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jmherbener
ParticipantCertainly, our time preferences can be raised by government policies, social security being a prime example. Trade deficits could be caused by currency manipulations of the government. Monetary inflation and credit expansion can increase our consumption by lowering interest rates.
And, hypothetically, if everyone in the world had extremely high time preferences, then we would begin to consume our capital stock and our standards of living would collapse. But our world economy is not like that, at least not yet. As we would expect, there is a spectrum of time preference that people have from extremely low, like the Chinese who currently save 45 percent of their incomes, to extremely high, like those in Denmark who have slightly negative saving rates.
So, in our world, people with different time preferences mutually satisfy them through lending and borrowing. Because all these different people live in an integrated market economy, they all enjoy the standards of living that the division of labor and capital stock built from the past produce. Those with higher time preferences shift their lifetime income from the future toward the present. By borrowing. they are able to consume more than they otherwise could sooner and must consume less than they otherwise could later. But their lifetime consumption is determined by their lifetime production. Those with lower time preferences shift their lifetime income from the present toward the future. By lending, they must consume less than they otherwise could sooner and get to consume more than they otherwise could later. But their lifetime consumption is also determined by their lifetime production.
ParticipantIf globalization means the further integration of everyone in the world into the system of private property and contract, then globalization will reduce income inequality for two reasons. First, differences in the price of the same things tends to be arbitraged away in the market. If wages are higher in one country and lower in another for the same labor, then globalization will bring them together. This would be true for all types of labor, including that of CEOs. The same is true of interest returns on capital investment. capitalists would tend to earn the same rate of return on similar investments anywhere in the world. Second, profits earned by entrepreneurs are imputed to wages and land rents over time. If an entrepreneur is earning sizable profit, then other entrepreneurs strive to earn them also by producing similar products. To do so, they bid up the prices of inputs. In this process, the profits diminish as wages and land rents rise.
These processes have been manifest in China for several decades. The capital accumulation processes has lifted half a billion people out of poverty in China over the last 30 years. It’s perverse to interpret such facts as claiming that the rich are getter richer and the less capable are being left behind.
Here are a few articles:
ParticipantOur economic problems are the result of Fed monetary inflation and credit expansion, government regulation, and government expenditures, taxes, and debt. None of our problems are the result of trading with the Chinese or having higher time preferences.
I suggest you read Tom Woods’s books, Meltdown and Rollback.
ParticipantHere is a brief comment by the philosopher David Gordon on someone’s objection to a priori knowledge in economics.
http://mises.org/daily/6582/Human-Reason-and-A-Priori-Economics
Here are a few defenses of a priori knowledge in economics.
http://library.mises.org/books/Ludwig%20von%20Mises/Human%20Action.pdf (chapter 2)
ParticipantEconomic progress occurs when we have more and better consumer goods to enjoy. Because consumer goods are heterogeneous, it isn’t possible to scientifically measure economic growth. GDP is a crude attempt at a metric of our capacity to produce final goods and services. Private Product Remaining is a better metric, because it nets out of GDP, the influence of government.
GDP in 2012 was $16.2 trillion. In other words, the production of final goods and services in the United States during 2012 was $16.2 trillion. We do produce things. Exports minus Imports in 2012 was -$535 billion. So our trade deficit was 3.3 percent of GDP. Surely, these facts do not warrant the conclusion that “we don’t produce anything.”
ParticipantThat’s correct. When the Fed lowers interest rates artificially, it causes entrepreneurs to invest in the wrong lines of capital capacity and consumers to increases consumption. The boom is a period of mal-investment and over-consumption.
ParticipantIf some people have higher time preferences and others lower time preferences and they are willing to engage in mutually advantageous lending and borrowing, the the market is “healthy” if the trades are made and “unhealthy” if the government prevents the trades from being made. Whether or not those with higher time preferences are wise to take on the debt is not a question that can be answered by economics reasoning alone.
At best, economics can explain the distinction between sustainable indebtedness and unsustainable indebtedness. In the unhampered market, the lenders will assess the likelihood of the borrowers to pay back their loans. They will lose if they overestimate the willingness and ability of the borrowers to pay back and they will gain if they accurately estimate. Thus, indebtedness is regulated in the market by the same profits and losses that regulate the production and exchange of anything. As I cited in a previous post, the average American household is much more indebted today than a hundred years ago. But, the bulk of that debt is sustainable because the average American household hold more assets. There is nothing unsustainable about a young person borrowing to buy a house and using his future earnings to pay for it.
Unsustainable indebtedness comes about when the Federal Reserve engages in monetary inflation and credit expansion. Some of the creation of credit is extended to borrowers who have neither the willingness nor the ability to pay back their loans. Banks are willing to do this because Fannie Mae and Freddie Mac created massive secondary markets for these sub-prime mortgages. The banks would earn the fees to write mortgages they knew would not be paid back and then sell them to Fannie and Freddie. The Fed is the source of unsustainable indebtedness in our economy, both private and governmental.
ParticipantNo, a person with high time preference will not live as well as a person with low time preference. But you were asking about the performance of the economy not about a person’s life. The economy’s performance is judged by how well we satisfy our preference in arranging a division of labor in production. Whether we have high time preferences or low time preferences, the market’s performance is judged by how well the market satisfies those preferences. Faster growth rates of GDP do not indicate a better performing economy than slower growth rates of GDP. If people have high time preferences, then slower growth rates of GDP indicate a well performing economy and if people have low time preferences, then faster growth rates of GDP indicate a well performing economy. But if people have high time preference, a faster growth rate of GDP does not indicate a better performing economy. It more than likely indicates that the Fed has generate a boom.
