[jmherbener]

GDP = C + I + G + (X-M)

Gross Domestic Product is equal to the sum of Consumption Expenditures, Investment Expenditures, Government Expenditures and Net Exports. The Final Goods included in GDP, then, are goods in the hands of final users: Consumer Goods bought by consumers, Capital Goods bought by entrepreneurs and held by them as assets, Government Goods bought by government officials and Net Exports.

There are two omissions to note. First, GDP does not include the production of intermediate capital goods. So to produce automobiles, which would be included in GDP, iron must be mined, steel must be made, fenders must be formed, and so on. None of the production of these intermediate capital goods is included in GDP. Second, government transfer payments are not included. So, fiscal expenditures for F-18s are included in GDP while social security payments are not.

Yes, G adds dollar for dollar to GDP. So, when the federal government increased its annual fiscal expenditures from $2.9 trillion to $4.0 trillion in 2009, GDP was $1.1 trillion larger than otherwise.

The argument about including G in GDP is that since G are financed by coercive extractions, the prices paid for government goods do not, and cannot, reflect the value people place on them. So adding G to C and I is like adding apples and oranges. Even though they are both denominated in money, government expenditures and private expenditures do not have a common meaning.

[jmherbener]

Tell the critic to stop talking in metaphors, The market is not a beast and the government doesn’t tame it.

The theory of how people act in concert within a division of labor to accumulate capital and generate economic progress in markets has been around without refutation since Adam Smith. Explain it to the critic and then ask him how exactly the coercive power of the state, aside from defending person and property, can improve the economizing of of production decisions made by entrepreneurs in the market..

[jmherbener]

Ask your friend what Americans would do with Chinese Renminbi they acquired by selling goods to the Chinese? They would spend them in China or trade them for dollars to someone who then spent them in China.

Even if the Chinese kept dollars, let’s say to make expenditures in the underground economy, it would have no effect on production in America. It would merely make the purchasing power of the dollar higher than otherwise in America. That is, the prices of everything would be lower than otherwise in America. Most people don’t realize that nearly 2/3 of all dollar currency is held overseas. And foreign holding of dollars increased dramatically in the prosperous 1990s.

[jmherbener]

Economic theory doesn’t tell us the particular reason for the lack of complete arbitrage or competition, just that they are incomplete is such cases. My example only discussed competition, i.e., buyers deserting high-priced sellers and patronizing low-priced sellers. Of course, the average gasoline buyer is not going to arbitrage, i.e., buy at a low price and resell at a high price. But, suppliers of gasoline to the gas stations might be able to arbitrage it. You would have to investigate the particulars of the case to find out whether they do or do not.

[jmherbener]

Here is a article by Max Wirth from the Journal of Political Economy (Mar. 1893) on the Crisis of 1890. He chronicles the credit expansion fueled boom in businesses at the end of the 1880s, especially in Europe and then the collapse in 1890-91.

http://www.jstor.org/stable/pdfplus/1817769.pdf?acceptTC=true

Here is an article by David Whitten that traces the consequent boom and bust in America with an eye toward the European situation. Table 3 documents some of the capital build up and collapse.

http://eh.net/encyclopedia/article/whitten.panic.1893

Murray Rothbard writes about this episode in his book A History of Money and Banking in the United States.

http://library.mises.org/books/Murray%20N%20Rothbard/History%20of%20Money%20and%20Banking%20in%20the%20United%20States%20The%20Colonial%20Era%20to%20World%20War%20II.pdf

As Rothbard points out the agitation in the U.S. for free silver led to passage of the free silver act of 1890 which doubled the Treasury’s production of silver and signaled a return to bimetallism. Foreigners speculated about more monetary inflation began to redeem gold at the Treasury. In June 1892, the Treasury put on the monetary brakes and the money supply fell precipitating the downturn of 1893.

The monetary inflation of the early 1890s led to malinvestments which were then liquidated in the depression. The severity of the downturn was caused, in part, by rising labor union activity. On that point, take a look at Robert Higg’s book, Crisis and Leviathan.

In short, this episode can be explained by the Austrian theory of the boom-bust cycle. Take a look at Tom Woods’ book, Meltdown, for an explanation of the theory.

[jmherbener]

Obviously, there must a reason why participants in this particular situation do not seek to exploit this difference by arbitrage or competition. Usually the reason is a particular preference people have. Buyers may perceive one station as having a superior product or buying experience. This kind of thing is common and often related to the personality of the seller or the personalities of the other customers. So trendy restaurants can sell meals at higher prices than the competition. Some Americans are loyal toward American car companies and so, their prices are higher than otherwise and, perhaps, even above technically superior foreign cars that are sold in the same market.

To apply this reasoning to big differences in gas prices in the same town, but not at stations across the street from each other, some buyers may view the location of some station as dangerous and therefore, not compete away a large price difference while the customers at the high price station don’t drive to the lower price stations out of loyalty to their neighborhood. Suppliers of gasoline don’t try to supply more at the dangerous stations because they really are dangerous and therefore, their costs are higher.

