WEBVTT NOTE The Supply of Money 1 00:00:00.000 --> 00:00:06.000 As I mentioned yesterday, and you all know this by reading Man Economy and State, 2 00:00:06.000 --> 00:00:12.000 Rothbard lays things out in a very logical and complete way. 3 00:00:12.000 --> 00:00:18.000 And so topics that he begins early in the book only culminate much later on. 4 00:00:18.000 --> 00:00:23.000 In this section of Chapter 11, we get the culmination finally, 5 00:00:23.000 --> 00:00:53.000 I use Man Economy and State as a textbook in my Principles of Macroeconomics class and on the very first day, these are freshmen, students mainly, I warn them of this, I say, you know, this book is a treatise, this is a real, this is not a textbook, this is a real treatise in economics and treatises start with first principles, first principles of economics. 6 00:00:53.000 --> 00:01:23.000 and then they move logically to the next step and then they build right as they go and so you you know you get the big pay off at the end when everything culminates and as you're going along you're just doing this sort of building the edifice and this goes right like that to them but you've read the book so you know that this is true and they're just a couple of last intermediate steps that Rothbard takes before he gives us this statement of the determination 7 00:01:23.000 --> 00:01:53.000 And the first is the stock of the money commodity and here remember he's talking about the unhampered market economy and the point that he's making about the stock of the money commodity in the unhampered market is that just since it is a good, just like any other good in the market economy, its production is regulated by profit, the entrepreneurs that make decisions about what the money commodity will be, the best satisfies consumers, 8 00:01:53.000 --> 00:01:57.600 How much of the money commodity is produced then depends upon consumer demands. 9 00:01:57.600 --> 00:02:04.100 And as he points out, these demands exist throughout the economy and the various uses of the money commodity. 10 00:02:04.100 --> 00:02:11.200 And so the entrepreneurs not only produce the right amount of gold, let's say, that consumers prefer, 11 00:02:11.200 --> 00:02:16.500 but they produce the amounts of gold that are preferred in the various uses of it 12 00:02:16.500 --> 00:02:22.400 and allocate the proper amount of the total stock of the money commodity into those different uses. 13 00:02:22.400 --> 00:02:31.400 So the right amount of gold is going into industrial uses, into dentistry, into the various, what we think of as monetary forms of gold, right? 14 00:02:31.400 --> 00:02:33.400 This too depends upon consumer preferences. 15 00:02:33.400 --> 00:02:44.400 He points out, for example, if there's coinage in the, if people are willing to pay fees to have money, commodity certified in the form of coins, 16 00:02:44.400 --> 00:02:50.400 then entrepreneurs will be glad to provide this. They can earn profit through this production process. 17 00:02:50.400 --> 00:02:58.900 to sell the coins at a premium to reflect the fact that consumers prefer this form of the money commodity. 18 00:02:58.900 --> 00:03:05.400 But as he points out, in other circumstances, it might be bullion or jewelry or whatever, right? 19 00:03:05.400 --> 00:03:12.400 This is just, again, a reflection of consumer preferences, what the form of the money commodity takes at any given point. 20 00:03:12.400 --> 00:03:19.400 But it's extremely important in Rothbard's theory to keep in mind that in the unhampered market, 21 00:03:19.400 --> 00:03:32.400 The production of money, the stock of money and the amount of it exists is just determined in exactly the same way as the production and the stock of all of the goods. 22 00:03:32.400 --> 00:03:37.400 Then the other point that he makes about the stock of money, of course, is claims to money. 23 00:03:37.400 --> 00:03:43.400 And here he makes the basic distinction of two different types of claims that we can have on money. 24 00:03:43.400 --> 00:03:49.400 One we've talked about already, that's a claim to future money, so we can have credit claims, right? 25 00:03:49.400 --> 00:03:58.400 These claims, of course, are not actionable in the present, but only on maturity of the loan. 26 00:03:58.400 --> 00:04:02.400 So you have an IOU that you hold as a claim of future money. 27 00:04:02.400 --> 00:04:04.400 So that would be one type. 28 00:04:04.400 --> 00:04:08.400 And then the second type, obviously, would be a claim on present money. 29 00:04:08.400 --> 00:04:19.400 And, as Rothbard points out, a claim on present money is not an indication of the IOU that somebody, you know, that you hold against someone who will deliver future money to you. 30 00:04:19.400 --> 00:04:27.400 A claim on present money has to be a claim indicating that you are, in fact, the owner of present money. 31 00:04:27.400 --> 00:04:34.400 So this gets into, then, the idea of a money warehouse, of an issuer of these claims. 32 00:04:34.400 --> 00:04:42.400 The power of claims on present money must be like a money warehouse that's storing money for the owners of money who possess the claims. 33 00:04:42.400 --> 00:04:49.400 Because a claim on present money simply is a, well, we might say a legal title of ownership to money. 34 00:04:49.400 --> 00:04:54.400 It's just an identification of who the owner of the money is. 35 00:04:54.400 --> 00:05:01.400 Okay, then as he points out, a claim to money could also then serve as a medium of exchange. 36 00:05:01.400 --> 00:05:03.400 It could become a money substitute. 37 00:05:03.400 --> 00:05:05.800 This, too, depends upon consumer preferences. 