Find counter arguments by entering NameVs… or …VsName.
The author or concept searched is found in the following 29 entries.
| Disputed term/author/ism | Author |
Entry |
Reference |
|---|---|---|---|
| Consumer’s Sovereignty | Hutt | Rothbard III 629 Consumer’s Sovereignty/Hutt/Rothbard: The metaphorical shibboleth of "consumers' sovereignty" has misled even the best economists. Many writers have used it as an ideal with which to contrast the allegedly imperfect free-market system. An example is Professor W.H. Hutt of the University of Cape Town, who has made the most careful defense of the concept of consumers' sovereignty.(1) Since he is the originator of this concept and his use of the term is widespread in the literature, his article is worth particular attention. Rothbard III 630 (…) Hutt defends his concept of consumers' sovereignty against the criticism that he has neglected the desires of producers. He does this by asserting that if a producer desires a means as an end in itself, then he is "consuming." In this formal sense (…) consumers' sovereignty, by definition, always obtains. Rothbard: Formally, there is nothing wrong with such a definition, for we have stressed throughout this book that an individual evaluates ends (consumption) on his value scale and that his valuation of means (for production) is dependent upon the former. In this sense, then, consumption always rules production. RothbardVsHutt: But this formal sense is not very useful for analyzing the situation on the market. And it is precisely the latter sense that Hutt and others employ. Rothbard III 631 (…) suppose producer A withholds his labor or land or capital service from the market. For whatever reason, he is exercising his sovereignty over his person and property. On the other hand, if he supplies them to the market, he is, to the extent that he aims at monetary return, submitting himselfto the demands of the consumers. In the aforementioned general sense, "consumption" rules in any case. But the critical question is: which "consumer"? The market consumer of exchangeable goods who buys these goods with money, or the market producer of exchangeable goods who sells these goods for money? To answer this question, it is necessary to distinguish between the "producer of exchangeable goods" and the "consumer of exchangeable goods," since the market, by definition, can deal only in such goods. In short, we can designate people as "producers" and as "consumers," even though every man must act as a consumer, and every man must also act, in another context, as a producer (or as the receiver of a gift from a producer). RothbardVsHutt: Making this distinction, we find that, contrary to Hutt, each individual has self-sovereignty over his person and property on the free market. The producer, and the producer alone, decides whether or not he will keep his property (including his own person) idle or sell it on the market for money (…). Rothbard III 632 Hutt: Hutt implicitly recognizes this, however, since he soon shifts his argument and begins inconsistently to hold up “consumers’ sovereignty” as an ethical ideal against which the activities of the free market are to be judged. On the other hand, when the producer acts to withhold his property in order to attain more monetary income than otherwise (presumably, although Hutt does not state this, by taking advantage of an inelastic demand curve for his product), then he is engaging in a vicious infringement on the consumers' will. He may do so by acting to restrict production of his own personal product, or, if he makes the same product as other producers, by acting in concert with them to restrict production in order to raise the price. Rothbard: This is the doctrine of monopoly price, and it is this monopoly price that is allegedly the instrument by which producers pervert their rightful function. >Monopolies. Hutt/Rothbard: Hutt recognizes the enormous diffculty of distinguishing among the producer's motives in any concrete case. The individual who withholds his own labor may be doing so in order to obtain leisure; and even the owner of land or capital may be withholding it in order to derive, say, an aesthetic enjoyment from the contemplation of his unused property. Suppose, indeed, that there is a mixture of motives in both cases. Hutt is definitely inclined to solve these diffculties by not giving the producer the benefit of the doubt, particularly in the case of property. Rothbard III 633 RothbardVsHutt: (…) (1) it is impossible, not simply impracticable, to separate the leisure from monetary considerations here, since both elements are involved, and only the person himself will know the intricate balancing of his own valuations. (2) More important, this act does not contravene the truth that the producer can earn money only by serving the consumers. Why has he been able to extract a "monopoly price" through restricting his production? Only because the demand for his services (either directly by consumers or indirectly from them through Iower-order producers) is inelastic, so that a decreased production of the good and a higher price will lead to increased expenditure on his product and therefore increased income for him. >Elasticity. Rothbard III 635 Yet this inelastic demand schedule is purely the result of the voluntary demands of the consumers. If the consumers were really angry at this "monopolistic action," they could easily make their demand curves elastic by boycotting the producer and/or by increasing their demands at the "competitive" production level. >Boycott. 1. W.H. Hutt, “The Concept of Consumers’ Sovereignty,” Economic Journal, March, 1940, pp. 66–77. Hutt originated the term in an article in 1934. For an interesting use of a similar concept, cf. Charles Coquelin, “Political Economy” in Lalor’s Cyclopedia, III, 222–23. |
Hutt I William H. Hutt The Theory of Idle Resources: A Study in Definition Carmel, Indiana 1977 Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Consumption (Economics) | Rothbard | Rothbard III 280 Consumption/Rothbard: (…) at any given point in time, the consumer is confronted with the previously existing money prices of the various consumers’ goods on the market. On the basis of his utility scale, he determines his rankings of various units of the several goods and of money, and these rankings determine how much money he will spend on each of the various goods. Specifically, he will spend money on each particular good until the marginal utility of adding a unit of the good ceases to be greater than the marginal utility that its money price on the market has for him. This is the law of consumer action in a market economy. As he spends money on a good, the marginal utility of the new units declines, while the marginal utility of the money forgone rises, until he ceases spending on that good. In those cases where the marginal utility of even one unit of a good is lower than the marginal utility of its money price, the individual will not buy any of that good. Rothbard III 281 Market: In this way are determined the individual demand schedules for each good and, consequently, the aggregate market-demand schedules for all buyers. The position of the market-demand schedule determines what the market price will be in the immediate future. Thus, if we consider action as divided into periods consisting of “days,” then the individual buyers set their rankings and demand schedules on the basis of the prices existing at the end of day 1, and these demand schedules determine what the prices will be by the end of day 2. >Planning/Rothbard. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Credit | Rothbard | Rothbard III 166 Credit/Rothbard: (…) a third type of claim arises from a credit exchange (or credit transaction). In a credit transaction, a present good is exchanged for a future good, or rather, a claim on a future good. >Goods/Rothbard, >Exchange/Rothbard. Prices in such exchanges are determined by value scales and the meeting of supply and demand schedules, just as in the case of exchanges of present goods. >Time preference, >Demand/Rothbard, >Supply/Rothbard. Price/credit: It is evident that the various rates of time preference - ultimately determined by relative positions on individual value scales - will act to set the price of credit exchanges. Moreover, the receiver of the present good - the debtor - will always have to repay a greater amount of the good in the future to the creditor - the man who receives the claim, since the same number of units is worth more as a present good than as a future good. Rothbard III 167 The creditor is rendering the debtor the service of using a good in the present, while the debtor pays for this service by repaying a greater amount of the good in the future. In the meanwhile, however, the claim is in existence, and it can be bought and sold in exchange for other goods. wagon. The price of this exchange will again be determined by supply and demand schedules. Market price/risk: Thus, [A’s] demand for the note (or [B’s] demand to hold) in terms of [goods] will be based on (a) the direct utility and exchange-value of the [good], and (b) the marginal utility of the added units of [(other) good], discounted by him on two possible grounds: (l) the length of time the claim has left until the date of “maturity,” and (2) the estimate of the security of the note. Thus, the less time there remains to elapse for a claim to any given good, the higher will it tend to be valued in the market. When a claim is thus transferred in exchange for some other good (or claim), this in itself is not a credit transaction. A credit exchange sets up an unfinished payment on the part of the debtor;(…). |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Demand | Rothbard | Rothbard III 152 Demand/Rothbard: An increased supply schedule, by lowering price, induces the market to demand the larger quantity offered. This, however, is not an increase in the demand schedule, but an extension along the same demand schedule. It is a larger quantity demanded in response to a more attractive price offer. This simple movement along the same schedule must not be confused with an increase in the demand schedule at each possible price. >Supply/Rothbard, >Price/Rothbard, >Stock keeping/Rothbard. Rothbard III 151 Supply/Rothbard: It is important to be on one’s guard here against a common confusion over such a term as “an increase in demand.” Whenever this phrase is used by itself in this work ((s) i.e. Rothbard. 1962. Man, Economy and State) it always signifies an increase in the demand schedule, i.e., an increase in the amounts that will be demanded at each hypothetical price. This “shift of the demand schedule to the right” always tends to cause an increase in price. It must never be confused with the “increase in quantity demanded” that takes place, for example, in response to an increased supply. Rothbard III 238 Demand/Rothbard: The money price is determined by actions decided according to individual value scales. Example: At any market price of six grains or under, he will exchange these grains for the butter; at a market price of seven grains or over, he will not make the purchase. His maximum buying price for a second pound of butter will be considerably lower. This result is always true, and stems from the law of utility; as he adds pounds of butter to his ownership, the marginal utility of each pound declines. Rothbard III 239 On the other hand, as he dispenses with grains of gold, the marginal utility to him of each remaining grain increases. Both these forces impel the maximum buying price of an additional unit to decline with an increase in the quantity purchased. From this value scale, we can compile this buyer’s demand schedule, the amount of each good that he will consume at each hypothetical money price on the market. >Price/Rothbard. Rothbard III 240 Demand curve: (…) because of the law of utility, an individual demand curve must be either “vertical” as the hypothetical price declines, or else rightward-sloping (i.e., the quantity demanded, as the money price falls, must be either the same or greater), not leftward-sloping (not a lower quantity demanded). Demand schedule: If this is the necessary configuration of every buyer’s demand schedule, it is clear that the existence of more than one buyer will tend greatly to reinforce this behavior. (…) the value scales of the buyers will almost always differ, which means that their maximum buying prices for any given pound of butter will differ. The result is that, as the market price is lowered, more and more buyers of different units are brought into the market. This effect greatly reinforces the rightward-sloping feature of the market-demand curve. >Supply/Rothbard, >Equilibrium price/Rothbard. Rothbard III 247 Demand curve/stock keeping/Rothbard: It is characteristic of the total demand curve that it always intersects the physical stock available at the same equilibrium price as the one at which the demand and supply schedules intersect. The Total Demand and Stock lines will therefore yield the same market equilibrium price as the other, although the quantity exchanged is not revealed by these curves. They do disclose, however, that, since all units of an existing stock must be possessed by someone, the market price of any good tends to be such that the aggregate demand to keep the stock will equal the stock itself. Then the stock will be in the hands of the most eager, or most capable, possessors. These are the ones who are willing to demand the most for the stock. That owner who would just sell his stock if the price rose slightly is the marginal possessor: that nonowner who would buy if the price fell slightly is the marginal nonpossessor.(1) >Stock keeping/Rothbard. Rothbard III 250 Demand schedule: What are the determinants of the demand and supply schedules themselves? Can any conclusions be formed about the value scales and the resulting schedules? >Speculation/Rothbard. Rothbard III 252 (…) we have still not explained the rankings of the good on the seller’s value scale and the rankings of money on the buyer’s. Rothbard III 256 Demand schedule: the general factors that determine the supply and demand schedules of any and all consumers’ goods, by all persons on the market, are the balancing on their value scales of their demand for the good for direct use and their demand for money, either for reservation or for exchange. (…) it is evident that decisions to invest are due to the demand for an expected money return in the future. A decision not to invest (…), is due to a competing demand to use a stock of money in the present. >Demand schedule. 1. The proof that the two sets of curves always yield the same equilibrium price is as follows: Let, at any price, the quantity demanded = D, the quantity supplied = S, the quantity of existing stock = K, the quantity of reserved demand = R, and the total demand to hold = T. The following are always true, by definition: S=K–R T=D+R Now, at the equilibrium price, where S and D intersect, S is obviously equal to D. But if S = D, then T = K – R + R, or T = K. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Demand for Money | Rothbard | Rothbard II 166 Demand for money/prices/Rothbard: (…) partial ‘real’ factors - such as government expenditures abroad, a sudden scarcity of food, or ‘a sudden diminution of the confidence of foreigners, in consequence of any great national disaster’ - could influence overall prices or the status of the pound in the foreign exchange market. But (…) such influences can only be trivial and temporary. The overriding causes of such price or exchange movements - not just in some remote ‘long run’ but a all times except temporary deviations - are monetary changes in the supply of and demand for money. Changes in ‘real’ factors can only have an important impact on exchange rates and general prices by altering the composition and the height of the demand for money on the market. But since market demands for money are neither homogeneous nor uniform nor do they ever change Rothbard II 167 equiproportionately, real changes will almost always have an impact on the demand for money. Salerno: ... since real disturbances are invariably attended by ‘distribution effects’, i.e. gains and losses of income and wealth by the affected market participants, it is most improbable that initially nonmonetary disturbances would not ultimately entail relative changes in the various national demands for money...[U]nder inconvertible conditions, the relative changes in the demands for the various national currencies, their quantities remaining unchanged, would be reflected in their long-run appreciation or depreciation on the foreign exchange market.(1) >Price theory/Rothbard. Rothbard III 756 Demand for money/Rothbard: The total demand for money on the market consists of two parts: Exchange demand: the exchange demand for money (by sellers of all other goods that wish to purchase money) and Reservation demand: the reservation demand for money (the demand for money to hold by those who already hold it). Because money is a commodity that permeates the market and is continually being supplied and demanded by everyone, and because the proportion which the existing stock of money bears to new production is high, it will be convenient to analyze the supply of and the demand for money in terms of the total demand-stock analysis (…). In contrast to other commodities, everyone on the market has both an exchange demand and a reservation demand for money. A. Exchange Demand Exchange demand: The exchange demand is his pre-income demand. As a seller of labor, land, capital goods, or consumers' goods, he must supply these goods and demand money in exchange to obtain a money income. >Production factors, >Income, >Goods, >Production. Demand: Aside from speculative considerations, the seller of ready-made goods will tend, (…) to have a perfectly inelastic (vertical) supply curve, since he has no reservation uses for the good. Rothbard III 757 Supply: But the supply curve of a good for money is equivalent to a (partial) demand curve for money in terms of the good to be supplied. Exchange demand: Therefore, the (exchange) demand curves for money in terms of land, capital goods, and consumers' goods will tend to be perfectly inelastic. >Elasticity/Rothbard. Labour: Some people might work a greater number of hours because they have a greater monetary inducement to sacrifice leisure for labor. Others may decide that the increased income permits them to sacrifice some money and take some of the increased earnings in greater leisure. In both cases, the man earns more money at the higher wage rate.