First off, let me address the main reason why there are so many so-called "Austrians" around today: They notice that applied Marxism, Keynesianism, and Monetarism have all failed, and that Keynes and Friedman's logic are severely faulty. But it must be noted, that this does not make the Austrians right by default, and I will explain why. I've done some reading on the ABCT and it seems that the Austrians are more Marxian than they think they are. I was astonished to see that they don't believe in the complete neutrality of money. Mises states that those who see the inflation first will see their purchasing power rise, and even unprofitable firms can survive with perpetual inflation. What strikes me, though, is that they don't build upon this logic, more specifically, that they don't investigate the alternative scenario.
You Austrians are well aware of the fact that in free markets, that is, "real capitalism," there is a natural tendency for falling prices; that is, as production increases the purchasing power or "value" of the money increases as well. In fact, many Austrians include the latter part of the 19th century as a perfect example of this, and surely it is. But if we apply Mises' logic, we see that perpetual falling prices must necessarily mean falling profits for the capitalists. Let's take one scenario:
T1 capitalist burrows money, pays his expenses, and produces. He gets his revenues, pays off some of his debt, his workers, and buys the additional commodities he needs for further production. T2 he has his capital, his workers, and he produces more products, as do his competitors. This lowers their market exchange rate, but no worries (thinks the capitalist), his costs will fall as well. (technology accelerates this process)
Well the capitalist would be right if the bank lowered their interest rate and if the laborers, for some reason, decide to take a cut in their salaries. But why would the laborers not take the real increase in wages? Why would the Austrians assume that workers would accept a fall in salaries? Furthermore, why would they assume that banks would lower their interest rates? As far as I understand it, Austrians believe that the interest rates represent time preferences, that is, current goods vs future goods. If this time preference remains the same, why should there be a fall in the interest rate?
Inflation may indeed increase, arbitrarily, the profits earned by producers; some become dependent upon perpetual inflation. But why wouldn't perpetual deflation destroy the capitalist's profits? Austrians seem to love deflation, but can never answer this question. If time preferences remain the same, deflation must eventually destroy their profits; and the capitalists, whose laborers refuse to take pay cuts, must begin massive layoffs in order to remain in business. Why was Marx wrong again?
Anyone who brings up the failure of communism/socialism/fascism will be wasting their own time. I know Marxism has failed; but that does not make you right. I'm saying that capitalism must destroy its self, as well as all other potential forms of economics. It's human nature to destroy ourselves.
MarxCapital:But why would the laborers not take the real increase in wages? Why would the Austrians assume that workers would accept a fall in salaries? Furthermore, why would they assume that banks would lower their interest rates?
Because of competition? If some workers are demanding an increase in real wages (via not accepting nominal wage cuts) above what employers want to pay them, then presumably other workers will take their place. For the same reason that workers today can't just demand a higher share of a company's profits.
It's true that there is a psychological resistance to nominal wage cuts, but that's at least partially because of persistent inflation.
I admit to not knowing how all adjustments are made in a deflationary economy, it is an interesting question. But I don't see how labor markets will necessarily fail in this way.
As for interest rates, there is a component of expected inflation in the nominal rate. No Austrian denies that (or should not, at least)
No. The nominal salaries of the workers would not necessarily decrease. If the nominal salaries of the workers would necessarily decrease, then nominal salaries would necessarily increase in an other facet of the economy. If that were the case, then workers would try to work for the least competitive company because the most competitive companies would continuously increase their efficiency and then cut your salary. That is ridiculous!
Why must nominal salaries decrease?
If I wrote it more than a few weeks ago, I probably hate it by now.
1) Ask the computer industry, where their prices fall faster than the rate of inflation, and where profits continue to be made.
2) What does this have to do ABCT?
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
MarxCapital:What strikes me, though, is that they don't build upon this logic, more specifically, that they don't investigate the alternative scenario.
They do.... you have a lot of reading to get to if you want to understand everything, I can't even give you every answer out there...
MarxCapital:Mises states that those who see the inflation first will see their purchasing power rise, and even unprofitable firms can survive with perpetual inflation.
