[jmherbener]

Yes, borrowing capital refers to borrowing capital funding to buy capital goods or, at least, producer goods.

[jmherbener]

The general point to keep in mind is that mergers, like all production decisions in the market, can be judged according to their effect on net income and net worth. If a merger lowers the value of the combined assets in serving consumers, then investors have incentive to break up the assets into components and thereby, increase their capital value. Entrepreneurs are continuously trying different combinations of assets by merging and breaking up.

So a merger is only viable in the market if it increases the value of assets. But if it increases the value of assets, this demonstrates that it better serves consumers than other ways to organize the assets.

In your situation, if a company owned all sources of supply of a resource, then whether or not it was a wise business decision to keep control of them and produce all the product in one enterprise or sell the sources of supply one-by-one to different groups of investors can be determined by which alternative renders the highest prices for the sources of supply.

[jmherbener]

Economic theory defines the terms “entrepreneur” and “capitalist” in a functional way. The function of the entrepreneur in the division of labor is to organize production according to his foresight. If his foresight in anticipating consumer demands is superior to other entrepreneurs, he will earn profit. The function of the capitalist in the division of labor is to save and invest. His saving-investing earns interest.

Real persons can be both entrepreneurs and capitalists at the same time. Or they can be just capitalists. There is disagreement among Austrians as to whether or not persons can be just entrepreneurs.

If an entrepreneur borrows all the capital funding for his operation, then he will earn only profit and not interest. The capitalists he borrows from will earn interest and he will earn only profit.

Take a look at Peter Klein on 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]

Here is the debate stimulated by Bryan Caplan’s article:

First, Caplan:

http://econfaculty.gmu.edu/bcaplan/whyaust.htm

Next, Guido Huelsmann

http://mises.org/journals/qjae/pdf/qjae2_4_1.pdf

Then, Walter Block:

http://mises.org/journals/qjae/pdf/qjae2_4_2.pdf

Caplan’s response:

http://econfaculty.gmu.edu/bcaplan/pdfs/probabilitycommonsense.pdf

And Hans Hoppe:

http://mises.org/journals/qjae/pdf/qjae8_4_6.pdf

[jmherbener]

A classic work on the topic of state-run enterprises is Mises’s book, Bureaucracy.

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

[jmherbener]

An unfunded liability is when someone is obligated to make future payments but does not own assets that generate sufficient future revenues to meet his obligations. A pension fund, for example, pools contributions to the fund and makes investments with the money that generate returns in the future to pay the fund’s obligations. If a pension fund has an unfunded liability, it is measured by the present value of the shortfall in paying the future stream of obligations. That is, the present amount of money that the pension fund would need to invest to generate enough revenue in the future to make up the shortfall.

Take a look at Gary North’s explanation of the calculation:

http://www.garynorth.com/public/804print.cfm

North claims that the current unfunded liabilities of the federal government (i.e., the present amount of money the federal government would need to invest to generate a future stream of revenue sufficient to pay its obligations like social security, medicare, etc.) is $222 trillion.

http://mises.org/daily/6192/Means-Testing-Your-Social-Security-Payments

[jmherbener]

Keynes argued for running budget deficits in recessions so that government expenditures, by making up for sagging private expenditures, restore aggregate demand to a level that renders full employment. He did not favor running permanent budget deficits, but only as long as and as large as needed to restore full-employment aggregate demand.

He also argued that to prevent depressions, the government should socialize investment. In that way, it couldn’t collapse from private investor pessimism.

[jmherbener]

I, too, disagree with the analyses given by Summers and Bernanke. The links to their articles were to provide background about what the Great Moderation was. Unfortunately, there isn’t much literature on the Great Moderation from Austrians. Joe Salerno made a few comments in his Congressional testimony. But they are disputing the claim that the GM was moderate.

http://financialservices.house.gov/media/pdf/031711salerno.pdf

[jmherbener]

Dr. Huelsmann answers this point in the articles above.