38 00:05:05.800 --> 00:05:11.600 It just depends upon whether or not people who use a medium of exchange prefer it. 39 00:05:11.600 --> 00:05:12.800 Why might they prefer it? 40 00:05:12.800 --> 00:05:16.400 Well, they might prefer it because they find it more convenient, 41 00:05:16.400 --> 00:05:18.400 especially for large purchases, let's say. 42 00:05:18.400 --> 00:05:25.500 They might prefer to have a single bill as a claim on money or $10,000 or something. 43 00:05:25.500 --> 00:05:30.000 They want to buy a used car as opposed to hauling around gold. 44 00:05:30.000 --> 00:05:41.800 Or they might, well it's a similar kind of thing, but they might have a preference for the claim as a medium of exchange because it doesn't require the movement of the money, right? 45 00:05:41.800 --> 00:05:46.400 So you don't have transportation costs involved in moving the physical gold. 46 00:05:46.400 --> 00:05:57.200 So the claim can simply serve as the medium of exchange as long again as other people in the economy accept the validity of the claim. 47 00:05:57.200 --> 00:06:02.400 So it does depend, again, upon just consumer valuations and things. 48 00:06:03.900 --> 00:06:07.600 Now, the next point he makes, of course, is that it is possible, 49 00:06:07.600 --> 00:06:12.200 once we have issuers of claims to money, 50 00:06:12.200 --> 00:06:16.000 that fraudulent claims could be produced. 51 00:06:16.000 --> 00:06:18.900 So a claim to money could be produced 52 00:06:18.900 --> 00:06:25.700 where there is no money commodity as property to which that claim refers. 53 00:06:25.700 --> 00:06:28.060 Now that obviously then would be fraud. 54 00:06:28.060 --> 00:06:32.260 So it would be as if I own my house and I have a title of ownership, 55 00:06:32.260 --> 00:06:38.940 I have a deed to my house, and I produce a second identical deed to my house, right? 56 00:06:38.940 --> 00:06:40.100 That would be fraudulent. 57 00:06:40.100 --> 00:06:44.620 If I sold it to someone, I'd be, you know, perpetrating a fraud upon them. 58 00:06:44.620 --> 00:06:49.220 There can't be two legitimate titles of ownership to a single piece of property, 59 00:06:49.220 --> 00:06:51.620 or as Rothbard puts it here, 60 00:06:51.620 --> 00:06:58.020 There can't be legitimate claims of ownership or deed titles of ownership to things that don't exist. 61 00:06:58.020 --> 00:07:06.920 Okay, so this is the status, then, of these, what do you call, pseudo receipts. 62 00:07:06.920 --> 00:07:14.520 Now, as he points out with money, it's more likely that the issuer of a claim to money 63 00:07:14.520 --> 00:07:17.720 would, in fact, engage in this kind of fraudulent behavior 64 00:07:17.720 --> 00:07:22.320 Then it would be for other warehousing goods, other goods that are warehoused. 65 00:07:22.320 --> 00:07:27.820 So, for example, you're all familiar, especially as students, right, 66 00:07:27.820 --> 00:07:34.220 with these little storage facilities that exist around major interstates and so on. 67 00:07:34.220 --> 00:07:38.320 These are in every town, even Gross City, a little town has these things. 68 00:07:38.320 --> 00:07:40.520 Where do you store your personal goods? 69 00:07:40.520 --> 00:07:47.620 So, you're a student, you go home for the summer and you store all your belongings in these little garages, basically. 70 00:07:47.620 --> 00:07:50.620 Right, and they lock them and protect them and so on. 71 00:07:50.620 --> 00:07:54.620 Well, these goods, since they're highly specific, 72 00:07:54.620 --> 00:08:01.620 it would be very difficult for the owner of the warehouse to issue pseudo receipts with respect to these goods, 73 00:08:01.620 --> 00:08:05.620 you know, to lend them out, in other words, for usefulness to other people. 74 00:08:05.620 --> 00:08:13.620 I mean, they could, maybe could do this, but it's more likely that something like this would happen with money 75 00:08:13.620 --> 00:08:16.620 than it is with goods of these sorts. 76 00:08:16.620 --> 00:08:22.220 This is because if I put my personal effects in one of these storage sheds, 77 00:08:22.220 --> 00:08:25.820 I can come back at any time and redeem my goods, right? 78 00:08:25.820 --> 00:08:33.820 Since they're my goods, the usefulness of the goods can only accrue to me if I have them and use them, right? 79 00:08:33.820 --> 00:08:41.020 So I am, in fact, likely, I'm very likely to come back, eventually, in fact, I will come back and redeem my goods. 80 00:08:41.020 --> 00:08:44.820 But with money, I don't have to redeem money in order to get the usefulness of the money, 81 00:08:44.820 --> 00:08:48.940 Because I can trade the money substitute, right? I can trade the claim to money. 82 00:08:48.940 --> 00:08:51.780 And so it's less likely that people will come in for redemption, 83 00:08:51.780 --> 00:08:56.860 and therefore easier to perpetrate a fraud of this sort. 84 00:08:56.860 --> 00:09:00.220 The second reason is because money is homogeneous, right? 85 00:09:00.220 --> 00:09:02.260 All the units of money are identical, 86 00:09:02.260 --> 00:09:08.380 and so the claims to money can be what are called general warrants. 87 00:09:08.380 --> 00:09:12.300 So you get a claim, let's say a bank note, 88 00:09:12.300 --> 00:09:18.700 And when you go for redemption of your $10 bank note, it's, let's say, $10 of gold, 89 00:09:18.700 --> 00:09:23.400 the banker can give you any $10 gold coin that he happens to have in the vault, right? 90 00:09:23.400 --> 00:09:30.200 It's not a claim to a specific coin, but a claim to any coin that he happens to have. 91 00:09:30.200 --> 00:09:34.200 And so it makes it, again, much more likely that he can, let's say, on the sly, 92 00:09:34.200 --> 00:09:41.100 lend out the coins that you deposited personally in his vault. 