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The author or concept searched is found in the following 58 entries.
| Disputed term/author/ism | Author |
Entry |
Reference |
|---|---|---|---|
| Buchanan, James M. | Boudreaux | Boudreaux I 8 Buchanan/Boudreaux: Keynesianism/Boudreaux: With aggregative thinking, “the social welfare” is promoted by “the government,” with the latter treated as if it’s an organism possessing a brain, and as if that brain’s main interest lies not in serving itself but, rather, in serving the nation. BuchananVsKeynesianism: Buchanan called such aggregative thinking the “organismic” notion of collectives - that is, the collective as organism. From the very start, nearly all of Buchanan’s lifetime work was devoted to replacing the organismic approach with the individualistic one - a way of doing economics and political science that insists that choices are made, and costs and benefits are experienced, only by individuals. (…) Buchanan wrote his first sole-authored book to debunk a myth about government debt that had become widely accepted only because of Keynesianism’s organismic assumptions. >Keynesianism, >Methodological individualism, >James M. Buchanan as Author. Boudreaux I 10 From its start, Buchanan’s entire career can be understood as a constructive scholarly reaction to the analytical errors of Keynesianism on the one hand, and excessively romantic beliefs about democracy on the other. >Democracy/Buchanan. |
Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
| Capitalism | Keynes | Rawls I 298 Capitalism/Savings/Accumulation/Inequality/Keynes/Rawls: Keynes writes that the enormous accumulation of capital before World War I could never have come about in a society where prosperity would have been more evenly distributed. (J. M. Keynes 1919(1)) I 299 The society was set up in such a way that the increased income was in the hands of those who tended to spend it least. The newly rich had not been gathered for large expenditures. It was precisely the inequality of wealth distribution that made it possible to build up capital quickly and the steady growth of prosperity for all. Keyne's thesis: this was the main justification of the capitalist system. If the rich had now spent their new prosperity on themselves, the regime would have been rejected as unreasonable. RawlsVsKeynes: there are more efficient ways to increase prosperity than the one described by Keynes, which is only valid under certain circumstances. But the essential point here is that Keynes' justification can be reversed to improve the situation of the working class. Keynes presumably claims that the circumstances could not have been changed to the detriment of the disadvantaged. But no matter what he actually meant, Keynes does not say that the hardship of the poor would have been justified by better living conditions of future generations. >Generational justice, >Justice, >Distributive justice. 1. J. M. Keynes, The Economic Consequences of The Peace, (London, 1919), pp. 18-22. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Rawl I J. Rawls A Theory of Justice: Original Edition Oxford 2005 |
| Capitalism | Schumpeter | Sobel I 33 Capitalism/Schumpeter/Sobel/Clemens: „Can capitalism survive? No. I do not think it can ... its very success undermines the social institutions which protect it, and "inevitably" creates conditions in which it will not be able to live and which strongly point to socialism as the heir apparent.“ (Joseph A. Schumpeter (1942), Capitalism, Socialism, and Democracy(1): 61.) Sobel/Clemens: Perhaps the most interesting aspect of Schumpeter's lifelong work in economics was a similarity between his work and that of Karl Marx, the most noted socialist writer in history. What makes this similarity striking is that Schumpeter's greatest insights relate to the role of the innovative entrepreneur at the heart of capitalism. >Entrepreneurship/Schumpeter, >Karl Marx, >Marxism, >Socialism. Yet, despite this insight, Schumpeter, like Marx, believed that the economic system of capitalism would eventually be replaced by socialism as a result of forces from within. In Capitalism, Socialism, and Democracy (CSD)(1) Schumpeter himself states: "My final conclusion therefore does not differ, however much my argument may, from that of most socialist writers and in particular from that of all Marxists" (CSD(1): 61).* Socialism/SchumpeterVsMarx: There are, however, two important differences between the analysis of Schumpeter and Marx with regard to the end of capitalism. First, while Marx personally desired socialism and believed it to be a superior economic system, Schumpeter did not, declaring: "Prognosis does not imply anything about the desirability of the course of events that one predicts. If a doctor predicts that his patient will die presently, this does not mean he desires it" (CSD(1): 61). Schumpeter was a firm believer in the power of private innovation and entrepreneurship and the benefits capitalism produced; ones that he believed were superior to the outcomes under socialism. Unlike Marx, Schumpeter did not want capitalism to be replaced by socialism, nor did he think this transition would be beneficial for the well-being of society. Second, while both Marx and Schumpeter believed there was an inevitable transition of capitalism into socialism, they disagreed on the causes. Marx believed capitalism would produce inequalities, monopolies, and economic failures that would lead to a revolt of the "exploited" working class (the "proletariat") against the wealthy, capitalist class (the "bourgeoisie") that owned the means of production. >Bourgeoisie. In stark contrast, Schumpeter understood from his analysis of history that capitalism greatly benefitted the working class: „Queen Elizabeth owned Silk stockings. The capitalist achievement does not typically consist in providing more Silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.“ (CSD(1): 67) Schumpeter clearly dismisses Marx's argument in an essay published in a 2008 collection of his writings, Essays on Entrepreneurship, Innovations, Business Cycles, and the Evolution of Capitalism (EOE)(2): SchumpeterVsMarx: „In Marx ... it is necessary to separate the arguments ... and the answer itself. All his arguments, but in particular the one that asserts that labour will be goaded into revolution by steadily increasing misery, can be proved to be untenable. But this does not dispose of the answer itself, because it is possible to arrive at a correct result by faulty methods.“ (EOE(2): 207-208) So while he agreed with Marx's conclusion that capitalism would be replaced by socialism, he firmly disagreed with the cause of the transition. Capitalism/Schumpeter: Schumpeter instead believed that capitalism would be destroyed by its very economic success as it produced an intellectual class that would subsequently work to undermine the systems of private property and private contracting that underpin the economic system of capitalism. >Bureaucracy/Schumpeter, >Entrepreneurship/Schumpeter. Sobel I 34 Def Capitalism/Schumpeter: „A society is called capitalist ifit entrusts its economic process to the guidance of the private businessman. This may be said to imply, first, private ownership of nonpersonal means of production, such as land, mines, industrial plant and equipment; and, second, production for private account, i.e., production by private initiative for private profit.“ (EOE(2): 189).** *In Thomas K. McCraw's definitive biography of Schumpeter, Prophet of lnnovation (2009(3)), he argues that Schumpeter's discussion of the socialism successfully replacing capitalism should be interpreted as, at least to some extent, sarcastic. McCraw writes: "As a whole, the organization of Schumpeter's discussion of socialism has elements of a Shell game. At first his argument seems designed to establish the viability of socialism and its likely replacement of capitalism. But there follows such a lengthy series of convoluted qualifications and assumptions as to raise doubts about his candor ... a careful reading leaves little question that his purpose has been to praise capitalism and condemn socialism. Even so, Schumpeter's irony escaped many readers" (2009(3):366-367). ** Schumpeter also stressed that "the institution of bank credit is so essential to the functioning of the capitalist system that, though not strictly implied in its definition, it should be added to the other two criteria" of private ownership and private production for private profit as defining characteristics of the capitalist system (EOE(2): 189). 1. Schumpeter, Joseph A. (1942). Capitalism, Socialism, and Democracy [CSD]. Harper & Brothers. 2. Schumpeter, Joseph A. (2008). Essays on Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism. Edited by Richard V. Clemence. 3. McCraw, Thomas K. (2009). Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Harvard University Press. Brocker I 250 Capitalism/Schumpeter: Thesis: a) Capitalism is best understood not as a system of market equilibria, but rather as a competitive dynamic process, driven by innovative companies, to disrupt equilibria; this process not only captures and transforms the structures of the economy, but all structures of modern society. b) For the sake of scientific progress, one must strictly distinguish between positive and normative analysis: Brocker I 251 SchumpeterVsClassical Economy/SchumpeterVsRicardo/SchumpeterVsKeynes: these authors did not make the distinction between positive and normative analysis. ((s) Distinction descriptive/normative.). Brocker I 254 Schumpeter's thesis: Capitalism will not perish from its failures, but from its successes. In contrast to Marx, however, this is presented as a conditional prognosis rather than an unconditional one. The condition is that no disturbing influences occur in the future development. (1) Schumpeter pro capitalism: see Civilization/Schumpeter. Brocker I 255 Innovation/Schumpeter: the development of capitalism can only be described taking into account the innovation competition for ever new products, processes and organizational forms, which is essential for the process of creative destruction. (2) Brocker I 262 Schumpeter's main message is that the (supposed) strengths of socialism should be feared as totalitarianism and that the (supposed) weaknesses of capitalism should be acknowledged as civilized in modern society and thus worthy of preservation. >Socialism/Schumpeter. 1. Joseph A. Schumpeter, Capitalism, Socialism and Democracy, New York 1942. Dt.: Joseph A. Schumpeter, Kapitalismus, Sozialismus und Demokratie, Tübingen/Basel 2005 (zuerst: Bern 1946). S. 105, 263. 2. Ebenda S. 142. Ingo Pies, „Joseph A. Schumpeter, Kapitalismus, Sozialismus und Demokratie (1942)“ in: Manfred Brocker (Hg.) Geschichte des politischen Denkens. Das 20. Jahrhundert. Frankfurt/M. 2018. |
EconSchum I Joseph A. Schumpeter The Theory of Economic Development An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Cambridge/MA 1934 German Edition: Theorie der wirtschaftlichen Entwicklung Leipzig 1912 Sobel I Russell S. Sobel Jason Clemens The Essential Joseph Schumpeter Vancouver 2020 Brocker I Manfred Brocker Geschichte des politischen Denkens. Das 20. Jahrhundert Frankfurt/M. 2018 |
| Consumption Function | Keynesianism | Rothbard III 861 Consumption function/Keynesianism/Rothbard: The stability of the passive consumption function, as contrasted withthe volatility of active investment, is a keystone of the Keynesian system. This assumption is replete withso many grave errors that it is necessary to take them up one at a time. Consumption function/RothbardVsKeynesianism/VsConsumption function: (a) How do the Keynesians justify the assumption of a stable consumption function (…)? One route was through "budget studies" - cross-sectional studies of the relation between family income and expenditure by income groups in a given year. This is supposed to intimate that those doing the "dissaving," i.e., the dishoarding, are poor people below the subsistence level who incur deficits by borrowing. But how long is this supposed to go on? >Hoarding/Keynesianism. RothbardVsKeynesianism: How can there be a continuous deficit? Who would continue to lend these people the money? It is more reasonable to suppose that the dishoarders are decumulating their previously accumulated capital, i.e., that they are wealthy people whose businesses suffered losses during that year. (b) Aside from the fact that budget studies are misinterpreted, there are graver fallacies involved. For the curve given by the budget study has no relation whatever to the Keynesian consumption function! The former, at best, gives a cross section of the relation between classes of family expenditure and income for one year; the Keynesian consumption function attempts to establish a relation between total social income and total social consumption for any given year, holding true over a hypothetical range of social incomes. At best, one entire budget curve can be summed up to yield only one point on the Keynesian consumption function. Budget studies, therefore, can in no way confirm the Keynesian assumptions. Rothbard III 862 (c) Another very popular device to confirm the consumption function reached the peak of its popularity during World War II. This was historical-statistical correlation of national income and consumption for a definite period of time, usually the 1930's. This correlation equation was then assumed to be the "stable" consumption function. Errors in this procedure were numerous. RothbardVs: In the first place, even assuming such a stable relation, it would only be an historical conclusion, not a theoretical law. In physics, an experimentally determined law may be assumed to be constant for other identical situations; in human action, historical situations are never the same, and therefore there are no quantitative constants! Conditions and valuations could change at any time, and the "stable" relationship altered. There is here no proof of a stable consumption function. RothbardVs: Moreover, a stable relation was not even established. Income was correlated with consumption and with investment. Since consumption is a much larger magnitude than (net) investment, no wonder that its percentage deviations around the regression equation were smaller! >Consumption/Keynesianism, >Investment/Keynes, >Interest/Keynesianism. Time/ex ante/ex post/RothbardVsKeynesianism: Thirdly, the consumption function is necessarily an ex ante relation; it is supposed to tell how much consumers will decide to spend given a certain total income. Historical statistics, on the other hand, record only ex post data, which give a completely different story. For any given period of time, for example, hoarding and dishoarding cannot be recorded ex post. In fact, ex post, on double-entry accounting records, total social income is always equal to total social expenditures. Yet, in the dynamic, ex ante, sense, it is precisely the divergence between total social income and total social expenditures (hoarding or dishoarding) that Plays the crucial role in the Keynesian theory. (1) Rothbard III 863 (d) Actually, the whole idea of stable consumption functions has now been discredited, although many Keynesians do not fully realize this In fact, Keynesians themselves have admitted that, in the long run, the consumption function is not stable, since total consumption rises as income rises; and that in the short run it is not stable, since it is affected by all sorts of changing factors. RothbardVs: But if it is not stable in the short run and not stable in the long run, what kind of stability does it have? (e) it is instructive to turn now to the reasons that Keynes himself, in contrast to his followers, gave for assuming his stable consumption function. It is a confused exposition The "propensity to consume" out of given income, according to Keynes, is determined by two sets of factors, "objective" and "subjective." Rothbard: It seems clear, however, that these are purely subjective decisions, so that there can be no separate objective determinants. 1. See Lindahl, "On Keynes' Economic System - Part I," Economic Record (May 1954). p. 169 n. Lindahl shows the diffculties of mixing an ex post income line with ex ante consumption and spending, as the Keynesians do. Lindahl also shows that theexpenditure and income lines coincide ifthe divergence between expected and realized income affects income and not stocks. Yet it cannot affect stocks, for, contrary to Keynesian assertion, there is no such thing as hoarding or any other unexpected event leading to "unintended increase in inventories." An increase in inventories is never unintended, since the seller has the alternative of selling the good at the market price. The fact that his inventory increases means that he has voluntarily invested in larger inventory, hoping for a future price rise. 2. Summing up disillusionment withthe consumption function are two significant articles: Murray E. Polakoff, "Some Critical Observations on the Major Keynesian Building Blocks," Southern Economic Journal, October, 1954, pp. 141-51; and Leo Fishman, "Consumer Expectations and the Consumption Function," ibid., January, 1954, pp. 243-51. |
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 Function | Rothbard | Rothbard III 776 Comsumtion Function/Rothbard: The Keynesian "consumption function" plays its part in establishing an alleged law that there exists a certain level of total income, say A, above which expenditures will be less than income (net hoarding), and below which expenditures will be greater than income (net dishoarding). But the basic Keynesian worry is hoarding, when total income must decline. Rothbard III 778 Keynesian law: The Keynesian law asserts social expenditures to be Iower than social income above point A, and higher than social income below point A, so that A will be the equilibrium point for social income to equal expenditure. For if social income is higher than A, social expenditures will be Iower than income, and income will therefore tend to decline from one day to the next until the equilibrium point A is reached. If social income is Iower than A, dishoarding will occur, expenditures will be higher than income, until finally A is reached again. RothbardVsKeynes/RothbardVsKeynesianism: (…) suppose that we now grant the validity of such a law; the only comment can be an impertinent: So what? What if there is a fall in the national income? Since the fall need only be in money terms, and real income, real capital, etc., may remain the same, Why any alarm? The only change is that the hoarders have accomplished their objective of increasing their real cash balances and increasing the real value of the monetary unit. It is true that the picture is rather more complex for the transition process until equilibrium is reached, (…) But the Keynesian system attempts to establish the perniciousness of the equilibrium position, and this it cannot do. >Free market/Keynesianism, >Unemployment/Keynesianism. |
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 |
