Hi, I'm starting to learn Austrian economics. I agree with almost everything I've read so far, but there's things I do not share about money. I'm influenced by Silvio Gesell, although I think I have a more libertarian view that he had. Is there any critique from the Austrian school against Gesell that I can read? Thanks in advance.
jtimon:My point is that with money as austrians think it should be (hard money) prevents some enterprises to take place, even if they will have customers and there's available resources to start and end it. The interest rate prevents businesses with less return than it to take place.
Just like foregoing Ponzi schemes "prevents" some profitable enterprises ("investments") taking place, as well.
Not every investment in a ponzi scheme can end sucessfully.
You weren't talking about every investment. You were concerned about the "investments" that would not have happened were it not for the Ponzi scheme.
I meant investments that can really be sucessfully ended (like building a house or making a net to fish).
Or lending printed money to guy A so he could buy a shovel (made by guy C!), and lending printed money to guy B so he can pay guy A to dig a ditch for guy B's enternainment? Then lending some more printed money to guy B so he too could buy a shovel (made by guy C!), and lending more printed money to guy A so he can pay guy B to cover said ditch for guy A's entertainment? Or some different "investments" altogether?
I mean, if it weren't for the Ponzi scheme of printed money (out of thin air) being lent out how else would we have two entertained guys (A and B), one happy shovel salesman (guy C), and one dug out ditch being filled back up? Right?
I should clarify myself further. I was assuming free market, full reserve and fixed monetary base. You don't need to warn me about the adversal effects of printing, fractional reserve and ponzi schemes.
jtimon: I should clarify myself further. I was assuming free market, full reserve and fixed monetary base. You don't need to warn me about the adversal effects of printing, fractional reserve and ponzi schemes.
Then why are you bothered by "investments" being foregone because of not enough money being made available (i.e. because of interest rates not being low enough)? You are aware that interest rates are but the price of money, and no one "sets" them in a free market where supply (lenders) meets demand (borrowers)?
These were your words:
I would say low interest rates.
It's said that with inflation/fractional reserve, more investments will be started than can actually be ended because the measurement of available resources is distorted. I agree. But without it, not all the investments that can be ended will be started, just the ones with a bigger return than the interest rates.
I agree.
But without it, not all the investments that can be ended will be started, just the ones with a bigger return than the interest rates.
My point is that with money as austrians think it should be (hard money) prevents some enterprises to take place, even if they will have customers and there's available resources to start and end it. The interest rate prevents businesses with less return than it to take place.
The key word is "available". There is always a demand for the resources that are going to be used to start and finish. If there was no demand, they would be available for free, by definition, and the popsicle guy could get his freezer without anyone printing money. Meaning, whatever resources are available that he needs money for, somebody else wants.
The fact that the other guy can get a greater return means he makes more profit. Meaning he has satisfied greater needs wasting less resources, for that is what generates profit.
EDIT: If you don't print money, how do you lower interest rates?
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What I understand Gesell claims is that interest rates, or the price of money if you wish, sets a minimum return to all other capitals. As the interest rates cannot go to zero, neither the capital returns can. Then some capital accumulation is not made just because it performs worse than money, not necessarily because there's not enough resources offered in the market to create the capitals.
It's said that with inflation/fractional reserve, more investments will be started than can actually be ended because the measurement of available resources is distorted.
I agree. But without it, not all the investments that can be ended will be started, just the ones with a bigger return than the interest rates.
Exactly. Only the investments with a higher return than the interest rates will be made.
jtimon, low (or manipulated, set) interest rates do not jibe with a "free market, full reserve and fixed monetary base". You can't have both at the same time. The market for money (its price, i.e. interest rates) is either free or it isn't.
Exactly. That's the WHOLE point. That's why an interest rate (i.e. price for money, just like any other price) exists. Scarcity of capital (just like any other valued property) can not be eliminated by printing currency out of thin air. Printing only re(mis)allocates whatever real (actual) capital is available.
If he would take the freezer or not depends on how much money he will make selling his popsicles (whatever that is). Everybody would be happier if could start his business (himself, his clients and the freezer seller), even if he could just afford a zero interest loan. But that won't happen with hard money.
Agreed. Gesell doesn't care about profits because they tend to zero by the forces of the free market. In some sense, they are the wages of the entrepreneurs.
Of course, this is the hardest part. Gesell proposed demurrage. But it needs either a monopoly of money issuance by the government (as he proposed) or for money with demurrage to be preferred over other moneys in the market as a medium of exchange. The last, as far as I know, remains to be proved as true or false. Other approaches come from the idea of removing the scarcity of money. In a LETS community, money is created when needed, moving up the balance of the seller of the product and down the one of the payer. These balances exist between every user and the LETS community as a whole which constitutes a state in itself and takes the losses from defaults. This can only function in small communities where defaults can be "prevented" or controlled by knowing each other well. A more elaborated approach inspired in LETS is Ripple. In Ripple, a network of accounts is created between the participants, each one connecting only to the people he trusts and with the credit limit he wants. The participants can issue IOUs (denominated in any unit of account) to trade between them. Using software, one can pay to someone who is not directly connected to, but indirectly through an arbitrary number of intermediaries, who keep their overall balance unchanged (or augmented by charging a fee) after the transaction. Interest rates (positives or negatives) can be applied too, but I think they would tend to zero because most accounts would be bidirectional. These are my thoughts on it, but even if we got no way to reduce the interest rates in a free market, we can study the effects of the interest rates on capital returns, capital accumulation, employment and wages.
