How Much Money?
How Much Money Does an Economy Need? is an outstanding guide to the essentials of monetary theory. Not content to expound his own views, Lewis carefully explains conflicting standpoints as well. Lewis does not disguise his own strong commitment to Austrian economics, but the reader of this book will understand not only this position, but its chief competitors as well. If the literate public absorbs its lessons, the book cannot fail to have a salutary effect on current economic policy. Hunter Lewis deserves congratulations for his notable achievement. FULL ARTICLE
Comments (56)
Sounds like a good book!
Published: August 5, 2008 9:38 AM
David Gordon is endeavoring to "Solving the Central Economic Puzzle of Money, Prices, and Jobs" by asking "How Much Money Does an Economy Need?". Well, if it's a free market economy then the free market decides by applying its checks and balances. Therefore a "Central Economic Puzzle" would be a moot point.
Since the term "Central" to my mind introduces the government into controlling the economy, I would like to ask "How much money would a government need to function in a free market economy?" Not much, because a free market will not tolerate say the price of building just one F18 fighter for $75M dollars for one thing.
The government in a free market economy will not function as the Central focal point for anything in particular. Multinational corporations (the corrupt kind) will see no benefit in sleeping with government servants with a militaristic stance.
The true function of governemt in a free market would be to protect our rights via courts of law, protect our lives via a police force and Defend our borders via a functioning military that has no aspirations to "defend" our country on foreign soil. And tens of trillians of dollars will not be necessary to run these agencies. And the entire Pentagon could be housed in a 20 x 20 foot room.
And to realize the funds to run these agencies, the government for once will have to hold bake sales like we do in this Land of the Free to raise money for our children's schools while some Pentagon Big Brass ass is tasting cavier and sipping champagne with the socialist elite.
Or the government could apply the concept of "voluntary taxation" which we would allow them to do in a free market economy. And by that I mean they can hold Lottery drawings for say One Billion Dollars. Can you imagine what that will get them? Every man and his dog who's in a perpetual state of shock from realizing that there are no free lunches and bailouts in a free market economy, will want to buy at least a dozen tickets.
Published: August 5, 2008 10:19 AM
Thanks for the review. I’m anxious to read the book.
Lewis may cover this but Hayek in “Prices and Production” and in “Pure Theory of Capital” emphasizes the shortage of capital and changing prices as the causes of business failures more than the rise in interest rates. Business would fail even if rates didn’t rise because 1) their aren’t enough capital goods to meet the demands of expanding and new businesses so their prices rise and 2) there aren’t enough consumer goods available to sustain greater employment until the newly added processes bear fruit. When the shortage of consumer goods becomes apparent, demand shifts back to producing consumers goods and the capital goods producers fail. This may be too complicated for Lewis’s audience, though, but it’s important to keep in mind.
Published: August 5, 2008 10:40 AM
"The whole point of free markets is to keep reducing prices, so that more and more people can afford to buy."
The whole point of the division of labor is to produce more stuff than can be produced without the division of labor, which is by definition a lowering of prices. All economic wealth creation production progress is by definition deflationary by definition of surplus supply production.
"The increase in the money supply lowers the monetary rate of interest. Investment then increases: because business loans are available at lower interest rates, projects that were formerly unprofitable are now feasible."
Typical false monetary theory, of which unfortunately the Austrian School is likely to remain mired in for at least a few more years. It is epistemologically impossible for investment to increase, just as it's epistemologically impossible for farming output to magically double by doubling the money supply. There is ZERO net effect on investment by changing money supply because money is not a capital good. Only an increase in capital goods savings can lead to an increase in investment.
One should always picture all the grains of sand in the world being the real potential supply of money for fiat money systems.
"Business then expands, especially in capital goods."
That's laughable fairy dust. If that were even really possible, then Keynes would of course been right.
"Quite the contrary, interest reflects time preference, the rate at which people prefer present goods to future goods."
Wrong. If anything reflects time preferences, it's Savings. Interest reflects the supply and demand of savings. If you want to save some food in the freezer for next year but nobody wants to borrow that frozen food in the meantime, the interest is ZERO, and zero interest won't affect the decision to store meat in a freezer or not.
And the interest rate would almost always be practically ZERO or very near ZERO in a real free market anyway, as there would be no enforceable contracts to use violence to put people into debt slavery, and all trade lending would be considered charity with no recovery recourse.
The exact same most marginally productive investments will be made regardless if it's the savers owning those businesses or enslaved debtors running those businesses to (pretend) save the savers the risks associated with their savings.
Borrowing and lending only serve to artificially increase short term prices, as estimated subjectively valued future production bids along with present production for present goods. The subjective value of this credit is inherently highly volatile, because it's enforced by violence just like fiat money. Savers wouldn't otherwise be able to trade their savings for other things except by accepting lower prices, limited by the pool of all other goods and services which exist in the present tense.
The correct answer to "How Much Money Does an Economy Need?" is it needs exactly as much money as is subjectively valued demanded as a pure end good, just as is similar for every other good produced, such as corn or houses.
Published: August 5, 2008 10:53 AM
Since money is now only an accounting fiction we probably need enough to cover a month's economic activity - enough to cover all demand deposits, a month's national payroll, pensions and interest payments, transfer payments, and capitol gains activities.
Published: August 5, 2008 12:32 PM
The businessman is not in a position to determine the real rate of interest v.the artificial rate of interest caused by the central bank's inflation. He or she can only react to the rate of interest in the marketplace at the time of his or her decision to utilize capital. What they can do is attempt to anticipate the timing of the bubble. This is difficult as well as we have seen with the sub-prime bubble and the dot com bubble where large financial institutions and companies became trapped with insolvency the only way out.
Published: August 5, 2008 4:01 PM
Re rtr: "It is epistemologically impossible for investment to increase" Ok, let's check it:
There is this pile of produced good and services. When people add to it through their labor, they accept in exchange money. When people exercise their claim on the good and services, they give up money in exchange for the stuff from the imaginary pile.
In the non-inflated case, if someone has money (by definition, those things used to get goods and services from pile) it means he previously added to the pile, and haven't exercised the claim on his share from that pile yet. The available money corresponds to the amount of real savings available on the pile, which can be either invested or consumed. People can have more money only if they save more, leaving more on the pile for investment or consumption.
In the case of money expansion from thin air, amount of money is increased with no addition to the pile of goods and services.
The catch is there's no telling if it was the first case (more money available because of more real savings, allowing real increase in investment), or the second (more fiat money sending false signal).
(If we could tell, we'd discount the money - but then there'd be no point in expanding them. The whole idea is to use the new money before the others notice. To buy with counterfeits at the original prices.)
In both cases investment increases. In the first case it's sustainable economical growth, because it matches time preference of consumers. In the fiat money case, after initial boom of investment comes the inevitable shortage of the goods (let's remember, from the beginning there wasn't really enough real savings, it was only fiat money that expanded). The increased investment took too much from the pile and it shows up there's too little left - prices shot up to correct the error caused by monetary expansion, and bust begins.
Investment in economy (i.e. using real savings for future production of end goods instead of direct consumption) does increase and decrease due to various reasons. Increase in money supply is one of the things that can cause real investment increase, but this boom being artifical, it will also bring about inevitable bust when the shortage of really available goods and services becomes apparent.
Thanks in advance for correcting the epistemological errors in this argument.
Published: August 5, 2008 5:19 PM
Ireland, money is no more a “claim slip” than any other good or service which has subjective value, and is willing and ready to be accepted in trade for other things. Money is *traded* for other things, just like other things are traded for money, or other things are traded for other, other things. All economic exchanges, including those involving money, are strict barter trade transactions.
Money will only be accepted in a trade if the marginal quantity of money is valued more than the other goods which are given away in the exchange. And money will only be given away in exchange if the marginal quantity of other goods received is valued more than the money which is given away in exchange.
Ireland: “The available money corresponds to the amount of real savings available on the pile, which can be either invested or consumed.”
That is a fundamental error of monetary theory. Would it make sense to say if there were no savings there would be no money? Of course not! Would it make sense to say if you ate some quantity of stored saved grain you were simultaneously eating money? Of course not! The quantity of money has no a priori steady ratio quantity or value relationship to real savings any more than the quantity of wheat has an a priori steady ratio quantity or value relationship to the quantity of cotton. The quantity of money is, always has been, and always will be, randomly independent of the quantity of real savings, depending on ever changing supply and demand (as an end valued good, and wholly not as a “means of exchange”).
Anyways, the quantity of real savings is always finite limited. They cannot magically be increased. It is epistemologically impossible to wave a magic wand and “alakazam hocus pocus” the quantity of real savings is doubled. Real savings can only be traded transferred from one particular person to another particular person, from one particular possible investment use to another particular possible investment use. Hence, real investment cannot magically be increased, as it is always limited by real savings. New “extra” investment undertakings cannot occur. And different investment productions can only be undertaken by voluntary trade.
At best, real savings could (actually they really cannot, but for the sake of theoretical demonstration) be split differently, could be split among more widespread investment possibilities (both short term and long term, doesn’t matter) which it is argued together cannot all be fully funded (hence “malinvestment” for those that are too slow to get completed real savings funding but are partly begun in the meantime, e.g. abandoned sky scraper skeleton foundations). Instead of slicing the loaf of bread of real savings ten ways for ten investment possibility uses, the loaf of bread of real savings is sliced twenty ways for twenty investment possibility uses (theoretically, in actuality it is not), some of the new extra slices which are alleged cannot be fully funded.
All of these investment possibilities are still profitable; there is never enough real savings to fund all profitable investment possibilities, so only the highest marginal investments are actually funded. They are funded by investor entrepreneurs bidding more for real savings, by offering higher returns to investor savers (who are in reality not pure *savers*, but saver *investors* willing to take investment risks, pure savers are always saving at 0% interest if not negative due to storage and security costs), given various risk/reward appetites. At best, more lower (but still positive) returning production projects could crowd out fewer higher returning production projects (Austrians argue short term projects partially crowd out partly begun long term projects, though they wrongly say those short term projects are not profitable). At best, productivity would still be increasing, just at a lower rate, offset somewhat by the greater number of lower (still positive) fully funded returning production projects, at least until the longer term projects were abandoned.
