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Thoughts on Economics

 
DanielGrings
 
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DanielGrings
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09 April 2015 14:26
 

[Note this is Part 6 of a series of emails to Sam Harris. This email is meant as a response to A New Year’s Resolution for the Rich, How Rich is Too Rich? and How to Lose Readers (Without Even Trying). Also see Part 19 in which I discuss a thought experiment on total inequality, Part 21 in which I expand on my arguments against intellectual property, and Part 22 in which address Sam’s concerns regarding laborsaving devices.]

[TL;DR: Economics is not a science. The current conversation among economists is intellectually and morally bankrupt. I argue for the Austrian axiomatic approach. Inequality is not a problem. Technology is not a threat to employment. “Intellectual property” is not a logically or morally sound concept. Economists tend to misunderstand and underestimate the importance of opportunity cost.]


In my previous email [Part 5] I have described my (potentially pathological) physiological condition. I also mentioned in passing that I am “fiscally conservative”, and based on your previous writings on the subject I suspect you might consider this a symptom of mental pathology as well. Perhaps you are interested in the following clarification.

First let me point out that, while I would love to have a conversation with you on any topic, I believe a discussion about economics could be especially helpful. This is for a combination of three reasons:

First, you strike me as somebody who truly believes in the power of having a sincere conversation. When you say that you don’t want to be wrong for a moment longer than you have to be, I believe you mean exactly what you say. You also lament the fact that even in the community founded on the principle of trying to prove oneself wrong (the scientific community) too few members show the necessary enthusiasm for being proven wrong by others.

Second, I am convinced that a large percentage of human-made suffering stems from our perpetual failure as a society and as a culture to have a proper conversation about economics.

Third, the conversation about economics we as a society are currently engaged in has reached a total gridlock.

On the third point, it used to be the case that there is at least a single subject all economists agree on: the minimum wage. “The minimum wage”, they would say with one voice, “is a price floor that achieves nothing but destroy employment opportunities for the poor and is therefore bad for everybody, especially the poor, in all cases without exception”. Somebody who has explained this very well is Joseph Stiglitz.

However, the Secretary-General of the OECD has just claimed that “a minimum wage can raise revenues at the bottom of the pay distribution”. While I would be interested to learn more about how artificially raising a company’s costs can increase its revenue, this statement really represents a watershed moment for me: I have to accept the fact that there is literally not a single issue anymore for which you won’t be able to find two prominent economists who make diametrically opposite claims. This may be a good time to reboot the conversation.

Let’s also not ignore just how politically charged this conversation has become. In most countries, but in the United States in particular, political discourse has been almost completely reduced to “the left” ridiculing “the right” and vice versa — as though letting caricatures fight each other to the death in a great public arena were the best way to discover how best to organize an economy. If you need yet another quick sample, just have a look at the comments to your Facebook post.

If such complete disagreement were to occur in any other field of science, you’d except a general state of shock and even panic: How could we have let this happen? Are we not practicing the same science anymore?

Therefore, the first question we should ask is not even, “Is economics a science?”, but rather, “Can economics even be a science?”

First, let’s note that not everything that involves math is a science: Astrology and numerology feature mathematical calculations very prominently, and both have diverged significantly and arguably deliberately from the scientific method.

The essential characteristic of the scientific method, according to the current consensus, is that it deals in falsifiable hypotheses. Where are the falsifiable hypotheses in economics? What could happen to the economy or in a lab that would prove a Keynesian wrong? If the economy develops to everybody’s satisfaction, it’s because we have printed and spent enough money; if it doesn’t, it’s because we haven’t pushed interest rates far enough into minus yet. In other words, a Keynesian will either say, “You have followed my advice sufficiently and are the better off for it”, or, “You have not followed my advice sufficiently and are the worse off for it”; he will never be in a position where he has to say, “Perhaps my advice wasn’t worth following in the first place”. 

By contrast, the one school of economics that claims that economics is not a science but rather a philosophy, the Austrian school, is not even invited to participate in the conversation ... precisely because it is “unscientific”.

When Paul Krugman refuses to debate Bob Murphy on the grounds that he “doesn’t want to participate in a circus” (is that the lion running from the Christian or the other way around?), he pretends he is the biologist refusing to debate the creationist, so as not to burden the public with a non-theory: We shouldn’t “teach the controversy” if there is no controversy. Of course, the first problem with this analogy is that Keynesianism is not nearly as universally accepted among economists as the theory of evolution is among biologists. The second problem is that creationists say, “We are right no matter what the evidence says”, whereas Austrian economists say, “Pay better attention to more evidence and think harder about what you can expect from the evidence” — and this should always be considered worthy of consideration and debate in the scientific community. Specifically, “I changed my mind. What’s the big deal?” is the antithesis of science. If you don’t see this, picture Richard Dawkins opening a creationism museum with the justification, “I changed my mind. What’s the big deal?”

I believe the only way out of our dilemma is for all of us, individually and collectively, to make an effort to understand fundamental economic principles. I explicitly argue for the Austrian approach here: Let us try to establish the right axioms, and, on as sound a foundation as we can create, let us gradually move upwards to more complex concepts.

This approach has at least one consequence that should make it seem more persuasive. A cause of much embarrassment for physicists is the sharp dissonance between the micro and the macro levels: We understand how large physical objects behave reasonably well, but when you get into the quantum scale, things get really weird. Most economists will argue that the same is true of the economy, only in reverse: The micro level may be very intuitive (saving is good for you, for obvious reasons), but at the macro level things get weird (and saving is really bad for the whole economy). Austrians argue that this conflict only appears to arise because at the macro level economists tend to trip over their own complicated models that are in fact divorced from fundamental economic principles (and saving is actually good for everybody).

What exactly are “fundamental economic principles”, and what may be the best way to improve one’s understanding of them? I am not sure whether it’s a good idea to try to compile a definite universal list of such principles, but I can recommend the following three texts that take the approach I have mentioned:

I have written a short text on the Auroville economy, that briefly introduces a few such fundamental concepts, but it’s really just a small sample.

The text I most recommend is Bob Murphy’s Lessons for the Young Economist, because I consider it a perfect example of the Austrian axiomatic approach to understanding economics.

Having read the foundation provided by Murphy, the second book (in chronological order, not necessarily in order of importance) that I recommend people read is Kel Kelly’s The Case for Legalizing Capitalism. If you want to claim that you are an (economic) liberal not because you have avoided the arguments against your position but because you have studied, understood and refuted them, Kel Kelly presents the arguments you should engage, conveniently bundled in one book. 

Whether or not you are interested in reading those texts, you may be interested in the following comments regarding your blog posts (having read those texts is not a requirement for understanding what I say below):


Inequality


I agree with you (and with Louis CK) that rich people should buy fewer sports cars and give more money to the poor. I disagree that the best way to achieve this is through government redistribution programs. I also believe that inequality is not a problem.

