I'm not a professional economist, I'm a political scientist seeking a double-check on my understanding of Austrian school economics. I am synthesizing what I've learned so far, and realize I have a long way to go. What follows is what I perceive is going wrong in our economy, from a theoretical standpoint. If something is bogus, or flawed, please let me know why. Please refrain from getting overly technical. Thank you for any help. Kyle
Here's my ten-point rough sketch of what goes wrong:1) The Fed keeps interest rates artificially low, thus falsely creating an atmosphere of positive speculation.2) Easy money begets malinvestment.3) Overproduction ensues, the market becomes saturated.4) Deflation, a decrease in demand reflected by declining prices, sets in.5) The Fed pumps more money in to stimulate demand, but the artificially easy credit has already worn out demand.6) Projections look bleaker, and production plummets.7) People get laid off or let go.8) People begin tapping into savings or more debt.9) If credit is tight, the crisis is intensely exacerbated.10) After a time lag (say six months for example, if you're lucky) the period of deflation is followed upon by rapid inflation, which, definitively, is the increase in prices relative to goods.
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ABCT is rather simple to understand. It's central premise is that some businesses become more profitable when interest rates are lower, while others become more profitable when consumption increases. Obviously, you cannot have both, because in order to have low interest rates, you need high savings rate meaning that you need to defer consumption. When credit is artificially created, lowering interest rates below their market level, industries that rely on low interest rates, like the housing industry and the vehicle industry, become more profitable. These industries then raise wages and hire more workers. However, because people still prefer consumption over saving, these people with higher wages and more jobs will not save more, they may in fact consume more. This means that consumption-based businesses become more profitable. Because of this increased profitability, consumption-based industries are able to bid away resources from interest rate-based industries. For example, the Walmarts of the world will bid away natural resources like steel, plastic, etc. from the GMs of the world. This makes the GMs of the world much less profitable, forcing them to lower wages and lay off workers. These workers then consume less, making the Walmarts of the world less profitable and forcing them to lower wages and lay off workers. This has a domino effect throwing us into recession. In order to correct such a recession, the malinvestments need to be cleared.
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11) Inflation causes the increase in prices relative to goods, but wages don't increase proportionately.
12) People get fed up and take to the streets armed with rifles and pitchforks.
13) Those in power are ousted and the cycle starts all over again.
Hi:
Politics are economics, because the things politicians do effect the economy. The bad investment is in capital over consumer goods. The bad money is the ultimate cause of the misallocation of resources. If we had good money, "A rising output and falling price level signifies a steady increase in the standard of living for each person in society. Typically, the cost of living falls steadily, while money wage rates remain the same, meaning that "real" wage rates, or the living standards of every worker, increase steadily, year by year."~Rothbard Good money would limit inflation. "In a free market unemployment is purely voluntary"~Mises The supposed stimulis will only increase the size of government while causing a further burden on actual production. Not all goods are superabundent such as air, therefore there is neccessarily scarcity.
Kyle:After a time lag (say six months for example, if you're lucky) the period of deflation is followed upon by rapid inflation, which, definitively, is the increase in prices relative to goods.
I see the biggest philosophical flaw in the recent interventions, is the assumption that government can fix the problems it has created by the use of more government. I should like to see the charlatans in congress first explain the reason for the 'business cycle' before they begin to proscribe the treatment for the symptoms of it.
Until we have sound money in a free market, I fear the darkest days are yet to come.
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aegis:13) Those in power are ousted and the cycle starts all over again.
13. Marshal Law. The End.
my 2c.
Thanks krazy kaju for providing some shading to my generalizations. I didn't think about the economy in terms of "interest-based" and "consumption-based" industries vying for resources. That seems like a good way to explain a deflationary spiral.
So I guess the question is, does my sequencing make sense in general? It is important to me and my family that I understand this correctly.
Bank Run: Hi: Politics are economics, because the things politicians do effect the economy. The bad investment is in capital over consumer goods. The bad money is the ultimate cause of the misallocation of resources. If we had good money, "A rising output and falling price level signifies a steady increase in the standard of living for each person in society. Typically, the cost of living falls steadily, while money wage rates remain the same, meaning that "real" wage rates, or the living standards of every worker, increase steadily, year by year."~Rothbard Good money would limit inflation. "In a free market unemployment is purely voluntary"~Mises The supposed stimulis will only increase the size of government while causing a further burden on actual production. Not all goods are superabundent such as air, therefore there is neccessarily scarcity. Kyle:After a time lag (say six months for example, if you're lucky) the period of deflation is followed upon by rapid inflation, which, definitively, is the increase in prices relative to goods. Actually inflation is an increase in the supply of the medium of exchange. Government has proved it is not responsible enough to have a monopoly on the production of the medium of exchange. I see the biggest philosophical flaw in the recent interventions, is the assumption that government can fix the problems it has created by the use of more government. I should like to see the charlatans in congress first explain the reason for the 'business cycle' before they begin to proscribe the treatment for the symptoms of it. Until we have sound money in a free market, I fear the darkest days are yet to come.
Actually you got me on that. I wrote prices but did not bring up money supply.. You're right. It is in the increase in money supply relative to goods.