[jmherbener]

Here are a few brief points of rebuttal:

1. Human action is forward looking, not backward looking. Therefore, how capital came into existence cannot matter for human action today. The price of a piece of equipment today cannot be affected by the “embodied” labor from its production in the past.

2. Austrians do not claim that capital is “embodied” time. They argue that the value of capital is in advancing a person in time toward the end he aims to attain in the future.

3. In claiming that the pure rate of interest is uniform across both the credit markets and the capital structure, Austrians do not assume “perfect knowledge” or overlook the distinction between “real” capital and financial capital. Austrians argue that savers have the alternatives of investing in either the credit markets or production process and therefore, they will arbitrage away any difference in the pure rate of interest between the two alternatives.

4. Contrary to the author, if people become more uncertain of the future and as a consequence hold more money, this results in a higher purchasing power of money and not a higher rate of interest.

5. Austrians argue that both the pure rate of interest and the amount of saving-investing are determined by time preferences. Any of a number of factors can change the rate of time preference and therefore, change the pure rate of interest and the amount of saving-investing. Austrians make no claims about any relationship between “real” interest rates and the amount of saving-investing.

6. Regardless of whether there are unemployed resources or not, people in society always must make a choice between allocating resources into shorter production processes (“consumption “) and longer production processes (“investment”).

7. Technology is not “embodied” memory. It is knowledge of production. Technology, applied in production, is an objective feature of capital goods and not of labor.

8. The capital structure as used in Austrian economics is not a metaphor but a stylistic description of the real economy.

[jmherbener]

Your scenario raises several interesting issues.

First, the transition from one pattern of demand for things to a different pattern will depend precisely on the extent to which entrepreneurs anticipate the new pattern. In the Austrian approach, we adhere to the realistic view that entrepreneurs have the incentive of earning profit and avoiding loss in making accurate predictions of the future, that entrepreneurs with superior foresight gain command over resources and entrepreneurs with inferior foresight lose command over resources, and that there exists a spectrum of foresight among entrepreneurs from less to more accurate. The transition in the real world from a state of lower demand for money to a state of higher demand for money can neither assume perfectly accurate anticipation nor perfectly inaccurate anticipation on the part of entrepreneurs.

Second, because the capital structure is an integrated system of production, continuously changing demand for some goods leads to changing demands for other goods across the entire capital structure. The effects of changes in demand for money, in this respect, are not different than the effects of changes in demand for other goods.

Third, the transition depends on the money production system in the economy. If the economy has a market monetary system, then as the PPM rises from the increased demand for money the production of money would increase, which moderates the rise in the PPM.

Given these points, let’s suppose that demand for money increases to a new higher level but time preferences stay the same. Entrepreneurs with inferior foresight will see their profits cut and maybe suffer losses. Entrepreneurs with superior foresight will maintain their profits. Those with less profit or losses will not need to immediately reduce production. All entrepreneurs hold equity as a buffer against their inability to forecast accurately every contingency. During the period of drawing down their equity, they revise their expectations. If they perceive, as those with superior foresight have already done, that their demands for inputs must fall in the wake of the reduced demand for their output, then input prices will fall and restore their net income. Even if entrepreneurs are duller in formulating more accurate expectations, the fact that demand for their outputs have fallen reduces their revenues which requires them to reduce their demand for inputs. Their reduced demand for inputs causes input prices to drop which restores the net income of production.

Only if the price spread between input prices and output prices were systematically and generally altered would the transition affect the length of the capital structure (instead of merely reconfiguring the composition of production within the capital structure. If the increased demand for money caused the spread between output prices and input prices to shrink, then the capital structure might be lengthened out because the interest rate in production would have fallen. Conversely, if the spread between output and input prices increased, then the capital structure might be shortened. In either case, the capital structure would return over time to that dictated by time preferences.

As to the composition of production within the capital structure, an increase in the demand for money would shift resources out of the production of some goods and into the production of money (given a market monetary system as noted above.) More generally, production would shift away from areas of lower relative demand and toward areas of higher relative demand. This is the same process going on continuously in the market economy as people shift their demands away from some goods and toward other goods.

