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jmherbener
ParticipantFirst, my apologies for the delay in responding. I just returned from vacation without technology.
Austrian Business Cycle Theory (ABCT) is built-up from, and hence integrated into, general price theory whereas neoclassical business cycle theories (NBCT) are not. Technically, I don’t think NBCT contradict general price theory. As the neoclassical economists see it, the two theories are trying to answer different questions. General economic theory explains the array of prices and allocation of goods whereas BCT explains booms and busts in the overall economy. Neoclassical economists typically assume that aggregate demand is a primary causal factor in generating booms and busts. Aggregate demand plays no role in general economic theory.
In the quote, Rothbard is highlighting the underlying difference between the Austrian approach and that of the neoclassical school. For neoclassical economists, economic theory requires formulating a model for each and every phenomenon they wish to analyze. Each model estimates the quantitative magnitude of effect produced by its cause and is tested by empirical evidence of the phenomenon at hand. They see no reason to investigate how the various models relate to each other. For Austrian economists, economic theory requires discovering the conceptual structure of human action. Because this is done by logical deduction from basic facts about human action, the entire edifice must hang together.
ParticipantFirst, my apologies for the long delay in addressing your question. I just returned from a vacation without technology.
In economic theories, economists try to discover cause and effect relationships within human action. Doing so requires stipulating a given state of mind of the person acting. The demand curve, for example, stipulates a given preference rank for the good relative to money in the mind of the buyer. Then the law of demand follows logically: only at some lower (higher) price would a person buy more (less) of a good than he actual buys at the market price, ceteris paribus.
Economists are not so bold as to claim to be able to model the human mind, i.e., to have a theory of the cause and effect structure of the human mind itself. For example, how fear rises in a person’s mind. This is a question left to psychology.
An economist who is trying to give an economic-historical (instead of an economic-theoretical) explanation of an event must rely on psychology to add to what can be know from economic theory.
The classic work in this area is Ludwig von Mises’s book, Theory and History:
https://mises.org/library/theory-and-history-interpretation-social-and-economic-evolution
ParticipantRothbard is dealing with the logical implications of time preference in this paragraph, i.e., the preference to have a given satisfaction sooner instead of later. Each consumer good has a period of production, i.e., the length of time necessary to produce the consumer good, and a duration of serviceability, i.e., the length of time the consumer good can be used before it is rendered useless.
The first case Rothbard looks at is between two consumer goods that have the same period of production and render the same satisfaction for each use, but one outlasts the other.
Symbolically, for two goods the period of production is days 1-5, the satisfaction per day of use is X.
Good 1: Day 1, day 2, 3, 4, 5; X, X, X, X, X, X.
Good 2: Day 1, day 2, 3, 4, 5; X, X, X, X, X, X, X, X, X.Good 2 would be chosen over good 1. In other words, a person would choose the more durable good.
In the second case, the two consumer goods again have the same period of production, but now the same satisfaction for all uses (instead of the same satisfaction from each use).
Symbolically, production takes from day 1-5 for either good, the total satisfaction from using each good for its entire usable life is X:
Good 1: Day 1, 2, 3, 4, 5; X (evenly acquired each day over 5 days).
Good 2: Day 1, 2, 3, 4, 5; X (evenly acquired each day over 3 days).Good 2 would be chosen over good 1. In other words, a person would chose the good that rendered the same satisfaction sooner rather than later.
ParticipantEconomic theory concerns the logic structure of human action. It seeks to find the universal, causal laws of human action. The law of demand, for example, states that at a lower price for a good, the quantity demanded would have been at least as large as it actually was at the actual price at which the good was traded.
Economic history adds to economic-theoretical knowledge, knowledge of contingent features of human action. Economic-theoretical knowledge is necessarily true while contingent knowledge is true in some cases but not in others. Fear is the latter. Sometimes human action is driven by fear, sometimes it is not. Some people are paralyzed by uncertainty, others thrive on it. Blending theoretical and contingent knowledge together into a full explanation of human action is economic history.
An excellent example of economic history is Bob Higg’s insight about regime uncertainty in explaining the length of the Great Depression.
ParticipantWages, like all other prices, are determined by supply of and demand for labor services. Demand for labor services by entrepreneurs depends upon the productivity of workers, which in turn depends upon the capital goods workers have. It is correct (as you say) that a larger supply of labor will result in lower wages; but it is correct only with a given (or at least a not larger) demand for labor.
