Can you have a sustained tight labor market in capitalism?

[HMS Conqueror]

As long as professional soldiers have large advantages over militias, this will be true. It doesn't even have to be in terms of equipement- just being able to spend all your time fighting instead of having to break off fighting because you need to go to work gives a warlord an advantage where they can encourage people it would be easier to pay then fight.

It's a hypothetical, so it's bad form to say it's "wrong", the only relevant fact is that it could happen, not that it necessarily always would, or that it's unrealistic that the guy on the island doesn't have to go to sleep or something - the point it's intended to convey is that property rights can be protected purely through self-defence, and contracting with other people voluntarily for the common defence.

I would like you to say that to Eddie Mabo, or any other Australian aborigine, for that matter. They tried to defend their property rights, but it turned out that they had sticks and the British had guns. It took taking the matter through the courts for native title to be recognised, and while you might fantasise about Eddie and his mates going on some romantic and glorious rebellion, all that would have realistically resulted in was a bunch of dead blackfellas.

For sure. And Poland in 1939 was a statist society, with an army and everything, yet it turned out that they were out-matched in a war and defeated. Similarly, if someone steals your stuff in 2010 USA, the cops aren't necessarily going to catch the thief and return your stuff, in fact that is quite rare for petty crime. So the good guy doesn't always win, and sometimes there's nothing we can do about injustice. But this is not unique to voluntarist systems.

That's why your argument is so confusing. Whatever you think "rights" are, do you disagree that a government which consistently enforces a reasonable form of property rights and does not arbitrarily violate them is good government, regardless of how much of the economy it controls?

The two can't be separated: the government "controlling" the economy is itself a violation of property. It may well be (and I think it probably is) true that transfer payments are less bad than wanton banditry, but that doesn't make either of them good, or somehow put property rights into the "big government" bracket.

Are you sure that's not a result of the US using different measures? I was under the impression that if you were unemployed for longer than a certain amount of time there you were taken off unemployment and no longer counted.

As I understand the ILO figures are collected using all the same methodology.

[Surlethe]

The two can't be separated: the government "controlling" the economy is itself a violation of property.

You didn't answer my question. Ceteris paribus, is a government which is (a) consistent and 'close' to the modern Western conception in its definition of property rights and (b) non-arbitrary in its enforcement of property rights a good government? Perhaps I was unclear: this is what I mean by "protects property rights."

[Simon_Jester]

It's a hypothetical, so it's bad form to say it's "wrong", the only relevant fact is that it could happen, not that it necessarily always would, or that it's unrealistic that the guy on the island doesn't have to go to sleep or something - the point it's intended to convey is that property rights can be protected purely through self-defence, and contracting with other people voluntarily for the common defence.

Show me where it has happened.

Now perhaps it wouldn't happen. For sure. And perhaps the state police, rather than defending your property rights, will decide that your ethnic group should be gassed to death, scrape the gold fillings out of your teeth, and use your hair to stuff pillows for the Wehrmacht. I'm sure you know that that isn't just a hypothetical, but it does not happen always, nor is it in principle for necessary for a government. The same is true in an anarchy: it may well lead to re-establishment of govt by warlords, but it ain't necessarily so, and for the purposes of this debate (which, I remind, is not even whether ancap'ism is possible, but just whether property rights necessary derive from governments), it doesn't matter if it could. It only matters that property rights can be defended by voluntarist means, and not only can be, but they are to a great extent even in the present, quite statist, society.

So it's clearly ridiculous to say that defend of property rights = big, just "good", government. It does not require government at all, and government itself violates property rights in proportion to its size, through taxation, and regulation. Now the blogger could have made a much weaker claim, for instance, "A government that nationalises health and education is less bad that one that allows rampant violation of property rights but does not itself tax or regulate too much." And I would agree there. But it is a far far weaker claim than to say that actually all the GDPPC correlation of economic freedom comes from the beneficence of government.

You have no property rights.

That's a view, I suppose, but an off-topic one. Both sides in the debate about the Heritage graph only considered the enforcement of property rights, irrespective of whether they are "real" rights, or whatever.

Yes: the neighborhood watch association.

You have chosen Option One, "exercising self-defence turns me into a government (in which case, Securicor are a government, and so are nightclub bouncers)". While I'd argue no more sensible, it is rhetorically the weaker of the two attacks, in that almost everyone plainly disagrees with it. There is a way to test it: set up a neighbourhood watch association and apply to the UN for recognition of statehood. Also, write to the USG and tell them that you've seceded.

You missed the point. Your example runs as follows:
1) Remove the government
2) Create a voluntarist association to protect the property (not property rights, concrete physical property) of the membership.

How is the entity you create under (2) different from a Third World militia? As your association grows larger, and as intruders stop being occasional nuisances and become actual problems (say, because the tribe over the hill keeps raiding en masse to steal your stuff) you will find yourself needing to do all the things Third World warlords do. To support the armed personnel needed to guard your property you will need a way for those who cannot or will not fight on the front line to support those who do: taxation. You will need to launch retaliatory attacks against other organized groups that commit offenses against you: raiding and most likely pillaging, because the best revenge for someone taking your property is to take your property back, with some of theirs for good measure to repay you for your trouble. You will need to punish troublemakers within your own group- by exile, or by physical punishment.

If everyone in the country does the same thing you get real anarchy: social units of hundreds or thousands brawling amongst themselves indiscriminately, robbing each other into mutual poverty, and enforcing mob justice on any members of their own communities they dislike.

This happens every time. There is no way to avoid it. It has been tried over and over, by people who had no desire to watch their country dissolve into chaos and bloodshed... and yet wound up participating in the bloodshed, because it was the only way to keep them and theirs from being torn apart and devoured by the general collapse of society.

---

...This does happen; the market really isn't guaranteed to produce results better than those that come about after government intervention.

At least, I wouldn't expect so from my read of the history books. If you disagree, feel free to demonstrate rather than assert this at any time.

There is a whole academic discipline that has been showing this for 50 years, called public choice theory. If such a thing can be summarised in one sentence, it is essentially applying the imperfections in information, and divergence in incentives that you criticise markets for having to the proposed governmental solutions. They come out worse. This goes some way to explaining why the government intervened heavily to expand the housing bubble (for instance), rather than to restrain it.

The difficulty here is that even saying "on average a government-dictated economic program will be worse than what a market-dictated one" doesn't generalize very well. For one, it does not address the question of what to do when the market has yielded an indisputably bad outcome: do we do nothing, or see if the on-average-mediocre performance of a government agency will beat the empirically-terrible outcome of the market in this instance?

That happens often enough that I don't think the conclusions of public choice theory can be taken so far as to say "It's reliably best to leave government out of the economy on general principles because the market will rearrange itself to optimize things." That completely ignores questions of what is being optimized; a market that optimizes the number of paperclips at the expense of all other concerns is no good to anyone, and a market that optimizes stock prices at the expense of all other concerns isn't going to be much better.

Results of what, specifically?

Results of highly market-based societies compared to moderately and slightly market-based ones, demonstrating that the former are systematically better than the latter, while factoring out obvious confounding variables.

If you're going to say, over and over, that markets produce the best results, you should be able to show what the results of markets are and that they are in fact best.

No not really. If you say that imposing price floors doesn't cause unemployment, all I have to demonstrate is that imposing price floors causes unemployment.

Anything as general as what you are asking for is very difficult to construct an experiment for. There are some ok proxy measures, like plotting various economic freedom indicies vs GDPPC:



but this approach is hardly watertight.[/quote]Which is kind of my point. You flat out do not have solid evidence to demonstrate that increasing what you would consider economic freedom is a reliable way to improve the state of the economy in terms of the well-being of the citizens. At best you can demonstrate a wobbly connection between what you consider economic freedom and per capita GDP. That is not the same thing.

*(see Surlethe's post about "less government" versus "good government" measures and their correlation with economic prosperity for problems with the approach you are now taking)

And since you started off with some rather ambitious statements regarding the superiority of markets to government intervention with the strong implication that the market would work better... that's fairly damning, especially if you go on to say that not only are markets superior to government intervention on average, but also that removing government intervention in favor of the market will reliably be an improvement. Because quite a lot of government intervention started specifically to avoid a bad situation generated by the market.