93 00:09:41.100 --> 00:09:44.500 Well, as, again, with personal goods, this won't happen, but I give the guy... 94 00:09:44.500 --> 00:09:48.700 I have a couch, and it's in this storage shed, and, you know, it's... 95 00:09:48.700 --> 00:09:51.900 I know my own couch, right? And so the guy lends out the couch, 96 00:09:51.900 --> 00:09:56.300 and then when I come and redeem, he gives me the couch out of the storage shed next to mine, 97 00:09:56.300 --> 00:09:59.600 and I say, well, that's not my couch, I don't want... that one I don't want, right? 98 00:09:59.600 --> 00:10:04.100 So it's less likely that he's lending out couches, more likely that you're lending out money, 99 00:10:04.100 --> 00:10:08.900 or that you're issuing pseudo receipts for money. 100 00:10:08.900 --> 00:10:16.820 Okay, now obviously the issue of fraudulent receipts creates certain effects and Rothbard 101 00:10:16.820 --> 00:10:23.380 here only mentions one. I think Professor Murphy talks, we'll talk about the business cycle 102 00:10:23.380 --> 00:10:28.220 in a different lecture so we won't go into this, but he mentions the financial effects 103 00:10:28.220 --> 00:10:32.740 on the issuer, right? So if we have a bank that's issuing, it's a fractional reserve 104 00:10:32.740 --> 00:10:37.020 bank, so it's issuing fiduciary media, then this creates the problem of the bank run. 105 00:10:37.020 --> 00:10:39.220 creates illiquidity in the bank. 106 00:10:39.220 --> 00:10:42.580 And as he points out, this is in the nature 107 00:10:42.580 --> 00:10:45.540 of the issue of the fraudulent claim. 108 00:10:45.540 --> 00:10:47.500 In other words, this isn't a management problem, right, 109 00:10:47.500 --> 00:10:52.020 where as a matter of entrepreneurial error, 110 00:10:52.020 --> 00:10:54.700 the manager of the bank or the entrepreneur 111 00:10:54.700 --> 00:10:59.700 has unfortunately lent too long into one part of the market 112 00:11:00.680 --> 00:11:04.660 when he needs the money, it turns out, in the short term. 113 00:11:04.660 --> 00:11:06.380 And he's caught illiquid 114 00:11:06.380 --> 00:11:08.280 because he's made an entrepreneurial error. 115 00:11:08.280 --> 00:11:11.720 This is just in the nature of the issue of the pseudo receipt. 116 00:11:11.720 --> 00:11:14.080 Once you issue a pseudo receipt, 117 00:11:14.080 --> 00:11:18.120 since it's available on demand, it's instantaneous. 118 00:11:18.120 --> 00:11:20.200 In other words, you create illiquidity. 119 00:11:20.200 --> 00:11:23.720 You can't, this is unavoidable or it's categorical. 120 00:11:25.040 --> 00:11:27.280 Okay, then the other point that he makes here 121 00:11:27.280 --> 00:11:31.080 about the difference is that once it happens 122 00:11:31.080 --> 00:11:34.040 that an issue of pseudo receipts occurs, 123 00:11:34.040 --> 00:11:40.040 It's possible for the banks that are issuing these pseudo receipts to affect the stock of money. 124 00:11:40.040 --> 00:11:42.040 Since this is the main task, right? 125 00:11:42.040 --> 00:11:50.040 So in a completely unhampered market, 100% reserve banking, no fraud is being committed by the issue of these claims. 126 00:11:50.040 --> 00:11:54.040 Then the issue of the claims will not affect the stock of money. 127 00:11:54.040 --> 00:12:01.040 It will affect, again, according to consumer preferences, it will affect the form of money, but not the overall amount. 128 00:12:01.040 --> 00:12:06.040 and all amount. So the gold that's being held in reserve or the commodity that's held in reserve 129 00:12:06.040 --> 00:12:09.040 is not serving the medium of exchange function. 130 00:12:09.040 --> 00:12:15.040 It's being substituted for dollar for dollar or gold ounce for gold ounce with the money substitute. 131 00:12:15.040 --> 00:12:18.040 But if pseudo receipts can be issued, that would add to the money stock. 132 00:12:18.040 --> 00:12:25.040 You would have the given, fully backed money substitutes in use as a medium of exchange. 133 00:12:25.040 --> 00:12:29.940 Exchange, and then in addition you'd have this, you'd have these new pseudo receipts 134 00:12:29.940 --> 00:12:32.580 adding to the money stock. 135 00:12:32.580 --> 00:12:38.280 Now here's where we get to the point that I made at the beginning about the regulation 136 00:12:38.280 --> 00:12:46.680 of the stock, of the production of the stock of money in the unhampered market by a profit. 137 00:12:46.680 --> 00:12:53.680 This is another indication we might say of the inability we have to logically to reconcile 138 00:12:53.680 --> 00:12:56.920 The issue of these pseudo receipts with the unhampered market. 139 00:12:56.920 --> 00:13:06.480 This isn't just a legal violation, but it leads to certain inconsistencies like categorical illiquidity, right? 140 00:13:06.480 --> 00:13:09.880 This doesn't exist in other areas of the market. 141 00:13:09.880 --> 00:13:16.120 But another one that Rothbard points out is that once an institution can issue these pseudo receipts, 142 00:13:16.120 --> 00:13:20.840 they cannot regulate the production of the pseudo receipts by profit. 143 00:13:20.840 --> 00:13:26.640 Because the issue of every additional pseudo-receipt is profitable, no matter how many you issue, right? 144 00:13:26.640 --> 00:13:32.440 You issue the pseudo-receipt and you get to spend it, or as in the case of a business cycle, 145 00:13:32.440 --> 00:13:37.340 you lend it out through the credit markets and you earn the rate of interest. 146 00:13:37.340 --> 00:13:40.040 And the cost is minimal. What does it take to print the receipt? 147 00:13:40.040 --> 00:13:43.940 What does it take to create an electronic accounting of these receipts, right? 