Broken Capitalism, Lecture 5 with David Gordon - Mises Academy
-
Upload
the-ludwig-von-mises-institute -
Category
Economy & Finance
-
view
370 -
download
0
description
Transcript of Broken Capitalism, Lecture 5 with David Gordon - Mises Academy
![Page 1: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/1.jpg)
Broken Capitalism, Lecture 5
David GordonMises Academy
July 15, 2013
![Page 2: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/2.jpg)
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.
![Page 3: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/3.jpg)
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?
![Page 4: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/4.jpg)
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.
![Page 5: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/5.jpg)
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
![Page 6: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/6.jpg)
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.
![Page 7: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/7.jpg)
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.
![Page 8: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/8.jpg)
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.
![Page 9: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/9.jpg)
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.
![Page 10: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/10.jpg)
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.
![Page 11: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/11.jpg)
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.
![Page 12: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/12.jpg)
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.
![Page 13: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/13.jpg)
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.
![Page 14: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/14.jpg)
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.
![Page 15: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/15.jpg)
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.
![Page 16: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/16.jpg)
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.
![Page 17: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/17.jpg)
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.
![Page 18: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/18.jpg)
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.
![Page 19: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/19.jpg)
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.
![Page 20: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/20.jpg)
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.
![Page 21: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/21.jpg)
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.
![Page 22: Broken Capitalism, Lecture 5 with David Gordon - Mises Academy](https://reader035.fdocuments.in/reader035/viewer/2022070302/54845d105806b5b3588b4628/html5/thumbnails/22.jpg)
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.