Maybe the most pernicious tool of the camp-following whores is the Circular Flow Diagram. It's taught to every high school and college kid, across the world. Once you adopt that as your overall model, you're primed to accept Keynes. Clearly, it's money, not production, which creates prosperity. Even free-market outfits like FEE teach it to kids as gospel.
Because it's visual, the brain grabs this picture and refers to it constantly. It takes volumes of text and months of work to dispel that visual image and its implications.
We're working to displace the CFD with our Austrian model, which we call LinKe. We show kids the Austrian view years before the Keynesians get their hands on them. And once you have the obviously correct picture in your head, the CFD really falls flat.
Thanks for the video! I've been looking for something like this while explaining this idea to little kids (you have to catch them early, right you are.)
I actually quite like the circular flow model *when it's understood correctly*. The problem is that it usually isn't. There are several incorrect assumptions:
1. For each sector, flows in have to equal flows out in every time period. (In reality, net outflows draw from a stock, which can sustain the flow until it's expended. Ice cream makers can sell to pie makers in the summer, and the flow can reverse in the winter).
2. The quantity of money is fixed. (In reality, money is constantly being created and destroyed).
3. All household spending is for immediate consumption. (In reality, durable goods are an important form of household saving).
4. Higher GDP is better. (In reality, squandering all household wealth on useless objects is bad, while spending on useful durable goods e.g. houses, cars, white goods, etc. is good).
5. (One of the worst!) Saving is a donation from households to banks, and investment is a donation from banks to firms. (In reality, saving is building up household stocks of money, and firms have to repay loans from their incomes).
Those are only the beginnings of its problems. One of its many flaws is that it's so likely to be "misunderstood". Keynesians 'understand' it one way, MMTer's another, Monetarists yet another... Reminds me of what Thomas Paine said about preachers; each understands the bible differently and each understands it best. Fine for religion, but not science.
One of CFD's big misdirections is treating the "factors" like they all have the same properties. They're just homogeneous, interchangeable, infinitely divisible blobs. If you want to be in the oil business, you just go down to Walmart and buy a few acres of oil land, three and a half oil wells, a pinch of refinery, a few hours of roughnecks and engineers, and you're off to the races. No scale impacts, no time elements, no differences in labor attributes, no clue where the factors come from... childishly simple.
Built by academics who never set foot in the real world and wanted to force the real world into a Keynesian mold. If their model reflected the complexities and unknowns of reality, no one would ever believe in central planning. And camp-followers couldn't allow that!
Yes, Keynesianism seems like it's presented for people who want to "manage the economy", so they can be the heroes, making everyone prosperous, and justifying them being well-remunerated for their wisdom in spending like drunken sailors and manipulating interest rates.
Regarding your 2nd paragraph, one breakthrough I had was in realising that I didn't have to pick a unit of economic value. Instead, I see different types of asset, liability and service as different dimensions of an enormous, but still finite, vector. My work doesn't try to predict what people will do: it just describes the effects of people's actions - essentially arithmetic. It's childishly simple, but it's enough to draw some very interesting conclusions. For example, I can trivially prove that QE is a zero-sum game, and I can explain the constraints on the rate of interest for a loan. I can also show that a government's negative equity is effectively an unrecognised liability of the private sector. I'm pretty confident I can also show that it's possible to have business cycles without the malinvestments which are explained well by ABCT.
Thank you so much for this well written explanation. People need to understand this concept and the implications now more than ever. From an Austrian capitalist.
Interestingly, my study based on balance sheets supports the same conclusion about liberty, despite approaching the analysis in a more Post-Keynesian way. The economy is essentially barter, except people can trade debts (both asset and liability sides) in addition to goods and services.
In my opinion, the biggest weakness of most economic theory is ignoring the critical importance of insolvency. For example, the government's negative net worth is an implicit liability of the private sector, and it's just being ignored as though it's unimportant.
If you want to see a simple economic model which reveals flaws in all sorts of economic theories, (and uses a rather nice arrow notation!), head over to https://economics21st.substack.com
I'd say the person who takes out the mortgage owns the house, but owes a lot of money to the lender. Much better to own it outright, as you say. I'd be interested to know whether you agree with my analysis. (To understand the basic idea and the notation, look at the pinned 'Start Here' article, which just links to a handful of other short articles).
In the US you do technically own the title to the property/house. The lender still has a lien and interest in the property until the mortgage is paid off. But if you stop paying, you won't own it for much longer.
From an economic perspective, I don't think it matters much. The ultimate outcome is the same, whichever party is the legal owner of the property in the period between mortgage creation and either full repayment or default.
