[jmherbener]

Your list is not quite right.
1. Demand for a consumer good increases.
2. Price of consumer good rises.
3. Profit for production of such consumer goods increases.
4. Entrepreneurs produce more of such consumer goods, which has two effects:
a. As they increase their supply of such consumer goods, the market-clearing price declines, which
reduces the profit from even more additional production.
b. As they increase their demand for the inputs used to produce such consumer goods, their market-
clearing prices rise, which also reduces the profit from even more additional production.

If your friend is a neoclassical economist, what is probably tripping you up (and it appears in your item no. 6) is that supply in the Austrian view is not based on costs of production. Production decisions are made based on costs of production, but selling decisions are based on the opportunity cost of selling the output, not the opportunity costs of producing it. Only in neoclassical models are selling decisions and production decisions synchronous. In reality entrepreneurs made production decisions and incur production costs before they made selling decisions and receive revenues. Once a good is produced, then production costs are sunk and are no longer opportunity costs of using or selling the good. But in order to sell the good and receive the revenue from the consumer, the good must have already been produced and therefore, production costs aren’t relevant for making the decision to sell or not to sell to the consumer.

If these points aren’t clear from the Austrian Economics lectures, take a look chapter 11 in Bob Murphy’s book, Lessons for the Young Economist:

http://mises.org/books/lessons_for_the_young_economist_murphy.pdf

[jmherbener]

Yes, non-determinism seems necessary to have human action and therefore, economic theory.

Murray Rothbard takes Aristotle’s position that human nature includes volition. Take a look at his monograph, The Mantle of Science:

http://mises.org/rothbard/mantle.asp

Ludwg von Mises takes the “softer”position that natural sciences have not as yet provided a materialistic explanation of human action and, given our ignorance, we must treat human action as if it entails volition.

Take a look at his book Human Action, pp. 105-106.

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

[jmherbener]

The dynamic I described does not depend at all on entrepreneurs lowering costs through finding more efficient methods of production. It is set in motion by increased demand for the good produced by the entrepreneur. Higher demand will increase the price of the good. The higher price of the good will increase the net income of producing it (even if the cost structure stays the same). The entrepreneurs’ Increased supply of the good will then moderate its price and the entrepreneurs’ increased demand for factors of production will increase their prices. These changes will eliminate the extra net income from further increased production.

[jmherbener]

Entrepreneurs base their production decisions on their anticipations of the array of prices of outputs and inputs that will occur over the period of production and sale of their output. They expand lines of production in which they anticipate profit and contract lines of production in which they anticipate losses.

So, not every case of increased demand driving up the price of some good right now will lead entrepreneurs to choose to expand its production. They might anticipate that other lines will generate more profit in the future from as yet unrealized increases in their demand. Also, as you imply, the economy is a lattice work of integrated production processes and therefore, prices are interrelated. Entrepreneurs might anticipate that other entrepreneurs bidding more heavily for inputs will drive their prices up and make unprofitable what would otherwise appear to be a profitable line of production. Another example how one must consider the integration of all economic activity is the specificity of capital goods used in production. If there is a highly specific capital good used as an input in the production of a good, then an increase in the price of the good from greater demand will dramatically increase the price of the specific capital good which raises the costs of production of the output. Entrepreneurs would then shift production toward the capital good which would moderate its price and bring the costs of production of the output down. The final effect on production of the output from an increase in its demand, therefore, may differ from the initial effect.

[jmherbener]

Critiques like these ignore the human element. They view resources from the perspective of our given technological knowledge about their use. (Remember the Peak Oil scare from a few years ago, now forgotten in the shale oil boom.) But humans are creative, they learn. As so, we develop better resource using technology over time.

Take a look at the work of George Reisman on this issue:

http://mises.org/daily/661

http://mises.org/daily/1927/The-Toxicity-of-Environmentalism

http://mises.org/media/1508/Environmental-and-Resource-Economics

http://mises.org/media/1028/Resource-Economics-and-Environmentalism

[jmherbener]

As I understand the situation you describe: Duquesne Light is subsidizing certain light bulbs that can be purchased at Home Depot. I take this to mean that a customer can buy the brand of subsidized light bulbs at a lower price than before. Your friend says this is a good idea since it will lead to less power consumption. But if she thinks that the poor will not change their habits in buying things just because their prices change, then the Duquesne Light subsidy will not lead to less power consumption and therefore, it will not be a good idea by her own standard.

Setting aside the condescending tone of her remarks about the poor, what body of evidence can she cite that the poor are more subject to ruinous buying habits than the non-poor? If she lacks evidence, then what argument can she bring forth to show that unlike non-poor human beings, poor human beings do not economize their actions according to their own judgments of value, i.e, they do not value alternatives and choose from among them the alternatives they value more?

[jmherbener]

The interest rate is the inter-temporal price of money, i.e. the exchange ratio between present money and future money. Fundamentally, it is determined by people’s time preferences, i.e., their preferences for a given satisfaction sooner instead of later. The interest rate is manifest in two ways. First, the contract rate of interest for credit transactions and second, the price spread between output prices and input prices in production.

