The Conservative Case for QE2, Or, Why I Still Will Not Be an Austrian.

[Smiling_Dave]

TY

[filc]

@Smiling Dave,

You were quoting Mises to try and refute Esuric, which is silly because he is correct, and you were mistkaken in this case. Furthermore you are missing a key tenant in the understanding of the ABCT, which would lead me to believe that your understanding of it is less then bragged about. Mainly, that changes in the supply of money effect prices unevenly.

And since you were trying to quote Mises, I will do the same and ask you to go back and read the chapters suggested.

Chapter XVII Indirect Exchange

• Section 4 - The determination of the purchasing power of money
• Section 6, Cash induced and goods induced changes in purchasing power

Chapter XX - Interest, Credit Expansion and Trade Cucles

• Section 6 - The gross market rate of interest as affected by inflation and credit expansion.

Chapter XVII Section 4

@HA

The main fault of the old quantity theory as well as the mathematical economists’ equation of exchange is that they have ignored this fundamental issue. Changes in the supply of money must bring about changes in other data too. The market system before and after the inflow or outflow of a quantity of money is not merely changed in that the cash holdings of the individuals and prices have increased or decreased. There have been effected also changes in the reciprocal exchange ratios between the various commodities and services which, if one wants to resort to metaphors, are more adequately described by the image of price revolution than by the misleading figure of an elevation or a sinking of the “price level.”

@HA

But even in setting aside all these things, we must never forget that changes in the quantity of money affect prices in an uneven way. It depends on the data of each particular case at what moment and to what extent the prices of the various commodities and services are affected. In the course of a monetary expansion (inflation) the first reaction is not only that the prices of some of them rise more quickly and more steeply than others. It may also occur that some fall at first as they are for the most part demanded by those groups whose interests are hurt.

Chapter XX Section 6

@HA

The essence of monetary theory is the cognition that cash-induced changes in the money relation affect the various prices, wage rates, and interest rates neither at the same time nor to the same extent. If this unevenness were absent, money would be neutral; changes in the money relation would not affect the structure of business, the size and direction of production in the various branches of industry, consumption, and the wealth and income of the various strata of the population.

Obviously there is much more. You must have missed these sections, or disagreed with them.

economists’ equation of exchange is that they have ignored this fundamental
issue. Changes in the supply of money must bring about changes in other
data too. The market system before and after the inflow or outflow of a
quantity of money is not merely changed in that the cash holdings of the
individuals and prices have increased or decreased. There have been effected
also changes in the reciprocal exchange ratios between the various commodities and services which, if one wants to resort to metaphors, are more
adequately described by the image of price revolution than by the misleading
figure of an elevation or a sinking of the “price level.”
economists’ equation of exchange is that they have ignored this fundamental
issue. Changes in the supply of money must bring about changes in other
data too. The market system before and after the inflow or outflow of a
quantity of money is not merely changed in that the cash holdings of the
individuals and prices have increased or decreased. There have been effected
also changes in the reciprocal exchange ratios between the various commodities and services which, if one wants to resort to metaphors, are more
adequately described by the image of price revolution than by the misleading
figure of an elevation or a sinking of the “price level.”
economists’ equation of exchange is that they have ignored this fundamental
issue. Changes in the supply of money must bring about changes in other
data too. The market system before and after the inflow or outflow of a
quantity of money is not merely changed in that the cash holdings of the
individuals and prices have increased or decreased. There have been effected
also changes in the reciprocal exchange ratios between the various commodities and services which, if one wants to resort to metaphors, are more
adequately described by the image of price revolution than by the misleading
figure of an elevation or a sinking of the “price level.”

[Smiling_Dave]

Dear filc.

Far be it from me to disagree with Mises without any proof whatsoever. I agree with him. Further, I knew that he says what I think is obvious upon reflection, that printing money does not affect all prices the same.

However, the disagreement between Esuric and me consists in the following.

1. I assert what to me is totally obvious, that printing money is NEVER good for an economy.

2. I assert that printing money raises prices. [Esuric very reluctantly agrees, but thinks the rise is trivial. I fail to see how he explains Zimbabwe and the Weimar Rebuplic and other hyperinflations].

3. I assert that this rise in prices, [uneven though it is], is an EVIL, and quoted Mises to that effect. [Esuric totally diagrees with this, It is either benign, or positively good].

4. I assert that deflation does no harm to an economy. Though it may change [or to use a judgemental loaded word. “distort”] relative prices, there is nothing wrong with that. Relative prices change all the time. For a reason. As opposed to the change in prices caused by money printing, which is caused by one group gobbling up resources without having earned the right to do so by their productivity. My source for this is the wise Hazlitt, in hs books on Inflation. [Esuric disagrees with this and thinks deflation is some horrible monster we must fear].

5. I assert that the brilliant Austrians who examined the effects of inflation on the trade cycle did not mean that said effects are the ONLY significant way inflation affects the economy. Their new discovery was, in my opinion, that inflation causes booms and busts IN ADDITION to all the other evils it was known to cause previously. I quoted Mises to back that up, who said inflation raises prices in an evil way. I also give you Zimbabwe and the Wiemar Republic and many other countries were destroyed not by trade cycles, but by higher and higher prices caused by constant money printing. [Esuric diagrees and thinks the Austrian books explaining booms and busts meant to say that all praxeological and historical knowledge gathered till now concerniong inflation is obsolete. Further, that when Mises wrote the chapters in Human Action on boom and busts he meant for us to at that point rip out all the other pages in Human Action that describe another great evil of inflation, rising prices.]

6. Esuric also has a mistake even if we grant all his other mistaken assumptions. He thinks that some magic formula exists that will tell us exactly how much money to print [and who to give it to for free] in such a way that the distortions caused by printing the money will exactly cancel out the distortions caused by deflation, and not create any new distortions. I consider this absurd, to put it mildly. if it is distortions one fears, adding new distortions [=money printing] on top of the old distortions [=deflation] seems to me an untenable position.

7. Walter Block does not say what scineram attributed to him. I quote from the link Mr Green so kindly provided. The bolded words are Blocks, but I’m the one who bolded them.