But the fact is longer term more capital intensive production projects aren’t undertaken in the first place unless real savings funding is secured in advance. A hot dog stand doesn’t order condiments and buns before the stand is constructed. And even if a bad quality entrepreneur were to commit such mistakes, nothing a priori precludes those mistakes from similarly occurring with no change in the money supply. All investments contain risk. Austrians assume normally smart entrepreneurs are magically turned into bad or dumb entrepreneurs.
End of Part I
Published: August 6, 2008 8:29 AM
Rtr: “It is epistemologically impossible for investment to increase, just as it's epistemologically impossible for farming output to magically double by doubling the money supply.”
“Epistemologically impossible” means that it’s impossible to know whether or not investment increased. Nevertheless, you missed the author’s point. He meant that investment increases in monetary terms. And as Ireland points out, some real investment does take place because people can’t distinguish between real money (that came from savings) and fake money (created ex nihilo by banks).
Rtr: “There is ZERO net effect on investment by changing money supply because money is not a capital good. Only an increase in capital goods savings can lead to an increase in investment.”
But money can buy capital goods, and it can persuade businesses to produce capital goods. You’re right that “only an increase in capital goods savings can lead to an increase in investment,” but how do people save capital goods? They can’t take iron ingots and put them in the bank. People save by selling what they produce for money and saving the money. An increase in money savings represents an increase in capital goods savings. However, banks can create money, too. How does a businessman who borrows from a bank know that the money he is borrowing comes from someone’s savings or from the bank creating it? He can’t. So he borrows that money and spends it on purchasing capital goods and paying wages. It spends just like money that was saved.
What the ABCT says is that much of the investment made by banks increasing the money supply supply is wasted and net investment does not increase because, as you write, there is a fixed amount of capital goods and consumer goods that isn’t sufficient to sustain increased investment. Real investment and growth requires savings.
Rtr: “And the interest rate would almost always be practically ZERO or very near ZERO in a real free market anyway…”
That denies the irrefutable fact that people prefer present goods to future ones.
Rtr: “Borrowing and lending only serve to artificially increase short term prices, as estimated subjectively valued future production bids along with present production for present goods.”
That is not true if money borrowed come strictly from savings, because savings means reduced consumption, so the borrower is using the goods the saver is not. But if money borrowed comes from credit expansion by banks, then you’re right, it only increases prices.
Rtr: “it needs exactly as much money as is subjectively valued demanded as a pure end good, just as is similar for every other good produced, such as corn or houses.”
You don’t answer the question. You merely restate it in a much more confusing manner. But to translate your sentence into plain English, all you have said is that the economy needs as much money as people want to hold in cash. And that is exactly what the ABCT says. If banks increase the supply of money beyond what people want, they get rid of the extra by exchanging it for goods. This causes prices to rise and eventually they will rise to a level that requires people to hold more in cash to meet their needs, so the new money eventually becomes absorbed.
Published: August 6, 2008 8:45 AM
Part II
Well, without turning this post into a chapter, the simple answer why more investments than can actually not be completely funded does not occur is because such a phenomena does not occur at any more of an artificially increased rate (let alone a categorical “exists” versus “does not exist” difference) in the absence of artificially changing the money supply even though there are innumerable profitable investment possibilities for which real savings are always finite limited, and cannot be used to fully fund all the innumerable profitable possible investment production possibilities. The most profitable investment possibilities will bid more for the scarce real savings, and be funded first, the second most profitable funded second, and so on in strict ordinal funding fashion. And artificially lowered “capped” interest rates would cause an immediate bust savings shortage (sans the boom) as fewer people would offer their savings; savers would withdraw savings from investments instead.
Ireland: “In the fiat money case, after initial boom of investment comes the inevitable shortage of the goods (let's remember, from the beginning there wasn't really enough real savings, it was only fiat money that expanded).”
A “boom of investment” is an epistemological impossibility. Investment is inescapably limited by real savings. Somehow (*cough* incorrect monetary theory *cough*) the Austrian School just wrongly assumed this. Even if the loaf of bread of real savings was sliced and split more ways (which it is not), it would still be an epistemological error to label that phenomenon a “boom”, as the total investment would by definition not be greater than it was before the loaf of bread of real savings was sliced and split among more investment possibilities (and in fact might be smaller as savers pull out their savings due to artificially low interest rates).
Ireland: “Increase in money supply is one of the things that can cause real investment increase, but this boom being artifical, it will also bring about inevitable bust when the shortage of really available goods and services becomes apparent.”
Even if there were an artificial “boom”, that would mean the economy was better off wealthier (at least in the short term) ala Keynes’ argument. We would be magically wealthier than we otherwise would have or could have been. There’s *always* a shortage of real savings. Things are subjectively valued because they are non infinite limited scarce. The (*cough* current *cough*) Austrian School argument is the same as the Keynesian argument with the minor (both wrong non demonstrated opinions) difference that instead of a Keynesian “smoothing” of artificial boom in an economic downturn plus an artificial bust in an economic upturn (which undisciplined government forsakes in practice anyway, nullifying the alleged theoretical “smoothing”), the Austrian argument alleges the caveat that the bust outweighs the boom due to “malinvestments”.
But the whole argument is an epistemological error “crock” due to the alleged calculations being only “apparent”. Somehow the market deals with changing supply and demand for all other goods except money, but fails to readily, in the same normal calculation time frame for non money goods, calculate changing supply and demand for “money”. This is a blatant contradiction, an illusion caused by failing to recognize that money is just another good in strict barter trade transactions.
In order to remain epistemologically consistent, the Austrian School would by definition have to maintain that all changes in supply and demand for all goods whatsoever cause “boom bust cycles”. But that would be an absurdity, an argument that changing tastes were causing poverty when in fact changing tastes were signaling how to reduce poverty, how to increase profit and wealth, how not to squander and waste savings by throwing them down a drain that is not being signaled through present changing supply and demand. The subjective value of absolutely everything, money included, is at all times an extrinsically represented “bubble”, a fashion fad like hula hoops or pet rocks or tulips. Thus abandoned skeleton sky scraper shells should be a normal occurrence in a free market as entrepreneurs adjust their calculations in real time, and realize finishing the project would cause more losses than completing the project.
Fashion fads and (*Big* “bubble”) Manias are part of a free market (with or without exacerbated poverty caused by government interference), just as earthquakes are part of natural plate tectonic processes. The supply and demand for everything, money included, is at all times merely “apparent”. Nobody has perfect omniscient knowledge of how much of any particular amount of a coffee crop is currently being planted by some particular Columbian farmer, or for that matter the number of fiat currency bills buried in some particular individual’s back yard. Increased horse racing and poker betting fads can occur for increased subjective valuation reasons just as increased housing speculation can occur for fad reasons.
There’s no a priori subjective valuation difference between investing in more expensive designer brand blue jeans than investing in more expensive housing. And such Manias occur precisely when “too many” such “investments” are undertaken as “means of future exchange”, possibly to escape depreciating fiat currency (houses become substitute forms of hoped for inflation hedged Giant Units of fiat currency in the 6 figure to 9 figure range) instead of being normally subjectively valued end demanded goods. The market is constantly looking, with varying degrees of fervor, for real money substitutes that are less volatile because fiat money is inherently volatile and unstable (worth absolutely ZERO in a real free market that does not have competing supplies of money production artificially prohibited by violence, which in the absence of that prohibition, the supply of fiat paper money would approach infinity).
And what happens in Manias in practice is the investors end up trading their "investment" houses back and forth to each other at ever higher prices, suckering some outsider greater fools in in the meantime. When it is generally grasped that it is a Mania, the subjective value of those investments dramatically drops very quickly because there are no "buyers", people voluntarily willing to trade, at those prices anymore. A massive loss of economic wealth "purchasing power" thus evaporates suddenly.
But Mania Bubbles aren't really "investments"; they are short term hot potato speculations that excite additional gamblers into the animal spirits Mania. Some normally prudent individuals may be conned into pyramid schemes, may suffer fraud, may pay the price of intentionally bad planning advice (to benefit unscrupulous individuals like realtors), and be stuck holding the bag at the top of the Mania as it collapses. Things which are normally pure end goods, like houses, are briefly turned into expected future profitable "means of exchange" investments/speculations. The fiat money bubble (of which it is at all times a bubble), independent of changing quantities, thus infects evolving substitute money forms, which are normally pure end goods, with the "means of exchange" fake investment fever, independent of changing fiat money supply quantity, although more so in heavy inflation times, as savers more desperately search for substitute goods which can better hold long term stored value.
Published: August 6, 2008 9:30 AM
the simple answer why more investments than can actually not be completely funded does not occur is because such a phenomena does not occur...
It's not that MORE investments occur, but that different, less profitable (and thus less subjectively valued by potential customers) investments are occuring due to misleading economic factors caused by government intervention. Investments are being diverted into less valuable channels.
Published: August 6, 2008 11:07 AM
rtr: "A “boom of investment” is an epistemological impossibility."
Yeah! It's just your imagination. All of those factory expansions and employment increases that happen when the Feds lower interest rates are nothing but a Keynesian plot to fool Austrians. They aren't happening.
rtr: "Austrian School argument is the same as the Keynesian argument with the minor (both wrong non demonstrated opinions) difference..."
I can hardly tell Austrian econ from Keynesian. I don't know why people like Hayek, Hazlitt and others make such a fuss.
rtr: "In order to remain epistemologically consistent, the Austrian School would by definition have to maintain that all changes in supply and demand for all goods whatsoever cause “boom bust cycles”.
I think you have hit on something. It's probably the cycle of tomatoe production that causes the booms and busts that don't really happen but the media is so fixated on that they think it happens and that fools us Austrians into thinking it happens, too.
rtr: "The supply and demand for everything, money included, is at all times merely “apparent”.
