Forum Replies Created
-
AuthorPosts
-
jmherbener
ParticipantIn a market economy resources are allocated across different lines of production according to their profitability. As resources move toward more profitable lines, production increases and the greater supply lowers their prices. As resources move away from less profitable lines, production declines and the smaller supply raises their prices. The array of prices of all goods in market economy reflects this efficient allocation of resources. The price of each good reflects the least valuable use of a unit of it given its efficient production and consequent supply.
For example, a person suffering a migraine headache will not have to pay all the money he owns to have it relieved. The price of relief will reflect the drug’s (or whatever service is rendered for its relief) marginal utility, i.e., the least-valuable use of the drug to all migraine sufferers. In the same way, a man dying of thirst does not have to pay all the money he owns to buy a bottle of water at Wal-Mart. He pays the same price as everyone else, a price which results from the efficient production of bottled water. The consequent enormous supply means that a bottle of water has a reasonable price.
The genius of the market economy is not that it keeps prices low to benefit consumers or keeps them high to benefit producers, but that it allocates the efficient amount of resources for society at large into each line of production, including “necessary” and well as “unnecessary” lines.
ParticipantFor any particular bank, it depends on the stability of its reserve during the process of credit creation. For the banking system, the expansion is 1/RRR. In Ch. XI of Mystery of Banking, Rothbard demonstrates that even with competitive banks, which are restricted in their issue of fiduciary media by redemption of their money substitutes by non-clients, the existence of a central bank will result in credit expansion from fiduciary issue as the central bank expands the reserves of the banks.
To use your example in Rothbard’s framework, suppose Customer X of Bank A deposits $100 cash in his checking account and the RRR=0.10, then the (minimum) the bank can expand its money substitutes by credit creation is $90. This assumes that Bank A makes a loan to a non-client, who will not accept a check drawn on Bank A but only cash. Then Bank A lends $90 in cash and is holding $10 against $100 deposit of Customer X. But the borrower either spends the cash or deposits it in his bank. If the cash is spend, the merchant then deposits it in his bank. Bank B, then, gets a cash reserve of $90 and credits Customer Y’s checking account with $90. Bank B can then lend $81 in cash and keep $9 reserve against the checking account of $90. And so on, until the entire banking system will have expanded checking accounts by $1,000 from the initial $100 increase in cash reserves.
Any particular bank can expand further than the minimum if it makes loans to clients instead of non-clients. Clients are those people willing to accept the bank’s checking accounts as a medium of exchange. So the maximum that Bank A can expand with $100 additional reserve and a RRR=0.10 is $1,000. Since, in this case, it does not need to lend any of its cash reserve in the process of crediting credit. The borrowers are willing to accept checking accounts drawn on Bank A instead.
Whatever might be the case for any particular bank, the banking system can expand by 1/RRR even in the case, as Rothbard demonstrated, where each bank can only expand by 1-RRR.
ParticipantThe only interest rate the Fed sets as a matter of administrative policy is the discount rate. The discount rate in the interest rate the Fed charges banks for loans they take out from the Fed.
The federal funds rate is the interest rates banks charge to other banks for over-night loans. Banks usually take out such loans to meet their reserve requirements. For this reason, the Fed targets the federal funds rate. If it rises (falls), the Fed takes that to mean that reserves are more (less) scarce.
To manipulate the federal funds rate, the Fed buys Treasuries or other assets from banks and pays for them with cash or checking account balances at the Fed. Either of these counts as reserves for the banks. The larger supply of reserves will reduce the banks’ demand for more reserves through federal funds borrowing and therefore, push the federal funds rate down.
With the greater reserves banks can issue fiduciary media and create credit. The additional supply of credit will push interest rates down in the credit markets the banks lend into, like mortgages or prime loans or AAA bonds.
If there was a loss of confidence in Treasuries, the Fed could just buy more of them to prop up their prices and keep their yields low.
Take a look at Murray Rothbard’s book, The Mystery of Banking:
ParticipantThe policy stems from an alleged asymmetry between price inflation or deflation set in motion by a change in the money side (i.e., the demand to hold money and the stock of money) and the goods side (i.e., the demand for and supply of goods), If the price inflation or deflation is caused by goods-side changes, then the market adjusts efficiently. If the price inflation or deflation is caused by money-side changes, then the market fails to adjust efficiently.
But there is no asymmetry. Each person ranks goods against money on his preference rank. If he initially ranks $500 above an iPad and then changes his ranking to iPad above $500, this is simultaneously an increase in demand for goods and a decrease in demand for money. If he increases his demand for money this is simultaneously a decrease in demand for goods.
