[jmherbener]

A worker who produces more will generate more revenue for the entrepreneur when the additional output his greater productivity generates is sold. Because of the greater revenue to be earned, the entrepreneur will pay more for such labor. In other words, entrepreneurs’ demand for more productive labor will be greater than their demand for less productive labor.

It doesn’t matter where the entrepreneurs’ sell the output produced by labor. What they’re willing to pay for labor depends on the revenue generated by customers who buy their output, wherever they might reside. If diary products produced in rural Pennsylvania are sold to consumers in NYC, diary workers receive higher wages than if they had to sell to their neighbors locally. Dairy workers then realize their higher real wage by purchasing products produced by other workers in other places.

Take a look at the work of Ben Powell on sweatshops:

http://econlib.org/library/Columns/y2008/Powellsweatshops.html

[jmherbener]

Mill is arguing that production, not consumption, is what generates wealth. He points out that it is a fallacy to conclude from the fact that an individual producer is better off if more people to buy his output, that everyone is better off if aggregate consumption is larger. He then distinguishes between unproductive consumption and saving, the latter of which provides a fund of consumption for workers who can then specialize in production without having to produce their own consumption goods. This process raises productivity and therefore, the wealth of people in the economy.

So if foreigners come to a country and buy goods for their own consumption, production overall is not stimulated. It is merely shifted away from goods with less demand toward goods with more demand.

[jmherbener]

2. Lengthening means that the new set of production processes take more time to complete than the old set. For example, the old set might be (1) mine iron in existing mines using existing equipment (2) produce steel with the iron in existing steel mills using existing equipment (3) fabricate car fenders with the steel in existing fabrication factories using existing equipment (4) assemble cars with the fenders in existing auto factories using existing equipment. With lower interest rates a new set of production processes become profitable. The new set requires more mines to be opened up which use new equipment and more steel mills to be produced which use new equipment and more fabrication and auto factories to be build which use new equipment. The new set of might be (1) mine iron in existing mines using existing equipment (2) produce steel with the iron in existing steel mills using existing equipment (3) fabricate new drilling equipment with the steel (4) open up new mines which use new equipment…and so on until new cars are produced. The new set of production processes take more time to complete than the old set.

4. The underlying factors affecting any particular interest rate include not only time preferences, by uncertainty associated with the loan, and anticipations concerning price inflation. All three of these factors work against the suppressing effect on interest rates of credit expansion. When the borrowed money from credit expansion is paid as income to those who produce the goods being bought with the borrowed money, they disburse it according to their time preferences which reduces the supply of credit from its artificially expanded amount and raises interest rates. As credit expansion proceeds, the additional credit must be extended to less credit worthy borrowers. Interest rates rise as risk premiums grow. Credit expansion occurs via monetary inflation, which tends to push the purchasing power of money down. Interest rates rise to compensate. Fed monetary inflation and credit expansion cannot stay ahead of these underlying factors indefinitely. The reason is people are always striving to economize. Imagine what would happen if the Fed engaged in monetary inflation and credit expansion of a small amount for a short time, say $10b for a month. Interest rates would quickly recover their time preference level keeping the losses from malinvestments to a minimum. People are engaged in the same economizing counter-reaction to Fed expansion even if it goes on for a long time in large amounts.

5. What Joe argues is that the two tendencies–for resources to move to the higher stages and to the lower stages–cannot be satisfied consistently. At most, resources are pulled from stages in the middle of the capital structure to the higher and the lower stages (where profit is larger at least initially), which implies that the new larger capital structure set in motion by building up the higher stages cannot be completed for lack of resources to build-up the complementary middle stages. When the demand for middle-stage capital goods grows in intensity, the profitability of shifting resources from the higher and lower stages reveal the malinvestments made there.

[jmherbener]

1. The price of every asset rises when interest rates fall because the price of an asset is the sum of the DMRP it generates in productive use each period over its useful lifespan. The discount (D) of the future stream of MRP is the rate of interest. A lower rate of interest means a smaller discount and therefore a larger sum of DMRPs.

