[jmherbener]

There are several assumptions involved in the computation of consumer and producer surpluses as a measure of the subjective gains from trade:

1. Value scales exist for each technical unit of the good traded, e.g., gallons of gasoline.
2. We can acquire information about the range of such value scales in traders minds that are not demonstrated by them in action.
3. Money is a measure of value, e.g., $10 = 1 util.
4. The value of money is the same across all traders.
5. If integration is used, value scales must be complete so that demand curves are smooth and continuous.

Take a look at chapter four of Murray Rothbard’s book, Man, Economy, and State:

http://library.mises.org/books/Murray%20N%20Rothbard/Man,%20Economy,%20and%20State,%20with%20Power%20and%20Market.pdf

[jmherbener]

The total stock of money is the sum of money plus money substitutes. The total stock of money and the total demand for money determine the purchasing power of money or the array of prices. In the last few years, the total stock of money has been increasing significantly, but the total demand for money has also been increasing. The result has been a modest, but significant increase in prices.

The monetary aggregates computed by the government are M1, M2, M2 – small time deposits, MZM, and M3 (discontinued). M1 is too narrow, excluding deposits that banks redeemable on demand at par. M2 is too broad, including small time deposits, which banks do not redeem on demand at par. MZM is too broad, including money market funds. M3 is much too broad, including large and small time deposits.

http://research.stlouisfed.org/fred2/categories/24

In the current reflation engineered by the Fed, credit expansion has been going into stocks and real estate instead of large time deposits at banks.

From 1/1/2010 to 9/1/2013:

M2-STD has increased 29 percent from $7,275.5 billion to $10,215.2 billion.

M2 has increased 28 percent from $8,432,8 billion to $10,770.4 billion.

M3 has increased around 1 percent from roughly $15,000 billion to $15,200 billion.

[jmherbener]

Even Marxists have abandoned the labor theory of value. Bohm-Bawerk’s critique proved definitive. Take a look at David Gordon’s book Introduction to Economic Reasoning, chapter 5.

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

[jmherbener]

If by “predict” what Friedman means is “give relatively accurate quantitative magnitudes for certain economic variables in the future” then no Austrian economist has denied that such prediction requires empirical knowledge. As Mises put it, such prediction is based on “thymology” which is a blending together of economic theory (which is universal truths about cause and effect relationships in human action and can be known a priori) and the relevant contingent features of the particular case to be predicted (which can be known only by experience).

If by “predict” what one means is “give accurate qualitative changes for certain economic variables in the future” then theory can be sufficient. One could have accurately predicted the reduction in farm output from the Soviet collectivization of agriculture without knowing anything from experience about such events. In theory we can stipulate particular contingent factors and abstractly deduce what will occur under the stipulation.

What should be asked of Friedman is to name any prediction with meaningful predictive value made by an economist who accepts the empirical-hypothesis testing method that does not require abstraction in the formulation of its model.

[jmherbener]

It would matter if the shifts from one tax source to another were large enough. But even if this has happened it’s secondary to the main effect of taxation, which is transferring command over resources out of the realm of economic calculation and into the realm without economic calculation.

Table 2.2 at the following link compiles the percentage composition of federal tax receipts by source from 1934 -2012. It shows that since 1947, Individual Income Taxes have made up between 39 and 50 percent of the total; Social Security Taxes (which are also individual income taxes) between 9 and 42 percent; Corporate Income Taxes between 6 and 32 percent; and Excise Taxes between 2.5 and 19 percent.

http://www.whitehouse.gov/omb/budget/HISTORICALS

Disparate tax rates on a given source also have consequences, but they too are secondary to the amount of tax revenue transferred to the state.

The top rate on federal income tax in 1980 was 70 percent, in 1986 it was dropped to 50 percent, in 1991 it was down to 31 percent, then rose again in 2000 to 39.6 percent, and today stands at 35 percent. The following charts document that even though top income tax rates have fallen from the 1970 and 1980s, the percent of all income taxes paid by the highest quintile has increased from 65 percent in 1979 to 86 percent in 2007. That fact is more important than what the top rate happens to be.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/Tax_liability_Shares.pdf

Murray Rothbard’s book Power and Market gives a thorough analysis of both primary and secondary effects of different tax regimes.

http://library.mises.org/books/Murray%20N%20Rothbard/Power%20and%20Market%20Government%20and%20the%20Economy.pdf

[jmherbener]

Yes, you are correct. Put another way, all banks together constitute a banking system in which the reserves held by all banks lead to a multiple expansion of fiduciary media issued by all banks. The distribution of reserves among the banks does not affect the ability of the system to maintain the overall issue of fiduciary media.

