There has been a lot of discussion lately on the campaign trail, in the media, and on many blogs. However, there is a lot of confusion regarding production and consumption, and what they mean for standards of living. This post will be a little more wonkish that my typical ones, but I will do my best to keep it simple.
Let’s start by defining our terms:
Production is the goods/services an economic actor generates (eg labor, physical goods).
Consumption is the goods/services an economic actor uses (eg food, shelter).
Production and consumption are intertwined. Paraphrasing Say’s Law, one must produce in order to consume. In other words, why do we work? So we can put food on the table. So we can clothe ourselves and our families. Our consumption is fueled by our production.
Likewise, our production is fueled by someone else’s consumption. Say’s Law is often misinterpreted as “supply creates its own demand.” This is incorrect. Supply must move to satisfy some demand. If I were to produce drool-covered toothbrushes, no one would by them. Regardless of how many I produce, there would be no demand for them. That is because these items satisfy no demand. So, one must produce something of value, something that can be consumed, before s/he can consume him/herself.
Ultimately, one’s standard of living is lifted not by how much one produces, but by how much one consumes. Bringing this back to the drool-covered toothbrushes, could I increase my standard of living by increasing their production? Not likely. So, it is unlikely production in and of itself is what determines standard of living.
Now, imagine a family. Mom and Dad are, by far, the most productive members of the family. The kids, all elementary school and younger, are not much productive. However, are the kids’ standard of living lower than the parents? In fact no, they all share the same standard of living. Why? Because they all consume the same! We can reasonably conclude, therefore, that it is consumption that helps determine standard of living.
How does this work back into trade? On the campaign trail, Bernie Sanders, Donald Trump, and many others across all of time and space, have confused production and consumption and their roles on standards of living. They see exports (that is, production), as the measure and imports (that is, consumption) as the cost. That is the opposite of what is actually going on.
As I just said exports are production and imports are consumption. Exports are what we must give up in order to consume. If one expands exports and shrinks imports, then one is reducing standards of living! If a nation operates at a trade deficit (that is, imports are greater than exports), that is not necessarily a bad thing. When a foreign government subsidizes their products so they become cheaper for Americans, that is not a negative for Americans.
The important take-away here is that money is not wealth. Gold makes a poor shelter. Dollar bills make for bad dinners. These things contain value only in that they may be traded for goods/services that can be consumed.
A Force for Good 
Jon,
I agree with you about free trade but I think the challenge to Say’s Law by Keynesians is not answered by the straw man of a drool-covered toothbrush. No one disputes the fact that it is possible in principle to produce a product so repulsive that there is no demand for it.
For years after the Great Recession started there was an oversupply of houses and cars in this country even though people still had a keen desire for those items. That is the kind of thing Keynesians are talking about when they challenge Say’s Law.
Any time you have to invent an imaginary product to make your point rather than selecting an example from actual economic history, that is a sign of weakness in your argument.
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I wasn’t responding to Keynesians. Say did have flaws, as anyone does. Just pointing out the flaw with the idea that production, not consumption, measures standard of living
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Shall I send Vic your way, or are you going to do it? 🙂
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Greg
At the simplest level, you must *produce* – go out each day and pick wild fruits and berries, dig up roots, and kill small animals with your bare hands before you can *consume* your meal. Production before consumption. In a better world you may be able to exchange some of what you produce for things other people have produced.
If you grow apples, hoping to exchange some of them for your neighbors peaches, you are creating a demand for those peaches. Demand for something requires not only the desire for that thing, but the ability to buy it. You may desperately want those peaches, but unless you have produced something your neighbor wants in exchange, there is no actual demand for them, and you probably won’t get any of them.
The recent oversupply of houses was created by a combination of very easy to get credit, low lending standards, and artificially low interest rates which misaligned the market signal between producers and consumers. The actual demand for houses (desire and ability) wasn’t really as high as builders were led to believe by the low interest rates, which indicated that consumers were deferring consumption, when in reality they weren’t saving much at all. At some point the misallocation of resources becomes unsustainable, and it comes crashing down.
Notice that building trades and construction were the first and hardest hit by the crash, resulting in massive unemployment while retail suffered only later and less severely. If lack of “aggregate demand” had been the problem as Keynesians are fond of claiming, we could expect retail to be hit sooner and harder.
I’m not sure if there were any drool covered houses involved,
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Ron,
My neighbors frequently give me overproduction from their gardens despite the fact that I produce no apples or other consumables. I employ no coercion at all to obtain these delicious items and am otherwise well fed. Perhaps even too well fed.
I do understand that production is the foundational economic problem. A complex modern economy has many features that are absent from fruit exchange with neighbors. Once such an economy is up and running it can occasionally run into problems on the supply OR demand side. I never understood why so many people think all the real problems lie on one side.
I agree that builders overestimated the demand for houses. There were several reasons for this and low interest rates were not the biggest. If low interest rates were the biggest reason we would have more home construction now because interest rates are lower now.
Keynesians don’t believe that lack of aggregate demand caused the Great Recession to start. They do think that boosting aggregate demand could cause it to end sooner.
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Ron,
On further consideration, perhaps there is a way to partially rescue your model. We could view the apparently free garden produce my neighbors frequently give me as compensation for the otherwise free, but highly valuable, wise economic advise I so generously produce and dispense.
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LOL
Oh, your poor neighbor! Things may not be what they seem. It seems plausible that when you start dispensing, your neighbor tactfully interrupts with something like:
“Oh! Hold on. I just remembered I’ve got some veggies for you. I’ll be right back.”
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Greg
“My neighbors frequently give me overproduction from their gardens despite the fact that I produce no apples or other consumables. I employ no coercion at all to obtain these delicious items and am otherwise well fed. Perhaps even too well fed.”
