November 30, 2014

Free Market Regulation

The idea of perfection in the market place is an impossible achievement. Regardless of what our position may be in the business cycle, there will not be a moment of collective realization where everyone can agree that the market place is exactly where it needs to be. Therefore, if we can agree that idea of perfection in the market place is unreasonable, then what makes the possibility of imperfection in the market place credible? The point I am driving towards is that in most cases regulations are imposed on the free market when there is market failure, or imperfection in the market place.

We understand how the market works; furthermore we know that the market is a discovery process. Building on this concept, I believe that market corrections can be achieved without government assistance. Once a market failure has been realized, is it really up to the discretion of the government to step in and act in order to produce more ideal outcome? I think not. Rather, I think the answer to correcting a market failure is through no regulation at all.

One way to correct a market failure is through competition. For instance, just before the depths of the recession, the market was beginning to correct itself by eliminating the firms that were not competitive. During that time we saw Lehman Brothers fail because of its position with sub prime mortgages, what’s peculiar about this is how few firms failed because of government intervention. Rather then letting fate decide the success or demise of another investment bank, Bear Sterns, the government stepped in and provided a bailout, likewise for AIG. The problem with this is that government intervention interferes with our assumption that the market is a discovery process, and furthermore weakens the possibility of the market to find a better way to operate.

Likewise, government regulation of the free market in times of market failure force outcomes that are not beneficial for entrepreneurs in that market. The issue I see with regulation and those who impose regulations is that they (politicians/government officials) may not be able to tell if they regulations they are imposing are working or not, whereas the entrepreneur can gage effectiveness of a regulation through either an increase in profits or loss. With regulations in place, entrepreneurs have to figure out how to work with the regulation to achieve the best possible outcome and not surprisingly this leads to a lack of discovery in the market place.

