Why the ABCT is wrong.

Economics Economics Questions
1

First off, let me address the main reason why there are so many so-called “Austrians” around today: They notice that applied Marxism, Keynesianism, and Monetarism have all failed, and that Keynes and Friedman’s logic are severely faulty. But it must be noted, that this does not make the Austrians right by default, and I will explain why. I’ve done some reading on the ABCT and it seems that the Austrians are more Marxian than they think they are. I was astonished to see that they don’t believe in the complete neutrality of money. Mises states that those who see the inflation first will see their purchasing power rise, and even unprofitable firms can survive with perpetual inflation. What strikes me, though, is that they don’t build upon this logic, more specifically, that they don’t investigate the alternative scenario.

You Austrians are well aware of the fact that in free markets, that is, “real capitalism,” there is a natural tendency for falling prices; that is, as production increases the purchasing power or “value” of the money increases as well. In fact, many Austrians include the latter part of the 19th century as a perfect example of this, and surely it is. But if we apply Mises’ logic, we see that perpetual falling prices must necessarily mean falling profits for the capitalists. Let’s take one scenario:

T1 capitalist burrows money, pays his expenses, and produces. He gets his revenues, pays off some of his debt, his workers, and buys the additional commodities he needs for further production. T2 he has his capital, his workers, and he produces more products, as do his competitors. This lowers their market exchange rate, but no worries (thinks the capitalist), his costs will fall as well. (technology accelerates this process)

Well the capitalist would be right if the bank lowered their interest rate and if the laborers, for some reason, decide to take a cut in their salaries. But why would the laborers not take the real increase in wages? Why would the Austrians assume that workers would accept a fall in salaries? Furthermore, why would they assume that banks would lower their interest rates? As far as I understand it, Austrians believe that the interest rates represent time preferences, that is, current goods vs future goods. If this time preference remains the same, why should there be a fall in the interest rate?

Inflation may indeed increase, arbitrarily, the profits earned by producers; some become dependent upon perpetual inflation. But why wouldn’t perpetual deflation destroy the capitalist’s profits? Austrians seem to love deflation, but can never answer this question. If time preferences remain the same, deflation must eventually destroy their profits; and the capitalists, whose laborers refuse to take pay cuts, must begin massive layoffs in order to remain in business. Why was Marx wrong again?

Anyone who brings up the failure of communism/socialism/fascism will be wasting their own time. I know Marxism has failed; but that does not make you right. I’m saying that capitalism must destroy its self, as well as all other potential forms of economics. It’s human nature to destroy ourselves.

2

Because of competition? If some workers are demanding an increase in real wages (via not accepting nominal wage cuts) above what employers want to pay them, then presumably other workers will take their place. For the same reason that workers today can’t just demand a higher share of a company’s profits.

It’s true that there is a psychological resistance to nominal wage cuts, but that’s at least partially because of persistent inflation.

I admit to not knowing how all adjustments are made in a deflationary economy, it is an interesting question. But I don’t see how labor markets will necessarily fail in this way.

As for interest rates, there is a component of expected inflation in the nominal rate. No Austrian denies that (or should not, at least)

3

No. The nominal salaries of the workers would not necessarily decrease. If the nominal salaries of the workers would necessarily decrease, then nominal salaries would necessarily increase in an other facet of the economy. If that were the case, then workers would try to work for the least competitive company because the most competitive companies would continuously increase their efficiency and then cut your salary. That is ridiculous!

Why must nominal salaries decrease?

4

  1. Ask the computer industry, where their prices fall faster than the rate of inflation, and where profits continue to be made.