(…) Therefore, a man’s backward-sloping supply curve will never be “backward” enough to make him earn less money at higher wage rates. Rothbard III 758 „Buying money“/market: Thus, a man will always earn more money at a higher wage rate, less money at a Iower. But what is earning money but another name for buying money? And that is precisely what is done. People buy money by selling goods and services that they possess or can create. Demand schedule for money: We are now attempting to arrive at the demand schedule for money in relation to various alternative purchasing powers or "exchange-values" of money. Exchange value of money: A Iower exchange-value of money is equivalent to higher goods-prices in terms of money. Conversely, a higher exchange-value of money is equivalent to Iower prices of goods. Labour/wages: In the labor market, a higher exchange-value of money is translated into Iower wage rates, and a Iower exchange-value of money into higher wage rates. Labour market: Hence, on the labor market, our law may be translated into the following terms: The higher the exchange-value of money, the Iower the quantity of money demanded; the Iower the exchange-value of money, the higher the quantity of money demanded (i.e., the Iower the wage rate, the less money earned; the higher the wage rate, the more money earned). Therefore, on the labor market, the demand-for-money schedule is not vertical, but falling, when the exchange-value of money increases, as in the case of any demand curve. Exchange demand for money: Adding the vertical demand curves for money in the other exchange markets to the falling demand curve in the labor market, we arrive at a falling exchange-demand curve for money. B. Reservation Demand Reservation demand: More important, because more volatile, in the total demand for money on the market is the reservation demand to hold money. This is everyone's post-income demand. After everyone has acquired his income, he must decide, between the allocation of his money assets in three directions: a) consumption spending, b) investment spending, and c) addition to his cash balance ("net hoarding"). Furthermore, he has the additional choice of subtraction from his cash balance ("net dishoarding"). How much he decides to retain in his cash balance is uniquely determined by the marginal utility of money in his cash balance on his value scale. >Cash balance/Rothbard. Reservation demand curve for money: (…) the higher the PPM (purchasing power of money; the exchange-value of money), the lower the quantity of money demanded in the cash balance. >Purchasing power/Rothbard. As a result, the reservation demand curve for money in the cash balance falls as the exchange-value of money increases. This falling demand curve, added to the falling exchange-demand curve for money, yields the market's total demand curvefor money - also falling in the familiar fashion for every commodity. Rothbard III 762 Equilibirum/purchasing power: Suppose (…) that the PPM (purchasing power of money) is slightly higher (…). The demand for money at that point will be less than the stock. People will become unwilling to hold money at that exchange-value and will be anxious to sell it for other goods. These sales will raise the prices of goods and Iower the PPM, until the equilibrium point is reached. On the other hand, suppose that the PPM is Iower (…). In that case, more people will demand money, in exchange or in reservation, than there is money stock available. The consequent excess of demand over supply will raise the PPM again (…). >Purchasing power parity/Rothbard. Rothbard III 766 Economic law: Every supply of money is always utilized to its maximum extent, and hence no social utility can be conferred by increasing the supply of money. >Money supply/Rothbard, >Money supply/David Hume. Economists have attempted mechanically to reduce the demand for money to various sources(2) RothbardVsKeynes: There is no such mechanical determination, however. Each individual decides for himself by his own standards his whole demand for cash balances, and we can only trace various influences which different catallactic events may have had on demand. >Speculative Demand, >Clearing/Rothbard. Rothbard III 772 Demand for money/Rothbard: Is the demand for money unlimited? A popular fallacy rejects the concept of "demand for money" because it is allegedly always unlimited. This idea misconceives the very nature of demand and confuses money with wealth or income. the form of holding back the good from being sold. (…) effective demand for money is not and cannot be unlimited; it is limited by the appraised value of the goods a person can sell in exchange and by the amount of that money which the individual wants to spend on goods rather than keep in his cash balance. Purchasing power: Furthermore, it is, of course, not "money" per se that he wants and demands, but money for its purchasing power, or "real" money, money in some way expressed in terms of what it will purchase. (This purchasing power of money (…) cannot be measured.) >Time preference/Rothbard, >Price/Rothbard. Rothbard III 775 Value of cash balances: The only necessary result (…) of a change in the demand-for-money schedule is precisely a change in the same direction of the proportion of total cash balances to total money income and in the real value of cash balances. Given the stock of money, an increased scramble for cash will simply Iower money incomes until the desired increase in real cash balances has been attained. If the demand for money falls, the reverse movement occurs. The desire to reduce cash balances causes an increase in money income. Total cash remains the same, but its proportion to incomes, as well as its real value, declines.(3) 1. Joseph Salerno. 1980. ‘The Doctrinal Antecedents of the Monetary Approach to the Balance of Payments’ (doctoral dissertation, Rutgers University, 1980), pp. 299-300. 2. J.M. Keynes’ Treatise on Money (New York: Harcourt, Brace, 1930) is a classic example of this type of analysis. 3. Strictly, the ceteris paribus condition will tend to be violated. An increased demand for money tends to Iower money prices and will therefore Iower money costs of gold mining. This will stimulate gold mining production until the interest return on mining is again the same as in other industries. Thus, the increased demand for money will also call forth new money to meet the demand. A decreased demand for money will raise money costs of gold mining and at least Iower the rate of new production. It will not actually decrease the total money stock unless the new production rate falls below the wear-and-tear rate. Cf. Jacques Rueff, "The Fallacies of Lord Keynes' General Theory" in Henry Hazlitt, ed., The Critics ofKeynesian Economics (Princeton, N.J.: D. Van Nostrand, 1960), pp. 238-63. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Durable Goods | Rothbard | Rothbard III 289 Durable Goods/Rothbard: Every type of consumers’ good will yield a certain amount of services per unit of time. These may be called unit services. When they are exchangeable, these services may be sold individually. On the other hand, when a good is a physical commodity and is durable, it may be sold to the consumer in one piece, thereby embodying an expected future accrual of many unit services. What are the interrelations among the markets for, and prices of, the unit services and the durable good as a whole? Other things being equal, it is obvious that a more durable good is more valuable than a less durable good, since it embodies more future unit services. Thus, suppose that there are two television sets, each identical in service to the viewer, but that A has an expected life of five years, and B of 10. Though the service is identical, B has twice as many services as A to offer the consumer. On the market, then, the price of B will tend to be twice the price of A. Nondurable goods/consumer goods: For nondurable goods, the problem of the separate sale of the service of the good and of the good itself does not arise. Since they embody services over a relatively short span of time, they are almost always sold as a whole. The problem whether services should be sold separately or with the good as a whole arises in the case of durable commodities, such as houses, pianos, tuxedos, television sets, etc. Renting/rent/service/Rothbard: The price oft he service unit is called the rent. Rothbard III 290 Durable good: Since the good itself is only a bundle of expected service units, it is proper to base our analysis on the service unit. >Renting/Rothbard. Market price: Example: suppose that a house is expected to have a life of 20 years. Assume that a year’s rental of the house has a market price, as determined by the market supply and demand schedules, of 10 ounces of gold. Now, what will be the market price of the house itself should it be sold? Since the annual rental price is 10 ounces (and if this rental is expected to continue), the buyer of the house will obtain what amounts to 20 × 10, or 200 ounces, of prospective rental income. Suppose that the market price of the house as a whole is 180 ounces. In that case, there will be a rush to buy the house, since there is an expected monetary profit to be gained by purchasing for 180 ounces and then renting out for a total income of 200 ounces. >Equilibrium price, >Relative price. Rothbard III 291 In the case of the durable good and its services, there is an equilibrium-price relation, which the market tends to establish. The market price of the good as a whole is equal to the present value of the sum of its expected (future) rental incomes or rental prices. Time/future: The expected future rental incomes are, of course, not necessarily a simple extrapolation of present rental prices. Indeed, since prices are always changing, it will almost always be the case that rental prices will change in the future.(1) 1. It needs to be kept in mind that, strictly, there is no such thing as a "present" price established by the market. When a man considers the price of a good, he is considering that price agreed upon in the last recorded transaction in the market. The "present" price is always, in reality the historically recorded price of the most immediate past (say, a half-hour ago). What always interests the actor is what various prices will be at various times in the future. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Economic Systems | Rothbard | Rothbard III 513 Economic system/Rothbard: In the real world, profits and losses are almost always intertwined with interest returns. Our separation of them is conceptually valid and very important, but cannot be made easily and quantitatively in practice. >Gain and Loss/Rothbard, >Interest rates. Evenly Rotating Economy (ERE): Let us sum up the essence of an evenly rotating economy: all factors of production are allocated to the areas where their discounted marginal value products (DMVP) are the greatest. These are determined by consumer demand schedules. >Evenly Rotating Economy (ERE)/Rothbard, >Marginal product/Rothbard. Decisions: In the modern world of specialization and division of labor, it is almost always the consumers alone who decide, and this in effect excludes the capitalists, who rarely consume more than a negligible amount of their own products. It is the consumers, then, given the “natural” facts of stocks of resources (particularly labor and land factors), who make the decisions for the economic system. >Rate of profit/Rothbard, >Profit/Rothbard, >Gain and Loss/Rothbard. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Equation of Exchange | Fisher | Rothbard III 830 Equation of Exchange/Fisher/Rothbard: The classic exposition of the equation of exchange was in Irving Fisher's Purchasing Power of Money.(1) Fisher describes the chief purpose of his work as that of investigating "the causes determining the purchasing power of money." Money is a generally acceptable medium of exchange, and purchasing power is rightly defined as the "quantities of other goods which a given quantity of goods will buy.“(2) He explains that the Iower the prices of goods, the larger will be the quantities that can be bought by a given amount of money, and therefore the greater the purchasing power of money. Vice versa if the prices of goods rise. Rothbard III 831 RothbardVsFisher, Irving: This is correct; but then comes this flagrant non sequitur: "In Short, the purchasing power of money is the reciprocal of the level of prices; so that the Study of the purchasing power of money is identical with the Study of price levels.“(3) Rothbard: From then on, Fisher proceeds to investigate the causes of the "price level"; thus, by a simple "in short," Fisher has leaped from the real world of an array of individual prices for an innumerable list of concrete goods into the misleading fiction of a "price level," without discussing the grave diffculties which any such concept must face. >Price level/Fisher. Rothbard III 832 Def price level/Fisher/Rothbard: The "price level" is allegedly determined by three aggregative factors: the quantity of money in circulation, its "velocity of circulation" - the average number of times during a period that a unit of money is exchanged for goods - and the total volume of goods bought for money. These are related by the famous equation of exchange: MV = PT. M - Money supply V - Velocity of circulation P – Price level T - Expenditures This equation of exchange is built up by Fisher in the following way: Def price level/Fisher: First, consider an individual exchange transaction - Smith buys 10 pounds of sugar for 7 cents a pound.(4) An exchange has been made, Smith giving up 70 cents to Jones, and Jones transferring 10 pounds of sugar to Smith. From this fact Fisher somehow deduces that "10 pounds of sugar have been regarded as equal to 70 cents, and this fact may be expressed thus: 70 cents = 10 pounds multiplied by 7 cents a pound.(5) RothbardVsFisher: This off-hand assumption of equality is not self-evident, as Fisher apparently assumes, but a tangle of fallacy and irrelevance. Value/equality/valuation: Who has "regarded" the 10 pounds of sugar as equal to the 70 cents? Certainly not Smith, the buyer of the sugar. He bought the sugar precisely because he considered the two quantities as unequal in value; to him the value of the sugar was greater than the value of the 70 cents, and that is why he made the exchange. On the other hand, Jones, the seller of the sugar, made the exchange precisely because the values of the two goods were unequal in the opposite direction, i.e., he valued the 70 cents more than he did the sugar. Exchange/RothbardVsAristotle: There is thus never any equality of values on the part of the two participants. The assumption that an exchange presumes some sort of equality has been a delusion of economic theory since Aristotle, and it is surprising that Fisher, an exponent of the subjective theory of value in many respects, fell into the ancient trap. Equality: There is certainly no equality of values between two goods exchanged or, as in this case, between the money and the good. Is there an equality in anything else, and can Fisher's doctrine be salvaged by finding such an equality? Obviously not; there is no equality in weight, length, or any other magnitude. But to Fisher, the equation represents an equality in value between the "money Side" and the "goods side"; (…). Rothbard III 833 Fisher: „[T]he total money paid is equal in value to the total value of the goods bought. The equation thus has a money side and a goods Side. The money side is the total money paid.... The goods side is made up of the products of quantities of goods exchanged multiplied by respective prices.“(6) Rothbard III 834 Equation of exchange: Fisher considers that this equation yields the significant information that the price is determined by the total money spent divided by the total supply of goods sold. RothbardVsFisher: Actually, of course, the equation, as an equation, tells us nothing about the determinants of price; thus, we could set up an equally truistic equation (…) This equation is just as mathematically true as the other, and, on Fisher's own mathematical grounds, we could argue cogently that Fisher has "left the important wheat price out of the equation." We could easily add innumerable equations with an infinite number of complex factors that "determine" price. Solution/Rothbard: The only knowledge we can have of the determinants of price is the knowledge deduced logically from the axioms of praxeology. ((s) I.e. from subjective valuations in the course of human action.) >Praxeology/Rothbard. Rothbard III 835 Determinants of price/Fisher: If we consider the equation of exchange as revealing the determinants ofprice, we find that Fisher must be implying that the determinants are [e.g.,] the "70 cents" and the "10 pounds of sugar." RothbardVsFisher: But it should be clear that things cannot determine prices. Things, whether pieces of money or pieces of sugar or pieces of anything else, can never act; they cannot set prices or supply and demand schedules. All this can be done only by human action: only individual actors can decide whether or not to buy; only their value scales determine prices. >Value/Rothbard, >Price level/Fisher. Rothbard III 839 Weighted average/Solution/Fisher: Fisher's more complicated concept of a weighted average, with the prices weighted by the quantities of each good sold, solves the problem of units in the numerator but not in the denominator: P = pQ + p’Q‘ + p‘‘Q‘‘ / Q + Q‘ + Q‘‘. RothbardVsFisher: The pQs are all money, but the Q's are still different units. Thus, any concept of average price level involves adding or multiplying quantities of completely different units of goods, such as butter, hats, sugar, etc., and is therefore meaningless and illegitimate. Even pounds of sugar and pounds of butter cannot be added together, because they are two different goods and their valuation is completely different. And if one is tempted to use poundage as the common unit of quantity, what is the pound weight of a concert or a medical or legal service?(7) Equation of Exchange/RothbardVsFisher: It is evident that PT, in the total equation of exchange, is a completely fallacious concept. While the equation E = pQf or an individual transaction is at least a trivial truism, although not very enlightening, the equation E = PT for the whole society is a false one. Neither P nor T can be defined meaningfully, and this would be necessary for this equation to have any validity. We are left only with E = pQ + p'Q', etc., which gives us only the useless truism, E =E.(8) >Velocity of circulation/Fisher. Rothbard III 840 Rothbard: In fact, since V is not an independently defined variable, M must be eliminated from the equation as well as V, and the Fisherine (and the Cambridge) equation cannot be used to demonstrate the "quantity theory of money." And since M and V must disappear, there are an infinite number of other "equations of exchange" that we could, with equal invalidity, uphold as "determinants of the price level." Thus, the aggregate stock of sugar in the economy may be termed s, and the ratio of E to the total stock of sugar may be called "average sugar turnover," or U. This new "equation of exchange" would be: SU = PT, and the stock of sugar would suddenly become a major determinant of the price level. Or we could substitute A = number of salesmen in the country, and x = total expenditures per salesman, or "salesmen turnover," to arrive at a new set of "determinants" in a new equation. And so on. >Quantity theory. 1. Fisher, Irving, Purchasing Power of Money, 2nd ed. New York: Macmillan, [1913] 1926. Reprinted as volume 4 of The Works of Irving Fisher, William J. Barber and James Tobin, eds. Pickering, 1997. especially pp. 13 ff. 2. Ibid., p. 13. 3. Ibid., p. 14. 4. We are using "dollars" and "cents" here instead of weights of gold for the sake of simplicity and because Fisher himself uses these expressions. 5. Fisher, Purchasing Power of Money, p. 16. 6. Ibid., p. 17. 7. For a brilliant critique of the disturbing effects of averaging even when a commensurable unit does exist, see Louis M. Spadaro, "Averages and Aggregates in Economics" in on Freedom and Free Enterprise, pp. 140-60. 8. See Clark Warburton, "Elementary Algebra and the Equation of Exchange," American Economic Review, June, 1953, pp. 3 58-61. Also see Mises, Human Action, p. 396; B.M. Anderson, Jr., The Value of Money (New York: Macmillan & Co., 1926), pp. 154-64; and Greidanus, Value of Money, pp. 59-62. |
