Social Failurecracy

It all began with Krugman, who made a post attacking Mises based on a "critique" by the blogger "Lord Keynes".

Salerno, Murphy and Hammond have offered good answers to Krugman. 

If you wanna see a real good discussion on wage rates and the Great Depression, see here. But in the meantime let's see some of LK's arguments.

LK: "The solution, then, for Mises was eliminating unemployment relief (presumably forcing the unemployed to starve and accept lower wages)..." 

The word "starve" was deliberately chosen by LK in order to arouse the indignation of the reader. Aparently he cannot "criticise" someone without appealing to this kind of tricks. Had LK read the article completely, he could have seen that Mises explains why workers would not "starve" necessarily because market wages cannot fall indefinitely: "This in no way means that the market would tend to push wage rates down indefinitely. Just as competition among workers has the tendency to lower wages, so does competition among employers tend to drive them up again. Market wage rates thus develop from the interplay of demand and supply." And even assuming LK did read it, it would mean that he deliberately misinterpreted what Mises wrote and his "criticism" would be worthless.

By the way, I must also emphasize that Mises did not advocate a uniform-in block fall in all wage rates, but for freedom in wage rates determination. Free wage rates do not mean falling wage rates. Some of them will certainly fall, but others may not do so and others may even rise: "However, it is not a question of reducing wage rates. This bears repeating with considerable emphasis. The problem is to re-establish freedom in the determination of wage rates.". I say this because people like Krugman has demonstrated that they have never read Mises or Hazlitt.

LK: "How else could such suppression of trade unions be realistically achieved except by government coercion?"

Apparently LK cannot think in other solution for problems than government coercion, and he projects that kind of behaviour to other people. Even to those, like Mises, who emphatically and explicitly had rejected government solution in the quotation LK himself has used: "formation of wage rates should be hampered neither by the clubs of striking pickets nor by government’s apparatus of force"

LK: "This is the point in the essay where Mises may as well have been winking at his audience to indicate what his words imply: that governments should break up and repress unions and restore labour market freedom."

I thought that this kind of empty rhetoric was only a feature of the left-wing writers here in southamerica, but I see that the Left is chatterbox at international level. Mises is clearly talking about violations of worker's rights to work ("those who molest persons willing to work") and destruction of property owned by the firm ("destroy machines and industrial equipment in enterprises that want to hire strikebreaker"), that two things are legal protective tasks that any government in the classical liberal tradition (or in the statist keynesian fantasy) must do, i.e. protect property and rights. LK has misinterpreted with his own words what Mises has clearly said. His caricaturization of Mises as a kind of "evil hater of unions" is based on nothing but an hallucination of his mind. Anyone, not biased by a subjective bad faith, would have noticed that there was nothing wrong in describing what a government in classical liberal tradition must do: protect rights (of workers to work) and property (of the firm).

All this is part of LK's desperate attempt to fuse Mises with fascism. Of course that's a big lie, a lot of people and I myself had refuted this and other attempts to do that fusion.  As "Lord Keynes" cannot even assert that Mises directly supported fascism (he lacks of evidence to do that), all he can do is to try to leave in his readers' mind the association he is unable to prove: "Mises the fascist". In the same way and using his own way of arguing, I could point out the reader the introduction of General Theory written for the totalitarian Nazi Germany of 1936 in which Keynes assured us that "The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state...". Of course I would never do that because I do not use LK's bad tricks, but LK's double standard would never let him say that this statement by Keynes could be interpreted as a positive comment on German totalitarianism. 

LK: "The reason is that capitalist investment and demand for labour is not a simple function of the wage rate or interest rate, as naïve, ignorant and incompetent Austrian ideologues like Mises thought, and many still think."

1) Note that it is false that Mises takes investment as a "function" of something, austrians like Mises explicitly rejected expresions in terms of rigid determined "functions" or "propensities" as keynesians do. (Of course this does not apply to those austrians who, in order to be interpreted by mainstream audience, use those terms.) 

2) As the real Lord Keynes, the blogger falls in the same old errors that Hazlitt showed:

"For that chapter is concerned with the effect of expectations merely on output and employment. Keynes should have recognized also that expectations are embodied and reflected in every price—including the price of the raw materials that the individual businessman has to buy, and the wage-rates that he has to pay... one of Keynes's own principal errors in his discussion of the relation of the marginal efficiency of capital to interest rates is his failure or refusal to recognize that current interest rates are also determined in large part by expectations regarding the future... The rate of interest is involved in every price in which the time element enters. The price of a house is the discounted value of its future income. As Irving Fisher has insisted: "The rate of interest is the most pervasive price in the whole price structure.""

