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Rusty Shackleford
Joined: 08 May 2008
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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 Posted: Thu Sep 03, 2009 9:09 am Post subject: |
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... a very long piece, no time to finish now, but here's a gem:
At a 90th birthday celebration for Milton Friedman, Ben Bernanke, formerly a more or less New Keynesian professor at Princeton, and by then a member of the Fed�s governing board, declared of the Great Depression: �You�re right. We did it. We�re very sorry. But thanks to you, it won�t happen again.� The clear message was that all you need to avoid depressions is a smarter Fed.
Nice. He admitted that the Federal Reserve caused the first Great Depression. How long before he admits that they've done it again, and that he had a hand in it. |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Thu Sep 03, 2009 10:40 am Post subject: |
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Here is proof positive that Krugman is an idiot. His story of the failed babysitting co-op and his complete failure to understand its implications. His story:
| Idiot Krugman wrote: |
I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.
This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another�s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time.
Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.
Unfortunately, it turned out that the co-op�s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .
In short, the co-op fell into a recession.
O.K., what do you think of this story? Don�t dismiss it as silly and trivial: economists have used small-scale examples to shed light on big questions ever since Adam Smith saw the roots of economic progress in a pin factory, and they�re right to do so. The question is whether this particular example, in which a recession is a problem of inadequate demand � there isn�t enough demand for baby-sitting to provide jobs for everyone who wants one � gets at the essence of what happens in a recession. |
So. Krugman misses the point entirely.
1) The "free money" scrip had no intrinsic value. It was backed by nothing. It had no value and could not be exchanged for goods and services. It could not be earned in any way. It did not meet the criteria of being a store of value and widely accepted. It was doomed to fail.
2) The economic system created was based on a single product being bought and sold or traded. Imagine an economy where all you have is farmers growing potatoes. They could trade potatoes all day with each other, but there would be very little need to do so.
For our would-be babysitters, other than the fact that they could help each other out at different times, there was no need for any exchange to take place. This means there was very little incentive to pursue the use of the scrip.
3) Finally, the "free money" in the form of scrip was issued with a 100% tax pending. This was a wealth tax - a 100% tax on the gift or inheritance of the scrip. The members therefore had no wealth and nothing to spend. The co-op members were willing to work and exchange services, but they were unable to use the money they were issued. The fact that you were issued and then had to repay the entire 20 scrip notes means they had no value in the economy. Of course no one spent them. You had to pay the tax and had little prospect of earning more scrip to do so. It is rational not to spend today, the money you have to pay to the taxman tomorrow. You set that money aside. And so, they did.
This parable is a good example of why you should not tax wealth. Taxes will stop economic transactions and slow economic growth, in this case to zero.
Of course, the co-op members no doubt did go out on the town. They probably used real baby sitters either from within or outside the co-op group and paid them with US dollars instead of the co-op scrip.
So, Krugman misses the point.
The co-op fell into a recession, not because of inadequate demand, the demand was there.
The co-op fell into a recession because the money was not backed by some commodity giving it some intrinsic value and due to bad tax policy in the form of the 100% wealth tax.
Since in the end, the entire money supply was subject to confiscation due to the 100% tax, no one bothered to participate in this micro-economy. The participants abandoned the scrip economy for a better one: The co-op had even worse taxation and a worse central bank than the US.
Again, Keynsianism, the new Keynsianism and Krugman have failed. Call it the failure of fascist-socialist neo-KKK ponzi economics.
And once again, a proper Austrian analysis shows that it was the monetary policies and tax policies of the "government," the co-op in this case, that caused the problems.
This case also shows why the US government and all its agents work so hard to prevent any private citizens or another nation from setting up an honest gold-backed currency. People would quickly transfer their wealth and transaction accounts to the gold-backed money. People would flee the world's fiat currencies and they would collapse. |
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mises
Joined: 05 Nov 2007
Location: retired
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Rusty Shackleford
Joined: 08 May 2008
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| Posted: Thu Sep 03, 2009 5:20 pm Post subject: |
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There are a million quotes I could pull out of this article (and I probably will.) Here is a good one.
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| Few economists saw our current crisis coming, but this predictive failure was the least of the field�s problems. More important was the profession�s blindness to the very possibility of catastrophic failures in a market economy. |
There is a prominent school of economic thought, that hardly needs mentioning here, which predicted this bubble and pretty much every bubble before it. Maybe someone should send Kruggy a reading list.
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| Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed�s best efforts |
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HAHAHAHAHAHAHAHAH. Holy crap! Where does he come up with this stuff?