You are confusing trivial leisure time pleasantries among people who lack nothing important to their survival, with a need to stave off starvation. If your neighbor wondered from day to day whether their meager harvest would provide enough of the necessities to keep the wolf from the door, you & he might be having a different conversation.
“A complex modern economy has many features that are absent from fruit exchange with neighbors.”
Of course, but the simple basic of production before consumption remains.
“Once such an economy is up and running it can occasionally run into problems on the supply OR demand side.”
Absolutely. There is no perfect information or perfectly efficient market.
“I never understood why so many people think all the real problems lie on one side.”
I don’t know anybody that believes that. The one great signalling mechanism that keeps all the complex interactions in some semblance of sync is something called *The Price*. The smoothest possible operation of a complex economy occurs when The Price can freely reflect supply and demand based on the voluntary transactions of millions of individuals as they all seek to act in their own self interest . Any outside distortion of the price signal, including that price called the interest rate, will invariably cause misalignment of the incentives of producers and consumers, and will predictably have unintended consequences, since the price meddlers can’t possibly account for the wants of millions of individual people, because as you point out, it’s complex.
“I agree that builders overestimated the demand for houses. There were several reasons for this and low interest rates were not the biggest.”
And what were those reasons?
“If low interest rates were the biggest reason we would have more home construction now because interest rates are lower now.”
Why, then, did builders stop building and lay off millions of workers if nothing had changed? low interest rates are generally a signal that individuals are saving instead of consuming, because their time preference is for deferred consumption. Long term investment for future consumption, including housing and capital goods is the appropriate course for producers to take.
In reality, buyers are not saving, but are consuming as fast as they can, encouraged by the same low interest rate that makes saving seem less desirable than otherwise. It makes sense to borrow at low rates in order to consume now, including housing. Low interest rates and easy credit along with the belief that housing prices can only rise, allow people to spend the equity in their homes now.
Eventually, when everyone that can buy or refinance a home has done so, it becomes apparent that there is no more capacity to consume, and the bubble bursts. Misaligned incentives, caused by an incorrect price signal.
For some reason Keynesians seem to believe that the way to avoid a hangover is to continue drinking.
“Keynesians don’t believe that lack of aggregate demand caused the Great Recession to start.”
What, then, do they think caused it? Animal spirits? complacency? Suddenly consumers in unison slowed their consumption for no reason? Thousands of producers started making serious errors all of a sudden for no reason? What?
“They do think that boosting aggregate demand could cause it to end sooner.”
Boosting aggregate demand for what? Housing? Cars? Consumers are already consuming at full capacity and have run up debt to high levels. Do Keynesians want more of the same?
What government fiscal policy can target exactly the right set of buttons and levers to correct the mis-allocation of resources? Skilled labor is one of those misallocated resources Should government hire unemployed carpenters to work as cake decorators?
It’s no mystery why there can be high unemployment AND high numbers of job openings at the same time.
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Ron,
Generalizing about self-described Keynesians is about as risky as generalizing about self described libertarians.
Keynes himself was well aware that a credit bubble could cause a crash. He wanted a counter-cyclical fiscal policy because it would tend to damp down credit bubbles and speed the recovery from crashes regardless of their causes.
This policy does not need to “target exactly the right set of buttons and levers.” It only needs to do better than the alternatives.
The housing bubble happened when the conventional wisdom came to accept that housing prices only go up in a well diversified pool. It worked like that for enough years that most people came to believe it would always work that way. They were wrong of course, but for years people who saved for a 20% down payment got further from their goal while their neighbors who had borrowed to the hilt built equity. Lenders who made risky loans were also the most successful during this period. THAT, much more than the interest rate, was why the norms changed in an unhealthy way.
This is the process that Minsky was describing when he said that “stability is destabilizing” because it rewards risky finance. Risky finance then becomes viewed as safer than it is and the cycle repeats. This has been going on since long before there was a Fed.
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Greg
“Keynes himself was well aware that a credit bubble could cause a crash. He wanted a counter-cyclical fiscal policy because it would tend to damp down credit bubbles and speed the recovery from crashes regardless of their causes.”
In other words you believe that government meddlers are better able to direct the actions of hundreds of millions of people than they can direct themselves?
A monetary policy causes credit expansion , so a fiscal policy should be used to counteract it? A pitchfork in one hand and a club in the other. How about just letting the market set interest rates to accurately align the interests of producers and consumers?
“This policy does not need to “target exactly the right set of buttons and levers.” It only needs to do better than the alternatives.”
What are the alternatives, and how would anyone know if the one chosen is working better than the others?
Credit expansion and low interest rates have continued since the crash with trillions of dollars poured into the economy. Why hasn’t aggregate demand soared to previously unheard of levels? The money’s available, why isn’t that plan working?
“The housing bubble happened when the conventional wisdom came to accept that housing prices only go up in a well diversified pool. It worked like that for enough years that most people came to believe it would always work that way.”
I don’t think many people believed prices would rise forever, they just knew they had to play the game while it was on and hoped to get out before the correction. Obviously when the music stops, some people won’t have chairs.
“…for years people who saved for a 20% down payment got further from their goal while their neighbors who had borrowed to the hilt built equity.”
Yep, if they didn’t play the game – and they knew it was a game – they lost out. Their neighbors who got out in time left with pockets full of cash, donated to them by those who got in too late and lost.
BTW can you explain where the money came from to buy these overpriced houses?
“Lenders who made risky loans were also the most successful during this period. THAT, much more than the interest rate, was why the norms changed in an unhealthy way.”
But the lenders didn’t lose. There wasn’t much risk. They were funded by Fan & Fred and bailed out as too big to fail by taxpayers.
“This is the process that Minsky was describing when he said that “stability is destabilizing” because it rewards risky finance. Risky finance then becomes viewed as safer than it is and the cycle repeats. This has been going on since long before there was a Fed.”
