[jmherbener]

Saving-investing is done to satisfy time preferences. A person gives up present satisfaction for a more valuable future satisfaction. Because people have different intensities of time preferences, those with lower time preferences can save and invest by lending to those with higher time preferences. The rate of interest emerges that clears the time market. Savers, however, have an array of investment opportunities. The main categories are consumer loans, producer loans, and direct investment in production. Bonds would be one type of producer loan while stock would be one type of direct investment in production. The holder of a bond has a claim on predetermined payments of future money from the enterprise. The holder of a share of stock has a proportionate claim on the equity of the enterprise. Investment in bonds earn interest while investment in stock earns interest plus profit (or minus loss).

However, because of uncertainty no matter the investment a person chooses, it is speculative. Thus, people can trade in and out of claims, e.g., bonds or stocks, based on their speculations about the future market values. In secondary markets, bonds and stock are trading from one group of saver-investors to another. The buyers have lower time preferences or higher expectations about future market values or both than sellers. They consider the anticipated return sufficient to compensate for their time preferences. The sellers have higher time preferences or lower expectations about future market values or both than buyers. They consider the anticipated return insufficient to compensate for their time preferences.

Secondary markets facilitate the rearrangement of ownership of claims from those who value them less to those who value them more.

[jmherbener]

Your example illustrates the first step of the business cycle, not efficiency. The issue of fiduciary media by banks leads to malinvestments during the boom which must be liquidated during the bust. Likewise, during the housing the boom the additional houses produced (and the additional capital capacity produced to support housing production) was not efficient.

It is only better for society to have another restaurant built if it proves to produce goods more valuable to people in society than the alternative production facility that could have been built with the same resources. That the restaurant owner pays back his loan is not a sufficient condition to prove social benefit. Lots of homeowners were paying back their mortgages during the housing boom.

In the market, profit and loss calculations reveal when the use of resources in one line of production have greater value than in another alternative line of production. An enterprise earns profit if the revenue generated by the sale of its output exceeds the costs incurred from the purchase of its inputs. The revenue generated is determined by the demand people have for its output. The costs incurred is determined by the demand other entrepreneurs have to produce their output which, in turn, is determined by the demand people have for their output. An enterprise earns profit by compensating the input owners for the loss of value they cannot receive from other entrepreneurs and then uses the inputs to produce output that people value more highly than that which would have been produced by other entrepreneurs.

Now apply these general principles to banking. If a bank intermediates credit, then they compensate savers by paying interest to borrow funds from them. Because they have lent money to the banks, the savers must reduce their demands for goods. But they have willingly entered into an agreement to do this. If the bank issues fiduciary media, then it pays no opportunity cost to obtain command over these funds. And yet, when it lends the funds out to borrowers, they are able to bid resources away from other people without anybody agreeing to such restrictions in their command over resources. Such activity is inefficient on these grounds alone.

We can come to the same conclusion about fiat money. If the government prints more fiat money and spends it to build three more bridges is society better off? Clearly not. All such spending of the government is inefficient by the nature of how the resources are transfers out of the hands of some people and into the hands of other people. Unless this is done in voluntary exchange under the guidance of economic calculation, then the activity is socially inefficient.

[jmherbener]

These arguments about the technical efficiency of media of exchange miss the point of economic efficiency. To use an analogy, consider the thermal efficiencies of different types of engines. Electric engines may have higher thermal efficiency than gasoline engines, but that does not determine which engine is economical efficient, i.e., superior in economizing resources. To determine economizing or economic efficiency, the only guide is economic calculation, i.e., the profitability of production.

In like manner, to determine the economically efficient media of exchange, one must refer to the profit of its production. The issue of fiat money and fiduciary media are not subject to the test of profit and loss. It is always profitable to issue more of them. Put another way, the issuer do not bear the opportunity cost suffered by others when of issuing more. Neither fiat money nor fiduciary media, therefore, can be part of the market economy. They are foreign elements because their production cannot be determined by profit and loss.