You say, “I think a certain level of wealth inequality is probably a very good thing.” I would phrase this more strongly: Some inequality is desirable simply because perfect equality is undesirable. I can think of only two scenarios where perfect equality of both wealth and income is achieved: a society where (armed) guards monitor everybody’s every move, to make sure nobody acquires property in excess of everybody else’s; or a tribe of early homo sapiens wandering naked through the African savanna. In the first case especially (and really in the second case as well), you also have the additional problem that, since utility is subjective, even if everybody has exactly the same kind of items in their possession, how wealthy people will actually be is determined by their preferences regarding those possessions. In other words, while everybody will have the same in nominal terms, actual satisfaction will vary. In both cases, the idyll of perfect equality is unlikely to last.

Since we agree that some inequality represents a necessary evil, we can ask (as you do), “How much inequality is too much?”

First, it’s worth pointing out that comparing an individual’s wealth to (national or global) GDP is completely meaningless. Even if GDP represented anything close to a nation’s “income” (it really doesn’t, see Kelly Chapter 10), you’d still be comparing wealth to income, which is comparing apples to oranges. Somebody can have large wealth and small income and vice versa.

[ Edited: 05 December 2017 02:45 by DanielGrings]
 
DanielGrings
 
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DanielGrings
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09 April 2015 14:27
 

Much more importantly, we must always remember that inequality is by definition about relative and not about absolute wealth: It’s about how much more or less somebody has when compared to others; it is not about how much they actually have. These two will be connected but are not interchangeable.

Therefore, to ask (as you do as well), “How rich is too rich?”, is to ask a quite separate question that is easy to answer: There is no such thing as too rich. If somebody drives a bigger car than you do, this in itself in no way makes you worse off. In fact, since you are concerned with the greatest possible well-being for everybody, if driving a big car makes that person happier, you should be happy for them as well.

By analogy, would it make sense to ask, “How healthy is too healthy?” Should we perhaps try to remedy the current state of “health inequality” by reducing the health of the “obscenely healthy” through government intervention? Should we not rather try to increase the health of the relatively unhealthy in absolute terms? Would it not be best for everybody to create a society where we allow everybody to be as healthy as they can be?

If you think this is a poor analogy, it is likely for one or both of two reasons: You believe that other people’s wealth does not help you increase your own (unlike their health) and/or you believe the economy is a zero-sum game (again, unlike health).

The last point is really the crux of the matter: We tend to take a “snapshot” of the whole economy, assign a nominal monetary value to all scarce resources, and then point out that the distribution of those resources must logically be a zero-sum game: all resources controlled by “the rich” are necessarily withheld from “the poor”. This ignores that while resources are indeed finite at any given moment, wealth can grow indefinitely through production and trade.

We don’t go to work every day to take resources from somebody else’s pocket and put them into our own. Rather, we work together with other people (and their resources) to continuously increase the amount of wealth available to everybody.

It is true that the process of creating new wealth can never be perfectly efficient. Many of the resources that we have at our disposal this very moment will be put to use in ways that fail to maximize everybody’s well-being.

Ostentation is such a form of waste. Ostentation (or “conspicuous consumption”) is not just about showing off how much wealth you have, but about showing off how much wealth you can afford to destroy. Sports cars are a prime example of this, since they lose half their value the first time somebody turns on the ignition.

How can we explain this strange behavior? I believe that at the core people wish to feel that their existence has meaning. In the absence of real meaning (and often masquerading as such) people seek validation from others. In a market economy (at least in principle) people receive money equal to the contribution they make to other people’s lives as valued by those people. Since our society is complex with many transactions involved, most people will never hear of the good deeds you have done for others. So, how do you make sure that strangers treat you with the respect you deserve right away? By showing off expensive things you don’t need, you show just how valuable you are to society.

We, individually and collectively, should develop the maturity to not depend on ostentation to feel good about ourselves. We should also develop the maturity to not feel threatened by (or insecure about or jealous of) other people’s wealth. Both are about the kind of culture we create with our everyday behavior. The government pointing guns at people is not likely to help with either.

Another important way resources go to waste is due to a failure to deal with the calculation problem and the incentive problem. Every movement from a market economy to a plan and control economy is a movement away from many skilled and experienced people making decisions regarding how their own resources that they have acquired through production or trade should be used while constantly exposed to a lot of information, towards fewer less skilled and less experienced people spending other people’s money with no personal stake or risk involved based on a slow political interpretation of a few arbitrary data points.

Why is Warren Buffett so much better at investing in infrastructure than the Federal government? In part because Buffett has to depend on prices for information, while the government can set (or change) many prices arbitrarily. The latter may seem like an advantage, but it is really about first ignoring and then falsifying important information.

If roads (and schools and hospitals ...) are in a terrible state precisely because the government is in charge of them, giving more money to the government (voluntarily or involuntarily) is not likely to be an effective remedy. Put differently, I fully support your idea of letting people from the Forbes 400 list create an “infrastructure bank”. I just prefer to call it “privatization”.

More generally, who owns resources should be of less concern to us than how well they are being used to make life better for everybody, including the poor.

You speak of the rich “hoarding” money (or “mindlessly letting it sit”) — as though Bill Gates were sleeping with $50 billion stuffed under his mattress. That (large) percentage of their wealth that the rich do not spend on ostentation is never hoarded: It is either invested directly (mostly in capital goods) or saved ... and borrowed and invested (mostly in capital goods). The “poor”, by contrast, tend to spend a much larger percentage of their income on consumption. Therefore, tax breaks for the rich are really tax breaks for production. These are not simply equally important sides of the same coin: Consumption is easy, production is hard (not the least because it requires the gratification delay inherent in saving and the willingness to accept large financial risks). That’s why the term “trickle-down” is so misleading: What matters is not the rich spending money but rather saving and investing it.

There is one school of economics, the supply-siders, who essentially claim that tax breaks for the rich are really all we need for the economy to prosper. The Austrian school strongly disagrees with this view and insists that what is most urgently needed is to fix our broken central bank fractional reserve fiat monetary system.

I believe that our current (and recent) economic crises are really one large monetary crisis. Therefore, the importance of this issue cannot be overstated. The Austrian view is explained very well in Murphy’s and especially Kelly’s book. I can also recommend an excellent detailed technical overview and lecture by Roger Garrison. I’ll just give a very brief outline here.

You might also enjoy this entertaining presentation of the “fight of the century” in two parts:
First video
Second video

First, here is my attempt at a definition of money:

Money is the total of the following:
1. The idea and the behavior based on the idea that
2. a commodity or the promise of a commodity
3. that is agreed upon and trusted by at least three parties as representing a potential claim on the goods and services of all the parties that so trust it
4. can be used to facilitate trade by circumventing the limitations of barter and increase freedom and efficiency
5. by one party transferring ownership and control over it to a second party that chooses to accept it
6. with the intention to surrender the first party’s claim over to the second party, whether in exchange for goods or services from the second party or not, at one point of time in a way as to allow the second party in return to surrender this claim in the same way with the same intention at an arbitrary point of time in the future to an arbitrary party that chooses to accept it
7. thus also serving as a store of value
8. and as a unit of account.

In practice, we can focus mostly on the most important aspect of money, and that is that it acts as a voucher for scarce resources.

