You seem to postulate that more (albeit different) regulations on what businesses and individuals may or may not do is a solution to a problem that I understand to be caused by regulation and coercion, or simply put, restrictions on liberty and disrespect for property rights and liberty.
Actually the system I described (I'll actually reveal what it is later on) is the very essence of liberty and property rights. Think for a moment about what I've described previously. When we pay interest to a bank who does it serve? The banking Oligarch's, not us. In a system where no interest is required (that prevents deflation and inflation also, by the way) and puts $200,000 to $300,000 dollars back in our pockets due to the erradication of interest on a $200,000 home we purchase. Whom does that serve?
What we're talking about then is economic Liberty! It's the people who are in debt up to their ears due to interest that I want to see liberated. Let them keep their own money, there is absolutely no need to deprive the American people of the fruits of their labors. I will try to present the whole system so you can see very clearly what I'm talking about shortly.
1) Either you didn't understand my point or you don't agree with it when I described the money creation process. There is no time preference in our present economic system. How can you put a time preference value on money created by an electronic transfer that probably cost the bank a few dollars? This money is not earned, it is created on the spot. This is the way money is created, believe me.
2) I'll answer the question about what takes the place of banks shortly (we're in the process of moving this week so it's been hectic). There is such an infrastructure though and it issues money and takes payments.
3) I wish I could! Unfortunately they have what we call a monopoly!
Actually I have Human Action, I've read books by both Rothbard and Hayek. I consider myself a Libertarian/Conservative. I'm not an expert by any means on Austrian Economics but I've a basic understanding of it.
Got a question for you: Have you ran across any Austrian literature that specifically addresses interest and it's justification?
As far as investment goes. I'm sorry, I see it only as a form of legalized gambling. If business needs money for capital formation / infrastructure, it can be supplied in exactly the same way. A business pledges as collateral a portion of their accumulated capital and money is issued interest free and paid back at the rate of depreciation of the related asset. Very simple solution.
You mentioned allowing "competing financial institutions". But you would have to prohibit the system I mentioned because no other financial institution would remain standing but this one system. You can't compete against 0% interest! A modest fee is all this system would take to cover it's expenses. Banks would fight it tooth and nail and thats why they refuse to even discuss it!
Rick: Got a question for you: Have you ran across any Austrian literature that specifically addresses interest and it's justification?
YES!!!
Time preference explains it.
God, I just realized how hard Man, Economy, and State and Human Action are with respect to interest. It falls out rather nicely in other places in a much more simple way. I found this book : http://library.mises.org//books/Robert%20P%20Murphy/Lessons%20for%20the%20Young%20Economist_Vol_4.pdf
It seems to do a particularly good job of laying it out in a simple straightforward way. Interest is determined by variations in time preference. Chaper 12 of that book states :
Actually the system I described (I'll actually reveal what it is later on) is the very essence of liberty and property rights.
Actually, it seems that by telling someone what kind of contract they can enter into (only one without interest) that the system you describe restricts liberty and property rights (by stipulating what a person may and may not do with his own property).
When we pay interest to a bank who does it serve? The banking Oligarch's, not us.
C'mon, now... When you take a loan, YOU agreed to pay that interest. You didn't have to take the loan. You could have saved up your money and bought, the house for example, debt free. When a bank takes a risk and loans someone capital in a free market, whom are they serving? The person taking the loan that wants to consume now.
In a system where no interest is required (that prevents deflation and inflation also, by the way)
Interest is not the cause of inflation or deflation.Whether you mean inflation as a rise in the general level of prices or by its true meaning, an increase in the monetary supply, the charging of interest is not the cause.
and puts $200,000 to $300,000 dollars back in our pockets due to the erradication of interest on a $200,000 home we purchase.
You know how one keeps all that money? By saving money, consuming later, and not going into debt. Even if interest was the cause of inflation, it would be caused by people that refuse to save and agree to consume now by paying interest over time.
The only one worth following is the one who leads... not the one who pulls; for it is not the direction that condemns the puller, it is the rope that he holds.
Thanks David. I'll look into that straight away.
It's not really stipulating or forcing anyone to enter into a contract to pay at 0% interest really. You can go ahead with another system that does but lets be realistic here. What would your choice be? I know what mine would. It is therefore for all practical purposes inevitable that people would choose the 0% option.
When we take out a loan with a bank we are (I would argue) forced into that contract. The financial institutions are a monopolistic system and no real alternatives are allowed. Saving one's money to purchase a home is totally unrealistic for the average consumer. I think you may be missing the point here though. If a system exists which will provide the funds neccessary for the purchase of the home, interest free, with no adverse side effects then where's the problem?
Interest is the cause of deflation. When you don't account for the outputs of money in circulation, you don't have the right model in which to figure out circulatory deflation or inflation. For example, I noticed the assumption of more money in circulation in relation to goods and services causes inflation. This is true unless you consider how that money came into existance (with every new wealth being created an equal amount of money is introduced into the economy).
But lets talk about the outflows of money out of circulation to see how circulatory deflation occurs. When you charge interest (setting aside the fact that your defrauding individuals of hundreds of thousands of dollars) where does that money go and to what amount? To the banks of course but think of that vast amount when you multiply thousands of dollars by every loan being made in the economy. This is an enormous sum of money being taken out of circulation. Can banks possibly spend this amount in our economy or do they speculate overseas? We also know banks lend a fraction of this back to the government and have the gall to charge them interest in doing so, who by the way pays the interest on the national debt? The American people in the form of taxes of course.
The point here is interest collected not spent back into the economy is money that depletes circulation thus causing circulatory deflation. There is a second source of circulatory deflation also. When you pay off a home, the principal is retired out of circulation, now you have for example a $200,000 home that has no money in circulation representing its value. This causes further circulatory deflation. By the way, price inflation is the topic of another discussion. Any monetary system has inflows and outflows. This is critical in understanding the big picture.
