Monthly Archives: September 2012

I Furiously Backpedal on Say’s Law

I made a post with an exposition of Say’s Law a few months ago. I stated:

Say’s Law states that the demand for a good is made up of the production of other goods. This can be clearly demonstrated by an imaginary barter economy. Suppose there are only two goods, fish and potatoes. If an individual wants to buy a fish, he must exchange a potato for the fish. He could not buy the fish without first producing the potato. Thus, the production of the potato is what constitutes the demand for the fish. And vice versa. The production of the fish is what constitutes the demand for the potato. Now, if the individual who wanted the fish did not produce a potato to use in exchange first, there would be no economic demand. All he would have is desire. But desire is only one part of demand, the other being the ability to actually buy the product. And this ability only comes with production.

If Say’s Law is true, there cannot be a general overproduction (the flip side of underconsumption) of goods on the free market. However, there can be overproduction in one area and underproduction in another, a misallocation of goods. This insight will help us understand what really causes business cycles, which will be explained in a future post.

Keynesian theory relies on the rejection of Say’s Law. If Say’s Law is valid, it cannot be, and vice versa.

However, Dr. Gene Callahan recently directed me toward a Murphy post that generalizes the case against Say’s Law. There I found a link to an analogy Callahan had made previously.

Imagine Bob Murphy, Silas Barta and I are living on a desert island. First Bob and I set Silas adrift at sea on a small raft while he’s sleeping. (Just kidding, Silas! We love you, man.) Then we set about catching fish from the island’s lagoon with our rough-hewn spears. In three hours a day, we each catch about five or six fish, enough to feed us well. Then we spend the rest of the day discussing teleology.

One day, Silas says, “Guys, we don’t work that much. We could really increase our productivity if we worked six hours a day.” Bob and I reluctantly go along. That day, we each catch a dozen fish, but are too tired to discuss teleology.

We each eat six of the fish and feel decently full. We eat three more each, and now we’re stuffed. We take our last three and bury them in the sand, thinking perhaps they’ll make the soil more fertile. Then we talk about the increased work load, and all decide, “Man, that just wasn’t worth it! It was better when we had more leisure time to discuss teleology.”

Here is a situation where fish are overproduced. Something has to be underproduced as well for Say’s Law to hold. What is underproduced in this situation is leisure. However, we don’t normally think of leisure being “produced,” we just think of it as an activity separate from “normal” types of consumption that have to be produced beforehand.

So we can say Say’s Law is held if we consider leisure as a good that is produced, but Say himself certainly did not think of it this way. I’d argue that regardless of how we formulate Say’s Law, we should acknowledge in a particular sense, there can be a general overproduction rather than a relative overproduction. And cases of this general production occur when leisure, money, and inventories are involved.

It’s important to note that even upon rejection of Say’s Law (assuming we formulate it as Say did himself), there are no necessary policy implications. Perhaps the market can handle these general overproductions better or perhaps the government can handle them better. What’s vital, however, is that we argue from and for the truth regardless of our respective ideologies, and this involves a rejection of the original version of Say’s Law


Keynesianism and the Current Crisis

I had heard about this major poopie by the Obama administration but had never seen it for myself till now. And it’s just as hilarious as it sounded.

So the two blue lines are the project unemployment rates with and without the proposed stimulus. Without the stimulus, the unemployment rate would go up to a jaw-dropping 8.8%, and with the stimulus it would only go up to 7%. Thank god for our wise economist overlords. Without them we would suffer unspeakable horrors of which the mere thought of has kept grown men up in the night shaking in fear.
Uh yeah, whoops, so the actual rate went to 10.1%. As Daniel Kuehn points out, there are two conclusions we can derive from this.

“1. To argue that forecasters in December 2008 did not get it right, or
2. To defend forecasters in December 2008 as presenting a viable counterfactual.”

In other words:

1) The forecasters did poor forecasting. The economic situation was actually far worse than they believed it to be. This is the argument Keynesians make after the fact, because it is the only viable route for anyone trying to maintain their beliefs. (I don’t really hold this against them, every ideology has a way to defend itself in seemingly dreadful circumstances)

2) The forecasters did correct forecasting. It is Keynesianism that is incorrect and fiscal stimuli are actually counterproductive.

While Kuehn chastises Steve Horwitz for leaving his options a little open-ended and not being perfectly clear as to which of the options he is arguing for (in the lecture Horwitz gives here), I think what Horwitz does is perfectly reasonable. After all, both are possibilities and both should be pointed out as just that, possibilities. #1 could be true, #2 could be true, or perhaps both could be true. These are simply things we cannot empirically prove.

Regardless, Bob Murphy has a typical hilarious commentary regarding Keynesianism and the current crisis here:

In this lecture, he points out the following graph in response to those that Keynesians who assert point #1 above, along with the coexisting argument that more really should have just been done from the monetary side.

Yup, Bernanke just didn’t do enough!

Obama Teaches Us How to Run a Circle around a Question

I posted this as a comment recently on EPJ in response to a video of Ben Swann interviewing Obama. Here’s a slightly edited version of what I said:

Firstly, here’s the interview I’m discussing, of which the first Q&A is what is relevant. Of course, feel free to watch the whole video if you’re interested.

So Swann asks Obama why his lawyers are fighting the judge’s orders against the NDAA’s indefinite detention clause. Obama responds:

1) His primary job is to keep the American people safe. Only next is his role to do it in a way that respects American values, traditions, and rule of law.
2) But there are people that have pledged to try to hurt Americans that they can’t try in a traditional court. It’s a complicated situation.
3) An American citizen can never be subject to that sort of detention. Congress has disagreed with him.
4) The only reason he passed it was so he could finance the military and pay the soldiers.
5) So he signed the bill saying he would never use this power, and he believed courts in the long run would find it unconstitutional.