2. Any production process of a consumer good consists of all steps from extracting natural resources to producing each intermediate capital good to eventually producing the consumer good. To lengthen a production process means that it takes more time to complete all the steps. Lengthening, then, is only justified when people’s time preferences decline, i.e., people are willing to wait longer to obtain the consumer good. Lengthening the capital structure involves diverting resources from lower stages to higher stages of production.

3a. Preferences that people have for a good determine both the position of demand and and the position of supply in the market. Supply and demand in turn determine both the amount of the good traded and its price. In the same way, time preferences determine both the position of the demand for and the position of the supply of present money in exchange for future money. Supply and demand in turn determine both the extent of saving-investing and the rate of interest. Credit expansion does not change people’s time preferences (i.e., it does not shift people’s demand for or supply of present money), it merely adds a artificial source of supply of present money to the supply people prefer. The extra supply of present money shifts the total supply to the right which suppresses interest rates. The lower interest rates in turn lower people’s quantity supplied of present money (they move down and to the left on their given supply curve) and raises people’s quantity demand for money (they move down and to the right on their given demand curve). But time preferences, which position both the supply and demand curves do not change. The artificial supply of present money through credit expansion drives a wedge between people’s genuine saving, which is now smaller, and people’s investment expenditures, which are now larger.

3b. The reason why profits concentrate in particular lines is that the borrowed money from credit expansion is spent to buy assets in particular lines of production and not in other lines. For example, cheap mortgage money is borrowed to buy houses and so prices of houses and prices of specific producer goods used to build houses rise relative to the prices of apples and the specific producer goods used to produce apples. This is what we called the “specific effect” of credit expansion.

4. The crack up boom only occurs when the central bank continues to relentlessly inflate the money stock through credit creation even in the face of rising prices all around. Thankfully, this is rather uncommon historically. Interest rates always rise as a feature of correcting the financial excesses of the boom. The interest rate is not just contract interest paid on loans, but is the spread between output prices and input prices in all production. As credit expansion occurs during the boom suppressing contract interest rates on loans, entrepreneurs begin to borrow cheap credit to buy assets leading to asset price inflation which squeezes price spreads. When the financial crisis hits, asset-price bubbles burst helping to restore price spreads to those consistent with people’s time preferences.

You might take a look at the article by Joe Salerno:

https://mises.org/library/reformulation-austrian-business-cycle-theory-light-financial-crisis-0

[jmherbener]

Take a look at the book, The Ethics of Liberty, by Murray Rothbard. Here is a review of the book.

https://mises.org/library/ethics-liberty-murray-rothbard

[jmherbener]

A bachelor’s degree in economics provides entry into most business careers. It is especially helpful for careers in finance. Entry-level positions in think-tanks can be taken by economics majors. Economics is the top undergraduate major for law school.

A Master’s degree in economics opens up mid-level business careers, especially in financial markets. Mid-level think-tank positions are also open to holders of Master’s in economics. It’s possible to teach economics at community colleges with a Master’s degree.

Ph.D. economists work as forecasters in businesses, especially financial markets, and hold academic positions at universities and colleges.

Here’s the American Economic Association page on careers for economics majors:

https://www.aeaweb.org/students/Careers.php

Our economics majors at Grove City College, who receive a thoroughly Austrian education in economics, enter into the same type of careers and graduate studies as non-Austrian economists.