F.M. Fisher I Franklin M. Fisher Disequilibrium Foundations of Equilibrium Economics (Econometric Society Monographs) Cambridge 1989 Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Equilibrium Price | Rothbard | Rothbard III 114 Equilibrium price/Rothbard: The amount offered for sale at each price is called the supply; the amount demanded for purchase at each price is called the demand. Rothbard III 115 As long as the demand exceeds the supply at any price, buyers will continue to overbid and the price will continue to rise. The converse occurs if the price begins near its highest point. Equilibrium price/supply/demand/Rothbard: If the overbidding of buyers will drive the price up whenever the quantity demanded is greater than the quantity supplied, and the underbidding of sellers drives the price down whenever supply is greater than demand, it is evident that the price of the good will find a resting point where the quantity demanded is equal to the quantity supplied (…). Rothbard III 116 Equilibrium: The specific feature of the “clearing of the market” performed by the equilibrium price is that, at this price alone, all those buyers and sellers who are willing to make exchanges can do so. >Market/Rothbard, >Price/Rothbard. Rothbard III 120 Demand/supply: (…) as the price increases, new suppliers with higher minimum selling prices are brought into the market, while demanders with low maximum buying prices will begin to drop out. Equilibrium price: (…) once the zone of intersection of the supply and demand curves has been determined, it is the buyers and sellers at the margin - in the area of the equilibrium point - that determine what the equilibrium price and the quantity exchanged will be. Rothbard III 132 Elasticity/speculation/demand: (…) the new demand curve, including anticipatory forecasting of the equilibrium price, is [more flattened], ((s)starting at a lower price). It is clear that such anticipations render the demand curve far more elastic, since more will be bought at the lower price and less at the higher. Rothbard III 133 Thus, the introduction of exchange-value can restrict demand above the anticipated equilibrium price and increase it below that price, although the final demand - to consume at the - equilibrium price will remain the same. >Speculation/Rothbard. Erroneous speculation: (…) we have assumed that this speculative supply and demand, this anticipating of the equilibrium price, has been correct, and we have seen that these correct anticipations have hastened the establishment of equilibrium. Suppose, however, that most of these expectations are erroneous. Suppose, for example, that the demanders tend to assume that the equilibrium price will be lower than it actually is. Does this change the equilibrium price or obstruct the passage to that price? Solution: As soon as the price settles at ((s) around the equilibirum price), the demanders see that shortages develop at this price, that they would like to buy more than is available, and the overbidding of the demanders raises the price again to the genuine equilibrium price. The same process of revelation of error occurs in the case of errors of anticipation by suppliers, and thus the forces of the market tend inexorably toward the establishment of the genuine equilibrium price, undistorted by speculative errors, which tend to reveal themselves and be eliminated. >Utility/Rothbard. Rothbard III 142 Exchange: exchanges will (…) take place in a quantity and at a final price determined by the intersection of the new combination of supply and demand schedules. This may set a different quantity of exchanges at the old equilibrium price or at a new price, depending on their specific content. Or it may happen that the new combination of schedules - in the new period of time - will be identical with the old and therefore set the same quantity of exchanges and the same price as on the old market. >Stock keeping/Rothbard, >Utility/Rothbard. Equilibrium: The market is always tending quickly toward its equilibrium position, and the wider the market is, and the better the communication among its participants, the more quickly will this position be established for any set of schedules. >Price/Rothbard, >Demand/Rothbard, >Supply/Rothbard. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Goods | Rothbard | Rothbard III 161 Goods/exchangeable goods/exchange/production/stock keeping/Rothbard: Economics, (…), is not a science that deals particularly with “material goods” or “material welfare.” It deals in general with the action of men to satisfy their desires, and, specifically, with the rocess of exchange of goods as a means for each individual to “produce” satisfactions for his desires. Rothbard III 162 These goods may be tangible commodities or they may be intangible personal services. The principles of supply and demand, of price determination, are exactly the same for any good, whether it is in one category or the other. The foregoing analysis is applicable to all goods. Thus, the following types of possible exchanges have been covered by our analysis: A commodity for a commodity; such as horses for fish. A commodity for a personal service; such as medical advice for butter, or farm labor for food. A personal service for a personal service; such as mutual log-rolling by two settlers, or medical advice for gardening labor, or teaching for a musical performance. Rothbard III 163 Exchange/trade: One evident reason for the confusion of exchange with a mere trade of material objects is the fact that much intangible property cannot, by its very nature, be exchanged. A violinist may own his musicianly ability and exchange units of it, in the form of service, for the services of a physician. But other personal attributes, which cannot be exchanged, may be desired as goods. Thus, Brown might have a desired end: to gain the genuine approval of Smith. This is a particular consumers’ good which he cannot purchase with any other good, for what he wants is the genuine approval rather than a show of approval that might be purchased. Inalienability: In relation to exchange, this intangible good is an inalienable property of Smith’s, i.e., it cannot be given up. On the other hand, when property that can be alienated is transferred, it, of course, becomes the property - under the sole and exclusive jurisdiction - of the person who has received it in exchange, and no later regret by the original owner can establish any claim to the property. Rothbard III 165 Goods-substitute: suppose that Jones deposits a good (…) in a warehouse for safekeeping. He retains ownership of the good, but transfers its physical possession to the warehouse owner, Green, for safekeeping. Green gives Jones a warehouse receipt for the [good], certifying that the [good] is there for safekeeping and giving the owner of the receipt a claim to receive the [good] whenever he presents the receipt to the warehouse. On an unhampered market, the claim would be regarded as absolutely secure and certain to be honored, and therefore Jones would be able to exchange the claim as a substitute for actual physical exchange of the [good]. >Stock keeping/Rothbard. Rothbard III 166 Shares: (…) the share is evidence of part-ownership, or a claim to part-ownership, of a good. This property right in a proportionate share of the use of a good can also be sold or bought in exchange. Credit: A third type of claim arises from a credit exchange (or credit transaction). In a credit transaction, a present good is exchanged for a future good, or rather, a claim on a future good. Prices in such exchanges are determined by value scales and the meeting of supply and demand schedules, just as in the case of exchanges of present goods. >Credit/Rothbard. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Interest Rates | Rothbard | Rothbard III 347 Interest rates/Rothbard: We here assume that the pure capitalists never purchase as a whole a factor that in itself could yield several units of service. They can only hire the services of factors per unit of time. >Factors of production/Rothbard, >Costs of production/Rothbard. E.g., A laborer cannot be bought, then, but his services can be bought over a period of time; i.e., he can be rented or hired. Rothbard III 349 Production/factors of production/investments/Rothbard: In the monetary economy, since money enters into all transactions, the discount of a future good against a present good can, in all cases, be expressed in terms of one good: money. This is so because the money commodity is a present good and because claims to future goods are almost always expressed in terms of future money income. The concept of rate of return is necessary in order for [the producer or investor] to compare different potential investments for different periods of time and involving different sums of money. For any amount of money that he saves, he would like to earn the greatest amount of net return, i.e., the greatest rate of net return. The absolute amount of return has to be reduced to units of time, and this is done by determining the rate per unit of time. Rothbard III 350 Pure interest rate/Evenly rotating economy/Rothbard: [in an evenly rotating economy], there is no entrepreneurial uncertainty, and the rate of net return is the pure exchange ratio between present and future goods. This rate of return is the rate of interest. This pure rate of interest will be uniform for all periods of time and for all lines of production and will remain constant in the evenly rotating economy. >Evenly rotating economy (ERE)/Rothbard. Rothbard III 351 Production: Suppose that at some time the rates of interest earned are not uniform as between several lines of production. If capitalists are generally earning 5 percent interest, and a capitalist is obtaining 7 percent in a particular line, other capitalists will enter this line and bid away the factors of production from him by raising factor prices. Rothbard III 370 Evenly rotating economy (ERE) /Rothbard: (…) in the ERE the interest return on monetary investment (the pure rate of interest) is the same everywhere in the economy, regardless of the type of product or the specific conditions of its production. Not only must the interest rate be uniform for each good; it must be uniform for every stage of every good. For suppose that the interest rate were higher in the higher stages than in the lower stages. Then capitalists would abandon producing in the lower stage, and shift to the higher stage, where the interest return is greater. Interest rate/production: It is important to realize that the interest rate is equal to the rate of price spread in the various stages. Too many writers consider the rate of interest as only the price of loans on the loan market. In reality, (…) the rate of interest pervades all time markets, and the productive loan market is a strictly subsidiary time market of only derivative importance.(1) Duration/time/production: We may now remove our restrictive assumption about the equality of duration of the various stages. (…) suppose that the uniform interest rate in the economy is 5 percent. This is 5 percent for a certain unit period of time, say a year. A production process or investment covering a period of two years will, in equilibrium, then earn 10 percent, the equivalent of 5 percent per year. The same will obtain for a stage of production of any length of time. Thus, irregularity or integration of stages does not hamper the equilibrating process in the slightest. Rothbard III 374 Production: The capitalists’ function is thus a time function, and their income is precisely an income representing the agio of present as compared to future goods. This interest income, then, is not derived from the concrete, heterogeneous capital goods, but from the generalized investment of time.(2) It comes from a willingness to sacrifice present goods for the purchase of future goods (the factor services). Rothbard III 375 Time preference/Rothbard: (…) a good at present is worth more now than its present value as a future good. Because money is the general medium of exchange, for the time market as well as for other markets, money is the present good, and the future goods are present expectations of the future acquisition of money. It follows from the law of time preference that present money is worth more than present expectations of the same amount of future money. In other words, future money (as we may call present expectations of money in the future) will always exchange at a discount compared to present money. This discount on future goods as compared with present goods (or, conversely, the premium commanded by present goods over future goods) is the rate of interest. Rothbard III 388 The time-market schedules of all individuals are aggregated on the market to form market-supply and market-demand schedules for present goods in terms of future goods. The supply schedule will increase with an increase in the rate of interest, and the demand schedule will fall with the higher rates of interest. Aggregating the supply and demand schedules on the time Rothbard III 389 market for all individuals in the market, we obtain (…) [a] demand curve for present goods in terms of the supply of future goods; it slopes rightward as the rate of interest falls. (…) the supply curve of present goods [is indicated] in terms of the demand for future goods; it slopes rightward as the rate of interest increases. The intersection of the two curves determines the equilibrium rate of interest—the rate of interest as it would tend to be in the evenly rotating economy. This pure rate of interest, then, is determined solely by the time preferences of the individuals in the society, and by no other factor.(3) >Evenly Rotating Economy, >Time preference/Rothbard. Rothbard III 405 It seems likely that the demand schedule for present goods by the original productive factors will be highly inelastic in response to changes in the interest rate. With the large base amount, the discounting by various rates of interest will very likely make little difference to the factor-owner.(4) Large changes in the interest rate, which would make an enormous difference to capitalists and determine huge differences in interest income and the profitableness of various lengthy productive processes, would have a negligible effect on the earnings of the owners of the original productive factors. Rothbard III 773 Interest rates/Rothbard: In the determination of the interest rate, we must (…) take account of allocating one's money stock by adding to or subtracting from one's cash balance. A man may allocate his money to consumption, investment, or addition to his cash balance. Time preference: His time preferences govern the proportion which an individual devotes to present and to future goods, i.e., to consumption and to investment. Cash balance: Now suppose a man's demand-for-money schedule increases, and he therefore decides to allocate a proportion of his money income to increasing his cash balance. There is no reason to suppose that this increase affects the consumption/investment proportion at all. Time preference: It could, but if so, it would mean a change in his time preference schedule as well as in his demand for money. >Cash balance/Rothbard. Demand for money: If the demand for money increases, there is no reason why a change in the demandfor money should affect the interest rate one iota. There is no necessity at all for an increase in the demand for money to raise the interest rate, or a decline to Iower it - no more than the opposite. In fact, there is no causal connection between the two; (…). >Demand for money/Rothbard. Rothbard III 997 Interest rate/money supply/Rothbard: Equilibrium: It should not be surprising that the market tends to revert to its preferred ratios. The same process (…) takes place in all prices after a change in the money stock. Increased money always begins in one area of the economy, raising prices there, and filters and diffuses eventually over the whole economy, which then roughly returns to an equilibrium pattern conforming to the value of the money. Rothbard III 998 The market therefore reacts to a distortion ofthe free-market interest rate by proceeding to revert to that very rate. The distortion caused by credit expansion deceives businessmen into believing that more savings are available and causes them to malinvest - to invest in projects that will turn out to be unprofitable when consumers have a chance to reassert their true preferences. This reassertion takes place fairly quickly – as soon as owners of factors receive their increased incomes and spend them. Market interest rate/money supply/Economic theories/Rothbard: This theory permits us to resolve an age-old controversy among economists: whether an increase in the money supply can Iower the market rate of interest. Rothbard III 998 Mercantilism/Keynesianism: To the mercantilists - and to the Keynesians - it was obvious that an increased money stock permanently Iowered the rate of interest (given the demand for money). Classical economics: To the classicists it was obvious that changes in the money stock could affect only the value of the monetary unit, and not the rate of interest. RothbardVsMercantilism/RothbardVsKeynesianism: The answer is that an increase in the supply of money does Iower the rate of interest when it enters the market as credit expansion, but only temporarily. In the long run (and this long run is not very "long"), the market re-establishes the free-market time-preference interest rate and eliminates the change. In the long run a change in the money stock affects only the value of the monetary unit. >Savings/Rothbard, >Inflation/Rothbard, >Credit expansion/Rothbard. Rothbard III 1002 Interest rate/Rothbard: (…) credit expansion does not necessarily Iower the interest rate below the rate previously recorded; it Iowers the rate below what it would have been in the free market and thus creates distortion and malinvestment. >Business cycle/Rothbard. Market interest rate/purchasing power: Recorded interest rates in the boom will generally rise, in fact, because of the purchasing-power component in the market interest rate. An increase in prices (…) generates a positive purchasing-power component in the natural interest rate, i.e., the rate of return earned by businessmen on the market. >Natural interest rate. Rothbard III 1003 Free market: In the free market this would quickly be reflected in the Ioan rate, which (…) is completely dependent on the natural rate. But a continual influx of circulating credit prevents the Ioan rate from catching up with the natural rate, and thereby generates the business-cycle process.(5) Loans: A further corollary of this bank-created discrepancy between the Ioan rate and the natural rate is that creditors on the Ioan market suffer losses for the benefit of their debtors: the capitalists on the stock market or those who own their own businesses. The latter gain during the boom by the differential between the Ioan rate and the natural rate, while the creditors (apart from banks, which create their own money) lose to the same extent. 1. In the reams of commentary on J.M. Keynes’ General Theory, no one has noticed the very revealing passage in which Keynes criticizes Mises’ discussion of this point. Keynes asserted that Mises’ “peculiar” new theory of interest “confused” the “marginal efficiency of capital” (the net rate of return on an investment) with the rate of interest. The point is that the “marginal efficiency of capital” is indeed the rate of interest! It is a price on the time market. It was precisely this “natural” rate, rather than the loan rate, that had been a central problem of interest theory for many years. The essentials of this doctrine were set forth by Böhm-Bawerk in Capital and Interest and should therefore not have been surprising to Keynes. See John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace & Co., 1936), pp. 192–93. It is precisely this preoccupation with the relatively unimportant problems of the loan market that constitutes one of the greatest defects of the Keynesian theory of interest. (RothbardVsKeynes). 2. As Böhm-Bawerk declared: Interest . . . may be obtained from any capital, no matter what be the kind of goods of which the capital consists: from goods that are barren as well as from those that are naturally fruitful; from perishable as well as from durable goods; from goods that can be replaced and from goods that cannot be replaced; from money as well as from commodities. (Böhm-Bawerk, Capital and Interest, p. 1) 3. The importance of time preference was first seen by Böhm-Bawerk in his Capital and Interest. The sole importance of time preference has been grasped by extremely few economists, notably by Frank A. Fetter and Ludwig von Mises. See Fetter, Economic Principles, pp. 235-316; idem, “Interest Theories, Old and New,” American Economic Review, March, 1914, pp. 68-92; and Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 476-534. 4. The rate of interest, however, will make a great deal of difference in so far as he is an owner and seller of a durable good. Land is, of course, durable almost by definition - in fact, generally permanent. So far, we have been dealing only with the sale of factor services, i.e., the “hire” or rent” of the factor, and abstracting from the sale or valuation of durable factors, which embody future services. Durable land (…) is “capitalized,” i.e., the value of the factor as a whole is the discounted sum of its future MVP’s ((marginal value product), and there the interest rate will make a significant difference. The price of durable land, however, is irrelevant to the supply schedule of land services in demand for present money. 5. Since Knut Wicksell is one of the fathers of this business-cycle approach, it is important to stress that our usage of "natural rate" differs from his. Wicksell's "natural rate" was akin to our "free-market rate"; our "natural rate" is the rate of return earned by businesses on the existing market without considering Ioan interest. It corresponds to what has been misleadingly called the "normal profit rate," but is actually the basic rate of interest. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Investments | Keynes | Kurz I 110 Investments/Keynes/Kurz: (…) The different qualities of land can also be ranked according to the rent they yield per acre; this ranking is known as the order of rentability. It has Kurz I 110 commonly been assumed that both orders are independent of income distribution and that they coincide. >Marginal Efficiency of Capital/Keynes. SraffaVsKeynes: In the late 1920s, Sraffa showed that this is true only in exceedingly special cases. In general, both orders depend on the rate of interest and do not coincide (see also Kurz and Salvadori 1995, chap. 10)(1). Sraffa’s findings have a direct bearing on Keynes’s investment demand schedule and his closely related view as regards the long-period relationship between the overall capital-labor ratio and the rate of return on capital. Both as regards the short and the long period, Keynes had fallen victim to the “monotonic prejudice” (see Gehrke and Kurz 2006)(2). As regards the former, with a change in the rate of interest it cannot be presumed that the ranking of investment projects will remain the same, because both expected gross revenues and costs will generally be affected by the change. The ranking of investment projects in a descending order of marginal efficiency is thus no less dependent on the rate of interest than the ranking of different qualities of land in terms of “fertility.” As regards the long period, there is no presumption that an increase in the capital-labor ratio is invariably accompanied by a decrease in the marginal efficiency of capital in general, as Keynes contended (see, e.g., CWK 7, p. 136)(3). 1. Kurz, H. D. and Salvadori, N. (1995). Theory of Production. A Long-period Analysis, Cambridge: Cambridge University Press. (Paperback edn 1997.) 