Recession explained

[The Script]

It seems to be what he's saying. "Austrian economics was fine for the past, but doesn't apply now".
What about Hayek vs Keynes videos, johnyj?
Have you seen these?
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

What do you think about them? They're talking about the present.

Thanks for sharing the video, really fun to watch  

Another one include Friedman
http://youtu.be/BwuJzo9eX9k

I read <<The General Theory of Employment, Interest and Money>> and agreed with "effective demand" concept, because my island model also reached such a conclusion without knowing his theory. It has nothing to do with politics etc...

Keynes wasn't the first one to use the concept of "effective demand".  That phrase dates back to Ricardo, and actually, even all the way back to Adam Smith.  However, Keynes took it and attempted to apply it to a precise mathematical function.  Let us examine his functions and see if it bears up under scrutiny.

From page 25 of The General Theory:

Let Z be the aggregate supply price of the output from employing N men, the relationship between Z and N being written Z = φ(N), which can be called the Aggregate Supply Function.  Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men, the relationship between D and N being D = f(N), which can be called the Aggregate Demand Function.

The definition of a function is that it is a specific and constant relationship between an input and an output.  Keynes' equations cannot fulfill this requirement and therefore shouldn't be written as functions.  There is no precise, mathematical relationship between the number of men employed and his costs or revenue.  It changes depending on individual workers' qualities, efficiency and available of equipment for the workers to use, etc.  They simply are not functions of each other in the mathematical definition of a function.

Also, why is the first equation the supply price of employing a given quantity of men, while the second one is the expected proceeds to be garnered from employing a specific quantity of men?  Z and N are real sums while D is the expectation of real sum further invalidating the formulation of these relationships through mathematical equations.

Now, you may argue that Keynes did not intend for his mathematical equations to be taken as literal mathematical equations, but they often are by mainstream economists.  Furthermore, formulating these relationships as mathematical functions lends itself to a lack of clarity and allows for false assumptions and inferences to made that can lead to gross errors further on in the economic thought process.

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[jtimon]

(well, you need to fund it through saving instead of borrowing)

What's wrong with borrowing and lending?

[Murwa]

Improved productivity doesn't cause recessions - it's the only reason we have the standard of living we do nowadays. You example is flawed. Just because A becomes more productive doesn't mean that he will fire C. If you had a business and developed a technology that would double your earnings, would you fire your employees and keep working the same amount as before? No, you'd keep the people onboard and take more time off!

You are assuming that he doesn't already have plenty of time off, that somehow magically technology doesnt allow him to work less.
Assumptions are a mother of all fuckups.

Tell why MC donalds will not fire its cashiers once it fully automate its selling. Of course they will be fired , that what is called profit maximization.

[jtimon]

Tell why MC donalds will not fire its cashiers once it fully automate its selling. Of course they will be fired , that what is called profit maximization.

And they will have free time to provide another service. With the money MC customers save from the automation, they will demand another services in which wages will rise attracting those unemployed.
They can also chose a more painful job or one with more qualification required. In this case, they, by selling their work, will drive wages down resulting also in reduced final costs for the customers. But consumers will spend what they save in other things.

[johnyj]

Improved productivity doesn't cause recessions - it's the only reason we have the standard of living we do nowadays. You example is flawed. Just because A becomes more productive doesn't mean that he will fire C. If you had a business and developed a technology that would double your earnings, would you fire your employees and keep working the same amount as before? No, you'd keep the people onboard and take more time off!

If you study my model, you will find out that after A and B increased their productivity to 4kg products per day, include C and D's work, the total fish will be 6kg/day and total fruits are 6kg/day, the GDP will be 12kg products.

But A and B need maximum 1.5 kg fish and fruits per day, C and D do not get a income increase due to they contribute nothing to productivity increase, so the aggregate demand on the island will increase to 10 kg products, less than the 12kg products.

That means A and B have to reduce the production, due to effective demand not high enough.

If M will buy those extra 2kg products and put it into investment, then everything is fine. But what if those guys just want simple island life and do not want anything more?

Keynes said:
If in a potentially wealthy community the inducement to invest is weak, then, in spite of its potential wealth, the working of the principle of effective demand will compel it to reduce its actual output, until, in spite of its potential wealth, it has become so poor that its surplus over its consumption is sufficiently diminished to correspond to the weakness of the inducement to invest.