So in other words, "no, but I have faith that my professor's lecture notes will."

Haha, I study a different subject, at a different university, in a different country.

This is just cheaper and easier (for you) than referring you to a textbook.[/quote]So what do you study, and why do you have faith in the discipline's ability to prove the things you want it to prove?

Possibly interesting, but to avoid another spam of quotes (thanks for cutting it down btw, I was trying to do so without you calling me a liar or a cheat or something!),

I would not have done so, nor need you reply to this quote.

we can concern ourselves just with what you wanted me to demonstrate: "The market largely eliminates involuntary unemployment: interventions create it, one way or another. The market assigns investment to the best expected returns: interventions divert it to worse ones."

The content here is really very simple: labour is a commodity; if people want to sell and no one wants to buy at the price they're offering, they can lower the price until there's a buyer. If, on the other hand, it is made illegal to lower the price, this can't happen, and you get involuntary unemployment. In the market, you only get involuntary unemployment for a short while, during the search period, or while people are working out what their labour is worth.

So rather than just ask twenty-questions about phrases and random points you don't agree with, can you explain what's wrong with the above reasoning?

The human cost.

Difficulties arise under this model because the cost of living doesn't have to match up with the price of labor. If it turns out that unskilled labor is "worth" two dollars an hour, the entire class of unskilled laborers are in trouble, because at those wages they will starve before the price of commodities essential for life (like food and shelter) fall to match their reduced wage. This is when the economic model breaks down because the peasants are storming the Bastille.

Even if the peasants do not storm the Bastille and overthrow society by main force in self-defense, society still winds up paying many costs as the consequence of having a large immiserized underclass. Some are direct costs, such as crime, which correlates strongly to poverty.

Others are opportunity costs. For the individual worker, one of their main forms of investable capital is time, and workers who are laboring very large numbers of hours at the low rates their labor is deemed "worth" by the market won't have the spare capital to improve their situation. They will not have time or energy to improve their education, to devote proper care to raising their children, and so forth. That has long term consequences that leave society worse off, like intergenerational poverty in which the state of being an unskilled worker becomes a hereditary condition and potential talent is wasted.

This is why relying on the market to set the baseline rate for labor doesn't necessarily work. If the price for oranges is too low to sell oranges profitably, the worst that happens is that some orange groves get chopped down to make room for apple orchards or something. If the price for labor is too low to sell labor profitably, you can't chop down the surplus people to make room, and the system winds up accomodating them in way that can cost as much in the long run than a welfare system would. Not least because of the endless risk of the Bastille being stormed.

This does not address my question.

Can you tell the difference between "I hate and am biased against X" and "I see no reason to assume that X is a golden hammer which solves all problems?"

More will follow as I have time.

It's the opposite, most people seem to be against markets almost everywhere. Even though they are the best possible approach almost everywhere.

You keep saying that. I think it's because you don't grasp the difference. You see people opposed to letting the market operate freely, and you assume they must hate markets even though markets are so efficient. Perhaps it's the other way round: other people oppose letting markets operate freely because they do not believe you can rely on markets to be so efficient that they run without supervision.

So, CAN you tell the difference between "I hate X" and "I see no reason to assume X is a cure for all problems? I really do want a straight answer to that question.

Do you understand that my opposition to laissez-fair fundamentalists like you comes from the second, not the first? That I oppose letting markets operate perfectly freely because I do not expect them to solve all my problems like a magic wand? Simply because I view them as a tool, like a hammer, and no tool is suited to all problems?

[K. A. Pital]

The same is true in an anarchy: it may well lead to re-establishment of govt by warlords, but it ain't necessarily so, and for the purposes of this debate (which, I remind, is not even whether ancap'ism is possible, but just whether property rights necessary derive from governments), it doesn't matter if it could. It only matters that property rights can be defended by voluntarist means...

Sorry, but it's not just a matter of "it could". It necessary would lead to a restoration of government by warlords, because this is what has happened universally without exception. When we speak about "anarchic" territories we mean territories governed by very small warlord tribes (Somalia, Waziristan). This happens necessarily. It is just the way things are. If you have an example of sustainable anarchy without enforcement agencies becoming de-facto governments, I am ears.

Yes, property rights can be defended by the old "MY TRIBE KILLS YOU TRIBE" way (which you describe as "voluntarist"). This is caveman mentality and an atrociously outdated way of dealing with society. The fact that you can defend your property rights with a militia doesn't mean property rights are well-protected. The exact opposite, in fact - if you need to arm yourself to the teeth and even form a military or paramilitary organization (lest we say, even a small government) - that means your rights are NOT protected, and you need to exercise a lot of brute force to protect them. In essence, when the government is absent, property rights are not protected any longer and this is why you need weapons - there's no other way to at least try to maintain your property (or seize the property of others to survive) when there's no government.

In a normal society you don't need to hold people at gunpoint to "protect" your property rights. In fact, you have no "rights" other than those supported by the power of your weapon in your "voluntarist" society. In a society with a functioning government you have many rights that you otherwise wouldnt - like free travel through any territories under that government.

It's kinda like general education - when it is not there, people can turn to homeschooling. That doesn't mean homeschooling is the better education, or that knowledge comes from homeschooling.

[Iosef Cross]

However, if you have labor markets, you are bound to have some unemployment. You can abolish labor markets to abolish unemployment, in the same way that you can abolish death by killing everybody. After that nobody will die again.

Nice twisting there, Iosef. I said "abolish death by science", not by killing everyone.

So, do you think that we can abolish unemployment in labor markets?

Milton Friedman has even developed the concept of natural rate of unemployment. With is used today by all serious economists.

Actually, no.

No?

For lack of time, let's see wikipedia take on it:

"The natural rate of unemployment (sometimes called the structural unemployment rate) is a concept of economic activity developed in particular by Milton Friedman and Edmund Phelps in the 1960s, both recipients of the Nobel prize in economics. In both cases, the development of the concept is cited as a main motivation behind the prize.[1][2] It represents the hypothetical unemployment rate consistent with aggregate production being at the "long-run" level. This level is consistent with aggregate production in the absence of various temporary frictions such as incomplete price adjustment in labor and goods markets. The natural rate of unemployment therefore corresponds to the unemployment rate prevailing under a classical view of determination of activity. It is mainly determined by the economy's supply side, and hence production possibilities and economic institutions. If these institutional features involve permanent mismatches in the labor market or real wage rigidities, the natural rate of unemployment may feature involuntary unemployment

The concept of natural rate of unemployment and nairu are closely connected and are important tools for understanding modern economies.

It is expected: there are about 50 people in the world that would fully understand what I said in the previous posts.

50 people in the world? Oh, I'm sorry - Iosef the Nobel Laureate, I forgot you haven't even completed your formal education. Sorry, what can a person who has completed his even know?

What anybody can know. You don't need to necessarily have a formal education to know about something. So, I haven't finished my BS yet (I have gone through 90% of the courses by now), but that doesn't mean that I cannot have the opinion that the Cournot model is not useful. Of course, I have developed this understanding outside my formal studies, since they are much more advanced than what I have seem in college.

You don't need to be a nobel level economist to understand it. The difference between a nobel level economist is the capacity to make contributions, not the capacity to understand these contributions. It is much easier to understand than to develop a theory.

What I said was based on research on a quite small field, therefore, few people have done research there and know these concepts.

From the two basic models of Bertrand and Cournot oligopoly from the 19th century to the more complex but equally useless models developed in the last decades.

Oligopoly economics is "useless". Come on, Nobel Laureate. Grant us some more wisdom.

Simple: To make any oligopoly model you need to restrict the scope of action of the decision makers. They aren't free to make any type of offers to any other individual.

For example, in the Cournot model in it's simplest form you have two firms that supply the market with a homogeneous good. These firms don't have freedom to chose if they discriminate, nor consumer's can make offers to firms. Firms only chose the quantity to be produced and the consumers bid for the supply produced.

