I recommend you download it above, over reading someone else’s summary. Even reading a chapter or two of Ricardo’s book will give you greater insight, and puts you on better footing to understand the pros and cons of free trade or the idea of the comparative advantage than any general description.
From Mercantilism to Free Trade
Ricardo, like Adam Smith, believed free trade would overcome many of the issues connected with Mercantilist economics.
In the post Napoleonic era, England switched from mercantilism to free trade, or a closer semblance of free markets and a free movement of labor and capital, it reached its gilded age.
Although still an empire, under the influence of classical economic thinking such as Adam Smith or David Ricardo, England flourished while empires like Spain waned, and it was no coincidence.
The idea of mercantilism was to accumulate bullion by an export driven economy.
Metaphorically mercantilism which saw countries economies as two tubs of baths, one hot and one cold, and when free trade is introduced or accelerated the hotter tub loses thermal energy and the cooler tub gains. For example, when the US trades with China, the US wealth or at least wealth creation is cooled off and Chinese wealth creation heats up or accelerates. Ricardo disagreed. These arguments initially seem counter intuitive until you understand economics and consumer and producer surplus gains from a comparative advantage.
Ricardian ideas on comparative advantage and free trade was the greatest contribution to economics found in On the Principles of Political Economy and Taxation.
Ricardo answers the above objection, that free trade is one sided, by use of logic and examples relevant to this 19th century world. His theory was based on specialization and a nation would concentrate on production and of resources that each country could generate wealth in an optimal way in comparison to other nations.
Any reallocation of the production process would be offset by efficiency gains. Ricardo used examples of Portugal producing cloth and wine at a lower cost than England but both England and Portugal would net out ahead.
Criticisms of Comparative Advantage Theory
Although his theory does contain weaknesses, he was aware of, his theory showed the benefits of free trade vastly outweighed the costs. For example, there were situations when capital was mobile as opposed to fixed and this would have different consequences.
Subsequent critiques included Keynesian Joan Robinson’s note that Portugal stayed underdeveloped in comparison to England. That is real world situations with dynamic equilibrium and less than full employment and with trade imbalances Ricardo’s theory of did not prove out.
However, in the end free trade would be a optimal. Specifically a country does not even have to have an absolute advantage to gain a comparative advantage. These terms Ricardo did not even use, but were coined and popularized by those like Johns Stuart Mill.
I (Mark Biernat) suggest if you couple Ricardo’s trade theory with free banking, that is an unregulated currency or sound money, trade imbalances can not sustain themselves. They have a self correcting mechanism. Free trade policy needs to be paired with a free money policy.
Ricardo in Modern Economic Terms
If Florida grows sugar cane and makes molasses and Connecticut grows apples and makes apple cider, it benefits both states to have no restriction on interstate trade. It would not make economic sense for Connecticut to become a vertically integrated molasses producer.
States are little different then countries. Free trade between regions or even towns and or households is similar free trade between countries. In the Middle Ages medieval faires and markets between towns ushered a new prosperity.
For example, if the soil and conditions and the expertise to create cheese and grow grapes in France is established, and India is better suited to grow cotton and send this to Vietnam to create clothes which are designed in the US. Why not allow this free economic process to unfold.
The net result is consumers get lower prices and it takes less cost to produce a comparable good. Society can employ resources that were used in less efficient production processes and allocated them in a different way.
Metaphorically when the PC was popularized if would have been inefficient to employ a legion of typists to do what a word processor could do. Those typist or the next generation could work in medical research and do higher level tasks.
Similarly, if India now grows cotton cheaper than the State of Georgia, people in Georgia can be employed in another field of work such as accounting or IT. Economics is dynamic and this will change every decade. However, the world is becoming more efficient with free trade and the most obvious consequence is general price stability and relative price deflation.
Theories are obvious after it has been stated.
Ricardo’s Theory of Value
Other topics in the book included a discussion on rent, wages and profit, and the labor theory of value.
The value of an object was based on the value of labor put into the creation of an object.
The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that .
In the preface, you can read Ricardo’s critique of, Adam Smith, Jean-Baptiste Say, Turgot, Stuart, Sismondi.
Ricardo felt Adam’s Smith theory of value lacked conceptual rigorous. He refined it to a labor theory of value, something Marx would use as his core theory of value. It was not until the marginal revolution with Jevons, Carl Menger and Léon Walras was value uncoupled with labor directly. However, many people conceptually still hold to a Ricardian theory of value.
Ricardo noted that as population increased rents, because land was scarce and fix, would increase. He had made his money in the stock market but was concerned about the welfare of others. He believed free trade would help alleviate this issue as it would increase the wealth of both countries involved.
Ricardo and the AI revolution – On Machinery
Ricardo foresaw technology improving the production process but at least in the short-term it created issues with labor and wages. More important he saw mechanization, increasing the Gini coefficient. That is the capitalist would benefit from the new technology and this would decrease the cost of production. While workers wages would decrease as competition included new machines as well as labor as an input in production.
This is the situation we have today. Increased competition with machines and vector learning lowers the wages of workers. I know many people college educated people who are thrilled with a $15/hr job.
The reason Ricardo’s mind was so great as a classical economist is his idea are relevant in today political economic discussion. However, his ideas are not only applicable, they are foreshadowing. If you read his work from the original context you can gain insights into the future of our global economies today.
If you have question about the free trade debate, tariffs and how David Ricardo would respond if he were living today, please leave a comment or write me. These are important issues in economics and misconceptions can affect people’s lives.
Michael Woodford’s 2010 paper “Financial Intermediation and Macroeconomic Analysis”, improves his theory that was articulated in this book, Interest Prices (2003). He based this on the data and experiences from the 2008 financial crisis and changing ideas in monetary economics since his 2003 work.
I have academic respect for Michael Woodford, this review is in no way a commentary on Woodford himself, the sincerity of his efforts, or his intelligent progress he has made with macro economic science.
However, his theories have issues. Yes, at a tactical mathematical level, everything balances and the numbers correspond to his constructs. However, at the strategic level, I question the the constructs and the logic of his assumptions.
His work on Financial Intermediation and Macroeconomic Analysis is correct in the sense we need to account for frictions and spreads when looking at the non-bank financing. I would agree with this underlying premise and the data.
Monetary policy based on questionable assumptions – My main criticism is that he advocate of micro engineering monetary policy by the Federal Reserve based on ideas that are not on sound theoretical footing. He advocates perfecting this through econometric models. .
My contention is even if AI were used to perfect the models and account for all variables it would still not get us closer to understanding human action in the market better than the entrepreneurial discovery process.
I think, his rule based approach is superior to discretionary action, but it does not necessarily lead to a high growth long-term equilibrium or optimal capital structure. This is particularly true when Woodford’s approach is coupled with quantitative easing and other tools of the Federal Reserve, outside the rule-based natural rate framework.
Specifically I have issues with:
His understanding of Wicksell’s natural rate of interest
Straffa’s critique of multiple rates of interest
Price stability being synonymous with Money macro equilibrium
His understanding of equilibrium and money neutrality
Central Bank rule based (Taylor) action as an optimal equilibrium course
These objections have not been addressed in his 2003 work. Therefore, to add another layer onto this with improve model’s I find it unproductive. However, I will give a summary review below.
What Woodford achieves in his paper on Financial Intermediation
He refines some of the ideas of the equilibrium rate of interest in line with an IS-MP and IS-LM model and adheres to the new Phillips curve, introduces multiple rates of interest, (not in the Straffa) and financial intermediation friction.
This kind of model provides a straight forward account of the way in which a central bank’s interest-rate policy affects the level of economic activity and also the inflation rate, once one adjoins a Phillips curve to the model).
Woodford, “Financial Intermediation and Macroeconomic Analysis”, 2010
Highly aggregated models do not represent human action
However, the assumptions of this model still are in question. The equations workout on a theoretical level, for example, merely altering the slope of the curves, and the precision of the model’s equations are refined. However, this is all on an abstract theoretical level and when markets are in a dynamic and changing environment, data from the past can not necessarily create predictable outcomes for future policy.
Regarding, individual intention and action and future outcomes, economists are notoriously poor prognosticators. If this is the case, policy should not assume so much power.
