Honest Question to Austrian's Part II - Why can't Government spending create wealth?

There is a reason why I use the term 'self-evident'. This denotes comprehension of something without proof. Economics abides by self-evidence. One does not know if a theory works until it is implemented. Consequently, each new theory is an attempt to remedy an older one.

The key, however, is to understand that what is being remedied is in the name of pursuing a normative result. While one learns in an introductory economics class that there is positive and normative economics, the line between the two is blurred, and I would argue, non-existent. In other words, economists are truly throwing theories at the wall to see if they stick.

 

My only problem with this is that I believe behind the scenes in the Internet universe that there are economic theories for any type of belief you can possibly have. What I believe, is there is a huge difference between what people say and what is actually done and just looking at the data, it seems that what is done is usually what should be done, rather than what is part of a "theory". Like Ronald Reagan was a fiscal conservative but almost tripled the national debt. He said it was his biggest regret as President, but it was the right thing to do, regardless of what he considers a regret or what he thinks should have been done. Like just researching the evolution of the Fed during the past 4 years and understanding what they are doing and why they are doing it makes so much sense. I just think what we have done for the past 80 years is a lot different than most "theories" that are thrown out there. It's a mixture of tons of theories and just deals with real world problems.

 

Before the fed, most corrections lasted a matter of months. No correction ever lasted more than about a year until the first attempt at implementation of Keynesian policy. That correction was extended for, what, 15 years?

 

Once again you are simply lying. The longest depression happened between 1873-1879 and last 5 years and 5 months. The Great Depression lasted 4 years 7 months. And recessions/depressions lasted much longer in the 1800s than the 1900s. You are such a liar that it is hilarious. You are either a liar or just extremely uneducated.

 

There are economists who disagree.

You are describing the effects of reduction in the supply of money. Again, I am not arguing for a reduction in the supply of money.

No. Velocity doesn't need to change at all.
MV=PQ.
Hold M and V stable. Quantity rises, and price falls. As production increase, prices decline (see flat screen TVs), with no change required in M or V.

If we produce more of something, it's price on the market will drop to the market clearing price. Aren't you supposed to be some sort of economic scientist or something?

 

The problem with frat boy is that he has zero critical thinking. He takes the most complex issue to the simplest level that is ridiculous. Frat's band of economic theory is about "distort" the demand rather letting the market to find its own equilibrium.

Just look at his moronic rationality...

"Like if we can produce 1 million apples but we only sell 800k. There is 200k of production that simply will not be made but could be made if there was an increase in demand...."

Businesses are constantly evolving with innovation and technology. Anyone that does not adapt and change fast enough to the constant changing environment would be going out of business. The Jap electronic makers are extremely under capacity. Of course they could produce more TVs, DVD,...etc...however the "DEMAND" for TVs is never going to be the same. Here are a few solutions for Japanese once dominated the world in this industry...

1- They need to come up with new product fast to regain the market share.
2- They can sit their asses all day and blaming and pointing fingers at Apple.
3- They can beg Japanese government to buy their products via stimulus measure.

Frat-boy solution would be the third option. LMAO!#!

 

Deflation a lowering of prices. You apprently are under the impression that it means something else?

 

Nah ah. Deflation, in frat's own world, is a lack of government spending.

 

That seems to be the common usage of the term, but other economists consider deflation/inflation to be the reduction/increase in the money supply. Friedman pointed out that inflation is always a monetary phenomenon. Same goes for deflation.

Inflation/deflation can not occur in a barter economy. For example, take a simply economy in which there are only two goods, apples and bananas. The price of apples is 2 bananas, and the price of bananas is 1/2 apple. Consider how it is impossible for deflation or inflation to occur in this economy. Thus, inflation/deflation MUST be caused by an increase/decrease in the supply of money.

 

Inflation/deflation is a nature of any economy, it can happen in any economy at any given time. Your example, you simply assume that there are a FIXED amount of apple/banana than can be produced. It does not work that way. As businesses evolve with innovation and technology they can produce more with less thus allowing them to allocate available resources efficiently. On the other hand, one bad weather season could cause a major disruption on supply side, subsequently, inflation skyrockets.

Central bankers use monetary policy as a tool to distort the of free-market pricing mechanism. The good news is they can't manipulate inflation/deflation forever as central bankers around the globe are actively printing and slashing interest rate since the global financial crash. Their goal is get more people into new debts but the result is a complete opposite so far.

