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jmherbener
ParticipantIt is always more favorable for standards of living to specialize in areas of comparative advantage. Doing so generates higher incomes than not doing so. With the higher incomes, people can save and invest to accumulate capital which makes them even more productive. With their greater wealth they then can save and invest even more.
Americans both exported agricultural and extractive industry goods and attracted capital investment from abroad at the same time. The capital investment was invested in lines of production that eventual integrated America’s economy into the world’s advanced capital structure.
To use an analogy, A family who owns a farm, but no capital equipment for mining on his land or building a blacksmith shop and tools would be better served in obtaining mining equipment and a blacksmith shop and tools by specializing in agricultural products and selling them to others in exchange for their capital investment in the mining equipment and the materials to construct a blacksmith shop and blacksmith tools than in abandoning farming and trying to produce the mining equipment, blacksmith materials, and blacksmith tools himself.
ParticipantSuch a claim by the critics is a-historical. America started with a subsistence level of standards of living in colonial days. They were exporting agricultural (e.g., tobacco, rice, etc.) and extractive resources (e.g., timber, fish, etc.) to England. Yet, by the time of the American revolution, American standards of living were on par with those in England. America continued to have comparative advantage in agricultural and extractive industries during the 19th century as it was becoming an industrial power. Even today, we export large amounts of agricultural and extractive goods. America is the world’s leading exporter of natural gas.
Similar stories could be told about other countries such as Canada.
ParticipantThe analysis from Forbes shows what multinational corporations actually pay in taxes in various countries:
http://www.forbes.com/pictures/fidj45hkdk/hey-mister-tax-man/
The effective tax rate in the USA is 2nd highest among the countries in the study. The Bahamas have the lowest effective tax rate at 5-15% depending on the size of the corporation. The USA effective tax rate is 23% for domestic firms and 28% for foreign firms. Only Japan is higher at 37% domestic and 38% foreign.
ParticipantI think your reasoning is sound. The role of speculation in economic efficiency is certainly under-appreciated.
ParticipantAssuming a constant money relationship, the price of good #2 would be lower in the long run only if its cost structure fell sufficiently so that production increased its stock relative to the original increase in demand. However unlikely, this might happen if, for example, the extra profit from the original increase in demand for good #2 was used to finance capital investment in a technological breakthrough in producing good #2. Likewise, the price of good #1 would be higher in the long run only if its cost structure rose sufficiently so that production decreased its stock relative to the original decrease in demand.
ParticipantFor the causes of the “price revolution” in the 16th and 17th centuries, the evidence is more secure. The Spanish monetary inflation from the exploitation of the gold and silver mines of the new world. For example:
http://www.sgtbkhalsadu.ac.in/colleges/tutorial/112706112009204808.pdf.pdf
For the earlier period, the evidence is not so clear. David Hacket Fisher argues that the previous price inflation coincided with the beginning of the hundred year’s war and the black death. If that’s the case, then it was caused by a reduction in production and not an increase in the money stock. See his book, The Great Wave: Price Revolutions and the Rhythm of History.
http://csmres.jmu.edu/geollab/fichter/GS102/2008PowerPoints/29-GreatWave-GG102.pdf
The increases in the money stock prior to the price revolution of the 16th century came from silver mines in central Europe. Jim Bolton in his book, Money in the Medieval English Economy, 973-1489, estimates that the silver money stock in England increased 27 to 40 fold from 1086 to 1300.
http://eh.net/book_reviews/money-in-the-medieval-english-economy-973-1489/
Bolton relies on Martin Allen’s book, Mints and Money in Medieval England.
ParticipantNathan Rosenberg and L.E. Birdsell, How the West Grew Rich (New York: Basic Books, 1986).
http://www.deirdremccloskey.com/docs/pdf/Article_63.pdf
Thomas DiLorenzo, How Capitalism Saved America (New York: Crown Forum, 2004).
https://mises.org/journals/qjae/pdf/qjae8_1_6.pdf
McCloskey has written quite a bit about the industrial revolution. Here are a few examples:
http://www.deirdremccloskey.com/docs/pdf/Article_62.pdf
http://www.deirdremccloskey.org/articles/revolution.php
The cause of economic progress is not merely free trade. Free trade simply allows for an extension of the division of labor, which does raise productivity as people and places are rearranged into their areas of comparative advantage. But the steady improvements of living standards are the result of capital accumulation which requires saving by people and investing by entrepreneurs.
ParticipantIf you define liquidation as “traded” then if housing prices fell and the quantity traded declined, there must have been a stronger leftward shift of the demand curve for housing than rightward of the supply curve of housing. So it was the drying up of demand for housing, not the flood of supply that caused housing prices to fall while at the same time “liquidation” declined.
ParticipantLike the prices of all goods, housing prices move up and down with changes in demand and supply. Housing prices plummeted because demand fell and supply rose. The reduced volume of house sales came from the fact that demand fell more than supply rose. Under those conditions, both the price and quantity traded of a good will decline. If the increase in supply was more than proportional to the reduced demand then price would fall the quantity traded would rise. So, in the housing collapse, demand fell relative to the increase supply. Demand for houses fell from investors pulling out and mortgage credit drying up.