Now for this, you realize that inflation is bad, because it can make unprofitable companies remain afloat and it destroys wealth
MarxCapital:Well the capitalist would be right if the bank lowered their interest rate and if the laborers, for some reason, decide to take a cut in their salaries. But why would the laborers not take the real increase in wages? Why would the Austrians assume that workers would accept a fall in salaries?
Well, in a real just world, if the business owner cannot pay employees due to falling prices and increased purchase power, he can fire them, and replace them with more labor, under the agreement to work for less, which should not be a problem, as the purchase power of the wage is increased, the B/O has the power to decide who works for him, and he can give the workers the choice, downgrade your pay or be fired, this example also ignores that better employees often (if we are discussing capitalism) receive a higher wage than their lesser counterparts, egalitarian systems like to sweep this under the table and forget it. Workers who do not accept a decrease in wages due ot increased purchase power are going to be looking for another job...
MarxCapital:Furthermore, why would they assume that banks would lower their interest rates? As far as I understand it, Austrians believe that the interest rates represent time preferences, that is, current goods vs future goods. If this time preference remains the same, why should there be a fall in the interest rate?
An increase in purchase power does not relate exactly to a decrease in time preference, except that when individuals have more liquidity, they save more or consume more, in saving they directly effect interest rates, if they consume more they are trading more capital to businesses, this will inevitably decrease the demand on bank investment, decreasing the interest rate. Interest rates are not a one factor phenomenon, this is part of the reason Keynesian Economics fails to properly predict or plan economy.
MarxCapital:Inflation may indeed increase, arbitrarily, the profits earned by producers; some become dependent upon perpetual inflation. But why wouldn't perpetual deflation destroy the capitalist's profits? Austrians seem to love deflation, but can never answer this question. If time preferences remain the same, deflation must eventually destroy their profits; and the capitalists, whose laborers refuse to take pay cuts, must begin massive layoffs in order to remain in business. Why was Marx wrong again?
Deflation increases the purchase power, this is why it does not destroy profits. If you have $100 and milk is $5 a gal. at one time, and next time you check it is $4 a gal. your $100 is worth more product (5 more gallons of Milk), this is deflation at work. If you have the same money and reverse the order of the price change your $100 is worth less product, this is inflation at work, do you see how inflation is bad and deflation is good?
Time preference is not an issue with deflation, how could deflation destroy profits if Time Preference remains the same, if A makes $100 a week and saves half and deflation happens, he makes $80 and he saves half, his time preference has not changed, now what you are not considering is the general decrease in the price of the factors of prodution whic his why profit destruction does not happen.
The "capitalists" you realize are the labor, through their savings, the business owner is not the only capitalist...
Why is Marx wrong about what specifically?
MarxCapital:It's human nature to destroy ourselves.
If this were the case young lady, you would not be here, nor would anyone else, we would have destroyed ourselves long ago.
It sounds like the ocean, smells like fresh mountain air, and tastes like the union of peanut butter and chocolate. ~Liberty Student
Much of your argument relies on a false claim that "time preferences remain the same".
for example:
MarxCapital: Well the capitalist would be right if the bank lowered their interest rate and if the laborers, for some reason, decide to take a cut in their salaries. But why would the laborers not take the real increase in wages? Why would the Austrians assume that workers would accept a fall in salaries? Furthermore, why would they assume that banks would lower their interest rates? As far as I understand it, Austrians believe that the interest rates represent time preferences, that is, current goods vs future goods. If this time preference remains the same, why should there be a fall in the interest rate?
It doesn't remain the same. The increase in productivity entails a lowering of time preference. Savings must be increased to allow for more future consumption. The increase in productivity is a result of capital accumulation. Capital accumulation IS savings accumulation. Let me put it this way so it becomes more intuitive. As people get wealthier, there is usually a tendency to save more, thus, enhancing further growth. If time preference remains the same, there is no growth.
There is no “automatic” mechanism that makes the economy grow. Growth requires new capital and new capital requires new savings. If you really want to understand more about how this works, you’re just going to have to dump Marx.
