[jmherbener]

Let’s stipulate an international gold standard.

Scenario 1: If the purchasing power of gold is higher in foreign countries than domestically, then people domestically will sell gold to and buy goods from foreigners. As the supply of goods shrinks in foreign countries, their prices will rise there. As the supply of goods rises domestically, their prices will fall there. As the supply of money increases in foreign countries, it purchasing power will fall there. As the supply of money declines domestically, its purchasing power will rise there. The prices of particular goods will rise in the foreign countries or fall in the domestic country according to the particular conditions of demand and supply. This arbitraging will stop when there is no more profit from moving goods and money from where their prices are low to where their prices are high.

If the domestic country bans imports, then prices of goods will stay high domestically and low in foreign countries. Likewise the purchasing power of money will stay low domestically and high in foreign countries.

You are starting Scenario 2 in the middle of the chain of cause and effect. You say prices increase domestically, but to do the analysis we need to know what has caused prices to rise. If we start with the condition that they are above prices in foreign countries, then we just have Scenario 1.

On your quick question: You must distinguish between demand, which we depict as the entire demand curve, and quantity demanded, which is a point on the demand curve. The position of the demand curve depends on people’s preferences. And the revenue maximizing price is at its mid-point. If an entrepreneur can lower his cost of production,this does not raise people’s preferences for his output and so he will not lower his price since doing so would reduce his revenues.

[jmherbener]

Perhaps it’s best to take it the way Murray Rothbard takes the Iron Law of Oligarchy. Namely as a universal, qualitative principle of human social interaction. Just like in any human organization, an elite will rise to the top to acquire a disproportionate amount of decision-making authority in the organization, in any economy, an elite will rise to the top to earn a disproportionate amount of income and wealth.

http://mises.org/fipandol/fipsec4.asp

The condition that gives rise to both the Iron Law of Oligarchy and Pareto’s Law is the differences among human persons.

[jmherbener]

Here is Mises in Human Action on human cooperation:

http://mises.org/daily/2813

Also, Frederic Bastiat is a great champion of social cooperation, although he focuses on why the interest of classes in society are harmonious.

http://library.mises.org/books/Frederic%20Bastiat/The%20Bastiat%20Collection.pdf

And here is Guido Hulsmann on Bastiat:

http://mises.org/journals/qjae/pdf/qjae4_4_3.pdf

[jmherbener]

Because I am not a philosopher, I posed your inquiry to Dr. Gordon. His response follows:

Thanks for forwarding your student’s excellent question. The reasoning used in praxeology is of different kinds. Sometimes, the issue is what is involved in a concept? For example, “an action involves the use of means to achieve an end.” This is not deduced from a premise.” Rather, one thinks about the concept of action and asks, is this statement true? Note that this is not a matter of stipulating a definition: rather, the concept is taken as given to consciousness and then one inquires about the nature of the concept. Doing this is not preliminary to formalization. Thinking about the nature of the concept is the praxeological reasoning: it isn’t an informal version of something else.

In other cases, there is reasoning from premises, as in the argument for the law of return or some of the arguments for time preference. I am not sure what your student means by a “cumulative premise”. It isn’t that conclusions are continually added to the concept of action, and then other propositions deduced from this combined premise. Rather, sometimes there is deduction of conclusions from premises, at other times what is done is thinking about the meaning of a concept. Your student is wrongly trying to look for parallels to the sort of formal structure he is used to from other classes.

[jmherbener]

Before one can deduce anything from the action axiom, one must state its meaning. As human beings we understand the meaning of human action from reflecting on our own experience in taking actions. We don’t deduce the meaning of uncertainty from the action axiom, we understand what uncertainty means by reflecting on the actions we have taken. From that knowledge we can deduce the laws of uncertainty. In other words, we have to explain the meaning of your step (1) before we formally deduce other propositions from it. We gain this meaning by reflection.

Take a look at David Gordon’s discussion of action in chapters 2 and 3 in his book:

https://mises.org/etexts/EconReasoning.pdf

[jmherbener]

It seems to me that Smith is arguing that by state intervention a certain line of production may be made profitable before it becomes so naturally. But to make a line profitable before it has efficient production, the state must divert capital investment from other lines which are naturally profitable from their efficiency. Doing that must decrease the overall profits and thereby decrease the overall capital accumulation in society. There is no social advantage in having the state subsidize investment in an unprofitable line so that capital will accumulate in it making production cheaper sooner than would have happened in the market. If a line of production has the potential to become efficient by investment in that line, then investors in the market will take care to invest capital into it and into the most advantageous lines over time.