This result is an implication of Ludwig von Mises’s famous integration of “micro” and “macro” economics that he accomplished in his book, The Theory of Money and Credit.
http://library.mises.org/books/Ludwig%20von%20Mises/The%20Theory%20of%20Money%20and%20Credit.pdf
ParticipantAfter Carl Menger, the Austrian school broke into two lines. The main line followed his causal-realist approach of Menger in the work of Boehm-Bawerk, Mises, and Rothbard. The branch line was inspired by Wieser and continued by Hayek.
Joe Salerno has a seminal article on the difference between the two branches as illustrated by the relationship between Mises and Hayek on the issue of economic calculation in a system of central planning.
ParticipantSocial phenomena are complex. That’s why in economic theorizing we start with Crusoe and build progressively toward situations that capture the features of the circumstances we wish to analyze. The free market is an interim step in the analysis of such circumstances. It is the necessary ground upon which the theory of government intervention rests.
If the circumstances we wish to explain are the difference in wages for textile workers in Vietnam versus America and how those wages will change over time, then we start with what would happen in the free market. After that we can add the complications of government intervention that are relevant to explain the circumstances we’re interested in.
An effective, general, minimum wage law in America will make legally unemployable any worker whose productivity is less than the minimum wage. The workers who remain employed still have their wages determined by their DMRP. Depending on the line of production, a worker’s DMRP may be different after the imposition of the minimum wage as capital investment is reallocated away from low wage areas toward high wage areas. Minimum wages do not contradict the market principle of wages being determined by DMRP they simply modify the level of worker productivity.
Whether or not this wage effect is significant in areas we are studying, like textile workers’ wages, is an empirical question. If a textile worker in America is making $20 an hour and the minimum wage is $7.25, the effect is probably insignificant. But, again, this is an empirical question that one needs to investigate to answer correctly.
There is also the question of the underground economy. If American entrepreneurs are willing to illegally hire textile workers (and use less capital intensive production processes) at wages below the minimum wage, then the minimum wage would have only minor effects. Every so often a story about such production will appear in the L.A. Times. But, again, this is an empirical question that one needs to investigate.
The effect of legally privileged unions is different than that of minimum wages. Minimum wages cause unemployment of workers with the lowest productivity. Unions exclude workers in one industry, raising DMRP and wages there, and push workers into non-union industries, lowering DMRP and wages there. If workers in the textile industry are unionized, then it is relevant for our investigation and if they are not unionize, it is largely irrelevant. But, unions do not raise wages generally throughout the economy.
Unionized labor makes up less than 10 percent of the private labor force in America. It’s likely that their effect on international wages differences is not that great. But, again, one would have to do the empirical work to find out in each industry.
There are also government restrictions on capital flows, different tax laws, the security of private property, and so on that would have to be considered in a full analysis.
ParticipantYes, we’re using the term differently. Might I suggest that you take a look at David Gordon’s book on economics, Introduction to Economic Reasoning. Dr. Gordon is philosopher who understands and appreciates Austrian economics.
http://library.mises.org/books/David%20Gordon/An%20Introduction%20to%20Economic%20Reasoning.pdf
ParticipantAustrians write little about international trade as a separate topic because we claim that economic laws are universal. Comparative advantage, for example, applies to people within the state Pennsylvania as well as between people in Pennsylvania and Ohio or Pennsylvania and China. And capital investment tends to be allocated to the highest-valued projects wherever they may be located in the world. To investigate such issues, any standard treatise will suffice, like Human Action or Man, Economy, and State.
International trade, from our perspective, mainly addresses various arrangements of government intervention among different states. One state erects tariff barriers to imports from the territory of another state, for example. Or one state inflates its money stock relative to the money stock of another state. Such analyses tend to appear in articles on Protectionism or International Monetary Systems.
David Osterfeld is good on development economics, an area in economics that addresses some of the issues you raise. You might consult his book, Prosperity versus Planning. Here’s a sample of his work:
ParticipantFor an overview of the claims about China manipulating its currency, take a look at China’s Currency: An Analysis of the Economic Issues by Wayne Morrison and Mark Labonte. It’s available at google books. I don’t endorse their analysis, but they give a decent account of the claims and some historical background.
The basic claim is that the Chinese government has undervalued the renminbi (RMB) for the purpose of making Chinese exports cheaper for foreigners. The Chinese government accomplishes this, allegedly, by supplying RMB against dollars which suppresses the price of RMB in dollars. In other words, a dollar buys more RMB than before. The Chinese government then uses the dollars it acquires when it sells RMB to buy U.S. Treasuries which artificially increases the merchandise trade surplus China has with the U.S. (or, equivalently increases the U.S. merchandise trade deficit with China). American manufacturers complain that this puts their production at a competitive disadvantage compared to Chinese production.
