Tuesday, October 30, 2012

Don Boudreaux responds

With a long update.

He continues to misunderstand the argument when he writes things like this: " If Morici – as I gather interpreted by Daniel – is correct, folks in places such as St. Louis and Phoenix should be disappointed, at least as far as their material standard of living goes, that they were denied Sandy’s munificence."

The idea is offensive, and he owes Morici an apology for even suggesting it - to say nothing of promoting that on a well read blog.

There was a brief comical interlude when the economics professor called it "fancying up the discussion" simply to distinguish between stocks and flows.

And then (as forecast) he brought in Krugman and accused him of celebrating the "benefits of terrorist attacks".

Fuck that.

You know why I continue to point out the problems with Cafe Hayek? Because they're bullies. And I've gotten lots of emails thanking me for it, including from a former student of Don's who agrees he's a bully. The man has a book whose title accuses people who disagree with him of being "half-wits" and "hypocrites". As long as people seem relatively interested in the critique I'll keep pointing it out.

A lot of their ammo gets pointed at Keynesianism, and I also have an interest in responding to that (the heyday of that was a couple years ago) because of personal interests. But certainly if you accuse good people of "celebrating" this stuff, I'm going to say something. It's not well reasoned, and it's simply not nice.

47 comments:

  1. Is there anything wrong with pointing out that updating inventories and infrastructure can stimulate an economy, in the situation of a disaster or not? Granted, one shouldn't wish for disasters, but it's still a fact that repairing/updating/replacing inventories and infrastructure from wear-and-tear or damage can be good for an economy.

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    1. You are and always have been a reasonable person. I agree. And when you say "can be good for an economy" it's crystal clear to me what you mean. This is relatively straightforward stuff. Really the only question is empirical - is the damage to the capital stock or crowding out or anything else like that enough to eliminate any GDP effect.

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    2. Henry Hazlitt, Economics in One Lesson:
      "It is sometimes said that the Germans or the Japanese had a postwar advantage over the Americans because their old plants, having been destroyed completely by bombs during the war, they could replace them with the most modern plants and equipment and thus produce more efficiently and at lower costs than the Americans with their older and half-obsolete plants and equipment. But if this were really a clear net advantage, Americans could easily offset it by immediately wrecking their old plants, junking all the old equipment. In fact, all manufacturers in all countries could scrap all their old plants and equipment every year and erect new plants and install new equipment.
      The simple truth is that there is an optimum rate of replacement, a best time for replacement. It would be an advantage for a manufacturer to have his factory and equipment destroyed by bombs only if the time had arrived when, through deterioration and obsolescence, his plant and equipment had already acquired a null or a negative value and the bombs fell just when he should have called in a wrecking crew or ordered new equipment anyway."

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    3. Does Hazlitt have a source for people claiming that?

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    4. To expand on Hazlitt's point....

      Certainly new infrastructure may be more productive than existing infrastructure. When infrastructure is replaced in the wake of a storm it demonstrates something; it demonstrates that the capability to build existing infrastructure was already available. So, if the storm had not occurred then other investments would have been made.

      To put it another way, there is an opportunity cost in replacing infrastructure. This is why it can't be good for the economy in the long term.

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  2. But they are bullying the bad guys. How can that be considered a bad thing? Look at poor Blue Aurora here. Whoever is responsible for Blue Aurora's misguided belief that a disaster is good for an economy deserves more than just bullying...they deserve public flogging.

    We never benefit, in any way shape or form, by having the big bad wolf, in any shape or form, blow our houses down. Whether it's a hurricane, or terrorists or congress...the subsequent uses of limited resources will produce far less abundance than their originally intended uses.

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    1. Were you being sarcastic?

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    2. This isn't much of a response: certainly nothing for others to be grateful for. You're just stating what he said, cursing at it, and demanding an apology.

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  3. I warned you about Don Boudreaux, years ago.

    --Invisible Backhand

    http://invisiblebackhand.wordpress.com/

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    1. This comment has been removed by a blog administrator.

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    2. This is heated enough as it is.

      PLEASE do not use ad hominems or make wild accusations about Don that aren't true. There's more than enough to criticize in Don without that sort of thing.

      This blog is open for business as a venue for criticism, not for hate or insults.

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    3. And the reason that's important - aside from just being decent and polite - is that it detracts from the effectiveness of the actual criticism of Don.

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    4. Daniel

      So you would be decent and polite to Hitler?

      What is the difference between Hitler and Don Boudreaux, other than degree.

      Don Boudreaux lies more

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  4. I don't like Don's style. I think he's unnecessarily aggressive even when he has a good point. (Which I think he often does especially when it comes to protectionism) But Morici does say that "when government authorities facilitate quick and effective rebuilding, the process of economic renewal can leave communities better off than before in many tangible ways." Now of course, Morici does provide the caveat that the hurricane has an unquantifiable human cost, etc... But Don's statement does account for that: "at least as far as their material standard of living goes" which clearly implies that Morici recognizes other losses.

    And Don is clearly using a reductio ad absurdum. He's not saying: "Morici thinks it would be better if the storm had hit all those other cities too." He's saying: "Morici's logic implies that those other cities would be better off if they had been hit by the storm. This is obviously ridiculous and shows that Morici hasn't thought this through." At least, that's how I read it.