[jmherbener]

The “economy” is all of us cooperating by arranging our resources in a division of labor by which each person produces to satisfy the consumption ends of other people and has his consumption ends satisfied by them. What improves the economy, then, is letting people self-select into different tasks under entrepreneurial organization of teams of producers. Entrepreneurs can use economic calculation to determine which techniques of production are lower cost and which set of consumer goods are higher valued. If everyone self-selects into their area of efficient production, then we can produce the greatest output with our given inputs. What harms the economy is violent interference with this self-selection process. Protectionism uses state coercion to criminalize trade between people that is perfectly licit, e.g., buying and selling clothes. When the state criminalizes trade in textiles, then less efficient textile producers continue to specialize in that area instead of their area of efficiency and more efficient textile producers must specialize in areas in which they are not efficient. With our given resources, we can produce less output. While protected textile workers may be better off, society is worse off. State coercion has forcibly transferred wealth from non-protected to protected workers. (For consumers to pay the higher prices for clothes which allows higher wages for inefficient textile workers, consumer must decrease their demands for other goods which suppresses wages of efficient workers in other industries.) This is not only immoral, it is inefficient. Furthermore, where does the application of protectionism end. if it’s good to protect textile workers, why not workers in other industries? According to the protectionist logic, then, it would be better if Americans consumed only what Americans produced and, with the same logic, it would be better if Pennsylvanians consumed only what Pennsylvanians produced, and so on down to self sufficiency for each person. At that point, each person would have all the jobs for himself, but his standard of living would be subsistence.

Take a look at Henry Hazlitt’s book, Economics in One Lesson:

http://library.mises.org/books/Henry%20Hazlitt/Economics%20in%20One%20Lesson.pdf

[jmherbener]

It’s important to emphasize that the Fed generated monetary inflation and credit expansion lengthens out the capital structure beyond what is sustainable given people’s time preferences. This mis-match between the capital structure and time preferences is what reverses the boom. So, the steps might be listed out as below:

1. Fed buys assets from banks increasing the banks’ reserves.
2. Banks create credit by issuing fiduciary media on their new reserves.
3. The greater supply of credit pushes down interest rates and funds riskier investment projects.
4. Demand for higher-order capital goods increases relative to lower-order capital goods because more timber must be cut and milled before more houses can be produced and more iron must be mined and milled into steel before more cars can be produced.
5. Resources shift toward higher-stages and away from lower-stages, but this shift is not supported by a lowering of people’s time preferences.
6. People reestablish their time preferences by spending and saving their incomes, which are larger with the greater stock of money, according to their time preferences. This restores interest rates to their higher levels, which collapsed asset prices.
7. Asset prices also decline because investors perceive the greater risk of investing further in the boom lines of production.
8. Lower asset prices reveal the mal-investments of the boom.
9. The collapse of asset prices makes banks insolvent since their assets are financial claims on the assets whose prices are falling, e.g., mortgages on houses.
10. Profits exist in reallocating resources to shorten the capital structure in a way that satisfies time preferences.
11. Entrepreneurs liquidate the mal-investments and reallocate resources. Once the capital structure is reconfigured, economic normalcy returns.

Take a look at Rothbard’s summary of business cycle theory in chapter 1 of America’s Great Depression:

http://library.mises.org/books/Murray%20N%20Rothbard/Americas%20Great%20Depression.pdf

[jmherbener]

It means that the financial claim is written in dollars as opposed to euros, yen, etc.

For example, GMC issues a $10,000 bond with a coupon rate of 3 percent. Whereas, Seiko issues a
¥ 1,000,000 bond with a coupon rate of 3 percent.

[jmherbener]

Yes, the dollar is still a world reserve currency. Primarily, it means that foreign central banks hold dollar denominated financial assets as a reserve against the issue of their own currencies. They do so because, just like under Bretton-Woods, that’s how monetary inflation can be coordinated (or managed as our leaders like to say) for the entire world. Secondarily, it means that foreign commercial banks hold dollar denominated financial assets as reserves also. They do so because the largest capital markets in the world are denominated in dollars. Also, foreign businesses and persons hold dollar currency in conducting international trade and, in some places, as a medium of exchange superior to their domestic currencies.