The perfect competition model doesn't need to make such restrictions. As Robert Aumann has shown in his classic paper, Markets with a Continuum of Traders: http://www.princeton.edu/~erp/ERParchiv ... fs/M39.pdf, when we allow traders to make exchanges and multiply their number, the set of possible equilibrium allocations tend to converge to the perfect competitive allocation. If we have a continuum of traders, the only allocation possible is the perfectly competitive allocation.

If we have a finite number of traders, without any restrictions of their ability to make offers to other traders, the equilibrium is indeterminate (but it is always pareto optimal). To make equilibria that aren't pareto optimal you must restrict the freedom of action of the traders, as the oligopoly model does. The problem is that in real life, people can make any offer that they want to other people, if the government can enforce contracts effectively. So, these models don't fulfill the same conditions as reality does.

However, they can be useful in some limit cases, but not as a general description of the workings of the market. The best model to understand the market is the perfect competition model.

However, with the passage of time, wages tend to converge to marginal product and workers tend to find jobs, though it takes time.

Actually, it's either this or NAIRU. Not both.

People are always finding jobs and are always quitting jobs. In the US every year about 30 million people are fired and hired. The NAIRU is the proportion of the labor force in transition between jobs. In full equilibrium, nobody would be fired and hired, hence, you wouldn't never have

The people that don't work and aren't looking for work are inactive, not unemployed. That's the set of people that doesn't tend to get jobs.

I think that you can be meaning that under capitalism you can have a large section of the population that doesn't have a job and has given up the search for a job. These people aren't unemployed they are inactive.

Hence, they are pretty much completely useless, though they could be used to describe temporary conditions, but not permanent tendencies or states.

An oligopoly can be long-lasting and even becoming more and more monopolistic over time.

Well, if you define oligopoly as the existence of a few companies in a market for some good, yes.

However, the theoretical models of oligopoly are not useful to understand the full scope of the workings of these markets.

Take for example, the situation of only two individuals and one indivisible good. The first individual values the good in 2 dollars and has the possession of the good and the second, in 4 dollars. What's the price that it will be traded for? Between 2 and 4 dollars. In this case we have a monopoly, where 1 individual has the entire supply of a good. However, the equilibrium will be efficient and the set of equilibria will be (2,4).

[Iosef Cross]

See, Iosef, that's why talking to you is not fun - you can't even get your definitions straight, the atrocious use of "second to" aside.

Then don't: We both benefit.

By the way - Fraser Institute and Heritage Institute are junk propaganda organizations - about the same worth as the tobacco apologists like the Cato institute and creationists. Sorry.

Of course, if it doesn't fit into your ideology, it is propaganda.

You probably doesn't pass a test like this one:

"The next time you're engaged in a political discussion with someone who has very strong views different from your own, ask them if they can name two famous thinkers or politicians whose politics are opposed to theirs who they also think are very smart and genuinely concerned with making the world a better place. If they can't, it's not clear they are able to grant the good faith such discussions should have."

So...

[K. A. Pital]

Then don't: We both benefit.

Indeed. My time is worth far more than yours lately, although I've had some fun with your megalomania. I don't think anything here requires any further comment from me - your last post was a perfect summary of what you are - a desperate ideologue armed with Wikipedia and an incomplete education.

[Samuel]

"The next time you're engaged in a political discussion with someone who has very strong views different from your own, ask them if they can name two famous thinkers or politicians whose politics are opposed to theirs who they also think are very smart and genuinely concerned with making the world a better place. If they can't, it's not clear they are able to grant the good faith such discussions should have."

Henry Hazlitt Economics in One Lesson (for one whose book I read just now)
Leon Trotsky
Everyone who ever supported Eugenics.
The list could go on.

So, do you think that we can abolish unemployment in labor markets?

If it is just frictional unemployment, you could deal with that with good enough communication. An individual puts up their skills on the net and an opening bid and people who need labor or who could benefit for their skills at such a price make offers.

These firms don't have freedom to chose if they discriminate, nor consumer's can make offers to firms. Firms only chose the quantity to be produced and the consumers bid for the supply produced.

And these approximations don't work in the real world... why?

However, they can be useful in some limit cases, but not as a general description of the workings of the market. The best model to understand the market is the perfect competition model.

Perfect competition states that long run profits in the economy will be zero, something that is obviously not true and in fact can't be true for the economy to work (if profits were zero no one would be a businessman.) The model cannot explain many of the major features of the market economy. For example company R&D or advertising doesn't work in the model- that requires monopolistic competition.

[HMS Conqueror]

You missed the point. Your example runs as follows:
1) Remove the government
2) Create a voluntarist association to protect the property (not property rights, concrete physical property) of the membership.

How is the entity you create under (2) different from a Third World militia? As your association grows larger, and as intruders stop being occasional nuisances and become actual problems (say, because the tribe over the hill keeps raiding en masse to steal your stuff) you will find yourself needing to do all the things Third World warlords do. To support the armed personnel needed to guard your property you will need a way for those who cannot or will not fight on the front line to support those who do: taxation. You will need to launch retaliatory attacks against other organized groups that commit offenses against you: raiding and most likely pillaging, because the best revenge for someone taking your property is to take your property back, with some of theirs for good measure to repay you for your trouble. You will need to punish troublemakers within your own group- by exile, or by physical punishment.

If everyone in the country does the same thing you get real anarchy: social units of hundreds or thousands brawling amongst themselves indiscriminately, robbing each other into mutual poverty, and enforcing mob justice on any members of their own communities they dislike.

This happens every time. There is no way to avoid it. It has been tried over and over, by people who had no desire to watch their country dissolve into chaos and bloodshed... and yet wound up participating in the bloodshed, because it was the only way to keep them and theirs from being torn apart and devoured by the general collapse of society.

How is Securicor different to a third world militia? Or to put it another way, how is the US police different to the German Gestapo?

But I do not care about this discussion; the key point is that "good government" here is being used to mean "least damaging violation of property rights", but used to imply that more government makes things better. Whether we could actually achieve a society with zero violation of property rights (ie. that had only voluntarist police, courts and military) is by the by.

Which is kind of my point. You flat out do not have solid evidence to demonstrate that increasing what you would consider economic freedom is a reliable way to improve the state of the economy in terms of the well-being of the citizens. At best you can demonstrate a wobbly connection between what you consider economic freedom and per capita GDP. That is not the same thing.

*(see Surlethe's post about "less government" versus "good government" measures and their correlation with economic prosperity for problems with the approach you are now taking)

And since you started off with some rather ambitious statements regarding the superiority of markets to government intervention with the strong implication that the market would work better... that's fairly damning, especially if you go on to say that not only are markets superior to government intervention on average, but also that removing government intervention in favor of the market will reliably be an improvement. Because quite a lot of government intervention started specifically to avoid a bad situation generated by the market.

I have very solid evidence for a huge amount of specific cases, and quite good evidence for the overall picture, while interventionism has bad evidence on both counts (that is, a strong negative correlation with living standards). The fuzziness of the overall data doesn't make your case stronger, it just increases the error bars.

The difficulty here is that even saying "on average a government-dictated economic program will be worse than what a market-dictated one" doesn't generalize very well. For one, it does not address the question of what to do when the market has yielded an indisputably bad outcome: do we do nothing, or see if the on-average-mediocre performance of a government agency will beat the empirically-terrible outcome of the market in this instance?

That happens often enough that I don't think the conclusions of public choice theory can be taken so far as to say "It's reliably best to leave government out of the economy on general principles because the market will rearrange itself to optimize things." That completely ignores questions of what is being optimized; a market that optimizes the number of paperclips at the expense of all other concerns is no good to anyone, and a market that optimizes stock prices at the expense of all other concerns isn't going to be much better.

Assuming that actually happens (what examples do you have?), politics is very much an either/or. You can't choose just the "good interventions", any more than you can choose to have a market with perfect information.

So what do you study, and why do you have faith in the discipline's ability to prove the things you want it to prove?

Physics. I don't have faith in the discipline, I simply follow the arguments and the evidence.

Difficulties arise under this model because the cost of living doesn't have to match up with the price of labor. If it turns out that unskilled labor is "worth" two dollars an hour, the entire class of unskilled laborers are in trouble, because at those wages they will starve before the price of commodities essential for life (like food and shelter) fall to match their reduced wage. This is when the economic model breaks down because the peasants are storming the Bastille.

