[jmherbener]

People strive to economize their resources. Since the division of labor is more productive than self-sufficiency, everyone produces to satisfy the consumptive ends of others and has his consumptive ends met by the production of others. Voluntary (monetary) exchange among person is necessary to economize the use of resources for society-at-large. Within the market economy each person earns income by producing to satisfy the preferences of others and disburses his income to have his preferences satisfied by the production of others. As with any other disbursement of income, a person saves to satisfy his preferences, specifically, his time preferences. Savers lend to investors who borrow the saving to make economizing investments in producer goods. Saving, therefore, is part of the economizing character of the market economy.

Unlike saving, Fed money printing is not endogenous to the market economy. Instead, it is a condition produced externally to the economizing character of the market and impose upon it. Monetary inflation and credit creation, therefore, inhibit the economizing of saving-investing. For this reason, people will struggle against them to re-establish their time preferences both in the rate of interest and in the proportion of income they desire to save and invest. The details of this process are spelled out in Austrian Business Cycle Theory.

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

[jmherbener]

You are correct to point out that entrepreneurs cannot pay wages in excess of a worker’s marginal revenue product and therefore, legally mandated benefits to workers require entrepreneurs to lower non-legally mandated benefits. Workers are actually made worse-off in the bargain since they cannot obtain their preferred compensation package from entrepreneurs. Moreover, in an unhampered market, if an entrepreneur hires workers under difficult working conditions, say coal mining or standing in security lines, then he may be required to skew his total compensation package toward wages instead of other benefits in his effort to satisfy the preferences of his workers (if workers have a preference for non-difficult working conditions).

You might suggest to your friends to read William Hutt’s book on collective bargaining.

https://mises.org/sites/default/files/The%20Theory%20of%20Collective%20Bargaining_2.pdf

[jmherbener]

Here are a few Financial Times stories criticizing Piketty’s data:

http://www.ft.com/intl/cms/s/2/e1f343ca-e281-11e3-89fd-00144feabdc0.html#axzz3LLtPo0lu

http://www.ft.com/intl/cms/s/0/c9ce1a54-e281-11e3-89fd-00144feabdc0.html#axzz3LLtPo0lu

And Alan Reynolds in the WSJ:

http://www.wsj.com/articles/alan-reynolds-why-pikettys-wealth-data-are-worthless-1404945590

[jmherbener]

In a libertarian society, private property rights are given the sanction of law. As a crime against private property rights, theft can occur as either the use or threat of violence or as fraud. Fraud occurs when a person substitutes something in the place of what he has agreed to exchange with another person. A counterfeit good is used to commit fraud. So, counterfeiting is illegal because it is implicit theft. Fraud, and thus implicit theft, would also occur if a person produced a counterfeit title of ownership to property and then traded it to someone else as genuine.

As you say, in a libertarian society people will choose what good they prefer as money. Whatever they choose, however, the production of that good will be regulated by profit, which in turn is generated by voluntary exchange of private property, just like that of any other good. Furthermore, money can be counterfeited in the same manner as any other good., The classic case is debasement of precious-metal coins passed off as full-valued. People could also choose to use titles of ownership to money as a medium of exchange. Bank notes or checking account deposits, for example. If these money substitutes are legally titles of ownership to money itself, then, they could be counterfeited by producing bank notes or checking account balances for which the issuer holds no corresponding money (i.e., fiduciary media).

In a libertarian society, entrepreneurs are free to try issuing fiat money in competition with other entrepreneurs producing commodity money and short-term loans as money substitutes in competition with other entrepreneurs producing money certificates. Success in the first case seems hopeless and in the second case extremely problematic. But those are questions of economic analysis and not private property rights.

To the extent that fiat money and fiduciary media are sustained in the market by legal privileges (i.e., legalized aggression against private property rights), then their issue entails unjust income and wealth redistribution. The legal privileges are the source of the theft.

[jmherbener]

For a short history of the Austrian school, take a look at Ludwig von Mises’s monograph:

https://mises.org/sites/default/files/Historical%20Setting%20of%20the%20Austrian%20School%20of%20Economics_3.pdf

Here is a short monograph on capitalism by Mises:

http://mises.org/library/capitalism

For a more extensive treatment of capitalism, take a look at Mises’s book Human Action, chapter 15:

https://mises.org/sites/default/files/Human%20Action_3.pdf

[jmherbener]

There is a large literature in economics on so-called “hold up” problems. Here are a few pieces by Peter Klein:

https://mises.org/library/williamson-and-austrians

http://web.missouri.edu/~kleinp/papers/KI140-17-433-464–KLEIN-x.pdf

http://www.cec.zju.edu.cn/~yao/uploadfile/papers/p007.pdf

The basic point is that contracts can be tailored to mitigate hold-ups. Both employers and employees can use contractual terms to protect themselves against exploitation.