To bridge this Neo-Keynesian construct to the real world of diverse markets and all the effects and complex human interactions which are seen and unseen are hard to quantify and prove. The theory works in an equation, but in the context of this theory supports an optimal policy decision for long term high growth and real market prices, at the aggregate level it is hard to make a determination.
This ultimately stems from a misunderstanding of what money is and how it functions in real-world markets. This goes beyond improved models for representing financial markets with fiction or without friction.
IS-LM and the Phillips Curve
Further, ideas such as the Phillips curve and the IS-LM model are precise on the theoretical level, but they are just one conceptual framework which is based on a construct for current central bank fiat money. There are criticism’s of both models, for example, criticisms of the IS-LM, however, this is beyond the scope of this post. IS=LM is a diagram for intermediate economics to understand, but to take this into serious theory, the objections and there are many from Gregory Mankiw, mild criticisms to Austrian school major criticisms.
Why banking is important
Firm and entrepreneurial capital financing for the expansion of business come from three sources, retained earnings, bank financing and firms going directly to the market. Retained earnings being the largest component. However, economic analysis and a theory of interest rates is focused on direct and indirect financing because these sources are considered on the margin. Economic decisions are made on the margin.
From these three sources, Woodford focuses on direct external financing over indirect financing, and his most current rendition with the inclusion of friction.
Monetary theory with no banks – However, I question the subsidiary role he places on banking. This seems to support his 2003 work. He claims to revisit Wicksellian theory, but private banks is not a center of his model, only the central bank and direct financial markets. I would have to see more data and evidence to convince me that decisions made at the margin in the credit market are made by non-bank financing. This is a broad stroke of the brush to assert that. Does this apply to all markets and all scales of banking and relevant investment activity or just the activity he looked at or what is good for Central bank policy as it exists today? Does this theory support the current paradigm? What is the US did not bailout the banks and the Federal Reserve did not pump money the way it did, perhaps the banking system would have reorganized into smaller, more efficient banks (Richard Werner’s bank prescriptions), that would support a more positive Gini coefficient. Woodford’s theory is specific to a line of thinking in our current political reality not a universal economic theory of financial markets.
Woodford’s argument is his emphasis is on direct market financing because the growing total dollar usage of direct financing compared to bank financing in the and its perceived role in the 2008 crisis. Therefore his model is constructed with this bias. However, this is not logically rigorous.
Consider how retained earnings is disproportionately large compared to all aspects of external financing, direct and indirect. However, economic focus is largely on external financing. This is because a basic assumption of economics since the marginal revolution as people make decisions on the margin.
That is, what exerts the most influence over markets in terms of movement may or may not be the total dollar amount, but what has the most marginal effect as firms make decisions on the margin.
Woodford does reference studies on both sides but misses this fundamental point. That is before we focus on one construct such as direct financing, economics needs to validate if that is correct. Even if leverage is a factor.
This might be, but it also might be similar to retained earnings in a way which firms finance but the marginal or driving effect of banking and indirect financing should play an important role in the model
We can not assume that based on growth rates of total dollar amounts of funding that this particular method has the most marginal entrepreneurial or decision making an influence. It may be true or it may not be. I think further empirical study at a micro level would be required. What seems to have had the greatest influence can only be known when you see all the influences of human action, rather than raw aggregate data.
The market is continually changing. Indicators have different weights based on changing market conditions. Even if direct financing is growing in numbers, economists need to always weigh marginal analysis before an assumption is made.
This is analogous to any financial ratio used in stock market analysis. As times and economic conditions change in a dynamic economy different variables and ratios are better indicators than others. Before one can make an assumption of where the emphasis should be placed in a model careful study needs to be made particularly at a firm level to understand where the marginal decisions are being made.
However, Woodford concludes and starts the foundation of is model is reasonable.
“Hence, what is needed instead is a framework for macroeconomic analysis in which intermediation plays a crucial role; in which frictions that can impede an efficient supply of credit are allowed for; yet at the same time one which takes account of the fact that the U.S. financial sector is now largely market-based”.
Financial Intermediation as the center and important part of Interest Rate transmission
This crucial role of financial intermediation is acknowledged. However, where the weight and emphasis is place is what is questioned. How much explanatory value is placed on financial intermediation compared to a bank or non-bank indirect financing when you are looking at it from a marginal perspective.
Woodford argues a new theory:
“the most important marginal suppliers of credit are no longer commercial banks, and in which deposits subject to reserve requirements are no longer the most important marginal source of funding even for commercial banks”.
Bifurcation of Interest and the total cost of borrowing
Woodford builds a new theory of Financial intermediation in the context of IS-MP to include financial frictions.
However, at the core of this theory is an equilibrium interest rate where interests for savers and borrowers are bifurcated to represent friction.
The spread between the two rates can cause counter-intuitive results and affect Fed Fund targeting Policy. Specifically, rates can fall but the cost of borrowing can increase because of the spread increases. Conversely, the Fed funds rate could with the objective of restrictive policy, however, the increase and the cost of borrowing could fall because of the decrease in the spread. This was observed in the pre-crisis and crisis era.
For Woodford, it is the total cost of borrowing, that determines credit expansion. This total cost includes the borrowing rates but also the spread. When making analysis or policy one has to look at the picture to determine, if the supply of intermediation will tend to increase or decrease.
This bifurcation in an IS-MP model of financial intermediation helps give a more accurate model.
Like the Keynesian model of Wage and Price frictions, Woodford has a model of LD and LS frictions when considering the Fed Funds rate.
Financial shocks that are amplified
Woodford suggests a theory of amplified financial shocks of supply of intermediation ultimately affect aggregate demand.
“The dependence of the supply of intermediation on the capital of intermediaries also introduces an important channel through which additional types of disturbances can affect aggregate activity…that shocks that might seem of only modest significance for the aggregate economy… can have substantial aggregate effects if the losses in question happen to be concentrated in highly leveraged intermediaries, who suffer significant reductions in their capital as a result. ” (p.19)
Woodford’s theory articulated is new in details, but overall the concept is not new. He goes onto describe the “vicious spiral… the resulting contraction of aggregate output may result in further losses to the banks, further reducing their capital, and hence tightening credit supply even more” (p.20).
Nothing more than mainline Keynesian idea dressed in aggregate equations
In one sense this is a rebranding of a Keynesian idea, this time supply of credit negative multiplier effect. Financial intermediation is an area that is leverage and have a disproportional effect on the market movement and in a cumulative fashion.
Like Richard Khan’s Keynesian consumption multiplier, Woodford transposes the known Keynesian ripple effect logic to the supply of intermediation.
To some extent, the supply of financial intermediation is analogous to a Keynesian wealth and income effect or some sort of multiplier.
An increase in aggregate economic activity will generally increase the value of intermediaries’ assets (loans are more likely to be repaid, land prices increase with increases in income, and so on) and hence their net worth. This will allow additional borrowing by the intermediaries, and hence a larger volume of credit for any given credit spread. (p,16)
The 2008 Credit Cycle
The Fed Funds rate did not act as a perfect tool or measure because of the spread but also another observed phenomenon.
That is shorter terms rates do not affect investor decisions as much as thought. Rather, ” level of long-term interest rates, which in turn depend on the expected average level of short rates over the coming decade, rather than the current level of short rates alone” (p.20)
This caused borrowing rates to fall with an increase in rates
Woodford understood the Wicksellian framework. He should have know before the 2008 crisis. His theories have empirical evidence, but as you see every crisis is different in a subtle way. It is not that a new exactness would bring the central bank closer to an optimal societal outcome not to mention, productive and allocative efficiency.
However, his theory does ex-post explain why rates were too low for too long after rate increases. As a Monday morning quarterback or an armchair historian his theory is excellent.
For example, from 2004 to 2007, though policy the Fed Funds rates increased. Yes Woodford makes a good point that frictions or spreads could to be accounted for to have a more accurate model. However, the underlying idea that the Fed Funds target was too low is still the main idea.
The inescapable issue
However, I continue to suggest, regardless of the new tactical improvements in modeling, the strategic picture is credit was too expansive for equilibrium let alone money macro equilibrium.
What if the natural rate was really 6% or 8% at that time? It would make no difference in the larger picture if frictions were not calculated. What would have mattered was the Fed Funds rate was brought up to a proper level to match the natural rate of interest net of all adjustments, which it was not. In retrospect, it was not even close.
