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Peter Schiff - Trickle Up Economics

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June 22, 2012 – Comments (51)

The political left wing has long tried to cast doubt on the fairness, and even the efficacy, of free market capitalism by branding it as a “trickle down” system.  This epithet is meant to show how the middle and lower classes are dependent on scraps of wealth that happen to fall from the buffet table of the rich. This characterization of an unfair and inefficient system has helped them demonize policies that lower taxes (if they also extend to the wealthy) and reduce regulation on business. 

To correct these supposed problems, they have long called for policies to redistribute wealth or for government to inject funds directly into the economy.  Either mechanism puts money into the hands of everyday consumers who they claim to be the true engines of economic growth. They believe that consumer spending lies at the root of the economic pyramid. When people spend,business owners are able to sell more products, hire more workers, and reap more profits. In essence,they believe in a system of “trickle up” economics, whereby prosperity flows upward from government into the lower and middle classes and ultimately to the upper class.

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51 Comments – Post Your Own

#1) On June 22, 2012 at 7:33 PM, outoffocus (23.09) wrote:

The "trickle down" and "trickle up" people both have it wrong and by the time they figure it out the US will all ready be up s***s creek without a paddle.

America's economy is dying because of its declining middle class.  I could leave it right there but I'm sure people will want an explanation. 

Trickle-down effect: Trickle down effect is flawed because the rich are savers.  Period. Once they reach a certain point their only real concern is wealth preservation. Yes they may invest in "riskier" assets from time to time but they will only do it with a small percentage of their capital.  But for the most part they are going to stick with tried and true investments (well established business and politics).  So depending on the rich to save the economy is useless.

Trickle up effect. The problem with the trickle up effect is poor people will aways spend money.  Most poor people do not have enough cushion to save so they spend whatever they get.  The problem is their spending doesnt go into investment into the economy.  Most of the time it goes right back to the rich people.  So if you give the poor a bunch of money, they are just going to spend in the place that advertised to the most.  In most cases those are big business.  Hence the money ends up right back in the "evil rich's" hands. 

The middle class: The middle class tends to have both money to save and spend.  In most cases they are in the best position to start new business which keeps the economy thriving (old business die, new businesses start).   If you look at some of the richest people today, you will notice they started off in either middle to upper middle class homes.  The problem is the "trickle up" and "trickle down" politicians have collectively been sucking the middle class dry with policies that only help either the rich or the poor.   In the meantime they are killing the goose that laid the golden egg with honerous taxes, regulations (that create barriers to entry for entreprenuers), bad monetary policy, bailouts, and TBTF. 

If you look at history at any society that had a huge gap between rich and poor, you will see huge social unrest.  If we continue down the path we're going then we are going to see it here. I would argue that it has already begun.

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#2) On June 22, 2012 at 11:30 PM, awallejr (81.55) wrote:

Sadly I think outoffocus might be right.  The US changed the day President Clinton signed the law that repealed Glass-Steagall.  It changed the rules of the game.  It enabled a small minority to amass greater wealth while squeezing out the vast majority.  We were stolen blind.  And despite this how many arrests happened under Obama? 

They got away with it.  I said appoint Eliot Spitzer head of the SEC.  Who cares that he had sex with a hooker in NY instead of Nevada. I mean really?  Sex is bad but ripping off the country blind isn't? He was a prosecuting shark and many that deserve to be behind bars actually might be.

There needs to be a third party.  A REAL party of the people, by the people, for the people.  Because right now we don't have that.  We have 2 parties each being bought by special interest groups.

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#3) On June 23, 2012 at 12:36 AM, somrh (86.39) wrote:

I think this sums up why I think Schiff is wrong on this one:

Income Inequality and Current Account Imbalances

IOW, savings <> investment (unless you define "savings" in a way that makes it equal to investment but then the excess income the rich have is not being "saved"). The end result of the income inequality is debt slavery for lower income earners. And that's how it trickles down. 

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#4) On June 23, 2012 at 12:44 AM, HarryCarysGhost (99.68) wrote:

awallejr

Why are you saddend?

What OOF said was clearly predictible.

I would add that Regan signing NAFTA also led to the downfall.

Bottom line is we got F*cked.

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#5) On June 23, 2012 at 12:47 AM, somrh (86.39) wrote:

I should just say that he may be right on the idea that income redistribution is not the best means for dealing with income inequality. I have no idea (the above paper discusses a few alternatives and the problems each have). What I do know is that the sort of investment that Schiff is advocating here is not what the rich are doing. (I'm presuming that financing a consumer purchase of a large screen tv is not "investment" in Schiff's sense.)

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#6) On June 23, 2012 at 3:45 AM, anathestalker (58.02) wrote:

There is a serious mixture of analogies and misuse of examples in the article. Copule of peculier things I noticed in this article.

First, The writter confuses the process of "Creativity/ Invention or Discovery" with  the process and logistics of "Supply". These two processes are not mutually inclusive of one another. One is can exist with out the other. Supply is a process of logistics. Creation/ or invention are ideas that come in to fruition though naturally induced nessessities or forced proceses.

Secondly, the article uses arguiments and examples that conclude in final proposal fly over its main assertion in that it unknowingly gives examples that are designed to support for the exact opposite point of view. This is wierd because the main idea; that Supply is the main "igniter" of economic growth. The contradictuion comes when the article admits that the "Demand" is the igniting and pertinent ingredient nessesary to spur Supply when it states that demand "always exists" which implies that there is or should be a demand first prior to the supply comes in to being.  

So, lets take the example of the Cell Phone Industry which was used as an example here...the article states that "21st century Americans are no more desirous of cell phones than their parents were" which is true, we always wanted cellphones. But it goes on to say that the "Supply" of the cheaper cellphones "Satisfied the Demand"... What???? First of all, what is the assumption here? Which came first, the supply?? I THINK NOT!

Here, the writer allocates the invention/or creation which led to the mass producing of cheper cellphones to "SUPPLY" which does not really describe what actually happened accurately. The fact is it is not the Supply that satisfied the demand but the invention and creation of new technology.. chips and such. Based on this flawed prmese, the article goes on to conclude in a very intelctual dishonest fashion that Supply of the cheaper phone was the ingrdient that spured the growth of the cell phone industry. This couldn't be farther from the truth. We all know cell it was invention of mass producing them that satisfied the demand. "Supply" is just a process of logistics. And demand was the main igniter for invention or what caused the recognition of its value. In short Demand is the initial spark. Not supply.

The fact is, there was a tremendous demand for cell phones ever since humans existed. We just didn't know there was a way. The "Creative"/ity part comes in here. When the first person who stumbled or discovered that there is a way to communicate with out physically walking up to some one or sending telegrams recognized its value because there was demand first. So the article stumbles all over itself in order to justify its premise by spauting bad examples under false premises.

But I must say the makes sense when I first read it because of the fact it is using the correct arguiment (that Demand is the main ingredient to spur growth), but the twist is that the article final asserton is actually the opposite (that Supply is the main ingredient to spur growth). One can easily be tricked in to believing the what the article is proposing is sound provable science but it's mostly subjective mumbo jumbo. Good read though! 

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#7) On June 23, 2012 at 7:42 AM, foolishforwine (< 20) wrote:

Peter Schiff is normally a pretty bright guy, but he is just plain wrong here. Desire is not the same as demand. Consumers  may desire goods and services, but if they don't have any money to buy them, there will be no demand. Businesses, by and large, will not invest in production and jobs to create goods and services unless they see that there will be a demand for such goods and services. (As we Fools know, stagnant and growing inventories of finished goods are not a welcome part of a business!) Businesses are currently awash in cash, and borrowing costs are at all time lows - the supply of capital to invest is enormous. Yet, are they investing? No, because there is no demand and they don't foresee any demand in the near future.

