Steve Keen, the Australian economist, gave a brilliant 30 minute speech last week that can be watched in its entirety below.
We are in agreement that debt levels have likely peaked relative to economic activity and that the likely course forward is an unwinding of this debt back to historical norms. I discussed this at length in my last post, "Missing the Forest for the Trees."
edit: the embedded video led to a repetitiously agonizing 16 second trailer for Michael Moore's "Capitalism: A Love Story." The actual speech can be found at the following link:
Full Speech Here
Although Professor Keen and I would likely agree on more than we would disagree, I have doubts that he would endorse the solutions I proposed in that post. He does not believe, it seems, in the benefits of mutual voluntary exchange, instead electing to cling to the absurd Marxist notion of 'capitalist exploitation' over susceptibly 'irrational' actors. To this extent, he is dead wrong. Keen fails to understand the difference between the neoclassical "rational expectations" thesis (that underpins the EMH) and the more Austrian "rational action." Rational expectations, we would agree, are impossible. To be able to foresee exactly how any action will result, one must operate with perfect information, or in other words, omniscience. This is absurd. No individual or group of individuals can make a claim to this ability - government central planners especially. But rational action is something else completely.
Rational action implies that at the time of decision making the actor will always elect something that he/she believes to be beneficial. Otherwise, no action would be taken. For example, if I were sitting on my couch feeling hungry, I may find the idea of expending energy and money to walk around the corner for a hamburger. Upon my completion of this task, whether I found the result of my action satisfying or not, my thought process was rational. It could have been insufficient and given me a tummy ache. I would then have experienced loss on this transaction. But my action was still rational. Rational action can lead to either profit or loss - two necessary potential outcomes for any action.
It seems that modern economics has been consumed by a utopian desire to eliminate "loss" from the realm of possible outcomes in voluntary exchange. To do this, the central planners seek to minimize our ability to engage in voluntary exchange, making more and more exchange involuntary. The justification for this is that people suffer from irrationality and require decisions to be made for them.
No greater folly has poisoned the minds of humankind.
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6 comments:
The embedded video is a trailer to
Michael Moore's "Capitalism: A Love Story"
Maybe it is my Linux, but it just repeats over and over.
Yeah, screwy file. I put up a link instead.
Matt, very well put. You deliver a concise explanation for (what seems to me) to be a simple issue that nevertheless seems to confuse a lot of smart people.
The video (without ads) is posted on Steve Keen's blog at:
http://www.debtdeflation.com/blogs/2009/11/06/my-per-capita-talk-on-debt/
There are about 320 comments about the video so far.
Matt: In case you would like to check them out, my various comments on his blog are around comment number 315.
I also very much like Steve Keen's talk. He is starting to have the credibility in Australia needed to create sensible solutions. Bullish on Australia if they get Keeny!
If you want to read more comments on the video, you can Google on "Zero Hedge Sobering words from Steve Keen". (Zero Hedge also posted the video).
all the best from
Namke von Federlein
$IRX has collapsed ! Financial collapse up ahead ?
Matt, I know you go to that site because I have seen your comments while posting my own. I believe Keen is one of the few guys out there with standing that has a clue as to what is going on. I don't believe he is one of those that would agree that much with Moore, who is an opportunist nut. I have watched that video twice and I make a point to go to his site most days to see what is new.
I believe the first thing I read by Von Mises was a short expose on this theory of the business cycle. In it he says the banks under rate risk and keep rates low too long and encourage long term investments that fail to make the cash flow to keep them alive. When the game goes as long as it did this time around, it creates a totally systematic situation that needs another solution other than the fend for yourself game. Keen is against the idea of what they are doing now, as he understands it is making it worse. My understanding is he is looking more for a bankruptcy settlement to clear the debt. This is going to happen whether we do it in a systematic way or wait for collapse. In some fashion, they sound like socialists. Hudson says we should go to a 100% reserve banking system and that the banks should borrow additional money from the government. I have to believe that there are some things social.
The backbone of any bubble is the capacity to expand credit on land by inflating its value. We are now watching that process deflete in the US and some other areas like Spain and Ireland, peak in China, Canada and Britain along with Australia and bottom in Japan. I heard a guy say years ago that once a structure was put on land, its value was minimal and that the value of the property had to stand on the land. I have seen 20 year old malls on prime locations go bad, despite being among the best in Dallas with Lord and Taylors and Neiman Marcus as tenants (Neimans is an old Dallas department store, so it had a strong leg to stand on and they stayed for 2 years after the rest of the mall deserted). They tore the mall down and redeveloped the property, but the land was worth more than the mall. So, you might see how credit is floated off land. The original big time bubble was John Law's use of the Mississippi territory under the authorization of Louis XIV to issue money. Of course, Louis saw it as a scheme to get himself out of debt. Clearly Hudson is onto something when he says land is something in common, provided by nature. I can see where we need a solution or the next step isn't capitalism or communism, but famine and feudalism. A solution to avoid that is more important than any philosophy on the short term.
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