To the extent Mises is saying that the extant quantity of
fiat money should not be changed and it is socially wasteful to use scarce
resources to add to the stock thereof, he is correct.

However, to the extent he
says that using resources (or goods in the case of conversion of the money
commodity from nonmonetary uses to monetary uses) to increase the supply
of monetary gold, e.g., any increase in the stock of gold money is socially
wasteful, he is wrong in our view, as is Rothbard, who agrees with Mises on
this, as we shall show.

So unless Esuric and scineram mean that when there is deflation we should start mining more energetically for gold, as opposed to printing more fiat money, then they cannot claim Dr Block as a supporter.

[filc]

@Smiling Dave

1. I assert what to me is totally obvious, that printing money is NEVER good for an economy.

Lets assume a free market. The money is gold, and money substitutes of various sorts. Would you say that gold miners are evil?

@Smiling Dave

2. I assert that printing money raises prices. [Esuric very reluctantly agrees, but thinks the rise is trivial. I fail to see how he explains Zimbabwe and the Weimar Rebuplic and other hyperinflations].

3. I assert that this rise in prices, [uneven though it is], is an EVIL, and quoted Mises to that effect. [Esuric totally diagrees with this, It is either benign, or positively good].

Then you are left with a problem of explaining how rising prices alone is quote, “evil”. Assuming an ERE, prices increasing uniformly, what exactly is evil about this situation?

What Esuric is pointing out is that you are mis-characterizing the issue. There is a reason why Mises’s explanation of monetary expansion does not dwell on inflation, or the “Crackup-boom” alone. If it were just that rising prices were evil, why waste time in creating a business cycle theory at all?

Printing Money is argued by Austrians to cause two problems, Inflation, and Business cycles. In an ERE inflation isn’t a problem, and Mises explains this in HA, I am too drunk and lazy to find the passage for now. Austrian’s instead really pay attention to the alteration in the structure of production during an inflationary period. The issue is that a stable structure of production is getting altered radically over a short period of time.

@Smiling Dave

4. I assert that deflation does no harm to an economy.

A radical reduction in the money supply would equally distort the structure of production. Economic calculation is looking for stability to some extent. It’s basing it’s judgements based on the historical data of yesterday, if the data moves relatively too quickly, there will be problems.

@Smiling Dave

Esuric also has a mistake even if we grant all his other mistaken assumptions. He thinks that some magic formula exists that will tell us exactly how much money to print [and who to give it to for free

I would be very reluctant in ever stating that Esuric is in error, without some serious, serious research and homework done on my part. I personally have never heard Esuric state exactly what you claim, that he endorses the printing of money.

However lets assume that he does advocate the printing of money. Assuming Banking occurs on the free market, with no central coercive authority, do you think we would have the same problems at hand? I personally think we would not.

IMHO, I think it stands that Esuric will have to clarify his position, because something tells me you are mis-representing him to some extent.

[Smiling_Dave]

Reminder: My replies are in bold.

@filc

@Smiling Dave

1. I assert what to me is totally obvious, that printing money is NEVER good for an economy.

Lets assume a free market. The money is gold, and money substitutes of various sorts. Would you say that gold miners are evil?

Gold still has intrinsic value. Mining it is productive input. Printing money has no intrinsic value [and dont jump on me for saying gold has, this was discussed at length in other threads, Esuric finally admitting it does]. Those who print it do not contribute something productive to the economy.

That said, your q seems to be a point of debate between Walter Block and Mises and Rothbard, so I reserve opinion on that matter. But they all agree that it is wasteful to print fiat money.

@Smiling Dave

2. I assert that printing money raises prices. [Esuric very reluctantly agrees, but thinks the rise is trivial. I fail to see how he explains Zimbabwe and the Weimar Rebuplic and other hyperinflations].

3. I assert that this rise in prices, [uneven though it is], is an EVIL, and quoted Mises to that effect. [Esuric totally diagrees with this, It is either benign, or positively good].

Then you are left with a problem of explaining how rising prices alone is quote, “evil”.

It steals our purchasing power. When you read Human Action, and got to the part where Mises writes that rising prices are evil, did you write in the margin of your copy that Mises fails to explain why rising prices are evil?

Assuming an ERE, prices increasing uniformly, what exactly is evil about this situation?

Did you decide Mises was in error when you read HA because of that q? I already explained why it is an evil. It gives Obama and pals the means to gobble up our resources without having produced anything. I suspect you know this, how could you not?

What Esuric is pointing out is that you are mis-characterizing the issue.

You mean he thinks I am. But I’m not.

There is a reason why Mises’s explanation of monetary expansion does not dwell on inflation, or the “Crackup-boom” alone. If it were just that rising prices were evil, why waste time in creating a business cycle theory at all?

Remember, Mises did mention it, and quite clearly. The reason he does not dwell on it is because it is readily understood. He did not realize some people wouldn’t get it unless he explained it for 500 pages. That’s like asking “If 2+2=4, why did Carl Gauss not dwell on that fact in any of his writings?”

Mises did not “create” a business cycle theory. He explained a well known, but hiterto unexplained, phenomenon.

Had he not explained it, it would remain unexplained. For example, if a scientist notices that washing the hands before operating reduces the death rate of his patients, but has no explanation why, it is a boon to mankind for someone to explain why. See here [number 4] for what happens otherwise. D****on’t really understand the q.

Also, there are times when the the rise is prices is invisible, offset as it is by better technology etc that lowers prices. Then the only thing we see is the cycle. An example of this is the thirties. In other times, we have stagflation.

Printing Money is argued by Austrians to cause two problems, Inflation, and Business cycles. In an ERE inflation isn’t a problem, and Mises explains this in HA, I am too drunk and lazy to find the passage for now.

Then I am too drunk and lazy to believe you, especially since I quoted Mises saying explicitly otherwise. He said it is an “evil”. He did not say it is “not a problem”.

Even if we grant that he wrote such a thing about an ERE, an ERE is a fictional thing, what one might call a thought experiment. In the real world, there is no such thing as an ERE, and in the real world, Mises wrote, Inflation is an “evil”.

