[jmherbener]

1. If Joe had a plausible investment project like the iPhone or a cure for cancer, he would have obtained funding in the capital markets. It’s capitalist who use economic calculation to weigh the different investment projects for which the entrepreneurs seek funding (of course an entrepreneur can be a capitalist by self-funding his projects). Outside of the market, we can’t tell whether or not a particular project generates a net gain to society. Furthermore, government bureaucrats can’t use economic calculation to select from among the investment projects that clamor for state funding.

2. The Fed uses its interest income (earned on securities that it buys via open market operations and then holds onto) to fund its own expenses. By law any surplus must be returned to the Treasury department.

3. Credit money is a claim to money itself that the government promises to make redeemable for money on demand at par but the claim is currently not so redeemable. It does not have to be a debt instrument. So, no substituting credit money for fiat money in your example wouldn’t change anything.

If by credit money you mean a money substitute (like a checking account), that too would not affect the analysis.

One element you have not mentioned in your scenario is money demand. Since each dollar of money can be spent over and over again during some period of time, the array of demands across the economy are not strictly limited by the amount of money. The $1,000 may generate tens of thousands of dollars of spending during a year’s time. The effect on the array of prices, then, depends upon both the money stock and the demand to hold money.

[jmherbener]

In chapter 12, Samuelson begins to outline the answer to your question. Costs come from factor prices and factor prices are determined according to marginal productivity theory.

This sounds like the Austrian position. However, the Austrian view accounts for actual time. Today entrepreneurs anticipate consumer demand and the price of the consumer good that will emerge in the future when the good is sold and, based on that future price, entrepreneurs demand factors of production accordingly. The factor prices are determined today by the overall entrepreneurial demand for factors (which depends on their anticipated marginal revenue product) and supply by factor owners. The prices of consumer goods today are determined by entrepreneurial supply (which is unrelated to either factor prices today or the cost of production of the goods in the past) and consumer demand today.

In contrast to this causal-realist view, neoclassical price theory is timeless. Consumer demand (based on consumer utility) and producer supply (based on costs of production) are assumed to exist synchronously. In partial equilibrium, the price of the consumer good is jointly determined by demand and costs of production. In general equilibrium, all prices of goods and factors are perfectly adjusted to each other (every price is jointly determined by every other price). There is no cause and effect in time, but only mutual determination moment-to-moment.

[jmherbener]

Economic calculation is the only method to determine both the goods higher-valued by people-at-large in society and the lower-cost methods of production for each of those goods. In a market economy, entrepreneurs can determine higher-valued goods by the demands people-at-large have for them and the lower-cost methods of production by the demands competing entrepreneurs-at-large have for the resources.

In central planning, government officials make all production decisions both what goods to produce and what methods of production to use. They cannot determine what goods are higher-valued to people-at-large, but they can (as Mises conceded) supplant their own preferences for those of people-at-large in selecting the goods to be produced. They cannot, however, determine the lower-cost methods of production even for the goods they themselves select to produce. But the calculation problem, per se, does apply to both the selection of higher-valued goods by people-at-large and the selection of lower-cost production methods for whatever goods are chosen.

In a mixed economy, government officials make production decisions for state-run enterprises. If government officials do not sell the goods produced in free competition with private enterprise, then they cannot make accurate decision about what goods are higher-valued to people-at-large. To the extent that they buy inputs in free competition with private enterprise, then the inefficiency of state-run enterprises relative to private enterprises will be manifest. For example, the cost per student in private v. government schools or private v. government healthcare. The coercive power of the state permits state-run enterprises to violate economic calculation and survive even though inefficient. Economic calculation has some impact on decisions of government officials in state-run enterprises, but it does not function as the strict limit imposed on private enterprises.

Take a look at Ludwig von Mises, Human Action on the mixed economy:

https://mises.org/system/tdf/Human%20Action_3.pdf?file=1&type=document

[jmherbener]

It is a common error to conflate “monopoly” with “bigness.” The social inefficiency of monopoly comes through a restriction of output and a raising of price. With genuine monopoly power, say through government legal protection, prices continue to rise (even faster than general price inflation) and quality declines. Examples are government schools and healthcare.

Bigness, on the other hand, can be obtained by superior service to consumers, offering them lower prices than the competition or higher quality. Examples are Amazon.com and Apple, Inc.

Here is a chart of the percent of GDP spend on healthcare. Americans spent 6% of GDP on healthcare in 1965 and 18% in 2011.

A Brief History Of Health Spending Since 1965

Here is a chart of the percent of a typical budget spent on food. Americans spent 17% of their income on food in 1960 and 10% in 2013.

http://www.npr.org/sections/thesalt/2015/03/02/389578089/your-grandparents-spent-more-of-their-money-on-food-than-you-do

Here is Tom DiLorenzo on Monopoly and Competition:

[jmherbener]

By “normalize” I don’t mean “move to a market-determined level.” That would be impossible, or at least impossible to know, given our central-bank directed fractional-reserve banking system. What I meant was that interest rates are moving up from their recession suppressed levels toward historically normal levels. This movement is being driven by the restoration of demand for credit which has been unusually suppressed by government policies during the so-called Great Recession.

Robert Higgs has written about this:

Of course, the Fed never permits a genuine or pure recovery of our economy. That would necessitate elimination of monetary inflation and credit expansion altogether. So, every post-recession phase of the business cycle in our economy is a mixture of monetary-inflation, credit expansion elements (on the money supply and credit supply sides of those markets) and restoration of entrepreneurial activity (on the money demand and credit demand sides of those markets). Money demand, which skyrockets during the bust, “normalizes” during the post-bust phase and investment, which collapses during the bust, “normalizes” during the post-bust phase.

[jmherbener]

For asset-price inflation to continue, investors must pour more and more funding into projects less-and-less likely to pay off in terms of the previous elevated rates of return. Investors with superior foresight recognize this fact first and pull out. When they pull out prices begin to soften or rise less vigorously leading other investors to pull out and so on.

No outsider knows what metrics the Fed actually uses in setting monetary policy.

Here is Janet Yellen on recent monetary policy. She has tended to emphasize the labor market and price inflation as guides and not interest rates.

https://www.federalreserve.gov/newsevents/speech/yellen20150327a.htm

Sometimes the Fed leads credit markets and sometimes it follows. It’s not unusual for the Fed to lower its target for the FFR and have market interest rates follow downward during the boom and for market interest rates to rise at the end of the bust or beginning of recovery and then the Fed follows by raising its target. This has been the pattern since the dotcom bubble burst.

https://fred.stlouisfed.org/series/BAMLC0A1CAAAEY

Market interest rates have remained low mainly because of suppressed demand for credit. This cause can be distinguished from the other possible cause of low rates, which is increased supply of credit, by looking at the amount of credit traded. If it is lower, then smaller demand is the cause. If it is higher, then larger supply is the cause. When rates begin to move up again, the cause is either an increased demand for credit or reduced supply. Clearly, demand is increasing which indicates, if not a recovery, at least a normalization of credit markets.

We have not seen any ill effects of the Fed raising its target rate because it is following market rates upward as they normalize.

[jmherbener]

I cannot speak to the contemporary situation concerning the Catholic Church’s teaching on speculation, but the history of it has been chronicled by the economist, Murray Rothbard, in his book “Economic Thought Before Adam Smith.”

https://www.mises.org/library/austrian-perspective-history-economic-thought

Rothbard shows how the scholars of the Catholic Church moderated and eventually overcame the restrictions placed on speculative gain initiated under Charlemagne. He cites Rufinus in his Summa (1157-59) of Gratian’s Decretum as the first scholar to justify arbitrage gain or profit from speculation coupled with the labor and expense of the lay merchant (p. 38). He did so on the same grounds as he justified profit to artisans as a result of their labor and expenses.

As Rothbard points out, Thomas Aquinas explicitly justified uncertainty of the future as a source of gain for a merchant (pp. 53-54).

The Late Scholastics tended to be even more favorable toward merchant activity. For example, Rothbard cites Thomas Cajetan in his treatise on foreign exchange, De Cambiis (1499), as the founder of expectations theory in economics (pp. 100-101).

[jmherbener]

There are two lines of argument that were advanced against central planning in the calculation debate that began the 1930s: one from Mises and another from Hayek.

Mises argued that without private property in the means of production there can be no prices for the factors of production and without prices for the factors of production the efficient technique of production in a given line of production cannot be determined. Different technically possible methods of production which use different machines, natural resources, and labor skills cannot be compared in the units of the inputs themselves to determine which technique uses the least inputs. An automobile, for example, can be built with a more capital-intensive or an more labor-intensive process, it can be powered by an internal-combustion or electric engine each of which requires a different configuration of inputs to produce, etc. The number of machines cannot be added to the number of labor hours to determine minimum input use. Linear programming does nothing to solve this problem. And, as Mises pointed out, this is a fundamental conceptual problem that exists regardless of the complexity of production across the entire economy.

The other fundamental problem that Mises raised with central planning, which also exists regardless of the complexity of production throughout the economy, is the uncertainty of the future. Efficient use of resources cannot rely solely on existing knowledge. Production aims at the realization of ends in the future. Efficiency, therefore, requires accurate entrepreneurial anticipation of how given courses of action will play out into the future. This is why central planners cannot rely on the existing prices of capitalism on the day of the revolution to guide their production decisions. Linear programming, obviously, does not solve, or even address, this problem.

On the calculation argument, take a look at Joe Salerno’s epilogue to Mises’s original 1920 article:

https://www.mises.org/library/economic-calculation-socialist-commonwealth

Hayek introduced a second line of argument, namely, the problem of obtaining the information sufficient for the central planners to make efficient production decisions. His main point was that such information is, at least partially, tacit. It consists of production know how that is contingent on person, place, and time. There is no process, Hayek argued, except market prices that can compile and transmit this information to production decision- makers. Linear programming does not address this problem.

Hayek also stressed that the knowledge necessary for central planners to make efficient production decisions is complex and constantly changing. There is no known method to compile such information into useful form except the pricing process of the market. The advocates of central planning took this last point, on which they thought faster, bigger computers could provide a solution, and asserting a theoretical solution declared victory over Mises and Hayek.

Lucas Engelhardt has called into question the veracity of such a procedure on its own grounds:

https://mises.org/library/central-plannings-computation-problem-0

[jmherbener]

Yes, the same item can be both a consumer good and a producer good to the same person at the same time. Your example illustrates this nicely. The classic example is a person using his human effort in a particular task. He can get both direct benefit, the pleasure of the work, and indirect benefit, the income from what is produced. Professional athletes often express such sentiments claiming to play for the love of the game.

There is a general principle involved which is that a person can achieve more than one end with given action. Whether or not a person achieves both a consumptive end and a productive end depends on whether or not the asset he owns generates a capital gain when he sells it. Another example is Jay Leno, who owns a stable of collector automobiles. He loves owning them and probably reaps a capital gain by selling one that he bought previously.

https://www.youtube.com/user/JayLenosGarage

[jmherbener]

In economic theory, the term “preference” has a narrow, technical meaning. It refers to the rank order of the two alternatives a person chooses between in taking an action.

In common discourse, “preference” has a broader, non-technical meaning. It refers to what a person favors.

For example, out of all the means of transportation, I favor a Mercedes S-Class Sedan. However, I prefer a Honda Accord. We know this because I own an Accord.

Conclusions about policy issues are not preferences in the narrow sense. They are the last step of an argument. When someone states that he favors or prefers open borders, he is saying that his analysis reaches this conclusion for the various reasons outlined in the argument he makes for open borders.

It would be a mistake, as you point out, for a person to assume that everyone else must have the same preferences that he has for alternatives in taking an action. For example, for me to assume that everyone must prefer, and hence own, a Honda Accord just as I do. It would also be a mistake for a person to assume that everyone else must be persuaded by an argument that he favors.

A person cannot be indifferent between the alternatives of choice in his own action. To act, he must choose and to choose, he must prefer. A person, however, can be indifferent about policy issues or the actions of other people or even his own potential actions.

While a person can be indifferent about policy issues, advocating a policy is an action and thus, requires a choice and a preference. I don’t see why a person couldn’t advocate against all state activity even if he thought that open borders was a good policy. Whether or not his position was logically consistent or wise would be an open question, but it would certainly be “rational” in the praxeological sense.

[jmherbener]

(1) A government has three sources of monetary revenue: taxes, debt, and monetary inflation. Without monetary inflation, or a decline in the demand for money, there can be no price inflation, i.e., no decline the in the purchasing power of money.

Bond holders are anticipating monetary inflation or a decline in money demand or both. They know full well that the Fed will accommodate larger debt-financed government expenditures with monetary inflation.

https://fred.stlouisfed.org/series/M2MNS

(2) If a person is not demonstrating action to the satisfaction of an observer, it does not follow that the person is no longer human. He may be, in fact, successfully acting. Passivity can be a means to an end. He may be, as you suggest, unsuccessfully acting. He may be temporarily unable to perform demonstrable action (he is rendered unconscious by a blow to the head) but not permanently incapable of demonstrable action. He is able to demonstrably act, potentially, and will demonstrably act once the temporary condition is removed.

[jmherbener]

(1) It’s not the Treasury selling more bonds, it’s investors who bought them in the past and have been holding on to them until now.

https://www.bloomberg.com/news/articles/2016-06-15/china-dumping-more-than-treasuries-as-u-s-stocks-join-fire-sale

Holders are selling in anticipation of higher rates of price inflation from more fiscal expenditures in the future. Higher rates of price inflation will mean higher interest rates on new bonds issued by the Treasury and thus, lower prices for the older bonds they have been holding.

http://www.reuters.com/article/usa-bonds-idUSL1N1DF0JM

(2) Ludwig von Mises wrote that “Thinking and acting are inseparable.” Take a look at Human Action, p. 177. No observer of a person can know the thoughts of a man, whether or not there are outward signs of action.

https://mises.org/library/human-action-0

Furthermore, a person who shows no outward sign of action is not by that fact alone demonstrably incapable of action. He can still act, potentially. For example, we would not declare a man unconscious from intoxication a non-human until he wakes up or even a man in a coma.

http://www.dailymail.co.uk/health/article-187920/Coma-man-wakes-19-years.html

A similar point could be made about newborn babies.

[jmherbener]

Indeed, there is a relationship and arbitrage is a connection. It is arbitrage that directs the flow of credit expansion from its primary areas which is generated by bank credit creation into related areas.

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

https://www.treasury.gov/resource-center/economic-policy/corp-bond-yield/Pages/Corp-Yield-Bond-Curve-Papers.aspx

[jmherbener]

Here is Stockman on Fed policy and jobs:

http://www.newsmax.com/Finance/DavidStockman/donald-trump-fed-rate-economy/2016/09/20/id/749137/

He seems to be arguing that Fed inflation generates disparate effects on various groups of prices. Jobs that are easier to outsource have lower nominal wage increases (I assume because of the competition of foreigners) than jobs that can’t be outsourced. The former, therefore, have stagnant real wages while the real wages of the latter go up.

[jmherbener]

When Americans pay in dollars for imports from China, the Chinese have two alternatives: they can hold the dollars or spend them. If they hold dollars, then the purchasing power of the dollar is higher than otherwise. As a consequence, Americans can buy goods at prices lower than otherwise. If the Chinese spend dollars, then they can either buy goods from Americans, in which case there would be neither a trade surplus nor deficit, or they can buy American assets, in which case the current account deficit would be matched by a capital account surplus.

More than half of dollar currency is held by foreigners overseas. The following Fed study is dated, but the analysis of currency holdings is interesting.

https://www.federalreserve.gov/pubs/bulletin/1996/1096lead.pdf

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