This being the case, money is the more useful in communicating information about supply and demand of goods and services the more stable the supply of money. Both monetary inflation and monetary deflation are equally harmful in distorting those price signals (for example, an increase in the prices of goods may be believed to be due to either an increase in demand or decrease in supply of those goods, even though it may be caused primarily by an increase in the supply of money). These distortions cause several other harmful side-effects (various forms of misallocation) that together create the boom-and-bust cycle. (The mainstream view conflates monetary inflation and deflation with price inflation and deflation and posits that monetary inflation is desirable in order to ward off price deflation. However, it is only monetary deflation, created through fractional reserve banking, that can be dangerous. See this article.)

A recession (or depression) is really the market trying to correct price distortions caused by a previous monetary inflation. Therefore to keep interest rates low (by printing more money) is exactly the wrong thing to do. Central banks confuse cause and effect: Instead of letting the fever cure the illness, they inflict the illness in order to cure the fever.

Our current monetary system does more harm to the poor than “inequality” ever could (it also incidentally needlessly exacerbates inequality). Therefore, it is this issue we really should be concerned about and debating.

The alternative to our current system would be to allow for a truly free market where people can use whatever commodity (or commodities) they like as monetary commodity. To be sound money, a commodity needs to have the following characteristics: scarce and stable in supply, durable, divisible, fungible, easily identified, and difficult to produce or “counterfeit” (to keep it scarce and its supply stable). In my view, cryptocurrencies with a guaranteed stable money supply possess these qualities to a higher degree than any other commodity in history (including gold). Very importantly, since these are digital commodities, there is no danger of going back to a system of “vouchers for vouchers” (we wouldn’t pay in gold but in “vouchers for gold”) that is at the root of the whole fractional reserve scam (see Chapter 3 in Kelly’s book). (Another problem with gold is that not only is the supply not stable — new gold can be found, mines might have to close etc. — we may one day have the technology to create gold in the lab much more cheaply than we do now, in which case it would soon lose all usefulness as money.)

[ Edited: 17 December 2015 08:15 by DanielGrings]
 
DanielGrings
 
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DanielGrings
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09 April 2015 14:27
 

Nanotechnology and employment


You ask what nanotechnology might do to employment. We don’t create goods and services so that people may find employment; people seek employment so that they may purchase more goods and services. The greater the supply of goods, the cheaper they are for everybody (and the greater the number of goods that can be given to “the poor” “for free” as charity). When it comes to creating more goods with less effort, nanotechnology would be very good news indeed and would result in astronomically large real wages (by which I mean wages in terms of what they can buy) for everybody. Simply put, if all it takes to create a spaceship is to push a button, the “wage” for pushing a button will be an amount of money equal to how much it costs to buy a spaceship (assuming that the worker owns the nanofabricator; they should be cheap, if they too can be nanofabricated at the push of a button). That wage can be an arbitrary number in nominal terms (perhaps several billion or just a few cents); the only thing that matters is what you actually get for your money. The more efficient the production in a society the higher the real wages.

Will we run out of buttons to press before everybody is fully employed? Certainly not. In a future where all manual labor is performed by robots, people will be paid large amounts of absolute wealth for doing whatever it is robots don’t do. And if robots really were to do “everything”, well, what would we need employment for? Everything would be given to us “for free” by robots. The simple reason that won’t happen, however, is that everybody can make an effort to make somebody else better off than they would be if they hadn’t made that effort and will be paid equal to how much better off they make them — and technology actually acts as a multiplier. Human labor need never become obsolete, but it might become more and more optional as far as survival is concerned.

Unemployment is not remedied by wealth redistribution, simply because it is not wealth (or wealth inequality) that causes unemployment. Unemployment occurs when employers are prohibited from hiring people for a wage equal to their productivity, and as a part of the business cycle (as explained in the final chapter of Murphy’s book).

Intellectual property rights are an example of artificial scarcity that won’t survive the internet. There is no chance they would survive nanotechnology.

If you are interested in reading about this subject in depth, I recommend Stephen Kinsella’s Against Intellectual Property and especially Against Intellectual Monopoly by Boldrin and Levine.

In any case, here is my argument in three paragraphs:

What exactly do you own when you own an idea? Property rights are rights to the exclusive control of a scarce resource. Ideas are not scarce. Good ideas are scarce in the sense that we need more of them, but not in the sense that we will ever run out of copies. No architect will ever tell you, “I’m sorry we can’t finish your house, but we’ve run out of copies of the idea of building houses.” By the logic of patent laws, the first person to have built a house should have had the right to collect royalties from everybody else who ever tried to build one after him, and — more importantly — even the right to prohibit them from building houses altogether. Making patents “expire” at some arbitrary point in time doesn’t solve the basic logical and economic problems involved.

Intellectual property is also ultimately incompatible with physical property. In this context, think of information as a recipe for how to use your physical resources. If you own all the ingredients for making an apple pie and you have the idea of how to make one, nobody should think that they have the right to point a gun to your head and say that you must not bake that pie because they thought of it first.

The marginal cost of production for any digital medium (book, song, software, movie etc.) is zero. This means that we can always create another copy for free. Creating the first copy (or “the original”) should be considered a service and the creator should be paid an amount equal to their marginal productivity. This can happen when a publisher orders the first copy (as was the case before copyright) and/or through threshold pledge or similar systems.


People who support the perpetuation of artificial scarcity usually fail to consider opportunity cost — another important fundamental economic principle that is basically about asking yourself, “What could I be doing instead?”

Here is a very helpful illustration from Robert H. Frank’s The Economic Naturalist.

His definition is: “The opportunity cost of engaging in an activity is the value of everything you must give up to pursue it.”

The current definition on Wikipedia is a bit more clear: “The opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the ‘cost’ incurred by not enjoying the benefit that would be had by taking the second best choice available.” Very importantly, it should be added that if the best option is not chosen, then the opportunity cost is equal to the best option.

Here is the scenario from the book to test whether somebody has understood the concept:

You have won a ticket to an Eric Clapton concert, and you can’t resell it (note that its value is irrelevant for this thought experiment). The only other activity you are considering is a Bob Dylan concert the same night (in other words, your choice is to either see Clapton or Dylan). A Dylan ticket costs $40. You would pay as much as $50 to see Dylan (note that mainstream economists measure subjective satisfaction or “utility” in currency for the purpose of doing math; in this example attending a Dylan concert “feels like fifty bucks” to you).

What is the opportunity cost of attending the Clapton concert? (Another way of phrasing this is: What’s the minimum in dollars visiting the Clapton concert should be worth to you for it to be the better choice?)

a.$0
b.$10
c.$40
d.$50

(I should point out that Austrians will strongly object to this thought experiment: The fact that you claim that you would pay $50 to see Dylan is irrelevant; what matters is how you actually spend your money (the preferences that you reveal through your actions). This also means that utility can’t in fact be “measured” at all. I completely agree with this criticism; however, I believe that the statistic given in the end is so interesting that the thought experiment is worth bringing up. I should also point out that I have reworded this thought experiment and, perhaps by giving additional “hints”, may have made it easier to solve than the original.)

Answer (in rot13 so as not to spoil it):
Gur bccbeghavgl pbfg bs nggraqvat gur Pyncgba pbapreg vf gra qbyynef. Lbh ner ybfvat bhg ba svsgl qbyynef va hgvyvgl, ohg lbh ner nyfb fnivat gur sbegl qbyynef lbh’q unir gb fcraq ba gur gvpxrg. Gurersber, vs frrvat Pyncgba vf jbegu ng yrnfg gra qbyynef gb lbh, nggraq uvf pbapreg. Bgurejvfr, nggraq gur Qlyna pbapreg.