[jmherbener]

When one person pays another person by writing a check or swiping a debit card, the claim to money itself that the first person had is now transfers to the second person. The customer who buys the croissant sees his checking account balance fall by $2.50 while the merchant who sells the croissant sees his checking account balance rise by $2.50. The overall amount of claims to money has stayed the same. If the customer and the merchant use the same bank, then the reserve position of the bank stays the same. If they use different banks, then the bank with expanding checking accounts will need to acquire reserves from the bank with contracting checking accounts. The expanding bank can sell securities to the contracting bank to obtain its reserves. Alternatively, the expanding bank could borrow reserves from the contracting bank. This is done everyday in the so-called Federal Funds Market. As long as expanding banks can acquire reserves from contracting banks, the money stock need not shrink when one bank experiences contracting checking account balances.

[jmherbener]

Monetary disequilibrium theorists argue that price deflation caused by increases in the supply of goods made possible by greater productivity is benign to the working of the market. But price deflation caused by an increase in the demand for money is not benign. The reason is prices are sticky downward in such a case. They think that monetary policy should keep the rate of increase in nominal GDP constant.

Take a look at the article by George Selgin:

http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/1990/5/cj10n1-14.pdf

This view has been criticized by Austrian economists:

http://mises.org/journals/qjae/pdf/qjae15_2_3.pdf

http://mises.org/journals/qjae/pdf/qjae15_3_3.pdf

[jmherbener]

Although I’ve never heard that particular view before, it sounds similar to the monetarist view of Milton Friedman who argued that the money supply should be increased at the same rate as the normal rate of increase in real GDP. As you surmise, the reason for such a policy is to prevent price deflation at least and to generate stable prices at most. Friedman did fear Fed officials having discretionary policy and so he argued for an automatic increase in the money supply of between 3-4 percent per year.

[jmherbener]

What you presented was fine. In a back-and-forth discussion, it helps to see what you and your opponent agree upon in order to focus on key points of difference. If Westman agrees with you that Misesian “economic theory” refers to a different aspect of knowledge about human action from that of neoclassical “economic theory,” then you can probe elsewhere. And then you can find out if he whether he thinks that the abstract knowledge gained in Misesian economic theory, what F.A. Hayek called the logic of action, helps us understand actual real human action. The next step might be to pose that the Misesian approach to understanding events that occur in the world is “economic history” whereas the neoclassical approach is empirically testing models. In other words, the abstract theory of Misesians is used to explain the empirical evidence of events in the world by using judgment to weigh the importance of the various causal factors that produce the evidence. The neoclassical abstract model is used to explain empirical evidence by empirically testing implications drawn from it. Use an example, like the Great Depression, to illustrate. After that you might point out the major criticisms Misesians make of the modelling technique in discovering real economic laws, i.e., universally true cause and effect relationship in human action. (Of course, you’ve already done this in your previous post.) And finally you might concede that empirical hypothesis testing may be able to establish historically contingent correlations. Such knowledge is not not vacuous, but its not everything we can know about human action. To get at this other knowledge we must proceed in a different way.

[jmherbener]

I think that you and Westman are taking past each other. Misesians and Neoclassicals use the phrase “economic theory” to refer to two different bodies of knowledge. But, Westman seems to be assuming that Misesians are attempting to discover the same body of knowledge that the Neoclassical economists are attempting to discover, namely, underlying relationships that can be tested empirically by their implications. Instead, Misesians are trying to discover what is universally true about human action. Recognizing this helps clarify the issues at stake in the debate.

