A Neodoxian Week

Miscellaneous Current Events
41

I didn’t know that about Hayek

“If investors and consumers suddenly hoard half of there money then would any problems result? If the answer is “yes” then what would you call this. If the answer is no then why not?”

The point that I have been making is that the fall in consumption is a symptom and not the disease. On top of that a depression occurs because the production going on is against the will of the consumers, it is a case of trying to force square pegs into round holes producing things consumers don’t want.

The very fact that people talk about a “housing bubble” suggests they think the problem is too many houses being built, do you think the problem was people simply need to keep buying houses? Mabye the government should buy houses and bulldoze them

42

“The point that I have been making is that the fall in consumption is a symptom and not the disease. On top of that a depression occurs because the production going on is against the will of the consumers, it is a case of trying to force square pegs into round holes producing things consumers don’t want.”

  1. Is it inconceivable that this could occur in a free market sans malinvestment?

  2. Do you agree that this fall in demand in general which occurs during the recession is greater than it would be without hoarding?

If you agree with point 2 then we have the same view on recessions and you are admitting that Keynes had a basic point about general gluts. If you disagree with point 2 then please address my previous post to you.

Thank you.

43

  1. Entrepreneurs will usually make the right decisions if a central bank doesn’t screw with interest rates and government incentives to loan to unworthy borrowers

  2. Hoarding could actually be a good thing because it means people are not patronizing shaky banks. Allow the bad banks to fail faster. Greenspan in his essay on gold and economic freedom said the best way to collapse the fractional reserve lending system is if everyone held gold, silver, copper. Let it collapse then we can invest in a sound banking system. The collapse of the shaky system is required to build a sound system

44
  1. You dodged my question. Do you disagree that ceteris paribus a constant level of aggregate demand will speed up the recovery process while a decreasing level of aggregate demand will speed it up?

To clarify, I think you made a good point, but not one that was relevant to the current discussion

45

Hoarding raises the value of money which allows people to buy more things with less money. It might be painful in a fractional reserve lending system, it might even paralyze the system, but in a world where banks are not overleveraged it isn’t really a negative.

The ideal is to have the fractional reserve lending system collapse not sustain it

46

“Hoarding raises the value of money which allows people to buy more things with less money.”

  1. In a recession why wouldn’t this raise uncertainty?

  2. In a recession why wouldn’t this increase the time required for a readjustment period?

“in a world where banks are not overleveraged it isn’t really a negative”

  1. Why?
47

@Neodoxy

Well, I can’t speak for everything Dave has said in this page, but I would check out his blog post on general gluts and cash hoarding:

He makes himself pretty clear there. General Gluts are another name for “massive hoarding”. And hoarding cash will not cause any problems because prices will adjust.

Price adjust? Who knew.

48

“prices will adjust”

That’s a new argument right?

49

“prices will adjust”

Who knew?

That’s a new argument right?

  1. Actually, it’s Mises in Human Action, as noted in my article.

  2. What Student and Neo mean is that some prices do not adjust in real life.

So their understanding of recessions, [and guys, correct me if I’m wrong], is this:

Normally, by some magic, prices perfectly match both supply and demand and also the stubborness of people who insist on a certain price for certain things. But when people start saving their money, although the laws of supply and demand will put pressure on prices to adjust to the new situation, some people will effectively resist this change. Then, of course, their wares will not be sold.

If this only happens with one type of good, that good only will not get sold. If it happens to every good, all goods will not get sold. If it happens to the price of labor, which is a component in the price of every good, we have a general glut, where nothing gets sold.

Thus the solution is to encourage dishoarding. Though people may not like this, too bad for them. It is more important to satisfy those who resist price changes than those who want to save for their retirement, or their children’s college education, or other future needs. In fact, govt intervention is vital to make sure this gets done, because unless these hoarders sacrifice their savings and their future, the whole economy will suffer.

We won’t go into the ethics of such a position. We merely point out the logical errors, which stare one in the face.

Their recipe for recession has two ingredients. One, people saving money. Two, some people resisting changes in prices. The flaw in their logic is the emphasis on the first component. Supply and demand change constantly. That is the nature of a free market. Thus, those who resist price changes will feel pressure all the time. No need to blame hoarding.

