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Economists

The economic theory of David Hume

David Hume was an 18th century philosopher who was important in the Scottish enlightenment and laissez-faire economics that lead to Smithian free market thinking.

David Hume’s contribution to economics

  1. extended John Locke’s view of property rights as a center of economics
  2. a quantity theory of money
  3. international thery of the balance of trade
Excess long-term inflows of gold - money creates an imbalance of trade. How long can an international trade imbalance last? What artificially keeps it going?

Hume on private property

Unlike Locke, Hume did not believe that private property was a natural right. This seems like a departure from Locke’s ideas, but it is not.

This is because although ownership was not a right, it was a necessary evil. Private property exists because of the fundamental economic problem of scarcity. That is, we have limited wealth and resources in this would, so it needs to be managed with the idea of private ownership. If there were unlimited goods, we would not need private property.

Unequal distribution of wealth is good

According to Hume an unequal distribution of wealth in society was a positive thing. Why? Because this is what makes people strive to improve themselves. Society gets innovation and individuals get self-actualization. Therefore, Hume like Adam Smith believed in freedom of expression in the market place.

  • Equality would destroy industry and thrift and lead to a nation to poverty.

Hume on balance of trade

When a country purses a mercantilist policy of trade, the steady inflow of  gold (money) results in inflation.  This makes the countries less competitive in the long run. Economics is about balance.  In the long run if a country pursues a mercantilist policy it will create disequilibrium, which would rebalance because of a loss  of  competitiveness.  This was known as price–specie-flow mechanism. It was an early balance of trade theory. If the central bank did not intervene trade flows would come back to equilibrium. This theory was accepted by classical economists and even Karl Marx. It was a counter to mercantilism.

The Mercantilist argument against this rebalancing thinking when like this:

The implicit hypothesis in this way of thinking is that of a low price elasticity of imports and exports. Under such conditions, an increase in internal prices with respect to international prices would cause an increase in the value of exports rather than causing changes in the quantities of imports and exports. Thus, an improvement in the terms of trade would reflect positively on the balance of payments. – Screpanti and Zamagni – An outline of Economic thought

It was a theory Cantillon believed. However, the logic of this thinking was not proven.  Free trade is a much better way.

Money

Further, Hume adhere to an early monetary theory of value.

It seems a maxim almost self-evident, that the prices of every thing depends on the proportion between commodities and money, and that any considerable alteration on either has the same effect, either of heightening or lowering the price. Encrease the commodities, they become cheaper; encrease the money, they rise in their value. As, on the other hand, a diminution of the former, and that of the latter, have contrary tendencies.

Which John Stuart Mill expanded on. It  implied a correlation between money in circulation and the price level. Hume believed that a money supply increase created a temporary stimulus because there was a lag.

Money is not, properly speaking, one of the subjects of commerce; but only the instrument which men have agreed upon to facilitate the exchange of one commodity for another. It is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy. -David Hume Of Money

Keynes later developed this theory. Central bank policy makers see money as the oil which can prime the pump to get the engine started again. This is all wrong. Stimulating the economy like this will only cause long-term problems. The economy is not an engine, more complex than can be imagined, the economy is the interaction between millions of people like me and you.

So you can see how an innocent theory like Hume’s theory of money was revisited and revised by some economists.

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Economists

Free market or government managed? – Which economic model Hayek or Keynes?

How do you see the future of the American economy? Which road is better?  Please I beg you to watch the video below. You can skip my homily on economics and sit back and relax and watch one minute of the economic video.  Just go to the center of the post and watch economics as you have never seen it before. If you do not like it turn it off and nothing lost. But it will draw you in.

The two main competing economic schools of though today are:

  • Continue to prime the pump with trickle down economics of from above with one central plan (Keynes) which is achieved by a spending push. This is supported by Obama but also the Neocon Republicans, who are most Republicans.
  • Instead of one central plan, 1000s of plans by entrepreneurs creating jobs on their own initiative, that is ground up economics. This economics arise when people are free  to act on their own dreams and initiative (Hayek). This idea is supported by the Libertarians and the Tea Party.

All political and economic empires have their end because of over extension

I live in a Post communist country. Bellow is an image I took the other morning of a building that is a monolithic ruin from this past civilization. That world was about the government can help the people better than people can help themselves.

Helping the economy with government planning will create nothing but massive waste and collapse. It does not matter if this is maintaining our empires around the globe or interfering with the markets domestically.

From an economic standpoint the answer is clear. What amazes me is why people do not see this? I am just asking the question. I would be very curious about people’s reaction to this video and if it is partial or basis to one side.

Here below, is a video created by EconStories, which illustrates the two approaches to economics.

The amount of detail in the video is amazing. Look close who is declared the winner and what happens to the loser. They made other videos which dealt with monetary policy and the Federal reserve bank. They are all good and recommended.

It is interesting to note that John Hicks who formalized Keynes’ theories with the IS-LM model and C (consumption) + I (Investment) and G (Government) = GDP and the general equilibrium theory was not a fully a believer in the ideas of Keynes. Keynes left out things like uncertainty and there were other aspects John Hicks did not agree with.

Hayek is always clearly the underdog. I do not know why and it is a question I continue to ask myself. Is it that people are influence too much by the charisma of the people carrying the message or they can not understand there is no economy at all. There is no ‘it’. This is an important point, as there is nothing really to manage or prime.

With few exceptions government central planning will create a disaster and collapse. You do not have to call it socialism but more fitting, corporatism.

There you have  it Friedrich Hayek and Keynes – which one has the answer for today’s economic crisis?

One last note please take my poll on capitalism.

 

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Economists

John Locke Economic Theory

John Locke believed you are the owner of your own life. When I was 15 he was my favorite thinker, I read him and was amazed by his clarity. He was known as the father of liberalism. John Locke is the philosophical basis of free-market economics and an important idea for your life. Why?

  • Locke believed in individual liberty. This is important because an individual could control one’s own labor (destiny). If you controlled your own labor and not the government or lord,  this would lead to a person owning the product of their work.

