[jmherbener]

Standard statistics like GDP are unreliable indicators of standards of living during wartime. For example, the government imposed wage and price controls during the war.

For an analysis of the wartime economy, see the article by Robert Higgs.

http://www.independent.org/newsroom/article.asp?id=138

Moreover, GDP includes government expenditures. So as the government drastically cut its expenditures after the war, GDP fell. This decline is an artifact of the way GDP is calculated. As government expenditures were falling, however, consumption was increasing. Here is Gene Smiley’s analysis of the wartime economy and transition to peacetime.

http://www.qc-econ-bba.org/instructors/Edelstein11/ECON224/08.pdf

[jmherbener]

In the latest housing boom, there were unfinished houses and housing developments left to decay during the bust. But malinvestments mean too much of some things have been produced to satisfy demand for them and too little of other things to satisfy demand for them. For example, there would be new logging roads left unused, lumber mills with excess capacity, empty office space, and so on. The evidence is revealed in the liquidation process of the bust.

There are entire uninhabited cities in China.

http://realestate.aol.com/blog/2013/03/05/china-empty-cities-photos/

[jmherbener]

Of course, but in analyzing social processes one must conceive, as Frederic Bastiat stressed, both the seen and the unseen. If we look only at the seen, then every government subsidy can be justified by the output stimulated by the subsidy regardless of the greater value of the goods not produced by the same resources.

http://www.econlib.org/library/Bastiat/basEss1.html

Consider Mises’s metaphor of the master builder. He argues that monetary inflation and credit expansion leads entrepreneurs as a group, like a master builder, to begin to lay a foundation for a building (i.e., the capital structure of the economy) that is much too large to complete given the resources he has. Of course, as construction begins, one could see that resources are shifted into the laying of the foundation. But the alternative uses of those resources in constructing a building with a smaller foundation are not seen since they are not undertaken. Only when the master builder comes to realize that he lacks the resources necessary to complete the larger building that he began to construct does he see that he malinvested his resources by laying to big a foundation.

https://mises.org/library/malinvestment-not-overinvestment-causes-booms

[jmherbener]

Monetary inflation and credit expansion change the lines of capital investment but not the overall amount of resources devoted to building the capital stock. They divert capital investment into lengthening the capital structure of the economy by expanding investment in the higher stages relative to lower stages. So, yes, some particular entrepreneur may have his project funded because of monetary inflation and credit expansion, but for the economy as a whole no additional resources are moved into building up the capital stock. There is no shift of resources overall into capital buildup because monetary inflation and credit expansion leave the demand for consumer goods and the lowest stage capital goods intact. In fact, the demand for consumer goods may increase as people’s wealth rises from the asset price inflation, e.g., the stock market boom, the housing bubble, etc. set in motion by monetary inflation and credit expansion. The boom that results from monetary inflation and credit expansion is therefore characterized by over-consumption and mal-investment.

Take a look at Joe Salerno’s article:

https://mises.org/sites/default/files/qjae15_1_1.pdf

[jmherbener]

The First Bank of the United States was an instrument of monetary inflation and credit expansion. It was a proto-central bank and therefore, not a different idea but a less extreme version of the same idea.

Here is Murray Rothbard’s assessment from his book, A History of Money and Banking in the United States:

https://mises.org/library/8-first-bank-united-states-1791-1811

Here’s more information on the FBUS:

http://wiki.mises.org/wiki/First_Bank_of_the_United_States

[jmherbener]

Entrepreneurs estimate the MRP of an input to determine what they are willing to pay to hire it. MRP is what is behind an entrepreneur’s demand for labor and other inputs. MRP is the contribution another unit of an input makes to an entrepreneur’s revenue. For example, if Tim Cook is considering hiring another engineer at Apple, he needs to estimate what that person’s labor will add to Apple’s revenue beyond what Apple’s revenue would be if the engineer was not hired. If the engineer’s MRP exceeds the market wages to hire him, then it will add to Apple’s net income to so so. If the engineer’s MRP is less than the market wage to hire him, then he will not be hired.

