Economics Questions

Re: The Economic Schools of Thought

krazy kaju — Sat, 05 Jul 2008 00:36:30 GMT

Jon Irenicus:

From that description, it seems very vague; mayhap it's just another school promising the world whilst offering little of substance? A lot of heterodox schools other than the Austrians (and perhaps the Marxians and Institutionalists) do not seem to have much depth to them.

-Jon

Well, technically speaking, every school of thought except the neoclassical school is "heterodox." So I'd include Austrians, Keynesians (and their derivatives), monetarists, and new classicists in what I would consider heterodox schools of thought that have depth.

Re: The Economic Schools of Thought

krazy kaju — Sat, 05 Jul 2008 00:28:36 GMT

Drift, I don't mean to insult, but you've really gone into the realm of the absurd when you began saying that the value of something "in paper" can be more than "in reality."

I don't think you understand the fact that the value of a commodity "in paper" represents the value of a commodity "in reality." For example, when the price of crude oil goes up in the stock market, what happens? Well, gas costs more. Why is that? Because the paper value (and therefore the real value) of a key ingredient in gasoline became more expensive.

Likewise, gold ETFs and real gold have the same value. Why is that? Because as people buy more gold ETFs that translates into a higher demand of real gold also because the value of gold and gold ETFs are linked in every possible legal and economic sense.

Re: The Economic Schools of Thought

wombatron — Fri, 04 Jul 2008 15:04:23 GMT

Anonymous Coward:

Jon Irenicus:

Sort of like the nuclear last resort option. Speaking of him, wonder where he's disappeared off to these days.

-Jon

Firebombing police stations I would imagine...

I wish him well nonetheless. I miss his charming ad hom arguments

Re: The Economic Schools of Thought

Anonymous Coward — Wed, 02 Jul 2008 02:27:29 GMT

Jon Irenicus:

Sort of like the nuclear last resort option. Speaking of him, wonder where he's disappeared off to these days.

-Jon

Firebombing police stations I would imagine...

Re: The Economic Schools of Thought

Jon Irenicus — Wed, 02 Jul 2008 02:26:19 GMT

Sort of like the nuclear last resort option. Speaking of him, wonder where he's disappeared off to these days.

-Jon

Re: The Economic Schools of Thought

liberty student — Wed, 02 Jul 2008 02:24:32 GMT

Yeah, if someone wanted to give him a hard time, they would send Nicky his way.

Re: The Economic Schools of Thought

Jon Irenicus — Wed, 02 Jul 2008 01:50:17 GMT

Check on his posting history before assuming anyone is giving him a "hard" time.

-Jon

Re: The Economic Schools of Thought

BlackSheep — Wed, 02 Jul 2008 01:30:05 GMT

DriftWood, people here are giving you a hard time, picking on every little irrelevancy. I just want to point out that I find your points interesting and well studied, so I hope you don't give up on us. ;) Anyway, I wished these different strategies on money could co-exist; I don't see it as a chaotic change at all, because people wouldn't just exchange their money for another, one day to the next. It seems like it would be a smooth change, unless the current central really messes things up, that might change region to region, and the currencies that provide the most stable prices would tend to win. Possibly there could be other monies, like precious metals, used for storage...

Re: The Economic Schools of Thought

Torsten — Tue, 01 Jul 2008 18:40:19 GMT

Jon Irenicus:
A lot of heterodox schools other than the Austrians (and perhaps the Marxians and Institutionalists) do not seem to have much depth to them.

I dug a bit further and I think they are kind of a special breed of institutionalists. The key concept seems to be a threefolding of civil society (culture), state (politics) and market (economics).

http://www.cadi.ph/threefolding.htm

Re: The Economic Schools of Thought

Jon Irenicus — Tue, 01 Jul 2008 16:41:30 GMT

From that description, it seems very vague; mayhap it's just another school promising the world whilst offering little of substance? A lot of heterodox schools other than the Austrians (and perhaps the Marxians and Institutionalists) do not seem to have much depth to them.