    Don is clearly being uncharitable and overly aggressive. He uses heavy-handed debate tactics and FWIW, I think he's too quick to dismiss the idea of a demand shortfall. But I don't think he's being dishonest of purposefully misleading.

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  5. Honestly??? You're complaining about Don being a bully but you the next day you shove your head farther up Brad Delong's ass??? A guy who routinely calls anyone that disagrees with him "The Stupidest Person Alive"?????

    Talk about double standards.

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    1. I've got a pretty long track record criticizing Brad for doing that.

      And you know what - he decided it was not an appropriate approach and he stopped doing it. He hasn't said that for a very long time. I think that's a good thing.

      "Stupidest man alive" was always something of a schtick anyway. He used it so often it was clearly not meant to be taken literally. It was his title for whacking people on the head when they said something ridiculous. That pales in comparison to what Don accused Morici and Krugman of here.

      Still, I agree, it's better Brad doesn't say that sort of thing. Clearly it was distracting from his contributions if nothing else. And he's stopped.

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    2. lol who didn't see that coming. When Delong says something mean, he's doing it to be funny (and even if he has unofficially stopped "stupidest man alive" he is hardly nicer to his intellectual opponents).

      When Don writes a book about "half-wits", its just one more example of what a bullying bugger he is.

      Would Don get nicer treatment from you if he linked approvingly to you more often? If he was a Democrat? Or if his publications might have more citations?

      I can't decide if you're narcissist, a ideologue, or a careerist.

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    3. I think the fact that he'd publish a book like that is consistent with his general attitude. I couldn't imagine DeLong writing like that. But yes, on its own in isolation I'd agree that a title like that on a blog post is about on par with "stupidest man alive". But it's not just a tagline on a blog post. If DeLong published a book titled "stupidest man alive" that compiled all his internet bickering, I'd have to revise my opinion of him too.

      I don't think linking would matter. Although there's a selection effect there. Someone is going to be more likely to link to me if they are on the same wavelength as me. So what's causal? It wouldn't matter if he's a Democrat. I'm positively disposed to lots of libertarians that are at least as non-Democrat as Don. And actually one thing Don is great about is citing his posts, sharing quotes from other works, etc.

      I'm not a narcissist or an ideologue. I guess it depends on what you mean by "careerist". I'd like to further my career, but I'm guessing you have more in mind than just that.

      Please stop commenting anonymously.

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    4. Also note that in the post you're referring to I praise Don Boudreaux as much as I praise Brad DeLong. Kind of throws a monkey wrench into your theory about ideology or narcissism, don't you think?

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    5. Not really. I'm sure Don has written at least one post where he was nice to an intellectual opponent. But that probably doesn't change your opinion that he *tends* to be a bully. In the same way, one post doesn't really change my view of you.

      More often than not, you will go out of your way to praise or defend people like Krugman and Delong. Even though they are both bullies, which is nominally the reason you are spending so much time riding Don's balls.

      So either being a bully has nothing to do with why you continue to argue with the folks at Cafe Hayek. Or, it does, and there is mitigating circumstances that prevent you from calling Krugman and Delong out for being bullies. Maybe because Krugman and Delong have both linked favorably to your blog, agree with you politically, and have higher academic standing than Don?

      Nah, that couldn't be it.

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    6. And please don't point out that you occasionally complain about Krugman and Delong being overly-aggressive. There is a difference between saying "Hey Brad, I think that post was too harsh" and "Brad, you are simply a bully!".

      There is a difference in the way you treat Don, even though he strikes me as just big of a jerk as Krugman or Delong. And, oddly enough, Don is the only one of these three that isn't a Democrat at a top 5 academic institution.

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    7. narcissist, a ideologue, or a careerist.

      Seems Daniel that I am not the only one to have noted your "inconsistencies"

      You are not the hot little sh!t you think you are.

      My two cents is that if you want a job after you get out of school you should shut up. Your lack of judgment and understanding is really starting to show

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    8. If DeLong published a book titled "stupidest man alive" it would be useful and widely read.

      Daniel, I have reviewed everything you have written and what you are has now become clear. You are a suck-up, having no moral compass.

      I have no problem explaining all the reasons I detest Don, starting with his dishonesty. You call him dishonest and then say you praise him. How in a moral world can you praise someone who is dishonest?

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  6. I think Don is right.

    Let's have a look at what Morici wrote:
    "Disasters can give an ailing construction sector a boost, while unleashing reinvestment that actually improves stricken areas and the lives of residents. Ultimately, Americans always seem to emerge stronger and rebuild better in the wake of disaster."

    There's the same problem here as with Blue Aurora's comments above. They ignore opportunity cost. The capital that goes into rebuilding cannot be used elsewhere.

    "That figure could grow as many rebuild larger and better than before. Consider a struggling restaurant, for example, whose owner invests his insurance settlement in a new and more attractive business. In areas like the Jersey Shore, older, smaller homes on large plots may be replaced by bigger dwellings that can accommodate more families during the tourist season. The Outer Banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale."

    Morici makes the same mistake here.

    He forgets that insurance premiums for everyone in at risk areas will rise.

    As a sidenote, the only conceivable way that this storm could benefit America is if the insurance companies are mostly overseas. But even this is unlikely to be true in the long run because insurance companies will adjust insurance premiums to account for the increase in risk. It's true only if insurance companies believe that Sandy is truly a one-off event.