The time preference of money and charging of interest doesn't even enter into the equation in the system I'm advocating.
Rick: When we take out a loan with a bank we are (I would argue) forced into that contract. The financial institutions are a monopolistic system and no real alternatives are allowed. Saving one's money to purchase a home is totally unrealistic for the average consumer. I think you may be missing the point here though. If a system exists which will provide the funds neccessary for the purchase of the home, interest free, with no adverse side effects then where's the problem?
Umm, you are not forced. It is possible, though difficult to rent and save simultaneously. The system you described has been artificially manufactured already, and the adverse side effect is that in this system there's no downward pressure on prices. The risk to the lender is how to get the value out of he home. He can't just take the home back and destroy it. You're missing the time preference issues associated with savings and lending. Savings drives productive investment. Savings redirects goods from direct consumption into delayed consumption (investment in production), without the redirection of goods from consumption to production all of our economy would collapse. They're propping it up right now via the debt bubble, but it's going to contract, and it's going to be painful. Please read the links. Production is delayed consumption turned to risky but potentially profitable action.
Rick: Interest is the cause of deflation. When you don't account for the outputs of money in circulation, you don't have the right model in which to figure out circulatory deflation or inflation. For example, I noticed the assumption of more money in circulation in relation to goods and services causes inflation. This is true unless you consider how that money came into existance (with every new wealth being created an equal amount of money is introduced into the economy).
How much money do you create to correspond with a new screwdriver?
Rick: But lets talk about the outflows of money out of circulation to see how circulatory deflation occurs. When you charge interest (setting aside the fact that your defrauding individuals of hundreds of thousands of dollars) where does that money go and to what amount? To the banks of course but think of that vast amount when you multiply thousands of dollars by every loan being made in the economy. This is an enormous sum of money being taken out of circulation. Can banks possibly spend this amount in our economy or do they speculate overseas? We also know banks lend a fraction of this back to the government and have the gall to charge them interest in doing so, who by the way pays the interest on the national debt? The American people in the form of taxes of course.
You've just described the Ponzi scheme we have, and the cause is fractional reserve banking. What you've described is no-reserve banking. What you're misunderstanding is that the creation of these units results in a lien against some asset. Without some mechanism to allow prices to find the supply/demand equilibrium, which this cannot do, there is no way to do economic calculation. Production falls apart. When this happens all of the liens end up defaulting putting all of the collateral back in the hands of this 0 interest bank you described. So, please explain how this is any different from what we're seeing now?
Rick: The point here is interest collected not spent back into the economy is money that depletes circulation thus causing circulatory deflation.
The point here is interest collected not spent back into the economy is money that depletes circulation thus causing circulatory deflation.
Wrong, interest collected under sound money is the profit for saving (forgoing consumption) and investing (engaging in risky productive speculation). It drives savings, which is the only way to engage in production. One must forgo consumption and invest time and resources to convert resources into consumable goods. What you've described can't even get to the point of having interest rates appear, because we have arbitrary pricing appearing from something other than supply and demand.
Rick: There is a second source of circulatory deflation also. When you pay off a home, the principal is retired out of circulation, now you have for example a $200,000 home that has no money in circulation representing its value. This causes further circulatory deflation. By the way, price inflation is the topic of another discussion. Any monetary system has inflows and outflows. This is critical in understanding the big picture.
There is a second source of circulatory deflation also. When you pay off a home, the principal is retired out of circulation, now you have for example a $200,000 home that has no money in circulation representing its value. This causes further circulatory deflation. By the way, price inflation is the topic of another discussion. Any monetary system has inflows and outflows. This is critical in understanding the big picture.
No you don't have a $200k home. You have a home that has some value, that is actually a relationship to other goods in the market place. It is not and cannot be an arbitrarily generated number. What you don't understand is that these prices don't appear in a vacuum. They are value for value. Not value for random number. Your system doesn't have a way to generate a price!
Rick: The time preference of money and charging of interest doesn't even enter into the equation in the system I'm advocating.
Nor do prices. You haven't accounted for supply and demand, and you haven't provided value to your accounting units. And until you do this, it's not a system that has any resemblance to a real money system. If these arbitrary accounting units some become imbued with value, and are not arbitrarily created out of thin air in some amount to some real asset, then you might have prices appear. If they do, you then need to understand the role of time preference in coming up with that price.
Ask yourself this, if land always produces the same quantity of crops, and the productive income from the property is the source of the price, why does land have prices? Unless the future returns from the land are valued at a discounted rate, you cannot arrive at a price that is not infinite. That discounting of future income is also interest... Future goods are discounted when compared against current goods. Money is no different.
Prices fluctuate in the market because goods fluctuate in value relative to each other. Your system has no value on the left side of the ledger, under a gold system there is value there and it's relatively (not perfectly) stable. But it cannot be counterfeited. The only way your money can be created is from thin air. Who would trust it? What would it's value be?
Interest fluctuates to move capital. When rates rise, it's a signal that there is unmet consumption has risen and production has dropped, and we need more goods produced in order. This motivates savings and slows consumption. As money goes into savings and then into investments, the interest rates drop and consumption begins to rise, as people lose interest in delaying consumption. It's a never-ending cycle that naturally regulates the quantity of a stable money supply competing for goods in the market, and moves that money from savings into investment and then back to consumption. There is no planner, yet everyone gets fed.
Stop trying to come up with the uber plan. You can't fix money. And no matter what the system, someone will try to game it. Competition in money will allow savvy consumers to prefer soundly run institutions, and will punish naive consumers of banks and the crooked men who run bad ones. Trust me, gold and silver win. There's a long, long history of gold winning. It's not a fluke.
Listen to that link I gave you to understand how savings, production and consumption all work together to drive interest rates in the market.
When we take out a loan with a bank we are (I would argue) forced into that contract. The financial institutions are a monopolistic system and no real alternatives are allowed.
Saving one's money to purchase a home is totally unrealistic for the average consumer.
Oh yeah now I remember why I unsubscribed from this thread.