148 00:13:43.940 --> 00:13:51.340 The bank can no longer regulate the production of these receipts by profitability. 149 00:13:51.340 --> 00:13:55.340 Now, that should send up a red flag to us. 150 00:13:55.340 --> 00:13:58.840 In what other area of the economy is that true? 151 00:13:58.840 --> 00:14:00.240 Something must be wrong here, right? 152 00:14:00.240 --> 00:14:04.740 This must not be, in fact, part of the unhampered market. 153 00:14:04.740 --> 00:14:08.140 Okay, then he deals with two criticisms of this claim that he makes, 154 00:14:08.140 --> 00:14:11.940 that on the unhampered market there must be 100% reserved banking. 155 00:14:11.940 --> 00:14:16.340 The first is that banks can't make profit if they do this, right? 156 00:14:16.340 --> 00:14:20.340 They can't, you know, they make a profit on the interest spread. 157 00:14:20.340 --> 00:14:25.740 When they engage in financial intermediation, they borrow from savers at one interest rate 158 00:14:25.740 --> 00:14:31.940 and then lend at the market rate, performing the middleman function to earn the interest spread. 159 00:14:31.940 --> 00:14:38.340 But if they print up a pseudo, I mean, print up claims to money, they don't, they don't earn any interest, right? 160 00:14:38.340 --> 00:14:43.040 The money that they're holding just sits in the vault, idle, 161 00:14:43.040 --> 00:14:46.240 and yet they have to bear the cost of printing the banknote 162 00:14:46.240 --> 00:14:50.340 or accounting for the checking account balances and so on. 163 00:14:50.340 --> 00:14:57.140 But as Rothbard already explained earlier, banks do this only if customers pay fees. 164 00:14:57.140 --> 00:15:01.740 So the profitability depends upon customer payment of fees 165 00:15:01.740 --> 00:15:04.640 to administer the checking account or to print the banknote 166 00:15:04.640 --> 00:15:34.640 or whatever the form of the money substitute might be so this is not problematic and then the second is that 100% reserve isn't this a the argument would be isn't this a sort of a restriction of the freedom of contract in the market so bankers or we have a free unhampered market shouldn't they be able to offer any possible type of deposit or 167 00:15:34.640 --> 00:15:42.640 service that they, that they, that they want. So if you restrict them by law, you could say you cannot offer a fractional reserve account. 168 00:15:42.640 --> 00:15:54.640 Wouldn't this be a restriction on their right of contract? And I think as Walter Block mentioned earlier, well, this is just, this is just sort of a confusion about the nature of private property on the market, right? 169 00:15:54.640 --> 00:15:59.640 So, we wouldn't say that it's a restriction of the unhampered market 170 00:15:59.640 --> 00:16:06.640 if we have a law against a four-murder contracts, right? 171 00:16:06.640 --> 00:16:11.640 No, the private property is more basic than contract, 172 00:16:11.640 --> 00:16:16.640 and not all sorts of contracts could be upheld in the unhampered market, 173 00:16:16.640 --> 00:16:19.640 only contracts that don't violate private property. 174 00:16:19.640 --> 00:16:23.640 And if this activity of this issue of the pseudo receipt is in fact fraudulent, 175 00:16:23.640 --> 00:16:30.760 fraudulent, well then it would be ruled out of bounds automatically, legally in 176 00:16:30.760 --> 00:16:35.400 the unhampered market. Okay and then, so after going through this discussion 177 00:16:35.400 --> 00:16:39.080 about the stock of money, there's one last, as I mentioned, intermediate step 178 00:16:39.080 --> 00:16:44.480 that he takes before he gives us his full price theory statement. And this is 179 00:16:44.480 --> 00:16:49.320 what, well we might call this the second way in which money is non-neutral. 180 00:16:49.320 --> 00:16:56.320 Professor Salerno already gave us the portion of the chapter where Rothbard is assuming that money is neutral. 181 00:16:56.320 --> 00:17:03.320 So here he relaxes this assumption and he gives us the kind of standard Misesian account of the non-neutrality of money. 182 00:17:03.320 --> 00:17:07.320 But let me remind you that he's already talked about another sense in which money is neutral. 183 00:17:07.320 --> 00:17:15.320 This is back in Chapter 4 when he said just the existence of money is non-neutral to the market. 184 00:17:15.320 --> 00:17:22.320 In other words, if we have a barter economy, we would have a certain array of prices, exchange rates, barter prices of things. 185 00:17:22.320 --> 00:17:28.320 But if instead we have a money economy, then that would change the whole array of prices. 186 00:17:28.320 --> 00:17:34.320 All these sort of implicit barter prices that you could calculate in a monetary economy would be entirely different. 187 00:17:34.320 --> 00:17:43.320 And remember, his argument is, this is because all the preference ranks of goods against money would be different than the preference ranks of goods against goods, right? 188 00:17:43.320 --> 00:17:49.320 Right? Because money is an entirely different good that would have a different value to people, and so everything is changed by this. 189 00:17:49.320 --> 00:17:52.320 So that's one sense in which we might say that money is non-neutral. 190 00:17:52.320 --> 00:17:58.320 Here he's talking about the sort of standard sense in which money is non-neutral, where the question is this. 191 00:17:58.320 --> 00:18:03.320 What happens when we produce more money? What happens when the stock of money increases? 192 00:18:03.320 --> 00:18:07.320 What effect do we get on prices and production? 