Now, think over your remarks and see how many of your concerns remain.
Harry Felker: An increase in purchase power does not relate exactly to a decrease in time preference,
An increase in purchase power does not relate exactly to a decrease in time preference,
Harry, you want to think about this one. What chapter did you get to in MES? A stationary economy is one where the ratio between savings and consumption is fixed. The current savings are just enough to maintain the current capital. There must be NET savings (new savings) in order to increase Capital and lengthen the structure of production.
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Labor like any other supplier will have to adjust their prices, wages, to the demand from consumers, employers. Keep in mind that as the value of the currency rises the amount of stuff the currency can buy will rise as well. This makes all consumers better off. It is government and fractional reserve banking employees that hate the idea of sound money as they are the beneficiaries of inflation.
The effects of inflation from the central banks and fractional reserve banks are anything but arbitrary. These effects are designed to help the partners in crime(Theft) of the central bank, those being the partner banks and the central government. It is the long term hidden effects of inflation that are negative that seem arbitrary, I prefer the term predetermined.
It is the ABCT that provides the description of the hidden effects of inflation and the prediction that at some future point there will be a bust resulting from the false signals inflation gives to entrepreneurs.
Many folks dislike the ABCT for several reasons: 1. It disagrees with the Keynesian and Chicago theories that a central bank can manage the value of the currency through inflation and grow an economy as fast as one based upon sound money. 2. It postulates that central and even decentralized banks can not create currency without long term negative and unpredictable effects. 3. It does not provide the timing of the busts. These are guesses. This is not a product of the ABCT as it is a product of the complexity of the economy.
As for layoffs, these are not the product of deflation. This is a lie perpetuated by the Keynesians in government to keep their system of theft running. These layoffs are the result of changes in the preferences of the consumers of labor , employers. The employers are reacting to the failures of these inflation based business activities. The idle labor must like any other supplier change its prices or its products to sell their products to the consumers. Unfortunately, people take time to make these changes and that is where the pain comes in.
DD5:What chapter did you get to in MES?
Not that far, I am dragging because of other factors... After next week I will be in it in earnest, back from my trip, and all that...
DD5:There must be NET savings (new savings) in order to increase Capital and lengthen the structure of production.
I understand this, I was trying to reason within her confines of no TP change....
I know it is impossible, but I tried...
Seeing as the preceding misrepresentation of the ABCT (there are so many mistakes in here, as were pointed out) has pretty much been thrashed to pieces, I will just respond "couldn't care less what you think" to this bit. You have a cynical viewpoint, and one which I see asserted a lot without much reason...
Freedom of markets is positively correlated with the degree of evolution in any society...
I. Ryan: No. The nominal salaries of the workers would not necessarily decrease. If the nominal salaries of the workers would necessarily decrease, then nominal salaries would necessarily increase in an other facet of the economy. If that were the case, then workers would try to work for the least competitive company because the most competitive companies would continuously increase their efficiency and then cut your salary. That is ridiculous! Why must nominal salaries decrease?
But it would be equalized throughout the entire labor market. It wouldn't be one industry lowering nominal wages, or just a few of them; even the ones not increasing their production could lower nominal wages through market competition. And during periods of sustained growth, that is, increased production runs, many many industries would increase production.
DD5: It doesn't remain the same. The increase in productivity entails a lowering of time preference.
It doesn't remain the same. The increase in productivity entails a lowering of time preference.
But why do time preferences necessarily have to fall? Why couldn't they remain the same? Would not the economy still grow? If production increases, continuously, so too must the purchasing power of money; but why should this not increase time preferences? If I can buy a lot of stuff now, more so than I once could, wouldn't I? It seems like your saying that growth must necessarily mean a fall in time preferences, which seems to mean continuous falls in the rate of interest. I think I should investigate capital theory a little bit more; but I must say, this isn't making a lot of sense.
People get wealthier, so they save, okay. But ABCT says that people also save during recessions, when there is a loss of wealth, or when times are uncertain. When wouldn't the people save?