November 24, 2014

Money and The Business Cycle

Money and The Business Cycle
Gregory T. Bogosian
            Money is critical to any market economy because money allows people to exchange property without direct barter. Thus money facilitates and accelerates transactions, and thus accelerates the market process in which the highest valued use of every good, service and commodity is found. Money is also necessary for people to do proper accounting to determine whether they are making a profit or a loss on their current economic activity. It is this accounting that allows firms to discern whether they are in the right industry, making their product the right way, and selling it at the right price.  Money is whatever is used for buying and selling things. In other words, money is the medium of exchanging property rights and keeping account of the profits and losses from those exchanges. There are seven criteria that something must meet to be used as money. 1. It must be widely valued so that people will be willing to trade away other valuable things to get it. 2. It must be easy to transport so that people can get it to the physical trading site where they can buy what they want. 3. It must be scarce enough so that small, easy to carry and measureable amounts of it can be used to complete most transactions. 4. It must be imperishable so that people can save it long enough to find a use for it that they judge to be worthwhile. 5. It must be easy to store so that people can always put it somewhere safe when they are not using it and retrieve it immediately when there is a transaction that they want to complete. 6. It must be easily divisible so that people can make change in any transaction and pay the exact price of whatever they buy. 7. Every unit of it must be interchangeable so that people can always tell how much they are paying or receiving in any transaction. The relationship between money and the overall economy has critical implications for public policy. Every major school of thought identifies money as a key element in the business cycle. The business cycle is the periodic fluctuation of the overall amount of output that is bought and sold and the resulting fluctuation in unemployment.
            Every country imposes a monopoly on the creation of money within its own borders. In most developed countries the government delegates its power to create money to an agency called a central bank. Central banks create money by buying financial assets, usually government bonds, from private banks with money that did not exist before the purchase. Private banks then use the new money that they made from selling the assets, called reserves, to make loans. Banks do not actually loan out their reserves or the money of their depositors. Rather, banks create the money that they loan out at the moment that they make the loan by simply entering it into their ledgers. What stops banks from loaning out infinite money and rendering the currency useless is that every country imposes a legal limit, defined by the ratio of reserves to deposits, on the amount of money that banks can have in outstanding loans. This method of controlling the money supply is called fractional reserve banking. This may seem to contradict the government having monopoly on the creation of money. However, the central bank still controls the overall money supply by controlling the amount of available reserves. Thus the central bank and, therefore, the government still maintains de facto control over the amount of money in circulation at any given time. In economics there is a fevered debate about the role of the central bank in the business cycle. The Keynesian school of thought teaches that central banks should use their power to create money to smooth out fluctuations in aggregate demand, or total spending, in order to maintain full employment of labor and other resources. Keynesianism teaches that prices do not adjust to clear the market fast enough in response to changes in total spending. The Austrian school maintains that Keynesianism cannot tell us why aggregate spending fluctuates at all. Keynesians usually argue that booms and recessions are self-fulfilling prophecies. When people believe that the economy is doing well, they assume that they will have higher income in the future. This encourages people to spend and invest more money, which leads to actual higher future income.  Equivalently, Keynesians argue that when people believe that the economy is getting worse, they assume that they will have less income in the future and thus cannot afford to spend as much money in the present, thus causing a recession. Austrians counter by arguing that Keynesian theory provides no explanation for why people’s expectations about the future of the economy and thus the future of their own personal finances change at all. Thus Keynesianism cannot explain why we do not have either a perpetual boom or a perpetual recession.
            The Austrian school teaches that prices adjust to clear all markets, including the labor market, on their own in both the short run and the long run. Thus equilibrium in the labor market, otherwise known as full employment, is compatible with any amount of money in the economy according to Austrian theory. The Austrian school teaches that the ultimate cause of the business cycle is the government monopoly on money which it exercises through the central bank. By manipulating the money supply, the central bank misleads entrepreneurs about the amount of investment that the savings rate will support. The Austrian school teaches that the business cycle will not occur and unemployment will not fluctuate so long as the real interest rate, the interest rate adjusted for inflation, accurately reflects the consumer’s willingness to sacrifice future consumption for present consumption by borrowing money and paying interest. Equivalently, the economy shall operate at full employment if the interest rate accurately reflects loaners’ willingness to sacrifice present consumption by saving and loaning out money for future consumption, made possible by repayment of the loan plus interest. In other words, the economy will operate at full employment so long as the interest rate equals the opportunity cost of additional loans. The Austrian school teaches that the central bank causes booms by lowering the interest rate to below optimal levels and thus causing more money to be loaned than the consumer’s saving can finance. This leads to entrepreneurs overestimating the consumer’s willingness to save, thus overestimating their willingness to pay for goods in the future. This makes entrepreneurs borrow too much money and spend too much money on new capital goods, thus devoting capital goods to the production of consumer goods that consumers do not want. The boom inevitably leads to a recession once entrepreneurs realize that people do not want to buy their products and that the interest rate does not accurately reflect people’s desire for future consumption. So the boom lasts until entrepreneurs realize that the central bank has fooled them and the recession lasts until the central bank discovers a new way to fool entrepreneurs. Thus the boom inevitably transforms into a recession as entrepreneurs realize that their investments will not pay off because people are not willing to spend as much money as the interest rate indicates. This raises the question of why entrepreneurs cannot tell when the central bank is lowering the interest rate to below optimal levels and thus deduce that they should not buy as much capital as they would buy otherwise. The answer is that the central bank’s control over the real interest rate ensures that neither entrepreneurs nor anyone else can ever tell what interest rate truly reflects the consumer’s willingness to sacrifice future consumption for present consumption by borrowing money and paying interest. Thus entrepreneurs never know whether the interest rate is above the correct level or below the correct level until after the fact. Governments pressure central banks into lowering the interest rate and thus creating booms because this makes it easier for governments to borrow money and thus finance politically important projects.
            The Austrian prescription for ending the business cycle is to eliminate the government monopoly on currency entirely and allow private banks to issue their own currency backed by gold or some other commodity that satisfies the seven criteria for being good money. Austrians argue that if each bank could issue its own currency backed by gold, then the central bank would be unable to manipulate interest rates and the interest rate would reach the level that accurately reflects the opportunity cost of making an additional loan on its own. If their currencies were backed by gold, then banks would not issue too much of their currency and thus not create lower than optimal interest. Any bank that issued more currency than their gold reserves support would provoke their competitors into buying their currency and redeeming it for gold that the issuing bank does not have, thus bankrupting the issuer and running them out of business. Thus the private banks would effectively regulate each other if they issued their own gold-backed currencies.  The normal argument for the government monopoly on money is that having only one currency rather than many currencies reduces transaction costs by removing the need to switch between currencies. The problem with this argument is that it only makes sense under the assumption that the currency market is a natural monopoly. If that were the case, then only one currency would endure and the government would have no need to give itself a monopoly on money to create a single currency economy. Moreover, the market has internalized the transaction costs of switching between currencies of different countries through the foreign exchange market. There is no obvious reason why an equivalent domestic exchange market would not emerge if the government ended its monopoly on currency and private currencies emerged. Once the transaction costs of switching currencies are internalized into a competitive market they cease to be an impediment to economic efficiency. In summary, the Austrian theory of how money relates to the business cycle implies that the optimal response to the business cycle is not actively manipulating the money supply because active manipulation of the money supply causes the business cycle. Rather, the optimal response is to eliminate the government monopoly on money and to trust that the market will produce the optimal amount of money on its own.