| Crises | Friedman | Brocker I 396 Crises/Friedman: thesis: the great global economic crisis of the early 1930s was not, as claimed by the academic school of Keynesianism, the result of immanent instability tendencies in the market economy, but a result of the failure of central bankers. >Federal Reserve Policy. Brocker I 397 After the American stock market crash of 1929, they had not tried hard enough to prevent the collapse of the banks; the related thereto annihilitaion of the accounts had reduced the money supply by 20 percent and the collapse of demand for goods and economic activity was thus inevitable. FriedmanVsKeynesianism, FriedmanVsKeynes. >Keynesianism, >J.M. Keynes. Solution/Friedman: a policy of steady money supply growth as a necessary and sufficient condition of macroeconomic stability, i.e. above all to preserve the value of money. However, this concept was only implemented in some countries in the early 1970s after Keynesian stability policy (a constant variation in taxes and government spending) failed due to the problem of rising inflation rates. >Monetarism. Peter Spahn, „Milton Friedman, Kapitalismus und Freiheit“, in: Manfred Brocker (Hg.) Geschichte des politischen Denkens. Das 20. Jahrhundert. Frankfurt/M. 2018 |
Econ Fried I Milton Friedman The role of monetary policy 1968 Brocker I Manfred Brocker Geschichte des politischen Denkens. Das 20. Jahrhundert Frankfurt/M. 2018 |
| Demand | Keynes | Boudreaux II 60 Demand/Keynes/Boudreaux: The Single most influential economics book written in the twentieth century is The General Theory of Employment, Interest, and Money(1), by the British economist John Maynard Keynes (1883—1946). Keynes reasoned that, just as high demand is key to the success of an individual firm, high aggregate demand is key to the success of a whole economy. Recession/Keynes: In Keynes's view, economic recessions are caused by too little aggregate demand. Solution: The cure for recessions, therefore, is higher aggregate demand. And the best way to increase aggregate demand is for government to ramp up its spending until economic health is restored - that is, until full employment is reached. Boudreaux II 61 This Keynesian View is widespread. It seems to make so much sense. Problems/VsKeynes: But it suffers serious flaws. And perhaps its biggest flaw is its focus on aggregate demand. By focusing on aggregate demand, Keynesian economics ignores the all-important ("microeconomic") details of an economy. Microeconomics: These vital details are how well or poorly each of the economy's many individual parts "fit" together and work together to generate goods and services for consumers, and to create job opportunities for workers. >Microeconomics. 1. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936). |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
| Demand for Money | Keynesianism | Rothbard III 789 Speculative demand/interest/Keynesianism/Rothbard: Admitting (…) that time preference determines the proportions of consumption and investment and that the demand for money determines the proportion of income hoarded, does the demand for money play a role in determining the interest rate? >Time preference/Rothbard, >Demand for money/Rothbard. The Keynesians assert that there is a relation between the rate of interest and a "speculative" demand for cash. Should the schedule of the latter rise, the former rises also. RothbardVsKeynesianism: But this is not necessarily true. A greater proportion of funds hoarded can be drawn from three alternative sources: (a) from funds that formerly went into consumption, (b) from funds that went into investment, and (c) from a mixture of both that leaves the old consumption-investment proportion unchanged. Condition (a) will bring about a fall in the rate of interest; condition (b) a rise in the rate of interest, and condition (c) will leave the rate of interest unchanged. Thus hoarding may reflect either a rise, a fall, or no change in the rate of interest, depending on whether time preferences have concomitantly risen, fallen, or remained the same. >Hoarding. Keynesianism: The Keynesians contend that the speculative demand for cash depends upon and determines the rate of interest in this way: if people expect that the rate of interest will rise in the near future, then their liquidity preference increases to await this rise. Equilibirum theory/Keynes/RothbardVsKeynes: This, however, can hardly be a part of a long-run equilibrium theory, such as Keynes is trying to establish. Speculation: Speculation, by its very nature, disappears in the ERE (Evenly Rotating Economy), and hence no fundamental causal theory can be based upon it. >Evenly Rotating Economy/Rothbard. Interest: Furthermore, what is an interest rate? One grave and fundamental Keynesian error is to persist in regarding the interest rate as a contract rate on Ioans, instead of the price spreads between stages of production. >Production structure/Rothbard. The former (…) is only the reflection of the latter. A strong expectation of a rapid rise in interest rate means a strong expectation of an increase in the price spreads, or rate of net return. Speculation: A fall in prices means that entrepreneurs generally expect that factor prices will fall further in the near future than their selling prices. >Factors of Production, >Factor market, >Structure of production/Rothbard. But it requires no Keynesian labyrinth to explain this phenomenon; all we are confronted with is a situation in which entrepreneurs, expecting that factor prices will soon fall, cease investing and wait for this happy event so that their return will be greater. This is not "liquidity preference," but speculation on price changes. >Liquidity preference/Keynesianism, >Speculation/Rothbard, >Investments/Rothbard, >Demand for money/Keynesianism. Rothbard III 790 Demand for money/Keynesianism/Rothbard: … The final Keynesian bogey is that people may acquire an unlimited demand for money, so that hoards will indefinitely increase. This is termed an "infinite" liquidity preference. >Liquidity preference/Keynesianism. Vs „Infinite“ money demand see >Demand for Money/Rothbard. And this is the only case in which neo-Keynesians such as Modigliani believe that involuntary unemployment can be compatible with price and wage freedom. >Modigliani. The Keynesian worry is that people will hoard instead of buying bonds for fear of a fall in the price of securities. >Hoarding/Rotbhard. RothbardVsKeynesianism: Translating this into more important "natural" terms, this would mean, (…) not investing because of expectation of imminent increases in the natural interest rate. Rather than act as a blockade, however, this expectation speeds the ensuing adjustment. Furthermore, the demand for money could not be infinite since people must always continue consuming, whatever their expectations. Of necessity, therefore, the demand for money could never be infinite. The existing level of consumption, in turn, will require a certain level of investment. As long as productive activities are continuing, there is no need or possibility of lasting unemployment, regardless of the degree of hoarding.(1) >Unemployment/Rothbard. Uncertainty: A demand for money to hold stems from the general uncertainty of the market. Keynesianism: Keynesians, however, attribute liquidity preference, not to general uncertainty, but to the specific uncertainty of future bond prices. RothbardVs: Surely this is a highly superficial and limiting view. In the first place, this cause of liquidity preference could occur only on a highly imperfect securities market. >Risks/Rothbard. LachmannVsKeynes: As Lachmann pointed out years ago in a neglected article, Keynes' causal pattern - "bearishness" causing "liquidity preference" (demand for cash) and high interest rates - could take place only in the absence of an organized forward orfutures market for securities. If such a market existed, both bears and bulls on the bond market „could express their expectations by forward transactions which do not require any cash. Where the market for securities is fully organized over time, the owner of 4% bonds who fears a rise in the rate of interest has no incentive to exchange them for cash, for he can always "hedge" by selling them forward.“(2) Rothbard III 792 Rothbard: Bearishness would cause a fall in forward bond prices, followed immediately by a fall in spot prices. Thus, speculative bearishness would, of course, cause at least a temporary rise in the rate of interest, but accompanied by no increase in the demand for cash. Hence, any attempted connection between liquidity preference, or demand for cash, and the rate of interest, falls to the ground. >Interest rates/Keynesianism, >Interest rates/Rothbard. 1. As Hutt points out, if we can conceive of a situation of infinitely elastic liquidity preference (and no such situation has ever existed), then "we can conceive of prices falling rapidly, keeping pace with expectations of price changes, but never reaching zero, with full utilization of resources persisting all the Way." Ibid., p. 398. 2. L.M. Lachmann, "Uncertainty and Liquidity Preference," Economica, August, 1937, p. 301. |
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 |
| Distribution Theory | Harcourt | Harcourt I 1 Distribution theory/Neoclassical economics/VsKeynesianism/Harcourt: There is a fundamental cleavage between the two groups, especially on whether distribution theory may be regarded as just an aspect of the marginal theory of value - the neoclassical(1) and neo-neoclassical view. Neo-Keynesianism: By contrast, the neo-Keynesians consider that the elements of the theory of distribution do not necessarily coincide with those that are relevant to the theory of value. They are especially critical of the neoclassical links between equilibrium factor prices and the marginal products of 'factors'. In classical fashion, that is, in the tradition especially of Ricardo and Marx, they argue that the theory of distribution should be analysed in different terms from that of the neoclassical theory of value, with the theory of distribution preceding in context and priority, though not in time, the theory of value. (…) once either the wage rate or the rate of profits is known, so, too, are prices in the neo-Keynesian schema. >Marginalism. 1. By 'neoclassical' we mean the body of doctrine that derives from the writings of the first and second generations of marginalists, whose writings are critically reviewed in Stigler's Production and Distribution Theories, Stigler [1941]. The neoclassicals whose work is most relevant in the context of the issues discussed in this book are Marshall, Walras, Wicksell, J. B. Clark and Wicksteed. |
Harcourt I Geoffrey C. Harcourt Some Cambridge controversies in the theory of capital Cambridge 1972 |
| Economic Cycle | Mises | Rothbard IV 21 Economic cycles/business cycles/Mises/Rothbard: Tradition: Economists had attempted many explanations, but even the best of them suffered from one fundamental flaw: none of them attempted to integrate the explanation of the business cycle with the general analysis of the economic system, with the “micro” theory of prices and production. >Microeconomics. Equilibirum: In fact, it was difficult to do so, because general economic analysis shows the market economy to be tending toward “equilibrium,” with full employment, minimal errors of forecasting, etc. Whence, then, the continuing series of booms or busts? Solution/Mises: Ludwig von Mises saw that, since the market economy could not itself lead to a continuing round of booms and busts, the explanation must then lie outside the market: in some external intervention. He built his great business cycle theory on three previously unconnected elements. 1) One was the Ricardian demonstration of the way in which government and the banking system habitually expand money and credit, driving prices up (the boom) and causing an outflow of gold and a subsequent contraction of money and prices (the bust). Mises realized that this was an excellent preliminary model, but that it did not explain how the production system was deeply affected by the boom or why a depression should then be made inevitable. >Ricardian theory, >David Ricardo. 2) Another element was the Böhm-Bawerkian analysis of capital and the structure of production. >Capital/Böhm-Bawerk, >Production/Böhm-Bawerk. 3) A third was the Swedish “Austrian” Knut Wicksells’ demonstration of the importance to the productive system and to prices of a gap between the “natural” rate of interest (the rate of interest without the interference of bank credit expansion) and the rate as actually affected by bank loans. >Knut Wicksell. Mises: From these three important but scattered theories, Mises(1) constructed his great theory of the business cycle. Into the smoothly functioning and harmonious market economy comes the expansion of bank credit and bank money, encouraged and promoted by the government and its central bank. >Central Bank, >Money supply/Mises. As the banks expand the supply of money (notes or deposits) and lend the new money to business, they push the rate of interest below the “natural” or time-preference rate, i.e., the free-market rate which reflects the voluntary proportions of consumption and investment by the public. As the interest rate is artificially lowered, the businesses take the new money and expand the structure of production, adding to capital investment, especially in the “remote” processes of production: in lengthy projects, machinery, industrial raw materials, and so on. The new money is used to bid up wages and other costs and to transfer resources into these earlier or “higher” orders of investment. Then, when the workers and other producers receive the new money, their time preferences having remained unchanged, they spend it in the old proportions. But this means that the public will not be saving enough to purchase the new high-order investments, and a collapse of those businesses and investments becomes inevitable. >Time preference/Böhm-Bawerk. Rothbard IV 22 Depression: The recession or depression is then seen as an inevitable re-adjustment of the production system, by which the market liquidates the unsound “over-investments” of the inflationary boom and returns to the consumption/investment proportion preferred by the consumers. Microeconomics: Mises thus for the first time integrated the explanation of the business cycle with general “micro-economic” analysis. The inflationary expansion of money by the governmentally-run banking system creates over-investment in the capital goods industries and underinvestment in consumer goods, and the “recession” or “depression” is the necessary process by which the market liquidates the distortions of the boom and returns to the free-market system of production organized to serve the consumers. Recovery arrives when this adjustment process is completed. MisesVsKeynes/MisesVsKeynesianism/Rothbard: The policy conclusions implied by the Misesian theory are the diametric opposite of the current fashion, whether “Keynesian” or “post-Keynesian.” If the government and its banking system are inflating credit, the Misesian prescription is (a) to stop inflating posthaste, and (b) not to interfere with the recession-adjustment, not prop up wage rates, prices, consumption or unsound investments, so as to allow the necessary liquidating process to do its work as quickly and smoothly as possible. The prescription is precisely the same if the economy is already in a recession. Rothbard IV 63 Interventions/Government/Central Banks/Mises: (…) in contrast to interventionists and statists who believe that the government must intervene to combat the recession process caused by the inner workings of free-market capitalism, Mises demonstrated precisely the opposite: that the government must keep its hands off the recession, so that the recession process can quickly eliminate the distortions imposed by the government-created inflationary boom. >Credit/Mises, >Inflation/Mises, >Central Banks/Mises. 1. Ludwig von Mises. 1912. The Theory of Money and Credit (Theorie des Geldes und der Umlaufsmittel, Translated by H.E. Batson in 1934; reprinted with “Monetary Reconstruction» (New Haven, Conn.: Yale University Press, 1953). Reprinted by the Foundation for Economic Education, 1971; reprinted with an Introduction by Murray N. Rothbard, Liberty Press Liberty Classics, 1989. |
EconMises I Ludwig von Mises Die Gemeinwirtschaft Jena 1922 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 Cycle | Neoclassical Economics | Mause I 226 Economy/Neoclassical Theory: Economic fluctuations can (...) in the sense of neo-classical theory or in the theory of real business cycles (Real Business Cycle or RBC-theory; Stadler 1994 (1)) also occur on the supply side of the goods markets if it comes to fluctuations in the provision of production factors. Neoclassical theory: for them, what is happening on the labour markets ((s) for economic development) is important in the medium term. NeoclassicsVsKeynesianism/NeoclassicismVsKeynesianism: Neoclassical models ((s) unlike Keynesianism, which looks at the behaviour of private households) regard the state as primarily responsible for the occurrence of economic cycles, while implying inherent stability in the private sector. An unsystematic monetary or fiscal policy leads to uncertainty and adjustment reactions of market participants, which are reflected in economic fluctuations. (See Hayek "presumption of reason", "pretense of knowledge"). >Economic Cycle/Public Choice. 1. Stadler, George W., Real business cycles. Journal of Economic Literature 32, (4) 1994, S. 1750– 1783. |
Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Economic Policies | Friedman | Mause I 57 Economic Policies/Friedman/FriedmanVsKeynesianism/FriedmanVsKeynes: Thesis: monetary policy can only achieve short-term success, but is neutral in the long term. Although expansionary monetary policy could initially increase demand and employment, workers would not be subject to monetary illusion and would demand a compensation for the inflation-related reduction in their real wages, i.e. an increase in nominal wages, which would cancel out the initial employment effect. In the long term, unemployment would therefore remain constant; monetary policy would only have caused prices to rise and would not have had any real employment effects. "Real" problems (e.g. unemployment) could only be solved by "real" measures (e.g. facilitating the recruitment of workers by relaxing employment protection, minimum wage and similar regulations). The monetarists therefore recommend a steady monetary policy with the objective of price stability. (1) Brocker I 398 Economic Policy/Friedman: Friedman was afraid that the welfare state would increasingly interfere in the pursuit of individual economic interests and... Brocker I 399 ...restrict market participants. Monetary policy deals with macroeconomic problems, the average values of employment and inflation. Individual liberty rights are affected indirectly at most. >Welfare State. Brocker I 400 Economic Policy/Politics/Friedman: Friedman rejects conscription and describes the efficiency and development possibilities of the market economy system in such bright colours that there is no room and no need for government intervention, bureaucratic controls or state-organized sectors. >Interventions. The educational system, for example, which from a conservative point of view serves not least to convey "state-preserving" values and ways of thinking, would have to be privatized, as would the media, transport and energy sectors, with the result that political groups lose some of their beloved power, influence and earning potential. >Education. Peter Spahn, „Milton Friedman, Kapitalismus und Freiheit“, in: Manfred Brocker (Hg.) Geschichte des politischen Denkens. Das 20. Jahrhundert. Frankfurt/M. 2018 1. M. Friedman, The role of monetary policy. American Economic Review 58, 1968, pp. 1-17. |
