Category: Philosophy

Etienne Mantoux on Keynes Multiplier Theory

Etienne Mantoux died a week before World War II ended. The multiplier is taught in economics 101. Etienne Mantoux was not a fan of the multiplier.

This brings us to the multiplier theory, under which Keynes merely develops some reflections due to R. F. Kahn on the incremental effects of a capital investment. Obviously the movements of capital entailed by investing a certain sum devoted, say, to the execution of a given public works program, will not be confined to the original sum, and a certain amount of additional investments will result, after a varying interval of time, from that initial outlay. The sums invested will more or less rapidly permeate the structure of production, first leading to expenditures among enterprises, and later, when they reach the consumer through payment of wages or other income, causing a demand for consumption goods, which in turn will step up demand for intermediate goods, and so on.
Most analyses of this highly complex phenomenon assume, as we have seen, that all the factors of production are employed. In that case a new investment can only have the effect, in production as a whole, of transferring factors from one branch to another, most often from the consumption goods to the production goods market. It then becomes difficult to speak of net secondary effects of the initial investment, since their addition does not go to augment total output. Kahn’s multiplier measured the ratio of the immediate increment of employment, due to a given investment, to the total increment. Keynes here defines his investment multiplier as the ratio of the total increment of income brought about by a given increment of investments, to this original increment (Y income, I investment, multiplier k=ΔY/ ΔI).
One might first point out that it is very hard to tell what moment to choose for evaluating the final result Y. The interval between the initial outlay and the time when the money invested reaches consumers is not only highly variable, but scarcely amenable to averaging without recourse to some concept like the “Austrian” theory’s “period of production”— apparently not very congenial to Keynes. His “period of production”, defined in terms of the time elapsed before increased demand for a given product expresses itself in a diminished elasticity of employment, looks very much like a petition principii. But the effects of the multiplier, approximate as they are, are indubitable. Far more debatable is the function making the multiplier depend on the propensity to consume. The latter is equal, by definition, to 1-1/k. since income is divided between consumption expenditures and investment expenditures.
Given the definition of the multiplier, the propensity to consume therefore becomes equal to 1-1/k, which amounts to saying that as the propensity to consume approaches unity, meaning if the community applies the totality of its income to consumption expenditures, the secondary effects of a primary investment would approach infinity. Remarkable!

Entrepreneurship and Being in the Minority

Airbnb sends along the following message to its users (my bold):

I am absurdly lucky even to be writing this email. Ten years ago we started Airbnb. Joe and I couldn’t pay rent, so we created the first AirBed & Breakfast and invited three people we’d never met to stay in our home. People said our idea would never work – “Strangers will never trust one another!” A decade later, people have checked into an Airbnb nearly 300 million times.

People told Mick Jagger that he couldn’t sing. He didn’t have the voice for rock and roll. Rodney Dangerfield was doing aluminum siding. He told people he was going to go back to comedy. “You are to old!” people told him. “Let it go”.
The times I made the most money in my life is when I was in the minority. When everyone told me how wrong I was or how this or that would not work. All traders should have a set of rules. One of my trading rules is this:
Being profitable usually means being in the minority.
People tend to reflect their failures in life onto others when they give advice. I don’t believe this is malicious in most cases, just the way most people work. There is nothing wrong with asking for advice. Just know who you are talking too. Always seek advice from successful people.

Conclusion
If you have an idea and everyone doesn’t laugh at you or tell you how wrong you are than you should reevaluate the idea.

Presidents and Stock Markets

Partisan hacks are now claiming Donald Trump is responsible for a terrific economy. Novice investors are investing based on this idea. They believe the following:
A successful businessman is now running the country.
He will run the country like a profitable company.
Therefore, I should buy stocks.

Let us start with some facts. The economy has been booming since 2010. I present a few charts to convince you I am correct about this view.

