[jmherbener]

Exchange rates are the actual prices that exist among different currencies. Market baskets are makeshift computations and not market prices. Suppose there is a market basket made up of one Yen and one USD against which changes in the market-basket value of the RMB is to be determined. If the RMB appreciates 10 percent against the Yen and depreciates 15 percent against the USD, then the market-basket value of the RMB would decline 5 percent. If the Bank of China desired to keep the market-basket of the RMB stable it would have to sell RMB for Yen to devalue the RMB by 10 percent and buy RMB with USD to appreciate the RMB by 15 percent. If instead, the Bank of China sold the market-basket for RMB to appreciate the RMB by 5 percent against the market-basket, it would leave the RMB overvalued against the Yen and undervalued against the USD.

[jmherbener]

The proper use of models or equations or both depends on what body of knowledge one is trying to discover. Austrian economists claim that the most fundamental body of knowledge about human action and interaction is the conceptual structure of human action and its logical implications. This body of knowledge can be acquired with a system of verbal logic. Within this “logic of action” thought experiments are used, such as the ceteris paribus stipulation you mention. One could call this a model, but it’s different than the models of neoclassical economics.

They claim that the most fundamental body of knowledge about human action are empirical regularities. It requires empirical-hypothesis testing to acquire this knowledge. The models used must be quantitatively definite, and hence their reliance on mathematics.

Austrian economists are skeptical of the possibility of discovering quantitatively definite empirical regularities in human action and interaction. It would seem, to the contrary, that the quantitative magnitude of the correlation between variables generated by human action is in constant flux. To paraphrase Ludwig von Mises, the problem is that there are no quantitative constants but only variables in the correlations among data sets generated by human action.

Austrians, then, would reject quantitatively precise, mathematical models but not reject verbally deduced, qualitative “models.” For example, Austrians would accept the “model” of demand and supply by which we can deduce that a larger demand for a good, with supply held constant, will result in a higher market-clearing price. Austrians would reject the model: D = a + bP and S = c + dP where a, b, and d are greater than 0 and b is less than 0 which results in a numeric magnitude for the market-clearing price determined by P = (a-c)/(d-b).

[jmherbener]

Here is the text of HR 1207 in the 111th Congress:

https://www.opencongress.org/bill/hr1207-111/text

Threat of the passage of HR 1207 led to the legal change you cite. It seems reasonable to conclude that the audit the fed bill would go further. For example, it stipulates the Federal Reserve District Banks also be audited. Moreover, it pits the Comptroller of the Currency against the Fed as a check on the Fed.

[jmherbener]

Bloomberg News sued under the freedom of information act to obtain the list of recipients of Fed loans during the downturn.

http://blogs.wsj.com/law/2009/08/25/federal-reserve-foiled-by-foia-ordered-to-cough-up-loan-recipients/

Here’s the bloomberg story mentioning Dodd-Frank:

http://www.bloomberg.com/news/articles/2010-12-01/fed-names-recipients-of-3-3-trillion-of-aid-during-u-s-financial-crisis

Here is a comprehensive account of Ron Paul’s Audit the Fed bill:

http://www.ronpaul.com/audit-the-federal-reserve-hr-1207/

[jmherbener]

Gross Domestic Product attempts to measure the production of all final goods and services in the economy. Gross Output attempts to measure all production, both of final and intermediate goods and services, in the economy. Although it might seem that the different components of these aggregates should move together, they do not do so in the face of time and uncertainty. For example, it might seem that Consumption and Investment expenditures should move up and down together making GDP = C + I a rather smoothly increasing statistic, one easily predicted by past trends. But the judgments persons make of their best courses of action change as they attempt to penetrate the fog of uncertainty. It’s well known that Investment expenditures vary more than Consumption expenditures over the business cycle. So a chart of Consumption would not correlate all that well with a chart of GDP over the cycle. The same thing can occur with respect to GDP and GO.