193 00:18:07.320 --> 00:18:11.960 So, as the economy adjusts to the increase in the stock of money, 194 00:18:11.960 --> 00:18:15.800 due prices in fact all doubled, all increase in proportion, 195 00:18:15.800 --> 00:18:18.680 whatever the relevant proportion is, 196 00:18:18.680 --> 00:18:25.720 so that decisions about production and consumption and so on wouldn't change. 197 00:18:25.720 --> 00:18:30.920 Now, here's the answer, remember, again, is just taken from Mises, 198 00:18:30.920 --> 00:18:33.560 it's exactly the same answer, he says. 199 00:18:33.560 --> 00:18:47.200 Since money is valued on preference ranks since, right, we have, we have, everyone is saying, oh, these good, here I have a certain amount of good, and rank it against a certain amount of money. 200 00:18:47.200 --> 00:18:53.000 When the stock of money increases, these rankings will all be changed, right? 201 00:18:53.000 --> 00:19:03.200 The rankings will be rearranged, so they're diminishing marginal utility of money or whatever, and people would begin to value any particular unit of money less, let's say, just as an example. 202 00:19:03.200 --> 00:19:06.200 So all the rank, all the preference rankings begin to change. 203 00:19:06.200 --> 00:19:11.200 Well, when all the preference rankings begin to change, well, all demands change. 204 00:19:11.200 --> 00:19:14.200 And then prices begin to change, right? 205 00:19:14.200 --> 00:19:18.200 And so the question is how exactly, you know, what are the conditions, 206 00:19:18.200 --> 00:19:24.200 what are the sort of praxeological conditions on the way in which these changes take place? 207 00:19:24.200 --> 00:19:28.200 Could we imagine that these changes would in fact result in neutrality? 208 00:19:28.200 --> 00:19:31.200 And Rothbard says, okay, no, they wouldn't. 209 00:19:31.200 --> 00:19:38.800 And he says we can imagine three different scenarios here of increasing strictness of assumptions. 210 00:19:38.800 --> 00:19:44.400 And even under the most strict conditions of assumptions, we would not get neutrality of money. 211 00:19:44.400 --> 00:19:48.500 So he says the first case is the realistic case. 212 00:19:48.500 --> 00:19:51.800 The first case is we have a division of labor, right? 213 00:19:51.800 --> 00:19:56.400 And over here in the economy, here we have the specialized money producers. 214 00:19:56.400 --> 00:19:59.400 This might be the state, but in the unhampered market, of course, it's not. 215 00:19:59.400 --> 00:20:02.800 It's not, it's just a group of entrepreneurs. 216 00:20:02.800 --> 00:20:07.200 So when money is produced, they're the ones who get the new money first. 217 00:20:07.200 --> 00:20:12.200 And so their value scales then are changed or their, you know, calculations, 218 00:20:12.200 --> 00:20:16.200 if they're entrepreneurs, their economic calculations are changed first. 219 00:20:16.200 --> 00:20:19.000 And then they begin, their demands change. 220 00:20:19.000 --> 00:20:25.400 So we get the more, you know, the, what a technological breakthrough occurs for the cost of gold 221 00:20:25.400 --> 00:20:27.400 The Theory of Money and Credit 222 00:20:55.400 --> 00:21:01.160 World Case, right? Okay, so that's not a problem. The second case is, I think, 223 00:21:01.160 --> 00:21:06.880 Professor Salerno mentioned, is the Friedman case, the equally spread money 224 00:21:06.880 --> 00:21:13.240 proportionately to everyone, you know, black helicopter model or the, you know, 225 00:21:13.240 --> 00:21:20.040 the Angel Gabriel, if you prefer, the more noble version of this from Hume. So, 226 00:21:20.040 --> 00:21:24.420 but the idea is that we don't have specialized money producers where the 227 00:21:24.420 --> 00:21:33.020 The money is emanating out from a given point in the economy, but everybody gets the new money equally somehow, proportionately equally somehow, through this process. 228 00:21:33.020 --> 00:21:36.520 He says, well, okay, in this case, we wouldn't have non-neutrality either. 229 00:21:36.520 --> 00:21:49.420 In other words, as people then, you know, go and begin to spend the new money, we wouldn't see an equal proportionate rise in all prices and therefore neutrality in production and consumption patterns. 230 00:21:49.420 --> 00:21:52.220 This is because people's preference ranks differ. 231 00:21:52.220 --> 00:21:56.060 The marginal utility that they place on money differs. 232 00:21:56.060 --> 00:22:00.060 In other words, if you woke up with an extra $100, 233 00:22:00.060 --> 00:22:03.020 you wouldn't just take it out and spend it equally proportionately 234 00:22:03.020 --> 00:22:05.420 on all the things you've already spent. 235 00:22:05.420 --> 00:22:08.140 I spend 1% of my income on DVDs or whatever, 236 00:22:08.140 --> 00:22:11.340 and so I take $1 of the $100 and spend it on a DVD. 237 00:22:11.340 --> 00:22:14.540 No, you'd spend it in an entirely different way. 238 00:22:14.540 --> 00:22:17.820 And so this will change relative prices, create non-neutrality. 239 00:22:17.820 --> 00:22:20.380 So even in that case, we don't have non-neutrality. 240 00:22:20.380 --> 00:22:24.060 And then Rothbard says, well, what if, even more restrictive, 241 00:22:24.060 --> 00:22:26.140 what if we had the case where the money was equally distributed 242 00:22:26.140 --> 00:22:31.180 and everybody in fact did spend the money equally proportionately in every direction? 