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Autrian school and Silvio Gesell

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jtimon posted on Tue, May 3 2011 6:26 AM


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.

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Ah, it's voluntary. I personally wouldn't touch it, but sure knock yourselves out, guys.

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Torsten replied on Tue, Jun 19 2012 11:23 AM

@ Jtimon, 

You or other Gesellians should first explain and illustrate the main theories and policy suggestions of Silvio Gesell. It is basically community based money in the form of vouchers that has been used in places like Worgl and worked well until the Austrian central bank cracked down on it. This still leaves the question, if it also would work well under other circumstances. 

Looking forward to hear more on this.

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Esuric replied on Tue, Jun 19 2012 4:28 PM

Gesell believed that there was an inherent disparity between money on the one hand and consumer/producer goods on the other. Money, according to Gesell (because it took the form of specie at the time), cannot rot, but all other goods either rot or depreciate. Because of this, economic stability, again according to him, is impossible. In order to fix the imbalance money must also expire/depreciate or "rot." Gesell proposed a form of currency based on stamps/vouchers that expire over time. 

Is a formal refutation of this nonsense really required?

"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."

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jtimon replied on Tue, Jun 19 2012 6:37 PM

It is working well in some regional currencies in germany like the chiemgauer:

http://en.wikipedia.org/wiki/Chiemgauer

But it hasn't been tried at a higher level. Irving Fisher proposed it for the US but it didn't happen.

The more original feature in Gesell work is his theory on interest.

gross/nominal interest = real interest + inflation premium = basic interest + risk premium + inflation premium

Note that the inflation premium could be negative. Austrian often refer to basic interest as time preference. The basic interest is an economic rent inherent in non perishable monies like gold. While the yield of real capitals stay above the basic interest everything's fine. But by competition among capitals, the yields of real capital should drop to zero just like economic profits do in perfect competition. But the basic interest prevents that from happening (that's his definition of capitalism and that's what he wants to remove to achieve a free market).

How does the basic interest prevent capital yields from falling?

When a given type of capital yields under the basic interest, lenders refuse to finance that capital market. No new production goods of that type (say houses, or facories of a given type) until by deterioration of capital or by an increase in demand, the capital can pay the basic interest again.

What happens when most or all types of capital yield below the basic interest? Aren't lenders forced to lower the rate?

No. Staying liquid represents an insurance against uncertainty that money holder gets for free if he doesn't want or can't exact the basic interest. Hoarding increases which causes deflation, which encourages hoarding. Besides credit/debt gets destroyed by deflation. The financial market gets cleared fast with these two positive feedbacks and a new price equilibrium is reached in which money-capital has recovered its privileged position and real capitals yield over the basic interest again. Note how the monetary rent is transferred to real capital through the financial market.

This rent is collected not only in loans but from the price of all products by the merchant. Money enables specialization and the market itself. But it can also stop commerce if it doesn't receive its tribute. Money is like a tollgate wares have to pay to pass through. All wares perish in the market waiting for the consumers, but money can wait as long as it takes to get its tribute. His solution is therefore letting the money rot too. He wants to suppress this rent by charging a demurrage fee on money that prevents hoarding. Money should only serve as medium of exchange and not storage of value.

Isn't it attacking savers?

You can buy commodities or invest in real capital yourself. You need to lend to have the symbolic value contained in money in the future. You can't hold that wildcard (which is the product of an implicit agreement among the currency users) for free. Yes, a demurrage few will make interests drop and lower their returns, but they will be saving much more from the chepeast products they will find in the market. Think about the price of the rent of a house which construction and maintainance costs in all its lifetime equal the sum of all the rents in the same period (economic profit = 0). Really cheap houses and everything else. Because there would be more houses and also more factories competing with each other. More employment too, because of this factories abundance.

Also, what made us think that money could serve as an effective store of value in the first place?

He puts it this way "As long as paper-money remains what it was meant to be, a medium of exchange, everything works smoothly. Paper-money used for any other purpose is not worth the paper upon which it is printed. It becomes a scrap of paper fit at best for lighting a pipe.