Now they may argue that only hoarding produces pressures to change prices across the board. But that very assumption is fallacious. When people save more money than they did before, do they buy less of everything across the board? I think it is foolish to make such an assumption. Maybe some people do, but many don’t. They cut down on their spending of those things that are lowest in their scale of values, but keep spending on those things higher on the scale. Austrians will be familiar with the concept of scale of values; others may have to read up.

Another aspect of this flaw in their reasoning [focusing on savings as the culprit] is accepting the second component as a given. It is not a law of nature that people resist changes in price so stubbornly that they shoot themselves and the whole economy in the foot. Anyone who goes shopping sees sales all the time. And if Neo and Student think labor will just never see reason, they err. It is the laws that give unfair power to unions that cause this stubborness. And where unions have less sway, lo and behold, wages fall. In the current recession, people many complain that employers “take advantage” of the situation by forcing them to work longer hours for the same pay. Guess what that is? Wages falling. So yes, it happens. All the time.

Unions themselves are the first to admit this, declaring that they are fighting for “higher wages”. Meaning they understand that without them, wages can and do fall.

Bottom line: Of course so called “sticky prices” will cause problems. But the presence of sticky prices is unrelated to people saving money.

In addition, there is a deeper flaw in their reasoning. They don’t understand that saving is a great blessing to everyone, both directly and indirectly. We need not go into the advantage of saving to the saver. It is what he chooses to do with the money he worked for, and so of course it is a blessing for him. He is getting exactly what he wants from his money, i.e. saving it.

But when Mr A saves, he benefits Mr B and Mr C and everyone else. First of all, he usually [= way over 99 percent of the money saved] puts the money in a bank, meaning the money will be invested in increasing the capital stock, the source of all wealth and prosperity. Second ly, by saving, he is, by definition, not consuming. It may be hard for some to grasp why this benefits everyone else, so we will use a homely analogy.

Imagine a group of people who get together for a party. They agree that everyone will bring some food [=work for a living]. One person brings a huge delicious cake [=works]. When the time comes to eat, he explains that he is on a diet and will not eat anything at the party [= does not spend the money he earned, but saves it]. Everyone is else is now very happy, because they get to eat more than if he was stuffing his face [= consuming].

50

Dave,

My response to your article on Mises is coming. I was going to let it be, but that was before I saw you seriously touting it as you have been doing. In the meantime I’ll keep this post short.

“prices will adjust”

Who knew?

That’s a new argument right?

“1. Actually, it’s Mises in Human Action, as noted in my article.”

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"2. What Student and Neo mean is that some prices do not adjust in real life.

So their understanding of recessions, [and guys, correct me if I’m wrong], is this:"

I think that I’ve reiterated my point enough times to you that if you were serious in actually understanding my point then you would have done so by now. Some might resist wage decreases, others might resist new information.

“Thus the solution is to encourage dishoarding. Though people may not like this, too bad for them. It is more important to satisfy those who resist price changes than those who want to save for their retirement, or their children’s college education, or other future needs. In fact, govt intervention is vital to make sure this gets done, because unless these hoarders sacrifice their savings and their future, the whole economy will suffer.”

No. The hoarding that we are talking about here is strictly dealing with that caused by a sudden downturn. Savings that actually represents a legitimate change in time preference, and which does not occur to rapidly merely changes the direction of productive efforts away from consumer’s to producer’s goods. As I have expressed I consider hoarding in a recession to be a collective goods problem. The reason people are saving is because they fear for their jobs. If their jobs were secured to a “normal” level then the hoarding would not occur, but since it is more jobs are lost. It is a self-fulfilling prophecy. Everybody would be better off if no one hoarded, but everyone would be worse off if they did not hoard. I’m also assuming, as you implicitly do, that all “savings” comes out of consumption and not investment.

Finally, I have never advocated government intervention. I’ve expressed as much in the what, 15, 20 messages we’ve exchanged on this general topic?

“Austrians will be familiar with the concept of scale of values; others may have to read up.”

It’s unnecessary, presumptuous, and inevitably ignorant statements like this that make discussing topics with you such a delight, Dave.

“It is the laws that give unfair power to unions that cause this stubbornness. And where unions have less sway, lo and behold, wages fall. In the current recession, people many complain that employers “take advantage” of the situation by forcing them to work longer hours for the same pay. Guess what that is? Wages falling. So yes, it happens. All the time.”