The ownership of private property would lead to people owning assets that would generate wealth independent of a government or lord. property was a natural right derived from labor not by the government as it had been in the past.

Locke believed natural law gave men rights

Why is this important? Because individual liberty (not a democracy)  is the basis of the United States.  If someone tries to control or limit your liberty, tap into your income stream or restrict the ownership of private property this was against natural law.

Man being born, as has been proved, with a title to perfect freedom, and an uncontrolled enjoyment of all the rights and privileges of the law of nature, equally with any other man, or number of men in the world, hath by nature a power, not only to preserve his property, that is, his life, liberty and estate, against the injuries and attempts of other men (and government). – Second treatise on Government

Locke believed in private property has the center of free economic based on natural law.  When you say natural law this means the government does not grant the right, but right exists before the government. The role of government is to protect these rights.

Note the similarity in language between John Locke and the founding fathers.

all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men – Declaration of Independence of the United States

Thomas Jefferson was in particular influenced by him. Marx critiques his theory of property.

Locke’s social contract believed reason and tolerance guided people’s actions. Latter self-interest (Thomas Hobbes) would be argued by other philosophers. However, Adam Smith argued for enlightened self-interest which is a combination of both. I tend to agree.

John Locke on inequality

Locke believed that in nature men are generally equal in talents and skills. This was an enlightenment idea. Although modern psychology might argue against this, I personally believe the talents of people are more equal (but sometimes different) than unequal.

Economic inequality comes about when people applied talent in different ways. This is so clear that it almost seems like circular reasoning. However, if that is true then why do people not live their lives by the idea today? If they want to make more money, why do they not pursue this with more vigor than look for excuses?

All wealth is the product of labor. Locke

However, to be honest, Locke also explained the inequality in relation to this theory of money and the problems money cause.

John Locke was not free trade

Although Locke’s theories were close to classical liberalism when it came to the individual he did not support free trade and was more of a mercantilist. Locke was a brilliant thinker but was not Adam Smith. Locke was more a theory of value and a natural law thinker.

Free Trade was a part of Dudley North and Mandeville’s political economy who extended Locke’s thinking that society is an abstraction and that individual appetites and interests were the basis of economics. Therefore North concluded that trade, interest rates, money should not be set or restricted by the government.

Locke and limits to accumulation and money – Locked believed there was a moral limit to excess accumulation of property because people had consumption limits. Excess consumption and accumulation was a waste and contrary to nature. However, money the ultimate durable good solved this problem. It eliminated the limits on accumulation.

Locke on monetary theory and trade

He was a basic monetarist, that is he believed that the value of money was inversely correlated to the amount of money in circulation. However, he wrongly assumed that if a country’s gold inflows decreased relative to other countries depression would set in. Locke believed (wrongly) the supply of gold increases relative to the volume of trade. David Hume, argued rightfully so that if this started to happen the price of goods relative to other countries would fall and correct this trade imbalance.

John Locke’s theory of value was based on supply and demand as outlined in Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money. Locke wrote:

The price of any commodity rises or falls by the proportion of the number of buyer and sellers.

Economics and your life

  • In conclusion, the basic elements of the ideas of the United States idea of liberty and in particular economic liberty are found in John Locke (“
    The end of law is not to abolish or restrain, but to preserve and enlarge freedom”).
  • I believe in examining the original thinkers of the political economy can be a great inspiration and motivation for people’s lives in pursuit of happiness and prosperity in their own lives. If you understand and look at life by penetrating philosophical problems deeply, rather than superficial modern motivational thinkers, your life will be richer both figuratively and literally, mine is.
Categories
Economists

Renaissance Economics

The main idea of how Renaissance economics broke from Medieval economics was, renaissance political economy started with the idea that people were motivated by self-interest.

Adam Smith later modifies this idea to ‘enlightened self-interest’. This assumption replaced the ideal of fair or just economics in the understanding of theologians from the Middle Ages.

The idea in economics that self-interest motivates people for profit maximization and prices, not for the love of the ideal of justice, seems to be something people still argue against today. Accept it or not; it is essential as an assumption for economic theory. It is also not as bad as it sounds.

From the Medieval view of economics

The following series of quotes are from An outline of the History of Economics by Ernesto Screpanti and Stefano Zamagni. It describes this idea well.

Ideal economics

This prescription (Medieval economics from the idea of Thomas Aquinas) aimed to encourage market transparency and the practice of fair trading and was justified by the doctrine of just price.

This all sounds good and what we want today. Even a great part of the political discussion in the USA is about economic justice. However, since self-initiative and fulfillment really motivate people when it comes to trade, it is a good place to start with a more realistic assumption.

The justification was, however, misleading because, according to doctrine, a just price should be determined by excluding monopolistic practices. An honorable profit should be earned, made up of two components: remuneration of managerial work, quasi stipendium laboris, and a fund for charity activities, a danaio di Dio, God’s money (although some guilds classified the danaio di Dio among the cost items).

What happens, in reality, is always different

Like Marxism, socialism, or any other idealistic system not based on self-interest, it failed. Self-interest is not bad. I could be motivated by self-interest to do great things for humanity. Even Plato argued there was no such thing as a true altruist; only people motivated to achieve happiness (I tend to not fully agree as to how someone actualized their self-interest makes all the difference, but that also was Plato’s point). This all being said, you need to start with the idea of self-interest, or your economic analysis will build an unstable foundation.

In actual fact, the major Florentine Guilds of the fourteenth and fifteenth centuries operated as authentic industrial syndicates, by controlling outlet and supply markets, regulating the labor market and wages and limiting competition among its members through fixing production quotas.

What what happened next to these Renaissance traders.

The ‘just’ price they fixed tended to be a monopolistic price collectively determined by representatives of the very subjects to whom it was prescribed. In view of the enormous profits it guaranteed, no one believed that it was just in the commonly accepted sense of the word, nor that it ensured only an honorable gain.

So as we can see, people often are thinking of themselves when it comes to trading and business. If you assume anything else, you will be burned, not in a medieval way, mind you, but by a business partner.