If your disagreement is not about merely factual aspects of the market, but ethical claims then there is an important distinction to make between different kinds of ethical claims: those concerning private property rights and those concerning the exercise of private property rights.

As long as the employer and employee abide by the terms of their contract, then the ethical claims of private property “rights” are upheld. The ethical claims about the “exercise” of a person’s rights are a further issue. To address that issue, a person must have a developed theory of ethics. For example, private property rights criminalize aggression against the legitimate property of another, but do not criminalize failure to “love one’s neighbor as himself.” Perhaps those whom you cannot convince have a different system of what ethical behavior is than you do. In particular, perhaps they hold that charging for insider information, so to speak, at a level that brings financial hardship to another is immoral although not a criminal violation of the other person’s private property rights.

Take a look at Murray Rothbard on this issue:

http://mises.org/sites/default/files/For%20a%20New%20Liberty%20The%20Libertarian%20Manifesto_3.pdf

[jmherbener]

Holding money (in Keynes-speak “saving”) means a reduction in demand for goods (in Keynes-speak is a leakage from the total spending) and therefore, results in price deflation. But paying back debt simply transfers money from the debtor to the creditor. For money demand to be reduced it must be the case that the creditors hold more of the money transferred than the debtors. This seems unlikely, especially if the debtors are banks since banks can pyramid more money substitutes on top of any cash paid back to them in loans or, at least, issue the same amount of the loans in money substitutes if they are paid back in money substitutes. So I don’t see what distinguishes “debt deflation” from deflation. Also, I don’t see what importance can be attached to the distinction between foreign and domestic debt in cases of hyperinflation. Hyperinflation is caused by increases in the money stock large enough to set in motion a collapse of money demand, which results in the vanishing of money’s purchasing power.

Here’s a more reasonable assessment of the German hyperinflation:

http://mises.org/library/90-years-ago-end-german-hyperinflation

Here’s more on hyperinflations in the 20th century:

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

http://www.cato.org/publications/commentary/hyperinflation-mugabe-versus-milosevic

https://www.dallasfed.org/assets/documents/institute/annual/2011/annual11b.pdf

[jmherbener]

In a free market, legitimate contracts cannot violate private property rights. Freedom of contract is contingent on there being no violation of private property rights. For example, a contact between a mobster and a wife to murder her husband for $10,000 is illegitimate and would not be defended by the law in a free market. Even the advocates of fractional-reserve, free banking don’t claim that the current treatment of fractional-reserve accounts would be legitimate on the free market. This is because fractional-reserve accounts give ownership claims to their cash reserves to (roughly) 10 different claimants at the same time. For this reason, your time-share example is dis-analogous. The analogous situation would be that for each unit a time-share company had it gave instantaneous claims to 4 different persons.

Proponents of fractional-reserve free banking, then, assert that in the free market banks would offer checking accounts that were lottery claims to the cash reserves. While such contracts might be legitimate on the free market (unlike the simultaneous, instantaneous claims of our current system), it’s highly unlikely that merchants would accept such account balances as a medium of exchange. After all, merchants can insist on being paid in money instead. Although banks could pay their customers interest as incentive to hold fractional-reserve accounts, it’s difficult to see how they could give incentive to non-customers (i.e., merchants) to accept the checking account transfers of their customers.

Here are some readings:

http://mises.org/library/against-fiduciary-media-0

http://mises.org/library/free-banking-and-fractional-reserves-response-pascal-salin

https://mises.org/library/fractional-reserve-banking-some-quibbles

http://direct.mises.org/library/fractional-reserves-and-fed

In summary, my view is that in the free market banks would be free to make any legitimate contract they desire with their customers, including contracts for lottery-ticket style accounts or near-instantaneous- loan accounts. But such accounts would not become money substitutes and therefore, would not be part of the money stock. the money stock in a free market would be commodity money and money certificates. By restricting the money stock to money and money certificates, monetary inflation and credit expansion are eliminated and with them, business cycles.