Econ Fried I Milton Friedman The role of monetary policy 1968 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 Brocker I Manfred Brocker Geschichte des politischen Denkens. Das 20. Jahrhundert Frankfurt/M. 2018 |
| Economic Policies | Monetarism | Mause I 57f Economic Policies/Monetarism/MonetarismVsKeynesianism/MonetarismVsKeynes: In contrast to the Keynesians, the monetarists (...) assume the fundamental stability of the private sector and therefore deny the need for an active stabilization policy. Instead, a stability policy in the form of reliable framework conditions and economic policy restraint on the part of the state is called for. See also Economic Policies/Friedman). Mause I 225 Economic Policy/Monetarism: all economic policy interventions are (...) assessed on the extent to which they influence the overall economic interest rate level. An expansive monetary policy initially causes interest rate cuts (liquidity effect) and thus considerable effects on the goods markets in the form of volume and price adjustments. See Assets/Neoclassics, See Demand for money/Tobin. |
Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Economics | Schumpeter | Brocker I 251 Economic Theory/Schumpeter: For the sake of scientific progress, a strict distinction must be made between positive and normative analysis: SchumpeterVsClassical Economy/SchumpeterVsRicardo/SchumpeterVsKeynes: these authors did not make the distinction between positive and normative analysis. ((s) Distinction descriptive/normative.). >J.M. Keynes, >Keynesianism, >D. Ricardo. Ingo Pies, „Joseph A. Schumpeter, Kapitalismus, Sozialismus und Demokratie (1942)“ in: Manfred Brocker (Hg.) Geschichte des politischen Denkens. Das 20. Jahrhundert. Frankfurt/M. 2018. |
EconSchum I Joseph A. Schumpeter The Theory of Economic Development An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Cambridge/MA 1934 German Edition: Theorie der wirtschaftlichen Entwicklung Leipzig 1912 Brocker I Manfred Brocker Geschichte des politischen Denkens. Das 20. Jahrhundert Frankfurt/M. 2018 |
| Equilibrium | Leijonhufvud | Henderson I 10 Equilibrium/LeijonhufvudVsKeynesianism/Henderson/Globerman: Leijonhufvud did some early work(1) arguing that most Keynesians had misinterpreted John Maynard Keynes's General Theory of Employment, Interest, and Money(2). In follow-on work, Leijonhufvud and Robert Clower argued that when existing market prices, especially wages, depart substantially from prices that would equilibrate supply and demand and there are strong frictions that make this equilibration costly, an economy can remain in disequilibrium for an extended period of time. Leijonhufvud had argued that people misinterpreted Keynes's explanation of less than full-employment equilibrium as a problem of insufficient aggregate demand rather than a problem of inflexible prices. >Supply, >Demand, >Keynesianism. 1. Leijonhufvud, Axel (1968). On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory. Oxford University Press. 2. Keynes, J. M. (1936). The general theory of employment, interest and money. London. |
Henderson I David R. Henderson Steven Globerman The Essential UCLA School of Economics Vancouver: Fraser Institute. 2019 |
| Equivalence Theorem | Barro | Mause I 277 Equivalence Theorem/government debt/Ricardo/Barro: Thesis: the financing of public expenditure via taxes or via government debt is equivalent. However, this requires a number of restrictive assumptions. The theorem goes back to Ricardo, but was only brought into its present form by Barro. (1) N.B.: The question is whether additional expenditure makes sense in consideration of the need for private cutting consumption to finance it, but not in what way it is financed. Reason: If government debt rises, private households will anticipate future tax increases and adjust their consumption patterns accordingly. VsEquivalence Theorem: the empirical relevance of these questions can be questioned. For example, there could be altruism between the generations: Parents plan with a basically infinite time horizon. Another problem: it is also assumed that the path of expenditure policy is independent of the financial instrument used. This is only plausible if intergenerational altruism works and voters are perfectly informed. Behavioral Economics/BuchananVsRicardo/BuchananVsBarro/BuchananVsEquivalence theorem: if government debt is perceived less strongly than taxes, debt-financed higher spending may be politically enforceable. Then Ricardo's equivalence collapses. (2) This problem also exists when the capital markets are not perfect, allowing households to easily shift consumption between the present and the future, even without public debt instruments. VsBarro: another problem: distorting taxes: If you move away from the first best tax system, it may well play a role for the welfare of individuals whether the state is in debt. Hereto: Solution/Barro: subsequently introduced the argument of tax smoothing into the discussion. (3) In this case, it makes sense to compensate for fluctuations in tax revenue by increasing and reducing government debt, but to keep tax rates relatively constant. BarroVsKeynesianism: The reason for this is not an economic policy countermeasure for Keynesian motives, but the fact that welfare losses caused by distorting taxes increase disproportionately with tax rates. For further problems see >Growth/Diamond. 1. Robert J. Barro. 1974. Are government bonds net wealth? Journal of Political Economy 82 (6): 1095– 1117. 2. James M. Buchanan & Richard E. Wagner. Democracy in deficit. The political legacy of Lord Keynes. New York 1977. 3. Robert J. Barro. 1979. On the determination of the public debt. Journal of Political Economy 87 (5): 940– 971. |
EconBarro I Robert J. Barro Rational expectations and the role of monetary policy 1976 EconBarro II Robert J. Barro David B. Gordon Rules, discretion and reputation in a model of monetary policcy 1983 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Equivalence Theorem | Ricardo | Mause I 277 Equivalence Theorem/government debt/Ricardo/Barro: Thesis: the financing of public expenditure via taxes or via government debt is equivalent. However, this requires a number of restrictive assumptions. The theorem goes back to Ricardo, but was only brought into its present form by Barro. (1) N.B.: The question is whether additional expenditure makes sense in consideration of the need for private cutting consumption to finance it, but not in what way it is financed. Reason: If government debt rises, private households will anticipate future tax increases and adjust their consumption patterns accordingly. VsEquivalence Theorem: the empirical relevance of these questions can be questioned. For example, there could be altruism between the generations: Parents plan with a basically infinite time horizon. Another problem: it is also assumed that the path of expenditure policy is independent of the financial instrument used. This is only plausible if intergenerational altruism works and voters are perfectly informed. Behavioral Economics/BuchananVsRicardo/BuchananVsBarro/BuchananVsEquivalence theorem: if government debt is perceived less strongly than taxes, debt-financed higher spending may be politically enforceable. Then Ricardo's equivalence collapses. (2) This problem also exists when the capital markets are not perfect, allowing households to easily shift consumption between the present and the future, even without public debt instruments. VsBarro: another problem: distorting taxes: If you move away from the first best tax system, it may well play a role for the welfare of individuals whether the state is in debt. Hereto: Solution/Barro: subsequently introduced the argument of tax smoothing into the discussion. (3) In this case, it makes sense to compensate for fluctuations in tax revenue by increasing and reducing government debt, but to keep tax rates relatively constant. BarroVsKeynesianism: The reason for this is not an economic policy countermeasure for Keynesian motives, but the fact that welfare losses caused by distorting taxes increase disproportionately with tax rates. For further problems see >Growth/Diamond. 1. Robert J. Barro. 1974. Are government bonds net wealth? Journal of Political Economy 82 (6): 1095 – 1117. 2. James M. Buchanan & Richard E. Wagner. Democracy in deficit. The political legacy of Lord Keynes. New York 1977. 3. Robert J. Barro. 1979. On the determination of the public debt. Journal of Political Economy 87 (5): 940– 971. |
EconRic I David Ricardo On the principles of political economy and taxation Indianapolis 2004 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Fiscal Policy | Neoclassical Economics | Mause I 235 Fiscal Policy/Neoclassical theories: many neo-classical economists (...) reject all forms of economic control through fiscal policy. The reason is that according to neoclassical theory, rational households expect tax increases in the future as government deficits rise. Def Ricardian equivalence: rational households are taking the expectation of rising taxes as an opportunity to reduce their consumption already today. NeoclassicismVsKeynesianism: See Government Debt/Keynesianism. >Taxation, >Globalization/Saez/Zucman, >Tax Avoidance, >Tax Competition, >Tax Compliance, >Tax Evasion, >Tax Havens, >Tax Incidence, >Tax Loopholes, >Tax System. |
Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Free Market | Keynesianism | Rothbard III 778 Free Market/Keynesianism/Rothbard: KeynesianismVsFree market: Therefore, the elaborate attempts of the Keynesians to demonstrate that free-market expenditures will be limited - that consumption is limited by the "function," and investment by stagnation of opportunities and "liquidity preference" - are futile. For even if they were correct (which they are not), the result would be pointless. There is nothing wrong with hoarding or dishoarding, or with "Iow" or "high" levels (whatever that may mean) of social money income. >Hoarding/Rothbard, >Consumption function/Keynesianism. Employment/unemployment: The Keynesian attempt to salvage meaning for their doctrine rests on one point and one point alone - the second major pillar of their system. This is the thesis that money social income and level of employment are correlated, and that the latter is a function of the former. This assumes that a certain "full employment" level of social income exists below which there is correspondingly greater unemployment. Rothbard III 780 The nub of the Keynesian critique of the free market economy (…) rests on the involuntary unemployment allegedly caused by too Iow a level of social expenditures and income. Problem: But how can this be, since we have previously explained that there can be no involuntary unemployment in a free market? >Free market/Rothbard, >Unemployment/Rothbard. Solution: The Keynesian "underemployment equilibrium" occurs only if money wage rates are rigid downward, i.e., if the supply curve of labor below "full employment" is infinitely elastic.(1) >Elasticity. Thus, suppose there is a "hoarding" (an increased demand for money), and social income falls. The result is a fall in the monetary demand curves for labor factors, as well as in all other monetary demand curves. >Hoarding/Rothbard. We would expect the general supply curve of labor factors to be vertical. Since only money wage rates are being changed while real wage rates (in terms of purchasing power) remain the same, there will be no shift in labor/leisure preferences, and the total stock of labor offered on the market will remain constant. At any rate, certainly no involuntary unemployment will arise. >Purchasing power/Rothbard. Rothbard III 1023 Free market/Keynesianism/Rothbard: The Keynesians depict the free market's monetary-fiscal system as minus a steering wheel, so that the economy, though readily adjustable in other ways, is constantly walking a precarious tightrope between depression and unemployment on the one side and inflation on the other. It is then necessary for the government, in its wisdom, to step in and steer the economy on an even course. RothbardVsKeynesianism: (…) it should be evident that the true picture is just about the reverse. The free market, unhampered, would not be in danger of suffering inflation, deflation, depression, or unemployment. But the intervention of government creates the tightrope for the economy and is constantly, if sometimes unwittingly, pushing the economy into these pitfalls. >Business cycles/Rothbard, >Inflation/Rothbard, >Free market/Rothbard. 1. Thus, see the revealing article by Franco Modigliani, "Liquidity Preference and the Theory of Interest and Money" in Hazlitt, Critics of Keynesian Economics, pp. 156-69. Also see the articles by Erik Lindahl, "On Keynes' Economic System - Part I," The Economic Record, May, 19 54, pp. 19-32; November, 1954, pp. 159-71; and Wassily W. Leontief, "Postulates: Keynes' General Theory and the Classicists" in S. Harris, ed., The New Economics (New York: Knopf, 1952), pp. 232-42. For an empirical critique of the assumed Keynesian correspondence between aggregate output and employment, see George W. Wilson, "The Relationship between Output and Employment," Review of Economics and Statistics, February, 1960, pp. 37-43. |
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 |
| Government Debt | Buchanan | Boudreaux I 13 Government debt/Buchanan/Boudreaux/Holcombe: „The essence of public debt, as a financing institution, is that it allows the objective cost of currently financed expenditure projects to be postponed in time. For the taxpayer, public debt delays the necessity of transferring command over resource services to the treasury.“ James M. Buchanan, “Confessions of a Burden Monger” (1964)(1). Boudreaux I 14 [It was a] consensus by mid-twentieth century economists that debt-financed projects are paid for by citizen-taxpayers at the time the projects are undertaken rather than by future generations. „New orthodoxy“/Buchanan: Buchanan called [this]“the new orthodoxy.” It was an orthodoxy because it was widely taken to be obviously true, and it was new because it sprung from Keynesian economics, which in 1958 was only 22 years old. Tradition: Until John Maynard Keynes published his General Theory of Employment, Interest, and Money in 1936(2), most economists - from Adam Smith in the mid-eighteenth century through economists in the early twentieth century - understood that the costs of government projects funded with debt are passed on to the future generations who, as citizen-taxpayers, must repay the debt. KeynesianismVsSmith, Adam: This understanding was rejected by the new orthodoxy ((s) Keynesianism) and replaced with the insistence that projects funded with borrowed money are, just like projects funded with currently collected taxes, paid for at the time the projects are undertaken. The new orthodoxy does recognize that debt financing nevertheless leaves a legacy for future citizen-taxpayers. In the case of [a] hypothetical hydroelectric dam built in 2021 with borrowed funds, citizens are obliged in 2051 to repay the debt that was incurred 30 years earlier. To do so they must, in 2051, pay more in taxes or suffer cuts in government programs (or some combination of the two) (…). Boudreaux I 15 But, the new orthodoxy continues, if the bond is owned and submitted for redemption by nationals, then apart from some relatively negligible costs incurred in carrying out the process of transferring the funds from citizen-taxpayers to citizen-bondholders, redemption imposes no net burden on nationals. Although those citizens who pay the debt are worse off as a result of paying more in taxes or receiving less in government services, other citizens - those who receive repayment of the debt - are better off by the same amount. Just as a household is made neither richer nor poorer if a wife transfers money to her husband, a nation is made neither richer nor poorer if one group of citizens transfers money to another group of citizens. Using the phrase that mid-1950s economists employed to describe this situation, nationals in 2051 might say, “We owe it to ourselves.” BuchananVsNew orthodoxy/BuchananVsKeynesianism: According to Buchanan, the new orthodoxy’s fatal flaw is its insistence that the costs of debt financing are incurred in the periods when the debt-financed programs are undertaken. Boudreaux I 16 And if this insistence is wrong, then the older, pre-Keynesian understanding is correct that programs funded with debt today are paid for by citizen-taxpayers tomorrow. Therefore, by using debt to finance government programs, we, today’s citizen-taxpayers, can indeed consume at the expense of our children and grandchildren. >Public finance, >Interest rates, cf. >Time/Rothbard. Solution/Buchanan: The key insight in Buchanan’s criticism of the new orthodoxy and, hence, of his revitalization of the older, classical view is the realization that creditors who lend money to the government do so voluntarily. But these creditors lend to the government only because they believe that the interest payments they will receive in exchange make such loans worthwhile for them. These creditors are not the purchasers of the debt-financed projects; instead, they are purchasers of future interest payments that make it worthwhile for them to sacrifice their consumption today. Thus, debt-financed government projects are not paid for by the government’s creditors. After all, the very reason the government in 2021 borrows the funds to build the dam is to relieve today’s citizen-taxpayers from having to pay for it. Yet someone has to pay for the dam! Who? Buchanan’s answer is that the dam is paid for by citizen-taxpayers in 2051, who are obliged to repay the debt. >Taxation. KeynesianismVsBuchanan: Adherents of the new orthodoxy respond by saying that if the debt is repaid to fellow citizens, there is no net reduction in aggregate national wealth. The repayment, they maintain, is merely a transfer, as if from the left hand to the right. BuchananVsVs: Buchanan, however, argued that this reasoning is mistaken. If the creditors in 2021 had not loaned [the money] to the government, they would have done something else with their money - something else of nearly equivalent value to lending