MarxCapital:But it would be equalized throughout the entire labor market. It wouldn't be one industry lowering nominal wages, or just a few of them; even the ones not increasing their production could lower nominal wages through market competition. And during periods of sustained growth, that is, increased production runs, many many industries would increase production.
If nominal wage decreases are "equalized through the entire labor market", then what happened to all the money? Did it disappear?
Jon Irenicus:Seeing as the preceding misrepresentation of the ABCT (there are so many mistakes in here, as were pointed out) has pretty much been thrashed to pieces, I will just respond "couldn't care less what you think" to this bit. You have a cynical viewpoint, and one which I see asserted a lot without much reason...
I didn't really mention the ABCT. I just presented a scenario which ABCT seemingly ignores. If you could just tell my why I'm wrong, it would be greatly appreciated.
I. Ryan:If nominal wage decreases are "equalized through the entire labor market", then what happened to all the money? Did it disappear?
The same quantity of money would have to disperse throughout an economy which has grown, that is, to all of the market actors. The economy has grown, there are more workers/producers/bankers/goods/services.
MarxCapital: Jon Irenicus:Seeing as the preceding misrepresentation of the ABCT (there are so many mistakes in here, as were pointed out) has pretty much been thrashed to pieces, I will just respond "couldn't care less what you think" to this bit. You have a cynical viewpoint, and one which I see asserted a lot without much reason... I didn't really mention the ABCT...
I didn't really mention the ABCT...
I know. That is why asking what your OP had to do with ATBC.
MarxCapital: I. Ryan: No. The nominal salaries of the workers would not necessarily decrease. If the nominal salaries of the workers would necessarily decrease, then nominal salaries would necessarily increase in an other facet of the economy. If that were the case, then workers would try to work for the least competitive company because the most competitive companies would continuously increase their efficiency and then cut your salary. That is ridiculous! Why must nominal salaries decrease? But it would be equalized throughout the entire labor market. It wouldn't be one industry lowering nominal wages, or just a few of them; even the ones not increasing their production could lower nominal wages through the market competition. And during periods of sustained growth, that is, increased production runs, many many industries would increase production.
But it would be equalized throughout the entire labor market. It wouldn't be one industry lowering nominal wages, or just a few of them; even the ones not increasing their production could lower nominal wages through the market competition. And during periods of sustained growth, that is, increased production runs, many many industries would increase production.
In all practical terms, you must understand that labor is a special scarce resource unlike other capital goods. Human labor cannot simply be increased in quantity by capital accumulation (savings) and better production processes. It is easy to imagine that the rate of capital accumulation will tend to be higher then the rate of population increase. What is important is real wages, and what determines real wages is the per-head quota of capital.
If your only objection is that nominal wages may not rise, although you acknowledge that real wages do rise, then your objection is extremely weak.
Hypothetically, if it were a problem (psychological problem) it will be easily be resolved by the market. If people are demanding more money in nominal terms, money producers (such as gold mints) will be profitable, thus, resolving the artificial shortage of money by inflation. If inflation gets to high, it will not be as profitable to produce the money, thus, a free market would probably produce a stable flow of new money regulated by the market. However, this inflation is not like artificial bank credit expansion. Not only is it regulated by the free market, but it will be extremely gradual and uniform, as wage earners of the mints spend their new money on a variety of different consumer products. No business cycle will be produced by such inflation. It is important to stress that Austrians don't like to emphasize this point in order not to distract you from the principle that the quantity of money is of no importance.
MarxCapital: DD5: It doesn't remain the same. The increase in productivity entails a lowering of time preference. But why do time preferences necessarily have to fall?
But why do time preferences necessarily have to fall?
Daniel:I know. That is why asking what your OP had to do with ATBC.
Because it doesn't address this very important question. Okay, inflation causes unsustainable bubbles which must inevitably lead to busts; but what then? What if the Austrians get their way only to see that deflation, over an extended period of time, must ruin profit potential? ABCT deals with one kind of scenario.
