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Economists

Natural Rate of Interest – Wicksell – Loan Capital Equal

Demand and Supply of Loan Capital Equal

Wicksell’s second definition of the natural rate of interest is the rate at which the demand for loan capital and the supply of loan capital is equal.

Wicksell writes “The rate of interest at which the demand for loan capital and the supply of savings exactly agree, and which more or less corresponds to the expected yield on the newly created capital, will then be the normal or natural real rate. (Wicksell Lectures on the Political Economy V2 Money (1935): p.193)

Wicksell’s second definition of the natural rate that equalizes the demand and supply for loan capital should be the same as the marginal productivity of this capital, that is his in natura (barter, term used by Mises) definition. He is not changing the definition but stating it from another angle.

Wicksell’s Capital Defined

The key here again is Wicksell’s definition of capital. Wicksell defines new loan capital, as mobile and not tied up in the production process. It is a very specific form of capital. It is not synonymous with common understandings of capital in terms of wealth or financial capital or simply any tool that enhances the production process, including fixed machines. Rather, Wicksell’s understanding goes back to the original meaning of capital from Adam Smith. Smith understood capital as ‘stock’ which in farm terms meant movable capital from a farm, hence the word livestock.

Wicksell writes: ” Of course, we are not here primarily concerned with capital which is more or less fixed or tied up in the production, such as building, ships, machinery, etc., for its yield has only an indirect influence on the interest rates in so far as it can attract or repel the employment of new capital in production. It is the latter mobile capital in its free and uninvested form with which we are concerned.”
Wicksell, Lectures on the Political Economy V2 Money, (1935): p.192

Not monetary or fixed capital

Wicksell discusses the production process and real physical capital, and not the price in money terms or credit at the bank for loanable funds. The supply and demand for capital meet in real, rather than monetary forms. Specifically, here Wicksell’s discussion again is concerning real mobile capital. This is congruent with his earlier writings that this is a non-monetary return on capital. To reiterate the point it is called the “natural” rate of interest rather than the monetary rate of interest, the loanable fund’s rate of interest.

Wicksell’s Theory did not Elaborate on Estimates

Nor is it an estimated rate of interest in a monetary economy. If Wicksell wanted to develop that theoretical line, that is an estimated rate in a monetary economy, he would have elaborated on this. Rather he specifically used the word ‘imaginary’ in reference to the natural rate and discusses at length the notion of capital being real and this means distant from any monetary influence.

If money were embedded in this equation it would change the whole theory. It would be a different theory, and would not link the real and monetary worlds in the same way, rather a distorted way.

Wicksell writes: “My thesis is, therefore, only an abstract statement, and somebody, perhaps, will ask: what is the use of it then? But I venture to assert that it may be of very great use all the same. Everybody knows the statement of Newton that, if the attraction of the sun were suddenly to cease, then the planets would leave their orbits in the tangential direction; this, too, of course, is only an abstract proposition” Economic Journal, XVII (1907), pp. 213–220.

It is a theory. A theory that describes an abstract theoretical concept, the “mechanics of price”, rather than a prescription for monetary policy to engineer the demand and supply for loan capital.

Wicksell does not go into how this should be determined or estimated or if it should be estimated, rather it is positive explanatory theory rather than normative policy assertions with welfare trade-offs.

These definitions of the natural rate of interest will be later taken up later by Mises in The Theory of Money and Credit in 1912, and Hayek’s Prices and Production in 1935. Keynes also explored this in Keynes’ A Treatise on Money in 1930.

Categories
Economists

Natural Rate of Interest – Wicksell’s Moneyless Rate

The natural rate of interest is an unobservable hypothetical rate of interest that was conceptualized by the Swedish Economist Knut Wicksell. There were precursors to this theory, such as Henry Thorton An Enquiry into the Nature and Effects of the Paper Credit of Great Britain in 1802, however, it was Wicksell’s theory that can trace a direct theoretical lineage through the twentieth century (Mises, Keynes, Hayek, Woodford) to today’s central bank’s key econometric variable and policy tool R-star.

Great knowledge is often lost through time. This is why it is imperative to return to the original understanding of Wicksell’s natural rate of interest to gain insight into current definitions and uses.

Three definitions of Wicksell’s Natural Rate of Interest

The natural rate of interest as understood by Wicksell meant three different interrelated ideas, depending on which rendition Wicksell was writing about.

  1. Barter Ratios – The rate of interest that would correspond to the return on new capital if barter ratios were used.
  2. The demand for and supply of savings and investment – Rate of interest that would equalize savings and investment ex-ante.
  3. The rate which brings price stability – The rate of interest that when harmonized with the market rate of interest would bring general price stability.

Subsequent economists developed or at least emphasized Wicksellian ideas based on the particular definition that worked for their model. For example, Mises, the in rate with relative prices, Keynes I=S ex-post, Michael Woodford focused on price stability through econometric estimates.

The key insight here is these three definitions are interrelated and should be synonymous, if and only if, you understand the original definition of the natural rate and the intent of Wicksell’s theory, that is it was an interest rate that was based on the capital theory of Böhm-Bawerk.

Taking one of these definitions or a part of it would lead to incorrect theoretical assumptions and models.

The purpose here is to look at the first version of this rate of interest.

Natural Rate of Interest in natura

Wicksell’s definition of the natural rate of interest by Wicksell is as follows:

The natural rate of interest as understood by Wicksell was the “rate of interest which would be determined by supply and demand if no use were made of money and all lending were affected in the form of real capital goods.” (Wicksell Interest and Prices p.188).

In other words, the natural rate would “more or less correspond to the expected yield on newly created (real mobile) capital” (Wicksell, Lectures on Political Economy V2 p.193) if barter ratios were used.

This definition is what Wicksell deemed as more accurate and precise definition than simply the ‘real interest rate of actual business’.

Wicksell writes “A more accurate though rather abstract, the criterion is obtained by thinking of it as the rate which would be determined by supply and demand if real capital were in kind without the intervention of money” (Wicksell, Interest and Prices pp. 29-30).

The important point here is Wicksell’s definition of the natural rate specifically and intentionally excluded the influence of money.

That is, the natural rate of interest by definition, as understood by Wicksell, is expressed in non-monetary terms. In other words, the natural rate is the marginal productivity of capital without reference or use of money and money prices.

This is why it is called “the natural rate of interest”. If money is used or referenced, such as money prices, then this is not the natural rate. If money prices were used it would be another rate, by supported by another theory, but it does stand on a footing in the context of Wicksellian theory.

  • Therefore based on the above quotes, directly from Wicksell an understanding of Knut Wicksell, the natural rate needs to be non-monetary.

A Unified Theory of Money

A unified theory is the central point of Wicksell’s theory. The reason why Wicksell’s theory is important is not just to explain price movements or disequilibrium, it was to create a unified theory of economics, that included capital, interest, and money. Wicksell stated the issue he was trying to correct in 1898 was “there is no complete and coherent theory of money.” (Wicksell, Interest and Prices, p. 27).

There was a dichotomy between real-world economics and monetary economics. The quantity theory of money explained price movement in the long run, but after price adjustments occurred as a result of the increase in the supply of money, there was little else. It was again, a world of supply and demand and a world of money which had no real effects other than aggregae price level movements.

In contrast, Wicksell put his theory of interest intentionally at the center of theory because this was the linkage, the element that unifies these two rehalms of economic thought.

However, in order to unify the bifurcated theory, the two worlds need to be defined clearly and not intermingled or it would dilute or nullify its theoretical power.

Therefore, the starting point needed to be a theory of interest that was based on a natural rate, a rate without money. This is because that was the representative rate of interest for the real world, the in world without money. It was the rate not in money.

Confusion in Economics in Wicksell’s time and today

Wicksell goes on to write ” Economists do not tire of impressing on their students that money and real capital are not the same , that interest on capital and interest on money are consequently different things”. But as soon as it comes to apply these ideas, almost without exception ‘the two subjects are mixed up in the most inextricable confusion’, as Mill puts it”. (Wicksell Interest and Prices p. 30)

It is this confusion that needs to be clarified. Micahel Woodford assumes a definition of the natural rate of interest, that is not congruent with Wicksellian theory. Neither the theory of Knut Wicksell of the Wicksellians that further, studied Wicksell’s ry.

Wicksell writes ” It is only with the development of a real theory of capital” (Jevons and Bohm-Bawerk)… it has become possible to make a survey of the phenomena of capital and interest, as they would be exhibited on the purely imaginary assumption that they could take place without the intervention of money and credit” (Wicksell, Interest and Prices p. 30).

Wicksell continues along the capital-centric lines by stating: “There is nothing so far to bring the rate of interest on money into coincidence with the rate which would be determined by the supply and demand if real capital goods were lent in kind.” (Wicksell Interest and Prices p. 30).

Therefore, we can conclude here, based on his own words, that the base of his theory of the natural rate of interest is real capital in the content of a world without money.

Metaphor of Water

It would be analogous to developing a complete theory and uses of hydrogen based on the properties of water, in a universe where only water existed rather than hydrogen in as an isolated periodic element. A better theory needs to understand what hydrogen and oxygen are in isolation, rather than only how hydrogen acts when oxygen is present in the form of water.