In fact, in light of Woodford’s new theory we could call the Econometrically derived natural rate the ‘net natural rate’, if you consider frictions. The strategic picture is still the same. Either, the natural rate is not something that can remotely be measured in any context or model estimates were off and continue to be off.
Therefore, even if you enter in frictions, the larger framework might be some adjustment to the natural rate calculation, but still, my premise is, the Wicksellian natural rate was significantly underestimated.
Woodford’s rebuttal is explained in the context of his model.
“an outward shift of the supply of intermediation schedule XS was responsible, rather than a movement along this schedule in response to a loosening of monetary policy.” (p. 22)
Further, Woodford argues : “the Fed’s increase in the funds rate over the period between 2004 and 2006 did less to restrain demand than would ordinarily have been expected”
Multiple interest rates
Woodford’s understanding of multiple interest rates is not based on the idea that each entrepreneur might have a specific natural or equilibrium rate, rather there are different rates between investors and savers. This would be a Straffa or even Robert Murphy understanding. Rather multiple rates of interest to Woodford is simply stratification of a singular conceptual policy rate to account for frictions.
“Suppose that instead of directly lending to ultimate borrowers themselves, savers fund intermediaries, who use these funds to lend to (or acquire financial claims on) the ultimate borrowers. Then it is necessary to distinguish between the interest rate i s (the rate paid to savers) at which intermediaries can fund themselves and the interest rate i b (the borrowing or loan rate) at which ultimate borrowers can finance additional current expenditure.
Like the gambler who things they can game the system
Which is a key point, that modeling of aggregate values, no matter how precise based on the last crisis will not be the same for the next crisis. This is because entrepreneurial optimizers, profit maximizers will find the next avenue to exploit. These exploitable holes exist because of monetary excess resulting from a departure from free-market banking will create a crack in the structure, and not always in the same place.
The system is design for smart individuals to work around it and take advantage of it. However, the more convoluted it becomes the less just it also becomes. This is why perhaps the focus should be on sound money rather than perfecting the a system that can always be gamed by the next generation of smart profit maximizes.
It is not that economic science should not model, rather we need to a course correction. The models should be based on the acknowledge that the natural rate framework, as seen by econometric models of R-star is not a meaningful tool. To build a model on this will not temper future business cycles or result in a higher growth model, rather a misallocation of resources.
Woodford’s Model for future monetary policy
i) the current value of the “natural rate of interest” – the real interest rate required for output equal to the natural rate, in the absence of financial frictions – converted into an equivalent. One might alternatively define the natural rate as the real rate that would be required for output, nominal interest rate by adding the current expected inflation rate, and (ii) the current interest-rate spread. (p.24-25)
Woodford’s new policy suggestions include not just interest rate targeting but spread targeting. If policy rates are at zero bounds then Central banks could intervene in market by favoring “the extension of credit to intermediaries by the central bank, on easier terms than are available from private creditors.
…Such a policy can relax the constraint on the size of intermediary balance sheets resulting from limited capital in the intermediary sector, by allowing increased leverage. “(p.27)
I question if the continued path of more complex interventions into market mechanisms is the best policy for long term growth. When this type of policy is known, opportunity can arise where economic agents expect the policy act in a way that would either change the policy action or would not result in desired effects in aggregate or in an optimal free market outcome of allocative and productive efficiency.
Reducing spreads is, in essence, returning a profit margin for firms that are working to provide a market service. It is favoring one group over another for a policy outcome which is questionable in the context of optimal growth.
Woodford acknowledges that it is not a long term policy for central banks to hold non-liquid non-treasury assets, however, the justification being a welfare effect to society if the central bank deems the market is not providing enough credit.
Woodford concludes that until increased regulation and financial supervision is in place, to have the policy tool of spread reduction to enhance rate targeting is recommended.
Zero Bounds Policy
The policy of targeting spreads as a zero bounds policy brings into question if the central bank should have put themselves in a zero bounds situation in the first place.
If a central bank as exhausted its primary monetary tool by putting themselves in a zero bounds position, perhaps it is based on their political motives to jump-start the economy as fast as possible instead of what is good for the long run optimal. This includes not only inflation and output but true allocation based on value. I question if the adverse trend in the Gini coefficient is not correlated to the central bank mis-estimating a fundamental policy guide as the natural rate of interest and whether a rapid and persistent decline in rates to a zero bounds situation did not exacerbate that.
Therefore, a further theory of fine-tuning a policy which is questionable comes into play, better is to examine the natural rate and rate targeting policy.
That is the cost of borrowing increased simply because the natural rate in certain markets was still higher than the fed funds rate increase. Wicksell would maintain an increase or decrease the money rate of interest needs to be seen in the context of the natural rate.
Even if the intricacies of the money market model did play a significant role, it comes back to the point that, R-star an econometric proxy of the natural rate was not high enough to keep the inflation of asset prices in check.
That is an economy with fiat money at an aggregate level will not manifest money macro equilibrium with econometric estimates of the natural rate of interest, no matter how precise the model seem.
The next crisis will exhibit different subtle features and characteristics that will cause this macro disequilibrium to prove out. It is precisely because disequilibrium with rational and forward-looking decision makers that optimize behavior, that investors will circumnavigate counter active policy.
The underlying premise being if there is a disequilibrium in the market for money, it will manifest in a new way. You can suppress the symptoms, but the disequilibrating effects, whether it is seen in, entrepreneurial efforts being steered towards non-market optimal ventures, the Gini coefficient, or asset bubbles will be there will be a crack in the structure. It will result in productive and allocative inefficiency, even if the economy seems to be in equilibrium.
If it did not we would all be able to predict the next crisis and policymakers would be able to steer us clear.
Wicksell’s third definition of the natural rate of interest focused on the price level. That is there is a rate of interest that tends neither to increase or decrease prices. That is, when the observable market rate of interest is at a certain level, the price level will be stable and there will be no tendency for price inflation or deflation.
“There is a certain rate of interest on loans which is neutral in respect to commodity prices and tends neither to raise nor lower them.” Wicksell, Interest and Prices, 1898. p.188
In this situation when the natural rate and market rate is equalized you would see stable aggregate prices. Working backward into the equation, when there is no inflation or deflation, we can say that the natural rate of interest is equal to the market rate of interest.
Relative Prices versus Absolute Prices
However, this says nothing about relative prices. Relative prices could change as a result of technical process.
“It is true that as a result of changes in the conditions of production, due for instance to technical progress, first on and then another group of commodities will be obtainable with a small expenditure of labour and other factors of production, and that must cause continual disturbances in relative values. But there is no apparent reason for any alteration in the general level of money prices.” Wicksell, Interest and Prices, 1898. p.193.
An important point here is, Wicksell’s definition of the natural rate referring to general price stability needs to be seen in context. It does not go into how interest rates can affect relative prices but keep the appearance of price stability. This is taken up by the Austrian business cycle theorists.
Why all definitions of the natural rate of interest matter
It is a consequence that flows from Wicksell’s other definitions of the natural rate being filled. That is, the marginal productivity of free mobile capital being equal to the market rate, hence the demand and supply of real capital being equal, therefore, as a result, prices in a static equilibrium tend neither to rise or fall.
In other words, there are a series of conditions before price stability is reached
The MPC in natura = i(market)
Assuming static equilibrium.
No increase in general productivity from technical gains that would reduce the overall cost structure of production. For example the AI revolution or in the 1920s electrification and automation.
This last point is important because if you see price stability, it does not mean that the natural rate equals the market rate or that I=S ex-ante. It could be price changes from a change in productivity.
Prices metaphor to weight
This would be analogous to someone who works out, and the doctor says they are overweight because thet shows their weight as out of range. However, if this weight gain is muscle, from training this has decreased their fat percentage but increased total mass. Therefore, the doctor’s conclusions are incorrect. And his policy recommendation for the person to lose weight incorrect. In contrast with someone who is in the normal rate of numbers, but has skinny arms and a gut. You can not just base an equilibrium on observed data without understanding what is behind the data.
Therefore, this is the weakest of Wicksell’s definition of the natural rate of interest. Better is to focus on Wicksell’s understanding of the natural rate as the rate where the in marginal return on newly created free mobile capitl.