You have many questions and arguments to show it is not an evil. Are you saying Mises was mistaken? That he contradicted himself, in one place saying it is an evil, in another that it is not a problem? Why are you ignoring the explicit evidence I presented from HA? To address yourself to the quote I supplied, you can remain drunk and lazy and need not look up anything else. It should be the first thing you do, before asking q’s and saying you remember that somewhere or other Mises said the opposite.

Austrian’s instead really pay attention to the alteration in the structure of production during an inflationary period.

“Pay attention”? What does that mean?

Do Mathematicians not “pay attention” to 2+2=4, because they don’t write about it?

Again, what are you going to do with the quote from Mises saying it is an evil? Was he “not paying attention” when he wrote that?

What about Hazlitt’s two books devoted solely to inflation? Did he write those works without “paying attention”?

The issue is that a stable structure of production is getting altered radically over a short period of time.

That is one issue. There is another, equally important, and at times more so. It’s called rising prices. And anyone fool enough to endorse money printing because rising prices is “not a problem” and nobody “pays attention” to rising prices may well end up with another Zimbabwe on his hands.

@Smiling Dave

4. I assert that deflation does no harm to an economy.

A radical reduction in the money supply would equally distort the structure of production.

Not distort. Change. Do not conflate the two.

Esuric already wrote that stuff, and I explained at least twice in the earlier posts why he is wrong. You ignore what I wrote there, as opposed to pointing out what you think is the flaw in my reasoning. Do you think constant repetition of your assertion, without adressing any objections raised to it, will convince me or whoever is following this discussion?

EDIT: Also, according to Esuric, why are there never “busts and busts”, always “booms and busts”? According to Esuric, there should be, somwhere on this planet, at some point in time, a business cycle started by deflation. But not only are there no historical examples of such a beast, there is no mention of them in Mises or Hayek or anywhere else. How did this happen?

Economic calculation is looking for stability to some extent.

And I am looking for Santa Claus. The difference is, my efforts to find him won’t harm anyone. Printing money in a doomed effort to achieve what is undesirable in the first place [beacuse stability is not a good thing in and of itself] will do great harm, as I have explained and have quoted Mises as agreeing with me.

It’s basing it’s judgements based on the historical data of yesterday, if the data moves relatively too quickly, there will be problems.

No there won’t. And even if there will be, meddling will only create greater problems, as I explained and quoted Mises to back me up.

@Smiling Dave

Esuric also has a mistake even if we grant all his other mistaken assumptions. He thinks that some magic formula exists that will tell us exactly how much money to print [and who to give it to for free

I would be very reluctant in ever stating that Esuric is in error, without some serious, serious research and homework done on my part.

The truth is more beloved to me than is Esuric. I have stated my reasons for concluding he is in error, and until shown why they are wrong, I go by them.

I personally have never heard Esuric state exactly what you claim, that he endorses the printing of money.

How do you think he plans to “fight” deflation? By donating all the millions that are under his mattress to charity?

However lets assume that he does advocate the printing of money. Assuming Banking occurs on the free market, with no central coercive authority, do you think we would have the same problems at hand? I personally think we would not.

You think printing money is fine in a free market absent a central bank? You think everyone should be allowed to counterfeit freely? The problems that counterfeiting raises when done on a massive scale are exactly the problems raised by money printing. In fact they are identical [but for some arbitrary law declaring one legal and the other not].

IMHO, I think it stands that Esuric will have to clarify his position, because something tells me you are mis-representing him to some extent.

I deduce that you think that his position as I stated it is pretty shaky. Glad we agree on something.

[filc]

@Smiling Dave

**That said, your q seems to be a point of debate between Walter Block and Mises and Rothbard, so I reserve opinion on that matter. But they all agree that it is wasteful to print fiat money.

**

As far as ABCT is concerned, this is irrelevant.

@Smiling Dave

**It steals our purchasing power. When you read Human Action, and got to the part where Mises writes that rising prices are evil, did you write in the margin of your copy that Mises fails to explain why rising prices are evil?

**

The purchasing power is not stolen if the inflation occurs uniformly. So it is not inflation alone that is “Evil”. You admit in this statement that it is not that inflation alone is what is evil(whatever that means) but the consequences it causes. Something Esuric was trying to further expand on. The issue here is an oversimplification by you, that Esuric was correcting. I believe you took issue with it, as most people on this forum take issue with people disagreeing with them.

I never read a part of HA where Mises said that inflation was evil, period, end of story. Such a statement is out of context for HA. A large portion of the book is dedicated to catallactics and economic calculation. Saying that inflation is evil, end of story, is a mis-characterization of the lessons that HA has to offer.

@Smiling Dave

**Did you decide Mises was in error when you read HA because of that q? I already explained why it is an evil.

**

I never decided that Mises was in error on this specific aspect. I decided that you were. Furthermore you have to stop using the word “evil”. It’s incoherent as far as the discussion is concerned.

The rest of your comments are just back peddling trying to find ways to cover the fact that you missed crucial parts of ABCT, HA, and other Austrian tennats before arguing with Esuric.

Furthermore when you make comments like the following

@Smiling Dave

**The truth is more beloved to me than is Esuric.

**

You pretty much send your own credibility down the drain. I give zero credibilty and respect to the overlly aarogant. Especially someone who naively believes that they have the best interest of truth, while their opponent does not.

At any rate my point was only that you either mistakingly forgot this specific aspect of the Austrian Capital theory. That Esuric was correct in his earlier responses to you, and you were either looking to argue with him, did not understand his responses, or do not understand ABCT all together.

You seem to be dragging me away from the discussion which should involve capital theory and the structure of production. I haven’t the time or interest to debate on anything else at the time. So my request is for you to stay on topic, your response was rather large, and little of it had to do with the topic at hand.

[filc]

Smiling Dave,

You should note that I consider your posts valuable to the community as a whole, and I for one enjoy your participation here. Don’t take anything I said too personally.

-Filc

[JohnnyFive]

The demand for money is not the same as the demand for savings.

‘Savings’, ‘liquidity holdings’ and ‘consumptions’ are three different ways of using your money.

You’re absolutely right, my language was imprecise. I should have just said ‘holding money’ rather than ‘saving’. I suppose another way to think about it is that when you sell goods you are buying money, and when you buy goods you are selling money. I think the concept ‘demand for money’ becomes more easily comparable to the concept of the demand for other goods when you think of it this way.