Empirical test of Wicksell’s Natural rate of Interest

Barter ratio natural rate estimate – I would try to estimate the natural rate of interest as if barter ratios were used, that is Wicksell’s original understanding of the natural rate.

For example, calculate the natural rate in a competitive market like potato seeds and potatoes. Potato seeds and Potatoes are essentially the same because a field by forgoing sale or consumption of a portion of current stock and setting it aside for seed. Therefore, the ‘seed capital’ can be calculated as a ratio based entrepreneurial inter-temporal calculations.

I could also use, sugar cane, or garlic as the seed is the same as the product.
I would sample say 100 potato farmers and determine the rate of return they would expect if they lent physical seed out of their yield. I would formalize the test.  It seems like a trivial point, but if I could prove that the expected rate of return on real mobile loanable capital under a barter ratio was different than R-Star, then this would tell us something. Perhaps there really are multiple rates of interest, perhaps R-Star is not the real world.
What does unobservable mean – Pretense of knowledge

The word unobservable in physics (Woodford wanted to study physics) is not the same as logically unobservable. In physics, you can calculate an unobservable distant star though interference.

In conclusion, if you read about Federal Reserve Policy, and their R-star for monetary policy challenge the idea that perhaps their model lacks theoretical rigor because the assumptions they base it on are not tied to the theory of Wicksell as they claim it is.

Categories
Economics

The Real Meaning of Laissez-Faire

Laissez-faire is an economic philosophy that literally translates to ‘let do’ or ‘let go.’ It generally means ‘leave it alone’ in reference to economic policy. Laissez-faire is an import word from the French because the genesis of modern economic thought connected to these ideas was physiocrats in the 18th-century. However, these ideas go back to ancient times.

Specifically, Laissez-faire economics defined takes the view that the relationship between economic agents and the government should be left unhindered. Free market trade and commerce, if unregulated, results in a more efficient outcome, and higher general prosperity than interventionist policies. It also results in greater individual happiness or at least self-actualization through unrestricted social interaction in the economic arena. This interaction tempered by moral choice and social awareness.

A laissez-faire economic philosophy relates to local regulation as well as macroeconomic financial and monetary policy. In the area of political debate, topics include trade, taxation, regulation, property rights, central banking and choice, and human action. It does not include moral issues that deprive others of life, liberty and the pursuit of happiness. Libertarians, classical economists, and laissez-faire economists are not anarchists; this is an important point. On the contrary, their goal is to improve human cooperation and peace as these ideas facilitates economics freedom.

However, the critical point often missed by too many of my students at first glance is, Laissez-faire economics is a spectrum rather than an either/or. You do not have to embrace one idea or the other. Even within the community of free-market economists, there are those that are extreme Laissez-faire and others that see government as ‘the night watchman.’

Therefore, it is essential to reserve judgment until one develops an economic philosophy that tests assumptions of any idea on the spectrum logically and if need be with empirical research.

Why there is confusion about Laissez-faire economics

The confusion is people often mixed with human normative statements about what ‘should be’ based on personal views on ‘justice’ with economics. They extrapolate and project the ends onto the means.

We can acknowledged that justice is the ultimate good. However, our conception of what justice is varies as does the way to achieve it. I recommend the book Six Great Ideas by Mortimer J. Adler for a clarification of this topic and why justice is the summon .

Yes, most people have compassion and sincere intentions to better humanity and a desire for justice; however, how we define and achieve this is the issue.

Some people subscribe to the classical liberal philosophy in economics, and others follow the derivatives of Karl Marx, e.g. socialism and communism.

Austrian economists like Mises, Hayek, Rothbard, and Robert P. Murphy want to make the world a better place for us to live by emphasizing choice and individual human action as the drivers for improvement.

Similarly on another group of economists like John Maynard Keynes, Michael Woodford, and Paul Krugman also want to make the world a better place, by developing theories about how political entities (central governments and central banks) should engineer people’s economic activity because of perceived market failures.

How can both of these educated, intelligent, knowledgeable economist vary so radically in their ideas is their ultimate aim is a more just society?

Adding to this confusion is the current trend in economic research. That is the desire to empirically test ideas, even if they are on an aggregate macro level. This empirical approach stems from the belief that economics is science closer to physics than social science. It is a science with laws and generalizations that are universal and humans are the particles.

The problem with this is individuals and their actions, and most important, purposeful intentions are not abstractions. Their dreams and desires that are changeable and uniquely human. It is not like if I drop an object on a planet with a specific gravity it will fall. Rather, humans are complex and even transcendent.

To abstract into seeing humans as objects and data points to be steered into a model’s constructs with the end goal of the model being a statistical average based on an economic index is an academic loss of objectivity. Words like output gap and average income, the natural rate or CPI are the targets of these models (despite their conflicting definitions) and do not represent individual choice.

Therefore at the core, an understanding about laissez-faire economics are not about which group of economists care more about humanity or can build a better model, rather it is about which group of economists understand some fundamental philosophical ideas.

Recommended thinkers in laissez-faire political economy

Adam Smith’s Wealth of Nations in 1776 and the Theory of Moral Sentiment are two works which detail this discussion.

However, it was Ludwig von Mises who in his book Human Action in 1949 helped clarify these issues.

A modern discussion is a book by Robert P. Murphy titled Choice Cooperation, Enterprise, and Human Action clarifies this further for the modern reader.

The underlying premise of the above mentioned political economists is, that when people are left to their ‘enlighted self-interest’ then society as a whole benefits through innovation and cooperation, even if the arena of economics is competitive. It is this free human expression that allows for society to prosper and individuals to be happy.

Conversely, the restriction of liberties stagnates society and has a significant social welfare cost. There is a loss of consumer and producer surplus. This loss of productive and allocative efficiency often exacerbates microeconomic loss and transmutes into large scales cycles, such as the Great Depression or Great Recession (caused by monetary mismanagement) or the collapse of the Soviet Union (caused by central planning of human goals and desires).

Plans by the many or plans by the few

Keynes versus Hayek

Subjectivity theory of value

A major contribution for Austrian Economics is taking Carl Menger’s subjectivity of value theory and understanding this applied to price. Price being the an inter-temporal information point. Price conveys information to individuals in society about how to satisfy others people in the market place. In contrast, if you take an objective theory of value such as Marxism which is tied to cost, specifically labor, then you see humans acting contrary to individual and societal happiness.

This can also be applied to monetary theory and the price of money/loan-able funds, that is the interest rate. However, that is another topic.

Selfishness or Service

Arguments that laissez-faire economics is governed by selfishness paints humans or society as innately evil. Further, it implies there are a few elite, ‘the good ones’, government bureaucrats and politicians or Ivory tower PhDs that are untainted by this malaise of humanity, so we surrender our individual rights to allow them to steer us for the ‘greater good’.

Whether it be Marxism, Socialism or Keynesianism, the market interventionist philosophy misunderstands the subtle point that there is a difference between pathological self-absorption and enlighted self-interest. This self-interest, which is aware of the whole of humanity, acts, to satisfy the wants of desires of others. This is manifest formally in the supply and demand construct but generally, in countries, higher on the freedom index are more prosperous.

Consider this, that generally, people are not robbing ATMs but rather, people are making Youtube channels and search engines and growing local organic produce for the farmer’s markets, finding cures for pollution like bacteria that eats plastic waste. This is why Malthusian predictions of the apocalypse caused by economic demand outstripping supply have not come to fruition, except in restricted economies like modern-day Venezuela or North Korea. The innovation brought about by creativity (almost by definition free-thinking), combined with enlighted self-interest is what makes laissez-faire economics not something to be ackknoweldged but rather understood.

We are always searching for ways we can serve one another. Laissez-faire capitalism and is not evil, but rather merely another word for human freedom and the belief that most people are innately good.

Categories
Money

The Economics of Growing your own Food

‘I wish I could grow money’. You can. Growing your own food works. If you are trying to save money or improve your diet from a culinary perspective nothing beats growing your groceries. In this post, I will give you a plan that I personally implement. It saves me substantial after-tax disposable income. This is a summary of knowledge that are hard-learned lessons from experience.

To toot my own horn, it would be hard to find this advice so compact and useful than in this post, so read on. I developed this system myself. It works. Therefore, if you want to save money, and good advice from a frugal economist, here is how.

Perhaps you care about your own money or the planet?

Further, if you care about sustainability and saving the planet then perhaps you can start doing things on a small scale like this and be a test case for sustainable agriculture. You can read Small Is Beautiful: A Study of Economics As If People Mattered by E. F. Schumacher and take inspiration. Or perhaps your motivated by self interest. Adam Smith would be proud either way.

As a bonus, this is especially written for those of use who are lazy and cheap.

Money savings can be beautiful
  • If you can save 500 dollars a month, it is easier than asking your boss for a raise.

In the old days people use to market garden produce like tomatoes and call these ‘mortgage lifters’. Today the system or the matrix has made people soft.

I encourage people to stop worrying about their day jobs and start thinking in terms of entrepreneurship and rugged individualism.

This is from an Austrian school of thought economist (Mises, Schumpeter, Hayek, Robert Murphy) coupled with the American spirit.