Much of the greatness of the post-WWII economy in the US is due to the fact that the profits derived from innovation and increases in productivity were shared up and down the wage scale - from factory workers up to top management. Workers and low-level management had increasingly more money to spend, and they did - reinvesting that money back into their local economy, creating more demand and keeping the cycle of economic growth going. This is what made the US economy so dynamic in the 30 years following WWII. Schiff is wrong to dismiss this, and he gives no credible reason for doing so.

In the last 30 years we have seen a massive redistribution of wealth upwards to the very wealthy. Lower and middle class folks were able to keep spending only by borrowing. That has essentially come to an end, and we are seeing the economic consequences of this now, over the past 4 years. Fairness aside - the tax, regulatory and management policies, in conjunction the inevitable effects of automation, that have led to the evisceration of the middle class have dire consequences for our economy, and it is hard to see how our economy can recover without finding some way to rebuild the middle class. Cell phones may have gotten cheaper in the past 20 years, but energy, your average house, car, television and meal have not.

Schiff's inability to distinguish "supply" from "innovation/creativity" is nicely outlined by others above.

 It is not for nothing that Krugman has a Nobel Prize. He would demolish Schiff in a debate on this topic.

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#8) On June 23, 2012 at 8:08 AM, whereaminow (20.23) wrote:

I hate to break it to our Keynesian commentors, but Supply must precede Demand. This is a basic law of economics.  Discussing and debating it is fine, but to overturn it you will also have to overturn all economic theory (keynesian or othewise) since they are all built from this assumption.

Humans have a general desire to increase their satisfaction. Do not confuse this with a desire for a specific economic good which does not yet exist.  It's impossible for a human to desire something that they do not even know about.  They have a general desire to increase their satisfaction.

Once goods are brought to the market (supplied), then consumers decide if these goods satisfy their most urgent wants at the price offered.  This is when general desire turns into specific demand.  

It is in response to this specific demand that moves prices for the produced good and all higher order goods used in making the end product.

Supply ALWAYS precedes demand for economic goods.  General desire to increase satisfaction always exists.  Do not confuse the two. 

David in Liberty

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#9) On June 23, 2012 at 9:00 AM, ETFsRule (99.94) wrote:

"The political left wing has long tried to cast doubt on the fairness, and even the efficacy, of free market capitalism by branding it as a “trickle down” system."

That is the worst explanation I have ever seen... it sounds like Schiff doesn't even know what "trickle down" refers to.

The political left has never referred to "free market capitalism" as a "trickle down" system.

"Trickle down economics" refers to tax breaks and other benefits from the government, that are specifically provided to wealthy individuals and corporations.

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#10) On June 23, 2012 at 11:03 AM, anathestalker (58.02) wrote:

This is pretty sad some ppl let the theories that has been once installed in them by the school system or books or even by cetain so called expert commentators coud their god given common sense. Labeling others as Kensian or Austrian really lumps not the labled person but the labeler. Real life is not as you were taught or read about. Economics in not an exact sicence. Its all estimation and derivations. Please get it right ppl.

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#11) On June 23, 2012 at 1:46 PM, awallejr (81.55) wrote:

Once goods are brought to the market (supplied), then consumers decide if these goods satisfy their most urgent wants at the price offered.  This is when general desire turns into specific demand.

Except you are discounting the producer making the goods as a result of polled desire.  Companies do this all the time with their taste testing for example.  No producer wants to create a bunch of supply that no one wants.  And while yes supply precedes demand satisfaction, demand/desire for certain new products certainly can and does precede eventual supply.  Simple examples like people wanting air conditioning in their cars before it was offered, or pre-packaged sliced bread.

But what annoys me is Schiff assuming that job creation depends upon the wealthy, when point in fact it doesn't.  Aside from moronic ballplayers and entertainers, the wealthy are more concerned with capital preservation.  Some will gamble on inventions or projects but it is the average joe who takes out loans on his house to sponsor his start up company that in the end creates the bulk of the jobs.  Google, Microsoft, Apple, Facebook all started by a couple guys with little in their pockets.  Eventually the venture capitalists and banks come into the picture to fund expansion and growth.  But your Rockerfeller heirs are too busy skiing in Colorado or having brunch in Paris to be bothered with that. 

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#12) On June 23, 2012 at 2:16 PM, anathestalker (58.02) wrote:

We need to emphasize on teaching more Critical Analysis and how to use it to navigate in the real world in our schools. Otherwise we  would be run over by people like Peter Schiff who can garner a fair amount of dull support to do damage.  

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#13) On June 23, 2012 at 2:35 PM, totallyoblivious (30.10) wrote:

From the article "The savings of the rich forms the capital that funds business investment which increases productivity." is really his central thesis, and it is patently false.

The primary goal of the rich is to preserve and grow their wealth, and they're doing this mostly by investing in low beta stocks, bonds, and real estate.  This does absolutely nothing to fund businesses.  There are exceptions, of course, especially in the tech industry where you see many people who got in early in a successful company leave to form their own, which generally requires assistance from venture capital.  But the rich are not throwing a large percentage of of their assets into such new risky ventures like this, just enough that they'll benefit nicely if the investment goes well but won't have any risk to their real wealth.  Schiff and the Republican party in general want people to believe that the wealthy are allocating the majority of their assets in a way that actually funds businesses, but it simply isn't true.

I'm strongly in favor of those who actually produce benefitting greatly from their productiveness.  The problem is old money, and this is where the real wealth is concentrated.  This not being allocated in any way which grows the economy, and often is in the hands of people who have done absolutely nothing to earn it aside from being a member of the lucky sperm club.  Estate taxes and gift taxes need to be at very high levels and strictly enforced; no loopholes allowed.  This passing on of wealth to generation after generation is the biggest flaw in the system, and needs to be fixed.

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#14) On June 23, 2012 at 3:31 PM, Chuck2010 (< 20) wrote:

Its been a long time since anyone who works for a living has shared in productivity gains. those rewards all seemed to go to the top right before they just shipped those same jobs to asia. 

the wealthy dont really have as much of their wealth tied to the stock market either. as a percent of their wealth it is typically not more than 20-30%. its the middle class getting clobbered everytime their 50% or more of their wealth held in 401K's and IRA's gets whacked in a market meltdown.

the commenter suggesting supply precedes demand is not correct about that. no businesses are building inventory now to meet any demand even though they are sitting on record levels of cash. in fact, CEO's polled recently are holding off on hiring waiting for demand to show some strength which will obviously be hurt by them not hiring. 

maybe Schiff could give Krugman a call and get an economics lesson or two or three.

 

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#15) On June 23, 2012 at 3:33 PM, somrh (86.39) wrote:

 whereiaminow wrote:

"I hate to break it to our Keynesian commentors, but Supply must precede Demand. This is a basic law of economics.  Discussing and debating it is fine, but to overturn it you will also have to overturn all economic theory (keynesian or othewise) since they are all built from this assumption."

I wasn't aware of this being a "law of economics"; I've always understood the neoclassical model as supposing supply/demand to be independent of each other (e.g., you can draw a supply curve that in no way depends upon a demand curve). If you want to suggest that neither curve exists until the good in question exists, I'm fine with that but that isn't saying the same thing. 

But I believe on that note, it already has been overturned. See Steve Keen's lectures on behavioral finance (I think lectures 01 and 02 cover supply/demand curves) or his book Debunking Economics.

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#16) On June 23, 2012 at 4:24 PM, whereaminow (20.23) wrote:

awallejr,

You have this argument and Peter Schiff. He does not assume that job creation comes from the rich.  He believes that job creation comes through SAVINGS.  You only need to read his book on this very subject "How an Economy Grows and Why It Crashes" to know this.  

If in his writings or speakings on TV, being a "celebrity" of sorts, his message gets confused as "rich people create jobs", that his fault for being clearer in communication.  But there's no doubt what he believes. 

You are also wrong on economic theory. I couldn't be any more clear.  Not even JM Keynes would disagree with what I said.  Only the Post-Keynesians believe that a lack of AGGREGATE demand - collectivist statistic - explains the failure of the market to reach the equilibrium price.  Keynes believed that the Paradox of Thrift and Sticky Wages were primarily responsible. Nowhere that I am aware of did he ever write that demand precedes supply.