  2. What does this have to do ABCT?

5

They do… you have a lot of reading to get to if you want to understand everything, I can’t even give you every answer out there…

Now for this, you realize that inflation is bad, because it can make unprofitable companies remain afloat and it destroys wealth

Well, in a real just world, if the business owner cannot pay employees due to falling prices and increased purchase power, he can fire them, and replace them with more labor, under the agreement to work for less, which should not be a problem, as the purchase power of the wage is increased, the B/O has the power to decide who works for him, and he can give the workers the choice, downgrade your pay or be fired, this example also ignores that better employees often (if we are discussing capitalism) receive a higher wage than their lesser counterparts, egalitarian systems like to sweep this under the table and forget it. Workers who do not accept a decrease in wages due ot increased purchase power are going to be looking for another job…

An increase in purchase power does not relate exactly to a decrease in time preference, except that when individuals have more liquidity, they save more or consume more, in saving they directly effect interest rates, if they consume more they are trading more capital to businesses, this will inevitably decrease the demand on bank investment, decreasing the interest rate. Interest rates are not a one factor phenomenon, this is part of the reason Keynesian Economics fails to properly predict or plan economy.

Deflation increases the purchase power, this is why it does not destroy profits. If you have $100 and milk is $5 a gal. at one time, and next time you check it is $4 a gal. your $100 is worth more product (5 more gallons of Milk), this is deflation at work. If you have the same money and reverse the order of the price change your $100 is worth less product, this is inflation at work, do you see how inflation is bad and deflation is good?

Time preference is not an issue with deflation, how could deflation destroy profits if Time Preference remains the same, if A makes $100 a week and saves half and deflation happens, he makes $80 and he saves half, his time preference has not changed, now what you are not considering is the general decrease in the price of the factors of prodution whic his why profit destruction does not happen.

The “capitalists” you realize are the labor, through their savings, the business owner is not the only capitalist…

Why is Marx wrong about what specifically?

If this were the case young lady, you would not be here, nor would anyone else, we would have destroyed ourselves long ago.

6

Much of your argument relies on a false claim that “time preferences remain the same”.

for example:

It doesn’t remain the same. The increase in productivity entails a lowering of time preference. Savings must be increased to allow for more future consumption. The increase in productivity is a result of capital accumulation. Capital accumulation IS savings accumulation. Let me put it this way so it becomes more intuitive. As people get wealthier, there is usually a tendency to save more, thus, enhancing further growth. If time preference remains the same, there is no growth.

There is no “automatic” mechanism that makes the economy grow. Growth requires new capital and new capital requires new savings. If you really want to understand more about how this works, you’re just going to have to dump Marx.

Now, think over your remarks and see how many of your concerns remain.

7

Harry, you want to think about this one. What chapter did you get to in MES? A stationary economy is one where the ratio between savings and consumption is fixed. The current savings are just enough to maintain the current capital. There must be NET savings (new savings) in order to increase Capital and lengthen the structure of production.

8

Labor like any other supplier will have to adjust their prices, wages, to the demand from consumers, employers. Keep in mind that as the value of the currency rises the amount of stuff the currency can buy will rise as well. This makes all consumers better off. It is government and fractional reserve banking employees that hate the idea of sound money as they are the beneficiaries of inflation.

The effects of inflation from the central banks and fractional reserve banks are anything but arbitrary. These effects are designed to help the partners in crime(Theft) of the central bank, those being the partner banks and the central government. It is the long term hidden effects of inflation that are negative that seem arbitrary, I prefer the term predetermined.

It is the ABCT that provides the description of the hidden effects of inflation and the prediction that at some future point there will be a bust resulting from the false signals inflation gives to entrepreneurs.

Many folks dislike the ABCT for several reasons: 1. It disagrees with the Keynesian and Chicago theories that a central bank can manage the value of the currency through inflation and grow an economy as fast as one based upon sound money. 2. It postulates that central and even decentralized banks can not create currency without long term negative and unpredictable effects. 3. It does not provide the timing of the busts. These are guesses. This is not a product of the ABCT as it is a product of the complexity of the economy.

As for layoffs, these are not the product of deflation. This is a lie perpetuated by the Keynesians in government to keep their system of theft running. These layoffs are the result of changes in the preferences of the consumers of labor , employers. The employers are reacting to the failures of these inflation based business activities. The idle labor must like any other supplier change its prices or its products to sell their products to the consumers. Unfortunately, people take time to make these changes and that is where the pain comes in.