Stable prices can not be considered equilibrium without a capital theory
Modern theorist miss this point. The Federal Reserves mandate of price stability and target of 2% is not only arbitrary but potentially damaging to the capital structure. In the Holston-Laubach-Williams (2017) model which estimates R-star, the modern version of the natural rate of interest, this line of thinking is not considered. It is a large theoretical oversight.
theory is largely replaced with a focus on prices in a monetary economy, rules targets. For example, Michael Woodford in his book Interest and Prices, 2003 takes Wicksell’s observable consequence of stability in Wicksell’s static equilibrium construct and applies it to a dynamic equilibrium virtually without reference to Wicksellian or Austrian capital theory. It is more about flexible prices and wages for Woodford. These have to be flexible, for the past, present, and future. Rigidities versus price flexibility is more important in his equilibrium rate than developing his theory along the lines of capital theory.
Wicksell’s second definition of the natural rate of interest is the rate at which the demand for loan capital and the supply of loan capital is equal.
Wicksell writes “The rate of interest at which the demand for loan capital and the supply of savings exactly agree, and which more or less corresponds to the expected yield on the newly created capital, will then be the normal or natural real rate. (Wicksell Lectures on the Political Economy V2 Money (1935): p.193)
Wicksell’s second definition of the natural rate that equalizes the demand and supply for loan capital should be the same as the marginal productivity of this capital, that is his in natura (barter, term used by Mises) definition. He is not changing the definition but stating it from another angle.
Wicksell’s Capital Defined
The key here again is Wicksell’s definition of capital. Wicksell defines new loan capital, as mobile and not tied up in the production process. It is a very specific form of capital. It is not synonymous with common understandings of capital in terms of wealth or financial capital or simply any tool that enhances the production process, including fixed machines. Rather, Wicksell’s understanding goes back to the original meaning of capital from Adam Smith. Smith understood capital as ‘stock’ which in farm terms meant movable capital from a farm, hence the word livestock.
Wicksell writes: ” Of course, we are not here primarily concerned with capital which is more or less fixed or tied up in the production, such as building, ships, machinery, etc., for its yield has only an indirect influence on the interest rates in so far as it can attract or repel the employment of new capital in production. It is the latter mobile capital in its free and uninvested form with which we are concerned.” Wicksell, Lectures on the Political Economy V2 Money, (1935): p.192
Not monetary or fixed capital
Wicksell discusses the production process and real physical capital, and not the price in money terms or credit at the bank for loanable funds. The supply and demand for capital meet in real, rather than monetary forms. Specifically, here Wicksell’s discussion again is concerning real mobile capital. This is congruent with his earlier writings that this is a non-monetary return on capital. To reiterate the point it is called the “natural” rate of interest rather than the monetary rate of interest, the loanable fund’s rate of interest.
Wicksell’s Theory did not Elaborate on Estimates
Nor is it an estimated rate of interest in a monetary economy. If Wicksell wanted to develop that theoretical line, that is an estimated rate in a monetary economy, he would have elaborated on this. Rather he specifically used the word ‘imaginary’ in reference to the natural rate and discusses at length the notion of capital being real and this means distant from any monetary influence.
If money were embedded in this equation it would change the whole theory. It would be a different theory, and would not link the real and monetary worlds in the same way, rather a distorted way.
Wicksell writes: “My thesis is, therefore, only an abstract statement, and somebody, perhaps, will ask: what is the use of it then? But I venture to assert that it may be of very great use all the same. Everybody knows the statement of Newton that, if the attraction of the sun were suddenly to cease, then the planets would leave their orbits in the tangential direction; this, too, of course, is only an abstract proposition” Economic Journal, XVII (1907), pp. 213–220.
It is a theory. A theory that describes an abstract theoretical concept, the “mechanics of price”, rather than a prescription for monetary policy to engineer the demand and supply for loan capital.
Wicksell does not go into how this should be determined or estimated or if it should be estimated, rather it is positive explanatory theory rather than normative policy assertions with welfare trade-offs.
These definitions of the natural rate of interest will be later taken up later by Mises in The Theory of Money and Credit in 1912, and Hayek’s Prices and Production in 1935. Keynes also explored this in Keynes’ A Treatise on Money in 1930.
The natural rate of interest is an unobservable hypothetical rate of interest that was conceptualized by the Swedish Economist Knut Wicksell. There were precursors to this theory, such as Henry Thorton An Enquiry into the Nature and Effects of the Paper Credit of Great Britain in 1802, however, it was Wicksell’s theory that can trace a direct theoretical lineage through the twentieth century (Mises, Keynes, Hayek, Woodford) to today’s central bank’s key econometric variable and policy tool R-star.
Great knowledge is often lost through time. This is why it is imperative to return to the original understanding of Wicksell’s natural rate of interest to gain insight into current definitions and uses.
Three definitions of Wicksell’s Natural Rate of Interest
The natural rate of interest as understood by Wicksell meant three different interrelated ideas, depending on which rendition Wicksell was writing about.
Barter Ratios – The rate of interest that would correspond to the return on new capital if barter ratios were used.
The demand for and supply of savings and investment – Rate of interest that would equalize savings and investment ex-ante.
The rate which brings price stability – The rate of interest that when harmonized with the market rate of interest would bring general price stability.
Subsequent economists developed or at least emphasized Wicksellian ideas based on the particular definition that worked for their model. For example, Mises, the in rate with relative prices, Keynes I=S ex-post, Michael Woodford focused on price stability through econometric estimates.
The key insight here is these three definitions are interrelated and should be synonymous, if and only if, you understand the original definition of the natural rate and the intent of Wicksell’s theory, that is it was an interest rate that was based on the capital theory of Böhm-Bawerk.
Taking one of these definitions or a part of it would lead to incorrect theoretical assumptions and models.
The purpose here is to look at the first version of this rate of interest.
Natural Rate of Interest in natura
Wicksell’s definition of the natural rate of interest by Wicksell is as follows:
The natural rate of interest as understood by Wicksell was the “rate of interest which would be determined by supply and demand if no use were made of money and all lending were affected in the form of real capital goods.” (Wicksell Interest and Prices p.188).
In other words, the natural rate would “more or less correspond to the expected yield on newly created (real mobile) capital” (Wicksell, Lectures on Political Economy V2 p.193) if barter ratios were used.
This definition is what Wicksell deemed as more accurate and precise definition than simply the ‘real interest rate of actual business’.
Wicksell writes “A more accurate though rather abstract, the criterion is obtained by thinking of it as the rate which would be determined by supply and demand if real capital were in kind without the intervention of money” (Wicksell, Interest and Prices pp. 29-30).
The important point here is Wicksell’s definition of the natural rate specifically and intentionally excluded the influence of money.
That is, the natural rate of interest by definition, as understood by Wicksell, is expressed in non-monetary terms. In other words, the natural rate is the marginal productivity of capital without reference or use of money and money prices.
This is why it is called “the natural rate of interest”. If money is used or referenced, such as money prices, then this is not the natural rate. If money prices were used it would be another rate, by supported by another theory, but it does stand on a footing in the context of Wicksellian theory.
Therefore based on the above quotes, directly from Wicksell an understanding of Knut Wicksell, the natural rate needs to be non-monetary.
A Unified Theory of Money
A unified theory is the central point of Wicksell’s theory. The reason why Wicksell’s theory is important is not just to explain price movements or disequilibrium, it was to create a unified theory of economics, that included capital, interest, and money. Wicksell stated the issue he was trying to correct in 1898 was “there is no complete and coherent theory of money.” (Wicksell, Interest and Prices, p. 27).
There was a dichotomy between real-world economics and monetary economics. The quantity theory of money explained price movement in the long run, but after price adjustments occurred as a result of the increase in the supply of money, there was little else. It was again, a world of supply and demand and a world of money which had no real effects other than aggregae price level movements.
In contrast, Wicksell put his theory of interest intentionally at the center of theory because this was the linkage, the element that unifies these two rehalms of economic thought.
However, in order to unify the bifurcated theory, the two worlds need to be defined clearly and not intermingled or it would dilute or nullify its theoretical power.