The arguments about the technical efficiency of money falsely conclude that the monetary arrangement that allows people to minimize the holding of money proper (or as you put it, maximize velocity) is the economizing monetary system. This is analogous to someone concluding that choosing electric engines over gasoline engines economizes resources in society because electric engines have higher thermal efficiency than gasoline engines.

[jmherbener]

Here are some Mises Daily articles on austerity:

https://mises.org/daily/6289/

http://mises.org/daily/5939/

http://mises.org/daily/5215/Is-Budget-Austerity-ModernDay-Hooverism

And a Free Market article:

http://mises.org/journals/fm/February2013.pdf

[jmherbener]

There is one faulty step in your argument. Banks do not lend out their reserves. They hold them against their fiduciary issue. When conditions return to normal and banks begin to lend again, they will do so by issuing fiduciary media and creating credit not by lending out their reserves. In that way, the banks will earn 0.25 percent on their reserves and the market interest rate on their created credit.

The reason the banks are not issuing much additional fiduciary media nor creating much additional credit is that they are still liquidating the bad loans accumulated during the boom from their balance sheets. Given the fragility of financial markets, banks prefer to hold a larger portion of their assets as cash on their balance sheets instead of loans and securities.

So given the unusual demand and supply conditions, credit markets are clearing at the current low interest rates. If banks raised their rates, they would have excess supply of credit.

[jmherbener]

The ERE is an imaginary construct used by economists to decompose net income into profit and interest. Interest is that part of net income that accrues to capitalist-entrepreneurs to compensate for their time preferences. They pay money to buy inputs before they receive money from the sale of outputs. Their saving-investing earn interest. Profit is that part of net income that accrues to the capitalist-entrepreneurs for their superior foresight. Those who more accurately anticipate the demands of consumers earn profit from their production decisions and those who less accurately anticipate consumer demands suffer losses.

To separate and analyze these two factors, economists pose the ERE. The ERE is constructed to eliminate uncertainty and therefore, profit. In the ERE, the patterns of demands are perfectly anticipated. Because of this, the profit that can be earned by reallocating resources toward more profitable and away from less profitable lines is exhausted. Although the ERE presents some philosophical puzzles, the absence of volition is not one of them. All that needs to be assumed is that the class of capitalist-entrepreneurs have perfectly accurate foresight about what other people will demand. This does not require that consumers be reduced to robots only that capitalist-entrepreneurs be elevated to demi-gods. Everyone still has his or her preferences and they choose and act accordingly. There would still be prices of outputs and inputs, production, earning and disbursing of incomes, and so on. In similar fashion, people would still have time preference and therefore, interest rates would exist in the ERE and interest income would be earned by capitalist-entrepreneurs.

[jmherbener]

As we have seen in the last few days, even a hint from the Fed that its expansionary policy might be scaled back soon led to a stock market sell off. If the Fed stopped expanding the monetary base, the asset price bubbles it has been fueling would burst. Interest rates would rise on the assets the Fed has been buying, namely, MBS and Treasuries. It’s not clear if that would set in motion a general rise in interest rates. It depends on how investors weigh the effects of a smaller stimulus to credit expansion against a reduced threat of price inflation.

Banks are not lending because they don’t see normal prospects for being paid back and they want to stay liquid. Banks have no incentive to lend their excess reserves. They can convert them into required reserves by issuing fiduciary media and expanding credit and still be paid interest by the Fed. The Fed pays interest on reserves, whether required or excess.

Price inflation will pick up as bank lending returns to normal (causing the money stock to expand more rapidly) and as money demand declines to normal.

[jmherbener]

Student loan debt is now the second largest category of household debt following only mortgage debt. Unlike other categories of debt which households have been paying down since the financial crisis, student loan debt has continued growing. It has reached the lofty height of $1 trillion. It is heavily subsidized by the state.

http://www.newyorkfed.org/studentloandebt/

One problem is that default rates are very high on student loans. Politicians don’t want big banks to be left holding the bag, so they suggest having the Fed bailout students who would otherwise default. Another problem is that the borrowed money has generated larger revenues for colleges who have spent the money to build up their capital capacity and well as administrative bureaucracy.

http://foundationsofecon.blogspot.com/2013/04/the-economics-of-student-debt.html

http://www.elcamino.cc.ca.us/administration/board/agendas/2013/January_2013.pdf

Like the bankers, universities don’t want the gravy train to stop. They don’t want to face liquidation.

