[jmherbener]

In the market economy, entrepreneurs are free to innovate to attract customers and customers are free to accept or reject their products and services. Given that there exist a variety of treatments with differing results, prices of outputs and inputs will adjust to economize the use resources devoted to each treatment.

Suppose there are two treatments for some neurological disease. One cures it completely with no recurrence in a single treatment. The other requires annual treatments for life, but it dramatically slows the progress, of the disease extending the patient’s life by several decades as the symptoms worsen steadily. There would be more demand by patients for the first treatment and, consequently, its price would be higher than that of the second treatment. In fact, because patients could borrow money against their future incomes, the price of the first treatment would be related to the present value of the stream of future payments made for the second treatment. So, its not obvious that a lifetime treatment would bring in more revenue than a onetime treatment. Regardless of which treatment generates greater revenue, the rate of return on investment would tend to be the same for either one. If the second treatment had a higher rate of return than the first, then investors would bid more for the resources to attempt to expand production. As a result, the price of the second treatment would fall and the costs would rise, both of which reduce the rate of return. When the rate of return in the two treatments is the same, then resources are efficiently allocated. Of course, if the costs of the first treatment are lower than that of the second treatment, no one will provide the second treatment.

[jmherbener]

Contra neoclassical economists, Mises points out the the only significance of the term “monopoly” is a case in which an entrepreneur has exclusive ownership over the supply of an input. Then, Mises argued, it’s possible for the entrepreneur to charge a monopoly price, i.e., a price above competitive level. This higher price, however, does not result in profit or higher rates of return. Instead, outside investors will bid up the price they are willing to pay to buy the monopolized input or, alternatively, the entrepreneur’s entire firm. This raises the cost structure of producing with the monopolized input which eliminates profit and brings the rate of return into conformity with other lines of production. The value of the monopoly ownership of an input is capitalized into the the price of the input itself. So the monopolist gets the benefit of owning a more valuable asset, but not monopoly profit.

Take a look at the section on “monopoly prices” in chapter 16 in Ludwig von Mises’s book, Human Action:

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

In the neoclassical case of a entrepreneur having market power, the adjustment process of the market works to raise production costs and eliminate any higher rate of return. The entrepreneur with market power competes for inputs with all other entrepreneurs. So if he bids more intensely to buy inputs and pushes up their prices, his profit is eliminated and the production of other entrepreneurs will shrink until the prices of their output rise to the point of restoring the common rate of return in their lines of production. If the entrepreneur with market power does not bid more for inputs, then outside investors will bid up the value of his assets, raising his production costs and eliminating his profit. The higher prices for these assets will cause other entrepreneurs who use them to cut back production leading to a higher price for their output and a restoration of the common rate of return in their lines of production.

[jmherbener]

I don’t think there is a consensus assumption among economists about the old nurture-nature debate. And the issue of whether or not robot production could create mass unemployment does not depend on which side you take in that debate. To get that conclusion, one must make dubious assumptions about the specificity of labor and the creativity of the human mind.

First, labor is relatively non-specific, Compared to capital goods and natural resources, labor does not lose much of its productivity if shifted into tasks from areas in which it is better suited. Of course, an assembly-line worker put out of a job by further capitalization of an auto factory won’t shift into academia as an economics professor. But there are many other tasks into which his labor can be shifted.

Moreover, if demand for their use in one line of production declines, workers can still be “employed” even without shifting into a different line of production as long as their prices are free to decline. This process even occurs for capital goods, which are relatively more specific than labor. Once demand for a capital good declines and its price falls, then investors will not invest to reproduce it. In similar fashion, if labor is in a shrinking line of production, it can still be employed in the same line as long as its wage is free to decline. The number of employable persons depends on wages. And, then, overtime people would shift their training away from areas being taken over by robots and into others areas.

Second, as long as robot production does not eliminate scarcity, everyone who wants to work can find employment in the market economy at some wage. Entrepreneurs will discover new tasks for human labor over time. Smarter persons create job opportunities for duller persons. It is precisely the incentive of the monetary profit to be earned by creating new productive activities for others that directs entrepreneurial effort into such endeavors.

Moreover, even if nominal wages are low in these newly-created employment areas, real wages are rising all around in society because of robot production.

Finally, if robot production eliminates scarcity altogether, then no one needs to work. Everyone could spend 24-hours a day in leisure activities and still have all their consumptive ends met.

[jmherbener]

First a few facts. The story by Mark Ames claims that 100,000 tech workers were affected by the cartel. The Bureau of Labor Statistics list 3,456,500 workers in “computer occupations” in America. Of those 3.5 million 1,397,870 are “software developers and programmers.”

http://www.bls.gov/oes/current/oes_nat.htm#15-0000 Scroll down to occupation code 15-0000.