[jmherbener]

As Joe Salerno points out there are different types of price deflations. One type is caused by economic progress which leads to increased money demand relative to the money stock. This type is benign to the operation of the economy. The U.S. experienced this so-called growth deflation in the latter part of the 19th century. Another type is an increase money demand in reaction to a previous bust. It too is benign and part of the liquidation and reallocation process that corrects the malinvestments of the boon. A third type, which is malignant is brought about by an intentional monetary deflation by the state.

https://mises.org/journals/qjae/pdf/qjae6_4_8.pdf

The hypothetical scenarios, such as your antagonist poses, in which price deflation is at rate great enough to create social problems would never occur in a market economy. These scenarios always assume that people have no alternative to the money that is generating a long-term price deflation. But, of course, if people have selected a commodity as money which experiences price deflation, then as the purchasing power of the money rises, the profitability of its production increases which leads entrepreneurs to produce more of the commodity money which mitigates the price deflation. Furthermore, if people have selected a commodity as money for which extra production in the face of rising profitability from price deflation is insufficient to mitigate the price deflation, then entrepreneurs will offer people a different commodity as money. If gold is subject to excessive price deflation, then people will use silver. If silver becomes subject to the same problem, then people will use copper, and so on.

For the economic analysis of deflation, take a look at Guido Huelsmann on deflation:

https://mises.org/books/deflationandliberty.pdf

http://mises.org/daily/1254

[jmherbener]

You might take a look at the book by Robert Ekelund and Robert Tollison, Politicized Economies: Monarchy, Monopoly, and Mercantilism. Here is a review of the book:

http://www.jstor.org/stable/30024404?seq=1

[jmherbener]

Take a look at these two articles by Robert Higgs:

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

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

[jmherbener]

What I meant was that those who claim that the Fed has reduced volatility since WWII appeal to studies that do not include the recent financial collapse. The study I linked to says the same thing: the performance of the Fed has been better since WWII than before WWII. Well, maybe, if you don’t include the Fed causing the recent boom-bust. The studies don’t include the recent boom-bust because they were published before the business cycle has run its course. Take a look at the study by Selgin, Lapstrates, and White at the link above.

[jmherbener]

The chart of monetary aggregates from the ECB shows that M1 growth rates were above 10 percent from 2003-2006 and then fell as the ECB tightened which triggered the financial crisis in Europe. The growth rate of M1 then increase from near zero in 2008 to nearly 15 percent in 2009 and then slowed until 2011. Since then it has increased from around 2 percent to around 8 percent in 2013 before falling again to around 5 percent currently.

http://sdw.ecb.europa.eu/reports.do?node=1000003501

The claim that this degree of monetary inflation was insufficient to revive the European economy should be given no more weight than Krugman’s similar claim about Fed inflation in the USA. Moreover, I don’t know exactly what your antagonist is referring to by “legal restraints” on the ECB, but in practice there are no actual “legal” restraints on government agencies since the government itself writes the law. If he’s just referring to the mandate to keep price inflation near the target of 2 percent, then he is mistaken. This is no more a constraint on the ECB than the same mandate is a constraint on the Fed.

In any case, neither did nearing the 2 percent target correlate with tightening of monetary policy nor lower than 2 percent correlate with expansionary monetary policy. As the growth rate of M1 slowed from 2006 to 2008, price inflation rose from 2 percent to 4 percent. Then as the growth rate of M1 rose from 2008 to 2009, price inflation fell from 4 percent to near zero. Then as the growth rate of M1 fell from 2009 to 2011, price inflation rose from near zero to 2.5 percent. Even though price inflation was already above its target of 2 percent in 2011, the ECB increased the growth rate of M1 from around 1 percent to 8 percent in the middle of 2013. Currently the rate of price inflation in the Euro is near zero percent. So, the ECB target is no barrier to further monetary inflation.

Here are statistics on Greece’s fiscal budget:

http://research.stlouisfed.org/fred2/series/GRCGFCEQDSMEI

Take a look at the article by Selgin, Lapstrates, and White on the performance of the Fed:

http://www.cato.org/sites/cato.org/files/pubs/pdf/WorkingPaper-2.pdf

The alleged improved performance of the Fed after WWII doesn’t include the recent housing boom and financial collapse. The excellent performance of the economy in the late 1940s and 1950s was caused more by the reconfiguration of capital investment and employment in the face of the giant rollback of the government from its wartime levels than to Fed policy. The great moderation from the mid-1980s to the mid-1990s was not caused by Fed policy at all, but instead was the result of the re-establishment of the dollar as a world reserve currency. Finally, the performance of the Fed is measured by reduced volatility of GDP. But chronic monetary inflation and credit expansion can lead to stagnation of GDP instead of volatility. This is what we’re experiencing currently with the Fed’s massive inflation of the monetary base during the downturn, which (contrary to your antagonist’s claim about what ABCT implies) is not starting another boom but adding to the uncertainty of the economic climate for investments in the future resulting in a dearth of investment today.