[johnyj]

Government spending to increase demand has a lot to do with politics. Politicians always love to spend to buy votes.
Also the market moves to what the government demands, so other demands can suffer because of it.
If the government spending is based on real loanable funds, the interest rates rise and private investors will find borrowing harder.
If it is based on monetizing public debt (the fed buying bonds), the interest rates are reduced, sending a false signal to investors, because their plans doesn't take into account the coming inflation and inflation will cause interest rates to rise in the long run.
So government spending always represents an attack against private investors, who are the ones supposed to solve crises.

I prefer to attack economic cycles at its roots, that is interest. The compounding effect of interest pushes the exponential growth of credit, but when that growth becomes unsustainable, the shrinking credit produces deflation which produces further liquidations in a positive feedback loop. Since reducing interest rates by monetizing debt is unsustainable, interest has to be eliminated by demurrage.

In my island model, there is no interest involved, just simple math, still you can see productivity increase will lead to recession

Actually I do not think government can do very profitable investments, but since most of the small companies fail anyway, it does not really matter who is doing the investment. In a post recession time, small companies typically are contracting and saving instead of investing, and banks typically are not willing to loan to those high risk small companies, so you really need some one powerful enough to spend BIG to bring up the demand. Ideally it should be the big multi-national corporations doing this, but I guess they do not really care about the effective demand when they are still looking at profit/earnings


I can think of  4 ways to do with increased productivity

1. Increase export
This put the problem to outside world, but do not work in a global level (There is no aliens on Mars will trade with human), it does not work when globalization has reached certain maturity

2. Move redundant people to new industry
This has been the case for hundreds of years, and mostly driven by human desire. Now that most of our desire have been fullfilled, it's getting difficult to find a new industry that can absorb huge amount of redundant people, so government spending for longterm projects is the current cure

3. Heavy taxation on high income people and use wellfare system to compensate those who have been replaced by machines and software
Nordic countries have this practise, this will create less trouble in society but reduce efficiency and discourage hard working (maybe that is needed)

4. Reduce the working hours so that more people are needed
This actually is the best long term approach no matter how high the productivity is, working hours can continously decrease and at the same time it gives people more time to consume, I don't know why no one is discussing this alternative

[jtimon]

Actually I do not think government can do very profitable investments, but since most of the small companies fail anyway, it does not really matter who is doing the investment.

Does it matter at least what the investment is or the government can just invest in preparations for a fiction alien invasion?

In a post recession time, small companies typically are contracting and saving instead of investing, and banks typically are not willing to loan to those high risk small companies, so you really need some one powerful enough to spend BIG to bring up the demand. Ideally it should be the big multi-national corporations doing this, but I guess they do not really care about the effective demand when they are still looking at profit/earnings

If the problem is the lack of investing and lending (I would say that caused by deflation but you just say is "typical in a crisis") why not just charging demurrage to money holders to encourage them to either spend (they can store goods as savings), invest or lend?
Have you heard about Silvio Gesell? Keynes liked him, but he (Keynes) didn't understand him (Gesell) correctly.

[Murwa]

Tell why MC donalds will not fire its cashiers once it fully automate its selling. Of course they will be fired , that what is called profit maximization.

And they will have free time to provide another service. With the money MC customers save from the automation, they will demand another services in which wages will rise attracting those unemployed.
They can also chose a more painful job or one with more qualification required. In this case, they, by selling their work, will drive wages down resulting also in reduced final costs for the customers. But consumers will spend what they save in other things.

Pay more attention to what you answering too.

Someone claimed that recession is not caused because people are not fired due to automation. That is obliviously wrong. People are fired , new jobs are needed.

Yes perhaps they can change profession or do different work , but in that case economy requires indefinite growth  to keep making new jobs all the time with ever increasing speed as time goes on. ( since progress is geometrical .

That obviously is unsustainable and we see the effects today.

[kjj]

That obviously is unsustainable and we see the effects today.

Gosh.  I bet this thread would be completely different if only we could find three people to put this theory into some sort of historical context.

[Murwa]

That obviously is unsustainable and we see the effects today.

Gosh.  I bet this thread would be completely different if only we could find three people to put this theory into some sort of historical context.

