[ExI] Valid economic reasoning should never go out of style/was Re: More on Health Costs

[Dan]

--- On Thu, 5/28/09, BillK <pharos at gmail.com> wrote:
> On 5/28/09, Lee Corbin wrote:
> <snip>
>>  What matters is not the number of jobs, but how
>>  much wealth is produced by jobs. Paying people
>>  to do nothing or to just fool around destroys
>>  wealth.
>>
>> Artificially low interest rates will always
>> create malinvestment,
>> as should be obvious to everyone. That it isn't
>> obvious to
>> everyone causes my paranoid circuits to fire,
>> and wonder just
>> how much in the grip of financial elites are all
>> of our habits
>> and prejudices, and even our whole economy.
>>
>> It's those who are nearest the new, hot money
>> who prosper,
>> (the big players and insiders of your footnote),
>> and it's
>> everyone else whose money depreciates in value.
> 
> Actually, I'm getting the feeling that this class of
> economic
> reasoning is rapidly becoming very old-fashioned.

We should be looking for valid economic reasoning -- not reasoning that is either old fashioned or new fangled.  Historically, the urge to sluff off valid economic reasoning is very strong.  The "new economy" talk of the railroad era -- yes, they had it back then too! -- led investors, policy-makers, and the general public to believe that bad policies -- policies that failed previously and that were theoretically unsound (even given the state of theory in the 19th century) -- would somehow work out.  And the boom-bust cycle resulted.

> In first world countries, to a greater and greater extent,
> we don't
> really *produce* anything. Production is China's job. In
> the West, we
> all have 'make-work' jobs. Call it intelligence work if you
> like.
> Really, it's just playing with computers.

This is actually a rather old fashioned view of wealth and of production.  The valid economic way to look at wealth and production is NOT to concretely look at farms and factories and assume that only specific physical goods are wealth.  Instead, wealth is what people value (if no one wanted oil, e.g., it wouldn't be considered part of wealth or useful to obtaining wealth); production is the process of transforming something into something more desirable (and this can be anything at all from the construction worker laying slabs to produce a building to the singer singing a song to produce music people want to hear).  That is a very wide and all inclusive view of wealth and of production.  It's not limited to who has the most farms or the bigger factories.

> All the 'investments' in the West don't *produce* anything.
> They are
> just schemes to move money around (and transfer wealth to
> the
> financial wizards).

See above.  Again, this is a very concrete, physical view of wealth.  Actually, in a truly free market, people in finance would create wealth -- just like farmers or factory workers.  They would do so to the extent that they made better investments than would be had otherwise -- most likely by forecasting correctly which investments would have higher yields, thereby directing capital to where it's most urgently demanded.  (Sadly, this isn't the case all the time because of inflation and regulations on investments and finance.)
 
> So getting all moralistic about 'production jobs' is now
> looking a bit silly.

I don't think this has to do with being moralistic.  One can completely take values out of the theory: malinvestments are malinvestments not because Lee or I don't like them, but because they lead to a production structure that doesn't sustain in the long run -- one that eventually must be corrected -- not because people are all moralistic but because eventually projects invested in fail and fail much more frequently than can be accounted for by simple, unsystematic entrepreneurial error.*  That's an objective truth -- not dependent on our values or morality or misdiagnoses.

Regards,

Dan

*  Entrepreneurship is, in a sense, forecasting future supplies, demands, prices.  It can and does fail.  However, it usually does not systematically fail on free markets because, all else being equal, the better entrepreneurs tend to succeed and the worse ones are weeded out (NOT meaning they drop dead, but merely that they are no longer given investor money to play with and there own stack of cash gets smaller too).  Systematic errors usually arise because of -- you guessed it! -- a system-wide cause.  Austrian Business Cycle Theory locates this system-wide cause in monetary inflation.  (Specifically, inflation messes up the price system so that the wrong signals are sent throughout the system in terms of what goods and services are most urgently demanded.  Relative prices are altered in such a way that wherever the inflation goes first, price increases follow.  Think of how the dot-com boom led to millions being paid for web site names and shifted
 workers and capital toward more web jobs that were later shown to not produce anything of value -- or a lot less than expected when the expected billions in sales for cheesegraters.com didn't materialize.)  After all, in an advanced money economy, money tends to be around one half of all trades, so any inflating of the money supply has an impact -- a real and not just monetary one -- well beyond the banking sector.  (Does this mean there are no other system-wide causes at work?  No, though business cycles can be traced to a primary inflationary cause while other system-wide cause tend to shape the specifics of the given cycle.  In other words, there are path dependencies -- or initial conditions (inflation) and boundary conditions (e.g., specific regulations that might shift malinvestments along one path as opposed to another).)