[jmherbener]

Here is an overview:

http://www.econlib.org/library/Enc1/NeoclassicalEconomics.html

In short, neoclassical economics is the reigning orthodoxy. It centers around modeling as a method of understanding the world. Its major divisions are micro and macro. Macroeconomics does include both Monetarist and Keynesian models. It should be pointed out, however, that there are other Keynesian views which are considered unorthodox.

[jmherbener]

It would take a fancy argument to demonstrate that bailing out Fannie Mae and Freddie Mac and other financial institutions in 2009 somehow revived commercial real estate in 2011.

[jmherbener]

Commercial Real Estate hit bottom in March 2011:

http://www.bloomberg.com/news/2011-05-23/u-s-commercial-real-estate-prices-decline-to-post-crash-low-moody-s-says.html

Most of QE1 took place from late 2008 to March 2009, the entire program was finished by March 2010:

http://www.bankrate.com/finance/federal-reserve/qe1-financial-crisis-timeline.aspx

Aside from this problem of timing, the money was not spent to prop up commercial real estate.

[jmherbener]

Every exchange of present money for future money commands the pure rate of interest. Whether its a consumer loan, the a corporate bond, or the buying of inputs to produce outputs.

An entrepreneur’s Net Income, which is the difference between the cost of buying his inputs and the revenue from selling his outputs includes (but is not limited to) a rate of return that conforms to the rate of interest. The capitalist earns the same rate of interest for lending his present money regardless of what use the borrower has for the funds, e.g., buy a house, build a factory, purchase inputs. This is no different than a steel producer who gets the same price for steel regardless of the use the buyer has for it, e.g., building a building, making a car, producing precision medical instruments. Now there are different prices for different types and qualities of steel, but each unit of a particular type that has a particular quality sells for the same price. Likewise, each unit of present money for the same maturity and same uncertainty (e.g., the uncertainty concerning the likelihood of the payoff) will receive the same rate of interest.

Suppose the production of cotton in America in 1830 is in a maturity and uncertainty class of investments that earns a rate of return of 7%. Also, different land areas (e.g., Louisiana, South Carolina) and different organizational structures (e.g., large plantations with slaves, small farms without slaves) have different physical productivity. If one alternative earned 10% and another 5%, then capitalists would shift their investment funds to the 10% return alternatives and out of the 5% return alternatives. By doing so, they would push up the prices of inputs (in particular, land) in the higher return areas and push down the prices of inputs in the lower return areas. They would continue to shift their investments until the rate of return was a uniform 7% of all investments in that class.

But just as credit card interest rates are permanently above mortgage rates, the rate of return on some investments in production will be higher than the rate of return on other investments. This occurs because investors do not find it advantageous to arbitrage across this difference. They don’t find it advantageous because there are different classes of investments, some with investments have longer time horizons and greater uncertainty than others.

[jmherbener]

Yes, people could negotiate contracts to avoid the ill-effects of a rising purchasing power of money. And, if they still thought it disadvantageous to use gold, they could choose silver or some other commodity that didn’t appreciate over time in a manner they considered troublesome.

Debtors and creditors dealt with the price deflation of the 19th century without the market evaporating.

Production of commodity money on the unhampered market would be regulated by its profitability, just like the production of every other good. If demand for men’s dress shoes (money) increased, then its price (purchasing power) would rise making it more profitable to produce. Entrepreneurs would step up production to earn the profit. Their increased demand for inputs would bid their prices up and their increased supply of output would moderate its price. They would continue their reallocation until production earned the rate of interest again like every other line of production.

[jmherbener]

There is a basic rate of return (i.e., the pure rate of interest) that tends to be the same in all production processes. It is the return to time preference. If it were 10% in one line and 5% in another, then investors would abandon the lower rate line and flood the higher rate line causing the former to rise and the latter to fall. This arbitrage would cease when the rates were roughly the same.

Profit is not a return, but a residual that is earned by entrepreneurs for their superior foresight. Entrepreneurs who anticipate more accurately the demands of consumers will earn profit and those who anticipate them less accurately will not.

The Net Income earned by an enterprise has four sources:

1. Interest from the investment by capitalists
2. Profit from the foresight of entrepreneurs
3. Wages from the labor of entrepreneurs
4. Quasi-wages from the leadership of entrepreneurs

So some lines of production earn more net income than other lines of production, but all lines tend to earn the same rate of return, i.e., pure rate of interest.

Take a look at the lectures on Economic Calculation and the Time Market for more details.

[jmherbener]

If all one is interested in determining the the dollar value of all that has been produced in the economy, then, counting the steel, and other parts of the car along with the car would be double counting. But the dollar value of what has been produced in an economy is, perhaps, the least interesting thing we could know about it.

If we really want to understand an economy, we have to know how all the different resources people have get allocated into all the different production processes. The monetary value of all production tells us nothing about this.