How much do you spend on food?†

According to the USDA a family spends about $902 a month in 2005 on a moderate food plan. I would say in this year, it is over $1,000 a month.

You can find the data here:

Cost of food per month

What I find strange is that this is grossly understated. If you work in a professional job and eat out, buy ready meals, coffee and snacks some estimates are north of $2,500 a month.

Perhaps there is a large substitution effect in play, people sacrifice what everyone ate in my parents time, that is organic, local produce with imported heavily sprayed low nutrient produce and package food. This substitution effect is to save cost but the quality has gone down.

That is one of the main reasons for obesity. When I moved back from Europe I put on 20lbs in no time eating the same food. I realized quality matters. Obesity has a cost also.

I cannot imagine what kind of food people are buying and feeding on. I often look at the shopping carts in front of me at the check out line and I can see. I observe, large bags of chips, and inorganic white rice and cheap low-fat milk.

When I do shop, I only shop at organic, local markets and my monthly family budget is less than $500 a month. Before I grew my own food it used to be up to $2000 a month but more realistically $1,200 dollars a month in my personal gilded age. Further, my diet has improved. My daughter is the tallest in her class.

Some people are like a modern day Henry David Thoreau – one of them: Rob Greenfield.

Look how happy he is. He takes it to the next level, you do not have to but common sense tells us that you can learn some food independence.

What I buy is dairy, flour and chicken or meat that is on sale for example, a few basics. However, the savings is substantial and you can take pride in providing for your family beyond just pushing paper behind a desk, which we all do.

If you do not have space, make a plan and find space. Innovate instead of telling me why not.

Excuses not to grow money

If you do not have space, grow vertical gardens and some inside. If you are in an apartment look for in a community garden. I did all those these so yes, it is possible.

These sweet potatoes grow up the side of my house and I harvest them when needed.
  • When American settlers came over on wooden ships to this country it seemed as those people were made of iron. They hacked their way out of the wilderness and buried their dead along the way. They survived in harsh and primitive conditions building their lives from scratch. You too can survive.

So no excuses, you can do it with little to no money – all you need is some sweat equity.

Thanks to the garden my family has gourmet, healthy meals every night of the week.

How I rotate my crops to bring prosperity to my fiefdom

Three Crop rotation System

I do the three crop rotation based on the idea that in the Middle Ages brought prosperity to Europe. An abundance of food allowed people to produce other things that were not connected to survival.

In economic terms, it was an outward shift in the PPC curve.

Here is the plan to grow food with no fertilizers, pesticides, herbicides or any amendments you buy at the store. Forget buying things. You need brain power rather than throwing money at the field.

My yard was pure sand. Nothing but weeds.

I had only Florida sand and not the garden is hard to stop. I use brainpower not muscle (these came after working in the garden) or money.

I live in growing zone 9A so I can grow all year around. If you can not you can modify this.

Tools you need – the capital

For an initial investment of fewer than 150 dollars, you will be set for life. I started only with a shovel so really you do not need more than that.

  • A shovel 15 dollars
  • Cover crop seed purchased from a professional seed store that sells to farmers. I can give you a company. Total cost with inoculat might be 35 dollars. You can save the seeds after the first season. If you are really cheap you can gather clover seeds from the wild.
  • A tarp of some sort or you can use cardboard for free, 20 dollars.
  • A couple of light plastic buckets 11 dollars
  • A cart with inflatable wheels 60 dollars – much better than a wheelbarrow.

I keep my front yard my front yard, grass and flowers and OK a few herbs and OK a few fruit trees. But from the front people have no idea what I do in the back.

In the backyard, I divide my yard into three sections for growing. I also leave a section for green grass so we can play. My whole property is 1/3 an acre. But perhaps I use less than a 1/4 of it for growing for my family. I have to measure this. In any given season it might be .1 acres because I use the three field rotation system.

calculate each soil amendment and look for the most cost/effective method. You can grow a tomato but who cares if it cost you $10. You want it to be free except for the opportunity cost of your time (which beats the gym).

Do not spend money, rather grow soil

In two of my fields, I grow cover crops to sequester nitrogen from the atmosphere. For pennies I plant in fallow fields cow peas in the summer and Austrian peas in the winter. I also grow clovers and alfalfa, and Crotalaria juncea (if I want to get exotic). These cover crops in fallow field with two seasons of rest, will supply all the nitrogen you need for your growing season.

I have inoculated all three garden plots additionally with Azospirillum Brasilense bacteria which does not need a symbiotic relationship with legumes.

The cover crops should crowding out the weeds. If you want to prep the field before you can remove the grass by hand or tarp it for a month and then remove it. I have done both. Tarpping can be replaced with covering it with hay, but that has a cost. Many times after fall pumpkin sales people will give you bales of hay if you ask. Rotting hay is even better.

That is your fertilizer. Those are your herbicides. Some people flame the weeds I do not. I tarp and plant.

I inoculate the field with mycorrhizal fungi, by planting a sock full of rice under a tree and then cultivating the fungi in a bucket. You want to build this up.

So far, not a lot of work, just brains. The good news is I do not need to mow most of my lawn, I just let it grow.

Once you have your plots under production, the first year might not be a high yield, I recommend adding free amendments.

I use homemade compost

  • My compost is made with:
  • Food compost
  • If you want to add more you can add the following
  • Leaves the neighbors bag up for the county to take away.
  • Seaweed I collect
  • Grass cuttings
  • If I am outside I pee there. It is basically the same as expensive fertilizer.
  • Horse manure which you can get free in any town.
  • Basically, everything goes there. Compost everything.

I do not turn it, I do not work it or use any bins, just a pile by the forest. Nature will decompose everything.

Other considerations

If I see bugs I squash them and leave them on the plants as a deterrent. I rotate the crops and mix them so they do not develop infestations. This will throw off mixed signals to the insects. It is called a chaos garden. If you need to you can spray plants with neem oil solution.

Chaos garden – each plant symbiotically helps the other.

Seeds – I buy wholesale or ebay, or from the food I purchase. Eventually I save the seeds or let things permaculture over.

Any fruit tree from your neighbor or deserted land you can propagate with a cutting.

What if you are super lazy?

If you want a white glove approach to garden, just tarp the grass, a month later throw alfalfa pellets from the feed store down and do nothing else. Then plant seeds. This is the cheapest all purpose fertilizer. A 50lbs bag will cost $14 and provide everything you need for a small food plot. It has triacontanol a grow hormone and will also act as a mulch.

You do not have to do anything else. No composting, no cover cropping, no work. Your ROI will still be green.

Row spacing

Whatever you feel good about. Some people cram it in and others space.

When I am motivated I build a hugelkulture mound. It takes no additional soil and gives you nice drainage and organic matter.

I also use free woodchip from tree companies. You can check out the Back to Eden method. These are optional.

What to grow to save money


I recommend starting with herbs as this is the high-value point. Find out what people grow professionally in your area as they have an economic interest in growing. Herbs are your vitamins, even if your other consumption is starches, herbs help your diet.

This is a yam that grows over 50 lbs and tastes like an Idaho potato. You could drop in the woods and it will grow.

Next, choose things that are almost invasive in your area that are food. For example, in Florida people grow everglade tomatoes, Seminole pumpkins, sweet potatoes, dioscorea alata and mulberry. You can not help to have these grow. If living in a post apocalyptic world they would still be growing on their own. You almost can not stop them from growing here. They are made for this soil and climate. Find the equivalents in your area. Write to me if you need hints.

Florida native tomatoes that grow like a weed. Everyday there are new tomatoes. Hard to believe since I could not get a decent tomato to ever grow.

If you have mycorrhizal fungi in your field and grow cover crops and add compost your garden will blow you away with the food that grows. You will make the desert bloom.

Some people go for calories and in a prepper paradigm it makes sense, I grow what is easiest to grow and taste good.

Write me if you have questions how to save money by growing food

You can give your food to your friends and enemies and build up social credit or karma depending on your perspective.

Even if you only save 500 dollars a month, think of what you can do with 500 dollars every month. Enroll your kids in chess camp or buy books or go to Europe. I am pretty lazy mind you, and if I can do it so can you. You will have fresh food every day.

Write me if you have questions or comment below. I want you to be on the road to prosperity.

Categories
Economics

What are the Causes of Inflation?

Inflation is a monetary phenomenon. Inflation can be defined as an aggregate increase in the prices or a decrease in the purchasing power of money. A price level change can be sustained or temporary. Inflation is sustained. Increases in the price level from exogenous shocks do not continue to increase prices generally.

In contrast, when monetary policy incorrect, there can be a sustained increase in the price level. The question is what is a monetary policy that creates inflation? There is a second question, how is inflation manifest. There is a third question, is a stable CPI synonymous with money macro equilibrium.

Monetary policy is bank action. There are two primary types of monetary policy that cause inflation or deflation.

  1. The central bank increases or decreases the quantity of money.
  2. The central bank increases or decreases the interest rate.

Quantity Theory of Money

The quantity of money is the oldest explanation for changes in the price level. Simply stated ceteris paribus for the velocity of money and the real output, the price level will increase if you increase the money supply. The equation is: P = VM/Y

This theory is an old theory, known in Roman times and before because of it is intuitive. If you increase the amount of money in circulation you will see a rise in the price level. The modern economists, John Stuart Mill and David Hume articulated this.