The anomaly of the physical junction of the medium of exchange and the medium of saving is still more obvious if we suppose that, as in Joseph's time, a series of fruitful years is followed by a series of bad ones. During the fruitful years the people would of course be able to save, that is, to pile up a mountain of paper-money. If during the following years of scarcity the people wish to utilise this mass of paper it becomes apparent that there is no supply to balance the piled-up demand."

He's taling about paper money here, but the example also serves for gold (as money, not as commodity once demonetized).

How this is different from Keynesianism?

Here he discusses a Keynesian-like paper-money reform: http://www.community-exchange.org/docs/Gesell/en/neo/part3/13.htm

"But here the reformers of the note-issue intervene and say, Why did the crisis break out ? Because prices fell - and prices fell because money was scarce. Because of the lowered rate of interest on real capital, part of the stock of money was withdrawn from circulation. Good ! We leave the savers or the savings-banks in possession of the money, and let them hoard it; we shall replace it with new money. The State prints money and advances it to the employers, if the money of capitalists and money-savers is held back. If the rate of interest on real capital falls, the State also reduces the rate of interest on the money it issues. If employers can extract only 3, 2, 1% from their houses, factories, ships, the State supplies them with money at 3, 2, 1 %, or, if necessary, at 0 %.

[...]

Savers produce more commodities than they consume, and they do not again set free the money they receive for their surplus unless they are promised interest. The proposal now before us is that the crisis which is the direct result of the savers' conduct should be resolved by the State supplying money to the employers at a lower rate of interest, this money to be new money straight from the printing-press. The surplus production of the savers is in this case not bought with their money, but with new money.

For the moment this is unimportant; with the help of the new money the building of houses, factories and ships proceeds without interruption. It is true that employers receive less and less interest from these enterprises, since building is now uninterrupted, and the supply of ships, tenements, etc. is constantly increasing. But parallel with the decrease of the interest they receive is the fall in the rate of interest they have to pay the Bank of Issue. As employers they are therefore indifferent to the amount of interest they receive on the ships or houses, as it must all be handed over to their creditors. Work proceeds without interruption, and there is therefore no interruption in saving. Many still find it advantageous to lend their savings at the lower rate of interest; but others, especially the small savers who, in any case, obtain but a trivial amount of interest, will return to tie old custom of keeping their savings at home and renouncing interest

[...]

But what if, for any reason, this demand came to life and appeared in the market ? Where would then be the corresponding supply of products ? If supply is lacking, prices rise, and rising prices cause differential profits. This prospect of gain entices money into the market ! The rise of prices, the prospect of differential profits, bursts open the savings-boxes and the billions of demand pour like an avalanche upon the market. "Sauve qui peut !" is the cry, and in the shipwreck the only lifeboats are the wares. Those who can buy wares are safe, so everybody buys wares. Demand rises to thousands of billions, and as supply is of course lacking, prices shoot up. The rise of prices annihilates savings. The peasant again uses paper-money as he used the French assignats - to paper his cowshed."

In summary, he accurately predicts a progresive fall in interest rates caused by the state by manipulating the financial market with newly created money (and not the real savings that are increasingly hoarded as a result of the lower interests) and eventually hyperinflation. He refers to Flürscheim, but is essentially against Keynesianism.

He adds: "A reform of this kind would be short-lived and would bring the possibility of the greatest fraud ever practised upon mankind. After such an attempt at reform the people, as in the past, would believe that their salvation lay in the gold standard and would clamour for its re-introduction."

How do you implement this then? If not Keynes nor Gold, what's the desirable structure of money?

This is where I disagree with Gesell more. Let's leave that for later. Without much detail..."[...]introduction of a medium of exchange subject to a material, inherent compulsion to circulate[...]With Free-Money the traditional connection between the medium of saving and the medium of exchange is, in conformity with the results of our inquiry, irrevocably broken. Money becomes a pure medium of exchange, independent of the will of its possessor. Money becomes materialised demand."