November 22, 2014

Money and Inflation.

                Money boils down to a medium of exchange and how much that dollar or Euro can get you is what the people in society value have that unit of exchange. Most economics class I have been in says that if the money supply is not increasing by 3% each year then our economy is not growing how it should. But let us think. If a dollar is just a way to exchange goods easier then why would the value of the dollar going up be such a terrible thing, and us purposefully devaluing our currency be good?
                If we just had a finite number of dollars in society, when more people want to use the dollar for exchange purposes the demand for the dollar when up, so its value went up. This would be called deflation. Most economists are scared of any kind of deflation because then they say there is less money to go around. But in a real economy, it checks itself often and corrects for this mistake. So if the value of the dollar goes up, then it would be more expensive to pay people the old wage they were used to, so wages would have to first go down. This is where the USA usually messed up, the government doesn't let or highly discourages companies from decreasing pay, hours, or anything which just doesn't add up. But soon after the workers loose a portion of their wages they realize deflation was across the board, so if they got a 10% pay reduction, they will most likely go to the store and by their groceries for about 10% less than their old cost.  
                Money is not the economy, the economy is the network of people that is working together to build products, deliver services and pay for these. This doesn't directly relate to money/currency at all. So we could just let deflation/inflation happen as they will and don’t get government involved. There will always be ups and down based on population or desires to save at the time, but they will level out when you look at it long term. Inflation in the end just devalues currency and punishes savers.


November 12, 2014

Let's discuss minimum wage

     What is the relationship between an employee and an employer? An employer is consuming labor from employees that supply it; their trade off is an agreed wage in which the employer compensates the employee for their labor. That is it for the most part. 
     If an employee does not like the amount that they are being paid, then they should have a choice to find work somewhere else. However, some people are unable to find higher paying work because they are under qualified to work in many places for numerous reasons. So the employee can either become qualified to work elsewhere or go into business for his or herself. 

     Some people believe that we should use the force to have a minimum wage because it is "fair" and instills "social justice". This is a foolish idea for people who do not have what they call a "livable wage". By having a minimum wage, employers will have less money to hire people, and the current amount of people that are working for that employer may be laid off because the employer does not have enough money to pay its workers. This is what the 15Now movement does not understand. 

