Purchasing power and wages are quite different things. I think you are a little confused here. I might get paid 5 dollars per hour. But if I am paid in Silver Dollars rather than through electronic credit my purchasing power is significantly higher. Equally if I am in a high inflationary environment, whatever I get paid, my purchasing power is rapidly lost. The biggest reduction in purchasing power is not the wage point, but the "real" wage point. The remorseless moves of all Governments to replace real currency (with intrinsic value), with fiat currency has destroyed purchasing power. They do this to pay for the same large programmes being advocated for, knowing that the people have to accept it given they are monopoly suppliers of currency (and ultimately taxes must be paid in the same denomination). But this is of course only a giant Ponzi scheme which is ultimately inflationary (the other major destroyer of purchasing power).
The only specific outcome I have in mind is the optimal position, so I am not sure what you mean. There are specific aims of other policies advocated (eg minimum wage), but as I have pointed out, these must come at the cost of others, where the overall position is sub-optimal.
There are asymmetries of power in the Market, that is true. But that is the case in every single human interaction. As stated earlier, the best protection is competition in the Market (by removing intervention not adding to it).
I do not have to assume a boom not any pattern of money distribution. Conventional economic thinking is that booms are great and busts are bad. That is true for the drug addict as well! In my tradition we consider booms as bad (the root cause) and busts as the necessary correction (but not good to experience). Money is a medium of exchange and therefore exchanged, not distributed. When we zoom out to look at distributions what we actually see is how many and/or how much success a person (or group) have had trading (exchanging) in the market. And like all spontaneous orders (Markets are a spontaneous and not a planned order), it follows Pareto's law.
Yes I think we agree on evolution. Just to build on your point: "whether species changes are the result of an accumulation of many traits or a specific few". It is of course both (not either/or). The deciding factor is do these changes impact on co-reproduction, in what are basically the same animal. If they do then speciation is the possible outcome. BUT whether few or many, these changes must occur through micro-evolution (or evolutionary theory is false). We do not see a Macro level, speciation events in one generation, eg a land based dinosaur developing functional flying ability (or whatever Macro effect we want to point to).
I understand the point on non-action. I just think it is flat out wrong. You could see being bald as a hairstyle using this approach to logic. Non-action is non-action. A=A. However, I think the point you want to make is "given our current situation" the removal of intervention policies and a return to the separation of the state and the economy (a position we largely saw before WWI in the West), amounts to an action and thus has unintended consequences. For me that is trivially true, because I am arguing differently ie "given a clean starting position" the best outcome is for non-intervention. BUT, I would also say that the act of returning the economy to non-intervention, will set about powerful processes that will return us to long term prosperity and health. There is little doubt that in the short term we will see significant economic hardship in some sectors, unemployment, and price instability. It is the cost of taking the patient through a withdrawl programme. The drugs they were used too, satisfied a physiological response which caused them short term pleasure at the cost of long term poor health and distress in their family. To remove that long term risk and restore everyones health, they will have significant short term pain. But because of the short term impact, would we NOT therefore advocate that withdrawl programmes are a good thing? And so it is with the economy. The maximising point is the maximising point, no other points on the graph optimise the total solution for everyone better. As Margaret Thatcher once said "you cannot buck the Market".
My argument absolutely does not assume that the market based approach naturally raises the cost of labour (wages). It is far more subtle but hard to explain. As you point out it will for some and not for others. I would contend that there will be a general trend over the long term in that direction, but not in all long term cases and not in the short or even medium terms. We should see the labour markets as approximate to a fractal pattern based on the structure of production and services. The clearing price of each of the various labour markets is the optimal point. Nobody is forced to work in a free market. The best protection labour get is not through legislation or unions (both of which hurt labour depending on their strength), but through competitive forces of the market. If labour is in demand because value is being efficiently extracted, the economy grows, then wages will also reflect that. The clearing price of each dynamic market (is the point were labour and capital settle there conflicting demands), reflects this fully. If someone in the Market can only command 5/hr, then that is all they can command. It is not the responsibility of government to force a broad swathe of the tax base to pay supplementary taxes to either 1) support a minimum wage policy 2) nor for them dis-incentivise work by having a benefits floor which pays more than work. These policies lead to widespread unintended consequences and movements away from the stable equilibrium reached in all other markets. The ripples are felt across the whole economy (Bastiat's point). So what sounds good and caring, ends up being anything but.