So people with poor credit caused the crash? If you check you will find that very few high risk borrowers defaulted.Minsky’s notion is no more satisfying than “animal spirits”. Again, where did the money come from?
If you were actually interested in better understanding the recent Great Recession I highly recommend <a href="http://www.amazon.com/Meltdown-Free-Market-Collapsed-Government-Bailouts/dp/1596985879".Tom Woods' "Meltdown"
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or maybe here:
http://www.amazon.com/Meltdown-Free-Market-Collapsed-Government-Bailouts/dp/1596985879
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Ron
>—“But the lenders didn’t lose. There wasn’t much risk.”
Are you really unaware that Fannie and Freddie stockholders lost nearly everything as did the shareholders in many companies that loaned into this market?
>—” Again, where did the money come from?”
Do I need to explain fractional reserve banking? Are you one of those Austrians who thinks all fractional reserve banking is fraudulent? A lot of credit was also created in the shadow banking system.
I checked out that book on Amazon. A copy advertised as “used, like new” was selling for 1 cent. Since this was priced by the free market the price must reflect the actual value, right? I will spend the 1 cent just to make you happy.
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Greg
“Are you really unaware that Fannie and Freddie stockholders lost…”
Yes, as it should be. Are you unaware that the two GSEs were placed in conservatorship and backstopped with over $200bn in taxpayer money? Are you aware of how many other financial organizations were bailed out by the taxpayers because they were too big to fail? Talk about moral hazard!
In a freer market lenders would assume all of the risk and close their doors when they failed. A lot less risky lending would have taken place absent those implicit guarantees – and without mandates to lend to unqualified borrowers.
“Do I need to explain fractional reserve banking? Are you one of those Austrians who thinks all fractional reserve banking is fraudulent? A lot of credit was also created in the shadow banking system.”
Thank you for acknowledging the role of the banking system in creating the money out of thin air that fueled the housing bubble.
“I checked out that book on Amazon. A copy advertised as “used, like new” was selling for 1 cent. Since this was priced by the free market the price must reflect the actual value, right? I will spend the 1 cent just to make you happy.”
That’s wonderful. I hope it helps you understand the problems with your explanation of the business cycle. I would prefer that you bought it because you thirst after knowledge, but buying it to make me happy is better than nothing I suppose.
Yes, the book is worth 1 cent to the seller who has read it and who now has the knowledge for themselves, and no longer needs a paper copy. For someone like you who doesn’t yet have that content, the book could be worth an enormous amount. My copy cost considerably more when it was new 8 years ago,
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Ron,
>—“Thank you for acknowledging the role of the banking system in creating the money out of thin air that fueled the housing bubble.”
I’m not sure why that needs thanks. Was it ever disputed by anyone?
Even in an an-cap banking system you would have credit bubbles created by fractional reserve banking with money created “out of thin air.”
You didn’t answer the question about whether or not your enthusiasm for Rothbard extends to his bizarre and inconsistent ideas on fractional reserve banking.
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Ron,
Yes, I am aware they were “backstopped.” That backstop likely prevented a full blown depression. Are you aware that the taxpayers have made a profit on the money used to bail out Fannie and Freddie? At present they are still producing huge profits that continue to flow into the Treasury. This has created a speculative interest in the secondary markets in Fannie and Freddie Preferred Stock which has gone up substantially from its lows.
Taxpayers have also made a profit on TARP money loaned to banks during the bailout.
There is always moral hazard involved in insurance whether public or private. Private insurance sometimes leads people to burn down buildings or murder people to try and collect the insurance proceeds.
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Greg
“I’m not sure why that needs thanks. Was it ever disputed by anyone?”
It wasn’t clear that you were willing to admit that intentional, artificial inflation of the money supply by the Fed was the source of the funds. The intent of continued low interest rates was, no doubt, to keep economic activity cooking on the front burner, but like most interventionist meddling, the lack of knowledge available to the meddlers caused unintended consequences – unless you are even more cynical and suspect, as some do, that the housing bubble was intentionally allowed to inflate to provide a soft landing after the dot-com bubble burst.
“Even in an an-cap banking system you would have credit bubbles created by fractional reserve banking with money created “out of thin air.””
A free market banking system would certainly be subject to the whims of incompetent bankers, including credit bubbles, but the incentives would be aligned, risks would be assumed by those who took them, and consequences would fall on those who deserved them. Fewer people would risk placing their deposits in a bank that might lose them through risky lending, The owners and depositors would assume all the risk. I suspect much more prudent behavior would be the result.
“You didn’t answer the question about whether or not your enthusiasm for Rothbard extends to his bizarre and inconsistent ideas on fractional reserve banking.”
Not sure what you think is bizarre or inconsistent about Rothbard’s position on banking. Perhaps you will elaborate. A belief that counterfeiting money is fraudulent isn’t uncommon or limited to Rothbardians.
Fractional reserve banking is a juggling act at best. There are risks to depositors that they should be allowed to accept if they wish. Self determination, after all, is primary. I suspect that banks would impose MUCH stricter reserve requirements on themselves, absent guarantees of taxpayer bailouts.
“Yes, I am aware they were “backstopped.” That backstop likely prevented a full blown depression.”
No, the bailouts likely prevented a painful but quick recovery as resources were redirected from where they had been misdirected for so long. It’s necessary for malinvested resources to be liquidated as quickly as possible to correct the misallocations. Efforts to shore up failed enterprises only prolonged the recovery. If something can’t continue on its own, it shouldn’t be forced to continue.
“Are you aware that the taxpayers have made a profit…”
Yes, I’m aware and I’m sure your argument is that all’s well that ends well, but the larger issue is that of forcing people to support something they wouldn’t support voluntarily. If private investors aren’t willing to risk their own resources, why would anyone believe they should override these risk assessments to spend taxpayer money? Government bureaucrats substituted their judgments for those of millions of private individuals. Perhaps you really do prefer a fascist state, but I don’t think so. It’s not the job of government in the US to control and rescue private enterprises, or to create public business enterprises. Check the user’s guide.