Therefore, the starting point needed to be a theory of interest that was based on a natural rate, a rate without money. This is because that was the representative rate of interest for the real world, the in world without money. It was the rate not in money.
Confusion in Economics in Wicksell’s time and today
Wicksell goes on to write ” Economists do not tire of impressing on their students that money and real capital are not the same , that interest on capital and interest on money are consequently different things”. But as soon as it comes to apply these ideas, almost without exception ‘the two subjects are mixed up in the most inextricable confusion’, as Mill puts it”. (Wicksell Interest and Prices p. 30)
It is this confusion that needs to be clarified. Micahel Woodford assumes a definition of the natural rate of interest, that is not congruent with Wicksellian theory. Neither the theory of Knut Wicksell of the Wicksellians that further, studied Wicksell’s ry.
Wicksell writes ” It is only with the development of a real theory of capital” (Jevons and Bohm-Bawerk)… it has become possible to make a survey of the phenomena of capital and interest, as they would be exhibited on the purely imaginary assumption that they could take place without the intervention of money and credit” (Wicksell, Interest and Prices p. 30).
Wicksell continues along the capital-centric lines by stating: “There is nothing so far to bring the rate of interest on money into coincidence with the rate which would be determined by the supply and demand if real capital goods were lent in kind.” (Wicksell Interest and Prices p. 30).
Therefore, we can conclude here, based on his own words, that the base of his theory of the natural rate of interest is real capital in the content of a world without money.
Metaphor of Water
It would be analogous to developing a complete theory and uses of hydrogen based on the properties of water, in a universe where only water existed rather than hydrogen in as an isolated periodic element. A better theory needs to understand what hydrogen and oxygen are in isolation, rather than only how hydrogen acts when oxygen is present in the form of water.
Empirical test of Wicksell’s Natural rate of Interest
Barter ratio natural rate estimate – I would try to estimate the natural rate of interest as if barter ratios were used, that is Wicksell’s original understanding
of the natural rate.
For example, calculate the natural rate in a competitive market like potato seeds and potatoes. Potato seeds and Potatoes are essentially the same because a field by forgoing sale or consumption of a portion of current stock and setting it aside for seed. Therefore, the ‘seed capital’ can be calculated as a ratio based entrepreneurial inter-temporal calculations.
I could also use, sugar cane, or garlic as the seed is the same as the product. I would sample say 100 potato farmers and determine the rate of return they would expect if they lent physical seed out of their yield. I would formalize the test. It seems like a trivial point, but if I could prove that the expected rate of return on real mobile loanable capital under a barter ratio was different than R-Star, then this would tell us something. Perhaps there really are multiple rates of interest, perhaps R-Star is not the real world. What does unobservable mean – Pretense of knowledge
The word unobservable in physics (Woodford wanted to study physics) is not the same as logically unobservable. In physics, you can calculate an unobservable distant star though interference.
In conclusion, if you read about Federal Reserve Policy, and their R-star for monetary policy challenge the idea that perhaps their model lacks theoretical rigor because the assumptions they base it on are not tied to the theory of Wicksell as they claim it is.
John Maynard Keynes’ book The General Theory of Employment, Interest and Money published 1936 was a paradigm shift from the classical school. His book was a new understanding of money and markets. Whereas Keynes’ Treatise on Money was an extension of the theory of time, his General Theory started what is known as the “Keynesian revolution”.
My recommendation as a college Economics Professor is, you need to read the original the General Theory, not someone’s interpretation of Keynes theory, as you will discover a radical difference.
This is why I present his book here for you to read or skim.
Download The General Theory of Employment, Interest Money by John Maynard Keynes in ebook formats for free
The incommensurability of Classical economics with economics
Keynes’ General Theory was significant because it reinterpreted the way markets function. Markets were not seen as simply a self-correcting mechanism, but rather, a complex dynamic between, consumers, investors, and government where human emotion was coupled with economic incentives.
Most notably John Maynard Keynes’ book The General Theory of Employment, Interest, and Money rewrote the textbook understanding of supply and demand behavior in aggregate, and the role of government in terms of countercyclical policies. This newfound role of government action was written in the context of a time of great economic upheaval known as the Great Depression. It appealed to academics and policymakers as it explained market failures to adjust to equilibrium. Keynesian economics theory was important, not only because of the logic behind the theory but specifically, the application empowered the espousers to help the situation of the time.
Think about it. This one book was the basis of such much change in government intervention in economic affairs. Do you think that was correct?
Did Keynes deepen the dichotomies in economics with his General Theory?
Whatever you think of the rigor of Keynes logics, the effect on economics was divisive. This is a positive, rather than a normative statement. The book furthered the dichotomy between monetary and real economics as well as microeconomics and macroeconomics. This is a controversial topic but worth consideration and examination. Some will argue it is only now we are seriously trying to address the micro-foundations of macroeconomics as well as the synthesis between monetary and real economics, for example, Michael Woodford’s Interest and Prices. Do you think Keyes’ book added or subtracted to the advancement of economics?
Read the General Theory not someone’s interpretation of Keynes
Many people have studied Keynesian Economics for an interest, studied AP economics or took college classes. Students might even be able to give the pros and the cons, yet never actually read anything by Keynes. Legions of economic students, even at the graduate level are immersed in Keynesian theory, yet have never read one word of the actual writings of John Maynard Keynes.
Policymakers have made their living off of promoting Keynesian ideas, yet have never read The General Theory of Employment, Interest, and Money. Can you that?
I teach Economics at a college level and working on my Ph.D. I tell my students it is critical to read primary source material from original thinkers. This is always better than the textbook, the web or even my understanding as a Professor. If you want to understand Keynesian economics, read Keynes’. Become an eye-witness to the history of economic thought. If you want to understand any ideas in economics, read the words of the world philosophers of the past. If you are inspired make your own interpretation in the content of the time and place you live in by reflecting on the primary source material.
Great minds come around only once every hundred years or so, read their words, not someone’s interpretation of them.
If you actually read Keynes you will find, often subsequent economist developed theoretical models that are not congruent with Keynes’ original writings. Ideas that were never in the General Theory are associated with Lord Keynes.
Ideas found in the General Theory of Employment, Interest and Money
Some ideas from are:
consumption function – The relationship between consumption spending and disposable income.
principle of effective demand – Total goods and services demanded that determine the rate of employment.
liquidity preference – The preference to hold money compared to other assets.
Sticky wages – Downward rigidity of wages because worker are reluctant to take pay cuts when a company or economy is in financial trouble, therefore the intersection of aggregate demand and aggregate supply can be suboptimal resulting in unemployment.
demand not supply – The classical economics understood Say’s law, that supply creates its own demand as valid, however, Keynes believed that demand was the key component of determining the level of the economy.
low employment equilibrium – The ideas that equilibrium was not synonymous with the optimally efficient use of resources because of irregularities that exist in the market system.
Interventionism – Governments role was central in managing the business cycle.
Gave new predominance to these ideas:
multiplier – A change in autonomous spending results in a larger change in real GDP
marginal efficiency of capital – “the rate of discount that would make the present value of the series of annuities given by the returns expected from the capital asset during its life just equal its supply price.” – (Keynes General Theory (p.135).
Ideas which are Keynesian are interpretations of Keynes and formalization which have not been questioned to the core and some which were not in his General Theory, such as the IS-LM curves. Therefore, there is no better way to understand the pros and cons of Keynesian economics than reading or skimming, The General Theory of Employment, Interest and Money.
If aggregate demand was the main driver behind the increase in GDP and prices including nominal wages were sticky, the economy could be stuck at equilibrium below full employment.
For example, if the aggregate the demand curve shifts to the left and output reduced through a drop in consumption (Y=C+I+G+NX), however, wages do not equilibrate, in other words, wages do not drop, rather they are sticky, there will be persistent unemployment. This unemployment will reinforce the cycle of depressed consumption.
The Keynesian prescription
If aggregate demand and aggregate supply intersect at a level below full employment then, the solution is to boost aggregate demand. It does not matter how, public works, tax cuts any fiscal stimulus will get the lifeblood of the economy circulating through the circular flow. The goal of Keynesian economics is to stimulate the economy through fiscal stimulus when markets fail.
What do you think of the economics of John Maynard Keynes?