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jtimon replied on Tue, Jun 19 2012 6:41 PM

How can I paste plain text from my favorite text editor and preserve the end of lines?

I don't expect anyone to read my last post that way.

Can I at least paste HTML directly? The software of this forum is strange.

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jtimon replied on Wed, Jun 20 2012 6:26 AM

Gesell believed that there was an inherent disparity between money on the one hand and consumer/producer goods on the other. Money, according to Gesell (because it took the form of specie at the time), cannot rot, but all other goods either rot or depreciate.

In his time there was the gold standard, not specie. As far as I know, without fractional reserve banking (at least in germany). How do you explain his concern with crises if everything was so perfect with gold-money?

Because of this, economic stability, again according to him, is impossible. In order to fix the imbalance money must also expire/depreciate or "rot." Gesell proposed a form of currency based on stamps/vouchers that expire over time.

Is a formal refutation of this nonsense really required?

Since there's alive economist (doctors and professors, scientists) who value his theory on interest, since his theory on interest is different from any other one and since he predicted the failure of paper-money without demurrage (a la Keynes). I think it is required, yes.

Could it be that your dogmas prevent you from understanding him?
In any case, if his reasonnings are nonsense you should find easy to reduce them ad adsurdum.
Are you familiarized with logical demonstrations?

Please, ask the following questions.

With "perfect competition" shouldn't capital yields fall to zero like economic profits?

Isn't this uncompatible with the time preference theory of interest?

Of the theories on interest that Gesell studied, what do you think is closer to time-preference?

I would say the time-preference theory on interest belongs to the "abstinence" cathegory, but tell me what you think.

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How do you explain his concern with crises if everything was so perfect with gold-money?

Are you asking how there can be inflation under a gold standard? 1. Debasing the coinage. 2. Printing more paper than there is gold to back it. 3. Going off the gold standard in "emergencies" such as wartime. 4. Confiscating the citizenries gold.

I think it is required, yes.

Nowadays every country is doing what he recommended, reducing the value of money constantly. They do this not by requiring money to be stamped, but by printing more and more of it. By the laws of supply and demand, this reduces its value. And yet, somehow we are not better off.

He also thought a zero interest rate would solve all our problems. But we have that now in the US, and it's not helping at all.

With "perfect competition" shouldn't capital yields fall to zero like economic profits?

With perfect competition neither capital yields nor economic profits fall to zero. Do you think with perfect competition there would be no profits? Would people just close up shop, because there is no profit? With perfect competition both capital yields and economic profits would tend to [but never actually settle there for good, because new ideas constantly change the situation] a certain amount, the same for all businesses. Mises explains all this in human Action, Chapter 19, I think.

Isn't this uncompatible with the time preference theory of interest?

Isn't what uncompatible?

Of the theories on interest that Gesell studied, what do you think is closer to time-preference?

Not sure why this is important. But it looks like abstinence at least talks about time preference a little bit, though it seems to confuse the cart with the horse.

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How can I paste plain text from my favorite text editor and preserve the end of lines?

Have you tried the Cntrl and V buttons?

The software of this forum is strange.

Yes.

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Sorry if this has already been mentioned, but he believed in not having an interest rate. Really?

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jtimon replied on Wed, Jun 20 2012 10:02 AM

Are you asking how there can be inflation under a gold standard? 1. Debasing the coinage. 2. Printing more paper than there is gold to back it. 3. Going off the gold standard in "emergencies" such as wartime. 4. Confiscating the citizenries gold.

Fair enough. So you claim there have not been a monetary crisis under a gold standard with no fracional reserve or other conterfeiting, right? I will not try to prove you wrong with history, let's stick to logic. I really like praxeology approach to economics.


Nowadays every country is doing what he recommended, reducing the value of money constantly. They do this not by requiring money to be stamped, but by printing more and more of it. By the laws of supply and demand, this reduces its value. And yet, somehow we are not better off.