Except you are discounting the producer making the goods as a result of polled desire.

No, I'm not. Polling people on their general desires and producing a specific economic good are two different things.  If all it took to make a successful product in this world was to run a focus group, businesses would never make miscalculations in judging consumer demand.

There is no poll that can tell a producer what will sell and at what price.  At best it can give them a vague idea of the consumers value scale at that point in time based on the limited choices in the poll.  But value scales are always changing, and the poll is essentially meaningless immediately after it's taken.

Entrepreneurs do not have to understand economic theory in order to be successful.  But a few do, and they do just fine without wasting their time on polls.

Demand is an economic term for a good that must be economized and is desired to be used fulfulling a most urgent want.  Nothing in a poll can explain that, because nothing in a poll needs to be economized. It's a hypothetical exercise into what a consumer might buy.  It may be even be useful sometimes.  But it has nothing to with economizing to satisfy wants.  No one is doing any economizing.  Those decisions can only be seen in exchange.

David in Liberty 

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#17) On June 23, 2012 at 4:28 PM, whereaminow (20.23) wrote:

somrh,

 I wasn't aware of this being a "law of economics";

Well now you are. It is. ALL economic theory.  Only post Keynesian macro-econometrics attempts to skirt around the issue by referring to aggregate demand as some different force. But even in their micro classes, they'll concede that Supply precedes Demand.

David in Liberty

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#18) On June 23, 2012 at 4:51 PM, whereaminow (20.23) wrote:

ETFsRule,

I actually agree with you. Trickle Down was coined by Supply Side economists such as Art Laffer.  Peter knows this, since Laffer still owes him money in their housing bubble bet.

If the term is used at all by the Left today, it is to mock Reaganite Republicans.

David in Liberty

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#19) On June 23, 2012 at 6:07 PM, whereaminow (20.23) wrote:

Finally, let me clear up another economic fallacy I see in the comments above.

Business owners do not speculate on an increase in demand.  That is an economic fallacy created by lazy journalists who do not understand basic economics and shortcut their way to catchy headlines.

If a capitalist is investing in inventory by sitting on it even though it does not move at the current price, he is speculating on higher prices in the future.  The reason for this speculation could be multifold, but the most common reasons are 1) expected future restriction of supply via government intervention - often lobbied for by the capitalist himself or 2) higher prices resulting from an increased money stock.

If a capitalist actually wanted an increase in demand, all he needs to do is lower his price.  The lower price will spur an increase in the quantity demanded by shifting the demand schedule.

So what you have today is not a lack of demand. You have a problem of price, mainly that entrepreneurs and capitalists failed to predict the price to obtained for the goods they produced.

How this ended up in a general boom that must crash, or better yet, why didn't market equilibrating forces reign in the misguided production before it became a general boom, is a story that mainstream economics cannot tell you. But that is another blog :)

David in Liberty

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#20) On June 23, 2012 at 6:22 PM, somrh (86.39) wrote:

whereaminow wrote:

"Well now you are."

Not really. You haven't explained yourself. I don't know what you mean.Allow me to elaborate.

What I take to be meant by "supply" or "demand" is a functional relationship between price and quantity (where quantity is typically treated as the dependent variable even though it's typically shown contra-convention on the horizontal axis.) Given a specified price for a particular product, the demand (supply) function tells you what quantity a buyer (seller) will desire to buy (sell). (Note: no where here am I introducing aggregate demand.) 

Given that definition, I can only assume that "supply precedes demand" means that the demand function can only be specified given a supply function. I've never seen anyone claim that.

I realize my definitions may differ from yours but you haven't specified what you mean (and to the extent you have, it's been quite confusing). Consider this, you said:

"Demand is an economic term for a good that must be economized and is desired to be used fulfulling a most urgent want."

I don't know what you want to say here. Logically you're saying DEMAND is A GOOD (with some specifying qualities). I don't think that's what you mean to say but I don't know what you mean.I think you mean to say that we talk about demand for a good not that it is a good. But that suggests something more akin to the definition of mine above: the amount of a specified good desired at a specified price. 

As for "supply", I suspect you mean something like "quantity of a specified good available for sale" (also known as inventory) but you'd have to elaborate. I'm used to seeing supply defined as the entire funcitonal relationship. See wiki for example:

supply is the amount of some product producers are willing and able to sell at a given price all other factors being held constant.

Or investopedia:

A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.

One sense of the above definition can be interpreted as supply=inventory. The other sense (especially the second sentence) suggests the functional relationship which I already mentioned.  The problem as I see it is that the way (I suspect) you're defining your terms sidesteps the entire discussion that Schiff is concerned with. Of course one has to produce a good before it is sold (if that's what you mean by "supply precedes demand" then I'll agree with your assertion but consider it trivial). But the reality is that businesses refrain from producing (hence, refrain from hiring workers) if they perceive that they won't be able to fetch a good price for their product and are unwilling to lower prices for the sake of output.  None of this needs investment of course (the business may already have the invested capital in place.)

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#21) On June 23, 2012 at 6:49 PM, somrh (86.39) wrote:

whereaminow wrote:

" If a capitalist actually wanted an increase in demand, all he needs to do is lower his price.  The lower price will spur an increase in the quantity demanded by shifting the demand schedule."

Huh? That wouldn't be an increase in demand/shift in the demand schedule. That might be a shift in the supply schedule (if that's what you meant to say). 

"So what you have today is not a lack of demand. You have a problem of price, mainly that entrepreneurs and capitalists failed to predict the price to obtained for the goods they produced."

That may be the case for present inventory but not future production (which is what is relevant for labor.) If a company has too much inventory on hand they may lower prices even to the extent of selling below the cost of the goods if it's economically sensible. But if price levels remain that low, the business can simply choose to not produce more goods until prices are adequate to give them a good markup over cost. They have no obligation to simply lower prices indefinitely. Some businesses will choose to accept lower output instead of price concessions. I suspect part of this simply has to do with getting an adequate return on capital (one that's at least as high as cost of capital). Otherwise they might as well just get out of the business they are in and do something else.

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#22) On June 23, 2012 at 6:53 PM, whereaminow (20.23) wrote:

somrh,

Given that definition, I can only assume that "supply precedes demand" means that the demand function can only be specified given a supply function. I've never seen anyone claim that. 

And that would be absolutely correct. You can draw and speculate on demand "functions" to your heart's content.  But the graphs depict demand  of a product already in existence.  If the product did not exist, there would be no demand for it.

Economics is the study of using means to satisfy wants through exchange. It is the act of economizing. You cannot economize something that does not exist.

Of course one has to produce a good before it is sold (if that's what you mean by "supply precedes demand" then I'll agree with your assertion but consider it trivial).

If it were indeed trivial, there wouldn't be so much confusing surrounding it, nor would a half dozen commentors hop on this thread to criticize Schiff for relating basic economics.

But the reality is that businesses refrain from producing (hence, refrain from hiring workers) if they perceive that they won't be able to fetch a good price for their product and are unwilling to lower prices for the sake of output.

And therefore, the problem isn't a lack of demand. It's a pricing problem caused by incorrect forecasting. They could increase demand simply by lowering their price. As I explained above, for whatever reason - as good or bad as those reasons may be - they are investing in inventory because they are speculating on higher prices down the road. 

Schiff's point was that printing money and giving it to consumers (or more likely, crony capitalists and banksters) does nothing to solve this problem.  Nor does any redistribution of wealth. It merely transfers the property - the object of human action - from one person to another.  Doing so further wrecks the pricing system and takes us away from equilibrium.  We don't find that to be helpful.

David in Liberty

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#23) On June 23, 2012 at 7:23 PM, somrh (86.39) wrote:

whereaminow wrote:

"If it were indeed trivial, there wouldn't be so much confusing surrounding it, nor would a half dozen commentors hop on this thread to criticize Schiff for relating basic economics."

