can this nut be cracked?

Public debates tend to radicalisation and simplification. We can find thousand of articles like this one, against keynesian theory, The Failure of Keynesian Economics, or against neoliberalism, If you think we're done with neoliberalism, think again, the opposite of keynesianism. The level is a little bit higher than before world war II or during the cold war, but it is obvious that the ghost of ideologies is still wandering around and the point of views have little to do with logic, but a lot with interests.

From a marketing point of view neoliberalism and similar tendencies, like the austrian school, are more efficient. Title like 'Capitalims and Freedom', from Milton Friedman, or 'The Road to Serfdom', from Friedrich Hayek, are better suited to evoke emotions than 'General Theory of Employement, Interest and Money' from Keynes, that sounds a bit academic. The first books are bestsellers and the last does not sell at all. If the title of Milton Friedmans book was 'Controlling and transparency. How to controll public spending?" and if the book was about adapting the controlling systems used in privat companies to bureaucracies, something concrete but boring, nobody would have bought this book, although this is the important question. Markets have the big advantage to have inherent mecanism of controlling. To put it short: Waste of ressources leads automatically to bankrupcy. In public spending we don't have an inherent, automatic controlling. Controlling has to be implemented "artificially". But this is not a philosophical questions, as Milton Friedman assumes, but a question of adapting existing software packages to the needs of public admininistration. The author doesn't talk about a theoretic possibility. System like that are already implemented in large parts of public administration and are more and more introduced.

If the degree of competition is not strong enough, liberty is menaced. But this is valid for the private sector as well as for the public sector. If Milton Friedman or Friedrich Hayek believe that the free market is a guarantor for liberty the hadn't read David Ricardo. If a system only guarantees the subsistence level, the only choice people have is to die.

Milton Friedman would have been more convincing if he had proved that David Ricardo, a defender of the freest market possible, is wrong instead of trying to prove that Keynes is wrong. The argumentation of Milton Friedman, that it is proved that "capitalism" is the most efficient system, and the guarantor of freedom is not very convincing. He compares only "capitalism" with "socialism", see Milton Friedman - Socialism vs. Capitalism. The problem is, that he doesn't define neither capitalism nor socialism.

What we actually have, in all western countries, is something which is called in Germany social market economy.The author doubts that this, successful system, is a German invention; we have similar systems in all Western countries. However, exactly this is the problem of Milton Friedman. By the way: Capitalism, or the idea that 'capital' is the force pushing forward history, is the strange idea of Karl Marx. Milton Friedman is talking about market economies and Karl Marx, and the neoclassics have the same problem. There is no need for individuals to take decisions because capital is something like a natural force. It accumulates automatically, Karl Marx, or flows, Léon Walras, automatically to the best use.

So let's go back and let's untangle a little bit of the confusion. The underlying strength of market economies is the decentralised information processing through prices and competitivity. Competitivity means that the signals of scarcity and the prices have to be taken into account by the individual market players otherwise, they go bankrupt or earn less money. At the other side, the scarcity is measured by prices through an objective, automatic and anonymous mechanism. There is no need for extra controlling. The system controls itself.

In some degree, we can even admit, that this system guarantees in a certain way, freedom. While companies are competing, no company can abuse it is power, for instance by demanding prices, which includes a rent based on power, but not on performance and if everybody has access to the market, power can be broken at any moment. Competing companies compete as well for the labour force. If manpower is scarce, they have to pay more to get it. We will discuss these topics later on throughout this manual, but until here, there is no problem.

However, existing prices mean, that there is transparency at least in at a certain moment. The market players know exactly what to do, although sometimes they are not able to do what needs to be done. If one company, for instance, is more than another able to adapt itself to a change in prices, they get an advantage over another company, who is not able to adapt itself.

In a situation like this, there is obviously no need for governmental intervention. If the price of petrol increases, car companies know exactly what to do. They have to produce cars which consume less petrol, and we have seen in the past, that they find a solution to the problem. (We will not discuss here any other failures of market economies, like external costs or meritory costs, which can justify government intervention. Right now we are only talking about the relevant issues related to Keynesian theory.)

If we have prices, then there is no risk in the Keynesian sense. Perhaps some companies are unable to change their production structure to suit better the new situation, but in this case, the Government cannot help. The Ministry of Economics will not develop a less consuming engine. In this case, the market player can do something, and if they succeed in adapting themselves, they will earn money otherwise, they have a problem.