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    1. But Blue Aurora stuck pretty closely to discussing GDP, and he was exactly right. He even was careful to say that it "can be good for an economy". I took that to mean that it's contingent on things like the degree of capacity utilization - in other words, the opportunity cost point.

      No, I think Blue Aurora is much more on target on Morici than Don.

      re: "He forgets that insurance premiums for everyone in at risk areas will rise."

      Well that depends on how Sandy fits into insurance actuarial models, right? Whether this was a big surprise for them or changes their expectations about things. If this caught them by surprise and changed their view of the risks, perhaps premiums should rise.

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    2. Well, Blue Aurora says "good for the economy". So, I assume he means in the long term, not just that it causes a temporary rise in GDP.

      Let's suppose that the economy is "below capacity" that means the extra demand soaks up spare capacity. Whereas if the economy is close to capacity extra demand takes away resources from other areas and causes inflation. That's fair enough, but it's not the opportunity cost point that Don and I are making. We're saying that the resources that went into rebuilding could have been used elsewhere either in this period or future ones.

      And yes I agree, the response of the insurance companies depends on how well Sandy fits into their models.

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    3. Also, while we are at it, we were just treated by Daniel with a post on how GDP != Welfare. On the other hand, I think that it's fair to read "good for the economy" as "welfare-improving" even if it's not the only possible reading.

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    4. Current: but WOULD they necessarily be used today, tomorrow, or even in the future at all? The argument that idle resources should be economized strikes me as having little sense. Besides, what if demand creates it own supply - what if demand for, say, concrete, will drive entrepreneurs to take loans, build new limestone quarries, processing plants, transport companies, hire workers, etc?

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    5. Roman,

      Certainly idle resources should be economized on. If you look around you almost every resource is idle for lots of the time. Does that mean that it should be employed and that it's wasteful to do otherwise? Of course not, often it isn't appropriate to use a resource at a particular time.

      Everything has a supply curve, let's take concrete, for example. Concrete must be made from raw materials, such as lime. Those materials need mining and treating. If the demand for concrete rises then the price rises. The point on the supply curve that intersects the demand curve moves to the right. Marginally less productive concrete manufacturing processes are brought into use and as a result more of other resources are needed to make concrete.

      Let's suppose that the economy is "below capacity" this year. Which I'll take to mean below trend GDP. Now, suppose that the government order the construction of many buildings. The resources that went into those buildings can't be used again. Ceteris paribus the supply of inputs for concrete will be reduced and future construction will be more expensive.

      For "demand to create it's own supply" what's needed is for the investment (in this case in buildings) to be worthwhile. That is, broadly speaking, they must provide a benefit beyond the input cost. If the buildings are useless then all the society is left with is higher prices for inputs. If the buildings fulfill useful functions then those functions are whot society gets in exchange for the later costs. Of course, if that function is useful enough it may entirely offset those costs. For this to happen the state must essentially act as a successful entrepreneur, it must create profitable commercial projects, or supply some under-supplied public good.

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    6. Roman, let me kill two birds with one stone here. Why not allow taxpayers to choose which government organizations they give their taxes to? At anytime throughout the year you could go to EPA website and submit a tax payment. They'd give you a receipt and you'd give all your receipts to the IRS by April 15.

      Chances are really good that you're going to respond that taxpayers would not be as good as congresspeople at picking the winners in the public sector. Your response can be explained by the fact that the decisions of 538 congresspeople are far easier to grasp and visualize than the decisions of 150 million taxpayers. It also helps us understand why you believe that a hurricane can pick better winners than millions and millions of people in the private sector can.

      So let's consider it on the individual level. Let's say you consistently make good decisions and I consistently make poor decisions. All things being equal...which one of us is more likely to be a taxpayer? The answer is obviously you. If taxpayers consistently pick losers rather than winners...then they wouldn't be taxpayers for very long.

      Therefore, if we could somehow prevent hurricanes from occurring...then it would be valuable to do so. But it's the same exact concept with congress. If we can prevent 538 congresspeople from picking the winners...then it would be valuable to do so. We can't prevent hurricanes from occurring...but we can prevent congress from occurring. It would be as simple as giving taxpayers the option to directly allocate their taxes.

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    7. Current,

      1. Your argument only really makes sense if we are speaking of the non-reusable goods. For example, bags of cement. Then we could say that every bag of cement must only be used at the most profitable time. If we consider durable goods then whenever they are idle we are losing some possible profits. If you are a painter of little figurines, and you make them with a 3D-printer that you use only once a week, then every point of time that you don't use it constitutes an inefficiency. Perhaps it is better to lease 3D-printer to somebody or, better yet, to rent it from some firm.

      Even if all we have is a perishable good then we must use it at some point of time lest it loses its qualities (rots, stains or obsoletes). But what determines how long we ought to wait? In the uncertain world we might as well wait forever for the right opportunity that will never come.

      2. Everything having a supply curve is a difficult proposition. Certain economic models have them, but in reality they only are the hypothetical constructs of the mind. At most, all one knows at one point of time is a quantity of some good on the market and its price. That's just a dot on the (quantity,price) diagram. And, actually, one really has not a dot but a multitude of dots because the difficulties in aggregating a multitude of products that are sold in different places and on different conditions into a single good.