The Federal Reserve Bank in the US and the European Central Bank has kept a fairly steady increase in the money supply. Hyperinflation in developing countries or the interwar experience of reminded modern central banks of the welfare cost of irresponsible monetary policy connected to changes in the quantity of money.

Definitions of the Money Supply

The most relevant definition of the money supply today is M2. M2 is cash and near cash plus bank reserves. Most people think money is cash, but relevant for monetary stability is M2.

Modest increases in M2 in a growing economy does not cause inflation.

Milton Friedman resurrected the quantity theory of money and advocated rule based monetary policy with the quantity money being the target.

Why the Quantity theory of Money is abandoned?

The theory is correct in the long-run and especially in cases of hyperinflation. However, for the intermediate term a better theory emerged.

Despite modern-day commentaries, we are not simply “printing money”. However, we are doing it metaphorically. This can be understood with a interest rate theory of inflation.

Knut Wicksell the founder of Modern Monetary Theory

Wicksell’s book Interest and Prices in 1898 explained a more relevant theory of price level movements. . The idea is there was an observable bank rate of interest, that is the rate you might see at the bank. This was known as the market rate of interest. However, there was also another rate of interest that this market rate was to be measured against. That was the natural rate of interest.

A level of interest is too low or too high relative to the natural rate. A nominal rate tells us little about the appropriate level or the target for the interest rate. However, the nominal rate is relevant when compared to the natural rate. This is not to be confused with the Fisher rate real rate of interest which is simply, the nominal rate minus the inflation rate.

Money Macro Equilibrium

The natural rate is the marginal productivity of capital if barter ratios were used and when harmonized with the market rate should bring money neutrality, that is no monetary inflation or deflation.

There still may be a change in the price level, even a persistent change but that would be caused by other factors, such as technological improvement.

Why are interest rates important for the prices?

Interest rates are a price. Specifically the price for loan-able funds. Purchasing power that can be used to fund the capital formation process. It is a price that is also inter-temporal. That is purchasing power used today versus the future.

A price – any price including an interest rate, conveys information about time and subjective valuation

Wicksell’s theory shifted the emphasis from a simple relationship between money and capital formation and expansion to purchasing power or credit. We are really talking about what level of credit should be in the market to fund entrepreneurial capital expansion or capital lengthening (Mises, 1912, The Theory of Money and Credit)?

Credit is more relevant in a modern economy because this is what entrepreneurs use, they certainly are not paying in cash, rather money is done in a bank giro system, money transfers and credit.

Therefore if interest is what governs the supply and demand for credit, the central bank tries to bring money to a neutral or equilibrium rate.

The natural rate of interest as a monetary policy target

After the central banks jettison targeting monetary aggregates, interest rate targets are the primary way that central banks achieve their mandated policy objective of price stability.

Misunderstanding of what the natural rate is has lead central banks to misestimate the natural rate or not consider there might be multiple natural of interest. It might be low because rates are low, and this a feedback mechanism.

The Fed uses an interest rate target called R star, this is an empirical estimation of the natural rate of interest. This theory is largely based on economists as Michael 2003, Interest and Prices. They believe like Wicksell, that if the natural rate of interest is equal to the market rate, in this , the Fed Funds rate, money would be neutral and price moments would be worked out in the real sector by supply and demand.

What is wrong with interest rate targeting?

The issue is, these estimates are wholly empirically based. The illusion that they have anything close to the natural rate estimate is manifest everything time a chief economist proclaims “this time is different’. Lets look at the theoretical basis for this central bank theoretical error.

In one rendition of the natural rate of interest Wicksell wrote:

This is necessarily the same rate of interest which wold be determined by the supply and demand if no use were made of money and all lending were effected in the form of real capital

Interest and Price, p.188

This is a monumental error by the Federal Reserve. It is an assumption. The assumption is in an economy where is ubiquitous, can you make an estimate of the rate of interest in ? That is a rate of interest is barter ratios are used. How can you have a natural rate of interest, a is hypothetical in a barter economy, if money is everywhere? It is a theoretical paradox with realworld implications.

If you are wrong, you will start a boom and bust cycle as articulated by F.A. Hayek. If money is not neutral and the price of credit is miss-priced than like every other price you will have a loss in surplus. Since there is no market for money unto itself, monetary disequilibrium is worked out through all prices across all markets.

I explain Austrian business cycle here in a natural rate framework. That is how a misunderstanding of the natural rate and how it coordinates investors and savers ex ante causes capital distortions which can be coupled with price distortions.

This is manifest giving wrong signals to entrepreneurs, like traffic lights that do not work.

Rates are too low to harmonize investors and savers ex ante. This is distorting the capital structure.

The result is an equilibrium that is less than optimal. It might seem like everything is functioning as should in the economy, especially with a stable price level defined as the CPI, but it is not.

The economy is in a disequilibrium that cannot be perceived at first glance because the natural rate of interest is at the wrong level. Only after the crisis has started or is this reality manifest.

How inflation is manifest

Typically there is not a traditional rise in the CPI like in old style theories and economies. This is because productivity gains associated with technological innovation has decreased the overall cost of production. Rather inflation is seen in asset bubbles like real estate and the stock market.

Asset bubbles – the new inflation

Business cycles and inflation are connected. Not in the old school Keynesian Phillips curve but with meteoric rise in the stock market. This is fueled by credit and debt brought about by a market rate of interest that is too low.

The cause of inflation, whether it is old style CPI inflation or manifest in asset bubble like the market the Federal Reserve bank’s non-market solution to the money supply. Creating empirical models which are based on wrong assumptions.

Productivity gains results in cost efficiency and a lower CPI.

Why is health care and college so expensive while the CPI does not manifest this? Because everything we observe is in aggregate. Because productivity gains in consumer goods have decreased their relative price, prices with social welfare in places like education and health have inflated.

The bottom line in the Federal Reserve causes price disequilibrium even if inflation is not manifest. This inflation is manifest in a estimate of the natural rate of interest.

Categories
Economics

Keynesian vs. Austrian Business Cycle Theory – Explained

I often ask my class to compare the Keynesian explanation for the business cycle compared to a monetary or Austrian explanation of a business cycle. I am primarily looking for the theory, rather than policy recommendations. I am looking for objectivity and positive economic analysis.

Here are my class notes summarized in pdf. If you need to study for an exam or just want to the ideas quickly you can download them here. This simple list of economic keywords. It is only a summary table.

Download Keynesian and Austrian Business Cycle Theory in PDF:

For a verbal discussion on the subject read the post below.

Funny answers my students give me in the Keynes versus Hayek debate

I often read and hear “Yeah man, Keynes was for big government and Hayek believed the government should stay out”. Then they apply some normative statement connected to what they think is right based on opinion. “Dude, Keynes man, he was bad”.

That is basically correct, however, I am really looking for the theory behind this. Why did the economists of the Keynesian school of thought and the Austrian school of thought come to come to different theoretical conclusions? It is the economic theory that brings you to a conclusion and even an economic ideology. Therefore, I am concerned with an objective non-basis statement of the theory as they understand it. In fact, sometimes I disallow students to use the word ‘government’. It is a too general cliche word. Better would be to go into fiscal or monetary policy.

Depending on which hat I wear that day, I would argue either the Keynesian or Austrian ideas, and sometime even suggest a synthesis. However, a synthesis as understood in today’s terms is really a Keynesian model. Full disclose, I come from a more Austrian perspective.

Regardless, I want my students and my readers to be able develop critical thinking. At the end, I want people to weight the evidence and perhaps draw some conclusions based on which theory is more logically rigorous and what the empirical evidence suggests. Being objective and impartial needs to be the stance from the start so even when you have a conclusion you can better defend it as you understand both sides.

Lucky, I find politics boring, this is why I prefer the theory over the prescription.

Lets get right into it.

How Keynes explained the business cycle

Y=C=I+G

Keynesian economics is an under-consumption model and explanation for the business cycle based on under-consumption. In the Y=C+I+G equation, C or consumption is the biggest component. Many people think G or government is, however, it is C. G is the most stable and I, Investment is the driver behind business initiatives and sensitive to interest rates.The reason C fell or falls is because Keynesian economics is an under-consumption model and explanation for the business cycle based on under-consumption. In the Y=C+I+G equation, C or consumption is the biggest component. Many people think G or government is, however, it is C. G is the most stable and I, Investment is the driver behind business initiatives and sensitive to interest rates.

Say’s law

Keynesians believe if C is the largest component, the lifeblood of the economy there is where the focus of the theory is. In contrast to Say’s law, Keynes believed demand creates its own supply. If people demand something business will respond and bring it to market. If consumer demand falls then business will have to cut back. Objectively this makes sense.

Aggregate Demand and Aggregate Supply model

If you look at the AD and AS model this would be seen in shifts in the AD curve. The long-run AS curve being vertical and AD moving to the left or right depending on decreasing or increasing consumer demand.

How Animal Spirits leads to unemployment

‘Animal Spirits a version of consumer confidence, is a primary in the fluctuations in GDP. The AD curve will fluctuate. What happens next is a domino effect. Whether you see it as a negative multiplier or the paradox of thrift, that is people are allocating money from spending to savings the end result is spending falls. Firms feel the in demand, and adjust their production. This ultimately is equated to unemployment. Profit-maximizing firms need to lay off workers because of lagging sales and fixed cost.