Even if the peasants do not storm the Bastille and overthrow society by main force in self-defense, society still winds up paying many costs as the consequence of having a large immiserized underclass. Some are direct costs, such as crime, which correlates strongly to poverty.

Others are opportunity costs. For the individual worker, one of their main forms of investable capital is time, and workers who are laboring very large numbers of hours at the low rates their labor is deemed "worth" by the market won't have the spare capital to improve their situation. They will not have time or energy to improve their education, to devote proper care to raising their children, and so forth. That has long term consequences that leave society worse off, like intergenerational poverty in which the state of being an unskilled worker becomes a hereditary condition and potential talent is wasted.

This is why relying on the market to set the baseline rate for labor doesn't necessarily work. If the price for oranges is too low to sell oranges profitably, the worst that happens is that some orange groves get chopped down to make room for apple orchards or something. If the price for labor is too low to sell labor profitably, you can't chop down the surplus people to make room, and the system winds up accomodating them in way that can cost as much in the long run than a welfare system would. Not least because of the endless risk of the Bastille being stormed.

There's a big distinction between interventions and transfer payments. I am against transfer payments, but that's really a philosophical rather than an economic debate. Arguing that the rich should pay money to the poor to supplement their income is very different to saying there should be a minimum wage (for instance), because the min. wage doesn't work as a transfer payment, it rather makes it illegal for unproductive workers to work at all.

Like I said to you before, there's not a trade-off here, these policies only make things worse for everyone.

[Simon_Jester]

How is Securicor different to a third world militia? Or to put it another way, how is the US police different to the German Gestapo?

In both cases, regulation. The Gestapo had no internal oversight responsible for making sure they limited their actions to the demands of justice; their moves toward torture and oppression were predictable in light of that, and have happened repeatedly throughout history. Securicor does have such oversight- if they started torturing people to death national governments would take exception and stop them.

But in an anarchist society where all communal defense needs are taken care of by voluntary militia, there is no such regulation. There is nothing to stop you, or your neighbor, from committing heinous acts like raping, looting, pillaging, or torture. And human beings do not have to be unique incomprehensible monsters to degenerate into the sort of animals that will do those things.

But I do not care about this discussion; the key point is that "good government" here is being used to mean "least damaging violation of property rights", but used to imply that more government makes things better. Whether we could actually achieve a society with zero violation of property rights (ie. that had only voluntarist police, courts and military) is by the by.

And yet this fundamental assumption is flawed. A good government will probably protect property rights, but this is incidental to its real missions of ensuring the safety and well-being of the citizens. Property rights are a means, not an end.

If you define the goodness of governments purely in terms of how little they interfere with property rights, your arguments may logically follow... but only because you took a perverse starting point. It would be like defining the goodness of government in terms of how many paperclips that government produces, or how many monuments to its own grandeur it constructs, or any other irrelevant criterion: it doesn't tell you anything about how society ought to work.

I have very solid evidence for a huge amount of specific cases, and quite good evidence for the overall picture, while interventionism has bad evidence on both counts (that is, a strong negative correlation with living standards). The fuzziness of the overall data doesn't make your case stronger, it just increases the error bars.

So where's the dataset?

Assuming that actually happens (what examples do you have?), politics is very much an either/or. You can't choose just the "good interventions", any more than you can choose to have a market with perfect information.

The most blatantly obvious example is the rise and fall of the financial sector over the past decade. The kind of financial manipulations that led to overleveraged banks needing massive bailouts to stave off collapse were impossible until quite recently... because they were illegal. Once the restrictions on them were released, the financial sector immediately set to using them to make as much money as possible, as the market called for. In the short term they made a pile of money. In the long term, they fucked up our banking sector to the point where it paralyzes the rest of the economy.

And you can say "prices got out of hand and the market had to realign accordingly," but price changes happen for a reason; they are not natural events imposed on us by the Hand of God.

Another obvious example: nothing in the market discourages us from setting things on fire until the CO2 from our flames causes massive global warming, because there is no market relationship between the level of global warming that eventually occurs and the cost of the particular gram of carbon you are about to burn. The price of the activity that will be paid isn't proportionate to the price that the person performing the activity pays.

Surely even classical market models have to admit that things can become perverse when it costs you 5$ to perform an activity that causes 10$ of damage to future GDP that you don't have to pay for?

There's a big distinction between interventions and transfer payments. I am against transfer payments, but that's really a philosophical rather than an economic debate. Arguing that the rich should pay money to the poor to supplement their income is very different to saying there should be a minimum wage (for instance), because the min. wage doesn't work as a transfer payment, it rather makes it illegal for unproductive workers to work at all.

On the contrary, transfer payments (or systems that amount to the same thing, are very much a subset of interventions. Government will tax people anyway to pay for certain things that the market is not prepared to supply. If it spends some of its money on things that disproportionately affect certain groups (like children, or the sick), so what? As long as it's a good investment, as long as it accomplishes important goals like laying the foundation for future growth (education, infrastructure) or averting crises that would otherwise harm the citizenry... why not?

Like I said to you before, there's not a trade-off here, these policies only make things worse for everyone.

Why? Why not have a system where those who cannot be productively employed at a minimal standard of living are supported by transfer payments? Is that really so much worse than a system where they're left to starve and predictably riot and try to overthrow the whole economy and rearrange it along lines that they can depend on to feed their children?

[HMS Conqueror]

How is Securicor different to a third world militia? Or to put it another way, how is the US police different to the German Gestapo?

In both cases, regulation. The Gestapo had no internal oversight responsible for making sure they limited their actions to the demands of justice; their moves toward torture and oppression were predictable in light of that, and have happened repeatedly throughout history. Securicor does have such oversight- if they started torturing people to death national governments would take exception and stop them.

But in an anarchist society where all communal defense needs are taken care of by voluntary militia, there is no such regulation. There is nothing to stop you, or your neighbor, from committing heinous acts like raping, looting, pillaging, or torture. And human beings do not have to be unique incomprehensible monsters to degenerate into the sort of animals that will do those things.

The Gestapo enforced the law as it was written, actually. People who refused to deport Jews to camps would, I am sure, be subject to internal discipline in the usual manner, and eventually transferred or sacked. That's probably not what you meant, but it illustrates the point: national governments are made of the same fallible humans, and can choose to act unjustly, in the same way as private militias, but it ain't necessarily so. Militias in Africa often act unjustly, but then, so do the states in Africa.

But I do not care about this discussion; the key point is that "good government" here is being used to mean "least damaging violation of property rights", but used to imply that more government makes things better. Whether we could actually achieve a society with zero violation of property rights (ie. that had only voluntarist police, courts and military) is by the by.

And yet this fundamental assumption is flawed. A good government will probably protect property rights, but this is incidental to its real missions of ensuring the safety and well-being of the citizens. Property rights are a means, not an end.

If you define the goodness of governments purely in terms of how little they interfere with property rights, your arguments may logically follow... but only because you took a perverse starting point. It would be like defining the goodness of government in terms of how many paperclips that government produces, or how many monuments to its own grandeur it constructs, or any other irrelevant criterion: it doesn't tell you anything about how society ought to work.

I agree a (comparatively) good government will violate property rights less than a (comparatively) bad government. The problem is using "good government" to imply that government is good, when at best it is a necessary evil, and I would argue an unnecessary one.

[btw, it was the blogger attacking the Heritage graph who defined it like that, in order to rescue his notion that more govt makes people richer. Although I do actually agree with it: property rights are human rights.]

I have very solid evidence for a huge amount of specific cases, and quite good evidence for the overall picture, while interventionism has bad evidence on both counts (that is, a strong negative correlation with living standards). The fuzziness of the overall data doesn't make your case stronger, it just increases the error bars.

So where's the dataset?

You already saw the heritage graph. To sum up for the individual cases would take longer than I have (if I even knew the whole story, which I don't), but I think I've been doing a pretty good job with employment regulations.

Assuming that actually happens (what examples do you have?), politics is very much an either/or. You can't choose just the "good interventions", any more than you can choose to have a market with perfect information.