[jmherbener]

Different costs of production for different producers cannot bring about different prices for homogenous units of a good that they sell in the same market at the same moment. The adjustment to higher costs for one input must be compensated for by lower costs for other inputs. Otherwise, the higher cost producer will suffer losses, or at least earn inadequate profit, and be pushed out of the market. It is very common in industries to have producers with varying cost structures. What permits them to coexist in a market is that demand is high enough to generate a price for the good that covers the highest-cost producer’s production costs.

For example, there is widely diverse farmland, in terms of its productivity, devoted to growing corn in America. Lower-cost per bushel producers in Nebraska co-exist with higher-cost per bushel producers in Pennsylvania all of them selling corn at the same price. This equilibrium is reached because the greater profitability of the low-cost producers is arbitraged away by investors who bid more heavily to own the specific factors of production that generate the lower cost. In this case, land. So after land prices are taken into account the rate of return on investing in Nebraska farming and Pennsylvania farming is the same.

Retailers accept whatever costs are involved in credit card transactions because they at least make up these costs in greater revenue from the sales they would miss out on if they didn’t accept credit cards.

Moreover, the existence of these fees gives room for financial innovations like peer-to-peer payment systems.

Here’s some information on the fees:

http://www.cardfellow.com/blog/credit-card-processing-fees/

[jmherbener]

Cwik is trying to isolate the effect of the suppression of the interest rate during the boom and its restoration during the bust on the profitability of production and thus, the liquidation of capital investment and reallocation of resources during the bust. In his model, he, therefore, assumes that input and output prices are constant (p. 5) to isolate the effect of movements in the interest rate on the present value calculation of asset prices and input prices. (In his model, the movement in input prices is accounted for in the movement of assets prices. Working capital appears in the numerator of the terms of the NPV equation for the price of fixed capital.) I think the general principle that his example shows is that asset prices must adjust downward relative to input prices to compensate for the rise in the interest rate in restoring profitability to production.

If we relax the assumption that input and output prices are constant, then even in Cwik’s model it is not necessary for input prices to rise. Whether or not they do would depend on output prices. And since the liquidation and reallocation process in the market restores the rate of return both to investment in working capital and fixed capital to the higher market interest rate, we know that at the end of the adjustment process output prices are higher relative to input prices.

Cwik is referring only to the effect of rising interest rates on working capital and fixed capital, others things the same, and he is insisting that this effect be taken into account in analyzing the liquidation and reallocation process.

[jmherbener]

Government regulation of entrepreneurs is both unnecessary and harmful. In a market economy, entrepreneurs strive to gain customers by offering different goods and services. As long as their offerings are consistent with private property, e.g., there is no fraud involved, then the goods and services will be subject to the test of profit and loss. Those that satisfy customers earn profit and survive, those that fail to satisfy customers suffer losses and die out. Customers can appeal to other entrepreneurs to provide expert advise about products too complicated for the non-expert. And this advise can also be tested by success and failure in the market. Government regulation impairs this efficient process of the market and is, therefore, harmful.

The entrepreneurs operating stock exchanges can set their own rules about which trades they allow and which they ban. We would expect that if naked short selling or algorithmic trading were allowed on some exchanges and not others, then customers’ preferences would determine which configuration of allowing and banning was most profitable.

Financial innovations, like derivatives, would also have to pass the market test of profit and loss. As long as no fraud is involved, its efficient for entrepreneurs to offer new financial products and find out if customers prefer them or not. The problems with derivatives in the latest boom-bust have been the result of government regulation. For example, Fannie Mae and Freddie Mac provided support for mortgage-backed securities which then generated a moral hazard for investors.

Here’s a piece by Bob Murphy on the financial crisis. He points out that credit default swaps were a financial innovation to get around government regulation on insurance:

http://fee.org/the_freeman/detail/did-deregulated-derivatives-cause-the-financial-crisis

[jmherbener]

To put it in different terms, Pareto’s Law is not a praxeological law but an empirical regularity or, we might say, an historical fact. Both facts and theory are important elements in debates. But Pareto’s Law refers to just one aspect of the social process for which there seems to be no praxeological explanation. For this reason, Austrian economists have not emphasized Pareto’s Law.

My guess is that the reason mainstream economists do not appeal to Pareto’s Law is that it has not been subject to rigorous econometric testing. Other mainstream economists have tried to formulate “power laws.”

http://www.dictionaryofeconomics.com/article?id=pde2008_P000324&edition=current&q=pareto%2080-20%20rule&topicid=&result_number=3

Schumpeter thought this a fruitful line of inquiry for economists. But the project has made little headway.

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