They could reduce workers wages , which is a cost of labor price adjustment. However, workers tend not to accept wage reductions either because of explicate contracts such as labor unions or implicate contracts or an general understanding.

Think about it, if your boss told you, sales were down a little, we will cut your salary by 20% would you agree? You personally have non-discretionary payments like your mortgage and car payments that you could not make. The usually scenario is a simply layoff.

When you are unemployed you personally will be spending less. For example, you will order less on Amazon and perhaps opt for a Netflix night watching Portlandia instead of a weekend trip to Portland. This means you are spending less and the economy as a whole starts to experience an inverse multiplier effect. That is, you spend less and business make less and have to lay off more people. The unemployed have less money and people again spend less and the result is business spending and employment is depressed. You have a recession or a depression.

The stickiness of wages and slow price adjustments cause the economy be to stuck outside equilibrium or in a less than optimal equilibrium. In other words, information and coordination lags affect price adjustments back to equilibrium.

Money in Keynesian theory

Money in the original Keynesian models played a relatively subsidiary role. It was connected to the liquidity preference and hoarding of money. Keynes introduced the idea of a liquidity trap, which no matter what the rate of interest people preferred to hold money rather than spend it.

Money’s role in the economy was essentially about spending and again, the C component in the Y=C=I+G equation. The problem was because of market failures money and spending was not flowing, not in a circular way or any way.

GDP in aggregate falls

The end result is you have an aggregate fall in GDP. Again this is aggregate. Aggregate is not be equated with individual people and markets. Just because the aggregate is down does not mean individuals are not prospering and making money. People who can adjust and adapt are the agents that bring markets back to equilibrium.

The Keynesian Solution

The ultimate solution is to increase G and this will create a money multiplier. Whether it is digging ditches, war, or paying the glass man to fix broken windows. If the engine has stalled you need to give it push.

Alternatively Keynesians do not mind monetary stimulus, low interest rates. It does not not matter just get spending flowing. It does not matter debt or deficits or Federal Reserve stimulus. When the economy is down turn the dials and micro manage the free market that has failed.

All you have to do is spend. The paradox of thrift needs to be eradicated, now get out there and spend money, it does not matter how.

How the Austrians explained the business cycle

The Austrian business cycle or ABCT is a monetary theory of the business cycle. disequilibrium in the money disequilibrium in the real sector. It is the boom that is the cause. A boom by a monetary policy that expands credit inappropriately for the level of real savings. Credit expansion should correspond to a real savings level. Instead, in a it is related to the Federal Reserve the interest rate and ‘creating money out of thin air’. This creates a distortion of the capital lengthening and formation process.

Do not worry about what that means now, it will become apparent latter.

Lets look at money and the real world then why and how their interrelationship is the basis of the Austrian Business Cycle theory.

Money

Money has been something that has evolved as a tool to satisfy the double coincidence of wants. A barter economy simply could not achieve the same level of efficiency in satisfy wants. Therefore, people started to spontaneously and organically use commodities that functioned as a medium of exchange and most efficiently satisfied the double coincidence of wants. Initially it was such things as shells or salt (hence the word ‘salary’) and eventually it evolved into metals such as silver and ultimately gold.

The important point is, it is not that gold was chosen, rather, people just started to use it as it worked the best. Money evolved to be what people use as a medium of exchange.

Economics of supply and demand

Basic economics is about the supply and demand for a particular good. For example, the price of potatoes is determined by the market forces of supply and demand.

If I bring potatoes I grow in my backyard to market for price of 3 (dollars or Euros) a basket, the market will tell me what if the price of 3 is correct. If I sell everyone and I am happy, with the price, this is a natural equilibrium.

If I sell my potatoes for 1 penny and I sell all I have, this would most likely not cover my cost.

If I sell my potatoes for 100 dollars I will not sell them.

My point is I find a market clearing price. The market clearing price ex post will be the equilibrium price.

The point being supply and demand work out disequilibrium quickly though the price mechanism.

There is no market for money

Every commodity, including capital goods works out disequilibrium through an adjustment in prices. However, money has no market, so it works out its equilibrium across all markets. This is because money is the second half of every transaction. Adjustments to equilibrium for money is seen across every market.

These adjustments can come in the form of adjustment to price, the price level such as monetary inflation or deflation. It also can come in the form of a business cycle, that is fluctuation from GDP away from the optimal, that is an output gap.

Therefore, a monetary theory and policy that is money neutral is important for an economy to achieve a high growth path and optimal equilibrium.

Interest rates an Monetary Theory

The old theory of money was the quantity theory of money for example David Hume, and its resurrection by Milton Friedman.

Austrian monetary theory starts with Wicksell’s understand of the relative interest rates. That is the quantity theory is true in the long-run but in the intermediate term and relevant for money macro equilibrium are interest rates.

Wicksell’s interest rate was:

determined by the supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital.

Knut Wicksell Interest and Prices, 1898

That is why it is called the natural rate. That is in natura means something that is raw in nature and untouched. It could be called the rate of interest.

If the central bank brings the market rate of interest, in modern terms the Federal Reserve Funds rate with the hypothetical natural rate, this would replicate a world without money, a money neutrality where all prices and quantities and investor dections are based on real factors rather than monetary arbitrage. Intertemoporal descions would be coordinated optimally for investment plans.

Wicksell and the Keynesians of today (For example Michel Woodford) would equate th8is with money macro equilibrium. It would be observational through a stable price level.

The issue is the natural rate of interest is a theoretical construct and by its definition unobserved. You cannot observe a natural rate, that is a rate of interest if only barter ratios were used because money is the second half of every transaction. It is embedded so deeply in the economy that any wholly empirical estimate like the Federal Reserves R* would be nothing short of a fairy-tale. See the Fed fairy-tale here: Natural Rate of Interest.

The Interest Rate is a Price

Prices coordinated inter-temporal decision making processes. For the entrepreneur it is part of the discovery process and allows the entrepreneur to make decisions about future plans for investment. Specifically, how to length and to what extent the entrepreneur takes on long term projects. Ludwig Von Mises in 1912 in the Theory of Money and Credit outlines this.

If the price of money, or more exactly the price of loanable funds is mispriced then wrong signals are sent through the market and you have a market miscoordination.

This is so profound because money is the second half of every translation. It is everywhere so money’s non-neutral effect on the economy is like a domino that starts a process.

Federal Reserve estimates of the natural rate of interest called R-star through the FED/US model and mirrored by the DSGE model and supported by the theory of Micheal Woodford in his book Interest and Prices are rule based better than discretionary policy. However, it would be the third best way to achieve money neutrality since these estimates will consistently create bubble no matter who good the math becomes. Why? Because money is the second half of every transaction and therefore the money neutral rate is unobserved.

Market prices do something, they communicate information, they are not just some arbitrary number.

Robert Murphy

Cluster of business mistakes

If you were to wake up one morning and you heard there were 500 fender benders on U.S. Route 1 you could assume either there was temporary insanity en masse or something more likely, the traffic lights all went green. When rates are low relative to the natural rate, all lights are green.

The economy is giving false signals to the proper level of savings and investment. This results in a . You have a cluster of business failures. That is a business cycle. It is a distortion of the capital structure from people getting wrong signals, in this case the interest rate controlled by the Federal Reserve.

If you centrally macro manage the interest rate, you will mislead people and they will make wrong decisions.

Malinvestment – Capital Theory

A detailed discussion on the malinvestment, caused by entrepreneurs getting wrong signals is beyond the scope of this article. However, idea is understandable. When the Fed sets rates too low, relative to a money neutral level because it can not estimate correctly or there are multiple natural rate, then ex ante investment and savings is coordinated in a distorted way ex post. It is saving that there is more savings then there really is when rates are low in relation to the natural rate.

The level of investment during the boom is not supported by real savings.

Whether it is the dot com bubble or the crisis of ’08 and the expansion of real estate or the next crisis, perhaps the stock market and debt expansion crash, there is a distortion. The interest rate is giving wrong singles about how the capital lengthening process is optimal for profit.

Investing does not have anything to do with frugality and savings and real value and wealth creation, but rather a credit fueled high. This cannot be sustained as it is artificial.

Money pumping exacerbates inequality

The policy of discretionary and non-discretionary money pumping is often tied to political and business incentives and potentially exacerbates the Gini coefficient because the money flows top down to the banks and to people who have preferred.access to credit.

Austrian school of economic solutions

Let the markets work. Let saving and investment and investment coordination be determined by real market prices. This includes the elimination of the Fed and it replaced by a market standard, rather than a standard. That is people, free people make choices about saving and investment and interest rate based on real rates and prices, rather than a planning the interest rate.

Keynes versus Hayek the next round

In the Keynes versus Hayek debate, new economists have entered the field.

Old Keynesians: John Maynard Keynes, John Hicks, Franco Modigliani, Paul Samuelson

New Keynesians: Michael Woodford, Paul Krugman.