If you didn’t get it right, don’t feel bad.
In a study quoted by Frank:
17.2% of 88 non-economics students got it right
7.4% of 270 economics students got it right
21.6% of 199 professional economists got it right.

The surest sign that economics is not a science is how confused the experts are about its basic ideas. Keynesians, including Paul Krugman, are often accused of ignoring opportunity cost — especially when they praise World War II as the ultimate economic stimulus program — and it seems to me that their argument is mostly that disasters and wars help liberate us from those nasty excess savings. I think it is safe to say that opportunity cost is a more helpful fundamental economic concept than “liquidity preference”.


I hope you have found this email a helpful response to your blog posts about inequality. I can explain why I am more optimistic than you are about the feasibility of a truly “libertarian” society replacing the state, but this will require a separate email [Part 7].

[ Edited: 17 December 2015 08:16 by DanielGrings]
 
Twissel
 
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09 April 2015 15:56
 

There are a couple of mistakes and problems in your post, and I’ll address them in no particular order.

- You say that there can be no such thing as too rich, just like there can be no such thing as too healthy. As a side-note, the comparison is bad because there is a limit on how healthy you can be: the limit of what can be achieved through healthy living and top-of-the-line medicine. Wealth on the other hand is only limited by the total money supply.
And this brings me to the core problem: while an economy should not (and usually is not) a zero-sum game, wealth IS: the money supply is limited, and every cent one person has, another one hasn’t. So a Gini-Coefficient of 1 is by every definition too rich.

- you say that it is better to for the rich to have money, since they will invest, instead of re-distributing it to the poor, since they will only spend it. What you fail to answer is: invest in what? If no one but the 1% have money to spend on anything but the basics, then logically there is no point in investing in any products but those desired by the 1%. Spending has many advantages over investment: the only form of information investment provides is the amount of free capital and expected levels of return-on-investment (ROI). Spending, on the other, provides information about purchasing-power, different desirabilities of similar products, brand loyalty etc. etc. A manufactures does not need to know who gives him money (and indeed many investors prefer to stay anonymous); but he must be acutely aware of what his customers want. And his knowledge will improve with the number of customers.

- you ignore the role of wealth for other purposes than economy. If there was a way to ensure that the rich do not get preference in the Justice system, education, political participation, access to infrastructure etc., the effects might not be so detrimental. But Money buys much more than goods: the power to re-distribute wealth yourself (via donations etc.) gives you vastly more social influence than a multitude of people with no income to donate.

- you bemoan the negative effects of the boom-and-bust cycle; what you don’t appreciate (and neither did Greenspan) is that artificially accelerated growth, followed by strong consolidation, will in total increase the speed of growth. Cheap capital makes it easier for new participants to enter the market, and recessions are the best way to tell economic success from just financial.

- Inflation will by definition hit those with lots of disposable income harder than those without. It will also reduce the cost of any loans you have - something that in theory the poor should have more of than the rich. On the downside, it will hit renters harder than real-estate owners. As long as housing costs are not too high (and you have negligible wealth), inflation will have a positive effect for you.

- privatization of infrastructure has been universally shown to bring no better service than state-ownership (often worse) while at the same time being much more expensive. Privatization also makes infrastructure susceptible to economic fluctuation, which can lead to the lack of critical infrastructure especially during times of crisis. The only way to avoid this is government-bailout of ‘too-big-to-fail’ infrastructure companies such as banks, power and telecom companies and the like.  The fact that there are companies considered oo-big-to-fail is an obvious indication that their core business should be state-run of at least very tightly regulated.

more to follow ...

 
 
Twissel
 
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09 April 2015 16:07
 

“reserved” (hehe)

[ Edited: 09 April 2015 16:09 by Twissel]
 
 
DanielGrings
 
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09 April 2015 18:26
 

Thank you for your comments.

Both health and wealth are limited to what is feasible at the time. You can try to argue that it is easier to become “extremely wealthy” than to become “extremely healthy”, but these are ultimately impossible to compare or even properly define.

“Wealth” doesn’t just include money, it includes all possessions. Money is a main part of the market mechanism we use to create and exchange those possessions (a process that is not zero-sum). In fact, there are quite a few rich people who are highly in debt (i.e. have “less than no money”) but own a lot of companies (or real estate). This illustrates that while the money supply is limited (or rather: should be) we don’t need to be concerned about anybody “hoarding” money to an extent of preventing other people from trading.

You mention a Gini Coefficient of 1. I’ve done a thought experiment (which I haven’t posted here yet), where one entity (the dragon Lofwyr, but we can make it Cthulhu, if you prefer) owns not just all money but all scarce resources. I show why I believe that, while he is “too rich” in the sense that he owns all food and means to produce food and could just let everybody starve, he himself has very strong financial (“wealth”) incentives not to. In fact, he has strong incentives to allow those resources to become distributed among many owners again.

Most “products desired by the 1%” are in fact products desired by everybody. “The 1%” might prefer the diamond encrusted version of some of those, but the most profit is still to be found in producing goods used by “the 99%”. Also, what “the basics” are changes over time. Is a smartphone part of the basics now? If yes, would it be still part of the basics now, had we “redistributed” all the money that had been invested in those companies away from them?

I’m not saying that spending is “bad”, obviously, but it should be on goods and services people actually want when given accurate information about supply and demand. Part of our current economic approach is essentially about tricking people into believing that they have more purchasing power than they actually do, so that they go and buy things they don’t need. This also means that “information” isn’t an end in itself but should help both producers and consumers to make better choices. Government attempts to “solve” inequality will generally end up distorting information.

We agree that wealth must not buy political power or “justice”. How do we best reduce this kind of influence? The prospect of specific government favors (like subsidies but also redistribution programs) is in fact a major incentive for abuse. In other words, if government intervention were not as common and acceptable as it is now, money would buy less influence.

This is also part of the culture that we create. I don’t see a problem with some people traveling first class or going to expensive schools. Of course, if people are hired based on which school they went to (rather than their actual abilities), this is a problem, but I argue that it is primarily a cultural one and not an economic one. Here, too, I think we shouldn’t say, “The rich mustn’t go to better schools”, but rather, “We should increase the quality of the education everybody has access to” and also “We should value people for their different interests and abilities”.

“Artificially accelerated growth, followed by strong consolidation, will in total increase the speed of growth.” How is “growth” measured here? In GDP? Or in more goods and services more efficiently allocated? What is “cheap capital”? Printing vouchers at a ratio of 10:1 to resources as opposed to 1:1? “Diluted capital” might be a better term here. If there are in fact advantages to a recession, why do we desperately try to print ourselves out of one every time?

It is true that inflation has advantages for people who are in debt (but being in debt has disadvantages greater than those advantages). However, an increase in prices of essential goods (like food) hits the poor a lot harder than the rich. Another problem with printing more money (monetary inflation) is that prices don’t adjust immediately (price inflation). The people who get their hands on the newly created money first (bankers and other members of “the rich”) enjoy a higher purchasing power than the rest, and the poorest members of society only get to feel the rise in prices.