9

Not that far, I am dragging because of other factors… After next week I will be in it in earnest, back from my trip, and all that…

I understand this, I was trying to reason within her confines of no TP change…

I know it is impossible, but I tried…

10

Seeing as the preceding misrepresentation of the ABCT (there are so many mistakes in here, as were pointed out) has pretty much been thrashed to pieces, I will just respond “couldn’t care less what you think” to this bit. You have a cynical viewpoint, and one which I see asserted a lot without much reason…

11

But it would be equalized throughout the entire labor market. It wouldn’t be one industry lowering nominal wages, or just a few of them; even the ones not increasing their production could lower nominal wages through market competition. And during periods of sustained growth, that is, increased production runs, many many industries would increase production.

12

But why do time preferences necessarily have to fall? Why couldn’t they remain the same? Would not the economy still grow? If production increases, continuously, so too must the purchasing power of money; but why should this not increase time preferences? If I can buy a lot of stuff now, more so than I once could, wouldn’t I? It seems like your saying that growth must necessarily mean a fall in time preferences, which seems to mean continuous falls in the rate of interest. I think I should investigate capital theory a little bit more; but I must say, this isn’t making a lot of sense.

People get wealthier, so they save, okay. But ABCT says that people also save during recessions, when there is a loss of wealth, or when times are uncertain. When wouldn’t the people save?

13

If nominal wage decreases are “equalized through the entire labor market”, then what happened to all the money? Did it disappear?

14

I didn’t really mention the ABCT. I just presented a scenario which ABCT seemingly ignores. If you could just tell my why I’m wrong, it would be greatly appreciated.

15

The same quantity of money would have to disperse throughout an economy which has grown, that is, to all of the market actors. The economy has grown, there are more workers/producers/bankers/goods/services.

16

I know. That is why asking what your OP had to do with ATBC.

17

In all practical terms, you must understand that labor is a special scarce resource unlike other capital goods. Human labor cannot simply be increased in quantity by capital accumulation (savings) and better production processes. It is easy to imagine that the rate of capital accumulation will tend to be higher then the rate of population increase. What is important is real wages, and what determines real wages is the per-head quota of capital.

If your only objection is that nominal wages may not rise, although you acknowledge that real wages do rise, then your objection is extremely weak.

Hypothetically, if it were a problem (psychological problem) it will be easily be resolved by the market. If people are demanding more money in nominal terms, money producers (such as gold mints) will be profitable, thus, resolving the artificial shortage of money by inflation. If inflation gets to high, it will not be as profitable to produce the money, thus, a free market would probably produce a stable flow of new money regulated by the market. However, this inflation is not like artificial bank credit expansion. Not only is it regulated by the free market, but it will be extremely gradual and uniform, as wage earners of the mints spend their new money on a variety of different consumer products. No business cycle will be produced by such inflation. It is important to stress that Austrians don’t like to emphasize this point in order not to distract you from the principle that the quantity of money is of no importance.

18
  1. Increases in productivity come from more effective production processes.
  2. More effective production processes involve more roundabout production methods.
  3. More roundabout production methods require more capital.
  4. Additional capital requires additional savings.
  5. Additional savings require a lower time preference.
19

Because it doesn’t address this very important question. Okay, inflation causes unsustainable bubbles which must inevitably lead to busts; but what then? What if the Austrians get their way only to see that deflation, over an extended period of time, must ruin profit potential? ABCT deals with one kind of scenario.

20

From what I gather it’s that the financial instruments at the time of the failure due to inevitable hyper-inflation (due to unbridled credit expansion not being easily discerned from seemingly ‘managed’ credit expansion), that such instruments will simply be discarded and replaced with other instruments. What happens from there, it seems to me that the logic of the situation does lead to a permanent loss of wealth, but was it really wealth at the start of it? If it was dependent on a monetary hat trick to exist, then one cannot attribute it to neither productivity gains nor to sound monetary policy. And that’s what I see is what the ABCT is trying to point out.