Broken Capitalism, Lecture 5 with David Gordon - Mises Academy
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Broken Capitalism, Lecture 5 with David Gordon - Mises Academy

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  • 1. Broken Capitalism, Lecture 5 David Gordon Mises Academy July 15, 2013
  • 2. Money and Wealth • Money is different from other goods and services. • Imagine that wasn’t any money. We are living in a barter economy. If I want something that I haven’t produced, I have to trade to get it. • What I own has two kinds of value: its direct use to me and how much other people want it.
  • 3. More Money? • Money in a free market is a commodity, like gold and silver. • It has some direct use as a commodity. E.g., gold is used for jewelry. • Almost all of the value of money is its exchange value. If you have money, how much of other goods can you get for it?
  • 4. Still More Money • How much is a unit of money worth? This depends on its purchasing power, i.e., what you can buy with it. • Is it true that the more units of money you have, e.g. more dollars, the better off you are? • Not necessarily. It depends how much each dollar is worth.
  • 5. The Value Of Money • What determines the value of a dollar? • Just like other goods, the value depends on demand and supply. • The supply consists of the number of monetary units. • The demand depends on how much people want to hold money
  • 6. Value of Money Continued • Suppose that people don’t want to increase their holding of money. If the number of money units goes up, the purchasing power of money will decrease. • Each dollar will buy less.
  • 7. Optimal Amount of Money • Any amount of money is sufficient to perform the services of money in the free market. • With a given stock of money, people can satisfy whatever demand they have to hold money. Purchasing power will adjust to changes in demand. • It is not true that as the economy grows, more units of money have to be issued.
  • 8. More Optimal • One way to express this point is that any amount of money is optimal. • This statement can be misunderstood. • The correct reading is the one we have already discussed: any amount of money is sufficient. • The incorrect reading is: If x is the amount of money at time t, then any change in x is sub- optimal, so long as demand to hold money stays the same.
  • 9. Inflation • People very often don’t realize that an increase in the supply of money doesn’t make everybody better off. • Many economic cranks think that making money or credit more readily available will result in prosperity. • Hazlitt mentions the Social Credit movement as an example.
  • 10. Effects of Inflation • You might think from what we have said so far than increasing the supply of money wouldn’t have any effect, so long as the demand to hold money hasn’t changed. • Suppose all prices, wages, etc., instantly doubled. What would change? • The Austrians define inflation as an increase in the money supply, rather than the price rise that often accompanies this rise.
  • 11. Effects Continued • In most cases, inflation does have effects. • When the state increases the supply of money, the money usually doesn’t get to everybody at the same time. • Suppose the state increases purchases of armaments and finances this by printing money. Then, the armaments makers have the money to spend.
  • 12. Spreading Money • When they spend their money, this will drive up the prices of what they spend it on. • The makers of these products will have new money to spend. This will in turn drive up the prices of other goods. • Price increases will gradually spread through the economy.
  • 13. Cantillon Effects • In the initial stages of the spread of money, people will have extra money but most prices haven’t risen yet. • People in the initial stages thus benefit from the increase. • Those in the later stages find that prices rise before they get more money. They lose out.
  • 14. More Cantillon • The way in which an increase in the money supply spreads through the economy is called Cantillon effects. These were named after the 18th century economist Richard Cantillon. • The relation between an increase in the money supply and price rises has to be traced in detail.
  • 15. Quantity of Money • There isn’t a mechanical relation between an increase in the quantity of money and an increase in prices. • E.g., it isn’t the case that doubling the supply of money automatically doubles the money supply.
  • 16. Bank Credit Expansion • One kind of inflation is important for the business cycle. This is an expansion of bank credit. • The expansion of bank credit lowers the rate of interest on loans.
  • 17. Rate of Interest • In the Austrian view, the rate of interest is not primarily determined by the demand and supply of money. • Rather, interest depends on time preference. • This is the rate at which people prefer present satisfactions to equivalent future satisfactions.
  • 18. Interest and Production • In the economy, some resources are devoted to making consumption goods, i.e., goods that people directly use. • Other resources are devoted to making production goods. These are goods used to produce other goods. • We also have goods that are used to produce goods that are used to produce these production goods, etc.
  • 19. Interest and Production Continued • In other words, we have different stages of production. A stage depends on how many steps it takes to get to consumer goods. • What determines how resources are distributed among the stages of production and also how many stages there are? • The answer is the rate of time preference. Because people prefer goods in the present to goods in the future, the structure of production will be limited in extent.
  • 20. Back To Bank Credit • We can now return to the expansion of bank credit. • When the bank expands credit, this will lower the money rate of interest. • Entrepreneurs will be able to invest in higher stages of production than before. Before the credit expansion, investing in these stages wouldn’t have been profitable.
  • 21. Collapse • Now the big problem comes up. • The rate of interest is fundamentally determined by the rate of time preference, not by the supply and demand of loanable funds. • After the credit expansion stops, the rate of interest will go up again.
  • 22. More Collapse • The businesses that expanded will no longer be able to get money to continue their activity. • These businesses will then collapse. Resources need to be shifted to lower stages of production, to correspond with the rate of time preference. • This collapse and resource transfer is the depression.