[jmherbener]

To estimate the DMRP of a unit of an input, the entrepreneur must select an appropriately sized unit. He would not be able to do the calculation of DMRP if he selects a unit size for which withdrawal of a unit would result in no production of the output. Your example is like this. In a similar manner, the entrepreneur in your example could not estimate the DMRP of fabric he is buying by removing all of it necessary to make a unit of output with one hour of labor effort.

Even in your highly-unrealistic example, in which the entrepreneur has a production process with only one worker and a given amount of material, the entrepreneur can define an appropriately-sized unit, one that is small enough that removal of it would result in some output. From that result he can estimate what the MRP of a the appropriate unit of labor would be. For example, he could select 1/2 hour of labor effort as the unit of labor and then estimate what output would be lost and what its market value would be.

In the usual case, such divisibility problems do not occur. If we assume that the entrepreneur in your example is hiring several workers and owns equipment that they are working with and buys materials for them to work on, then he can more readily imagine what would happen to production if he withdrew one of his workers for a day or an hour.

[jmherbener]

A standard source is Angus Maddison’s work, e.g., his book, The World Economy: A Millennial Perspective.

http://www.ggdc.net/maddison/oriindex.htm

Here is a quote from the website:

“Over the past millennium, world population rose 22–fold. Per capita income increased 13–fold, world GDP nearly 300–fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, and there was no advance in per capita income.”

“From the year 1000 to 1820 the advance in per capita income was a slow crawl — the world average rose about 50 per cent. Most of the growth went to accommodate a fourfold increase in population.”

“Since 1820, world development has been much more dynamic. Per capita income rose more than eightfold, population more than fivefold.”

“Per capita income growth is not the only indicator of welfare. Over the long run, there has been a dramatic increase in life expectation. In the year 1000, the average infant could expect to live about 24 years. A third would die in the first year of life, hunger and epidemic disease would ravage the survivors. There was an almost imperceptible rise up to 1820, mainly in Western Europe. Most of the improvement has occurred since then. Now the average infant can expect to survive 66 years.”

“The growth process was uneven in space as well as time. The rise in life expectation and income has been most rapid in Western Europe, North America, Australasia and Japan. By 1820, this group had forged ahead to an income level twice that in the rest of the world. By 1998, the gap was 7:1. Between the United States and Africa the gap is now 20:1. This gap is still widening. Divergence is dominant but not inexorable. In the past half century, resurgent Asian countries have demonstrated that an important degree of catch–up is feasible. Nevertheless world economic growth has slowed substantially since 1973, and the Asian advance has been offset by stagnation or retrogression elsewhere.”

[jmherbener]

The author pins most of his explanation on gold flows, but as the following chart of Fed assets shows, there was a large spike of gold holdings in the U.S. in 1917 and then a modest growth until 1919 then a two year plateau. The increase in the Fed’s balance sheet from 1917 to 1921 was driven by the enormous increase in bills discounted and significant increases in Treasuries, especially long-term. In other words, it was deliberate credit expansion by the Fed, not an automatic reaction to international gold flows.

Likewise, the monetary contraction starting in 1921 was the intentional sell-off of bills discounted by the Fed, which completely overwhelmed the coincident gold inflows. The Fed’s balance sheet didn’t stop falling until 1922 (well after the recovery had begun) and plateaued for the next two years (as the recovery proceeded apace). In other words, Fed policy was decidedly contractionary the early recovery from 1921-1922 and significantly contractionary during the entire recovery from 1921-1924.

http://greshams-law.com/2012/02/13/charting-the-federal-reserves-assets-from-1915-to-2012/

Each federal reserve bank set its own discount rate in the 1920s. The first chart at the link below shows the discount rates through the 1920s. the rates were generally rose during 1920 from 6 to 7 percent where they stood until the spring of 1921, then the FRDBs lowered their rates to 4 1/2-5 percent by the end of 1921. Then they were steady until mid-1924, just like the Fed’s balance sheet.

https://fraser.stlouisfed.org/scribd/?item_id=6408&filepath=/docs/publications/bms/1914-1941/BMS14-41_complete.pdf&start_page=421

Clearly, Fed policy was not expansionary during the recovery.

As the Fed balance sheet charts show, the longest and largest period of gold inflows into the U.S. occurred after FDR seized Americans’ gold at $20.67 an ounce and revalued it at $35 in 1934. After 1934, we experienced the “golden avalanche” as FDR’s overvaluing of gold caused foreigner holders to arbitrage it to the U.S. But the U.S. went off the gold standard completely in 1934. All the major countries save a few preceded us in doing so. Belgium left in 1935 and France and Italy left in 1936. So the golden avalanche could not have contracted the money stock in countries already off the gold standard such as Britain, Germany, Japan, etc.