The total stock of money and the total demand for money determine money’s purchasing power, which is the inverse of the prices of goods.

The exchange rate between different moneys adjusts to keep the purchasing power of any one money the same everywhere. So if the demand for the dollar increases, with the money stock the same, the purchasing power of the dollar will increase. This means both that prices will fall domestically and that the dollar will appreciate internationally.

The demand for money and time preferences are independent of each other. They refer to two different ends and actions to attain those ends. Time preference is the preference to attain a given satisfaction sooner instead of later. A person acts inter-temporally to satisfy his time preferences. If his time preference is low he lends to someone with higher time preference and earn the rate of interest. The demand for money is the preference to retain money balances, instead of lending them, for the purpose of dealing with uncertainty.

The interest rate would not be directly affected by high demand for money or low demand for money. If demand for money were high, then the purchasing power of money would be high, i.e., prices of goods would be low. If the demand for money were low, then the purchasing power of money would be low, i.e., prices of goods would be high. But the price spread between output prices and input prices need not be affected. Suppose an iPad Air sells for $500 and has costs of $450 for a price spread of $50. If money demand increased sufficiently, then the iPad Air might sell for $250 but the entrepreneurial demand for inputs would also fall and so costs wind up at $225 and the price spread of $25 renders the same rate of return.

Money is neither “easier to come by” in periods of price inflation nor “harder to come by” in periods of price deflation. It’s precisely the change in the purchasing power of money that make any stock of money suitable to perform all exchanges in society. The increased stock of money during inflation induces no surplus of money because people use it to increase their demand goods, which bids up their prices. At the higher prices, they spend more money but are just able to buy the goods offered for sale. And the reduced stock of money during deflation induces no shortage of money because people reduce their demand for goods, which lowers their prices. At the lower prices, they spend less money but are just able to buy all the goods offered for sale.

If a change in the purchasing power of money is unanticipated by people, then the rate of price inflation or deflation will affect the price spread between output prices and input prices and market rate of interests will be higher or lower, respectively. But this does not affect people’s time preferences.

[jmherbener]

First, the free market economy cannot be blamed for the impositions on it from an international system of pegged exchanged rates among different fiat currencies issued by the world’s central banks. A free market economy would tend to have a single, commodity money everywhere. In such a system, people increase their demands for some goods by decreasing their demands for other goods. Money moves to into the hands of those selling goods for which demand has increased and out of the hands of those who are selling goods for which demand has decreased. It’s not a social problem that production of the goods experiencing falling demand shrinks and production of the goods experiencing rising demand grows. For example, if demand for consumer electronics increases and for automobiles decreases, it’s not a social problem that Silicon Valley prospers and Detroit declines. Put another way, if California used “Golden Bear” currency and Michigan used “Great Lakes” currency, it would be incorrect to say that appreciating exchange rates of the “Golden Bear” against the “Great Lakes” is the cause of the decline in profitability of California producers who sell into Michigan. The problem for those producers is that their customers are earning less income because they are selling goods people no longer want as urgently as other things.

Second, in a world of various fiat currencies movements in exchange rates, just like all other prices, are an effect of changes in underlying preferences people have. If the French increase their demand for Dutch natural gas relative to say vacations in Paris, then they must increase their demand for Dutch guilders relative to French franks. The Dutch producers of natural gas prosper by satisfying this greater demand. French workers in the tourist industry in Paris earn less income and reduce their demand for Dutch wooden shoes, and therefore their demand for Dutch guilders, and the producers of such shoes earn less income. Whether or not the dutch guilder appreciates against other currencies depends on the extent to which the increase demand for guilder by those buying natural gas is offset by the decrease in demand by those not buying other Dutch exports.

Third, in a world of various fiat currencies, each currency will tend to have the same purchasing power everywhere it is traded. For example, if the dollar had greater purchasing power in France than in America, Americans would buy more French goods, which means they would sell dollars for franks leading to a devaluation of the dollar in France. This would continue until the purchasing power of the dollar was roughly the same in America as France. So the Dutch guilder could only appreciate against other currencies if their was a purchasing power disparity of the guilder in different places. This could occur if the world demand for Dutch guilders increased on net from a shift toward buying Dutch natural gas. But, any appreciation would be only temporary if the purchasing power of the guilder in different countries was not changed by the shift of demand toward Dutch natural gas.

Take a look at the New Palgrave Dictionary of Economics entry on the Dutch disease:

http://www.dictionaryofeconomics.com/article?id=pde2008_D000264&edition=current&q=dutch%20disease%20&topicid=&result_number=2

[jmherbener]

You might also consider Henry Hazlitt’s Economics in One Lesson:

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

And Shawn Ritenour’s Foundations of Economics:

http://www.foundationsofeconomics.com/index.php

[jmherbener]

Under a gold coin standard, the name dollar is defined as a weight of gold. So there is no dollar price of gold. There are only dollar prices of goods and services. Once defined, the dollar equivalent to gold does not change. If ten dollars is a defined as equivalent to a half ounce of gold, then a half ounce of gold cannot fall from $10 to $9. A half ounce of gold can fall in purchasing power relative to goods, but not in a dollar defined name.