As you can see in the following graph, employment has been steadily rising from 1960 to 2000.
https://fred.stlouisfed.org/series/PAYNSA
In the same time period, the percent of women in total employment only rose until 1990, since then it has been level.
https://fred.stlouisfed.org/series/CES0000000039
As the labor force participation rate of women rose, that of men fell.
https://fred.stlouisfed.org/series/CES0000000039
https://fred.stlouisfed.org/series/LNU01300001
The stagnation of wages since the 1970s has been on the demand, not the supply, side of the market. There has been much slower capital accumulation than previously and the less rapid capital accumulation has been the result of the final breakdown of a gold-based, international monetary system that occurred in 1971.
ParticipantCost is always related to action. So one must first identify the action a person is taking before assessing its cost.
If the action is continuing to own land that a person already has, then the cost is the current market price because selling the land is the alternative foregone if one holds onto it.
If the action is buying land by an investor with the intention of selling it later for a monetary gain, then the cost is the market price at the time of purchase.
If the action is using land an entrepreneur owns as an asset in production, then the cost is the amortized portion of the current market price of the land. The market price he paid for the land when he acquired it in the past is not relevant for his decision to use the land in production now.
An entrepreneur running a business enterprise continues to own assets and then buys inputs and uses both assets and inputs in production. So today when an entrepreneur decides to use his owned assets and acquire inputs to produce output and sell it in the future with the intention of earning profit, the appropriate costs are the current market prices of inputs and the amortized portion of the current market prices of assets. A year later, When the entrepreneur makes the next production run, the appropriate costs are the current market prices of inputs and the amortized portion of the current market prices of assets. Last year’s market price of assets is no longer relevant for this year’s production decision.
ParticipantCost refers to opportunity cost, i.e., the value of the alternative foregone when taking an action. In production, an entrepreneur uses assets he owns and buys inputs from others. Both owned assets and bought inputs impose costs on the entrepreneur. This is true for any entrepreneur, not just one who owns the entire supply of a resource. Any entrepreneur who has a rising demand for his product will have a rising cost structure for his owned assets. That is how he gains a monetary reward for superior entrepreneurship. The prices of assets he owns rises.
Any competitor who purchased a mine from Alcoa would have to pay the higher price (i.e., the price that incorporates the monopoly price of output) and therefore, would not be able to stay in business by undercutting Alcoa’s price. Because Alcoa can obtain the higher price by selling the mine, the cost of retaining ownership of the mine is also higher.
Consider another example: Government price supports for corn push up prices for corn. An investor who wants to get into farming would find that the price of corn-growing land has risen to the point at which no extra profit can be earned. The competitive bidding of outside investors to obtain higher profits generates this result. (Technically, it generates a tendency toward this result. Actually, all investment is uncertain and therefore, investors with superior foresight can buy assets before their prices fully rise and so earn extra profit.) Farmers who owned land before the price supports were raised do not earn extra profit (at least not after the adjustment of the market). Instead, they earn a capital gain in the market price of their assets.
October 13, 2017 at 4:15 pm in reply to: Lecture 17: Developing the principles of economic theory. #18894ParticipantMany thanks for your kind comments. In fact, I agree with your sentiments.
Here is a piece I wrote surveying the rise of the market economy in Christendom:
https://mises.org/library/small-states-global-economy-empire-necessary
September 30, 2017 at 7:59 pm in reply to: Investing in the stock market under our failed economic system #21174ParticipantI don’t know the particulars, but it must be possible to hold a bank account in foreign currency. You could trade in the currency of a foreign stock market and convert your holdings to Swiss Francs.
Here is how the Swiss Franc has done against the dollar:
ParticipantActually, Ricardo assumed the immobility of both capital goods and labor across international boundaries. In his model, only produced goods can move from one country to another, not resources.
Here is Bob Murphy discussing this point which was raised as an objection to Ricardo’s argument for free trade by Paul Craig Roberts:
https://mises.org/library/free-trade-and-factor-mobility
Here is the debate between Vox Day and Bob Murphy:
Neither Bob nor Vox discusses the claim that the argument for free trade is negated by the immobility of capital goods. (I listened only to their opening statements, so maybe later on in the debate Vox does claim this.) The only reference to mobility in his opening statement, Vox claims that the same logic applies to free trade in goods as free immigration of persons. Then, he asserts that we see empirically that free immigration impairs the wealth of the country receiving immigrants. He concludes from these two propositions that free trade of goods can also impair the wealth of countries receiving goods. He is wrong to conclude this. Free trade moves more goods into the country (we obtain goods with less sacrifice of other goods) and leaves the population the same. So, per capita standards of living rise. Free immigration increases population. So, per capita standards of living increase only if that of immigrants is above the per capita standard before immigration. The logic of free trade and free immigration is not the same.