[AdrianHealey]

@Smiling Dave

Did you decide Mises was in error when you read HA because of that q? I already explained why it is an evil. It gives Obama and pals the means to gobble up our resources without having produced anything. I suspect you know this, how could you not?

Smiling Dave, there is one point you’re clearly missing. Nobody is saying that, given the world we live in, that inflation is bad. Indeed: because it raises prices and so on. But in a world where all prices immediately would adjust to this ‘new’ money, inflation wouldn’t be a problem. The problem is thus not inflation ‘in itself’, but the Cantillon-effects that necessarily happen (in this world) where money enters in the economy. That’s the real crux of relative price differences and so on and so forth. Not the pure element of ‘inflation’ in and of itself.

Remember where Esuric, originally, responded too: “When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up”

Regarding the businesscycle; the relevant issue is price coordination, not the fact that ‘prices rise’.

<= You are suggesting that these prices raises are a problem. Esuric, correctly, states: " Simply put, if prices were perfect, i.e., if they instantaneously and simultaneously adjusted to alterations in the supply of money, then inflation and deflation wouldn’t really be a problem at all" <= The Cantillon-effects; those are what hamper the economy. If prices just adapt instantly, there wouldn’t be a problem But that would be impossible in this world.

Furthermore; invoking the Weimar republic and Zimbabwe isn’t an argument. The argument isn’t ‘we should print money’. The argument is that we should match the demand for money as liquidity as an variable, where market forces should work to match supply and demand. Inflation is thus possible, as a increase in the supply of money in excess of the demand for money, which would show up in price inflation and inflationary gdp numbers (as has happened in Zimbabwe and the Weimar republic). When you want to engage in an argument, it helps when you can argue against the argument itself and not some straw man version of it.

You think printing money is fine in a free market absent a central bank? You think everyone should be allowed to counterfeit freely? The problems that counterfeiting raises when done on a massive scale are exactly the problems raised by money printing. In fact they are identical [but for some arbitrary law declaring one legal and the other not].

<= This is called ‘beggin the question’. Nobody supports counterfeiting. So you might want to assume that’s not what they mean. Maybe you should criticize the arguments themselves in stead of, again, a straw man fallacy of it?

[Caley_McKibbin]

Nonetheless, we are stuck with this monopoly producer of money and have to work with it.

The monopoly is the only reason that it is used.

If only I didn’t have this cup restricting me to carrying a limited amount of liquid. Very funny.

P.S. I fully endorse free printing.

[Smiling_Dave]

Dear filc,

TY for your kind words. I, too, certainly mean nothing personal. And I am glad someone thinks my contributions here of value. I feared my colloquial style might be raising eyebrows.

A word about how to tell what is my reply to your latsest post, quted here. I will use italic font this time, the bold already being all over the place.

@filc

@Smiling Dave

**That said, your q seems to be a point of debate between Walter Block and Mises and Rothbard, so I reserve opinion on that matter. But they all agree that it is wasteful to print fiat money.

**

As far as ABCT is concerned, this is irrelevant.

It is relevant to the q you asked me, which was do i diapprove of gold mining etc. My reply was that I leave that for the big guns, Mises and Block, to settle among themselves. But the world we live in now is one of fiat money, where of course it is bad to print more.

@Smiling Dave

**It steals our purchasing power. When you read Human Action, and got to the part where Mises writes that rising prices are evil, did you write in the margin of your copy that Mises fails to explain why rising prices are evil?

**

The purchasing power is not stolen if the inflation occurs uniformly.

Maybe in theory this is true. I don’t know. But it never happens in the real world.

So it is not inflation alone that is “Evil”.

That’s like saying “In a world where there is no electricity, an electric chair will kill no one. So an electric chair alone is harmless.” We live in a real world, where inflation has caused and will continue to cause untold woe. Are we disagreeing about this?

You admit in this statement that it is not that inflation alone is what is evil(whatever that means)

When I call it “evil”, I am using Mises’ phrase.

but the consequences it causes. Something Esuric was trying to further expand on.

With this new twist on what Esuric was saying is “In a world with no electricity, an electric chair will harm no one. So when there is deflation, let’s put someone in an electric chair.” Which is sophistry. Because we live in a world where there is electricity and printing money causes great harm.

The issue here is an oversimplification by you, that Esuric was correcting.

That’s not the issue. He was coming out in defense of QE2, the topic of this original post. I disagree. QE2 is not taking place in a world with no electricity.

Further, he admitted reluctantly that printing money does raise prices. So that we are now not talking about a world with no electricicty , where inflation is benign. His argument was that it indeed causes prices to rise, but only a teeny weeny bit. And he was saying that this is true praxeologically, that it is the great discovery of the brilliant later Austrians. Long live the trade cycle, death to the mythical price inflation.

That being his argument, Zimbabwe is very relevant. As is the quote from Mises that people seem to be ignoring.

I believe you took issue with it, as most people on this forum take issue with people disagreeing with them.

I can live with people disagreeing with me. It’s the personal comments I find offensive.

I never read a part of HA where Mises said that inflation was evil, period, end of story.

filc, are you denying the existence of my quote?

Such a statement is out of context for HA.

No it’s not. It’s a simple truth. And I quoted the whole piece at great length, lest someone toss out the “out of context” wheeze.

A large portion of the book is dedicated to catallactics and economic calculation. Saying that inflation is evil, end of story, is a mis-characterization of the lessons that HA has to offer.

I fear you missed the boat, big time. So what if it is devoted to catallectics? Rising prices are a catallectic thing. And should be part of anyones economic calculation. And it is a huge part of the lesson that HA has to offer, that printing money raises prices in this real world of ours, that the latter is a great evil in this real world of ours, and my mind boggles that people don’t get it.

@Smiling Dave

**Did you decide Mises was in error when you read HA because of that q? I already explained why it is an evil.

**

I never decided that Mises was in error on this specific aspect. I decided that you were.

But I was quoting him. So we are either both right or both wrong. You can’t have your cake etc.

Furthermore you have to stop using the word “evil”. It’s incoherent as far as the discussion is concerned.