The most blatantly obvious example is the rise and fall of the financial sector over the past decade. The kind of financial manipulations that led to overleveraged banks needing massive bailouts to stave off collapse were impossible until quite recently... because they were illegal. Once the restrictions on them were released, the financial sector immediately set to using them to make as much money as possible, as the market called for. In the short term they made a pile of money. In the long term, they fucked up our banking sector to the point where it paralyzes the rest of the economy.

And you can say "prices got out of hand and the market had to realign accordingly," but price changes happen for a reason; they are not natural events imposed on us by the Hand of God.

Banking is the most incestuous industry we currently have. In all countries (it is actually a requirement to be a member of the World Bank, for instance) the money supply itself and an 'official' interest rate are controlled by state planning boards called central banks. The state implicitly guarantees all banks, or at least, all the big ones that can afford to buy politicians. So I do not accept this example at face value as being a market failure.

Even if I were to do so, though, how has regulation made things better? Regulation encouraged sub-prime, with the FMs subsidising it, and the Community Reinvestment Act making it mandatory, and the regulators did not even predict the collapse. So I think the case for you here is extremely weak, and probably goes against your position.

Another obvious example: nothing in the market discourages us from setting things on fire until the CO2 from our flames causes massive global warming, because there is no market relationship between the level of global warming that eventually occurs and the cost of the particular gram of carbon you are about to burn. The price of the activity that will be paid isn't proportionate to the price that the person performing the activity pays.

Surely even classical market models have to admit that things can become perverse when it costs you 5$ to perform an activity that causes 10$ of damage to future GDP that you don't have to pay for?

The AGW is bad because it causes property damage, so it should be a tort. Actually it used to be, before govt made it illegal to sue for air pollution, in response to pressure from factory owners. For the public good, ofc: this was when the political class thought that industrial development, and not a clean environment, was a "public good", you see.

But again, suppose I accept this argument. What have states done? Most claim to have accepted the problem for 10 years or more, yet CO2 keeps on climbing, and the cap and trade schemes are routinely rigged by the special interests.

If it helps to look at it this way, I'm not against regulation, just that I think the state is bad at regulating things in a just and effective manner. Property rights are far preferable.

There's a big distinction between interventions and transfer payments. I am against transfer payments, but that's really a philosophical rather than an economic debate. Arguing that the rich should pay money to the poor to supplement their income is very different to saying there should be a minimum wage (for instance), because the min. wage doesn't work as a transfer payment, it rather makes it illegal for unproductive workers to work at all.

On the contrary, transfer payments (or systems that amount to the same thing, are very much a subset of interventions. Government will tax people anyway to pay for certain things that the market is not prepared to supply. If it spends some of its money on things that disproportionately affect certain groups (like children, or the sick), so what? As long as it's a good investment, as long as it accomplishes important goals like laying the foundation for future growth (education, infrastructure) or averting crises that would otherwise harm the citizenry... why not?

An idealised transfer payment simply means Person A gets to consume the goods instead of Person B, without reducing the total output, increasing unemployment, etc. This is often not true. For instance, unemployment benefit increases unemployment, and all taxation reduces incentives to work to some extent, so it's never really a zero sum game like this, there is always some loss. But I put the relatively innocuous transfer payments in a different box to things like the minimum wage, which cause almost entirely deadweight loss and even harm the people they're meant to help.

[Simon_Jester]

The Gestapo enforced the law as it was written, actually. People who refused to deport Jews to camps would, I am sure, be subject to internal discipline in the usual manner, and eventually transferred or sacked. That's probably not what you meant, but it illustrates the point: national governments are made of the same fallible humans, and can choose to act unjustly, in the same way as private militias, but it ain't necessarily so. Militias in Africa often act unjustly, but then, so do the states in Africa.

Manifestly so, not least because the difference between an African government and an African militia is usually one of degree, not of kind. Other nations are more fortunate in that the difference between their government and a bandit troops is qualitative as well as quantitative: organizations with sufficient internal policing to enforce a higher standard on themselves.

What bothers me is that in preference to even the most internally policed of governments, you prefer an entity with no internal policing, because of your great trust in its self-correcting properties. That strikes me as very irrational.

I agree a (comparatively) good government will violate property rights less than a (comparatively) bad government. The problem is using "good government" to imply that government is good, when at best it is a necessary evil, and I would argue an unnecessary one.

...That ignores my point. You're defining the quality of government in terms of the degree to which it does not impinge on property rights. Which is like defining the quality of government in terms of how many paperclips or monuments it makes: it is completely missing the point, confusing what is at best an instrumental good (good for the sake of the things it lets us do) for an intrinsic good.

My point is that this is a silly way to go about it. And that it is equally silly of you to think the world is split into "less government!" and "more government!" camps. For me and, I strongly suspect, the blogger you mention below, it's not about more or less government. It's about whether government intervention is needed or called for to perform specific tasks.

[btw, it was the blogger attacking the Heritage graph who defined it like that, in order to rescue his notion that more govt makes people richer. Although I do actually agree with it: property rights are human rights.]

You ignored his analysis almost completely. His point is that the Heritage Index doesn't measure what it purports to measure: it does not measure the degree to which government avoids intervening in the economy. It measures a combination of that and a completely different set of factors that often have a great deal to do with having more government. For instance, the Heritage Index takes into account corruption or its absence, but anti-corruption policing requires both extra government agencies and regulations limiting the power of wealthy rent-seekers to interact with polticians. Countries with smaller governments don't reliably have less corrupt governments.

The variables by which the Heritage Foundation graded the "smallness" and "non-interventionalism" of governments have little to do with those countries' prosperity, compared to variables that are largely independent of the size of the government.

Moreover, the Heritage Foundation's case is further weakened if we look at things other than GDP, like life expectancy. The "Government spending" component of the Heritage Index is negatively correlated with life expectancy, which I'd think is an interesting result if we are to then turn around and claim that the government that governs best governs (and spends) least.

I have very solid evidence for a huge amount of specific cases, and quite good evidence for the overall picture, while interventionism has bad evidence on both counts (that is, a strong negative correlation with living standards). The fuzziness of the overall data doesn't make your case stronger, it just increases the error bars.

So where's the dataset?

You already saw the heritage graph. To sum up for the individual cases would take longer than I have (if I even knew the whole story, which I don't), but I think I've been doing a pretty good job with employment regulations.[/quote]Well, you would think so, wouldn't you?

The Heritage graph is a rotten excuse for an analysis, because it doesn't do a satisfactory job of controlling for different variables. This is basic science: you do not index together ten variables, two or three of which are determined by the "small government" libertarianism of the society, then compare societies against the index and say "ah-ha, the countries that are doing well are high on the index, they must be prosperous because they are libertarian!"

That's a catastrophic failure to consider alternative hypotheses: for instance, as Kwak illustrated, it might be that the variables we would expect to be most important to deciding how libertarian a country is are least important in deciding how prosperous it is. Or it might be that the Heritage Index variables are biased because of their subjectivity: countries get more points if they are the sort of country the Heritage Foundation likes, not because of anything measurable that they did. Or it might be that the variables are heavily entangled, which exaggerates the apparent spread between high and low performers.

Banking is the most incestuous industry we currently have. In all countries (it is actually a requirement to be a member of the World Bank, for instance) the money supply itself and an 'official' interest rate are controlled by state planning boards called central banks. The state implicitly guarantees all banks, or at least, all the big ones that can afford to buy politicians. So I do not accept this example at face value as being a market failure.

Was the financial sector more stable back when the banks were drastically less regulated?

Even if I were to do so, though, how has regulation made things better? Regulation encouraged sub-prime, with the FMs subsidising it, and the Community Reinvestment Act making it mandatory, and the regulators did not even predict the collapse. So I think the case for you here is extremely weak, and probably goes against your position.

The current generation of regulators failed to predict the collapse, which stands to reason because they're the ones who altered the regulatory regime to make the collapse inevitable. Once upon a time this could not have happened.

Criticism of incestuous relationships between banking and government works both ways: in your model it's bad because it distorts the market. In my model it's bad because it locks down the government's ability to avert failure states, in a case of "regulatory capture" where agencies responsible for keeping an industry from harming society instead start making decisions based on what is good for the industry. When bank regulators are more interested in the health of the banks than the health of the nation (and when the more libertarian-inclined parties in their society encourage them to think like this), it is inevitable that the banks will start acting in ways that compromise the health of society.