[jmherbener]

Index numbers are used to make calculations of percent change easier. In Higgs’s chart, whatever the real GDP figure for 1939 is that figure is assigned an index number of 100. Then if the 1943 real GDP figure for 1943 is 48.6 percent larger than that for 1939, the index number for 1943 is 148.6.

Let’s say that real GDP is 1939 was $92.2 billion and that it was $137.0 billion in 1943. Then real GDP increased 48.6 percent from 1939 to 1943.

Like you, Higgs was incredulous that anyone would infer from these data that the actual standards of living of Americans rose by nearly 50 percent during the early part of the war. He wrote his article to rebut that conclusion.

[jmherbener]

Take a look at Roger Garrison’s article, Is Milton Friedman a Keynesian?

http://www.auburn.edu/~garriro/fm2friedman.htm

[jmherbener]

Bob Murphy has been an active critic of MMT. Here’s a sample:

http://mises.org/daily/5260

[jmherbener]

Take a look at Guido Huelsmann’s monograph:

http://library.mises.org/books/Jorg%20Guido%20Hulsmann/Deflation%20and%20Liberty.pdf

And also, Joe Salerno’s article:

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

And Salerno on the latest research:

http://mises.org/daily/1583

[jmherbener]

As you suggested, there’s no apriori way to know if producing and selling a less durable product generates more net income than producing and selling a more durable product. What we do know apriori is that entrepreneurs economize for society at large by selecting the alternative that renders the most net income. In producing any non-perishable consumer good, e.g., cars, computers, refrigerators, lawn mowers, houses, light bulbs, etc. entrepreneurs have a choice between producing more and less durable alternatives.

Take a look at F.A. Hayek’s rebuttal of Galbraith:

http://library.mises.org/books/friedrich%20a%20hayek/The%20Non%20Sequitur%20of%20the%20Dependence%20Effect.pdf

[jmherbener]

I don’t see what cartels and monopolies have to do with your questions. The entrepreneurs of every business enterprise regardless of the circumstances concerning other entrepreneurs use economic calculation to make their production decisions. They choose those lines of production that generate the greatest net income and invest in those lines of capital that generate the greatest net worth.

In your example, a light bulb company would estimate the revenues and costs from bulbs with different features, such as life expectancies, luminosity, color, etc., and produce those that generate the greatest net income. For each chosen line of production, the entrepreneur would ask a price that maximizes revenue, which would be at the mid-point of the demand curve for that line. It doesn’t matter what other entrepreneurs are doing, the best strategy for any entrepreneur is to restrict output and raise price to the mid-point of the demand curve for his product and no further.

In choosing its capital capacity, the light bulb company would estimate the asset values and liabilities associated with different configurations of capital capacity and choose those with the greatest net worth. Economies of scale is just one technical feature of the different options available. It is unlikely that an entrepreneur will choose a configuration with a significant range of unexploited economies of scale. To do so means that until he can expand production significantly he has invested in excess capacity.

Take a look at the relevant sections 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]

Central planning supplants markets altogether. By supplanting markets altogether, central planning eliminates economic calculation and with it any vestige of production decisions being made that economize for society. The division of labor cannot develop under central planning.

Fiscal policy, which is based on confiscation (i.e., taxation), does not supplant markets. The state uses markets to get what it wants. Because economic calculation still exists, production decisions made by entrepreneurs economize for society as well as possible given the expropriations of the state. Although crippled, the division of labor can still develop.

Central planning has entirely different results from market economies. This is why economists categorize economies into three broad types: Command Economies; Unhampered Market Economies; and Hampered Market Economies.

Each of the three types of economies can go on for long periods of time. But their results are different.

Take a look at the relevant sections of Ludwig von Mises’s book, Human Action:

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

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