“There is always moral hazard involved in insurance whether public or private.”
Yes there is. Your point?
“Private insurance sometimes leads people to burn down buildings or murder people to try and collect the insurance proceeds.”
And that’s irrelevant to a discussion of private vs public.
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Ron,
Intentional inflation of the money supply by the Fed was not the only, or even the main, source of credit creation during the housing bubble. Credit creation in the shadow banking system was an even bigger source. A lot of this was unregulated and legally off balance sheet.
Rothbard thought fractional reserve banking was fraud. Now I know words often mean very different things to libertarians but isn’t “fraud” a crime that people are authorized to use violence to stop in an-cap? If not, why not? If so, we have a situation where Rothbard thinks he is authorized to use violence to stop people who voluntarily choose to engage in fractional reserve banking. “Voluntarily” committing fraud doesn’t make it permissible does it?
It is one thing to argue that something is a bad idea. It is another thing to argue that it is “fraud,” “theft” or “counterfeiting.” Using those words implies you are claiming the right to use violence or coercion to stop those acts because they are criminal.
>—“Yes, I’m aware and I’m sure your argument is that all’s well that ends well…”
Like I said, if you hate government enough its successes will upset you even more than its failures.
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Greg
“A lot of this was unregulated and legally off balance sheet.”
Which of course, is its best feature. It was private money substitutes with no backing by government. People are free to risk their own money, you know. Of course as it turned out there were apparently implicit guarantees of taxpayer support so what we would normally consider risky behavior, wasn’t really terribly risky.
“Rothbard thought fractional reserve banking was fraud.”
Which of course it is, but as we know, many things that would be punished as crimes if we mere mortals did them aren’t considered crimes when government does them.
Remember Nixon? “When the President does it, that means that it is not illegal.”
Theft, counterfeiting, murder, kidnapping, imprisonment without trial or representation, breaking into someones house and shooting their dog – All perfectly legal if government does them. We use pleasant sounding euphemisms to describe these activities, of course. Theft of property is “paying your fair share” counterfeiting is called “price stabilization” or “quantitative easing” Murder is called “doing our patriotic duty” by traveling halfway around the world to shoot at people we don’t even know, and of course those folks are known as “heroes”, especially when they themselves are killed or wounded.
Tell me about words having different meanings!
“It is one thing to argue that something is a bad idea. It is another thing to argue that it is “fraud,” “theft” or “counterfeiting.””
I can think of no better words to describe them, can you?
“Using those words implies you are claiming the right to use violence or coercion to stop those acts because they are criminal.”
Having the right to use force against government and actually doing it are two different things. We tolerate some things because the cost of stopping them is too great and unlikely to be effective. We always have a right to resist government tyranny.
“Like I said, if you hate government enough its successes will upset you even more than its failures.”
You consider robbing people at gunpoint to keep failed businesses from collapsing as they should a success? Wow.
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Ron,
>—“Having the right to use force against government and actually doing it are two different things. We tolerate some things because the cost of stopping them is too great and unlikely to be effective. We always have a right to resist government tyranny.”
My point was about private crime. Follow the logic of your own thought. If engaging in fractional reserve banking is fraud – and therefore a crime – then NON-governent actors have a license to commit violence against entirely private fractional reserve bankers who engage in this behavior.
This is a formula for more violence and coercion, not less. This is the Lysander Spooner problem where his own logic led him to claim the right to hunt and kill people who merely voted in a way he disapproved of. Of course he would never *require* people to do this hunting and killing. You can’t require someone to do something.
That would be wrong.
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Greg
“My point was about private crime. Follow the logic of your own thought. If engaging in fractional reserve banking is fraud – and therefore a crime –”
Fractional reserve banking is fraudulent in the way a ponzi scheme is fraudulent, except we know our money isn’t really there. (most of us know that) There is no theft committed until someone’s money isn’t available on demand. The difference is that government immunizes fractional reserve banking, so the juggling isn’t considered a crime., and the normal remedies for theft can’t be applied.
In addition to immunity from criminal and civil prosecution banks are protected by government mandated insurance, lenders of last resort, and when all else fails, taxpayer money.
Without heavy government regulation and immunity, banks would assume the entire risk of juggling, and depositors could select banks based on their assessment of the risks involved. I can almost imagine banks competing by bragging about the high reserves they hold. The normal institutional remedies against theft would be in place.
My right to take action against theft isn’t reduced by government protection of bankers, but my options are reduced to actions that could themselves be treated as crimes. Recovering my lost deposit out of the hide of a pudgy banker, while somewhat satisfying, might cause me additional losses, so I would most likely not chose that course of action.
Spooner obviously understood that to actually hunt down and kill someone who conspired to rob him would have greater consequences than the loss of his stolen property, so he didn’t do so.
“then NON-governent actors have a license to commit violence against entirely private fractional reserve bankers who engage in this behavior.”
Not a license, a right.to take action to recover their stolen deposit.
“You can’t require someone to do something.
That would be wrong.”
That’s almost correct, You can require someone to do something they’ve promised to do – like give you your money when you demand it.
And of course can require someone to NOT do something, since rights are negative.
“Get off my lawn!” ” Don’t touch me!”
“Feed me, I’m hungry!”Oops, not that one.“ “Voluntarily” committing fraud doesn’t make it permissible does it?”
I’m not sure it can be done any other way. Is there an accidental way to commit fraud?
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Ron,
You are still missing my point. There was fractional reserve banking long BEFORE there was FDIC insurance, bailouts or too big to fail. In an-cap you would STILL have fractional reserve banking. An overwhelming majority of of depositors voluntarily took the risk of losing money in order to earn interest even before they had government protection. They did this as depositors in both mutual banks and a stock banks. Both engaged in fractional reserve banking.