Hey rick, I skimmed through a bit. I can see why a borrower would be interested in a 0% loan, but remind me why anybody would be eager to lend at that rate.
You alternate between taking a haughty lecturer's attitude one moment, before making statements that betray your lack of understanding (created money can't have a time preference? Huh?).
I'll leave you with this quote here, since you said you've read some Rothbard:
It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.
You mean why would they be eager to make a modest profit? .......hmm....... maybe to support their families. Sorry, I couldn't resist. That was a softball ready to be hit out of the park.
I certainly didn't intend to come off as "haughty". My only intention is to communicate what I believe is an honest and simple solution that will put the money you earned back into your pocket to enjoy what your entitled to. After all you earned it already! I would think you would be listening very intently to see if this is a viable solution or not. But if you like to throw your money away then I guess that's your choice.
So with that being said here's a rather revealing quote.
The study of money, above all other fields, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. -- John Kenneth Galbraith
P.U. More revealing than your quote is whom you chose to quote.
remind me why anybody would be eager to lend at that [0%] rate.
You mean why would they be eager to make a modest profit? .......hmm....... maybe to support their families.
There is no profit to be made, modest or otherwise, by making a loan at 0% interest. There is only risk that you won't get your money back.
Sorry, I couldn't resist. That was a wild swing and a miss on a pitch straight down the middle.
Your proposal is a dishonest (or highly ignorant) and complex scheme that will only lead to less trade, lower standards of living, and less overall prosperity.There is no need to put your money back into your pocket to enjoy what you're entitled to. Since you earned it, you can do what you want with it. Want it to stay "in your pocket?" Don't take it out of your pocket! Don't spend it! But you're not entitled to others' money in the form of a loan without their consent. If they stipulate you pay them back with interest, you can: 1) agree to those terms or 2) decline. You're not entitled to have a house right this instant. You may have the privilege to, but only if someone who has saved money (and forgone their own consumption) is willing to give it to you. It just so happens that they're going to expect you to pay them back, with interest. But they are not, not is anyone else in society, forcing you to go into debt. You can save your money if you'd like and then make your purchase, paid in full.
It appears that several people have read what you propose, and have discerned that it is NOT a viable solution. It will have unintended consequences (you obviously don't realize that, though), and will result in, as I said, less trade, lower standards of living, and less overall prosperity. There's just no incentive to make loans, no way to determine prices, and no room for liberty or property rights, as the only way people will engage in your plan is if a government coerced them to. Until you can refute the law of supply and demand, the function and value of prices and profits, or the fact that only production (and not spending) increases wealth, your proposal has LITERALLY no grounding in economics. While you're at it, maybe you can refute Human Action (Mises), as it would seem necessary as well for your proposal to have the slightest chance of working out like you think it will.
It turns out that the truth has evaded you, as the complexity of your idea has blinded you and disguised fallacy as solution.
@Stephen
Right!? A Keynesian! A reformer who looked favorably on public spending (financed through taxation, of course), so much that, perhaps, he was more of an activist than an economist. Here's another quote from him, which of course, if completely backwards:
"Under capitalism, man exploits man. Under communism, it's just the opposite."
In case you were wondering, Rick, under capitalism, man serves man. In fact, the most successful are those that serve the most men to the highest level. Under communism, or socialism, or fascism, or democracy, or any form of collectivism, man exploits man. It's the whole idea: some part of society lives at the expense of the productive members of society. It is exactly like parasitism, where the parasite cares not for the well-being of the host, but merely will look for a new host once the previous one has been completely drained of energy. And no, the current system in America is NOT capitalism. It is a form of collectivism; call it corporatism.
Phi, did you misunderstand the quote you posted? I'm pretty sure it's meant to be a joke - the implication being that if you switch the subject and object of the sentence 'man exploiting man', you end up with 'man exploiting man': the same thing. Of course, I disagree with his assessment of capitalism...
I guess I did. Haha I do admit I was confused, but I chalked it up to a central-planner's odd form of logic and language. Ultimately I decided he must have meant opposite as the opposite verb, implying that the opposite of 'man exploits man' is 'man serves man.' My apologies on that, and thankful for pointing that out, Aristippus.
Yeah I admit that's a pretty good line by Galbraith, but that doesn't change the fact that he was the Paul Krugman of the '60s.
You don’t create any money as the buyer has the necessary funds to purchase it directly.
I agree you need collateral to back up a default on a promissory obligation but here’s the strength of this system
Supply and demand is determined by buyers and sellers. The seller sells to the buyer willing to pay the highest price. The buyer shops around to buy at the lowest price. What does charging interest have to do with this? Interest will slow economic growth by taking away money from people who would have otherwise spent it into the economy, creating job growth and more wealth. Economic calculation is more accurate under this proposed system because no deflation or inflation exists!
The definition of deflation and inflation is the amount of money in circulation in reference to goods and services. Deflation occurs when there’s too little. Inflation occurs when there’s too much. How can you disagree with this? Obviously the $200,000 I used was an example. I don’t know what the price would be.
Nor do prices. You haven't accounted for supply and demand, and you haven't provided value to your accounting units. And until you do this, it's not a system that has any resemblance to a real money system. If these arbitrary accounting units some become imbued with value, and are not arbitrarily created out of thin air in some amount to some real asset, then you might have prices appear. If they do, you then need to understand the role of time preference in coming up with that price. Ask yourself this, if land always produces the same quantity of crops, and the productive income from the property is the source of the price, why does land have prices? Unless the future returns from the land are valued at a discounted rate, you cannot arrive at a price that is not infinite. That discounting of future income is also interest... Future goods are discounted when compared against current goods. Money is no different. Prices fluctuate in the market because goods fluctuate in value relative to each other. Your system has no value on the left side of the ledger, under a gold system there is value there and it's relatively (not perfectly) stable. But it cannot be counterfeited. The only way your money can be created is from thin air. Who would trust it? What would it's value be? Interest fluctuates to move capital. When rates rise, it's a signal that there is unmet consumption has risen and production has dropped, and we need more goods produced in order. This motivates savings and slows consumption. As money goes into savings and then into investments, the interest rates drop and consumption begins to rise, as people lose interest in delaying consumption. It's a never-ending cycle that naturally regulates the quantity of a stable money supply competing for goods in the market, and moves that money from savings into investment and then back to consumption. There is no planner, yet everyone gets fed. Stop trying to come up with the uber plan. You can't fix money. And no matter what the system, someone will try to game it. Competition in money will allow savvy consumers to prefer soundly run institutions, and will punish naive consumers of banks and the crooked men who run bad ones. Trust me, gold and silver win. There's a long, long history of gold winning. It's not a fluke. Listen to that link I gave you to understand how savings, production and consumption all work together to drive interest rates in the market.
