There are so many errors in Rozeff’s critique that basically his entire argument is one long journey through monetary confusion. I will start by identifying his theoretical errors and then proceed to show where he specifically applies these errors in his critique of Ellen. Rozeff doesn’t understand, and therefore fails to engage, Ellen’s basic argument, which is that the monetary cost of government borrowing money to finance capital expenditure is DOUBLED (on average) by interest payments to private sector lenders, and that government (and the taxpayers who ultimately pay the interest) can save itself the interest expense by opening a public bank and lending the money to itself, then refunding the interest charges to itself, creating effectively interest free loans, and thereby saving taxpayers fully one half of the money cost of the capital goods. This is a “monetary” mechanism to reduce a money cost, but Rozeff makes a long argument about the cost of “real capital”, as if real capital (labor and all other economic resources) and financial capital (money) are one and the same thing. They are not. Money and the real economy are two entirely separate systems. Financial capital and real capital are two entirely different kinds of things. The real economy produces exactly zero “money” (except counterfeiters). It produces economic goods and services. The money system produces exactly zero “economic value”: it creates and allocates money numbers. How do these two disparate systems interact so that the economy has money to use? The essence of Rozeff’s error is the common feature of all such error that we find in the classical, neoclassical and Austrian schools of thinking. They conflate goods-values with money, and they vacillate between the two uses as if goods and money are one and the same thing. The foundation of this error is assuming in the first place that we are essentially living in a barter economy where everybody produces goods values and we exchange those values with one another, often via the medium of money, and money is just another commodity of flexible value like all other goods that people exchange in the marketplace. The fallacy arises from failing to recognize that money is something “real”. Unlike gold, fiat money is simply numbers in banking system computers (purely numerical bank deposits are exchangeable for ‘physical’ banknotes), but even though money is just numbers it still is not merely some numerical “representation”, with economic goods being the “real” thing exchanged. Money, whether in the form of purely numerical bank deposits that can be transferred by check or debit, or in the form of banknotes (“cash”; soft currency), or in the form of a commodity like gold (hard currency), is the entire demand side of the supply-demand equation. In fact we live in a money economy, not a barter economy. We do not “exchange goods values” in the marketplace. We “buy and sell stuff”. This next point is critical so I will shout it: THE DEMAND SIDE OF VIRTUALLY EVERY ECONOMIC EXCHANGE IN THE REAL WORLD MARKETPLACE IS MONEY. Demand is not ‘represented by’ or ‘denominated in’ money. Demand IS money. Everybody “wants” economic goods, so there is always real demand for goods. But there is not always “effective demand” for goods. Effective demand is money in the hands of people who want to buy stuff. The stuff can be consumer goods that will be used up by the buyer or it can be capital goods that will be worked by the buyer to generate more economic value. Either way, whether the money is spent as consumption or investment, the critical fact is that no consumption or investment can take place without the SPENDING of MONEY. Where does money come from and how does it get into the hands of people who want to buy stuff? I.e., how does money become effective demand for consumer and investment goods? Classical, neoclassical and Austrian economics never answer this question, and they don’t think they have to, because they simply “assume” the money. They follow Jean-Baptiste Say, “Supply creates its own demand.” In a barter economy if I produce tin pails and if there is always a demand for tin pails because our economy is always in a state of scarcity, then by producing the pails I have produced “exchange value” that I can haul to the marketplace and use to “purchase” a side of pork or whatever else I “demand”. My production of a “supply” of economic goods automatically provides me with effective “demand” for goods produced by others. “Supply creates its own demand.” But this only works in a barter economy under conditions of permanent economic scarcity where more goods of practically any kind are always wanted by people. In the real world we have businesses who do nothing but load perfectly good and almost new furnishings and other real economic goods out of foreclosed McMansions and haul that stuff to the dump where it is crushed by bulldozers because THERE IS NO EFFECTIVE DEMAND FOR THOSE GOODS. The people