Monday, 20 October 2008

A lot of contra-cyclical nonsense [update 2]

More economic illiteracy to point out today from both commentariat and cabinet, from both NZ and overseas.  I blame their teachers. 
First up is Cactus.  Yep, in getting the right end of the stick here she's got the wrong end of supply and demand when she says:
It took me one day being in Hong Kong to realise that the price in a market is not necessarily a straight and easy supply = demand equilibrium, but whatever the seller knows you are willing and able to pay for it.
Wrong on the first point, but dead right on the last.  It doesn't matter a damn what you or a government valuer think your house (or your car or your hour of pointless labour) is worth: it's only worth what someone wants to pay you for it.  Something for vendors (and minimum-wage advocates) to think about in coming months.
You see, whatever your teachers might have told you, demand is simply desire backed up by the ability to pay.  The value of your goods brought to market depends on how many other people are offering the same or similar to you, put in the same room with those desiring to buy them backed up by their ability to pay.  Bingo.  That's supply and demand, although it's not an "equilibrium" at all: it's a (cough) "double-coincidence of wants." What's that mean?  It means that you want that money more than you want the goods -- and seeing your bills and the maintenance payments on your first wife piling up, you want that money desperately; whereas the buyer wants the goods more than he wants the money -- and seeing you sweat, he knows he doesn't have to pay as much money as you first said.
Like I said, I blame her teachers for not knowing she was disagreeing with herself.
Anyway, as she points out -- and as a perfect illustration of "demand" being "desire backed up by the ability to pay": there's been "immediate moves" by Aussie house sellers to up their prices to match Kevin Rudd's pre-Xmas bonus to first-home buyers.  (Much like owners of NZ rental properties up their rates to match their tenants Accommodation Supplement -- making this a gift to owners of NZ rental properties.  But I digress.)  Another example of how the important lesson pointed out by Henry Hazlitt is, or should be, the very first lesson in economics, i.e., that
the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
I blame Kevin Rudd's teachers for not knowing the lesson themselves.
Anyway, onwards to more ignorance at The Hive where they say "We agree fully" (their words) with this economically illiterate crap (my assessment) from the Herald's John Armstrong.  Yes, John Boy Junior again, ever the economic illiterate, who starts by observing (correctly) that "the pretend [election] campaign is having to make way for the real one as the international crisis has worsened," before slipping as usual into blissful know-nothing illiteracy:
    Labour has now grabbed the bull by the horns, using the likelihood of the country's slipping into a deep recession as an opportunity to demonstrate political leadership.
See what I mean?  In what exactly does Labour's "political leadership" consist, one wonders?  Turns out it's in abject economic ignorance, on which the other team is now steaming hard to catch up...
    [Labour] is now proposing a Keynesian-style spend-up as an economic stimulus. A December mini-Budget would bring forward rail, road and other construction projects to keep people in work.
    In what is termed "counter-cyclical economic management", Cullen is saying paying off debt during the good times has provided room to borrow to stave off the bad times.
Now here one can only blame the teachers.  A "Keynesian-style spend-up as an economic stimulus" is not what the doctor should be ordering -- or The Hive or Armstrong applauding.  Quite apart from being a nonsense phrase even on its own terms, "room to borrow" is not the same thing at all as "able to pay."
Remember that point?  Desire is one thing. Being able to pay for your wishes is another thing altogether.  (And governments, and Michael Cullen, use the power of economic ignorance to get you to pay for their desires.  Brilliant, huh.) 
Once you grasp the nature of government economic management and that simple economic point, that every wish has to be paid for if it's ever going to come true, then you'll understand that Government deficit spending doesn't stimulate the economy at all (if it did, a decade of then-record US deficit spending in the thirties wouldn't have prolonged the depression for a decade) because unless you've got the cash flow to match your spending, you're taking real capital away from the pool of real savings.  And who you're taking it away from is producers, real producers, who would have used those real savings to build real things that show real profits, not to build things like electric train sets and large holes in the ground. That's not stimulus, it's rank stupidity -- taking resources out of the mouths of the productive to pour down black holes marked economic ignorance.
And what's this about "counter-cyclical economic management" leaving us ready to face the bad times?  Have any of these people noticed the NZ government is only making us ready to join the bad times?
Even if Cullen hadn't pissed away eight years of unrepeatable economic golden weather and had actually followed the prescription of "counter-cyclical" prudence he claimed to have followed, contrary to the claims of most of the mainstream economists (there's those teachers again) that would have left us no better off.  Why? Because the whole theory is a crock.
Since the theory is so widely held; since it's still -- unfortunately -- so widely taught; and since whichever of the main parties takes up the reins in a month's time so much of New Zealand's real wealth is going to be wasted on it in the coming years, let me quote at some length Ludwig von Mises' explanation of exactly why the theory is a crock.  If you can't afford to watch your money being wasted, then you can't afford not to read on and find out exactly how it's going to be wasted, and why:
The Chimera of Contracyclical Policies
    An essential element of the "unorthodox" doctrines, advanced both by all socialists and by all interventionists, is that the recurrence of depressions is a phenomenon inherent in the very operation of the market economy.
    But while the socialists contend that only the substitution of socialism for capitalism can eradicate the evil, the interventionists ascribe to the government the power to correct the operation of the market economy in such a way as to bring about what they call "economic stability."
    These interventionists would be right if their antidepression plans were to aim at a radical abandonment of credit expansion policies. However, they reject this idea in advance. What they want is to expand credit more and more and to prevent depressions by the adoption of special "contracyclical" measures.