The confusion is that there is two distinct meanings being given. Your choice to define "supply=inventory" is, imo, an uninformative way of framing the problems raised. I've pointed out that the definition I provided above (which doesn't imply "supply precedes demand") is also an accepted definition in economics. So it's not basic economics. 

Schiff's point was that printing money and giving it to consumers (or more likely, crony capitalists and banksters) does nothing to solve this problem.  Nor does any redistribution of wealth. It merely transfers the property - the object of human action - from one person to another.  Doing so further wrecks the pricing system and takes us away from equilibrium.  We don't find that to be helpful. 

Actually it can address the problem in this sense. Let's suppose that a business (as I specified in the previous post) wants to sell a product at no less than P. An increase in price levels will cause P to be worth less than it was previously and therefore, would be a real decrease in prices (though not nominal). 

I do agree with you that giving the money to banks under the guise that they will loan this money out is naive (perhaps for different reasons than you and Schiff, I don't know.) But giving money to consumers will result in some of that money purchasing goods and services (increase in demand in the neoclassical lingo) and some of that money will be used to dispel debt (thereby increasing the amount of income available for spending in the future). In other words, it can help an overindebtedness problem. 

The problem is that debt is typically denominated in nominal terms. If prices decline (deflation) then the real value of the debt actually increases. So when you have too much debt and prices are lowered, you end up with debt deflation (Fisher).

I suspect you and I (and Schiff) agree that the real solution is to not accumulate so much debt in the first place.  Where we probably differ is how to address the problem now that it's here. Inflation is a way to cause the real value of debt to shrink. Whether or not it's the "right" way or "best" way is up for debate. And the way inflation actually hits may not show up in workers wages, it may effect the prices of different assets and goods differently. 

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#24) On June 23, 2012 at 7:24 PM, awallejr (81.55) wrote:

whereaminow

I hope we aren't really engaging in semantics but a guy calls up Snapple asking them to make a specific drink (demand first) and then after he hangs up supply is there.  This goes on all the time (well not as fast as in that snapple commercial).  As stated before, customers buying a car and then demanding certain changes (like putting in air conditioners or radios, etc).  That is demand asking for the supply.  Now if you are talking about discovering price equilibrium that is another story.

And as to Schiff I quote him from the link: "The savings of the rich forms the capital that funds business investment which increases productivity."

Seems kind of clear that he attributes the rich as the ultimate force when in fact it is not true.  That totally ignores the pooled funds of the average joe.  Municpal Credit Unions, regional banks, public and private pension funds.  These are all sources of capital.  But it is the average joe who takes an idea, shoulders the risk acting on that idea and hopefully builds a company that eventually grows creating jobs. Google, Apple, Microsoft, Facebook, etc.

Civil discussion for a change ;p

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#25) On June 23, 2012 at 8:23 PM, anathestalker (58.02) wrote:

whereiminnow,

"If the product did not exist, there would be no demand for it" 

This is a wrong assumtion. Perhaps this is where you & Peter went array in your theories .. 

Consider this example.. Do we have a shuttle service to take us to the Moon? how about to Mars? 

Now does it mean there is NO demand for it since the service technically does not exist? 

You'd probably say that there IS no demand for it, but that would be wrong Jack! Because there is a demand for this even though it doesn't exist. As a matter if fact there are engineers working on this constantly for years because there is a demand out there even though the service does not exist. As a matter of fact a private company had just made the first successful private launch,  docking and safely rerturn of a ship just this past year. It is heralded as a "Significant step to space travel". 

So.. let me ask you this.. do you still believe your class room theory applies here?

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#26) On June 23, 2012 at 8:30 PM, whereaminow (20.23) wrote:

anathestalker,

Now does it mean there is NO demand for it since the service technically does not exist?

Yes, economically speaking, it means there is NO demand for it. Demand is for specific economic goods. They need to be economized. Hence the term ECONOMICS.

It's not about make believe fantasies. It's about real goods used in their most valuable ends.

I'm sorry. You're plain wrong.  This is economics.  What you are talking about is not economics. Plain and simple.

  do you still believe your class room theory applies here?

The theories of Ludwig von Mises and the Austrian School, to which Peter and I belong, are NOT allowed in classrooms. 

But the Austrian School predicted the housing crash. So yeah, I would say their theories apply here.

David in Liberty

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#27) On June 23, 2012 at 8:38 PM, whereaminow (20.23) wrote:

awallejr,

I won't go so far as to say that the non-exchange interactions between suppliers and their customers don't matter. I'm only saying that economically speaking, the best they can do is give a snapshot of an individual consumers' value scale at a point in time. And that value is even further limited by the fact that not all will be truthful / aware of their own value scales until the "money is on the line" so to speak.

"The savings of the rich forms the capital that funds business investment which increases productivity." - Schiff

That's true but I admit it's misleading. He's talking about the capital goods - the plants and machinery that are used to produce - not your run-of-the-mill entrepreneur trying to create something in social media.

So while what he says is true in that sense, it doesn't tell the whole picture.

The full point I would make is that savings can best be defined - I think - as abstaining from consumption. That doesn't necessarily mean piling up ounces of shiny gold coins, although that is one very easy way to save. It could mean quitting Harvard, moving to an apartment in California, and working countless hours with a few associates to create Facebook. Certainly those young kids restricted their consumption.

David in Liberty

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#28) On June 23, 2012 at 8:40 PM, whereaminow (20.23) wrote:

somrh,

I suspect you and I (and Schiff) agree that the real solution is to not accumulate so much debt in the first place.  Where we probably differ is how to address the problem now that it's here. Inflation is a way to cause the real value of debt to shrink

That's pretty much perfect. So I'll stop since I think that would lead us to blogs written and to be written...

David in Liberty

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#29) On June 23, 2012 at 10:29 PM, CaptainWidget (61.81) wrote:

I'm sorry. Can someone explain how the rich saving money prevents the poor from attaining money? This is likely the biggest fallacy that exists in the modern discussion of wealth. 

 

Savings of the rich=loans for the poor 

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#30) On June 24, 2012 at 1:45 AM, awallejr (81.55) wrote:

 whereaminow

I'm only saying that economically speaking, the best they can do is give a snapshot of an individual consumers' value scale at a point in time. And that value is even further limited by the fact that not all will be truthful / aware of their own value scales until the "money is on the line" so to speak.

I will admit that I do not understand this comment so will move on except to acknowledge that people may "lie" although on the other hand they may not be.  "Money on the line" only would matter if the price to meet the requested item is simply too expensive.  But then again it may not be.  Hence demand could precede supply.

As for Schiff

He's talking about the capital goods - the plants and machinery that are used to produce - not your run-of-the-mill entrepreneur trying to create something in social media.

Why only the rich?  I just listed several alternatives that can supply the capital for plants and machinery.  The rich investing in Tbills aren't building those plants and machinery.  It is nothing but a con.  A con by the rich trying to dupe the rest that they are the ones creating jobs (when in fact they aren't) and that therefore keep their taxes low.

Well guess what, the Kudlowites are screaming how poorly the economy is growing YET the Bush tax rates have been maintained by Obama. If keeping low taxes on the rich is imperative why did we endure the greatest recession in history and why hasn't there been a V shaped recovery while we maintained low tax rates on the rich?  The answer is simple, they are full of sh*t. 

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#31) On June 24, 2012 at 11:55 AM, amassafortune (29.49) wrote:

True wealth creators do deserve an extention of the Bush tax breaks to reward them for their effort and to help them continue the process of adding jobs or improving our quality of life.

The problem with the Republicans' stance is that it too simply equates high income with wealth creation. Endeavors like high-interest payday loans may generate high incomes for owners, but the public benefit of their service is suspect. 

Technology exists that allows us to better-identify those who deserve the tax break extention. Similar to the way any online comment section ranks worthy posts, people could nominate or individuals could self-nominate for the wealth creator tax break status. Up and down votes with comments enabled would rank the entire nominated pool.

Maybe the cut-off would be the top 50% of the population with a net positive score that gets the tax break, but results over time would indicate the appropriate cut-off that rewards true wealth creation that includes a public benefit. 