to the government - such as, for instance, lending [the money] to private companies. >Time preference, >Opportunity costs. Credit/repayment: Buchanan assumed, not unrealistically, that credit markets are competitive. From this assumption it follows that the attractiveness to creditors of lending to the government is only marginally greater than (that is, is largely equivalent to) the attractiveness of using their money in other ways. And so when in 2051 the government’s creditors are repaid, they are made no better off (or worse off) than they would have been had they used their money differently in 2021. Repayment of the debt does not make the repaid creditors anything but marginally richer than they would have been had they instead invested their money in alternative projects. But repayment does make the citizen-taxpayers who foot the bill poorer by the full amount of the repayment. >Credit. Boudreaux I 19 Note that Buchanan’s argument that each debt-financed project is paid for by the future citizen-taxpayers who must service the debt holds regardless of whether the project is wasteful or productive. Debt/taxation/Buchanan: Buchanan’s argument should not, therefore, be interpreted as counselling against any and all debt financing. He explicitly recognized that it is appropriate to finance some projects with debt rather than with current taxation. Projects that yield benefits to future citizen-taxpayers are appropriately paid for by those future taxpayers rather than by current taxpayers who derive no benefits from such projects. In such cases, debt financing is a vehicle for handing the bill to those who will receive the benefits. Free rider/Buchanan: This ability of current taxpayers to use debt financing to free-ride on the wealth of future generations led Buchanan to worry that government today will both spend excessively and fund too many projects with debt. >Moral hazard. Boudreaux I 20 Democracy/Buchanan: Tomorrow’s citizen-taxpayers, after all, are not today’s voters. Thus, the interests of these future generations are under-represented in the political process. To reduce the magnitude of this problem, Buchanan endorsed constitutional rules that oblige governments to annually keep their budgets in balance. Constitution/Buchanan: His fear that the opportunity for debt financing of government projects and programs would be abused was so acute that it led him to endorse a balanced-budget amendment to the US Constitution. His participation in a political effort to secure such an amendment is one of the very few specific, ground-level policy battles that he actively joined. >Constitution/Buchanan. Boudreaux I 21 Government Debt: When analyzing the activities of government, the costs and benefits of government policies fall on individuals, not on aggregates or groups. The argument that domestically held public debt is no burden because “we owe it to ourselves” is revealed as fallacious once we recognize that the aggregate – ourselves - is really composed of many individuals, some of whom will pay the taxes to finance the debt repayment, and some of whom will receive the proceeds when they redeem the bonds they hold. 1. Buchanan, James M. (1964). “Confessions of a Burden Monger”. Journal of Political Economy Vol. 72, No. 5 (Oct., 1964), pp. 486-488. 2. Keynes, J. M. [1936] The General Theory of Employment, Interest and Money. London: Macmillan. Mause I 279 Government Debt/Buchanan: Question: Is it basically acceptable for citizens to give their representatives the opportunity to deficit finance their budgets? (Prerequisite: the Ricardian Equivalence Theorem does not apply; see Terminology/Economic Theories). Brennan/Buchanan: No: Deficit financing would be systematically used to finance expenditures beyond the desired level and past the tax resistance of citizens.(1) >Generational Justice/Diamond, Equivalence Theorem/Barro. See also BuchananVsBarro. 1. Geoffrey Brennan & James M. Buchanan, The power to tax. Analytical foundations of a fiscal constitution. Cambridge 1980. |
EconBuchan I James M. Buchanan Politics as Public Choice Carmel, IN 2000 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Government Debt | Keynesianism | Mause I 235 Government Debt/Keynesianism: if the production potential is already fully exploited, so that higher government spending on goods and services will lead in the long run to lower private spending on goods and services than would be possible without higher government spending, a deficit should be accepted from a Keynesian perspective and expenditure increased to prevent continued weakness in demand and high unemployment. Def Crowding In: Stimulation of private investment activity through government support for overall economic demand. VsKeynesianism: See Government Debt/Neoclassical Theories. Mause I 277 Government Debt/Keynesianism: According to Keynesian interpretations, deficits in public budgets during the recession serve as a stimulus to strengthen overall economic demand and thus help to weaken the economic downturn and reduce the extent of involuntary unemployment. Problem: Multiplying factor: Whether active deficit-spending can fulfil this purpose depends above all on the answer to the empirical question of how high the public spending multiplier is, which provides information on how strong the effect of additional, deficit-financed public spending on gross domestic product is. This question is still controversial today. (1) In a crisis in the financial and banking sector and in economics with flexible exchange rates the factor seems to be clearly higher. (2) 1. Ethan Ilzetzki, Enrique G. Mendoza, und Carlos A. Végh. 2013. How big (small?) are fiscal multipliers? Journal of Monetary Economics 60 (2): 239– 254. 2. Giancarlo Corsetti und Gernot J. Müller. 2015. Fiscal Multipliers: Lessons from the Great Recession for Small Open Economies. Research Report, Stockholm: Swedish Fiscal Policy Council. |
Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Government Debt | Neoclassical Economics | Mause I 235 Government Debt/Neoclassical Theories: NeoclassicismVsKeynesianism: Thesis: State deficits have no effect on overall economic demand, because rational budgets expect the rising debt burden to lead to tax increases in the future as government deficits rise. >Neoclassical economics, >">Keynesianism, >J.M. Keynes. Def Ricardian equivalence: rational households are taking the expectation of rising taxes as an opportunity to reduce their consumption already today. Tax policy/Neoclassics: many neo-classical economists therefore reject any form of economic control through fiscal policy. >Taxation. |
Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Government Policy | Schumpeter | Sobel I 28 Government policy/Schumpeter/Sobel/Clemens: Schumpeter's ideas about the functioning of government were likely informed by his first-hand experience as the minister of finance of Austria. At the time, and even today, much of the economic analysis of government intervention relied on a set ofimplicit (sometimes explicit) assumptions about the actors in the political sphere - that they are selfless, benevolent, leaders and bureaucrats worried only about the public interest, untouched by influence from interest groups. Indeed, much of the interventionist approach to macroeconomic policy championed by John Maynard Keynes implicitly relies on the wise actions of benevolent government actors who selflessly worry about the common good. SchumpeterVsKeynes: Schumpeter knew from his own experience that these assumptions were incorrect. >John Maynard Keynes, >Keynesianism. Democracy: Schumpeter understood that democracy was merely an alternative process for producing social and economic outcomes, and "it would not necessarily follow that the political decisions produced by that process from the raw material of those individual volitions would represent anything that could in any convincing sense be called the will of the people" (CSD(1): 254). Regarding the idea that government pursues some common good, Schumpeter argues: „There is, first, no such thing as a uniquely determined common good that all People could agree on or be made to agree on by the force of rational argument. This is due not primarily to the fact that some people may want things other than the common good but to the much more fundamental fact that to different individuals and groups the common good is bound to mean different things ... as a consequence ... the particular concept of the will of the people ... vanishes into thin air.“ (CSD(1): 251-252) Sobel/Clemens: Schumpeter recognized that to understand democratic outcomes one must look to understand the motivations and different desires of the individuals involved in the process, be they the voters, elected politicians, or administrators and bureaucrats running government agencies. That is, to understand democratic outcomes one must understand the role of what he termed "Human Nature in Politics". Thus, Schumpeter shared a common insight With the founders of the field of public choice, such as Nobel Laureate James Buchanan, who recognized that just because individuals step into the public sphere, they do not suddenly start acting for the common good - instead they continue to be self-interested actors concerned With their own goals and desires. >James M. Buchanan, >Public Choice Theory, >Public Choice. Democracy/Schumpeter: According to Schumpeter, democracy is best understood as follows: "it may be put into the nutshell of a definition ... the democratic method is that institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for people's vote" (CSD(1): 269). According to Schumpeter, as far as there are genuine group-wise volitions ... we are now able to insert them in exactly the role they actually play … called to life by some political leader who turns them into political factors ... by working them up and by including eventually appropriate items in his competitive offering ... The incessant competitive struggle to get into offce or to Stay in it imparts to every consideration of policies and measures the bias so admirably expressed by the phrase about "dealing in votes". (CSD(1): 270, 287). |
EconSchum I Joseph A. Schumpeter The Theory of Economic Development An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Cambridge/MA 1934 German Edition: Theorie der wirtschaftlichen Entwicklung Leipzig 1912 Sobel I Russell S. Sobel Jason Clemens The Essential Joseph Schumpeter Vancouver 2020 |
| Hoarding (Economics) | Rothbard | Rothbard III 775 Hoarding/money/Rothbard: The very word "hoarding" is a most inappropriate one to use in economics, since it is laden with connotations of vicious antisocial action. But there is nothing at all antisocial about either "hoarding" or "dishoarding." "Hoarding" is simply an increase in the demand for money, and the result of this change in valuations is that People get what they desire, i.e., an increase in the real value of their cash balances and of the monetary unit.(1) Conversely, if the People desire a Iowering of their real cash balances or in the value of the monetary unit, they may accomplish this through "dishoarding." No other significant economic relation - real income, capital structure, etc. - need be changed at all. Rothbard III 776 DefinabilityVsHoarding: (…) there is no theoretical way of defining "hoarding" beyond a simple addition to one's cash balance in a certain period of time. Yet most writers use the term in a normative fashion, implying that there is some vague standard below which a cash balance is legitimate and above which it is antisocial and vicious. But any quantitative limit set on the demand-for-money schedule would be completely arbitrary and unwarranted. >Keynesianism/Rothbard, >Keynesianism, >Quantity theory, >Consumption function. Rothbard III 778 KeynesianismVsHording: Keynesian law: The Keynesian law asserts social expenditures to be Iower than social income above point A, and higher than social income below point A, so that A will be the equilibrium point for social income to equal expenditure. For if social income is higher than A, social expenditures will be Iower than income, and income will therefore tend to decline from one day to the next until the equilibrium point A is reached. If social income is Iower than A, dishoarding will occur, expenditures will be higher than income, until finally A is reached again. RothbardVsKeynes/RothbardVsKeynesianism: (…) suppose that we now grant the validity of such a law; the only comment can be an impertinent: So what? What if there is a fall in the national income? Since the fall need only be in money terms, and real income, real capital, etc., may remain the same, Why any alarm? The only change is that the hoarders have accomplished their objective of increasing their real cash balances and increasing the real value of the monetary unit. It is true that the picture is rather more complex for the transition process until equilibrium is reached, (…) But the Keynesian system attempts to establish the perniciousness of the equilibrium position, and this it cannot do. 1. See the excellent article by W.H. Hutt, “The Significance of Price Flexibility” in Hazlitt, Critics of Keynseian Economics, pp. 383-406. |
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 |
| Inflation | Keynesianism | Rothbard III 1022 Inflation/Keynesianism/Rothbard: Keynesian and neo-Keynesian "compensatory fiscal policy" advocates that government deflate during an "inflationary" period and inflate (incur deficits, financed by borrowing from the banks) to combat a depression. RothbardVsKeynesianism: It is clear that government inflation can relieve unemployment and unsold stocks only if the process dupes the owners into accepting Iower real prices or wages. This "money illusion" relies on the owners' being too ignorant to realize when their real incomes have declined - a slender basis on which to ground a cure. >Money illusion/Keynes. Furthermore, the inflation will benefit part of the public at the expense of the rest, and any credit expansion will only set a further "boom-bust" cycle into motion. Rothbard III 1023 Free market/Keynesianism: The Keynesians depict the free market's monetary-fiscal system as minus a steering wheel, so that the economy, though readily adjustable in other ways, is constantly walking a precarious tightrope between depression and unemployment on the one side and inflation on the other. It is then necessary for the government, in its wisdom, to step in and steer the economy on an even course. After our completed analysis of money and business cycles, however, it should be evident that the true picture is just about the reverse. The free market, unhampered, would not be in danger of suffering inflation, deflation, depression, or unemployment. But the intervention of government creates the tightrope for the economy and is constantly, if sometimes unwittingly, pushing the economy into these pitfalls. >Business cycles/Rothbard, >Inflation/Rothbard, >Free market/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 | Classical Economics | 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 of the 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. >Time preference/Rothbard, >Savings/Rothbard, >Inflation/Rothbard, >Credit expansion/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 | Keynes | Rothbard III 790 Interest rates/speculation/Keynes/Rothbard: Uncertainty: A demand for money to hold stems from the general uncertainty of the market. Keynesianism: Keynesians, however, attribute liquidity preference, not to general uncertainty, but to the specific uncertainty of future bond prices. RothbardVs: Surely this is a highly superficial and limiting view. In the first place, this cause of liquidity preference could occur only on a highly imperfect securities market. >Risks/Rothbard. LachmannVsKeynes: As Lachmann pointed out years ago in a neglected article, Keynes' causal pattern - "bearishness" causing "liquidity preference" (demand for cash) and high interest rates - could take place only in the absence of an organized forward orfutures market for securities. If such a market existed, both bears and bulls on the bond market „could express their expectations by forward transactions which do not require any cash. Where the market for securities is fully organized over time, the owner of 4% bonds who fears a rise in the rate of interest has no incentive to exchange them for cash, for he can always "hedge" by selling them forward.“(1) Rothbard III 792 Rothbard: Bearishness would cause a fall in forward bond prices, followed immediately by a fall in spot prices. Thus, speculative bearishness would, of course, cause at least a temporary rise in the rate of interest, but accompanied by no increase in the demand for cash. Hence, any attempted connection between liquidity preference, or demand for cash, and the rate of interest, falls to the ground. >Bonds/Rothbard. Security/interest/RothbardVsKeynes: The fact that such a securities market has not been organized indicates that traders are not nearly as worried about rising interest rates as Keynes believes. Ifthey were and this fear loomed as an important phenomenon, then surely a futures market would have developed in securities. Loans/Rothbard: Furthermore (…) interest rates on Ioans are merely a reflection of price spreads, so that a prediction of higher interest rates really means the expectation of Iower prices and, especially, Iower costs, resulting in a greater demand for money. And all speculation, on the free market, is self-correcting and speeds adjustment, rather than a cause of economic trouble. >Loans/Rothbard. 1. L.M. Lachmann, "Uncertainty and Liquidity Preference," Economica, August, 1937, p. 301. Mause I 56 Interest Rates/Keynes: According to his liquidity preference theory, interest is a monetary phenomenon, not a real one as in Neoclassicism. >Neoclassical economics. Interest rates are therefore mainly determined by money supply and demand - less by real factors such as capital supply and demand. >Money supply, >Demand for money. For this reason, monetary policy can influence real variables (such as the level of investment) via the level of interest rates. On the other hand, as a result of nominal wage rigidity, the money supply and price levels have an impact on the level of real wages and thus on the level of employment. Unlike neoclassicism, Keynes' system cannot see real and monetary aspects of economic activity independently.(1) >Monetary policy, >Keynesianism. 1. Cf. .J. M. Keynes, The general theory of employment, interest and money. London 1936. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 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 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Interest Rates | Keynesianism | Rothbard III 787 Interest rates/Keynesianism/Rothbard: A fall in the rate of interest, according to the Keynesians, means that less interest is being earned from bonds, and therefore there is a greater inducement to hold cash. This is correct (as long as we allow ourselves to think in terms of the interest rate as determining instead of being determined), but highly inadequate. Rothbard III 788 RothbardVsKeynes: For if a Iower interest rate "induces" greater cash holdings, it also induces greater consumption, since consumption also becomes more attractive. In fact, one of the grave defects of the liquidity-preference approach is that the Keynesians never think in terms of three "margins" being decided at once. They think only in terms of two at a time. >Liquidity preference/Keynes, >Liquidity preference/Modigliani. Interest/RothbardVsKeynesianism: The rate of interest (…) is determined by time preferences, which also determine the proportions of consumption and investment. To think of the rate of interest as "inducing" more or less saving or hoarding is to misunderstand the problem completely.(1) >Time preference/Rothbard. Time preference: Admitting, then, that time preference determines the proportions of consumption and investment and that the demand for money determines the proportion of income hoarded, does the demand for money play a role in determining the interest rate? Rothbard III 789 Keynesianism: The Keynesians assert that there is a relation between the rate of interest and a "speculative" demand for cash. Should the schedule of the latter rise, the former rises also. RothbardVsKeynesianism: But this is not necessarily true. A greater proportion of funds hoarded can be drawn from three alternative sources: (a) from funds that formerly went into consumption, (b) from funds that went into investment, and (c) from a mixture of both that leaves the old consumption-investment proportion unchanged. Condition (a) will bring about a fall in the rate of interest; condition (b) a rise in the rate of interest, and condition (c) will leave the rate of interest unchanged. Thus hoarding may reflect either a rise, a fall, or no change in the rate of interest, depending on whether time preferences have concomitantly risen, fallen, or remained the same. >Speculative demand/Keynesianism. Rothbard III 789 Speculative demand/interest/Keynesianism/Rothbard: Admitting (…) that time preference determines the proportions of consumption and investment and that the demand for money determines the proportion of income hoarded, does the demand for money play a role in determining the interest rate? >Time preference/Rothbard, >Demand for money/Rothbard. The Keynesians assert that there is a relation between the rate of interest and a "speculative" demand for cash. Should the schedule of the latter rise, the former rises also. RothbardVsKeynesianism: But this is not necessarily true. A greater proportion of funds hoarded can be drawn from three alternative sources: (a) from funds that formerly went into consumption, (b) from funds that went into investment, and (c) from a mixture of both that leaves the old consumption-investment proportion unchanged. Condition (a) will bring about a fall in the rate of interest; condition (b) a rise in the rate of interest, and condition (c) will leave the rate of interest unchanged. Thus hoarding may reflect either a rise, a fall, or no change in the rate of interest, depending on whether time preferences have concomitantly risen, fallen, or remained the same. >Hoarding/Keynesianism. Keynesianism: The Keynesians contend that the speculative demand for cash depends upon and determines the rate of interest in this way: if people expect that the rate of interest will rise in the near future, then their liquidity preference increases to await this rise. Equilibirum theory/Keynes/RothbardVsKeynes: This, however, can hardly be a part of a long-run equilibrium theory, such as Keynes is trying to establish. Speculation: Speculation, by its very nature, disappears in the ERE (Evenly Rotating Economy), and hence no fundamental causal theory can be based upon it. >Evenly Rotating Economy/Rothbard. Interest: Furthermore, what is an interest rate? One grave and fundamental Keynesian error is to persist in regarding the interest rate as a contract rate on Ioans, instead of the price spreads between stages of production. >Production structure/Rothbard. The former (…) is only the reflection of the latter. A strong expectation of a rapid rise in interest rate means a strong expectation of an increase in the price spreads, or rate of net return. Speculation: A fall in prices means that entrepreneurs generally expect that factor prices will fall further in the near future than their selling prices. >Factors of Production, >Factor market, >Structure of production/Rothbard. But it requires no Keynesian labyrinth to explain this phenomenon; all we are confronted with is a situation in which entrepreneurs, expecting that factor prices will soon fall, cease investing and wait for this happy event so that their return will be greater. This is not "liquidity preference," but speculation on price changes. >Liquidity preference/Keynesianism, >Speculation/Rothbard, >Investments/Rothbard, >Demand for money/Keynesianism. 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 of the 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. >Time preference/Rothbard, >Savings/Rothbard, >Inflation/Rothbard, >Credit expansion/Rothbard. 1. Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 529-30. Mause I 225 Interest Rates/Keynesianism: In Post-Keynesian models in the tradition of Keynes (1) and Kalecki (2) it is often assumed that interest rates will have little influence on demand for goods in the real economy. In particular, there is skepticism about the interest rate response of investment demand. However, monetary policy is regarded as relevant to distribution policy because it is also assumed to have an influence on long-term interest rates and thus on the income generation of asset owners. >J. M. Keynes, >M. Kalecki, >Economic cycle, >Investment trap, >Monetary policy. 1. J. M. Keynes, The general theory of employment, interest and money. London 1936 2. Michal Kalecki, In Collected works of Michal Kalecki, Hrsg. Jerzy Osyatinski. Oxford 1973. |
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 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Interest Rates | Mercantilism | 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 of the 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. >Time preference/Rothbard, >Savings/Rothbard, >Inflation/Rothbard, >Credit expansion/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 |
| Investment Multiplier | Friedman | Landsburg I 7 Investment multiplier/Friedman/Landsburg: „Keynesian Multiplier“: Example: If you want people to spend more, you should start by raising their incomes. Encourage your government to hire Alice and raise her salary by a dollar. She'll spend an extra 90 cents or so - and that's only the beginning. If she spends that 90 cents at the butcher shop or the hair salon or the craft brewery, then the butcher or the beautician or the brewer earns an extra 90 cents and probably spends about 90 percent ofthat, which raises yet someone else's income, and off we go. When all is said and done, one dollar of additional government spending can raise total spending (and total income) by $ 10 or more. That's the story of the so-called "Keynesian multiplier." Once upon a time, pretty much all economists considered it a cornerstone of policymaking. FriedmanVsKeynes: Here's the problem: Income is indeed highly correlated with spending. But correlation is not causation. When Alice out-earns Bob by a dollar, she typically outspends him by 90 cents. But her current earning is not the cause of that spending. Instead, she outspends him (in most cases) because she expects to continue to out-earn him for many years to come. As a general rule, people calibrate their spending not to their current incomes but to their permanent incomes - that is, to something like their expected lifetime earnings. Now if Alice gets a $ 1 yearly raise from her private employer, she's likely to believe - correctly! - that the raise is probably permanent. That's why she spends more, and that's why the data show that higher incomes usually go hand-in-hand with higher spending. But if, instead, Alice gets a $ 1 yearly raise from a government that has decided to temporarily ramp up spending, she'll probably want to squirrel most of that dollar away against the day when her salary returns to normal. The cycle of spending we called the Keynesian multiplier never gets off the ground. >Permanent Income Hypothesis/Friedman. Wrong solution: Maybe the cure is for the government to hire Alice and permanently raise her salary by $ 1 a year. That sounds good until you start thinking about where the government is going to get that dollar every Year: a) The government could raise Bob's taxes by a dollar a Year. But then just as Alice's spending goes up, Bob's goes down. If you want to increase total spending, this gets you nowhere. b) The government could borrow a dollar from Bob every year. But eventually Bob is going to want to be paid back, at which point the government is going to have to raise Charlie's taxes to get the money. At that point, Charlie starts spending less. Landsburg I 8 Worse yet, if Charlie follows the news, he's likely to realize today that the government is running up debt, that future taxes are likely to rise, and that his own permanent income has therefore a taken a hit, which means he'll reduce his spending immediately. Problem: If you want Alice to spend more, you have to increase her permanent income, not just her current income. But the government can't increase Alice's permanent income without decreasing Bob's or Charlie's permanent income by the same amount, which dooms the entire project to failure.* That's one consequence of Milton Friedman's permanent income hypothesis. >Permanent Income Hypothesis/Friedman. *There are occasional exceptions. Conceivably the government could build a highway that reduces transportation costs by so much that everyone's permanent income - even after factoring in the taxes they pay to build the highway - goes up. Unfortunately, most government projects are not that productive. |
Econ Fried I Milton Friedman The role of monetary policy 1968 Landsburg I Steven E. Landsburg The Essential Milton Friedman Vancouver: Fraser Institute 2019 |
| 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 |
| Keynesianism | Rothbard | Rothbard III 776 Keynesianism/Rothbard: One of the two major pillars of the Keynesian system (…) is the proclamation that savings become equal to investment only through the terrible route of a decline in social income. The (implicit) foundation of Keynesianism is the assertion that at a certain level of total social income, total social expenditures out of this income will be Iower than income, the remainder going into hoards. >Hoarding/Rothbard. This will Iower total social income in the next period of time, since (…) total income in one "day" equals, and is determined by, total expenditures in the previous "day." Consumption function: The Keynesian "consumption function" plays its part in establishing an alleged law that there exists a certain level of total income, say A, above which expenditures will be less than income (net hoarding), and below which expenditures will be greater than income (net dishoarding). But the basic Keynesian worry is hoarding, when total income must decline. >Consumption function/Rothbard. Rothbard III 778 Keynesian law: The Keynesian law asserts social expenditures to be Iower than social income above point A, and higher than social income below point A, so that A will be the equilibrium point for social income to equal expenditure. For if social income is higher than A, social expenditures will be Iower than income, and income will therefore tend to decline from one day to the next until the equilibrium point A is reached. If social income is Iower than A, dishoarding will occur, expenditures will be higher than income, until finally A is reached again. RothbardVsKeynes/RothbardVsKeynesianism: (…) suppose that we now grant the validity of such a law; the only comment can be an impertinent: So what? What if there is a fall in the national income? Since the fall need only be in money terms, and real income, real capital, etc., may remain the same, Why any alarm? The only change is that the hoarders have accomplished their objective of increasing their real cash balances and increasing the real value of the monetary unit. It is true that the picture is rather more complex for the transition process until equilibrium is reached, (…) But the Keynesian system attempts to establish the perniciousness of the equilibrium position, and this it cannot do. >Free market/Keynesianism, >Unemployment/Keynesianism. Rothbard III 783 Unemployment: The sum and substance of the "Keynesian Revolution" was the thesis that there can be an unemployment equilibrium on the free market. (…) the only sense in which this is true was known years before Keynes: that widespread union maintenance of excessively high wage rates will cause unemployment. |
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 |
| Liquidity Preference | Keynes | Kurz I 114 Liquidity Preference/Keynes/Kurz: Keynes starts the chapter by pointing out “that the rate of interest on money plays a peculiar part in setting a limit to the level of employment.” Wherein lies “the peculiarity of money as distinct from other assets” (CWK 7, p. 222)(1)? Keynes defines the money rate of interest à la Wicksell and adds that with regard to all durable goods there is an analogue to the money rate of interest: “Thus for every durable commodity we have a rate of interest in terms of itself, a wheat-rate of interest, a copper-rate of interest, a house-rate of interest” (pp. 222–223)(1). In a footnote he adds: “This relationship was first pointed out by Mr Sraffa, Economic Journal, March 1932, p. 50”(2 (p. 223n)(1). At any given moment of time, these rates will generally not be equal to one another: the ratio between spot and future price will be “notoriously different” between different commodities: This, we shall find, will lead us to the clue we are seeking. For it may be that it is the greatest of the own-rates of interest … which rules the roost …; and that there are reasons why it is the money-rate of interest which is often the greatest (because, as we shall find, certain forces, which operate to reduce the own-rates of interest of other assets, do not operate in the case of money). (pp. 223–224)(1) Why is this so? Surprisingly, Keynes approaches the question by defining the own rates of different commodities not in terms of expected changes of prices but in terms of three characteristics that supposedly can all be translated into interest rate equivalents. These are 1) the “yield or output q... by assisting some process of production or supplying services to a consumer”; 2) the costs of holding the object or “carrying cost c”; and Kurz I 115 3) the “liquidity premium” l, expressing the amount, in terms of the object, its proprietor is willing to part company with for the “potential convenience or security” associated with the “power of disposal over an asset during a period” (p. 226).(1) Keynes concludes: It follows that the total return expected from the ownership of an asset over a period is equal to its yield minus its carrying cost plus its liquiditypremium, i.e. to q – c + l. That is to say, q – c + l is the own-rate of interest of any commodity, where q, c and l are measured in terms of itself as the standard. (p. 226)(1). SraffaVSKeynes: Sraffa spots immediately that the usual choice of money as standard of value has an important implication: “The point is, that in the case of the rate of the article chosen as standard, the effect upon it of the expected depreciation is concealed”.(2) Kurz: This is a crucial point, which Keynes apparently had lost sight of and which had seriously misled him. 1. Keynes, J. M. (1971–1989). The Collected Writings of John Maynard Keynes, D. Moggridge (ed.), London: Macmillan. 2. 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 |
| Liquidity Preference | Keynesianism | Rothbard III Liquidity Preference/Keynesianism/Rothbard: Those Keynesians who recognize the grave diffculties of their system fall back on one last string in their bow - "liquidity preference." Rothbard: Intelligent Keynesians will concede that involuntary unemployment is a "special" or rare case, and Lindahl goes even further to say that it could be only a short-run and not a long-run equilibrium phenomenon.(1) >Unemployment/Keynesianism, >Equilibrium. RothbardVsModigliani/RothbardVsLindahl: Neither Modigliani nor Lindahl, however, is thoroughgoing enough in his critique of the Keynesian system, particularly of the "liquidity preference" doctrine. Causality/method/RothbardVsKeynesianism: The Keynesian system, as is quite clear from the mathematical portrayals of it given by its followers, suffers grievously from the mathematical-economic sin of "mutual determination." The use of mathematical functions, which are reversible at will, is appropriate in physics, where we do not know the causes of the observed movements. Since we do not know the causes, any mathematical law explaining or describing movements will be reversible, and, as far as we are concerned, any of the variables in the function is just as much "cause" as another. Praxeology/Rothbard: In praxeology, the science of human action, however, we know the original cause - motivated action by individuals. >Praxeology/Rothbard. Solution/Rothbard: This knowledge provides us with true axioms. From these axioms, true laws are deduced. They are deduced step by step in a logical, cause-and-effect relationship. Since first causes are known, their consequent effects are also known. Economics therefore traces unilinear cause-and-effect relations, not vague "mutually determining" relations. Interest/Keynesianism/Rothbard: This methodological reminder is singularly applicable to the Keynesian theory of interest. For the Keynesians consider the rate of interest (a) as determining investment and (b) as being determined by the demand for money to hold "for speculative purposes" (liquidity preference). In practice, however, they treat the latter not as determining the rate of interest, but as being determined by it. RothbardVsKeynesianism: The methodology of "mutual determination" has completely obscured this sleight of hand. KeynesianismVsVvs: Keynesians might object that all demand and supply curves are "mutually determining" in their relation to price. Demand/RothbardVsKeynesianism: But this facile assertion is not correct. Demand curves are determined by utility scales, and supply curves by speculation and the stock produced by given labor and land factors, which is ultimately governed by time preferences. >Time preference/Rothbard. Rothbard III 786 The Keynesians therefore treat the rate of interest, not as they believe they do - as determined by liquidity preference - but rather as some sort of mysterious and unexplained force imposing itself on the other elements of the economic system. Thus, Keynesian discussion of liquidity preference centers around "inducement to hold cash" as the rate of interest rises or falls. According to the theory of liquidity preference, a fall in the rate of interest increases the quantity of cash demanded for "speculative purposes" (liquidity preferences), and a rise in the rate of interest Iowers liquidity preference. RothbardVsLiquidity preference: The first error in this concept is the arbitrary separation of the demand for money into two separate parts: a "transactions demand," supposedly determined by the Size of social income, and a "speculative demand," determined by the rate of interest. (…) all sorts of influences impinge themselves on the demand for money. Value/demand for money: But they are only influences working through the value scales of individuals. And there is only one final demand for money, because each individual has only one value scale. There is no way by which we can split the demand up into two parts and speak of them as independent entities. Furthermore, there are far more than two influences on demand. In the final analysis, the demand for money, like all utilities, cannot be reduced to simple determinants; it is the outcome of free, independent decisions on individual value scales. There is, therefore, no "transaction demand" uniquely determined by the size of income. >Liquidity preference/Modigliani, >Demand for money/Rothbard. 1. Cf. Lindahl's critique of Lawrence Klein's The Keynesian Revolution in "On Keynes' Economic System - Part I," p. 162. Also see Leontief, "Postulates: Keynes' General Theory and the Classicists." |