While I agree that government intervention is a serious source of price-inflexibility and that prices are not nearly as inflexible as many Keynesians assume, this does not mean they are not somewhat sticky. Most importantly I don’t understand why you continually blame unions for price inflexibility when unions have been making up a smaller and smaller portion of the economy.

51

Neo,

I await your response to my article on Mises.

In the meantime, let me reassure you that when I wrote about people having to read up on their AE, I meant Student, who obviously is extremely deficient in basic Austrian knowledge, as he admitted himself a few times in this very thread. [Had no clue about what Say’s law actually is. Thought Mises denied that people use money as a store of value].

Although I would not be remiss in going the sarcastic route, given the mocking replies of “who knew?” and “That’s a new argument right?”, I chose not to go there.

You wrote, “No. The hoarding that we are talking about here is strictly dealing with that caused by a sudden downturn.”

What’s happening is I am having to deal with two people at once, who have different nuances. Student was insistent that he is talking about something neither Mises nor I ever heard of, supposedly, that people use money as a store of value. Which I take to mean that they save it in order to spend in their retirement, etc. My summary was indeed based on my understanding of his thesis, the standard Keynesian one. I think that will answer most of your objections to my summary, including that you do not advocate govt interference. Others certainly do.

So let me devote the rest of this post to the points unique to your vision.

  1. First, I am not assuming that hoarding comes at the expense of consumption and not investment. As Mises pointed out in the article, the capital accumulation that benefits society has already taken place when the person actually works for a living and gets money to hoard. Even if he used to invest that money and now hoards it, he does not reduce investment per se by his act of not investing. What he does is change the course of investment. Say he used to buy pipes for his plumbing business, and now he stops. that just frees up raw materials for others to buy. previuosly they were not able to out bid him for the materials they need, so he got them. Once he drops out of the market, others will get what he no longer uses.

  2. Even if people hoard out of concern for the future, fearing for their jobs, the line of reasoning stays the same. Money that is hoarded, is, by definition, not used to withdraw things from the market, be it consumer or producer goods. This frees them up for others to use. There is no getting round this conclusion.

Bottom line, the results of hoarding are the same no matter why people do it. If you admit it is a good thing sometimes, that same goodness exists at all times.

  1. I understand you don’t advocate govt intervention. Your focus is more on analysis of the causes of a recession than the methods presented as cures.

  2. About unions. Indeed they make up a smaller portion of the private sector economy. But they make up the vast majority of the govt sector. And they are bankrupting their govt employers, the states, just as they bankrupted their private employers.

In addition, I agree that unions are only one way govt interference in a free market promotes unemployment. After all, the potential employer has a say in whether someone will get a job or not. What counts, as far as he is concerned, is not what the worker gains by being hired, but what the employer loses by hiring him. And the govt can make it painful indeed to hire someone, even at low wages.

For example, I know of an employer who laid off a worker because he was drinking on the job to the point of unconsiousness. Not wanting to make waves, he told the worker he just doesn’t have any more work for him. The worker went on to get unemployment insurance. As a result, the govt increased the amount of money the employer has to pay the govt per worker for unemployment insurance. After all, he’s the kind of guy who fires people. Result? The employer decided to hire as few people as possible. He could not afford this new expense.

Be that as it may, there are many more ways the govt sticks it to the employer for hiring someone. Latest example is Obamacare, which led directly to layoffs by many firms.

So why did I talk about unions? First, because where they are allowed to thrive, like New York City, they are a huge problem. Second, because Keynes in his book used them as his reason for sticky wages. I was using a sort of shorthand by saying unions, following him.

  1. Prices may be somewhat sticky. So what? It’s not enough to cause a recession [see below]. Recessions, as you know from your studies of AE, are caused by malinvestments, which in turned are caused by meddling with the money supply.

And if prices are sticky, the only thing to do is wait until they unstick. A person doesn’t sell his wares or his work at a low price today because he thinks tomorrow he will do better. It may take time for him to grasp that it’s not going to happen, at least not before he needs money to live on. How long do you think it will take? Fifteen years, like the extent of the Great Depression? Six years, like the length of the current recession? I say a few months is ample. So that recessions cannot be explained by somewhat sticky prices.

