[jmherbener]

To succeed entrepreneurs must act as agents for consumers at large arranging production in the manner people prefer. If experts can convince people of the perils of global warming, then entrepreneurs can profit by arranging their production in ways that minimize its effect on global warming. There are countless examples of businesses adopting socially acceptable practices because consumers make them profitable.

The burden of convincing others of the perils of global warming would be on the experts. Like everyone else who is trying to convince other people of the truth of their claims, in a free society the experts would have to rely on the power of their ideas and their rhetorical skills, In the free society, no one would have the power to coerce others into accepting his views on anything.

As to global warming, the evidence doesn’t look all that convincing:

http://blog.independent.org/2012/10/27/its-official-no-global-warming-since-1997/

[jmherbener]

Here’s a conventional piece on the Phillip’s Curve:

http://www.econlib.org/library/Enc/PhillipsCurve.html

The Phillip’s Curve doesn’t get anything exactly right. Monetary inflation can generate lots of different combinations of price inflation and unemployment depending on the contingencies of the situation in which it occurs. Sometimes, like the boom of the 1960s, it generates both more price inflation and less unemployment. Other times, like the 1970s, it generates more price inflation and more unemployment. Clearly, there is nothing like a constant relationship between price inflation and unemployment. Even Fed economists are skeptical.

http://www.federalreserve.gov/pubs/feds/2001/200130/200130pap.pdf

[jmherbener]

First, the claim about wealth transfers isn’t true unless capitalists and entrepreneurs fail to anticipate the changes in money’s PP, If they correctly anticipate higher prices in the future, they bid more heavily for factors of production today and factor prices rise today keeping rates of return the same, i.e., interest rates are unaffected. If they correctly anticipate lower prices in the future, they bid less heavily for factors of production today and factor prices fall today keeping rates of return the same, i.e., interest rates are unaffected.

Second, price deflation in today’s world would cause widespread default on debt obligations. However, this has little effect on production. After the defaults, capitalists would still find it better to fund superior entrepreneurs and not inferior ones. If superior entrepreneurs are currently in charge, then they would likely remain. For example, if Apple defaulted on its debt because of its increasing burden during price deflation and capitalists thought Tim Cook was still the best person to run Apple, why wouldn’t they just renegotiate a partial default and continue with production they anticipate will be profitable in the future? Why wouldn’t banks simply renegotiate mortgages to relieve part of the debt homeowners who are likely to continue paying back on new terms? The point is that asset values need a one time reduction to come in line with the new anticipated deflationary future. The best way to deal with this is to take the loss and move on.

[jmherbener]

The argument about government goods and services is that we can’t know their monetary value to consumers because they are not voluntarily purchased on the market. Of course, our use of them indicates that we value them, but it doesn’t indicate how much we value them. Therefore, it is a fallacy to add government expenditures used to provide their goods with consumer purchases of privately produced goods as if government expenditures had the same meaning as consumer purchases.

I’m not disagreeing with what you’re asserting Mises claimed. No index could ever be formed in comparing one set of goods to another because there is no common unit in which the goods can be added up that doesn’t itself change over time. Assessing whether or not standards of living have risen is economic history not economic theory. By nature, it’s not scientific. But who would deny that if you look at the set of consumer goods a typical family had in 1912 in America and compared it to the set of consumer goods a typical family has in 2012, that standards of living have risen in the past hundred years.

Your quote by Sowell illustrates why economists look at real wages and per capita income. If you look at real wages there is evidence of stagnation. The question is what are the causes? My contention would be that the 1970s and the 2000s were periods of dramatic booms and busts while the 1980s and 1990s were more normal periods of economic progress. The reason for this pattern has to do with the USA going off the international gold standard in 1971, re-establishing a dollar-reserve standard in the early 1980s, and having the dynamics of that international arrangement play themselves out in the 2000s in a way similar to the collapse of Bretton-Woods in the 1960s.

[jmherbener]

Real wages have been declining, or at least stagnant, since the 1970s. But overall compensation has been rising.

http://www.econbrowser.com/archives/2005/12/declining_real.html

As the linked blog discusses, it’s controversial to claim that government mandated benefits constitute part of standard of living in the same way that voluntarily chosen goods and services do.

Standards of living consist in the set of consumer goods and services that people have to use. So the direct measure of standards of living is to investigate what set of goods and services households have and see how it changes over time.

While doing so is difficult and reasonable people can disagree in their judgments, it’s much clearer that capital accumulation in America has slowed since the 1970s.

[jmherbener]

A rising purchasing power of money and falling prices for things traded against money are just two ways of saying the same thing. If money’s purchasing power is falling because of increased production of goods, then the prices of those goods will be falling relative to the prices of other things traded against money. So even if wages for labor services decline during economic progress, prices of goods decline to a greater extent and real wages, i.e., standard of living, rise.