Take a look at the seminal work on Regime Uncertainty by Robert Higgs:

http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

[jmherbener]

Money supply growth does not correlate with price inflation rates because price inflation depends not only on money supply but money demand. The growth rates of the money supply have been much higher than rates of price inflation in the last 8 years because people are holding onto money instead of spending it as readily as they normally do. The demand to hold money normally increases in a bust because people want to have liquid assets. Here is a story on the money holding of Apple, Inc.

http://www.telegraph.co.uk/finance/businesslatestnews/10760392/Apple-and-Microsoft-have-bigger-cash-holdings-than-UK.html

[jmherbener]

Like any other price, the purchasing power of money (which is the inverse of the prices of goods and services) depends on both demand and supply. Changes in the money stock and the demand to hold money determine changes in the purchasing power of money (which is the inverse of price inflation-deflation).

Here is a discussion of the TMS including links to a few charts:

http://wiki.mises.org/wiki/True_Money_Supply

Here is one of the TMS charts:

http://www.forbes.com/sites/michaelpollaro/2014/11/16/the-u-s-money-supply-decelerates-in-october-the-risk-of-an-economic-bust-just-went-up/

Here are more charts:

https://mises.org/markets-and-data

The BLS began to compute gross output in 2014. Its series only goes back to 2012:

http://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51&isuri=1&5114=q&5102=15

[jmherbener]

To anticipate the state of the economy in the near future, I suggest you work out different scenarios based on sound economic theory and then choose the one you judge to be most likely.

The general theoretical principle is that movements toward stronger protection of private property, freedom of trade, free enterprise, sound money, etc. will result in higher and faster rising standard of living and movements away from these elements will lead to lower and slower rising or even falling standards of living.

To assess which direction our economy will be moving in over the next few years, one has to keep up with politics. What will be the impact of Dodd-Frank, Obamacare, and other regulations, what new regulations are pending, what will be the course of monetary policy and the likelihood of monetary reform, what will happen to government budgets (taxing and spending) and debt.

This is a daunting task, so I suggest you rely on the work of sound economists. Keep up with articles on mises.org and other outlets that publish their work. For an example of how this analysis has been done to explain economic history, take a look at Murray Rothbard’s book, America’s Great Depression.

https://www.mises.org/library/americas-great-depression

[jmherbener]

Austrian Business Cycle Theory does not assume that all information is known. It rests on the realistic view that people formulate expectations about the future, which is itself uncertain, as the basis for taking action.

Instead, ABCT argues that monetary inflation via credit expansion alters the pattern of demands in the economy, both by consumers and entrepreneurs, towards a build-up of capital structure at the lower stages to produce more consumer goods and the higher stages to produce more capital goods in extraction industries. Yet, the real resources in the economy are insufficient to accomplish both. Although the build-up of the capital structure can continue for some time, it cannot be completed for lack of resources. Take a look at the essay, “The Austrian Theory of the Trade Cycle,” by Ludwig von Mises in this book:

https://mises.org/library/austrian-theory-trade-cycle-and-other-essays

And the article by Joe Salerno:

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

The insights of behavioral economics are neither necessary nor sufficient to have a theoretical explanation of the business cycle. Here is Peter Klein on the Austrian theory of the entrepreneur:

https://mises.org/library/capitalist-and-entrepreneur-essays-organizations-and-markets

Here are additional resources concerning ABCT:

http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory

[jmherbener]

Neoclassical economists claim to respect the ordinal ranking of subjective valuation. Their claim relies on representation theorems in mathematics that demonstrate a correspondence between an ordinal rank of bundles of units of goods and the numeric utility generated by a utility function under certain assumptions. Of course, some of the assumptions are entirely unrealistic. For example, that a person can rank every possible bundle of units of different goods even if the amount of a good in a different bundle differs by only an infinitesimal amount. Gerard Debreu is credited with the proof:

https://en.m.wikipedia.org/wiki/Debreu_theorems

It seems to me that the Neoclassical technique of model building is what results in market failures which in turn can be corrected by government intervention. A particular market failure is simply a logic consequence of the assumptions of the model.

https://en.wikipedia.org/wiki/Market_failure

[jmherbener]

It isn’t safe to assume that vendors who sell tickets are uncontrolled by local governments. Concert halls, sports arenas, etc. are subsidized by governments and therefore, their policies are likely controlled. For an example of a somewhat hidden government control, consider anti-gouging laws that prevent gasoline stations from raising prices to clear markets in “emergencies.” The resulting excess demand isn’t a market generated result even though the man of the street might see it that way. The mere fact that it is illegal to resell a ticket at a price above face value is prima facie evidence, although not proof, that the government is controlling the pricing policy of the vendor.

