fundamentalist's comments

PS, as Angus Maddison demonstrates, world standards of living changed very little between the dawn of history and 1600. Kings in 1600 AD lived about the same as kings in 2000 BC. Peasants in 1600 lived mostly like peasants in 2000 BC.

But beginning in the Dutch Republic of the 17th century, standards of living began to sky rocket. If you graphed it you would get a hockey stick effect. The Dutch were the first people in history to escape Malthusian cycles of famine and mass death, while Spain, the super power of its day, deteriorated. Similar growth spread to England with the Dutch conquest of England in 1688, and it spread to the US. Then it slowly spread across Europe.

That hockey stick is what economics and history must explain.

So if China had free markets, why did it not develop like Western Europe after 1600? China and the Ottoman Empire were far wealthier and technically advanced in 1600 than was anyone in Western Europe. The Ottomans had a market that went from Morocco to China. The cities of China and the Ottoman Empire were much larger, too. So why did the West develop and not those empires?

VOX: "Soaring food and fuel prices: Their impact on public finances and other causes of persistently high consumer price inflation in North African and Middle Eastern countries"

Inflation is rising prices, so VOX is saying that rising prices cause rising prices?

Jasiek, I think you have me confused with a neoclassical economist. Although I have my degree in Keynesian/neoclassical economics, I follow the Austrian tradition, which is very different from neo-classical econ on the business cycle. So I disagree with many of the ideas in neoclassical as much as I do with Keynesian econ.

Jasiek: “Thus, Keynes thinks that investment is decided in the manner independent of the manner saving is decided.”

Yeah, Keynes had a lot of odd ideas. The literature is full of critiques of them. But the fact is that businesses borrow a great deal for investment and they borrow from savings. Savings and investment are tightly linked, regardless of what Keynes thought.

Jasiek: “On the other hand, the Reaganomics assumed that investment is always equal to saving (as explained above) and that, therefore, the private investment will expand by reducing the marginal rates of tax.”

I think you misunderstand neo-classical econ. They don’t assume that “investment is always equal to saving”. That is an accounting identity which is always true by definition. Hayek would say that yes, ex-post savings and investment always match because that is true by definition. However, ex-ante savings and investment do not match because most investment comes from credit expansion far above the level of savings. And that sets up the distortions in the capital structure that cause the boom/bust cycle.

Jasiek: “It is not Friedman’s monetarism itself but the then deregulation as an essential part of suuply-side economics…that solved the then stagflation.”

Higher interest rates, thanks to Friedman, stopped inflation. Then deregulation helped get the economy going again.

Jasiek: “which transferred the liquidity preference due to transactions-motives or precautionary-motives to the liquidity preference due to speculative-motives.”

All that means is that people quit holding onto large amounts of cash out of fear and uncertainty and felt confident enough to invest it. I have no problem with that. But what you have to address is why people were so fearful and lacking in confidence in the first place. Neither Keynes not Friedman could answer that. The Austrians did.

Jasiek: “The streets have been filled with imported goods, such that the balance of trade has deteriorated.”

Only with consumer goods. As RA demonstrates in a more recent post, the US is still the largest manufacturer in the world, just not of consumer goods. And as Keynes pointed out after WWI, large capital inflows that are needed to finance budget deficits cause huge amounts of imports and trade imbalances.

It's relative, today. There aren't many. But take a look at the Index of Economic Freedom compiled by the American Enterprise Institute. And the measure of success is per capita gdp, or people becoming wealthier. The freer the nations are in trade the wealthier are their people and the faster their economies grow.

Tzimisces: “Most of the institutions that had to be formed for modern integrated markets to function involved the state sweeping away a mass of accumulated local and traditional associations that had developed to shield people from the operations of the market before there were centralized political authorities to take over the task.”

That’s very poor history. Read Braudel’s economic history. Even though his is a Marxist, he will prove your version wrong. I assume that by “local and traditional associations” you are referring to guilds. I could be wrong. Guilds held their power because the state gave it to them. Guilds and cartels melted away when states began to remove their protection for them and free market competition began.

Besides, there were no free markets in the world before the Dutch Republic created them in the 16th century. And with them came the end of guilds.

