[jmherbener]

Perhaps it’s more accurate to say that the will is the faculty by which a person exercises ownership over his mind and body. Ownership is controlling the use of means. Means are items used in action, not action itself. Action is applying means to attain ends.

Take a look at Murray Rothbard’s book, The Ethics of Liberty.

https://mises.org/system/tdf/The%20Ethics%20of%20Liberty_0.pdf?file=1&type=document

In chapter 6, “A Crusoe Social Philosophy,” Rothbard lays out the argument.

[jmherbener]

In the unhampered market economy, people are free to select whatever particular goods they think will best satisfy their preference and entrepreneurs are free to offer for sale whatever goods they anticipate will do so and thereby, render profit.

There are several desirable properties of money that narrow the range of goods that people would select. Widespread salability is the most fundamental since money, by definition, is the general medium of exchange. And, as you point out, it’s usefulness in performing economic calculation is another. Excessive price inflation or deflation is a detriment for something to be used as money. The volatility of bitcoin’s price, or the price of gold or that of silver, is always in terms of the dollar and so doesn’t imply volatility of overall prices in bitcoin, or gold or silver, if it were money. The fixed upper limit on bitcoin production, however, renders it much less desirable as money (as long as economic growth continues) compared to other goods, like gold or silver. In the 19th century, when the U.S. was under a gold standard prices fell mildly (even though gold production continued). But the decline was not large enough to interfere with credit transactions. With a fixed money stock, as under bitcoin, it might have been. For example, if an interest rate in the absence of price inflation or price deflation was 2% and price deflation under bitcoin was 6%, then there would be no loans. Lenders would hold money instead of lending it at a -4% rate of interest. Entrepreneurs would offer gold money or silver money instead of bitcoin to eliminate the potential problem of negative interest rates.

Here’s a wiki on bitcoin:

http://wiki.mises.org/wiki/Bitcoin

[jmherbener]

Money proper on the unhampered market economy, according to Mises, is a commodity, e.g., gold. The production of all goods in the market economy, including gold coins, is regulated by profit and loss. Each line of production of the various goods expands until no additional profit can be earned by further production. In the market economy, therefore, the only justification for an expansion of production of any good is if demand for it increases. Then, revenues will exceed costs for some expanded production. No entrepreneur expands production of a good if demand has not risen. If he did so, he would suffer losses. Gold miners don’t spontaneously start producing more gold. If they did the would suffer losses on such production. If demand has not increased, they would have to lower the price of gold to sell the added supply and their costs of production for the additional supply would rise (or at least, not fall). If Apple, Inc. increased production of the iPhone 7 by 20%, they could sell the larger supply only at a lower price. To ramp up production by 20%, they might have to pay overtime to labor or premiums to suppliers, etc.

Mises, then, is just applying this general principle, that production of a good is regulated by profit and loss, to money itself.

[jmherbener]

You are, most assuredly, on the right track.

Here’s another short piece on the economics of predatory pricing:

http://cei.org/PDFs/predatorypricing.pdf

[jmherbener]

The argument your friends advance is called “predatory pricing” in the economics literature. A firm selling a similar product with a similar cost structure as a rival undercuts a rival by charging a price below its costs. This strategy forces losses on both firms, but the predator has deep pockets and can outlast his rival. The payoff for the losses the predator suffers in displacing his rival come if and only if he is able to recoup his losses (and more) by earning excessive profits in the absence of the competition of his rival. Obviously, for this strategy to work, it must be nearly impossible for a rival to arise in the wake of the excessive profits earned by the predator. The classic article showing how difficult this is to achieve is by John McGee. Here is a short article on the topic:

https://mises.org/library/100-years-myths-about-standard-oil

Predatory pricing cannot be done by a retail firm. If Amazon drove Diapers.com out of business by undercutting both of their costs (in particular, paying the wholesale price to buy diapers from say Pampers), then as soon as Amazon raised its retail price after pushing Diapers.com out it would also be profitable for another competitor to step in or even for Pampers to sell online.

Tom DiLorenzo has written extensively about antitrust, monopoly, and competition:

https://mises.org/library/anti-trust-anti-truth

Here is Dom Armentano’s book, Antitrust the Case for Repeal:

https://mises.org/system/tdf/Antitrust%20The%20Case%20for%20Repeal_1_0.pdf?file=1&type=document

[jmherbener]

ABCT, like all economic theory, gives us the general cause-and-effect structure of human action and interaction. To understand the particular, concrete aspects of human action and interaction requires human judgments, which vary from one person to another. Even if all entrepreneurs understood ABCT, each of them would have a different anticipation of how monetary inflation and credit expansion will be manifest in the particulars of time and place. Given that there is a spectrum of entrepreneurs from superior to inferior, the boom-bust will result from monetary inflation and credit expansion.

Take a look at Lucas Engelhardt’s article:

https://mises.org/library/expansionary-monetary-policy-and-decreasing-entrepreneurial-quality

[jmherbener]

Every action has a value gained and a cost foregone. The cost of any action is the value of the next best end that could have been achieved if the resources had not gone to attain the end that was achieved. An action is only justified when its value exceeds its cost. In society, the resources used to attain one end satisfy a particular group of people and the the same resources used to attain the next best end satisfy a different group of people. The only way to objectively compare the value to all the persons who benefit from one end attained with the value to all the person who forego the benefit from the next best end is the market, i.e., each person demonstrates his preference for each end relative to money. Outside of the market, i.e., without a market, it is impossible to objectively compare the preferences of different persons.

Money demand is fulfilled by the holding of a stock of money. This principle of action an be generalized to all goods. People participate in exchange to obtain a more valuable stock of goods. They give up what the value less to obtain what they value more. It is imprecise and unnecessary to say that money “circulates.” Metaphors are unnecessary in reasoning when the concepts themselves are clearer. Moreover, it makes little sense to generalize this metaphor for all goods. Of course, one can calculate all sorts of strange figures from market data. Would any economic-theoretical knowledge be gained by calculating the rate of circulation of automobiles per year or shoe factories per month that could not be gained in a more straight-forward manner. It is more meaningful to say that the demand to hold money has increased than to say that the circulation of money has slowed down. Money is actually held by people. It does not circulate.

Here is Henry Hazlitt on the velocity of circulation of money.

https://mises.org/library/velocity-circulation

[jmherbener]

The value scale Rothbard uses on p. 123 of MES refers to a seller of horses. In other words, Johnson has four horses and no barrels of fish. Rothbard indicates this by putting what a person does not have in parenthesis. The first horse, then, for Johnson is the least-valuable use he has for a horse. The first horse sold is at the bottom of his value scale. His supply of horses at a price of 81 barrels of fish (in Rothbard’s chart) would be 1 and at a price of 88 barrels of fish would be 2 and so on.

Rothbard goes on to develop the value scale for a buyer, Smith, on p. 125. On this scale horses are in parenthesis and barrels of fish are not. The first horse is the most valued use to which Smith would put a horse. The first horse bought is at the top of the value scale. He’s willing to buy the first horse at a price of 100 barrels of fish and at a price of 94 barrels of fish he willing to buy 2 horses and so on.

In Rothbard’s example, fish is the analog to money in developing the demand for and supply of a good from preference ranks. It isn’t necessary to determine the preference rank use for units of money (barrels of fish). To the contrary, the second law of utility, that a person prefers a large stock of a good to a smaller stock, suffices for constructing the demand for horses and the supply of horses in terms of fish (or money).

[jmherbener]

Jackson’s translated value scale would be:

1. A – 3rd horse
2. D,E,F,G – 4 barrels of fish
3. D,E,F – 3 barrels of fish
4. B – 2nd horse
5. D,E – 2 barrels of fish
6. C – 1st horse
7. D – 1 barrel of fish

This value scale assumes that his horses come in equally-serviceable units and that his barrels of fish come in equally-serviceable units. Equally-serviceable units of a good mean that any one unit can satisfy any one end. So 4 barrels of fish allow Jackson to satisfy his four highest-valued ends (D,E,F,G).

[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.

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