-Jon

Re: The Economic Schools of Thought

Stolz2525 — Tue, 01 Jul 2008 16:05:24 GMT

DriftWood:
It sounds like some optimum unchanging value for the size of the money supply is possible, when its clear (to some of us) that the size of the money supply should not be set by a constant value, but by the variable called demand for money.

This is a simple (and possibly stupid question), but why? Prices are set in the marketplace on a good by supply and demand, but that is assuming the money is a constant. If you continuely vary the money supply then you make it much harder for anyone in the marketplace to find an acceptable price for any particular good.

DriftWood:
Its just that his ideas about monetary policy is so destructive (because deflation of the value of the currency),

This is actually a false statement. The definition of deflation is a decrease in the monetary supply, and he was for keeping it constant, supporting neither inflation nor deflation.

What I think you aren't seeing is that there can be different causes of price decreases (what you call price deflation). One is an actual contraction of the monetary supply, or deflation. This is almost always the result of a previous inflationary period and is very bad. However, while the deflation is bad, it's just a syptom of the inflationary policy. The second reason prices decrease is because of advances in production. For instance, a computer today costs half of what it did 10 years ago and its 20 times as powerful. No one seems to have a problem with this, but without inflation this is what you'd be seeing in other industries too. Their growth just isn't fast enough to beat inflation like the computer industry can.

A constant money supply also gives people incentive to save for the future, because the value of their money isn't constantly being eroded. This creates more reserves for banks to lend, which would lower interest rates, creating cheaper money for businesses. This is a good signal to businesses that investment at that time will pay off in the future. Because of the way things are now, they lack that signal. In reality, the signal is reversed because generally when the economy is doing poorly and people have low savings, that is when the FED cuts the interest rates.

Of course all this is assuming it really matters what is "best" for society as a whole. Many central planners will tell you that they do in fact know, and that they can spend your money better than you can. The overarching issue in my mind is that theft is wrong, and whether or not it is good for society is of no consequence. When you inflate a currency you steal from everyone holding that currency in order to give to the few whose "demand" you are satisfying.

Re: The Economic Schools of Thought

Torsten — Tue, 01 Jul 2008 13:06:37 GMT

Does anyone know what "associative economics" is?

I found the following on the net:

With its many and wide-ranging implications for modern economic life, associative economics places human beings at the centre of all economic processes. Our capacity to be both free and responsible means we can make conscious what is otherwise left to the unconscious working of market forces and that we can therefore regulate our own behaviour and thus obviate the state's role in this regard.

As represented in the Centre, the nature and significance of associative economics takes full account of wide ranging views from Aristotle to Adam Smith, Karl Marx to J M Keynes and Milton Friedman, as well as the 'sustainability critique' and the sophistications of modern finance. It also owes much to the observations of
Rudolf Steiner, the Austrian 'renaissance man' whose seminal work was concerned with the advent of global economics.

http://www.cfae.biz/associative_economics/

and

Associative Economics – economic arrangement which fosters interaction among producers, traders, creditors and consumers and where appropriate price, true human needs, poverty eradication, equity and impact on the environment are explicitly addressed in the process. http://www.cadi.ph/glossary_of_terms.htm

Re: The Economic Schools of Thought

Anonymous Coward — Tue, 01 Jul 2008 10:48:31 GMT

Argh...you're killing me here DriftWood...

Such a fine collection of fallacy and strawman arguments and I have to go to bed.

I would suggest you find another source of your economic 'knowledge' and not to rely so heavily on that messed up site.

Re: The Economic Schools of Thought

DriftWood — Tue, 01 Jul 2008 10:14:32 GMT

"The gold standard is when gold is currency. The gold exchange standard is when national currency is arbitrarily given a value in gold, but that value can be changed or abolished at the whim of a nation's central bank or government."