In the case of a university president making $700K, the nomination justification comment may cite all the developed minds they help add to society. Counter arguments might include tuition that ran 200% above inflation for the past decade, or evidence that students graduate with debt levels that consume 10% more of their lifetime earnings than under the previous president.

Head of the BLS making high six figures to post spun employment numbers that are already tracked by several private-sector sources? Probably no wealth creation tax break.

Head of a third-generation blacktop company who just cracked the $250K income mark, employs only U.S.-eligible workers, and just added an employee health care stipend even though a full health plan is not yet affordable to the company? Yes, probably.

Someone like Richard Branson, if he has taxable U.S. income, would probably pass this public wealth creator sniff text.

Paul Ryan would give the largest private tobacco farmer in the U.S. the tax break. The online nomination method probably would not.

Paul Ryan himself? Romney? Buffett? Apple execs? Limbaugh? Howard Stern? I'm not sure, but predict there will be many comments.

Morgan Freeman? Yes. Clooney, Yes. Mel Gibson, maybe not so much. Pete Rose... even God says it's too close. Some winners will be based on popularity, but some winners are already chosen that way. 

Those who get the wealth creator tax break should be wealth creators, not just people with high incomes.

 We are at a technological point where much public policy can be more effectively managed, in efficiency terms and outcome, by the general public. This is one reason the Fed, Congress, lobby groups, large banks, and political parties are scrambling to consolidate and centralize. Many people holding historically representative positions can be replaced today by technology. We no longer need reps to abandon their farms and smithing businesses to ride a horse for a month to meet and vote on our behalf. We can do it ourselves in our pajamas.    

This proposed site may already exist. If not, maybe it would be a worthy Fool addition. 

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#32) On June 24, 2012 at 2:32 PM, whereaminow (20.23) wrote:

awallejr,

A good discussion. I think you're right to criticize Schiff's class warfare wording in this post. I'm guessing he's playing to the crowd a bit, since he's been consistently critical of liberal redistribution, particularly Occupy (there is a great video of him at Occupy talking to the protestors).  But I can't see inside his head, so I won't defend that tactic any further. Libertarians such as myself view class warfare as a battle between those who use the power of the State to enrich themselves at others' expense, and those who get robbed by the State to provide that enrichment.  Both rich and poor can fall in either category.

My main goal here was to point out that he's correct in his economic analysis of supply and demand. I feel I've said all I can for now.

Thanks,

David in Liberty

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#33) On June 24, 2012 at 7:32 PM, anathestalker (58.02) wrote:

whereiamnow

Your answer regarding the "Space Shuttle" only indicates how your theory does not take everything in realiy in to account. You just simply rejected the fact that the demad for space travel actually exists. This is the main flaw with your theory. However, it should be noted that, your own buddy Peter admits that Demand always exists (I think this is a hedge if you ask me) which is why his arguments were more sound; albeit drew wrong conclusions.     

The fact remainis that there is a Deman for that service guy! You are denieing it exists b/c it doesn't fit in to your therical framework.

IF this isn't classroom economics, I don't know what else to tell you.  

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#34) On June 24, 2012 at 10:14 PM, whereaminow (20.23) wrote:

^ Either you didn't read my comments or you don't understand them. Either way, thanks for the discussion.

David in Liberty 

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#35) On June 25, 2012 at 11:18 AM, anathestalker (58.02) wrote:

whereaminow.

Calling it fantasy when you can clearly see that it is a genuine demand is not an answer.

The theory you subscribe to sets the parameters of what should be examined and what should be left out. What variables it leaves out leads you the subscriber to sound as subscribers such as yourself not understand reality but assume they do in their minds. And you call my question fantasy??

Anyways, you are welcome.  I did not mean to ramble on. I start out with the intention of  simple one line sentence and I end up wrting paragrahs. ..) 

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#36) On June 25, 2012 at 7:43 PM, somrh (86.39) wrote:

whereaminow:

Let me put give a sort of defiinition of "demand" that I think you would accept and would also invalidate Schiff's claim. This doesn't depend in any way on "aggregate demand" nor any beliefs about a "demand curve" and how it behaves (the Keen videos/literature from post 15 points to evidence that the demand curve doesn't behave the way economics theory tells you they do.)

Let's suppose we have Widgets Inc that produces Widgets. In order to produce a widget, they have to order materials from a supplier and then it goes through various processes which end in a final product. The time it takes from start to finish is the lead time. 

Let's make this entirely concrete. Let's suppose that the lead time T=1 year. Let's suppose that the Widget Inc has current inventory of I = 100 widgets. 

Now Widget Inc needs to assess how many widgets they will need in one years time. In other words, they need to assess how many widgets they will sell one year from now. Let's suppose that they expect to sell 1000 widgets one year from now. I contend that this is Widget Inc's estimation of what Demand will be for widgets one year from now. 

As a result, Widget Inc needs to produce at least 900 more widgets (they may produce more, say 1000, to keep an inventory buffer). 

So the amount of widgets actually sold will be:

Starting Inventory + Widgets Produced over the period - Ending Inventory 

or said alternatively

Widgets produced - Change in inventory

I suggest that Current Inventory + Produced Widgets is the same as Supply of widgets, in your sense of the word. 

Now I contend that Widget Inc's expectation of future demand for widgets plays a causal role in determining whether or not Widget Inc will choose to produce widgets and how many they will produce. In other words, what determines whether or not Widget Inc hires (more) workers to produce widgets depends upon the expectation of demand for widgets.

So if we acknowledge that "supply" is at least related to actually goods produced and that actual goods produced is determined by a business' expectations of actual demand for the product, then that establishes a relationship between demand and supply that Schiff argument fails to address. And it's precisely that relationship which is what economists who advocate "stimulating" demand are attempting to accomplish.

Initially this post was twice as long but I chose to snip the rest.

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#37) On June 26, 2012 at 10:25 AM, whereaminow (20.23) wrote:

And it's precisely that relationship which is what economists who advocate "stimulating" demand are attempting to accomplish.

Your analysis works perfectly fine up until this sentence. It's not up to economists to stimulate demand. It's up to producers. Economics would like to stimulate demand. They would like plan and run the economy. But once they do that, they cease being economists and become central planners/bureaucrats.  F.A. Hayek called this term "The Fatal Conceit" - the deep seated belief of economists that they can know things that are unknowable.

One of those unknowable things is where the goods in question rank on the subjective value scales of prospective buyers.  We all want to "change the world" but economists try to do that by taking shortcuts (a utility function is such a shortcut, and a dangerous one at that).

The Austrian School argues that the reason goods are not being sold is because the distribution of goods at current prices represents a previous malinvestment during a general boom caused by interest rate maniuplation.  It's hard to argue against that when clearly we had a Federal Reserve manipulating interest rates downward to spur a housing boom. (Krugman in fact called for these very policies in 2001, saying that they would bring about a housing boom. He thought that would be a good thing. Austrian School economists thought it would result in a terrible crash.)

So that takes us to another discussion. Were the goods created during the boom represntative of an equilibrium of supply and demand, or where they a malinvestment caused by faulty price signals created by interest rate manipulation?  We vote the latter. 

David in Liberty

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#38) On June 28, 2012 at 4:13 PM, somrh (86.39) wrote:

There isn't any problem with my analysis; it's just that we're dealing with a different question. Schiff's argument was that we shouldn't "stimulate" demand because the relationship is backwards. I've argued that the relationship isn't backwards, ergo, his argument fails. Whether or not there are other reasons for whether or not we should stimulate demand is another question.

I think we likely share some agreement over the causes though I feel it overly simplistic to look only at one (low interest rates). But what steps we need to take to prevent another problem aren't necessarily the same things we need to cure this one. That's one place we likely differ. I certainly don't have any beliefs about markets necessarily being able to "correct" themselves or whether or not such a "cure" (assuming it does work) is the best option.

I'm also not of the belief that "govt intervention = bad". That doesn't mean I think it's all good either. (For example, I'm still not big on the low rates strategy.)