    In the contest of these plans the government appears as a deity that stands and works outside the orbit of human affairs, that is independent of the actions of its subjects, and has the power to interfere with these actions from without. It has at its disposal means and funds that are not provided by the people and can be freely used for whatever purposes the rulers are prepared to employ them for. What is needed to make the most beneficent use of this power is merely to follow the advice given by the experts.
    The most advertised among these suggested remedies is contracyclical timing of public works and expenditure on public enterprises. The idea is not so new as its champions would have us believe. When depression came in the past, public opinion always asked the government to embark upon public works in order to create jobs and to stop the drop in prices.
    But the problem is how to finance these public works. If the government taxes the citizens or borrows from them, it does not add anything to what the Keynesians call the aggregate amount of spending. It restricts the private citizen's power to consume or to invest to the same extent that it increases its own. If, however, the government resorts to the cherished inflationary methods of financing, it makes things worse, not better. It may thus delay for a short time the outbreak of the slump. But when the unavoidable payoff does come, the crisis is the heavier the longer the government has postponed it.
    The interventionist experts are at a loss to grasp the real problems involved. As they see it, the main thing is "to plan public capital expenditure well in advance and to accumulate a shelf of fully worked out capital projects which can be put into operation at short notice." This, they say, "is the right policy and one which we recommend all countries should adopt." [7] However, the problem is not to elaborate projects, but to provide the material means for their execution. The interventionists believe that this could be easily achieved by holding back government expenditure in the boom and increasing it when the depression comes.
    Now, restriction of government expenditure may be certainly be a good thing...
And it sure would have been if we'd seen it.
But it does not provide the funds a government needs for a later expansion of its expenditure. An individual may conduct his affairs in this way. He may accumulate savings when his income is high and spend them later when his income drops. But it is different with a nation or all nations together. The treasury may hoard a considerable part of the lavish revenue from taxes which flows into the public exchequer as a result of the boom. As far and as long as it withholds these funds from circulation, its policy is really deflationary and contracyclical and may to this extent weaken the boom created by credit expansion. But when these funds are spent again, they alter the money relation and create a cash-induced tendency toward a drop in the monetary unit's purchasing power. By no means can these funds provide the capital goods required for the execution of the shelved public works.
    The fundamental error of these projects consists in the fact that they ignore the shortage of capital goods. In their eyes the depression is merely caused by a mysterious lack of the people's propensity both to consume and to invest. While the only real problem is to produce more and to consume less in order to increase the stock of capital goods available, the interventionists want to increase both consumption and investment. They want the government to embark upon projects which are unprofitable precisely because the factors of production needed for their execution must be withdrawn from other lines of employment in which they would fulfill wants the satisfaction of which the consumers consider more urgent.
    They do not realize that such public works must considerably intensify the real evil, the shortage of capital goods.
    One could, of course, think of another mode for the employment of the savings the government makes in the boom period. The treasury could invest its surplus in buying large stocks of all those materials which it will later, when the depression comes, need for the execution of the public works planned and of the consumers' goods which those occupied in these public works will ask for. But if the authorities were to act in this way, they would considerably intensify the boom, accelerate the outbreak of the crisis, and make its consequences more serious.[8]
    All this talk about contracyclical government activities aims at one goal only, namely, to divert the public's attention from cognizance of the real cause of the cyclical fluctuations of business [which is their earlier inflationary credit expansion]. All governments are firmly committed to the policy of low interest rates, credit expansion, and inflation. When the unavoidable aftermath of these short-term policies appears, they know only of one remedy--to go on in inflationary ventures.
Mises' prescient comments come from his book Human Action, from the Chapter 'Currency & Credit Manipulation, Section 5: Credit Expansion' -- which is happily online right here.  It's as up to date as next week.
Why not print out Mises' description of what's about to happen and keep it handy over coming months, and just check back occasionally to see how damned accurate Mises' description of the coming capital consumption will be.  It won't be pretty, but at least you'll have the chance to learn something -- as long as you forget what your mainstream economics teachers taught you back in high school.
UPDATE 1: Now here's an Economic Plan to I can agree with -- one that's serious about the scale and the nature of the economic crisis:
    With chill economic winds blowing and all the mainstream political parties either unaware that the global economy has changed while they've been out campaigning, or abjectly clueless what to do about it, Libertarianz finance spokesman Mr Darby released the only credible plan to confront both galloping government deficits and collapsing financial markets.
    "I call it the Don't-Spend-So-Goddamned-Much Plan," he says.
Great stuff (read on here).  And looks like it's a two-parter, with more to come shortly...
UPDATE 2:  And here's the second part and it's a beauty -- and urgently needed:
    "The response of the mainstream political parties to the global economic crisis has been universally appalling," says Libertarianz party leader Bernard Darnton. "First denial, then promises of deficit spending of both the type and degree that helped delay recovery from the Great Depression for more than a decade" ...
"This morning, Libertarianz finance spokesman Mr Darby released the first part of our plan outlining what government can do to prepare New Zealand to weather the crisis: the Stop-Spending-So-Goddamn-Much Plan. This afternoon," says Darnton, "I'm announcing the crucial second part."
"I call it the Get-The-Hell-Out-Of-The-Way Plan."
And a damn good plan it is if I say so myself -- the only credible plan I've seen -- the only one which doesn't call for growing the bloody state, which every other moron is promising to do.  Read it here.