From what I gather it's that the financial instruments at the time of the failure due to inevitable hyper-inflation (due to unbridled credit expansion not being easily discerned from seemingly 'managed' credit expansion), that such instruments will simply be discarded and replaced with other instruments. What happens from there, it seems to me that the logic of the situation does lead to a permanent loss of wealth, but was it really wealth at the start of it? If it was dependent on a monetary hat trick to exist, then one cannot attribute it to neither productivity gains nor to sound monetary policy. And that's what I see is what the ABCT is trying to point out.
"The power of liberty going forward is in decentralization. Not in leaders, but in decentralized activism. In a market process." -- liberty student
MarxCapital: Daniel:I know. That is why asking what your OP had to do with ATBC. Because it doesn't address this very important question. Okay, inflation causes unsustainable bubbles which must inevitably lead to busts; but what then? What if the Austrians get their way only to see that deflation, over an extended period of time, must ruin profit potential? ABCT deals with one kind of scenario.
Please define "inflation" and "deflation". I'm not sure what definitions you are using.
Lilburne:5. Additional savings require a lower time preference.
So if one person enters the labor market, and is paid a wage, and decides to save a little bit of that wage, there must be a change in society's time preference (diminished time preference)?
MarxCapital: But if we apply Mises' logic, we see that perpetual falling prices must necessarily mean falling profits for the capitalists. Let's take one scenario:
But if we apply Mises' logic, we see that perpetual falling prices must necessarily mean falling profits for the capitalists. Let's take one scenario:
You state that purchasing power increases as prices fall. How come the same doesn't apply to the one receiving the profits? You cannot quantify wealth and profits with the idea that money is static. If the purchasing power is increased we can earn less money and still have higher "Real Profits" by being able to purchase more with our profits. So your statement is in directly contridiction with the point you made earlier.
MarxCapital: Why would the Austrians assume that workers would accept a fall in salaries?
Why would the Austrians assume that workers would accept a fall in salaries?
Unless operating in some sort of cartel like a union workers never have a choice at what their industry's going rate is. They can negotiate their personal going rate but that rate will be dictated by the market rate of whatever labor he is offering. You have to realise that labor is a commodity like anything else. Depending on how much supply/demand there is per industry. Also, don't assume that because the workers wage's fall due to natural competition that will always equate to less Real Wages. Additionally even during deflation some industry's going wage rate may go up depending on demand.
You see this now in the tech industry with IT/Network admins saturating the market as unemployed. Jobs that they once had and were receiving 6 digits on can at best be replaced with a signifigant reduction in wages. The market is saturated with those types of skills which reduced that skills value.
MarxCapital: Furthermore, why would they assume that banks would lower their interest rates?
Furthermore, why would they assume that banks would lower their interest rates?
Why do you assume that all business's must use credit to operate. Credit is just another commodity like anything else. If there is very low demand for the credit and more people are saving banks will be desperate to get business. That will shoot interest rates down. If there is a high demand for credit, in the banks best interest of staying solvent they will raise rates. This whole process is extremely simple. I'm not sure why it's so hard to understand. I also don't understand why everyone thinks that credit is like some sort of magical powder that acts different than any other commodity.
Now this whole process gets distorted when you have an inflationary policy as it removes the natural scarcity of currency. The same problems would happen if somehow we could magically make Banana's fall from the sky at demand.
MarxCapital: As far as I understand it, Austrians believe that the interest rates represent time preferences, that is, current goods vs future goods. If this time preference remains the same, why should there be a fall in the interest rate?
As far as I understand it, Austrians believe that the interest rates represent time preferences, that is, current goods vs future goods. If this time preference remains the same, why should there be a fall in the interest rate?
I don't understand? Why would time preference's stay the same? Price's arn't static. Neither is credit.
MarxCapital: Inflation may indeed increase, arbitrarily, the profits earned by producers; some become dependent upon perpetual inflation. But why wouldn't perpetual deflation destroy the capitalist's profits?
Inflation may indeed increase, arbitrarily, the profits earned by producers; some become dependent upon perpetual inflation. But why wouldn't perpetual deflation destroy the capitalist's profits?
