[jmherbener]

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.)

[jmherbener]

Here’s a useful discussion of Ricardian Equivalence.

http://www.econlib.org/library/Columns/Teachers/ricardianequiv.html

There are two important points. First, no matter how the government finances its command over resources, the inefficiency of transferring resources from entrepreneurs in the market to bureaucrats in the government occurs in the present. Resources are taken out of the realm of decision-making with economic calculation and pulled into the realm of decision-making without economic calculation. Neither debt financing nor monetary inflation delay this burden into the future.

Second, the methods of financing a government expenditure (taxes, borrowing or monetary inflation) have different secondary effects on the efficiency of economic activity as it plays out into the future.

[jmherbener]

The key point, as you note, is that an increase demand for money raises the PPM, that is prices fall from the concomitant decrease in demand for goods, both consumer and producer goods. If time preferences stay the same, then the price spreads between consumer and producer goods must stay the same, i.e., the rate of return in production must stay the same. The extent to which the PPM rises, then, will depend upon maintaining the same price spread between the now lower prices of both consumer goods and producer goods. To put the point more generally, prices are flexible enough to adjust throughout the economy to maintain both a unchanging interest rate of return on production and a lower overall price structure in the face of an increase in money demand.

[jmherbener]

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.”

https://mises.org/library/profit-and-loss-0

[jmherbener]

There is no critique in the class material of the concept of “velocity” of money. The Austrian analysis of the purchasing power of money or price inflation is in the lecture on the “Money Market” in the course on Austrian Economics.

Mises has a critique of the quantity theory of money in his book, The Theory of Money and Credit:

https://mises.org/system/tdf/The%20Theory%20of%20Money%20and%20Credit_3.pdf?file=1&type=document

The basic point is that nothing more can be learned about the price of a good by using the concept of velocity. The price of cars is determined by demand and supply. We don’t need to know anything about the “velocity” of cars to understand how the price is determined. The price of money or its purchasing power is also determined by demand and supply. Velocity of money adds no additional insight to the analysis.

[jmherbener]

Here are the categories of Goods:

1. Present Goods
a. Consumer Goods
b. Media of Exchange
2. Future Goods
a. Producer Goods

Income = Consumption + Saving-Investing

Here are the categories of Saving-Investing:

1. Plain Saving-Investing: Storing existing goods.
2. Capitalist Saving-Investing: Diverting resources from more direct to more indirect production.

Time preference determines the ratio of consumption to capitalist saving-investing and the interest rate of return on production. Capitalist saving-investing earns a rate of interest.

People hold money balances to deal with the uncertainty of the future. Money holdings are plain saving-investing. Plain saving-investing does not earn a rate of interest.

In the ERE there would be no money holdings at all, yet there would be capitalist saving-investing and a capital structure of production for producing consumer goods. Also, all production would earn the interest rate of return, but there would be no profits or losses.

[jmherbener]

Unemployment can be voluntary or involuntary. Voluntary unemployment is beneficial since it is chosen by persons as their preferred alternative. Some people chose to retire from the workforce and live off their pensions. Millennials are known to take a “gap” year between graduating college and starting a career. Such forms of unemployment are beneficial. Likewise, employers benefit when choosing a preferred candidate over a less-preferred one in filling a position. Since employment requires a mutually-beneficial exchange of labor services between the worker and the employer and searches are required by both parties to find the best “fit”, unemployment during the search process can be chosen by workers and employers and therefore, be beneficial.

Involuntary unemployment harms someone. It occurs, mainly, when the state criminalizes certain terms of employment. A legal minimum wage above the market wage can result in involuntary employment. Both the employer and the worker would benefit from employment, but the employer refuses to hire the worker under penalty of law.

Here is an article on the topic by Hans Hoppe:

https://mises.org/library/misesian-case-against-keynes

[jmherbener]

An addition to money holdings is not consumption. It is plain saving, which as you suggest, is a present good, but not a consumer good.

If a person’s time preference doesn’t change, then his ratio of Saving-Investing to Consumption does not change. With his time preference constant, for a person to fund an addition to his money holdings out of his given income on anything, he must draw the funds out of consumption and saving-investing in the same proportion. If he draws the funds exclusively from consumption, then the ratio of S-I to C would necessarily change.

[jmherbener]

Well, that’s what the author claims. But I don’t see why it must be so. Time preference determines the price spread between output and input prices. The demand for and supply of money determine the PPM overall. The two are not related in any logically necessary fashion. The author assumes that when the rate of return in money production is increasing from increasing money demand that the rate of return in other lines has stayed the same. In fact, the rate of return must be falling in lines of production in which demand has gone down to allow the increase demand for money. People satisfy their increased demand for money by reducing their demand for, and increasing their supply of, other goods.