     If these people are able to raise the minimum wage to 15 dollars and hour, then not only will currently unemployed people in that area have a harder time finding work, but there is a very likely chance that the companies effected by this will have massive layoffs so that their costs of production do not out-weigh the revenue they gain. 

     If there was no minimum wage and wages are drastically decreased, then the entire market would be effected by this. The reason why is this: if consumers don't have money to buy anything, then businesses cannot sell anything. Eventually, the only businesses that could survive are the ones that lower their prices along with their wages. This is a direct relation between wages, prices and unemployment. This also has the opposite affect if there is a minimum wage. 

     This means that minimum wages drive prices up, so that business can profit, and they increase unemployment. If the 15Now movement really cares about "social justice" and "livable wages" they should not focus on raising the minimum wage as this would have the opposite affect on people who are already struggling. 

November 5, 2014


lately I have been reading a lot of Mises for my economics class, and have been conflicting with some ideas he has, but one idea i have to agree with is his views on Interventionism. It seems that in the U.S. Interventionism has been a huge topic of interest and has been put in affect all over the nation. In Mises opinion there should be very minimal intervention by government and quite frankly I would have to agree with him.
So Why does Mises think Interventionism should be minimal? Well Mises analyses Interventionism by observing certain government intervention and seeing if it achieves the end goal that is desired, and in most cases it is not. let's take a simple example of a price ceiling on good A. Now that good A is less expensive, more people can buy than producers are willing to produce at the ceiling price. This creates a shortage, and in a shortage there are certain people that are willing to pay a higher price so a black market is created with higher prices for good A. In the end Intervention has created a shortage and has not successfully been able to lower prices. Mises explains this inefficiency well in Economic Policy: Thoughts for Today and Tomorrow, when he states "The government wants to interfere in order to force businessmen to conduct there affairs in a different way than they would have chosen if they had obeyed only the consumer."
The city of portland is also a great real life example of why government interventionism doesn't work. In the city of Portland, the Government is very concerned about sprawl. In order to decrease sprawl the government has enforced many laws such as urban growth boundaries, reduced parking, smaller yards, public transportation, and many other things. The problem is that this is not what the market wants thus forcing people who don't prefer the new laws out of the jurisdiction of the metro area of portland to other suburbs and cities, thus creating more sprawl. Once again showing that intervention in most cases achieves the opposite of the target goal.
The problem with interventionism is simple. In a market, the absolute best you can do is to match the exact preferences of the consumers. If this is the case, the best government intervention can do is to help the market achieve the exact preferences of the consumer, which is exactly what the market would do anyways without any government intervention, therefore intervention can only do worse than the free market, deeming interventionism inferior to the free market.