I stand by my right to quote Mises, who used the word evil. Are you saying he was being incoherent? And it is very relevant and important here. I want Esuric, when his hand is about to start the printing press, to see Mises in his mind’s eye, standing before him like an Old Testament prophet and saying, “Esuric my son, what you are about to do is EVIL EVIL EVIL”

The rest of your comments are just back peddling trying to find ways to cover the fact that you missed crucial parts of ABCT, HA, and other Austrian tennats before arguing with Esuric.

filc, that’s a low blow, imputing unworthy motives to me. I was not back peddling at all. Back peddling means saying something different that one said originally, which is not at all the case. Sheesh.

Furthermore when you make comments like the following

@Smiling Dave

**The truth is more beloved to me than is Esuric.

**

You pretty much send your own credibility down the drain. I give zero credibilty and respect to the overlly aarogant.

1. filc, you reach that conclusion by being overly generous. I was stating an inequality. On the left side of the scale was truth, on the right side Esuric. You thought I was raising the left side of the scale, which may be considered arrogance. You can guess the rest.

2. I will refrain from discussing how arrogant Esuric is.

Especially someone who naively believes that they have the best interest of truth, while their opponent does not.

As far as I know, I’m not trying to lie. As far as I have seen Esuric’s debating tactics… well I’ll drop that hot potato.

At any rate my point was only that you either mistakingly forgot this specific aspect of the Austrian Capital theory. That Esuric was correct in his earlier responses to you, and you were either looking to argue with him, did not understand his responses, or do not understand ABCT all together.

None of the above.

You seem to be dragging me away from the discussion which should involve capital theory and the structure of production.

The topics were “Is QE2 good or bad?” “Is deflation good or bad?” “Is printing money good or bad?” 'What is the view of the great Austraians on money printing?" These call for more than capital thoery and the structure of production. I am remeinde dof the old saying, when all you have is a hammer, everything looks like nails.

And my response was large, but every part of it was relevant to the topics at hand.

I haven’t the time or interest to debate on anything else at the time.

Then I thank you for your valuable input thus far.

[Autolykos]

Hi Esuric,

Thanks for posting a challenging response to my explanation.

@Esuric

It’s far more complicated than this and I don’t fully understand it myself. But before I get into my explanation I think it’s important to go over Mises’ typology of economic goods. Mises breaks it down into three distinct categories; first, there are the consumer goods, then there are the producer goods, and finally there are “media of exchange,” i.e., money. This third and final category is a good and class in itself. The natural rate of interest is determined solely by the ratio of demand between consumer goods (consumption) and producer goods (saving), but is not affected by alterations in monetary conditions.

That begs the question: why isn’t the natural rate of interest (which I understand is a conceptual device) affected by alterations in monetary conditions?

@Esuric

Okay, so let’s imagine a simple two good economy where individuals can choose between either x1 or x2. In period t1, the total supply of x1 equals 20 and the total supply of x2 equals 20 as well. As the demand, and therefore price of x1 rises (say by 50%), the demand (and therefore price) of x2 must necessarily fall (by 50%). But the process doesn’t end here. The alteration in the relative structure of prices will cause capital to “flow” from sector x2 towards sector x1 so that the supply of x1 in period t2 will equal 30, and the supply of x2 in period t2 will equal 10 (equalizing profits across both industries). Prices guide production. In the aggregate, though, there is no change in total output; the only thing that has changed is the direction of investment, and the composition total consumer goods produced.

Why must x1 and x2 be mutually exclusive? Or is that a hidden assumption on your part?

If they aren’t mutually exclusive, then can’t demand for x1 rise with demand for x2 staying the same?

As an aside, I wonder if this kind of thing is why many people support zero-sum policies – it seems easier to them to “take” more of the existing stock of capital/wealth than it does to generate new capital/wealth.

@Esuric

Now let’s include another good into our simple economy, call it x3, and it will represent money. What happens when the demand for x3 rises? Individuals will limit their consumption and increase sales in order to satiate their demand for money. The demand, and therefore price, of either good x1 and x2 must fall; in fact, the demand and price of both x1 and x2 may, and probably will fall until the price of money adjusts (when the price of x1 and x2 fall enough). But now the marginal producers in industries x1 and x2 will no longer be profitable and this will yield disinvestment.

Why won’t they be profitable anymore?

What do you mean “disinvestment”? Do you mean “withdrawal/liquidation of investment” or do you mean “malinvestment”?

@Esuric

Now let’s consider what actually happens when the demand for money rises. Individuals, as I’ve mentioned, will cut consumption and they will withdraw money from the bank, from their savings. They will also sell off their securities (bonds and stocks) for liquidity. This will lower (a) the total supply of loanable funds and (b) the demand for securities, which forces financial intermediaries to charge higher rates of return in order to increase QD. In other words, the market rate(s) of interest will rise, but the natural rate of interest will remain unaltered (because the only thing that has changed is monetary conditions). I’m assuming that the demand for consumer goods (consumption) and the demand for producer goods (savings) fall in a proportionate manner for the sake of simplicity. It could very well be the case that they change unevenly which would alter the natural rate of interest.

Isn’t holding onto actual money itself a form of savings? It just isn’t savings in a bank.

Otherwise, I agree that this will, ceteris paribus, lower the supply of loanable funds and the demand for securities. By “QD”, do you mean “quantity demanded”? Which class of economic goods do securities belong to? Since they aren’t money themselves, it would seem that they’re either consumer or producer goods. And what about loanable funds? Are they part of the money stock, or are they producer goods?

@Esuric

My model, though, assumes an economy consisting of a single phase of production. With such an assumption, an elevated rate of savings would produce a similar type of effect except for the fact that interest rates would fall, saving the profitability of a few marginal producers. But when we lax this assumption, and consider an economy consisting of multiple phases of production, than an elevated savings rate actually increases total profit in the aggregate (the stock of profits, so to speak) and total output.

Let’s now consider the effects of saving in an economy consisting of multiple phases of production:

Again, I have to ask whether you’re including “money-hoarding” as a form of savings. I imagine that people who take money out of banks aren’t thinking “I don’t want to save this money anymore”, they’re simply changing the way in which they’re saving it.

