September 16, 2016 at 9:25 am #18806
Let’s say that a person counterfeits one million dollars to start his own pharmaceutical business. The seen is that he creates jobs, spurs new research. I’m guessing the unseen is money is devalued for everyone. What else would be the unseen?
Let’s say that his investment pays off and his company discovers the cure for cancer.
Could it be that this fraud/gamble can benefit society in the long run.
I’m guessing that this is sort of what government does, except most of their gambles don’t pay off.September 16, 2016 at 11:42 am #18807jmherbenerModerator
What is unseen is the alternative valuable goods that would have been produced by the resources that have been drawn into the counterfeiter’s operation. The only way to ensure that the value of goods produced in one line of production exceeds those produced in other lines of production with the same resources is to have the expanding line of production compensate for the value in other lines by paying prices for the resources that are greater than what would have been paid for them in the contracting lines of production.
Because the future is uncertain, capitalist can only predict which investments in the various lines of production by entrepreneurs will pay off. The only way to ensure that the allocation of capital funding is done efficiently is to have entrepreneurs cover the cost of funding their projects by paying back their loans with interest.
Obviously, not everyone who has a project can be funded with newly produced money, whether counterfeited or handed out by the state. There are only so many real resources to go around. Therefore, some process of picking who gets funded, besides the foresight of capitalist who aim to fund projects that will generate a rate of return, would have to be used. Just because a person is good at counterfeiting doesn’t demonstrate the likelihood of their investment project paying off. Likewise, joining the ranks of politicians or bureaucrats doesn’t demonstrate a superior ability to pick successful investment projects. Capitalists, on the other hand, have their own wealth on the line when they fund projects and earn monetary gains for superior foresight and suffer monetary losses for inferior foresight.
Take a look at Mises’s article, “Profit and Loss.”September 21, 2016 at 8:33 pm #18808
Read “Profit and Loss”, will read it again. Very clear and cleverly scathing.
What would be the effect upon an economy if everyone counterfeited $1,000 and spent it in one day? and they didn’t know that others were counterfeiting.
Would there be a different effect if they knew everyone was counterfeiting?
How about the opposite? What if everyone lost (permanently destroyed) $1,000 dollars?
If they thought they were the only one? If they knew it happened to everyone?September 22, 2016 at 3:23 pm #18809jmherbenerModerator
If everyone counterfeited $1,000 and spent it in one day, some entrepreneurs would run down their inventories, others would raise their prices, and others would suffer excess demand. Then the new money would be earned by producers and disbursed according to their time preferences pushing up demands more generally. In the end the purchasing power of money would decline and income and wealth would be redistributed. The only difference between a case in which people know and a case in which they don’t know that others are counterfeiting is that if they know, they will attempt to buy things before others and so the impact of the three possibilities will be felt earlier in the day. However, with more money, their demands must increase and with them, prices of goods must go up. (We are ignoring the possibility of building up money holdings.)
In the case of $1,000 disappearing from everyone’s money holdings in one day in which they reacted by reducing their demands by $1,000, some entrepreneurs would build their inventories, others would lower their prices, and others would suffer excess supply. Then the incomes of producers would fall and they would reduce their consumption and investment expenditures according to their time preferences pushing down prices generally. If people thought everyone has less money to spend, they would try to delay the reduction of their demands until after others reduce their demands and so the impact of falling prices would be felt more heavily at the end of the day. However, with less money to spend, their demands must decline and with them, the prices of goods must also decline. (We are ignoring the possibility of running down existing money holdings to fund demands.)September 24, 2016 at 5:39 am #18810
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