If you look beyond the mechanics, what is the effect on the value of money in the two different gold standards? Its the same, the value of money keeps in sync with the value of gold. If the value of gold goes down, the value of money goes down the same amount, and if the value of gold goes up, the value of money goes up the same amount. The value of gold and money will always be the same. This price of gold will always be same. It will be fixed, it will be stable. It does not matter what this initial fixed number is, as long as it stays fixed.

In the case of gold coins, the demand for gold and money is kept the same automatically.. you cant separate the demand for money from the demand for gold (same goes for supply). So the value always stays the same. With a gold receipt you can, and there is nothing that ensures that the demand is kept equal. There is nothing that says that at any given time there will be exactly the same amount of people doing trade with gold coins as there is people trading with gold receipts. People simply prefer gold receipts over gold, this difference in demand, creates a difference in value.

This is not the whole story. This is where it gets real interesting. As the demand for gold and gold receipts will drift appart, and their values drift appart (because supply is constant). There is another factor that counteracts this, increasing value gap because of the, gap in demand. The supply of gold in the economic system will automatically be reduced until the value of gold and gold receipts are again the same. How does this happen? Well as people use less gold, and more gold receipts for trading.. and the value of gold receipts in this market grows.. people will take any gold they have and deposit it in exchange for gold receips. This will actually increase the supply of gold receipts and reduce the amount of gold in the market. This will continue until their values are again the same.

So the important part of gold receipts is that it can be exchanged for gold on request, not that the fact that they are backed by gold. This is a important distinction. So a bank (or central bank) that promises to exchange one gold receipts for one gold coin, is just another way of saying that it promises to buy gold for one receipt, and it promises to sell gold for one receipt. The promise is to keep a price fix, between gold and gold receipts. This is what keeps the value of gold and gold receips from drifting appart. If gold recipts gets more valuable than gold.. that is if the market price for gold to gold receipts are no longer one to one.. Then people will take advantage of the below market price fix, of the bank, and sell them gold in exchgange for gold receipts. This way the amount of gold in the market is decreased and the amount of gold receipts are increased, which means that gold gets more valuable again and gold receipts get less valuable again.. until they once again are the same. The system works the same the other way around..

So again the only thing that keeps the value of gold receipts and gold the same is the fixed price peg of the banks. This means its not the amount of gold in reserves that sets the value of gold receipts, its the fixed price peg. So this means the amount of gold reserves does not matter, as long as the bank keeps its one to one price peg, then the forces of the free market will ensure that the value of gold and gold receipts stay the same. So the bank could make it known that it owned no gold at all, and that it would just buy gold off the market, to be able to keep its promise to exchange gold receipts for gold. And vice versa. Its quite an amazing thing once you get your head around it.

Anything with an amount of demand, and an amount of supply, has a value. Everything of value can be compared to the value of everything else. As long as people can distinguish between a thing and a thing, their value will be different. Gold and gold receipts are not the same thing, their demand will be different and their value will be different.

So in the end, saying that the demand for gold receipts is demand for gold.. does not hold up if you think about it.

Saying receipts would be worth more than the commodity they represent is absurd. Receipts represent the commodity. Nobody says, "Oh, the price of corn on the stock market went down, but that's only on the stock market, in real life it is different"

The difference between gold and gold receipts, is a bit similar to the difference of a commodity and its paper future contract. The corn futures contract is a promise to exchange the paper corn for real corn at a specific date and place. The price between corns futures contracts that will exchange for corn at years end, and the price of corn at years can be very large. Speculators only affect the price of paper corn, as they have no demand for real corn or keep any supplies off the market. They alwasy sell the futures conbtract, even at a loss, before they would have to pick up the corn. The closer in time it gets to year end the smaller the difference in the price between corn and its corn futures contract will get. At years end, the one to one fixed exchange rate between corn and the corn contract will ensure that their equal value.