But even if vendors set their own pricing policies and price tickets below market-clearing to give charity to some of their customers or to create buzz for the event, the market still clears. Secondary markets arise and generate this result if it doesn’t occur in primary markets.

[jmherbener]

Professor Manish was not discussing a business reporting to the government. He was referring to the method by which the categories of income (namely wages, rent, interest, and profit) can be applied to adding up everyone’s income. If Joe and Mary earn $80,000 in net income, how is that to be categorized? To do so, one needs to be able to calculate their imputed wages and imputed interest.

[jmherbener]

It’s more than just a construct for businesses to report to the government. It’s an aspect of economic calculation itself.

Let’s take a stylistic example. Joe and Mary Smith own the Main Street Diner, a mom and pop restaurant, in Grove City, Pennsylvania. For 2014, their net income was $80,000. During the year, Joe worked for 1,000 hours as a cook and Mary worked 1,250 hours as a waitress. They pay their cooks $12 an hour and their waitress $8 an hour. Considering the sources of their net income (i.e., what productive contribution did they make to the operation of their restaurant), $22,000 of their net income of $80,000 came from the value of their labor. They earned implicit or imputed wages since they could have earned $22,000 if they were hired elsewhere as a cook and waitress. Mary and Joe also invested $1 million of their own saving into the restaurant. The annual rate of interest on similar loans is 5 percent. Thus, $50,000 of their net income of $80,000 is implicit or imputed interest since they could have lent their $1 million to someone else and earned $50,000. Assuming that they make no other productive contribution, the residual $8,000 of their net income of $80,000 is profit for their entrepreneurship.

In making production decisions, it’s valuable for Joe and Mary to be able to calculate the sources of their income. If an economist wanted to compile everyone’s income, he would use these economic categories of sources of income: Wages for labor; Rent for land; Interest for capital; and Profit for entrepreneurship. Accurately compiling everyone’s income by source would require the economist to take account of implicit or imputed income earned in the four sources of income.

[jmherbener]

Professor Manish is referring to the opportunity cost of foregone interest income when a person self-finances his business. Instead of self-financing, if an entrepreneur borrows from the credit markets, then he pays interest to the lender. The rate of interest is determined by the market. If an entrepreneur self-finances, then he foregoes earning interest on the funds that he could have earned by lending them in the credit markets to a borrower. He must account for this opportunity cost of using his own funds by recognizing that his net income from production includes the interest income he could have earned by lending out the funds he used instead to self finance his operation. Whether he self-fiances or not, however, the rate of interest is determined by the market.

[jmherbener]

As a system of production, the economy is the division of labor. Each person produces to satisfy the consumptive ends of other persons and has his own consumptive ends satisfied by others. It follows that a “better economy” is one in which people use their resources to satisfy more valuable consumptive ends that they have. It also follows that the location, nationality, ethnicity, etc. of different persons are not relevant, per se, to the determination of who the best producers are in satisfying the consumptive ends of any person.

Productivity increases over time as persons accumulate capital. If productivity rises sufficiently in some area, then a smaller proportion of people may be needed to produce in that area to satisfy the consumptive ends of everyone. Such a process has occurred with agriculture starting in the second half of the 19th century. The percent of workers in agriculture has fallen from around 70 percent in 1840 to around 2 percent today. The same process started in manufacturing after the Second World War. The percent of workers in manufacturing has fallen since then from around 30 percent to around 10 percent today.

Non-farm employment data are in figure 5 of this article:

http://www.prb.org/pdf08/63.2uslabor.pdf

Here is a useful short analysis:

http://www.minnpost.com/macro-micro-minnesota/2012/02/history-lessons-understanding-decline-manufacturing

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