[jmherbener]

1. The law of diminishing marginal utility requires the stipulation of units of a good that are equally-serviceable to a person. A unit of a good is the amount of it a person chooses as suitable to attain an end. Equally-serviceable means that any one unit can satisfy any one end a person has. If a person has more than one equally-serviceable unit of a good, the marginal unit is the one that satisfies the least-valued end.

For example, if a person selects a gallon of water as the suitable amount to attain either his end for drinking, his end for watering his plants, or his end of washing his hands during the day and if he has two equally-serviceable gallons of water, then the marginal unit of water for him is the one he uses to water his plants and the marginal utility of water is the value the aid that unit renders in attain his end of watering his plants.

2. When a person uses a unit of means to attain an end he gives up the value of next most valuable end he could have attained with that unit. This is the dis-utility of his choice. In the above example, the dis-utility of the second gallon of water is the value of the aid in renders in attain the end of washing the person’s hands.

The term “dis-utility” is typically confined to choices a person makes in allocating his human effort. When a person chooses to apply his human effort to labor, he gives up leisure. The value of the leisure he gives up is the dis-utility of labor. A person allocates a unit of human effort to labor, then, when the marginal utility of the good produced by the unit of labor exceeds the the dis-utility of that labor.

The distinction being made here is between the distasteful aspects of performing a labor task and the opportunity costs of doing so. The distasteful aspects are included in the labor’s marginal utility and not its dis-utility. Similarly, a person might enjoy performing a labor task. Such pleasure would be included in the labor’s marginal utility.

[jmherbener]

The extent of assets under the supervision of an entrepreneurial group, just like all other production decisions, is subject to the constraint of economic calculation. Larger combinations of assets are sustainable if they increase net worth, i.e., if the acquired assets have greater monetary value under the supervision of acquiring entrepreneurial group than they did under the supervision of the dis-investing entrepreneurial group. The market value of different combinations of assets under the control of an entrepreneurial group is determined by investors at large and not by either the acquiring or dis-investing entrepreneurial group.

Moreover, for a business enterprise to remain efficient once its combination of assets is too large for the entrepreneurial group that formed it to directly oversee it, the entrepreneurs must divide it into profit centers and hire managers over each center with the instruction to earn profit and pay each manager a share of the profit earned by the center he oversees. In this way, collectivism is not implied in bigness of private enterprise.

In the unhampered market economy, if an enlarging enterprise or an emerging cartel of enterprises is becoming less efficient in satisfying consumer preference, then the monetary value of the assets of these enterprises will decline. Profit and equity can then be earned by breaking up combination. In contrast, if government intervention supports enlarging enterprises, then inefficiency and collectivism (or at least, bureaucratization) will go along with bigness.

[jmherbener]

Charts of various data sets relevant to the business cycle are available at the St. Louis Federal Reserve Bank’s website.

Here is GDP:

http://research.stlouisfed.org/fred2/graph/?id=GDPA

Once you get to the page, click on “edit graph” and you can set the years included, restricting them to 1929-1941 and the graph will be redrawn.

The NBER is the organization that officially dates business cycles:

http://www.nber.org/cycles.html

[jmherbener]

Time preference refers to the universal preference every person has for a given satisfaction sooner instead of later. It operates in every inter-temporal choice, regardless of the goods involved. Whether or not a particular good renders the same or a different satisfaction when used at one moment in time instead of another is a separate question. But, as Rothbard puts it, the value scale is unitary. The human mind is able to compare all considerations relevant to choice when deciding to act. A person discounts, according to his time preference, the different future satisfaction to make it comparable to the present satisfaction.

Thus, in your example, it is time preference that dominates the choice between a greater satisfaction later and a lesser satisfaction sooner. After discounting the future satisfaction to take account of his time preference, the person prefers the present satisfaction.

This basic consideration of discounting future valuations is the ground for calculating the present value in money of future revenues to be earned from an investment in the market. If the discount is large enough and the future revenue small enough, then a person will not invest money today into such a project.

[jmherbener]

Take a look at the Vedder and Galloway article:

http://mises.org/journals/rae/pdf/RAE5_2_1.pdf

Check the references in Higgs’s article the V and G article for proponents of the war prosperity view. Higgs has a list in footnote 3. V and G have a section in their article on such proponents starting on page 14.

[jmherbener]

On an unhampered market economy, the production of every good is regulated by profit. More gold would be mined and minted into coin only if the revenues it generated more than covered its production costs. Gold mining and minting “add more money to the economy” in the same way that all production adds more goods to the economy.

Issuing fiat money and fiduciary media cannot be regulated by profit since doing so always generates more revenue than costs. Producing more fiat money and issuing more fiduciary media cannot add more money to the economy in the way production of others goods do so. Such monetary inflation is categorically different than production of gold coins on the unhampered market.

The reason real wages fall during monetary inflation is that the processes of the boom-bust that it sets in motion consumes part of the capital structure. Labor, therefore, becomes less productive.

[jmherbener]

Overall prices fall because of a change in the money relation. The money stock fall relative to money demand or money demand increases relative to the money stock. The former is more common during a bust.