  1. "..Cullen is saying paying off debt during the good times has provided room to borrow to stave off the bad times..."

    Are those halfwits sure Cullen said that?!?! ...even he would not be that stupid.

    Giving credit where it is due I am inclined to think Cullen paid off debt in good times with a vow never to get the Country into such a headlock again!

    When the election is over I very much doubt he has the sort of plans those idiots are claiming.

  2. PC said...
    it's only worth what someone wants to pay you for it.

    You've just rephrased market equilibrium (without you being aware of it) in different wording but it doesn't change the fact that it boils down to equilibrium.

    Here is a fact:

    ...what someone wants to pay...

    This is true, but to say that ...what someone wants to pay..., doesn't last forever. WHY? Because of that fellow called Mr. Equilibrium who operates non-stop in the market place and this is an undeniable fact.

  3. Ah yes, FF, that's the point I was making there. Cactus was saying the same thing, but saying she wasn't.

  4. Ah yes, Elijah, Cullen's been saying this for years.

    This has been his stated reason that he couldn't cut taxes in the good time.

    But come the bad times and his pockets are empty.

    As Mises says, a household can work this way, but not a country's treasury.

  5. Yes, I understand his point (although I disagreed with it) about tax cuts...but has Cullen been saying in the last week or so that he intends massive spending in a mini budget before Xmas to create employment?!?! ...(I have not really been following NZ news for a few days)...and if so, I would be surprised and disappointed in Cullen.

  6. Oh Dear Wise One

    I was stating that in the context of there being 2 markets for good and services - a local Chinese market, and an expat market.

    Perhaps you can explain in economic terms then why there are 2 prices for one good in a market? That based on the colour of my skin, I am charged a different price than I would be if I was another colour?

    And how that fits in with the cute little graphs they teach you at Hi' Skool?

  7. Labour just announced no new spending today elijah.

    My apologies for the link, but it's the source.

  8. Hi Cactus,

    Yeah, I was a trifle unfair in using you as the hook to the post, but I figured you could take it. And I owed you one. :-)

    You're charged a different price for the very reason you describe: based on the colour of your skin the suppliers know your desire is backed up with different "able to pay" than the locals.

    It doesn't exactly fit in with the cute little graphs they teach you back in the factory schools, but that's the fault of the cute graphs, not of supply and demand.

    Who the fuck has ever met a "demand schedule" anyway?

    Like I said, I blame your teachers.

    Essentially suppliers are always going to charge what they think buyers will bear. And since different buyers will have different levels of demand and your seller has an effectively unlimited supply, he'll charge differently to different buyers.

    The price for you is set when what the "marginal white buyer" is willing to pay meets what the "marginal smart-as-a-tack seller" is prepared to take to part with their goods.

    And the price for the locals is set by what the "marginal yellow buyer" is willing and able to pay meets what the "marginal smart-as-a-tack seller" is prepared to take to part with their goods.

    Different buyers, different prices.

    It's not much different to what vets do when they decide whether to recommend surgery: they look out the window at the client's car to see if they can afford it, or if they should just suggest euthanasia.

  9. Hi Stephen,

    You need to read the full package, not just the headlines.

    They were simply saying no more election bribes -- which means they figure the student allowance bribe is enough.

    But in that same speech Clark says "Now he says is the time for extra infrastructure spending to give the non-financial economy the help it needs...