So firstly, he doesn’t explain why we can’t try the people who have “pledged to hurt Americans” in a traditional court. If they have taken such a pledge, it would undoubtedly be easy to lock them up.

Secondly, in response to point #3 and 4, Anonymous @12:22 AM has pointed out that Carl Levin, one of the two creators of the bill, stated it was the Obama administration that wanted the power in the first place. Here’s the video of that:

Thirdly, if point #5 is true, WHY are his lawyers fighting the judge who ALREADY ruled it unconstitutional. Obama runs a complete circle around the question, in the end, completely avoiding answering it at all. Swann asks Obama why his lawyers are fighting the judge’s ruling. Obama essentially replies “I would never use the power, and the courts will rule it unconstitutional in the long run.” And the alert listener thinks “wait a second…if Obama wants the courts to say it’s unconstitutional, then isn’t it merely hypocritical to be fighting the court when it already DOES say it’s unconstitutional?” Obama’s actions speak louder than his words. Swann asks “why are you fighting the court’s orders against the NDAA” and Obama responds “I want the courts to be against the NDAA.”

????? This is akin to asking someone “why did you kill that man?” and them responding “I want him to live.”

Unfortunately, I’d venture to say 99% of Americans are not alert. Hell, for a moment there, even I thought to myself “Oh Obama isn’t so bad he just passed it so the troops can get paid, and he’s hoping in the long run the courts will find it unconstitutional.”

This man is a devious tyrant. The overused idiom “sly as a fox”is only an understatement describing the politician’s wit and charm in pleasing the average American.

For those interested, here are Swann’s responses after the fact:

We All Agree

That our health care system is terrible, but what’s the solution?

Paul Krugman is out with a blog post titled “Health Systems and Health Costs”

From this graph, he argues that the Canadian system, which has risen in spending considerably less than that of the US system, should therefore be adopted in the US:

So, Canada has a single-payer insurance system — actually called Medicare. Four decades ago, Canada spent about the same share of GDP on health care as we did. Since then, however, Canadian spending has risen far more slowly than spending in the US, which relies much more on private insurance. Meanwhile, despite the scare stories opponents of reform like to tell, Canadian health care appears on average to be as good as or better than US care; polls indicate that Canadians are more satisfied with their health care than Americans.

He then states that ironically, Republicans are arguing to get rid of the single-payer part of the system to keep costs down, while it’s obvious Canada demonstrates that the exact opposite route is the best way to keep prices down.

What Krugman’s simplistic analysis fails to take account of, in terms of empirical evidence, is the data pre-1970s.

As this chart shows, health care spending/GDP in the US rises slowly in the early to mid 20th century, then accelerates drastically after 1960.

This is basically the same graph but here the prices of health care (the title is incorrect by the way; it’s supposed to say “CPI All Items v. Medical Care”) in the US are compared with the prices of all items. As the graph shows, medical care expenses are rising with other expenses up till around 1970 and then take off, diverging by a large amount from other goods in general.

I would love to find Canadian health care costs pre-1970 to compare it to costs in the US but was unable to. After all, 1965 was when Medicare was enacted and 1973 is when the HMO Act of 1973 was passed, so it’s obviously illogical to criticize those who want to move toward a  free market in health care based on data after 1970 (if we are so gracious to accept that this is what the GOP actually desires).

Let me restate Krugman’s logic to show exactly where I take issue with his argument. Krugman points out that Canadian healthcare spending/GDP post-1970 is lower than US healthcare spending/GDP post-1970 (and the gap has expanded ever since). Therefore, the Canadian healthcare system is more desirable than the US healthcare system post-1970. And because the Canadian system is a single payer system while the US system is a mix of single payer and private insurance, pure single payer leads to cheaper prices than mixes of single payer and private insurance, and pure single payer leads to cheaper prices than pure private insurance.

This last part is where he goes wrong. We could be extremely critical and even point out that correlation isn’t causality, maybe there are quality concerns, etc., but let’s grant those propositions for now. The non-sequitur he commits is when he goes from the fact that there are cheaper prices in pure single-payer than in the mixed system to the conclusion that therefore there would be cheaper prices in pure single-payer than in a pure-private system.

Sure, prima facie it might seem that his final conclusion would follow, but couldn’t it very well be that both pure single-payer and pure private systems have cheaper prices than a mixed system? As the historical data shows, prices in the US exploded upon its aberration from the free market, so if we take all the data into account, wouldn’t it actually seem reasonable that both pure systems had cheaper prices than a mixed system? You see, in proving that a pure single-payer system has cheaper prices than a mixed (single-payer + private) system, Krugman proves this and this only. It does not follow that a pure single-payer system has cheaper prices than a pure private system, and if Krugman wanted to legitimately prove this, he would have to show data before the US system became extremely interventionist.

Of course, this leaves us to reason why both systems have cheaper prices than a mixed system, but that seems relatively easy to solve.  The US health care system is fueled by a credit bubble created through artificially lower interest rates (because of Federal Reserve policy) that makes borrowing easier for the US. A lot of this borrowed money is funneled into health care through programs such as Medicare. The US also has a lot of regulations on insurance companies mandating them to insure “preventative” measures such as regular doctor visits, that cause prices to go up since people don’t have to pay the full price and will visit more often. These regulations and artificially low interest rates would not be present on the free market and thus prices would be lower. The US also borrows to an extent Canada is unable to borrow because of the dollar’s status as the world reserve currency, and so it is not surprising that Canada’s prices are lower. Canada’s health care system has effective price controls (another cause of lower prices) but its people are allowed to visit the doctor as much as they want, hence the longer waiting lines in Canada.

I’ll likely revisit this issue in the future and include more information explaining how the Canadian system has and a private system would have lower costs than those of the current system in the United States.