[jmherbener]

The government must use its coercive power to maintain the widespread use of its fiat money against competing media of exchange that it does not control. The first U.S. legal tender law in 1862 mandated U.S. notes as legal tender for all debts public and private. That phrase still appears on F.R. notes today, even though as you point out the courts have narrowed the scope of legal tender. As the courts winnowed down the scope of legal tender laws, other legal disabilities were placed on competing media of exchange. Gold coins were declared of equal face value with U.S. notes and therefore, as gold appreciated against the inflated notes, those who had debts discharged them with notes instead of gold. The government recently erected legal disabilities for bitcoin as a medium of exchange by declaring it “property” which is subject to capital taxation tax when used in exchange.

Here are a few articles to read on these issues:

http://fee.org/the_freeman/detail/the-illegality-of-legal-tender

http://fee.org/the_freeman/detail/book-review-the-gold-clause-what-it-is-and-how-to-use-it-profitably-edited-by-henry-mark-holzer

http://freedom-school.com/money/contracts-payable-in-gold.pdf

http://www.bloomberg.com/news/2014-03-25/bitcoin-is-property-not-currency-in-tax-system-irs-says.html

[jmherbener]

Let’s stipulate that CB inflation means that the CB inflates the money stock through bank credit creation so that the economy experiences 2 percent price and inflation and that CB deflation means that the CB inflates the money stock through bank credit creation enough to cause 2 percent price deflation. (Implicitly, then, we’re stipulating that economic growth of output is greater than 2 percent.)

Given those stipulated conditions, the effects of either price inflation or price deflation depend on how people adapt to them. To the extent that people correctly anticipate price inflation or price deflation, the effects are diminished. For example, if people correctly anticipate 2 percent price inflation, then entrepreneurs will bid input prices up today 2 percent higher than otherwise and the owners of inputs will accept 2 percent higher prices for their inputs without changing their supply of the inputs. The rate of return, then, would be unaffected. So there would be no wealth transfer between lenders and borrowers. Even if people only anticipate price inflation somewhat accurately, lenders will insist on higher interest rates to compensate for the price inflation they anticipate and borrowers will be willing to pay higher rates according to their anticipations of how much the purchasing power of money in the future will be diminished. Once again, these speculative activities reduce the wealth transfer from lenders to borrowers. Even the holders of money can reduce the erosion of their wealth from money’s falling purchasing power if they can adjust to receive the newly created money earlier in the social process of it coming into existence and then being spent again and again. It is in the micro-economics of the money creation process that the inefficiencies of monetary inflation reside.

A similar analysis could be done for the price deflation case. There, too, the ill-effects of price deflation are mitigated to the extent that people anticipate the price deflation.

In both the price inflation and price deflation cases, the inefficiency from CB monetary inflation and credit expansion comes from the micro-economic distortions in prices, profit, production, and investment. This inefficiency occurs whether or not the monetary inflation and credit expansion generates price inflation or price deflation. CB monetary inflation through bank credit creation pushes the interest rate below its time-preference level and the borrowed money gets spent along particular lines of production, for example housing, which alters the profitability of production processes ancillary to housing. Patterns of production, resource allocation, and investment shift during the boom. The bust inevitably follows in which the malinvestments are liquidated and the capital structure reconfigured to satisfy time preferences.

For more details on how the boom-bust cycle has played out in its current iteration, take a look at Joe Salerno’s article:

http://mises.org/journals/qjae/pdf/qjae15_1_1.pdf

[jmherbener]

Here are a few pieces:

https://mises.org/journals/jls/11_1/11_1_4.pdf

https://mises.org/etexts/Mises/bureaucracy/Section4.asp

http://mises.org/daily/1643

http://mises.org/daily/1497

[jmherbener]

It wouldn’t matter whether or not union wages were tied to the minimum wage. Minimum wages raise union wages regardless of legal conditions. Minimum wages raises union wages by criminalizing the hiring of low-wage workers. With a minimum wage, businesses can no longer configure production with more low-wage labor, but must find a configuration with more high-wage labor and more productive capital. Walter Williams tells the story about how, when he was a youngster, businesses would hire a gang of teenagers to move boxes in a warehouse, but with the minimum wage it was cheaper to hire one union workers and a forklift to do the same job.

Take a look at Williams’s book, The State against Blacks.

http://fee.org/the_freeman/detail/a-reviewers-notebook-the-state-against-blacks

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