Privatization of infrastructure is a somewhat complex issue. It’s worth looking at how privatization has been implemented and in what context (i.e. what role the government still plays). Infrastructure is always “susceptible to economic fluctuation”. The question is what reason there is to think that the government can respond to those more efficiently than the private sector. I think we should also question the logic of “too-big-to-fail”. If there is a lack of critical infrastructure, a lot of people will be willing to pay (a lot of) money to fix that. If a company fails (due to mismanagement, for example), let another company step in and provide this service (and reap the profit). Don’t bail out a company that fails to be profitable when providing a service that is so important that a lot of people are willing to pay a lot of money for it. Banks especially shouldn’t be “bailed out”; they should stop practicing fractional reserve banking and redistributing risk in fraudulent ways.

You might be interested in my next post (on libertarianism), where I look at some of what I mention here in more detail (including privatization of infrastructure).

[ Edited: 09 April 2015 19:37 by DanielGrings]
 
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09 April 2015 20:20
 
DanielGrings - 09 April 2015 12:26 PM

[Note this is Part 6 of a series of emails to Sam Harris. Also see Part 19 in which I discuss a thought experiment on total inequality.]

[TL;DR: Economics is not a science. The current conversation among economists is intellectually and morally bankrupt. I argue for the Austrian axiomatic approach. Inequality is not a problem. Technology is not a threat to employment. “Intellectual property” is not a logically or morally sound concept. Economists tend to misunderstand and underestimate the importance of opportunity cost.]

In my previous email [Part 5] I have described my (potentially pathological) physiological condition. I also mentioned in passing that I am “fiscally conservative”, and based on your previous writings on the subject I suspect you might consider this a symptom of mental pathology as well. Perhaps you are interested in the following clarification.

First let me point out that, while I would love to have a conversation with you on any topic, I believe a discussion about economics could be especially helpful. This is for a combination of three reasons:

First, you strike me as somebody who truly believes in the power of having a sincere conversation. When you say that you don’t want to be wrong for a moment longer than you have to be, I believe you mean exactly what you say. You also lament the fact that even in the community founded on the principle of trying to prove oneself wrong (the scientific community) too few members show the necessary enthusiasm for being proven wrong by others.

Second, I am convinced that a large percentage of human-made suffering stems from our perpetual failure as a society and as a culture to have a proper conversation about economics.

Third, the conversation about economics we as a society are currently engaged in has reached a total gridlock.

On the third point, it used to be the case that there is at least a single subject all economists agree on: the minimum wage. “The minimum wage”, they would say with one voice, “is a price floor that achieves nothing but destroy employment opportunities for the poor and is therefore bad for everybody, especially the poor, in all cases without exception”. Somebody who has explained this very well is Joseph Stiglitz [link to the article Professor Stiglitz and the Minimum Wage by Vedran Vuk at Mises Daily].

However, the Secretary-General of the OECD has just claimed [link to Launch of the Economic Survey of Germany 2014 at the OECD website] that “a minimum wage can raise revenues at the bottom of the pay distribution”. While I would be interested to learn more about how artificially raising a company’s costs can increase its revenue, this statement really represents a watershed moment for me: I have to accept the fact that there is literally not a single issue anymore for which you won’t be able to find two prominent economists who make diametrically opposite claims. This may be a good time to reboot the conversation.

Let’s also not ignore just how politically charged this conversation has become. In most countries, but in the United States in particular, political discourse has been almost completely reduced to “the left” ridiculing “the right” and vice versa — as though letting caricatures fight each other to the death in a great public arena were the best way to discover how best to organize an economy. If you need yet another quick sample, just have a look at the comments to your Facebook post [from 14.5.14]

If such complete disagreement were to occur in any other field of science, you’d except a general state of shock and even panic: How could we have let this happen? Are we not practicing the same science anymore?

Therefore, the first question we should ask is not even, “Is economics a science?”, but rather, “Can economics even be a science?”

First, let’s note that not everything that involves math is a science: Astrology and numerology feature mathematical calculations very prominently, and both have diverged significantly and arguably deliberately from the scientific method.

The essential characteristic of the scientific method, according to the current consensus, is that is deals in falsifiable hypotheses. Where are the falsifiable hypotheses in economics? What could happen to the economy or in a lab that would prove a Keynesian wrong? If the economy develops to everybody’s satisfaction, it’s because we have printed and spent enough money; if it doesn’t, it’s because we haven’t pushed interest rates far enough into minus yet. In other words, a Keynesian will either say, “You have followed my advice sufficiently and are the better off for it”, or, “You have not followed my advice sufficiently and are the worse off for it”; he will never be in a position where he has to say, “Perhaps my advice wasn’t worth following in the first place”. 

By contrast, the one school of economics that claims that economics is not a science but rather a philosophy, the Austrian school, is not even invited to participate in the conversation ... precisely because it is “unscientific”.

When Paul Krugman refuses to debate Bob Murphy on the grounds that he “doesn’t want to participate in a circus” (is that the lion running from the Christian or the other way around?), he pretends he is the biologist refusing to debate the creationist, so as not to burden the public with a non-theory: We shouldn’t “teach the controversy” if there is no controversy. Of course, the first problem with this analogy is that Keynesianism is not nearly as universally accepted among economists as the theory of evolution is among biologists. The second problem is that creationists say, “We are right no matter what the evidence says”, whereas Austrian economists say, “Pay better attention to more evidence and think harder about what you can expect from the evidence” — and this should always be considered worthy of consideration and debate in the scientific community. Specifically, “I changed my mind. What’s the big deal?” is the antithesis of science. If you don’t see this, picture Richard Dawkins opening a creationism museum with the justification, “I changed my mind. What’s the big deal?”

I believe the only way out of our dilemma is for all of us, individually and collectively, to make an effort to understand fundamental economic principles. I explicitly argue for the Austrian approach here: Let us try to establish the right axioms, and, on as sound a foundation as we can create, let us gradually move upwards to more complex concepts.

This approach has at least one consequence that should make it seem more persuasive. A cause of much embarrassment for physicists is the sharp dissonance between the micro and the macro levels: We understand how large physical objects behave reasonably well, but when you get into the quantum scale, things get really weird. Most economists will argue that the same is true of the economy, only in reverse: The micro level may be very intuitive (saving is good for you, for obvious reasons), but at the macro level things get weird (and saving is really bad for the whole economy). Austrians argue that this conflict only appears to arise because at the macro level economists tend to trip over their own complicated models that are in fact divorced from fundamental economic principles (and saving is actually good for everybody).

What exactly are “fundamental economic principles”, and what may be the best way to improve one’s understanding of them? I am not sure whether it’s a good idea to try to compile a definite universal list of such principles, but I can recommend the following three texts that take the approach I have mentioned:

I have written a short text on the Auroville economy[link to Reflections on the Auroville Economy From a Mainstream Economic Perspective], that briefly introduces a few such fundamental concepts, but it’s really just a small sample.

The text I most recommend is Bob Murphy’s Lessons for the Young Economist [link to a PDF version], because I consider it a perfect example of the Austrian axiomatic approach to understanding economics.