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 |
| Liquidity Preference | Modigliani | Rothbard III 786 Liquidity preference/Modigliani/Rothbard: Modigliani explains this "liquidity preference" as follows: „we should expect that any fall in the rate of interest ... would induce a growing number of potential investors to keep their assets in the form of money, rather than securities; that is to say, we should expect a fall in the rate of interest to increase the demand for money as an asset.“(1) RothbardVsModigliani: This is subject to the criticism, (…) that the rate of interest is here determining, and is not itself explained by any cause. Furthermore, what does this statement mean? Interest rates/Keynesianism: A fall in the rate of interest, according to the Keynesians, means that less interest is being earned from bonds, and therefore there is a greater inducement to hold cash. This is correct (as long as we allow ourselves to think in terms of the interest rate as determining instead of being determined), but highly inadequate. Rothbard III 787 RothbardVsKeynes/VsLiquidity preference: For if a Iower interest rate "induces" greater cash holdings, it also induces greater consumption, since consumption also becomes more attractive. In fact, one of the grave defects of the liquidity-preference approach is that the Keynesians never think in terms of three "margins" being decided at once. They think only in terms of two at a time. Modigliani: Hence, Modigliani: "Having made his consumption-saving plan, the individual has to make decisions concerning the assets he owns"; i.e., he then allocates them between money and securities.“(2) Rothbard: In other words, people first decide between consumption and saving (in the sense of not consuming); and then they decide between investing and hoarding these savings. But this is an absurdly artificial construction. People decide on all three of their alternatives, weighing one against each of the others. To say that people first decide between consuming and not consuming and then choose between hoarding and investing is just as misleading as to say that people first choose how much to hoard and then decide between consumption and investment.(3) >Hoarding/Rothbard. Allocation/Rothbard: People, therefore, allocate their money among consumption, investment, and hoarding. The proportion between consumption and investment reflects individual time preferences. Consumption reflects desires for present goods, and investment reflects desires for future goods. An increase in the demand-for-money schedule does not affect the rate of interest if the proportion between consumption and investment (i.e., time preference) remains the same. >Time preference/Rothbard. Interest/RothbardVsKeynesianism: The rate of interest, we must reiterate, is determined by time preferences, which also determine the proportions of consumption and investment. To think of the rate of interest as "inducing" more or less saving or hoarding is to misunderstand the problem completely.(4) 1. Modigliani, "Liquidity Preference and the Theory of Interest and Money," pp. 139-40. .” In Henry Hazlitt, ed., The Critics of Keynesian Economics. Princeton, N.J.: D. Van Nostrand, 1960. Reprinted by University Press of America, 1983. 2. Ibid., p. 137. 3. See the critique of the Keynesian doctrine by Tjardus Greidanus, The Value of Money (2nd ed.; London: Staples Press, 1950), pp. 194-215, and of the liquidity-preference theory by D.H. Robertson, "Mr. Keynes and the Rate of Interest" in Readings in the Theory oflncome Distribution, pp. 439-41. In contrast to Keynes' famous phrase that the rate of interest is "the reward for parting with liquidity," Greidanus points out that buying consumers' goods (or even producers' goods in Keynes' sense of "interest") sacrifices liquidity and yet earns no interest "reward." Greidanus, Value of Money, p. 211. Also see Hazlitt, Failure of the "New Economics," pp. 186 ff. 4. Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 529-30. |
Modigliani I Franco Modigliani Frank J. Fabozzi Capital Markets: Institutions and Instruments. New Jersey 1996 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 |
| Macroeconomics | Muth | Mause I 57f Macroeconomics/MacroeconomicsVsMonetarism/MacroeconomicsVsKeynesianism/Muth/Lucas: Problems of monetarism or Keynesianism are the lack of explanation of wage and price rigidities or wage and price formation at all, or the arbitrary approach in modeling the expectations of economic entities. >Keynesianism, >Monetarism, >Monetary policy. Ultimately, there was a lack of a microeconomic foundation for macroeconomics. The new Classical Macroeconomics, of which John F. Muth (1930-2005) and Robert E. Lucas (born 1937) are the main representatives tried to close this gap. >John F. Muth, >Robert E. Lucas. Two assumptions are fundamental to this approach: On the one hand, it is assumed that expectations are rational, i.e. that the modelled economic entities utilize all information inherent in the model and therefore arrive at the same forecasts as the model itself. On the other hand, price flexibility and the permanent equilibrium of the markets are assumed. Accordingly, fluctuations in production and employment are not interpreted as imbalances but as a sequence of equilibrium positions. >Equilibrium, >Equilibrium theory. New Classical Macroeconomics Thesis: There is no involuntary unemployment! >Unemployment. VsMuth/VsLucas/VsMacroeconomics: the macroeconomic problems observed were more or less defined away. There was no real foundation through a microeconomic approach. |
Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| 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 |
| Marshall, Alfred | Sraffa | Kurz I 104 Alfred Marshall/SraffaVsMarshall/SraffaVsKeynes/Sraffa/Kurz: [While Sraffa ciritizied Marshall], Keynes and with him most Cambridge economists clung to Marshallian concepts, making use, in particular, of the Marshallian demand-and-supply apparatus. Seen from Sraffa’s point of view, this meant that their analyses were flawed. A careful scrutiny would invariably bring the flaws into the open. As regards Keynes’s contributions, Sraffa’s criticism concerned especially the following: 1. The idea expressed in the Treatise(1) that the price level of consumption goods and that of investment goods can be considered as determined independently of one another, and the related idea that the price level of the latter is determined exclusively by the propensity of the public to “hoard” money. 2. The “marginal efficiency of capital” schedule in the General Theory, which carried over the concept of a given order of fertility of different qualities of land to the ordering of investment projects. 3. The view that the banking system can control the money supply and that therefore the quantity of money in the system can be considered exogenous. 4. The argument put forward by Keynes to substantiate his view that the liquidity preference of the public prevents the money rate of interest from falling to a level compatible with a volume of investment equal to full employment savings. >Alfred Marshall, >Demand, >Supply. Kurz I 105 While Keynes focused on the problem of money and output as a whole, Sraffa focused on the problem of value and distribution. >Value, >Distribution/Sraffa, >Distribution/Leontief. 1. Piero Sraffa: The Man and the Scholar, London: Routledge. Marcuzzo, C. (2002). “The Collaboration between J. M. Keynes and R. F. Kahn from the Treatise to the General Theory,” History of Political Economy, 34:2, 421-447. 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. |
Sraffa I Piero Sraffa Production of Commodities by Means of Commodities. Prelude to a Critique of Economic Theory (Cambridge: Cambridge University Press). Cambridge 1960 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 |
| Microeconomics | Hayek | Boudreaux II 61 Microeconomics/Hayek/Boudreaux: VsKeynesianism: By focusing on aggregate demand, Keynesian economics ignores the all-important ("microeconomic") details of an economy. Microeconomics: These vital details are how well or poorly each of the economy's many individual parts "fit" together and work together to generate goods and services for consumers, and to create job opportunities for workers. Example: If you have all of the parts of, say, an automobile scattered randomly about a large room, the main reason you do not have a functioning car is not that you do not want, or that you fail to "demand," such a car. Instead, the chief reason you have no functioning car is that those parts aren't fitted together in ways that allow them all to operate smoothly together so that a drivable and reliable car exists. Demand: It's true that no one will exert the energy and initiative required to assemble all of the parts into a working vehicle if there is no (or too little) demand for such a vehicle. VsKeynes: But your desire to have a drivable car is not really the main obstacle standing between you and a working vehicle. Knowledge: The main obstacle is the challenge of mobilizing all the knowledge involved in assembling these pieces into a car and motivating people to put forth the effort to perform that assembly. Macroeconomics/demand: The desire of nearly everyone to possess and consume automobiles, along with lots of other goods and services, can be depended upon always to exist. Problem: The challenge is to ensure that producers have the knowledge and the incentives actually to produce the goods and services that people want. Microeconomics: The challenge, in other words, is to get the economic details right so that produc-ers have both the knowledge and the incentive to produce the "right" mix of outputs. Relative prices are the main source of both this knowledge and these incentives. >Relative prices. |
Hayek I Friedrich A. Hayek The Road to Serfdom: Text and Documents--The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2) Chicago 2007 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
| Monetary Policy | Friedman | Mause I 57 Monetary Policy/Friedman/FriedmanVsKeynesianism/FriedmanVsKeynes: Thesis: monetary policy can only achieve short-term success, but is neutral in the long term. Although expansionary monetary policy could initially increase demand and employment, workers would not be subject to monetary illusion and would demand a compensation for the inflation-related reduction in their real wages, i.e. an increase in nominal wages, which would cancel out the initial employment effect. In the long term, unemployment would therefore remain constant; monetary policy would only have caused prices to rise and would not have had any real employment effects. "Real" problems (e.g. unemployment) could only be solved by "real" measures (e.g. facilitating the recruitment of workers by relaxing employment protection, minimum wage and similar regulations). The monetarists therefore recommend a steady monetary policy with the objective of price stability.(1) >Monetarism. 1. M. Friedman, The role of monetary policy. American Economic Review 58, 1968, pp. 1-17. Brocker I 398 Monetary Policy/Friedman: a steady monetary policy can eliminate the political and even make central banks superfluous. The aim is to expand the money supply moderately and regularly. In theory, it is sufficient for a banknote issuing office to set up a standing order for an amount x. FriedmanVsCentral Banks, FriedmanVsPolicy. >Politics, >Federal Reserve Policy. Peter Spahn, „Milton Friedman, Kapitalismus und Freiheit“, in: Manfred Brocker (Hg.) Geschichte des politischen Denkens. Das 20. Jahrhundert. Frankfurt/M. 2018 |
Econ Fried I Milton Friedman The role of monetary policy 1968 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 Brocker I Manfred Brocker Geschichte des politischen Denkens. Das 20. Jahrhundert Frankfurt/M. 2018 |
| Money | Hayek | Coyne I 33 Money/Hayek/Coyne/Boettke: Building upon Mises's earlier work (The Theory of Money and Credit, 1912)(1), which served as the foundation for the Austrian theory of the trade cycle, Hayek worked to refine both the technical understanding of capital coordination and the institutional details of credit policy. He published two books (Monetary Theory and the Trade Cycle, 1929(2); and Prices and Production, 1931(3)), which analyzed the effects of credit expansion on the economy's capital structure. Hayek presented this work in a series of lectures at the London School of Economics, where he was received with great acclaim and appointed, in 1932, as the Tooke Professor of Economics Science and Statistics. Hayek's arrival in London sparked the most fundamental debate in monetary policy in the twentieth century - the Hayek-Keynes debate. John Maynard Keynes had published A Treatise on Money in 1930(4), of which Hayek wrote a lengthy and critical two-part review. HayekVsKeynes: The main problem with Keynes's position, Hayek argued, was his failure to understand the role that the interest rate plays in coordinating plans and the capital structure, through time, in a market society. >Interest rates. Business cycle: The Mises-Hayek theory of the trade cycle offered an alternative by rendering intelligible the "cluster of errors" that occurs during the bust by focusing on the distortions in relative prices and in the capital structure created by government-induced credit expansions. >Credit expansion, >Business cycle/Mises. In this regard, the Mises-Hayek theory of the business cycle is one illustration of the dynamics of interventionism whereby an initial government intervention into the market sets off a chain ofunintended and undesirable consequences. Oney/Hayek/Mises: At the core of the Mises-Hayek theory is the idea that money is not neutral. Money would be neutral if a monetary expansion had no effect on real prices. For example, it would be neutral if a doubling of the money supply led to an automatic doubling of all prices and wages such that real wealth would be left unchanged. >Money/Mises, >Price/Mises. People's bank accounts would double and so too would prices such that their real purchasing power remained the same. The notion that money is not neutral, in contrast, emphasizes that monetary expansion does not raise all prices and wages instantaneously and in unison. Instead, money works its way through the economic system starting at the point of injection and causing changes in relative prices as it filters through the system. This process benefits the early recipients of the newly printed money at the expense of those later in line. Purchasing power: Those who receive the new money prior to the full adjustment of prices benefit through increased purchasing power that enables them to bid resources away from others who lack the improved purchasing power. >Purchasing power. Those who are the last to receive the new money suffer from reduced purchasing power because prices have already adjusted upward. The relative price changes caused by the credit expansion influence the process of exchange and production as entrepreneurs respond to the signals sent by prices as they make and revise their production plans. >Relative prices. Production: These production plans, in turn, are what determine the capital structure and, ultimately, what consumer goods are produced. >Business cycle, >F. A: Hayek, >Production. 1. Ludwig von Mises. 1912. The Theory of Money and Credit (Theorie des Geldes und der Umlaufsmittel, Translated by H.E. Batson in 1934; reprinted with “Monetary Reconstruction» (New Haven, Conn.: Yale University Press, 1953). Reprinted by the Foundation for Economic Education, 1971; reprinted with an Introduction by Murray N. Rothbard, Liberty Press Liberty Classics, 1989. 2. F. A. Hayek. 1933.Monetary Theory and the Trade Cycle. New York: Harcourt Brace & Co. 3. F. A. Hayek, Prices and Production. 2nd ed. London: Routledge and Kegan Paul, 1935. Reprinted by Augustus M. Kelley, 1967. 4. John Maynard Keynes. 1930. A Treatis on Money, London: Macmillan |
Hayek I Friedrich A. Hayek The Road to Serfdom: Text and Documents--The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2) Chicago 2007 Coyne I Christopher J. Coyne Peter J. Boettke The Essential Austrian Economics Vancouver 2020 |