[jmherbener]

You might consult the book by Joseph Calandro, Applied Value Investing.

http://www.amazon.com/Applied-Value-Investing-Application-Acquisitions/dp/0071628185?tag=duckduckgo-ffsb-20

Also, read Mises Daily articles by Frank Shostak.

https://mises.org/profile/frank-shostak

Finally, Guido Huelsmann is working on a book on finance.

http://guidohulsmann.com/

[jmherbener]

Any and all action is taken by a person to obtain something the anticipate will be more valuable by foregoing an alternative considered less valuable. If two persons each anticipate a gain by exchanging what they have for what they want, then it’s in the interest of both of them to cooperate by finding a mutually agreeable price. The basic point of exchange between a buyer and a seller is for them to realize its mutual benefit. Sellers and buyers are free in a market economy to use whatever method they think best in formulating asking and offering prices. However, to make their trade and realize its mutual benefit, they must settle on prices that generate mutual benefit, i.e., prices above the minimum that the seller is willing to accept and below the maximum the buyer is willing to pay. The existence of billions of exchanges every day throughout the world illustrates the truth of this claim.

Of course, government coercive force can attempt to impose legally mandated prices. The NRA cartelized various industries during the Great Depression. The point was not to make prices inflexible, but to raise them back to their pre-depression levels. By the time the NRA was in force in 1933, prices had already fallen dramatically. Price were clearly not rigid downward as they fell 30 percent from 1929 to 1933. Prices were not sticky downward during the depression. Moreover, the NRA was declared unconstitutional by the Supreme Court in 1935. So, at most, the NRA codes only administered prices for two years.

http://fee.org/freeman/the-nra-how-price-fixing-perpetuated-the-great-depression/

As Joe Salerno has argued, the changeability of prices are one part of an entrepreneur’s strategy to cater to buyers. If buyers want prices that change rapidly in response to changes in demand, then entrepreneurs employ the technology to make this possible as in financial markets like the NYSE. If buyers want prices to change more gradually regardless of the moment to moment changes in demand, then entrepreneurs give buyers that result as in retail stores like Wal-Mart.

https://mises.org/blog/whos-afraid-sticky-prices

The billions of successful exchanges that occur every day belie the claim that the behavior of person in unpredictable. Moreover, the laws of demand and supply do not refer to predicting people’s changing preferences over time. The laws take a person’s preference as it is demonstrated in action and conjecture at that moment what would be logical for the person to have done had the price been different than it was while every other relevant factor involve in the person’s behavior remained the same.

[jmherbener]

Most central banks attempt to hit a target rate of price inflation of around 2 percent. If price inflation is below the target, the central bank accelerates monetary inflation and if price inflation is above the target, the central bank decelerates monetary inflation.

I suggest Joe Salerno’s book, Money Sound and Unsound:

https://mises.org/library/money-sound-and-unsound-1

Although I don’t know the details of Cruz’s proposal for gold in the monetary system, he’s clearly not calling for a return to even the classic gold standard, let alone a genuine gold standard.

http://www.cnn.com/2015/12/22/politics/ted-cruz-gold-standard/index.html?iid=EL

[jmherbener]

The classical work is Henry Hazlitt’s book, Economics in One Lesson:

http://fee.org/files/doclib/20121116_economicsinonelesson.pdf

You might consult, Ludwig von Mises’s book, Planning for Freedom:

https://mises.org/library/planning-freedom-and-twelve-other-essays-and-addresses

Also, take a look at Robert Murphy’s book, Lessons for the Young Economists:

https://mises.org/library/lessons-young-economist

[jmherbener]

The story assumes that banks will lend their excess reserves when market interest rates rise. To prevent the excess reserves from getting into the hands of people, the Fed will have to raise the interest rate it pays on reserves. But this is not the normal way that banks operate. When banks have excess reserves, they normally convert them into required reserves by issuing fiduciary media by creating credit. To prevent this process, the Fed must create a spread between the interest rate it pays on required reserves and the interest rate it pays on excess reserves.

Excess reserves are around $2.5 trillion and the interest on them, according to the story is $12 billion. The interest payments to banks, then, are a drop in the bucket in a $18 trillion GDP. But, the excess reserves are much more than a drop in the bucket and the fiduciary media that could be created on the excess reserves are more than the bucket.