In the article replying to Roberts, Bob gives an example of the mobility of capital goods: an American capitalist ships a tractor to Brazil to take advantage of low wages. The only completely immobile factor, then, is land.
The argument you quote above confuses capital specificity with capital mobility. Capital goods are relatively specific, which means they cannot be shifted from one production process to another production process and maintain their productivity. Capital goods, however, can be moved from one location to another in the same line of production as Bob’s example illustrates. Even factories and other structures on particular land sites can be dismantled and reconstructed elsewhere. Of course, it’s typically less costly to invest capital funding in building a new factory in another location and re-allocating the existing factory to a different use. In such cases and in even more extreme ones in which capital improvements on land cannot be dismantled and moved (like a mine shaft), there is a dynamic mobility of capital structures brought about by the mobility of capital funding.
ParticipantThe chart below shows the price movements more clearly. Extend the time to “1 yr” and you can see the current speculative surge. Extend the time to “all” and you can see previous speculative excesses.
There is Mises’s book, Theory of Money and Credit:
https://mises.org/library/theory-money-and-credit
Also, Fritz Machlup’s book, Stock Market, Credit, and Capital Formation:
https://mises.org/library/stock-market-credit-and-capital-formation
ParticipantPrice deflation would not cause a special problem for gold production. In an economy of capital accumulation, which is what causes rising productivity, the prices of inputs decline. Falling input prices generate more profit from production of output and therefore, entrepreneurs produce more output which pushes down output prices. Prices of inputs in gold production, too, would be falling which would make gold production more profitable and it’s production would be increased. Thus, there is no special problem of production of gold during price deflation.
If gold production is inadequate to prevent price deflation at rates sufficient to impair credit transactions, then (as you say) entrepreneurs would simply switch to silver or some other commodity that is more readily produced.
In a growing economy, people’s wealth is increasing and they desire to hold a larger stock of goods, including money. Even if the demand for money didn’t increase, production of money would be stimulated by falling costs of production as described above. This is a general phenomenon for all goods: their production is stimulated by larger profit which can occur from a rising prices for their outputs or falling prices for their inputs.
ParticipantRothbard repeats this point made by David Hume many times. One place is What Has Government Done to Our Money, pp. 24-26.
For something to become money, it must displace the existing money as the general medium of exchange. People must become convinced that it serves as a general medium of exchange better than any thing else. Of course, government intervention can suppress people’s preferences to choose a market-produced money.
http://wiki.mises.org/wiki/Bitcoin
It seems likely, but it’s not logically necessary, that if Bitcoin became money it’s market price would rise. It may be that it’s current price is driven by what proves to be wild speculation.
https://bitcoincharts.com/charts/bitstampUSD#rg60ztgSzm1g10zm2g25zv
ParticipantLending at a negative interest rate would be like selling a product at a negative price. No one would do so there would be no supply of credit at all and therefore no loans and no rate of interest at all. It could be the case, as you suggest, that the most urgent borrowers might be willing to pay an interest rate that more than compensates for the price deflation, say 10%. In this case, the inefficiency of an excessively deflationary money is partial instead of total. There are many willing lenders and willing borrowers at the pure rate of interest who would supply and demand credit and thereby, satisfy their time preferences. But many lenders will not do so given the extent of price deflation.
What Rothbard means is that people can make all the trades they want to make with any amount of money (above a technical minimum). If they have twice as much money, prices will be twice as high and if they have half as much money prices will be half as high. But, they can make all their trades regardless.
Participant(1) Arbitrage moves the supply of any good into its various uses and among its various users so that its price is uniform (for homogeneous units of supply) across all the uses. If the price were higher in one use as opposed to another, profit would exist for moving it out of the other use and into the profitable one. It’s an empirical question as to whether or not the demand for gold as money would be sufficient to draw gold out of other uses and into a monetary use.
This story has a breakdown of the amount of gold in various uses:
http://www.encyclopedia.com/science-and-technology/chemistry/compounds-and-elements/gold
(2) The existence and timing of asset price bubbles is an historical, not theoretical, question. One cannot “know” when they exist. One can only make a judgment based on one’s entrepreneurial foresight. They can be known to exist ex post. What we can know about asset price bubbles theoretically is that they are caused by monetary inflation and credit expansion. We can use evidence of monetary inflation credit expansion, then, to guide our judgment concerning the existence and extent of asset price bubbles.
https://mises.org/library/can-asset-price-bubbles-be-harmless
(3) One argument is that as the crises arrives, entrepreneurs realize that demands will decline for their products. Their debt servicing, however, continues which squeezes their profit. In response, they shift away from long-term borrowing (so as not to increase their debt service) to short-term loans (so as to make up for lost sales revenue).
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