Old Austrians: Ludwig von Mises, F.A. Hayek

New Austrians: George Selgin, Steven Horwitz, Robert Murphy, William , Lawrence H. White

Although I would like to go into more detail, it is a good review. It is more a sketch of two schools of thought and if you have questions or please leave them in the comments below.

Categories
Stock market

Stock market crash prediction

Markets are hard to predict but economics give insight to the future direction of the stock market.

Update: The market has not crashed yet because the Fed keeps pumping money and might do so until after the 2020 election. It is political.

  1. macroeconomic data
  2. moving averages or trends analysis
  3. quantitative

I am getting a Ph.D. in Economics and I am partial to economic influences on the market. It would be irresponsible of me to claim I know the direction of the market, because I do not, however, I have some clues.

My tip is, do not listen to subjective information reported on the news, look at the macroeconomic data for the economy as a whole. The stock market is a leading indicator. It reflects the general future trend in the economy.

The relationship between the natural rate of interest compared to the market rate of interest

What you can trust – Economics and Interest rates

What you can trust is macroeconomic data which in the long-run will be accurate.  For example, the stock market will not perform when GDP growth rates are moving down, and real interest rates are movirfng up.

The macro indicator I trust the most is the interest rate.  More precisely the relationship between what is known as the natural rate of interest or the marginal productivity of capital in a moniless economy and the observed bank rate.

Federal Reserve econometric models try to estimate the natural rate of interest to determine its relation to the observable rate nominal rate of interest.

The data and the theory behind economic and stock market movements

When there is a disequilibrium in the money market govern by the relationship between the market and natural rate, this will create shocks in the real sector. The stock market is forward-looking and will try to anticipate this with a movement downward.

Practical stock market tip

Without getting technical, for practical applications for you, try simply to watch the interest rates set by the central bank. Analysis is in relation to the general health of the economy. What the trend and Do you think the moves by the Federal reserve are prudent to temper inflation or regardless do interest rate increases slow the

Stock market crash predictions

The following is a list of reasons the stock market, a leading economic indicator could decline.  The caveat being when this will be, today or in five years. The stock market is a good crystal ball for the economy because expectations are the driver. Therefore, if the economy is expected to slow, then movements in the equity market follow.

  • Interest rates – the biggest driver of the economy. Interest rates are the price of loanable funds and consumer spending.  Real Interest rates are increasing. Bank observed rates are not in line with the natural rate of interest. If the Federal Reserve interest rate increases continue the market will decline. We can stop here if we wanted to. It is almost that simple. I do not know the correlation studies to validate this hypothesis but this is what theory tells us. 
  • Political uncertainty – The country is divided so the political change is slow. Therefore they cannot address the real issue of the Federal Debt.
  • Unstatinable debt – Federal, State, and private debt is growing. The result is government debt crowds out private investment. Further, there is a question if interest on the debt can be paid in the future.
  • Inflation – Not the official CPI or PPI, things you see at the grocery store or at work, I am referring to real estate and the stock market.  Prices in the real estate market and stock market have inordinately increased to levels that might not collate to natural value or historic conservative levels.
  • Stock valuations are high – It depends what numbers you are looking at but according to Robert Shiller, price compared to cyclically adjusted earnings than 16, this means this the market is overvalued.
  • Monetary policy is ineffective –  The Federal Reserve have used its tools to stimulate the economy and is out of . Monetary stimulus is like pushing against the wind.
  • Fiscal policy is ineffective – The bulwark of fiscal stimulus is at a point now where the benefit of a is less because of the effect on real interest rates.
  • Ask yourself do you create anything – I do not know if I know too many Americans involved in the creation process, but rather moving paper and working on the computer. If Americans are pressing each other pants in a service economy, this is not a good sign. The US does create, it creates pharmaceuticals, defense-related and software. Only the last can be argued to add real value

Here is the reality about the direction of the market. Noone knows. Do not take counsel of your fears. Invest in a disciplined objective rational way. If you dollar cost average and invest for the long term you mitigate much of the risk.

You need to be objective and not emotional about your investment strategy.

Do not let emotions like fear govern your investment statgey.

The solution to stock market crash predictions

  • Follow interest rates, the market moves inversely to real interest rates –  When rates trend up in relation to the natural rate of interest,  you could move into more conservative investments.
  • Dollar cost average in and out of the market – Trust that the market is a positive sum game if you invest for the long-run and avoid sudden undiversified movements in and out unless you a  professional trader with AI backing your investment tactics.
  • Use a very good quantitative screen on your equities picks – I have mentioned valuengine.com and moneycentral.msn.com top ten picks many times. The reason is if your individual picks are good they will fall less if a crash comes and bounce back faster on the uptick.
  • Use a simple moving average to give you signals to exit the market – Moving averages are not a science but a general guide. They have gotten me out of major downturns like in 2007 and given me the green light to get back in.  Consider using something like a 12 month moving average on the S&P. It is a very broad technical indicator.
  • There is always more risk being out of the market than in – Whether market returns luck or skill, if you are in the market and have a plan for investing, a disciplined system, in the long run, you will make money because the market in a growing economy is a positive sum game.
  • Global markets and counter-cyclical markets – Markets move in tandem, however, some are countercyclical, research these markets.

Ask me if you have questions, I can not give investment advice but I can tell you from the perspective of an economist, what might happen based on my subjective personal observations.

Categories
Economists

General Theory by Keynes – Free Ebook

John Maynard Keynes’ book The General Theory of Employment, Interest and Money published 1936 was a paradigm shift from the classical school. His book was a new understanding of money and markets. Whereas Keynes’ Treatise on Money was an extension of the theory of time,  his General Theory started what is known as the “Keynesian revolution”.

My recommendation as a college Economics Professor is, you need to read the original the General Theory, not someone’s interpretation of Keynes theory, as you will discover a radical difference.

This is why I present his book here for you to read or skim.

Download this book for free

Download The General Theory of Employment, Interest Money by John Maynard Keynes in ebook formats for free

Download for free the General Theory here.

General Theory of Employment, Interest and Money – Download in PDF

General Theory of Employment, Interest and Money – Download in Epub

The incommensurability of Classical economics with economics

Keynes’ General Theory was significant because it reinterpreted the way markets function. Markets were not seen as simply a self-correcting mechanism, but rather, a complex dynamic between, consumers, investors, and government where human emotion was coupled with economic incentives.

Most notably John Maynard Keynes’ book The General Theory of Employment, Interest, and Money rewrote the textbook understanding of supply and demand behavior in aggregate, and the role of government in terms of countercyclical policies. This newfound role of government action was written in the context of a time of great economic upheaval known as the Great Depression. It appealed to academics and policymakers as it explained market failures to adjust to equilibrium. Keynesian economics theory was important, not only because of the logic behind the theory but specifically, the application empowered the espousers to help the situation of the time.

Think about it. This one book was the basis of such much change in government intervention in economic affairs. Do you think that was correct?

Did Keynes deepen the dichotomies in economics with his General Theory?

Whatever you think of the rigor of Keynes logics, the effect on economics was divisive. This is a positive, rather than a normative statement. The book furthered the dichotomy between monetary and real economics as well as microeconomics and macroeconomics. This is a controversial topic but worth consideration and examination. Some will argue it is only now we are seriously trying to address the micro-foundations of macroeconomics as well as the synthesis between monetary and real economics, for example, Michael Woodford’s Interest and Prices. Do you think Keyes’ book added or subtracted to the advancement of economics?

John Maynard Keynes wrote the book on modern Macro

Read the General Theory not someone’s interpretation of Keynes

Many people have studied Keynesian Economics for an interest, studied AP economics or took college classes. Students might even be able to give the pros and the cons, yet never actually read anything by Keynes. Legions of economic students, even at the graduate level are immersed in Keynesian theory, yet have never read one word of the actual writings of John Maynard Keynes.

Policymakers have made their living off of promoting Keynesian ideas, yet have never read The General Theory of Employment, Interest, and Money. Can you that?

I teach Economics at a college level and working on my Ph.D. I tell my students it is critical to read primary source material from original thinkers. This is always better than the textbook, the web or even my understanding as a Professor. If you want to understand Keynesian economics, read Keynes’. Become an eye-witness to the history of economic thought. If you want to understand any ideas in economics, read the words of the world philosophers of the past. If you are inspired make your own interpretation in the content of the time and place you live in by reflecting on the primary source material.

Great minds come around only once every hundred years or so, read their words, not someone’s interpretation of them.

Mark Biernat

If you actually read Keynes you will find, often subsequent economist developed theoretical models that are not congruent with Keynes’ original writings. Ideas that were never in the General Theory are associated with Lord Keynes.

Ideas found in the General Theory of Employment, Interest and Money

Some ideas from are:

  • consumption function –  The relationship between consumption spending and disposable income.
  • principle of effective demand – Total goods and services demanded that determine the rate of employment.
  • liquidity preference – The preference to hold money compared to other assets.
  • Sticky wages – Downward rigidity of wages because worker are reluctant to take pay cuts when a company or economy is in financial trouble, therefore the intersection of aggregate demand and aggregate supply can be suboptimal resulting in unemployment.
  • demand not supply – The classical economics understood Say’s law, that supply creates its own demand as valid, however, Keynes believed that demand was the key component of determining the level of the economy.
  • low employment equilibrium – The ideas that equilibrium was not synonymous with the optimally efficient use of resources because of irregularities that exist in the market system.
  • Interventionism – Governments role was central in managing the business cycle.