ParticipantMonetary inflation and credit expansion raise money incomes, but lower real incomes. Wealth refers to real incomes, i.e., people’s standards of living or the consumer goods people have. Wealth increases through capital accumulation which raises productivity of inputs and results in the production of more and better consumer goods. To accelerate capital accumulation, people must lower their time preferences, releasing resources from producing consumer goods more directly and reallocating them into more indirect production of consumer goods. Monetary inflation and credit expansion shift resources into more indirect production processes even though people do not prefer them as they have not lowered their time preferences. The ensuing alteration is called a “boom” instead of economic growth because it involves a building up of the economy’s capital structure, seemingly aping the process of economic growth, which proves to be unsustainable. Because the build-up is not justified by lower time preferences, it must be torn down in the bust.
September 4, 2014 at 5:08 pm in reply to: If the Dollar Collapse.. Wouldn't Other Currencies…. #18428ParticipantWhether or not it’s reasonable to hold foreign currencies as a hedge against the collapse of the dollar depends, as you suggest, on the likelihood of the collapse of those currencies as well. It may be more reasonable to hold precious metals or other real assets. There could be some foreign currencies, however, that foreigners rush into as the exit their dollar holdings. These currencies might appreciate relative to the dollar even more than real assets.
As you note, the collapse of the dollar is not inexorably linked to a proportionate collapse of foreign currencies. The reason is that foreigners outside the U.S. hold a significant portion of physical dollar currency, around 60 percent, which is much higher than the percent of any other currency, such as the Euro, held by persons outside the Euro zone. Therefore, the collapse of the dollar is much more likely, under your scenario, since those bound to accept the dollar legally, namely Americans, are not holding most of the dollars. Foreigners can easily dump large quantities of dollars on the American economy in a short period of time. Whereas, Americans cannot divest themselves completely of dollars, at least not legally. But, I dare say, only an insignificant portion of Australian dollars are being held by foreigners. So the downward pressure on the Australian dollar is less than that on the American dollar, given that Australians also face legal tender laws for the Australian dollar.
ParticipantIn our current circumstances, there are two factors that will push up interest rates despite the Fed’s efforts to hold them down.
First, a return to normalcy on the demand-side of credit markets. Entrepreneurs are still holding back their investments in the face of uncertainties they perceive. When demand for credit returns to normal, it will put upward pressure on interest rates. Of course, the banking system has plenty of excess reserves upon which it can create credit, which would moderate the upward pressure on interest rates. Whether or not banks begin to lend normally depends on their assessment of uncertainty in extending loans.
Second, renewed price inflation will push up interest rates. Entrepreneurs are still holding money in the face of the uncertainties they perceive. When their normal money demand is restored, price inflation will pick up. When banks begin the normal process of creating credit on their excess reserves, then the money stock will increase which also puts upward pressure on prices.
There’s not much the Fed can do to control an entrepreneurial decline in money demand and there’s not much their willing do to control renewed credit creation by banks. Reversing their QEs and thereby, removing the excess reserves from banks, risks igniting a secondary downturn. With Yellen in charge, the Fed will undoubted err on the side of price inflation and not risk price deflation. Significant price inflation will boost interest rates.
ParticipantIn actual history, these three factors (population growth, technological improvement, and capital accumulation) have been intertwined in rising standards of living. Before standards of living began to rise around 1200 A.D. in western Europe, population rose very slowly, technology progressed very little, and capital per head did not accumulate significantly. Presumably, more people were added to the existing trade nexus, but that didn’t seem to raise standards of living appreciably.
Theoretically, the difficulty in answering your question comes from the contingent conditions involved in holding technology and capital accumulation constant while increasing population. For example, what complementary capital goods will the rising population work with if there is no capital accumulation? Presumably, the productive activity of the additional population would be placed on less productive land since the most productive land sites are already in use. So unless there was some reason to think that the larger populations enhanced the comparative advantage of different people in different places as they, too, came into trading relationships, then it seems unlikely that merely having more people to trade with would raise everyone’s productivity and therefore standards of living.
ParticipantThe great American “Austrian school” economist, Frank Fetter (who was chairman of the economics department at Princeton in the first half of the 20th century) wrote his dissertation on Malthusian population theory. In his presidential address to the American Economic Association in 1913, he was pessimistic on the likelihood of continuing increases in standards of living under the strain of population growth:
http://onlinelibrary.wiley.com/doi/10.1111/j.1728-4457.1999.00577.x/abstract
But, like those of Malthus himself, such pessimistic predictions have so far proven unwarranted. The main causes of standards of living continuing to rise are technological advance and capital accumulation. As long as these factors continue to progress, even population growth that would put human population beyond the point of covering the entire surface of the earth with productive activity, would not necessary reduce standards of living. Fortunately, you and I are unlikely to personally experience such a state of affairs to witness the results firsthand.
Ludwig von Mises analyzes this point of “over-population” in his discussion of the Law of Association in his book Human Action. There he points out that any population growth beyond the point at which the entire surface of the earth is filled with productive activity will result in unemployment of the least-productive people. They could be kept alive only by the charity of the producers.
http://library.mises.org/books/Ludwig%20von%20Mises/Human%20Action.pdf
His discussion is in chapter 8.
ParticipantThe best exposition of the capital structure is in Murray Rothbard’s book, Man, Economy, and State:
Take a look at chapters 5 and 6.
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