When you call that “fraud” and “counterfeiting” you are suggesting that it is not legitimate for people to voluntarily contract to take that risk. No one is forced to deposit money in a fractional reserve bank. Failing in business isn’t a crime. When you fail in business, people who have invested money with you in hopes of earning money might suffer a loss. That is not fraud. It’s a bad investment. People have been free to start banks with 100% reserves. There has been virtually no interest in that by depositors even if you go back before modern protections for depositors.
When you say that people who voluntarily chose to contract to deposit their money in a fractional reserve bank have a right to “take action to recover their lost deposits” (or to stop counterfeiting) you are saying they have the right to use violence if necessary. And it will be necessary.
When you say that people have “the right to use force against the government” you are licensing violence. Not too far from where I live a sovereign citizen type recently exercised his “right to use force against the government” by ambushing and killing a state trooper he had never previously interacted with. Do you really believe this was a legitimate exercise of his “rights”? Is that how you would explain to to the trooper’s widow and young kids?
This is all good fun when it’s just couple guys talking political theory on the internet. When you put it into practice it turns tragic very quickly. Of course it’s true that most people weigh the costs and benefits when they feel the urge to “use force” against someone they think has wronged them. Change those costs and benefits by removing a governmental police and judicial system and a lot more people will be “using force.”
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Greg
“You are still missing my point. There was fractional reserve banking.. …Both engaged in fractional reserve banking.”
Yes.
“When you call that “fraud” and “counterfeiting” you are suggesting that it is not legitimate for people to voluntarily contract to take that risk.,”
No I’m not.
“No one is forced to deposit money in a fractional reserve bank.”
Correct.
“Failing in business isn’t a crime. When you fail in business, people who have invested money with you in hopes of earning money might suffer a loss. That is not fraud. It’s a bad investment.”
Again, correct.
And you are missing my point. Funds in a demand deposit account may be demanded at any time, in any amount up to the total balance, with no advance notice to the institution. That is the contract. These accounts aren’t investments, and no one expects to gain or lose money based on the success of the institution. What they do expect is that their money will be handed over when they demand it.
Everyone knows (should know) that everyone’s money isn’t really available at all times, and the bank can’t really produce everyone’s funds if everyone demands it at once. In the bad old days banks would simply close their doors and say, “Sorry, we’re out of money. come back some other time.”
That is fraud.
Although bank runs and liquidity crises are less likely due to safeguards in place today, the ultimate backstop and the worst creator of moral hazard is the Fed and federal government which it is now clear will do anything to keep insolvent institutions from collapsing, including throwing taxpayer’s money at them.
I’m not sure what you would call it if I took money from you against your will and knowledge your knowledge to help keep a local business open. Pick a nice sounding word for theft.
“When you say that people who voluntarily chose to contract to deposit their money in a fractional reserve bank have a right to “take action to recover their lost deposits” (or to stop counterfeiting) you are saying they have the right to use violence if necessary.”
What action do you think is appropriate to remedy a breach of contract?
When you say that people have “the right to use force against the government” you are licensing violence. Not too far from where I live a sovereign citizen type recently exercised his “right to use force against the government” by ambushing and killing a state trooper he had never previously interacted with. Do you really believe this was a legitimate exercise of his “rights”?
Strawman much?
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Ron,
>—“That is the contract. These accounts aren’t investments, and no one expects to gain or lose money based on the success of the institution.”
The interest offered is offered and accepted PRECISELY because it is a way to “gain” money. It has this in common with a bond even though other details of the contract are different. Bankers don’t pay interest because they like having less money. They pay it to compensate depositors for taking a risk and to give them an incentive to take that risk. When there used to be bank runs, the very existence of the run as a psychological phenomenon depended on people understanding that they were taking a risk that if too many people asked for their funds at once they wouldn’t be there.
No contract can require a bankrupt business to have money it has lost through the normal risks of the business that it is in. If a fire insurance company suffers an unusual number of fires and goes bankrupt and is unable to pay on claims as a result have they committed fraud? Were they required to hold in reserve enough money to pay if all the houses burned down at once?
I didn’t realize how fully involved you were with the Rothbard cult. Do you agree with him that it is OK to torture criminal suspects?
The state trooper whose murder I described above was an instrument of the state’s coercive force. You have said that it is OK to use force to resist the government. Why was his murder not a legitimate act of resistance to the government by your theories? If it even wasn’t. You are going to need to explain this one. We know Spooner thought it was permissible even though he didn’t like the cost/benefit analysis for himself.
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Greg
“If a fire insurance company suffers an unusual number of fires and goes bankrupt and is unable to pay on claims as a result have they committed fraud? Were they required to hold in reserve enough money to pay if all the houses burned down at once?”
No. An insurance contract is a promise to pay some unspecified amount at some unspecified future date if certain losses occur. This, unlike a demand deposit, is not a debt. Better call Saul – or some other attorney familiar with insurance law because I don’t know. I would guess that a breach of contract, or failure to perform had occurred, but not fraud. Your total remedy might be return of your deposit. Your example of all houses burning at once could only conceivably occur in the event of war or insurrection, which as far as I know are excluded losses for most ins policies.
Your demand deposit account, on the other hand, is a debt. Property has changed hands under the condition that it can be reclaimed at any time for any reason. When it’s not presented on demand it has been stolen.
Yes, I understand the psychology of bank runs, and they are virtually impossible these days due to safeguards in place, including, ultimately, taxpayer money. Even if the guarantees are only implicit, we can see that they become explicit when considered necessary by our masters.
Hopefully you understand that I have no problem with private parties engaging in whatever type of contractual arrangements they wish, as long as they are private entities using private funds. My objection is to placing taxpayers at risk.to prop up a business that should close. Terrible moral hazard.