When you trade stocks in the stock market, you are not thinking about an honorable price, but the best price you can get. Now with the profits you make, you might give the rest to charity as many investors do, but the motive at the point of business is to optimizes your price.

This is how Renaissance economics gave birth to the modern political economy. A shift in the way analysis was done. A simple shift in the idea of just price and business to self-motivated action. Greed is an inordinate desire that distorts the soul. Enlightened self-interest is something else. It does help us understand aggregate economic behavior.

I think the above story of the Florentine traders illustrates this point well. This rest of this post will be more an economic sermon than the history of economics thought.

Road to serfdom again

Maybe the following idea is a bit of a stretch and a departure from the history of economics, but I thought I would make the case anyway. It related to those Florentine merchants in the above example.

Above, you can see that monopolistic power and market distortions create injustice. It distorts prices. The biggest problem today is government support of failing business, banks, oil interests, lobby groups, military complex, etc. We have today jettisoned the idea of fair trade, and the idea of economic justice goes out the door.

  • The best thing the US can do today is to promote free market and nonmonopolistic competition. This includes, no lobbies from pharmaceuticals, insurance companies, oil interests, medical establishment, no government bailouts of failing businesses, no international military (25 to 50% of the budget depending on who calculated it), no Federal Reserve, no government or state agencies, as well as no government interference in free markets and little to no taxation.
  • All these market distortions put money in someone’s pocket and lock in profits while citizens pay via debt and taxes. It creates higher prices and your lifestyle is less.

Therefore my thesis here is, the reality is there was no clear break from Medieval to Renaissance economics to modern economics. A massive government bureaucracy replaced the feudal state. People work more days if you aggregate taxes and debt spending for the government than people did for their feudal lords. It is true. We have a road to serfdom if you understand that debt spending is a form of taxation.

This monopolistic government power which distorts market competition no different from the Florentine guilds, you pay the price and work for your pittance.

Humanism, philosophy, and the explosion of trade all started to erode the feudal system. No longer did empowered lords and Bishops have such an economic hold on people who with justification from above. People wanted and rightfully so more economic freedom.

However, the feudal state has been replaced by the social state.

  • The Renaissance that was not – This today holds parallels with people rebelling against working for empowered lords (favored corporations) and Bishops (government power and orthodoxy) thinking they know better than you when it comes to economics.

Government is nothing more than a drain on your life energy. You are a feudal serf with better gadgets but modest wages and high taxes: bye-bye renaissance economics and the idea of humanism for the good of all.

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Economists

Aquinas’ economics

St. Thomas Aquinas contribution to economic theory

Thomas Aquinas’s economic thinking followed Aristotle’s economic thought. The basis was the idea of justice and wages, and prices. Economics was about fairness and justice to both philosophers. However, there was one idea that I liked was unique to the economic thinking of Aquinas. That is, Thomas Aquinas took Aristotelian thought one step further. This step was arguably the beginning of the economic theory.

It was connected with Aquinas’ view of private property. Much of modern economics is based on the definition of property rights. John Locke and the enlightenment philosophers were all about this. This was free-market economics and the basis of our legal system. It even reaches us today when it comes to intellectual property rights and software and movies, for example. Why we can watch Netflix in the US but not in Europe, let’s look at why Aquinas thought this was important.

 

Why private property was essential to Aquinas

Aquinas believed that since all of creation came from God, nothing we have here is ours. All of creation is to be shared. For me, this makes perfect sense. Many egotistical people have a sense of entitlement and privilege. I remember one lawyer tell me everything he accomplished in his life was because of him, and he deserves his wealth. There is some truth to that, but it is very arrogant to say that.

Why everything we have his a gift. He was born in preppy Connecticut and raised with a silver spoon in his mouth. Proper childhood nutrition, stimulation parents that cared, etc. I said, OK, what if you were born in Africa, and then when you were five years old someone hit you over the head with a rock, and then your life was over. Don’t you see everything you have is a gift from God? More that is given to you in this life means you will be held accountable for more.

Why was Aquinas different? However, Aquinas added one more aspect to this idea that everything is to be shared and is a gift. That is, man needed incentives to work. Private property, although not belonging to anyone, created an incentive for people to work.

Therefore, private ownership could be just and fair if the work was fair and honorable. It motivated man on this earth to till the land. I am slightly greedy and always want to improve my economic condition. Although if I were a billionaire, which I am not, I would not say that my fortune and money was from anything else but from above. Therefore, I believe you need to work like everything in life is in your hands, but know that everything in life is in God’s hands. This was the basis of the economic theory of Aquinas.

The take away from this post is not only an exciting history of economics trivia about the origin of modern economic theory but to make you aware of the reality of money and work and why we are here. Again I am slightly greedy and strive to create more investing in stocks and entrepreneurial activities. But I go back to the idea that everything we have on this earth is not ours. If you can not share money, share your mental talents, and ideas with others. I do not believe in hoarding ideas. I try to share all my money, making ideas online, for example. Some are good, and some are less than perfect. But all the talent and property we have is on loan to us from God. Nothing great we achieve in life has any real meaning. Anything we accomplish means nothing. It is a gift synonymous with responsibility.

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Economists

Medieval Economics – Economic Fairy-tales From the Middle Ages

 

The serf was tied to the land he cultivated

and received protection from the lord in return for certain economic and

political services. The ultimate control of economic activity was in the hands

of the king, who could, in most cases, transfer the feuds from one lord to

another. Land and labour were transferred rather than bought and sold; and

this meant that there was no need for labour and land markets. Authority,

faith, and tradition were enough to guarantee that the system worked well.

Medieval economics myths

The Middle Ages are called a distant mirror because although far away from our current life, it often has a message for today. This post will give three examples of economic myths about how we think about economics in the Middle Ages and hint at how they are relevant today.

I have read a few books on the history of economic thought and the history of the Middle Ages. There are a few myths that keep getting recycled that annoy me. I mean, how can these respected Professors of the history of economic thought write such things with authority about economics in the Middle Ages, and yet they were never there. I was there.