Gave new predominance to these ideas:

  • multiplier – A change in autonomous spending results in a larger change in real GDP
  • marginal efficiency of capital – “the rate of discount that would make the present value of the series of annuities given by the returns expected from the capital asset during its life just equal its supply price.” – (Keynes General Theory (p.135).

Ideas which are Keynesian are interpretations of Keynes and formalization which have not been questioned to the core and some which were not in his General Theory, such as the IS-LM curves. Therefore, there is no better way to understand the pros and cons of Keynesian economics than reading or skimming,  The General Theory of Employment, Interest and Money.

Aggregate demand shift + sticky wages = equilibrium below full employment

If aggregate demand was the main driver behind the increase in GDP and prices including nominal wages were sticky, the economy could be stuck at equilibrium below full employment.

For example, if the aggregate the demand curve shifts to the left and output reduced through a drop in consumption (Y=C+I+G+NX), however, wages do not equilibrate, in other words, wages do not drop, rather they are sticky, there will be persistent unemployment. This unemployment will reinforce the cycle of depressed consumption.

The Keynesian prescription

If aggregate demand and aggregate supply intersect at a level below full employment then, the solution is to boost aggregate demand. It does not matter how,  public works, tax cuts any fiscal stimulus will get the lifeblood of the economy circulating through the circular flow.  The goal of Keynesian economics is to stimulate the economy through fiscal stimulus when markets fail.

What do you think of the economics of John Maynard Keynes?

Above is a downloadable free version of the complete General Theory of Employment, Interest Money. If you have any commentary on the impact of Keynes’ theory or your understanding of this book, please share this in the comments below or contact me.

Categories
Money

Cryptocurrencies – the next evolution of money

Cryptocurrency investing is like choosing Democracy over a King. That is, you are investing in an idea. You believe in decentralized currency and the freedom of economics and money. 

  • Even with the collapse of the Crypto bubble, the idea will resurface in another form as the market determination of the supply and demand for a medium of exchange central control by the ECB the Fed and other central banks.

That being said, the market is hyperinflated. I personally do not invest in this. This post is wild speculation on my part and I have not tied it to any microeconomic foundations or macro theory.

I get into enough trouble with investing in things I know something about, why should take a long or short position on something I do not know anything about.

– Warren Buffett on Cyrpocurrency investing

However, from a theoretical perspective, my question to skeptics is, if you were to bet on a political system that would be the convention in the next 100 years would it be monarchy or democracy? Analogously so it is with money, once people get understand the idea, I believe the monetary convention in the future will be decentralized currency. It is a paradigm shift. I can not image in 100 years people will be walking into Walmart and pulling out crumpled up dollar bills, or at least to buy things online. I am not saying that Altcoins will go up forever in value, but once the idea catches fire, it will be a revolution in monetary economics. Science fiction movies describes this reality with electronic credit. The central banks will see their power decline and fade.  I do not know if that will be in ten years or one hundred years, but it probably will happen as the evolution of money continues.

You can burn books but you can not stop and idea, once it catches fire. – Mark Biernat

I teach economics and want to clarify the emergence of Bitcoin and other private currencies from a historical perspective.

Historically people have used various commodities as a medium of exchange

Money has evolved. What is money? It is anything that functions as a medium of exchange. In order to function as a medium of exchange it needs to be generally accepted and people have to trust it. Initially this medium of exchange was something that had intrinsic value. For example, beaver pelts, to salt (that is where we derive the word ‘salary’ from Latin) to species (e.g. gold and silver).  Latter governments issued coin and fiat paper money. However, banks, insurance companies railroads and private individuals also issued money, for example in The US, Canada Scotland in our Gilded age. The government monopoly of money for most of us started in 1914 with the Federal Reserve system. In fact, if you consider the evolution of money in civilization, the government monopoly of money is an anomaly.  Money is evolving. Money continues to evolve as economies and our economic understanding evolves.

Salt was used as a medium of exchange

Is one system of money better than the other?

Each monetary system serves a purpose and functions to serve the people who live in that time. At this point in man’s economic evolution, the currency that works best is, fast, something that can not be forged and circumvents the government’s misuse of monetary policies, something that is durable and can be transmitted electronically and lastly since fiat money does not have any intrinsic value and has worked, it does not have to be tied to anything tangible either. The logical conclusion at this juncture is private money.

Why the fiat currency system is archaic?

For example, the chairman of the Federal Reserve is similar to a despot. At anytime without any real checks and balances could over stimulate the economy and exacerbate the boom and bust cycle.  There is an argument that, the Federal Reserve caused WWII.  When the world needed economic help most, both the Central Bank in the US and Germany made mistakes that exacerbated the global depression and contributed to people looking for extreme political ideas to either fix their economic woes or look for blame.

Since 1914, how many business cycles have we seen?  The Great Depression, the Great Recession, the Dot com boom, it seems that the existence of the Federal Reserve system and government control over money does not liberate people, but tries to manage them and fails. Its primary objective is to stabilizes prices and lessen the trade cycle but it does not necessarily do a better job than an alternative system.

Therefore, believing in a centralized government issued currency can be equated to believing in a king or a queen should be your ruler. Theoretically it can work, however, like all top down approaches it is prone to oversight. If you really meditate on this truth you understand why the world is gravitating towards cryptocurrency/ Altcoins are metaphorically like the Alibaba, Amazon or Ebay of the money market. That is, buyers and sellers come together in a market and determine value. That is capitalism and that is freedom.

The world will flat and it will always be

If you think the world will stay the same just like it is today especially in the financial markets think again. The world is always changing and reinventing itself. Economic paradigms are investing the way we interact.  Although I do not have a crystal ball and I cannot see the future, I think this cryptocurrency is just the beginning of the S curve a wave that will eventually hit maturity in the long-term. If that is true, the current valuations of any of these cryptocurrencies, Bitcoin, Ripple, Ethereum or Litecoin  are undervalued based on a social economic trend. I am not giving investment advice, but I personally am dollar cost averaging small quantities systematically.  The idea of free money in the digital age is an advance over the  altcoins in the 1800s in the US, Canada and Scotland when private citizens insurance companies, railroads and banks issued currencies. It was arguable our Gilded age.

Once an idea is out, it is hard to suppress. For the world to jettison the idea of private money would be like people abandoning fiat money and going back to commodity money. Economics is an evolutionary science.

How I invest

I do not invest. I put a few dollars in for fun into cryptocurrencies. If you do you can not invest based on technicals or traditional value because none of that makes sense. Buying altcoins is really is a bet that currency will be decentralized.  If free banking and money continue to gain acceptance it will appreciate. I would dollar cost average in and diversity with money I can afford to lose. Those are time tested investment techniques. If it all fizzles out and we go back to gold coins or something then so be it. However, in the context of the evolution of money I think there is a greater chance fiat money will be the dinosaur. However, we do not know if that will be ten years or one-hundred years.

Investing in decentralization in contrast to speculating on government money

The reason buying cryptocurrency is investing, rather than rather than a gambit with FX zero sum game trading.  Tune out the hype and yield to the logic of this argument. The idea behind Bitcoin, Ethereum, Litecoin and Ripple is you believe in the revolution of money. It is the idea that decentralized currency will rule over government controlled currency.  In contrast, believing in the monopoly of money by a central bank is very little difference than believing that kings and queens should  rule over you and determine your economic fate.

Analogously surrounding the inner circle of Kings and Queens are the aristocracy, that is, the investment banks and those looking for bailouts or favor.  Under that are the little people, the serfs or workers, that means you and me.  With free money you break the monopoly, circumvent the matrix and participate in the evolution of money. Money becomes a true medium of exchange, minus the politics and social engineering of governments.

The idea of decentralized currency in essence is a belief in freedom and free money. Money being the most important commodity, the lubrication for free transactions it would make sense it would be free rather than controlled, since economic experiments with control result in deadweight loss. When things are controlled they do not reach social or economic optimum.

The future of Crypocurrency

Is Altcoins or Cryptocurrency in a boom or a bust? There is no way, anyone can tell. I am an Economics Professor and former Stock broker and investment guru but I do not know and do not recommend putting more than lottery ticket money. 

Yet, from a long-term theoretical perspective, and you look at macro-social-economics trends, Cryptocurrencies are the next logical step in the evolution of money.

Categories
Economists

Capital by Karl Marx in PDF

This is a free version of Capital by Karl Marx for download below in PDF. It is not just the book Volume I,  that are found on other websites, nor an on-line version where you have to scroll through endless pages in your browser, rather this is Volume I, II and III in one book in a downloadable format. Further, the edition is free, based on public domain copyright. Therefore, please download my complete version of Capital by Karl Marx for free.

Das Kapital downloads in the following formats:

Capital Karl Marx PDF

Capital Karl Marx ePub

Capital Karl Marx MOBI

The books are above, it is a simple download link.

I zipped the files because of the size. All files contain all three volumes of his works and a short introduction by me. My downloads are secure and virus free. My name is Mark Biernat and I am a college Economics professor. I am providing the works of great Economics of the past because I love Economic theory and the history of Economics.