That's what I keep telling my landlord. His demand for my rent is not real; it's apparent. If he would just change his subjective valuation of everything he wouldn't need my rent.
rtr: "And such Manias occur precisely when “too many” such “investments” are undertaken as “means of future exchange”, possibly to escape depreciating fiat currency (houses become substitute forms of hoped for inflation hedged Giant Units of fiat currency in the 6 figure to 9 figure range) instead of being normally subjectively valued end demanded goods."
Well if people would quit subjectively valuing paper money less and subjectively valuing houses more then such manias wouldn't happen. The problem is that people can't epistemologically control their subjective valuations. I keep mine locked in the garage for that very reason.
rtr: "And what happens in Manias in practice is the investors end up trading their "investment" houses back and forth to each other at ever higher prices, suckering some outsider greater fools in in the meantime."
And amazingly, they accomplish all of that without any increase in the money supply. I wonder how they pay those higher prices without any new money? Must be magic!
rtr: "When it is generally grasped that it is a Mania, the subjective value of those investments dramatically drops very quickly because there are no "buyers", people voluntarily willing to trade, at those prices anymore."
Why doesn't someone tell us it's a Mania when it's born? That would save us a lot of trouble. Must be another Keynesian plot to keep the Mania disguised until us Austrians get suckered in.
Published: August 6, 2008 12:24 PM
rtr: "When it is generally grasped that it is a Mania, the subjective value of those investments dramatically drops very quickly because there are no "buyers", people voluntarily willing to trade, at those prices anymore."
Why doesn't someone tell us it's a Mania when it's born? That would save us a lot of trouble. Must be another Keynesian plot to keep the Mania disguised until us Austrians get suckered in.
I don't know--these 'manias' sound a lot like 'excessive exuberance' to me.
;-)
Published: August 6, 2008 2:25 PM
fundamentalist: "“Epistemologically impossible” means that it’s impossible to know whether or not investment increased."
What? Either there is more total investment, or there is not more total investment. If there is not more total investment, there is no artificial "boom". And if you don't know if there is more or less investment, you don't know if there is a boom or bust.
fundamentalist: "He meant that investment increases in monetary terms."
Money is no less real subjectively valued than anything else. Why bother talking about "real" savings and "real" investment then?
More money might be traded for each marginal unit of real savings, but that is *not* a boom of increased real investment. Unless you demonstrate that real capital goods savings are magically increased by printing more fiat paper dollars, the Austrian School declaration of a "boom" period is an epistemological error, is plain and simple, false. Real capital goods savings can only be traded to others or continued to be held and used by the original real savers; it is no surprise that given the increase in supply of money, that each marginal unit of real capital goods savings trades for more money.
The ABCT is a version of the Broken Window Fallacy. "If there's more money, there's a "boom"! If we break a window, there's a "boom"!" The reason the Austrian School made this error is because they are fundamentally confused on monetary theory (and I'm not saying that other schools are less confused), assuming money is something other than what it really is, just another end valued good.
That would mean the Austrian School agrees with Keynes that printing more money at an ever accelerating rate will keep the boom going, will make people wealthier in the short term than they otherwise would have been. Keynes doesn't disagree with what the Austrians are saying; he wholeheartedly agrees! Snap your fingers, "boom", artificially increased wealth due to government intervention in the free market.
But you are just failing to see the unseen, not associating different employment and new factories with the abandoned old employments and old factories. So where's the beef? Where's the "boom"? There is none. That was always just a non demonstrated error assumption. There's not even a definition dispute confusion like say over the classical meaning of the word "liberalism"; the ABCT assumes the fairy dust magic of increased artificial "boom" wealth.
fundamentalist: "And as Ireland points out, some real investment does take place because people can’t distinguish between real money (that came from savings) and fake money (created ex nihilo by banks)."
No real "extra" "boom" investment can take place by definition of there not being any real extra capital goods savings. You've merely bought into an illusion of assuming any and all investment from that point of increased money is extra real boom investment. The only "fake" money is money that is not positively subjectively valued. That's why the Austrian School has thus far failed to observe that the real problem is not increasing the money supply, but the prohibition against competition increasing the money supply to whatever limit they so can increase it, so that the scarcity subjective value which is established reflects REALITY. Only in such a free market environment does a real money supply as determined by the free market come into existence.
fundamentalist: "But money can buy capital goods, and it can persuade businesses to produce capital goods."
Anything and everything which is subjectively valued can buy that, including Love. :P
fundamentalist: "but how do people save capital goods? They can’t take iron ingots and put them in the bank."
That's a good presently unanswered question in economics. Far too many people just wrongly assumed it was answered. But it's not. Capital goods savings is definitively not money savings. We don't insert gold coins into the magic slot machine, pull the handle, and out pops a finished skyscraper. Capital goods savings are any and all things which are subjectively valued and which are not permanently consumed. Capital goods savings are subjectively valued. Their value and their physical forms are non constant. Capital goods savings are non consumable stuff of positive subjective value that can be traded for labor and other stuff.
So people don't (usually) store iron ingots in the bank, but they do offer things of positive subjective value, generally converted to "money" first, to get labor to manufacture iron ingots. But there indeed may not be a clean delineating line between capital goods savings and ongoing present tense production and trade. But people do store grains and other food stuffs.
End of Part I of II
Published: August 6, 2008 4:23 PM
Here is my answer to the original post.
From my understanding of Austrian school economics, the right answer to the question, "How much money does an economy need?" would be "a relatively stable amount."
In other words, there is no economic value in an increase of the money supply. (Something that either Dr. Rothbard or Mises wrote.) Rather, it would be best if it stayed the same...which isn't even possible in a commodity based monetary system. But at least in such a system the supply would remain relatively stable if Gold were the commodity.
as productivity increased, and more goods were produced, the value of the money would increase in relation to the goods, thus there would be falling prices and although nominal wages would stay the same or drop a bit, real wages would go up. So the amount of the commodity money would not be relative...so long as it didn't increase or decrease too drastically in supply, thus preventing needless booms and busts.
That's my take on it.
Joe
Published: August 6, 2008 4:49 PM
Hello rtr, thanks for the answer. It seems the second part answers the question I was about to ask - what is the theory of business cycle, if Austrian one is wrong. Let me see if I got it right.
1. "Investment is inescapably limited by real savings"
Yes, we cannot invest more than we have really saved. If there's 100 cubes in the stock, we can only serve 100 cubes to projects. I'm happy to fully agree with you.
The misunderstanding here is that what we say is this: if there's 100 cubes _and_ the people are told to believe there are 200 cubes, they may fall for it, and calculate with 200 cubes, prepare and execute grand plans (boom). This is what we call "increase in investment" - they attempt to invest more than they would if they knew there's just 100 cubes. The projects will only start failing (bust) after the 100 cubes are really spent (malinvested) and they aren't able to get the other cubes they need to finish. (If the magicians are any good, they will still think there are 100 more cubes somewhere and will blame the failure to get them on the free market in cubes.)
2. ".. an illusion caused by failing to recognize that money is just another good in strict barter trade transactions."
Second thesis argues that market can handle value of money just as it does for anything else, and it will discount it for the expansion in money supply (and that Austrians fail to recognize this).
To be able to agree here, I have to add that this holds true if the market is allowed to operate in the realm of money too. Here I'm curious if you're aware of this implicit presumption, because with it included, what you say is the Austrian theory of money.
Without it the argument doesn't hold: if there's no market in money, then money clearly is NOT "just another good in strict barter trade".
So we could agree here, if you note that previously we talked about a real-life situation, where there is NO free market in money, the money is a monopoly backed by state violence (hence the name "fiat money"), and we argue this is what brings about booms and busts.
We'd like to have the money system you describe, because Austrian theory predicts the disappearance of booms and busts then - but as of now the governments won't allow that to happen.
3. "Manias are part of a free market, just as earthquakes are part of natural plate tectonic processes"
Says who? The source of this idea is unlcear, and I have to disagree with it. Though I again fully agree with the following:
"Mania Bubbles aren't really "investments"; they are short term hot potato speculations that excite additional gamblers"
Yes, we can think of bubbles as a kind of Ponzi schemes. The question that we try to answer is what _enables_ such schemes to operate, what "causes" it, in the sense that Economics is the science of cause and effect.
Why all the honest people that evade all the other "lotteries" fall for these bubbles? Could they have evaded it or not? Is there something we can do about it?
Austrian theory traces Manias back to the bad monetary policies, namely FRB, fiat money, money supply expansion. Your proposition that Manias are just a fact of life is a bit empty to be a scientific explanation. Having to choose between ATBC and "bubbles as facts of life", I choose ATBC to be my BCT.
5. Conclusion
We can agree with several good points (finite supply of real savings, need of real savings for investment, bubbles as fraud schemes).
The misunderstandings happen, perhaps it is explained now (boom = being tricked into attempt to increase investment beyond real savings; fiat money is not governed by free market money laws because it is, well, fiat).
And the strange business cycle theory ... Ok, selling it on this blog is a tough order, but thanks for trying anyway. :-)
Published: August 6, 2008 4:51 PM
Part II
fundamentalist: "People save by selling what they produce for money and saving the money. An increase in money savings represents an increase in capital goods savings."
That would *necessitate* an ever increasing money supply in order for savings to have the capability of being saved. And savers are not investors; savers are savers. Savers save for 0% interest; investors invest for a positive profit return. All savings would be diminishing the money supply. All investments would merely be channeling stored subjective value, in whatever form(s) positive subjective value exists, towards directed individual production processes investments.
Maybe we are in fact in a real no savings real investment boom. People make their own investments or hire others to make their own investments through mutual funds, 401k plans, IRAs, etc. More people invest more than they ever have before precisely because they are not saving. People buy shares of stock, part ownership of businesses routinely with their paychecks. The little guy is a part investor; it’s not just giant industrial capitalists anymore. It's savers who invest, and not savers who save, that fuel productivity increases. So there possibly could be no such thing as "capital goods savings" per se. Wouldn't shock me. The last century of economics scholarship is full of wanton illusion, such as the laughable notion of a "trade deficit", primarily descended from horribly ill grasped and ill defined monetary theory. Capital goods savings would by definition be non used savings wasting and collecting rust and dust. It's probably more likely capital goods are mostly just redirected from less profitable to more profitable uses constantly in real time as the market sends changing signals, and often times are recycled into different use forms when and where they can be.
fundamentalist: “That denies the irrefutable fact that people prefer present goods to future ones.”