Ah yes because situations from 200 years ago totally apply .

[jtimon]

Tell why MC donalds will not fire its cashiers once it fully automate its selling. Of course they will be fired , that what is called profit maximization.

And they will have free time to provide another service. With the money MC customers save from the automation, they will demand another services in which wages will rise attracting those unemployed.
They can also chose a more painful job or one with more qualification required. In this case, they, by selling their work, will drive wages down resulting also in reduced final costs for the customers. But consumers will spend what they save in other things.

Pay more attention to what you answering too.

I guess this is the "collaboration instead of competition", the awareness and the "unalienated culture" that the resource based economy promotes.

Someone claimed that recession is not caused because people are not fired due to automation. That is obliviously wrong.

Yes, someone said that recessions are not caused by increased automation and I state the same thing.

People are fired , new jobs are needed.
Yes perhaps they can change profession or do different work , but in that case economy requires indefinite growth  to keep making new jobs all the time

No. The workers that have been substituted by machines have to find other ways to serve others, but that's not infinite growth.

with ever increasing speed as time goes on.[/b] ( since progress is geometrical .

Are you going to say moore's law is an universal law of nature applicable to all humans technologies or something?

The exponential growth in money supply and energy production are completely unrelated with the exponential grow of GDP?
Is technology the only thing that affects the economy?  
 

That obviously is unsustainable and we see the effects today.

I know, we must destroy the machines or free trade. And you're not a luddite because you love robots and hydroponics. I know you're a cornucopian.

[jtimon]

That obviously is unsustainable and we see the effects today.

Gosh.  I bet this thread would be completely different if only we could find three people to put this theory into some sort of historical context.

Ah yes because situations from 200 years ago totally apply .

Wasn't technology the cause of unemployment back then?
Does your luddite/cornucopian theory of recessions only apply to the "age of computers" or something?

[Murwa]

People are fired , new jobs are needed.
Yes perhaps they can change profession or do different work , but in that case economy requires indefinite growth  to keep making new jobs all the time

No. The workers that have been substituted by machines have to find other ways to serve others, but that's not infinite growth.

Oh i love how you used the word serve, i like high grade prostitutes as well.

Ok so what are they gonna do exactly , picking their noses ? Practically everything you do for money requires consumption of some sort even if energy.

The rest i wont even comment because it is below certain level.

[Murwa]

Wasn't technology the cause of unemployment back then?
Does your luddite/cornucopian theory of recessions only apply to the "age of computers" or something?

Situation back then  :

New jobs were created faster then they were replayed by machines. Technological progress was relatively slow we had plenty of cheap resources around and so.

Today :

New jobs are created slower then they are replaced by machines. Progress in automation and robotics is very fast and increasing as we speak , also we are reaching energy,resource,peak, that slows down job creation.

No difference  ?

World fucking changes it doest stay the same for 200 years , gosh.

Just it is only enough that process of automation is faster then job creation and you have a problem . It is not like we all are gonna wake up tomorrow unemployed ...

[jtimon]

People are fired , new jobs are needed.
Yes perhaps they can change profession or do different work , but in that case economy requires indefinite growth  to keep making new jobs all the time

No. The workers that have been substituted by machines have to find other ways to serve others, but that's not infinite growth.

Oh i love how you used the word serve, i like high grade prostitutes as well.

The word comes from service. If you ever hire an economics teacher, he would be serving you. Mixing jobs with arguable reputation doesn't help with the "level of the discussion". I don't have anything against prostitution provided is voluntary, but that's totally off-topic.

Ok so what are they gonna do exactly , picking their noses ? Practically everything you do for money requires consumption of some sort even if energy.

They can give you economics lessons, design and maintain the machines that leave them without job, become scientist, sell their art, etc.
There's many services to sell.

Wasn't technology the cause of unemployment back then?
Does your luddite/cornucopian theory of recessions only apply to the "age of computers" or something?

World fucking changes it doest stay the same for 200 years , gosh.

Your your theory doesn't apply for all recessions but only the last one?
Just clarify this, please.

[Murwa]

They can give you economics lessons, design and maintain the machines that leave them without job, become scientist, sell their art, etc.
There's many services to sell.

And those services dont consume anything ?
Economic lessons are drafted on earth with stick ? Scientists dont use any tools ? Artists draw pictures only in their imaginations ?

