| Subject: | [socialcredit] RE: OWNERSHIP: time preference | | Date: | Monday, December 13, 2004 11:24:44 (-0000) | | From: | Wetzel Dave <Davewetzel @.......uk>
|
Maybe we should be looking at the speculation in land as a reason for booms
and slumps.
The slump is caused by land that is kept out of the market while the owner
speculates on a future windfall gain.
The withdrawal of land from the market denies people jobs and homes.
It also causes land prices to rise.
Hence accommodation for business and homes becomes even more expensive.
Marginal firms are unable to afford essential premises and business activity
declines.
Dave
Dave Wetzel.
-----Original Message-----
From: william_b_ryan@yahoo.com [mailto:william_b_ryan@yahoo.com]
Sent: 12 December 2004 21:24
To: ownership@cog.kent.edu; socialcredit@elistas.com
Subject: OWNERSHIP: time preference
Pat Gunning: "What you should do is look at your
assumptions and your logic."
--------------------------
-----------------------
[Reply] To which as a general principle I perfectly
agree. While recognizing--since reading his notes to
this list over these past few months--he has
objections to certain aspects of Rothbard's approach,
which I appreciate even though I yet do not yet fully
understand, I wonder if Professor Gunning has any
specific objections to the summary presentation of
the Austrian Theory of the Trade Cycle appended
below? I am simply asking if in his estimation it is
a fair representation? Assuming it is a fair
representation, I would like to take it as the focal
point for discussion, in that it is succinctly and
clearly stated. If it is not, perhaps he might
suggest another.
In the spirit of disclosure to those who didn't
already know, I will admit I am skeptical of time
preference theory in reespect to money.
-
[Rothbard] "Without bank credit expansion, supply and
demand tend to be equilibrated through the free price
system, and no cumulative booms or busts can then
develop."
--------------------------
-----------------------
[Reply] Which I suggested earlier might be an example
of the post hoc, ergo, prompter hoc fallacy.
-
[Rothbard] "Economic growth comes about largely as
the result of falling rates of time-preference, which
lead to an increase in the proportion of saving and
investment to consumption, and also to a falling rate
of interest."
--------------------------
-----------------------
[Reply] Assume an economy in even rotation in terms
of finance, that with each rotation new and improved
technology is introduced. Would not such an economy
"grow" without any change in time preference?
-
F A I R U S E C L A I M E D
SOURCE: http://www.mises.org/tradcycl/econdepr.asp
Murray Rothbard
Building on the Ricardians, on general "Austrian"
theory, and on his own creative genius, Mises
developed the following theory of the business cycle:
Without bank credit expansion, supply and demand tend
to be equilibrated through the free price system, and
no cumulative booms or busts can then develop. But
then government through its central bank stimulates
bank credit expansion by expanding central bank
liabilities and therefore the cash reserves of all
the nation's commercial banks. The banks then proceed
to expand credit and hence the nation's money supply
in the form of check deposits. As the Ricardians saw,
this expansion of bank money drives up the prices of
goods and hence causes inflation. But, Mises showed,
it does something else, and something even more
sinister. Bank credit expansion, by pouring new loan
funds into the business world, artificially lowers
the rate of interest in the economy below its free
market level.
On the free and unhampered market, the interest rate
is determined purely by the "time-preferences" of all
the individuals that make up the market economy. For
the essence of a loan is that a "present good" (money
which can be used at present) is being exchanged for
a "future good" (an IOU which can only be used at
some point in the future). Since people always prefer
money right now to the present prospect of getting
the same amount of money some time in the future, the
present good always commands a premium in the market
over the future. This premium is the interest rate,
and its height will vary according to the degree to
which people prefer the present to the future, i.e.,
the degree of their time-preferences.
People's time-preferences also determine the extent
to which people will save and invest, as compared to
how much they will consume. If people's time-
preferences should fall, i.e., if their degree of
preference for present over future falls, then people
will tend to consume less now and save and invest
more; at the same time, and for the same reason, the
rate of interest, the rate of time-discount, will
also fall. Economic growth comes about largely as the
result of falling rates of time-preference, which
lead to an increase in the proportion of saving and
investment to consumption, and also to a falling rate
of interest.
But what happens when the rate of interest falls, not
because of lower time-preferences and higher savings,
but from government interference that promotes the
expansion of bank credit? In other words, if the rate
of interest falls artificially, due to intervention,
rather than naturally, as a result of changes in the
valuations and preferences of the consuming public?
What happens is trouble. For businessmen, seeing the
rate of interest fall, react as they always would and
must to such a change of market signals: They invest
more in capital and producers' goods. Investments,
particularly in lengthy and time-consuming projects,
which previously looked unprofitable now seem
profitable, because of the fall of the interest
charge. In short, businessmen react as they would
react if savings had genuinely increased: They expand
their investment in durable equipment, in capital
goods, in industrial raw material, in construction as
compared to their direct production of consumer
goods.
Businesses, in short, happily borrow the newly
expanded bank money that is coming to them at cheaper
rates; they use the money to invest in capital goods,
and eventually this money gets paid out in higher
rents to land, and higher wages to workers in the
capital goods industries. The increased business
demand bids up labor costs, but businesses think they
can pay these higher costs because they have been
fooled by the government-and-bank intervention in the
loan market and its decisively important tampering
with the interest-rate signal of the marketplace.