Yes, I was in the Middle Ages and was able to observe what really went on in terms of economic activity. Well, not exactly but pretty close to it. See, time moves at different rates in different places. My grandparents were born in Ukraine in the 1800s. Feudalism was still very much intact in the form of serfdom. Although they were free, many were not. You do not need a time machine to understand these feudal economics. I was close enough to be able to make more accurate assessments than reading a book on the history of economic theory.

The serf was tied to the land he cultivated and received protection from the lord in return for certain economic and political services. The ultimate control of economic activity was in the hands of the king, who could, in most cases, transfer the feuds from one lord to another. Land and labor were transferred rather than bought and sold, and this meant that there was no need for labor and land markets. Authority, faith, and tradition were enough to guarantee that the system worked well. – An Outline of Economic Thought by Scempanti and Zamagni 2005 (a good book by the way).

Myth 1 the feudal serfs exchanged work for the protection

People write that a feudal lord would protect the serfs in exchange for working the land. After all, the Dark Ages and beyond were a pretty rough place with bands of marauders and Vikings around.

This was not true. The feudal serfs, if organized, could defend themselves better than one lord for every 100 peasants. Rome builds its empire on organizing farmers into legions ( it collapsed mostly because of initial problems). See it for what it was, serfdom was a justification, and a poor one at that for enslaving people. It sounds like 1984 again. Keep the threat of war going to perpetuate the government. The road to serfdom is believing the government or power above ill protect you better than you can protect yourself.

In fact, I would say that the peasants needed protection from the lords and government. This is why most countries have a Robin Hood legend in most countries. For example, in the East, he is Janosik.

This is why we had an American Revolution, to protect from the abused of government. This is why there was even a communist revolution in Russia. Everyone used and abused the peasants and workers for their own reasons. Of course, so did the communists.

Peasants were enslaved because the law said they could be. I remember the movie ‘History of the word part I’, when the king was shagging the servants, he kept turning to the camera and saying,” it’s good to be the king’. This was feudalism; this is, to a much lesser extent, big government.

Myth number 2 the Church scared people into submission

Think of Brother Cadfael. Read Thomas Kempis, written with such sincerity and humility. Yes, the Church as necessary, but people submitted because of the law and threat of punishment from the government, not out of fear of some silly parish priest. Not out of faith, as stated above. If you think of the Polish revolution against the Communists, it was faith and the Church that led the charge.

In Poland, where I live, we had a very Medieval form of Catholicism (in a good way). In fact, for a long time, I also did, and maybe I still have some of that. But as much as I respect the beauty of religion as do others, I know no one personally who is a literalist like the opponents of religion creates with their paper tigers. Let me explain.

Everyone knows the Church and religion are two diffident ideas. Don’t you? Think of Canterbury tales. This is an ancient form of writing, and even there, you could detect some mocking of the Church. People poked fun at the Church like today, or at least to it with a grain of salt.

It was not the Church that keeps people in line during the Middle Ages; it was like today, government armies or threat of imprisonment.

Myth 3 Markets were starting to develop

At the same time, the formation of cities in densely populated areas and the widespread diffusion of craft workshops laid the ground for the beginnings of intense commercial activity. The figure of the independent merchant appeared, initially, in the gaps in and at the edges of the traditional economy and, later, in a new economic sphere: the free city and its markets, the seeds of the modern European city. – An Outline of Economic Thought by Scempanti and Zamagni .

Economic histories write how medieval fairs and trading were the cradles of capitalism. The reality, capitalism always existed. It is natural, like speaking. When People need something, they trade with their neighbors. This is even in the Bible. People in the Middle Ages traded also. This is what happens in the Polish countryside today. Barter is popular, I scratch your back you scratch mine.

It is a normal form of human interaction to exchanges goods and services. Romans did it, and so did people in the Middle ages. The only difference was there were fewer economic freedoms because of the government. I think this is why Hayek’s Road to Serfdom is so popular today. People’s free economic freedom is being eroded.

Economics Fairy-tales from the Middle Ages and idea for today

From the above discussion, we can draw maybe three parallels for today.

  1. The government protects you in exchange for your payment (taxes) – a myth. Reality – The government drains people’s productive energy and does more harm than good in most cases.
  2. Faith holds people down and economics back – a myth. Reality- the threat of legal punishment does. In contrast, faith liberates people.
  3. Markets evolve slowly, and economics improve with time – Myth. Reality – Markets explode when people are free. As written about by our founding fathers and Adam Smith, when people are free to choose, they will trade. This will be the most efficient form of stimulus. People always traded and wanted to do business; it was the king or feudal lord or government that prevented people or slowed things down. It was not an evolutionary thing, but rather restrictions held people back.

These are three examples of economic myths of the Middle Ages and draw your conclusions about today.

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Economists

Economic Theory of Aristotle

The economics of Aristotle, money and prices and some lessons for today

Economics comes from a Greek word oikos, meaning home or home economics. Political economy thinking started as an extension of home economics on a larger scale. The Ancient Greeks loved to use metaphors of people’s real lives and extrapolate it to the state, government society, think of Plato’s philosopher-king.

I love this idea. Think about your own life how you have to balance your budget and develop a home economy like a nation. In a sense, this microcosm, macrocosm theories from the Ancient Greeks, are metaphors that clarify ideas. If only the government were as responsible as you are with your money.

Value of Aristotle – The great value behind Aristotle’s economic thinking was it got people thinking abstractly about economics. People always had, of course, but more formally. I think Aristotle was a great thinker but not radical enough for the modern world. What amazes me is how many people still think along these lines on a subconscious level, even me. They hold themselves back economically with some for of Aristotelian economic thinking. Well-intentioned mind you, but operating on faulty logic does not help oneself financially. Do you have any of these ideas in your thinking?

The idea behind Aristotle’s pricing theory

The Communist manifesto was the idea of just price. It literally means standard evaluation. Aristotle wrote a lot about economic thinking, society, justice. His ideas of a natural price or just price were very Platonic in a sense, there was some universal measure. This logic could also be extended to a wage or price of labor as based on a reasonable standard of living for one’s occupation. Therefore, there was some abstract price, whether wages that were fitting to something based on a common evaluation. The value to the community determined the value of thins.