He also thought a zero interest rate would solve all our problems. But we have that now in the US, and it's not helping at all.

Please, read my post above under the question "How this is different from keynesianism?" He specifically predicted that a Keynesian-like system would fail. His prediction: interest rates dropping (through monetary inflation) to zero and then hyperinflation. I think you will at least agree with him there, although probably for different reasons.

 

With perfect competition neither capital yields nor economic profits fall to zero. Do you think with perfect competition there would be no profits? Would people just close up shop, because there is no profit? With perfect competition both capital yields and economic profits would tend to [but never actually settle there for good, because new ideas constantly change the situation] a certain amount, the same for all businesses. Mises explains all this in human Action, Chapter 19, I think.

 

I meant the theoric concept of perfect competition in which (I'm not making this up), mathemathical theoric reserch demonstrates that economic profits drop to zero. But I accept your notion that they tend to zero. Do you think that capital yields also tend to zero by competition in the same way profits do?

 

Not sure why this is important. But it looks like abstinence at least talks about time preference a little bit, though it seems to confuse the cart with the horse.

Does the Austrian school has a similar classification? Have they classified his theory on interest and explained why is wrong?

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jtimon replied on Wed, Jun 20 2012 10:10 AM

Sorry if this has already been mentioned, but he believed in not having an interest rate. Really?

No. He wanted the interest rate to be determined by supply and demand in a free market. But he claims that lenders are at an unfair advantage and that at low interest, they will prefer to hoard rather than spend, invest or lend. What he wants is to discourage hoarding, to separate the medium of exchange from the store of value through demurrage. He also wanted to maintain stable prices through an elastic supply, but I don't think that's necessary. I would be happy with a fixed monetary supply if it has demurrage.

What he predicts is that this will lead to zero interest (offered by real savers, not a central bank) and a more prosperous society.

 

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jtimon replied on Wed, Jun 20 2012 10:16 AM

Have you tried the Cntrl and V buttons?

 

Yes, but it didn't seem to work. I think I know what was happenning, I probably wasn't pushing the save button and was viewing the preview.
Thank you anyway, now I know I can do it.

 

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Torsten replied on Wed, Jun 20 2012 12:59 PM

If taken narrowly, there would be some Austrian objections to Gesells free money. 
But tell me one thing, would the free money be legal tender or could it be freely exchanged with any other currency? I mean this for market participants in the area where the free money is implemented and used. 

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jtimon replied on Wed, Jun 20 2012 1:45 PM

If taken narrowly, there would be some Austrian objections to Gesells free money.

Not sure what you mean here.


But tell me one thing, would the free money be legal tender or could it be freely exchanged with any other currency? I mean this for market participants in the area where the free money is implemented and used.

Gesell's intitial proposal (freigeld) was a monetary monopoly ran by the state, because he thinks money is a natural monopoly.

The chiemgauer, for example, is actually a private currency implemented at the local level which is used in parallel with euros (is also backed by euros).

Since I'm a free monetary market advocate (like E.C. Riegel) I prefer my proposal which does not depend on any state. It's basically a fork of bitcoin with demurrage. I've called it freicoin. I hope I get the time to code it some time soon.

Most austrians (agreeing with me in the free monetary market part) say "it just won't be competitive". I believe it will. I consider myself some sort of  gesell-austrian hybrid, although Gesell himself was pretty libertarian in general. Despite his monopoly money proposal is often reffered to as an anarchist.

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I meant the theoric concept of perfect competition in which (I'm not making this up), mathemathical theoric reserch demonstrates that economic profits drop to zero. But I accept your notion that they tend to zero. Do you think that capital yields also tend to zero by competition in the same way profits do?

First sentence: I vaguely remember Mises mentioning such an idea in HA, only to disagree.

Second sentence: My notion, which I got from Mises, is that they tend to a positive non zero number.

Third sentence: Capital yields also tend to that same non zero number.

I think Chapter 19 of Human Action is where all this is discussed.

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