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jmherbener
ParticipantAs I understand it, Nurske’s theory is if the state of an underdeveloped country takes the wealth of its poor citizens and spends it on capital projects across the economy it will increase productivity which will then expand markets domestically. That way, the underdeveloped country can enjoy economic growth without integrating into the world economy.
His argument defies every sound economic theory about economic growth. Economic growth requires capital accumulation, i.e., saving and investing directed by entrepreneurs into capital projects that produce goods that satisfy people’s preferences. The quickest way for poor people to experience economic growth is to integrate their activities into the already developed world economy. Then they can rely upon the saving, production, and entrepreneurship of other people instead of merely their own.
Take a look at P.T. Bauer’s book, Equality, The Third World, and Economic Delusion and David Osterfeld, Prosperity versus Planning,
ParticipantBob Murphy has written study guides to Rothbard’s, Man, Economy, and State and Mises’s Human Action that you might consult.
Also, there is a glossary for Human Action by Percy Greaves called Mises Made Easier.
ParticipantThere was a proto-Austrian line of thought among classical economists. It started with Richard Cantillon went through Turgot to J.B. Say and the French Liberal School, including Frederic Bastiat. This line was part of what is called the continental classical economists. Bastiat influenced the leading American economists before the end of the 19th century including Francis Wayland.
The British classical economists, Adam Smith, David Hume, David Ricardo, Jeremy Bentham, Robert Malthus, James Mill, John Stuart Mill, were the forerunners of today’s neoclassical school.
Take a look at Murray Rothbard’s second volume on the history of economic thought, Classical Economics, to get an idea of which classical economists would be valuable to read. His discussion of Cantillon, Turgot, and Smith are in the the first volume of his history of thought, also available online at mises.org.
ParticipantThe current monetary system has fiat money produced by a central bank and fiduciary media (money substitutes with a fractional reserve of money). The point of the system from the view of the state is to permit unlimited monetary inflation and credit expansion controlled by the state. The state desires the system to have fractional reserve banking because that is the source of credit expansion and credit expansion is the method the state uses to fund its own debt. Credit expansion is also lucrative for banks. In fact, it is so lucrative that banks have a tendency to extend it too far setting in motion bank runs. So the state must regulate the fraction to keep the banking system intact.
If the central bank wants monetary inflation and credit expansion it could provide more reserves to the banks by issuing fiat money and buying assets from banks or it could allow banks to lower the fraction of their reserves or some combination. Normally, the Fed has left the reserve fraction the same and regulated monetary inflation and credit expansion by buying assets from banks. Before the crisis, banks held a 6-7 percent reserve against their fiduciary media, i.,e., their checkable deposits.
I cover these points in my lecture on Monetary Policy. Also, take a look at Rothbard’s, The Mystery of Banking.
http://library.mises.org/books/Murray%20N%20Rothbard/Mystery%20of%20Banking.pdf
ParticipantA monetary system can have two types of media of exchange: money and money substitutes. Money is the general medium of exchange. Money substitutes are perfectly secure, on-demand, at-par redemption claims for money. Money plus money substitutes constitute the system’s money stock. In our system, for example, Federal Reserve Notes are money and checkable deposits are money substitutes.
There are three types of money: commodity, fiat, and credit. Commodity money has (roughly) the same value of the commodity from which it is made as its purchasing power as a medium of exchange. Commodity money comes into existence by people’s choice within a market and can be maintained entirely by private enterprise. Fiat money has less value of the commodity from which it is made than purchasing power as a medium of exchange. Fiat money can only come into and maintain existence from the intervention of the state. Credit money occurs when the state declares that it will make something money or a money substitute in the future and people believe the state and therefore, use the item as money today.
There are two types of money substitutes: money certificates and fiduciary media. Money certificates have a 100 percent reserve of money into which they can be redeemed. Money certificates would be produced by private enterprises as warehouse receipts (i.e., owners titles to money being warehoused) of money owned by people and stored by the private enterprises. Fiduciary media have a fractional reserve of money into which they can be redeemed. Fiduciary media come into existence through intervention of the state.
With these categories as background, one can define different monetary systems by combining the different types of money and money substitutes. For example,
Free Market: commodity money and money certificates.
Classical Gold Standard: gold coin money and fiduciary media.
Current Monetary Regime: Fiat money and fiduciary media.Then one could add contingent conditions to tailor the description of the system to particular cases in the real world. For example,
Gold Exchange Standard: gold bullion money and fiduciary media.
And, of course, there could be more complex contingencies, as say under the National Banking System.