    "I announced last Sunday that, given the privilege of re-election, Labour will finalise a December economic statement.

    "That statement, within our first forty days, will contain an economic stimulus package...

    "At the core of that package will be plans to bring forward investment in infrastructure and other projects which are job rich.

    That's your Keynesian-style spend-up right there.

  10. "It's not much different to what vets do when they decide whether to recommend surgery: they look out the window at the client's car to see if they can afford it, or if they should just suggest euthanasia".


    Of course Economists change the rules all the time so can't be relied upon for accurate analysis about anything, least of all a financial crisis.

  11. I guess you could start by ruling out all of them who despite their learned babbling were unable to even notice that their world was about to collapse.

    A sort of 'Economist's Razor' -- it should rule out about ninety-five percent of the useless bastards.

  12. "I guess you could start by ruling out all of them who despite their learned babbling were unable to even notice that their world was about to collapse."

    Harsh: they could see it coming.

    They just had no answer...


  13. Ah shit, I thought the infrastructure stuff was already promised.


  14. Of course Economists change the rules all the time so can't be relied upon for accurate analysis about anything, least of all a financial crisis.

    What on earth??? Why has Kate come over all Labour-loving?

    Clunking Fist: they could see it coming.

    Nope: they created it. It's Labour's fault. Just like it was last time, and the time before that, and the time before that.

    Whoever wins, National or Labour (forget that: National will win, but Labour might rort their way back in with MMP & the maorimander) there will be a mini-budget in December

    one of them will raise the minimum wage and all benefit levels, and whack up taxes on companies and rich pricks

    one of them will cut spending, cut benefits, and cut civil sevants (across the board cut of 30% in civil servants salaries for example! yeah!)

    there's no question which of those is better for NZ.
    anyone who votes Labour is so stupid and uninformed they should not be allowed to vote.

  15. PC, FF,

    What equilibrium? Where? When?


  16. Anonymous

    It is every bit as much the National socialists' fault as it is the Labour socialists.


  17. Anon obviously too young to remeber Muldoon!

  18. Clunking Fist

    Wasn't it spelt Muldoom?


  19. Indeed!

    As an 11 yr old living in a Labour voting household (God give me strength: the ma & pa were self-employed at the time) I was very impressed with this "Think Big" thing. But obviously my brain still had some growing to do. My parents, alas...

  20. Clunking Fist

    I met him. He was still the PM (had about another two years to go). There was a cocktail evening that a school was running. Since he was the electorate MP he was invited to attend and accepted.

    He was a short guy but had a great power of presence. When he walked into the room everyone noticed and stopped talking for a few moments. Then he worked the room, spoke to every group and 20 minutes later was off and gone.

    There were two things I remember about that. They were his presence and his economy with time. Each group got an alloted amount and no more. There was no in real engagement in conversation, even with people he knew (and by all accounts knew well).

    I also remember how people behaved. They were completely awed by the guy. They talked about him long after he'd departed. What was interesting was the respect and approval granted to him, even in his absence. This, even from people who privately had said they were unhappy with his policies and the direction he was steering NZ. It was a curious display of intellectual impotence. Perhaps it was fear.

    Back over in Australia, their take on the story was that most Kiwis were either sneaks or sheep. I thought about it at the time and figured the Aussies may have had some insight.

    Do you remember this?
    "New Zealand the way you want it."


  21. "It was a curious display of intellectual impotence".

    And not restricted to the general public, LG. Tom Scott has often talked of the entire press gallery being in awe of him. He genuinely unnerved them. Even though he was a terrible old economic socialist himself, it was satisfying to think of those lefties getting their collective knickers in a nervous knot! :)

    And yes, I do remember "NZ the way you want it". Even though it essentially meant nothing, it was a brilliant slogan, nonetheless.

    As a kid in the 70s, the evening news was chock full every night of pasty little blokes with various British accents, (none of whom possessed an 'H' between them), fronting unions on strike. The whinging, Marxist bastards irritated me then and still do. That Muldoon stood up to them was perhaps his greatest (only?) triumph - hence the slogan working beautifully for him.

  22. ""NZ the way you want it". Even though it essentially meant nothing, it was a brilliant slogan, nonetheless."

    I don't remeber it, but I can see why it was good: it could mean different things to different people. Like John Key really.


  23. Perhaps you can explain in economic terms then why there are 2 prices for one good in a market?

    There aren't two prices; there's a range of prices: you're willing to pay $x, and the seller is willing to sell for $y. If x<y, no transaction occurs. If x>y, you pay some price between y and x. His initial offer will be higher if he thinks your "x" is higher than the locals (because you're white, or because you're wearing a Rolex, or whatever).

  24. ".. but I can see why it was good: it could mean different things to different people. Like John Key really."



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