Yea but let's be honest, some leftists may say that libertarians and such dont care about the poor. And the truth is, that we actually don't. So let's be honest atleast and dont try to lie about it. Being poor in a free society is only because of ignorance.

Being poor today can be understood, but once we get rid of these vampires, there will be no more excuse to be poor because all opportunities will be opened then and only a lazy idiot would starve in that society.

Goldman Sachs exemplifies a financial institution that benefits from low interest rates whilst millions of people suffer from it.
Google or Apple at least have a decent value chain, they provide value for your money.

The problem with financial institutions is not those who make more than them (e.g. Google, Apple) but with the way they handle their affairs, just watch the movie "Margin Call" (based on true story) and see what I'm talking about.

The real "smart" people are those who make lots of money and can afford paying for the things you mentioned.
Have you watched the movie "Margin Call"?
Or what about Alessio Rastani's famous Youtube video?

Alessio said "Goldman Sachs rules the world", they tell the government what to do, they control so many things and make billions of $$$ on a monthly basis.

When you study business you learn that organizations and firms are companies ranging from small to big - but institutions - these are very large organizations ... educational institutions such as universities and colleges dictate our lives when it comes to studies ... and financial institutions such as Goldman Sachs dictate our financial lives.

Is it fair? No.
But what can you do about it? If you can't beat 'em join 'em.

Of course that the lowering of the i-phone 5 price when the i-phone 6 comes out, has nothing to do with deflation, this is as clear to me as to you.

But the ARGUMENT you (and so many others) use against deflation is that the diminishing of prices make consumers delay their consumption.   That *argument* against deflation doesn't assume deflation or anything, but makes the assumption that if a consumer desires item X, and knows that the price of item X will be 2% lower next year than today, he will delay the acquisition of item X to next year.  The *reason* why that price is lowering for that hypothesis is not specified.  It is (erroneously) assumed that if desired-for items will lower in price, consumers will delay their acquisition to profit from the lower price.

And THAT hypothesis is contradicted by the i-phone example.

Because if it were true, people that KNOW that their desired-for i-phone 5 which costs them, say, $500 today, that exact same i-phone, will cost maybe only $380 when the i-phone 6 will come out next year, and will wait for it, to profit from the price drop.

So if that hypothesis were to hold, i-phone 5 would only massively be bought when the i-phone 6 would come out, because consumers would have delayed their acquisition to profit from the price drop (which, in this case, we all agree, has nothing to do with deflation, but is a price drop all the same).


Lowering interest to counter deflation is monetarism.  Lowering interest rates to try to stimulate the economy, on the other hand, I thought, was pure Keynesianism.

You might hope you have an idea of what to expect !  If you have no idea whether the money you borrow has any chance of giving an ROI, then the interest on it should be huge, because the creditor takes a big risk of you defaulting !

And that's my point exactly: too cheap money (too low interest rates) invite people to be able to invest in low-return investments with no problem of default.  But, contrary to your claims, the capacity of production of capital goods is limited too.  So if many people can buy capital goods with very low return, because the credit conditions are easy, then most of the capital goods will be allocated to low-return undertakings.  And if most capital goods are allocated to low-return undertakings, well, global return in the economy (growth!) will be very low too.

This is what it means: easy money allows serious bad allocation of resources, while the investor doing so has no problems, and is not eliminated from the race.

It is here where we get the Keynesian recipe for disaster: if the economy slows down, Keynesians lower credit rates, which will cause even more bad allocation of resources, which will in its turn generate an even worse growth.  As a result, Keynesians lower even further the interest rate, until they are caught in the liquidity trap and/or stagflation.


Aggregate demand ORIENTS production. But if production is badly organized, because of mis allocation of resources, which is itself a result of cheap credit, it will not provide growth.


This is already 100 times that this has been contradicted.  Steady, minor inflation, or deflation, have of course not the slightest influence on consumption.  First of all because the effect is too small in the balance of things that make a decision to buy or not.  If you are hungry, the fact that next year a loaf of bread cost 2% more or less will absolutely not influence your decision to buy it right now.
And second, because it is compensated.  If you consider buying a sports car right now, or next year, you might say that next year, it will cost maybe 2% more, but you will also earn 2% more.  So the fact that it will cost 2% more next year, will not be the reason why you buy it right now or not.
And we already saw that everything that happens on credit is perfectly compensated because of the difference between real and nominal interest rate: in an inflationary economy, interest rates will be higher exactly by the amount of steady inflation.

This on the theoretical side.

On the empirical side, the examples with computers and i-phones show you that people do not delay their acquisitions because the price of the item will be lower next year ; and the price drop of i-phones is way way bigger than the price drop in a mild deflation.

In other words, as well empirically, as theoretically, mild, steady inflation or deflation have absolutely no influence on consumption.