2. Gehrke, C. and Kurz, H. D. (2006). “Sraffa on von Bortkiewicz: Reconstructing the Classical Theory of Value and Distribution,” History of Political Economy, 38:1, 91 -149. 3. Keynes, J. M. (1971–1989). The Collected Writings of John Maynard Keynes, D. Moggridge (ed.), London: Macmillan. Kurz, Heinz D. „Keynes, Sraffa, and the latter’s “secret skepticism“. In: Kurz, Heinz; Salvadori, Neri 2015. Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). London, UK: Routledge. Rothbard III 859 Investments/Keynes/Rothbard: Keynesians have differed on the causal determinants of investment. Originally, Keynes determined it by the interest rate as compared with the marginal effciency of capital, or prospect for net return. The interest rate is supposed to be determined by the money relation; we have seen that this idea is fallacious. RothbardVs: Actually, the equilibrium net rate of return is the interest rate, the natural rate to which the bond rate conforms. Rather than changes in the interest rate causing changes in investment (…) changes in time preference are reflected in changes in consumption-investment decisions. Changes in the interest rate and in investment are two sides of a coin, both determined by individual valuations and time preferences. PigouVsKeynsianism: The error of calling the interest rate the cause of investment changes, and itself determined by the money relation, is also adopted by such "critics" of the Keynesian system as Pigou, Who asserts that falling prices will release enough cash to Iower the interest rate, stimulate investment, and thus finally restore full employment. Keynesianism: Modern Keynesians have tended to abandon the intricacies of the relation between interest and investment and simply declare themselves agnostic on the factors determining investment. They rest their case on an alleged determination of consumption.(1) >Consumption function, >Consumption/Keynesianism. 1. Some Keynesians account for investment by the "acceleration principle". The Hansen "stagnation" thesis - that investment is determined by population growth, the rate of technological improvement, etc. - seems happily to be a thing of the past. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Kurz I Heinz D. Kurz Neri Salvadori Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). Routledge. London 2015 Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Marginal Efficiency of Capital | Keynes | Kurz I 109 Def Marginal Efficiency of Capital/Keynes/Kurz: „I define the marginal efficiency of capital as being equal to that rate of discount which would make the present value of the series of annuities given by the returns expected from the capital-asset during its life just equal to its supply price.“ (CWK 7, p. 135)(1). Keynes goes on to argue that the various projects may be ordered according to their marginal efficiencies and then suggests to aggregate them, “so as to provide a schedule relating the rate of aggregate investment to the corresponding marginal efficiency of capital in general which that rate of investment will establish” (CWK 7, p. 136)(1). This he calls the “investment demand schedule,” which he confronts with the current rate of interest. He concludes: “the rate of investment will be pushed to the point on the investment demand-schedule where the marginal efficiency of capital in general is equal to the market rate of return” (CWK 7, pp. 136-137)(1). Problems/VsKeynes: Keynes rests his argument on the dubious partial equilibrium method: he assumes that the schedule and the money rate of interest are independent of one another. Yet, if one was to depend on the other, or if they were interdependent, the argument in its present form would break down. Several commentators, including Pasinetti (1974)(2), have emphasized that Keynes’s argument consists of an adaptation of the classical doctrine of extensive diminishing returns to the theory of investment. This doctrine (see, e.g., Kurz 1978)(3) typically assumes that the different qualities of land can be brought into an order of fertility, with the first quality exhibiting the lowest unit costs of production of, say, corn; the second quality, the second lowest unit costs; and so on. In competitive conditions, with a rise in “effectual demand” (Adam Smith), the different qualities of land will be taken into cultivation according to this order. The different qualities of land can also be ranked according to the rent they yield per acre; this ranking is known as the order of rentability. It has Kurz I 110 commonly been assumed that both orders are independent of income distribution and that they coincide. SraffaVsKeynes: In the late 1920s, Sraffa showed that this is true only in exceedingly special cases. In general, both orders depend on the rate of interest and do not coincide (see also Kurz and Salvadori 1995, chap. 10)(4). >Investments/Keynes. Kurz I 116 SraffaVsKeynes: Next Keynes brings in the marginal efficiency of capital and compares it with the rate of interest. Sraffa comments: “‘Marginal efficiency’ and ‘the’ rate of interest are obscure: the former is not defined in this context and the latter has two definitions on p. 227.”(5) It is at any rate misleading what Keynes says, because the rate of interest of an object, whose actual price exceeds cost of production, is according to the definition given on pp. 222–223(5) (relatively) high, not low. Keynes then expounds his view in terms of the three-assets example. Since in equilibrium the own rates, expressed in the same numeraire, must be equal, one gets the following result: with the own rate of money being constant, “it follows that a1 and a2 must be rising. In other words, the present money-price of every commodity other than money tends to fall relatively to its expected future price” (p. 228)(5). Sraffa comments that exactly the opposite follows: “this will lower, not raise, their rates of interest.” Sraffa/Kurz: Keynes simply got it wrong. 1. Keynes, J. M. (1971–1989). The Collected Writings of John Maynard Keynes, D. Moggridge (ed.), London: Macmillan. 2. Pasinetti, L. L. (1974). Growth and Income Distribution. Essays in Economic Theory, Cambridge: Cambridge University Press. 3. Kurz, H. D. (1978). “Rent Theory in a Multisectoral Model,” Oxford Economic Papers, 30, 16-37. 4. Kurz, H. D. and Salvadori, N. (1995). Theory of Production. A Long-period Analysis, Cambridge: Cambridge University Press. (Paperback edn 1997.) 5. Sraffa, P. (1932). “Dr. Hayek on Money and Capital,” Economic Journal, 42, 42-53. Kurz, Heinz D. „Keynes, Sraffa, and the latter’s “secret skepticism“. In: Kurz, Heinz; Salvadori, Neri 2015. Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). London, UK: Routledge. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Kurz I Heinz D. Kurz Neri Salvadori Revisiting Classical Economics: Studies in Long-Period Analysis (Routledge Studies in the History of Economics). Routledge. London 2015 |
| Marginal Utility | Rothbard | Rothbard III 72 Marginal utility/Rothbard: For example, it is erroneous to argue as follows: It is possible that a man needs four eggs to bake a cake. In that case, the second egg may be used for a less urgent use than the first eg…(etc.) Rothbard III 73 This argument neglects the fact that a “good” is not the physical material, but any material whatever of which the units will constitute an equally serviceable supply. >Consumer goods/Rothbard, >Capital goods/Rothbard. Rothbard III 301 Marginal utility/Rothbard: Purchasing power: Even if we confine ourselves to the same period, monetary incomes are not an infallible guide. There are, for example, many consumers’ goods that are obtainable both through monetary exchange and outside the money nexus. >Purchasing power/Rothbard. Psychic income: Neither can we measure psychic incomes if we confine ourselves to goods in the monetary nexus. >Income/Rothbard. Utility/marginal utility: It follows that the law of the diminishing marginal utility of money applies only to the valuations of each individual person. There can be no comparison of such utility between persons. Thus, we cannot, as some writers have done, assert that an extra dollar is enjoyed less by a Rockefeller than by a poor man. If Rockefeller were suddenly to become poor, each dollar would be worth more to him than it is now; similarly, if the poor man were to become rich, his value scales remaining the same, each dollar would be worth less than it is now. RothbardVsTradition: A doctrine commonly held by writers on utility is that the consumer acts so as to bring the marginal utility that any good has for him into equality with the price of that good. Rothbard III 302 RothbardVsJevons: Now, if a writer couches the exposition in terms of highly divisible goods, such as butter, and in terms of small units of money, such as pennies, it is easy to leap unthinkingly to the conclusion that the consumer for each good will act in such a way as to equalize, at the market price, the marginal utility of the sum of money and the marginal utility of the good. It should be clear, however, that there is never any such “equalization.” Even in the case of the most divisible of goods, there will still be a difference in rank, not an equalization, between the two utilities. Of course, the consumer tries to spend his money so as to bring the two as close as possible, but they can never be equal. Furthermore, the marginal utility of each particular good, after the purchases are made, differs in rank from that of every other. >Marginal utility/W. St. Jevons, >Marginal utility of money/Rothbard. Rothbard III 464 Marginal utility/price/Rothbard: The marginal utility of a unit of a good is determined by a man’s diminishing marginal utility schedule evaluating a certain supply or stock of that good. Similarly, the market’s establishment of the price of a consumers’ good is determined by the aggregate consumer demand schedules—diminishing—and their intersection with the given supply or stock of a good. >Factor market/Rothbard, >Factors of production/Rothbard, >Marginal product/Rothbard. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Markets | Rothbard | Rothbard III 142 Market/price/Rothbard: The market can be renewed again only if there is a change in the relative position of the two goods under consideration on the value scales of at least two individuals, one of them a possessor of one good and the other a possessor of the second good. Price/equilibrium price: Exchanges will then take place in a quantity and at a final price determined by the intersection of the new combination of supply and demand schedules. This may set a different quantity of exchanges at the old equilibrium price or at a new price, depending on their specific content. Or it may happen that the new combination of schedules - in the new period of time - will be identical with the old and therefore set the same quantity of exchanges and the same price as on the old market. >Stock keeping/Rothbard, >Utility/Rothbard. Equilibrium: The market is always tending quickly toward its equilibrium position, and the wider the market is, and the better the communication among its participants, the more quickly will this position be established for any set of schedules. >Price/Rothbard. Furthermore, a growth of specialized speculation will tend to improve the forecasts of the equilibrium point and hasten the arrival at equilibrium. However, in those cases where the market does not arrive at equilibrium before the supply or demand schedules themselves change, the market does not reach the equilibrium point. It becomes continuous, moving toward a new equilibrium position before the old one has been reached.(1) >Speculation/Rothbard. Rothbard III 147 Stock: with the total stock constant, changes in both supply and demand curves are due solely to changes in the demand to hold the good by either sellers or buyers, which in turn are due to shifts in the relative utility of the two goods. >Utility/Rothbard, >Stock keeping/Rothbard, >Price/Rothbard. Rothbard III 88 Market/exchange/exchange value/Rothbard: goods may (…) be exchanged for other goods of greater usefulness to the actor. A man will exchange a unit of a good so long as the goods that it can command in exchange have greater value to him than the value it had in direct use, i.e., so long as its exchange-value is greater than its direct use-value. On the other hand, from then on, their respective assets had greater use-value to their owners than exchange-value.(2) The existence and possibilities of exchange open up for producers the avenue of producing for a “market” rather than for themselves. Instead of attempting to maximize his product in isolation by producing goods solely for his own use, each person can now produce goods in anticipation of their exchange-value, and exchange these goods for others that are more valuable to him. It is evident that since this opens a new avenue for the utility of goods, it becomes possible for each person to increase his productivity. >Exchange value, >Use value. Praxeology: Through praxeology, therefore, we know that only gains can come to every participant in exchange and that each must benefit by the transaction; otherwise he would not engage in it. Empirically we know that the exchange economy has made possible an enormous increase in productivity and satisfactions for all the participants. >Praxeology/Rothbard, >Society/Rothbard, >Property/Rothbard. Rothbard III 92 Free market: On the free market, the goods will be owned by those who either produced them, first put them to use, or received them in gifts. Similarly, under a system of violence and hegemonic bonds, someone or some people must superintend and direct the operations of these goods. Whoever performs these functions in effect owns these goods as property, regardless of the legal definition of ownership. This applies to persons and their services as well as to material goods. >Price/Rothbard. Rothbard III 117 Aside from the universal fact of the scarcity of all goods, a price that is below the equilibrium price creates an additional shortage of supply for demanders, while a price above equilibrium creates a surplus of goods for sale as compared to demands for purchase. We see that the market process always tends to eliminate such shortages and surpluses and establish a price where demanders can find a supply, and suppliers a demand. >Terms of Trade/Rothbard. 1. This situation is not likely to arise in the case of the market equilibria (…). Generally, a market tends to “clear itself” quickly by establishing its equilibrium price, after which a certain number of exchanges take place, leading toward what has been termed the plain state of rest - the condition after the various exchanges have taken place. 2. On use-value and exchange-value, see Menger, Principles of Economics, pp. 226-35. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Money | Rothbard | Rothbard III 192 Money/Rothbard: The establishment of a money on the market enormously increases the scope for specialization and division of labor, immensely widens the market for every product (…). Production: Intricate and remote stages of production are now possible, and specialization can extend to every part of a production process as well as to the type of good produced. Direct exchange/production/RothbardVsTradition: (…) it is a mistake on the part of many writers who wish to set forth the doctrines of modern economics to analyze direct exchange only and then to insert money somewhere at the end of the analysis, considering the task finished. Rothbard III 193 On the contrary, the analysis of direct exchange is useful only as an introductory aid to the analysis of a society of indirect exchange; direct exchange would leave very little scope for the market or for production. Market: (…) nearly all exchanges are made against money, and money impresses its stamp upon the entire economic system. Producers of consumers’ goods as well as owners of durable consumers’ goods, owners of capital goods, and sellers of labor services, all sell their goods against money and purchase with money the factors that they need. Rothbard III 195 Monetary unit: (…) every good is “in supply” if it can be divided into units, each of which is homogeneous with every other. The money commodity is no exception to this rule. The most universally traded commodity in the community, it is bought and sold always in terms of units of its weight. It is clear that the size of the unit of the money commodity chosen for any transaction is irrelevant for economic analysis and is purely a matter of convenience for the various parties. Rothbard III 196 Unification: … ((s) for unification) the names of the monetary units … ((s) can be] in terms of universally acceptable units of weight. Rothbard III 199 Free market/trade: On the unhampered market of a money economy, producers of commodities and services sell their goods for the money commodity, then use the money acquired to buy other desired goods. Money production/gold: Money is acquired in this way by all except the producers of the original gold on the market—those who mined and marketed it. However, the production of the money commodity, as with all other valuable commodities, itself requires the use of land, labor, and capital goods, and these must be paid for by the use of money. The gold miner, then, receives no money by gift, but must actively find and produce gold to acquire his money. >Goods/Rothbard, >Consumer goods/Rothbard, >Capital goods/Rothbard, >Investments/Rothbard, >Trade, >Exchange/Rothbard, >Free market/Rothbard, >Service/Rothbard. Rothbard III 203 Money/society/community: Let us assume for purposes of simplification that the total stock of the money commodity in the community has remained unchanged over the period. (This is not an unrealistic assumption, since newly mined gold is small compared to the existing stock.) Now it is obvious that, like all valuable property, all money must, at any point in time, be owned by someone. At any point in time, the sum of the cash holdings of all individuals is equal to the total stock of money in the community. >Cash balance/Rothbard. Rothbard III 217 Marginal utility/money: The marginal utility of money income will tend to decline as more money is acquired, since money is a good. In so far as money is desired for the purchase of consumers’ goods, an “ounce-worth” of consumers’ goods will also decline in utility as new ounces are acquired. Rothbard III 235 Money/Rothbard: Many writers have erred in believing that money can somehow be abstracted from the formation of money prices and that analysis can accurately describe affairs “as if” exchanges really took place by way of barter. With money and money prices pervading all exchanges, there can be no abstraction from money in analyzing the formation of prices in an economy of indirect exchange. >Price/Rothbard, >Indirect exchange/Rothbard. Market: Just as in the case of direct exchange, there will always be a tendency on the market for one money price to be established for each good. (…) the determinants are the individual value scales, expressed through demand and supply schedules. Rothbard III 237 Purchasing power/Rothbard: For every good except money, then, the purchasing power of its unit is identical to the money price that it can obtain on the market. What is the purchasing power of the monetary unit? Obviously, the purchasing power of, e.g., an ounce of gold can be considered only in relation to all the goods that the ounce could purchase or help to purchase. The purchasing power of the monetary unit consists of an array of all the particular goods-prices in the society in terms of the unit.