Honertus Quatestus was also a similar idea. That is an honorable quote or price for a profit. Profit was the cost of labor plus a reasonable fair and take for the owner of the process. The idea of bonitus intrinscia or intrinscic price is not only a central idea behind Aristotle’s economic philosophy but still in society today. The owner could have a fair profit as society would let him provide for his family for providing a service.

Although the idea of a natural or just price or wage is very noble, prices, in reality, are subjective. As a human, I agree. I mean in the ideal world it would be nice if a fair days work for a fair days pay. Further a fair price based on, I do not know what, something fair and just. But the reality is different.

Lesson on prices from Aristotle’s mistake for today – Think about politicians who try to control wages prices and profits based on their view of that is fair and just. I agree people make unrealistic amounts of money and some things are way overpriced, but in the end, the market controls often hurt more people then they help in aggregate. Think of rent-controlled apartments. It leads to a greater unfairness in the long run when landlords let the units go downhill and abandon them, and the quality decreases as non-price rationing kicks in.

Health care might be this type of mess. We do not know. But generally, the idea of a just price is ideal, but the reality is economics is so dynamic in nature, you can not control prices on something that seems fair or right. The world and people are too complex. This is why Aristotle’s price theory was wrong.

Why Aristotle’s price theory was wrong – Prices and wages in the real world, not the Platonic world, are determined subjectively by supply and demand. That is something in the market that is worth exactly what someone will pay for it. This is why one year, a vacation home in Florida is worth is $200,000 after construction, and a few years later, a half a million bucks, then during a crisis less than initial cost or book value. People cry well I can’t sell this bellow cost. I say, why not? I have lost money on assets before, supply and demand, not cost determined price. I mean, would it not be great if prices and wags have some sense of fairness or justice?

They do not. Aristotle’s ideas of just wage, price, and profit have little baring to reality. But much of Medieval thinking which was based on Aristotle and then St. Thomas Aquinus and the Catholic church (which is a bulwark of neo-Platonic philosophy even today). Brilliant minds when it came to ethics but with economics a bit idealistic.

One idea I do like in Aristotle’s economica was the idea of the gentlemen farmer, simply as an ideal.

Aristotle’s theory of money

Money has a different value than other goods. Money’s value was imposturous. That is the value not determined by the communist ( like it should be) but by the King. I could make all kinds of metaphors about today’s Central bank, but the comparison is too obvious to discuss. When the government controls the money instead of the people, it is a form of artificial monopoly.

The take away here is Aristotle and Theophrastus, his student, believing price or wages has some abstract natural value is very medieval thinking and will only hold you back like the serfs were held back. Free your mind and understand that price and wages have no relation to value.

Marx also had this fallacy of price and wages that they should be determined by the amount of labor put into an object. This thinking is so incorrect, and when applied to real-life like in communism, the results are people suffer. The world is a war of ideas, and wrong thinking by economics philosophers make people pay a heavy price.

It is evident then that the getting of money is not the same thing as the economy – Aristotle (Politics A Treatise on Government)

I disagree, and I think Aristotle was wrong about economics. Do not let any academic professor lead you to believe otherwise.

If you want to read more about the Economics or political economy, I recommend either read the original classics or Frederick Charles Copleston, SJ is a perfect substitute. Reading Copleston is like reading philosophers themselves.

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Economists

John Maynard Keynes was wrong

John Maynard Keynes was wrong again

For the historical record here is a document. It was put into PDF by the Cato Institute. I hope students of the history of economics will look back on this as confirmation that Keynesian economics is wrong. I recommend you download that file and review it. It is very short and to the point.

  • Keynes believed Y=C+I+G, or at least his followers did. However, I am not Y. I am not an aggregate number. Any attempt to prop up Y results in a distortion of the natural order or the market, and results in economic suffering.

Many Economists, stop short of saying the economists John Maynard Keynes was wrong about his general theory of disequilibrium. When it comes to the realm of pure theory it is something hard to prove or disprove on a macro economic level because there are so many exogenous and endogenous variables that go into large scale economics. It is not like calculating the price elasticity of the price of wheat. Simply put, macroeconomists have a hard time to prove, why aggregate demand gets stuck at disequilibrium.

I disagree. John Maynard Keynes was wrong. If you just your own powers of observation, it is clear he was wrong.  Keynes was well-intentioned but, like Karl Marx, Keynesian economics is fuzzy logic. His economic theory threw back the progress of civilization and the defenders of that paradigm. If governments did not listen to Keynesian professors, we would all have been better off, wealthier and live with more freedom.

Keynesian theory in a nutshell

Keynes believed that aggregate demand (Consumption + Investment + Government expenditures), settled below full employment. This long-term could be a lifetime for some as ‘in the long-run, we are all dead’. Therefore there was a need for action. For him, inadequate demand (C+I+G) was the cause of chronic unemployment. If demand was increased the economy would move back to a state of full employment. Demand could come from Consumption or Investment. However, when this did not occur, the government needs to prime the pump by spending. It is a nice economic fairy-tale but unfortunately reckless and it is beyond me how so many academics and politicians built careers on this idea.