@Esuric

This is not the case when there’s an elevated demand for money, even in an economy consisting of multiple phases of production. A higher demand for money, again even in an economy consisting of multiple phases of production, will elevate the market rate of interest above the natural rate, constricting general economic activity. This will yield a condition which resembles inadequate effective demand until prices adjust (which will take time and the adjustments will be uneven).

If most people’s demand for money rises vis-a-vis other goods, then aren’t they indeed signalling a constriction of general economic activity – at least in the present? What’s the problem here?

@Esuric

I believe this is why MET support “keeping MV stable,” i.e., satiating the demand for money as money when it rises. And you can basically find this argument in Hayek’s Prices and Production. In other words, Warlas’ law, and a crude version of Say’s law, only holds when there is monetary equilibrium (savings will not equal investment when there’s monetary disequilibrium).

To be honest, I wonder whether this isn’t just an attempt at having one’s cake and eating it too. In other words, the idea is to satiate people’s demand for money without a corresponding contraction in economic activity. Of course, the question is why such a contraction is necessarily a bad thing.

[DD5]

@Esuric

This is what economic analysis (pure theory) is. You compare the real world with a hypothetical and perfect world in order to identify and analyze the relationships between certain variables, …

This is economic analysis misconstruing its objects under investigation. You are misapplying the imaginary construct of static equilibrium or the ERE. Equilibrium is not a "hypothetical perfect world"as you ascribe to it, but a hypothetical mental and imaginary construct that would be brought about if and only if no further change in market data was ever to occur. Equilibrium means no change and no further human action.

Its only use is to aid us in analyzing change, that is, the market process. Only in this respect, is it valid to say that we compare the real world to equilibrium,i.e., we study change by comparing it to the static. It is not comparing the imperfect world with the perfect equilibrium world.

@Esuric

I mean, should we just abandon Austrian business cycle theory because inter-temporal equilibrium can never be attained

What you’re basically saying makes no sense. You’re basically saying that a discrepency of market data from some imaginary equilibrium point is disturbing, and that’s your basis for using equilibrium analysis. You got it all wrong! That’s the fallacy behind “perfect competition” and all the mathematical equilibrium analysis. The disturbance is always on entrepreneurial forces working to bring about some imaginary equilibrium point, not a discrepancy from the equilibrium point itself. Big big difference.

You’re basically saying that since market data is diverging from equilibrium, this or that is below or above some equilibrium “natural” rate or price. In other words, the market never works!

[Smiling_Dave]

@AdrianHealey

@Smiling Dave

Did you decide Mises was in error when you read HA because of that q? I already explained why it is an evil. It gives Obama and pals the means to gobble up our resources without having produced anything. I suspect you know this, how could you not?

Smiling Dave, there is one point you’re clearly missing. Nobody is saying that, given the world we live in, that inflation is bad. Indeed: because it raises prices and so on.

If that is the case, I’m fine. My impression was that Esuruc is saying that it’s just an insignificant lil thing, a speck of dust in the wind. The real problem is the trade cycle.

But in a world where all prices immediately would adjust to this ‘new’ money, inflation wouldn’t be a problem. The problem is thus not inflation ‘in itself’, but the Cantillon-effects that necessarily happen (in this world) where money enters in the economy. That’s the real crux of relative price differences and so on and so forth. Not the pure element of ‘inflation’ in and of itself.

One can construct as many theoretical worlds as one wishes, and I have no quarrel with it.

Remember where Esuric, originally, responded too: “When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up”

Since we were discussing the real world, I take it you agree with my stattement, that they will go up, and that that is a big problem.

Regarding the businesscycle; the relevant issue is price coordination, not the fact that ‘prices rise’.

Who was discussing the business cycle, we were discussing the real world.

<= You are suggesting that these prices raises are a problem. Esuric, correctly, states: " Simply put, if prices were perfect, i.e., if they instantaneously and simultaneously adjusted to alterations in the supply of money, then inflation and deflation wouldn’t really be a problem at all" <= The Cantillon-effects; those are what hamper the economy. If prices just adapt instantly, there wouldn’t be a problem But that would be impossible in this world.

He goes on to discuss the real world and say deflation sucks, because it changes prices, and that we need to print fat oodles of money to “solve the problem” of deflation

Furthermore; invoking the Weimar republic and Zimbabwe isn’t an argument. The argument isn’t ‘we should print money’.

Of course it is. Esuric stated quite clearly that [to his understanding] brilliant Austrian minds have discovered that rising prices are a mere bagatelle, nothing to worry about IN THE REAL WORLD.

But perhaps I misunderstand you. maybe you are saying "Forget about Esuric. I am about to present a different version of things, where printing money in the real world is bad, but where other parts of Esuric’s thesis are true.

OK, I’ll give a listen.

The argument is that we should match the demand for money as liquidity as an variable,

First of all, Why?

Second of all, that is impossible, because you ruin the value of the currency everyone is holding, gaining nothing. See the story above of cutting apples in half.

where market forces should work to match supply and demand.

Oh, I’m all for market forces. But printing money is not market forces.

Inflation is thus possible, as a increase in the supply of money in excess of the demand for money, which would show up in price inflation and inflationary gdp numbers (as has happened in Zimbabwe and the Weimar republic). When you want to engage in an argument, it helps when you can argue against the argument itself and not some straw man version of it.

Esurioc stated quite clearly that even in the real world, rising prices is a trivial ole thing, nothing to worry about, really. The great Austrian minds discovered this, he thinks. Thus Zimbab and Weimar are totally relevant.

You think printing money is fine in a free market absent a central bank? You think everyone should be allowed to counterfeit freely? The problems that counterfeiting raises when done on a massive scale are exactly the problems raised by money printing. In fact they are identical [but for some arbitrary law declaring one legal and the other not].

<= This is called ‘beggin the question’. Nobody supports counterfeiting. So you might want to assume that’s not what they mean. Maybe you should criticize the arguments themselves in stead of, again, a straw man fallacy of it?
The q was do I thin printing money is OK in a free market absent a cenbtarl bank. My reply was that printing money is exactly the same, catallecticaly, as counterfeitng. There is only an irrlevent legal distinction between them.
If you think they are not identical, tell me why.