[jmherbener]

The classic work on taxes is Murray Rothbard’s Power and Market:

http://library.mises.org/books/Murray%20N%20Rothbard/Power%20and%20Market%20Government%20and%20the%20Economy.pdf

[jmherbener]

The complicating factor is whether or not the Fed can remove the enormous excess reserves that its policy has generated from banks before the banks issue fiduciary media by creating credit on the basis of these reserves. Here are the numbers:

On 8/1/08, Total Reserves were $46 b, Excess Reserves $2 b, and the money stock $6,408 b.
On 9/1/13, TR were $2,334 b, ER $2,214, and the money stock $10,215 b
The ratio of money stock to TR on 8/1/08 was 140. Each dollar of reserves supported $140 of money stock.
At the same ratio, the money stock today would be $326,760 b. That is the potential inflation in the system.

Here is Bernanke on how the Fed plans to counter this inflationary potential:

http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm

And here is Bob Murphy’s response:

http://mises.org/daily/5110/

[jmherbener]

The unhampered market generates an integrated system of production in the form of a division of labor. The goal of the system is to economize the use of resources for everyone who participates., i.e., to satisfy higher-value consumption ends of people using lower-cost means. The market makes this possible via economic calculation, i.e., the computation by entrepreneurs of net income (Net Income = Revenue – Cost) and net worth (Net Worth = Assets – Liabilities). Each production process that generates sufficient net income is economizing (or Good) and each production process that generates insufficient net income is not economizing (or Bad). Each investment that generates sufficient net worth is economizing (or Good) and each investment that generates insufficient net worth is not economizing (or Bad).

The market system of production is integrated by the structure of prices. Consumer demands generate prices for consumer goods which provide revenue to entrepreneurs who supply them. Entrepreneurs use the revenue to demand factors of production which generates prices for the factors of production in accordance with their productivity in aiding the production of consumer goods. Prices of producer goods generate income for their owners. Consumers use the income to demand consumer goods. In this way, the price structure is integrated.

Now suppose the government establishes fiat money and begins printing it and spending it on consumer goods. Because it is not based on the earning of income from producing in the division of labor, this spending is a foreign element to economizing. It makes production of some lines profitable without them being economizing and others unprofitable without them being non-economizing.

The issue of fiduciary media by banks is similar. Savers have their time preferences satisfied by lending a portion of their income, which they earned by producing on the market. Investors borrow the funds provided by savers. The trade of present money for future money determines the interest rate at the level that clears the market. Investors then use the funds to buy assets which have value in economizing. Fiduciary media is foreign element to economizing. It increases the supply of funds to lend without the funds coming from the income of producers. Investment projects will be undertaken that are not economizing and others that are economizing will not be undertaken.

The bust follows the boom because after the newly-issued fiduciary media is borrowed and spent to buy assets in the different lines of investment, it is then paid to producers and becomes their income. At that point, the newly-issued fiduciary media is integrated into the market. But that implies that the capital structure artificially built up by the issue of fiduciary media is no longer profitable and must be liquidated.

Take a look at the early chapters of Murray Rothbard’s, America’s Great Depression for a good overview of Misesian business cycle theory:

http://mises.org/rothbard/agd.pdf

[jmherbener]

In the unhampered market, all resources would be directed by entrepreneurs who use economic calculations of profit to allocate resources into lines of production that people value more highly and economic calculations of equity to allocate investment into lines that produce goods that people value more highly. Taxes transfer control over resource away from entrepreneurs toward government officials who cannot use economic calculation to determine their use and thus, taxes detract from the efficiency of the market. The extent of the depredation of taxes on standards of living depend on the proportion of resources controlled by the state. If taxes give control of 1 percent of resources to the state, then the depredation is small. If taxes give control of 10 percent, then the depredations are larger. If 20 percent larger still and so on. Tax rates don’t matter much unless by changing them tax revenues change. So the claim of your antagonist that economic progress continued normally when tax rates where higher demonstrates that taxes are irrelevant to economic activity misses the point. If you look at the data, they show that regardless of tax rates, tax revenues stayed roughly the same. I such a case, economic theory concludes that the economy would perform roughly the same even though tax rates are higher.

Put another way, your antagonist has made a category mistake. He has conflated tax rates with tax revenues. Economic theory shows that higher tax revenues will impair economic prosperity. Tax rates, on the other hand, have little to do with it (not nothing mind you, but little.) Regardless of tax rates, tax revenues stayed roughly the same and therefore, had no differential impact on economic activity at all.

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