All markets reach an equilibrium (whether intervened in or not). That is not the question you should be asking. The questions are: 1) how stable (in the short term) is that equilibrium?; and 2) how free to adjust (in the medium to longer term) is that equilibrium? In a minimum wage controlled labour market the clearing price of wage labour is not free to adjust. It has no medium or long term flexibility, and if set too high has no short term stability. And because clearing prices of the market are over-riden by such a policy, a sub optimal result must axiomatically follow.
The same applies to the money markets (as to the labour markets). The interest rate policy (set by central authorities) will, if done badly (normally forcing too low a set of interest rates for too long), create distorted capital structures in the whole economy (including bubbles), and an unstable equilibrium is reached beyond the possible economic frontier (of production & investment). Eventually this equilibrium will break (is unsustainable) because it is beyond the frontier (simply put the money is not there), and the economy snaps back like a rubber band to below its frontier (which is why we see depressions and credit crunches). Because its the capital structure that is distorted, it is also the capital that gets devalued to take up the slack (shares, deposits, house prices or whatever). Thus any serious deviation from the money market clearing price (loanable funds market) for any significant time, is sub-optimal for the whole economy (even though a section of society may temporarily benefit).
It may seem contradictory to both have stability and freedom to adjust, but this is essential since market prices co-ordinate supply and demand through TIME. Hence stability is reached only in the short run, but adjustments are essential in the medium to longer run as the balance of savings, investment, consumption and production alter.
I did not say economic research should be abandoned. It is useful in the say way as Macro effects of evolution are informative. But it is not decisive in determining policy that impacts on Micro-Economics. Again to mention my tradition of Economics, we make no distinction between Micro and Macro Economics. There is just economics. All economics (human action) is at bottom Micro, although we can only really see the effects at the Macro level.
Thank you for your comments. We will have to watch this doesn't turn into its own mini debate.
Firstly Evolution. I apologise if I gave you the impression otherwise, but evolutionary theory is sound and for it to be sound all evolution must only occur at the Micro level, and what we euphemistically refer to is "Macro-Evolution" is in effect the accumulation of thousands of micro events leading to a speciation event (the classic example of this is ring speciation).
I did not say we do not see the effects of evolution on a Macro scale. We do. Evolutionary theory is about as well attested as anything in science can be. Evolution is a continuous process. I said in reality all evolution (ie the process) is on a Micro-scale and therefore the conjunction of the words "Macro" and "Evolution" is not really a thing, but a contradiction in terms. It implies there are evolutionary processes at the level of species to species transition, which is simply false (it only happens within a species). BUT if it continues unabated: a speciation event will occur (usually demarcated by reproductive difficulties between one new species and the old), even though they are still effectively the same animal or plant. And if these divergences continue the Macro effects are magnified. Whales and Cows can no longer co-reproduce, even though they share a common ancestor.
This is the same mistake creationists make when asking "have you ever seen a cat give birth to a dog?" (or something similar). They are literalising the term "Macro-Evolution" (which it is not clear to me if you are doing it or not), as an instant magical speciation event (which to be fair to them is what the term implies). But they are fundamentally mistaken. There is only evolution (not Micro and Macro). It is a hugely complex process of waste, trial and error. It is motored by continual natural micro-evolutionary processes, from which we occasionally zoom out to see the accumulated picture (at the Macro level). But we cannot control evolution by controlling Macro variables. The same analogy applies in economics.
A non-action is not an action. This is rather a rhetorical ploy. A=A. There can be no unintended economic consequences through non-action (non-intervention), since all economic actions that follow are made intentionally by free individuals voluntarily (as long as we apply the rule of law), whether they are good or bad for the individual could be described as unintended personal consequences, but that is an inevitable in any field of human action like for example "crossing the road". It is thus not in the scope of what we are talking about.
I agree with your axiomatic reasoning approach. This is exactly the approach I would advocate. And it follows axiomatically that interference in market clearing prices, must lead to sub-optimal outcomes. There is no other point on the graph where outcomes are optimised other than at the prevailing market clearing price.