Does he actually believe there are pure free markets in the States? This is the straw man of the century and unfortunately one that is subscribed to by 99% of the population.
As for the second part of that paragraph, I am flabbergasted. "Neither side was prepared to cope with an economy that went off the rails despite the Fed�s best efforts." I think he means an economy that hung onto the rail so long in spite of the Fed. |
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Rusty Shackleford
Joined: 08 May 2008
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| Posted: Thu Sep 03, 2009 5:27 pm Post subject: |
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| As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth |
To have a firm grasp of economic concepts, you need surprisingly little math. All the great writings on economy eschew math, almost completely. Economics In One Lesson, the writings of Hayek and Mises. Even elementary econ text books contain only basic algebra and a tiny bit of calc.
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Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts;....... |
Sigh. Trying to blame bubbles on normal people, when it is really the political elite who blow the bubbles. |
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Rusty Shackleford
Joined: 08 May 2008
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| Posted: Thu Sep 03, 2009 5:28 pm Post subject: |
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Last one for now.
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| .......and to the dangers created when regulators don�t believe in regulation. |
When has that ever happened? |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Thu Sep 03, 2009 5:29 pm Post subject: |
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| They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts;....... |
I assume he is making reference to Greenspan. Clearly, he wouldn't blame the outcome of one mans actions on the society as a whole. That would be evil. The society has profoundly suffered from the Fed's actions. To then blame them for their own suffering is cynical.
By the way, Helicopter Ben hired Paul Krugman at Princeton. And then was his boss for half a decade. |
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Rusty Shackleford
Joined: 08 May 2008
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| Posted: Thu Sep 03, 2009 5:40 pm Post subject: |
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| it took World War II to bring the Great Depression to a definitive end. |
I'm speechless. |
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RufusW
Joined: 14 Jun 2008
Location: Busan
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| Posted: Thu Sep 03, 2009 5:49 pm Post subject: |
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| Rusty Shackleford wrote: |
| Does he actually believe there are pure free markets in the States? |
No, I think he was referring to what some economists believe: free markets "never go astray" and therefore regulation etc. should be relaxed and the market will self-correct. |
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Rusty Shackleford
Joined: 08 May 2008
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| Posted: Thu Sep 03, 2009 6:01 pm Post subject: |
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| RufusW wrote: |
| Rusty Shackleford wrote: |
| Does he actually believe there are pure free markets in the States? |
No, I think he was referring to what some economists believe: free markets "never go astray" and therefore regulation etc. should be relaxed and the market will self-correct. |
I'm pleased you pointed that out as later in the article he drops this clanger.
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| Even during the heyday of perfect-market economics,........ |
If you can point that time out to me and prove we are better off in terms of growth (which is really the crux of what macro is about), I will both eat my hat and bow down before the mighty edifice of Keynesian authority. |
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Rusty Shackleford
Joined: 08 May 2008
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| Posted: Thu Sep 03, 2009 6:11 pm Post subject: |
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This is his final statement.
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| When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won�t be neat; but we can hope that it will have the virtue of being at least partly right. |
And I agree with it. Markets aren't perfect by any stretch of the imagination. But they are far more perfect than any human being, or group of humans for that matter, that has ever existed. They are simply too large and too complex to hope to consistently influence in any positive manner. |
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RufusW
Joined: 14 Jun 2008
Location: Busan
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| Posted: Thu Sep 03, 2009 6:36 pm Post subject: |
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| Rusty Shackleford wrote: |
| Markets aren't perfect by any stretch of the imagination. But they are far more perfect than any human being, or group of humans for that matter, that has ever existed. |
Err....wat? Markets are groups of people - that's the whole point! |
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Rusty Shackleford
Joined: 08 May 2008
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| Posted: Thu Sep 03, 2009 6:41 pm Post subject: |
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| RufusW wrote: |
| Rusty Shackleford wrote: |
| Markets aren't perfect by any stretch of the imagination. But they are far more perfect than any human being, or group of humans for that matter, that has ever existed. |
Err....wat? Markets are groups of people - that's the whole point! |
They are far more complex than that. There are non human factors in markets, the weather, govt policy and technology for instance.
My point was that markets are far more perfect than the humans who try to influence them. |
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RufusW
Joined: 14 Jun 2008
Location: Busan
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| Posted: Thu Sep 03, 2009 6:45 pm Post subject: |
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| All decisions within a market are made by people or groups of people (companies) or organisations representing people (the government). |
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