52

The problem with American wages not dropping is also caused by the welfare state. You can just go on food stamps instead of working thus raising unemployment

  1. In the first place hoarding is caused by uncertainty. In the boom people act silly but in the bust the errors of the boom are revealed and long term and risky projects probably need to be abandoned. You even said that hoarding happens because of a downturn so people are acting rational when they hoard

  2. By speeding up the liquidation of mal-investments it will speed up the healing process. Would you prefer that shaky banks be propped up? You are against government intervention but if individuals decided to just go out and buy things and invest in shaky banks it would be the same as a bank bailout whither or not individuals or the government is doing it. If people don’t have enough faith in the system to invest there is probably a good reason for that and they shouldn’t go out of their way to prop up shaky firms as patriotism

  3. Because a rising value of money is only bad when everyone is in debt. A bank run can’t happen in a 100% reserve lending system

My question to you is why do you think a depression could happen on a free market? After a period of time don’t you think people will simply stop hoarding

53

“I am having to deal with two people at once”

Then you should either specify this or not do this. I don’t know exactly how you expected someone to react to this.

“1. First, I am not assuming that hoarding comes at the expense of consumption and not investment. As Mises pointed out in the article, the capital accumulation that benefits society has already taken place when the person actually works for a living and gets money to hoard. Even if he used to invest that money and now hoards it, he does not reduce investment per se by his act of not investing.”

This is one area where I think you are absolutely wrong. All money taken out of investment decreases the extent of capital accumulation and decreases the capital structure. If we assume someone has the ability to: consume, save, and invest, then increasing consumption puts pressure on prices in the shortest stages nearest the production of consumer’s goods, indirectly raising the interest rate, and thereby shortening the structure of production and capital consumption. If one invests then one puts pressure on decreasing the interest rate, increasing the length of production, and decreasing prices in stages closest to consumption while increasing them in areas further away from it.

Therefore, what you, and partly what Mises talked about is the short term process of:

Rothbard expressed this as a ratio. So for instance if, in a particular time period individuals were to invest 1 dollar for every 10 they consumed, then the ratio would be 10:1. If the inverse was true and the ratio looked like 1:10, then the second society would be far less rich in terms of enjoying consumer’s goods over time, but very wealth in this respect in the long run, while the first society’s productivity and standard of living would absolutely pale in comparison. This is where plain savings comes in. It is obvious that this matters based upon whether or not it goes into consumption or investment. Let’s say that the consumption/investment ratio were 5:5, and consumers were deciding how to allocate their last bit of income which will change the ratio by 1 in either direction if fully spent in one area. If it is spent in consumption then it increases to 6:5, while if it is allocated to investment it becomes 5:6 towards investment. If it is allocated to neither of these and money is just plain saved then prices adjust downward through the board, but back to their old ratios in investment/consumption.

However, if hoarding “comes out” of consumption or investment then something slightly different occurs. If the money supply is 1 trillion and 500 billion is allocated to both investment and consumption then if 100B is saved, then what matters most, particularly in the long term, is WHERE this comes out of. Consumers save 100B then the ratio is now 4:5, increasing capital accumulation. Punch line: if investors hoard then the money the ratio is now 5:4, decreasing capital accumulation.

“Say he used to buy pipes for his plumbing business, and now he stops. that just frees up raw materials for others to buy. previously they were not able to out bid him for the materials they need, so he got them. Once he drops out of the market, others will get what he no longer uses.”

I’m a little confused by the exact mechanics of this example. I’m assuming here that what you mean is that guy starts his own business with his own money and does plumbing, since if he’s just a plumber there is no investment from him, so I’mma ignore the plumber and just talk about an investor who used to invest his money in plumbing. If the business fails and he pulls out his money then this decreases how much money in general is being invested in the economy, fewer loans are provided in the market as a whole and the interest rate rises, decreasing capital accumulation. What you are looking at is a short term concern.

Brief aside: This is why increasingly I’m finding myself disliking Mises’ work in HA: it’s not a very good book in explaining certain specific chains of causality, particularly in the area of capital. Mises describes the outcomes of most relationships perfectly, but the reasons for these are not clear. Hayek’s work on the business cycle and capital accumulation was (IMO) infinitely superior, even if he did make some large errors. Regardless he laid the foundation for the more “perfected” work by Rothbard and De Soto on the matter. I think this is part of what is confusing your understanding in this respect.