[Autolykos]

@DD5

This is economic analysis misconstruing its objects under investigation. You are misapplying the imaginary construct of static equilibrium or the ERE. Equilibrium is not a "hypothetical perfect world"as you ascribe to it, but a hypothetical mental and imaginary construct that would be brought about if and only if no further change in market data was ever to occur. Equilibrium means no change and no further human action.

Its only use is to aid us in analyzing change, that is, the market process. Only in this respect, is it valid to say that we compare the real world to equilibrium,i.e., we study change by comparing it to the static. It is not comparing the imperfect world with the perfect equilibrium world.

Indeed. I think of “market equilibria” as being like asymptotes: points which things move toward but never actually reach. Markets are more complicated than math, furthermore, because the equilibria are both interdependent and in constant flux.

@DD5

What you’re basically saying makes no sense. You’re basically saying that a discrepency of market data from some imaginary equilibrium point is disturbing, and that’s your basis for using equilibrium analysis. You got it all wrong! That’s the fallacy behind “perfect competition” and all the mathematical equilibrium analysis. The disturbance is always on entrepreneurial forces working to bring about some imaginary equilibrium point, not a discrepancy from the equilibrium point itself. Big big difference.

You’re basically saying that since market data is diverging from equilibrium, this or that is below or above some equilibrium “natural” rate or price. In other words, the market never works!

Very good point. If “market failure” is defined as “not reaching an equilibrium condition”, then all markets are always in a state of failure.

[DD5]

@filc

A radical reduction in the money supply would equally distort the structure of production.

Do you agree that money is always at work no matter what the magnitude of one’s cash balance is, or some aggregate cash balances?

If so, how do changes in average cash balances constitute “distortions”? How can it be distortion any more then the perpetually endless changes in market data that occur always and everywhere? Distorted from what? What is the point of reference for your “measurement”?

@filc

It’s basing it’s judgements based on the historical data of yesterday, if the data moves relatively too quickly, there will be problems.

“too quickly” is not a category of action. It is a personal value judgement. It has no place in scientific inquiry and economic science.

@filc

Assuming Banking occurs on the free market, with no central coercive authority, do you think we would have the same problems at hand? I personally think we would not.

non-sequitur. It doesn’t follow from this that anything that MET (it’s not MIT) has to say is correct.

[Esuric]

@AdrianHealey

This is the part that doesn’t make sense to me. You say ‘the natural rate of interest remains unaltered’, but how can this be true?

I’m holding the ceteris paribus condition. I’m analyzing the effects of an elevated demand for money, all other things equal. It’s true that an elevated demand for money will reduce total consumption and total savings, but the ratio between the two remains unaltered (as long as we maintain the ceteris paribus condition). So for example:

1. Let’s say that C₁ (consumption in period one), S₁ (savings in period one ) and k₁ (the demand for money in period 1) all equal 4
2. Now let’s assume that the k rises to, say, 8
3. C₂ (consumption in period two) and S₂ will each equal 2 while k₂ equals 8

As long as the ratio of demand between consumption and savings remains unaltered then there is no change in the natural rate of interest (time preference). Now of course consumption and saving patterns may change in relative terms as well, due to a change in the demand for money, and this would indeed alter the natural rate of interest, but then we’re no longer holding the ceteris paribus condition.

@flic

IMHO, I think it stands that Esuric will have to clarify his position, because something tells me you are mis-representing him to some extent.

Of course he’s misrepresenting my position. This guy is totally lost. For some reason he believes that I support government printing money, and that I’m unaware of the fact that inflation is solely caused by an expansion in the supply of money beyond the demand for money (I reject cost-push theories of inflation and/or other endogenous explanations).

What I support is a free and competitive banking system without arbitrary regulations.

@Autolykos

That begs the question: why isn’t the natural rate of interest (which I understand is a conceptual device) affected by alterations in monetary conditions?

Because the natural rate of interest reflects time preference, not liquidity preference. Familiarity with Austrian capital theory is required in order to understand my argument.

@Autolykos

Why must x1 and x2 be mutually exclusive? Or is that a hidden assumption on your part?

Yes, I’m employing static analysis (general equilibrium) with an economy consisting of only two markets and two goods (there is no economic growth). Under such circumstances, a higher demand for x1 must necessarily mean a proportionately lower demand for x2. There are only so many resources available at any given time; you can’t elevate the demand and therefore production of both x1 and x2 without additional savings and investment.

@Autolykos

Why won’t they be profitable anymore?

Because there’s a lower demand.

@Autolykos

What do you mean “disinvestment”? Do you mean “withdrawal/liquidation of investment”…?

Yes.

@Autolykos

Isn’t holding onto actual money itself a form of savings? It just isn’t savings in a bank.

No. Savings constitutes a higher demand for future goods while the demand for money is the demand for liquidity. Here’s a more precise definition,

“Simply put, it means that people’s demand to hold real money balances at the current price level is in excess of the supply of such balances.”

@DD5

You are misapplying the imaginary construct of static equilibrium or the ERE. Equilibrium is not a "hypothetical perfect world"as you ascribe to it, but a hypothetical mental and imaginary construct that would be brought about if and only if no further change in market data was ever to occur. Equilibrium means no change and no further human action.

By perfect, I mean a world where any further change must necessarily yield Pareto inefficient outcomes; a world where individuals are no longer willing to alter the state of affairs. This condition is, of course, entirely illusory, but quite useful for economic analysis (as Mises explains).

@DD5

What you’re basically saying makes no sense. You’re basically saying that a discrepency of market data from some imaginary equilibrium point is disturbing, and that’s your basis for using equilibrium analysis.

So then do you dismiss the concept of inter-temporal equilibrium as entirely fruitless or do you merely condemn the concept of monetary equilibrium? Austrian business cycle theory is merely the investigation of the ramifications associated with inter-temporal disequilibrium; inter-temporal equilibrium is just as unattainable as monetary equilibrium. Why should we abandon the latter but not the former? You’re being inconsistent, and quite frankly, incoherent.

@DD5

You’re basically saying that since market data is diverging from equilibrium, this or that is below or above some equilibrium “natural” rate or price. In other words, the market never works!