[jmherbener]

One thing we can say a priori about income distribution is that market economies generate a prosperous middle class and non-market economies do not. In non-market economies there are only rich and poor, but the bulk of income in market economies is earned by the middle class.

[jmherbener]

Speculation would dampen any actual price increases in emergencies. Anticipating higher prices, entrepreneurs would be prepared to shift supply from other markets into the disaster area. Their increased supply of goods would moderate the price increases necessary to clear markets under the new conditions.

[jmherbener]

Here is Murray Rothbard on Milton Friedman:

http://www.lewrockwell.com/rothbard/rothbard43.html

As you can see, differences on money is just part of the distinction between the two schools.

[jmherbener]

The money stock would not be constant in a market economy with commodity money. Money production would be regulated by profit. If the purchasing power of money was anticipated to rise, then entrepreneurs could profit by producing more commodity money. This process would moderate any price deflation.

People are also free to select which commodity they want to use as money. If they thought gold would be less suitable because it would result in modest price deflation and thereby raise the problem of appreciating real value of debt, they could chose silver instead. In fact, silver (which is not as restrictive in production) not gold is the most widely used commodity money in history. People could even contract their debts in silver and use gold for other purchases. Using more than one commodity as money is called a parallel standard, which has historical precedent as well.

[jmherbener]

Saving is postponing consumption. Investing is making capital goods. Obviously S=I in all cases.

In self-sufficiency, Robinson Crusoe, to devote resources to making capital goods by which he makes consume goods more indirectly, he must divert them from making consumer goods more directly. He gives up picking coconuts to make a net and then use the net to catch fish. His saving is the reduction in his coconut consumption that is done to release his labor into making the net, which is his investment.

In the division of labor, one person postpones his consumption by lending present money (called financial investing or making an investment expenditure) to an entrepreneur who uses the funds to bid for the production of capital goods, which is making an investment. (If one person saves and makes a financial investment to someone else who uses the funds to bid for the production of a consumer good, then no social saving-investing has taken place.)

Saving and investing are two steps to a single process called capital formation. You are correct, consumption competes with S-I. A person’s time preference determines the split between S-I and consumption.

[jmherbener]

Here is Bob Murphy’s reply to Glasner:

http://consultingbyrpm.com/blog/2012/10/david-glasner-needs-to-re-read-mises.html

On the second point, you’re correct. Glasner doesn’t account for the fact that prices of capital goods move disproportionately, depending on their degree of specificity, in response to a change in output prices. Those that fall the most, will not be profitable to produce once the downturn starts.

He doesn’t seem to acknowledge that unsustainability refers to inter-temporal malinvestments. The capital structure has been built up during the boom in a manner that does not satisfy people’s time preferences. (Any production process that doesn’t satisfy people’s preferences is unsustainable.) Once this fact is manifest in the financial crisis, there are profits to be earned by reconfiguring the capital structure in the way that best does satisfy people’s preferences.

[jmherbener]

Sorry for my imprecision. Yes, the PPM would be rising not falling and yes, nominal wages, not real.

No, real wages would tend to rise as nominal wages fell more slowly than prices of output. Capital goods prices would be falling more than the prices of output. like the computer industry. The price of a massage is not the same as the wage of the masseur. The price of the massage must cover the prices of all the inputs used to produce it. The prices of more specific factors of production will adjust more to changes in the price of output than the prices of less specific factors.

[jmherbener]

Right, we can’t ignore compensation, but there is no “scientific” way of handling it. We must use our judgment. We are in the realm of economic history, not theory.

I don’t think there is a single index to indicate living standards. We have to look at all the relevant data and make a judgment call.

The Sowell quote said that HH income rose slowly because the average number of people in a HH declined. My point is that it’s precisely because of such problems with HH income that economists don’t use it. They use measures standardized for population, like per capita real income and real wages. Some of those statistics indicate stagnation others do not.

[jmherbener]

In the unhampered market, the production of money and money substitutes would be regulated by profit. If the PPM was anticipated by entrepreneurs to rise during economic progress, then they would produce more money to earn the profit. The increased production of money would moderate the rise in the PPM.

The classical gold standard of the nineteenth century permitted the issue of fiduciary media. Also, there were issues of silver money as well until the Gold Standard Act of 1900. Of course, price inflation and booms and busts occurred as a result.

Once the prices of the houses, for which mortgages are claims, collapses, then banks must judge whether it is wise to quickly renegotiate the terms of the mortgage to make it feasible to get the most payments possible. Whether they renegotiate or not depends in part on their anticipation of the restoration of housing prices. If they think the prices will rise again soon, they will be reluctant to renegotiate. This is another source of inefficiency introduced by government attempts to prop these prices up again through monetary inflation. Another factor is the likelihood of the homeowner to pay back the mortgage on the old or new terms.

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