I’ve listened to about ½ of the Rothbard discussion.
This is a long post and it’s hard to keep up with you guys.
The first point is that money is never created out of thin air. It’s always backed by a promissory obligation to give up ones labor and production over a period of time.
This system does have value. Are you saying real goods have no value?
Why do you have to have interest to send a signal to increase or decrease production? Simple supply and demand sends this signal in the form of price fluctuations. If products become more expensive then that sends a signal to business to get moving and make profits.
There is no profit to be made, modest or otherwise, by making a loan at 0% interest. There is only risk that you won't get your money back
Have you not understood that there is no risk involved here? How can there be risk when at any given time the asset is worth what is owed on it? The cost to implement this is "fee based". Not some compound interest exponential function nonsense someone pulled out of the air.
Rick: How much money do you create to correspond with a new screwdriver? You don’t create any money as the buyer has the necessary funds to purchase it directly.
Wait, come back you can't gloss this over. I asked what the producer sells it for. If large goods get money created as a claim against them then all goods large or small have money created. I'm asking you how many units of this lien based currency do you create for my screwdriver?
Rick: You've just described the Ponzi scheme we have, and the cause is fractional reserve banking. What you've described is no-reserve banking. What you're misunderstanding is that the creation of these units results in a lien against some asset. Without some mechanism to allow prices to find the supply/demand equilibrium, which this cannot do, there is no way to do economic calculation. Production falls apart. When this happens all of the liens end up defaulting putting all of the collateral back in the hands of this 0 interest bank you described. So, please explain how this is any different from what we're seeing now? I agree you need collateral to back up a default on a promissory obligation but here’s the strength of this system
Wait, you can't move on so quickly. A default on a promissory obligation? So, what obligation was incurred by creating the promissory note? When a bank issues a promissory not, they also give me something of value, traditionally it was gold. Currently it's a trust-backed fiat paper money. I can exchange that money for goods. But how large is the obligation? No one wants to own 1/200,000th of my house. It doesn't have any use.
Rick: A promissory note is issued by the lender. It is his and not the property of any institution.
Then where is the obligation? Under normal loans the bank bears the risk of default. In this case? Each person I spend a unit of this currency has a portion of an obligation, instead of value. I think your point is that at least something would back the money even if it was just a portion of an obligation, which the current system doesn't seem to cover. But you've already dodged the price setting function.
Rick: Supply and demand is determined by buyers and sellers. The seller sells to the buyer willing to pay the highest price. The buyer shops around to buy at the lowest price. What does charging interest have to do with this? Interest will slow economic growth by taking away money from people who would have otherwise spent it into the economy, creating job growth and more wealth. Economic calculation is more accurate under this proposed system because no deflation or inflation exists!
Ok, you miss the role interest has in driving savings and investment. That time preference means future goods are not as valuable now as they will be. The exchange of something now for the same thing in the future is an exchange of two different goods. Interest merely tells you what current supply and demand in the market set the price of that difference in value. If we were to generate a price table the bottom line is that you are comparing dollars today with dollars tomorrow. If the interest rate is 8%, then 1$ now is = $1.08 next year on this date. That's a price difference between two DIFFERENT goods.
Rick: No you don't have a $200k home. You have a home that has some value, that is actually a relationship to other goods in the market place. It is not and cannot be an arbitrarily generated number. What you don't understand is that these prices don't appear in a vacuum. They are value for value. Not value for random number. Your system doesn't have a way to generate a price! The definition of deflation and inflation is the amount of money in circulation in reference to goods and services. Deflation occurs when there’s too little. Inflation occurs when there’s too much. How can you disagree with this? Obviously the $200,000 I used was an example. I don’t know what the price would be.
I disagree wtih this. How? Because it's inaccurate. Inflation and deflation are a money supply issue. Not too much or too little, but less or more. "Too much" is the adjective used by someone who doesn't like rising prices and vice versa. What's ignored is that the changes in prices with a stable money supply are caused by changes in supply and demand of the underlying goods. We all want more money to do more stuff. And unfortunately with governments printing fiat money, that's what happens. Some people vote themselves more money.
Money will always be competing for goods (actively engaged in setting prices by exchanging hands for goods) or sitting on the sidelines waiting for prices which motivate the holder of money to trade it for current goods and services instead of holding it in order to purchase future goods and services.