Another obvious example: nothing in the market discourages us from setting things on fire until the CO2 from our flames causes massive global warming, because there is no market relationship between the level of global warming that eventually occurs and the cost of the particular gram of carbon you are about to burn. The price of the activity that will be paid isn't proportionate to the price that the person performing the activity pays.

Surely even classical market models have to admit that things can become perverse when it costs you 5$ to perform an activity that causes 10$ of damage to future GDP that you don't have to pay for?

The AGW is bad because it causes property damage, so it should be a tort. Actually it used to be, before govt made it illegal to sue for air pollution, in response to pressure from factory owners. For the public good, ofc: this was when the political class thought that industrial development, and not a clean environment, was a "public good", you see.

The problem comes from attempting to organize the tort. Unless you live in an ideal economic universe (one about as chimerical frictionless vacuum often invoked in physics to simplify problems), no feasible tort can solve this problem: by the time we know the damage has been done, charging the responsible parties won't solve anything. Courts will not accurately and reliably charge CO2 producers for the real cost of their activities. They can't, because they can't commission enormous environmental studies to investigate the problem in an unbiased way. So they find themselves having to split the difference between a lawsuit by... who is suing for the damage done here, anyway?- and the corporation which will always assert that its products are harmless.

Without the budget and logistics to examine the problem for themselves, they're never going to get it right. So allowing people to sue for air pollution isn't going to solve the problem.

But again, suppose I accept this argument. What have states done? Most claim to have accepted the problem for 10 years or more, yet CO2 keeps on climbing, and the cap and trade schemes are routinely rigged by the special interests.

If it helps to look at it this way, I'm not against regulation, just that I think the state is bad at regulating things in a just and effective manner. Property rights are far preferable.

Conversely, I think that property rights are bad at regulating things because they do not enforce themselves. I mean, look at what you're proposing: every tort is just as much a state intervention as an environmental regulation; it's just an intervention brought on by private citizens coming before the government to request the intervention. Prices imposed on polluters by a lawsuit don't reliably match the real damage done by the pollution, not least because people in that type of suit routinely accept much less money than they deserve for the damages, because the polluter has advantages in the court system.

Look at what's happening with the BP situation in the Gulf. That spill destroyed the entire fishing industry of the region in question. BP is not paying out that kind of money, not when they can get away with not doing so. It's much more economical to fight a court battle than to pay damages on that scale, and because they're the ones who haven't lost their jobs in an environmental disaster, they have much deeper pockets than the people who have a reason to sue them.

Or do you plan to guarantee public funding of torts against polluters, so that large numbers of poor people don't wind up consistently being beaten in court by wealthy organizations, or forced to bargain down to a fraction of the damages to avoid being beaten?

[J]

Banking is the most incestuous industry we currently have. In all countries (it is actually a requirement to be a member of the World Bank, for instance) the money supply itself and an 'official' interest rate are controlled by state planning boards called central banks. The state implicitly guarantees all banks, or at least, all the big ones that can afford to buy politicians. So I do not accept this example at face value as being a market failure.

Wrong. The bond market sets the rates, the central bank follows. The retail banks and other financials set the money supply through loaning out money via fractional reserve lending, with the interest rates being set by the market. Central banks pretend they control the rates and money supply and everyone else either believes them or pretends to believe them. The central banks for the most part are separate entities from the government, for instance the US Federal Reserve is a private bank.

Even if I were to do so, though, how has regulation made things better? Regulation encouraged sub-prime, with the FMs subsidising it, and the Community Reinvestment Act making it mandatory, and the regulators did not even predict the collapse. So I think the case for you here is extremely weak, and probably goes against your position.

You're so full of shit. Sub-prime happened because we threw away leverage limit regulations and underwriting standards, in other words because we de-regulated. The CRA didn't force anyone to lend money to sub-prime borrowers, it merely states that financials must make loans available to qualified borrowers in lower income areas instead of refusing to loan to anyone in those areas as was common practice in the past. The key word is qualified, meaning the borrowers meet all the requirements for sound underwriting standards. The CRA doesn't force banks to lend to sub-prime borrowers, anyone who thinks it does is mistanken, ignorant or stupid.

[Surlethe]

Wrong. The bond market sets the rates, the central bank follows.

Nonsense. The central bank controls the bond supply, and hence has the ability to set rates. The only sense in which the bond market sets rates is that the demand for bonds is uncontrolled and represents a constraint within which the central bank must work.

[J]

Wrong. The bond market sets the rates, the central bank follows.

Nonsense. The central bank controls the bond supply, and hence has the ability to set rates. The only sense in which the bond market sets rates is that the demand for bonds is uncontrolled and represents a constraint within which the central bank must work.

The central bank does not control the bond supply, that's up to Treasury. The central bank markets bonds via the primary dealer system in the US and similar systems in other countries, and it may in extraordinary cases make direct purchases of the bonds itself (we call this printing). The bond market looks at both the supply of bonds and the probability of default then demands an appropriate interest rate to cover the risk. For example if the US were to lose its AAA rating, interest rates would rise significantly even if the supply of bonds remained constant. In addition this neglects the secondary market for bonds, if Pimco or JPMorgan decided to dump their T-bill assets into the market it would cause an increase in rates, conversely, if they went on a buying spree it would drive down the yield and lower the rates.

[Surlethe]

Wrong. The bond market sets the rates, the central bank follows.

Nonsense. The central bank controls the bond supply, and hence has the ability to set rates. The only sense in which the bond market sets rates is that the demand for bonds is uncontrolled and represents a constraint within which the central bank must work.

The central bank does not control the bond supply, that's up to Treasury. The central bank markets bonds via the primary dealer system in the US and similar systems in other countries, and it may in extraordinary cases make direct purchases of the bonds itself (we call this printing). The bond market looks at both the supply of bonds and the probability of default then demands an appropriate interest rate to cover the risk. For example if the US were to lose its AAA rating, interest rates would rise significantly even if the supply of bonds remained constant. In addition this neglects the secondary market for bonds, if Pimco or JPMorgan decided to dump their T-bill assets into the market it would cause an increase in rates, conversely, if they went on a buying spree it would drive down the yield and lower the rates.

The Fed's open market operations involve buying and selling bonds to manipulate the interest rate, right? Aside from that, you basically reiterated what I said, just with a little more elaboration.

[J]

The Fed's open market operations involve buying and selling bonds to manipulate the interest rate, right? Aside from that, you basically reiterated what I said, just with a little more elaboration.

Not exactly, and only to a limited degree. The Fed can attempt to influence rates with TOMOs and POMOs, but it cannot set them outright nor control them to any significant degree should the bond market choose not to co-operate. Paul Volcker for instance got a taste of this when the bond market became upset with him and went "no bid" early on in his tenure as the Fed chairman, rates went up about 25% across the board in a matter of weeks.

[Surlethe]

You and I are saying the same thing: the Fed manipulates the interest rates within the constraints the bond market sets (particularly, the private supply and demand for bonds).

[J]

Are you sure? It seems like you're saying the central banks are the primary drivers of interest rate changes and bond supplies, I'm saying they aren't, and that the market is the entity in the driver's seat with the Fed being the back seat driver.

[Surlethe]

At any point in time, visualize the private supply and demand curves as set by the preferences of the market participants. Those don't change. Then the Fed does its open-market ops and pushes the supply/demand curves to the interest rates it wants. It is often successful at this --- e.g., there's a chart floating around of the Greenspan years comparing announced targets to actual rates; they track very closely.

What you're saying is that it's possible for the private supply and demand curves to drastically change. For instance, if the supply curve flattens out a lot, the Fed has to buy up a lot more bonds to push the interest rate up. If there's a bond market revolt, this corresponds to some abrupt change in configuration of the market preferences: if I'm visualizing it correctly, this means that demand is very close to zero until interest rates are extremely high. The Fed can still set interest rates in this situation, but it will have to really buy up a lot of bonds, but whether the picture I've sketched is correct isn't really relevant to my point.