“I didn’t realize how fully involved you were with the Rothbard cult. Do you agree with him that it is OK to torture criminal suspects?”
Suspects? No. You have misread Rothbard. It’s not OK to mistreat any innocent person, including suspects. And of course we are all innocent until proven guilty. He does condone punishment for those guilty of crimes. Cops are guilty of crimes themselves if they mistreated innocent people. Hopefully that’s not too fine a distinction for you. But of course we know that for the most part cops are above the laws which apply to the rest of us.
But of course there are a frightening number of Americans who DO approve of torture, and many other violations of human rights.
There’s also the concept of proportionality. Let the punishment fit the crime. We don’t usually shoot people who step on our toes or offend our nostrils with their odor.
“The state trooper whose murder I described above was an instrument of the state’s coercive force. You have said that it is OK to use force to resist the government. Why was his murder not a legitimate act of resistance to the government by your theories?”
I’m pretty sure you know the answer. Without knowing more details It’s not clear that the person was legitimately resisting government tyranny, and then there’s that proportionality thing, and in the several examples I’m aware of the suspect is now dead, so justice prevailed. None of the news reports indicate whether suspects were carrying ancap membership cards. It’s possible they had other reasons for their actions.
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Ron,
He killed the state trooper simply because he thought the trooper was the instrument of an oppressive government, not because they had a previous personal interaction. He used the same logic Lysander Spooner offered. He wanted to “use force” to resist what he took to be an oppressive government. He is in jail now, very much alive. Did he commit a crime in your world????? Why are you ducking this question? What possible additional details do you require to stop ducking this question?
It is quite amazing that it’s really hard for you to decide whether this should be legal but easy for you to decide that it should be legal for parents to starve their children.
I am still unclear whether or not you think fractional reserve banking is fraudulent when depositors are well aware they could lose their deposits AND still voluntarily choose to make those deposits in an attempt to earn interest. This has been done both with and without government guarantees. If these voluntary contracts are legitimate, you will have to accept the fact that they create money. If they aren’t, you will have to coerce people to stop them from making voluntary contracts they are fully informed about. How can you not see the contradiction in your position here?
Yes, Rothbard only thought it was legitimate for cops to torture guilty suspects. If they got it wrong we could always fix it by torturing the cop that got it wrong. One problem with that is that these people are only SUSPECTS. Another is that it gives cops a powerful incentive to frame any suspect they have tortured. Incentives matter. Unless you don’t want them to. Another problem is that you can’t untorture the innocent suspects.
Private insurance companies can suffer losses that cause them to go bankrupt in cases other than war or insurrection. This has actually happened many times. All the houses don’t really need to burn down at once. These companies just need to suffer more losses than their reserves can cover. Competition has the effect of providing an incentive to not carry more reserves than you need. But how much you need is an estimate that some people will get wrong. Do you view such cases as fraud or ordinary business failures.
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Greg
Just being a government agent isn’t sufficient reason to kill them, but a person may resist government aggression. Was that the case in your example? Was the officer using force or threatening to use force? Was the suspect afraid he would be killed or badly injured? Was shooting the officer a proportional response. Details are missing. Would the suspect’s actions be considered legitimate against a non government agent?
I’m not ducking the question, I’m not aware of the case you’re referring to, and you haven’t provided enough information to give a yes or no answer. It will be much easier when and if I know more about it.
In 1775 a bunch of farmers in Massachusetts resisted government forces attempting to confiscate their store of arms. They used deadly force. Were they criminals?
“It is quite amazing that it’s really hard for you to decide whether this should be legal but easy for you to decide that it should be legal for parents to starve their children.”
Nice strawman! I haven’t claimed it should be legal to starve one’s children. We’ve covered all that. People (rarely, thank goodness) DO starve their children. Pretending they have a right to be fed doesn’t help them at all.
“If they got it wrong we could always fix it by torturing the cop that got it wrong”
If they got it wrong the victim could determine a proportional punishment and carry it out. What would be more just than that?
“One problem with that is that these people are only SUSPECTS.”
Yes, I explained that.
“Another is that it gives cops a powerful incentive to frame any suspect they have tortured.”
Cops have that incentive now. What’s your point?
“Incentives matter.”
Yes they do.
“Another problem is that you can’t untorture the innocent suspects.”
That’s correct. Cops have a tremendous incentive to get it right, so prudence might dictate that they refrain from torture, and respect the rights of those with whom they interact, so as to not commit crimes themselves.
Similarly, you can’t unexecute or un-imprison an innocent person. Great certainty of guilt is necessary.
“I am still unclear whether or not you think fractional reserve banking is fraudulent when depositors are well aware they could lose their deposits AND still voluntarily choose to make those deposits in an attempt to earn interest.”
I think I’ve explained this, but just in case, I’ll summarize one more time.
First of all, if you are earning any meaningful interest on your demand deposit accounts, please tell me the name of your bank so I can move my accounts there. I think interest on checking accounts is just a little something to entice customers, sort of like offering a free toaster.
I don’t know about others, but I use demand accounts for safety and convenience, not for any interest I might earn.
Demand deposit contracts are legitimate. People may voluntarily take any risk they wish. There is fraud when a depositers money isn’t available when they ask for it, because it’s guaranteed to be available.
Similarly pyramid schemes of all types, including Ponzi’s are only fraudulent to the extent that people don’t get their money back.
“…you will have to accept the fact that they create money.”
Of course fractional reserve banking creates money. That’s the whole purpose. In a free market this would act to serve varying levels of demand for money, and the risks would be assumed by those who chose to accept them. The problem comes from government monetary policies acting through a central bank system to create artificial levels of money supply and artificial interest rates in order to influence economic activity and allow virtually unlimited government spending rather than acting only as a lender of last resort.