Rick: Nor do prices. You haven't accounted for supply and demand, and you haven't provided value to your accounting units. And until you do this, it's not a system that has any resemblance to a real money system. If these arbitrary accounting units some become imbued with value, and are not arbitrarily created out of thin air in some amount to some real asset, then you might have prices appear. If they do, you then need to understand the role of time preference in coming up with that price. Ask yourself this, if land always produces the same quantity of crops, and the productive income from the property is the source of the price, why does land have prices? Unless the future returns from the land are valued at a discounted rate, you cannot arrive at a price that is not infinite. That discounting of future income is also interest... Future goods are discounted when compared against current goods. Money is no different. Prices fluctuate in the market because goods fluctuate in value relative to each other. Your system has no value on the left side of the ledger, under a gold system there is value there and it's relatively (not perfectly) stable. But it cannot be counterfeited. The only way your money can be created is from thin air. Who would trust it? What would it's value be? Interest fluctuates to move capital. When rates rise, it's a signal that there is unmet consumption has risen and production has dropped, and we need more goods produced in order. This motivates savings and slows consumption. As money goes into savings and then into investments, the interest rates drop and consumption begins to rise, as people lose interest in delaying consumption. It's a never-ending cycle that naturally regulates the quantity of a stable money supply competing for goods in the market, and moves that money from savings into investment and then back to consumption. There is no planner, yet everyone gets fed. Stop trying to come up with the uber plan. You can't fix money. And no matter what the system, someone will try to game it. Competition in money will allow savvy consumers to prefer soundly run institutions, and will punish naive consumers of banks and the crooked men who run bad ones. Trust me, gold and silver win. There's a long, long history of gold winning. It's not a fluke. Listen to that link I gave you to understand how savings, production and consumption all work together to drive interest rates in the market. I’ve listened to about ½ of the Rothbard discussion. This is a long post and it’s hard to keep up with you guys. The first point is that money is never created out of thin air. It’s always backed by a promissory obligation to give up ones labor and production over a period of time. This system does have value. Are you saying real goods have no value?
No, I'm saying that prices are ratios of values not values. In your system there is nothing on the other side of the ratio, and in order to do exchage you end up establishing a ratio.
So how many claims to a screwdriver get exchanged for a claim on the house above? Meaning what's the unit of account?
Rick: Why do you have to have interest to send a signal to increase or decrease production? Simple supply and demand sends this signal in the form of price fluctuations. If products become more expensive then that sends a signal to business to get moving and make profits.
How do prices get established in your system such that products can become "more expensive". More expensive means a rise in prices. How do those prices rise in your system of liens against property?
Interest explains the difference in the subjective value between present goods (including labor and land) and future goods (including labor and land) between two different actors. When I build a house, I've stored up money as a substitute for generating all of the goods necessary to build the house and instead storing them.
Go back and look at Crusoe level production. Eating a roasted chicken involves production to get to that point. All of these efforts go into creating the consumer good.
1. Find chicken
2. Kill chicken
3. Strip feathers
4. Remove the guts
5. Build a fire
6. Cook the chicken
Each takes time and effort to produce the consumer good, "chicken ready to be eaten".
Each step along the way is an investment of time and resources. It's production. Each step delays current consumption in order to produce a good I prefer to that current consumption.
1. Could've picked berries off a bush or larva off the ground and put them in my mouth.
2. Pick and eat berries while watching the chicken run around.
3. Eat raw chicken and feathers and guts
4. Eat raw chicken and guts
5. Eat raw chicken
6. Eat raw chicken while getting warm by the fire...
Each step is investment in a productive effort. At each step, I prefer the future good (cooked chicken) to the present consumption option.
It is this preference of a future good to the current good, which explains production. You cannot wipe this out. Austrian Economics (praxeology) makes the logical claim that all other things being equal, a current good has a higher value than the same good at some future time. The rate of interest tells us what that difference in value is. If you don't include this, interest becomes confusing. But as soon as you do include this difference in time preference things make sense.
1. Finite prices for land
2. Asset prices
3. Rent
4. Wages
@Rick
I think you're on the verge of a major breakthrough. Keep at it.
As you get more clear on the logical implications of human action it'll become more and more clear.
In paticular, no one wants a claim against your property unless it's at a discounted rate for what they believe is the market value of your property. converting that claim into other useful assets has costs, I'd rather have cash.
Where did the money that corresponds to the screwdriver come from unless it was not created by the central planning organization you wish to replace banks?
Here are a few of the weaknesses of your system:
1. The promissory note is backed by nothing. It's a piece of paper that can only have value because other goods have value.
2. Your "common monetary foundation" is nothing more than a central planning bank that determines who is worthy to buy what, fixes prices, manipulate the supply of money to the benefit of only a select few. It's been tried and it doesn't work.
3. There is no longer a market to determine what market value is under your system. In fact, your system would destroy the ability of consumers to know what market value could possibly be. Only the central planning common monetary bank would be able to set and would have to enforce prices for its policies to be at all effective.
spent it into the economy, creating job growth and more wealth.
Again with the Keynesianism! Spending does not create jobs!! Spending does not create wealth!! Quit saying it does, because if it did, we shouldn't have the kind of unemployment we do in this country. Our government spends trillions every year, and no matter what you think, it doesn't create wealth; it redistributes it, and any jobs created are necessarily less efficient (thus less productive thus add less wealth) than jobs created by the free market.
Economic prediction is difficult because of human action, which luckily, your system would require a totalitarian state to enforce so human action could be limied. Of course, then economic theory goes out the window, and as history shows, these kinds of state do very poorly economically (see USSR).
Your system is creating money out of thin air, no matter how you try to rephrase it. Unless you let the seller (of the loan) determine his price (which may and mst likely will include an interest rate), and let buyers of labor determine the value of that labor, you have no price structure; you have an arbitrary set of prices that change at the whim of the central planners at the "common monetary foundation."
Your system is only valuable to a tyrant. It requires to force individuals to accept its prices and the values it assign to goods and services. It also will, like all retrictions of liberty, cause individuals to find ways to get around the restrictions, which then requires a chain-reaction of ever-increasingrestrictions on libertie of all kinds. Again, history demonstrates this to be so.
Am I saying real goods don't have value? No, I'm saying real goods only have value insofar as individuals are each free to voluntarily trade them all on any terms both parties consent to. Your system doesn't allow this. Thus, it would destoroy the method and means upon which values are determined, which are unique to each individual. You might be confusing value with prices, but no matter, you don't seem to understand prices either. Just because you think a house is worth $100,000 doesn't stop me from valuing it at $10,000 nor does it stop another man from valuing it at $1,000,000. But your system can't have that. It relies on all men agreeing with the central planners' decree that "IT SHALL BE WORTH $100,000!"