In other words, the rising rate of return in money production is balanced by a falling rate of return in other lines so that when the reallocation of resources is finished, the rate of return is the same as it was before money demand increased and demand for other goods declined. As long as time preferences don’t change during the process, the rate of return overall will not change. The only difference between this case and the case of demand shifts between goods other than money, like landline and cell phones, is that in this case the PPM also changes during the adjustment process.

[jmherbener]

The productivity of a land site or a capital good (or a labor service) determines its price along with the revenue generated by output it produces. The price of a factor of production conforms to its MRP.Investment by entrepreneurs to buy factors of production, however, earns only the rate of interest. Entrepreneurs pay DMRP to buy factors (sooner) and receive their MRP when selling the output (later).

What Rothbard is referring to is the distinction between factors of production that exist in nature, which are land and labor, and factors of production that come into existence through production, which are capital goods. Neither land nor labor needs to be produced to come into existence, so they have gross physical productivity. But capital goods must be produced to come into existence, so they have only net physical productivity. As shown above all factors of production have only net monetary productivity, i.e., investment in them earns only a net return, which is the rate of interest.

[jmherbener]

The IS-LM model stipulates certain “channels” of influence that one variable has on another. These stipulations are Keynesian and therefore subject to critique from an Austrian viewpoint.

Keynes asserted that the interest rate is determined by the stock of money and the demand to hold money. This effect occurs indirectly as people trade money holdings for bonds in their asset portfolios. People sell bonds to satisfy their demand to hold more money and therefore, interest rates rise as the necessary consequence of bond prices falling.

Austrians counter that as a medium of exchange people hold money in lieu of demand for goods in general and not just bonds. People sell across all goods to satisfy their increased demand to hold money and therefore, prices in general fall.

Furthermore, unless time preferences change during the transition between the original and higher demand for money, the ratio between consumption and saving-investing will not change. Time preferences determine both the pure rate of interest and the ratio of consumption to saving-investing. It doesn’t seem to me that the unnamed author provides an argument to show that time preferences necessarily change in the transition. He has simply stated, correctly, that the composition of investment will shift away from other goods and into commodity money. But commodity money production is no different than the production of any other good in the economy in terms of generating a rate of return. And so, his case is no different than increased demand for smartphones leading to an increase production by pulling capital and labor out of the production of landline phones. Such changes in the composition of investment do not affect the rate of return or the proportion of resources in the economy devoted to saving-investing, both of which are determined by time preferences.

[jmherbener]

The first chapter of Henry Hazlitt’s Economics in One Lesson is a classic.

https://mises.org/system/tdf/Henry%20Hazlitt%20Economics%20in%20One%20Lesson.pdf?file=1&type=document

You could pick a chapter from Bob Murphy’s book Lessons for the Young Economist.

https://mises.org/system/tdf/lessons_for_the_young_economist_murphy_0.pdf?file=1&type=document

[jmherbener]

Because business-to-business sales are a multiple of consumer-to-business sales, the bulk of economic activity in the economy is not included in GDP. Consumption is not 70% of the economy (it is 70% of GDP) and therefore, stimulating consumption via fiscal and monetary policy is unlikely to bring an economy out of depression or lead to economic growth. Macroeconomic problems are likely caused by production aimed at satisfying business-to-business sales and not production to satisfy consumer-to-business sales.

https://mises.org/blog/growth-trends-measured-gdp-and-gross-output

[jmherbener]

GDP includes the market value of all final goods and services produced during some period of time. Investment, then, are factors of production (mainly capital goods) purchased by entrepreneurs and used by them instead of becoming part of the product they produce which are sold to someone else who then uses them. “Investment” in GDP accounts for the market value of capital capacity, i.e., assets, owned by the entrepreneur throughout the time frame of production. An auto entrepreneur, for example, owns a factory. He holds onto the factory as an asset for decades across hundreds of production runs for which he is purchasing materials and labor. Thus, his “investment” included in GDP is the market value of maintenance and additions to his capital capacity.

http://www.econlib.org/library/Enc/NationalIncomeAccounts.html

[jmherbener]

Gross Output includes the market value of all intermediate capital goods produced during a given time period in addition to the items in GDP. So, not only the market value of automobiles sold to consumers, which is in GDP, but the market value of the iron mined, the steel made, the tires fabricated, etc. are in GO.

http://www.bea.gov/faq/index.cfm?faq_id=1034

Here is Mark Skousen on GO:

http://mskousen.com/category/gross-output/

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