However, the discussion of Keynesianism is completely different. Keynesian theory is about a situation where the individual market player can do nothing. If there is a strong liquidity preference, we will discuss this term in the chapter about Keynes, in other words if nobody is willing to invest, because any real investment seems to risky, then the best thing the market player can do is save money, fire their employees and reduce consumption. In doing this, they create the situation they wanted to avoid. There will be less consumption, less investment and less employment. The rational reaction to this problem is save more, consume less and fire employees.

The neoliberal solution to this problem is straightforward, simple and wrong; reduce wages. The idea is that companies hire more people if wages are reduced. This is obviously true at an individual level. However, lower wages means less demand for the others and the others. This leads to a general reduction in wages, and if the prices remain the same, there will be less purchasing power than before. Only in the case that the amount effect, more people are employed, is more significant than the wage effect, the single worker earns less, the purchasing power will increase. If the companies believe that this work, it would be a good idea to go to for instance to Ethiopia. Wages are extremely low there. Should big business be producing there? The problem is, that there is no purchasing power in Ethiopia. The low wages are of no help. Companies can as well try to sell something to countries where wages are very low, for instance, Burma. They will see that this is much more complicated than selling things in Germany.

The solution to neoliberalism is not original. It is obvious that it is interesting to produce cheaply, for instance by not caring about pollution, and selling to countries with high purchasing power, where wages are high. However, the trick does not work if wages are low everywhere.

The solution to the problem, therefore, is something else. The productivity must be improved, and good wages must be paid and that requires real investments. However, if everybody is afraid of the future and of losing his money, nobody would invest.

The whole discussion is a little bit more complex. From the start of this website, the reader can download a little book about Keynes, for a more detailed explanation. Note, the title of the book of Milton Friedman, Capitalism and Freedom, suggests that "capital" is something important to the economy, that it is the condition for investments. It is not "Capital" for investments must be liquid, in other words, it must be money. Capital is the not consumed, the saved part of incomes of the past. To have money, there is no need to save. This is a big difference. Milton Freedman is the founder of monetarism as well. Monetarism is a theory that gets to the same result as the classical quantity theory arguing with keynesian monetary transfer mecanism and some special assumptions. This is pure classical quantity theory, Milton Friedman - Understanding Inflation. We know that he knows it better, as we will see later, see monetarism, but the result of monetarism is the same.

The author has the impression that Milton Friedman didn't get the central point of Keynesian theory. Money doesn't get his value from the past but from the future. If we get 100 dollars, we don't expect that the thing we want to buy with this 100 dollars is already produced. We expect that it will be produced when we will buy it. Alternatively, in other words, we don't care if is already produced, we only want that someone produces it, when we want to buy it.

It is to suppose that Milton Freedman doesn't distinguish between money and capital because some of this conclusions are only plausible, it no distinction is made between capital and money. In this video, Milton Friedman - The Free Lunch Myth, Milton Friedman argues that resources used for producing one thing can be used to produce another thing. This is true on a microeconomic level, but not on a macroeconomic level. A market player has, of course, some resources, his workforce, capital, land whatever. And if he uses these resources, he can't use them for anything else.

From a macroeconomic point of view, this is wrong. In the situation supposed by Keynes, unemployment, there are resources which are not used at all. In order to activate these resources, there is no capital, something scarce, because it is the result of a previous effort which is needed, but money and money can be produced quickly. The central banks right now, we are still in 2014, produces billions of it a year, in dollars, euros, pesos, yen whatever. If these money is used to activate resources and the money is paid back later, the same amount of money which has been produced is destroyed when the credit is paid off. That happens every day.

The point is not, as Milton Friedman assumes, that there is a lack of capital. The problem is, that there is a lack of possibilities to invest in profitable projects. On how to resolve this problem, see can this nut be cracked.

It is a strange kind of phenomena that Milton Friedman uses Keynesian concepts, but didn't get the basic idea. Capital is one thing, and money is something entirely different. Milton Friedman makes the same mistakes as the classical and neoclassical theory. For a more detailed discussion, see the chapter about Keynes or the little book downloadable from the startpage.

That doesn't mean that the neoliberals are completely wrong. There is the risk that resources are wasted if the government takes away money from the people and uses it for other things. However, that has nothing to do with Keynes. Keynes is not about taking away resources taxing people in order to invest the money in less profitable investments. Keynes is about activating resources which are not used at all. It is very hard to see how there can be a misallocation in the case of idle resources.

If we talk about the risks of governmental intervention in the economy we have to distinguish, between two very different situations.