The historical correlations that one finds have most probably the opposite causal effect: when economy slows down, credit contracts, people consume less, and HENCE prices drop.  So observed deflation is a consequence of economic slowing down, it is not its origin.
And when economy booms, there is credit expansion, people consume more, and HENCE prices rise, so there is most probably some inflation.  But these are consequences, not the causes.

The point is simply that credits that stand for capital, are good.  Credits that stand for consumption, are a burden on the future.
Nobody is saying that credit that is backed up by capital is bad, on the contrary.  As you say, that's the source of growth.  but a mountain of debt, not backed by capital, is a recipe for disaster. 

Normally, the interest rate on credit is the lower bound of ROI of capital.  Indeed, no person in his right mind is going to take a credit to invest in capital on which the expected ROI is lower than the interest on the credit.  As such, the interest rate for credit is approximately the ROI on capital, which is then by itself the economic growth.  The funny thing is that by setting artificially the interest rate to near-zero, you are inviting people to invest in capital with an ROI of near-zero.  You shouldn't be surprised then to get an economic growth of near-zero !

Being generous on the credit market has the perverse effect of allowing people to invest in low-ROI capital.  That low-ROI capital will then, well, generate low ROI, which will imply a low growth.  As a reaction to that, Keynesians will lower even more interest rate !
To invite people even more to do bad investments...

This is again not a matter of spending or not spending, but of spending *on what*.  If you think of share holders as wealthier than labourers, which must be your assumption to think of a different spending profile, then share holders probably spend more on investment goods and less on consumption goods, and spend more on luxury items and less on mass items.

Offer will adapt to demand.  So if share holders spend more on investment goods, then that is simply as if the savings rate is larger in the economy.  The amount of increase in capital goods will be larger.  If share holders spend more on luxury goods, that means that production will orient more on luxury goods.

So the only thing you do by shifting rewards from share holders to labourers, in as much as their demand profiles are different, is that you will produce less luxury goods and less capital goods, and that you will produce more mass goods.

Instead of building private launching rigs that send private spaceships to the moon, you will sell mobile phones and coca cola.
Instead of companies that build private jets, you will have Boeing and Airbus building aircrafts for mass transportation.  Instead of having companies that build luxury castles, you will have companies that build apartment buildings.

Yes.  But economic growth is not based upon massive debt.  That's about like saying that your wealth is based upon a loan.
If you bought a luxury car, and you smoke expensive sigars, on credit, you can't really say that you're a rich man or woman can't you ?
So if you have "economic growth" based on a Mount Everest of debt, do you really have economic growth ?  Or are you living off future wealth ?

The other problem here (and sorry for jumping in the middle) is the % of total money spent for the shareholders and the laborers. In this case, I imagine the latter spends a far greater % of their money than the former. Therefore, increasing the amount to the laborers ensures that a greater % of that gets funneled back into the economy via consumption than if shareholders saw an increase.

We're not talking about the same thing.  The production is the same, the sales price is the same, the costs of supplies is the same.

The argument was: a producer should INCREASE the wages (for the same labour) in order to get MORE CONSUMPTION.  Now that's crazy, because if, all else equal, the producer increases wages, he has to take it from the profit he makes, and hence reduce dividends by exactly the same amount.  So what his labourers will consume more with their increased wages for the same amount of labour, the share holders will consume less with their reduced dividends.

(yes, yes, their demands will be DIFFERENT IN NATURE, but we said that already).

Suppose you make tablets.  You make 500 of them, each costs $150.-  Suppose your labourers buy 100 of them, and your share holders also buy 100 of them.  300 are sold to the rest of the economy.  Now, if you increase the wages of your labourers, maybe they will buy 150 of them now.  But you had to diminish the dividends to your shareholders, which only buy 50 of them.

You've shifted simply the consumption from your share holders to your labourers by increasing their wages (and by decreasing by the same amount the dividends).



It is called a gedanken experiment, to test the logic.  

It doesn't of course, because the amount by which wages increase, the dividends decrease.  The same amount of money is set in circulation, it only targets different people (because different production factors).  As such, of course, demand will be different in quality.


It is a different demand, and there will be different products.

Consider a totally automatic economy, completely robotized, that produces luxury sports cars, palaces, kaviar and champagne.  With robotized high-level medecine, and every other thing a rich person may need or desire.  And of course robots.  You could think of an economy that is totally run automatically, and where all the profits go to their shareholders, which are also the consumers of these luxury products.  The economic circle is closed, and not a single wage is paid, and not a single amount of labour is sold.  In this case, the share holders are the sole consumers, and generate the total agregate demand for the goods they produce.

This is an extreme case, but it illustrates that "wages" do not play a specific role in the circulation of money.  It only plays an important role when labour is important, but it has no fundamental role.

When labour is important (when it is needed in large quantities in industry), then of course industry needs to answer the demand of the potential labourers to a sufficient extend to buy their labour.  And that's what wages are, and that's why the industry is mass-consumption oriented.