(1) It is evident that the money commodity and the determinants of its purchasing power introduce a complication in the demand and supply schedules of barter conditions, since the demand and supply situation for money is a unique one. >Price/Rothbard, >Money supply/Rothbard, >Demand for money/Rothbard. Rothbard III 265 Money/Rothbard: E.g., Oppertunity cost: It should be noted that since this cost refers to a decision on a marginal unit, of whatever size, this is also the “marginal cost” of the decision. This cost is subjective and is ranked on the individual’s value scale. Rothbard III 267 It might be thought, and many writers have assumed, that money has here performed the function of measuring and rendering comparable the utilities of the different individuals. It has, however, done nothing of the sort. The marginal utility of money differs from person to person, just as does the marginal utility of any other good. The fact that an ounce of money can buy various goods on the market and that such opportunities may be open to all does not give us any information about the ways in which various people will rank these different combinations of goods. There is no measuring or comparability in the field of values or ranks. Money permits only prices to be comparable, by establishing money prices for every good. Money regression: To determine the price of a good, we analyze the market-demand schedule for the good; this in turn depends on the individual demand schedules; these in their turn are determined by the individuals’ value rankings of units of the good and units of money as given by the various alternative uses of money; yet the latter latter alternatives depend in turn on given prices of the other goods. Rothbard III 268 A hypothetical demand for eggs must assume as given some money price for butter, clothes, etc. But how, then, can value scales and utilities be used to explain the formation of money prices, when these value scales and utilities themselves depend upon the existence of money prices? It is obvious that this vitally important problem of circularity (X depends on Y, while Y depends on X) exists not only in regard to decisions by consumers but also in regard to any exchange decision in the money economy. (…) the marginal utility of addition of money to the seller of the stock is based on its already being money and its ready command of other goods that the seller will buy - consumers’ goods and factors of production alike. The seller’s marginal utility therefore also depends on the previous existence of money prices for the various goods in the economy. >Regression theorem. Similarly, for the laborer, landowner, investor, or owner of a capital good: in selling his services or goods, money has a marginal utility of addition, which is a necessary prior condition to his decision to sell the goods and therefore a determinant in his supply curve of the good for money. And yet this marginal utility always depends on there being a previous array of money prices in existence. Rothbard III 269 Solution/Mises/Rothbard: The solution of this crucial problem of circularity has been provided by Professor Ludwig von Mises, in his notable theory of the money regression.(1) The theory of money regression may be explained by examining the period of time that is being considered in each part of our analysis. Let us define a “day” as the period of time just sufficient to determine the market prices of every good in the society. On day X, then, the money price of each good is determined by the interactions of the supply and demand schedules of money and the good by the buyers and sellers on that day. Each buyer and seller ranks money and the given good in accordance with the relative marginal utility of the two to him. Therefore, a money price at the end of day X is determined by the marginal utilities of money and the good as they existed at the beginning of day X. But the marginal utility of money is based (…) on a previously existing array of money prices. Money is demanded and considered useful because of its already existing money prices. Therefore, the price of a good on day X is determined by the marginal utility of the good on day X and the marginal utility of money on day X, which last in turn depends on the prices of goods on day X – 1. The economic analysis of money prices is therefore not circular. >Circularity/Philosophical theories. Rothbard III 756 Money/Rothbard: Money is a commodity that serves as a general medium of exchange; its exchanges therefore permeate the economic system. Like all commodities, it has a market demand and a market supply, although its special situation lends it many unique features. „Price“ of money: (…) its "price" has no unique expression on the market. Other commodities are all expressible in terms of units of money and therefore have uniquely identifiable prices. The money commodity, however, can be expressed only by an array of all the other commodities, i.e., all the goods and services that money can buy on the market. Measuring: This array has no uniquely expressible unit, and, (…) changes in the array cannot be measured. Yet the concept of the "price" or the "value" of money, or the "purchasing power of the monetary unit," is no less real and important for all that. Exchange value: It simply must be borne in mind that, (…) there is no single "price level" or measurable unit by which the value-array of money can be expressed. This exchange-value of money also takes on peculiar importance because, unlike other commodities, the prime purpose of the money commodity is to be exchanged, now or in the future, for directly consumable or productive commodities. >Demand for money/Rothbard, >Money supply/Rothbard, >Currency in circulation/Rothbard, >Purchasing power/Rothbard. Rothbard III 817 Money/Rothbard: (…) money can never be neutral. One set of conditions tending to raise the PPM can never precisely offset another set of factors tending to Iower it. >Economy/Rothbard, >Money market/Rothbard. Thus, suppose that an increase in the stock of goods tends to raise the PPM, while at the same time, an increase in the money supply tends to Iower it. One change can never offset the other; for one change will Iower one set of prices more than others, while the other will raise a different set within the whole array of prices. >Price/Rothbard. 1. Many writers interpret the “purchasing power of the monetary unit” as being some sort of “price level,” a measurable entity consisting of some sort of average of “all goods combined.” The major classical economists did not take this fallacious position: When they speak of the value of money or of the level of prices without explicit qualification, they mean the array of prices, of both commodities and services, in all its particularity and without conscious implication of any kind of statistical average. (Jacob Viner, Studies in the Theory of International Trade [New York: Harper & Bros., 1937], p. 314) Also cf. Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 1094. 2. See Mises, Theory of Money and Credit, New Haven, Conn.: Yale University Press, 1953 and 1957. Reprinted by Liberty Fund, 1995. pp. 97-123 , and Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 405-08. Also see Schumpeter, History of Economic Analysis, New York: Oxford University Press, [1954] 1996. p. 1090. This problem obstructed the development of economic science until Mises provided the solution. Failure to solve it led many economists to despair of ever constructing a satisfactory economic analysis of money prices. They were led to abandon fundamental analysis of money prices and to separate completely the prices of goods from their money components. In this fallacious course, they assumed that individual prices are determined wholly as in barter, without money components, while the supply of and the demand for money determined an imaginary figment called the "general price level." Economists began to specialize separately in the "theory of price," which completely abstracted from money in its real functions, and a "theory of money," which abstracted from individual prices and dealt solely with a mythical "price level." The former were solely preoccupied with a particular price and its determinants; the latter solely with the "economy as a whole" without relation to the individual components - called "microeconomics" and "macroeconomics" respectively. Actually, such fallacious premises led inevitably to erroneous conclusions. It is certainly legitimate and necessary for economics, in working out an analysis of reality, to isolate different segments for concentration as the analysis proceeds; but it is not legitimate to falsify reality in this separation, so that the final analysis does not present a correct picture of the individual parts and their interrelations. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Price | Rothbard | Rothbard II 166 Prices/Demand for money/Rothbard: (…) partial ‘real’ factors - such as government expenditures abroad, a sudden scarcity of food, or ‘a sudden diminution of the confidence of foreigners, in consequence of any great national disaster’ - could influence overall prices or the status of the pound in the foreign exchange market. But (…) such influences can only be trivial and temporary. The overriding causes of such price or exchange movements - not just in some remote ‘long run’ but a all times except temporary deviations - are monetary changes in the supply of and demand for money. Changes in ‘real’ factors can only have an important impact on exchange rates and general prices by altering the composition and the height of the demand for money on the market. But since market demands for money are neither homogeneous nor uniform nor do they ever change Rothbard II 167 equiproportionately, real changes will almost always have an impact on the demand for money. Salerno: ... since real disturbances are invariably attended by ‘distribution effects’, i.e. gains and losses of income and wealth by the affected market participants, it is most improbable that initially nonmonetary disturbances would not ultimately entail relative changes in the various national demands for money...[U]nder inconvertible conditions, the relative changes in the demands for the various national currencies, their quantities remaining unchanged, would be reflected in their long-run appreciation or depreciation on the foreign exchange market.(1) >Price theory/Rothbard. 1. Joseph Salerno. 1980. ‘The Doctrinal Antecedents of the Monetary Approach to the Balance of Payments’ (doctoral dissertation, Rutgers University, 1980), pp. 299-300. Rothbard III 105 Price/exchange/Rothbard: One of the most important problems in economic analysis is the question: What principles determine the formation of prices on the free market? What can be said by logical derivation from the fundamental assumption of human action in order to explain the determination of all prices in interpersonal exchanges, past, present, and future? >Exchange/Rothbard, >Terms of Trade/Rothbard, >Markets/Rothbard. Rothbard III 108 In order for an exchange to be made, then, the minimum selling price of the seller must be lower than the maximum buying price of the buyer for that good. (…) the price of the good in isolated exchange will be established somewhere between the maximum buying price and the minimum selling price (…). We cannot say at which point the price will be set. That depends on the data of each particular case, on the specific conditions prevailing. In particular, it will depend upon the bargaining skill (…). Rothbard III 110 Competition: [in this case] the price in the exchange will be high enough to exclude the “less capable” or “less urgent” buyer - the one whose value scale does not permit him to offer as high a price as the other, “more capable,” buyer. (…) the addition of another competing buyer for the product considerably narrows the zone of bargaining in determining the price that will be set. Rothbard III 111 The general rule still holds: The price will be between the maximum buying price of the most capable and that of the next most capable competitor, including the former and excluding the latter.(1) It is also evident that the narrowing of the bargaining zone has taken place in an upward direction, and to the advantage of the seller of the product. >Auctions. Rothbard III 112 Universal competition: (…) in a modern, complex economy based on an intricate network of exchanges [there is a] two-sided competition of buyers and sellers. Rothbard III 114 As the offering price rises, the disproportion between the amount offered for sale and the amount demanded for purchase at the given price diminishes, but as long as the latter is greater than the former, mutual overbidding of buyers will continue to raise the price. The amount offered for sale at each price is called the supply; the amount demanded for purchase at each price is called the demand. Rothbard III 115 As long as the demand exceeds the supply at any price, buyers will continue to overbid and the price will continue to rise. The converse occurs if the price begins near its highest point. Equilibrium price/supply/demand/Rothbard: If the overbidding of buyers will drive the price up whenever the quantity demanded is greater than the quantity supplied, and the underbidding of sellers drives the price down whenever supply is greater than demand, it is evident that the price of the good will find a resting point where the quantity demanded is equal to the quantity supplied (…). Rothbard III 116 Value/exchange/Rothbard: Evidently, the more capable or “more urgent,” buyers (and sellers) - the supramarginal (which includes the marginal) - obtain a psychic surplus in this exchange, for they are better off than they would have been if the price had been higher (or lower). However, since goods can be ranked only on each individual’s value scale, and no measurement of psychic gain can be made either for one individual or between different individuals, little of value can be said about this psychic gain except that it exists. Equilibrium: The specific feature of the “clearing of the market” performed by the equilibrium price is that, at this price alone, all those buyers and sellers who are willing to make exchanges can do so. >Market/Rothbard. Rothbard III 117 Market/Rothbard: It is important to realize that this process of overbidding of buyers and underbidding of sellers always takes place in the market, even if the surface aspects of the specific case make it appear that only the sellers (or buyers) are setting the price. ((s) see above, equilibirum price). Rothbard III 119 Once the market price is established, it is clear that one price must rule over the entire market. Rothbard III 120 Demand/supply: (…) as the price increases, new suppliers with higher minimum selling prices are brought into the market, while demanders with low maximum buying prices will begin to drop out. Equilibrium price: (…) once the zone of intersection of the supply and demand curves has been determined, it is the buyers and sellers at the margin - in the area of the equilibrium point - that determine what the equilibrium price and the quantity exchanged will be. Rothbard III 122 Now we can remove this restriction and complete our analysis of the real world of exchange by permitting suppliers and demanders to exchange any number of [goods] that they may desire.(…) the removal of our implicit restriction makes no substantial change in the analysis. Rothbard III 229 Price/Rothbard: it is obvious that man, in his capacity as a buyer of consumers’ goods with money, will seek to buy each particular good at the lowest money price possible. For a man who owns money and seeks to buy consumers’ goods, it is clear that the lower the money prices of the goods he seeks to buy, the greater is his psychic income; for the more goods he can buy, the more uses he can make with the same amount of his money. The buyer will therefore seek the lowest money prices for the goods he buys. Thus, ceteris paribus, the psychic income of man as a seller for money is maximized by selling the good at the highest money price obtainable; the psychic income of man as a buyer with money is maximized by buying the good for the lowest money price obtainable. >Cash balance, >Value, >Market, >Exchange/Rothbard, >Allocation/Rothbard, >Income/Rothbard, >Indirect exchange. Rothbard III 234 Indirect exchange: (…) with money being used for all exchanges, money prices serve as a common denominator of all exchange ratios. Rothbard III 235 Instead of a myriad of isolated markets for each good and every other good, each good exchanges for money, and the exchange ratios between every good and every other good can easily be estimated by observing their money prices. Barter: Here it must be emphasized that these exchange ratios are only hypothetical, and can be computed at all only because of the exchanges against money. It is only through the use of money that we can hypothetically estimate these “barter ratios,” and it is only by intermediate exchanges against money that one good can finally be exchanged for the other at the hypothetical ratio. >Demand/Rothbard, >Supply/Rothbard. Rothbard III 341 Price/production costs/Rothbard: (…) once the product has been made, "cost" has no influence on the price of the product. Past costs, being ephemeral, are irrelevant to present determination of prices. The agitation that often takes place over sales "below cost" is now placed in its proper perspective. It is obvious that, in the relevant sense of "cost," no such sales can take Place. The sale of an already produced good is likely to be costless, and if it is not, and price is below its costs, then the seller will hold on to the good rather than make the sale. That costs do have an influence in production is not denied by anyone. However, the influence is not directly on the price, but on the amount that will be produced or, more specifically, on the degree to which factors will be used. >Factors of production/Rothbard. Rothbard III 464 Marginal utility/price/Rothbard: The marginal utility of a unit of a good is determined by a man’s diminishing marginal utility schedule evaluating a certain supply or stock of that good. Similarly, the market’s establishment of the price of a consumers’ good is determined by the aggregate consumer demand schedules—diminishing—and their intersection with the given supply or stock of a good. >Factor market/Rothbard, >Marginal product/Rothbard. Rothbard III 774 Price/Time preference/demand for money/interest//Rothbard: Time Preference and the Individual's money stock: (…) an individual's money stock Iowers the effective time-preference rate along the time-preference schedule, and conversely a decrease raises the time-preference rate (see above). Demand for money/cash balance/interest: Why does this not apply here? Simply because we were dealing with each individual's money stock and assuming that the "real" exchange-value of each unit of money remained the same. Money units: In this case time-preference schedule relates to "real" monetary units, not simply to money itself. If the social stock of money changes or if the demand for money changes, the objective exchange-value of a monetary unit (the PPM; purchasing power of monetary unit) will change also. If the PPM falls, then more money in the hands of an individual may not necessarily Iower the time-preference rate on his schedule, for the more money may only just compensate him for the fall in the PPM, and his "real money stock" may therefore be the same as before. >Cash balance/Rothbard. This again demonstrates that the money relation (money supply and demand for money) is neutral to time preference and the pure rate of interest. Prices: An increased demand for money, then, tends to Iower prices all around without changing time preference or the pure rate of interest. Rothbard III 816 Price/goods/money/Rothbard: The price of goods-in-general will now be determined by the monetary demand for all goods (factor of increase) and the stock of all goods (factor of decrease). Demand: Now, when all goods are considered, the exchange demand for goods equals the stock of money minus the reservation demand for money. (In contrast to any specific good, there is no need to subtract people's expenditures on other goods.) The total demand for goods, then, equals the stock of money minus the reservation demand for money, plus the reservation demand for all goods. Goods: The ultimate determinants of the price of all goods are: the stock of money and the reservation demand for goods (factors of increase), and the stock of all goods and the reservation demand for money (factors of decrease). Purchasing power: Now let us consider the obverse Side: the PPM (purchasing power oft he monetary unit). The PPM (…) is determined by the demand for money (factor of increase) and the stock of money (factor of decrease). The exchange demand for money equals the stock of all goods minus the reservation demand for all goods. Therefore, the ultimate determinants of the PPM are: the stock of all goods and the reservation demand for money (factors of increase), and the stock of money and the reservation demand for goods (factors of decrease). Symmetry: We see that this is the exact obverse of the determinants of the price of all goods, which, in turn, is the reciprocal of the PPM. Barter/exchange: Thus, the analysis of the money side and the goods side of prices is completely harmonious. No longer is there need for an arbitrary division between a barter-type analysis of relative goods-prices and a holistic analysis of the PPM. >Economy/Rothbard. 1. Auction sales are examples of markets for one unit of a good with one seller and many buyers. Cf. Boulding, Economic Analysis, pp. 41-43. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Purchasing Power | Rothbard | Rothbard III 237 Purchasing power/Rothbard: For every good except money, then, the purchasing power of its unit is identical to the money price that it can obtain on the market. What is the purchasing power of the monetary unit? Obviously, the purchasing power of, e.g., an ounce of gold can be considered only in relation to all the goods that the ounce could purchase or help to purchase. The purchasing power of the monetary unit consists of an array of all the particular goods-prices in the society in terms of the unit.