[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.

[jmherbener]

Perhaps your antagonist will accept the following line of argument. Effects in the social order are the result of a multiplicity of causes. Theory is the only way to determine what effect a particular cause will have. Empirical correlation cannot do so.

For example, Paul Krugman was criticized that his advice that the government try massive fiscal and monetary stimulus to bring the economy out of the recent downturn had not worked by 2011. His response was not to concede that the correlation of massive stimulus and continuing depression demonstrate cause and effect, but to reply that the stimulus had not been big enough. But in doing so he was making a theoretical claim , not an empirical one, because he had no evidence to back him up.

If your antagonist will accept this line of argument, as Krugman implicitly does, then perhaps you can reason with him about taxes. And, as you say, the main point is that entrepreneurs in the market can make efficient production decisions using economic calculation while bureaucrats in the state cannot. So, economic progress depends on the extent to which taxing transfers command over resources out of private hands into the hands of the state. Interestingly, this has little to do with tax rates. The portion of GDP controlled by the government has stayed remarkably consistent since the early 1950s regardless of tax rates. Here are two charts: the first taxes and the second expenditures.

http://www.usgovernmentrevenue.com/revenue_history

Since the early 1950s, federal government taxes as a percent of GDP have hovered between 15 and 20 percent.

http://www.usgovernmentspending.com/us_20th_century_chart.html

Since the early 1950s, federal government spending as a percent of GDP has been between 18 and 24 percent.

The data are in Table 1.2 at the link below:

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

[jmherbener]

Yes, that line of thinking is reasonable. Here’s the True Money Supply as formulated by Rothbard:

http://mises.org/content/nofed/chart.aspx

[jmherbener]

People often have multiple motives for an action. If banks pay interest on deposits and make them redeemable on demand at par for cash, then customers can hold deposit balances for both reasons. It’s not necessary to separate their motives in order to compute the funds devoted to saving-investing and the funds devoted to money holdings.

One can determine the extent of saving-investing in the economy by adding up all the funds spent on producers goods. The sources of saving-investing can be determined by adding up self financed funds and financed funds. Banks contribution to the later can be discovered by looking at their loan portfolios on the asset side of their balance sheets.

One can determine the money stock in the economy by adding up all money proper plus all money substitutes, i.e., all redemption claims to money payable on demand at par.

[jmherbener]

Labor is the only category of producer good that must have an opportunity cost because of the personal use value of leisure foregone. But other resources could have personal use value to their owners and therefore, could have an opportunity cost that is more valuable to their owners than the after-tax income. For example, a landowner could own land that he uses for his personal ends instead of leasing it to a farmer when the tax lowers the lease payment.

[jmherbener]

But, again, shifting in the mainstream literature (and thus, in the way Rothbard uses the term), means “shifting the reduction in income from a tax levied on you to someone else.” The sales tax is levied on the entrepreneurs. The state collects the tax from them. But the entrepreneurs’s income is profit, the difference between his selling prices to consumers and his buying prices to owners of factors of production. This leaves open the possibility that entrepreneurs can restore the pre-tax price spread (and thus, their profits) by either raising their selling prices for output or lowering their buying prices for inputs. If entrepreneurs shift the tax, then their income, which is profit, remains the same even though they pay the tax while that of either consumers or owners of factors of production declines.

Shifting does not refer to the production dynamics of the market. So Rothbard’s claim about the production effects of the tax are subsequent to new pattern of prices of factors of production result from the tax. In response to your last statement, then, Rothbard would say: the reduced demand for factors of production is the method entrepreneurs use to shift the tax to producers. The resulting change in the pattern of prices for producer goods will make some previously-viable production now not viable. With reduced supply, given demand, the price for such goods will rise. The rise in price harms consumers but does not shift consumer incomes to the state.

The attempt to shift the sales tax forward to consumers is asymmetric to the case of shifting it backward to producers. In the forward shifting case, when the tax is levied on entrepreneurs, they have previously-produced stocks to sell. It only reduces their revenue to raise their prices. Therefore, they will not do so. Their revenues are maximized at the existing prices because when the state levies a tax on entrepreneurs it does not increase consumer demands for their products. According to Rothbard, then, taxes can never be shifted forward. So there is no such case to compare to the case where taxes are shifted backward to analyze whether or not firms go out of business in both cases.

[jmherbener]

First, it is not obvious that government schooling has positive externalities. Government officials can pursue their own interests in providing education because tax revenue frees them from having to cater to what parents want. In a democracy, their interests are in having a population “educated” to accept the rule of the state. Furthermore, I doubt if government education is highly correlated with crime rates. Does Mankiw cite studies? Finally, I don’t see how having government schooling K-12 results in developing more technology. At best, one could say that advanced technical training in college and graduate school might provide the ground work for it. But, even here, technological advance depends on the innovative character of the person and a freedom of the institutional setting in which he works rather than on training, which must be limited to what is already known.

Second, there are two cases of positive externalities. One is where the person generating the externality would not increase his production regardless of a government subsidy. Obvious, no government subsidy can be justified in this case. Only in the other case where the person would increase production could a subsidy be potentially justified,

Third, in the case where a person would increase production it isn’t obvious that the subsidy couldn’t be provided voluntarily. Even my local NPR station has fund drives and solicits over $100,000 in donations each time. Surely, if people really value the provision of some good, they will be willing to financially support its production. Maybe the government subsidy that NPR receives results in too many public radio programs or public radio programs with little social benefit or public radio programs that are too costly to produce.

Fourth, if the government uses coercion to provide the subsidy, then it creates “forced riders.” Using coercion takes the decision of government officials outside the realm of economic calculation. Therefore, their decision cannot be economizing for society as a whole. Government officials make production decisions on the basis of their own preferences, not by objectively comparing the preferences of others and producing what others find more valuable.

Take a look at Ludwig von Mises on externalities in Human Action:

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

And Murray Rothbard in Power and Market:

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

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