Above is a downloadable free version of the complete General Theory of Employment, Interest Money. If you have any commentary on the impact of Keynes’ theory or your understanding of this book, please share this in the comments below or contact me.
This is a free version of Capital by Karl Marx for download below in PDF. It is not just the book Volume I, that are found on other websites, nor an on-line version where you have to scroll through endless pages in your browser, rather this is Volume I, II and III in one book in a downloadable format. Further, the edition is free, based on public domain copyright. Therefore, please download my complete version of Capital by Karl Marx for free.
The books are above, it is a simple download link.
I zipped the files because of the size. All files contain all three volumes of his works and a short introduction by me. My downloads are secure and virus free. My name is Mark Biernat and I am a college Economics professor. I am providing the works of great Economics of the past because I love Economic theory and the history of Economics.
The world is a war of ideas – Schopenhauer
Karl Marx’s ideas were perceived as so dangerous that the Germans shipped him in a sealed boxcar to Russia because they were afraid of his economic theory spreading.
What were Marx’s ideas and why were they so powerful?
Although his theories are not largely recognized today as valid, there are some truths in his theory. Even in our democratic mix economies, there are some aspects of this theory that have insights into how markets operate and fail. Further, as times change his ideas may become more relevant and even more valid depending on the course of the future.
I know this sounds crazy right? However, with population growth and limited resources in a future Malthusian world scenario, stratification of wealth and Gini coefficients of income distributions skewed, Marxist ideas might have greater value in understanding human nature and the social science of economics. I believe in capitalism’s production and allocation efficiencies and I do not believe religion is an opium of the masses, however, a further examination of Marxist ideas is worth anyone study.
Karl Marx was a classical economist and wrote in a time that echoes our times in a strange twist of irony.
For example, my family came from Eastern Europe, and before the communist revolution. At that time, most people worked their whole life, yes their whole life for one guy who lived in a big house and owned the land granted to him by some ancient government. Is that what you want from your one existence here on this planet? Yes, you could have a house and a small field but most of your wealth a productive activity when to the owner.
However, how much different is that than today? Unless you are the owner of a business, you are part of the working class. Even if you have a salary of 65k you still are working for the company, bank to pay the mortgage, insurance, medical and all the other expenses. Your boss has great leverage over you because he knows you have bills to pay. It is not exactly like you are sharing in the wealth of your productive efforts proportionally or a free man. A free person is someone who has everything paid off, savings and economic rewards are equal to productive efforts. You basically are allowed to live in a house on a tiny piece of land for working your life away.
You can see that Marxist ideas have emotional appeal as well as some theoretical truth based on the time. I and my family have always been unrepentant capitalists, as Marxist theory is not only economic but also has an anti-religious partiality. However, the economic theory alone, as articulated in Capital is a worthy read. In one sense, understanding Marx will better make you be able to defend your own capitalist ideals. At the very least it is a fascinating read of history.
The Irony of Karl Marx
Marx wrote against the exploitation of the worker by the capitalist. However, could not his ideas have some validity if you replace the ‘oppression of the capitalist’ with the ‘burden of government’ and excess taxation? Is not the oppression of today, not the entrepreneurs who create Facebook or Google, or Bill Gates and Warren Buffet who gave away his fortune to charity, but a government that keeps about half your productive efforts in a year, creates an inefficient distribution of wealth and “deadweight loss” decreasing consumer surplus and producer surplus? The feudal lord only required 1/3 of your productive time.
Marx lived from 1830 to 1883, however, if you substitute the players in his book with a modern interpretation (such a big company or government, you will find a relevant view you can relate to.
Is there a new theory for Marx?
The paradigms of ideas shift when old ideas are looked at in a new way. I recommend reading Capital because you might find something that was not looked at before. Something that is valid and meaningful that has been overlooked. These discoveries happen all the time.
If you are Marxist or leaning to the left, try to see where the theory in Das Kapital is still valid and where it is outdated.
I teach economics in a college setting. Although I personally have libertarian capitalistic views, I want the academic space I teach in to be a forum for the exchange of open ideas as no one has a monopoly on the truth. Therefore, I offer the works of Karl Marx free for download and suspend my preconceived notions.
Adam Smith contrasted with Karl Marx
While Adam Smith believed capitalism was motivated by enlightened self-interest, people create value to satiate demand. When people pursue enlightened self-interest society as a whole benefit in ways that could never be imagined or engineered. Marx has a different view.
Karl Marx’s theory was the exploitation of labor, that is to create producer surplus, from uncompensated worker effort. The owner of the production could claim surplus value because of legal protection. The ruling regime granted capitalist property rights.
What was the theory of Marx?
If we understand what Marx believed was wrong with capitalism we can create a better capitalism model.
Alienation (Entfernung) – Marx believed the work was a fundamental source of happiness in people. However, people needed to see their work in the objects they created. Since the modern world and capitalism is focused on specialization this alienates the worker’s product from the worker. Marx believes this alienation or entfernung was the first wrong of capitalism.
Modern work is insecure – Workers are inputs that can be replaced.
Primitive accumulation (Ursprünglich) – Workers are unfairly compensated for the value the create. He discussed the theory of “primitive accumulation”. Marx saw profit as a thief of worker surplus. Profit is another term for the exploitation of talent and effort.
Capitalism is unstable – Because of the boom and bust cycle which are endemic and caused by a crisis of overproduction and abundance from the efficiency of specialization. This overabundance causes unemployment as not everyone is needed. His answer was redistributing the wealth of producer surplus to worker surplus.
Commodity fetishism (Warenfetischismus) – Capitalism puts emotional strain on capitalistic – Whether it is marriage or the internal struggles they go through. Their economic interest overrides humanistic concerns.
Marx believed a capitalist ideology was created because society is brainwashed to attribute value judgments on things that do not matter.
So is Marx correct?
He makes some points relevant to his time and important to continue to improve our time. Some ideas he had was free education, free libraries, public transportation and roads, progressive income tax. These ideas have all come to fruition and as capitalism evolves in our mixed economy more of his ideas are ironically become manifest through capitalism.
Marx is a conflict theory because one group of society is not in competition but conflict and oppression with another group in society. It sociology is one model that is not common. More common is cooperation, competition or isolation. Marx’s idea is this conflict is between the rich and the poor. Class conflict was the basis of his theory.
Marx’s goal was justice. He did not envision the totalitarian oppression of Communism, which to the Soviets was seen as a transitional state towards the path to Utopia. He wanted to create an equal society in terms of economic opportunity to actualize their lives through intellectual endeavors.
In the context of his time, Marx was writing about, a transition from feudalism to industrialization. During feudalism, people had rights to have their own animals and farm in the commons. However, with the passage of the Enclosure Acts in the 18th century in England, land ownership and use became restrictive and migration to the cities limited workers to factory work for making a means of employment.
This set up Marx’s model of workers and capitalists which is elaborated on in his theories on capitalist ideology. In the factories, factory workers were employed at substance wages and children were used as cheap labor.
The classes were the factory owners or the Bourgeoisie and the workers or the proletariat. The capitalist system is based on a system that encourages inequality. Through education of the proletariat and eventual revolution that would over thought the system, a new system where all people were treated equally. Further, the capital and businesses were community-owned, this system was called communism. It was the abolition of private property.
Marx eventually had to flee Germany and reside in London. Marx cooperated with Engels.
Marx used Hegelian logic, dialectical materialism in his theory. In another twist of irony, in one sense Marx was the first hyper consumer, as all that exists in the world was material, rather than spiritual transcendence and meaning. Therefore, his system of happiness (util maximization) was based on satiation through material equality and intellectual pursuits, not a soulful transcendence.
Although scarcity is the fundamental problem of economics, it is not the meaning of life or the answer to the human condition, take a look around you.
Marx was incorrect on two basic points
This labor theory of value – which stated that the value of any object is the amount of labor input into its creation is the basis of price.
Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it – Adam Smith
Value is not determined by labor input or any objective measure but by supply and demand, it is subjective, whatever value people ascribe value to it.
Free movement of labor and capital – in modern society makes working in one place or profession a choice rather than a fate. Further, there is intellectual capital which has little to no barriers to entry in contrast to the ideas of the early industrial age.