It seems like a lot of Americans who give lip service to the idea of freedom are quick to take government handouts and resent any discussion of reducing or eliminating these “freebies”. They don’t see any harm to their liberty as long as the government provides comfort and security. It is very sad to see that half of our country does not choose freedom but, rather, dependency (and do not see the slippery slope that inevitably follows). In a democracy, when people perceive themselves to be comfortable, is there any way to resurrect liberty for all?
A lack of intelligence and self discipline makes this all possible, thus the dumbing down process taking place in the public school systems, sPoRtz, porn, and Hollyweird propoganda, all designed to keep the goyim entertained and content. Bread and circus.
The thing is that most people have trouble grasping even the principle of the Broken Window, either as explained by Bastiat or by Hazlitt; and that's where it all starts.
I got my Econ doctorate at Penn in the late 80s-early 90s, when they were explicitly Chicago school. I remember waiting around outside to take the year-end prelim exams and talking to someone who mentioned their preference for the Austrian school. I’d not heard of it before, but it fit right in with the Ayn Rand novels I was chewing my way through....
I’m a student who has recently come back from a solo trip to front line Ukraine. I’ve just published a new piece on my experiences and thought readers here may appreciate it. Please do see what you think. https://irongoose.substack.com/
Great article! Thanks for the resource recommendations!
Lots of great pearls of wisdom. e.g. The best way to help people, the best way to build a society, is liberty.
And for the sake of arguing your point, even if SOME government economic intervention (say 15%) is beneficial, the fact that MOST of it is harmful is still enough to validate the logic that NO government intervention (unless for consumer protection) is much better overall than any -- because there's no way to know in advance, which of their interventions will end up having positive impacts that outweigh the unforeseen unintended consequences.
The road to serfdom....everyone should read it. Thanks once again for another great article.
Yes, absolutely essential. And read again, and again.
Maybe the most pernicious tool of the camp-following whores is the Circular Flow Diagram. It's taught to every high school and college kid, across the world. Once you adopt that as your overall model, you're primed to accept Keynes. Clearly, it's money, not production, which creates prosperity. Even free-market outfits like FEE teach it to kids as gospel.
Because it's visual, the brain grabs this picture and refers to it constantly. It takes volumes of text and months of work to dispel that visual image and its implications.
We're working to displace the CFD with our Austrian model, which we call LinKe. We show kids the Austrian view years before the Keynesians get their hands on them. And once you have the obviously correct picture in your head, the CFD really falls flat.
Feel free to share this model with any kids you care about. https://vimeo.com/828163972?share=copy
Thanks for the video! I've been looking for something like this while explaining this idea to little kids (you have to catch them early, right you are.)
Thanks, Iris. Here's a longer one that adds context for the model and takes you all the way to business cycle theory.
https://vimeo.com/854507169?share=copy
Thanks, this is genuinely helpful!
Cool video, nice visualizations.
Thanks, Joe!!!
I actually quite like the circular flow model *when it's understood correctly*. The problem is that it usually isn't. There are several incorrect assumptions:
1. For each sector, flows in have to equal flows out in every time period. (In reality, net outflows draw from a stock, which can sustain the flow until it's expended. Ice cream makers can sell to pie makers in the summer, and the flow can reverse in the winter).
2. The quantity of money is fixed. (In reality, money is constantly being created and destroyed).
3. All household spending is for immediate consumption. (In reality, durable goods are an important form of household saving).
4. Higher GDP is better. (In reality, squandering all household wealth on useless objects is bad, while spending on useful durable goods e.g. houses, cars, white goods, etc. is good).
5. (One of the worst!) Saving is a donation from households to banks, and investment is a donation from banks to firms. (In reality, saving is building up household stocks of money, and firms have to repay loans from their incomes).
Those are only the beginnings of its problems. One of its many flaws is that it's so likely to be "misunderstood". Keynesians 'understand' it one way, MMTer's another, Monetarists yet another... Reminds me of what Thomas Paine said about preachers; each understands the bible differently and each understands it best. Fine for religion, but not science.
One of CFD's big misdirections is treating the "factors" like they all have the same properties. They're just homogeneous, interchangeable, infinitely divisible blobs. If you want to be in the oil business, you just go down to Walmart and buy a few acres of oil land, three and a half oil wells, a pinch of refinery, a few hours of roughnecks and engineers, and you're off to the races. No scale impacts, no time elements, no differences in labor attributes, no clue where the factors come from... childishly simple.
Built by academics who never set foot in the real world and wanted to force the real world into a Keynesian mold. If their model reflected the complexities and unknowns of reality, no one would ever believe in central planning. And camp-followers couldn't allow that!