The link between prices of consumer goods and producer goods is the rate of interest. Typically, then the price spread falls during the boom and then moves up in the crisis. During the bust, it can move either up or down depending on how time preferences change.

Here is the Bank of Japan page on prices:

http://www.boj.or.jp/en/statistics/pi/index.htm/

Here is the BOJ statistics on corporate prices from 1980 to the present:

http://www.stat-search.boj.or.jp/ssi/cgi-bin/famecgi2?cgi=$graphwnd_en

The website will make other graphs by selecting a series, like “wholesale prices.”

[jmherbener]

The money stock in a country is money proper plus money substitutes, i.e., on demand at par redemption claims for money.

In the U.S., the most accurate official measure of the money stock is MZM, i.e., money of zero maturity. M1 is too narrow (it doesn’t include all on demand at par redemption claims) and M2 is too broad (it includes credit instruments) and M3 has been discontinued.

Movements in M2 and M3, then are capturing part of the credit expansion instead of monetary inflation.

Here is the Bank of Japan statistics on M2 and M3 from 1980 to the present:

http://www.stat-search.boj.or.jp/ssi/cgi-bin/famecgi2?cgi=$graphwnd_en

Here is the BOJ page on monetary statistics:

http://www.boj.or.jp/en/statistics/money/ms/index.htm/

[jmherbener]

People’s time preferences determine both the pure rate of interest and the amount of present money exchanged for future money. The same pure rate of interest is earned on every exchange of present money for future money, whether loans in the credit market or investments in production. If time preferences become higher, then interest rates will be higher and the amount of present money exchanged for future money will be smaller. In your example, since investors can earn 10 percent instead of 2 percent by lending into credit markets, they will reduce their demands for capital goods which reduces their prices. Capital goods prices will fall until investing in them also earn the 10 percent interest rate.

[jmherbener]

Conditions are different during a boom than they are during a bust. After 1923, the 1920s was a period of boom. Interest rates were low because banks had created credit, i.e., the supply of credit was increasing faster than the demand for credit. Banks are happy to lend under these conditions even if interest rates are falling because there is almost no cost to creating credit.

Currently, interest rates are low because demand for credit has collapsed. Banks are reluctant to lend during a bust because of the perilous condition of their balance sheets. Even when the FR bails them out by buying their bad loans, the banks hold cash instead of making new loans. They do this because the nominal value of cash cannot decline, but the nominal value of loans and investments can.

[jmherbener]

In normal times the FR does buy Treasury securities, almost exclusively. But it has the legal authority to buy a wide variety of assets. Since the crisis began the FR has purchased nearly $1 trillion in mortgage backed securities (MBS) and continues to buy $85 billion a month of Treasuries and MBS.

[jmherbener]

Banks offering checking accounts to customers. Banks will redeem a customers’ checking account balances on demand at par for cash. Because of this, merchants accept checks drawn on these accounts instead of cash. They are money substitutes.

Banks hold only a fraction of reserves of money for redemption against their customers’ checking accounts. In normal times, banks in the U.S. hold around 5 percent reserves against their customers’ checking account balances. For every $100 you have in your checking account, your bank has $5 in reserves.

Our central bank, the Federal Reserve System (FRS) or Federal Reserve (FR) for short, allows banks to hold either cash, which are Federal Reserve Notes (FRN), or checking account balances that banks have at the FRS as reserves against the checking account balances customers have at the banks.

[jmherbener]

The discount formula is the complement to the compound formula. The future value of a present sum of money put on interest for one period is FV=PV(1+i). And for n periods it is FV = PV(1+i) raised to the n power. So if I lend $1,000 for one year at an annual interest rate of 0.05, then in one year my $1,000 compounds into $1,100. Therefore, if I am to receive $1,050 in one year its present value is the sum of money I would need to lend on interest now for it to accumulate to $1,050 in one year, namely $1,000. The formula is PV = FV/(1+i). And for n periods it is PV = FV/(1+i) raised to the n power.

Thus, in the lecture $5,000 to be received in one year at a 0.05 rate of interest is $5,000/1.05 = $4,762.

And $6,000 to be received in two years is $6,000/(1.1025) = $5,442

[jmherbener]

The pure rate of interest is determined by the time preferences of everyone in society. Lenders, who have lower time preferences, supply present money to borrowers, who have higher time preferences. The pure rate of interest is at the level that clears the market, i.e., at which the quantity demanded of present money is the same as the quantity supplied.

Arbitrage by lenders keeps the pure rate of interest the same across the time market. If the 2 year corporate bond rate is 5%, then the rate of return on investment in 2 year production processes in the capital structure will also be 5%.

If circumstances differ between two types of loans, then their market rates of interest will differ even if they have the same time preference premium. If the two year corporate bond is AAA at 5% and the two year investment project is riskier, then its interest rate will be above 5%.

[jmherbener]

The typology is:

Time Market
1. Credit Markets
**a. Consumer Loans
**b. Producer Loans
2. Capital Structure

The consumer loan markets and the capital structure are independent components of the time market. The producer loan market is a dependent component, i.e., all the fund borrowed in the producer loan markets are spent into the capital structure.

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