The problem comes as soon as the workers and
landlords-largely the former, since most gross
business income is paid out in wages-begin to spend
the new bank money that they have received in the
form of higher wages. For the time-preferences of the
public have not really gotten lower; the public
doesn't want to save more than it has. So the workers
set about to consume most of their new income, in
short to reestablish the old consumer/saving
proportions. This means that they redirect the
spending back to the consumer goods industries, and
they don't save and invest enough to buy the newly-
produced machines, capital equipment, industrial raw
materials, etc. This all reveals itself as a sudden
sharp and continuing depression in the producers'
goods industries. Once the consumers reestablished
their desired consumption/investment proportions, it
is thus revealed that business had invested too much
in capital goods and had underinvested in consumer
goods. Business had been seduced by the governmental
tampering and artificial lowering of the rate of
interest, and acted as if more savings were available
to invest than were really there. As soon as the new
bank money filtered through the system and the
consumers reestablished their old proportions, it
became clear that there were not enough savings to
buy all the producers' goods, and that business had
misinvested the limited savings available. Business
had overinvested in capital goods and underinvested
in consumer products.
The inflationary boom thus leads to distortions of
the pricing and production system. Prices of labor
and raw materials in the capital goods industries had
been bid up during the boom too high to be profitable
once the consumers reassert their old
consumption/investment preferences. The "depression"
is then seen as the necessary and healthy phase by
which the market economy sloughs off and liquidates
the unsound, uneconomic investments of the boom, and
reestablishes those proportions between consumption
and investment that are truly desired by the
consumers. The depression is the painful but
necessary process by which the free market sloughs
off the excesses and errors of the boom and
reestablishes the market economy in its function of
efficient service to the mass of consumers. Since
prices of factors of production have been bid too
high in the boom, this means that prices of labor and
goods in these capital goods industries must be
allowed to fall until proper market relations are
resumed.
Since the workers receive the increased money in the
form of higher wages fairly rapidly, how is it that
booms can go on for years without having their
unsound investments revealed, their errors due to
tampering with market signals become evident, and the
depression-adjustment process begins its work? The
answer is that booms would be very short lived if the
bank credit expansion and subsequent pushing of the
rate of interest below the free market level were a
one-shot affair. But the point is that the credit
expansion is not one-shot; it proceeds on and on,
never giving consumers the chance to reestablish
their preferred proportions of consumption and
saving, never allowing the rise in costs in the
capital goods industries to catch up to the
inflationary rise in prices. Like the repeated doping
of a horse, the boom is kept on its way and ahead of
its inevitable comeuppance, by repeated doses of the
stimulant of bank credit. It is only when bank credit
expansion must finally stop, either because the banks
are getting into a shaky condition or because the
public begins to balk at the continuing inflation,
that retribution finally catches up with the boom. As
soon as credit expansion stops, then the piper must
be paid, and the inevitable readjustments liquidate
the unsound over-investments of the boom, with the
reassertion of a greater proportionate emphasis on
consumers' goods production.
Thus, the Misesian theory of the business cycle
accounts for all of our puzzles: The repeated and
recurrent nature of the cycle, the massive cluster of
entrepreneurial error, the far greater intensity of
the boom and bust in the producers' goods industries.
Mises, then, pinpoints the blame for the cycle on
inflationary bank credit expansion propelled by the
intervention of government and its central bank. What
does Mises say should be done, say by government,
once the depression arrives? What is the governmental
role in the cure of depression? In the first place,
government must cease inflating as soon as possible.
It is true that this will, inevitably, bring the
inflationary boom abruptly to an end, and commence
the inevitable recession or depression. But the
longer the government waits for this, the worse the
necessary readjustments will have to be. The sooner
the depression-readjustment is gotten over with, the
better. This means, also, that the government must
never try to prop up unsound business situations; it
must never bail out or lend money to business firms
in trouble. Doing this will simply prolong the agony
and convert a sharp and quick depression phase into a
lingering and chronic disease. The government must
never try to prop up wage rates or prices of
producers' goods; doing so will prolong and delay
indefinitely the completion of the depression-
adjustment process; it will cause indefinite and
prolonged depression and mass unemployment in the
vital capital goods industries. The government must
not try to inflate again, in order to get out of the
depression. For even if this reinflation succeeds, it
will only sow greater trouble later on. The
government must do nothing to encourage consumption,
and it must not increase its own expenditures, for
this will further increase the social consumption/
investment ratio. In fact, cutting the government
budget will improve the ratio. What the economy needs
is not more consumption spending but more saving, in
order to validate some of the excessive investments
of the boom.
Thus, what the government should do, according to the
Misesian analysis of the depression, is absolutely
nothing. It should, from the point of view of
economic health and ending the depression as quickly
as possible, maintain a strict hands off, "laissez-
faire" policy. Anything it does will delay and
obstruct the adjustment process of the market; the
less it does, the more rapidly will the market
adjustment process do its work, and sound economic
recovery ensue.
The Misesian prescription is thus the exact opposite
of the Keynesian: It is for the government to keep
absolute hands off the economy and to confine itself
to stopping its own inflation and to cutting its own
budget.
-
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