We should not forget at root economics is a dismal discipline, as it is in effect the study of shortages. We can build no Utopia out of it. And even if we could, it would most likely be a truly depressing place to live in. In my tradition of economic thought, we see the economy as a complex and chaotic system, rather than a science/engineering discipline (ie it is NOT a big machine with input>process>output). Instead like the weather it is unknowable, unpredictable and inscrutable, and can only really be studied through a branch of logic and not of science (in particular the logic of human action).
Whilst there is some value in understanding aggregates (macro-economics), one cannot fool oneself into then tinkering with those aggregates, and knowing with cast-iron certainty what the impact is (like the minimum wage). This was the mistake of Keynesianism and of Socialism. Economic information is not held on a spreadsheet, but is held by all of us in real time, with changing demands and changing minds (micro-economics).
To use an analogy. It is a bit like trying to study Evolutionary Biology only through macro-evolution. There is (in reality) no macro-evolution, only micro-evolution. Over time and geography one can see the effects of micro-evolution through macro effects (and study them in retrospect as a guide to one potential future). But one cannot see the micro effects through macro-evolution (in real time ).
Similarly nobody can anticipate the minds of everyone, every second of every day, especially when the economic environment is constantly changing around them. This is why central planning is a fatal conceit, and why the research in fields like the minimum wage is so flawed. The research explicitly targets group X (benefitting), or group Y (disbenefitting) and only at point in time Z. Researchers have to do this to limit the near infinite variables, but as such it only reflects the policy aspirations of the researchers, not the truth.
To me tinkering about with legislation on the back of research like this, in macro-economics, is dangerous nonsense. Policy instruments have untold, unseen and unintended consequences, which is ALWAYS at a cost (which is never calculated, but always borne by some unidentified people in the long term). This is not to say free-market Capitalism in and of itself solves all problems (it doesn't). But it is to say it is better than any of the alternatives, because it allows for the free natural equilibriums to emerge and stabilize. Governments, Policy Wonks, QUANGOs, Central Banks, Universities, Scholars (wanting to make a name for themselves), Economists et al all have press offices. But the free-market has no press office. Which is why it gets blamed for things like "market failures" and depressions, when in reality the seed was sown by the very groups mentioned now looking for an excuse to hide the mess created by their tinkering.
Milton Friedman had a great take on this. He read every report (during his working lifetime) by the US Treasury. He could sum every report up into 2 types. In the good years, the US Treasury claimed that because of its good governance, "x" happened. In the bad years the US Treasury claimed that despite their judicious efforts, "y" happened and blew them off-course. This might be true for Wars and Crises, but every year? One has to wonder.
Capitalism is not a political system. It has nothing to say about democracy. It calls for a separation of state and economics (ie for individualism, voluntarism and private property rights). It's only political interface is to support the rule of law (in particular contract and property rights) and protection from external aggression (a military). There are traditions that within the overall umbrella of Capitalism that call for a no-state solution (which borders on the political). But we must differentiate between political freedoms and economic freedoms. Capitalism only requires economic freedoms to be maximised (where that exact point lies to some extent depends on the country, ts geography and the culture of the people).
Socialism is a political system that removes these economic rights and replaces it with an economic system which nationalises industry and attempts to centrally plan outcomes to a desired arbitrary pattern. And is always a total disaster. Sooner or later the plans collapse and people "want a strong man" to sort it out..and they find the body politik is only too willing to oblige. Even in its ideal form it is far from a democracy as it calls for a crushing both political and economic freedoms, under a boot.
Communism is an a-political system, akin to an anarchy as @armoredcat states.
Capitalism doesn't need a democracy (in theory nor practice) to function (eg Singapore or HK). However it needs people to have economic freedom, and as such political freedoms tend to develop alongside this in most Capitalist countries. But it can still function without. Socialism inevitably leads to authoritarianism as laid out beautifully in the "Road to Serfdom" by Friedrich Hayek. The classic current case study is Venezeula.
There is absolutely zero evidence to conclude that people become "more equal" the more Socialism they have. A quick cross-reference of the GINI coefficient and the international economic freedom index by country shows no such correlation. One could say that people in Socialist countries where universally poorer than their counterparts in Capitalist countries. That evidence is clear.