As for your last question:

(1) I have no reason to believe that markets are ever in equilibrium (I believe many in the Austrian school would concur with this).

(2) I have no reason to believe that there exists exactly one equilibrium price. (There could be multiple).

(3) I have no reason to believe that any particular equilibrium is a stable equilibrium. If there are equilibrium prices, then some might be unstable.

Given those three things, I don't know what "faulty price signals" means. No doubt the Fed keeping rates low was a contributing factor. But I think that's just one piece of the puzzle.

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#39) On June 28, 2012 at 6:57 PM, anathestalker (58.02) wrote:

Somrh

I am wondering if you are a professor or sorts?  I don't think whereiminow is going to allow himself to admit he's been reading the wrong good book. Its pretty typical argument I hear from so called Libritarians.  I have no idea why their capacity to understand doen't go past a certain point.  

I certainly don't mean to insult anyone but have you ever wondered reasons behind his arguments? 

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#40) On July 01, 2012 at 3:25 PM, somrh (86.39) wrote:

I'm not a professor. I just read a lot of different things.

I think there are some interesting insights within the Austrian school. I think one problematic underlying is the premise that trade is, in one form or another, just an instance of barter. Once that premise is taken for granted, then a number of claims follow (that money is a commodity, that one has to produce something in order to demand a good or service, etc).

[. . .]

So going back to this whole interest rate issue, I got to thinking about what an "equilibrium" interest rate would even look like given that we live with fractional reserve banking. In other words, what's the "supply of loanable funds"? Banks make loans (and thereby create credit money) whenever they so choose largely independent of a sort of "supply of money" (they are reserve constrained to an extent but banks seem to worry about reserves after they've made the loan, not prior).

It's interesting to note that the Austrians make a distinction here that, to me, suggests that as long as fractional reserve banking is existence, then the Austrians ought to contend that there's no reason interest rates are ever in equilibrium and that there's no reason that interest rates should tend toward equilibirum. 

See here:

The Role of Fractional Reserve Banking and Financial Intermediation in the Money Supply Process

Mises (and Rothbard) makes a distinction between commodity credit (loan banking) and circulating credit (deposit banking).

The commodity credit is credit offered in which actual funds (gold, currency, etc) are loaned to someone or some entity. The bank serves as an intermediary to the transaction. Bonds serve a good example here.

Contrast that with "circulating credit" in which the claim is made that deposits in a bank don't actually count as "savings" because funds are intentionally kept liquid. Banks aren't serving as an intermediary (in this capacity) but actually creating credit (money) and thereby lending it. The depositors funds, at best, serve as just a limitation as to how far the banks can take this process.

So in a sense if we consider bank loans as part of investment, then investment can occur without savings in a fractional reserve system. This is due to the fact that the deposits in demand accounts are not savings. 

What they consider a "natural" interest rate is the one chosen by borrowers and actual savers (ones loaning money for a fixed length of time - such as a bond or perhaps a CD) consider an appropriate interest rate. 

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#41) On July 04, 2012 at 12:30 AM, whereaminow (20.23) wrote:

I didn't realize we were going to continue a great discussion. I will post a reply following the holiday. I hope you come back to continue this.

 

David in Liberty

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#42) On July 04, 2012 at 4:16 PM, whereaminow (20.23) wrote:

somrh,

Let's continue.

Schiff's argument was that we shouldn't "stimulate" demand because the relationship is backwards. I've argued that the relationship isn't backwards, ergo, his argument fails.

Demand is the quantity purchased at a particular price.  If there is nothing to purchase, there is no demand.  I don't know how to make that any clearer.  What you and other commentors are referring to, when you speak of general human desires, is not demand in an economic sense. Demand is about goods that need to be economized. Only things previously produced (or nature-given factors) needs to economized.  Hence, supply always precedes demand.

I know you will keep arguing it. That's fine. But you need to write a new economics text then, since you are overturning the entire profession.  You will also have to explain why things that aren't real need to be economized.  

I certainly don't have any beliefs about markets necessarily being able to "correct" themselves or whether or not such a "cure" (assuming it does work) is the best option.

It is not a belief. It is a certainty.  Prices allocate resources. That's their role in this world.  Free of government intervention, markets clear. Prices are the only thing we have in this world, unfortunately, to tell us what consumers value scales actually are.

For what reason am I to believe that government, which derives its revenue from involuntary means, can develop a system that allocates resources more efficiently than a market?  Besides being immoral to use force manage the economy (the economy is us), it is silly to think that destroying the price system through intervention somehow makes it work better.

(1) I have no reason to believe that markets are ever in equilibrium (I believe many in the Austrian school would concur with this). 

Free markets always tend toward equilibrium.  Equilibrium prices are rarely achieved and, if they are, rarely for long, because the only constant in economics is change (in tastes, factors or production, etc).  

(2) I have no reason to believe that there exists exactly one equilibrium price. (There could be multiple).

There can only be one equilibrium price for an economic good. If there are multiple prices, consumers (the actors) value the goods differently, and therefore, they are not the same good.  I.E., ice in the summer is a different economic good than ice in the winter.  Goods are the objects of human action.  Homogenous goods are interchangeable and will have one equilibrium price. 

(3) I have no reason to believe that any particular equilibrium is a stable equilibrium. If there are equilibrium prices, then some might be unstable

Exactly as I said above, equilibrium prices are not stable because the nature of human action is that it creates change.  Change creates new values and alters equilibrium prices.

Given those three things, I don't know what "faulty price signals" means. No doubt the Fed keeping rates low was a contributing factor. But I think that's just one piece of the puzzle. 

I would recommend that you study Capital Theory - how capital is used in the structure of production.  Production, left to a free market, responds to changes in the rate of interest.  However, that rate of interest is determined by savings.  We'll cover this more in response to your second comment.  You have some of it down already. Some of it needs clearing up.

David in Liberty

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#43) On July 04, 2012 at 4:19 PM, whereaminow (20.23) wrote:

anathestalker,

You didn't mean to insult anyone... after insulting me?

Hmm, well, no offense but your comment wasn't worth a velvet painting of a donkey and a whale getting it on.

(There is no one good book, right or wrong.)

David in Liberty

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#44) On July 04, 2012 at 4:46 PM, whereaminow (20.23) wrote:

somrh,

I really enjoyed your second comment.  It seems you have taken the time to study some of the Austrian position on credit, and that's great.

I hadn't read Cochran's paper so thank you for linking to it.

I think one problematic underlying is the premise that trade is, in one form or another, just an instance of barter. 

I'm not sure how you came to this conclusion, but that is incorrect.  Barter is direct exchange.  Austrians make a clear distinction between direct exchange and indirect exchange.

It is true that the regression theorom states how a society goes from barter to indirect exchange. Once a commodity money is chosen, barter is no longer necessary.  Indirect exchange is not another form of barter.  It is a different type of exchange.

I concede that the regression theorom does not specifically take account for the man who trades his goat for a promise to work his neighbor's farm in the next month.  MMT proponents and Communists think this somehow proves that money did not arise from barter.  I don't know why, however, since such debt arrangements are merely a barter exchange of a present good for a future good and still require the double coincidence of wants that is the hallmark of direct exchange. In other words, it's still barter.

The key difference between indirect and direct exchange is the removal of the need for the double coincidence of wants  Although it doesn't seem all that important, it actually is, since this idea that money is just debt misunderstands the role of money in taking us away from a barter economy.  Debt does not specifically do that.  You can have debt in a barter economy, just as in a market economy.

Moving on...

It's interesting to note that the Austrians make a distinction here that, to me, suggests that as long as fractional reserve banking is existence, then the Austrians ought to contend that there's no reason interest rates are ever in equilibrium and that there's no reason that interest rates should tend toward equilibirum. 

White Contra Mises on Fiduciary Media

This article will at least help to clear up the differences in the different types of credit.  When banks issue credit that is not backed by real commodity money, they are issuing fiduciary media, which drives interest rates down. 

