Forum Replies Created
-
AuthorPosts
-
jmherbener
ParticipantGary North accepts Pareto’s Law. But he sees it as a law of sociology, not economics:
http://www.garynorth.com/public/7595.cfm
ParticipantThere are two basic reasons. First, lower interest rates will increase the P.V. of future revenue streams. Second, the credit created will be spent along particular lines of production, which will boost the prices of assets used along that line of production. For example, suppose a significant amount of the credit expansion goes to mortgages. When the borrowers buy houses their prices are bid up making their production more profitable. Entrepreneurs producing houses have more revenue and use it to bid more heavily for inputs, which pushes up their prices. The prices of more specific inputs rise more than those of less specific inputs. The producers of the more specific inputs have more revenue and use it to bid more heavily for inputs, and so on. A third reason is that people may reduce their demand to hold money. Investors begin to anticipate how asset prices are moving up and may bid them up more quickly. The owners of the assets now have more wealth and may being to spend on things which augments the existing lines of asset price increases and likely adds additional lines of assets price increases throughout the capital structure.
ParticipantWhen interest rates rise, the P.V. of longer term projects falls more than the P.V. of shorter term projects. The greater capital losses in longer term investments leads capitalist to shift toward shorter term projects. To see how this affects profitability, consider iron mining over the cycle. The build-up during the boom in mining production will prove to be profitable as business demand for iron is increasing in other stages of production. But when interest rates rise and the bust ensues, the demand for iron in the other stages declines, but the cost structure of the built-up mining production remains at boom-levels until the collapse of asset prices. Then the collapse of prices of assets used in mining will make their production less profitable and so on. As the liquidation and re-allocation process proceeds, the capital structure is shorten to once again satisfy people’s time preferences.
ParticipantThe present value of future revenue is found be discounting the future revenue by the factor (1+i) raised to the exponent corresponding to the future time period. For example, revenue to be earned after two years at 5 percent is discounted by 1.05 squared or 1.1025. So, $1,000 to be received two years from today has a P.V. of $907.03. Revenue to be earned ten years from now at 5 percent is discounted by 1.05 raised to the 10th power or 1.629. So $1,000 to be earned in ten years has a P.V. of $613.87. If the interest rate falls from 5 percent to 4 percent, then the corresponding discount factors are now 1.0816 and 1.480. So the 2 year discount falls by 1.9 percent while the 10 year discount falls by 9.2 percent.
So, for two investment projects of different time horizons, when the interest rate falls the discount on shorter term projects falls less than the discount on longer term projects. The result is that longer term projects gain in P.V. compared to short term projects.
To see the effect of a lowering of the interest rate on the length of the entire capital structure, take a look at Murray Rothbard’s illustration in chapter 8 of his book, Man, Economy, and State:
ParticipantIf we had a free enterprise economy, then their fears would be baseless. As long as a person is able to work and willing to accept a wage commensurate with his productivity, there will be an entrepreneur willing to hire him. In our interventionist economy, government regulations make it tougher for workers. Entrepreneurs have their capital taxed away, their ability to hire constrained by rules and regulations, costs of employing mandated by the state, and so on.
When the G.I.s came home from World War Two, entrepreneurs started new businesses and expanded old ones to employ over 10 million ex-soldiers in a matter of several months.
Generally, labor is the most adaptable resource to changes in use. Unskilled workers can move into and out of a multitude of different activities and still be productive and therefore, find a job and earn a wage. Capital goods are not so easily moved from one task to another and may experience under-utilization, or even obsolescence, more readily.
ParticipantIn the old days, AT&T was a national, regulated monopoly. Its monopoly position was created and maintained by the government. The government authorized its connection charge. Since then the government created and maintained regional, regulated monopolies in the phone market. What has diminished the power of the government monopolies to charge long-distance connection fees has been the cell phone revolution.
Take a look at Tom DiLorenzo’s article on natural monopoly:
Here’s a piece on telecommunication regulation:
ParticipantOver-investment theories claim that during the boom total spending in the economy shifts away from consumption and toward investment. The ABCT argues that monetary inflation and credit expansion suppress interest rates which leads to more consumption and a shift of investment into longer production processes, which eventually prove to be unprofitable.
Take a look at the article by Joe Salerno:
ParticipantEntrepreneurs solve the hold out problem with special terms of contracts. For example, an entrepreneur wanting to buy adjacent land parcels owned by several different land owners could offer each one a contract to buy his land contingent on the entrepreneur’s purchase of all the other parcels from other land owners or he could offer each landowner an option contract to buy his parcel at a future date (when the entrepreneur has made option contracts with the other landowners) at a price agreed upon today and then exercise the options only when all the landowners agree to sell.