What Mises seems to outline in the section you quoted (the only thing I could ever make sense of) is that because there are unsold consumer’s goods the prices of these goods falls, increasing real wages and therefore increasing how much capital we can accumulate at any wage. However this aspect of it is a short term effect. In the long run there is no unsold surplus and real wages reach their old levels. Therefore the long run factor promoting capital accumulation is what I have outlined above.

Therefore in your example, perhaps for a short time investment will remain relatively unchanged because now all of the capital the plumber had is available for use, decreasing the costs of investment for a time. However, unless this somehow induces new lenders to enter in to the market then in the long run there is not enough money to invest in the same “level” of projects being undergone before the investor plumber left the market. This decreases capital accumulation. If this were not the case and your above scenario were true then ALL investors could leave the market and investment would not be changed. If this is not the case then ceteris paribus the plumber pulling out his money from production must decrease capital accumulation

Well jeez that turned into one big ass section about a single point, probably because this is the first thing I’ve seen you argue which is really explicitly wrong. I’ll respond to whatever else later, I need eats now.

If you want to read back up on this then Rothbard’s words on capital accumulation in MES, as well as a good deal of his words on savings in the chapter on money might help. As I said, I think that reading Mises’ work on causality in this matter is just confusing and possibly even fallacious, whereas Rothbard goes about it in a much better way.

54

Thank you for the well thought out post, Neo. Here’s my response:

All money taken out of investment decreases the extent of capital accumulation and decreases the capital structure.

I think this is the key sentence, and I think it’s wrong. Capital and money are not the same thing. Here is a thought experiment to prove my point.

Say a country that used money suddenly decided to return to a barter economy. There would be many changes as a result, of course. For one, people who were rich because they had plenty of cash, but only cash, would become paupers overnight. For another, all the inconveniences and difficulties of barter would come back to life, things like difficulties finding double coincidence of wants, and the like.

But one thing that would not change is the productive capacity of the country. All the machinery is still there, all the land, all the workers, everything. Whatever capital [meaning already-produced durable goods that are used in production of goods or services. Wikipedia] existed before still exists. Whoever owned them before owns them now. Whoever needed them before needs them now. [And even if they change hands as a result of the elimination of cash, so what? They still exist]. Sure, things would be awkward and clumsy because of the limitations of barter that make smooth transactions impossible, but every pair of shoes that could have been made before can be made now.

If one asks, who will buy the shoes and all the goods made now that many people have not a penny to their name, the answer lies, of course, in Say’s Law. I think there is unanimous agreement that it applies in a barter economy, and it ensures that whatever is made, someone will have the purchasing power to buy.

Bottom line, the existence of money does not increase the productive capacity of an economy. It also does not increase the demand [=ability and desire to buy] for what is produced. All it does is to merely greases the wheels of trading a bit. And all this is true both in the long and short run.

Ever so much more so does the above analysis apply when plenty of money still exists, but people are hoarding some of it. The exclusion of their cash from the economy does not change the productive capacity. Factories do not go tumbling down as if an earthquake struck merely because someone put a few dollars under his mattress.

What will change is the same as in the above thought experiment, who gets what slice of the pie, because money leaving the economy changes the purchasing power of money [=increases it] and the prices of commodities [=lowers them]. But the capital accumulation stays the same. What is produced may change, because the shifting of wealth to Mr A from Mr B might mean more pizzas made and less birthday cakes, because Mr A likes pizza and can now afford them, while Mr B can no longer afford cake, but so what? Consumer tastes change all the time anyway, and wealth moves around all the time, too.

Your long post deserves a longer reply, but the weekend buzz has set in. Besides, a lot will depend on how the issues raised in this post are concluded. If you agree things will go one way. If you have objections they will move in another direction.

55

In the meantime, let me reassure you that when I wrote about people having to read up on their AE, I meant Student, who obviously is extremely deficient in basic Austrian knowledge, as he admitted himself a few times in this very thread. [Had no clue about what Say’s law actually is. Thought Mises denied that people use money as a store of value].

I agree that you think my understanding of Say’s Law is different than your own (though you have not been very clear about what you actually think it means). But my understanding of Say’s Law is perfectly consistant with Austrian economists like Steve Horowitz and Tyler Cowen, who support their interpretations pretty well imo. If you think Horowitz or Cowen are too impure to call himself “Austrian”, I can live with that. I am less interested in labels and dogma and more interested in good economics.