As to your question on interest relaying signals to entrepreneurs on whether to increase or decrease production, as well as supply and demand relating to this, you can start a new thread of that for all I care. You have routinely ignored when others have tried to explain these to you (and why your economic theories are fallacy). There are plenty of threads that have addressed these questions, plenty of free resources on mises.org, or you could simply read what myself and others have posted.
You could start here, and it's free, so there's no excuse unless you really don't want to know the answers to your questions and understand our criticisms of your proposal.
Henry Hazlitt's Economics In One Lesson.
http://mises.org/books/economics_in_one_lesson_hazlitt.pdf
While you're at it, Henry Hazlitt's Thinking as a Science.
http://mises.org/document/3456/Thinking-as-a-Science
@phi
Hey, I really think he's close to getting it, and I think he really is interested in these concepts. I want to give him the benefit of the doubt.
If I had come up with some neat idea which I thought would fix things, and people told me, "No! You're missing x", I'd probably take some time to evaluate x to determine if my ideas still fit. I'd argue and try to get my ideas to fit, and test what people said and see if I could get things to fit. If I realized I was pushing a square peg into a round hole I'd stop.
For example, I've been vocal around here espousing an a priori definition of ownership, property, and conflict as a basis for a Praxeological science of Politics. It'll be very hard to push me off of it.
But I don't hear him rejecting the criticisms, I hear him engaging with ideas he doesn't yet have his head around, like interest, value, prices, money. He has preconceived notions about what these are, and we're introducing the deep praxeological foundations from which these categories emerge. When he sees that recasting them in other ways leads to conclusions that can't be true in reality, he'll get it.
For example, humans only exchange value for value. There is no other type of exchange. Even a coerced exchange is value for value. If you threaten to punch me unless I give you my lunch money, I get an unbroken nose and you get my money. As you understand these things, it all plays out.
He's bright, he'll get it. My point is, that we're right, we've been down this road ourselves, his arguments and discussions aren't going to poke holes in Austrian Economics, and if he DOES somehow manage to, then he's going to make us all the better for it. At a minimum those all of us should get better at understanding and explaining Austrian Economics, and more fundamentally the praxeology, the science of human action from which all of economics derives.
But I'd put my money on his getting it (not much money, I'm risk averse). And once he does, this same passion for discussion and argumentation, and theorizing about solutions, is the kind of thing we need in the Austrian camp. We need people like this in our society, and we need them on our side.
The monetary system is not mine and didn't claim it was as well. It is called Mathematically Perfected Economy™. The author is Mike Montagne. After the butcher job unfairly done on it in this forum, I would expect people to be more confused about it had I never mentioned it at all. It's really unfortunate people can't have civil discussions on matters that are the most important to us. I was going to propose that we get 3 people each from the Austrian's and MPE crowd and exchange ideas in a debate format with a few stipulations that no personal insults be allowed (issues only). But I'm afraid that time is past.
Thanks for engaging in a lively discussion guys. I can see where this is heading so I won't go away mad, I'll just go away. Take care!
the truth has evaded you, as the complexity of your idea has blinded you and disguised fallacy as solution. Want it to stay "in your pocket?" Don't take it out of your pocket! the only way people will engage in your plan is if a government coerced them to. Stop trying to come up with the uber plan. You can't fix money. Your proposal is a dishonest (or highly ignorant) and complex scheme your system would require a totalitarian state Your system is only valuable to a tyrant. You might be confusing value with prices, but no matter, you don't seem to understand prices either. But your system....... relies on all men agreeing with the central planners' decree that "IT SHALL BE WORTH $100,000!" You have routinely ignored when others have tried to explain these to you (and why your economic theories are fallacy). your proposal has LITERALLY no grounding in economics.
the truth has evaded you, as the complexity of your idea has blinded you and disguised fallacy as solution.
Want it to stay "in your pocket?" Don't take it out of your pocket!
the only way people will engage in your plan is if a government coerced them to.
Stop trying to come up with the uber plan. You can't fix money.
Your proposal is a dishonest (or highly ignorant) and complex scheme
your system would require a totalitarian state
Your system is only valuable to a tyrant.
You might be confusing value with prices, but no matter, you don't seem to understand prices either.
But your system....... relies on all men agreeing with the central planners' decree that "IT SHALL BE WORTH $100,000!"
You have routinely ignored when others have tried to explain these to you (and why your economic theories are fallacy).
your proposal has LITERALLY no grounding in economics.
@Rick...
That's too bad. Evidently this has been discussed before here.
http://mises.org/Community/forums/t/2660.aspx
Actually, I've read some of the site for this guy now.
I'm saddened that there isn't some better representation here from Austrian Economists.
There are some huge fundamental flaws in his criticism of Austrian Economics, and some underlying assumptions for his system that are demonstrably false.
Rick, my hope is that you take this seriously and ignore the invectives which obviously make you feel you must be right if people get mad.
Let me give some examples, and these are really simple.
From the page : http://www.perfecteconomy.com/pg-what-is-mathematically-perfected-economy.html
In terms of freedom or ability to produce and trade, these anticipated conditions are equivalent to mathematically perfected economy™:
i. We are free to endeavor at non-injurious industry to the full extent of our capacities;
ii. We are free to trade;
iii. We are free to agree upon reasonable value;
iv. And because no one takes from the trade anything but the equal of what they contribute to it, each party receives the full, self-determined equivalent of their contribution to the overall pool of wealth.
Sounds wonderful right? Except there are some insidious fundamental flaws. In particular ii, iii, and iv.