When we begin to investigate the working of the economy we see that consumer demands can only explain the production of consumer goods since consumers do not demand producer goods directly. To explain the production of producers goods, we need to understand entrepreneurial demands for them. When we trace back the production of consumer goods to their sources, then, we see that the amount of demand entrepreneurs have for all the producer goods necessary to make some consumer good far outweigh the demand consumers have for it. In other words, the far great portion of production in an economy is of producer goods, which is explained by entrepreneurial demands, which results in investment spending. Consumer demands and consumption spending are a far smaller portion of all demands and total spending and the production of consumer goods is a smaller portion of the production across the entire economy.

Murray Rothbard explained all of this and why it’s important in the production chapters in Man, Economy, and State:

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

[jmherbener]

The monetary inflation and price inflation of the 1970s led investors to buy gold as an investment hedge against further inflation. (This, by the way, is what Bernanke is trying to replicate: inflate the money stock sufficiently so that price start to rise leading people to form expectations that prices will rise further leading them to buy goods across the economy now and drive prices up now. The higher prices, he thinks, will stimulate production across the economy.)

Just like the last ten years, investors bought gold because they expect more rapid price inflation in the future. When the Fed tightens, investors may change their expectations and sell gold, popping the bubble. This is what happened in 1980. The gold price collapsed for a year and stayed at a new level for several years thereafter, higher than that of the mid-1970s but lower than that of early 1980.

The reason that price inflation was moderate for the rest of the 1980s and through the 1990s was that even though the Fed kept the money stock inflating briskly, the demand to hold money increased as well.

Bubbles can arise in any market where investors borrow credit created by banks during the process of monetary inflation, housing, autos, land, gold, and so on. These bubbles are a secondary, not primary feature of the boom-bust. The primary feature of the boom-bust is the artificial lengthening of the capital structure beyond what is supported by people’s time preferences.

For the price of gold to fall now, investors would have to lower their expectations about future price inflation in which case investors would sell gold and buy other other goods or hold more money. Of course, there are other reasons why demand for gold has been increasing and therefore, other reasons why the demand for gold might fall in the future.

We live in an age of inflation so generally, in the abstract, holding gold seems prudent. As to timing of buying and selling and portfolio allocation and so on, I render no opinion. I’m only a humble economist, not, alas, an entrepreneur.

[jmherbener]

Fed monetary inflation in the late 1970s created a bubble in gold late in 1979 and into 1980. When Paul Volker at the Fed slowed monetary inflation to break the double-digit price inflation, the bubble popped.

http://www.kitco.com/charts/historicalgold.html

(You must construct the chart by selecting the relevant years.)

Only time will tell if the run up in gold from 2000 to 2013 will prove to be a bubble.

http://www.kitco.com/charts/historicalgold.html

(You must construct the chart by selecting the relevant years.)

What moderated the price of gold in the 1980s and 1990s was an increase in world demand to hold dollars, which moderated price inflation. Price inflation has remained moderate through the 2000-2013 period and the run up in gold has occurred during a bust instead of before the bust as in the 1980s. What’s the same for the two periods is the expansionary monetary policy of the Fed. We’ll see soon enough if investors have over- or under-estimated the effect of such policy on the purchasing power of the dollar and the price of gold.

[jmherbener]

There is a vast literature on the economics of slavery. I would suggest you take a look at Gordon Tullock’s short article. It’s not definitive, but it raises essential points of economics. For example, slaves had capital value which had to be included in any accounting of the profitability of slavery. The dynamic of the market tends to direct investment into different lines of production so that there is a tendency toward the same rate of return in every line of production. In other words, slavery is no more profitable than any other line. Another example: Tullock points out that southern slave owners received a huge subsidy in the form of government mandated slave patrols. He also discuses the economics of manumission.

http://mises.org/journals/lar/pdfs/3_2/3_2_1.pdf

[jmherbener]

GDP is the monetary value of all final goods produced domestically during a period of time. Final goods are those in the hands of final users. They include goods bought by consumers, governments, businesses, and foreigners (i.e., net exports),

National Income and Product Accounts were invented as guides to government policy. Here are the sordid details:

http://www.bea.gov/national/pdf/nipaguid.pdf

http://www.bea.gov/scb/account_articles/general/0100od/maintext.htm

GDP is worthless as a measure of people’s well-being or even standard of living, i.e., the objective properties of set of goods they have. Obviously, then, it cannot be used to measure economic progress. At best, GDP is merely a measure of economic production.

Attempts have been made to modify GDP to make it more meaningful. Adjustments for changes in the purchasing power of money render Real GDP, which attempts to eliminate the impact of price inflation and price deflation. But, as Mises demonstrated, there is no objectively correct way to calculate a price index and therefore, such calculations will be manipulated for political reasons rendering them suspect for conducting economic analysis.

Austrians have constructed Private Product Remaining, which nets government activity out of GDP.

http://mises.org/daily/2231/

Even as a measure of economic production, GDP is, at best, misleading. by including only final goods, it ignores the vast majority of production in the economy which is the production of intermediate capital goods. Iron is mined and refined into steel which is formed into fenders which are assembled into cars. Only the production of cars is included in GDP. Production across the entire capital structure is left out. This omission leads to the fallacy that consumption is 70% of the economy. No, consumption is 70% of GDP, but a small fraction of the entire economy.