243 00:22:31.900 --> 00:22:34.540 What about that case? Would we have neutrality in that case? 244 00:22:34.540 --> 00:22:35.020 He says, no. 245 00:22:35.660 --> 00:22:38.540 He says, and the reason we wouldn't have neutrality in that case is the reason, 246 00:22:39.340 --> 00:22:42.700 I don't know if Professor Salerno meant to say that, meant to apply it to this case, 247 00:22:42.700 --> 00:22:46.380 but he mentioned this point, is that the adjustment process takes time 248 00:22:46.380 --> 00:23:16.380 and the time of adjustment won't be the same in every production process right the time the time of adjustment of prices and so on and how people would react to this wouldn't be the same and so even if everyone went out and began to spend equally proportionately it wouldn't necessarily I mean maybe again under certain more restrictive assumptions it would but not just under the bare assumption that prices the spending on or demands throughout the economy would be equally proportionally rising this is because the 249 00:23:16.380 --> 00:23:21.380 The actual effect of this would not necessarily be the same in every market across time. 250 00:23:22.380 --> 00:23:27.380 Okay, so then he gets to this culmination of his theory of price. 251 00:23:27.380 --> 00:23:32.380 And remember the point of all this, what's distinctive about this is that 252 00:23:32.380 --> 00:23:36.380 Rothbard has built this system in a completely integrated way. 253 00:23:36.380 --> 00:23:43.380 The theory of prices of all goods is completely integrated with the theory of the purchasing power of money. 254 00:23:43.380 --> 00:23:52.980 So these things are all determined together in the same causal process moving through time. 255 00:23:52.980 --> 00:24:00.680 So this is the way he pictures it, these are statements that he makes about it. 256 00:24:00.680 --> 00:24:05.480 So let's start with the first, this is the beginning part of the logic of his claim, right? 257 00:24:05.480 --> 00:24:08.880 He says, let's look at each good or any particular good, 258 00:24:08.880 --> 00:24:13.480 The price of a good, as we know, is determined by total demand for the good and total stock. 259 00:24:13.480 --> 00:24:17.480 Total demand for the good is the two parts of exchange demand and reservation demands, 260 00:24:17.480 --> 00:24:20.880 what Professor Salerno was talking about last lecture. 261 00:24:20.880 --> 00:24:25.280 Okay, the exchange demand for any good, this is the total, 262 00:24:25.280 --> 00:24:30.080 this is not the demand an individual person has, but the total market exchange demand, 263 00:24:30.080 --> 00:24:33.280 for any good is the total stock of money, 264 00:24:33.280 --> 00:24:36.380 minus the exchange demand for all other goods, 265 00:24:36.380 --> 00:24:38.480 minus the reservation demand for money, right? 266 00:24:38.480 --> 00:24:42.240 The total amount of money that exists and people possess, 267 00:24:42.240 --> 00:24:46.440 and out of that total stock of money, they reserve some, the reservation demand for money. 268 00:24:46.440 --> 00:24:50.920 Then they spend some of the stock on other goods, so that's the exchange demand for other goods. 269 00:24:50.920 --> 00:24:55.680 And then whatever else they're not spending on other goods, they have to exchange for this good. 270 00:24:55.680 --> 00:24:58.200 So that's the exchange demand for this good. 271 00:24:58.200 --> 00:25:01.160 Then there's the reservation demand for the good, right? 272 00:25:01.160 --> 00:25:05.480 So those two things make up the total demand for any particular good. 273 00:25:05.480 --> 00:25:06.720 Then he moves to the next step. 274 00:25:06.720 --> 00:25:10.680 The next step is, what about the prices of all goods? 275 00:25:10.680 --> 00:25:12.880 Okay, so the prices of all goods are determined by, 276 00:25:12.880 --> 00:25:17.480 and this is, I use different symbols from Joseph Salerno, 277 00:25:17.480 --> 00:25:21.480 so, but anyway, this is total demand for all goods 278 00:25:21.480 --> 00:25:24.480 and the total stock of all goods, right? 279 00:25:25.480 --> 00:25:28.280 So what's the total demand for all goods? 280 00:25:28.280 --> 00:25:30.400 The total demand for all goods is the exchange demand 281 00:25:30.400 --> 00:25:33.960 for all goods plus the reservation demand for all goods. 282 00:25:33.960 --> 00:25:35.600 Exchange demand for all goods, of course, 283 00:25:35.600 --> 00:25:39.600 This is just the total stock of money minus the reservation demand for money. 284 00:25:39.600 --> 00:25:42.600 You can solve this algebraically from the first equation, 285 00:25:42.600 --> 00:25:44.600 the exchange demand for any one good, right, 286 00:25:44.600 --> 00:25:48.600 just by adding to both sides the exchange demand for all the other goods. 287 00:25:48.600 --> 00:25:50.600 Or you can just see this logically. 288 00:25:50.600 --> 00:25:53.600 The total stock of money and the total reservation demand for money 289 00:25:53.600 --> 00:25:56.600 is the amount of money we hold in our cash balances. 290 00:25:56.600 --> 00:26:00.600 And then the exchange demand for all other goods must be the residual, right, 291 00:26:00.600 --> 00:26:02.600 the amount that we're spending on all the goods. 292 00:26:02.600 --> 00:26:06.600 and the Reservation Demand for All Goods. 293 00:26:06.600 --> 00:26:13.600 Okay, so we have just these three factors that determine the prices of all goods. 294 00:26:13.600 --> 00:26:20.600 The exchange demand for all goods, total stock of money, reservation demand for money, 295 00:26:20.600 --> 00:26:23.600 and the reservation demand for goods, those three factors. 296 00:26:23.600 --> 00:26:25.600 Now, let's do the same thing for the PPM. 297 00:26:25.600 --> 00:26:29.600 PPM is determined by the total demand for money and the total stock of money. 298 00:26:29.600 --> 00:26:31.600 Okay, so the total demand for money, we can break down into these two components. 299 00:26:31.600 --> 00:26:34.600 Exchange Demand for Money and Reservation Demand for Money 300 00:26:34.600 --> 00:26:36.600 What's the exchange demand for money? 