[jmherbener]

Such claims are part of the oft-refuted mercantilist view of international trade. Specifically, the claim that a nation is better off by exporting more than it imports. Whatever policies the state can impose that favor exports and discourage imports is justified. One such policy is for the state to make its currency cheaper in foreign exchange markets than dictated by its domestic purchasing power. Doing so stimulates exports by making domestic prices lower for foreigners who can trade their foreign currency for more of the domestic currency. This is what is meant by currency manipulation in international trade.

A state could use monetary inflation to manipulate its currency or it could use monetary inflation for other purposes. Monetary inflation stimulates exports only if it devalues the domestic currency against foreign exchange before it pushes domestic prices up. Usually this does happen because foreign exchange traders react more quickly to monetary inflation than the average domestic consumer. There are other ways besides monetary inflation to manipulate currencies. For example, a state could peg its domestic currency to a foreign currency at an artificially low level and then use tax revenues to supply more of its domestic currency in foreign exchange markets to keep its exchange rate at the peg. Of course, it’s more likely a state would print the additional money it wants to supply against foreign exchange. This is what China is accused of doing.

In addition to the reduced demand for Iranian Rial in foreign exchange markets, another way that sanctions push up prices in Iran is that they reduce the stock of goods Iranians have available to buy.

[jmherbener]

The government reallocates resources through both fiscal and monetary policy. Expansion of production in areas stimulated by fiscal expenditures are not self reversing as the production in areas stimulated by monetary inflation are. For example, the build up of public education, funded through taxes and expenditures of the state, is sustainable as long as the budget is intact. (Of course, the state’s budget deteriorates during the bust and some cutbacks may occur in public education, but it’s not like liquidation in the private sector.)

Higher education is partly funded through budgets and partly through private credit. So, the build up in higher education over the years has not been purely through credit expansion. But, the build up of higher education was much more rapid from 2000-2010 than it was from 1990-2000.

http://nces.ed.gov/fastfacts/display.asp?id=98

Some of this expansion in enrollment has been financed by credit and a growing portion has been by private credit. In assessing the prospects for the future it’s one must also keep in mind that some downsizing at universities after the financial collapse because of budget cutbacks and declines in university endowments has already been done. And, the credit financing of higher education has been steadily rising, not spiking in the last few years:

http://www.insidehighered.com/news/2012/05/03/how-student-debt-became-focus-presidential-campaign

If there is a bubble that will pop, it will likely happen upon the recognition by potential borrowers that “investment” in higher education will not pay off. If their withdrawal from higher education is significant, it will force some institutions into bankruptcy. For them to liquidate their campuses, the prices of their assets will have to collapse. Construction will be affected. Lots of highly paid administrators and tenured faculty will have to take big pay cuts.

Given the state’s desire to have a kept intellectual class, I think it less likely it will sit by and watch a significant collapse of higher education than some private industry.

[jmherbener]

Credit markets are worldwide. Therefore, every borrower of a particular uncertainty group and maturity of loan, pays the same interest rate. The reason Japan is not in a higher uncertainty group and Greece is (and therefore, Greece pays a higher interest rate) is that the Greek government has made other huge budget commitments that the Japanese haven’t and the Greek government is at the limit of its taxing ability. Investors think it more likely that Japan can pay off it debt given the paucity of its other budgetary items and the greater likelihood of Japan actually collecting higher taxes in the future. The prospects for economic growth in Japan, which expands the tax base, are greater than in Greece.

[jmherbener]

Enormous government debt is bad because it transfers an enormous amount of resources from markets, in which they are used efficiently, to the state, in which they are used inefficiently.

The problem with continuing to service the debt when it expands enormously is that doing so takes up an increasing portion of the government’s budget. There comes a point at which it must face a choice between servicing the debt and its other budgetary obligations. Usually, the government delays this choice by monetary inflation. But monetary inflation destabilizes financial markets and causes price inflation, which pushes up interest rates and puts further pressure on the government’s budget from servicing the debt.

But, you’re correct. The government could choose a more prudent course by limiting its other expenditures, running budget surpluses, and retiring debt. If it did so, no catastrophe would inevitably follow.

[jmherbener]

Society is complex. There are a host of causal factors at work bringing about any historical result. That’s why we need theory to understand the world. When real economies are a combination of market forces and government forces, we must have sound theory to disentangle the causal factors. The theory of the free or unhampered market economy is essential to doing so. It doesn’t matter whether or not such an economy exists in the real world. We have no other way to disentangle the different causal effects.

The unhampered market economy is an economy in which legal sanction is given to all voluntary exchanges and private property and any involuntary exchange and any aggression against private property are illegal.

Take a look at the lecture on the unhampered market economy for more details.

Your friend is entirely mistaken to claim that any particular set of goods are prerequisites of the market economy. At best, he could merely claim that infrastructure provided by the State is a requisite to some particular goods produced by our interventionist market economy. Of course, in any economy the production of some things depends on the production of other things. But, by his own admission we don’t have a free market economy. So how could he know, except by theorizing, whether or not such an economy requires state-produced goods that our economy has.