Here are some statistics on foreign currency reserves:

http://www.imf.org/external/np/sta/cofer/eng/

Here are some statistics on central bank balance sheets:

http://www.yardeni.com/pub/peacockfedecbassets.pdf

Here is a Fed paper on dollar currency held overseas:

http://www.clevelandfed.org/research/commentary/1996/041596.htm

[jmherbener]

There are several equivocations involved.

First, it’s not reasoning, but reason that is a requisite of thinking. As Mises puts it, the logical structure of the mind is a requisite for human thinking.

Second, by the term “thinking” Mises is referring to what you have called reasoning. He is not talking about having thoughts in our minds or contemplating certain abstract concepts. He is talking about the process of drawing conclusions about the cause and effect connections in human action.

David Gordon says that creatures who are not human beings may also be able to think even though they lack a human brain. An obvious example is God. But for human beings living in the world, which is the subject matter of economics, a person’s body, including his brain, is a scarce resource.

Indeed, your questions raise philosophical issue that are beyond the scope of praxeology.

[jmherbener]

Ludwig von Mises thought that thinking and acting were inseparable. Take a look at his book, Human Action, pp. 24-25 and 177.

http://library.mises.org/books/Ludwig%20von%20Mises/Human%20Action.pdf

David Gordon believes that thinking is an action because it is purposeful behavior. Take a look at his book, Introduction to Economic Reasoning, pp. 18-20.

http://library.mises.org/books/David%20Gordon/An%20Introduction%20to%20Economic%20Reasoning.pdf

I think that Rothbard, Mises, and Gordon would agree that reason is the precondition for thinking while knowledge or ideas themselves are the product of thinking. If thinking is considered an action, then, it would employ the scarce resource of the person’s brain.

[jmherbener]

Foreigners who obtain dollars by selling goods to us can use them to buy our goods or to buy our assets (either physical or financial), i.e., to invest in our economy or simply hold our dollars. As you point out, if they buy our goods this improves the standards of living of all concerned by extending the division of labor to encompass more people in more places. If they invest in our assets, this too improves the standards of living of all concerned. The capital structure of the world economy is built up more fully. If they hold dollars, then we benefit in having higher purchasing power of our dollar than otherwise. In all cases, we benefit.

[jmherbener]

Entrepreneurs are always arbitraging to take advantage of differences in prices. If prices were lower in states without sales taxes, then entrepreneurs would shift supply toward the higher priced state. The costs of production are not higher in the sales tax state because the sales tax is imputed backward to lower the prices of factors of production. Since it may be that entrepreneurs cannot pay less for materials, then wages would be lower.

These theoretical proposition are difficult to verify with superficial empirical evidence because the “other things equal” condition of the theory is rarely met in the world. Consider the following case, with which I’m familiar. Pennsylvania has no sales tax on clothing. Grove City, Pa. has a large Prime Outlet mall with many name-brand clothing stores. The prices for clothes in these stores are lower than normal retail. But, the reason is not that Rothbard’s analysis is wrong and the lack of sales tax permits lower costs of production and thus, lower prices. It’s because the clothes sold at Grove City Prime Outlets are “seconds,” i.e., clothes returned to other stores and repaired to be resold.

You would have a similar difficulty in empirical investigation of prices at restaurants in the two different states. If prices are lower in Portland, it might be because Vancouver is a more desirable location than Portland and not because Vancouver has a sales tax and Portland does not.

[jmherbener]

This ambiguity in the phrase “division of labor” has existed since Adam Smith used the pin factory example to illustrate the concept. David Ricardo did much to clear up the ambiguity with his exposition of comparative advantage. He demonstrated that specialization of labor according to efficiency raises productivity. Since Ricardo, then, economists tend to refer to the division of labor as the social arrangement of labor in which each person specializes in his area of comparative advantage. The assignment of tasks among different workers working with a given capital capacity is not, strictly speaking, the division of labor, but a technical condition of the capital capacity itself. An assembly line with six working stations is designed to operate with six workers, each one working at one station.

So, you are correct. The division of labor refers to a society in which each person forgoes self-sufficiency and produces for the consumptive ends of other people by specializing in his area of efficiency.