In the first situation, the product produced by the government is clearly specified. These kind of things are producing passports, registering a car, food control, providing certificates and so on. These products are the same in any part and if a controlling system exists, if we know how much the production of, for example, a building permissions costs, we can compare these costs. The public administration than don't get the money they believe is needed, but the median cost for each public product multiplied by the amount of these products produced. The inefficient public administrations, therefore, have an incentive to reduce their costs. They will find at the beginning a lot of reasons why they are less efficient than others, but if concrete data exists, we get a more substantial discussion. That's the way it works in the public administration of Berlin. The effect is still better if these data are published. This is a simple controlling problem, which can be resolved with the right software. We introduce artificially market mechanisms in the public administration. If we don't have this control, bureaucracies will become fatter and fatter.

By the way, this is another option. If the teaching of the fundamental ideas of economics can be reduced to two years, see can this nut be cracked, students can specialise in controlling of public administrations. If 50 percent of the pin passes through the hand of the state, what is the case in industrialised nations, in major part with no or little control, there is a lot to do.

The author would say that a "philosophical" text, like Capitalism and Freedom, has no impact. Public employees and most of all publicly employed economists will agree with Milton Friedman, and argue against the waste of resources, but they will not see that the marginal product of a discussion paper paid by the taxpayer is zero. This is consumptive public expenditure, something very different than investing public expenditure. Keynes only argued in favour of the last one.

We have an entirely different problem if the product is not well defined, as it happens in public schooling or jurisprudence. In this case, the goal is undefined it is really hard to define how much resources are needed to obtain an undefined goal. Neoliberals would say that the best thing is not define any goal let the things be done by private initiative. That would mean, for instance, that we would see appear koran schools and living bombs. We will discuss this topic in detail when talking about Milton Friedman.

Some systems of this kind where the goal is not clearly defined, produce strange results. The court fees, for instance, don't depend on the costs of the judicial procedures but on the amount of the claims. This means that someone with a profitable judicial proceeding or big claim is not much work, civil processes very often are of this kind, subsidizes little profitable proceedings, like criminal proceedings.

There is little logic in this. Criminal justice concerns the whole society. The society as a whole is to be protected. Therefore, it is hard to understand why the people who are involved in a civil proceeding should pay for that.

Actually, things are still more strange. Right now in Germany, the kind of a controlling system is introduced aims to calculate the costs of the products of jurisprudence, the judgements. If we have a similar social structure in the long run and arithmetic average, the costs of the same type of legal problem should be more or less the same. It would be therefore possible to charge only the costs generated by a proceeding. However, although this would be possible if the process of introducing this controlling system is finished, nobody has the intention to change the way the court fees are calculated. The situation can be improved by publishing these data, but employees in this sector will resist to any decision which leads to more control.

However, jurisprudence is strange as well in another sense. The jurisprudence is the only sector where stupidity, incompetence and idleness is profitable. The more a lawyer is stupid, idle and incompetent, the better his chances to get to the second or third instance and earn more money. The problem could be resolved by paying only in case of success. In this case, a lawyer would only accept a case, when he believes that he can win it.

The next problem is, with jurisprudence there are many problems, it is really a funny world that there is no obligation for a judge to know the laws recently adopted by the parliament. This can have fatal consequences, particularly in the field of recently adopted laws concerning communication and internet. The parliament can enact as many laws as they want, but there is no obligation for a judge to know them.

The independence of jurisprudence is an illustrative example of how an undefined goal can become a real weapon. At first glance, it seems to be positive. It must be granted that politics are not able to influence the outcome of a proceeding or to use jurisprudence to eliminate their opponents. Something, without any doubt, that happens very often.

In practice, the independence of the jurisprudence was always granted but had never had any impact in critical times. Politics has many possibilities to control the jurisprudence anyway.

Independence of jurisprudence means as well that they alone, decide how much money they need, how much time they require for a judgement, how the jurisprudence is organised, how they interpret the law if they are willing to work or not and so on. In detail, the situation is different in each country, and a detailed study is necessary, but the strong resistance we can see for instance nowadays in Germany against the introduction of controlling in jurisprudence shows clearly that jurisprudence has its own interests, which they defend by any means. We will discuss this topic once again when talking about Milton Friedman. We will then discuss something more concrete, like the licenses needed to work as a lawyer and how they are issued.

In most countries, the fees for the lawyers as well as the court fees depend exclusively from the claim of the proceeding. There is no relationship between performance and payment. The same thing applies to the payment of the judges, prosecutors and all the other employees of jurisprudence. Therefore, they can't improve their situation by being better than others, but only by defending their interests as a group. Nobody would say that in any other sector a system like that would work.