Even if we make the example a bit simpler by taking time out of the equation..say we have a contract that at any time can be exchanged for a given amount of corn. Still the value and price of the contract and the corn its exchangable for could be a bit different. The demand would be different because corn is good for eating, while the contract would be better for storage. Say instead of having a big stockpile in some warehouse, and having to pay storage and risking the corn going bad.. you could just carry around some of these contracts in your wallet. So the value and price of corn would be a bit higher or lower than real corn depending on wether you where hungry or wether you where stockpiling. However forgetting about these small differences in inherent value, the fixed price peg would bring back the values together. The values would be kept relatively the same, becuse of the fixed exchange rate between the two. The value of the corn contract would be worth about the same as real corn (give or take), not because at all times there was some specific corn gathering dust in some specific warehouse with your name on it, but because you would get the promised amount of corn when you requested it. You would not care if that corn had been stored in a warehosse all the time, or wether it had been growning and only harvested yesterday. You see what im getting at? Its not the size of the corn stock pile in some warehouse that sets the value of the corn contracts value, its the promise that the contract will be exchanged on request for a specific amount of corn that sets its value. This is a fundemanetal difference. I hope you see it.

Cheers

Re: The Economic Schools of Thought

krazy kaju — Tue, 01 Jul 2008 00:30:53 GMT

DriftWood:

I responded to the core rothbardian assumtions that your posts where based on. I did not want to put in the time of refuting the specific points one by one.

Actually, no you didn't.

Any mechanism that makes the value of gold and money the same is a gold standard.

False. The gold standard is when gold is currency. The gold exchange standard is when national currency is arbitrarily given a value in gold, but that value can be changed or abolished at the whim of a nation's central bank or government.

However what Rothbardians fail to realize that this one to one relationship does not ensure that the value of gold receipts and the value of gold itself is equal. I know its seems like logical but its not, but check this out. The value of the receipts will be higher than the value of gold simply because there is more demand for gold receipts than for gold. Why would there be more demand for gold receipts? Because gold receipts and gold is not the same thing. Gold receipts has all the positive qualities of gold, because the receipts can be exchanged for gold. But gold recepits also have some positive qualities that gold does not have. They are easier to carry around, every receipt is of identical value to every other receipt (no two gold coins on the other hand are of identical weight), their value does not ware out (gold coind weights change threw ware and tear), they are harder to counterfeitin (part of the gold in gold coins can be replaced by less valuable metals). So all this means that there will be more demand for gold receipts than for gold itself.

No, that doesn't mean that gold receipts would have greater value. It means that people would prefer to use receipts over coins, which would encourage banks to print receipts so they can get more customers.

Saying receipts would be worth more than the commodity they represent is absurd. Receipts represent the commodity. Nobody says, "Oh, the price of corn on the stock market went down, but that's only on the stock market, in real life it is different" or "oh, the price of gold ETFs went up, but that's only ETFs, gold isn't worth more." A receipt and the commodity are linked: higher demand for receipts means that gold is worth more, because it's higher demand for gold.

A greater demand for receipts might mean that hard forms of gold won't be used as currency, so what? The price of receipts and of the commodities they represent are linked legally and economically.

If half the gold reserves where stolen or lost, noone would know.

Yes, people would know when their local bank fails. A lesson in economic history should serve you right. Do you know why the Panic of 1819 happened? New England banks demanded Midwestern banks exchange their receipts for gold, but the Midwestern banks printed more receipts than the gold they had. Those banks failed and consequently, there were "runs on the banks" and we were thrown into a very deep depression.

The supply of gold receipts MUST be larger for the value of gold and gold receipts to be the same. This is not just theory, this is the way gold standards worked for the past couple of hundred years. Its how the gold standard worked ever since gold coins where replaced by gold receipts as the preferred money.

If this is how gold standards have worked historically, please provide specific examples with reliable sources. But saying that receipts and commodities are priced differently is just ridiculous. Receipts represent the value of gold, so the more receipts are used (the higher the demand), the more they are worth, and consequently, the more the gold those receipts represent are worth.