Tzimisces: “A laissez faire approach can't work because people will demand the sort of institutional services once supplied by traditional associations…”

It worked quite will in the US from its founding until the early 20th century. People didn’t start demanding “protection” from businesses until socialism became popular.

Tzimisces: “I'm not aware of a general long term case where these three aspects don't proceed together in a tightly linked and contingent fashion.”

The Dutch Republic from the late 16th century through the 18th (until Napoleon conquered them), Great Britain from the late 17th century through the 19th, and the same for the US.

You are arguing for including more socialism in the mixed economy. Look to Europe for the results of such policies. European countries are going bankrupt, yet you advocate the same thing for the US?

Have you read any of Hayek’s or Mises’ histories? I think you would find them to be very good historians. They don’t ignore anything. The data of history are so vast and contradictory that a historian can find support for just about any idea. To make sense of it, one has to have a sound theory of economics to aid him in filtering and interpreting it.

Any historian who claims to approach history without any organizing/filtering theory is deceiving himself. It’s impossible to do. There is too much data. Every historian has to filter and organize the data in order to draw conclusions about it.

JG, even socialists like Krugman are free traders. Ideology has nothing to do with it. The empirical evidence is overwhelming. Free trade nations always do better even when no one else is practicing free trade.

The idea that trade deficits are bad comes from the mercantilism of the 16th century. It has been refuted by every economists, using empirical evidence and logic, by Adam Smith and other economists since.

Whether trade deficits are bad or not depends upon what causes them. A rapidly growing country can cause them, in which case they're good. Or government deficits can cause them, in which case they are bad. Ours are caused primarily because of a low savings rate and huge government deficits.

RA never disappoints: bigger government is always better.

But I doubt we can tax and spend our way to prosperity. Europe pays three times as much for gasoline as we do. Are they that much more prosperous than us?

Our governments (state, local and federal) already take close to 50% of our income. Will we really be more prosperous if they took say 75%?

All economics says there is only one way to prosperity: private investment (there is no such thing as state investment). Larger and large governments do not create prosperity.

Tzimisces, You posted a very thoughtful response, but you focus on changing governmental assistance programs when those programs are at the heart of the problem.

As you wrote, people are afraid to leave SSDI because healthcare costs are so high. And I agree they are ridiculously high, but why? Is it the free market? No. Healthcare is the most heavily regulated industry in the US. There is no free market in healthcare. The problem is restrictions on the supply (through licensing) and subsidies for demand. Medicare and Medicaid, along with employer paid plans and government control of insurance all create an unlimited demand for a resource that is artificially restricted by the state. That’s why healthcare costs have risen at twice the rate of cpi for decades.

With all its power, the state cannot repeal the laws of supply and demand because they are human nature.

And why do poor people have trouble finding good paying jobs? Economists know of only one way to create good paying jobs – investment. Yet high taxes, regulation and inflationary monetary policies destroy investment. Investment requires savings and the government punishes savers on many levels.

Americans thought they could control the market with interventionist policies and produce the results that they thought socialism would give them without suffering the problems of socialism, ie, the “third way.” (Of course, the market is nothing but the people, so they are trying to control themselves with their legislation). What they have found instead is that the “third way” or “mixed” economy, creates problems of its own. In some ways it’s worse than pure socialism.

As Hayek and Mises wrote, one state intervention in the economy causes unintended problems which require more intervention in an endless cycle. That’s why the Federal Register of new regulations runs 10,000 pages per year.

You’re right that we are currently at the point where we need to abandon the “third way” mentality and make the leap toward full socialism or retreat toward laissez-faire. Our current healthcare system is a good example. Costs will continue to rise until they bankrupt us unless we do something. Going to a totally socialist system paid for by the federal government would be better than the current system by far.

But the results of such a system are predictable. Europe has shown us the way: eventually the state will go broke because it will not be able to raise the taxes to pay for such a system.

Former Californian: "Free trade has been preached in universities for many decades. It sounds good in theory, but in practice, it only helps the top investing class."

That's simply not true. The empirical evidence for the benefits of free trade are overwhelming. Economics merely teaches the facts of life.