As far as Mises goes, I will let other people read the essay and decide for themselves.

I know I personally couldn’t find any mention in that essay of people choosing to hoard cash, as they might do in times of uncertainty if money is viewed as a store of value. This seems like a very odd omission from an article that is nominally about Say’s Law and how it relates to Keynesian economics.

56

Horwitz is in this camp, known as the Monetary Disequilibrium Theorists. They pretend that Say, and Austrian Economics in general, is on their side. Their mascot is Hayek, since he was wishy washy on this point until 1974 [when he got his Nobel Prize for being an Austrian, and ditched the Money Cranks for good].

”Hayek went through three phases. His first is the Hayek’s Overcoat phase. Then he became a turncoat, excuse the pun. Phase three was after he won the Nobel prize, and put his overcoat back on.

In case anyone is interested, I just want to say this characterization of Hayek’s intellectual biography is pretty unfounded. If you want the real scoop, try Bruce Caldwell’s book, Hayek’s Challenge. In the mean time, here are a few choice quotes.

Now, obviously, you can argue that Hayek’s views evolved with time (whose doesn’t). But you can’t get around the fact that over much Hayek’s career he openly admited that aggregate demand problems were possible. And later in his career he believed they were not only possible, but correctable through monetary intervention. If it makes you feel better to say Hayek was not really an Austrian or that he was only pretending to believe aggregate demand problems were possible to advance his career or whatever, all I can say is follow your bliss.

And that’s all I have to say about that. I really don’t enjoy discussions like “what did Economist X really believe 80 years ago”. I prefer to talk about economics, not economists.

Hayek in 1932:
“It is agreed that hoarding money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable.”
http://thinkmarkets.wordpress.com/2010/06/30/keynes-versus-hayek-past-is-prologue/

Hayek in 1933:
"There can be little question that these rigidities tend to delay the process of adaptation and that this will cause a “secondary” deflation which at first will intensify the depression but ultimately will help to overcome these rigidities.”
http://www.scribd.com/doc/50441846/Did-Hayek-and-Robbins-Deepen-the-Great-Depression-by-Lawrence-White

Hayek in 1978 (3 years AFTER he won the Nobel):
“a ‘secondary depression’ caused by an induced deflation should of course be prevented by appropriate monetary counter-measures. Though I am sometimes accused of having represented the deflationary cause of the business cycles as part of the curative process, I do not think that was ever what I argued. What I did believe at one time was that a deflation might be necessary to break the developing downward rigidity of all particular wages which has of course become one of the main causes of inflation. I no longer think this is a politically possible method and we shall have to find other means to restore the flexibility of the wage structure than the present method of raising all wages except those which must fall relatively to all others. Nor did I ever doubt that in most situations employment could be temporarily increased by increasing money expenditure.”
http://www.coordinationproblem.org/2011/05/hayek-on-deflation.html

57

Dave,

I think what you overlook in your post is time preference. To produce more capital-intensive and more productive longer-term projects resources that could have been used to produce current projects, or shorter term projects, have to be used to instead produce projects in the future.

Let’s take your barter example. Let’s put this down to a two good example. Let’s say that I am the barter equivalent of a capitalist. I will lend you my massive stockpile of canned goods. By providing your workers to live off the canned goods you to make a pin factory. In return you promise me 10,000 pins in a year after your factory has been completed (let’s say that this is a decent pay off in terms of what I could acquire through barter). If my time-preference is low, then I will accept that deal, but if my time preference is extremely high, then it might take 100,000 pins to induce me to give you my canned goods instead of selling them for, say, 9,000 pins today from current producers instead of a year from now.

Furthermore with the viewpoint you express above I don’t understand exactly how you think capital accumulation comes about. By investing and decreasing the interest rate and the “price” of money one makes longer-term production viable. This is the essence of Austrian capital theory on the free market. The way that money is used: consumption or investment, directly affects how the market is organized. Indeed I don’t understand how you explain ABCT in the absence of this, because for mal-investment to occur the decrease in the interest rate must lead to deviations in real production. If this were not the case then why does this lead to investments that are not sustainable?

“Capital and money are not the same thing. Here is a thought experiment to prove my point.”