[jmherbener]

Yes, Schumpeter was wrong. Mises argued that any credit creation from the issue of fiduciary media generates mal-investments which must be liquidated later. People’s time preference determine both the pure rate of interest and the extent of saving-investing people prefer. People’s preferred saving-investing releases resources from lower-order to higher-order production. Credit creation from fiduciary media issue does not create more resources it merely diverts more of them from lower-order to higher-order production than people desire according to their time preferences.

Take a look at chapter 20 in Ludwig von Mises’s Human Action:

http://library.mises.org/books/Ludwig%20von%20Mises/Human%20Action.pdf

Here is Murray Rothbard on Schumpeter:

https://mises.org/journals/rae/pdf/R1_6.PDF

[jmherbener]

First, a monetary system with commodity money and money certificates (i.e., 100 percent reserve money substitutes) would not have a fixed money stock. As an increase in the demand for money raised money’s purchasing power, it would make the production of coins more profitable and entrepreneurs would respond by increasing the production of coins. So, the money stock in a market economy would adjust to the demand for money in the same manner as the production of any good adjusts to the demand for it.

Second, if people were using a commodity for which it was not possible, say for technical reasons, to increase its production and this created difficulties for trading, then entrepreneurs would step in and provide a different commodity for which this problem did not exist. If gold is too restrictive in its production, then people will use silver.

Third, the claim that if the money stock were fixed, then there would not be enough money to pay interest is completely false. The structure of prices adjusts to the money stock, whatever it happens to be. Interest, which is the price spread between selling prices of output in the future and buying prices of inputs in the present adjusts with the level of prices overall. If people had twice as much money, then both buying prices of outputs and inputs would be twice as high. And if people had half as much money, then both buying prices of outputs and inputs would be half as high. Put another way, if there was not enough money to buy all the output to be produced, then prices of output would be lower, but so would the prices of inputs and therefore, interest would remain.

Fourth, the claim ignores the fact that money demand can change. With the same amount of money people can buy more goods at higher prices if their desire to hold money is less intense.

Here is Tom Woods on the Greenbackers:

http://tomwoods.com/paper/

[jmherbener]

Under Bretton-Woods, when the Fed inflated the dollar a portion of the new money would be acquired and held by foreign central banks who could then inflated their currencies proportionately. The pegged exchange rates were a gauge by which officials could tell whether or not a country had over- or under-inflated relative to dollar inflation. The IMF served as the enforcement wing of the system imposing “austerity” programs on over-inflating countries and extending them loans to make sure that U.S. banks would be paid regardless of the financial distress their profligate ways generated.

3. As long as foreign countries did not redeem dollars for gold in the U.S., the U.S. gained from the system. It could inflate without currency devaluation (since foreign currencies were inflated proportionately) or significant domestic price inflation (since dollars were held overseas). In the system, both the IMF and the World Bank extend loans. Officially, the IMF loans are short-term to help countries with balance-of-payments or exchange rate problems while the World Bank makes long-term loan for capital projects.

https://www.imf.org/external/np/exr/facts/imfwb.htm

4. There are different types of deflation. There is the forced monetary deflation of central banks, which harms economic efficiency. Then there is the market correction of a previous monetary inflation, which helps restore economic efficiency. Then there is so-called “growth deflation” in which prices decline as production of goods expands more than production of money. This, too, helps efficiency. Take a look at Joe Salerno’s article:

http://mises.org/journals/scholar/salerno.pdf

2. It might be the case that the regulation changed from the writing of one book to the other.

1. SDRs were introduced near the end of the Bretton-Woods system to increase the reserve positions of countries participating in the IMF. This was an effort to replace the gold being drained from the system through dollar redemption.

http://www.imf.org/external/np/exr/facts/sdr.HTM

[jmherbener]

Here are a few pieces on Krugman’s baby-sitting co-op model:

http://mises.org/journals/qjae/pdf/qjae3_1_9.pdf

http://bastiat.mises.org/2014/03/krugman-and-the-babysitters/

Here is Greg Mankiw on New Keynesian models.

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

You might consult his textbooks for an introduction to New Keynesian models.

http://www.amazon.com/N.-Gregory-Mankiw/e/B001H6Q104

[Author]

Posts