      Then you are making an assumption that the slope of the supply curve for concrete will be positive. Why? It might as well be negative and then the price will be lower with the higher demand. Increasing returns to scale and all that. I'd even go as far as to say that the supply curve for the industrially produced good like a concrete is almost certainly downward slopping in the sense that higher levels of production lower the costs of production of concrete.

      3. The key phrase is 'ceteris paribus'. If there is only a finite pool of some resource that is partly used by a government for some purpose then its quantity drops and a price of the rest rises. But if the economy we are considering is an open system? Government orders the construction of a number of buildings. Construction firms enter into the tenders for those projects and some will win. Then they'll get the money from the banks and order cement and sand from the firms that sell them. These firms do not have a finite pool of those resources, they just produce them whenever they perceive that they'll be able to sell. Probably, the prices for sand and cement won't change (if the markets for them have administered prices and the party of cement and sand is sufficiently small). If there is a sufficiently big increase in demand for concrete (perhaps, government is building fallout shelters all across the country) then the price might very well fall because it is more effective to produce a lot of sand and cement and then it'd be easier for other entrepreneurs to buy and use concrete for their projects.

      4. Not quite. What is needed is for the other firms to perceive profitable opportunities in extending their production. We might as well change the government in this hypothetical situations to the private firm and get the same result. Let's suppose a big wealthy corporation like Gazprom moves into some small African country that has recently found natural gas deposits. Gazprom needs buildings for the offices and dormitories, so it hires local construction firms with a promise of 100 000 dollars. These construction firms will need to buy a lot of bricks, so local brick-makers will rise their supply of their product.

      The private firms are constrained by their obligations to the owners, so they'd try to make their investments profitable. Governments (to some extent) are unconstrained by profitability and so could just dump bricks into the ocean. But even in that extreme case the extended productive capacity (of the local brick-makers) was created practically ex nihilo.

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    8. Xerographica,

      "Why not allow taxpayers to choose which government organizations they give their taxes to?"
      Because taxation is a foundation of government power and all government power is authoritarian in its nature. Next you are going to do what, ask for your share of the nuclear weapons?

      "It also helps us understand why you believe that a hurricane can pick better winners than millions and millions of people in the private sector can."
      Your troll fat is threatening to stain the screen of my notebook.

      "We can't prevent hurricanes from occurring...but we can prevent congress from occurring."
      First start your own micronation on the boat in the middle of the ocean and then reallocate the taxes however you'd like.

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    9. Roman, that has got to be one of the all time worst counter arguments that I've ever been subjected to. I mean, it really takes the cake.

      Authoritarianism is all we need to guarantee the most beneficial allocation of limited resources? Really? Can you offer any historical examples?

      Why would I ask for my share of nuclear weapons? Seriously? Taxpayers who gave their taxes to the DoD would expect M16s and tanks in return? Maybe? It's like that commercial that states that people can "symbolically" adopt a tiger. Just in case some knucklehead would submit a donation and wait patiently at the mail box for a package with a tiger cub inside.

      My troll fat is threatening to stain the screen on your notebook? That's your explanation as to why a hurricane can pick better winners than millions and millions of people in the private sector can? There you are, using a notebook that you chose to purchase...yet you completely fail to understand the importance of your partial knowledge and opportunity cost decisions. How much research did you do before purchasing that notebook? What did you have to give up in order to purchase that notebook? Would you be better off if you smashed your notebook into a thousand pieces?

      Why would I have to start my own micronation to directly allocate my taxes? No thanks, I prefer to stay right here and advocate that we all be given the option to directly allocate our taxes. If our authoritarian leaders are so great then I'm sure taxpayers won't choose the option to directly allocate their taxes.

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    10. Roman,

      Those are all good questions.

      > 1. Your argument only really makes sense if we are speaking
      > of the non-reusable goods. For example, bags of cement.
      > ...
      > Even if all we have is a perishable good then we must use
      > it at some point of time lest it loses its qualities (rots,
      > stains or obsoletes).

      I agree with you about perishable goods. Let's suppose there's a glut of cauliflowers, so there are thousands of cauliflowers available, so many that the price reduces to below the cost of picking. A storm then ruins the remaining cauliflowers. That may have very little effect on the economy, because if the storm had not happened the farmer would have ploughed the remaining cauliflowers in anyway. But not many goods are like that. Even fresh food generally has a resale value as animal feed or fertilizer, at least if it's in bulk.

      Reusable goods are not necessarily immune from my argument. Most "permanent" capital still wears out as it's used. That is, the number of units of output it's creates per period is inversely proportional to it's life. Not all capital goods are like that, some wear out only with time. Also, most permanent capital requires some sort of circulating capital to produce and output, or it requires scarce labour. For example, the instruments I use in my lab don't deteriorate with use, but someone has to use them. People qualified to do so are generally not found in dole queues. Labour expended in my lab means less labour expended elsewhere.

      So, there are two cases where the opportunity cost of making an output may be zero:
      * When the permanent capital needed ages only with time, and the labour required is unemployed.
      * When the good is perishable and it's supply is in surplus.

      It's true that the owner of an underutilized capital good will always suffer a loss. But that doesn't mean that society overall does. Suppose I have a glassmaking machine that only has one scarce input: it requires only one gallon of oil to make a sheet of glass. Then suppose that a window is broken. In that case someone pays me to replace the window. I make a profit, he bears a loss, but that's just redistribution. Overall society is down by one gallon of oil.