ParticipantI think Rothbard was stipulating, as I also did in my previous post, that the value of the output was staying the same in the adjustment process.
In general, however, such a stipulation does not hold (which is what I implicitly assumed in my first post) and both output and input prices would adjust. In your example, then, the price of the mall would fall below $10 million when the economy reached the ERE and the reproduction costs would rise above $8 million.
ParticipantA healthy economy is one that satisfies our preferences. If we have higher time preferences, then we want the economy to growth less rapidly so that we can devote more resources to producing consumer goods now instead of building up a bigger capital structure to produce more consumer goods in the future.
One might claim that it’s better for people to have lower time preferences instead of higher, but economic theory makes no judgment about what people’s preferences are. Economic theory explains which means are suitable to attain the ends people prefer and which are unsuitable.
ParticipantYes, Americans have higher time preferences today than Americans a hundred years ago. Evidence of this is saving as a proportion of income. In the late 19th century Americans saved 20-25 percent of their income. Today it’s 5 percent. Other evidence would be personal debt per household. Their was almost no consumer debt in America before the 1920s. Now the personal debt per household is around $200,000. Of course, it’s also true that the average household hold much more valuable assets than it did a hundred years ago.
Here’s a Fed study on household debt:
http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q12013.pdf
ParticipantIt would be worth the present value of the future revenue stream generated by its contribution in satisfying consumers. In your example, that is currently $10 million (before reaching the ERE). In the ERE if the mall had a price of $10 million, then the factors of production used to build such a mall would have a value equal to $10 million discounted by the appropriate rate of interest.
ParticipantEmployment in manufacturing has fallen from just under 15 million in 2003 to just under 12 million today. Peak employment was in 1979 at 19.5 million.
http://data.bls.gov/timeseries/CES3000000001?data_tool=XGtable
Here’s a congressional study on U.S. manufacturing. No surprise, we’re still the biggest manufacturing country in the world. Although, U.S. share of world manufacturing has been falling.
http://www.fas.org/sgp/crs/misc/R42135.pdf
The trade statistics don’t break down the types of merchandise traded in the balance of payments, i.e., whether manufacturing, mining, agriculture, and so on. The basic categories are merchandise and services.
The shift away from manufacturing toward other sectors is likely a natural result of adaptation to our changing comparative advantage in the world. China has developed a large manufacturing sector because its more efficient to have them do this instead of us and its more efficient for us to do other things. People in both places gain. Employment in manufacturing would fall and its contribution to our overall production would shrink, but standards of living rise.
America went through a similar shift concerning agriculture last century. But hardly anyone today thinks it’s a bad thing for American society that only 2 percent of our workforce is in agriculture instead of 20 percent or 40 percent.
ParticipantAs a general rule, insurance companies do not control the costs incurred by producers whom they pay. Hurricane insurance companies do not control the costs of re-building when a hurricane strikes. If the clients buy insurance for replacing their structures, then the companies agree to pay the costs of replacement.
With health “insurance,” the companies agree to pay for medical procedures. They cannot then “control” the costs of providing the procedure. If the state is subsidizing the companies, then they have more money to spend to pay for the procedures and the price is bid up. If one company tries to keep it’s costs down by paying less or substituting a different less-costly procedure, then, other companies will move in to earn the higher profit. To get business, they will have to provide better terms. That means they spend more and healthcare prices rise.
This is one alleged justification for single-payer system. If there was just one “insurance” company, then the competitive process could be eliminated and healthcare prices held down. I’m not saying I agree with this assessment, only that some people argue this way.
On why the American healthcare system is so much more expensive than those of other countries, it seems to me that one has to entertain the possibility that the system is designed to be so. It has been, after all, constructed by doctors. What is cost for patients is income for doctors. So we have a system designed largely by doctors which makes doctors rich. When insurance companies try to reduce costs by offering limited policies, the state makes doing so illegal, as we’ve seen in the roll out of Obamacare. The state mandates that insurance companies cover all sorts of things because it means that more money will be spent on doctor’s services and other beneficiaries of the system.
ParticipantPrices for the factors of production, labor, land, materials, etc. are determined by the demand entrepreneurs have to use them in their various production processes across the economy. The land has a price of $3 m because their are entrepreneurs who will pay that price to employ that land in their productive processes. The same is true of the price for labor and the price for materials. Prices for factors of production are determined by entrepreneur demands for them which in turn are determined by the revenues that consumers generate from the output produced and the productivity of the factor of production in producing those outputs.
The net income entrepreneurs earn in their production processes comes from the productive contributions made by the entrepreneurs: wages for their labor used; interest for their capital invested; and profit for their foresight. In the ERE, profit would be zero, but net income would remain because entrepreneurial labor and capital funding still has value in producing goods.
The spread between output prices and input prices in the ERE, then, reflects the interest return on investment. This must be uniform for a similar types of investments, because capitalist would invest more heavily in higher return areas than lower return areas. By expanding production in higher return areas, output prices decline and input prices rise, reducing the price spread and by contracting production in lower return areas, output prices rise and input prices fall, increasing the price spread.
As we approached the ERE, in your example, production of malls would increase because of the greater return. This would lower output prices and raise input prices. Which input prices rise by how much cannot be determined by theory alone. All we can say is that factors more specific to a production process would rise more and prices less specific to a production process would rise less. In your example, land prices probably would rise the most.
Prices of output do not move to conform to replacement costs. Prices of output fall because of the additional supply of entrepreneurs who are taking advantage of the profit opportunity. Prices of inputs rise for the same reason. Price spreads conform to the interest return.
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