who want those goods are “bankrupt”: they have no money to pay for the goods they want, so they are kicked out of their house and their goods are hauled to the dump. Our real world economy violates the conditions under which Say’s Law applies. We do not suffer economic scarcity. We live in economic abundance, luxuriously, extravagantly, wastefully so. And with labor specialization almost nobody directly produces anything of exchangeable value. Farmers who sell food in farmers’ markets are an exception, as are service providers like welders and mechanics who fix stuff. Most people work in offices (try selling the pieces of paper with writing on them, that you produce in the office, out in “the free market”: the “exchange value” of that “production” is effectively $zero outside your office) and retail where no real economic wealth at all is directly produced; or they work in complex industries where any individual only contributes a narrow (and in itself unmarketable) component of what will ultimately be the product that is sold, like steel or oil or a car. By digging a hole in the ground you produce a hole. Nobody is going to buy that hole from you. It has no exchange value. But pumping crude oil out of that hole and refining it into gasoline will ultimately generate a marketable commodity, gasoline, which itself is only in demand if internal combustion engines also exist, AND if the people who want to use those engines to power machines have money to buy the gasoline. We are so far removed from any semblance of bartering exchange values in a marketplace that the idea would be laughable if it weren’t for the woeful fact that it is accepted as “reality” by classical, neoclassical and Austrian schools of economics. As I will demonstrate by pointing out instances in Rozeff’s arguments below. My comments will be in {brackets}.
The Many Fallacies of Ellen Brown by Michael Rozeff, Lew Rockwell.com Ellen Brown, who is an attorney, has written an article about what she calls “An Economic Bill of Rights”. I will argue that her case is totally wrong. It is totally permeated with factual and conceptual errors. Even without my showing precisely how her financial analysis is in error {i.e. my perspective is “intuitively obvious” so I don’t need to engage her arguments logically}, we can understand that she is propounding nonsense by looking at her pie-in-the-sky conclusion: “If the government owned the banks, it could keep the interest and get these projects at half price. That means governments – state and federal – could double the number of projects they could afford, without costing the taxpayers a single penny more than we are paying now. “This opens up exciting possibilities. Federal and state governments could fund all sorts of things we think we can’t afford now, simply by owning their own banks.” Brown wants government to double in size {the chain of logic eludes me, but if Rozeff is saying that government doubling its capital projects doubles government per se, then he is wrongly assuming that capital projects comprise 100% of government activity}. That would make it 80 percent of the economy {federal taxes are currently 18% of GDP, and the deficit is about 10% of GDP, so federal government is currently 28% of the economy, not 40% as Rozeff’s arithmetic suggests; add State and local government and 40% might be accurate, but here again, capital projects are a minor component of government activity so doubling the projects does not double the government}. This is nonsense. It is an impossibility. If government becomes 80 percent of the economy, the economy will shrink drastically because productivity will plummet {the assumption is made without proof that government is unconditionally inefficient and that the private sector is unconditionally more efficient}. Not only that, huge amounts of capital will откликавшейся country {that horse is long gone: huge amounts of capital have already flown to Asia and elsewhere over the past 30 years of corporate globalization}. Brown thinks that this expansion can be done costlessly. That is, she thinks that the resources absorbed by government are costless. This is patently false. All resources diverted to government are taken away from persons who would otherwise use them for their own purposes {this is true if and only if the economy is already running at full capacity. When the economy is slack, such as in a recession/depression, NOBODY is using the idle resources, nor does anybody who has money want to put them to work, because depression is a lack of effective demand and you can’t recover the costs of your investments under these circumstances let alone make profits}. The diversion removes the opportunities for private use. Hence the cost of the diversion to government is, at a minimum, the opportunity cost of those resources or capital {in a depression the opportunity cost of using idle resources IS NEGATIVE; that is, there is positive net economic benefit from putting those resources to work rather than letting them lie idle}. And that’s a minimum cost because it excludes the costs the government incurs in seizing the resources and the costs incurred in misallocating those resources after they are seized (gee, only government misallocates? How about several trillion dollars worth of McMansions whose construction was financed by money-creating PRIVATE SECTOR bankers? Was there a wee bit of financial misallocation here that caused a wee bit of real resource misallocation, as in building millions of houses that NOBODY IN AMERICA CAN AFFORD TO BUY AT THEIR COST PRICE?