ParticipantMises took the position that while it might be possible, in principle, to give a purely material explanation for human choice (and therefore, human action), no one has been able to do so up to now. And until someone gives such an explanation, we must treat human choice as not purely caused by material factors.
Take a look at the relevant sections of Human Action:
http://library.mises.org/books/Ludwig%20von%20Mises/Human%20Action.pdf
Rothbard took the stronger position that humans do have free will and argued against determinism.
Take a look at The Mantle of Science:
http://mises.org/rothbard/mantle.asp
Either position provides scope for human action and economics.
ParticipantWages are determined by the productivity of labor. A worker is paid the Discounted Marginal Revenue Product of his labor, i.e., the present value of the extra revenue his labor adds to a production process. If wages are lower in Vietnam than America it’s because labor productivity is lower there than in America.
If America established free trade with Vietnam, then American capitalist-entrepreneurs would invest in Vietnam . By raising the productivity of Vietnamese labor, the capital investment would move Vietnam wages up while American wages would not change (assuming no disinvestment in America). The equalization of wages would take time, so in transition American wages would remain higher than Vietnamese wages. The greater production of goods made possible by the capital investment implies that standards of living rise all around.
ParticipantThe free market exists in every voluntary exchange of private property. It has been, is now, and will continue to be the source of the world’s prosperity.
There are several Economic Freedom Indexes that have established a positive correlation between the extent of economic freedom and measures of prosperity across scores of countries.
http://www.heritage.org/index/default
There have been economies nearly free of state activity: some of the American colonies, some areas of medieval Europe, and so on.
August 3, 2012 at 4:46 pm in reply to: How does the Fed lower the standard of living of the Chinese? #16988ParticipantThe Fed makes a liquid market for Treasury debt by purchasing them from banks with the issue of dollars that banks then hold as reserves. The liquid market gives greater incentive to others, including foreigners, to buy and hold Treasury debt as an asset.
With the dollars earned from the sale of goods and assets they have produced, the Chinese people could either buy American goods or American assets, including Treasuries. If they buy assets, they are expressing their lower time preferences to earn the rate of return on their American investments. Technically, this lowers their standard of living, i.e., the consumer goods they enjoy, in the present, which they are willing to do to get higher standards of living in the future. Americans express their higher time preferences by consuming more goods in the present than if the Chinese were demanding present goods more heavily.
What’s been more common than the Chinese people buying Treasuries is that the Chinese government taxes the Chinese people to buy U.S. Treasuries. This lowers standards of living for the Chinese people in the present and in the future. The greater command the U.S. government has over resources then reduces the standard of living of Americans in the present (fewer consumer goods) and in the future (fewer investments in the capital structure).
I don’t think Americans get to consume without producing. It is true that whoever has the power to issue legal tender, fiat paper money can consume without producing. So the U.S. government can consume without producing by issuing fiat money. But Americans are not the beneficiary of this wealth transfer but its victims, along with foreigners.
ParticipantAs I understand it, the axiom that unreceived act is unlimited refers to the claim that one aspect of what it means for God to be infinite is that he exists as pure actuality lacking any potentiality. Therefore, He needs nothing to actualize His potential.
I’ve never heard the phrase “unlimited character of the free market” before so I’m unsure what it means. By it clearly cannot mean that the free market is pure actuality since the free market is merely part of the nexus of voluntary interactions among human beings.
Economists sometimes refer to the universal character of economic laws, but this refers to the conceptual meaning of human action and not actions themselves.
ParticipantPeople trade when there is a difference in value. Whether a consumer good, producer good, or money a difference in the value of something will result in trade away from lower-valued and toward higher-valued uses. As the good is arbitraged in this way its price will tend to become uniform.
If bread prices are lower in the countryside and higher in the city, then sellers will shift supply to the city and buyers will shift demand to the countryside. The price will fall in the city and rise in the countryside until no additional advantage exists in such arbitrage.
If wages are lower in one country and higher in another, then sellers of labor (workers) will move supply from the former to the later and buyers of labor (capitalist-entrepreneurs) will move demand from the later to the former. Wages will come together until no advantage exits in further arbitrage. Everyone benefits from the greater production of consumer goods made possible by the further extension of the division of labor. The greater production of goods will push their prices down generally, given no change in the money relation.
-
AuthorPosts