PART 2
Purchasing power and wages are quite different things. I think you are a little confused here. I might get paid 5 dollars per hour. But if I am paid in Silver Dollars rather than through electronic credit my purchasing power is significantly higher. Equally if I am in a high inflationary environment, whatever I get paid, my purchasing power is rapidly lost. The biggest reduction in purchasing power is not the wage point, but the "real" wage point. The remorseless moves of all Governments to replace real currency (with intrinsic value), with fiat currency has destroyed purchasing power. They do this to pay for the same large programmes being advocated for, knowing that the people have to accept it given they are monopoly suppliers of currency (and ultimately taxes must be paid in the same denomination). But this is of course only a giant Ponzi scheme which is ultimately inflationary (the other major destroyer of purchasing power).
The only specific outcome I have in mind is the optimal position, so I am not sure what you mean. There are specific aims of other policies advocated (eg minimum wage), but as I have pointed out, these must come at the cost of others, where the overall position is sub-optimal.
There are asymmetries of power in the Market, that is true. But that is the case in every single human interaction. As stated earlier, the best protection is competition in the Market (by removing intervention not adding to it).
I do not have to assume a boom not any pattern of money distribution. Conventional economic thinking is that booms are great and busts are bad. That is true for the drug addict as well! In my tradition we consider booms as bad (the root cause) and busts as the necessary correction (but not good to experience). Money is a medium of exchange and therefore exchanged, not distributed. When we zoom out to look at distributions what we actually see is how many and/or how much success a person (or group) have had trading (exchanging) in the market. And like all spontaneous orders (Markets are a spontaneous and not a planned order), it follows Pareto's law.
PART 1. Sorry what do you mean DM?
Yes I think we agree on evolution. Just to build on your point: "whether species changes are the result of an accumulation of many traits or a specific few". It is of course both (not either/or). The deciding factor is do these changes impact on co-reproduction, in what are basically the same animal. If they do then speciation is the possible outcome. BUT whether few or many, these changes must occur through micro-evolution (or evolutionary theory is false). We do not see a Macro level, speciation events in one generation, eg a land based dinosaur developing functional flying ability (or whatever Macro effect we want to point to).
I understand the point on non-action. I just think it is flat out wrong. You could see being bald as a hairstyle using this approach to logic. Non-action is non-action. A=A. However, I think the point you want to make is "given our current situation" the removal of intervention policies and a return to the separation of the state and the economy (a position we largely saw before WWI in the West), amounts to an action and thus has unintended consequences. For me that is trivially true, because I am arguing differently ie "given a clean starting position" the best outcome is for non-intervention. BUT, I would also say that the act of returning the economy to non-intervention, will set about powerful processes that will return us to long term prosperity and health. There is little doubt that in the short term we will see significant economic hardship in some sectors, unemployment, and price instability. It is the cost of taking the patient through a withdrawl programme. The drugs they were used too, satisfied a physiological response which caused them short term pleasure at the cost of long term poor health and distress in their family. To remove that long term risk and restore everyones health, they will have significant short term pain. But because of the short term impact, would we NOT therefore advocate that withdrawl programmes are a good thing? And so it is with the economy. The maximising point is the maximising point, no other points on the graph optimise the total solution for everyone better. As Margaret Thatcher once said "you cannot buck the Market".
My argument absolutely does not assume that the market based approach naturally raises the cost of labour (wages). It is far more subtle but hard to explain. As you point out it will for some and not for others. I would contend that there will be a general trend over the long term in that direction, but not in all long term cases and not in the short or even medium terms. We should see the labour markets as approximate to a fractal pattern based on the structure of production and services. The clearing price of each of the various labour markets is the optimal point. Nobody is forced to work in a free market. The best protection labour get is not through legislation or unions (both of which hurt labour depending on their strength), but through competitive forces of the market. If labour is in demand because value is being efficiently extracted, the economy grows, then wages will also reflect that. The clearing price of each dynamic market (is the point were labour and capital settle there conflicting demands), reflects this fully. If someone in the Market can only command 5/hr, then that is all they can command. It is not the responsibility of government to force a broad swathe of the tax base to pay supplementary taxes to either 1) support a minimum wage policy 2) nor for them dis-incentivise work by having a benefits floor which pays more than work. These policies lead to widespread unintended consequences and movements away from the stable equilibrium reached in all other markets. The ripples are felt across the whole economy (Bastiat's point). So what sounds good and caring, ends up being anything but.