Here are a few comments. First, there is some amount of consumption that must be done and people will not wait for prices to fall tomorrow before they buy food, clothing, fuel, etc. So price spirals, if they exist, have a termination point. Second, speculation cuts the spiral short. If entrepreneurs realize the extent to which prices will fall in the future, they will lower prices today. Third, lower prices for outputs reduce revenue for entrepreneurs who must, then, lower their demands for inputs which reduces prices for inputs. There is no need for production to be curtailed if input and output prices fall proportionately. The problem of the bust is not falling aggregate demand, but a mismatch of productive capacity built up during the boom with preferences that emerge in the bust. Layoffs occur during the bust in areas of malinvestment that occurred during the boom. The solution, then, is liquidation of the malinvestments and reallocation of resources into lines that satisfy consumer preferences as they will be in the near future.

[jmherbener]

Look at page 369 in MES. The trapezoid is the shaded area of the rectangle.

[jmherbener]

To what theory of deflationary spirals are you referring? Here are few good articles on the theory of deflation.

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

http://mises.org/journals/qjae/pdf/qjae6_4_4.pdf

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

[jmherbener]

The so-called Great Moderation occurred in the industrialized world, not just the U.S. Here is the evidence:

http://www.kansascityfed.org/publicat/econrev/pdf/3q05summ.pdf

As Ben Bernanke has pointed out, the volatility of real GDP was lower before the 1970s and after the 1970s. Here is Bernanke’s article:

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2004/20040220/default.htm

So the explanation for the Great Moderation has to do with the breakup of Bretton-Woods. Before 1971, there was an international monetary system that to a certain degree coordinated world-wide inflation with the dollar. When the Fed inflated if gave other countries room to inflate their currencies as dollars wound up in those countries through foreign exchange. Part of the impact of Fed monetary inflation was felt overseas and, if coordinated with other countries, resulted in less dramatic booms and busts.

Bretton-Woods began to unravel in the late 1960s. When it collapsed in 1971, countries allowed their currencies to float (albeit a managed float). When the Fed inflated, the full impact was felt in the U.S. and thus, more volatility in the economy.

In the 1980s, the U.S. put a dollar reserve standard, with pegged exchange rates, back in place. When the Fed inflated the dollar, more dollars were held overseas through foreign exchange and became reserve for the expansion of domestic currencies. This smoothed out the business cycle in industrialized world, but made it more volatile in the less industrialized world. Places like southeast Asia, in particular. After the collapse in southeast Asia beginning in 1997, the effect of Fed inflation was felt more in the U.S. and we had the DotCom bubble followed by the housing bubble.

[jmherbener]

Hazlitt’s point is that one cannot justify government expenditures by pointing to the benefit they do, a bridge is built, 100 people are employed, etc. One use of resources can only be justified by showing that it is more valuable to people than their best alternative use. This is precisely what entrepreneur demonstrate each time their production earns profit. Government cannot do this because it raises revenue through coercion, i.e., taxation.

It follows that the direct burden of government on society is the extent to which it diverts resources from private hands into its own. If government expenditures for wars and other programs that control the use of resources were slashed and the resources returned to private hands, then society would be better off. If the reduced expenditures were matched by reduced taxes, it wouldn’t affect the expenditures made to service the debt. (Expenditures to service the debt are those made to pay interest on the debt. There is neither a “sinking” fund to pay off the principle nor any proposals to pay down the debt by running surpluses. If there were, then total expenditures and taxes would not necessarily fall.)

[jmherbener]

Evan, I think the best strategy for having a fruitful discussion with one of your professors is to know her positions well enough to ask her provocative questions. If she struggles with an answer, then point her to the relevant literature. With a political science professor, listen to what she says about economics and economists. In private conversations, ask her what literature she has read on economic topics or by economists. Bring up some arguments by economists who write about politics, like Mancur Olson.

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

[jmherbener]

Interest rates on Treasuries follow market interest rates up and down. There is usually a spread between Treasuries of a given maturity and the same maturity private debt because investors perceive lower default risk on Treasuries. However, Treasuries move up and down with market interest rates. Here is the 3-month Treasury Bill rate:

http://research.stlouisfed.org/fred2/series/TB3MS?cid=116

So the capital value of Treasuries moves inversely with interest rates, just like the capital value of other assets. If market interest rates rise, then the capital value (i.e., the market price) of Treasuries will fall. One factor that makes market interest rates rise is unanticipated price inflation.So if price inflation picks up and investors haven’t built it into interest rates already, then the prices of existing securities, including Treasuries, will fall.

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