[jmherbener]

Auto loan statistics are compiled by Equifax. Here’s a piece on Equifax’s October 2014 report.

http://insight.equifax.com/auto-market-revels-in-record-vehicle-loan-totals-a-breakdown-of-the-recent-national-consumer-credit-trends-report/

It shows that in the fall of 2014 financial institutions had 31.4 million auto loans worth $453 billion and auto companies had 34.1 million auto loans worth $471.2 billion.

Here’s an Equifax report on subprime auto loans.

http://www.equifax.com/assets/corp/subprime_auto_economic_commentary.pdf

[jmherbener]

A person voting does not bear the opportunity cost of obtaining the alternative he votes for. A person paying the market price to buy a good does bear the opportunity cost of having his preference satisfied. Whatever made be said in its favor, voting is not an action that demonstrates that a person voting for one alternative values it more relative to the value placed on the alternative given up by a voter who favored it. All voting demonstrates is that each voter values the alternative he votes for more than he himself values the other alternative. But a person who buys a good pays a price that other persons are unwilling to pay and thereby demonstrates that he values the good relative to money more than other persons value the good relative to money. Moreover, a person who votes for an option has his vote nullified by a person voting against his option regardless of how intensely each voter values the option he favors. A person who values something more than another person can, however, outbid him by paying a higher price. Voting does not register the intensity of a person’s preference, bidding prices for goods does.

[jmherbener]

The Fed is paying 0.25% interest on both required reserves and excess reserves. Therefore, banks do not lose any interest payment from the Fed if they convert their excess reserves to required reserves by creating credit, i.e., extending more loans and writing the loan balances into their customers’ checking accounts. Banks are more reluctant to extend loans than they are in normal times and the Fed thinks it can regulate the banks’ extension of loans as it normalizes by paying a higher interest rate on excess reserves than on required reserves. In any case, QE (Fed purchase of securities) does increase bank reserves. Whether or not banks extend loans on top of their reserves is their option. Currently they are not fully exercising that option.

[jmherbener]

The conclusion that the purchasing power of a given money is the same in every location where the money can be exchanged for goods is a particular case of a general “law of one price.” If a good is divisible into homogeneous units, say troy ounces of pure gold, then each unit will sell for the same price in the same market at the same moment. If, to the contrary, gold was selling for $1,500 an ounce in London and $1,200 an ounce in New York today, then arbitragers could earn profit by buying in New York and selling in London. As they continued to do so the profit would shrink for additional arbitrage because they are increasing the demand in New York, driving the price up there, and increasing the supply in London, driving the price down there. The arbitrage will cease only when there is no additional profit to be earned, that is, when the prices in the two locations are the same, net of transaction costs.

Money is a nearly perfect example of the law of one price because every unit of money is homogeneous and the transaction costs of transferring money from one location to another is nearly zero. We can, therefore, infer that the purchasing power of a given money is the same in every location where it can be traded for goods.

It follows that if the price of a given good is higher in one location than another, then there must be a difference in the subjective value people place on the good in one location relative to the other.

Ludwig von Mises uses the following example to illustrate. The price of a room at a hotel on the top of a ski-resort mountain is higher than an equivalent room at a hotel at the bottom of the mountain. The purchasing power of money, however, is the same at the top and bottom of the mountain.

The price of goods is higher in Hawaii because the people who live there value living there more highly than living on the mainland. For that reason, they are willing to pay the costs for transportation to have the goods shipped to them.

Price inflation, however, does not refer to the prices of some goods being higher in one place and lower in another. It refers to changes in the purchasing power of money, that is, in the prices of goods rising all around both in places where they are higher and in places where they are lower. It is true that when the money supply is increased with a given money demand, the prices of some goods will increase more and the prices of other goods with increase less and the prices of some goods will increase sooner and the prices of other goods will increase later, however, price inflation refers to the circumstance that prices overall are higher. Think of the prices in an economy as a swarm of bees. Individual bees are constantly changing their positions relative to each other with some rising and others falling, whether the swarm is stationary, upward moving, or downward moving. Price inflation occurs when the swarm is moving up and price deflation when the swarm is moving down.

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