Think of it as an L curve with inflation going up but deflation going out sideways. Deflation will never render prices to 0. Inflation will never render prices to infinite. Both of those value's would be impossible.
MarxCapital: Austrians seem to love deflation, but can never answer this question. If time preferences remain the same, deflation must eventually destroy their profits;
Austrians seem to love deflation, but can never answer this question. If time preferences remain the same, deflation must eventually destroy their profits;
Maybe to you it seems as if they've never answerd the question because most of the responses are implied. But since Deflation increases purchasing power the same apply's to those receiving profits. Meaning they can earn less "profits" meanwhile earning more "Real Profits". In deflation their profits arn't destroyed at all. I have no idea how you could come to that conclusion. Really this isn't hard to understand and it's basic commen sense.
MarxCapital: and the capitalists, whose laborers refuse to take pay cuts, must begin massive layoffs in order to remain in business. Why was Marx wrong again?
and the capitalists, whose laborers refuse to take pay cuts, must begin massive layoffs in order to remain in business. Why was Marx wrong again?
Again I suppose if you lived in a static world where no one ever changes jobs and business's never go in or out than I could see why you would get confused by this. However laborers who refuse to take pay cuts will simply be left un-employed. It's really that simple. There wouldn't be any massive lay-offs. I have no idea what kind of curb ball your trying to throw with that but thats a silly argument. Lay-offs don't happen world wide at once. At most it may happen one industry at a time but usually only when there has been substantial market interference.
MarxCapital: Anyone who brings up the failure of communism/socialism/fascism will be wasting their own time. I know Marxism has failed; but that does not make you right. I'm saying that capitalism must destroy its self, as well as all other potential forms of economics. It's human nature to destroy ourselves.
So to summarize your whole post. You beleive capitalism will tend towards destruction as when deflation kicks in business's will somehow lose their profits and stop doing business. Lets not forget that you yourself stated the following:
MarxCapital: as production increases the purchasing power or "value" of the money increases as well
as production increases the purchasing power or "value" of the money increases as well
You openly state that purchasing power and the value of money increases. Therefore you can do more with less money. So how can you be confused when less profits are earned it doesn't equate to less "Real Profits".
Also it's theoretically and technically impossible to reach 0. A service or good might cost a penny, it may cost 1/100th of a penny, it may cost 1/100000th of a penny. However it will never equal 0. Depending on that economy 1/10000th of a penny might be alot!
MarxCapital: Lilburne:5. Additional savings require a lower time preference. So if one person enters the labor market, and is paid a wage, and decides to save a little bit of that wage, there must be a change in society's time preference (diminished time preference)?
There's no societal time preference. There's only individual time preferences, which adjust accordingly to the given value each one wishes to achieve.
Daniel:Please define "inflation" and "deflation". I'm not sure what definitions you are using.
I'm talking about rising or falling aggregate prices, or the increase/decrease in the purchasing power of money. Natural or unnatural
MarxCapital: Lilburne:5. Additional savings require a lower time preference. So if one person enters the labor market, and is paid a wage, and decides to save a little bit of that wage, there must be a change in society's time preference ...?
So if one person enters the labor market, and is paid a wage, and decides to save a little bit of that wage, there must be a change in society's time preference ...?
Yeah, although one person hardly makes a difference. But when the Fed of private banks practice FRB, they mess up the interest rate. Note: by "society's time preference, I assume you mean the interest rate.
Rising prices don't cause the ATBC, expansion of the money supply does (money backed by nothing). However, monetary expansion, however, can lead to higher prices.
MarxCapital: DD5: It doesn't remain the same. The increase in productivity entails a lowering of time preference. But why do time preferences necessarily have to fall? Why couldn't they remain the same? Would not the economy still grow? If production increases, continuously, so too must the purchasing power of money; but why should this not increase time preferences? If I can buy a lot of stuff now, more so than I once could, wouldn't I? It seems like your saying that growth must necessarily mean a fall in time preferences, which seems to mean continuous falls in the rate of interest. I think I should investigate capital theory a little bit more; but I must say, this isn't making a lot of sense. People get wealthier, so they save, okay. But ABCT says that people also save during recessions, when there is a loss of wealth, or when times are uncertain. When wouldn't the people save?