Also, wages for tech workers are high and rising. The BLS calculates $80,200 as the average annual wage of “computer occupations” and $90,470 for “software developers and programmers” in America in 2012. The median income of a family of four is around $51,000. The average annual wage of “computer and mathematical occupations” in 2000 was $58,050 and in 2012 was $80,180.

http://www.bls.gov/oes/2000/oes_15Co.htm

http://www.bls.gov/oes/current/oes_nat.htm#15-0000

Moreover, the tech industry is worldwide. Samsung, not Apple is the world’s biggest tech company. Therefore, the market for tech workers is global. No silicon-value cartel could suppress their wages. If a small, local cartel did suppress wages, then it would create a profit opportunity. Either workers would leave for market-level wages elsewhere (and haven’t we been told ad nauseam that tech workers can do their work from any location that has a internet connection) or capitalist would fund non-cartel companies to hire them away from the low paying cartels. No matter how big a cartel becomes in a single industry, it will always be dwarfed by world capital markets and destroyed by capitalist eager to earn profit created by a successful cartel.

Take a look at Dom Armentano’s book, Anti-trust and Monopoly and his work, Anti-trust: the Case for Repeal:

http://library.mises.org/books/Dominick%20Armentano/Antitrust%20The%20Case%20for%20Repeal.pdf

[jmherbener]

Under the Bretton-Woods international monetary system (1944-1971), the dollar was redeemable by foreign central banks at the rate of $35 an ounce. As the Fed generated monetary inflation, the redemption became more tenuous. By the mid-1960s, the dollar was devaluing against other currencies and gold. Led by the French, the redemption claims became more intense after 1968 and then Nixon rescinded redemption in August 1971.

Take a look at the last chapter of Murray Rothbard’s book, A History of Money and Banking in the United States:

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

For an explanation of how the Fed generates monetary inflation and credit expansion, consult Rothbard’s book, the Mystery of Banking:

http://mises.org/Books/mysteryofbanking.pdf

In short, the Fed generates monetary inflation and credit expansion by purchasing securities from banks with newly issued money. The banks use the newly-issued money as reserves against the checking account balances of their customers, With more reserves, the banks then can issue more checking account balances by making loans to their customers. Fro example if banks hold a 10% reserve of cash against their checkable deposits, then each $1 in new reserves can support $10 in new checking account balances.

Here are the data for the money stock measure called M1 which is roughly cash plus checkable deposits:

http://research.stlouisfed.org/fred2/categories/25

[jmherbener]

The purpose of QE1 and QE2 was to bailout the banking system and thereby, according to Bernanke, save the world economy from collapse. You can read his statements here:

http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm

http://www.federalreserve.gov/newsevents/speech/bernanke20100827a.htm

Of course, his statements also mention pushing interest rates down to get credit flowing again and stimulate spending and production. But as you point out, the Fed’s actions are not consistent with that narrative. But they are consistent with a bailout of banks. In addition to the two QEs that took bad assets off the books of banks and replaced them with cash reserves, the Fed helped the banks by paying interest on reserves so that banks would not be sitting on idle cash reserves, but earning revenue to bolster their financial situation.

With QE3, there was no more talk about a banking collapse, but the policy has had similar effects as the earlier QEs. The Fed pledged to buy an additional $40 billion of Mortgage Back Securities and $45 billion in Treasuries each month. So, just like the first two QEs, QE3 has bolstered the balance sheet of the banking system without loosening credit significantly. Here is the story:

http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html

[jmherbener]

The viability of a production process depends on the spread between output prices and input prices, not on the level of output prices. Deflation means that the purchasing power of money is rising, i.e., all prices are falling. As long as output prices and input prices fall together, production processes can be maintained.

In Japan, prices have been falling (albeit modestly), throughout the different production processes since the financial collapse in 1989. In fact, the wholesale price index has fallen more than the consumer price index, which is the usual case during price deflation.

Here’s a chart of the wholesale price index:

http://www.indexmundi.com/facts/japan/wholesale-price-index

Here’s a chart of the consumer price index:

http://www.tradingeconomics.com/japan/consumer-price-index-cpi

You can select the beginning year to make a chart with a comparable time-frame to the wholesale chart.