What if any of the above services gets better efficiency due to better equipment ( for example more machines can be serviced per person ) , the person that loses its job and he change it for different one , he is forced to start consuming even more.

Your your theory doesn't apply for all recessions but only the last one?
Just clarify this, please.

No really the tendency started since great depression. Just look how many useless jobs we have since then ( bankers , marketers , lawyers , government employees ) and many more
I dont think it is a main reason for recession since societies were offseting in creation of above jobs.

The main reason for todays recession is obviously criminals from wall street and money created out of debt.

[jtimon]

They can give you economics lessons, design and maintain the machines that leave them without job, become scientist, sell their art, etc.
There's many services to sell.

And those services dont consume anything ?
Economic lessons are drafted on earth with stick ? Scientists dont use any tools ? Artists draw pictures only in their imaginations ?

The lessons can be teach orally or with computers. Most scientist use computers as their main tool. Artist can produce culture much cheaper thanks to technology.
But how they needing resources leads to the need of infinite growth?

What if any of the above services gets better efficiency due to better equipment ( for example more machines can be serviced per person ) , the person that loses its job and he change it for different one , he is forced to start consuming even more.

No, I don't think no one is forced to consume. If the services get better efficiency and more jobs are destroyed, new jobs will be created, it's the same question again.
You assume that machines will eventually do everything that people value.

Your your theory doesn't apply for all recessions but only the last one?
Just clarify this, please.

No really the tendency started since great depression.

So there wasn't economic cycles before the great depression? Why we don't call it the first depression then?

Just look how many useless jobs we have since then ( bankers , marketers , lawyers , government employees ) and many more
I dont think it is a main reason for recession since societies were offseting in creation of above jobs.

They're useless jobs in your opinion. Be the intermediary in a lending/borrowing transactions seems useful to its customers. Without basic interest and without the state provided privilege of fractional reserve without negotiating with the depositors banking would be very different though. 
And what sustain really useless jobs (only the government is able to pay for these) is not the "surplus prosperity machines provide" but the institutionalized robbery from other members of society known as taxation.   

The main reason for todays recession is obviously criminals from wall street and money created out of debt.

I think Greenspan's printing and Bush's "owning a house is the American dream and the government will help people that can't afford to own one to buy it" helped.
I recommend you this documentary.
And again, I think interest is in the roots of economic crises. Do you see something wrong in my previous reasoning?

[johnyj]

Does it matter at least what the investment is or the government can just invest in preparations for a fiction alien invasion?

There is something hidden behind this, I still can not figure it out clearly, maybe it has something to do with people's desire

If the government created a Mars immigration project and hire 10 million people to work on it, they will get a super loan from FED to finance the project, but how could they payback the loan?

So, this project must bring some income in the future, and that income will come from the majority of the people, the project must serve the interest of most of the people to be profitable

In the island model, after A and B fired C and D, pushing the GDP down to 6 shells and C and D now become jobless. C and D could each produce 2kg potatoes per day and sell potatoes to buy fish and fruits, thus even lift the sales of A and B

Nowadays, if you are jobless, could you easily find a way to serve the interest of most of the other people? No way, most of such kind of service have already been industrilized and mass produced. And the biggest problem is after a people get enough rich, he will be quite satisfied with his life and his demand increases very slow while his saving might get bigger and bigger

In the past, demand is never a problem since many social members are poor and have strong demand, people were working hard to improve their life, but after entering 21st centry, it's totally another picture: almost everyone have their house/cars/food/cloth/mobile phone/notebook, quite difficult to dig out a requirement that is big enough to create lots of job

[johnyj]

After the people established in Mars, they dig deep into the planet and mined unobtanium, which is 20 million dollar per kg



Then this Mars project will very easy payback it self and even made the government super rich

So the key point is: Why this unobtanium could value so high?

There could be many reason, but through economic point of view, people have super high demand for this precious metal is the only reason, and their ability to pay is another issue

In basic island model, C take out 100 shells loan to harvest a black pearl, and sell the pearl for 200 shells. Although his loan is magnitudes higher than the GDP of the island, he is still very profitable, so the bank will not deny his loan. But how could he payback the loan is the big question: A and B simply do not have the ability to buy his pearl