The introduction of controlling can be of some help. At least quantitative data, costs, can be obtained this way. Concerning the qualitative aspect of jurisprudence, the quality of the judgements and the only way to exert control is transparency. If all the judgements were published, it would be possible to detect certain characteristics of certain judges and lawyers, their relationship with certain lawyers, legal chicanery and trickery. That wouldn't oblige them to change, but they would have a problem if they can't defend their behaviour in public. Transparency can exert a very strong pressure.

We don't say therefore that there is no truth in neoliberalism. Milton Friedman is right in criticizing the fact that some groups defend their interests to the detriment of the rest of society. The problem is that he, as well as Friedrich Hayek, mixes everything with everything.

The market mechanisms are without any doubt the most efficient way to control a system. They are objective, anonymous and very strong. If market mechanisms do not control a system, it risks to end up on the wrong path. Wherever market mechanism doesn't exist, they should be introduced artificially, for instance through public controlling and transparency.

This is easy to be done in the case that the product is well defined, and quality is of little importance and can be measured easily. In this case, it is not a "philosophical" problem. It is much more a software problem. Besides a cost type calculation, we need a product cost accounting.

Things become more complicated when the product is not well defined, and the quality have to be taken into account. However, in most of these cases, the average product costs are a good approximation. It is hard to believe for instance, that all the copyright disputes in one court are more complicated than in another court. If a product cost calculation shows that there are big differences between one court and another, between one judge and another, there must be a reason for that, and the data must be analysed more in detail. In this case, the product cost controlling is only a hint for further analysis.

It is hard to see why this is an issue of liberty. It is a simple issue of controlling. Philosophical books like "Capitalism and Freedom" perhaps are discussed in public, but don't have any real impact, because they don't have any concrete solutions. It is even to suppose that the employees of jurisprudence will interpret any interference of the state in their affairs as an attack on their freedom.

Although the Havelmo theorem suggests the opposite, Keynesianism has nothing to do with increasing taxes. If we take away money from private investors and giving it to the state under the assumption that the government invests instead of the private market players, we would presume that the government knows better than the private market player who knows how to invest the money. That is very doubtful. We can find arguments for this thesis, but nothing really convincing. On the other side, there is no need to clear this point, because investements are financed with money, not with capital, not consumed incomes of the past. So the only interesting question is, if there are investements able to eliminate the money created before by paying off the credit.

The Keynesian theory is an entirely different issue. The Keynesian theory is about activating idle resources. In this case, the only interesting question is if the public debt will increase or not. It will increase, if the investements of the government are not able to pay back the credit and it will not increase, if this is possible.

If economists say that this is not possible, and we can read that in millions of articles like this one, Nota Bene: Keynes’ perpetual debt machine, we have a strange kind of situation. Well paid economists in thousands of think tanks, "research" institutions or universities are not able to detect investments, which make it possible to pay the credit back, although governmental spending profits from all kind of secondary effects, more taxes, less spending in social transfer, multiple effects. Academic economists suppose that they are not able to detect interesting investments, but suppose that entrepreneurs will find them. In this case, we don't need them. If the only thing they can do is writing discussions papers which are never discussed, it is of course not profitable.

We have a very serious problem with the way economists are trained and with the academic curricula, see "can this nut be cracked?".

The thing is strange as well from a theoretical point of view. In the neoclassic theory, the basis of the contemporary mainstream economy is that capital flows automatically and without any human effort in the best use, with the result that (monetary) marginal product of capital is the same in all cases. (Monetary, because the physical product can remain the same, but the monetary value diminishes, if the supply increases, because otherwise there wouldn't be enough demand.) Léon Walras shows us that total equilibrium can be obtained by resolving some equations.There is no decision making of human beings needed. If this was true, unfortunately, it is not true, then it should be easy to promote economic activity by injecting money. Automatically the money would flow to the most profitable use. The only difference between Keynesianism and neoclassic theory would be that in the neoclassic theory, investments are done with capital, not consumed and saved income from the PAST, but in Keynesian theory, the investment would be financed with money and savings must be made in the FUTURE, to pay off the credit. (This is not the only impact of Keynesian theory, but to clarify that neoclassic theory is contradictory, we simplify it a bit.)

In this case, if insecurity doesn't exist and capital or money flows automatically in the best use, with Keynesian policy a steady state, all resources are in use, could be obtained even earlier, because no previous saving is needed.

In both theories, the fundamental problem is the same. Someone must detect investments profitable enough to pay back the credit or yield a profit sufficiently high to recompense the investor for his previous efforts.