You are correct. The more prominent the role of fractional reserve banks in a society, the further the structure of production will be altered.

Don't make the mistake of the MMT crowd by confusing bank money (today, entirely fiduciary media) with "the supply of loanable funds."  In a free market, there is a great deal of commodity money outside the banking system that constitutes the supply of loanable funds.  (E.g, the first car ever produced in America was developed with loans that originated outside the banking system. This was back in the day when people didn't keep all their money in the bank.)

What they consider a "natural" interest rate is the one chosen by borrowers and actual savers (ones loaning money for a fixed length of time - such as a bond or perhaps a CD) consider an appropriate interest rate.

Yes, but the key point is one of time preference. If consumers are showing preference for future goods over present goods by delaying consumption, thus increasing the supply of loanable funds, then interest rates will fall (toward a new equilibrium).

The signal they are sending to producers is thus: lengthen the structure of production, invest in more capital goods, and produce more for the future.

Now consider if the consumers have displayed no time preference for future goods, instead consuming everything in sight.  But an increase in fiduciary media drops the rate of interest anyway!  Now what can an economist say about the rate of interest in comparison to the equilibrium rate?

David in Liberty 

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#45) On July 05, 2012 at 4:36 PM, somrh (86.39) wrote:

David:

" But you need to write a new economics text then, since you are overturning the entire profession.  You will also have to explain why things that aren't real need to be economized."

I've already pointed out that the definitions I used are consistent with "economics texts".

In post #20, I offered two definitions (from outside sources) which are both consistent with my usage. So I don't think I'm failing to define words "correctly".

In post #24, I used the terms in a way you would agree with to show that supply is determined by demand (since businesses will not produce goods if they do not believe they will be saleable). You didn't object to the rationale but the conclusion. This is because, normatively speaking, you think the government ought not get involved.

At best what you've done is insisted on definitions that are no where to be found in any usage I've ever seen and then insisted that Peter Schiff is correct. Unfortunately that at best implies that Schiff is making a straw man argument and not actually addressing the claim made by those he disagrees with. 

Now, I know that you don't agree with neoclassical economics and I do not either. I will, however, offer an entirely different interpretation that doesn't come from any post-keynesian but one of the classicals: Adam Smith. 

In Chapter 7 of The Wealth of Nations he writes:

When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price.

In other words, "the natural price" of the commodity (in a perfectly "competitive market") is set in such a way that:

Return on Capital = Cost of Capital (both equity and debt costs)

Of course Smith acknowledges that (market) price can deviate from this "natural" price but he claims that it will tend towards this:

"The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating."

In other words,  what is the "stable equilibrium" according to Smith is not where "supply meets demand". Rather, the price which markets tend to, according to Smith, is set by ROC=COC and the quantity is set by quantity demanded at that price. 

Granted, I have plenty of reservations with Smith's view. For one, in the real world there isn't "perfect competition". Many businesses can maintain a "competitive advantage" for great lengths of time which give them an "economic moat". In such cases ROC > COC.

My point is not to say "Adam Smith is right" but to show that he is actually using a different model than the textbooks offer. 

With regard to my comments about Equilibrium and your response.

When I say "I have no reason...", I'm not claiming I'm ignorant of what theory states; I know what it states. I'm saying that if you want me to accept the theory you have to actually offer arguments for why I ought to accept it. 

I reject the theory because it is neither sound nor consistent. I provided resources in post #15 if you want to actually engage the material and have that discussion. If you lack the time or interest then it's suffice to say that I won't accept equilbrium theory and will not accept any conclusions drawn from it.

Some of what you've said with regard to economic theory doesn't even make any sense. For example:

"There can only be one equilibrium price for an economic good. If there are multiple prices, consumers (the actors) value the goods differently, and therefore, they are not the same good."

This seems to confuse the current price which buyers and sellers are making purchases and a stable "equilibrium" price.

Aside from that, it's more an issue of understanding what I meant by "equilibrium" and "stable" versus "unstable" equilibrium. 

These economic ideas were borrowed from physics (particularly thermodynamics) and their interpretation is mathematical.

To give an example, the surface of the earth is a stable equilibrium (for position) but so is the surface of the moon. Which equilibrium you tend toward will depend upon where you start.

For an example of an unstable equilibrium, suppose you're balancing some item on some relatively thin point. If you're right on the equilibrium point it will remain in balance. But any slight disturbance will cause it to go out of equilibrium. This is an "unstable equilibrium" because any slight deviations from the equilibrium point result in it tending away from that point.

The mathematical interpretation comes from differential equations.This article seems to give a good example of the mathematics (with some graphs) if you're not familiar.

Regarding "Capital Theory" you will have to either specify something you think I should read or specify where you think I'm misunderstanding something. I agree thinking in terms of how businesses actually behave both in how they determine whether or not to invest and how they choose to employ individuals for production is insightful. That's also why I reject much of neoclassical economic theory. 

Regarding Interest Rates

We may be largely in agreement here but I'm not sure if we're on the same page. 

you wrote:

"However, that rate of interest is determined by savings."

I actually disagree with this.  And I suspect the Austrians agree with me here (and you as well) so I'll try to explain myself. I suspect our disagreement has to do with the fact that we are not on the same page.

I'm going to spell out a couple of things to see if we're on the same page. If we're not we can go back to those issues. 

1) I suggest we can think of their being at least two kinds of markets for loans. (1) Markets in which people "save" meaning they transfer capital to a borrower. (Bond markets serve a good example). (2) Markets in which people deposit funds and banks create loans via fractional reserve process. 

2) I contend that these two kinds of  markets are not independent. By this I mean that interest rates set in one market will have an effect on interest rates set in other market (I do not mean to say that they will be identical rates). 

From this I conclude that the rate of interest is possibly never equal to the "natural rate of interest" because the fractional reserve process has an effect on interest rates that are actually set. 

I suspect the article you linked me to agrees with this conclusion. For example:

"However, Mises's chapter on the business cycle [. . .] makes it clear that the necessary and sufficient cause of the cycle is the unsustainable divergence between the "loan" and "natural" rates of interest caused by the creation of fiduciary media."

As a side note, I've always had some sympathy for the Austrian idea that fractional reserve banking leads to instability.

Lastly, on barter

While I'm still weighing the evidence (I'm still in the middle of David Graeber's book), I've read enough to cause me to doubt the traditional view (whether to accept his alternative I'm not sure). The idea that barter came first then money emerged to solve some problem of "double coincidence of wants" and credit later is, perhaps, a myth. If you want to get a glimpse of his position see an interview:

What is debt?

and also a response to a critque to his interview:

On the invention of money

As for your specific example:

"I concede that the regression theorom does not specifically take account for the man who trades his goat for a promise to work his neighbor's farm in the next month."

I'd be inclined to wonder why there is any "exchange" in this scenario at all. If these two are neighbors and are on amicable terms, why wouldn't the neighbor simply offer the goat as a gift? This doesn't rule out that there isn't some sort of expectation that the one neighbor will "return" the favor. But there's no reason to suppose "returning" the favor amounts to giving something "equivalent" back because there's no reason to suppose they've done any "economic calculation" to work out such equivalencies. 

In other words, the entire hypothetical scenario assumes that the two individuals' only social relation is one of "exchange" and "economic calculation". There's no reason to suppose any of that. And if there is no "exchange" nor "economic calculation" then there is no barter since barter requires both.

The epistemic point to make here is that imagining hypothetical scenarios and then making assumptions about how people behave in those scenarios without either checking empirically whether the assumptions are reasonable and/or whether the model's predictions are reasonable does not make for good scientific inquiry. That's why I'm sympathetic to Graeber's approach and unsympathetic to the economic textbooks.

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#46) On July 05, 2012 at 8:21 PM, whereaminow (20.23) wrote:

somrh,

First off, I should apologize. It isn't you that needs to rewrite econ texts. I have forgotten that for the most part they've already been mangled beyond repair anyway.  I should know this from curious readings of Samuelson's horrendous texts.