Trade (or exchange) is predicated on a discontintuity of value! Each party to the exchange values what the other is offering more than they value what they have. They have DISAGREED on value. What they agree to under money is a price. But the agreement is in the exact quantity of money that the purchaser is willing to give up for the good they are getting. The purchaser values that quantity of money less than the quantity of money they are receiving. That's different, the only two things that have the same value is two items that are in fact equivalent substitutes for each other. Imagine you have a 5$ bill and I have a 5$ bill. We agree they have the same value. Under what circumstances would we exchange them? We wouldn't. Under what conditions would I give you a 5$ bill now, and accept in return a 5$ bill later? If I value 5$ later MORE than I value the 5$ now. This MUST be true, it's a priori.
That covers 2 and 3. Now let's look at 4. "no one takes from the trade anything but the equal of what they contribute to it." This can't be true, as I've shown you must benefit from the trade IN YOUR OWN ESTIMATION, or you would not engage in the trade. This subjectively perceived benefit is the source of all value. It drives exchange. Exchange to be efficient, results in indirect exchange. For indirect exchange to be efficient, the market will fix on some number of goods that will operate as mediums of exchange. And the market efficiently produces prices in terms of QUANTITIES (this will depend on the market unit, for metals its weight) of the medium of exchange.
But all of this is driven by the DIFFERENCE in value. If things were valued equally there would be no exchanges. So, what he actually wants is "Fair" exchange of value. There is no such thing. In fact, if you look back at 4, I hope you see there's a major flaw in this part : "each party receives the full, self-determined equivalent of their contribution"
Nevermind that what's actually being described is a production effort not a trade, and that confusion is a big deal. But lets say 3 men (George, Herman, and Archibald) engage in a productive effort to produce the aforementioned screwdriver. George puts iron and tools to work the iron into the effort. Herman brings the plastic for the handle and tools for working the plastic into a shape. Archibald takes the iron, plastic and the tools and produces the finished product from the inputs.
How much does George get? How much does Herman get? and how much does Archibald get?
"each party receives the full, self-determined equivalent of their contribution."
What if George thinks his contribution was worth 4$, and Herman says my contribution was worth $3.50, and Archibald, because he did all the hard work thinks, my contribution was worth 8$.
Well the total contribution by this method ends up being $15.50. You might say they should sell it for 15.50 and everyone's happy. Awesome, but wait... Anikan, Luke, and Obi wan, are offering their screwdrivers for 12$. No one buys the ones George, Herman, and Archibald made.
Now what? The system you describe would have them given a promissory note for the $15.50. They owe that same 15.50 back at some future time. Good everyone's happy. It's 12 months later, and they haven't paid back the 15.50. What does the issuing authority do? They come claim the screwdriver. Well hello, awesome. No, the screwdriver now either sits in a warehouse of crap no one wants, because it's overvalued. OR the issuing authority sells the screwdriver for less.
Explain how I want to be an issuing authority in this scenario?
Rick, as ornery as people might be here about some of this stuff that seems so obvious to those of us who've been thinking about such things for a long time, I can understand that it might take quite a bit to get your head around some of the deep implications of subjective value and human action.
But that doesn't make us wrong, and trust me Mike Montagne is very, very wrong on this. I'm a computer programmer. I'm a self-taught philosopher and economist (or not you can decide for yourself).
One thing he's forgetting is that with any logical, mathematical, or scientific theory or system the question isn't simply whether or not it's self-consistent. The question also arises whether or not it applies. I don't know if it's self-consistent. But I guarantee you it doesn't apply.
The Austrian criticism of the mathematical models isn't that it isn't good math. It's that it ignores the nature of human action. In particular it can't account for the ways in which people value goods and services in the economy. The criticism is that the models don't apply, or more precisely apply so narrowly as to be useless, because they assume things that aren't true, or conditions which rarely occur.
My non-economic observation would be that his site is setup like a standard "buy my product site".
Last point. He uses his mathematical model to demonstrate that the debt will balloon to total global collapse. He suggests that interest is the cause.
But if we look back at my example, the issue that he's trying to solve is built into production. It's the risk inherent in producing any good. "Will I make back my investment of time and resources?" That's the "flaw" that needs to be purged from the system. But it's inherent in every productive effort. We can't remove the fact that you might not engage in a productive effort! It's not a fault issue, it's a fact of the nature of human action. Losses occur when production outputs don't result in sufficient value to cover the costs.
So, looking back at the crusoe environment losses and profits were already there. Let's say that crusoe wants coconuts as a consumer good. He picks them up off the ground, and then exhausts those (without walking a long distance) and now he has to figure out one of two things. 1) Get the ones in the tree, or 2) walk farther.
In trying alternative ways of getting coconuts from the tree, he might try things that aren't worth the time and energy put in. That's a loss. Taking 4 hours to create a long stick (lashing multiple sticks together) that nets me 2 coconuts from the tree, is not as cost efficient as walking 1 hour and getting 10 coconuts from the ground, and walking back for one hour.
On the other hand manufacturing some type of lashing with which to shimmy up the tree, that takes 30 minutes to make and then getting 20 coconuts from 3 local trees in the next hour, seems like that's a profitable production effort.
Losses and profits are inherent in human action. In an economy with money we don't have to do all of the raw calculations of time and energy and resources that go into producing a consumer good. Instead we get prices established in the market. Those prices are used (accounting) to determine whether or not a production effort might be (future) or was (past) productive.
Losses and profits will occur, they are inherent, we will see them in terms of money.
What Montagne is conflating is interest and profit/loss in the system. What's causing the global debt crisis he's concerned about is the lack of losses being expunged by the system. Instead of defaulting on debt, which is how the system clears out bad investments, the current system, keeps pushing new money into the system, to try to prevent cyclical localized contractions.
Interest is the difference in the value of a good now when compared to the same good later. They are in fact different goods. I can construct scenarios where a good now is NOT worth as much as a good later. IF the quantity of money stays the same, a specific quantity of money is worth more now than it is later. To everyone, all the time. Interest rates are the discounted rate of return.
Montagne did not explain this issue. He equates money at all times in all places as the same value. Because he misunderstands value. It's subjective. He misunderstands production. It's delayed consumption. It has profit and loss built into it. He misunderstands the role of time in production. Deferred consumption only occurs when something in the future is valued more than an alternative action now.