      The important thing I haven't mentioned is human capital. Some capital may deteriorate if not used, for example brake discs, or more importantly: skills. The employer pays the cost of making his/her employees skillful, but the employee pays the cost of not using his/her skills. As a result it may be worthwhile overall to maintain a high level of skill in a particular sector. But, each employer in that sector may temporarily downsize when demand falls. That's illogical for those employers as a whole, and detrimental to society, but it happens because skills can't be traded. So, there's a third case: if the marginal cost of making a good is smaller than the marginal cost of the loss of skills caused by making the workforce redundant, then the opportunity cost of making the good is less than zero (there's an opportunity cost of not making it).

      I'm not convinced that any of these second-order effects are important. But, there again, I'd love to know, especially about the last one.

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    11. Continued ....

      > 2. Everything having a supply curve is a difficult proposition.
      > Certain economic models have them, but in reality they only are
      > the hypothetical constructs of the mind.

      You're too critical of supply curves, and you give them a too broad and too important role. Supply curves, at least in the economics I'm familiar with, are only short-run things. I agree that the things you describe can occur, but they have little to do with supply curves.

      I agree that concrete and other goods have increasing returns to scale. But that doesn't negate my argument. I'll describe this using the supply-curve as a short-run ceteris-paribus/partial-equilibrium style thing.... Let's suppose that at time X there is a natural disaster and many buildings are destroyed. The demand for concrete then rises in the short-term. Initially that will cause the price to rise. But, that price rise may cause investment in better concrete making facilities. So, let's suppose that engineers and workers are employed to build better concrete plants. That may lead to a fall in concrete prices later, maybe even a permanent fall, because the supply curve is pushed out (now we have a different supply curve). But that comes at a cost, more capital and labour has been put into the design and building of the new concrete plants. Those resources could have been employed elsewhere, the people could have been designing and making other things for other industries which would have permenantly reduced costs in those industries. So, the question comes back to #1 above: under what conditions does an output have no opportunity cost? It's extremely unlikely that the types of workers involved here would have no opportunity cost, the productive capacity is certainly not created "practically ex nihilo".

      You can make a sort of long-run supply curve that goes negative because of increasing returns to scale if you like. But, such a creature doesn't tell us anything useful about opportunity cost.


      > 4. Not quite. What is needed is for the other firms to perceive
      > profitable opportunities in extending their production.

      No, what's needed is for there to *be* profitable opportunities. If businesses merely percieve profit opportunities then that's enough to get them to invest, but not enough to ensure that the resulting investment is worth more than the inputs. Churchill was right when he said "It is a socialist idea that making profits is a vice; I consider the real vice is making losses".

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    12. Current,

      Thank you for continuing this discussion. It’s been very immensely interesting so far.

      >>>Reusable goods are not necessarily immune from my argument. Most "permanent" capital still wears out as it's used. That is, the number of units of output it's creates per period is inversely proportional to it's life. Not all capital goods are like that, some wear out only with time. Also, most permanent capital requires some sort of circulating capital to produce and output, or it requires scarce labour. For example, the instruments I use in my lab don't deteriorate with use, but someone has to use them. People qualified to do so are generally not found in dole queues. Labour expended in my lab means less labour expended elsewhere.<<<

      Your objection is very powerful, so I have to at least partially agree with you. In the end, both perishable and reusable goods -usually- (I put this word here to avert the possible bringing up rare wines, stamp marks and other rare things) lose their value with the passing of time through the process of either physical degradation, which may be miniscule but still unavoidable, or through the process of obsoleting.

      >>>So, there are two cases where the opportunity cost of making an output may be zero:
      * When the permanent capital needed ages only with time, and the labour required is unemployed.
      * When the good is perishable and it's supply is in surplus.<<<

      I’d say the opportunity cost might be –close- to zero even when the permanent capital also degrades with use. To illustrate this thesis, I will reuse the case made by William Petty in the seventeenth century (or the variation thereof – I only remember the gist of it). Imagine a very poor Ireland of the 17th century where 4/5 of population are employed in agriculture, primitive manufacture or other productive professions, but 1/5 can’t find employment anywhere. Should it be profitable to outfit them with shovels and employ them in the public works, even though the shovels will break and they will need to be fed? That depends on what they will build, because the value of the built infrastructure might far outstrip the cost of shovels and the corn to feed them. And that’s NOT getting into the negative effects of starving a part of the population to death.

      The modern tools lose their value when used… But they do also lose it if not used, so the opportunity cost of employing them might be negligible in the certain situations. If the entire economy is engaged in production sans some distinct plant, population group and so on I agree it may bring net losses to force them to work at any cost. But I think that in the cases of depressions, when underemployment of capital is widespread and a lot of the population is unemployed the opportunity costs of stimulating production are too small to be seriously considered.