A few reasons why the Economist John Maynard Keynes got it wrong

  • The damage continues Freedom in the market, balanced government budgets and a gold standard where nullified by Keynes. I personally like freedom, responsible governments, and money that can be trusted. Keynes’ economics hurts us today.
  • Milton Friedman proved the basic ideas of Keynesian economics were wrong and not empirical. Friedman argued the basic ideas of Keynesian economics was based on a model of economics that was distant from testable reality. For example, the Phillips curve model (developed after Keynes) was not based on anything empirical, rather just showed a relationship. However, the Phillips curve was not fixed or stable, and certainly not a policy tool. In fact, Government intervention as recommended by Keynes will cause stagflation. Stagflation is inflation combined with unemployment. This was the result of Keynesian policies and reckless expansionary Federal Reserve policies and fiat money. The result will be long-term disequilibrium in the employment market with inflation unless the market rescues us. Think about the 1970s.
  • Keynes was wrong on a philosophical level. This is because the study of economics and the role of government is not only about sustaining consumption-driven booms. Protecting the American consumer is not the highest goal of government. The US constitution never mentioned anything about this. However, it does talk a lot about liberty.
  • Keynes misunderstood the role of the market. He was well versed in classical economics, but blinded by his own ideas. For example, when the economy is artificially inflated with a credit boom, the bubble needs to deflate. If it is not allowed to adjust, the cycle is prolonged. Markets perform the important role of helping people economically.
  • Keynes was naive because Government is an inefficient way of allocating resources. Government stimulus falls under the influence of special-interest politics. It was a justification for government spending and all things most thinking people do not like politicians.
  • Keynesian economics is forced redistribution of income. Is it the role of the government to redistribute income on a large scale?
  • The primary cause of a business cycle is disequilibrium in the financial markets which spreads to the real sector. Think of the speculation of the 1920s or the credit boom before 2007. To correct this the financial markets need to adjust including letting large inefficient dinosaurs fall and smaller more efficient and competitive lenders take their place. Hiring bureaucrats or throwing money at a favored industry is wrong and our children will have to pay for this.
  • Keynesian economics believes in central planning. For me, living in a post-communist country is unthinkable. You might argue central planning is a strong word for government intervention, but ultimately what else is it. Someone else knows how to spend your hard-earned money than you.

The Austrian school of economics, Lucas, the Chicago school, Monetarist and many others noted and respected economist has clearly warned against following the failed economic policies of Keynes, yet they have been resurrected by for political reasons.

Use your own powers of observation. Think about the current state of political economy in the world. The crisis has lasted from 2007 to 2011 and beyond. Keynesian economics does not work. When we pull out of the crisis it will be in spite of the New Deal II not because of it. John Maynard Keynes was wrong.

Categories
Economists

Utilitarianism – Jeremy Bentham, John Stuart Mill – Utilitarian calculators

Utilitarians explain all human action

The moral worth of a decision and action values its usefulness in maximizing utility/minimizing negative utility and this is summed among all living thinking beings. Jeremy Bentham (was not just a character on Lost) and John Stuart Mill (IQ of about 190) championed economic philosophy called Utilitarianism. What amazes me about Utilitarian analysis is it can be applied to every aspect of life from economics to criminology. In fact, I think it can better explain human behavior than psychology. In this post, I will illustrate the utilitarian analysis with a crime I commit.

Actions are right in proportion as they tend to promote happiness; wrong as they tend to produce the reverse of happiness. By happiness is intended pleasure and the absence of pain.  – John Stuart Mill

Utilitarianism and crime – my example

I ride the trams every day in my city of Krakow. From time to time I break the law (let us say hypothetically to avoid self-incrimination). When I only have one stop and it is the weekend, I do not always buy a ticket. I know that they check mostly on weekdays and the risk of getting caught is minimal for a one-stop ride. Further, the fine is only 25 dollars for a first-time offense. Therefore, the price of a 1 dollar ticket for me is sometimes too great weighing the risks and rewards. This is an example of a simple utilitarian calculation of happiness.

However, let’s spice it up a bit. For me, the calculation is not that simple. It is not simply a calculation of probability and risk and reward, but also a moral question. For me to break the law and rip off the good people of Krakow, even for 1 stop is not normally permissible for me.

The price of a tram ticket is more than the benefit of riding one-stop without the risk of getting caught, in some cases. A utilitarian argument.

However, recently a great moral injustice has come down upon me, which is beyond the scope of this post (I myself was a victim of a horrible crime that could have been prevented). In moments of weakness, I do sometimes ride the tram for free in my bitterness. I know it is petty, but it gives me some feeling of momentary satisfaction. However, the fact that I suffer from the pains of moral guilt prevents me from doing in the future.

Further, others might add one more thing, that is the thrill of getting away with something. Some people have different indifference curves and are not risk-averse. They get a lot of utils from the adrenaline of risk.

Happiness the goal of human life in Utilitarian analysis

The above all come into a decision calculation which is still a utilitarian calculation of maximizing happiness.

When I decide that I will ride the tram, I make a decision if I will buy and cancel my tick or go for the free ride. 99% of the time I will pay. However, I am a free rider that 1% of the time when I feel particularly bitter and throw caution to the wind. In some way, I justify my actions by the city paying me back or the attitude I do not care.

A Utilitarians’ life is a calculation and every human a calculator. The greatest happiness was the goal of this calculation.

The equation itself is simple. Each decision is a measure of punishment and reward. It was not simply accountancy of the debits and credits of physical pain and physical pleasure, Rather it takes into account all aspects of human happiness, including moral feelings, risk, and probability.

Every decision in life can be broken down into this type of utilitarian decision tree. Crime, work, even love is an attempt to maximize happiness. What is life but a calculation? This is what the utilitarians believe. Utilitarians take a quantitative reductionist approach to life and ethics and law. Here are some Jeremy Bentham quotes on law and utilitarianism.

It is the greatest good to the greatest number of people which is the measure of right and wrong.

It is vain to talk of the interest of the community, without understanding what is the interest of the individual.

The greatest happiness of the greatest number is the foundation of morals and legislation. –
Jeremy Bentham

There are many critiques of Utilitarianism from Marx to Wittgenstein, Daniel Dennett Matthew Ostrow. However, the purpose of this post is to simply illustrate the possibility of this philosophy in everyday life.

The despotism of custom is everywhere the standing hindrance to human advancement.- John Stuart Mill

Next time you ride a tram or subway, think of me. Think of your actions and be aware of why you do something and see if you can fit it into a utilitarian model and if those actions should be changed for your greater good. I know I need to change my actions or at least my thought patterns.  I believe when you maximize your own personal greater good and happiness in an enlightened way, society as a whole benefit. What do you think?