Having read the foundation provided by Murphy, the second book (in chronological order, not necessarily in order of importance) that I recommend people read is Kel Kelly’s The Case for Legalizing Capitalism [link to a PDF version]. If you want to claim that you are an (economic) liberal not because you have avoided the arguments against your position but because you have studied, understood and refuted them, Kel Kelly presents the arguments you should engage, conveniently bundled in one book. 

Whether or not you are interested in reading those texts, you may be interested in the following comments regarding your blog posts (having read those texts is not a requirement for understanding what I say below):


Inequality


I agree with you (and with Louis CK [link to the video Louis CK - My Life is Really Evil on YouTube]) that rich people should buy fewer sports cars and give more money to the poor. I disagree that the best way to achieve this is through government redistribution programs. I also believe that inequality is not a problem.

You say, “I think a certain level of wealth inequality is probably a very good thing.” I would phrase this more strongly: Some inequality is desirable simply because perfect equality is undesirable. I can think of only two scenarios where perfect equality of both wealth and income is achieved: a society where (armed) guards monitor everybody’s every move, to make sure nobody acquires property in excess of everybody else’s; or a tribe of early homo sapiens wandering naked through the African savanna. In the first case especially (and really in the second case as well), you also have the additional problem that, since utility is subjective, even if everybody has exactly the same kind of items in their possession, how wealthy people will actually be is determined by their preferences regarding those possessions. In other words, while everybody will have the same in nominal terms, actual satisfaction will vary. In both cases, the idyll of perfect equality is unlikely to last.

Since we agree that some inequality represents a necessary evil, we can ask (as you do), “How much inequality is too much?”

First, it’s worth pointing out that comparing an individual’s wealth to (national or global) GDP is completely meaningless. Even if GDP represented anything close to a nation’s ‘income’ (it really doesn’t, see Kelly Chapter 10), you’d still be comparing wealth to income, which is comparing apples to oranges. Somebody can have large wealth and small income and vice versa.

Much more importantly, we must always remember that inequality is by definition about relative and not about absolute wealth: It’s about how much more or less somebody has when compared to others; it is not about how much they actually have. These two will be connected but are not interchangeable.

[Continued in next post]


I got to the part where it says “First let me point out….”  Then I stopped reading.

I might interact with you if you could constrict your three posts into 4 sentences.

Staying within the theme of this forum “Succinctness is next to Ungodliness”.  Since I am into “Ungodly” it follows that I am into “succinct”

 
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09 April 2015 20:37
 
jdrnd - 09 April 2015 06:20 PM

I got to the part where it says “First let me point out….”  Then I stopped reading.

I might interact with you if you could constrict your three posts into 4 sentences.

Staying within the theme of this forum “Succinctness is next to Ungodliness”.  Since I am into “Ungodly” it follows that I am into “succinct”

I agree that “First let me point out” can be safely omitted. Here is a 4 sentence version:
“Economics is not a science. The current conversation among economists is intellectually and morally bankrupt. I argue for the Austrian axiomatic approach. Discuss.”

EDIT: In case that version is merely “brief” as opposed to “succinct”, how about this version:

“Economics is not a science, because it doesn’t deal in falsifiable hypotheses. The current conversation among economists is intellectually and morally bankrupt, because prominent economists support the minimum wage without offering an actual argument in its favor (and they get away with it). I argue for the Austrian axiomatic approach, because it is clear about the limitations of economic reasoning and avoids many of its pitfalls. Discuss.”

[ Edited: 09 April 2015 21:03 by DanielGrings]
 
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09 April 2015 21:37
 
DanielGrings - 09 April 2015 12:26 PM

However, the Secretary-General of the OECD has just claimed [link to Launch of the Economic Survey of Germany 2014 at the OECD website] that “a minimum wage can raise revenues at the bottom of the pay distribution”. While I would be interested to learn more about how artificially raising a company’s costs can increase its revenue,....

That’s why Henry Ford paid his workers what was, at the time, a much higher wage than he could have gotten away with. That allowed them to have enough money to buy his cars.

 
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09 April 2015 23:31
 
DanielGrings - 09 April 2015 06:37 PM

“Economics is not a science, because it doesn’t deal in falsifiable hypotheses.

I can’t comment, because I don’t know enough about economics.

 
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09 April 2015 23:33
 

That being said, I think we should restore the tariffs.  That would bring the jobs back to the US.

 
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10 April 2015 04:28
 

@Daniel

Wow, you seem to have a singular gift of making bad comparisons.

DanielGrings - 09 April 2015 04:26 PM

Both health and wealth are limited to what is feasible at the time. You can try to argue that it is easier to become “extremely wealthy” than to become “extremely healthy”, but these are ultimately impossible to compare or even properly define.

This is not remotely similar: in theory there is no limit on how many people can be very healthy (and most 20-somethings are very healthy), but this is not true for wealth: wealth is by definition an imbalance: not everyone can be wealthy at the same time, which translates to your example that if I take antibiotics, you will get my flu. Please find a better metaphor- this one truly makes no sense.

DanielGrings - 09 April 2015 04:26 PM

“Wealth” doesn’t just include money, it includes all possessions. Money is a main part of the market mechanism we use to create and exchange those possessions (a process that is not zero-sum).


the market itself is a zero-sum game - it’s just an exchange. It is what we do with the result of the exchange which leads to synergies and emergent properties.

DanielGrings - 09 April 2015 04:26 PM

In fact, there are quite a few rich people who are highly in debt (i.e. have “less than no money”) but own a lot of companies (or real estate).

If they are in net debt, they are by definition not rich. What actually happens is that the wealthy take out loans to take advantage of inflation and leverage their investments. This might get them out of net-debt or just allow them to live their lives in luxury at the expense of their heirs.

DanielGrings - 09 April 2015 04:26 PM

You mention a Gini Coefficient of 1. I’ve done a thought experiment (which I haven’t posted here yet), where one entity (the dragon Lofwyr, but we can make it Cthulhu, if you prefer) owns not just all money but all scarce resources. I show why I believe that, while he is “too rich” in the sense that he owns all food and means to produce food and could just let everybody starve, he himself has very strong financial (“wealth”) incentives not to. In fact, he has strong incentives to allow those resources to become distributed among many owners again.

You obviously don’t know the owner of Saeder-Krupp very well - he’d love nothing more than to see us grovel, begging for food and let anyone starve who would not make a good slave.  At least Cthulhu would just eat us all…
Funny how you think it is both in the 1% interest to redistribute wealth and good if they do it, but it is an anathema if the government does exactly the same thing… double standards anyone?

DanielGrings - 09 April 2015 04:26 PM

Most “products desired by the 1%” are in fact products desired by everybody. “The 1%” might prefer the diamond encrusted version of some of those, but the most profit is still to be found in producing goods used by “the 99%”. Also, what “the basics” are changes over time. Is a smartphone part of the basics now? If yes, would it be still part of the basics now, had we “redistributed” all the money that had been invested in those companies away from them?

And how, please, will the 99% pay for that product? Will the manufactures give it away? Do you really think that there is such a thing as trickle-down economics, except in some neo-libs mind? There are plenty of luxury products we desire, but they are made precisely because the rich want things most people can’t have.  And with basics I mean existential minimum - a $500 phone with phone-plan is not a basic commodity.

