Austrian-Economics

John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936. In it, he advocated for dirigistic inflationary policies to stimulate the economy and aid economic recovery. Idle resources—money, labor, capital—had to be employed; otherwise, they were being wasted. William H Hutt provided one of the earliest rebuttals of the general theory. His book, The Theory of Idle Resources (1939), lists several valid reasons for resource unemployment: ...

Anne Robert Jacques Turgot, in his criticism of usury laws, described the concept of time-preference and its role in lending at interest. Time-preference refers to the discounting of the future, and the concomitant placing of a premium upon the present. If this rate of discounting is high, the time-preference is high. If the discounting rate is low, the time-preference is low. Since we prefer a present good to an equivalent amount of the good at some point in the future, lenders will demand, and borrowers will accept, an interest on a loan. Interest is the price of time-preference. ...

In my previous discussion about the effects of inflation, I missed an important point. This might be the most pernicious of its cultural effects: inflation discourages productivity and encourages speculation. The distortions generated by inflation are not immediately apparent. While an inflationary episode is underway, labor is tricked into accepting the same nominal wage (that is, accepting a lower real wage), since price levels have not risen yet. Soon, prices rise and the decline in purchasing power becomes apparent. Long after the prices have risen are the labor able to negotiate a (nominal) wage increase. This increase is also likely to be lower than the rate of inflation, thus the real wage continues to be lower than what it was prior to the inflationary episode. A decline in real wages discourages productivity. ...

The Price-Specie-Flow Mechanism The price-specie-flow (PSF) mechanism is the extension of the quantity theory of money (QTM) to a multi-country scenario. Proponents of the end-neutrality of QTM often implicitly assume a closed economy. But when nations trade amongst each other, the injection of monetary units in a nation can, instead of putting upward pressure on local prices, promote imports, and thus cause an outflow of money, in the short term. The price-specie-flow mechanism accounts for these dynamics. ...

Statement The level of prices depend on the quantity of money. Early discussions on this matter can be found in the essays of John Locke, David Hume and Irving Fisher (see Reference). Discussion Provided that the item used as money can be divided and combined as necessary, any amount of money is sufficient for running an economy. Ideas about bringing lasting changes to an economy by expanding the money supply are invalid. Should the money supply increase, all else equal, the prices of goods and services would increase proportionately. Thus, the outcome would ultimately be neutral. ...

In earlier posts, I have regarded inflation as counterfeiting conducted by the government. This is not hyperbole. It is merely calling an activity its proper name. The Illegal Case To understand this label, let us go over what happens when an ordinary criminal counterfeits money. Suppose these fake tokens are virtually indistinguishable from already circulating monetary units. The criminal and his associates are able to go to the market and buy goods and services at prevailing rates. These people benefit the most: they did not even have to part with anything of value to obtain these tokens. ...

Inflation (that is, the counterfeiting of money by the government) has several destructive effects on the economy. It transfers wealth from late recipients of newly issued monetary units to those who receive them relatively earlier. It hurts the ability of economic actors to perform economic calculation. It degrades the quality of goods and services produced in the economy. Furthermore, it causes boom and bust cycles in the economy. Wealth Redistribution The overall effect of the introduction of new monetary tokens is a general increase in price levels. But this effect is neither smooth nor instantaneous. Not everyone acquires an equal amount of these tokens, or at the same time. Also, not all prices rise proportionately, or at the same time. ...

Private individuals and businesses must either sell something of value to acquire money or expend time and resources to mine it directly (think of gold mining in the case of a gold standard). Governments, in contrast, do not obtain payment for goods or services they produce; they generate revenues through the seizure of assets. In the past, they might have sent their agents to seize grains, cattle, coins, etc. from people. But in a monetary economy, they simply seize monetary assets, which is a lot easier to do. ...

Before discussing fractional reserve banking, let’s go over the concept of full reserve banking. Suppose a bank takes in total deposits worth $100 million from its depositors. The bank promises the depositors that they may withdraw their deposits anytime. The bank, in this case, simply acts as a warehouse for the money deposited, collecting fees from the depositors in return. At any time, all deposited money remains within the bank; and at any time, any or all depositors may come to collect the money they have deposited. This is full reserve banking: all the deposits remain in reserve. ...