| Money Illusion | Keynes | Rothbard III 783 Money Illusion/Keynes/Keynesianism/Rothbard: Keynes believed that while other elements of the economic system, including prices, were set basically in real terms, workers bargained even ultimately only in terms of money wages - that unions insisted on minimum money wage rates downward, but would passively accept falling real wages in the form of rising prices, money wage rates remaining the same. Unemployment: The Keynesian prescription for eliminating unemployment therefore rests specifically on the "money illusion" - that unions will impose minimum money wage rates, but are too stupid to impose minimum real wage rates per se. Unions, however, have learned about purchasing-power problems and the distinction between money and real rates; indeed, it hardly requires much reasoning ability to grasp this distinction.(1) >Unemployment/Keynesianism, >Unemployment/Rothbard. Inflation/VsMoney illusion: Ironically, Keynes' advocacy of inflation based on the "money illusion" rested on the historical experience (…) that, during an inflation, selling prices rise faster than wage rates. Minimum wage: Yet an economy in which unions impose minimum wage rates is precisely an economy in which unions will be alive to any losses in their real, as well as their money, wages. >Minimum wage/Rothbard. Inflation: Inflation, therefore, cannot be used as a means of duping unions into relieving unemployment.(2) RothbardVsKeynesianism: Keynesianism has been touted as at least a "practical" system. Whatever its theoretical defects, it is alleged to be fit for the modern world of unionism. >Unions/Rothbard. RothbardVsKeynes: Yet it is precisely in the modern world that Keynes' doctrine is least appropriate or practical.(3) KeynesismVsVs:The Keynesians object that to allow rigid money wage rates to become flexible downward would further Iower monetary demand for goods, and therefore monetary income. But this completely confuses wage rates with aggregate payroll, or total income going to wages.(4) That the former falls does not mean that the latter falls. On the contrary, total income is,(…) , determined by total expenditures in the previous period of time. Lower wage rates will cause the hiring of those made unemployed by the old excessively high wage rates. The fact that labor is now cheaper relatively to land factors will cause investors to expend a greater proportion on labor vis-å-vis land than before. And the employment of unemployed labor increases production and therefore aggregate real income. Furthermore, even if payrolls also decline, prices and wage rates can adjust (…) . 1. Cf. Lindahl, "On Keynes' Economic System—Part I," pp. 25, 159 ff. Lindahl's articles provide a good summary as well as a critique of the Keynesian system. 2. Furthermore, inflation is, at best, an ineffcient and distortive substitute for flexible wage rates. For inflation affects the entire economy and its prices, while particular wage rates will fall only to the extent necessary to "clear" the market for the particular labor factor. Thus, freely flexible wage rates will fall only in those fields necessary to eliminate unemployment in those particular areas. Cf. Henry Hazlitt, The Failure of the "New Economics" (Princeton, N.J.: D. Van Nostrand, 19 59), pp. 278 ff. 3. Cf. L. Albert Hahn, The Economics oflllusion (New York: Squier Publishing Co., 1949), pp. 50 ff., 166 ff., and passim. 4. Cf. Hutt, "Significance of Price Flexibility." |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 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 Supply | Friedman | Landsburg I 14 Money supply/Friedman/Landsburg: (...) let's imagine a simple world where, as of a particular Monday morning, the populace collectively holds a total of $ 1 million. The government, which has been planning all along to buy $ 1 million worth of paper clips on Monday afternoon, makes the decision to pay for those paper clips with newly printed money (as opposed to using, say, tax revenue or borrowed funds). What should we expect to happen? As of Monday afternoon, the people who sell paper clips are holding more money than they held this morning. In fact, the total money supply has doubled, so if we average this over the entire population, the average person (call her Alice) is now holding twice as much as she held this morning. But that's more than she wants. If she wanted this much money, she would have arranged for it in the first Place (perhaps by depositing a bit more of her paycheque into her chequing account instead of her retirement account). Landsburg I 15 Problem: how is she going to get rid of this excess money? Discarding it seems like an exceptionally bad idea. Maybe she turns to her neighbour Bob and talks him into borrowing one of her dollars. But then Bob has an extra dollar to get rid of. Maybe she goes to the bank and buys a certificate of deposit. But then her banker, Carol, has more money than she wants in her vault. No matter where the money goes, the average person still has twice as much money as he or she did this morning and is still trying to get rid ofit. The other way to get rid of money is to spend it. So sooner or later, Alice (or someone) decides to buy an extra hamburger or an extra haircut or a more expensive sweater - or maybe she schedules a gutter repair she'd been planning to put off till next year. Prices: This bids up the prices of hamburgers, haircuts, sweaters, and home maintenance by, say, 10 percent. Because prices are higher, people are now willing to hold 10 percent more money than they held this morning. Unfortunately, the amount of money floating around has gone up not by 10 percent but by 100 percent. So the process continues until prices are bid up by fully 100 percent. Now people want to hold all the excess money and the process comes to a halt.* The bottom line: - If you double (or triple or quadruple) the money supply, prices will double (or triple or quadruple). The process might take a while, and some interesting stuff can happen along the way. A little reflection reveals a somewhat deeper moral: - A jump in the general level of prices (as opposed to an increase in the price of one specific good or another) is always caused by people trying to get rid of money. >Price level. Landsburg I 16 Why might people want to get rid of money? We've listed some reasons already - a wider acceptance of credit cards, an increase in street crime, a rise in the interest rate, or an increase in the supply of money, leaving people with more than they want to hold. >Inflation/Friedman. Landsburg I 22 Money Supply/Friedman/Landsburg: (…) like many things, inflation in small doses is a little bit bad and inflation in higher doses is extremely bad. But why put up with any badness you don't have to put up with? It seems like the best scenario is no inflation at all - and the recipe to accomplish that scenario is zero growth in the money supply. Landsburg I 23 Question: (…) why not go even further? If Alice enjoys holding 10 weeks' income in the form of money, perhaps she'd be even happier holding 12 weeks' income. Maybe she could use a little nudge in that direction! We could provide that nudge with a negative inflation rate (also called deflation), which causes the money in Alice's pocket to grow over time in value, thus encouraging her to hold more of it. >Inflation, >Inflation/Friedman, >Deflation. Problem: If holding a little extra money makes Alice a little happier, why does she need a nudge? >Nudging. The answer is that when Alice chooses to hold more money—and hence to spend less money- she's helping to keep the price level down, which benefits not just her but (…) countless others. And if they in turn hold more money, then Alice shares in the benefits. As a result, everyone can be better off if everyone gets a little nudge. Negative Inflation/Friedman: So Friedman was led to contemplate a negative inflation rate, driven by a steady reduction in the money supply. (The government could, for example, collect some taxes in cash and burn 10 percent of the proceeds.) Problem: On the other hand, money supply growth has some advantages. Money supply growth/taxation: If the government pays for paper clips with newly minted money, then it doesn't have to pay for paper clips by taxing (say) coffee, and that's good for everyone who buys or sells coffee. Solution/Taxation/Friedman: After weighing this and other factors, Friedman in the end endorsed a small but positive inflation rate on the order of about 2 percent a year, but, believing that 2 percent a year was likely to be politically infeasible, declared himself perfectly willing to settle for as much as 5 percent. Problem: (…) in the short run, the price adjustments take place in fits and starts, which can have important consequences. >Quantity theory. * (…) People try to get rid of money by buying things, which drives up prices until people are willing to hold the extra money after all. You might wonder why we can't tell a different story: Maybe people try to get rid of money by lending it, which drives down interest rates until people are willing to hold the extra money after all. (Remember that when the interest rate is Iow, alternatives to money - like certificates of deposit - are less attractive.) The problem with that story is that it runs afoul of economic theory, which tells us that the interest rate must be fully determined by the supply and demand for current and future goods and services, leaving no room for it to be affected by changes in the supply and demand for money. Brocker I 397 Money Supply/FriedmanVsKeynesianism/Economic Crisis/Friedman: thesis: after the economic crisis of the early 1930s, central banks had not tried hard enough to prevent the collapse of banks. Solution/Friedman: a policy of steady money supply growth as a necessary and sufficient condition of macroeconomic stability, i.e. above all to preserve the value of money. >Monetarism. Peter Spahn, „Milton Friedman, Kapitalismus und Freiheit“, in: Manfred Brocker (Hg.) Geschichte des politischen Denkens. Das 20. Jahrhundert. Frankfurt/M. 2018 |
Econ Fried I Milton Friedman The role of monetary policy 1968 Landsburg I Steven E. Landsburg The Essential Milton Friedman Vancouver: Fraser Institute 2019 Brocker I Manfred Brocker Geschichte des politischen Denkens. Das 20. Jahrhundert Frankfurt/M. 2018 |
| Money Supply | Keynes | Landsburg I 28 Recession/Keynes/Keynesianism/Landsburg: The Keynesians (… including Keynes) believed that the money supply had been largely stable throughout the 1930s, and offered this as evidence that a stable money supply is impotent against economic catastrophe. Money was being created, according to the Keynesians, and people were simply holding it. FriedmanVsKeynes/Landsburg: That was simply false. What certainly happened was that the money supply was allowed to shrink dramatically, largely due to bank failures that the authorities did little to prevent or to counteract. ((…) "money" includes checking account balances, most of which are created by banks, as when your banker gives you a $ 10,000 Ioan (…) . When banks fail, those balances disappear.) >Near Money, >Banks, >Loans, >Cash balance, >Credit, >Money supply. Landsburg I 29 FriedmanVsKeynes/FriedmanVsKeynesianism/Landsburg: When money disappears, people try to acquire more of it (in the exact reverse of what happens when new money is created and people try to get rid of it). They do this by not buying things. In the long run, the only effect is a fall in prices. But in the short run, the effect is a reduction in economic activity. When that reduction in economic activity comes in the midst of an existing recession, and when it leads to additional bank failures and further reductions in the money supply, the disastrous short run can go on for many years. So for economic policy, the key takeaway is that this history should not be allowed to repeat itself. Academicians and policymakers have taken this very much to heart. Thanks largely to the policies that Friedman and Schwartz inspired, North America entered a 70-year period of unprecedented economic stability, with many believing that the frequent severe recessions of the past were never to repeat themselves. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Landsburg I Steven E. Landsburg The Essential Milton Friedman Vancouver: Fraser Institute 2019 |
| Permanent Income Hypothesis | Friedman | Landsburg I 8 Permanent Income Hypothesis/Friedman/Landsburg: Friedman hypothesized that: A) When your permanent income rises by, say, $ 100 a year, you'll typically increase your annual spending by something very close to $ 100.* B) When your non-permanent income rises or falls by $ 100 in a given year (because of an unexpected bonus at work, a lost wallet, a winning scratch-off ticket, or an illness) then you'll typically make only a small adjustment in your current spending. If Alice out-earns Bob by $ 100 a year, then (for an average Alice and an average Bob) it's usually because her permanent income exceeds his by about $ 90 and her non-permanent income exceeds his by $ 10. Therefore, since only her permanent income affects her spending, she outspends him by about $90. Landsburg I 9 Problem/FriedmanVsKeynes: Therefore it's very easy for an economist to notice that when Alice out-earns Bob by $ 100, She outspends him by $ 90 -while remaining entirely oblivious to what lies behind the numbers. In particular, that economist can easily make the mistake of believing that a $ 100 increase in non-permanent income can lead to a $90 increase in spending. But that inference, which underlies the entire theory of the Keynesian multiplier, is wrong. Cf. >Investment multiplier/Keynes. Permanent/income vs. absolute income: The permanent income hypothesis also settles a nagging riddle that had been troubling economists for a long time. Example: a) If Alice earns $ 20,000 more than her neighbour Bob, she typically outspends him by about $ 18,000. b) But if Alice earns $ 20,000 more than her grandfather did at her age, she typically outspends him by almost the full $ 20,000. (We see this in real-world data.) Whence the discrepancy? Solution: When Alice out-earns Bob, it's often partly because she's having an unusually good Year. Unusually good years don't generally repeat themselves. So if she out-earns Bob by $ 20,000, she might expect to out-earn him by only about $ 18,000 going forward, and increases her spending by almost that amount. But when Alice out-earns her grandfather, it's likely to be because times have changed. That's a permanent condition. She expects to continue out-earning him by about the same amount forever, and spends accordingly. Landburg I 10 Confirmations of the hypothesis: Friedman proposed several tests. For example: farmers' income is heavily dependent on market and weather conditions (this was especially true in Friedman's time, when farmers didn't routinely hedge their bets through futures markets). Factory workers' income is far more predictable. So an upward spike in Frank the farmer's income is likely to be mostly temporary, whereas an upward spike in Mary the machinist's income is likely to be mostly permanent (maybe she got promoted!). Therefore we should (on average of course) see machinists with income spikes increasing their spending by more than farmers with income spikes. Real world data confirm this prediction. Friedman carried out a great many such tests, comparing not just farmers versus machinists, but Swedes versus Englishmen, black Americans versus white Americans, young people versus old people, and more. The results in each case are consistent With the permanent income hypothesis. *Exactly how close depends on a variety of factors including the interest rate and how much you've already got in the bank. |
Econ Fried I Milton Friedman The role of monetary policy 1968 Landsburg I Steven E. Landsburg The Essential Milton Friedman Vancouver: Fraser Institute 2019 |
| Politics | Nordhaus | Mause I 227 Politics/Nordhaus: Nordhaus Thesis: Fluctuations in the sense of political economic cycles are deliberately accepted in order to create a positive macroeconomic environment - especially on the labour markets - in the run-up to upcoming elections, which significantly increases the chances of political leaders being re-elected. (1) (2) See Economic Policy/Keynesianism, Economy/Neoclassical Theory, Economic Cycle/Kalecki. (NordhausVsKeynesians, NordhausVsKalecki, KaleckiVsNordhaus, KeynsianismVsNordhaus.) 1. William D. Nordhaus, The political business cycle. Review of Economic Studies 42, (2), 1975, S. 169– 190. 2. W. D. Nordhaus, Alternative approaches to the political business cycle. Brookings Papers on Economic Activity 2, 1989, S. 1– 68. |
EconNordh I William D. Nordhaus The political business cycle 1975 Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Preferences | Keynes | Boudreaux I 97 Preferences/Keynes/Boudreaux/Holcombe: BuchananVsKeynes: (…) Buchanan was insistent that society isn’t a creature with a mind. Society has neither preferences nor the ability to choose. Only each of the many individuals who comprise society possesses preferences, and only individuals have the ability to choose. Groups/collectives/Keynes: The aggregate way of thinking that prompted economists to lose sight of the fact that groups, as such, have no preferences became popular among economists in the mid-twentieth century, especially through the influence of John Maynard Keynes. Aggregate Demand: Again, it was Keynes who introduced the notion of “aggregate demand,” which treats society as a whole as the demander of goods and services. Along the same lines, economists developed “representative agent” models in which everyone is “represented” in the model by a single decision-maker whose preferences are assumed to be those typical of the group. |
EconKeyn I John Maynard Keynes The Economic Consequences of the Peace New York 1920 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
| Quantity Theory | Keynes | Kurz I 106 Quantity theory/Keynes/Sraffa/Kurz: „The real task of such a [monetary] theory [which] is to treat the problem dynamically, analysing the different elements involved, in such a manner as to exhibit the causal process by which the price level is determined, and the method of transition from one position of equilibrium to another.“ (CWK 5, p. 120)(1). The quantity theory of money in its various forms, Keynes insisted, was ill adapted for this purpose. He then proposed to break away from the conventional method of starting from a given quantity of money irrespective of the uses to which it is put. Instead he started from the flow of aggregate earnings or money income and “its twofold division (1) into the parts which have been earned by the production of consumption goods and of investment goods respectively, and (2) into the parts which are expended on consumption goods and on savings respectively”. (CWK 5, p. 121)(1). He maintained that if the two divisions (1) and (2) are in the same proportions, then the price level of consumption goods will equal their respective costs of production. If not, price level and costs will differ from one another, giving rise to (extra, or windfall) profits or losses in the consumption sector. The price level of consumption goods is said to be “solely determined by the disposition of the public towards ‘saving’” and “entirely independent of the price level of investment goods” (CWK 5, pp. 129 and 123)(1). The latter is said to depend on the public’s choice between “bank deposits” and “securities.” This is motivated in terms of the observation that the decision to hold the one or the other relates “not only to the current increment to the wealth of individuals, but also to the whole block of their existing capital”. (CWK 5, p. 127)(1). Kurz I 107 SraffaVsKeynes: Keynes was wrong in assuming that the effect of a fall in consumption demand would be an immediate and proportional fall in price, whereas an increased demand for securities would not appreciably raise their price. Keynes also overlooked the fact that a rise in the price of securities is a source of profits (equal to premiums) that would compensate firms for any losses due to a fall in consumption prices. Contrary to Keynes’s view, the price levels relating to industries producing investment and consumption goods were not independent of one another. In a system characterized by a circular flow of commodities, Keynes’s distinction lacks precision, because one and the same type of commodity may be used both as an investment and as a consumption good. How can the price of such a commodity be determined in two radically different and independent ways? More important, the two kinds of industries are typically intimately intertwined. 1. 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. |