I don’t know how to make my position any clearer. Fraud occurs when the juggler drops the ball.
“Private insurance companies can suffer losses that cause them to go bankrupt in cases other than war or insurrection. This has actually happened many times. All the houses don’t really need to burn down at once. These companies just need to suffer more losses than their reserves can cover. Competition has the effect of providing an incentive to not carry more reserves than you need. But how much you need is an estimate that some people will get wrong. Do you view such cases as fraud or ordinary business failures”
I’ve explained that. Insurance company failures are not fraud.
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Ron,
I have told you twice already that the trooper in question had not had a previous interaction with the guy who shot him. Both times you responded that was just too hard to tell if it was justified with this limited information. The shooter correctly identified him as an instrument of state law enforcement which includes the virtual certainty of enforcing laws you take to be coercive.
>–“I haven’t claimed it should be legal to starve one’s children.”
No, you’ve claimed it shouldn’t be illegal. Things that aren’t illegal are legal.
>—“What would be more just than that?”
Having the issue decided by a more impartial and less emotionally involved party would be more just than that.
>—“People (rarely, thank goodness) DO starve their children. Pretending they have a right to be fed doesn’t help them at all.”
Let’s check that logic by seeing how it works in some other situation. How about “People (rarely, thank goodness) DO murder other people. Pretending they have a right not to be murdered doesn’t help them at all.” See the problem?
>—” Great certainty of guilt is necessary.”
But of course that doesn’t mean there should be a right to a fair trial in an-cap world. We could have them for people who can afford to pay for them maybe.
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The most profound difference between production and consumption … a difference which, it seems to me, overwhelms all other economic considerations… is that those on the consumption side do the choosing that counts. The choosing done by producers are guesses.
As important as that is (to me) I don’t know what to do with it.
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Walter
The Consumer is king, that’s for sure. Of course other than government redistribution, charity, and parent/child transactions, we all both consumers and producers.
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Greg
“I have told you twice already that the trooper in question had not had a previous interaction with the guy who shot him. Both times you responded that was just too hard to tell if it was justified with this limited information. The shooter correctly identified him as an instrument of state law enforcement which includes the virtual certainty of enforcing laws you take to be coercive.”
And I’ve already told you that just being an agent of the state isn’t sufficient reason to kill them. If that’s all there is to it, then no, the shooting wasn’t justified. I can’t understand why you even asked an obvious question. What’s the point? It’s also not permissible to shoot government traffic lights or books from your local library – or any other manifestations of the state that isn’t taking agressive action against you..
“No, you’ve claimed it shouldn’t be illegal. Things that aren’t illegal are legal”
Legal or illegal implies something is permitted or forbidden by the state. Some things are simply outside the purview of the state.
“Having the issue decided by a more impartial and less emotionally involved party would be more just than that.”
No one not directly connected to the crime has an actual stake in the punishment of a criminal, and certainly has no right to carry out that punishment.
>—“People (rarely, thank goodness) DO starve their children. Pretending they have a right to be fed doesn’t help them at all.”
“Let’s check that logic by seeing how it works in some other situation. How about “People (rarely, thank goodness) DO murder other people. Pretending they have a right not to be murdered doesn’t help them at all.” See the problem?”
There IS no problem. The child certainly has a negative right not to be murdered, but no positive right to be fed. Do you really not understand the difference?
“But of course that doesn’t mean there should be a right to a fair trial in an-cap world. We could have them for people who can afford to pay for them maybe.”
Of course. And maybe we could contribute to a defense fund for those who can’t afford it. It’s pretty common. For example, I frequently contribute to the Institute for Justice to help with the costs of protecting people from idiotic and unjust barriers to entry erected by the state to protect favored special interests from competition.
I can also imagine mutual defense societies and or insurance products to cover the legal expenses of a person accused of a crime or breach of contract..
Keep in mind that a whole raft of things that are now statutory crimes wouldn’t be, in an ancap world. The justice system would be much simpler.
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Ron,
>–“Let’s check that logic by seeing how it works in some other situation. How about “People (rarely, thank goodness) DO murder other people. Pretending they have a right not to be murdered doesn’t help them at all.” See the problem?”
>—“There IS no problem. The child certainly has a negative right not to be murdered, but no positive right to be fed. Do you really not understand the difference?”
I pointed out that a problem in the logical form of the claim you made. You responded that there couldn’t have been a problem in your logical form because your answer is consistent with your dogma about positive and negative rights.
Successful challenges to the validity of the logical form of an argument prove that the argument fails. They cannot prove whether or not the conclusion of the argument is true. It is possible to make a logically invalid argument for a true conclusion. Here is an example of that: Two plus two equals four because it is raining.
This is pretty basic stuff that a guy like you who likes to debate really should get up to speed on.
>—“I can also imagine…”
No doubt. I have never doubted the fertility and scope of your imagination.
>—“No one not directly connected to the crime has an actual stake in the punishment of a criminal, and certainly has no right to carry out that punishment.”
This means that if someone murders a person with no friends or family no one has standing to punish the act.
>—“Do you really not understand the difference?”
Do you really not understand that it is possible to understand the difference and still disagree with you? And in fact, the overwhelming majority of people do disagree with you on this. I sincerely hope I will not have to explain to you again why merely citing this fact is not committing the logical fallacy of appeal to practice.
>—” I can’t understand why you even asked an obvious question. What’s the point? It’s also not permissible to shoot government traffic lights or books from your local library – or any other manifestations of the state that isn’t taking agressive action against you..
Some people, including your hero Lysander Spooner and the killer in question, consider the passing of laws that coerce them and the existence of armed policemen to enforce those laws to be an aggressive action against themselves.
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Greg
I see that you really don’t understand the difference in the forms of the two statements, one involving negative rights and the other positive rights. Yes, it’s certainly possible to disagree on whether either negative or positive rights exist, but it’s not possible to use the two concepts interchangeably, which it appears you’re doing, and it seems to be what’s confusing you, as you’re still getting it wrong.