If one foot is defined as equivalent to 12 inches, then the “value” of the foot cannot fall to ten inches. Feet and inches are just two different names for an equivalent length. A person’s height could change from 5′ to 6′ but that would still be equivalent to a change from 60″ to 72″. So the price of a month’s rent could change from a half ounce of gold to an ounce of gold, but that would be equivalent to a change from $10 to $20. Gold ounces and dollars are merely two different ways of referring to the same thing.

Under a gold coin standard, a bank note is not traded for a gold coin. A bank note is redeemed by the issuing bank for the equivalent amount of gold. This is what makes bank notes a substitute for gold coins. Merchant accept either a half ounce gold coin or a $10 bank note because they know that the bank that issued the $10 bank note will redeem it for a half ounce gold coin. So gold coins and bank notes both trade for goods and services, but not for each other. The legal way of seeing the relationship between bank notes and gold coins is that bank notes are titles of ownership to gold coins. A $10 bank note issued by the First National Bank is a legal title of ownership to a half ounce gold coin. The FNB stamps this fact on the bank note. For example a $10 bank note might have the words, “pay to the bearer of this note, $10 in gold” stamped on it. So, the value of a bank note in terms of gold is fixed contractually by the issuing bank. The bank does this to create general acceptance of its bank notes as a substitute medium of exchange for gold coins.

[jmherbener]

Needless to say, a paper purporting to show that demand curves slope upward to the right has been controversial.

Here’s are a few answers to Card and Krueger:

http://mises.org/daily/2596/Minimum-Wage-Laws-Economics-versus-Ideology

http://mises.org/daily/6638/Welfare-Minimum-Wages-and-Unemployment

https://mises.org/daily/2130

Here’s a piece claiming that Krueger himself disavowed the conclusion you cite:

http://www.forbes.com/sites/susanadams/2011/08/31/obama-nominee-pulled-back-on-minimum-wage-defense/

[jmherbener]

Bank notes were simply claims to a fixed dollar equivalent of gold. For example, a $10 bank note could be redeem at the issuing bank for a $10 gold coin. So the bank note had the same exchange value as the equivalent gold coin.

[jmherbener]

In addition to the source I listed above, take a look at the epilogue to Section 5 (pp. 486-490) in Murray Rothbard’s book, A History of Money and Banking in the United States.

http://mises.org/books/historyofmoney.pdf

In short, foreign dollar redemption for gold under Bretton-Woods was, in practice, done mainly by foreign central banks. As the U.S. inflated dollars in the 1960s, the dollar devalued against gold and foreign central banks began to redeem dollars for gold. Gold was flowing out of the U.S. Treasury in the late 1960 and early 1970s. This is one reason, Nixon closed the gold window in August 1971.

U.S. commercial bank notes were not redeemable for gold or silver under the Federal Reserve System, which started operations in 1914. Commercial banks exchanged their gold reserves for Federal Reserve Notes and the Fed came to own the “country’s” gold stock. If Americans wanted to buy foreign goods, they just traded Federal Reserve Notes for foreign currencies. They did not need to convert to gold first.

Finally, under Bretton-Woods, foreign governments stored their gold in the U.S. So when a trade imbalance required gold to move from the U.S. to a foreign country, it would simply be moved from one part of the vault in Fort Knox to another.

[jmherbener]

It’s not the near zero percent Federal Funds Rate, which the Fed manipulates, or the near zero percent short term rates, which are influenced by the Fed policy, that is causing entrepreneurs to sit on cash instead of investing. Mid-term and long-term interest rates are low, but not at unprecedented levels. Ten year Treasuries are at 2.54 percent and 20 year at 3.47 percent.

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

The reason entrepreneurs are sitting on the sidelines is uncertainty generated by government policies. Take a look at Robert Higgs’s work on this point.

http://mises.org/daily/6275/Regime-Uncertainty-Some-Clarifications

[jmherbener]

The exchange ratio of gold to other goods is not fixed, but fluctuates with changes in people’s preferences with respect to gold coins relative to other goods. The dollar is just a name for a weight of gold, so the dollar must have a fixed definition in terms of gold. In a pure gold standard, money is gold coins. As Rothbard points out, we can dispense with the name “dollar” altogether and just name the gold coins by their weight. In other words, we could call a gold coin “1/20th of an ounce.” Or we could call the gold coin of 1/20th of an ounce of gold some made up name like “Hayek.” Then two Hayeks would refer to 1/10th of an ounce of gold or two 1/20th of an ounce coins. Neither the Hayek nor the dollar is a fixed “value” for the coin. Instead it refers to the fixed weight of gold that the coin contains.

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