Here is a scholarly article on the background behind the contract solution to such alleged externalities (the hold up problem is discussed on p. 467f):
ParticipantThe study below gives several citations to the literature on wealth distribution over time:
http://www.econ.nyu.edu/user/benhabib/pareto-volterra-oct24.pdf
ParticipantAustrian economists have proposed two types of plans to restore commodity money. One is to make the dollar redeemable into gold and then leave gold production up to the market.
Rothbard lays out one version of this type at the end of The Case Against the Fed:
https://mises.org/books/fed.pdf
Mises has a version of this type in part four of The Theory of Money and Credit:
https://mises.org/books/tmc.pdf
The second type is to remove all legal barriers to private money and all legal privileges for government money and let the market take over.
Advocates of this view include Hans Sennholz, Guido Huelsmann, Joe Salerno, and Peter Klein. For example, Huelsmann mentions this at the end of The Ethics of Money Production:
https://mises.org/books/moneyproduction.pdf
These different proposals have different effects on debtors. For example, One of Rothbard’s plans calls for redeeming all currency into the Fed’s gold stock dollar for dollar and making banks keep a 100 percent reserve of money against their customers’s checking accounts. This plan would destroy the created credit that was based on the issue of fiduciary media. In other words, banks would have to call in loans or not renew loans in order to build up their reserves to 100 percent. Rothbard has a second plan, which like Mises’s, prevents any further fiduciary media issue and credit creation. These plans, along with the second type of reform measures would leave existing dollar debts intact to be paid off, but not renewed and as that happened the credit supply would gradually shrink.
ParticipantFiat money is not itself a debt instrument. Debt comes into existence when one party, the lender, loans money to another party, the borrower. The debt instrument is the borrower’s I.O.U. to pay back the principle borrowed plus interest. U.S. Treasury securities are debt instruments. Corporate bonds are debt instruments. Certificates of deposit are debt instruments.
Fiat money is money itself. It is not itself a loan to a borrower that the government must pay back principle plus interest in the future. Just like a counterfeit bills are not an I.O.U. of the counterfeiter to pay back principle plus interest in the future to someone.
Governments of some countries can, and have in the past, simply printed fiat money and spent it to buy goods and services. Technically, this process need not involve debt at all.
In practice the Federal Reserve’s policy of issuing of fiat money expands the supply of credit and thereby makes the sale of federal debt by the Treasury more feasible. Without monetary inflation and credit expansion interest rates would be much higher and government borrowing less feasible.
Instead of a balanced budget amendment, a more binding constraint on the issue of debt by the federal government would be to supplant the Federal Reserve with a commodity money like gold coins or silver coins.
In the first chart at the link below is the history of Gross Public Debt. You can see how it exploded after the U.S. repudiated dollar redemption into gold in 1971.
http://www.usgovernmentdebt.us/debt_deficit_history
You can read about the issues involved in Murray Rothbard’s book, What Has Government Done to Our Money?
ParticipantHere is an OECD study:
ParticipantNon-market societies (like ancient ones) had a small group of rich but the the bulk of people were poor. The rich in non-market economies had little outlet for their wealth except consumption. In market economies, however, the rich can invest in capitalist production, which generates even more wealth. The bulk of the wealth from the greater productivity of capital capacity , however, goes to workers. The capitalist earn only the rate of return on their investment, but the workers earn the value of what their labor produces, which is greatly enhanced by capital goods. Since the rich in any society are a small minority, entrepreneurs in a market economy will cater mainly to the bulk of workers, who are middle-class.
Take a look at chapter 15 in Ludwig von Mises’s book, Human Action:
ParticipantSetting aside the money relation, whether or not goods become more or less scarce (and therefore, command higher prices or lower prices) would be determined by whether or not the additional persons in a growing population produced less than or more than they consumed.
If they are duplicating the existing production processes, then, they will be producing more than they are consuming. But, in that case, goods are becoming less scarce and their prices would be falling.
If they are producing less than they are consuming, but their deficit is being made up by reduced consumption of the existing population, then the scarcity of goods is not changing and prices would stay the same. Only in this case could the population actually increase while the additional people are producing less than they are consuming.
If they are producing less than they are consuming and the existing population does not distribute goods to them, then they will die and population will not increase and scarcity and prices will not change.
It seems to me that historical cases of rising population, at least in the market economies of the western world, correspond to the first case.
ParticipantIn both the case of human action and the case of complex physical phenomenon, there is the problem that the “facts” available to empirically test hypotheses are themselves complex, i.e., generated by the complex set of causal factors, and not simple facts, i.e., generated by a controlled experiment in which only one causal factor is permitted to change.
The additional problem in the case of human action is that it may not be possible to give an entirely material explanation of human valuing and choosing, whereas it is possible, at least in theory, to give an entirely material explanation of physical phenomenon.
Take a look at Ludwig von Mises’s book Human Action, pp. 30-32 and 17-18.
-
AuthorPosts