In post #24, I used the terms in a way you would agree with to show that supply is determined by demand (since businesses will not produce goods if they do not believe they will be saleable). You didn't object to the rationale but the conclusion. This is because, normatively speaking, you think the government ought not get involved. 

I do object to the rationale. It's incorrect.  I'm sorry that I glossed over and didn't give it a full response then.

You are not talking about demand. You are talking about entrepreneurial epectations. NOBODY knows what the demand will be for their product.  Suppliers produce, and then find out the demand when the product is either sold or not.

Again, economists tend to think they can know the unknowable.  They make a very serious mistake when they confuse entrepreneurial activity with supply/demand.

Think of it his way. If guessing what would be produced is called demand, then what would you call the quantity actually purchased at a particular price?  Super real demand???

The quantity purchased is demand. Speculating on what will be purchased is not demand.

I've tried, as best I can, to hammer the point home that demand is for actual real goods that need to be economized.  Entrepreneurial guesses do not have to be economized.  They are best estimates of what that demand will be.

I'm going to stop here. And get back to Smith. And then Graeber later. He's way more fun anyway.

I think, judging by your critical nature of the economics profession, that you will be happy to know that I don't think Adam Smith was a very good economist!

But Graeber and I actually have had some discussion and found some common ground. 

Till I return...

David in Liberty

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#47) On July 07, 2012 at 12:14 PM, HeatherAnCap (< 20) wrote:

whereaminow

I just googled something along the lines of "supply precedes demand" and your answers came up! They are very well written and comprehensive so that now what was once murkey seems so blatantly obvious! I wanted to create an account to thank you for answering my questions :)

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#48) On July 08, 2012 at 5:09 PM, somrh (86.39) wrote:

David wrote:

You are not talking about demand.

Perhaps Schiff is not either.  See this quote and tell me how it fits with your definition:

"Demand always exists and does not need to be stimulated by cash redistribution. 21st century Americans are no more desirous of cell phones than their parents were."

Stictly speaking I never said that a business' estimation of demand (at a given price) was demand. But your criticism seems to rest on some idea that because actual quantity demanded for a given price at a given time is unknown that it can have no effect on a business' decision in how much it produces. This amounts to the idea that business would be no better off producing products in quantities at random. I suggest this is absurd.

While the amount is unknown that does not mean that they cannot, statistically speaking, do a half-way decent job of estimating it (I would suggest that the sucess of their business actually depends upon it to a degree). As result real demand has an effect on expected demand which has an effect on the quantity that a business chooses to produce. 

Now Schiff is talking about a much broader process here. He of course is referring to things like investment particularly productivity improvements, which obviously take time. Schiff writes:

"The reason why they [cell phones] are now as ubiquitous as key chains is not that government stimulated demand, but that industry figured out how to supply them far more efficiently. The supply satisfied the demand."

In the neoclassical modeling schema, he is suggesting the way to improve output is to "shift" the supply curve. The supply curve then intersects with a demand curve (which is downward sloping according to the neoclassical models) in such a way that supply and demand intersect at a lower price and higher quantity.

So if he's advocating this schema, it does make me wonder how one can conclude that a shift in supply will raise quantity produced but a shift in demand won't. Granted, I have no interest in defending the neoclassical model and perhaps he does not either. But I am having difficulty understanding how your word usages matches with Schiff's. 

How can Schiff claim that increases in productivity that allow (cheaper) production of cell phones meet the demand of consumers who desire cell phones if the demand for cell phones (at the new specific price) didn't already "exist"? 

Graeber problably deserves his own blog but I try to keep my own blogs here on caps restricted to investment related themes. But I'd definitely be up for discussing his book. There's a lot of interesting material. 

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#49) On July 09, 2012 at 12:24 PM, whereaminow (20.23) wrote:

somrh,

I'm cranky from not being to able to write much this week, so I'll be brief. I'm going to skip over the rest of your commentary on Schiff. Honestly, take it up with him.  I explained the fundamentals.  The rest is semantics and, frankly, boring.

As for Graeber and debt.  Graeber and I found ourselves in a discussion very similar to this one a few months ago, talking about his book.  I actually like Graeber.  He's petulant, but passionate and smart.  

Let's go back to your criticism of my example. It could have been a gift, you said.  Ok, so what?  It's still an object of human action.  It doesn't fall under the category of catallactics but it's still a scarce resource being economized. The gifter values the psychic revenue from bestowing the object upon the receiver more than any other object of action he can procure with it.  

Graeber tried to make the same point with me. I made the same response and pointed out that Mises covered this nearly 70 years before his book came out.  

As a side note, I also asked him how gifts come about in a world with no private property.  I didn't get a response on that one, but I leave that to the commies to answer.  Reason #9,000 I'm glad I'm not a socialist.

But Graeber's an anarchist and we both loved James C. Scott's book The Art of Not Being Governed so I thought we got along just fine.

Anyway, and again I have to keep this brief, and to take it back to our discussion, there is no reason why debt cannot be part of a barter society.  Debt, in an of itself, does not remove us from barter and place in a state of indirect exchange. Only money does that. Therefore, debt is not money.  

David in Liberty

 

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#50) On July 09, 2012 at 6:02 PM, somrh (86.39) wrote:

David,

"The gifter values the psychic revenue from bestowing the object upon the receiver more than any other object of action he can procure with it."

This phrasing you're using here is, in of itself, interesting. Now, I have no clue what "psychic revenue" is or why a giver would "value" such a thing (or what it even means to value "psychic revenue") but it is an interesting metaphor. Revenue is an economic metaphor which is being used explicitly in referenced to something "psychic" in attempt to reduce a particular set of human relations down to something "economized". 

One of the main themes I've gathered from Graeber is the fact that we have a particular paradigm (in a Kuhnian sense, though I haven't seen any reference to Kuhn here) with a particular language and a variety of metaphors that inform how we view the world. 

"I also asked him how gifts come about in a world with no private property."

I think this is less problematic than you think. One first has to offer a definition of "private property" (or more appropriately, private property rights). For example, Graeber offers one definition:

"In Roman law, property, or dominium, is a relation between a person and a thing, characterized by absolute power of that person over that thing"

Of course nothing has "absolute power" over anything.  Graeber goes on to write:

"The only thing "absolute" about my rights to a chainsaw is my right to prevent anyone else from using it."

But what does it really mean to have a "right" to prevent anyone else from using it? After all, I can show ut as Graeber's house, shoot him in the head and use his chainsaw. So how does his "right" prevent me from using it? 

So really this entire thing has nothing to do with "property" per se but "rights". What you're asking is how someone can transfer "rights" without first having said rights.

For someone like me who doesn't subscribe to a theory of "natural rights" this is less of a problem of defining "gift" without the use of property. Rights are just particular set of cultural norms. There are other ways in which we can organize ourselves and you can define "gift" in terms of those practices without appealing to "rights".

As a side note, I do think having a society organized around "rights" is a useful way to organize ourselves. 

As for this:

Anyway, and again I have to keep this brief, and to take it back to our discussion, there is no reason why debt cannot be part of a barter society.  Debt, in an of itself, does not remove us from barter and place in a state of indirect exchange. Only money does that. Therefore, debt is not money.  

I'm either having difficulty reconstructing this argument or I'm not sure what conclusion you're trying to draw. I don't particularly like your phrasing (for instance, saying "debt does not remove us from barter in a state of indirect exchange" kind of assumes what's at stake here but you're stating it as a premise.)

Let me give an attempt and you can correct my understanding:

1) Not all debt is transferable

2) Debt that is not transferable cannot be exchanged for other things. 

I'm OK with both of these and if you want to define some feature of money that ties into that, I'm OK with that. I don't know what that's supposed to conclude. Debt can be money since debt can be transferable. 

If you want to conclude that not all money is debt and/or not all debt is money I'm OK with both of those.

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#51) On July 27, 2012 at 2:21 AM, anathestalker (58.02) wrote:

What happened to this thread... I guess he ran out of books to quote.

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