The neoclassical argument, which is as well a cornerstone in the monetarism, affirms that injecting more money will lead to inflation and, in the long run, inflation leads to a demand for higher wages and the economy, therefore, ends up in the same situation as before, only that prices and wages have increased.

The problem is that since 40 years, we don't have, at least in the industrialised world, any inflation. The little inflation we have is necessary for a market economy. In order to reveal scarcity, the prices of some products must rise, and if other prices don't fall, we have some inflation.

Inflation would happen if the supply side was not able to satisfy the growing demand, but it seems that the supply side is always able to satisfy the demand. Even in historically unique situations, a situation we had in Germany after the fall of the wall in 1989, where the demand of East Germany (17 million people) was almost entirely satisfied by West Germany (63 million people) from one day to the other, a historically really exceptional situation, there was no inflation at all. For a short period, the account balance became negative, something unusual for Germany because part of the consumption was satisfied in foreign countries by import.

Although we can find thousand of articles about deficit spending and inflation, some of them wondering that there is no relationship at all, see Why Isn’t There More Inflation?, the phenomena doesn't exist anymore. In a globalized world, any demand can be satisfied with the whole world, and it is very difficult to bring the worldwide supply to the knees.

The question since 40 years, it takes some time until economists realise that something has changed, the problematic relationship is deficit spending and public debt, deficit spending and negative trade balances. In order to resolve this problem, we need a rentable use for idle resources. The neoclassical mainstream says that this can be attained by lowering the wages, Keynes says, that this can be attained by lowering the interest rates injecting more money. Rentability depends on the total costs and wages, and interest rates are costs.

We don't have to go into detail about neoclassic theory to see that Keynesian theory is more plausible. Lowering the wages, we risk to reduce the demand and without demand, the economy can't grow. If money is injected, only extra demand is produced.

(In order to see the relevance: If credit is paid back in 10 years, the sum is 300,000 dollars, the type of interest 2.5 percent, the money paid for interests is 39,371,65 dollars. If the type of interest is 5 percent, the money to be paid for interests is 81.835,85 dollars. The difference is 42.464,20 dollars. That means, if this company, the one who invests the 300, 000 dollars, has three employees, it can pay 1,415 dollars more every year if the type of interest is lowered to 2.5 percent. This obviously would be bad for the people who get income from interests, but everybody agrees that it is less hard to earn money just sitting and wait, than having to work for it.)

In summary, it is to presume that in part, the mathematic modeling of the IS-LM model is responsible for the misleading interpretations of the Keynesian theory. Although the curve is called IS curve (with I like INVESTMENT and S like SAVING), in further discussions, no distinction is made between consumptive public expenditure and investing public expenditure. In general, we read in textbooks nice sentences like "if public spending is increased, the IS curve shifted upward." That's true, but in reality, we must distinguish. If public spending consists of consumption, for instance, social transfers, the only way to get the money back are the multiple effects. (For further explanation see the little book about Keynes downloadable from the start of this website.) Pure consumption doesn't generate any income, obviously. The situation is different if the public spending consists of investments. In this case, the investment itself produces income and pay off the credit doesn't depend therefore entirely on secondary effects. To make it easy, public spending could consist in research and development on stem cells. If this leads to a procedure allowing to create any human organ, it would obviously be a very big business.

For sake of simplicity this distinction is not made in the IS-LM model, although the name of the curve still reveals, that Keynes talked about investements and not consumption. We get a system as mecanical as the total equilibrium of Léon Walras.

It has been a little bit difficult to untangle the different positions, but it is clear, we are talking about how the nut can be cracked, that all the problems have little to do with writing discussion papers in scientific journals, which are never discussed.

The real problems are more practical and economists will find a job, when they are able to resolve them. But no advice is needed in discussion papers, nobody is going to read that, it is irrelevant.

Philosophical debate about liberty are not helpful. It's a question of controlling. We have already said that the study of economics can be reduced to two years. A specialisation on controlling in the public administrations, including the software packages, is therefore possible. You will find more examples in the previous chapters.

Philosophical debates about the Keynesian theory are not needed also. What is to be said about the Keynesian theory is said in the little book you can download from the startsite of this website. Adding some thousand discussion papers about the topic to the millions already existing, which nobody reads, are not helpful. It is more important to detect possible investments in the case that the private market player don't find them. For the state, it is also possible to invest in things that are only profitable in the very long run, like 100 years. The next generation will have no problem with inheriting debts, if they inherit assets as well. (It is to presume that the Egyptian pyramids were not a big business for old Egypt, but nowadays they are big business. To formulate it in a somehow surrealistic way.)

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