Way before Donald Trump took office the economy was already taking off. We heard from partisan hacks on the right that there was no recovery when Obama was in office. In other words, seeing is not believing.
We heard from partisan hacks on the left that if Donald Trump was elected president, there would be a stock market crash.  An entire year has passed. There has been no stock market crash.
Let me dissect each one of these claims.

A successful businessman is now running the country.
A successful businessman is the President of the US (POTUS), but he is not running the country. Presidents are powerless. What did Barack Obama accomplish that anyone remembers? Obamacare. It is falling apart as I write. Health care prices go up, up and away since the promise of the affordable health care act. Congress and the president can not get any thing done. This is a good thing. Governments can not do anything without hurting some one first. Governments have no resources. They only have what they take from others. Governments can not help group A unless they first take from group B. The only thing good the POTUS can do is undo things. This is not happening. The CFR grows by leaps and bounds each year.

He will run the country like a profitable company.
Countries can not be ran like a business. In the business world there is something called profit and loss. A business man starts a company. If he operates at a profit he is making the consumer happy. The market tells him he is allocating resources correctly. If he incurs a loss he is not allocating resources effectively. The market tells him he must change his ways. If not, he will be faced with financial ruin. Governments do not operate on profit and loss. They have no idea if they are allocating resources effectively. If governments could allocate resources effectively, the Soviet Union would have been a wonderful place to live.

Therefore, I should buy stocks.
After making two false statements they now come to a conclusion. Not surprisingly, when your conclusion is based on two false statements you risk coming to a false conclusion. Lets assume Trump is going to win the next election for the sake of argument. Do you believe a recession is not going to happen between now and seven years? If your only indicator is “Donald Trump is president”, plan to suffer a loss in your investments.

Conclusion
Buying stocks based on who is president is not wise. As demonstrated above, the president does not have much power when it comes to the economy. The Federal Reserve has always been the driving force of booms and bust.

Marx and Economics

Karl Marx had the idea that all value is derived from labor. This was not an original idea. He picked up this idea from what is now called ‘classic economics’. Mainly Adam Smith and David Ricardo. If all value comes from labor than where does profit come from? Profit must be the exploitation of the worker. The employee worked for 8 hours and only got paid for 7 hours. One hour went into the capitalist pocket. This was what Marx called ‘surplus value’.
Karl Marx correctly observed that rates of profit normalize. In his first volume of Capital, Marx promised he would solve what seemed like a contradiction in subsequent volumes. That on one hand, he believed in the labor theory of value. On the other hand, rates of profits normalize.
These two ideas don’t appear to be contradictions as Marx said. They are contradictions. If profits are the sole source of exploitation of the workers than we would see profits higher in labor intensive fields. In fact, in order for a capitalist to get more profit, the capitalist could just hire more workers. This flies right in the face of what is observed in the real world. Unfortunately for Karl Marx a man named Eugen Bohm von Bawerk lived. In Eugen Bohm von Bawerk work, Capital and interest, he attacks this idea:

Either products do really exchange, in the long run, in proportion to the labour incorporated in them, and the amount of rent in a production is really regulated by the amount of labour employed in it,-in which case an equalization of profits is impossible; or there is an equalization of the profits of capital,-in which case it is impossible that products should continue to exchange in proportion to the labour incorporated in them, and that the amount of labour spent should be the only thing that determines the amount of rent obtainable.

In other words, Bawerk said Marx would never solve this problem. Marx had Volume I of Capital published in 1867. Karl Marx died in 1883. The lie is he died before he got to finish Volume II and Volume III of Capital. The truth is Karl Marx went on to work on other subjects. Math, science, agricultural, statistics, etc. He never published a full book about economics again. He really did not publish any thing after that.
In corresponding letters between Marx and Engels, Engels pleaded with Marx to finish his books. Marx told Engels he was working on them. He had stopped working on them long ago.
After Marx died, Engels rummaged through Marx’s desk and found Capital Volume II and III. Engels edited them and published them. Eugen Bohm von Bawerk hit back hard:

MANY years ago, long before the above-mentioned prize essays on the compatibility of an equal average rate of profit with the Marxian law of value had appeared, the present writer had expressed his opinion on this subject in the following words: “Either products do actually exchange in the long run in proportion to the labor attaching to them—in which case an equalization of the gains of capital is impossible; or there is an equalization of the gains of capital—in which case it is impossible that products should continue to exchange in proportion to the labor attaching to them
From the Marxian camp the actual incompatibility of these two propositions was first acknowledged a few years ago by Conrad Schmidt. Now we have the authoritative confirmation of the master himself. He has stated concisely and precisely that an equal rate of profit is only possible when the conditions of sale are such that some commodities are sold above their value, and others under their value, and thus are not exchanged in proportion to the labor embodied in them. And neither has he left us in doubt as to which of the two irreconcilable propositions conforms in his opinion to the actual facts. He teaches, with a clearness and directness which merit our gratitude, that it is the equalization of the gains of capital. And he even goes so far as to say, with the same directness and clearness, that the several commodities do not actually exchange with each other in proportion to the labor they contain, but that they exchange in that varying proportion to the labor which is rendered necessary by the equalization of the gains of capital.
In what relation does this doctrine of the third volume stand to the celebrated law of value of the first volume ? Does it contain the solution of the seeming contradiction looked for with so much anxiety? Does it prove “how not only without contradicting the law of value, but even by virtue of it, an equal average rate of profit can and must be created”? Does it not rather contain the exact opposite of such a proof, namely, the statement of an actual irreconcilable contradiction, and does it not prove that the equal average rate of profit can only manifest itself if, and because, the alleged law of value does not hold good?
I do not think that any one who examines the matter impartially and soberly can remain long in doubt. In the first volume it was maintained, with the greatest emphasis, that all value is based on labor and labor alone, and that values of commodities were in proportion to the working time necessary for their production. These propositions were deduced and distilled directly and exclusively from the exchange relations of commodities in which they were “immanent.’ We were directed “to start from the exchange value, and exchange relation of commodities, in order to come upon the track of the value concealed in them” (I, 55). The value was declared to be “the common factor which appears in the exchange relation of commodities” (I, 45). We were told, in the form and with the emphasis of a stringent syllogistic conclusion, allowing of no exception, that to set down two commodities as equivalents in exchange implied that “a common factor of the same magnitude” existed in both, to which each of the two “must be reducible” (I, 43). Apart, therefore, from temporary and occasional variations which “appear to be a breach of the law of the exchange of commodities” (I, 177), commodities which embody the same amount of labor must on principle, in the long run, exchange for each other. And now in the third volume we are told briefly and dryly that what, according to the teaching of the first volume, must be, is not and never can be; that individual commodities do and must exchange with each other in a proportion different from that of the labor incorporated in them, and this not accidentally and temporarily, but of necessity and permanently.

Here is the intellectual death blow (if there is not a word for this phrase there should be):

I cannot help myself; I see here no explanation and reconciliation of a contradiction, but the bare contradiction itself. Marx’s third volume contradicts the first. The theory of the average rate of profit and of the prices of production cannot be reconciled with the theory of value. This is the impression which must, I believe, be received by every logical thinker.

People still use the word exploitation. Discard them. They are confused. All they have left is a slogan with no meaning. Many people have tried to revive Marx’s economics since Bawerk sent it to the graveyard in 1896. They have all failed. Serious economist have long ago jettisoned the labor theory of value and the exploitation theory.  Even though Bawerk drove a stake through the heart of Marxian economics, Marx’s philosophy remained untouched. Dialectical materialism would go on to dominate twentieth century thought.