So, the market sets the rules of the game and the Fed can set interest rates within those rules. (I believe this leads to the conclusion that the Fed can control the market equilibrium quantity of bonds or the interest rates, but not both.)

[J]

(I believe this leads to the conclusion that the Fed can control the market equilibrium quantity of bonds or the interest rates, but not both.)

Actually it can, if it owned the entire float or a sufficiently large portion of the market for US Treasury bonds. Then again if it did we'd very likely have much more pressing problems to worry about. Which isn't to say it's impossible, the Fed might become desperate & dumb enough at some point to try this.

[Iosef Cross]

So, do you think that we can abolish unemployment in labor markets?

If it is just frictional unemployment, you could deal with that with good enough communication. An individual puts up their skills on the net and an opening bid and people who need labor or who could benefit for their skills at such a price make offers.

The time that workers take to find jobs would be always greater than zero.

But since unemployment is measured as the proportion of the labor force in search for jobs for a time greater than 1 month, it is hypothetically possible that in a future society could have a total of zero people that would be looking for jobs for a period greater than 1 month.

These firms don't have freedom to chose if they discriminate, nor consumer's can make offers to firms. Firms only chose the quantity to be produced and the consumers bid for the supply produced.

And these approximations don't work in the real world... why?

Because in the real world firms discriminate consumers and consumers can make direct offers to firms.

While it is generally true that firms set one price and consumers take this price as given. However, it is not true to assume that there can be no alternative trading mechanisms, as these models assume.

However, they can be useful in some limit cases, but not as a general description of the workings of the market. The best model to understand the market is the perfect competition model.

Perfect competition states that long run profits in the economy will be zero, something that is obviously not true and in fact can't be true for the economy to work (if profits were zero no one would be a businessman.) The model cannot explain many of the major features of the market economy. For example company R&D or advertising doesn't work in the model- that requires monopolistic competition.

Perfect competition states that all individual decision makers are price takers. That prices are equal to marginal costs and that prices are equal to the marginal rates of substitution between goods for all agents. You can have positive profits in perfect competition depending on the assumptions that you make about the shape of the marginal costs curve of the firm.

If you have constant returns to scale, marginal costs equal average costs and you have zero profits.

However, in economics profits are defined as balance sheets profits minus interest in capital invested, minus the risk factor of business and minus inflation on factor prices. While in the real world most firms have profits, their profits aren't usually above interest on the company's capital stock.

For example, if you have a 100 billion dollar firm, and real interest rates of 5%, to have zero economic profits the firm must make 5 billion balance sheet profits every year. If the profits have variance, them the average profits must be higher than 5 billion to pay for the extra risk of the investment. Real world firms are valued in the profit that they can make, so if a firm A makes 10 billion profits every year, with 5% interest rates, the market value of the firm shares would tend to be 200 billion.

It is true that the perfect competition model doesn't capture the existence of entrepreneurship and the processes of disequilibrium changes in the market. But neither does any other equilibrium model. Hayek already noted in 1946 that criticism of the perfect competition model are usually based on the idea that other models like monopolistic competition and oligopoly models could be more realistic. However, this axis of criticism fails to understand the real problem, which is that the perfect competition model represents the potential outcome of a competitive process and not the competitive process itself.

As I have already said, under perfect competition prices are equal to marginal costs. This means that the cost of producing an additional unit of a good is equal to the price that consumers are willing to pay for the good. When such situation can occur? After all possible gains for increasing production are exhausted, in a equilibrium with perfect information for all market participants. This is a state where learning and the transmission of information doesn't happen. Advertising is a type of transmission of information to consumers.

Reality is not under perfect competition right now, but it tends to be and prices tends to converge to marginal costs. Reality is under disequilibrium, but the general equilibrium model is highly relevant for your understanding of economic reality (general equilibrium is also called walrasian equilibrium or perfectly competitive general equilibrium).

[Iosef Cross]

Wrong. The bond market sets the rates, the central bank follows. The retail banks and other financials set the money supply through loaning out money via fractional reserve lending, with the interest rates being set by the market. Central banks pretend they control the rates and money supply and everyone else either believes them or pretends to believe them. The central banks for the most part are separate entities from the government, for instance the US Federal Reserve is a private bank.

The central bank determines the money base, while private banks can multiply this base thought fractional reserve banking. However, the central bank also determines the rules of leverage limit and compulsory deposits, with set the bar on credit expansion. So, while central banks do not directly determine the quantity of money in the economy they strongly influence the evolution of the monetary aggregates.

So, if we have massive monetary expansion, the FED can take control of the situation and the FED is a government agency, while not directly linked to the current government it is part of the State. The US didn't have a central bank when it was under the gold standard, but in those times the money base was determined by physical gold deposits. Today the money base is a matter of State.

The interest rate is determined by the supply and demand for loanable funds. While the central bank can increase the nominal supply of loanable funds by increasing money supply, if the economic actors predict correctly the increase in the supply of loanable funds by increase in money supply, prices will rise and the real money supply (nominal money supply/price variation) will not change. This means that in the long run interest rates and the real supply of money are determined by real factors only.

Banks also cannot increase the real supply of money in the long run for the same reason: If they decrease their reserves and the nominal quantity of money is multiplied, prices will increase and the real stock of money will not increase. The real stock of money is determined in the long run by consumer preferences on the quantity of purchasing power to hold in the form of money, if they want to increase their monetary holdings, they increase the demand for money, with decreases prices, increasing the real supply of money.

The real interest rate is determined in the long run by the time preferences of the consumers and the "marginal rate of intertemporal transformation" in production (for lack of a better term), which is the declivity of the production possibilities frontier.

You're so full of shit. Sub-prime happened because we threw away leverage limit regulations and underwriting standards, in other words because we de-regulated.

It is excessively simplistic to blame deregulation of the financial sector as the cause of this crisis. Deregulation in the financial sector has been happening in the last several decades in the US, since the 70's. There were about 5-6 recessions in the period, however, people started to blame deregulation in only this single recession.

It is true that deregulation facilitated the great increase in the supply of credit in the last years, with feed the bubble. But the 2008-2009 recession in the US was caused by bad monetary policy by the FED after the 2001 recession, when they lowered interest rates to absurdly low levels. The deregulation amplificated the bubble and created the conditions for the biggest recession of the last 80 years.

If the FED had good monetary policy, they would have contracted the money base as the banks expanded their money multiplier, negating the bubble effect of the credit expansion performed by the banks, as the real supply of loanable funds wouldn't have increased. The problem with that policy is the technical difficulties involved in the synchronization of the contraction of money base and the increase in the banking multiplier.

[J]

The central bank determines the money base, while private banks can multiply this base thought fractional reserve banking. However, the central bank also determines the rules of leverage limit and compulsory deposits, with set the bar on credit expansion. So, while central banks do not directly determine the quantity of money in the economy they strongly influence the evolution of the monetary aggregates.

This is only true in a fiat money system. Guess what? We do not have a fiat money system, we have a credit-money system. Furthermore, the Central Bank does not determine leverage limits nor compulsary deposits, those aspects are controlled by the SEC, FDIC, OTC, and other regulatory agencies. You are wrong on all counts, as usual.

So, if we have massive monetary expansion, the FED can take control of the situation and the FED is a government agency, while not directly linked to the current government it is part of the State. The US didn't have a central bank when it was under the gold standard, but in those times the money base was determined by physical gold deposits. Today the money base is a matter of State.

The Fed is not a government agency, it is a private banking entity. Its only public functions are that it creates legal tender through auctioning Treasury bonds or outright printing and it remits a share of its profits to Treasury. Read the Federal Reserve Act some day. In all other respects it operates with complete independence from the State. Oh, by the way, the Federal Reserve Act which created the Fed was signed in 1913, the US did not go off the gold standard until 1971. So once again you're wrong on all counts.

The interest rate is determined by the supply and demand for loanable funds. While the central bank can increase the nominal supply of loanable funds by increasing money supply, if the economic actors predict correctly the increase in the supply of loanable funds by increase in money supply, prices will rise and the real money supply (nominal money supply/price variation) will not change. This means that in the long run interest rates and the real supply of money are determined by real factors only.