Everybody would be happier if could start his business (himself, his clients and the freezer seller), even if he could just afford a zero interest loan.
1. No, the supermarket and all its meat customers would be unhappy. They want the freezer, too.
2. http://en.wikipedia.org/wiki/Popsicle
No, the supermarket and all its meat customers would be unhappy. They want the freezer, too.
The business with more returns would use the resource, but if none of them will be able to pay the interest rate, none of them will take the freezer, that will stay with the freezer seller. With zero interest rates, there's more chances that one of the two will invest in the freezer. The big question is still how to achieve this within a free market (and avoiding miss-allocations).
jtimon:With zero interest rates, there's more chances that one of the two will invest in the freezer. The big question is still how to achieve this within a free market (and avoiding miss-allocations).
I give up. Dave, he's all yours.
...if none of them will be able to pay the interest rate, none of them will take the freezer, that will stay with the freezer seller. With zero interest rates, there's more chances that one of the two will invest in the freezer.
There is a reason that an interest rate is what it is. The banker [and the depositors who trust him with their money] has to always ask himself, "Am I better off holding on to this cash, or lending it to this guy with the popsicles? After all, a bird in the hand is worth two in the bush. So I want as high an interest rate as I can get to justify parting with my hard earned money. After all, this yokel may lose it all. For all I know, he may just go out and snort coke with the money, or buy some lemon of a freezer that will break down in a month, leaving us both broke, too. And if interest rates are zero, or too close to zero, it just is not worth the risk I am getting into handing the money over to this guy for a few years. I'm better off snorting the coke myself with the money, or waiting till something better comes along."
Ok. Because of its novelty, I'm sure there's no autrian school text about Ripple, but is there any text on demurrage (without relating it to printing)?
Maybe it's hard to see, but a currency with demurrage and a stable monetary base is feasible. My question would be, circulating within a free market in paralel with a stable monetary base currency without demurrage, would it be competitive or it would dissapear?
I didn't read your post when I wrote my last one.
Of course, bankers would charge for his services. The risk premium would also be charged (or reduced with collateral). Ideally, the demurrage would be equal (but inverse) to the liquidity premium. Gesell proposed a 5% demurrage based on some research about the history of interest rates, but I think that number is quite arbitrary.
If money is scarce, the only way the interest can be lower than with hard money is using money with demurrage. Remains the question of if it would be compettive.
1. We are getting wilder and wilder here. Demurrage seems to be setting up a system like the card game of Old Maid, so that whoever is left holding the physical money loses something. This will encourage bankers to invest all right, but it will also encourage mad spending, as everyone is in a rush to fob his cash on the next guy and buy something with no demurrage fee, like drugs. It's like a country hit by hyperinflation.
2. OK, a few q's. What right has someone to inflict this plague on society? Cause it will help a few deadbeats get loans? Why should the holders of money have to lose so that these guys nobody trusts to loan to will get a little extra?
3. Who knows what the unintended consequences will be for such a thing. I expect people will start avoiding that money like the poison it is, finding all kinds of creative ways not to use it. Meaning a loss of time and energy, better spent on producing things, wasted away on avoiding some ridiculous demurrage fee.
4. Why not have dissolving money, made of a material that will self destruct after a while?
Well, it depends on how high the demurrage fee were. If it were too high, the scenario, as you say, would be similar to a country with hyperinflation. If it is low, the spending would be encouraged just like in a country with modest inflation, but without the miss-allocations produced by printing. I must admit that I don't know what would be the right demurrage rate, intuitively I suspect that it shouldn't lead to negative interest rates.
2. OK, a few q's. What right has someone to inflict this plague on society?
I think that it could be a gain for society, but no one would have the right to impose it. It would be used only in the case that people accept it in payments. If it were not competitive as a medium of exchange against a similar currency without demurrage, the free market will make it disappear.
Cause it will help a few deadbeats get loans? Why should the holders of money have to lose so that these guys nobody trusts to loan to will get a little extra?
Is not that nobody trust them (that kind of people won't get the loan if there's demurrage neither), is that their capital returns are not as high as the interest rates for currencies without demurrage. There are benefits for society. Since the wealth is distributed between wages, capital returns and profits, the only way to increase wages is to decrease capital returns, which have a bottom limit determined by interest rates. For example, the rent of a house is its capital return. The rent of a house cannot be lower than the interest rate of the cost of constructing the house because no more houses will be constructed when the returns of the housing sector become as low as the interest rates. For Robinson, if the value of living in a house (the rent) over the years it will last equals (or is a little bit superior than) the costs of constructing it, it would be reasonable for him to construct it. When money comes into play that is not true anymore: every capital must be at least as good as money. In this sense, hard money sets an upper limit to capital accumulation.
People won't need creative ways to avoid using it because in a free market they could just use a money without demurrage instead. The question is, will people reject every payment with that currency because of the demurrage or will they calculate how much they will lose and adapt prices accordingly? Maybe both currencies would circulate in parallel, one being preferred for saving and the other for spending.
I doubt that such a material exists. But I think the more important part of gold durability for it to become money naturally from a barter economy is its resistance to water, fire and the elements in general. If gold would lose a small percentage of its weight over time and it magically returned to the mine, I think it could have emerged as money too.