Above are the links for the three volumes of in one book: Critique of Political Economy, The Process of Circulation of Capital and The Process of Capitalist Production as a Whole.

The world is a war of ideas – Schopenhauer

Karl Marx’s ideas were perceived as so dangerous that the Germans shipped him in a sealed boxcar to Russia because they were afraid of his economic theory spreading.

What were Marx’s ideas and why were they so powerful?

Although his theories are not largely recognized today as valid, there are some truths in his theory. Even in our democratic mix economies, there are some aspects of this theory that have insights into how markets operate and fail. Further, as times change his ideas may become more relevant and even more valid depending on the course of the future.

I know this sounds crazy right? However, with population growth and limited resources in a future Malthusian world scenario, stratification of wealth and Gini coefficients of income distributions skewed, Marxist ideas might have greater value in understanding human nature and the social science of economics. I believe in capitalism’s production and allocation efficiencies and I do not believe religion is an opium of the masses, however, a further examination of Marxist ideas is worth anyone study.

  • Karl Marx was a classical economist and wrote in a time that echoes our times in a strange twist of irony.

For example, my family came from Eastern Europe, and before the communist revolution. At that time, most people worked their whole life, yes their whole life for one guy who lived in a big house and owned the land granted to him by some ancient government. Is that what you want from your one existence here on this planet? Yes, you could have a house and a small field but most of your wealth a productive activity when to the owner.

However, how much different is that than today? Unless you are the owner of a business, you are part of the working class. Even if you have a salary of 65k you still are working for the company, bank to pay the mortgage, insurance, medical and all the other expenses. Your boss has great leverage over you because he knows you have bills to pay.  It is not exactly like you are sharing in the wealth of your productive efforts proportionally or a free man.  A free person is someone who has everything paid off, savings and economic rewards are equal to productive efforts. You basically are allowed to live in a house on a tiny piece of land for working your life away.

You can see that Marxist ideas have emotional appeal as well as some theoretical truth based on the time. I and my family have always been unrepentant capitalists, as Marxist theory is not only economic but also has an anti-religious partiality. However, the economic theory alone, as articulated in Capital is a worthy read. In one sense, understanding Marx will better make you be able to defend your own capitalist ideals. At the very least it is a fascinating read of history.

The cliché capitalist life only exists in movies, in reality, most people work hard and when they achieve they give back through charity

The Irony of Karl Marx

Marx wrote against the exploitation of the worker by the capitalist. However, could not his ideas have some validity if you replace the ‘oppression of the capitalist’ with the ‘burden of government’ and excess taxation? Is not the oppression of today, not the entrepreneurs who create Facebook or Google, or Bill Gates and Warren Buffet who gave away his fortune to charity, but a government that keeps about half your productive efforts in a year, creates an inefficient distribution of wealth and “deadweight loss” decreasing consumer surplus and producer surplus? The feudal lord only required 1/3 of your productive time.

Marx lived from 1830 to 1883, however, if you substitute the players in his book with a modern interpretation (such a big company or government, you will find a relevant view you can relate to.

Is there a new theory for Marx?

The paradigms of ideas shift when old ideas are looked at in a new way. I recommend reading Capital because you might find something that was not looked at before. Something that is valid and meaningful that has been overlooked. These discoveries happen all the time.

If you are Marxist or leaning to the left, try to see where the theory in Das Kapital is still valid and where it is outdated.

I teach economics in a college setting. Although I personally have libertarian capitalistic views,  I want the academic space I teach in to be a forum for the exchange of open ideas as no one has a monopoly on the truth. Therefore, I offer the works of Karl Marx free for download and suspend my preconceived notions.

Adam Smith contrasted with Karl Marx

While Adam Smith believed capitalism was motivated by enlightened self-interest, people create value to satiate demand. When people pursue enlightened self-interest society as a whole benefit in ways that could never be imagined or engineered. Marx has a different view.

Karl Marx’s theory was the exploitation of labor, that is to create producer surplus, from uncompensated worker effort. The owner of the production could claim surplus value because of legal protection. The ruling regime granted capitalist property rights.

What was the theory of Marx?

If we understand what Marx believed was wrong with capitalism we can create a better capitalism model.

Marx articulated

  • Alienation (Entfernung) – Marx believed the work was a fundamental source of happiness in people. However, people needed to see their work in the objects they created. Since the modern world and capitalism is focused on specialization this alienates the worker’s product from the worker. Marx believes this alienation or entfernung was the first wrong of capitalism.
  • Modern work is insecure – Workers are inputs that can be replaced.
  • Primitive accumulation (Ursprünglich) – Workers are unfairly compensated for the value the create. He discussed the theory of “primitive accumulation”. Marx saw profit as a thief of worker surplus. Profit is another term for the exploitation of talent and effort.
  • Capitalism is unstable – Because of the boom and bust cycle which are endemic and caused by a crisis of overproduction and abundance from the efficiency of specialization. This overabundance causes unemployment as not everyone is needed. His answer was redistributing the wealth of producer surplus to worker surplus.
  • Commodity fetishism (Warenfetischismus) – Capitalism puts emotional strain on capitalistic – Whether it is marriage or the internal struggles they go through. Their economic interest overrides humanistic concerns.

Marx believed a capitalist ideology was created because society is brainwashed to attribute value judgments on things that do not matter.

So is Marx correct?

He makes some points relevant to his time and important to continue to improve our time. Some ideas he had was free education, free libraries, public transportation and roads, progressive income tax. These ideas have all come to fruition and as capitalism evolves in our mixed economy more of his ideas are ironically become manifest through capitalism.

Marx is a conflict theory because one group of society is not in competition but conflict and oppression with another group in society. It sociology is one model that is not common. More common is cooperation, competition or isolation. Marx’s idea is this conflict is between the rich and the poor. Class conflict was the basis of his theory.

Marx’s goal was justice. He did not envision the totalitarian oppression of Communism, which to the Soviets was seen as a transitional state towards the path to Utopia. He wanted to create an equal society in terms of economic opportunity to actualize their lives through intellectual endeavors.

In the context of his time, Marx was writing about, a transition from feudalism to industrialization. During feudalism, people had rights to have their own animals and farm in the commons. However, with the passage of the Enclosure Acts in the 18th century in England, land ownership and use became restrictive and migration to the cities limited workers to factory work for making a means of employment.

This set up Marx’s model of workers and capitalists which is elaborated on in his theories on capitalist ideology. In the factories, factory workers were employed at substance wages and children were used as cheap labor.

The classes were the factory owners or the Bourgeoisie and the workers or the proletariat. The capitalist system is based on a system that encourages inequality. Through education of the proletariat and eventual revolution that would over thought the system, a new system where all people were treated equally. Further, the capital and businesses were community-owned, this system was called communism. It was the abolition of private property.

Marx eventually had to flee Germany and reside in London. Marx cooperated with Engels.

Marx used Hegelian logic, dialectical materialism in his theory. In another twist of irony, in one sense Marx was the first hyper consumer, as all that exists in the world was material, rather than spiritual transcendence and meaning. Therefore, his system of happiness (util maximization) was based on satiation through material equality and intellectual pursuits, not a soulful transcendence.

  • Although scarcity is the fundamental problem of economics, it is not the meaning of life or the answer to the human condition, take a look around you.

Marx was incorrect on two basic points

  • This labor theory of value – which stated that the value of any object is the amount of labor input into its creation is the basis of price.

Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it – Adam Smith

Value is not determined by labor input or any objective measure but by supply and demand, it is subjective, whatever value people ascribe value to it.

  • Free movement of labor and capital – in modern society makes working in one place or profession a choice rather than a fate. Further, there is intellectual capital which has little to no barriers to entry in contrast to the ideas of the early industrial age.

If you do not like your job quit

I personally live semi-off the grid (or at least off the matrix) by growing my own food and creating my own businesses. You are not as indentured to your job and your career as you think.

All roads in capitalism are not paved with gold

The big picture – Freedom and equality

These are seen as the two social values that are parlayed to create a society that is just. Justice as the ultimate good. They have to be balanced with both equality and freedom which are limited goods. You do not want the freedom to yell fire in a crowded movie if it was not true, or allow children to smoke. Nor do you want to make everyone so equal that it crushes the human spirit. Society as a whole should strive to maximize justice.

Marx had an inordinate emphasis on equality which brought societies which espouse his ideology to a lower social medium. Compare North Korea to South Korea. What was once West Berlin or East Berlin? Hong Kong to mainland China before China became a mixed economy. If you believe that humans are naturally good then, if you maximize freedom justice will prevail. If you believe that humans are fundamentally exploitive (rather than competitive), than Marx’s ideas might appeal to you.

I believe humans are both good and competitive, not in aggregate exploitative. In aggregate you will find exceptions, but not a rule. Understanding the difference between healthy competition and straight exploitation is something that you have to decide. I would recommend looking at the people who live next to you or you are in a relationship with. Are they fundamentally bad people or someone like yourself, someone with dreams and hopes that they are trying to actualize?

Does self-actualization go beyond the tangible goods and economic prosperity, perhaps faith and God is the center rather than material goods like Marx theorized?