Categories
Economists

Hayek – Road to Serfdom – Summary

A medieval serf worked 3 days for his lord. If you aggregate all the taxes you pay, not just income taxes, you work 4 days. Is this what you want in your life? The Road to Serfdom by Friedrich von Hayek stands in opposition to the idea of a partnership between government and business in state capitalism.

It is an important book today because now economists and politicians are debating how to solve the high unemployment and long-term disequilibrium in the financial markets. Government monetary and fiscal policy seem ineffective.

The answer in Hayek’s book is less government. If politicians try to influence the economy, it will result in a loss of freedom and prosperity for the poor and the rich. The Government bureaucracy gains a power like the feudal lord once did. Once this system is in place, the process is almost irreversible. It comes in increments so you do not notice it.

Hayek is a classical liberal, which means he is essentially libertarian. This is not to be confused with Democrats that are liberal in a more socialist sense. I enjoyed reading the Austrian school of economics very much. It is not intended to be a new Religion, but rather simply a development of Western philosophy and an extension of enlightenment ideals, the same ideas in which the United States was founded and the founding fathers hoped to protect.

The purpose of this book is to give a summary of Hayek’s book Road to Serfdom.

How does a freeman become a serf?

One thousand years ago it was by force or economic hardship, such as crop failures. Further, serfdom was inherited. That means if your children would be born into your situation of payment to the feudal lord. In Hayek’s book, he argues the road to serfdom is though central government planning or managing of the economy. High taxes and the large government will have the same effect as it did 1000 years ago.

Anything I write here in the Summary of Road to serfdom does not do it justice, you have to read the book yourself.

Road to Serfdom Chapters

  1. The Abandoned Road
  2. The Great Utopia
  3. Individualism and Collectivism
  4. The “Inevitability” of Planning
  5. Planning and Democracy
  6. Planning and the Rule of Law
  7. Economic Control and Totalitarianism
  8. Who, Whom?
  9. Security and Freedom
  10. Why the Worst Get on Top
  11. The End of Truth
  12. The Socialist Roots of Nazism
  13. The Totalitarians in Our Midst
  14. Material Conditions and Ideal Ends
  15. The Prospects of International Order
  16. Conclusion

Road to Serfdom Summary

Hayek wrote the book after WWII when the world was rebuilding from German fascism and was threatened by Communism.

The first part of the book deals with planning and democracy and planning and the rule of law. In these chapter’s Hayek’s thesis is that in order for people to plan the economy they need to be empowered. They need power over other men. Without this legal power then, government planning would be ineffective. The obstacle is a democracy.

The central idea in the part of the book is a comparison between centralized power and decentralized power. With social government centralizing power and canceling individual liberty in the process they can achieve their aim of planning. However, Hayek, believe the only protection against abuse is decentralization. It is not only a theoretical argument but also observed in reality. There is a political trade-off here between government and individual liberty.

Think about how much power an employer has over a man. If you think this is unfair or unjust compare it to a bureaucrat who has the law and can take all liberties from an individual if needed. An unskilled worker in a free country like the US or the UK has a better life than an engineer or manager in communist Russia. There is no comparison.

If a worker in a free society wants to change his job, place or work, upgrade his skills it is all up to him. This is all based on the idea of private property and personal freedom. That is in a competing society property and production is distributed across society as a whole rather than governed by a central authority. Government abuse of power exceeds individual abuse of power.

When there is a centralization of power in the hand of government it is about economic power. Economic power is the way the government controls people. The political economy of this country is something close to serfdom.

The Abandoned road – History of freedom and its abandonment for government control

Individualism is based (as Adam Smith believed) that the individuals are free to develop their own skills and talents and use them wherever they like. It has its roots in Christianity (although Hayek was an agnostic), is connected to the renaissance and then enlightenment. Hayek believed the transfer of power from the state to the individual became the basis of western civilization.

The theme over the last 1000 years of civilization was freeing people from the shackles of serfdom, Kingdoms, and dictators and giving the power to individual choice.

  • Growth of science was a result of the growth of individual freedom.
  • Material comfort and scientific advancement accelerated exponentially when impediments to individual freedom were removed.
  • No one can doubt that empowering the individual had positive unintended consequences when you look at the evolution of society through the 19th and 20th century. It would not be wise to replace with this collectivism and state control again.

Unconscious and unintended effects of aggregate individual action were superior to central planning. Again The USA and the UK compared to communist Russia, fascist Italy and national socialism of Germany. These systems forced the supervision of your life.

The National Socialists of Germany were against individualism, capitalism, democracy and classical liberalism. The idea of mixing democracy and socialism and then the transition came slowly in Germany. People believed that socialism (economic control and guidance by the government) could be mixed with democracy and freedom would not be lost. Some people believe this today in the USA and UK.

Why Hayek opposed Planning

In Road to Serfdom Hayek, opposed central planning for two reasons:

  1. Central planning was significantly less efficient than free capitalism in terms of development and resource allocation.
  2. The method of control ultimately was dependent on force.

Hayek did leave open some doors for public goods and limiting abuse of employers, however, the point was government needs to be proactive in its protection of competition, rather than planning ways around it or finding a middle ground which will slide into socialism or the road to serfdom.

The Great Utopia

The grand idea is socialism and democracy can be combined. This is the great utopia Hayek referred to. However, if you trace the origins of socialism it was a reaction of the ideals of the enlightenment and the French revolution.

Tocqueville wrote “socialism makes people a mere agent, a number…Democracy seeks equality through freedom, while socialism seeks equality through restraint and servitude”.

A planned economy Hayek believed will never produce as much output, creativity, and happiness as a free economic system. To debate that a planned economy is more efficient is absurd.

Hayek goes on and on to criticize totalitarianism. Some of the books get redundant on this subject, however, remember the historical time he was writing.

The world went full cycle:

  • from a great economic crisis
  • to the solution of – trust in government to solve the problems of this crisis
  • to the concentration of power on part of the government through the message crisis
  • laws that are passed to legitimize economic control over people lives
  • loose of personal freedom

This is why Hayek’s writing was more writing for everyone rather than some verbose economic treatise. The best writers are those who can explain complex ideas simply.