November 4, 2014

Seven Bad Ideas by Jeff Madrick

            In doing research on books for an economic independent study I came across the above referenced title. In this book Madrick argues that the most fundamental ideas that many economist hold was the catalyst that led us down the road of disparity and was the foremost cause of the mortgage and banking crisis that many have dubbed the Great Recession. Madrick claims this occurrence is rooted in economic and political policy that dates back to the latter half of the Twentieth Century. Madrick argues that in the 1970s, due to a bad economy including high inflation, high unemployment, high mortgage rates and political conflicts like the Vietnam War and Watergate, the country simultaneously shifted to a different school of thought due to distrust in the government. One promoted by Nobel Prize winning economist Milton Freidman. This political philosophy promoted a free market economic system while restraining interventionism and as Madrick claims, is the cause our most recent economic crisis.  
            Madrick's first argument opposes the notion of Adam Smith's Invisible Hand, saying that Smith never intended for this to be a principal of his economics and theorized that in an ideal economy it could work. Smith's idea is that when leaving markets alone, the pursuit of self interests will produce an efficient outcome between consumer demand and producer supply. An argument against government interference and for consumer choice. Madrick further goes on to promote more government involvement economically and justifies governments manipulation of the money supply through inflation. Bad idea number two is that economists put too much emphasis on keeping inflation low. Madrick claims that inflating the money supply will lead our economy out of this recession. Lastly, Madrick argues, not surprisingly, against Milton Friedman's stance against government intervention. Asserting irrational claims like the need to raise tax rates. Madrick says that we have one of the lowest tax rates of any major nation and we further continue to press for lower taxes. Large governments that use taxes efficiently are essential for our society and economy to aspire. Big governments of past eras fostered efficient economic policies, it is the weaker laissez-faire governments that have brought about the undesirable outcomes like rent seeking and recessions, arguing high wage economic policy is what would spur our economy. The same economic policies we promoted as a country in the 1950s and 60s. High wages drive demand.
            Its hard to know where to start when so many arguments are flawed. Simply looking at the big picture of the 2008 recession and inflation I believe Madrick has overlooked the cause and effects of inflation. Inflation is simply an increase in the money supply. As the amount of money in supply goes up, the value goes down. When this happens people need more to survive. Thus, rising prices are the result of inflation and a depression is the correction period that follows. The only way to prohibit a depression is to avoid inflation. Inflation was the cause of the Great Recession, not the answer as Madrick explains. Post 9-11 as the government pumped money into the economy to pay for the abroad operations the money supply rose drastically. This money found its way into real estate and caused one of the largest bubbles in history. Because of the excess money, lenders took risks that they wouldn't have otherwise. Shortly before the recession government tightened economic polices raising interest rates. This didn't change lending practices though and shortly following the bubble burst. Quite a different picture from the one explained by Madrick. Governments involvement clearly made the situation worse, not better. A strong argument against interventionism and inflation.     

Government intervention in work place laws

Workplace discrimination is an issue that has plagued the United States for many years. The government realizing its mistakes decides the best course of action is to enact laws protecting those who face discrimination. Numerous laws have been enacted such as equal pay for equal work and so forth. I argue however, that while these laws sound good they fail to fix the problems they were created for.

Discrimination can occur in a variety of different ways and in very different ways. For this essay I will be talking about workplace discrimination via unemployment and differing wages. One of the largest problems talked about these days is the gender pay gap where women make less then men. One such law was enacted in 1963 was the Equal Pay Act. I hope that the majority of people would agree that people regardless of the physical characteristics should make the same for equal work, and at the time it is easy to understand how this law was created. However, I argue that this law and those that followed failed to fix the issue of equal pay and may have made things worse.

In a free market system the market itself will punish any employer with discriminatory practices. An example could be an ice cream shop where a particular owner is looking to hire an additional worker to serve ice cream. Two people apply for the job one with blue eyes who will add 10 dollars a day in profits and one with brown eyes who will add 20 dollars a day in profit. The simple answer would be to hire the one who will add the most profit. The owner of this shop however, has a prejudice against people with brown eyes and because of that prejudice hires the person with blue eyes and loses out on the additional 10 dollars in profit a day.This same ice cream shop example can be looked at in another way. For this example lets say that both employees productivity is the same but the owner still has his prejudice against brown eyes and for that reason he pays the person with brown eyes less even though there productivity is the same. to Fix the situation the government imposes a new law saying that all employees must be paid the same. to the owner, because of his prejudice, will fire the employee with brown eyes because he believes that persons productivity is below what he is required to pay them because of the law.

In this situation had the law not been enacted the individual would leave the ice cream shop and be hired by someone without that prejudice at a rate their productivity deserves. Its understandable for people to think that a law is the solution to an unequal pay issue and while the above analysis is short I hope it shows that laws always have unintended consequences. "The most shocking abuses of minorities and women in history occurred under the regimes of tyrannical governments" not from any amount of individuals collective prejudices. The problem I see is that as more laws continue to be added we move further and further from a free market. 


Murphy, Robert P. "The Economics of Discrimination." 2 August 2010. Library of Economics and Liberty.