PART 2
All markets reach an equilibrium (whether intervened in or not). That is not the question you should be asking. The questions are: 1) how stable (in the short term) is that equilibrium?; and 2) how free to adjust (in the medium to longer term) is that equilibrium? In a minimum wage controlled labour market the clearing price of wage labour is not free to adjust. It has no medium or long term flexibility, and if set too high has no short term stability. And because clearing prices of the market are over-riden by such a policy, a sub optimal result must axiomatically follow.
The same applies to the money markets (as to the labour markets). The interest rate policy (set by central authorities) will, if done badly (normally forcing too low a set of interest rates for too long), create distorted capital structures in the whole economy (including bubbles), and an unstable equilibrium is reached beyond the possible economic frontier (of production & investment). Eventually this equilibrium will break (is unsustainable) because it is beyond the frontier (simply put the money is not there), and the economy snaps back like a rubber band to below its frontier (which is why we see depressions and credit crunches). Because its the capital structure that is distorted, it is also the capital that gets devalued to take up the slack (shares, deposits, house prices or whatever). Thus any serious deviation from the money market clearing price (loanable funds market) for any significant time, is sub-optimal for the whole economy (even though a section of society may temporarily benefit).
It may seem contradictory to both have stability and freedom to adjust, but this is essential since market prices co-ordinate supply and demand through TIME. Hence stability is reached only in the short run, but adjustments are essential in the medium to longer run as the balance of savings, investment, consumption and production alter.
I did not say economic research should be abandoned. It is useful in the say way as Macro effects of evolution are informative. But it is not decisive in determining policy that impacts on Micro-Economics. Again to mention my tradition of Economics, we make no distinction between Micro and Macro Economics. There is just economics. All economics (human action) is at bottom Micro, although we can only really see the effects at the Macro level.
PART 1.
Thank you for your comments. We will have to watch this doesn't turn into its own mini debate.
Firstly Evolution. I apologise if I gave you the impression otherwise, but evolutionary theory is sound and for it to be sound all evolution must only occur at the Micro level, and what we euphemistically refer to is "Macro-Evolution" is in effect the accumulation of thousands of micro events leading to a speciation event (the classic example of this is ring speciation).
I did not say we do not see the effects of evolution on a Macro scale. We do. Evolutionary theory is about as well attested as anything in science can be. Evolution is a continuous process. I said in reality all evolution (ie the process) is on a Micro-scale and therefore the conjunction of the words "Macro" and "Evolution" is not really a thing, but a contradiction in terms. It implies there are evolutionary processes at the level of species to species transition, which is simply false (it only happens within a species). BUT if it continues unabated: a speciation event will occur (usually demarcated by reproductive difficulties between one new species and the old), even though they are still effectively the same animal or plant. And if these divergences continue the Macro effects are magnified. Whales and Cows can no longer co-reproduce, even though they share a common ancestor.
This is the same mistake creationists make when asking "have you ever seen a cat give birth to a dog?" (or something similar). They are literalising the term "Macro-Evolution" (which it is not clear to me if you are doing it or not), as an instant magical speciation event (which to be fair to them is what the term implies). But they are fundamentally mistaken. There is only evolution (not Micro and Macro). It is a hugely complex process of waste, trial and error. It is motored by continual natural micro-evolutionary processes, from which we occasionally zoom out to see the accumulated picture (at the Macro level). But we cannot control evolution by controlling Macro variables. The same analogy applies in economics.
A non-action is not an action. This is rather a rhetorical ploy. A=A. There can be no unintended economic consequences through non-action (non-intervention), since all economic actions that follow are made intentionally by free individuals voluntarily (as long as we apply the rule of law), whether they are good or bad for the individual could be described as unintended personal consequences, but that is an inevitable in any field of human action like for example "crossing the road". It is thus not in the scope of what we are talking about.
I agree with your axiomatic reasoning approach. This is exactly the approach I would advocate. And it follows axiomatically that interference in market clearing prices, must lead to sub-optimal outcomes. There is no other point on the graph where outcomes are optimised other than at the prevailing market clearing price.