These two statements aren’t logically the same, so it’s not possible to use one to challenge the logical form of the other:
1. People (rarely, thank goodness) DO starve their children. Pretending they have a right to be fed doesn’t help them at all.
2. People (rarely, thank goodness) DO murder other people. Pretending they have a right not to be murdered doesn’t help them at all.
A statement consistent with #1 might be:
3. People (rarely, thank goodness) DO murder other people. Pretending they have a right to be shielded from murder doesn’t help them at all.
A statement consistent with #2 might be:
4. People (rarely, thank goodness) DO starve their children. Pretending they have a right not to be starved doesn’t help them at all.
Hope that helps, because I’m starting to believe you don’t have any meaningful arguments on that subject.
“This means that if someone murders a person with no friends or family no one has standing to punish the act.”
Well No, it doesn’t, and I probably could have worded that better. The point is that I have no standing in that case, and unless you have some closer connection to the case than just exposure to news reports, you don’t either.
“In fact the overwhelming majority of people do disagree with you on this.”
You can imagine that’s true, and it may even be true, but it’s irrelevant.
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Ron,
>—“Yes, it’s certainly possible to disagree on whether either negative or positive rights exist, but it’s not possible to use the two concepts interchangeably,”
You never want to find yourself arguing that something is “not possible” that happens all the time. Language is entirely conventional. Both the Founding Fathers who wrote the Constitution, and the 99% of Americans who accept the legitimacy of the RIGHT to a trial by jury as codified in the Bill of RIGHTS, are using the word “rights” to include some positive and some negative rights just as they use the term to “tomato” to refer to more than one type of tomato. Notice that no one calls it “the Bill of Positive and Negative Rights.”
For it to be “not possible to use the two concepts interchangeably” you will either have to argue that language is not conventional or that the overwhelming majority of English speakers don’t use the words in accordance with the convention that I described. Which are you claiming?
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Greg
I’ve gotta say I admire your persistence. f you fail at one thing you just move right on to something else.
You will either have to argue that the overwhelming majority of English speakers don’t use different terms to describe concepts that aren’t the same, or that the words “positive” and “negative” are used interchangeably to have the same meaning. Which are you claiming?
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Ron,
I will not have to argue that at all. I am claiming that you are the one out of step with prevailing language conventions. It’s OK for you to make the choice to be but the fact that you don’t even know that you have explains a lot about why an-cap ideas aren’t getting any traction.
It’s not just that most people are opposed to them, it’s that most people who disagree with these ideas don’t even think of them as something worthy of second glance or a response. Every time I want to type “anarcho-capitalism” I have to override auto correct. Just a little tidbit there to show how little influence an-caps have had on prevailing language conventions.
Talk in your own jargon all you like but you will find it doesn’t change any minds. F.A. Hayek and Milton Friedman were the two most effective proponents of smaller government. They never needed a special jargon when talking to the unconverted. Of course, they were both, famously, consequentialists who were inclined to argue that their opponents had good intentions but had not accounted for unintended consequences.
By all means, carry on calling people who disagree with you thugs and thieves and claiming moral superiority and wondering why that never changes any minds. It is entirely commonplace for different people to sometimes use words in conflicting ways. There is no higher standard than prevailing conventions to decide which usages are “correct.” Occasionally attempts to change the language convention succeed, but more often they don’t. If you think there is some higher standard than convention for correct use of language, I would love to know what it is.
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Greg
You’re right. I’ve failed to notice that language convention has changed so that the words positive and negative now mean the same thing.
You really are out of gas here.
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Ron,
You have lost track of the argument. Let’s review:
First, you made a statement explaining why you did not believe it should be illegal for people to starve their children.
That statement did NOT use the words “positive” or “negative.”
Next I falsely assumed that you knew that challenges to the logical validity of an argument are challenges to the form, not the substance of the argument.
So I demonstrated this problem by keeping the same form and substituting one action for another. I STILL did not use the words “positive” or “negative.”
You replied that this all didn’t matter because of your opinions about the meaning of those terms that neither of us had used in the argument to that point! This is a howling non-sequitur.
I explained that my objection merely proved you had made a logically defective argument. And that it is possible to make a logically defective argument for either a true or a false statement.
You then resumed arguing about the meaning of those words that were neither in your original statement nor my challenge to it, without showing the dimmest glimmer of understanding about the logical issues involved.
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Greg
“You have lost track of the argument. Let’s review:”
Well, one of us has for sure. Yes, let’s review. I’ll assume you mean a review of this thread only, because at this point I don’t have enough interest to search through the dozens of previous discussions we’ve had. If your recollections differ from mine, I’ll ask for a reference.
“First, you made a statement explaining why you did not believe it should be illegal for people to starve their children.”
The first reference on this thread to the words “children” or “starve” are in a comment by you in which you attributed a positon to me that I don’t actually hold, hence the accusation of creating a strawman. You must be referring to a previous discussion.
“That statement did NOT use the words “positive” or “negative.”
That’s correct, but my recollection is that our original discussion did include those words in refernce to positive and negative rights, and my claim was that “children don’t have a positive right to be fed”. If you have something different let’s see it.
“So I demonstrated this problem by keeping the same form and substituting one action for another. I STILL did not use the words “positive” or “negative.”
And here is where you go off the rails. You substituted an action (positive) for an inaction (negative) that’s in the original, so you DIDN’T keep the same logical form. I spent some considerale effort explaining that to you, but apparently to no avail. I can recommend some material on the subject by people who explain it better than I can if you wish.
The rest of your comment has no value, as it’s based on that confusion about positive and negative actions.
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testing wordpress user name
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I see that changing user names doesn’t change icon.
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testing
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