So for LK, one of the most important prices of the whole economy, the interest rate, is unimportant. The capital value at any time is based on expectations of future rental prices discounted by a rate of interest. In other words, the present value of an investment project is completely dependent on the size of expected cash flows, the timing of those expected cash flows and the rate of interest. 

So we have LK saying that investment 1) involves "the expectations of business people" and 2) "is not a simple function of the wage rate or interest rate". Any individual entrepreneur must take in account expected wage rates (and other expected costs), expected price of product and market interest rates which also have expectations on them. Then LK has denied that expectations (expected interest and wages) have an important role on investment and at the same time he has asserted that expectations have an important role on investment. Wage rates and interest rates are important part of and are determined by expectations, but LK has wrongly understated them.    

3) Entrepreneur's investment is determined in last instance by price spreads i.e. the difference between expected costs (included the interest rate) and the expected future price of the product. An entrepreneur is concerned about his own product/s or service/s, not by the aggregate "level of demand for output". He sees his parcel, his own business and clients, the environment where he moves, etc. For individual entrepreneur the expected and particular price of product (which is not determined by the firm, but only set waiting for consumers to pay) is also very important, not only the quantity firm is planning to sell. Once again the aggregate biased way of thinking of keynesians made them fall into error. For a refutation from the real Lord Keynes see here. 

4) An investment is done because people expect it will yield some profit or return (future consumption) that will be greater than otherwise. Obviously since investment means looking at the future, the entrepreneur faces uncertainty (this is nothing new nor original, it has been stressed by austrians for decades, nor is any kind of concession to LK). The subjective utility of future investment is discounted by uncertainty. Time preference also is very important in deciding whether or not invest, people balance additional returns vs consume at present. Particular time preference and particular uncertainty of future faced by individual entrepreneur limit investment. 

But even though uncertainty can delay investment, expectations alone are not the ultimate limit for entrepreneurs' activities. Even if there is a sudden anomalous and over-exaggerated rise in positive expectations, entrepreneurs will face a market "natural break". Assuming no change in quantity of money and credit, as long as all or a great majority of entrepreneurs want to start new projects or to extend the existing ones, they will need more of their specific kinds of labor and raw materials. But as all or a great majority of entrepreneurs want a limited quantity of factors, they will have to pay a higher price. And not only that, the funds needed to finance their ventures must come from somewhere, so they will push up the market rate of interest (this is not necessarily the "loan rate" of interest). So exaggerated expectations will start to diminish as the difference between expected costs (included interest rate) and expected future price goes down.

LK: "Mises was blissfully unaware of what many economists were to discover in the 1930s and what Gardiner Means had already discovered: that real world price rigidities are mainly caused by the private sector itself, because most businesses adopt relatively inflexible mark-up/administered prices."

A totally false statement. Mises and other economists already knew by 1912 that "fixed prices" "play a large part" in selling policies. However Mises was not so ignorant to believe that those firms determine prices, because they just set the price. LK's mistake is double: 1) deliberate ignorance about Mises' 1912 book and 2) deliberate ignorance that Gardiner Means' "theory" is false in theoretical (as Machlup and others demonstrated) and empirical (as Stigler and others demonstrated) grounds. I said "deliberately" because LK has read Mises' book and he surely has heard about the bibliography of the debate.

LK's comments about "debt deflation" only demonstrate how bad and fallacious his "business cycle theory" is because, as I explained here, it has been demonstrated that debt-deflation is just a special case of a more general process: malinvestment liquidation. 

Finally about the alleged "refutation" of ABCT by Sraffa, see here for my short explanation about why that is not true when it's applied to Mises. And also see here, here and here to see the full story with all quotations and evidence that demonstrate that misesian ABCT is totally immune to all accusations about interest theory and policy issue raised by Sraffa against Hayek.

As we see "Lord Keynes"' criticism falls by its own weight. And Krugman's reliance on such bad arguments one more time demonstrates why an increasing number of people, including me, do not and cannot have any respect for him and his NYblog.