If you do not like your job quit
I personally live semi-off the grid (or at least off the matrix) by growing my own food and creating my own businesses. You are not as indentured to your job and your career as you think.
The big picture – Freedom and equality
These are seen as the two social values that are parlayed to create a society that is just. Justice as the ultimate good. They have to be balanced with both equality and freedom which are limited goods. You do not want the freedom to yell fire in a crowded movie if it was not true, or allow children to smoke. Nor do you want to make everyone so equal that it crushes the human spirit. Society as a whole should strive to maximize justice.
Marx had an inordinate emphasis on equality which brought societies which espouse his ideology to a lower social medium. Compare North Korea to South Korea. What was once West Berlin or East Berlin? Hong Kong to mainland China before China became a mixed economy. If you believe that humans are naturally good then, if you maximize freedom justice will prevail. If you believe that humans are fundamentally exploitive (rather than competitive), than Marx’s ideas might appeal to you.
I believe humans are both good and competitive, not in aggregate exploitative. In aggregate you will find exceptions, but not a rule. Understanding the difference between healthy competition and straight exploitation is something that you have to decide. I would recommend looking at the people who live next to you or you are in a relationship with. Are they fundamentally bad people or someone like yourself, someone with dreams and hopes that they are trying to actualize?
Does self-actualization go beyond the tangible goods and economic prosperity, perhaps faith and God is the center rather than material goods like Marx theorized?
The book On Liberty by John Stuart Mill written in 1859 is available here in PDF format for e-readers. You can download it below. The idea of Liberty is central idea behind our nation. The US was founded on the ideals of the enlightenment, something I personally believe in.
Social values of justice, equality and liberty
The idea of individual liberty is to some extent has taken second place to the idea of the common good. Society has three main virtues, liberty, justice and equality Justice being the ultimate good, something you can never have too much of. However, between equality and liberty, the pendulum is swinging in favor of equality. Equality is often revised and renamed and the motive is expressed as the common good. However, that is a slippery slope. As warm and fuzzy the notion of the common good is, it is not the way to run your life or a nation.
John Stuart Mill On Liberty explains why. Mill believed he stood in opposition to the idea that someone else has a greater wisdom to run your life than you, even if your actions are deemed immoral by current social norms.
Was John Stuart Mill smart or just another writer with ideas?
On a side note, John Stuart Mill had an IQ estimated to be 180 and the clarity of this though illustrates this. That is why reading On Liberty in pdf is so engaging it is written by a clear mind. When you read this book, it elevates your mind and you can see it was written by no ordinary thinker.
What is the idea behind liberty?
Although liberty is not an unlimited good and therefore, not the ultimate social virtue, it is a close second. The reason that liberty is not unlimited, is we do not have the right to do things that will harm others. We do not have the liberty to yell ‘fire’ in a crowded movie house. That is the least of the examples. Justice you can never had too much of but liberty yes. However, to get to that social optimal society, the path is through the promotion of individual action which is not restricted by the abstraction of the political economic systems.
The idea of liberty is simple, the individual rather than the state can bring individuals and in aggregate society to a greater level. Mill writes:
over himself, over his own body and mind, the individual is sovereign.
John Stuart Mill was also the first to articulate the Harm Principle. That is:
the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.
These two ideas is largely the basis of libertarian political ideas and one of the reason why I am a Libertarian. It would be so easy for civilization to De-evolutionalize and resign oneself to state paternalism, but I for one will not because it is not good for me or good for society.
I also feel that Mill was insightful regarding the idea that the tyranny of the majority.
It is not that there is anything radically new in Mill’s ideas it was an explanation of the continued struggle for mankind to resist the state, the struggle between authority and liberty. The ideas were in the air and he was influenced by the German philosopher Wilhelm von Humboldt, in his essay On the Limits of State Action.
In this book you can see the connection to Utilitarianism.
I have kept this post fairly short as its main purpose was to deliver a download of On Liberty by John Stuart Mill in pdf format for ebook readers, and not to analysis it to the end. It is a short book and better you skim it than read my analysis.
The Communist Manifesto by Karl Marx and Friedrich Engels changed the world. It was a social political gospel for the economically disheartened.
I have put together a free copy of Karl Marx in PDF here. I resisted interjecting my own views into the introduction of the book as I did not want to sway the objectivity of the reader or ruin the experience of reading it with an open mind.
The question is if you lived during the time of Marx or afterward, without the experience of the 20th century Communism or Stalin or the Soviet Union and the surreal society that resulted from this ideology; would you personally have been swayed by Marx’s writing? That is, the question that you have to ask yourself. Imagine yourself as a peasant in the countryside in Eastern Europe whose family had been working for a land owner’s family for centuries. In other words your economic life, and that of your children’s centered on your, indentured existence and the landowners entitled existence based on birth right. He got the land (and you as a serf) as his family was one of the Kings cronies not through merit. Would that be fair?
Then you read the Communist Manifesto in PDF (OK not in PDF as there were no e-ebooks back then), what would have thought? Would you have had a different idea if you read it in 19th century London, England as a factory worker? Or a free farmer in France or Germany?
How was Lenin (who the Germans were so afraid of put in a seal box car to Russia) different from Marx? These are great historical questions but you can not answer them fully until you read the book to start. So download my version of the Communist Manifesto in PDF above.
What I would have done after reading the Communist Manifesto
The enlightenment, anti-Marxism and the ideas of Adam Smith are so ingrained in my mentality it is hard for me to imagine anything other than me trying to escape to America where things were more enlighten and petty Czars, Kings and even the Pope did not have such a top down influence on people’s lives. But this is me I am an escapist expat anyway.
I do not think I would have swallowed his ideas fully. I do not believe in replacing one top down approach with another. I know Communism was supposed to be a bottoms up organic movement, but to get to that ideal state, if you read Marx (and Engels) in 1848, there would have to have been a revolution and some Utopian State classless society with the elimination of private property, I do not think I would have believed it or promoted revolution which could have resulted in bloodshed. Further it is based on anger and resentment, not a good thing to base a new theology on. Us Vs. them.
I think I would have tried to escape to the USA. What would you have done?
Why I am not a Marxist and no Marxist is right
At the heart of the criticism of Marx and the Communist Manifesto was Marx’s theory of value. To date no Marxist has been able to refute this criticism. That is, value is not determined not by the amount of labor put into a product, but subjectively by supply and demand. I did not make this up, that is a law of economics, so do not blame me. It is just the way it is. Value and price is subjective not determined by an objective measure like labor or worker input. Marx’s error was so glaring about workers and the proletariat and bourgeoisie, it is hard to believe in retrospect that anyone believed that “proletariat vs bourgeoisie in the Communist Manifesto”.
What amazes me is people in the USA and Europe people allow themselves today to still be manipulated by this play on emotions of class struggle. “the poor’ Vs. the rich”. In a free society where people have access to education and intellectual capital like a skill, training or an idea pay more than physical labor or old fashion forms of capital, why they still play into the hands of class warfare politics. Where people are free to move around the country and sometimes world as can capital, especially their intellectual capital, I do not understand all this ‘yeah its ‘them’ that makes society all wrong’ attitude on the left. Someone please explain it to me?
The best form of socialism is capitalism.
Do not be so naive when you here politicians beating the drums for a more just society and spreading the wealth and making ‘them’ pay for ‘us. The US and free market economies have the largest and wealthiest middles classes in the world. Socialist countries both Communist style and Western European style have a poor and more restricted middle class. Even in the one Utopia that seems to work, and everyone points to, that is Sweden, I would still way rather be an American or British than Swedish. I live in the EU the average Swedish guy lives a very modest life, not like in fun, free America. Who can deny America is not fun? But let’s be honest, most of Socialism or Communism was and is more like North Korea, oppression of the human spirit, which is the greatest poverty of all.
Karl Marx was a left-wing Hegelian who argued that God was an “opiate of the masses”. The purpose of this post is to give an answer to Marx’s view of religion for today’s time. Now more than ever, economics and wealth is a hot topic. The idea of the poor, the struggling middle class, and the wealthy are no less relevant than in Marx’s time. Although the developement of economics and religion was not predicted precisely by Marx, there is a relationship between faith and economics that Marx seemed to anticipate. What were his ideas, and why did he hold them? I will examine the question, “was Marx right about his theory of religion”? I will clearly answer this question.