If I were to take a guess at classifying the systems you mention, they would be as follows.
Commodity Money: commodity money and fiduciary media.
Sovereign Fiat: fiat money and money certificates.
Debt Based Fiat: fiat money and fiduciary media.In our current system, money itself (i.e., currency or Federal Reserve Notes) is printed by the Federal Reserve. Banks bring money substitutes (i.e., checking account balances) into existence by creating credit. The process of monetary inflation and credit expansion is driven by the financial gain to the state for printing more fiat paper money (and having credit expanded by the banks) and the indefinite profitability for banks to issue more fiduciary media by creating more credit.
ParticipantYou haven’t specified the proximity of the item used as money to the attainment of your end. That is the key to classifying an item as a consumer good, producer good, or medium of exchange.
The condition that “without it, it would not be possible to attain my end” applies to all goods chosen by a person in his action. Without a car, I cannot attain my end of commuting to work. Without labor, steel, rubber, and so on a car cannot be produced and my end cannot be attained. Without money, I cannot buy a car and my end cannot be attained. Consumer goods, producer goods, and money all contribute to the attainment of an end and therefore, all of them have psychic value to a person, not just the consumer good.
The item used as money is a consumer good to a person when he attains his end directly in one action with the item. Let’s say gold coins are money, and I hold a particular gold coin for its sentimental or historical value. When I do this, the coin is not a medium of exchange to me. I have classified it as a consumer good because it gives me psychic value directly. Then let’s say I give the coin to my son who classifies it as money. As a medium of exchange, the gold coin cannot directly satisfy my son’s end. The only function of a medium of exchange is to facilitate trade. He must eventually spend it to acquire a consumer good that directly satisfies his end.
ParticipantSumner’s proposal is for the Fed to target potential NGDP. So if the Fed thinks that potential NGDP will increase by 4 percent per year, it would inflate the money stock by, say, 6 percent per year. He considers this superior to a monetary policy that targets the price level.
http://www.adamsmith.org/sites/default/files/resources/ASI_NGDP_WEB.pdf
A basic problem with this from the Austrian view is that any monetary inflation and credit expansion will set in motion the boom-bust cycle. To avoid the boom-bust cycle, money production must be left to the profit and loss test of the market.
Here is Bob Murphy on Scott Sumner:
http://mises.org/daily/4904/Following-the-EfficientMarkets-Hypothesis-into-Absurdity
ParticipantOf course, the object used as a medium of exchange could also be valued for some other end. Gold could be valued for dental work or wads of FRNs for a keepsake or to light cigars. But in such cases the gold or the FRNs are no longer money. The person acting has reclassified the objects themselves as consumer goods. But money itself, the general medium of exchange, has its value as a good derived from the value a person attaches to the medium of exchange function.
So a person has an end he wishes to attain. He then identifies objects in the world as suitable means to attain his end. He perceives the structure of the means in a sequence of steps to attain his end. In analyzing his action, economists refer to the good that he chooses to directly attain his end a consumer good. The goods that are used to make the consumer good economists call producer goods. The general medium of exchange economists call money. The categories are fixed and universal. In his action, a person chooses what in particular is a consumer good, producer good, and medium of exchange. But that does not affect the definitions of the categories of goods.
ParticipantConsumer goods and producer goods are defined by their proximity to the attainment of an end. A consumer good satisfies an end in one action. A producer good takes more than one action to satisfy an end. Saving is done to earn interest which is a step toward attaining more valuable consumer goods in the future. Holding money (as money itself, i.e., the medium of exchange) is done to deal with uncertainty but does so only because money can be spent to accommodate unforeseen occurrences. Money’s usefulness (as money itself and not the general usefulness of the object used as money, like gold) is as a medium of exchange. But to obtain the use value of the medium of exchange, it must (eventually) be spent to acquire goods that then are used to satisfy ends.
In economic logic, we don’t refer to intermediate steps toward the attainment of an (ultimate) end as attaining (intermediate) ends. There is just the (ultimate) end attained at the end of all the necessary steps. If I wish to satisfy my hunger in the morning, then eating bacon and eggs directly attains my end. So they are consumer goods. The money I use to buy the bacon and eggs at the restaurant indirectly satisfies my hunger. The labor of the waitress and cook, likewise, indirectly satisfy my hunger. So neither money nor labor is a consumer good.
ParticipantPower over monetary policy was not centralized in the Board of Governors until the Banking Act of 1935. Benjamin Strong headed the group of Federal Reserve District Bank presidents who, with Board approval, determined rates of discount for commercial paper and open market operations during the 1920s. They engineered a significant monetary inflation and credit expansion in part to re-establish the gold standard, at the pre-War parities and in part to stimulate domestic economic activity.