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    13. >>>It's true that the owner of an underutilized capital good will always suffer a loss. But that doesn't mean that society overall does. Suppose I have a glassmaking machine that only has one scarce input: it requires only one gallon of oil to make a sheet of glass. Then suppose that a window is broken. In that case someone pays me to replace the window. I make a profit, he bears a loss, but that's just redistribution. Overall society is down by one gallon of oil.<<<
      That’s if you kept sitting on the money you’d get. But if you used them to buy something then perhaps the result would be less clear-cut. In the case of the deeply depressed economy that money might have circulated in your community quite a number of times, allowing for the rise of the welfare. Yes, the society might be down a gallon of oil, but perhaps it is up something else. But if the economy is close to the full utilization of resources? It is fair to say that the result will be close to just redistributive, minus a gallon of oil, because this little money transaction will have almost no effect. Another fair point will be to point that the owner of the window will have less money for –his- own purchases. If he is more money-constrained, then it’s a loss for the economy. But he might be a wealthy hoarder, have an access to cheap credit or the ability to outright create money.
      >>>So, there's a third case: if the marginal cost of making a good is smaller than the marginal cost of the loss of skills caused by making the workforce redundant, then the opportunity cost of making the good is less than zero (there's an opportunity cost of not making it).
      I'm not convinced that any of these second-order effects are important. But, there again, I'd love to know, especially about the last one.<<<
      Add to the marginal costs of the loss of skills the societal costs of rising unemployment. You pay people welfare benefits, and you create a culture of dependency on the free bread and circuses. Don’t pay, and starve your population off and force them to take a life of banditry. It’s a bad choice.

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    14. >>>You're too critical of supply curves, and you give them a too broad and too important role. Supply curves, at least in the economics I'm familiar with, are only short-run things. I agree that the things you describe can occur, but they have little to do with supply curves.<<<

      The very concept of supply curves is flawed. They are supposed to represent a dynamic reality of the ability of industry to expand the production… But they collapse it into the static picture that is easy to represent on the pages of textbooks but difficult to justify when considering real processes of production. I suppose in Marshall’s times they were an OK instrument of the economists, but not now.
      Marshall considered what marginal costs are faced by the firms and he came with a distinction of cases of MC>0 (positive slope of S), MC=0 and MC<0 (negative slope). If marginal costs of production are less than zero, then it is more efficient for the firm to expand since it is not constrained by the rising level of costs. Such firms could theoretically expand indefinitely if not for other constrains (size of the market, other firms, advertising, unmanageability…)

      Sraffa disputed with this representation of the production; his 1926 article is well worth the read for anybody. Three cases described above a but ‘empty boxes’ because depending on the conditions, economies of scale and time the ability to produce a little bit more goods will change. Besides, the bigger you make the piece of economy you try to describe with ceteris paribus conditions needed for the representation of distinct S and D curves, the more interdependent they get and the more worthless ceteris paribus clause becomes. For a market of rentable flats in some city? Alright, supply and demand analysis is appropriate. For the whole economy of some country? Definitely not, because through the every point on the S curve you’ll have to draw distinct demand curves. And then how you’ll choose a point of equilibrium? You can’t.

      Finally, I will have to point you to the research of Alan Blinder. He is a neoclassical economist, but of the experimental bend. He conducted series of interviews (1998) with the managers of different companies, asking them, for example, how much they are constrained in expanding their production. About 90% of firms, it was found, face MC=0 or MC<0, so they’d readily expand their production giving someone will buy it. And that’s even in the short run.

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    15. >>>I agree that concrete and other goods have increasing returns to scale. But that doesn't negate my argument. I'll describe this using the supply-curve as a short-run ceteris-paribus/partial-equilibrium style thing....<<<

      That’s the problem; you arrive to your conclusions by assuming the ‘right’ model for that. But since models are tautological in nature, you only reap what you sow. I’ve already pointed that: if you assume that the society is very closed and very constrained in resources, then every loss of resources will only make the remaining resources more scarce and dear. Is that a realistical assumption? Probably not in the usual circumstances (barring something like a nuclear war, Yellowstone eruption and the like).

      In the less catastrophic situation modern industrial societies are very capable of expanding production in case of the rise of demand for it. First, almost all firms have a stock of unsold goods and given that prices are sticky (mostly because they are administered by firms’ management) the main short-run changes are going to be in the size of inventories. Second, the existing productive capability is usually massively underutilized (http://www.insee.fr/en/themes/info-rapide.asp?id=56). Third, well, I’ve mentioned Alan Blinder above.

      >>>You can make a sort of long-run supply curve that goes negative because of increasing returns to scale if you like. But, such a creature doesn't tell us anything useful about opportunity cost.<<<

      Opportunity cost is a nice concept, but why should we highlight it in detriment to everything else?

      >>>No, what's needed is for there to *be* profitable opportunities. If businesses merely percieve profit opportunities then that's enough to get them to invest, but not enough to ensure that the resulting investment is worth more than the inputs. Churchill was right when he said "It is a socialist idea that making profits is a vice; I consider the real vice is making losses".<<<

      What is needed is demand for the production. If it dries up (Gazprom moved out of country or run out of things to build), then the business (of brickmakers) will wither and die. Still, what one business/government spends is another one profit, so…

      Bringing up Churchill’s remark was uncalled for. Sustainability and profitability are important, did I say somewhere it is not so?

      P. S. I personally like Attlee more. Not because he was a lefty, but because of his considerable crisis management skills and his less visible but more important role in the making of History.

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    16. I'm going to move one of your replies out-of-order....

      "Opportunity cost is a nice concept, but why should we highlight it in detriment to everything else?"

      There are two related questions we've been talking about. Firstly, can a disaster of some sort have lasting economic benefits. Secondly, can "stimulus" have lasting economic benefits. For both questions there are two scenarios, something happens or it doesn't happen. Costs are involved in both scenarios, and fall differently depending on whether the event in question happens or not. So, opportunity cost is central to everything we're discussing here.