Why examine Marx when we have great thinkers like Dawkins and Hawkins answering the question about belief for us?
Why is it important to return the arguments of Marx when we have people like Stephen Hawkins and Richard Dawkins telling us God did not create the universe?
The reason is that modern scientific arguments offer nothing new, and are not as well logically developed as the those already stated in classical philosophy, and more recently by Marx, Feuerbach, and Freud.
The smirk sarcastic arguments of the showman Richard Dawkins, a man who knows less about religion than I know about science is dwarfed in comparison to the arguments in classical philosophy (in light of Dawkins’ smugness, the South Park parody of him was not unjustified). Hawkins puts on a similar show of ignorance or at least disrespect. for epistemology. Therefore, I like to dismiss modern cult figures such as these. Unless someone really offers something that new, that the classic thinkers did not discuss, there is not much to get excited about. Therefore, I lets return to the nineteenth century.
I would say of “great classical atheistic” arguments against religion put forth by Marx, Feuerbach, and Freud are as relevant as ever. Karl Marx had the weakest arguments. However, Marx’s are worthy of examination.
The ruling classes used religion to give false hope and comfort to the poor and strengthen and keep their power
The poor used religion as a form of protest against their economic conditions, to aid them in their economic alienation.
In both cases Marx argued that religion, at its core, was a projection. It was a false projection and illusion, which found its genesis in economic inequality and material suffering. The advent of atheistic social state would extinguish the need for this projection and the need for religion.
What seems true in Marx’s negative theology today – the relationship between economics and faith
Religion often is misused for purely power-political goals, including war. – Hans Kung
The ruling class does use religion to unconsciously manipulate the masses. For example, as theologian Hans Kung points out about the neoconservatives in the USA, in “an almost Orwellian structure of lies thought that they had God on their side in the invasion of Afghanistan and Iraq.” This message was conveyed to the American people, and it did influence the course of events for many years to come. (My input is: the war may or may not have been politically correct, but to say that God, the center of all love in the universe was on the side of the American missiles, is incomprehensible and manipulative. Furthermore, I find the vocal mixing of religion and politics distasteful.)
You can see that in Scandinavian countries, like Sweden and Denmark, that economic prosperity seems to have weakened the need for religion.
Via state-sponsored state atheism and socialism in places like China, religion is no longer necessary or at least practiced by the masses.
In capitalist countries like the UK, as prosperity sky rockets, religion wanes. Ethical scientific atheism and a general attitude apathy concerning religion as material needs are satisfied the youth becomes predominate and the paper tiger of fundamentalism is easily knocked down.
In contrast, in impoverished countries like Brazil or Latin American religion is as important as ever. Liberation theology has even developed which is in essence an empowerment of the economy.
Therefore, from a non-theoretical, but an observable level it seems that Marx’s critique of religion is not without merit.
A deeper look at the theory of Marx’s ideas on religion
Die Religion … ist das Opium des Volkes – Marx – Critique of Hegel’s Philosophy of Right.
I often glaze over quotes and like to read people’s analysis of thinkers, as it is mentally easier. However, this quote of Marx summarizes better than I can regarding his theory of religion.
Religion is…. a protest against real suffering. Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people. The abolition of religion as the illusory happiness of the people is the demand for their real happiness. To call on them to give up their illusions about their condition is to call on them to give up a condition that requires illusions.
Marx further developed this idea of protest against suffering to equate it to material lack. Therefore, what religion was a protest against material or economic suffering in the world. Not only, but primarily. When needs are satisfied, people can give up their illusion of God and achieve real happiness.
Why did Marx have these views?
Marx was born Jewish but raised as a Christian to avoid anti-Semitic persecution. This early, on imprinted, a distaste for religion on his personal psychology.
He subsequently studied Hegelian philosophy and with other young Hegelians like Bruno Bauer and developed the idea that the material world, not ideas, was what mattered in the world. This is ironically, in contrast to Hegel’s belief that the world is a war of ideas.
Religion as a projection – “The religious world is but the reflex of the real world”, was at the core of his ideas. It was a symptom, an illusion.
Why Marx was wrong on religion
Flowing from the three points above are my criticism of Marx. The last being the deal breaker.
Marx on Religion my first criticism: – My first question is, do you think that Marx’s own experience living in an anti-Semitic world had an influence on his objectivity? Was his view of atheism a form of protest and psychological satisfaction against his own early life experiences, and his philosophy was only the layers added as an ego defense mechanism? Objectively speaking, I think we all do this to some extent.
Marx on religion my second criticism: – Hegel himself said, ‘There is a complex stratification of reality’. As humans we not only have material needs and suffering but social, psychological and spiritual needs (for example as illustrated by Maslow’s hierarchy of needs). Marx over emphasised the material world and over simplified the equation for human happiness.
A projection of nothingness?: My third criticism
The real ‘opium of the masses’ is not religion as Karl Marx has said, rather, a belief in nothingness after death. This belief is certainly easier to accept and less frightening to people than the belief, that their betrayals, greed, cowardice, murders and other assorted sins will be seen by all when their life on earth has ended. -Czeslaw Milosz
People’s projection of nothingness or non-existence after death is just as much a projection and an illusion based on hope and fear as other people’s projection of ‘an unfolding of a greater reality’ after death. Some people find great comfort in projecting nothingness and take pride in this belief complete with an ego defense mechanisms. Nothingness is a projection also.
We can not conclude on the reality or none reality of God based on the psycho-genesis or anthropomorphic understanding of mankind’s belief in religion, nor can we explain the existence of God based on economic and social repression like Marx implied. The existence of God, or non-existence of God, is independent of what I think, what I believe, and whatever the cause of my beliefs or disbelief. To do so would be what psychology calls “magical thinking”.
This last point is important. The existence or non-existence of God has nothing to do with what people think or why they think it. Yes, Marx was correct that the genesis of some people’s beliefs about God and religion come from an unconscious psychology of protest and longing for comfort, even economic comfort, a desire to be lifted from this vale of tears. However, this does not clearly resolve the issues about the ultimate reality or the Absolute. At best, it brings us back to an agnosticism on the issue. It is a huge cognitive leap to offer an explanation about why people believe and then advocate a strong form of atheism. If you understand this, you understand the logical flaw in Marx’s thinking. Therefore, Karl Marx was wrong about religion.
Observable evidence today that religion is not just for the economically repressed
The United States, arguably the richest country in the world, is still, at its core, a religious country. Ireland, arguably the one of the richest countries in Europe, is still religious, as is Italy, Portugal, and the-up-and coming Poland. I live in Poland and have observed an almost doubling of wealth, with only a slight decrease in religiosity. India is another rising country, like South Korea, that is religious. So many economics is the not the primary factor. Rather humans are more complex and other social and political issues are at play. What about Kuwait and other rich Middle Eastern countries. Do we, with an ethnocentric Euro-American view, on the world just discount all the wealthy from these countries just because they are Muslim?
Religion in less religious, wealthy regions resurfaces as spirituality. For example, in Boston, where I am from, in the USA I meet a lot of people who declare themselves not religious, like in Sweden also. However, many of these people believe in God or a greater reality, even if not using the language of a religious person. It is more an evolution in the collective unconsciousness and language.
Scores of wealthy people like I know personally or are known internationally, like great investors like John Templeton, are believers. So it is not a matter of one’s level of relative wealth, but ultimately choice. A choice that is influenced by our genetics and environment, but still a choice. Each person has to answer the question ‘no’ to a fundamental trust in an ultimate reality or a “yes'”. This is not based on an economic equation.
The toll of proselytization of Marxism was 110 million lives in just 70 years of the 20th century. This dwarfs any of the criticism against (many rightly so) against religious fanaticism’s ill effects.
Therefore, again we can conclude just because religion does have a liberating effect on people economically, does not mean it is untrue, nor will it fade away with economic prosperity.
The purpose of this post is not to give an argument about the existence or non-existence of God. Therefore, I will stop here. However, if you want a more detailed investigation on the matter, I recommend the works of Hans Kung. He has written in detail about Marx and religion in his book Does God Exist. His latest book What I believe, is a summary of those ideas, although Marx is not addressed in-depth.