Yes, Keynesianism seems like it's presented for people who want to "manage the economy", so they can be the heroes, making everyone prosperous, and justifying them being well-remunerated for their wisdom in spending like drunken sailors and manipulating interest rates.
Regarding your 2nd paragraph, one breakthrough I had was in realising that I didn't have to pick a unit of economic value. Instead, I see different types of asset, liability and service as different dimensions of an enormous, but still finite, vector. My work doesn't try to predict what people will do: it just describes the effects of people's actions - essentially arithmetic. It's childishly simple, but it's enough to draw some very interesting conclusions. For example, I can trivially prove that QE is a zero-sum game, and I can explain the constraints on the rate of interest for a loan. I can also show that a government's negative equity is effectively an unrecognised liability of the private sector. I'm pretty confident I can also show that it's possible to have business cycles without the malinvestments which are explained well by ABCT.
Thank you so much for this well written explanation. People need to understand this concept and the implications now more than ever. From an Austrian capitalist.
Excellent piece
The universe is transactional, and runs on the marginal utility of those transactions. It seems only the Austrian School has figured that out.
Interestingly, my study based on balance sheets supports the same conclusion about liberty, despite approaching the analysis in a more Post-Keynesian way. The economy is essentially barter, except people can trade debts (both asset and liability sides) in addition to goods and services.
In my opinion, the biggest weakness of most economic theory is ignoring the critical importance of insolvency. For example, the government's negative net worth is an implicit liability of the private sector, and it's just being ignored as though it's unimportant.
If you want to see a simple economic model which reveals flaws in all sorts of economic theories, (and uses a rather nice arrow notation!), head over to https://economics21st.substack.com
P.S. The axioms I needed were:
1. People can own things.
2. People can be owed things.
3. People can owe things.
It's easy to owe a house (mortgage). Much better to own it.
Homeower Vs Homeowner
I wrote a short article on mortgages. https://economics21st.substack.com/p/mortgages-quick-and-easy-series
I'd say the person who takes out the mortgage owns the house, but owes a lot of money to the lender. Much better to own it outright, as you say. I'd be interested to know whether you agree with my analysis. (To understand the basic idea and the notation, look at the pinned 'Start Here' article, which just links to a handful of other short articles).
In the US you do technically own the title to the property/house. The lender still has a lien and interest in the property until the mortgage is paid off. But if you stop paying, you won't own it for much longer.
True.
From an economic perspective, I don't think it matters much. The ultimate outcome is the same, whichever party is the legal owner of the property in the period between mortgage creation and either full repayment or default.
There's a nice description of the difference on Wikipedia: https://en.wikipedia.org/wiki/Mortgage_law#Legal_aspects
It seems like a lot of Americans who give lip service to the idea of freedom are quick to take government handouts and resent any discussion of reducing or eliminating these “freebies”. They don’t see any harm to their liberty as long as the government provides comfort and security. It is very sad to see that half of our country does not choose freedom but, rather, dependency (and do not see the slippery slope that inevitably follows). In a democracy, when people perceive themselves to be comfortable, is there any way to resurrect liberty for all?
A lack of intelligence and self discipline makes this all possible, thus the dumbing down process taking place in the public school systems, sPoRtz, porn, and Hollyweird propoganda, all designed to keep the goyim entertained and content. Bread and circus.
Always feeling smarter after reading an article of yours.... thank you very much
Beautifully succinct. Thank you.
Yup ... or as I heard Saifedean once say, Austrian economics is economics.
Love your writings and podcast. Just wish somehow we could get a transcript of your weekly podcast to read and not solely listen??
The thing is that most people have trouble grasping even the principle of the Broken Window, either as explained by Bastiat or by Hazlitt; and that's where it all starts.
Thanks Peter, great article.
I got my Econ doctorate at Penn in the late 80s-early 90s, when they were explicitly Chicago school. I remember waiting around outside to take the year-end prelim exams and talking to someone who mentioned their preference for the Austrian school. I’d not heard of it before, but it fit right in with the Ayn Rand novels I was chewing my way through....
Brilliant work
I’m a student who has recently come back from a solo trip to front line Ukraine. I’ve just published a new piece on my experiences and thought readers here may appreciate it. Please do see what you think. https://irongoose.substack.com/
Great article! Thanks for the resource recommendations!
Lots of great pearls of wisdom. e.g. The best way to help people, the best way to build a society, is liberty.
And for the sake of arguing your point, even if SOME government economic intervention (say 15%) is beneficial, the fact that MOST of it is harmful is still enough to validate the logic that NO government intervention (unless for consumer protection) is much better overall than any -- because there's no way to know in advance, which of their interventions will end up having positive impacts that outweigh the unforeseen unintended consequences.
Excellent, Professor!