And people prefer, or more epistemologically accurately, *WISH*, non scarcity to scarcity. If only every one dollar bill was a one million dollar bill, fundamentalist could cure world poverty, at least in the short term, with his magic “boom”. Future goods are a *wish*, not a preference, just as present goods are a *wish*, not a preference, for those who want, but don't have means of obtaining them. But nevertheless throwing coins down wishing wells is observed economic activity. And so is dressing up as Fundamentalist Claus, and passing out presents, observed economic activity.
fundamentalist: “That is not true if money borrowed come strictly from savings, because savings means reduced consumption, so the borrower is using the goods the saver is not.”
Not everything which is saved is capable of being consumed. Does anybody eat gold coins for nutritional purposes? So what are people really saving? Stuff that can’t be consumed anyway, for the most part. Everything which has positive subjective value in the present tense is total savings. That last piece of chocolate cake in the refrigerator is savings until it is consumed or otherwise disposed. Savings are just subjectively valued things, which can be traded for other stuff or money, or other, other stuff, e.g. houses are savings, because houses can be traded for money which can be traded for investment capital and labor. Savings can be wasted "malinvestment" economic activity. We could one day perhaps say, the population would have been better off opening the flood gates of oil production before those forthcoming alternative energy sources futures productions came on-line and devalued those savings. And there are plenty of other examples of wasted savings for the sake of saving. Savings aren't necessarily a priori "good".
fundamentalist: “But to translate your sentence into plain English, all you have said is that the economy needs as much money as people want to hold in cash. And that is exactly what the ABCT says. If banks increase the supply of money beyond what people want, they get rid of the extra by exchanging it for goods.”
That’s not what I said. People want infinite wealth. People always want more money, just as people always want more of everything else which they want by definition of unsatiated action. Banks can never increase the supply of money beyond what people want. Plenty of people would be happy to help the Federal Reserve by operating printing presses in their basements. Bank fake money is just artificially scarce; in reality with competition supplies not prohibited it’s non scarce. Their vaults are full of fiat grains of sand in a real free market. One scoop for you, two scoops for them. Dig in.
rtr: "And what happens in Manias in practice is the investors end up trading their "investment" houses back and forth to each other at ever higher prices, suckering some outsider greater fools in in the meantime."
fundamentalist: “And amazingly, they accomplish all of that without any increase in the money supply. I wonder how they pay those higher prices without any new money? Must be magic!”
rtr: "When it is generally grasped that it is a Mania, the subjective value of those investments dramatically drops very quickly because there are no "buyers", people voluntarily willing to trade, at those prices anymore."
fundamentalist: “Why doesn't someone tell us it's a Mania when it's born? That would save us a lot of trouble.”
What? If you were to remain consistent you should have said, “And amazingly, they accomplish all of that without any decrease in the money supply. I wonder how they pay those lower prices without any less money? Must be magic!”
Your “bust” is busted! :P More money, yet prices going down. Enroll now for the Summer 2009 Mises University, featuring magic tricks and one liners by fundamentalist.
Larry N. Martin: "I don't know--these 'manias' sound a lot like 'excessive exuberance' to me. ;-)"
You don't know the half of it. :P
Published: August 6, 2008 4:53 PM
Here is my answer to the original post.
From my understanding of Austrian school economics, the right answer to the question, "How much money does an economy need?" would be "a relatively stable amount."
In other words, there is no economic value in an increase of the money supply. (Something that either Dr. Rothbard or Mises wrote.) Rather, it would be best if it stayed the same...which isn't even possible in a commodity based monetary system. But at least in such a system the supply would remain relatively stable if Gold were the commodity.
as productivity increased, and more goods were produced, the value of the money would increase in relation to the goods, thus there would be falling prices and although nominal wages would stay the same or drop a bit, real wages would go up. So the amount of the commodity money would not be relative...so long as it didn't increase or decrease too drastically in supply, thus preventing needless booms and busts.
That's my take on it.
Joe
Published: August 6, 2008 4:53 PM
Here is my answer to the original post.
From my understanding of Austrian school economics, the right answer to the question, "How much money does an economy need?" would be "a relatively stable amount."
In other words, there is no economic value in an increase of the money supply. (Something that either Dr. Rothbard or Mises wrote.) Rather, it would be best if it stayed the same...which isn't even possible in a commodity based monetary system. But at least in such a system the supply would remain relatively stable if Gold were the commodity.
as productivity increased, and more goods were produced, the value of the money would increase in relation to the goods, thus there would be falling prices and although nominal wages would stay the same or drop a bit, real wages would go up. So the amount of the commodity money would not be relative...so long as it didn't increase or decrease too drastically in supply, thus preventing needless booms and busts.
That's my take on it.
Joe
Published: August 6, 2008 5:07 PM
Joe,
I agreed with you even after the first time.
My answer is also any but stable.
However, I would argue with your second statement:
"there is no economic value in an increase of the money supply". Then it would not be done if it were true. What you forget is the time and the heterogenity of value. It might be true in a long run (but in the long run we all dead :)). Also it is advantegaous for some and disadvantageous for others and, with its own dynamics. Thus how the business cycle pops up.
Austrians are always looking at this from the viewpoint of the damages. It would worth examining this phenomenon from the other side as well. How advantages of the bad guys realizes and with what dynamics. It would help to understand the enemy and their motives.
Published: August 6, 2008 8:55 PM
andras: "It would worth examining this phenomenon from the other side as well. How advantages of the bad guys realizes and with what dynamics."
That's a good point because I agree with Hayek that stopping fractional banking and the Fed's manipulation of money is very unrealistic. We should learn its affects well and use it to make money. One way to do so is get into banking. The Feds main job is to bail out banks. Second, always borrow as much as you can during a recession after the Fed has lowered interest rates and invest the money in something that increases with inflation, like gold or land, but invest in what has been out of favor with investors. Then watch the signals from the Austrian Business Cycle and sell everything before the next crash. Learn when things like commodities and stocks should peak during the cycle and sell them. I know a lot of people have tried such timing a failed, but they haven't used the ABCT.
Published: August 6, 2008 9:18 PM
Hello fundamentalist,
There are a few people who tried and succeeded without ABCT, one of them George Soros. In his book he lays down the theory which is full of mainstream "balances and equilibria", then he adds there are "times of highly unbalanced markets" where (as he had demonstrated) big money can be made. It is more intuition than science, but these "highly unbalanced markets" somewhat map to what ABCT recognizes as booms, and his framework allowed him to go with the same "sell before bust hits" strategy.
As for big time borrowing, this would be a gamble going on the presumption that money supply will always go up. Should there be some drop in money supply with the prices and wages dropping too, repaying the debt can get quite hard. I'd expect that the more free market in money we'd have, the bigger chance such borrowing would be liquidated as malinvestment. So under current government it's a sound and safe get-rich plan :)).
Published: August 7, 2008 1:09 AM
Hello andras,
Austrian theory looks from neutral point, it speaks about what happens and why. That analysis is clear: those who get new money first (be they good or bad), profit from buying at old prices, before market adjusts them to match increased money supply.
Any situation where economic structure changes offers profits to those who can guess what the needed changes will be and brings loses to those who are caught unprepared. Booms and busts are huge changes, offering huge profits and huge loses. If you're looking for an investment plan, fundamentalist above gave you one. The challenge is to guess how much will the pyramid bear, and when will it collapse.
One doubt: there are enough other fraud schemes, why would anyone want to test his luck just in boom/bust bubbles, and evade all the other opportunities? If one skips other Ponzi schemes, it looks more consistent to stay clear from bubble activities too, once we're able to recognize them as such. (If we don't recognize it, we can't profit from it, fair is fair.)
Published: August 7, 2008 1:37 AM
Ireland, Has Soros made any money since the collapse of fixed currencies? Soros made his money betting against the British pound when it was locked into a trading range. He could see that the Brits had inflated the pound far beyond what the trading range could bear and sold pounds to the British central bank at inflated prices. When the Brits were forced to abandon the range and let the pound plummet, Soros paid off loans with the cheaper pound. He did that a couple more times before most countries abandoned fixed exchange rates. I would like to see him try his hand at making money on floating currencies.
But you're right that many financial experts, those in the pits, not professors, understand that the economy works very much as Austrian econ says, even though they don't know about Austrian econ.
If you learn the ABCT well, I think you'll be able to predict when the money supply will drop and you can sell everything before that happens. You can also hedge in the derivatives market in case your timing is a little off. But the money supply won't collapse until businesses start failing and can't pay back loans or won't take out new loans.
Last year, I had all my money in stocks. I was reading Hayek's "Pure Theory of Capital" and noticed that profits peak just before a collapse because prices have risen. High profits were all the news at the time, so I sold and put my money in a money market and avoided the collapse of the stock market. I'm not sure I could do it again, but I'm studying Hayek's writings a lot more closely now.
Published: August 7, 2008 8:13 AM
Ireland, Human Action isn’t a “cycle”. It’s a one way street of *preference*. “Business cycles” are an illusion, a misinformed anthropomorphic belief error, akin to that because we see the Sun rise in the East and set in the West, the Sun must therefore be revolving around the Earth. There are no business cycles because there are no Action cycles.
But one could certainly see how those who have adopted false monetary theory would run around in confused "cycle" circles. They believe monetary exchange is an *equation* of value, which of course is shown to be an absurdity the moment such fools stop trading the exact same things back and forth to each other rather than continuing the back and forth exchange for a never ending time period approaching infinity.
Ireland: “The misunderstanding here is that what we say is this: if there's 100 cubes _and_ the people are told to believe there are 200 cubes, they may fall for it, and calculate with 200 cubes, prepare and execute grand plans (boom).”
Except that there would never be such lasting miscalculation as the evidence of market price trade transactions mounted, are always in the process of gather evidence signals through pricing data, to reflect reality, exactly the way it does for all changing supplies and all changing demands. Nobody ever calculates absolutely anything with perfect omniscience.