Non sequitur. Stop putting words in my mouth. I’m merely identifying and analyzing the effects of monetary and inter-temporal disequilibrium, that’s all. The market rate of interest can fall below the natural rate, and it can rise above the natural rate. I don’t know why some are so bent on ignoring the latter condition.

[Autolykos]

Esuric, I’m disappointed that you didn’t respond to all of my last post. Why didn’t you? Can you please do so?

@Esuric

Because the natural rate of interest reflects time preference, not liquidity preference. Familiarity with Austrian capital theory is required in order to understand my argument.

Are you implying that I’m not familiar with Austrian capital theory? If so, why?

You took the time to write a lengthy response to part of an earlier post of mine, and I appreciate that. However, if you’re not going to help me fully understand your argument, what’s the point?

With that said, I think my questions about which categories securities and loanable funds fall into are relevant here. I’d greatly appreciate it if you’d address them.

@Esuric

Yes, I’m employing static analysis with a general equilibrium economy consisting of only two markets and two goods (there is no economic growth). Under such circumstances, a higher demand for x1 must necessarily mean a lower demand for x2. There are only so many resources available at any given time; you can elevate the demand and therefore production of both x1 and x2 without additional savings and investment.

Okay, so all resources are being employed to provide either x1 or x2. Thanks for the clarification.

@Esuric

@Autolykos

Why won’t they be profitable anymore?

Because there’s a lower demand.

As someone else pointed out, lower demand for x1 and x2 would mean lower demand for their inputs, correct? So the prices of the inputs should adjust downward as well. Hence I fail to see how lower demand necessarily leads to any firms (let alone the most marginal) becoming unprofitable.

@Esuric

@Autolykos

What do you mean “disinvestment”? Do you mean “withdrawal/liquidation of investment”…?

Yes.

Thanks. So I guess I don’t see the problem with such disinvestment.

@Esuric

@Autolykos

Isn’t holding onto actual money itself a form of savings? It just isn’t savings in a bank.

No. Savings constitutes a higher demand for future goods while the demand for money is the demand for liquidity. Here’s a more precise definition,

“Simply put, it means that people’s demand to hold real money balances at the current price level is in excess of the supply of such balances.”

I think I addressed that definition already. My point was that there’s no reason for the current price level to remain the same.

Are you defining “savings” as “higher demand for future goods” in the above?

What are the reasons why demand for liquidity would rise? It seems to me that, when people don’t spend their money right away, they are signalling a higher demand for future goods. Does it really matter whether they put that money in bank savings accounts or under their mattresses? If so, why?

[Esuric]

With that said, I think my questions about which categories securities and loanable funds fall into are relevant here. I’d greatly appreciate it if you’d address them.

It’s not. It’s entirely irrelevant, but if I had to categorize them, I would say that they’re future goods (since they are claims to future goods, i.e., capital goods).

As someone else pointed out, lower demand for x1 and x2 would mean lower demand for their inputs, correct?

As I’ve mentioned in my original response to you, i originally assumed an economy consisting of a single phase of production. There are no inputs. Either way, if we assume an economy consisting of multiple phase of production (a structure of production), a higher demand for money, which elevates the market rate of interest above the natural rate, would make it so that the prices of final outputs would all faster than the prices of inputs, because the structure of production is either contracting, or not expanding enough to restore profitability (as is the case when there’s a higher rate of savings).

Thanks. So I guess I don’t see the problem with such disinvestment.

You don’t see a problem with a contraction in total output and lower wage rates (society becoming poorer)? Okay.

I think I addressed that definition already. My point was that there’s no reason for the current price level to remain the same.

Of course. You can restore real cash balances by allowing prices to adjust (fall), but, as I’ve mentioned, this can be problematic (uneven adjustments, certain lags, etc).

What are the reasons why demand for liquidity would rise?

This is an interesting question. Personally, I believe that the demand for money only truly rises by any significant degree during a recession, i.e., a period of extreme uncertainty (people tend to demand liquidity, the safest asset, during such circumstances). Severe monetary disequilibrium, when the demand for money rises above the supply of money (this is merely one type of monetary disequilibrium, of course), is a potential consequence of a recession. During “normal times,” the demand for money is fairly stable as transactions are routinized.

It seems to me that, when people don’t spend their money right away, they are signalling a higher demand for future goods.

Why would you say that? They’re not demand goods in the future; they’re demanding liquidity.

Does it really matter whether they put that money in bank savings accounts or under their mattresses? If so, why?

Yes, and I’ve already explained why.

[DD5]

@Esuric

So then do you dismiss the concept of inter-temporal equilibrium as entirely fruitless or do you merely condemn the concept of monetary equilibrium?

How can I dismiss it when I carefully elaborated on its proper and improper use. And I also explained how it is valid in explaining ABCT:

DD5: “The disturbance is always on entrepreneurial forces working to bring about some imaginary equilibrium point, not a discrepancy from the equilibrium point itself. Big big difference.”

@Esuric

Why should we abandon the latter but not the former? You’re being inconsistent, and quite frankly, incoherent.

I have defined my terms above about equilibrium. You have yet to show how I have been inconsistent. In fact, right now, you are beginning to construct an argument that equivocates “distortion” with “disequilibrium”.

@Esuric

Austrian business cycle theory is merely the investigation of the ramifications associated with inter-temporal disequilibrium;

This cannot be so if the above is to be taken literally, for everything is in disequilibrium. The above is at best, very poor wording used to describe the problem by MET theorists, and at worse, totally fallacious.

ABCT is about inter-temporal distortions, and not inter-temporal disequilbrium. Again, if you’re going to equivocate distortions with disequilibrium, then I’m afraid we’re going to have to abandon all hope for the possibility of a consistent logical argument.

@Esuric

@DD5

You’re basically saying that since market data is diverging from equilibrium, this or that is below or above some equilibrium “natural” rate or price. In other words, the market never works!

Non sequitur. Stop putting words in my mouth.

I’m not putting any words in your mouth. You just said it again. How is this:

“Austrian business cycle theory is merely the investigation of the ramifications associated with inter-temporal disequilibrium”

not saying that market data is diverting from equilibrium?