301 00:26:36.600 --> 00:26:40.600 What's just the inverse of the case for the exchange demand for all goods, right? 302 00:26:40.600 --> 00:26:44.600 Exchange demand for money is the total stock of all goods 303 00:26:44.600 --> 00:26:47.600 minus the reservation demand for all goods. 304 00:26:47.600 --> 00:26:51.600 I have a total stock of goods, the reservation demand for all goods. 305 00:26:51.600 --> 00:26:54.600 The difference is the goods that I supply. 306 00:26:54.600 --> 00:26:58.600 But the goods that I supply, this is just exchange demand for money, right? 307 00:26:58.600 --> 00:27:02.960 Okay, I'm supplying these goods in order to get the exchange demand for money. 308 00:27:02.960 --> 00:27:06.520 Okay, so he says that, summing this up, right, he says the ultimate determinants of the prices 309 00:27:06.520 --> 00:27:10.160 of goods and the PPM then are these four factors. 310 00:27:10.160 --> 00:27:13.040 The total stock of money and the reservation demand for goods. 311 00:27:13.040 --> 00:27:15.560 These are the factors of increase for prices, right? 312 00:27:15.560 --> 00:27:18.880 In other words, if these factors increase, prices go up. 313 00:27:18.880 --> 00:27:22.040 And these are factors of decrease, he says, for the PPM. 314 00:27:22.040 --> 00:27:28.160 So if you increase the total stock of money, prices for goods will rise, PPM will go down. 315 00:27:28.160 --> 00:27:31.520 If you increase the reservation demand for goods, same thing. 316 00:27:31.520 --> 00:27:33.280 Prices of goods would go up. 317 00:27:33.280 --> 00:27:34.960 People are more reluctant to sell them, right? 318 00:27:34.960 --> 00:27:37.680 Prices of goods will go up, PPM will go down. 319 00:27:37.680 --> 00:27:40.320 Then the total stock of goods and the reservation demand for money 320 00:27:40.320 --> 00:27:42.320 are the factors of decrease for prices 321 00:27:42.320 --> 00:27:45.160 and the factors of increase for the PPM. 322 00:27:45.160 --> 00:27:47.240 So we can reduce the whole analysis, 323 00:27:47.240 --> 00:27:50.000 or we can summarize, I guess, better word, 324 00:27:50.000 --> 00:27:53.760 the whole analysis into these four factors. 325 00:27:53.760 --> 00:27:58.040 Now, I want to mention this in some additional detail. 326 00:27:58.040 --> 00:28:04.760 tomorrow, so I won't go into this, but there are implications of this, and Joseph Salerno 327 00:28:04.760 --> 00:28:12.160 has written a great article on, I don't remember the title now, but the sort of working title 328 00:28:12.160 --> 00:28:15.200 had something to do with Rothbard's equation, but I don't think that made it into the final 329 00:28:15.200 --> 00:28:16.200 title. 330 00:28:16.200 --> 00:28:20.660 But anyway, applying these insights, this framework, then to a couple of interesting 331 00:28:20.660 --> 00:28:27.880 macro questions, and I'll talk about that a little bit tomorrow on the research panel 332 00:28:27.880 --> 00:28:32.280 but it's not that this is just a sort of intellectual exercise. 333 00:28:32.280 --> 00:28:39.080 This can be actually applied to interesting questions in macroeconomics. 334 00:28:39.080 --> 00:28:45.180 Okay, now there are four other topics that I just want to briefly mention. 335 00:28:45.180 --> 00:28:49.280 The first one is one that I want to mention because there was a question about this 336 00:28:49.280 --> 00:28:56.380 and this has to do with the purchasing power parity theory of exchange rates. 337 00:28:56.380 --> 00:29:01.380 Okay, so the analysis that Rothbard goes through is this, right? 338 00:29:01.380 --> 00:29:08.580 Throughout the whole book, he's focusing, well, one of the focal points of analysis 339 00:29:08.580 --> 00:29:14.740 is this idea that all action is aiming at the acquisition of a value difference. 340 00:29:14.740 --> 00:29:20.780 But even the simplest actions are just, what will you do this evening and, you know, study Man Economy and State, right? 341 00:29:20.780 --> 00:29:25.500 You're choosing between that and some other option that you value less highly. 342 00:29:25.500 --> 00:29:27.500 And so you're aiming at this value difference. 343 00:29:27.500 --> 00:29:31.500 And then as you act and realize this value, 344 00:29:31.500 --> 00:29:34.700 if there is a possibility of additional action 345 00:29:34.700 --> 00:29:38.900 that is also beneficial on the basis of a difference value, 346 00:29:38.900 --> 00:29:42.300 this difference in value will diminish. 347 00:29:42.300 --> 00:29:44.300 The rank orders, in other words, will diminish, right? 348 00:29:44.300 --> 00:29:47.100 There's diminishing marginal utility of both goods 349 00:29:47.100 --> 00:29:51.500 as you move in the direction of exchanging them, one for another. 350 00:29:51.500 --> 00:29:54.300 And so this happens then in markets. 351 00:29:54.300 --> 00:29:57.400 This is the principle of arbitraging, right, across different prices. 352 00:29:57.400 --> 00:30:03.800 We have different factor input prices and output prices. 353 00:30:03.800 --> 00:30:08.200 And so production is guided by the differences here to exploit these. 354 00:30:08.200 --> 00:30:12.000 And these two come down then together to some particular point, right? 355 00:30:12.000 --> 00:30:15.900 They may be far apart and then action brings them closer and closer to get. 356 00:30:15.900 --> 00:30:20.700 In other words, the gains are acquired and fewer and fewer gains are available. 357 00:30:20.700 --> 00:30:24.500 Okay, so the same thing happens then in the law of one price. 358 00:30:24.500 --> 00:30:26.000 This is the same principle. 