We should not forget at root economics is a dismal discipline, as it is in effect the study of shortages. We can build no Utopia out of it. And even if we could, it would most likely be a truly depressing place to live in. In my tradition of economic thought, we see the economy as a complex and chaotic system, rather than a science/engineering discipline (ie it is NOT a big machine with input>process>output). Instead like the weather it is unknowable, unpredictable and inscrutable, and can only really be studied through a branch of logic and not of science (in particular the logic of human action).
Whilst there is some value in understanding aggregates (macro-economics), one cannot fool oneself into then tinkering with those aggregates, and knowing with cast-iron certainty what the impact is (like the minimum wage). This was the mistake of Keynesianism and of Socialism. Economic information is not held on a spreadsheet, but is held by all of us in real time, with changing demands and changing minds (micro-economics).
To use an analogy. It is a bit like trying to study Evolutionary Biology only through macro-evolution. There is (in reality) no macro-evolution, only micro-evolution. Over time and geography one can see the effects of micro-evolution through macro effects (and study them in retrospect as a guide to one potential future). But one cannot see the micro effects through macro-evolution (in real time ).
Similarly nobody can anticipate the minds of everyone, every second of every day, especially when the economic environment is constantly changing around them. This is why central planning is a fatal conceit, and why the research in fields like the minimum wage is so flawed. The research explicitly targets group X (benefitting), or group Y (disbenefitting) and only at point in time Z. Researchers have to do this to limit the near infinite variables, but as such it only reflects the policy aspirations of the researchers, not the truth.
To me tinkering about with legislation on the back of research like this, in macro-economics, is dangerous nonsense. Policy instruments have untold, unseen and unintended consequences, which is ALWAYS at a cost (which is never calculated, but always borne by some unidentified people in the long term). This is not to say free-market Capitalism in and of itself solves all problems (it doesn't). But it is to say it is better than any of the alternatives, because it allows for the free natural equilibriums to emerge and stabilize. Governments, Policy Wonks, QUANGOs, Central Banks, Universities, Scholars (wanting to make a name for themselves), Economists et al all have press offices. But the free-market has no press office. Which is why it gets blamed for things like "market failures" and depressions, when in reality the seed was sown by the very groups mentioned now looking for an excuse to hide the mess created by their tinkering.
Milton Friedman had a great take on this. He read every report (during his working lifetime) by the US Treasury. He could sum every report up into 2 types. In the good years, the US Treasury claimed that because of its good governance, "x" happened. In the bad years the US Treasury claimed that despite their judicious efforts, "y" happened and blew them off-course. This might be true for Wars and Crises, but every year? One has to wonder.
Thank you for your feedback and taking the time to offer your insights.
Capitalism is not a political system. It has nothing to say about democracy. It calls for a separation of state and economics (ie for individualism, voluntarism and private property rights). It's only political interface is to support the rule of law (in particular contract and property rights) and protection from external aggression (a military). There are traditions that within the overall umbrella of Capitalism that call for a no-state solution (which borders on the political). But we must differentiate between political freedoms and economic freedoms. Capitalism only requires economic freedoms to be maximised (where that exact point lies to some extent depends on the country, ts geography and the culture of the people).
Socialism is a political system that removes these economic rights and replaces it with an economic system which nationalises industry and attempts to centrally plan outcomes to a desired arbitrary pattern. And is always a total disaster. Sooner or later the plans collapse and people "want a strong man" to sort it out..and they find the body politik is only too willing to oblige. Even in its ideal form it is far from a democracy as it calls for a crushing both political and economic freedoms, under a boot.
Communism is an a-political system, akin to an anarchy as @armoredcat states.
Capitalism doesn't need a democracy (in theory nor practice) to function (eg Singapore or HK). However it needs people to have economic freedom, and as such political freedoms tend to develop alongside this in most Capitalist countries. But it can still function without. Socialism inevitably leads to authoritarianism as laid out beautifully in the "Road to Serfdom" by Friedrich Hayek. The classic current case study is Venezeula.
There is absolutely zero evidence to conclude that people become "more equal" the more Socialism they have. A quick cross-reference of the GINI coefficient and the international economic freedom index by country shows no such correlation. One could say that people in Socialist countries where universally poorer than their counterparts in Capitalist countries. That evidence is clear.