[jmherbener]

If immigrants come to America and go on welfare, then they draw down average standards of living. This is straight forward and I don’t think even immigration proponents deny it. But the anti-immigration labor economists seem to be claiming that immigrants lower average standards of living in America just by lowering the market wage in labor markets they enter.

[jmherbener]

The argument that immigration is an economic loss to society because it lowers the wages of workers who compete with immigrants is incorrect. If it were true, then population growth from any source, foreign or domestic, would lower social well being. Social well-being would also decline if people in one country integrated their economic activity with people in another country. In other words, free trade would lower standards of living..

Extending the division of labor results in greater physical production. Reallocating resources from lower to higher valued uses results in higher-valued production. Accumulating capital results in higher-value goods being produced in lower-cost ways. These economic principles transcend political boarders.

While the dynamic of the market improves the economizing of resources for society at large it doesn’t and can’t guarantee that each person has a higher standard of living after each adjustment than he did before. Entrepreneurs who lack the foresight to anticipate declines in consumer demand for their products will see their incomes decline as entrepreneurs with superior foresight attract consumer demand. Workers for inferior entrepreneurs will see their incomes decline if they choose to remain in their employ. The only way to prevent such changes in income patterns is to destroy the market altogether.

But this doesn’t seem to be the complaint of the anti-immigration economists, In other words, they don’t seem to be merely apologists for some special interest group, e.g., they want protectionist measures designed to prevent immigrants or foreigners in their own country from competing against domestic garment workers to help out the domestic garment workers even though society at large would be worse off.

They seem to be claiming that by lowering wages in certain labor markets an influx of immigrants lowers the average standard of living in the country. But that cannot be the case in terms of physical production of goods, i.e., standard of living, as long as immigrants produce at least as much as much as they consume. With an influx of immigrant garment workers, for example, wages will decline for all garment workers, but the physical production of domestic garment workers who remain in their jobs will not decline. So if the immigrant workers produce at least as much as they consume, then the average standard of living will not decline.

And if what the anti-immigration economists’ seem to be claiming was correct, then it would be an argument against free trade and not just immigration. If foreign wages for garment workers are lower than domestic wages, then capitalists will invest in foreign countries which will lower the demand for domestic garment workers and hence, their wages. The result, they claim, are lower average wages domestically. But, again, this argument conflates monetary with real wages. Average standards of living will rise for workers in society at large even though domestic garment workers’ average share of goods produced in society might be lower.

[jmherbener]

Of course, you are correct. There is enough gold in the world to serve as a medium of exchange.

The estimated total stock of gold in September 2011 was 171,300 tonnes. Each tonne is 32,150 troy ounces. So that’s 5.5 billion troy ounces of gold.

http://en.wikipedia.org/wiki/Gold_reserve

Each year for the past 15 years, around 80 million ounces of gold has been produced.

http://www.goldsheetlinks.com/production.htm

You could point out to her that prices have fallen for extended periods in history. The purchasing power of money rose during the classical gold standard, for example.

http://mises.org/money/4s1.asp

You could remind her that no one has to impose lower computer, cell phone, TV, and other consumer goods prices that occur year after year on us. Consumers are happy to pay lower prices and producers can still earn profit because capital accumulation has been driving down the prices of their inputs.

Silver has served more often than gold as a commodity money in history. The greater stock of silver relative to that of gold means its purchasing power is more suited to making everyday purchases of medium- and low-priced items. And the greater annual production of silver relative to that of gold means its purchasing power does not rise over time. In an unhampered market, people would choose a commodity money taking these facts into account. If they thought a rising purchasing power of money was problematic, they would choose silver instead of gold.

[jmherbener]

When banks intermediate credit, they tend to match the time structure of their loans (assets) with the time structure of their borrowings (liabilities). Also, interest rates tend to rise across the time structure because of increased intensity of time preferences, i.e., shorter term loans have lower rates than longer term loans. Arbitrage by banks from shorter term borrowing to longer term lending would be possible if banks find a stable renewal by savers of some portion of their short term lending to banks. Doing so would flatten the yield curve make banks less liquid,. Both of these factors would eliminate the profitability of further such arbitraging.

With fiduciary media and credit creation under central banking, these restrains are relaxed. The central bank targets the federal funds rate (i.e., the interest rate banks pay to borrow reserves from other banks) by supplying banks with more (or less) reserves through larger (or smaller) purchases of bank assets. Banks must decide how to allocate the credit they create across the yield curve without the guidance of savers’ preferences. Whether they lend long or short term, their balance sheets will be illiquid, so that does not constrain them. Their liabilities (i.e., the fiduciary media) are instantaneous) while their assets (i.e., their loans) have time structures. If the central bank has policies that shield banks from the ill effects of their illiquidity (e.g., bailouts, deposit insurance, soft bank audits, and so on), then they will tend to allocate credit longer term to earn higher interest rates. Government policies shielding banks also lead them to reduce their equity.

You might take a look at the relevant articles by Guido Huelsmann:

http://guidohulsmann.com/#publications

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