After the War, the exchange rate of the pound had fallen to $3.20. Britain tried to restore the gold standard at a rate of $4.76. Speculation had driven the rate near $4.70 after 1925, but the fundamentals of underlying purchasing power would not justify it without significant manipulation. That is what the speculators were betting on.
Strong reported to the Board that for the three years 1925-1927, the Fed’s portfolio increased $200 million, the gold stock $18 million, but bank credit had soared by $5 billion. The discount rate was lowered from 6 percent to 4 percent.
The idea was that the pound would appreciate against the dollar if the dollar’s purchasing power was lowered by monetary inflation. The scheme failed because, Britain refused to moderate its own monetary inflation and rising international demand for the dollar prevented the purchasing power of dollar from falling.
The eminent monetary economist, Alan Meltzer, chronicles this story in his landmark book, A History of the Federal Reserve System, Vol. 1.
ParticipantThere are two burdens from debt financing of the state. The primary burden is born by the present generation. Bondholders give up command over resources by lending to the state and society in general suffers lower standards of living than it could have enjoyed when the state directs the use of resources instead of entrepreneurs. The latter is the burden born by society at large.
The secondary burden from debt financing is independent of the primary burden. It occurs only if the state taxes some people in the future to pay bondholders. If so, taxpayers bear a burden and bondholders receive a benefit. Control of resources are not transferred to state and so, there is no burden on society at large.
In your case, then, the primary burden is suffered by the Chinese holders of U.S. bonds and by people around the world whose standard of living is lowered by having resources used inefficiently by the U.S. state instead of efficiently by U.S. entrepreneurs. The secondary burden occurs if and when the U.S. state taxes Americans and uses the tax revenue to pay Chinese bondholders. But this is not a burden on society at large.
It doesn’t matter whether or not the taxpayers and bondholders are in the same political boundary. The secondary burden will be suffered by taxpayers and offset by the benefit to the bondholders. So it’s misleading to say that future generations bear either the primary or secondary burdens. The secondary burden is born by the taxpayers (not Americans in general), wherever they reside, and offset by the benefit to the bondholders (not the Chinese in general), wherever they reside.
ParticipantBut the bondholder has born the burden in the present, not the future. The bondholder has given up buying consumer goods or making investments in the present when he lent to the state. So future generations do not bear the burden of the debt. If the state coerces taxpayers to pay bondholders in the future that is an additional burden on the taxpayers that is independent of the primary burden of the debt, which is born in the present. This secondary burden on future taxpayers is exactly offset by the secondary benefit to future bondholders. So future generations do not bear the burden of the debt.
ParticipantWhat if the state borrowed today and then in the future it defaulted on the debt and no taxes were extracted and no bondholders were paid. Wouldn’t the burden of the debt be the same today as in the case where the state taxes some people in the future to pay other people? And isn’t this present burden the main answer to the claim that the debt doesn’t matter because “we owe it to ourselves”?
ParticipantThere are two different issues that we should not conflate. The first is the transfer of control over resources from private hands to the state. The happens whenever the state spends funds, from whatever source it acquires them: taxes, borrowing, and monetary inflation. This transfer of control takes resources out of the realm of efficient decision making by entrepreneurs using economic calculation and puts them into the realm of inefficient decision making by politicians and bureaucrats. The burden of the loss of efficiency is born in the present by society at large.
The second issue is the transfer of wealth between taxpayers and bondholders in the future as the state pays the bondholders. This does not transfer resources from private hands to the state. It transfers wealth between two private parties, taxpayers lose and bondholders gain. Of course, this has inefficiencies too since it’s coerced, but it does not transfer resources to the decision making control of the state.
This distinct is helpful in disabusing one of the fallacy that if the state borrows today the burden falls entirely on future generations. Actually, the burden falls on the present generation as resources in the present are wasted by the state. Then, in the future, the state adds the additional inefficiency of coercively transferring wealth from one private group, taxpayers, to another private group, bondholders.
ParticipantWhen the state borrows today to pay for its expenditures, resources are transferred from private hands to the state today. The burden of the loss of resources from taking them away from their efficient use in the hands of entrepreneurs and putting them into the hands of politicians and bureaucrats occurs now. When the debt is paid in the future by taxes, there is a transfer of wealth between private parties, from taxpayers to bondholders. Resources stay in private hands. Future generations do not pay for state borrowing, the present generation does.
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