      Do you mean that we should be thinking about redistribution too? That's a completely different issue. Some of the things I've discussed here may redistribute wealth to the poor, some won't. I think redistribution is something that we should be up-front about. That is, if someone thinks something should be done because it will redistribute wealth rather than because it will create more wealth, then they should say so. It's hardly an unpopular platform with the public.

      "I'd say the opportunity cost might be –close- to zero even when the permanent capital also degrades with use."

      Yes, I'd agree with that, so long as the degradation isn't large. In that case if output is bought then there is some cost bourne by the wider economy in exchange for a higher employment rate.

      The example you give from William Petty of building roads is a bit different though. What you're saying is that the value of the infrastructure constructed may outstrip the cost. In that case what you have is an example of sensible public investment. That is, if the state own the roads then from time-to-time when demand for transportation increases they should spend more on those roads. Of course they'll have to charge that back to the populace over time. That sort of logic applies at any time. In a recession it may be more appropriate for the state to build roads and so on because the price of inputs such as labour may fall. Of course, the same is true of private enterprise too, the company I work for have ordered a lot of construction work recently because it's currently cheaper than it was.

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    17. "The modern tools lose their value when used... But they do also lose it if not used, so the opportunity cost of employing them might be negligible in the certain situations. If the entire economy is engaged in production sans some distinct plant, population group and so on I agree it may bring net losses to force them to work at any cost. But I think that in the cases of depressions, when underemployment of capital is widespread and a lot of the population is unemployed the opportunity costs of stimulating production are too small to be seriously considered."

      I don't know about historical depressions, but in the case of modern depressions I don't agree. The problem is the targeting of unemployed labour and capital. It's easy for the government to buy things, but it's not easy for them to buy things that bring into use idle resources in the sense we're discussing. Take roads for example, let's suppose the state want to build a road that won't improve transportation times much. Building a road today is quite a high-tech business, there's a lot of planning involved. If the civil engineers and managers weren't building a particular road they would probably be involved in other construction projects, they wouldn't be on the dole. The workers are also not the same sort of builders who build houses. Add to that the materials and fuel, and it becomes clear that the opportunity cost of the road is significant.

      This is one reason natural disasters are such a bad case. Firstly, there's the loss of capital, but then the rebuilding doesn't necessarily require resources that are in surplus. Even in a recession most resources (human and physical capital) are not idle, so most of the demand will fall where there is opportunity cost.

      A governments that wants to "stimulate" the economy with public works will have a very difficult job ensuring that idle resources are targeted. In general these days capital formation is done by highly qualified specialists who are rarely unemployed. There are a few exceptions such as construction of some commercial buildings and housebuilding. In practice governments don't worry much about targeting idle resources. So practical stimulus operations are unlikely to expand a societies wealth in the long-term because they'll bid resources away from profitable private sector projects.

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    18. "Overall society is down by one gallon of oil.<<<
      That’s if you kept sitting on the money you’d get. But if you used them to buy something then perhaps the result would be less clear-cut. In the case of the deeply depressed economy that money might have circulated in your community quite a number of times, allowing for the rise of the welfare. Yes, the society might be down a gallon of oil, but perhaps it is up something else. But if the economy is close to the full utilization of resources? It is fair to say that the result will be close to just redistributive, minus a gallon of oil, because this little money transaction will have almost no effect. Another fair point will be to point that the owner of the window will have less money for –his- own purchases. If he is more money-constrained, then it’s a loss for the economy. But he might be a wealthy hoarder, have an access to cheap credit or the ability to outright create money."

      I don't agree that "full utilization" of resources is necessary. As I said about, even when the economy is in depression most people are employed and most capital is employed. Increasing demand in most markets still has opportunity cost.

      You write "In the case of the deeply depressed economy that money might have circulated in your community quite a number of times". In this case the communities spending must be limited by liquidity. If people could borrow then my money would not be necessary to allow them to spend. In the modern world it's most likely that they would be able to borrow. That's especially true of businesses, even in bad economic situations it's generally possibly for businesses with good prospects to raise funds through borrowing or floatation.

      Consumers are a different matter, suppose in this hypothetical situation, I were to spend my profit on consumer goods. That benefits me, but it also means I consume resources which others can't consume. If I invest it badly then resources are also consumed. If I invest it well then things are different, maybe the long-run return will be high enough to pay for the gallow on oil mentioned earlier. The same sort of thing is true for the next person in the chain who spends the money they get from me. And of-course, the same thing is true in the counter-factual case where the window isn't broken and the shop-owner keeps the money. So, the different propensities to spend are only likely to cause different distributions of wealth, and different consumption of consumer goods. They may cause an increase in wealth if money falls into the hands of a skilled but liquidity-constrained entrepreneur.

      But, you're comments alude to monetary economics, which does make things more interesting. This is where "money illusion" and "cumulative rot" come in. Let's suppose that a particular unemployed worker expects the consumer prices to be X, and expects his wage to be Y. But he can only find employment at a wage of 0.9 * Y, so he refuses the offer, or accepts and works few hours. It may happen that consumer prices will be 0.9 * X. That means that he should have taken the employment, the lower money wage masked a similar real wage. This is where I think the real problem is. Most people can borrow if they want to, they aren't liquidity limited. But, most people calculate their costs and wages in money prices. That is, if consumer prices increased 3% last year, then they expect something similar next year. This causes people to underproduce in some cases and overproduce in others.

