Economics Questions

Re: Question about AGD by Rothbard

Michelangelo — Wed, 05 Oct 2011 20:10:55 GMT

Hmm. Aside from malsavings what are the effects of an artifical deflation if not a change in consumption?

Re: Question about AGD by Rothbard

Smiling Dave — Wed, 05 Oct 2011 07:19:28 GMT

Michelangelo,

Thanks for the quote. Reading ahead a few paragraphs, I saw this [emphasis mine]:

Deflation and contraction are less likely to spread havoc than inflation and expansion not merely because they are only rarely resorted to. They are less disastrous also on account of their inherent effects. Expansion squanders scarce factors of production by malinvestment and overconsumption. If it once comes to an end, a tedious process of recovery is needed in order to wipe out the impoverishment it has left behind. But contraction produces neither malinvestment nor overconsumption. The temporary restriction in business activities that it engenders may by and large be offset by the drop in consumption on the part of the discharged wage earners and the owners of the material factors of production the sales of which drop. No protracted scars are left. When the contraction comes to an end, the process of readjustment does not need to make good for losses caused by capital consumption.

Re: Question about AGD by Rothbard

Michelangelo — Wed, 05 Oct 2011 06:17:03 GMT

See p.570: 7. The Gross Market Rate of Interest as Affected by
Deflation and Credit Contraction

In these cases a temporary tendency toward a rise in the gross market rate
of interest ensues. Projects which would have appeared profitable before
appear so no longer. A tendency develops toward a fall in the prices of factors
of production and later toward a fall in the prices of consumers’ goods also.
Business becomes slack. The deadlock ceases only when prices and wage rates
are by and large adjusted to the new money relation. Then the loan market too
adapts itself to the new state of affairs, and the gross market rate of interest is
no longer disarranged by a shortage of money offered for advances...

http://mises.org/Books/humanaction.pdf

Re: Question about AGD by Rothbard

Aristippus — Wed, 05 Oct 2011 06:00:02 GMT

1. Ultimately wouldn't generally increased investment require more investment in the higher orders? E.g. capital goods required for the pizza shop. I admit the 'must lengthen the structure of production' is puzzling - perhaps he meant to write something like 'must increase investment in the goods that lengthen the structure of production' simply as a qualification of what he meant by higher-order goods. The passage is odd. 2. I could be wrong, but if in the deflationary period people move to cash (since its value is believed to continue to rise against other goods), there will not be any additional investment and malinvestment in other goods which would lead to a significantly uneven adjustment. Deflation and credit contraction do not lead to malinvestment, but rather a lack of further investment. The belief that prices will drop even further causes the capitalist-entrepreneur to obstain from investing, meaning he cannot create further malinvestments. That's what I recall from Mises, anyway. EDIT: I have no idea what's going on with the impossibility of paragraphs here.

Re: Question about AGD by Rothbard

Smiling Dave — Wed, 05 Oct 2011 05:14:36 GMT

One of us is going to look foolish....

Re: Question about AGD by Rothbard

Michelangelo — Wed, 05 Oct 2011 01:15:37 GMT

Are we discussing a deflationary period following a period of inflation? Or a deflationary period followin a period of equilibrium?

I'm quite sure Mises discusses how a trade cycle would develop in the latter situation by discouraging investment in areas that would have otherwise been funded proir to the increase in interest rates. Let me go find the passage..

Question about AGD by Rothbard

Smiling Dave — Tue, 04 Oct 2011 23:36:58 GMT

He writes in footnote 13 to chapter one:

Some readers may ask: why doesn’t credit contraction lead to malinvestment, by causing overinvestment in lower-order goods and underinvestment in higher-order goods, thus reversing the consequences of credit expansion? The answer stems from the Austrian analysis of the structure of production. There is no arbitrary choice of investing in lower or higher-order goods. Any increased investment must be made in the higher-order goods, must lengthen the structure of production. A decreased amount of investment in the economy simply reduces higher-order capital. Thus, credit contraction will cause not excess of investment in the lower orders, but simply a shorter structure than would otherwise have been established.

1. I don't understand that. Why must any increased investment be in higher order goods? Can't a coin dealer, for example, underconsume and replenish his stock of coins?

Similarly, why must it lengthen the structure of production? Can't there just be more pizza shops built? Or gold mines looked for? How do more pizza shops and gold mines lengthen the structure of production?

2. There was a discussion here a while back if a deflation can cause a business cycle, with some arguing that since it distorts prices, it can. Rothbard is stating a case here that it just can't happen. Anyone here see how defend the other side from his reasoning?

In particular, I refer to this post, [of Esuric's, recommended by filc] which set off a little firestorm:

The fact is that prices do not instantaneously and simultaneously adjust, and when they do adjust, they do so in ways which actually perpetuates disequilibrium and yields a misallocation of resources towards ultimately untenable productions (what are known as malinvestments). Simply put, an expansion in the supply of money beyond the demand for money, say by 10%, does not yield 10% general price inflation (I'm assuming that total output is constant): some prices may rise by 10%, some may rise by greater than 10%, some prices may not rise at all, and other prices may actually fall (there are time lags between the various price adjustments). It is this uneven adjustment that causes the major problems, namely the trade cycle.

Similarly, deflation, caused by a reduction in the supply of money below the demand for money, also leads to uneven adjustments. Some prices fall further than others, sometimes wages don't fall fast enough (causing unemployment) and some prices may actually rise. This is due to the fact that money enters (or leaves) the economy at certain points and then permeates amongst the rest of society, altering preferences and expectations.

Let me summarize his position:

1. Uneven adjustment causes a trade cycle.

1a. A trade cycle's dominant feature is malinvestment. [He doesn't say it, but implies it, and I think it is obvious to any who read a bit of AE]

2. Deflation causes uneven adjustments.

3. Therefore, says Smiling Dave, Aristotle tells me accepting Esuric's assertions force one to conclude that deflation causes malinvestments.

Well! How do you refute Rothbard's argument to the contrary?