On another thread, a certain sub-issue emerged as being critical. I thought it so important that it should have its own thread to prevent muddying the waters with other issues.
Imagine two potential borrowers going into a bank. One wishes to borrow X units of currency for a non-productive investment like building an extension to his house. The other wants to borrow X to build a new machine he’s just invented that will manufacture some good more efficiently than the previous production process. The bank only has enough money for one of the investments. The two potential borrowers then bid to offer the highest interest rate. Both borrowers are equally likely to give the money back. The amount that they bid in interest will of course be proportional to the borrowers perceived benefit to themselves personally, they are being 100% selfish.
Here is my analysis so far (it may change depending on your comments).
Productive investment: The total benefit derived from borrowing X units is equal to (A) the benefit to the borrower in profits after the machine is built plus (B) The benefit to the community of trade between the borrower and the community during the investment phase, as the borrower spends the X units plus (C) The benefit to the community from having cheaper goods available to purchase as a result of the completed investment.
Non-productive investment: The total benefit derived from borrowing X units is equal to (A) the benefit to the borrower of having his new house extension plus (B) The benefit to the community of trade between the borrower and the community during the investment phase as the borrower spends the X units + (there is no C).
The B’s in the two cases will be approximately equal because they are both instances of the borrower spending X units.
Yes, you missed everything. You don’t understand the purpose of the price mechanism, as a rational, unbiased way to allocate scarce resources. If the entrepreneur’s investment is not more secure than a man looking for an addition to his home, then he doesn’t “deserve” that loan anymore than the next guy. Next you’ll tell me that the government should ban producing high quality cars because the steel could be employed more “productively” in the creation of public schools or hospitals. Or, you’ll tell me that my income doesn’t belong to me because I’m not as “productive” as the engineer who lives next door to me. What about economics don’t you understand? Maximum efficiency is best determined by individual’s acting on their own behalf; led by an invisible hand, the market assures maximum social welfare (for lack of a better term) though the price mechanism and self-interest.
“I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.” -Adam Smith, get to know him.
you fail to understand subjective value theory, your theories have cardinal utility implicit and hence delude you into thinking the inter-personal comparisons of utility are possible. you seem bamboozled by the fact that some activies are technologically productive, and seem ignorant of the fact that such projects are not necessarily economically productive. The worlds biggest truck factory was built by socialists in russia, it was technologically productive, but it was not economically productive.
Assertion 1 (from AE) Selfish desires of the individual are aligned with the benefit to the community.
If you want to claim that it is impossible to compare benefits of something to person A with the benefits to person B then by that same logic you could not possibly determine the truth or otherwise of assertion 1.
Community is never meant some mystical aggregate or sum that implies that you can quantify the total benefit is some mathematical way. It means that people in order to profit, must provide something of value to some member or members of the community.
Given the fact that some members are better off as a result of the service provided, if you like, then on net, the total wealth for the entire community has been increased. It is obvious that if the service is directed to those who are willing to bid the most for it, then the net wealth creation in the community will be greatest.
My assertion is composed of three sentences. If anyone wants to suggest that I’ve somehow got it all wrong or I don’t understand this or that, then could you include in your posting a statement of which of the three sentences is wrong.
You’ve got it all wrong. All your previous posts are wrong, and I assume all your future posts are wrong since you have no desire to learn. You assume to have dismanteled several tenets of the austrian school of thought without bothering to understand those tenets in the first place. You than ignore the points we raise about various fundamental flaws in your logic.
We can only dismiss such arguments as lunacy or folly.
You can be descried basically as someone who assumes themselves as being a physicist without any basic physics training. Then proceed to formulate your own theories while ignoring the teachings of Newton and other physicists of the past. As a result your re-inventing the wheel and doing it all wrong.
I’ve just realized that my labeling of my assertion is such that it makes it awkward to phrase the rest of my post. So I’m going to re-label the components as follows:
Productive investment: The total benefit derived from borrowing X units
is equal to (A) the benefit to the borrower in profits after the machine
is built plus (B) The benefit to the community of trade between the borrower
and the community during the investment phase, as the borrower spends the X
units plus (C) The benefit to the community from having cheaper goods available
to purchase as a result of the completed investment.
Non-productive investment: The total benefit derived from borrowing X
units is equal to (D) the benefit to the borrower of having his new house
extension plus (E) The benefit to the community of trade between the borrower
and the community during the investment phase as the borrower spends the X
units.
The B and E in the two cases will be approximately equal because they are both
instances of the borrower spending X units.
The amount that the “productive investment” guy will be willing to bid is proportional to (A) (the benefit to him personally).
The amount that the non-productive investment guy will be willing to bid will be proportional to (D) (the benefit to him personally).
Now (A) will be a certain fraction of the total benefit. Whilst (D) will be a different (larger) fraction of the total benefit. So choosing the biggest number out of A and D may yield a different result to choosing the largest out of (A+B+C) vs (D+E). Its basic math. There is no avoiding it.
Just to help anyone struggling with the math. This “(A+B+C) vs (D+E)” issue is rather like the following.
Imagine two families the Smiths and the Thompsons. Every year they have a heaviest pumpkin growing contest. On a certain day they bring their heaviest pumpkin to the town square to be weighed by the mayor. The mayor however does not do a fair weighing. He always takes 80% of the the full weight of the smith’s pumpkin, but he compares that to 70% of the weight of the Thompson’s pumpkin… What do you think will happen? Well it may be the case that the true heaviest pumpkin often wins, but there will be an unfair bias towards awarding the prize to the Smiths. The mayor is considering different sized fractions of the weights of the pumpkins.
The is what I assert will happen with laissez faire lending. There will be a unhelpful bias toward lending to consume vs lending to invest.