For a product to become mainstream, the mainstream must have purchasing power. Apple did not make one phone for one super-rich-person and made him pay for the development cost, then sell the next 50million at cost. A single smartphone is nothing but a fancy mini-tablet. It gets its power from being connected to million other phones. For the spread and development of new technologies, the super-rich purchases have always been irrelevant: these phones were developed by companies which already made their money in computers, by selling to the masses, not the 1%. 

DanielGrings - 09 April 2015 04:26 PM

I’m not saying that spending is “bad”, obviously, but it should be on goods and services people actually want when given accurate information about supply and demand. Part of our current economic approach is essentially about tricking people into believing that they have more purchasing power than they actually do, so that they go and buy things they don’t need. This also means that “information” isn’t an end in itself but should help both producers and consumers to make better choices. Government attempts to “solve” inequality will generally end up distorting information.

So the market is good when rich (and therefore wise) people engage in it, but if the (unwashed) masses do it, it’s bad for them and bad for the market.
Are you even aware how often you apply double-standards? Above you mention that people are tricked into buying stuff they don’t need for too much money - which means that companies distort our perception of the utility and value of their product (through advertising etc.). This is the fault of the consumer, according to you, and by taking his money away we can help him.
But when the government distorts prices by not taxing all goods equal, for example, it is in the wrong it ‘distorts’ the market.

DanielGrings - 09 April 2015 04:26 PM

We agree that wealth must not buy political power or “justice”. How do we best reduce this kind of influence? The prospect of specific government favors (like subsidies but also redistribution programs) is in fact a major incentive for abuse. In other words, if government intervention were not as common and acceptable as it is now, money would buy less influence.

This is also part of the culture that we create. I don’t see a problem with some people traveling first class or going to expensive schools. Of course, if people are hired based on which school they went to (rather than their actual abilities), this is a problem, but I argue that it is primarily a cultural one and not an economic one. Here, too, I think we shouldn’t say, “The rich mustn’t go to better schools”, but rather, “We should increase the quality of the education everybody has access to” and also “We should value people for their different interests and abilities”.

Ah, so the existence of specific laws is at fault, not the people who wrote the laws, who got elected and are supported by Super-Pac’s…
And according to you, everyone but legal professionals, educators and lawmakers should be incentified by wealth ...

DanielGrings - 09 April 2015 04:26 PM

“Artificially accelerated growth, followed by strong consolidation, will in total increase the speed of growth.” How is “growth” measured here? In GDP? Or in more goods and services more efficiently allocated? What is “cheap capital”? Printing vouchers at a ratio of 10:1 to resources as opposed to 1:1? “Diluted capital” might be a better term here. If there are in fact advantages to a recession, why do we desperately try to print ourselves out of one every time?

Measurable true growth in employment, manufactured products, exports etc. Recessions burst artificial bubbles caused by cheap money, this is why they are so essential - and why it was so bad that Greenspan did not let them happen. But otherwise, the system has served us well for half a century.

DanielGrings - 09 April 2015 04:26 PM

Privatization of infrastructure is a somewhat complex issue. It’s worth looking at how privatization has been implemented and in what context (i.e. what role the government still plays). Infrastructure is always “susceptible to economic fluctuation”. The question is what reason there is to think that the government can respond to those more efficiently than the private sector. I think we should also question the logic of “too-big-to-fail”. If there is a lack of critical infrastructure, a lot of people will be willing to pay (a lot of) money to fix that. If a company fails (due to mismanagement, for example), let another company step in and provide this service (and reap the profit). Don’t bail out a company that fails to be profitable when providing a service that is so important that a lot of people are willing to pay a lot of money for it. Banks especially shouldn’t be “bailed out”; they should stop practicing fractional reserve banking and redistributing risk in fraudulent ways.

Privatization is complicated, but we had decades of experience, and the vote is definitely in: it creates no net benefit for the economy and society as a whole, only siphons money to companies. It is a prime form of subsidy, the sort you ought to hate.
You obviously don’t understand Infrastructure: this is an area where there can be no real market because at any time there will only be a very limited number of companies able to quickly fix a critical bridge, clean-up after a train-wreck and repair storm-damaged power-lines. If a major player in these fields goes bust, it takes years for other to pick up the slag - years the people affect don’t have. The idea that you can just throw money at the problem is hilarious: if you life somewhere where the town did not have enough money to keep the local dam in repair and it’s about to burst, you think the community suddenly has the money to rebuild it from the ground-up? On which cloud, exactly, do you live?

Banking is infrastructure, too, and the interconnectedness of banking means that and bank insolvency can trigger a cascade of insolvencies unless firewalls are in place - something regulators are still fighting tooth-and-nail to get done.

[ Edited: 10 April 2015 04:52 by Twissel]
 
 
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10 April 2015 11:26
 
burt - 09 April 2015 07:37 PM

That’s why Henry Ford paid his workers what was, at the time, a much higher wage than he could have gotten away with. That allowed them to have enough money to buy his cars.

A worker’s wage isn’t arbitrary but based on their marginal revenue product. If it’s $9 per hour, and you pay them $10 per hour, then you lose $1 per hour. If you employ 1000 people, that’s $1000 per hour. If you are a wealthy entrepreneur (like Henry Ford) and you can afford to spend $1000 per hour on charity, I encourage you to do so. I have no problem with charity; in fact, I believe we need a lot more of it. It’s a problem to make it illegal not to do this (which is what the minimum wage is about). That is because not the entire economy can run this way.

A company is essentially an engine of prosperity that requires that resources are efficiently allocated. This means that each production component (including labor) should be accurately priced (i.e. based on supply, demand and productivity). In the above example, if you pay $9 instead of $10, the “engine” can not only run indefinitely (and not just until the entrepreneur has run out of savings), but productivity can grow over time. Even if workers don’t get more productive themselves (they don’t work harder or longer of more efficiently), the fact that they are part of a more efficient process will result in a higher wage for them (i.e. soon you can pay them $10 per hour and not lose anything).

Also, remember that there are two aspects to a “wage”: how much money the worker receives and the price of the goods they wish to purchase with it. Had Ford not paid his workers more than their productivity, his cars would have been cheaper to produce, and more people would have been able to afford them. This probably would not have made the workers at his factory quite as well off, but they would have benefited from other companies selling their products at low prices (and not paying their workers extra). You see that it’s more complex than just “pay the workers as much as possible and everybody will be better off”.

 
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10 April 2015 12:05
 

I agree that “health” and “wealth” are different in many ways. I do think that the example of health can be helpful in pointing out misconceptions around wealth.

Twissell - 10 April 2015 02:28 AM

wealth is by definition an imbalance: not everyone can be wealthy at the same time

This is not true: Everybody can be wealthy in absolute terms (everybody can have more than a certain threshold), and everybody can be wealthier than people were at a previous point in history. Obviously, not everybody can be richer than everybody else (nor can everybody be above-average), but we should not limit the concept of “wealth” to only that form of relative wealth.

Twissell - 10 April 2015 02:28 AM

the market itself is a zero-sum game - it’s just an exchange. It is what we do with the result of the exchange which leads to synergies and emergent properties.