Hayek went on to write how the idea that an economy could be controlled is more absurd than any military plan of action. Economies are so complex and to control agencies and prices and flow of money from the private sector to the public sector is virtually impossible. Even if the individual agencies succeeded the plan as who often fails.

A key point is like all the pieces of this the planning move up the pyramid, at the top you need even more authoritarian control, in order to try to implement the plan successfully. This results in people “being treated like cattle” If you want an economically helped by the government do not think it is as benign as a warm fussy social economy.

The implication for today’s economy is even at the agency level planning needs power or dictatorship to work. It could come in the form of a housing czar or a financial banking regulation czar or national health care board, but it needs a concentration of power. This is what Hayek warned against.

Hayek believed even if in a democratic form, to carry out government policies, you need to sacrifice personal freedoms. There can be no compromises with democracy and socialism. This is the grand lie of a social utopia. Social programs mean the destruction of freedom. This has been the great lesson of the 20th century. People have to see be aware of the cost and read history.

Hayek wrote that a system of government that was socialistic and therefore totalitarian would be different in the US and UK than had been in Italy and German. In fact in the US and UK, people would not be extreme and better leadership, but it would be leaning towards control. It would be a more subtle transition in increments.

Hayek’s view on how a leader gains election support

It is in increments that liberty is lost. politicians gain the support of the naive or people who want a ready-made system or values and solutions. It is this package deal that can easily be sold. The leader usually focuses on the negative and jealous of those who are better off. The leader will comment on how bad things are and how the rich and greedy have messed things up (this sounds a little like Obama to me). The leader needs mass support so he appeals to the lowest common denominator in people, that is it is the fault of the wealthy. He contrasts between ‘us’ and ‘them’.

The leader makes an appeal for the ‘good of the whole’ to sacrifice the ‘them’ who are guilty and have brought about this crisis which the leader is going to fix.

From here Hayek goes into details of totalitarianism the lack of morals the followers have. This might not be as interesting for modern readers as times have changed, but form a historical point of view leaders. Hayek talks about individuals in power disregarding the rights of the old or sick, collectivism means the end of the truth. The ends justify the means.

The way totalitarians make people believe their way is the best is to try to convey that the state-controlled economy is something they always believed in but did not have proper voice or recognition.

Hayek believed that liberty was the main thing that is destroyed first. It is destroyed in the name of some greater good or freedom or right promised by the government. In fact, politicians create something called “collective freedom”. That is broad freedom give to policymakers and planners but the rights of the individuals are sacrificed. The government planners make decisions for the people about economics.

Any tendency to criticizes the action of the government is suppressed or shouted down. Even people who are not into politics could be suspect as every action and thought needs to be seen as guided for some social purpose. Even the theory of relativity was seen as an attack on traditional values in Germany. Each country has its own version of political correctness.

The idea of planning is in contrast to the ideals of America and Great Britain, that is self-reliance and individual responsibility as opposed to transferring responsibility.

Hayek – Freedom, security and the poor

Hayek believed that society has reached a certain level there is no reason society can not help people with the basics. This is the security to survive in a minimum life and way. This can be done without endangering general freedom.

However, beyond in the US and the UK groups organizes and lobby to try to control competition and prices for the argument of stabilization. People try to grant security to one group, with disservice coming to another. Thought the political process one group is granted security by creating another. From this, a great deal of the competitiveness of the market and society is reduced and society as a whole suffered.

There is a broad measure to get security guaranteed to them by the state or government with restructuring measures being applied to the rest of the population.

In societies, like western democracies, people are too ready to give up their freedom for security. The high price for which freedom came is easily traded for a government promise of greater economic freedom.

Political leaders must learn that the trade-off between security and freedom is illusionary. Once freedom is sacrificed security is lost.

A better civilization based on a classical liberal ideal

Only with the courage to upload the ideals of liberty can a society move forward. This can be done with an awareness of the past and the mistakes of the past. How many people have suffered under a planned economy? A policy of freedom for the individual person is the only way a society can progress. This is the political economy.

More about Hayek’s book

Hayek’s book Road to serfdom was to be part of general series called “Abuse and the decline of Reason”. It was written in the 1940s and was inspired by the French author, Alexis de Tocqueville’s writings on the Road to servitude. Note the similarity of titles. It was published in 1944 and was popular despite the limit on wartime paper.

It was published by the University of Chicago in 1944 and in the US had immense popularity.

Almost seventy years later it has been number one on Amazon’s bestseller book list (thanks to Glen Beck, you can get it in pdf, e-book, etc)). This is evidence that despite how much the world has changed the general idea is the same. It also was published by Readers Digest.

Hayek was not anti-government or anarchist. He just believed in the least government possible. The government could play a role in the regulation of work and monetary policy as well as the transmission of information. So like Adam Smith, there is a role for the government.

Hayek’s book The Road to Serfdom is not a manual for complete free market laissez-faire capitalism, but rather more a warning against government planning, the concentration of power (and a limitation on liberty) as democracies, even the US and the UK could be transformed into socialism or worst.

Aleksandr Solzhenitsyn remarked when translating to Russian, how someone who had never lived under totalitarian rule could understand so well like Hayek, what it was like. I am an American living in post-communist Poland and I would say Hayek was a brilliant mind who understood how the government has and does destroy so much good in society.

Keynes, of course, read F.A. Hayek’s book but believed it had no practical application.

Hayek Quotes

The important point is that, if we take the people who’s views influence developments, they are now in this country in some measure all socialists. It is no longer fashionable to emphasize that “we are all socialists now”, this is so merely because the fact is too obvious. Scarcely anybody doubts that we must continue to move towards socialism.

The successful politician owes his power to the fact that he moves within the accepted framework of thought, that he thinks and talks conventionally. It would be almost a contradiction in terms for a politician to be a leader in the field of ideas. His task in a democracy is to find out what the opinions held by the largest number are, not to give currency to new opinions which may become the majority view in some distant future.

Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends.