[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

[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.

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