The theory of the market economy demonstrates that production decisions made by entrepreneurs economize the use of resources for society at large. Efficient production depends on earning profit and avoiding loss. The state’s production decisions cannot satisfy the profit and loss test of social efficiency and therefore, they are, by nature, inefficient. Contrary to the claim of your friend, entrepreneurs on the market take account of the inter-temporal dimension of profit efficiently through the rate of interest. State officials simply ignore this dimension of profit as they do all its other dimensions.

Take a look at the lectures on economic calculation, profit, and equity.

No conclusions about the operation of the market economy can be drawn merely from claims made by Smith, Hayek, or Friedman. One has to exam their arguments and see. There have been many criticisms of all three of them, pointing out the inconsistencies in their defense of an interventionist system. (They all favored a market economy, but not one of them favored the free market economy.)

The function of a market economy is to satisfy the most valuable preferences of society at large. All economists agree that the market, generally, does so because production decisions are subject to profit and loss. One must demonstrate, not merely assert as your friend does, how the market systematically fails to do so and how the state can intervene to systematically correct the market’s failure.

It’s not a market failure that our society lacks certain conditions that the market is not designed to provide. The market is a production system and so, it succeeds or fails on the basis of whether or not it produces the goods that society at large prefers. Claiming that the market fails because some people are unhappy or obese or have less income than other people is like claiming that a car engine isn’t working right if the driver crashes the car because the breaks fail.

On Public Goods and Market Failure, take a look at Murray Rothbard’s, Power and Market:

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

Without theorizing, how could your friend discern whether or not the argument that the Fed’s monetary inflation and credit expansion might have had more to do with the financial collapse than the re-regulation of financial markets? In fact, without theorizing, how would he know what the effects of re-regulation were?

[jmherbener]

It’s hard to fit the two main economic arguments about the effects of monetary inflation into pithy political statements. But, to say, as your friend implies, that monetary inflation doesn’t matter because all prices and wages go up together is mistaken.

Monetary inflation will push the prices of some goods up further than the prices of other goods and it will push the prices of some goods up sooner than the prices of other goods. Because of this, income is redistributed away from those who are selling goods whose prices go up later and not so much and buying goods whose prices go up sooner and further. Income is redistributed toward those who are selling goods whose prices go up sooner and further and buy goods whose prices are going up later and not so much. These changes in the structure of prices change the profitability of lines of production and therefore, entrepreneurs shift resources toward the more profitable and away from the less profitable lines.

Monetary inflation, therefore, retards the efficiency with which entrepreneurs arrange production to satisfy people’s consumption demands. Instead, resources are forced into production to serve the interests of the state.

Take a look at the lectures on money and monetary policy for more details.

[jmherbener]

It seems to me that Gilder’s view of the entrepreneur has more affiliation with the view of Schumpeter than either that of Mises or Kirzner.

I agree with Mises that the entrepreneur’s creativity is constrained in a market economy by what other people will make profitable. Of course, entrepreneurs make production decision and offer the goods they produce for sale, but what they produce must be salable to other people otherwise, they fail as entrepreneurs. The market economy is concerted effort on the part of people to better satisfy their ends. So I don’t see that Gilder is making a useful distinction when he contrasts the entrepreneur with the market.

Take a look at Peter Klein’s book, The Capitalist and the Entrepreneur.

http://library.mises.org/books/Peter%20G%20Klein/The%20Capitalist%20and%20the%20Entrepreneur%20Essays%20on%20Organizations%20and%20Markets.pdf

[jmherbener]

If your client wants you to explain the history (including the present situation) or predict the future of the local real estate market, then your analysis is economic history. Economic history is a blending of economic theory (i.e., what is universally true for all markets and all real estate markets) and with knowledge of contingent conditions for your particular market. The difficulty of economic history is judging the relevant of the different causal factors. Take a look at Mises’s book, Theory and History:

http://library.mises.org/books/Ludwig%20von%20Mises/Theory%20and%20History%20An%20Interpretation%20of%20Social%20and%20Economic%20Evolution.pdf

If your client wants you to assess the independent effect of a single causal factor, then your analysis is applied economics. Applied economics constructs a theory incorporating all the relevant conditions of the situation and then changes the single causal factor tracing through its effects on the market in an imaginary construct. An example of applied economics is Joseph Calandro’s book, Applied Value Investing:

http://www.amazon.com/Applied-Value-Investing-Application-Acquisitions/dp/0071628185

[jmherbener]

2. The SSA calculates the unfunded liability for all persons alive today. The projection, then, runs for the next seventy five years. For example, the unfunded liability starting in 2012 calculates the figure for the period from 2012 through 2086. The SSA says that figure turns out to be $8.6 trillion.

The SSA also calculates the unfunded liability for an indefinite future. The SSA calculates that figure in 2012 is $20.5 trillion.

http://www.ssa.gov/oact/TR/2012/tr2012.pdf

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