making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange-value, is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser. The never ending augmentation of exchange value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh into circulation. (Marx 1867: 151)

Keen then goes on to explain all the horrors that follow from people not spending all the money they make. The bottom line of all these bad things, what they all lead up to, is "a potential for instability". And what are these dread Horsemen that will bring on the Instability Apocalypse? 

Leading the charge is "speculative overproduction".

Then comes the Profit Twins, namely, "excessive and insufficient expectations of profit".

Neck and neck with the others is "maldistribution of income".

Bringing up the rear is "excessive debt".

And, like the hordes of peasants who always follow the knights on horseback, we have "the whole panoply of macroeconomic issues that believers in Say’s Law cannot comprehend".


And since Say did not understand any of this, Keen concludes that Say did not understand Capitalism. Capitalism, where people exist who hoard money for its own sake. Capitalism, where those hoarders will create a big fat glut of products and sleep on big bags of money.


Here's the quote:
With the presence of a circuit dominated by the desire to accumulate, the
simple harmony of commodity production and consumption (vulnerable only
to disproportionality) gives way to the potential for instability arising from
speculative overproduction, excessive and insufficient expectations of profit,
maldistribution of income, excessive debt, and the whole panoply of
macroeconomic issues that believers in Say’s Law cannot comprehend. Say’s
‘Law’ therefore, is not a recondite insight into the nature of a market
economy, but evidence of a basic failure to comprehend capitalism.


OK. let's take them one at a time.
1. Speculative overproduction. Since the chair maker is interested in making money, and the only way to make money [for him] is to make chairs, he is going to spend day and night in the shop, making chair after chair after chair, hoping he can sell them [=speculating]. But he might make too many chairs [=overproduction].

Foolish Say did not grasp that in a barter economy, the chair maker only wants to make one chair, enough to trade for a pair of pants. He won't make more and more chairs, hoping to trade them for a pair of pants, and a shirt, and a pair of shoes, etc. etc. Nope, he is not a greedy capitalist, and he is content to sit around half naked and barefoot, because there exists no money.

Only in an economy where there is money, only then does the chairmaker get greedy. He still is happy to sit around in a pair of pants only [=underconsumes], but he makes more and more chairs because he wants because he wants cash. Cash, do you hear me? CASH! For its own sake, not to spend.  

Can there be anything more absurd than such a proposition? To think that people in a barter economy have finite limited desires, and only the existence of money makes them want more? Even in a barter economy, that chairmaker will work as hard as he can, because there are plenty of good things to be had.

2. Excessive and insufficient expectations of profit. Keen explains this later on:
Euphoric expectations during a boom may lead capitalists to produce
too much of everything relative to the future ability of the system to finance
their sale at a profit [=excessive expectation of profit] ...while ...depressed expectations during a slump may lead to a self-fulfilling spiral into depression [=insufficient expectations of profit].

In other words, that poor chairmaker, and all his pals, are bound to miscalculate, surely. As Keen puts it...
In an uncertain world, expectations of what and how much to
produce will necessarily be sectorally and in the aggregate incorrect to at
least some degree.

Can anyone really know exactly how many chairs to make, how many suits, how many anything? Of course not. So that either that chairmaker will make too many chairs, or too few. In either case, the balance that Say postulated, that supply and demand are equal by definition, is just wrong.

...whereas exchange in the C-M-C' sphere has its own guarantee of overall balance ,[=Say's Law is true in a barter economy, because then the chairmaker and everyone else knows exactly how many chairs to make always. Not only that, the hens know exactly how many eggs to lay, the cows exactly how much milk to give, the very earth knows exactly how much corn to produce.], no such guarantee exists for exchange done within the M-C-M+ circuit [=where there is money in the economy, then and only then does the chairmaker and everyone else suddenly have no clue how much to make. The glitter of gold and the greenness of dollars makes him and the hens and the cows suddenly not understand what they grasped when there was no money].

I mean, seriously, folks. Who is paying Keen for producing this drivel? What idiots out there think he is saying something of meaning? People are actually linking to his paper, not to mock it, but thinking it somehow refutes Austrian Economics. The mind boggles.

3. Maldistribution of income. In a barter economy, everybody makes their fair share. You work, you make one chair, you trade it for one pair of pants, everything is fairly distributed. But in a capitalist economy, some people are making much more money than they should be. And why? Keen doesn't say. He doesn't say how he knows what the proper amount is that one "should" make. He also doesn't say why only in a money economy do people make more money than they "should".

Now, it could be that Keen is a Marxist and believes in the labor theory of value [=workers are exploited by their employers], as did Marx. If that is the case, then refuting him is beyond the scope of this humble article. There are plenty of books and articles over at mises.org showing how stupid that theory is.

But even if we accept the labor theory of value for the sake of argument, and accept that hiring workers creates a maldistribution of income, it is silly to posit that one can only hire workers in an economy that has money. One can hire workers in a barter economy as well. Duh. So if Say's Law is fine and correct in a barter economy, despite there being workers hired by someone else, it is also correct in a money economy. So if that's what Keen means, he is not being very keen.

But maybe he isn't a Marxist. Maybe he understands that the labor theory of value is silly. Maybe what he means by maldistribution of income is that in a money economy there are bankers, who make money unfairly, charging interest and stuff. Here's the quote that makes me think this:

...a monetary production economy has a triangular relationship
between a seller at one apex, a buyer at another, and a bank at the third that
records the transaction as a debit to the buyer and a credit to the seller, and
charges and pays differential interest.

Here, too, Keen forgets that you don't need money to charge interest. The chairmaker needs wood. He goes to his neighbor who has some trees. the cahirmaker borrows some wood, promising to return it plus 5% more at the end of the year. What's so hard to understand?

4. Excessive debt. He gets this one from Minsky. Here's the quote:

If income is to grow, the financial markets, where the various plans to save and
invest are reconciled, must generate an aggregate demand that, aside from brief
intervals, is ever rising. For real aggregate demand to be increasing, . . . it is
necessary that current spending plans, summed over all sectors, be greater than
current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1963 [1982]: 6)

Well, I guess we can't blame Keen for swallowing Keynes' nonsense. Whole generations have been brainwashed into thinking that a country gets richer by going into debt, as opposed to by increasing production. But again, this is as true [or false] of a barter economy as it is of a money economy.

Bottom line, if Say's Law is true in a barter economy, which Keen grants, nothing has changed by having money in the economy. At least none of the four things Keen mentioned.

Here's my answer to the obvious question, "What was he thinking?" Marx and Keen and all the leftists look around and see that businessmen have more money than they do. How did they get the money? By going into business. Ergo, business is a bad thing, and money is a bad thing. Since Say's Law being false means bad things happen, Say's Law must be false in an economy with money and businessmen. Or something like that.