But that doesn't have to be so.  Industry can be luxury oriented if labour is not needed in large quantities, or, as in my gedanken experiment, at all.

It seems that in this thread, people have difficulty following a somewhat involved argument.  The point I argued AGAINST, was:

- "industrials should pay high wages to their personnel, because otherwise they don't have customers that can buy their products".

I argued against it by providing a similarly erroneous statement which applied this time not to entrepreneurs that make goods, but to workers that produce labor (call it reductio ad absurdum):

"workers should pay more labour to their employers so that these can sell cheaper products, and so that employers can buy more labour"

and I argued ALSO against it with my "weak" form of Say's law.

My point is that there is no need that it are LABORERS that buy products.  It can just as well be share holders.  The more you pay to laborers, the less you pay to your share holders.  So the more your laborers can buy your products, the less your shareholders can buy your products.

I gave an ultimate example of a hypothetical totally automatic production, where there is NO labor any more.  Then all the income goes to share holders.  They can just as well buy the products, while according to the theorem I am arguing against, if there are no wages, there would not be any consumption.  That's simply not true, because what is not paid as wages, can be paid as dividends.

That's the contents of my "weak" version of Say's law.

That's an extension of the "bookkeeping" version of Say's law which is, as I outlined above, obviously correct.

You are referring to the version of Say's law that says that all production WILL be bought, and that economy will always work at maximum output.  THAT version is of course wrong, because it goes one step further.

The "bookkeeping" version of Say's law tells us that all production CAN be bought.  However, a stronger version (in fact, the original version) of Say's law states that it WILL be bought.  Now, *that* is not necessarily true.  You might very well decide, even though you have the money, NOT to buy the production that remains to be bought, simply because you're not INTERESTED in buying it.  In other words, one can produce goods which are not in demand.  The earnings to buy them are available, but nobody wants to buy them.

I use Say's law in its more restricted version, which simply states that it is impossible to have, *by lack of earnings*, overproduction that CANNOT be bought.  I'm not using Say's original version of the law, that deduces (erroneously) from this, that it WILL be bought.

So, yes, I agree with Keynes' rejection of the strong version of it, exactly because of lack of demand.  But that was not what was discussed here.  I mentioned (the restricted version of) Say's law to contradict the statement that if wages are not high enough, there is simply not enough EARNINGS to be ABLE to buy the production. That is obviously wrong.

 

It is obviously correct, because it is simple accountancy.  The entire sales of any enterprise goes exactly to all of the production factors: wages (paying labor), dividends (paying capital and entrepreneurship), and the buying of other materials and services (ground), which are, themselves then, again inputs to other enterprises.

In the end, every penny that is earned in selling the goods, comes in the hands of someone, directly or indirectly involved in its production.  All those pennies together are, obviously, exactly equal to the sum of the prices of the sold goods.  So all those receivers of those pennies can buy exactly the sold goods.

Never ever can goods be sold that cannot be bought by the income generated by that sale.  Of course, it is not because those goods can be bought, that they WILL be bought, because the receivers of those sales incomes might want OTHER things.  But every penny that is an income from a sales, will end up in SOMEONE's pockets, and can hence in principle be spend to buy that product.  That's the essence of the contents of Say's law.  It is simple, mathematical, bookkeeping.

The only way in which Say's law could be wrong, is if somebody were to burry some money received from the sales, to never dig it up again.  Then, the sum of all the prices of the sold goods, minus the amount of money burried, would of course not be sufficient to buy all those goods.  But that is because there would be a "leak" in the money fluxes.

I will tell him that too


Seriously, the argument is totally flawed, because it goes against Say's law.  Say's law says that all beneficiaries of all the production factors of a product make exactly the amount of money necessary to buy up all of the production, if they want to.

Consider an extreme case, where industry is totally automatized and labor is worth zilch, because there is no labor needed any more.  According to your argument, in such a case, that industry wouldn't find any customers, because labor wage (macro) is zero.

Nothing is less true.  In fact, all the sales go in the pockets of the share holders, so THEY can buy the products.

In a totally automated industry, the industry will make products for the share holders, which will be their sole customers, and which will be totally served by all the fully automated  production.  Without one single dollar of wages.

Essentially it boils down to what money supply you are talking about - M0 or M2.
M2 primarily increases through banks making loans.
M0 increases due to printing of money, which then makes its way into the economy.

It depends on what country your refer, in US the federal reserve prints they money and distributes it to the banks and from the banks you just cash  it out with you debit card etc.

I can now use the same strategy towards a worker.  I can say that in order for my products to become cheaper so that he can buy more of them, I propose that he works 20% more time for a slightly lower wage.  The logic is the same.  If the guy tells me: "hey, you propose me to work more and earn less ?" I will answer him: "but my dear, your benefit is that you have increased your output"