If by “synergies and emergent properties”, you mean “gains from trade”, we might have an agreement here. But if “gains from trade” exist, then “exchanges are zero-sum” only in some physical sense (items have swapped location). Also, don’t ignore production (and that trade happens as part of production processes): We don’t just take each other’s stuff; we create more stuff to go around.

Twissell - 10 April 2015 02:28 AM

If they are in net debt, they are by definition not rich.

The point I was making is that they have no money. I was commenting on your claim that the limited supply of money can be a problem (“every cent one person has, another one hasn’t”).

Twissell - 10 April 2015 02:28 AM

You obviously don’t know the owner of Saeder-Krupp very well

Don’t assume you know what the thought experiment is about before you have read it. It’s not “What Would Lofwyr Do?”; it’s “If a single person were to own all scarce resources (excluding labor), which economic principles (and incentives) would apply?”

Twissell - 10 April 2015 02:28 AM

Funny how you think it is both in the 1% interest to redistribute wealth and good if they do it, but it is an anathema if the government does exactly the same thing… double standards anyone?

It’s not a double standard, because I talk about very different things. I don’t say (in that thought experiment you haven’t read yet) that the 1% should “redistribute” wealth, but rather that they have incentives to loan out their property, hire people to take care of it, and that they will have to pay increasingly high wages to keep up with (emerging and growing) competition. I mean to show that “total inequality” wouldn’t last and that there would be an increase in (income and wealth) equality.

Even if we do compare private charity and government redistribution, there are striking differences: The latter involves coercion (you may argue that that’s necessary; I doubt you want to argue that it’s an advantage), and it also distorts price and incentive structures (and creates bad incentives) far more than private charity tends to do. Just to give one example: When people are charitable with other people’s money, they often feel they have an incentive to put as much of it as possible into their own pocket; when people are charitable with their own money, they logically don’t have this incentive. Again, you can argue that government redistribution is necessary, because private charity “wouldn’t be enough”, but I hope you don’t deny that government redistribution has serious disadvantages.

Twissell - 10 April 2015 02:28 AM

Do you really think that there is such a thing as trickle-down economics

Yes, I mention it explicitly and explain (briefly) why the term is misleading.

Twissell - 10 April 2015 02:28 AM

And with basics I mean existential minimum - a $500 phone with phone-plan is not a basic commodity.

You misunderstood my point. I’m saying a $1 phone is part of the basics now, in the sense that even “the poor” can afford it. This is not thanks to government redistribution but thanks to private investment in this technology (aimed at providing goods to “the 99%”).

Twissell - 10 April 2015 02:28 AM

For the spread and development of new technologies, the super-rich purchases have always been irrelevant

My point exactly.

Twissell - 10 April 2015 02:28 AM

So the market is good when rich (and therefore wise) people engage in it, but if the (unwashed) masses do it, it’s bad for them and bad for the market.
Are you even aware how often you apply double-standards?

Where did you get that from? I said no such thing. I’m saying that spending (no matter by whom) is not an end in itself (i.e whether you are rich or poor, buying things you don’t need is wasteful and therefore “bad” and not “good for the economy”).

Twissell - 10 April 2015 02:28 AM

Above you mention that people are tricked into buying stuff they don’t need for too much money - which means that companies distort our perception of the utility and value of their product (through advertising etc.). This is the fault of the consumer, according to you, and by taking his money away we can help him.

I should have clarified that I was talking about government “stimulus” programs, which are meant to “stimulate aggregate demand”, i.e. trick people into buying things they don’t need by printing more money. “According to me?” Again, don’t put words in my mouth. Also, where do I suggest “taking away the consumer’s money”?

Twissell - 10 April 2015 02:28 AM

But when the government distorts prices by not taxing all goods equal, for example, it is in the wrong it ‘distorts’ the market.

Even when it does tax all goods equally, it still distorts prices (they no longer reflect information about supply and demand as accurately as before).

Twissell - 10 April 2015 02:28 AM

Ah, so the existence of specific laws is at fault

I was talking more about our social contract as a whole. See my post on libertarianism.

Twissell - 10 April 2015 02:28 AM

And according to you, everyone but legal professionals, educators and lawmakers should be incentified by wealth ...

Nobody should be incentivized (primarily) by wealth, but all allocation problems are best solved by using prices. Again, this is a basic social contract question I’ll get to in the next post.

Twissell - 10 April 2015 02:28 AM

Measurable true growth in employment, manufactured products, exports etc.

How do you measure “manufactured products” (and services!)? Are you sure you aren’t using GDP for this? Employment is a little problematic as an indicator, because of the “overheating” effect during a boom (this is explained in the material I have linked where the business cycle is discussed). Exports are irrelevant: Whether your neighbor sells more products to people living in other countries than he buys from them or not has zero effect on your prosperity.

Twissell - 10 April 2015 02:28 AM

Recessions burst artificial bubbles caused by cheap money, this is why they are so essential

Yes, and fever helps cure illness. Still better not to make oneself deliberately sick, though.

Twissell - 10 April 2015 02:28 AM

Privatization [...] creates no net benefit for the economy and society as a whole.

The former communist bloc might disagree with you here. But I assume you meant “in the context of a democracy” — again, that’s a more complex question.

Twissell - 10 April 2015 02:28 AM

It is a prime form of subsidy, the sort you ought to hate.

To the extent that privatization is “subsidy”, it isn’t privatization. If every movement from government control towards free market is really a movement back towards government control, I obviously can’t win.

Twissell - 10 April 2015 02:28 AM

You obviously don’t understand Infrastructure: this is an area where there can be no real market

Given how remarkably inefficient government services are, it’s worth questioning that (see my next post)

Twissell - 10 April 2015 02:28 AM

The idea that you can just throw money at the problem is hilarious: if you life somewhere where the town did not have enough money to keep the local dam in repair and it’s about to burst, you think the community suddenly has the money to rebuild it from the ground-up?

In such a scenario, the solution will involve somebody throwing money at the problem. You obviously think that this can only ever be “the government”, because private individuals are incapable of creating institutions (like insurance or charity) that can accomplish the same thing. This assumption can be challenged, but it requires questioning our social contract (see my next post).

Twissell - 10 April 2015 02:28 AM

Banking is infrastructure, too,

Sure, banking is a vital part of our economy, but it’s also a service very unlike roads and trains.

Twissell - 10 April 2015 02:28 AM

the interconnectedness of banking means that and bank insolvency can trigger a cascade of insolvencies

The Austrian view is that this “cascade of insolvencies” happens due to a contraction of the money supply that is only possible as a result of fractional reserve banking (you could think of it as “fractional reserve banking in reverse”).

[ Edited: 17 December 2015 08:19 by DanielGrings]
 
DanielGrings
 
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DanielGrings
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10 April 2015 17:13
 

I’ve posted the thought experiment here, in case you are interested. (I mention it in the context of explaining why an AGI is not likely to want to “take over the world”.)

[ Edited: 17 December 2015 08:19 by DanielGrings]
 
glacier
 
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glacier
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10 April 2015 19:57
 

I quit reading in the first sentence when you made the claim that economics is not a science.

 
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