MPP diminishes for adding more and more workers to a given set of complementary factors of production because of the fixed productive capacity of the complementary factors and the diversity of workers. If Apple posts a job opening and receives 100 applications, it will hire the most productive additional worker from the pool of applicants. If it wishes to expand its labor force further, it will have to hire less productive workers, in other words, workers from the same 100 applicants that it didn’t hire before. Moreover, as it expands its work force with a given set of complementary factors, the workers will eventually exhaust the productive capacity of the complementary factors of production. If Apple has an office complex designed for 1,000 workers to use and then it hires another 100 workers the office complex with be used less efficiently, e.g., shared offices, staggered work schedules, etc.

The reason why Apple is always hiring in the area of diminishing returns for labor is that to avoid doing so, it would have to invest in a much larger capital capacity such that adding workers to the bigger facility did not exhaust its productive capacity. But doing that means that Apple would have large excess capacity. It would have paid to build capacity that it cannot use. It’s more efficient to build smaller facilities and then duplicate them as they need arises. But that means, that entrepreneurs will always be in the diminishing marginal productivity area in the use of their variable inputs.

[jmherbener]

Not under the circumstances stipulated. If the berry bushes are configured diversely on the island, with some more robust and some nearer to Crusoe’s shelter and others less robust and some further away and if Crusoe is concerned in his berry picking activity with the end of producing berries (instead of some combination of ends, like picking berries getting exercise), then he will allocate his first efforts toward the most robust berry bushes nearby and having exhausted them he will move on to the next most robust berry bushes nearby and so on.

[jmherbener]

Here are the official Kansas state revenue statistics:

http://budget.ks.gov/cre.htm

To find out whether revenues have been falling and if so from what source just compare an entry for 2015 with that of 2014. For example, the cumulative income tax revenue in March 2014 for fiscal year 2014 was $1.91 billion (total tax revenue was $4.13 billion) and for March 2015 was $1.84 billion (total was $4.08). Then you would have to investigate whether or not the decline was caused by a declining income base (because of the recession) or declining income tax rates (because of Brownback’s policy). Then you would need to look at the expenditure side of the budget to see if rising expenditures are pushing up the deficit as well as falling tax revenues.

[jmherbener]

Thankfully, there are several career paths available in promoting liberty. I recommend that you play to your strengths. If your comparative advantage is in scholarship and high theory, aim for a professorship. If you’re gifted in math, become an economics professor. If not, go for political science, law, literature, etc. If your comparative advantage is in writing, then become a journalist or novelist or write books about topics of interest from a libertarian perspective. If you have a heart for charity, then pioneer voluntary associations to provide aid to people in need. If you’re entrepreneurial, become the next Tom Woods or just make a pile of money and donate it to support others who advocate liberty in their writing and speaking.

[jmherbener]

Here is a Fed paper explaining QE. The authors note that the purchases of Treasuries were conducted by the FRDB of New York in the same manner as it conducts regular Open Market Operations (pp. 9-10). The New York Fed bank holds auctions for primary dealers, who sell the Treasuries to the Fed.

http://www.ny.frb.org/research/staff_reports/sr441.pdf

The article notes that the New York Fed Bank posted a summary of its QE purchases on its website as the program went along (p. 10, note 17).

http://www.newyorkfed.org/markets/pomo/operations/search.html#

To determine whether or not the Fed was shrinking the time between the sale of the Treasuries by the Treasury and the purchase of the Treasuries by the Fed, one would have to compare the normal OMO purchases before 2008 with the QE purchases. Given the Fed article’s description of the program, there doesn’t seem to be any evidence that the time lag shrank or, at least, that the Fed purchases were immediately after the Treasury sales as your friend claims. (One could go through each purchase on the website to see if the Fed made any immediate purchases.) In any case, your friend is correct that the Fed purchases of Treasuries, whatever the lag happens to be, provide lower-interest-rate-than-otherwise funding for the Treasury, which spends the funds on general programs of the Federal government. But the Fed indirectly funding the Treasury expenditures in this way is always the case for all Fed purchases of Treasuries and not a special consequence of the QEs.