Alexander Gray on Scientific Socialism

Gray wrote with satire and humor. This was very effective. From the book “The Socialist Tradition, From Moses To Lenin”:

To witness BohmBawerk or Mr. Joseph carving up Marx is but a pedestrian pleasure; for these are but pedestrian writers, who are so pedestrian as to clutch at the plain meaning of words, not realizing that what Marx really’ meant has no necessary connection with what Marx undeniably said. To witness Marx surrounded by his friends is, however, a joy of an entirely different order. For it is fairly clear that none of them really knows what Marx really meant; they are even in considerable doubt as to what he was talking about; there are hints that Marx himself did not know what he was doing. In particular, there is no one to tell us what Marx thought he meant by , ‘value.’ And indeed, what all these conjectures reveal is somewhat astounding, and, one would like to think, unique. Capital is, in one sense, a three-volume treatise, expounding a theory of value and its manifold applications. Yet Marx never condescends to say what he means by ‘value,’ which accordingly is what anyone cares to make it as he follows the unfolding scroll from 1867 to 1894. Nor does anyone know to what world all this applies. Is it to the world in which Marx wrote? Or to an abstract, ‘ pure,’ capitalist world existing ideally in the imagination, and nowhere else? Or (odd as the suggestion may appear) was Marx(probably unconsciously) thinking in terms of medieval conditions? No one knows. Are we concerned with Wissenschaft, slogans, myths, or incantations? Marx, it has been said, was a prophet-albeit a prophet whose ambitions lay in another direction-and perhaps this suggestion provides the best approach. One does not apply to Jeremiah and Ezekiel the tests to which less inspired men are subjected. Perhaps the mistake the world and most of the critics have made is just that they have not sufficiently regarded Marx as a prophet-a man above logic, uttering cryptic and incomprehensible words, which every man may interpret as he chooses.

The most obvious difficulty of the Materialist Conception of History, at least in its less guarded statements, is seen in its helplessness when confronted with the problem of mind, and of the influence of mind on mind. Doubtless great men are conditioned by their environment, but they are certainly not produced by their environment; we all reflect our times. It is easy enough to persuade ourselves that any of the leaders of humanity could have appeared only when he did appear.
It is absurd to assume that any great man was bound to appear at the appropriate juncture. When he was old enough to know better, Engels, in a letter of January 25, 1894, more or less champions this extraordinary view. That Napoleon, ‘just that particular Corsican,’ appeared and did what he did, was an accident, but if just that particular Corsican had failed to turn up, ‘ another would have filled the place’-apparently with equal efficiency. ‘The man has always been found- as soon as he became necessary.’ Presumably the man is also found as soon as he is unnecessary, of whom there are many at large in the world in these latter days. Engels can hardly have thought of the curious theological implications of the view that we all have somewhere our deputy ready to do our work when we are put out of action. It is indeed by no means overwhelmingly obvious that if Hegel and Marx had died in their infancy, the Hegelian philosophy would’ have been produced by someone called Schmidt to give a flavour to the three volumes of Capital, written by some one called Meyer :on the whole, the chances are against it.

Me, Worried?

Mr Stockman has an excellent article posted. It should be read from top to bottom. It has a lot of numbers and pretty graphs. To summarize in one sentence: The US government will have red ink from now until a default.
I agree with his assessment. Here is the difference:
He sees disaster. I see opportunity.
The US government will not be able to fund itself. This is a good thing. It will have to sell off assets to pay for grandpa’s prostate exam. Once it gets very bad, they will pull the plug on poor old grandpa. In other words, they will default on the sacred cows: Medicaid, Medicare and Social Security.
Here is our opportunity. The opportunity to capture the hearts and minds of the public. The opportunity to say “We were right. You were wrong”.

The right people will have to be in the right places to articulate the right ideas. Will we succeed? Probably not. The masses will blame the political party in charge. They will blame the president. They will blame everyone except themselves. They will not look in the mirror and write down what they see. A person who tried to vote themselves prosperity at the expense of others.  I call this theft by the majority. The masses call it democracy.
I am very optimistic about our small chance to capture the future. Our only weapons are to keep reading, keep writing, keep talking.