Anyone can show that compounding interest must run to infinity. What he doesn't account for is that defaulting on a bad loan, or losing your investment in a bad business is the healthy recovery mechanism. The problem in the system today is that unproductive investments aren't being allowed to default so the market can normalize. We will get a global crash, which simply means a massive reallocation of all of the bad resource investments. The "book values" of all of these financial assets are bogus, and need to collapse as they would have long ago in a market economy. Yes, interest on these bad debts is a burden on the economy, yes it will cause a massive economic collapse. NO, it's not the fault of interest. Part of the reason is the interference with the natural market correction, by preventing the defaults. The other part is arbitrary expansion of the money supply (which happens in your system also) which makes it look like there's more demand for consumer goods than there is. The expansion of easy credit, props that view up, by allowing consumers to finance consumption through debt.
Defaulting on these debt obligations is the solution. It punishes the user of the credit, it punishes the supplier of the credit. The moral hazard is in interfering with this correction, by putting the burden on others who didn't engage in the unwise debt/credit creation.
Pleease...This would make me feel bad if I hadn't been following this forum from the start.
This discussion didn't begin with personal insults (nor, really did it ever end up going there). It started with what seemed like genuine questions about the nature of inflation and its relationship to the money supply. I am not super-active on this forum but I felt compelled to take the time to answer his questions, because they seemed to be in good faith. However, it soon became clear that he wasn't so much interested in learning as he was in pushing his own idea, which is no crime in itself (maybe he's right and I'm wrong), but becomes tiresome and repetitive when he fails to address the criticisms of his idea coming from several different people. I understand that he is coming from a different perspective, and that terms like "interest" "inflation" and even "money" can mean different things to different people. But to me it is somewhat arrogant to go to a website devoted to Austrian Economics and try to win people over without first learning the basics of Austrian Economics.
So if he feels that people were too mean to him and is ready to indict AE as a result, first of all, "boo-hoo," and secondly, I suggest that he take a look at the thread from the beginning and see that several people were engaged, interested, and not at all insulting, right from the start. The invective (which is a little too strong a word, IMO) only began later, when after long posts regarding terms like inflation, deflation, money, interest, time preference, he still misused them and hadn't modified his own position at all or even acknowledged their definitions in light of his own view. This made it obvious, again, that he was here to lecture, not to learn; unfortunately he's totally out of his depth in the subject he's trying to lecture everybody on.
@Stephen,
I gotta be honest, I don't personally get bothered by those types of arguments. But I'm not impressed by them, I find them boorish, in both directions. But I've seen a lot of younger, less robust personalities take their ball and go home. I have a way I tend to do "outreach" which is what I view this as.
Now, when I read the other post here about Montagne's Perfect mathematical ... whatever it's called, I saw that the discussion rapidly degenerated in the same way. I didn't find any clear refutation of Montagne's arguments. When I go looking for analysis of anyone's "newfangled super-duper solve every problem theory", I appreciate it when I find clear, concise, logical refutation that helps me understand where the author went wrong. I was personally disappointed that this didn't happen in that thread. More importantly, when the discussion does devolve in that way, an observer can be left with bad impressions of both positions.
Now, I'm not the "guardian" of the image of Austrian Economics, but I personally felt compelled to do the hard low-level thinking that demonstrated clearly where these ideas went wrong. IF Rick's openly and honestly looking, I think it will be clear. If not, then hopefully my posts will stand as clear and honest points of reference when others look for similar answers.
I really, truly believe, as Mises did (see Ultimate Foundation of Economic Science), that Praxeology is the root of Epistemology and Logic, and that all human science social or otherwise must flow from this foundation. An Epistemology that doesn't embrace the teleological nature of human action and thought, can't explain the relationship between knowledge and reality, but when one includes human action it suddenly makes sense.
We can demonstrate the flaw in connecting these artificially constructed theories to social institutions and phenomena (economics and politics) which emerge from human action, BECAUSE they deny the a priori categories of human action. I believe I did just that, and I hope our community is stronger for it, both in image, and in knowledge.
If we're right, we don't need to be rude. We're right!! That's enough. It's the blowhard who looks foolish in the face of intelligent reason. And I can argue passionately, without calling names, or talking down to people.
I will also passionately defend your right to call him an idiot. I may differ in how I view an "idiot." An idiot to me is just someone with bad categories - categories he applies to reality in ways and in places where it doesn't fit. He's not some subhuman category of the human race. He has all of the same tools that you and I do.
I feel just as passionately about defending, supporting and expanding the influence of Austrian Economics. I also have strong opinions about what works towards that goal and what doesn't, and I won't shy away from saying so, either directly, or by demonstrating it with the way I communicate.
David,
I definitely appreciate the need for that type of outreach, as you call it. Again, perhaps the entire discussion was in good faith and he was truly trying to learn. However, my overall impression was that he was not going to change his mind, and even worse, he wasn't going to attempt to modify his "categories", as you say.
As for the name calling, I try to make it a point not to go there. It is counterproductive. Thus, (without going back and checking to make sure), I don't think I called him anything like an idiot. I don't think I called him anything, since I know as well as anybody that ad hominem is simply an admission of defeat.
But for sure, you introduced an added element of civility that brought the tone of the thread up, so that's good.
Edit--
Yeah, I went back and looked. I never called the guy an idiot. The closest thing I said was that he displayed a lack of understanding.
I should have been more careful. I didn't look to see if you did. Perhaps I was projecting my own interpretation of some of his responses :). Oops!
I didn't meant to mischaracterize your responses or anyone elses. I was trying to avoid believing he was actually trolling, and instead I was hopeful that he was honestly seeking dialog to harden and hone his position.
No problem! If that's what he was looking for, then at the very least I know he received recommendations to read Man, Economy, and State, Human Action, and Economics in One Lesson. If he follows that advice his position should be pretty well honed, I would say.