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 |
| Recession | Friedman | Landsburg I 27 Recession/Friedman/Landsburg: (…) [one] might think that in recessionary times, it would be a good idea to create additional money and get the economy moving again. Time/Problem: Unfortunately, (…) long and variable lags make it essentially impossible to exploit this avenue. >Quantity theory/Friedman. By the time your monetary shock starts to bear fruit, the recession is likely to be over, in which case all you've accomplished is a spurt of inflation. >Inflation. Solution/Friedman: From this, Friedman argued that changing the money supply is largely ineffective (and even counter-productive) as a weapon against short-run problems like recessions, and therefore it's best for policymakers to focus on the long run. And in the long run (…) , the quantity theory of money argues for a Iow and steady rate of money supply growth. As many economists do, let's call that the "Friedman rule." >Money supply/Friedman, >Quantity theory/Friedman. Landsburg I 28 Great Depression/recession: [in the Great Depression] with unemployment rates ranging between 25 and 35 percent through much of the world, incomes [were] falling dramatically, and, in many places, entire industries (including mining, logging, and construction) [were] shutting down almost completely. Why? Friedman and Schwartz(1) laid the blame squarely at the feet of the monetary authorities who allowed the US money supply to fall by almost one third. This, they argued persuasively, turned a moderately severe recession into a tragedy. >Money supply/Friedman. Amazingly enough, nobody knew this before Friedman and Schwartz came along. Keynes/Keynesianism: The Keynesians (this time including Keynes) believed that the money supply had been largely stable throughout the 1930s, and offered this as evidence that a stable money supply is impotent against economic catastrophe. Money was being created, according to the Keynesians, and people were simply holding it. >Recession/Keynes/Keynesianism, >Money supply/Keynes, >Money supply/Keynesianism. FriedmanVsKeynes/Landsburg: That was simply false. What certainly happened was that the money supply was allowed to shrink dramatically, largely due to bank failures that the authorities did little to prevent or to counteract. ((…) "money" includes checking account balances, most of which are created by banks, as when your banker gives you a $ 10,000 Ioan (…) . When banks fail, those balances disappear.) >Near Money, >Banks, >Loans, >Cash balance, >Credit, >Money supply. Landsburg I 29 FriedmanVsKeynes/FriedmanVsKeynesianism/Landsburg: When money disappears, people try to acquire more of it (in the exact reverse of what happens when new money is created and people try to get rid of it). They do this by not buying things. In the long run, the only effect is a fall in prices. But in the short run, the effect is a reduction in economic activity. When that reduction in economic activity comes in the midst of an existing recession, and when it leads to additional bank failures and further reductions in the money supply, the disastrous short run can go on for many years. So for economic policy, the key takeaway is that this history should not be allowed to repeat itself. Academicians and policymakers have taken this very much to heart. Thanks largely to the policies that Friedman and Schwartz inspired, North America entered a 70-year period of unprecedented economic stability, with many believing that the frequent severe recessions of the past were never to repeat themselves. 1. Milton Friedman and Anna Schwartz. (1963). Monetary History of the United States: 1867-1960. Princeton University Press. |
Econ Fried I Milton Friedman The role of monetary policy 1968 Landsburg I Steven E. Landsburg The Essential Milton Friedman Vancouver: Fraser Institute 2019 |
| Recession | Keynesianism | Landsburg I 28 Recession/Keynes/Keynesianism/Landsburg: The Keynesians (… including Keynes) believed that the money supply had been largely stable throughout the 1930s, and offered this as evidence that a stable money supply is impotent against economic catastrophe. Money was being created, according to the Keynesians, and people were simply holding it. FriedmanVsKeynes/Landsburg: That was simply false. What certainly happened was that the money supply was allowed to shrink dramatically, largely due to bank failures that the authorities did little to prevent or to counteract. ((…) "money" includes checking account balances, most of which are created by banks, as when your banker gives you a $ 10,000 Ioan (…) . When banks fail, those balances disappear.) >Near Money, >Banks, >Loans, >Cash balance, >Credit, >Money supply. Landsburg I 29 FriedmanVsKeynes/FriedmanVsKeynesianism/Landsburg: When money disappears, people try to acquire more of it (in the exact reverse of what happens when new money is created and people try to get rid of it). They do this by not buying things. In the long run, the only effect is a fall in prices. But in the short run, the effect is a reduction in economic activity. When that reduction in economic activity comes in the midst of an existing recession, and when it leads to additional bank failures and further reductions in the money supply, the disastrous short run can go on for many years. So for economic policy, the key takeaway is that this history should not be allowed to repeat itself. Academicians and policymakers have taken this very much to heart. Thanks largely to the policies that Friedman and Schwartz inspired, North America entered a 70-year period of unprecedented economic stability, with many believing that the frequent severe recessions of the past were never to repeat themselves. |
Landsburg I Steven E. Landsburg The Essential Milton Friedman Vancouver: Fraser Institute 2019 |
| Savings Rate | Neoclassical Economics | Bofinger I 44 Saving/investment/NeoclassicalsVsKeynesianism/Krämer: A central line of conflict between neoclassicals and Keynesians is, for example, the direction of action between saving and investment. KeynesianismVsNeoclassicals: Keynes assumed that investment decisions are autonomous and that this determines the level of savings in an economy. Neoclassicists take the opposite view. >Neoclassicals, >Keynesianism, >Keynes, >Saving, >Investments. Hagen Krämer. 2015. „Make no mistake, Thomas! Verteilungstheorie und Ungleichheitsdynamik bei Piketty“. In: Thomas Piketty und die Verteilungsfrage. Ed. Peter Bofinger, Gustav A. Horn, Kai D. Schmid und Till van Treeck. 2015. |
Bofinger II Peter Bofinger Monetary Policy: Goals, Institutions, Strategies, and Instruments Oxford 2001 |
| Stagflation | Keynesianism | Mause I 57 Stagflation/Keynesianism/VsKeynesianism: After initial economic policy successes in the 1950s and 1960s, doubts grew about Keynesian macroeconomics (see Economic Policy/Keynesianism), when unemployment and inflation ("stagflation") occurred simultaneously since the early 1970s. See Monetary Policy/Friedman. |
Mause I Karsten Mause Christian Müller Klaus Schubert, Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018 |
| Terminology | Buchanan | Brocker I 562 Terminology/Buchanan: "protective state": Provides citizens with protection in the form of legal certainty. Productive state: here, citizens agree on what public goods they want to provide, in what quantities and at what cost to whom. Both forms complement each other according to Buchanan's concept of economic liberalism. In this way, the state separates itself from the extremes of utopian anarchy (in the sense of a spontaneous, morally harmonizing coexistence order) and a threatening, expanding bureaucracy of a welfare state by Leviathan. See Buchanan 1975 (1). 1. James M. Buchanan, The Limits of Liberty. Between Anarchy and Leviathan, Chicago/London 1975. Dt.: James M. Buchanan, Die Grenzen der Freiheit. Zwischen Anarchie und Leviathan, Tübingen 1984. Wolfgang Kersting, „James M. Buchanan, Die Grenzen der Freiheit“ in: Manfred Brocker (Hg.) Geschichte des politischen Denkens. Das 20. Jahrhundert. Frankfurt/M. 2018 Boudreaux I 8 Terminology/Buchanan/Boudreaux: With aggregative thinking, “the social welfare” is promoted by “the government,” with the latter treated as if it’s an organism possessing a brain, and as if that brain’s main interest lies not in serving itself but, rather, in serving the nation. BuchananVsKeynesianism: Buchanan called such aggregative thinking the “organismic” notion of collectives - that is, the collective as organism. |
EconBuchan I James M. Buchanan Politics as Public Choice Carmel, IN 2000 Brocker I Manfred Brocker Geschichte des politischen Denkens. Das 20. Jahrhundert Frankfurt/M. 2018 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
| Unemployment | Hayek | Rothbard III 586 Unemployment/Hayek/Rothbard: One alleged example of a possible case of involuntary unemployment on the free market has been suggested by Professor Hayek.(1) Hayek maintains that when there is a shift from investment to consumption, and therefore a shortening of the production structure on the market, there will be a necessary temporary unemployment of workmen thrown out of work in the higher stages, lasting until they can be reabsorbed in the shorter processes of the later stages. Rothbard: It is true that there is a loss in income, as well as a loss in capital, from a shift to shorter processes. It is also true that the shortening of the structure means that there is a transition period when, at final wage rates, there will be unemployment of the men displaced from the longer processes. RothbardVsHayek: However, during this transition period there is no reason Why these workers cannot bid down wage rates until they are Iow enough to enable the employment of all the workers during the transition. This transition wage rate will be Iower than the new equilibrium wage rate. But at no time is there a necessity for unemployment. 1. Hayek, Prices and Production, 2nd ed. London: Routledge and Kegan Paul, 1935. Reprinted by Augustus M. Kelley, 1967. pp. 91-93. Boudreaux II 60 Unemployment/Hayek/Boudreaux: „In fact ... the very measures which the dominant "macro-economic" theory has recommended as a remedy for unemployment, namely, the increase of aggregate demand, have become a cause of a very extensive misallocation of resources which is likely to make later large-scale unemployment inevitable. The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together With the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate - or perhaps even only so long as it continues to accelerate at agiven rate.“(1) (HayekVsKeynes, HayekVsKeynesianism, HayekVsFriedman.) >Money supply, >Interventions/Hayek, >Economic cycles/Hayek, >Demand/Hayek. 1. Friedrich Hayek (1974). The Pretense of Knowledge. Lecture given in acceptance of the Nobel Prize for Economics.ln Bruce Caldwell (ed.), Markets and Other Orders, XV (Liberty Fund Library, 2014): 367. |
Hayek I Friedrich A. Hayek The Road to Serfdom: Text and Documents--The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2) Chicago 2007 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 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
| Unemployment | Rothbard | Rothbard III 581 Unemployment/Neoclassical economics/Keynesianism/Rothbard: The Keynesians, in the mid-1930’s, inaugurated the fashion of declaiming: Neoclassical economics is all right for its special area, but it assumes “full employment.” Since “orthodox” economics “assumes full employment,” it holds true only so long as “full employment” prevails. If it does not, we enter a Keynesian wonderland where all economic truths are vitiated or reversed. “Full employment” is supposed to be the condition of no unemployment and therefore the goal at which everyone aims. Rothbard III 582 In the first Place, it should be emphasized that economic theory does not "assume" full employment. Economics, in fact, "assumes" nothing. The whole discussion of alleged "assumptions" reflects the bias of the epistemology of physics, where "assumptions" are made without originally knowing their validity and are eventually tested to see whether or not their consequents are correct. The economist does not "assume"; he knows. He concludes on the basis oflogical deduction from self-evident axioms, i.e., axioms that are either logically or empirically incontrovertible. Now what does economics conclude on the matter of unemployment or "full employment"? In the first place, there is no "problem" involved in the unemployment of either land or capital goods factors. (The latter condition is often known as "idle" or "unused capacity.") We have seen above that a crucial distinction between land and labor is that labor is relatively scarce. As a result, there will always be land factors remaining unused, or as a further result, labor factors will always befully employed on thefree market to the extent that laborers are so willing. There is no problem of "unemployed land," since land remains unused for a good reason. Indeed, if this were not so (and it is conceivable that some day it will not be), the situation would be most unpleasant. If there is ever a time when land is scarcer than labor, then land will be fully employed, and some labor factors will either get a zero wage or else a wage below minimum subsistence level. This is the old classical bugbear of population pressing the food supply down to below-subsistence levels, and certainly this is theoretically possible in the future. >Unemployment/Keynesianism. Rothbard III 584 But what of the able-bodied worker who “can’t find a job”? This situation cannot obtain. In those cases, of course, where a worker insists on a certain type of job or a certain minimum wage rate, he may well remain “unemployed.” But he does so only of his own volition and on his own responsibility. But while this is true in the general labor market, it is not necessarily true for particular labor markets, for particular regions or occupations (…). Rothbard III 583 Wages/unemployment/Keynesianism/Rothbard: RothbardVsKeynesianism: (…) the whole modern and Keynesian emphasis on employment has to be revalued. For the great missing link in their discussion of unemployment is precisely the wage rate. To talk of unemployment or employment without reference to a wage rate is as meaningless as talking of “supply” or “demand” without reference to a price. And it is precisely analogous. The demand for a commodity makes sense only with reference to a certain price. In a market for goods, it is obvious that whatever stock is offered as supply, it will be “cleared,” i.e., sold, at a price determined by the demand of the consumers. No good need remain unsold if the seller wants to sell it; all he need do is lower the price sufficiently, in extreme cases even below zero if there is no demand for the good and he wants to get it off his hands. The situation is precisely the same here. Here we are dealing with labor services. Whatever supply of labor service is brought to market can be sold, but only if wages are set at whatever rate will clear the market. >Free market/Rothbard. The problem, then, is not employment, but employment at an above-subsistence wage. |
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 |
| Wages | Rothbard | Rothbard III 558 Wages/Rothbard: A wage is the term describing the payment for the unit services of a labor factor. A wage, therefore, is a special case of rent; it is labor’s “hire.” On a free market this rent cannot, of course, be capitalized, since the whole labor factor—the man—cannot be bought and sold for a price, his income to accrue to his owner. This is precisely what occurs, however, under a regime of slavery. The wage, in fact, is the only source of rent that cannot be capitalized on the free market, since every man is necessarily a self-owner with an inalienable will. >Inalienability/Rothbard, >Slavery/Rothbard, >Labour/Rothbard, >Production factors/Rothbard, >Service/Rothbard. One distinction between wages and land rents, then, is that the latter are capitalized and transformed into interest return, while the former are not. >Capitalization/Rothbard. Rothbard III 580 Wages/Rothbard: It is “total wage rates” that are determined on the market. They tend to be equalized on the market and to be set at the DMVP (descounted marginal value product) of the worker. Total wage rates are the money paid out by the employer for labor services. They do not necessarily correspond to the “take-home pay” of the worker. The latter may be called the “overt wage rates.” Thus, suppose that there are two competing employers bidding for the same type of labor. One employer, Mr. A, pays out a certain amount of money, not in direct wages, but in pension funds or other “welfare” benefits. These benefits, it must be realized, will not be added as a gift from the employer to the workers. They will not be additions to the total wage rates. Overt wage rates paid out by Mr. A will instead be correspondingly lower than those paid out by his rival, Mr. B, who does not have to spend on the “welfare” benefits. To the employer, in other words, it makes no difference in what form workers cost him money, whether in “take-home pay” or in welfare benefits. But he cannot pay more than the worker’s DMVP; i.e., the worker’s total wage income is set by this amount. The worker, in effect, chooses in what form he would like his pay and in what proportion of net wage rates to “welfare” benefits. >Labour/Rothbard, >Economy/Rothbard. Rothbard III 583 Wages/unemployment/Keynesianism/Rothbard: RothbardVsKeynesianism: (…) the whole modern and Keynesian emphasis on employment has to be revalued. For the great missing link in their discussion of unemployment is precisely the wage rate. To talk of unemployment or employment without reference to a wage rate is as meaningless as talking of “supply” or “demand” without reference to a price. And it is precisely analogous. The demand for a commodity makes sense only with reference to a certain price. In a market for goods, it is obvious that whatever stock is offered as supply, it will be “cleared,” i.e., sold, at a price determined by the demand of the consumers. No good need remain unsold if the seller wants to sell it; all he need do is lower the price sufficiently, in extreme cases even below zero if there is no demand for the good and he wants to get it off his hands. The situation is precisely the same here. Here we are dealing with labor services. Whatever supply of labor service is brought to market can be sold, but only if wages are set at whatever rate will clear the market. >Free market/Rothbard. The problem, then, is not employment, but employment at an above-subsistence wage. >Unemployment/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 |
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