Liburne has given you above an adequate response.
Let me just elaborate on your concern about the continuously falling interest rate. You are once again thinking in nominal terms. Interest is no more then wages earned on saved money. This is the same problem of falling wages. Interest rates in nominal terms may or may not fall (depending on whether quantity of money is fixed or gradually rising as a result of monetary inflation as I have explained above). But like regular wages, the return from falling rates of interest will be higher in real terms.
MarxCapital:What if the Austrians get their way only to see that deflation, over an extended period of time, must ruin profit potential?
Profit consists of two strata.
One stratum ("short-run profit") is acquired via entrepreneurship, which is basically making good business bets on uncertainty.
But even if that stratum didn't exist; even if there were no uncertainty (a situation called the evenly rotating economy), there would still be a persistent strata of "long-run profit". This underlying stratum is entirely based on capital investment, which depends on time preference. (Read Capital and Interest by Bohm-Bawerk.) The lower the time-preference, the higher the long-run profits. Deflation effects the valuation ratio between money and goods. It does not effect the valuation ratio between "goods sooner" and "the same goods later", which is what time preference is all about. Therefore, deflation does not affect time preference, which means it does not effect long-run profit.
Lilburne:But even if that stratum didn't exist; even if there were no uncertainty (a situation called the evenly rotating economy), there would still be a persistent strata of "long-run profit". This underlying stratum is entirely based on capital investment, which depends on time preference. (Read Capital and Interest by Bohm-Bawerk.) The lower the time-preference, the higher the long-run profits. Deflation effects the valuation ratio between money and goods. It does not effect the valuation ratio between "goods sooner" and "the same goods later", which is what time preference is all about. Therefore, deflation does not affect time preference, which means it does not effect long-run profit.
This is an interesting point. Though I still don't see how it wouldn't affect long run profits if workers continuously see increases in real wages, that is, if they don't take the nominal cuts (keeping their wages the same).
MarxCapital:This is an interesting point. Though I still don't see how it wouldn't affect long run profits if workers continuously see increases in real wages, that is, if they don't take the nominal cuts (keeping their wages the same).
You haven't given any plausible argument as to why this would be the case, any more than workers would receive continuous increases in real wages in an inflationary environment (beyond what employers are willing and able to pay them). As people adjust to deflationary expectations, if workers wouldn't accept nominal wage cuts when real wages are rising, then employers will find people who will.
Why, in your deflationary scenario, are workers not accepting lower wages, but all other sellers are accepting lower prices?
As I stated in my OP, as production increases, so too will the purchasing power of money; prices will fall across the board. This is the nature of an exchange economy; but if workers don't take nominal wage cuts, and instead, decide to take an increase in real salaries, costs will increase. Why won't workers take pay cuts? Ask them, traditionally, laborers don't accept lower wages, even nominally, and entrepreneurs don't like lowering wages because it lowers productivity. It seems that layoffs would be the most probable solution.
One more question: I believe that capital per worker increases their productivity and therefore should increase their wages, but according to you guys, workers will accept nominal wage cuts and be satisfied with a steady real salary. When production expands, how come workers won't see their real wages rise?
MarxCapital: As I stated in my OP, as production increases, so too will the purchasing power of money; prices will fall across the board. This is the nature of an exchange economy; but if workers don't take nominal wage cuts, and instead, decide to take an increase in real salaries, costs will increase. Why won't workers take pay cuts? Ask them, traditionally, laborers don't accept lower wages, even nominally, and entrepreneurs don't like lowering wages because it lowers productivity. It seems that layoffs would be the most probable solution. One more question: I believe that capital per worker increases their productivity and therefore should increase their wages, but according to you guys, workers will accept nominal wage cuts and be satisfied with a steady real salary. When production expands, how come workers won't see their real wages rise?
Who says real wages won't rise? In a growing economy, they will. But if steady nominal wage rates mean an increase in real wages that is above what employers are able and willing to pay them, then nominal wages will have to fall.