In the quoted passage I did not claim that they were the same. It has nothing to do with hoarding per se, indeed in this instance I will argue that prices are perfectly flexible because it doesn’t actually change my argument about the long term consequences. If everyone decreases the amount of money they are putting into investment and consumption by half and hoards that money instead then actual production will not change, prices will just fall by 50% across the board. However, if this money comes out of investment then capital consumption will occur because the interest rate will rise dramatically, the supply of loanable funds will shift dramatically to the left but without a corresponding change in consumption, therefore resources will be allocated more towards short-run productive processes and capital will not be accumulated to nearly the same extent. This is because long-term production is now so much more expensive that long term capital intensive projects are unprofitable.

Hoarding does not magically increase capital accumulation. It does so through a series of specific steps. If hoards come out of loanable funds, or if they do more so than out of consumption then this will decrease capital accumulation after prices adjust. I don’t feel like you really addressed this concern. It would seem instead that the barter example served to obscure the role interest and money have in the moneyed economy. Money does affect real factors, and investment and capital accumulation are certainly cases of this.

58

Hey Dave

This sounds like a big big copout to me - meaning that, yes, an economy can run without a common media of exchange and Say’s Law applies wherever production and exchange takes place. But you’re thought experiment is not merely removing the influence or the institution of money. In your thought-experiment you are confiscating the purchasing power of all cash-holders. Now, other holders of goods still have purchasing power because goods can be exchanged against one another. If goods on opposite sides of an exchange are not valued proportionately, then a discount will occur. For example if you have 100 pairs of flipflops and want my toolset, I might accept those flipflops but I will ask for more of those flipflops (a higher price for the toolset) than if you were just paying in cash, because flipflops are less marketable than cash and I value the time I might spend trying to find a buyer. Money helps out this problem by smoothing out the inconvenience of exchanging goods many times before one actually gets the desired one.

In your example, you neglected to reimburse those cash-holders with whatever goods or resources they would have bought with said money. When money is invested or given to a bank for lending, it represents the entrepeneurial employment of resources. Money is not a consumable good, it is a medium of exchange, a link from one point to another. When Neo (correct me if I’m wrong Neo) talks about taking money out of investment and putting it into hoarding, what is of significance in this example is not that pieces of paper or gold coins are taken out of an interest bearing deposit account and then stuffed under the mattress, but that resources are diverted away from investment and then sit in unemployment, exemplified by the “inactivity of the money”.

59

Jargon,

“When Neo (correct me if I’m wrong Neo) talks about taking money out of investment and putting it into hoarding, what is of significance in this example is not that pieces of paper or gold coins are taken out of an interest bearing deposit account and then stuffed under the mattress, but that resources are diverted away from investment and then sit in unemployment, exemplified by the “inactivity of the money”.”

I think that while you’re looking at the matter fundamentally differently (not necessarily incorrectly) than I am in the rest of your post, I agree fully with the statement right until you start talking about unemployed resources. While I think that you can make the case that this would happen in the short run, this is not what I’m focusing on right now exactly because what we are talking about would seem to show a fundamental misunderstanding of an important aspect of the Austrian framework.

To go back to the usual example, Robinson Crusoe can either enjoy five fish today by fishing without a net, or he can just catch one fish a day and spend the rest of his time making a net for a week which will then allow him to catch seven fish a day. Depending upon Crusoe’s time preference he will either invest in the net and enjoy a better standard of living tomorrow, or he will enjoy a better standard of living today.

In our economy the interest rate communicates to entrepreneurs how oriented they should be towards the production of more future vs. more present goods. The more money is spent on consumption the higher the “lower” stages of production climb, attracting more resources to those stages and away from higher ones. This increases output today, but decreases it in future, either relatively or absolutely. Meanwhile the more that is invested the more the opposite occurs.

Plain savings causes deflation and increases the purchasing power of money. therefore by a large number of investors taking their money out of the loan market and saving it they bring about a decrease in purchasing power, but since consumption has not decreased it means that consumption will increase in absolute terms leading to more present production. This may or may not lead to unemployed resources, but it will lead to lesser capital accumulation than would have otherwise occurred.

60

Here is an infamous quote from Rothbard in America’s Great Depression

http://mises.org/rothbard/agd.pdf

Electronic P. 86