}. Brown doesn’t understand the effects of government on private economic behavior (am I hearing the confidence fairy?}. She doesn’t understand government’s inefficiency and incapacity to be productive { a ridiculous generalization – government bureaucrats are worthless slackers; corporate bureaucrats are value generating paragons; Rozeff specializes in mistaking the slogans and truisms of anti-government propagana as “facts”}. She doesn’t understand cost, that is, opportunity cost {Rozeff doesn’t understand economics, idle capacity economics}. Brown thinks that there is a governmental free lunch. She thinks she has discovered a free lunch that has up to now eluded realization and perhaps discovery by the human race {recently Dirk Ehnts has been digging up centuries old expressions of these ‘discoveries’; e.g. Thomas Malthus’ description of the fallacy of composition of “savings”; during the last depression 80-90 years ago Irving Fisher and CH Douglas wrote extensively about their ‘discoveries’; more recently Hyman Minsky built on those ‘discoveries’; what is “news” to Mr. Rozeff is ancient history to anybody who have done any research into the history of thinking about money and macroeconomics; apparently only private sector bankers who create money as loans at interest deserve a “free lunch” in Rozeff’s universe}. She seems not to realize that the Russian and Chinese Communists did what she is proposing. They absorbed all the banks. They mobilized all the capital they could lay their hands on. They funded all sorts of things. The costs of seizing this capital were enormous {apparently Mr. Rozeff is unaware of developments in China since Deng Xiopang declared in 1988, “to be rich is glorious”; the Chinese government owns the Chinese money system and the banks, and China “funds all kinds of things”, like high speed rail, massive industrial capacity, etc. I am failing to see the “enormous costs” of “seizing this capital”; what I see looks very much like enormous benefits to the Chinese economy and people}. Millions of people were killed, imprisoned, and sent to gulags. Millions were impoverished. Misery mushroomed. The results were total failure {Rozeff’s point here is valid: excessive centralized control of a large scale economy like China or Russia rarely generates optimal outcomes; just look at the uniform herd behavior of US and European bankers during the 2000s RE bubble, which popped, and “millions were impoverished. Misery mushroomed. The results were total failure.”; excessive allocation power is the culprit, whether the concentrated allocation power is wielded by government managers or private managers called “bankers”}. The difficulty in rebutting what she says is that her message has been reduced to a simple catchy theme. It is a false theme, but it still has the power to attract. Her theme appeals to anti-banker sentiments {pretty hard to find any pro-banker sentiment among the still bleeding OECD victims of recent bankster kleptocracy}. It appeals to anti-interest sentiments {classical economics was all about freeing the productive factors from economic rents, like interest payments; so is Rozeff disparaging Smith, Ricardo and Mill along with Ellen Brown?}. She asserts that the prices we pay for goods are 40 percent interest costs. This catches one’s attention, but it is total nonsense. It is totally wrong. It is outrageously high and exaggerated {if this is exaggerated, then how can it be that finance is capturing 40% of ALL corporate profits? 50% of the total price paid for mortgaged gov’t capital projects and mortgaged private and commercial real estate is interest that is paid year by year over the amortization of the debt; RE and other capital spending do not comprise 80% of all spending, so the 50% interest component of RE and capital costs does not by itself produce the 40% interest total in all prices; but RE is by far the largest asset class in every economy, so it’s no stretch that 40% of all prices is interest}. She goes on to assert that this cost, whatever size it is, magically disappears if government owns the banks{no, Ellen is making the much narrower and entirely correct case that public infrastructure costs could be reduced by half if government self financed rather than borrowed from and paid interest to private bankers}. Th...
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