Banks also cannot increase the real supply of money in the long run for the same reason: If they decrease their reserves and the nominal quantity of money is multiplied, prices will increase and the real stock of money will not increase. The real stock of money is determined in the long run by consumer preferences on the quantity of purchasing power to hold in the form of money, if they want to increase their monetary holdings, they increase the demand for money, with decreases prices, increasing the real supply of money.

Only true in a fiat money system. We live in a credit-money world, fiat money rules do not apply.

The real interest rate is determined in the long run by the time preferences of the consumers and the "marginal rate of intertemporal transformation" in production (for lack of a better term), which is the declivity of the production possibilities frontier.

Wrong. Again. Real interest rates are determined by the opportunity cost of loaning out assets over a given time period and the risk of default and costs of recovery over the course of the loan.

It is excessively simplistic to blame deregulation of the financial sector as the cause of this crisis. Deregulation in the financial sector has been happening in the last several decades in the US, since the 70's. There were about 5-6 recessions in the period, however, people started to blame deregulation in only this single recession.

I've blamed every crash since 1980 on deregulation.

It is true that deregulation facilitated the great increase in the supply of credit in the last years, with feed the bubble. But the 2008-2009 recession in the US was caused by bad monetary policy by the FED after the 2001 recession, when they lowered interest rates to absurdly low levels. The deregulation amplificated the bubble and created the conditions for the biggest recession of the last 80 years.

Wrong on all counts, again. If the regulators had actually enforced all the rules as they existed in 30 years ago, the bubble couldn't have started in the first place even if interest rates were zero. A housing and credit bubble cannot get underway if 20% downpayments, 30% DTI, and proper underwriting standards are enforced. Banks cannot blow up if their leverage limits are restricted to 10:1 given the above mortgage underwriting guidelines as the historical default rate of those mortages is and continues to be well under 1%.

If the FED had good monetary policy, they would have contracted the money base as the banks expanded their money multiplier, negating the bubble effect of the credit expansion performed by the banks, as the real supply of loanable funds wouldn't have increased. The problem with that policy is the technical difficulties involved in the synchronization of the contraction of money base and the increase in the banking multiplier.

US banks do not have leverage limits, you can thank Hank Paulson for that gift in 2004. Unless the Fed is willing to shrink the monetary base down to zero, banks can continue doing whatever they want. Oh, and did I mention that this, like the rest of the crap you've spewed only applies in a fiat money system? Which, by the way, we don't have?

[Iosef Cross]

The central bank determines the money base, while private banks can multiply this base thought fractional reserve banking. However, the central bank also determines the rules of leverage limit and compulsory deposits, with set the bar on credit expansion. So, while central banks do not directly determine the quantity of money in the economy they strongly influence the evolution of the monetary aggregates.

This is only true in a fiat money system. Guess what? We do not have a fiat money system, we have a credit-money system.

In the fiat money system the state would have total control over the money supply. In your system the state has limited control over the money supply.

You didn't understand what I posted.

Furthermore, the Central Bank does not determine leverage limits nor compulsary deposits, those aspects are controlled by the SEC, FDIC, OTC, and other regulatory agencies. You are wrong on all counts, as usual.

The central bank of my country determines compulsory deposits. I didn't know that the US had a more complicated system.

So, if we have massive monetary expansion, the FED can take control of the situation and the FED is a government agency, while not directly linked to the current government it is part of the State. The US didn't have a central bank when it was under the gold standard, but in those times the money base was determined by physical gold deposits. Today the money base is a matter of State.

The Fed is not a government agency, it is a private banking entity. Its only public functions are that it creates legal tender through auctioning Treasury bonds or outright printing and it remits a share of its profits to Treasury. Read the Federal Reserve Act some day. In all other respects it operates with complete independence from the State. Oh, by the way, the Federal Reserve Act which created the Fed was signed in 1913, the US did not go off the gold standard until 1971. So once again you're wrong on all counts.

The process of terminating the gold standard started in the early 20th century with World War One. The US exited the gold standard in the 1930's. The last link with gold was lost in 1971. The classic gold standard period is from 1875 to 1914.

Only true in a fiat money system. We live in a credit-money world, fiat money rules do not apply.

So, banks do not expand money supply though fractional reserve banking? Yourself said:

The retail banks and other financials set the money supply through loaning out money via fractional reserve lending, with the interest rates being set by the market.

I am wrong if you you said before wasn't true.

So you are contradicting yourself.

The real interest rate is determined in the long run by the time preferences of the consumers and the "marginal rate of intertemporal transformation" in production (for lack of a better term), which is the declivity of the production possibilities frontier.

Wrong. Again. Real interest rates are determined by the opportunity cost of loaning out assets over a given time period and the risk of default and costs of recovery over the course of the loan.

You didn't understand.

The opportunity cost of loaning out assets are determined by the interplay of the consumer preferences and the intertemporal production frontier.

The other factors you mention are risk and transaction costs, which don't determine the pure rate of interest but affect the market rate of interest. Higher risks and transaction costs increase the costs of lending, with increases interest rates.

It is excessively simplistic to blame deregulation of the financial sector as the cause of this crisis. Deregulation in the financial sector has been happening in the last several decades in the US, since the 70's. There were about 5-6 recessions in the period, however, people started to blame deregulation in only this single recession.

I've blamed every crash since 1980 on deregulation.

Well... That's even more simplistic. Though in a certain way, it is true. But only in a very limited way.

It is true that deregulation facilitated the great increase in the supply of credit in the last years, with feed the bubble. But the 2008-2009 recession in the US was caused by bad monetary policy by the FED after the 2001 recession, when they lowered interest rates to absurdly low levels. The deregulation amplificated the bubble and created the conditions for the biggest recession of the last 80 years.

Wrong on all counts, again. If the regulators had actually enforced all the rules as they existed in 30 years ago, the bubble couldn't have started in the first place even if interest rates were zero. A housing and credit bubble cannot get underway if 20% downpayments, 30% DTI, and proper underwriting standards are enforced. Banks cannot blow up if their leverage limits are restricted to 10:1 given the above mortgage underwriting guidelines as the historical default rate of those mortages is and continues to be well under 1%.

The monetary base still increased. So even with a constant money multiplier, the volume of credit would expand and a cycle would develop. However, the money multiplier increased, with accelerated the credit expansion and increased the size of the cycle, including the boom and the bust.

If the FED had good monetary policy, they would have contracted the money base as the banks expanded their money multiplier, negating the bubble effect of the credit expansion performed by the banks, as the real supply of loanable funds wouldn't have increased. The problem with that policy is the technical difficulties involved in the synchronization of the contraction of money base and the increase in the banking multiplier.

US banks do not have leverage limits, you can thank Hank Paulson for that gift in 2004. Unless the Fed is willing to shrink the monetary base down to zero, banks can continue doing whatever they want.

Money exists because there is uncertainty. Without uncertainty, banks could predict the exact dates in which people would withdraw their deposits and hence they could operate with 0% reserves. As result the money multiplier would tend to infinity and the money supply would tend to infinity and the value of money will tend to zero.

In this situation business cycles wouldn't ever happen nor people would use money. Also, people would make all possible exchanges at time zero and the market would be in a perpetual equilibrium.*

However, in the real world, uncertainty exists and bank must have reserves. So the central bank can indeed prevent credit expansion by contracting the money base. The fact is that in the last 10 years the US money base increased, while the money multiplier increased, with added to the total money supply.

US money supply:
http://upload.wikimedia.org/wikipedia/e ... upply2.svg

It shows that money supply increased between 2000 and 2009, but M3 increased much more, showing that the banking multiplier increased as well. However, if the money base had contracted, the same money multiplier would have resulted in a constant money supply and the lack of credit expansion associated with the present crisis. So monetary policy is responsible for the present crisis as well as the private banks.

You clearly didn't understand anything that I argued, but I was expecting that. Of course, if you didn't understand anything it would look like "crap". I didn't intend to educate you since you are clearly hostile to anything that doesn't fit your crude conceptions of these problems.

*That's the assumptions of the models that modern macroeconomics are based on. They certainly failed to understand the present crisis.