(1) >Money/Rothbard, >Price/Rothbard. Rothbard III 300 Purchasing power/Rothbard: (…) it does not, as we perhaps might think, give any exact indication of the amount of services that each individual obtains purely from exchangeable consumers’ goods. An income of 50 ounces of gold in one year may not, and most likely will not, mean the same to him in terms of services from exchangeable goods as an income of 50 ounces in some other year. The purchasing power of money in terms of all other commodities is continually changing, and there is no way to measure such changes. >Income/Rothbard, >Allocation/Rothbard. Problem: (…) as historians rather than economists, we can make imprecise judgments comparing the “real” income rather than the monetary income between periods. Thus, if Jones received 1,000 ounces of income in one year and 1,200 in the next, and prices generally rose during the year, Jones’ “real income” in terms of goods purchasable by the money has risen considerably less than the nominal monetary increase or perhaps fallen. However (…) there is no precise method of measuring or even identifying the purchasing power of money and its changes. >Marginal utility of money/Rothbard. Rothbard III 314 [The] power of the monetary unit to purchase quantities of various goods is called the purchasing power of the monetary unit. This purchasing power of money consists of the array of all the given money prices on the market at any particular time, considered in terms of the prices of goods per unit of money. Regression theorem: (…) today's purchasing power of the monetary unit is determined by today’s marginal utilities of money and of goods, expressed in demand schedules, while today’s marginal utility of money is directly dependent on yesterday’s purchasing power of money. >Regression theorem. Rothbard III 762 Purchasing power/Rothbard: The purchasing power of money is (…) determined by two factors: the total demand schedule for money to hold and the stock of money in existence. >Demand for money/Rothbard. At the previous equilibrium PPM (purchasing power of money) point, (…) the demand for money now exceeds the stock available (…). The bids push the PPM upwards until it reaches the equilibrium point (…). The converse will be true for a shift of the total demand curve leftward - a decline in the total demand schedule. Then, the PPM will fall accordingly. Rothbard III 763 Equilibirum: Money will be sold at a lower PPM to induce people to hold it, and the PPM will fall until it reaches a new equilibrium point (…). At the new stock level there is an excess of stock, (…) over the total demand for money. Money will be sold at a Iower PPM to induce people to hold it, and the PPM will fall until it reaches a new equilibrium point (…). Conversely, if the stock of money is decreased, there will be an excess of demand for money at the existing PPM, and the PPM will rise until the new equilibrium point is reached. The effect of the quantity of money on its exchange-value is thus simply set forth in our analysis (…) The absurdity of classifying monetary theories into mutually exclusive divisions (such as "supply and demand theory," "quantity theory," "cash balance theory," "commodity theory," "income and expenditure theory") should now be evident.(2) For all these elements are found in this analysis. Money is a commodity; its supply or quantity is important in determining its exchange-value; demand for money for the cash balance is also important for this purpose; and the analysis can be applied to income and expenditure situations. >Quantity theory. Rothbard III 813 Purchasing power/Rothbard: (…) an increase in the stock of money leads to a fall in the PPM and a decrease in the stock of money leads to a rise in the PPM. However, there is no simple and uneventful rise and fall in the PPM. For a change in the stock of money is not automatically simultaneous. New money enters the system at some specific point and then becomes diffused in this way throughout the economy. The individuals who receive the new money first are the greatest gainers from the increased money; those who receive it last are the greatest losers, since all their buying prices have increased before their selling prices. >Buying price/Rothbard, >Selling price/Rothbard, >Price/Rothbard. Gains and losses: Monetarily, it is clear that the gains of the approximate first half of the recipients of new money are exactly counterbalanced by the losses of the second half. Conversely, if money should somehow disappear from the system, say through wear and tear or through being misplaced, the initial loser cuts his spending and suffers most, while the last Who feel the impact of a decreased money supply gain the most. For a decrease in the money supply results in losses for the first owners, Who suffer a cut in selling price before their buying prices are Iowered, and gains for the last, Who see their buying prices fall before their income is cut.(3) >Equilibrium/Rothbard. 1. Many writers interpret the “purchasing power of the monetary unit” as being some sort of “price level,” a measurable entity consisting of some sort of average of “all goods combined.” The major classical economists did not take this fallacious position: When they speak of the value of money or of the level of prices without explicit qualification, they mean the array of prices, of both commodities and services, in all its particularity and without conscious implication of any kind of statistical average. (Jacob Viner, Studies in the Theory of International Trade [New York: Harper & Bros., 1937], p. 314) Also cf. Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 1094. 2. A typical such classification can be found in Lester V. Chandler, An Introduction to Monetary Theory (New York: Harper & Bros., 1940). 3. See Mises, Theory of Money and Credit, New Haven, Conn.: Yale University Press, 1953 and 1957. Reprinted by Liberty Fund, 1995. pp. 131 - 45. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Relative Price | Rothbard | Rothbard III 281 Relative Price/Rothbard: The available goods are ranked, along with the possibility of holding the money commodity in one’s cash balance, on each individual’s value scale. Then, in accordance with the rankings and the law of utility, the individual allocates his units of money to the most highly valued uses: the various consumers’ goods, investment in various factors, and addition to his cash balance. Rothbard III 282 The law of the interrelation of consumers' goods is: The more substitutes there are availablefor any given good, the more elastic will tend to be the demand schedules (individual and market)for that good. By the definition of "good," two goods cannot be "perfect substitutes" for each Other, since if consumers regarded two goods as completely identical, they would, by definition, be one good. All consumers' goods are, on the other hand, partial substitutes for one another. When a man ranks in his value scale the myriad of goods available and balances the diminishing utilities of each, he is treating them all as partial substitutes for one another. A change in ranking for one good by necessity changes the rankings of all the other goods, since all the rankings are ordinal and relative. A higher price for one good (owing, say, to a decrease in stock produced) will tend to shift the demand of consumers from that to other consumers' goods, and therefore their demand schedules will tend to increase. >Demand/Rothbard, >Supply/Rothbard, >Price/Rothbard. Conversely, an increased supply and a consequent Iowering of price for a good will tend to shift consumer demand from other goods to this one and Iower the demand schedules for the other goods (for some, of course, more than for others). It is a mistake to suppose that only technologically similar goods are substitutes for one another. The more money consumers spend on pork, the less they have to spend on beef, or the more money they spend on travel, the less they have to spend on TV sets. Suppose that a reduction in its supply raises the price of pork on the market; it is clear that the quantity demanded, and the price, of beef will be affected by this change. Elasticity: If the demand schedulefor pork is more than unitarily elastic in this range, then the higher price will cause less money to be spent on pork, and more money will tend to be shifted to such a substitute as beef. The demand schedules for beef will increase, and the price of beef will tend to rise. >Elasticity/Rothbard. Inelasticity: On the other hand, if the demand schedule for pork is inelastic, more consumers' money will be spent on pork, and the result will be a fall in the demand schedule for beef and consequently in its price. Rothbard III 283 Consumer goods: (…) consumers' goods, in so far as they are substitutes for one another, are related as follows: When the stock of A rises and the price of A therefore falls, (1) if the demand schedule for A is elastic, there will be a tendency for a decline in the demand schedules for B, C, D, etc., and consequent declines in their prices; (2) if the demand schedule for A is inelastic, there will be a rise in the demand schedules for B, C, D, etc., and a consequent rise in their prices; (3) if the demand schedule has exactly neutral (or unitary) elasticity, so that there is no change in the amount of money expended on A, there will be no effect on the demands for and the prices of the other goods. Rothbard III 285 While all consumers’ goods compete with one another for consumer purchases, some goods are also complementary to one another. These are goods whose uses are closely linked together by consumers, so that movements in demand for them are likely to be closely tied together. Rothbard III 286 This discussion of the interrelation of consumers’ goods has treated the effect only of changes from the stock, or supply, side. The effects are different when the change occurs in the demand schedule instead of in the quantity of stock. (…) the demand schedules are determined by individual value scales and that a rise in the marginal utility of a unit of A necessarily means a relative fall in the utility of the other consumers’ goods. >Marginal utility/Rothbard, >Stock keeping/Rothbard, >Comparative Advantage, >Durable goods. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Sales Tax | Rothbard | Rothbard III 930 Sales tax/Rothbard: The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the tax can be equally well enforced everywhere, then business will simply "pass on" the 20-percent increase in all prices to consumers. Prices: In fact, however, there is no way for prices to increase at all! As in the case of one particular industry, prices were previously set, or approximately so, at the points of maximum net revenue for the firms. Factors of production/goods: Stocks of goods or factors have not yet changed, and neither have demand schedules. How then could prices rise? Moreover, if we look at the general array of prices, as is proper when dealing with a general sales tax, these are determined by the supply of and the demand for money, from the goods and money sides. For the general array of prices to rise, there must be either an increase in the supply of money, a decrease in the demand schedule for money, or both. Nothing in a general sales tax causes a change in either of these determinants. Long-run effects/VsSales tax: Furthermore, the long-run effects of a general sales tax on prices will be smaller than in the case of an equivalent partial excise tax. >Excise tax/Rothbard. Excise tax: A tax on a specific industry, such as liquor, will push resources out of this industry and into others, and therefore the relative price of the taxed commodity will eventually rise. In a general, uniformly enforced sales tax, however, there is no room for such shifts of resources.(1) >Tax Shifting/Rothbard, >Taxation/Rothbard, >Income tax/Rothbard, >Cost Principle/Rothbard, >Neutral taxation/Economic theories, >Neutral taxation/Rothbard, >Service/Rothbard, >Bureaucracy/Rothbard, >Benefit principle/Rothbard, >Progressive tax/Rothbard. Rothbard III 931 Prices: In considering the general sales tax, many people are misled by the fact that the price paid by the consumer necessarily includes the tax. (…) [the consumer] tends to conclude that the tax has simply been added on to the "price.". Revenue: The revenue to the firm has, in effect, been reduced to allow for payment of taxes. This is precisely the consequence of a general sales tax. Its immediate impact Iowers the gross revenue of firms by the amount of the tax. Long run effects: In the long run, of course, firms cannot pay the tax, the loss in gross revenue of firms being imputed backward to interest income by capitalists and to wages and rents earned by owners of original factors - labor and ground land. >Factors of production/Rothbard. Backward shifting: A decrease in gross revenue to retail firms is reflected back to a decreased demand for the products of all the higher-order firms. The major result of a general sales tax is a general reduction in the net revenues accruing to original factors. The sales tax has been shifted backwards to original factor returns - to interest and to all wages and ground rents. No longer does every original factor of production earn its discounted marginal product. Discounted marginal value product (DMVP): Original factors now earn less than their DMVPs, the reduction consisting of the sales tax paid to the government. Rothbard III 933 Effect on consumption: (…) the general sales tax is a conspicuous example of failure to tax consumption. The sales tax is commonly supposed to penalize consumption, rather than income or capital. Yet we find that the sales tax reduces, not just consumption, but the incomes of original factors. The general sales tax is therefore an income tax, albeit a rather haphazard one. Politics: a) Many "right-wing" economists have advocated general sales taxation, as opposed to income taxation, on the grounds that the former taxes consumption but not savings-investment; b) many "left-wing" economists have opposed sales taxation for the same reason. RothbardVs: Both are mistaken; the sales tax is an income tax, though of a more haphazard and uncertain incidence. The major effect of the general sales tax will be that of the income tax - to reduce the consumption and the saving-invest- ment of the taxpayers.(2) Investments: In fact, since (…) the income tax by its nature falls more heavily on savings-investment than on consumption, we reach the paradoxical and important conclusion that a tax on consumption will fall more heavily on savings-investment than on consumption in its ultimate incidence. 1. Resources can now shift only from work into idleness (or into barter). This, of course, may and probably will happen; since (…) a sales tax is a tax on incomes, the rise in opportunity cost of leisure may push some workers into idleness and thereby Iower the quantity of goods produced. To this extent, prices will eventually rise, although hardly in the smooth, immediate, proportionate way of "shifting." See the pioneering article by Harry Gunnison Brown, "The Incidence of a General Output or a General Sales Tax," reprinted in R.A. Musgrave and C.S. Shoup, eds., Readings in the Economics of Taxation (Homewood, 111.: Richard D. Irwin, 1959), pp. 330—39. While this was the first modern attack on the fallacy that sales taxes are shifted forward, Brown unfortunately weakened the implications of this thesis toward the end of his article. 2. Mr. Frank Chodorov, in his The Income Tax - Root of All Evil (New York: Devin-Adair, 1954), fails to indicate what other type of tax would be "better" from a free-market point ofview, than the income tax. It is clear from our discussion that there are few taxes indeed that will not be as bad as the income tax from the viewpoint of the free market. Certainly sales or excise taxation will not fill the bill. Mr. Chodorov, furthermore, is surely wrong when he terms income and inheritance taxes unique denials of the right of individual property. Any tax whatever infringes on property right, and there is nothing in an "indirect tax" which makes the infringement any less clear. It is true that an income tax forces the subject to keep records and disclose his personal dealings, thus imposing a further loss in his utility. The sales tax, however, also forces record-keeping; the difference again is one of degree rather than of kind, since here the directness covers only retail storekeepers instead of the bulk of the population. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Specialization | Rothbard | Rothbard III 96 Specialization/division of labour/Rothbard: It is clear that conditions for exchange, and therefore increased productivity for the participants, will occur where each party has a superiority in productivity in regard to one of the goods exchanged - a superiority that may be due either to better nature-given factors or to the ability of the producer. (…) the inferior producer benefits by receiving some of the products of the superior one. The latter benefits also, however, by being free to devote himself to that product in which his productive superiority is the greatest. Example: A doctor who is an excellent gardener may very well prefer to employ a hired man who as a gardener is inferior to himself, because thereby he can devote more time to his medical practice.(1) Rothbard: This important principle - that exchange may beneficially take place even when one party is superior in both lines of production - is known as the law of association, the law of comparative costs, or the law of comparative advantage. >Comparative Advantage, >Division of labour/Rothbard. Rothbard III 153 Stock keeping/production/market/Rothbard: The size of the stock of any good depends on the rate at which the good has been and is being produced. And since human wants for most goods are continuous, the goods that are worn out through use must constantly be replaced by new production. An analysis of the rate of production and its determinants is thus of central importance in an analysis of human action. (…) while any one individual can at different times be both a buyer and a seller of existing stock, in the production of that stock there must be specialization. The initial sales of any new stock will all be made by original producers of the good. The old stock will be sold by: Rothbard III 154 (a) original producers who through past reservation demand had accumulated old stock; (b) previous buyers who had bought in speculative anticipation of reselling at a higher price; and (c) previous buyers on whose value scales the relative utility of the good for their direct use has fallen. Demand: The market demand schedule at any time consists of the sum of the demand schedules of: (a) Buyers for direct use, (b) Speculative buyers for resale at a higher price. Goods: Since the good consists of equally serviceable units, the buyers are necessarily indifferent as to whether it is old or new stock that they are purchasing. If they are not, then the “stock” refers to two different goods, and not the same good. Rothbard III 155 Stock: The only reason for a producer to reserve, to hold on to, any of his stock is speculative - in anticipation of a higher price for the good in the future. (In direct exchange, there is also the possibility of exchange for a third good (…). Rothbard III 156 Value/use value: If the speculative elements are also excluded from the demand schedule, it is clear that this schedule will be determined solely by the utility of the good in direct use (as compared with the utility of the sale-good). The only two elements in the value of a good are its direct use-value and its exchange-value, and the demand schedule consists of demand for direct use plus the speculative demand in anticipation of reselling at a higher price. Rothbard III 157 If we exclude the latter element (e.g., at the equilibrium price), the only ultimate source of demand is the direct use-value of the good to the purchaser. If we abstract from the speculative elements in a market, therefore, the sole determinant of the market price of the stock of a good is its relative direct use-value to its purchasers. Entrepreneurship/Rothbard: The key consideration is that the demand schedules, and consequently the future prices, are not and can never be definitely and automatically known to the producers. They must estimate the future state of demand as best they can. 1. Kenneth E. Boulding, Economic Analysis (Ist ed.; New York: Harper & Bros., 1941), p. 30; also ibid., pp. 22-32. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Speculative Demand | Rothbard | Rothbard III 767 Speculative Demand for money/Rothbard: It is true (…) that the only use for money is in exchange. From this, however, it must not be inferred, as some writers have done, that this exchange must be immediate. Indeed, the reason that a reservation demand for money exists and cash balances are kept is that the individual is keeping his money in reserve forfuture exchanges. That is the function of a cash balance - to wait for a propitious time to make an exchange. Future/purchasing power: One of the most obvious influences on the demand for money is expectation of future changes in the exchange-value of money. Thus, suppose that, at a certain point in the future, the PPM (purchasing power of monetary unit) is expected to drop rapidly. How the demand-for-money schedule now reacts depends on the number of people who hold this expectation and the strength with which they hold it. It also depends on the distance in the future at which the change is expected to take place. The further away in time any economic event, the more its impact will be discounted in the present by the interest rate. Whatever the degree of impact, however, an expected future fall in the PPM will tend to Iower the PPM now. For an expected fall in the PPM means that present units of money are worth more than they will be in the future, in which case there will be a fall in the demand-for-money schedule as people tend to spend more money now than at the future date. A general expectation of an imminent fall in the PPM will Iower the demand schedule for money now and thus tend to bring about the fall at the present moment. Rothbard III 768 Demand for money: There is, however, a "real" or underlying demand for money. Money may not be physically consumed, but it is used, and therefore it has utility in a cash balance. Such utility amounts to more than speculation on a rise in the PPM. This is demonstrated by the fact that People do hold cash even when they anticipate a fall in the PPM. Such holdings may be reduced, but they still exist, and (…) this must be so in an uncertain world. In fact, without willingness to hold cash, there could be no monetary-exchange economy whatever. >Cash balance/Rothbard. Pesudo equilibrium: The speculative demand therefore anticipates the underlying nonspeculative demands (…) Suppose, then, that there is a general anticipation of a rise in the PPM (a fall in prices) not reflected in underlying supply and demand. It is true that, at first, this general anticipation raises, ceteris paribus, the demand for money and the PPM. But this situation does not last. For now that a pseudo "equilibrium" has been reached, the speculative anticipators, Who did not "really" have an increased demand for money, sell their money (buy goods) to reap their gains. But this means that the underlying demand comes tot he firce, and this is less than the money stock at that PPM. >Demand for money/Rothbard, >Clearing/Rothbard. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Supply | Rothbard | Rothbard III 151 Supply/Rothbard: It is important to be on one’s guard here against a common confusion over such a term as “an increase in demand.” Whenever this phrase is used by itself in this work ((s) i.e. Rothbard. 1962. Man, Economy and State) it always signifies an increase in the demand schedule, i.e., an increase in the amounts that will be demanded at each hypothetical price. This “shift of the demand schedule to the right” always tends to cause an increase in price. It must never be confused with the “increase in quantity demanded” that takes place, for example, in response to an increased supply. Rothbard III 152 Demand/Rothbard: An increased supply schedule, by lowering price, induces the market to demand the larger quantity offered. This, however, is not an increase in the demand schedule, but an extension along the same demand schedule. It is a larger quantity demanded in response to a more attractive price offer. This simple movement along the same schedule must not be confused with an increase in the demand schedule at each possible price. >Demand/Rothbard, >Stock keeping/Rothbard. Rothbard III 243 Supply/Rothbard: [Example:] If the market price were two grains of gold, this seller would sell no butter, since even the first pound in his stock ranks above the acquisition of two grains on his value scale. At a price of three grains, he would sell two pounds, each of which ranks below three grains on his value scale. At a price of four grains, he would sell three pounds, etc. Supply curve/price: It is evident that, as the hypothetical price is lowered, the individual supply curve must be either vertical or leftward-sloping, i.e., a lower price must lead either to a lesser or to the same supply, never to more. This is, of course, equivalent to the statement that as the hypothetical price increases, the supply curve is either vertical or rightward-sloping. Cf. >Demand/Rothbard, >Price/Rothbard. Utility: Again, the reason is the law of utility; as the seller disposes of his stock, its marginal utility to him tends to rise, while the marginal utility of the money acquired tends to fall. Of course, if the marginal utility of the stock to the supplier is nil, and if the marginal utility of money to him falls only slowly as he acquires it, the law may not change his quantity supplied during the range of action on the market, so that the supply curve may be vertical throughout almost all of its range. Rothbard III 254 Stock keeping: (…) the greater the proportion of old stock to new production, other things being equal, the greater will tend to be the importance of the supply of old possessors compared to that of new producers. The tendency will be for old stock to be more important the greater the durability of the good. For supply schedule see >Demand/Rothbard. >Demand schedule. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Tax Incidence | Rothbard | Rothbard III 926 Tax Shifting/Rothbard: There are still economists, incredibly, who hew to the old nineteenth-cen- tury "equal diffusion" theory of taxation, which simply closes the problem by proclaiming that "all taxes are shifted to everyone," so that there is no need to analyze each one in particular.(1) Shifting/Rothbard: This obscurantist tendency is fostered by treating "shifting" in too broad a way. Income tax: Thus, if an income tax is levied on Jones at 80 percent, this will hurt not only Jones, but also - by decreasing Jones' incentives as well as capacities - other consumers by reducing Jones' work and savings. Rothbard III 927 Diffusion of effects: It is therefore true that the effects of taxation diffuse outward from the center of the target. Tax burden/VsTax incidence: But this is far from saying that Jones can simply shift the tax burden onto the shoulders of others. The concept of "shifting" will here be limited to the case where the payment of a tax can be directly transferredfrom the original payer to someone else, and will not be used when others suffer in addition to the original taxpayer. The latter may be called the "indirect effects" of the tax. Income Tax: The first rule of shifting is that an income tax cannot be shifted. Shifting/wages/unions/consumption/employers: This formerly accepted truth in economics is now countered with the popular assumption that, for example, a tax on wages will spur unions to demand higher wages to compensate for the tax, and that therefore the tax on wages is shifted "forward" onto the employer, who, in turn, shifts it again forward onto the body of consumers. RothbardVs: (…) yet almost every step in this commonly proclaimed sequence is an egregious fallacy. It is absurd, in the first place, to think that workers or unions wait quietly for a tax to galvanize them into making demands. Workers always want higher wages; unions always demand more. The question is: Will they get more? Problem: There is no reason to think that they can. Marginal productivity: A worker can get only the value of the discounted marginal productivity of his labor. No clamor will raise that productivity, and therefore none can raise the wage he earns from his employer. Unions: Union demands for higher wages will be treated as usual, i.e., they can be satisfied only at the cost of the unemployment of some of the work force in that industry. Taxation: But this is true whether or not there has been a tax on wages; the tax will have nothing to do with the final wage set on the market. The idea that the increased cost will be passed on to the consumer by the employer is an illustration of perhaps the single most widespread fallacy on taxation: that businessmen can simply shift their higher costs forward onto the consumers in the form of higher prices. Prices: the price of a given product is set by the demand schedules of the consumers. There is nothing in higher costs or higher taxes which, per se, increases these schedules; hence, any change in selling prices, whether higher or Iower, will decrease the revenues of the business involved. For each business, on the market, tends to be, at all times, at its "maximum profit point" in relation to the consumers. Rothbard III 928 Taxation/costs: Prices are already at their point of maximum return for the business; therefore, higher taxes or other costs imposed on the firm will reduce their net incomes rather than be smoothly and easily passed on to consumers. (…) no tax (not just an income tax) can ever be shifted forward. >Excise tax/Rothbard. Backward shifting: Taxes, (…) can more readily be "shifted backward" than forward. Strictly, the result is not shifting because it is not a painless process. But it is clear that the backward process (backward to the factors of production) happens more quickly and directly than the effects on consumers. For losses or Iowered profits to liquor firms will immediately Iower their demand for land, labor, and capital factors of production; this falling of demand schedules will Iower wages and rents earned in the liquor industry; and these Iower earnings will induce a shift of labor, land and capital out of liquor and into other industries. The rapid "backward-shifting" is in harmony with the "Austrian" theory of consumption (…); for prices of factors are determined by the selling prices of the goods which they produce, and not vice versa (which would have to be the conclusion of the naive "shifting-forward" doctrine). >Factors of production/Rothbard, >Austrian School. Rothbard III 930 It should be noted that, in some cases, the industry itself can welcome a tax upon it, for the sake of conferring an indirect, but effective, monopolistic privilege on the supramarginal firms. Thus, a flat "license" tax will confer a particular privilege on the more heavily capitalized firms, which can more easily afford to pay the fee. Sales tax: The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the tax can be equally well enforced everywhere, then business will simply "pass on" the 20-percent increase in all prices to consumers. In fact, however, there is no way for prices to increase at all! >Sales tax/Rothbard. Rothbard III 931 Forward shifting/Rothbard: The myth that a sales tax can be shifted forward is comparable to the myth that a general union-imposed wage increase can be shifted forward to higher prices for consumers, thereby "causing inflation." There is here no way that the general array ofprices can rise, and the only possible result of such a wage increase is mass unemployment.(2) Excise tax: A tax on a specific industry, such as liquor, will push resources out of this industry and into others, and therefore the relative price of the taxed commodity will eventually rise. In a general, uniformly enforced sales tax, however, there is no room for such shifts of resources.(3) Backward shifting: A decrease in gross revenue to retail firms is reflected back to a decreased demand for the products of all the higher-order firms. The major result of a general sales tax is a general reduction in the net revenues accruing to original factors. The sales tax has been shifted backwards to original factor returns - to interest and to all wages and ground rents. No longer does every original factor of production earn its discounted marginal product. Discounted marginal value product (DMVP): Original factors now earn less than their DMVPs, the reduction consisting of the sales tax paid to the government. 1. For a critique of this doctrine, see E.R.A. Seligman, The Shifting and Incidence of Taxation (New York: Macmillan & Co., 1899), pp. 122-36. 2. Of course, ifthe money supply is increased after a wage rise, and credit expanded, prices can be raised so that money wages are again not above their discounted marginal value products. 3. Resources can now shift only from work into idleness (or into barter). This, of course, may and probably will happen; since (…) a sales tax is a tax on incomes, the rise in opportunity cost of leisure may push some workers into idleness and thereby Iower the quantity of goods produced. To this extent, prices will eventually rise, although hardly in the smooth, immediate, proportionate way of "shifting." See the pioneering article by Harry Gunnison Brown, "The Incidence of a General Output or a General Sales Tax," reprinted in R.A. Musgrave and C.S. Shoup, eds., Readings in the Economics of Taxation (Homewood, 111.: Richard D. Irwin, 1959), pp. 330-39. While this was the first modern attack on the fallacy that sales taxes are shifted forward, Brown unfortunately weakened the implications of this thesis toward the end of his article. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Tax Shifting | Rothbard | Rothbard III 926 Tax Shifting/Rothbard: There are still economists, incredibly, who hew to the old nineteenth-cen- tury "equal diffusion" theory of taxation, which simply closes the problem by proclaiming that "all taxes are shifted to everyone," so that there is no need to analyze each one in particular.(1) Shifting/Rothbard: This obscurantist tendency is fostered by treating "shifting" in too broad a way. Income tax: Thus, if an income tax is levied on Jones at 80 percent, this will hurt not only Jones, but also - by decreasing Jones' incentives as well as capacities - other consumers by reducing Jones' work and savings. Rothbard III 927 Diffusion of effects: It is therefore true that the effects of taxation diffuse outward from the center of the target. Tax burden/VsTax shifting: But this is far from saying that Jones can simply shift the tax burden onto the shoulders of others. The concept of "shifting" will here be limited to the case where the payment of a tax can be directly transferredfrom the original payer to someone else, and will not be used when others suffer in addition to the original taxpayer. The latter may be called the "indirect effects" of the tax. Income Tax: The first rule of shifting is that an income tax cannot be shifted. Shifting/wages/unions/consumption/employers: This formerly accepted truth in economics is now countered with the popular assumption that, for example, a tax on wages will spur unions to demand higher wages to compensate for the tax, and that therefore the tax on wages is shifted "forward" onto the employer, who, in turn, shifts it again forward onto the body of consumers. RothbardVs: (…) yet almost every step in this commonly proclaimed sequence is an egregious fallacy. It is absurd, in the first place, to think that workers or unions wait quietly for a tax to galvanize them into making demands. Workers always want higher wages; unions always demand more. The question is: Will they get more? Problem: There is no reason to think that they can. Marginal productivity: A worker can get only the value of the discounted marginal productivity of his labor. No clamor will raise that productivity, and therefore none can raise the wage he earns from his employer. Unions: Union demands for higher wages will be treated as usual, i.e., they can be satisfied only at the cost of the unemployment of some of the work force in that industry. Taxation: But this is true whether or not there has been a tax on wages; the tax will have nothing to do with the final wage set on the market. The idea that the increased cost will be passed on to the consumer by the employer is an illustration of perhaps the single most widespread fallacy on taxation: that businessmen can simply shift their higher costs forward onto the consumers in the form of higher prices. Prices: the price of a given product is set by the demand schedules of the consumers. There is nothing in higher costs or higher taxes which, per se, increases these schedules; hence, any change in selling prices, whether higher or Iower, will decrease the revenues of the business involved. For each business, on the market, tends to be, at all times, at its "maximum profit point" in relation to the consumers. Rothbard III 928 Taxation/costs: Prices are already at their point of maximum return for the business; therefore, higher taxes or other costs imposed on the firm will reduce their net incomes rather than be smoothly and easily passed on to consumers. (…) no tax (not just an income tax) can ever be shifted forward. >Excise tax/Rothbard. Backward shifting: Taxes, (…) can more readily be "shifted backward" than forward. Strictly, the result is not shifting because it is not a painless process. But it is clear that the backward process (backward to the factors of production) happens more quickly and directly than the effects on consumers. For losses or Iowered profits to liquor firms will immediately Iower their demand for land, labor, and capital factors of production; this falling of demand schedules will Iower wages and rents earned in the liquor industry; and these Iower earnings will induce a shift of labor, land and capital out of liquor and into other industries. The rapid "backward-shifting" is in harmony with the "Austrian" theory of consumption (…); for prices of factors are determined by the selling prices of the goods which they produce, and not vice versa (which would have to be the conclusion of the naive "shifting-forward" doctrine). >Factors of production/Rothbard, >Austrian School. Rothbard III 930 It should be noted that, in some cases, the industry itself can welcome a tax upon it, for the sake of conferring an indirect, but effective, monopolistic privilege on the supramarginal firms. Thus, a flat "license" tax will confer a particular privilege on the more heavily capitalized firms, which can more easily afford to pay the fee. Sales tax: The most popular example of a tax supposedly shifted forward is the general sales tax. Surely, for example, if the government imposes a uniform 20-percent tax on all retail sales, and if we can make the simplifying assumption that the tax can be equally well enforced everywhere, then business will simply "pass on" the 20-percent increase in all prices to consumers. In fact, however, there is no way for prices to increase at all! >Sales tax/Rothbard. Rothbard III 931 Forward shifting/Rothbard: The myth that a sales tax can be shifted forward is comparable to the myth that a general union-imposed wage increase can be shifted forward to higher prices for consumers, thereby "causing inflation." There is here no way that the general array ofprices can rise, and the only possible result of such a wage increase is mass unemployment.(2) Excise tax: A tax on a specific industry, such as liquor, will push resources out of this industry and into others, and therefore the relative price of the taxed commodity will eventually rise. In a general, uniformly enforced sales tax, however, there is no room for such shifts of resources.(3) Backward shifting: A decrease in gross revenue to retail firms is reflected back to a decreased demand for the products of all the higher-order firms. The major result of a general sales tax is a general reduction in the net revenues accruing to original factors. The sales tax has been shifted backwards to original factor returns - to interest and to all wages and ground rents. No longer does every original factor of production earn its discounted marginal product. Discounted marginal value product (DMVP): Original factors now earn less than their DMVPs, the reduction consisting of the sales tax paid to the government. 1. For a critique of this doctrine, see E.R.A. Seligman, The Shifting and Incidence of Taxation (New York: Macmillan & Co., 1899), pp. 122-36. 2. Of course, ifthe money supply is increased after a wage rise, and credit expanded, prices can be raised so that money wages are again not above their discounted marginal value products. 3. Resources can now shift only from work into idleness (or into barter). This, of course, may and probably will happen; since (…) a sales tax is a tax on incomes, the rise in opportunity cost of leisure may push some workers into idleness and thereby Iower the quantity of goods produced. To this extent, prices will eventually rise, although hardly in the smooth, immediate, proportionate way of "shifting." See the pioneering article by Harry Gunnison Brown, "The Incidence of a General Output or a General Sales Tax," reprinted in R.A. Musgrave and C.S. Shoup, eds., Readings in the Economics of Taxation (Homewood, 111.: Richard D. Irwin, 1959), pp. 330-39. While this was the first modern attack on the fallacy that sales taxes are shifted forward, Brown unfortunately weakened the implications of this thesis toward the end of his article. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Time | Rothbard | Rothbard II 167 Price Theory/time/Rothbard: Here we must emphasize a crucial distinction between the proper status of the ‘short run’ and the ‘long run’ in economic theory. In price theory proper, the short run should take precedence, because it is the real-world market price, while the long run is the remote, ultimate tendency that never occurs, and could only take place if all the data were frozen for several years. In sum, we could only live in the improbable if not impossible world of long-run general equilibrium – where all profits and losses are zero – if all values, technologies and resources were frozen for years. But in monetary theory, the order of precedence should be different. For in monetary theory, the impact of partial ‘real’ factors on the price level, exchange rates, and on the balance of payments, are all ephemera determined by the general factors: the supply of and demand for money. These monetary influences are not ‘long-run’ in the sense of far off and remote, but are underlying and dominant every day in the real world. The monetary influence corresponding to the long run of general equilibrium would be a condition where all price levels and all real wage levels in a gold standard world would be identical, or strictly proportionate to the relative currency weights of gold. In a freely fluctuating, fiat money world, this would be the situation where all price levels would be strictly proportionate to the currency ratios at the international market exchange rates. But dominant influences of the supply and demand for money on price levels and exchange rates occur in the real world all the time, and always predominate over the ephemera of ‘real’ specific price and expenditure changes. Hence real-world analysis, which must always predominate, comprises short-run price analysis and slightly longer-run (but still far from final equilibrium) monetary reasoning. To put it another way: in the real world, all prices are determined by the interaction of supply and demand. For individual prices, this means consumer valuations and consumer demands for a given stock: supply and demand in the real world. This is ‘short-run’ micro-analysis. For overall prices or the ‘price level’, the relevant supply and demand is the supply of and demand for money: the result of individual utility valuations of the given stock of money at any time. And while equally real and dominant in the Rothbard II 168 ‘macro-sphere’, this is determinant in a slightly longer run than the superficial ‘real’ factors stressed by anti-bullionists in all ages. >Money, >Money supply, >Demand for money, >Bullionism, >Inflation, >Central Banks. Rothbard III 277 Time/action/economy/Rothbard: It is convenient to distinguish the two vantage points by which an actor judges his action as ex ante and ex post. Ex ante: Ex ante is his position when he must decide on a course of action; it is the relevant and dominant consideration for human action. It is the actor considering his alternative courses and the consequences of each. Ex post: Ex post is his recorded observation of the results of his past action. It is the judging of his past actions and their results. Ex ante, then, he will always take the most advantageous course of action, and will always have a psychic profit, with revenue exceeding cost. Ex post, he may have profited or lost from a course of action. Revenue may or may not have exceeded cost, depending on how good an entrepreneur he has been in making his original action. It is clear that his ex post judgments are mainly useful to him in the weighing of his ex ante considerations for future action. Suppose that an ultimate consumer buys a product and then finds he was mistaken in this purchase and the good has little or no value to him. Thus, a man might buy a cake and find that he does not like it at all. Ex ante the (expected) utility of the cake was greater than the marginal utility of the money forgone in purchasing it; ex post he finds that he was in error and that if he had it to do over again, he would not have bought the cake. The purchase was the consumer’s responsibility, and he must bear the loss as well as the gain from his voluntary transaction. Of course, no one can relive the past, but he can use this knowledge, for example, to avoid purchasing such a cake again. It should be obvious that the cake, once purchased, may have little or no value even though the man originally paid several grains of gold for it. Cost: The cost of the cake was the forgone marginal utility of the three grains of gold paid for it. But this cost incurred in the past cannot confer any value on the cake now. This would seem obvious, and yet economics has always suffered from neglect of this truth, particularly during the nineteenth century, in the form of various “cost” theories of value. These cost theories asserted that the value of goods is conferred by the costs or sacrifices incurred in their acquisition in the past. On the contrary, it is clear that value can be conferred on a good only by individuals’ desires to use it directly in the present or in the present expectation of selling to such individuals in the future.(1) Rothbard III 378 Time/Rothbard: The pure capitalist (…) in performing a capital-advancing function in the productive system, plays a sort of intermediary role. He sells money (a present good) to factorowners in exchange for the services of their factors (prospective future goods). For „pure“ capitalist see >Evenly Rotating Economy/Rothbard; >Production/Rothbard, >Investment/Rothbard. He holds these goods and continues to hire work on them until they have been transformed into consumers’ goods (present goods), which are then sold to the public for money (a present good). The premium that he earns from the sale of present goods, compared to what he paid for future goods, is the rate of interest earned on the exchange. >Interest rate/Rothbard, >Capitalism/Rothbard, >Loans/Rothbard, >Credit/Rothbard. Production: The time market is therefore not restricted to the loan market. It permeates the entire production structure of the complex economy. All productive factors are future goods: they provide for their owner the expectation of being advanced toward the final goal of consumption, a goal which provides the raison d’être for the whole productive enterprise. It is a time market where the future goods sold do not constitute a credit transaction, as in the case of the loan market. The transaction is complete in itself and needs no further payment by either party. In this case, the buyer of the future goods - the capitalist - earns his income through transforming these goods into present goods, rather than through the presentation of an I.O.U. claim on the original seller of a future good. >Capitalism/Rothbard. Time market/Rothbard: The time market, the market where present goods exchange for future goods, is, then, an aggregate with several component parts. In one part of the market, capitalists exchange their money savings (present goods) for the services of numerous factors (future goods). This is one part, and the most important part, of the time market. Another is the consumers’ loan market, where savers lend their money in a credit transaction, in exchange for an I.O.U. of future money. Rothbard III 379 The savers are the suppliers of present money, the borrowers the suppliers of future money, in the form of I.O.U.’s. Rothbard III 388 The time-market schedules of all individuals are aggregated on the market to form market-supply and market-demand schedules for present goods in terms of future goods. The supply schedule will increase with an increase in the rate of interest, and the demand schedule will fall with the higher rates of interest. >Production structure/Rothbard, >Supply/Rothbard, >Demand/Rothbard. Rothbard III 404 Factors of production: The pure demanders of present goods on the time market are the various groups of laborers and landowners - the sellers of the services of original productive factors. Their price on the market (…) will be set equal to the marginal value product of their units, discounted by the prevailing rate of interest. The greater the rate of interest, the less will the price of their service be, or rather, the greater will be the discount from their marginal value product considered as the matured present good.(2) Rothbard III 420 The connection between the returns on investment and money loans to consumers is not an obvious one. But it is clear (…) that both are parts of one time market. 1. As Wicksteed states: “Efforts are regulated by anticipated values, but values are not controlled by antecedent efforts,” and The value of what you have got is not affected by the value of what you have relinquished or forgone in order to get it. But the measure of the advantages you are willing to forgo in order to get a thing is determined by the value that you expect it to have when you have got it. (Wicksteed, Common Sense of Political Economy, I, 93 and 89). 2. Cf. Böhm-Bawerk, Positive Theory of Capital, pp. 299–322, 329-38 |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Utility | Longfield | Rothbard II 122 Value theory/subjective utility/Longfield/Rothbard: In value theory, Longfield worked out the subjective theory of value and price more fully than had been accomplished before in Great Britain. He concentrated firmly on market price as the important consideration rather than long-run price, and also showed that both are in any case determined by supply and demand. Marginalism: Longfield broke important new ground in his detailed marginal analysis of demand. Here he worked out the concept of consumer demand as a schedule, related to sets of prices, and even developed the idea of individual falling demand schedules as the fundamental basis of aggregate market demand. Demand/Longfield: (…) Longfield showed that market demand curves are constituted by a spectrum of supramarginal, marginal, and submarginal buyers, each with different intensities of demand. Furthermore, ‘the measure of the intensity of any person's demand for any commodity is the amount which he would be willing and able to give for it, rather than remain without it, or forego the gratification which it is calculated to afford him’. Price/Longfield: Yet, of course, despite the different intensities of demand, all Rothbard II 123 exchanges will be at the same market price. If, then, ‘the price is attempted to be raised one degree beyond this sum, the demanders, who by the change cease to be purchasers, must be those the intensity of whose demand was precisely measured by the former price... Thus the market price is measured by the demand, which being of the least intensity, yet leads to actual purchases’. In short, the marginal demand becomes a key to the determination of price. Supply/Longfiled: In his analysis of supply, Longfield showed that the supply relevant to the real, day-to-day market price is a previously produced stock of a good now fixed for the immediate present period (in short, what would now be called a vertical supply curve for the immediate market period). Furthermore, Longfield saw clearly, in contrast to Ricardo, that cost of production in no sense determines price; at most, it contributes indirectly to that determination by affecting the extent of supply. His analysis comes close to the later Austrian theory by brilliantly pointing out that the effect of cost on supply comes from the expectations of producers in deciding how much of a good to make and put on the market. Thus the cost of production acts by its influence on the supply, ‘since men will not produce commodities unless with the reasonable expectation of selling them for more than the cost of producing them’. Rothbard II 124 Isaac ButtVsLongfied/Rothbard: In utility theory proper, Butt corrected Longfield's Smith-like error in referring to consumption per se as ‘unproductive’. Butt also noted that the labour theory of value might be in a sense applicable if labour were the only scarce resource, and if, moreover, it were homogeneous and costlessly mobile between industries. But such conditions are of course impossible. 1. Mountifort Longfield. 1833. Lectures on Political Economy. Dublin 1834. https://doi.org/10.2307/2223849 |
Longfield I Mountifort Longfield Lectures on political economy, delivered in Trinity and Michaelmas terms, 1833 Dublin 1834 Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Utility | Rothbard | Rothbard III 134 Utility/demand/supply/equilibirum price/price/Rothbard: The actions of both buyers and sellers on the market may be related to the concepts of psychic revenue, profit, and cost. We remember that the aim of every actor is the highest position of psychic revenue and thus the making of a psychic profit compared to his next best alternative - his cost. Whether or not an individual buys depends on whether it is his best alternative with his given resources (…). Revenue: His expected revenue in any action will be balanced against his expected cost - his next best alternative. In this case, the revenue will be either (a) the satisfaction of ends from the direct use of the [good] or (b) expected resale of the [good] at a higher price - whichever has the highest utility to him. greater. The expected revenue is the marginal utility of the added [good] for the buyer; Cost: the expected cost is the marginal utility of the [good] given up. For either revenue or cost, the higher value in direct use or in exchange will be chosen as the marginal utility of the good. Rothbard III 135 Supply: The seller, as well as the buyer, attempts to maximize his psychic revenue by trying to attain a revenue higher than his psychic cost - the utility of the next best alternative he will have to forgo in taking his action. The seller will weigh the marginal utility of the added sale-good (…) against the marginal utility of the purchase-good given up (…), in deciding whether or not to make the sale at any particular price. Revenue: The psychic revenue for the seller will be the higher of the utilities stemming from one of the following sources: (a) the value in direct use of the sale-good (…) or (b) the speculative value of re-exchanging the [good] for the [good] at a lower price in the future. Cost: The cost of the seller’s action will be the highest utility forgone among the following alternatives: (a) the value in direct use of the [good] given up or (b) the speculative value of selling at a higher price in the future or (c) the exchange-value of acquiring some other good for the [good]. Utility/Rothbard: it is, for every good, utility and utility alone that determines the price and the quantity exchanged. Utility and utility alone determines the nature of the supply and demand schedules. RothbardVsTradition: It is therefore clearly fallacious to believe, as has been the popular assumption, that utility and “costs” are equally and independently potent in determining price. “Cost” is simply the utility of the next best alternative that must be forgone in any action, and it is therefore part and parcel of utility on the individual’s value scale. This cost is, of course, always a present consideration of a future event, even if this “future” is a very near one. >Price/Rothbard, >Market/Rothbard, >Marginal Utility/Rothbard. Rothbard III 305 Utility/Rothbard: Many errors in discussions of utility stem from an assumption that it is some sort of quantity, measurable at least in principle. >Marginal utility/Jevons. When we refer to a consumer’s “maximization” of utility, for example, we are not referring to a definite stock or quantity of something to be maximized. We refer to the highest-ranking position on the individual’s value scale. Similarly, it is the assumption of the infinitely small, added to the belief in utility as a quantity, that leads to the error of treating marginal utility as the mathematical derivative of the integral “total utility” of several units of a good. Actually, there is no such relation, and there is no such thing as “total utility,” only the marginal utility of a larger-sized unit. The size of the unit depends on its relevance to the particular action. This illustrates one of the grave dangers of the mathematical method in economics, since this method carries with it the bias of the assumption of continuity, or the infinitely small step. >Marginal utility/Rothbard, >Purchasing power/Rothbard, >Action/Rothbard. Rothbard III 306 Measuring/praxeology: The key problem in utility theory, neglected by the mathematical writers, has been the size of the unit. Under the assumption of mathematical continuity, this is not a problem at all; it could hardly be when the mathematically conceived unit is infinitely small and therefore literally sizeless. In a praxeological analysis of human action, however, this becomes a basic question. The relevant size of the unit varies according to the particular situation, and in each of these situations this relevant unit becomes the marginal unit. There is none but a simple ordinal relation among the utilities of the variously sized units. Rothbard III 314 There are, then, two laws ofutility, both following from the apodictic conditions of human action: first, that given the size of a unit of a good, the (marginal) utility of each unit decreases as the supply of units increases; second, that the (marginal) utility of a larger-sized unit is greater than the (marginal) utility of a smaller-sized unit. The first is the law of diminishing marginal utility. The second has been called the law of increasing total utility. The relationship between the two laws and between the items considered in both is purely one of rank, i.e., ordinal. >Measurements/Rothbard, >Value/Mises. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
| Utility of Money | Rothbard | Rothbard III 764 Utility of Money/Rothbard: In the case of consumers' goods, we do not go behind their subjective utilities on people's value scales to investigate why they were preferred; economics must stop once the ranking has been made. Money as a good: In the case of money, however, we are confronted with a different problem. For the utility of money (…) depends solely on its prospective use as the general medium of exchange. >Demand for money/Rothbard. Hence the subjective utility of money is dependent on the objective exchange-value of money (…).(1) Demand for goods: or other goods, demand in the market is a means of routing commodities into the hands of their consumers. Demand for money: For money, on the other hand, the "price" of money is precisely the variable on which the demand schedule depends and to which almost the whole of the demand for money is keyed. Money price: without a price, or an objective exchange-value, any other good would be snapped up as a welcome free gift; but money, without a price, would not be used at all, since its entire use consists in its command of other goods on the market. The sole use of money is to be exchanged for goods, and if it had no price and therefore no exchange- value, it could not be exchanged and would no longer be used. >Money/Rothbard. Rothbard III 765 Money: Money, on the contrary, is solely useful for exchange purposes. Money, per se, cannot be consumed and cannot be used directly as a producers' good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing. Land or capital is always in the form of some specific good, some specific productive instrument. Money always remains in someone's cash balance. >Cash balance/Rothbard, >Currency in circulation/Rothbard. Money utility: Goods are useful and scarce, and any increment in goods is a social benefit. But money is useful not directly, but only in exchanges. (…) as the stock of money in society changes, the objective exchange-value of money changes inversely (though not necessarily proportionally) until the money relation is again in equilibrium. When there is less money, the exchange-value of the monetary unit rises; when there is more money, the exchange-value of the monetary unit falls. >Demand for money/Rothbard. We conclude that there is no such thing as "too little" or "too much" money, that, whatever the social money stock, the benefits of money are always utilized to the maximum extent. Money supply: An increase in the supply of money confers no social benefit whatever; it simply benefits some at the expense of others, as will be detailed further below. Similarly, a decrease in the money stock involves no social loss. For money is used only for its purchasing power in exchange, and an increase in the money stock simply dilutes the purchasing power of each monetary unit. Conversely, a fall in the money stock increases the purchasing power of each unit. Rothbard III 766 Economic law: Every supply of money is always utilized to its maximum extent, and hence no social utility can be conferred by increasing the supply of money. >Money supply/David Hume. 1. See Mises, Theory of Money and Credit, New Haven, Conn.: Yale University Press, 1953 and 1957. Reprinted by Liberty Fund, 1995. p. 98. The entire volume is indispensable for the analysis of money. Also see Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. chap. xvii and chap. xx. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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