Your reason is that traditionally workers don't accept lower wages? Well that's because it would mean a fall in real wages in an inflationary environment. You're telling me resistance to nominal wage cuts and layoffs would be a permanent phenomenon in face of deflation? It just doesn't make sense.
Rooster: Who says real wages won't rise? In a growing economy, they will. But if steady nominal wage rates mean an increase in real wages that is above what employers are able and willing to pay them, then nominal wages will have to fall. Your reason is that traditionally workers don't accept lower wages? Well that's because it would mean a fall in real wages in an inflationary environment. You're telling me resistance to nominal wage cuts and layoffs would be a permanent phenomenon in face of deflation? It just doesn't make sense.
Well I don't know what a deflationary scenario looks like, and I can't find it in any of the Austrian books I've read. We've never seen sustained free market activity. I know the currency school failed, and Mises provides an explanation; but how do we know that Mises tied up all of the loose ends?
Anyways, I've read Monetary theory and the trade cycle, Theory of money and credit, and the Austrian theory of trade cycles; should I get into Prices and production? Or venture into capital theory, namely the works of Bohm-Bawerk.
MarxCapital:But if we apply Mises' logic, we see that perpetual falling prices must necessarily mean falling profits for the capitalists.
my advice. read Reisman.
http://www.csupomona.edu/~jkirkpatrick/Papers/AJESNetCons.pdf
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Marx,
Are you going to actually respond to people's rebuttels which is normal in most discussions or continue to attempt at changing the subject. If you continue to change the subject I have to quesiton why you posted here in the first place?
MarxCapital:as production increases, so too will the purchasing power of money; prices will fall across the board.
If the quantity of money were to decrease, then prices would fall across the board. However, if productivity increases, then only the goods that were more efficiently produced, and the lower order goods for which they were capital, would have falling prices.
Let's take a hypothetical example of increased productivity. Let's isolate variables by considering an increase in one industry. Let's say that capitalists who own a tractor company, for some reason develop a lower time preference. They reduce consumption, and increase investment into their industry. With the increased investment, they are able to develop more roundabout and more productive processes for creating tractors. They are then able to produce the same number of tractors for less outlay. They will then be able to underprice their competition, out-compete them, and thereby make greater profits. Eventually the competition is forced to also become more productive, or perish. Those that do, will via competition continue to bid tractor prices down. In this deflationary situation, product prices and revenue may have gone down, but so did costs, because that is what made the firms more productive in the first place. Therefore, even if revenue went down, profit margins wouldn't, ceteris paribum. Did the greater productivity of the tractor industry lead to lower or higher wages? It depends on the nature of the more roundabout process: that is how labor-intensive it happened to be. But there is nothing about greater productivity as such that would automatically lead to a necessary change in the wage rates. Did the tractor firms need to have the wages they paid go down in order for their profit to not be destroyed by the deflationary process? No, because the deflationary effect was caused by greater efficiency in the first place, which means again, that the lower prices and revenue are offset by the more cost-effective means of production.
MarxCapital:traditionally, laborers don't accept lower wages
Productive capital investment will lead to lower demand for labor only if the new processes call for less labor. If that were the case, and you are saying that the lower demand would NOT have a lowering effect on wages, then you are denying the law of supply and demand.
Read the responses you got so far. I have nothing to add to them.
MarxCapital:One more question: I believe that capital per worker increases their productivity and therefore should increase their wages, but according to you guys, workers will accept nominal wage cuts and be satisfied with a steady real salary. When production expands, how come workers won't see their real wages rise?
Any greater productivity came from greater capital investment. Greater capital investment came from the increased sacrifice (deferral of consumption) of the saver. Why should the worker take proceeds that were the direct result of the sacrifice of the saver? Why would the saver save in the first place if she knew that was going to be the result? There are a number of ways an individual laborer can garner higher wages. But simply being part of a more productive process by virtue of someone else's investment is not one of them.
Under your system, a construction company who equips a worker with a more powerful, but equally easy to use, power drill would thereby need to pay him higher wages!