[jmherbener]

The asymmetry of the boom compared to the bust has little to do with the difference in upward and downward flexibility of prices. The boom begins with monetary inflation and credit expansion which generates capital funding to be invested. The additional money can be allocated into any production process in the economy since money is completely liquid. The capital funding, then, gets converted into capital goods which results in the building up and lengthening out of the capital structure. The bust begins with the malinvested capital structure. Since capital goods are somewhat specific, they cannot as easily as money be shifted into other production processes with their full monetary value intact. As long as the government does not interfere with the liquidation and reallocation process, however, it can proceed apace (even in the face of the necessity to convert the uses of specific capital goods) as it did in the downturn of 1920-1921.

[jmherbener]

Not too long ago, Paul Craig Roberts stirred up a controversy concerning the mobility of capital, comparative advantage, and free trade.

http://www.nytimes.com/2004/01/06/opinion/second-thoughts-on-free-trade.html

http://mises.org/library/free-trade-and-factor-mobility

http://mises.org/library/who-benefits-free-trade-and-how

http://mises.org/library/can-trade-bring-poverty

https://mises.org/library/reply-schumer-and-roberts

[jmherbener]

I recommend you take Austrian Economics Step by Step first and then What’s Wrong With Textbook Economics. The first course will give you the background to understand the second course.

[jmherbener]

If people hold onto money, then they are not spending it on consumer goods or saving it in which case the money gets spent on producer goods. The reduced demand for goods lowers their prices. Lower prices for goods means a larger purchasing power of money. The larger purchasing power of money (i.e., the higher price of money) is what satisfies people’s desire to hold more purchasing power in the form of money even though the stock of money has not changed.

If we were to diagram the analysis, the increase demand for money shifts the demand for money curve upward to the right, which results in a higher price for money (in the link below ignore the Keynesian assumption that the price of money is the interest rate). The higher price for money eliminates the excess stock of money which the increase demand for money (the difference between a and b) would bring about in the absence of a higher price for money.

https://fixingtheeconomists.files.wordpress.com/2013/09/money-supply-demand-curve.jpg?w=500

On average people are worse off over the cycle because there are fewer goods produced in the economy than if there had been no cycle. Of course, some workers might be better off and others worse off depending on the relative movement of demand for their labor and some entrepreneurs may be better off and others worse off depending on the relative movement of demand for their goods. But overall, society is worse off.

As you say, people are not worse off or better off because prices and wages both have fallen.

[jmherbener]

In analyzing any situation of profit and loss in production, one must look at all costs of production and not just wages. If output prices are falling, then costs of production overall must fall close to proportionately to the fall in output prices to maintain profitability. Costs fall close to proportionately and not exactly proportionately because the interest rate, which is the rate of return or price spread between output prices and input prices, changes over the phases of the cycle. But setting that issue aside, falling output prices will affect the movement of prices of inputs according to the specificity of the inputs. Since labor is generally less specific than capital goods, wages will fall less relative to the fall in output prices and prices of capital goods will fall more relative to the fall in output prices. The symmetric movement occurs during the boom. Prices of capital goods rise relative to wages as prices of output are pushed up by monetary inflation and credit expansion.

Real wages fall over the cycle because capital goods have been malinvested and labor misallocated. Production is less efficient than it would have been had capital and labor not been squandered. Even if nominal wages rise relative to output prices, real wages will be lower because fewer goods have been produced than would have been without the malinvested capital.

It would be very unusual for money to have the same purchasing power at the end of a cycle as it had at the beginning. During the boom there is inflation of the money stock and typically, but not necessarily, a reduction in the demand to hold money and during the bust there can be either deflation or inflation of the money stock and typically, but not necessarily, an increase in the demand to hold money. It’s rare for these various forces to render the same purchasing power of money over time.

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