 

The frequency of volatile changes in the business cycle would be more apparent. For example, in the National Banking Era, the time frame between banking collapses and recessions would be approximately three years. So, while corrections would occur quickly, stability would not last for long.

 

No, I was just pointing to the prices at one particular point in time. Of course, as the supply of each individual good fluctuates, the relative prices of goods will vary over time. I agree with you on that point.

So, as you point out, if the supply of apples begins to decline over time, prices will adjust so that perhaps one apple costs 3 bananas and 1 banana costs 1/3 of an apple. Yet, can we say "the price level" changed? Of course not. The price of apples went up and the price of bananas relative to apples went down. This is not a change in the price level, but simply a change in the relative prices of goods. This is not inflation or deflation.

Inflation or deflation can only occur when the price of money changes. ONLY a change in the price of money can equally effect the price of all other goods.

Understood. Supply and demand for each individual good changes over time.

I agree that manipulation of the money supply distorts prices.

 

It's hilarious how you guys will not stop. You literally think you have it all figured out, lol. No matter how many economists, no matter how educated they are, no matter how many studies have been done, you guys will believe what you want to believe. Why is it the stupidest people are always the most confident in their beliefs?

I just listed off 4 papers from some of the most prestigious academic institutions in the world telling you guys why deflation needs to be avoided and it does not phase you. Amazing!!

 

That's not true at all. Inflation and deflation can both be caused by changes to velocity and/or production. It is not completely dependent on the quantity of money.

 

This has nothing to do with the supply of money. You simply do not have a clue what you are talking about and have absolutely no clue what velocity of money is. Deflation can happen with out a reduction in the money supply. You just don't want to believe it so you keep lying about me talking about reducing the money supply when I have never said that once.

 

Okay, MV=PQ. If V goes down, P can also go down. So what? What does this have to do with M? We're talking about increasing M.

 

I agree.

MV=PQ. If Q goes up, and M is held constant, then either V can go up, or P can go down (or some combination of the two).

I agree that it is not dependent on M.

However, if M is changed, then at least one of the other variables must change.

 

So does inflation. It can happen without increase in money supply nor velocity of money has to be at elevated level.

I'm pretty sure you have no clue what does "velocity" really mean, let alone talking about either inflation/deflation.

 

Thanks for the straw man. No, no economic model can EVER prevent recessions (a depression is just a bad recession).

The simple fact is that, no matter how you dance around it, there is an efficiency loss in government spending. In order for the government to spend money, even if it wasn't wasting it and was directly it wisely, the government has to tax to get that money. In order to tax, the government has to hire employees to collect taxes. So if 10% of taxes go to collecting taxes, there is a minimum 10% loss in efficiency.

And that is assuming that the government doesn't waste the money.

 

No there isn't. You just made this up! Nice try!

 

I'm talking about increasing M. I have no clue what you are talking about because you keep implying that I'm talking about decreasing M. I understand how math works. The problem is how do you get the variables to go in the direction you want in the real world. How do you get P to decrease and Q to increase at the same time? If you can figure that out, you would win a Nobel Prize. Good luck!!

 

I agree too. Now that we understand the math. How do we get this to happen in the real world. Based on studies and empirical evidence economists have come to the conclusion that when V decreases (because of an economic shock or whatever) that Q decreases (less aggregate demand) and P decreases. Now, they also have come to the conclusion that as Q and P decrease the cycle exacerbates itself and becomes worse causing even less Q and lower P.

What you are talking about is lowering P and increasing Q at the same time. Remember we are talking about aggregates here, this includes real assets that people invest in. So if P is going down on the aggregate than what would cause V to remain constant or increase allowing Q to increase?

That's what all these papers are talking about. They are talking about investment and debt. Investors do not invest when prices are going down, people do not go in to debt when the value of money is going to rise... and people who currently have debt are paying much more in terms of real value than they borrowed in the first place causing many just to default.

All of this we know happens with deflation. This is what happens in the real world. So unless you can convince me that you can lower aggregate P and increase aggregate Q without increasing M and maintaining V... than I'm all ears. I just have a gut feeling that you have absolutely no clue what I'm talking about and no clue how to articulate why your solution would cause this phenomenon.

 

I think you have it the other way around, it is not falling prices that raise aggregate gdp. It is rising gdp that lowers prices.

You are aware, are you not, that in the US there have been long periods during which the price level gradually dropped.

Increase productivity. If aggregate output (Q) rises, price (P) will fall, with no necessary change to MV.

 

Your graph is 7 years out of date

 

Let the free market control M and V.