Have you ever once bought a loaf of bread with perfect omniscient data of all the factors and the total world supply of bread at the moment of your purchase? Of course not! The loaf of bread is subjectively worth more than your marginal quantity of money, or it is not, and vice versa for the seller of the loaf of bread. The End.
There are at all times numerous individuals who are attempting to spread misinformation to profit from trying to cause others to miscalculate. There are people attempting to blindly piggy back the actions of others.There are at all times people with insider information, people with specialist knowledge, people with more experience, people with better talent. Their actions nonetheless send price signals. Feel free to jump in the oil futures pit and shout next months supply will be double this months! Bring a friend the next day who shouts next months supply will be half this months! There’s no scarcity of contradictory economic predictions and beliefs; this is why trade occurs, because people subjectively value the exact same things differently. Market prices are information.
Everybody is free to trade and use their resources however they wish. There is no boom and no bust from these actions. Every single action, every single trade, is always only occurring solely because that which is received is valued more than that which is given away in exchange. There is never ever, never ever has been, never ever will be, a single voluntary trade transaction that does not mutually profit both parties to the exchange at the moment of the exchange, including voluntarily accepted trade transactions involving government increased quantities of fiat paper. Everyone has the choice to not do the trade transaction.
You’re stuck in a non strict barter trade transaction analysis mode brought on by faulty monetary theory. There are no “equations” of value in any trades, including those involving money.
Ireland: “This is what we call "increase in investment" - they attempt to invest more than they would if they knew there's just 100 cubes.”
It’s epistemologically impossible to increase investment beyond the a priori existing subjectively valued total means of investment. There never ever can be an artificial boom, by definition of trade, by definition of action, by definition of choice.
Ireland: “The projects will only start failing (bust) after the 100 cubes are really spent (malinvested) and they aren't able to get the other cubes they need to finish.”
So did those who traded away the cubes “malinvest” too? Or are those who traded away those cubes better off for having traded them away? Or are they worse off? Either way, there is no general “malinvestment” from those trade transactions and use of those investments for particular production processes. Quantities are not economic values. Economic values are always greater than or less than the particular quantity of a particular something, by definition of trade.
Stuff isn’t *just* spent. Stuff isn’t just *bought*. Stuff is always *traded*, both simultaneously bought and sold, spent and received. Those cubes don’t ever disappear unless they are consumed or disposed. The store is buying your money simultaneously as you are buying their goods. You sell money. The store sells goods. You buy goods. The store buys money. Faulty monetary theory has blinded people into restricting such words to transactions involving money, such that they fail to see the real mutual trade nature of all economic exchanges.
Ireland: “To be able to agree here, I have to add that this holds true if the market is allowed to operate in the realm of money too.”
Of course it does for every single voluntary trade that involves money. Money is subjectively valued. Anyone who disagrees is free to prove me wrong by dropping hundred dollar fiat bills in the public street and observe whether they are voluntarily picked up. Continue this experiment until you are sure that that fiat money has positive subjective market value. :P The market of subjective valuation doesn’t cease because particular ,marginal units may be stolen.
Ireland: “So we could agree here, if you note that previously we talked about a real-life situation, where there is NO free market in money, the money is a monopoly backed by state violence (hence the name "fiat money"), and we argue this is what brings about booms and busts.”
We are in complete agreement that there is no free market in money *production*. Fiat money is artificially scarce only by violent government interference prohibiting competition. However, there is indeed a free market in money trade, by definition of trade being voluntary. If Santa Claus came down the chimney and forced you at gun point to give him all your coal for some fiat paper, that would be a non free market non trade.
End of Part I
Published: August 7, 2008 9:04 AM
Part II
Ireland: “We'd like to have the money system you describe, because Austrian theory predicts the disappearance of booms and busts then - but as of now the governments won't allow that to happen.”
My methodology is purely Austrian, deduced strictly from Misean action principles. I’m just assuming the throne by superior epistemological demonstration, a methodology of strict barter trade analysis, which will be the foundational basis for all economics knowledge advancement in the 21st century. :P But if Austrian theory would predict the disappearance of booms and busts in the absence of fiat money, then surely Austrian theory should recognize that changing quantities of free market money do not entail calculation problems which lead to artificial booms and busts. The only problem is that monetary theory as begun and expanded throughout the 20th century is fundamentally, fatally flawed. This is the source of the epistemological errors in economic theory, generally.
rtr: “Manias are part of a free market, just as earthquakes are part of natural plate tectonic processes"
Ireland: “Says who? The source of this idea is unlcear”
Says observed economic action. Says observed speculation. Says screaming cheering betting sports fans. Says massively changing subjective valuation observed in fashion fads, such as hula hoops, pet rocks, and real estate house flippers. And on and on and on. Says the particular example of middle ages Tulipomania instead of the particular non example of middle ages Houseomania. Any articles at mises.org on a “Gold Rush”? That would be a perfect example of a free market Mania.
Just as inflation isn’t uniform and simultaneously even, nor are Manias uniform and simultaneously even across all existing goods and services. That they appear in particular endeavors and not evenly spread across all existing endeavors is evidence of a Mania rather than a general “boom”.
Ireland: “Yes, we can think of bubbles as a kind of Ponzi schemes. The question that we try to answer is what _enables_ such schemes to operate, what "causes" it, in the sense that Economics is the science of cause and effect.
Why all the honest people that evade all the other "lotteries" fall for these bubbles? Could they have evaded it or not? Is there something we can do about it?”
All good questions. Fraud captures victims, plain and simple. Free market institutions, such as money established by the free market, can mitigate fraud, but it cannot eradicate fraud. There’s no free market Utopia whereby violence magically disappears. The effect is plainly a net materially poorer society. The world is poorer because an inferior fiat money system exists by the enforcement of violence. People have been bamboozled into building houses around the base of an active volcano while being told the volcano is not active.
Ireland: “And the strange business cycle theory ... Ok, selling it on this blog is a tough order, but thanks for trying anyway. :-)”
Selling it? Or intellectual fraud? :P In the meantime should we just assume all references to the ABCT on the blog are just too tough non demonstrations of parrots talking to each other? Parrot 1: “Squawk, ABCT!” Parrot 2: “Squawk, Don’t eat me!” Maybe there’s a Scientology advancement fee? :P
People aren’t omniscient, both in economic activity, and intellectual scholarship. Feel free to quote from original sources. Internet space isn’t finite. I can just as easily demonstrate Mises’ epistemological errors, if that helps. :P That said, Mises was still a genius far above his contemporaries in his achievements, and in elite intellectual company stretching back thousands of years. He wasn’t however, omniscient or infallible, and unfortunately, faulty monetary theory got him, even though he came very close to overcoming it.
[After today I'll be away 'til next week. So if any further responses are necessary, I'll get back to it on Monday.]
Published: August 7, 2008 9:46 AM
Andras et al.
Sorry for posting the same thing several times. I think I figured out this blog. It was my first post.
Andras, I agree that increasing the money supply does help some people. I should have been written more clearly. I intended to state that, as a whole, as a society, there is no net benefit to increasing the money supply. It causes an expropriation from one group to another. Those who obtain the new money first buy at the old prices before the inflation hits and "taxes" the rest of us.
Enjoying following the conversation.
Joe E.
Published: August 7, 2008 3:45 PM
Sure, except that other supplies and demands aren't manipulated with the specific purpose of throwing off investor's predictions. If inflation were predictable it would be as you say -- people could take it into consideration and counteract the effects. But then the inflation would have no purpose. In order to inflate the money supply meaningfully -- to effect lower interest rates -- the rate of inflation must exceed the predicted rate the majority of the time. The result is a chaotic feedback loop, with both sides are attempting to predict and control the other's actions, and the actual long-term rate of inflation consequently becomes impossible to predict or account for.
Published: August 8, 2008 1:55 PM
Jesse, the specific purpose of any and all human action is immaterial to the economic analysis of that action. It doesn’t matter why somebody wants something, it doesn’t matter why somebody doesn’t want something, it doesn’t matter why somebody does something, it doesn’t matter why period; it just matters that it was done and did. And it certainly matters even less how some people may or may not have predict(ed) some things.
Manipulation fully defines any and all action, whether it’s a farmer “manipulating” his field with seed, whether it’s a magician “manipulating” his tricks, or whether it’s the Federal Reserve “manipulating” the supply of money. Nobody a priori registers their planned actions in advance with a market price adjustment clearing committee.
Everything whatsoever which is subjectively valued will be increased to its *maximum* supply capability, lowering prices every single action step of the way, in strict ordinal fashion of satisfying the most pressing desires first.
Jessie: “But then the inflation would have no purpose”
The inflation would *always* have a subjective purpose, by definition of action. Inflation of everything increases subjective wealth value, up until it reaches the point of non scarce infinity, money included, not sold separately. The inflation of everything increases subjective wealth, money included. Only a false monetary theory causes people to think the inflation of money is causing poverty rather than the opposite.
Jessie: “In order to inflate the money supply meaningfully -- to effect lower interest rates -- the rate of inflation must exceed the predicted rate the majority of the time”
Absolutely nothing is omnisciently predictable.
Jessie: “The result is a chaotic feedback loop”
A chaotic feedback loop is action, is market prices.
Jessie: “the actual long-term rate of inflation consequently becomes impossible to predict or account for.”
Just *exactly* as all changes (long term and short term) in all supplies, and all changes (long term and short term) in all demands, *IS* impossible to omnisciently predict or account (in advance) for. The market is RE-active to the exact same extent it is PRO-active.
Published: August 11, 2008 8:36 AM
Joe Dorner: “I intended to state that, as a whole, as a society, there is no net benefit to increasing the money supply.”
Wrong. 100% Wrong. Increasing the supply of *everything*, money included, is *always* beneficial to increasing the *NET* subjective economic wealth of society. But it does not get any more CRYSTAL CLEAR, that contemporary “monetary theory” is fundamentally, fatally flawed.
Joe Dorner: “It causes an expropriation from one group to another”
Now you understand the befuddled jealousy and hate of Marxists, of Socialists, of Statists, of Collectivists, hidden within your own “monetary theory”.
Joe Dorner: “Those who obtain the new money first buy at the old prices before the inflation hits and "taxes" the rest of us.”
Those who obtain by producing any new marginal units of any good whatsoever *trade* at the "old" prices before others. This doesn't harm anybody. All trade benefits both parties to the trade.
The only harm with fiat money supply is the prohibition against competing money supply competition, which allows fiat money to remain an artificially scarce inferior quality "money". Regarding it's increase in supply as "harmful" is ignorant erroneous economic analysis. And that, in a nutshell, is the biggest epistemological demonstration in the field of economics, since Menger's sliced marginal utility. (Excuse me, for tooting my own horn. :P)
Published: August 11, 2008 8:53 AM
re rtr and to sum up the debate, the position minus a few unimportant rants is as follows:
1. money is just another good in strict barter trade transactions
Starts good, that's Austrian theory of money ok.
2. “monetary theory” is fundamentally, fatally flawed.
How come, if the theory was laid down so nicely only a moment ago? Also there's no clear answer about what the flaw is, other than a set of statements repeating the same thing about there being a flaw.
3. “Business cycles” are an illusion
I see why this had to be: to keep the worldview consistent one that refuses theory of money must also refuse the works citing it, including ABCT.
The decision to throw out complete "business cycle" concept was a bit of a surprise though. Given both historical and recent experience, most people would know what a "business cycle" means. The offered substitute (mania) is poor as it covers only part of "business cycle", and the explanation (manias happen, we can observe that) is even worse, as that is no explanation at all.
Unless these shortcomings are addressed it is indeed true that further responses are unnecessary.
Published: August 19, 2008 12:37 AM
Ireland, monetary theory is fundamentally fatally flawed for various reasons, for the various statements made that are epistemologically false.
1.) The more money there exists in an economy the wealthier everyone by definition is. Just like the more diamonds and the more water exists in an economy, the wealthier everyone by definition is.
People just don't know what "money" is because they are confused by epistemologically contradictory "monetary theory".
I have no idea what you mean by "keep the world view consistent", but I already answered you that action is a one way street of *preference*, at all times.
Published: August 19, 2008 8:28 AM
rtr, there's some difficulty for me to follow the line of reasoning, so please let me go through it one by one:
monetary theory is fundamentally fatally flawed
Which one theory is flawed - mainstream / keynesian theory, or some other exotic theory, or the one saying that money is just another good in strict barter trade transactions which is, as far as I can tell, as Austrian theory of money as it gets?
The more money there exists in an economy the wealthier everyone by definition is. Just like the more diamonds and the more water exists in an economy, the wealthier everyone by definition is.
These statements are supposed to argue what, and where they come from? Honestly I'm lost on what should this be telling us. Also I'm afraid only those holding the new additional stuff will be better off, not everyone. (This distinction when applied to new money is central to understanding ABCT.)
People just don't know what "money" is
People don't know a great deal of things. So what? We discussed here that money is those goods and services that can be used to buy other goods and services (Austrian definition of money, part of Austrian theory of money). Is this definition confused or flawed? If yes where exactly?
what you mean by "keep the world view consistent"
ABCT finds artifical increase in money supply to be the cause of business cycle. So refusing theory of money and accepting ABCT at the same time would be contradictory. Thus someone who refuses theory of money, must also refuse ABCT to keep his worldview consistent. This is understandable, while of course far from a valid argument against ABCT.
action is a one way street of *preference*
I agree with importance of subjective preference and its demonstration in the human action. Fail to see what exactly does this add to the debate about money and business cycles, sorry.
Published: August 19, 2008 9:56 AM
Ireland, Austrian monetary theory is money is a "medium of exchange". That's completely contradictory to my, rtr, epistemological demonstration that "money is just another good in strict barter trade transactions". Austrian Theory hasn't yet absorbed my epistemological demonstrations regarding monetary theory. Is food a "medium of exchange"? Of course not! Can food be exchanged for other goods? Of course! But all food isn't a stale fruit cake that gets passed back and forth from Xmas to Xmas, never wanted, as a true "medium of exchange".
All monetary theory is flawed, mainstream, Austrian, Keynesian. They are all self contradictory theories.
Ireland: "Also I'm afraid only those holding the new additional stuff will be better off, not everyone. (This distinction when applied to new money is central to understanding ABCT.)"
That's a typical example of how you are wrong. It shows how Austrian monetary theory is fundamentally fatally flawed. That belief that "not everyone" is better off, is in epistemological contradiction to the increased economic wealth brought about by the division of labor. Everyone is better off the more the supply of everything increases, including money, because the more stuff which is created, the lower the price, the cheaper it is. Your argument, the Austrian argument, is an absurd reductio back toward autonomous production, and increased scarcity.
*ALL* goods and services can be used to "buy" (*trade* for) other goods and services. Money is just the most commonly traded good in exchange. But it has subjective value for the exact same reason any other good has subjective value, because it's demanded as an end good.
Ireland: "ABCT finds artifical increase in money supply to be the cause of business cycle."
There's no such thing as an "artificial increase" in money supply! There's *only* such thing as an artificial scarcity in money supply. That's just another example of how fundamentally fatally flawed monetary theory is causing epistemological errors elsewhere in the field of economics, such as the ABCT.
Construct an imaginary example of all goods in the economy, removing "money" from that economy. Increase them all willy nilly. Will any "business cycle" result from any increase in any goods? Of course not! There's no such thing.
Published: August 19, 2008 10:44 AM
"Increasing the supply of *everything*, money included, is *always* beneficial to increasing the *NET* subjective economic wealth of society."
If you are a methodological individualist then you can't really say the above. "Society" cannot subjectively value things, only individuals can. Mises whole philosophy and economics was based on methodological individualism.
Published: August 19, 2008 11:58 AM
jp, by "society" I just mean the aggregate of all individuals, which is exactly what Mises meant by it too. That's no different then the aggregate of "supply" and the aggregate of "demand". My whole philosophy too is based on methodological individualism, on strict action principles. Another epistemologically accurate name for "Human Action" is *preference*.
If something is subjectively valued, if anything is subjectively valued, increasing the supply of that thing that is subjectively valued is always increasing net subjective aggregate wealth, even as each additional marginal unit is worth less than the previous existing marginal unit (the addition is still net positive by definition of subjective value).
A society with a supply of 100 tons of wheat is by definition richer than a society with 50 tons of wheat. A society with a supply of 100 billion barrels of oil is richer than a society with a supply of 10 billion barrels of oil. A society with 50 million tons of gold is richer than a society with 19.5 million tons of gold. And likewise a society with 10X "money" is richer than a society with 5X "money". There be laid bare the fundamentally fatally flawed theory of money, which will (and is) pole vault(ing) me into the elite ranks of economic scholarship on par with Menger and Mises.
This is the sole reason why society exists. This is the sole reason why the division of labor and trade exists. Because more wealth is created in a shorter period of time with less effort. This by definition lowers prices, makes more things affordable, so that everyone has more stuff through specialized labor production and trade of that surplus labor production. Money is not an exception; that it was falsely believed that "too much" money would cause poverty, or calculation confusion, or "business cycles", is a fundamentally fatally flawed result of epistemologically in error monetary theory. The gist of the argument against socialism is that more material wealth results from free market production and trade.
Don't forget jp, you were one of the first ones on my side of the argument with the recognition that Austrian monetary theory, and all various other monetary theories, are fundamentally just different versions of the Marxist "use-value" theory of value. It's amazing that such a flaw could go overlooked and unnoticed for over a century, but hooray for me, I get to get the goodies and fame that will be coming with the biggest economic discovery of the 21st century. Say hello to your new super star. :P I never was kidding with the claim that it is the biggest economic advance since sliced marginal utility. But even more importantly, the methodology opens up a whole host of new epistemological demonstrations. That there is no such thing as a "business cycle" is just one more of them.
Published: August 19, 2008 1:55 PM
rtr,
So it's ok for you to use the word "society" as a shorthand for "aggregate of individuals," but when someone else uses "medium of exchange" as a shorthand for "homogeneous, durable, divisible commodity that a person receives in one barter transaction with the expectation of exchanging it away again in a future barter transaction," he is committing a grave epistemological error.
Right, gotcha.
Published: August 19, 2008 2:52 PM
PR, that shorthand "medium of exchange" would not uniquely define "money", but many surplus division of labor productions of many goods. You've perfectly described the hot potato in the childrens' game: nobody wants it as an end good when the music stops. They only want it in so far as they can exchange it for other stuff, which by definition means nobody wants it as end "consumption" good. That's why "medium of exchange" is an epistemological contradiction. A pure medium of exchange is desired by nobody. It's a figurative economic "black hole".
But Austrian monetary theory nevertheless regards an increase in money supply, whether fiat, or a homogeneous, durable, divisible commodity like gold as "bad". That's without a doubt, a monetary theory epistemological error.
Published: August 19, 2008 3:56 PM
rtr, I've said already and will repeat it, that I agree with the statement
money is just another good in strict barter trade transactions
Moreover I consider it to be a key part of what I understand to be the Austrian theory of money. You however say:
Austrian monetary theory is money is a "medium of exchange"
Mind you, this statement is found in your post only, in my arguments please look up that money is defined as "those goods and services that can be used to buy other goods and services". Now let's be honest, does this sound closer to a "medium of exchange" or to another good in strict barter trade? In other words, whom are you trying to counterargument here, yourself?
Yes the antoher good is further restricted by the given definition to be such, which allows one to get other goods and services in exchange for the good known as money. It's your definition plus a describtion of what "money" is good for. Where is the flaw in that?
Are you saying that money is something different from "a good (or service), which can be used to obtain other (end) goods and services"? If so, I wonder what constitutes "money" in your world then, as you've already mentioned that it is a good, but not just any good, and "good that can be exchanged" is not good enough ... Mystery! :-)
Published: August 19, 2008 4:57 PM
rtr, you'll have to love this one:
Everyone is better off the more the supply of everything increases
Ok money aside, let's have barter and some people who invested their surplus in stockpiles of a particular durable good, in the hopes to preserve the fruits of their labor by exchanging the stock back for less durable consumption goods later and gradually, as they'll need those. (Normal real savings, think pension reserves if you will.)
With an unexpected increase in supply of this particular good those who saved are hosed. They bought high, and will be able to sell only low. See, not everyone is better off by that increase, these poor souls are made far worse by the increase in supply and drop in price of that good.
Waiting for you to locate the flaw in this simplest barteric example. Or maybe the original statement was a bit too absolute. Wasn't it?
Published: August 19, 2008 5:15 PM
Ireland, I define money simply as the most commonly exchanged good in trade transactions. In every instance when it is traded, it is only traded because that which is received in exchange is valued more than that which is given away in exchange. The exact same marginal unit of money is valued differently by two different individuals in every exchange in which that marginal unit of money changes hands.
Ireland: "in my arguments please look up that money is defined as "those goods and services that can be used to buy other goods and services""
That's every subjectively valued good and service whatsoever, a conflation of *everything* which has subjective value, in other words the net subjective wealth of an economy in absolutely every different form of subjective value that exists. Remember in the division of labor, *every* good and service is produced beyond the supply of what the producer wants herself because it can be traded for other goods and services which are produced beyond the supply of what those producers themselves want.
But such arbitrary conflations exist in all the monetary theories. They conflate currency, promises, credit, debt, savings in artificial buildings called “banks" (as if a house is not “saved” if it isn’t in a bank vault, named First National Jesus Bank or otherwise :P) , defaults, along with the subjective value of those various “instruments". There is no methodologically precise classification of "money", which makes monetary theory sloppy. And that is precisely why you will see even Austrian monetary theory conflating changes in net economic subjective valuation of all sorts of disparate goods with "money". But obviously this problem besets all the various different monetary theories, and not just the Austrian, which is why I mocked mainstream monetary theory here:
http://blog.mises.org/archives/008397.asp#comment-430633
Fundamentally flawed “monetary theory” confuses and conflates quantity together with subjective value.
Published: August 19, 2008 5:36 PM
rtr - you know, it's strange really. The first two paragraphs are straight from Mises, then comes the arbitrary conflations part, which is a complicated way of telling us that we cannot exactly tell what is and what isn't money. (Well, yes, we can't tell, because we're just mere humans and as such we can't encompas the subjective valuations of zillons of our human fellows.)
Then you go on and tell that this is bad, without explaining why it is bad. Care to explain what's so wrong with being unable to methodologically precisely classificate "money"?
(Also it's unclear what's the plan for escaping the same issue in the non-monetary theory of yours. Let's remember that "money" in the form of just another good in strict barter trade transactions still exists in it.)
Published: August 19, 2008 6:02 PM
Ireland: "They bought high, and will be able to sell only low. See, not everyone is better off by that increase, these poor souls are made far worse by the increase in supply and drop in price of that good."
Society is net wealthier because that particular good is more bountiful, is less scarce. Subjective value is not constant for anyone or anything. Some stuff is always valued more, some other stuff is always valued less. That's why saving "money" is not necessarily smart. If you want to "profit" from saving, you should save stuff, in the particular form, that will be in greater demand in the future than it is in the present. Savings of "money" is not savings of (or investment into) "capital goods". And nobody omnisciently a priori knows what will be more in demand in the future, for example, copper versus gold, but the market will signal the changing subjective value through supply and demand trade transactions.
Published: August 19, 2008 6:10 PM
rtr - if yours way around conflation is supposed to be achieved by this:
I define money simply as the most commonly exchanged good in trade transactions
Then it brings a few doubts:
1. What about the second, third, fourth etc most commonly exchanged goods in trade transactions? These are no longer money? What are they then?
2. Which one is the most commonly exchanged good in trade transactions nowadays? Cash? Cheques? Credit Card Service? Gold? I mean, you say they cannot all be money or we'd have the dreaded conflation again. And these are for sure not one single good, most people would tell them apart quite readily.
So it must be something else. I suppose you'll tell us.
Published: August 19, 2008 6:25 PM
rtr Everyone is better off the more the supply of everything increases
me: hey wait a minute, not everyone is better off
rtr: Society is net wealthier
Would you please stick to the subject? "Society" wasn't the question, so here it comes again:
Do you agree that not everyone is better off? Not every human being is better off if something increases, there may be losers - it will be the people who didn't foresee that increase.
Yes or No?
Published: August 19, 2008 6:45 PM
Ireland: “1. What about the second, third, fourth etc most commonly exchanged goods in trade transactions? These are no longer money? What are they then?”
Great questions. The answer is it doesn’t really matter. “Money” is just another subjectively valued good, or multiple distinct subjectively valued goods, for whatever psychological reasons it’s subjectively valued. “Money” is just an artificial label, a misnomer, in the sense that everything of subjective value is "money". Same for all the secondary and on forms of most commonly traded goods. The same more is better division of labor surplus production of wealth principle will apply.
But problems, analysis, solutions, etc. will be less conflated, and thus observation of actual economic phenomena will be more accurate. People will focus on for instance “sub-prime mortgage loans” rather than “credit generally”. Better to focus on the specific (“bad”) good rather than a conflation of a basket of goods. At a minimum, "Promises" should be highlighted out of the "money basket" as just another good/service in the economy. The term "credit" masks the nature of what exactly is being subjectively valued and traded, as does the term "money" to a lesser degree.
Ireland: “Do you agree that not everyone is better off? Not every human being is better off if something increases, there may be losers - it will be the people who didn't foresee that increase.
Yes or No? “
Nobody is worse off, in strict Pareto efficiency terms. No, I don’t agree. It’s not a “loss” if you don’t win the lottery because you don’t have a priori omniscient knowledge of what the winning lottery numbers will be. You will only save something because you are subjectively better off saving something than not saving something. You will only buy a lottery ticket because you are subjectively better off buying a lottery ticket than not buying a lottery ticket. Action is a one way street of preference. I’m not “worse off” because everyone won’t sign over in contract all their future earnings, minus bare subsistence living standard expenses, to me.
Trade only occurs when it’s a mutual win, when both sides profit from exchange at the moment of exchange. You make the Marxist Cartel argument that increased production causes the neighbor producer of the same good “harm”. No, this is just a competition efficiency market signal, which benefits those less marginally efficient producers by signaling them to produce something else, to stop saving or investing in whatever they are saving or investing in, because they are inefficiently duplicating effort which is being more efficiently accomplished elsewhere, and they would be better off focusing their efforts elsewhere as signaled by prices.
Complaining that your savings are worth half of what they were a year ago is epistemologically no different than complaining that your savings weren’t worth ten times what they were a year ago. It’s nothing more than a wish.
So no, there are no “losers”. Those who save stuff have exactly the stuff they saved, whether or not others value the stuff they saved more, less, or the same. You would otherwise have to consider every action of every other human being that increases supplies of all goods as "harmful", which is absurd, because your small piece of relative wealth savings becomes relatively smaller with all increased wealth savings or production, no matter in what forms they exist.
Published: August 20, 2008 9:01 AM
rtr: Nobody is worse off ... [followed by a lot of long words]
Ok then, once again slowly and carefully. To be able to compare we need two cases with some difference.
A. Let's save 10 cubes. Let's say nothing changes in the cube market in our chosen period of time. So after this time we're able to unload the saved cubes under the original conditions.
B. Let's have the same saved 10 cubes, and the same period of time. This time however, in that period the market in cubes changes, let's say the available supply increases and price drops. So the unloading brings us back less.
We're worse off in the case B compared to the case A. We're worse off because of the increase in the supply of cubes.
Your answer at this point argues its our fault for playing lottery, and a sin to blame others and whatnot. Well if you look close enough, any blaming is only found in your posts. Our side of argument follows a different route:
We only show that there are living human beings, who are in very real terms made worse off by an increased supply of the chosen good, compared with the situation when said increase doesn't occur. Just pure facts: some people are worse off. Dot. Finished. Was it this time slow enough?
Now that's clear that people can be worse off when something increases, we can move on:
rtr: Complaining that your savings are worth half of what they were a year ago is [wrong]
This is where it depends. Remember, economics is science of cause and effect, so we should ask what's the cause of the savings being worth less.
If the savings halve due to some cause beyond human control (say meteor strike), indeed there's little to complain about, and there's nothing the economics theory could say about it.
If however, the cause is a thief who stole half of the saved stuff, you bet we'll complain. There was someone else's action making us worse off, though in this case again it's not an economic issue.
Now in our case there's this clever action of human beings, armed with printing presses and/or central banks. And we need the science of economics to help us connect all the dots from these actions to their effect of booms and busts.
Those of us able to do it stand then here, making the case against such actions, because it can be shown that even the "whole society" is worse off as a result, not just some individuals.
If we failed to get to that level with you, it's only because of your persistent refusal to acknowledge even that some individuals may be worse off. We cannot build the second floor without having the first one up.
Published: August 20, 2008 10:26 AM
rtr: "jp, by "society" I just mean the aggregate of all individuals, which is exactly what Mises meant by it too. That's no different then the aggregate of "supply" and the aggregate of "demand""
Yes, but as you say subjective valuation is preference... comparison of one thing to another... ranking. It is not something that can be done without something else to bring into comparison with. It is not a number or amount. It is entirely ordinal, not cardinal.
Therefore it would be impossible to sum every individual's rankings, preferences etc to arrive at society's net subjective value.
"Don't forget jp, you were one of the first ones on my side of the argument with the recognition that Austrian monetary theory, and all various other monetary theories, are fundamentally just different versions of the Marxist "use-value" theory of value."
I have been thinking about that strange aspect of monetary theory since last year and I think we see things the same way.
Before you nominate yourself for the Nobel Prize, have you checked to see if other early writers didn't mention the point? If it's such a huge flaw I doubt other people haven't seen it.
Published: August 20, 2008 11:56 AM
rtr: Austrian monetary theory ... [is] just different versions of the Marxist "use-value" theory of value.
jp: I think we see things the same way.
jp, please let me use this opportunity to ask you for help. rtr is trying hard to tell us something, but at least for me the point doesn't come. As said above, in what I understand to be Austrian theory of money, said money is defined as "those goods and services that can be used to buy other goods and services". So two things:
1. What exactly do you guys mean by Marxist "use-value" fallacy, could you please spell it out, or even better demonstrate it on an example?
If it is the thing described in "msHmA: Part 3, Chapter XI. Valuation without calculation in paragraph 3.XI.11", as cited by rtr in the other thread, a simple "yes that's it" will be enough. But then
2. How this thing is fundamentally equivalent with the Austrian theory of money?
See, Austrians with the famous "Socialism can't calculate" conclusion were among the first to disprove Marxist "theories". Maybe that's the reason why the statement about "Austrian theory (of money) being equivalent to Marxist fallacy" gives me a pause, and more than hints at possible flaw somewhere in the process of coming up with such result.
Here's now hope someone could please translate what you are talking about into words understandable by humble me.
(Special note: no, irony doesn't help with the understanding, please skip it. Same goes for inclusion of irrelevant topics and flamebaits. Thank you so much for understanding.)
Published: August 20, 2008 1:09 PM
Ireland, the price of acquiring an 11th cube in your 10 cube example is cheaper. You are better off, assuming you still subjectively value cubes, which by definition of you continuing to save them, you do. Sorry, but you can *never* be worse off when the supply of something increases. That would be an epistemological contradiction against any and all action whatsoever. That you believe you can be is the demonstration of fundamentally flawed monetary theory infecting economic theory in other areas.
By definition of action, all action is increasing subjective wealth. The whole purpose of the division of labor is to increase the supply of everything and lower prices. You are not in any sense worse off if nobody is not voluntarily willing to trade anything of theirs for anything of yours, at any ratio, changed or unchanged, throughout all time. Working an extra hour does not make you poorer than not working an extra hour. More people working doesn't make you poorer because there is more labor competing with you, because there is a greater supply of labor.
The possibility that the supply would increase in the future existed in the past when you decided to save those cubes in spite of the possibility that the supply of cubes could change, in spite of all sorts of potential risks, such as theft or natural disaster. By definition of continuing to save those cubes you valued saving those cubes in spite of the inclusion of all possible risks; included in that preference was all future possible supply and demand changes. Supply and demand is never constant, for yourself, let alone others not yourself. If you didn't, you wouldn't have saved them. And you still have everyone single one of your ten cubes. You have lost *nothing*. And it's ridiculous to pretend your tastes will be the same in the future, let alone the tastes of everyone else.
If you wanted to "lock in" an exchange ratio of one good in terms of another good for a period of time then you should have done that specific hedged trade by *paying* for "insurance" to lock in an exchange ratio. But none of your 10 cubes burned down to the ground. And if your 10 cubes had burned down, your replacement costs are cheaper. You chose to hold cubes rather than have traded those cubes for a basket of other possible things, solely because you were personally subjectively better off holding cubes and only cubes than not holding them.
Published: August 20, 2008 2:11 PM
jp: "Therefore it would be impossible to sum every individual's rankings, preferences etc to arrive at society's net subjective value."
By definition of it being a "good", a "supply", it is positively subjectively valued. Increasing the supply will by definition be increasing net subjective value wealth. A supply which continues to have diminishing marginal utility subjective wealth is still increasing in net wealth. The less scarce things are, the wealthier people are. All goods are by definition ranked higher than the absence of those goods.
Published: August 20, 2008 2:33 PM
rtr: The price of acquiring an 11th cube in your 10 cube example is cheaper. You are better off, assuming you still subjectively value cubes, which by definition of you continuing to save them, you do.
Please explain to me, slowly, about this assumption. The "save even more" case is clear, getting more of the cubes will be easier when there's more of them.
But did I anywhere speak about adding to the stock, or buying more cubes? No, my argument was exactly the opposite, I've argued the case where I'm going to unload the cubes. This additional assumption of yours is turning the argument on its head. By analyzing buying more cubes you're following a different part of the story, one that no one here talked about.
Would you analyze the other part now, about the people who instead of buying cubes need to exchange their saved cubes for other things, in the situation where cube supply increased?
Remember, it's not us to tell what the people want. There are those that will have to sell. Show us how these are better off.
Published: August 20, 2008 3:15 PM
Ireland, just start from the case of you have one unit of Good 'A' that you wish to exchange for some other unit of Good 'B'. If nobody wants your Good 'A', you are not worse off, you are not better off, you are exactly as you were, with one unit of Good 'A'.
Now assume you exchange one unit of Good 'A' for one unit of Good 'B'. You are by definition of trade better off. You save Good 'B' for a period of time. Now you *wish* to trade your unit of Good 'B' for some other different Good 'C' again. If nobody wants your Good 'B', you are not worse off, you are not better off, you are exactly as you were, with one unit of Good 'B'.
It is *impossible* by definition of action for you to be worse off. You will not under any circumstances trade away any unit of any Good 'X', unless what you receive in return is valued more than what you give away. If you feel what is offered in return for your savings in whatever Good 'X' form you have them, then you will by definition of subjective value not be willing to trade away your Good 'X'.
"Wanting to do something" is a wish, not an action.
Published: August 20, 2008 4:23 PM
rtr: If nobody wants your Good 'A', you are not worse off, you are not better off, you are exactly as you were, with one unit of Good 'A'.
As I said, you keep making stuff up, and you're pretty competent at that. In this case the willed up thing is the case agains which we compare. Your argument says that something compared to itself is the same, which is trivially true, but then what exactly is it supposed to add to the debate remains unclear.
Here's one more cube example, refined as to leave as little room for the evasive add-ons:
1. Let there be someone in possesion of 10 cubes. We're not talking about how the possesion came about or anything, just pure fact of ownership. Consistency check: yes, people do own things.
2. Let's consider the situation where this person will get rid of them. Again, the reasons why he might want to do that are beyond our speculation, just pure facts, cubes are sold as to get other goods, under the normal conditions of a sale - i.e. they're exchanged for what someone else on the market is willing to give upon receiving 10 cubes. Consistency check: yes, people do sell and buy things.
3. Gedankenexperiment: let's imagine two such cube sales, the only difference between them being that in one case the supply of cubes on the market is higher, all else being equal. Let's call them "original situation" and "increased cube supply scenario". These are the situations that we'll be comparing when judging if someone is made better off or worse off by an increase of available cubes. Consitency check: yes, even my cat would understand what is being compared to what.
You tell us: in this situation, the seller will be able to get a better deal on the market with original or higher cube supply? He'll get more stuff for himself in "original situation" or in "increased cube supply scenario"? In other words, he personaly will be better off in the original case, or in the case where "society is net wealthier"?
Published: August 21, 2008 12:27 AM
Ireland: "You tell us: in this situation, the seller will be able to get a better deal on the market with original or higher cube supply? He'll get more stuff for himself in "original situation" or in "increased cube supply scenario"? In other words, he personaly will be better off in the original case, or in the case where "society is net wealthier"?"
He'll be able to get a better deal trading for more cubes, just as the rest of society is net wealthier because the price of cubes is lower because the supply of cubes is greater. You're also unrealistically assuming the supply of everything else doesn't increase, which is an assumption contrary to the division of labor production. But even in that scenario he is *still* better off. Assume the supply of cubes doubles from 100 to 200, and the supply of everything else remains constant. He still has his original 10 cubes (let's say the original total supply of 100 cubes were "green" colored, and the new doubling of cubes are "purple" colored), and can trade those cubes for a maximum of everything else which exists PLUS 100 new "purple" cubes.
To even more clearly see how absurd your belief is, keep the supply of total cubes the same, along with your ownership of 10 cubes, and cut the supply of all other non cube goods in half. Are you richer, better off? Of course not. Your cubes can trade for half as much stuff as before, even though that represents a bigger portion of the total economic wealth "pie". Although you would claim you are "richer", you are in fact *poorer*. Increasing supply is *always* increasing net economic wealth, and *never* causing anyone to be worse off poorer in real terms.
Now we can clearly see that Austrian monetary theory (and all monetary theory) commits the Marxist fallacy of believing an equal shared smaller net area pie represents a greater net economic wealth area than an unequal shared "pie" which is twice as large.
To see the absurdity, yet again, from a different perspective, assume the supply of cubes again doubles, but this time you own all the cubes which exist both before and after the doubling of the cube supply. Are you merely no better off and no worse off after the supply of cubes doubles? Of course not! You are by definition richer. You have more stuff of subjective value.
There is no constant ratio of exchange between goods and services, money included, and there never has been, and never will be.
There could also be no change in the supply of cubes, but people in the future subjectively value those cubes half as much as they used to. Or there could be no change in the supply of cubes, but people subjectively value those cubes twice as much as they used to.
Your theory is such an utter contradictory fallacy, that any increase in any production of anything would be causing some person "harm". It would be an argument for war against all surplus production and division of labor trade, an argument against competition, and an argument against freedom. It would be an argument for total individual strict isolationism. And any improvement in the material condition of man would be an act of war because somebody with more stuff is subsequently by definition richer than you and "causing" you to be poor. But that's Marxist-Austrian Monetary Theory in a nutshell.
Assume the supply of cubes remains the same, the supply of all other goods remains the same, but a new supply of a new good called "pyramids" is introduced that is the same quantity as your cubes. Are you richer, poorer, the same? According to your twisted fallacy filled "logic" those pyramids will be stealing away market share wealth from your cubes. Less of those other goods will trade for your "cubes" as more of those other goods trade for "pyramids" instead of your "cubes", leaving you "worse off". And soeth concludeth another amazing post by Pharaoh rtr. :P
Thus we see a little deeper into the befuddled hate of wounded Marxist psyches to find that incorrect economic theory has twisted their minds. Who would've guessed even Austrian monetary theory got infected with it?
Published: August 21, 2008 9:14 AM
Ok I've had enough. PR summed it up better than I ever could.
Here it ends, with one last sad hello to our new super star. And a big sorry to everyone else for wasting so much blogspace.
Published: August 21, 2008 6:02 PM