[jmherbener]

The entrepreneur’s decision to sell a good in the face of actual offers by buyers of his output comes after his decision to begin producing the good in the face of actual offers by sellers of their inputs. His production costs incurred in the past have no bearing on his decision to sell the good to a buyer in the present. At that point, the entrepreneur’s alternatives are to sell the good to buyer A at the current price or to keep the good in anticipation of selling it to buyer B in the future at a more favorable price or to use the good for his personal satisfaction. For this reason, we can depict the seller’s behavior as either supply of the good or reservation demand for the good. At a higher current price offer, he will be willing to sell more (or retain less now) of the good currently, other factors the same. At a lower current price offer, he will be willing to sell less (or retain more now) of the good currently,other factors the same. Analytically, the seller’s behavior can be depicted either as an upward sloping to the right supply curve (from the higher opportunity cost of retaining a smaller amount of the good for sale in the future) or as a downward sloping to the right reservation demand curve. The market-clearing price of the good is determined by the interplay of either supply and demand or total demand (regular demand plus reservation demand) and the total stock. The total stock of housing, or any good, is fixed at any moment in time and therefore, it graphs as a vertical line against various prices.

For example, the price of a house in my town of Grove City can be analyzed as either the price that equates the quantity supplied with the quantity demanded or the price that equates the total stock of houses with the total demand to own houses.

Whatever this price happens to be, then house-building entrepreneurs make their production decisions on the basis of their anticipation of what the price will be at the point in the future when houses they start building today are ready to sell and the prices of the inputs they need to purchase to build the houses.

An entrepreneur’s decision to produce a given good and the decision to sell that good are not synchronous in time. Therefore, the supply curve that, along with the demand curve, determines the price of that good does not also determine production decisions. Production decisions are made by an entrepreneur judgment in anticipation of the future price of that good.

[jmherbener]

Take a look at Benjamin Anderson’s book, Economics and the Public Welfare:

http://library.mises.org/books/Benjamin%20Anderson/Economics%20and%20the%20Public%20Welfare.pdf

And Gene Smiley’s article, The U.S. Economy in the 1920s:

http://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/

Also take a look at the sources cited by Tom Woods in his article on the 1920-21 downturn:

http://mises.org/daily/3788

[jmherbener]

Take a look at the classic work by Murray Rothbard:

http://mises.org/daily/2120

And this article by Walter Block:

http://mises.org/etexts/Environfreedom.pdf

And this article by George Reisman:

http://mises.org/daily/661

[jmherbener]

Take a look at this monograph by Guido Huelsmann:

http://library.mises.org/books/J246rg%20Guido%20H252lsmann/Deflation%20and%20Liberty.pdf

And this article by Joe Salerno:

http://mises.org/journals/qjae/pdf/qjae6_4_8.pdf

[jmherbener]

During my college education as an economics major and then graduate student, none of my professors, save one, ever mentioned an Austrian school economist. I knew about the Chicago school from my undergraduate days and studied under a student of Milton Friedman’s in graduate school, but never considered myself a member of the Chicago school. In microeconomics, the free-market implications of general-equilibrium models were plain enough and reinforced my philosophical attachment to liberty. Friedman was fine in this realm, but his macroeconomics was a mess. Being dissatisfied with neoclassical economics after finishing my PhD, I started to read the Austrians, first Hayek, then Mises, then Rothbard. The power of their ideas convinced me.

[jmherbener]

They likely mean that theses are the two most prominent free-market schools (at least Chicago once was). But, as you point out, method is crucial. A model is a foundation of sand (as the decline of the Chicago school as a proponent of the free market illustrates) and leaves one open to the charge that one’s economic theory is just a scientific fig leaf for covering up one’s unseemly libertarian prejudice.

Liberty Magazine published a piece on the “Austro-Chicagoan Empire” in 2005:

https://mises.org/journals/liberty/Liberty_Magazine_November_2005.pdf

[jmherbener]

Fractional-reserve banks supply credit in two ways: they intermediate the savings of their customers and they credit credit out of thin air by issuing fiduciary media, i.e., checking account balances of their customers that are not backed by a corresponding reserve of cash.

There is no “money-multiplier” for the savings of people that banks intermediate into the credit markets. The “money multiplier” refers only to fiduciary media that banks create out of thin air on the basis of their cash reserves. If the Fed provides prints more money and buys securities from banks, then the banks banks can create a multiple amount of checkable deposits on top of those addition cash reserves.

A monetary system with a central bank and fractional-reserve banks is inherently inflationary, as you say.

Take a look at Murray Rothbard’s book, the Mystery of Banking:’

http://library.mises.org/books/Murray%20N%20Rothbard/Mystery%20of%20Banking.pdf

[jmherbener]

The policy proposal by the greenbackers is to abolish the Fed and turn the power of the printing press over to Congress. Here is Bob Murphy on why that’s a bad idea:

http://www.theamericanconservative.com/articles/the-follies-of-the-modern-greenbacker-movement/

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