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    19. "You pay people welfare benefits, and you create a culture of dependency on the free bread and circuses. Don't pay, and starve your population off and force them to take a life of banditry. It’s a bad choice."

      The problem with stimulus though is that it often isn't that different to welfare in the long-run. It rarely is targetted at idle-resources with no opportunity cost and it's often long-term even though it's not meant to be. Businesses that are dependent on government orders lose their competitiveness.

      "The very concept of supply curves is flawed. They are supposed to represent a dynamic reality of the ability of industry to expand the production..."

      Supply curves are short-run "static pictures". At a particular time there's a particular supply curve. As the prices of inputs and technology change a supply curve shifts left and right.

      "Marshall considered what marginal costs are faced by the firms and he came with a distinction of cases of MC>0 (positive slope of S), MC=0 and MC<0 (negative slope). If marginal costs of production are less than zero, then it is more efficient for the firm to expand since it is not constrained by the rising level of costs. Such firms could theoretically expand indefinitely if not for other constrains (size of the market, other firms, advertising, unmanageability...)"

      Firms that face MC=0 or MC<0 will expand, as you say until they reach the situation where MC>0. Capitalists will fund them to do so because it will be profitable. So, these are special cases, even more so than Giffen goods are for demand curves. Businesses will fully exploit their economies of scale, until diseconomies of scale take over. Take the silicon fabrication plant at the place I work. The capital equipment in that plant is very expensive, but the raw inputs (silicon and various chemicals) are relatively cheap. So, the plant is normally in use 24 hours a day for most of the year. Regular shutdown occurs though for replacement and maintenance of equipment and when the cost of employing workers on overtime rates exceeds profits. As a result, at the margin there is MC>0.

      I'm dubious about Alan Blinder's argument. If 90% of firms face MC=0 or MC<0 then why don't they expand production? Remember, if you are at MC<0 and you can sell an extra unit then there's no reason not to, it's all profit. Unit price would have to fall faster with volume than costs do for it to be unprofitable. I'd say the actions of businesses here speak louder than their words.

      "Three cases described above a but ‘empty boxes’ because depending on the conditions, economies of scale and time the ability to produce a little bit more goods will change."

      Yes, of course it will. But that doesn't make these ideas "empty boxes", all it means is that they apply differently at different times. If capital is applied in one direction or another then marginal costs and supply curves change.

      I agree that supply and demand analysis is a microeconomic tool. It's not valid to apply it to a whole economy for a whole host of reasons. But that doesn't mean magical things necessarily happen. What we've been doing here in this discussion is following the effects of marginal changes through several steps. That remains a valid exercise because it only relies on supply and demand at the level of specific markets.

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    20. "In the less catastrophic situation modern industrial societies are very capable of expanding production in case of the rise of demand for it. First, almost all firms have a stock of unsold goods and given that prices are sticky (mostly because they are administered by firms’ management) the main short-run changes are going to be in the size of inventories. Second, the existing productive capability is usually massively underutilized (http://www.insee.fr/en/themes/info-rapide.asp?id=56)."

      I'm not doubting that modern industrial societies are capables of expanding production for some good if demand for it rises. Nor am I doubting that such an expansion could cause investment in technological improvements that push out the supply curve for such goods in the long term. What I'm doubting is that this comes for free. It doesn't, it comes at the cost to other possible improvements.

      As you say prices for many things are administered, and therefore sticky. That's partly because of costs in changing prices, and partly because customers appreciate stable prices. But this doesn't mean that marginal costs don't have an effect, it just means that businesses and their customers absorb the differences over short time periods. Let's say, for example, that the demand for a particular chip sold by my employer were to increase greatly. To expand production will increase per unit cost temporarily, but the company will do so without increasing the price to the customers. Similarly, if the quantity sold were to decrease then any savings this provides would not be passed on to the customer as a price reduction. Then, over a longer period of time, if a particular chip continues selling in high volumes then investment will be made into producing it more efficiently. Of course doing that means not investing in something else, so there is a cost.

      The french construction industry capacity utilization figures that you show don't tell the whole story. They don't say anything about what the labour situation, such as the cost of labour. Nor do they say anything about the costs of other inputs. The tables refer to problems with labour supply and "obstacles to production", but they don't clearly indicate what role they played in determining capacity utilization.

      "Bringing up Churchill’s remark was uncalled for. Sustainability and profitability are important, did I say somewhere it is not so?"

      What I took from your remarks was that you were worried about firms not investing. My point was that that's only part of the issue. Investing in something unprofitable usually means that inputs are converted to output for no gain. The inputs would have been better of left as they were for other businesses to use. There's a chance that positive externalities of the business would outwiegh the costs, or that some of the inputs would not have been used. But, that requires some pretty odd situations to occur.

      You may agree, I may have misunderstood you.

      "What is needed is demand for the production. If it dries up (Gazprom moved out of country or run out of things to build), then the business (of brickmakers) will wither and die. Still, what one business/government spends is another one profit, so..."

      I agree that demand is important. But as I said above, I'm doubtful that demand can be created without a great deal of waste. In the long term people can demand because they have products to exchange, they can demand because they can supply. I wouldn't say that Say's law is true in a short-run sense though.

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  7. & I presume you saw that Cafe Hayek has joined the War on Nate Silver and the Central Limit Theorem?

    Brad DeLong

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