359 00:30:26.000 --> 00:30:30.000 So we have arbitrage opportunities between goods that are selling at different prices 360 00:30:30.000 --> 00:30:35.200 and the arbitrage then brings the prices together as those gains are realized, right? 361 00:30:35.200 --> 00:30:40.300 And as Rothbard points out, for goods, this arbitrage process will be somewhat incomplete. 362 00:30:40.300 --> 00:30:42.200 It won't be entirely complete. 363 00:30:42.200 --> 00:30:45.200 The goods prices might not come completely together. 364 00:30:45.200 --> 00:30:49.800 And this is because of locational differences in the main. 365 00:30:49.800 --> 00:30:58.600 The locational differences would create different prices, let's say, for maybe for gasoline near the point of production, 366 00:30:58.600 --> 00:31:02.600 then farther away, the transportation costs or something of this sort, right? 367 00:31:02.600 --> 00:31:06.800 Because we can categorize, the goods actually become categorized differently. 368 00:31:06.800 --> 00:31:13.500 The good would be, let's say, if I'm in Pennsylvania, I want gasoline, and the gasoline's in Texas where it's being produced. 369 00:31:13.500 --> 00:31:17.200 Gasoline in Texas is a capital good, not a consumer good, right? 370 00:31:17.200 --> 00:31:20.200 In order to make it a consumer good, you have to deliver it to me. 371 00:31:20.200 --> 00:31:22.200 It's an extra step of production. 372 00:31:22.200 --> 00:31:26.200 And so naturally, its price differs by this transportation cost. 373 00:31:26.200 --> 00:31:28.200 Well, what if we apply this to money? 374 00:31:28.200 --> 00:31:33.200 Okay, well, there aren't transportation costs, especially with redemption claims. 375 00:31:33.200 --> 00:31:35.200 There are almost no transportation costs of money. 376 00:31:35.200 --> 00:31:39.200 Nobody needs, at least, to engage in the transportation costs of moving gold around. 377 00:31:39.200 --> 00:31:42.200 They can exchange claims. 378 00:31:42.200 --> 00:31:46.200 And there's no distinction between money in one place is a capital good 379 00:31:46.200 --> 00:31:49.400 Capital Good and Money in another place is a consumer good, right? 380 00:31:49.400 --> 00:31:53.160 This capital consumption distinction doesn't apply to money. 381 00:31:53.160 --> 00:31:56.300 Money is always and everywhere the medium of exchange. 382 00:31:56.300 --> 00:32:04.860 So we would expect, in fact, we theoretically know that the purchasing power of money in any place must be roughly the same. 383 00:32:04.860 --> 00:32:12.160 Any one money in any one market area, the purchasing power of money must be the same in every place in the market area, right? 384 00:32:12.160 --> 00:32:15.360 Every place in the United States, the purchasing power of money is the same. 385 00:32:15.360 --> 00:32:20.400 Now, this doesn't seem to, this seems to find the face of empirical experience though. 386 00:32:20.400 --> 00:32:28.560 We go to New York City and, you know, we buy lunch at some place in New York City or we 387 00:32:28.560 --> 00:32:34.480 pay a much higher price than we do here in Auburn, or we rent an apartment there and 388 00:32:34.480 --> 00:32:35.800 a higher apartment. 389 00:32:35.800 --> 00:32:38.160 So that has to be explained in a different way. 390 00:32:38.160 --> 00:32:42.960 We won't go back through the arguments about this, but you see the basic point, right? 391 00:32:42.960 --> 00:32:48.360 There are other explanations that differences in the nature of the goods and differences 392 00:32:48.360 --> 00:32:51.720 in subjective values of the experience surrounding the goods and so on. 393 00:32:51.720 --> 00:32:54.160 So we don't need to repeat any of that. 394 00:32:54.160 --> 00:32:57.400 Okay, so now we get to the purchasing power parity. 395 00:32:57.400 --> 00:33:02.320 So let's suppose that we have two different locations where two different monies are used, 396 00:33:02.320 --> 00:33:04.000 two different market locations. 397 00:33:04.000 --> 00:33:08.520 We have the euro and the area and the dollar area. 398 00:33:08.520 --> 00:33:11.440 Suppose we have an unhampered market where the, you know, we have free exchange of the 399 00:33:11.440 --> 00:33:41.440 of Currencies, and so on, that it must also be the case that arbitrage opportunities would exist as long as the purchasing power of money, of the dollar, let's say in Europe, differed from the purchasing power of the dollar in the U.S., and so that the purchasing power, since, again, as long as there aren't, again, transportation costs and moving money or other sorts of transactions costs, then we should, we should know, we should know theoretically that the purchasing power of the dollar would be the same everywhere through exchange rates. Now, the question that was asked about this was regarding empirical 400 00:33:41.440 --> 00:33:43.440 Is there any empirical evidence of this? 401 00:33:43.440 --> 00:33:51.440 And, you know, and if so, does this sort of, you know, raise the stature of the Austrian school on this point? 402 00:33:51.440 --> 00:33:54.440 And this is a very good question. 403 00:33:54.440 --> 00:33:59.440 There are sort of many aspects to it that I want to just mention. 404 00:33:59.440 --> 00:34:07.440 One aspect is that you should remember from Rothbard's discussion here that here we have another case 405 00:34:07.440 --> 00:34:13.740 Another case where theory is an underlying factor that's working out a particular result. 406 00:34:13.740 --> 00:34:18.240 This is like, let's say, the equalization of the pure rate of interest. 407 00:34:18.240 --> 00:34:24.240 That is very difficult to see manifest in empirical evidence. 408 00:34:24.240 --> 00:34:28.140 Even the equality of the purchasing power of money, again, as we've already seen, 409 00:34:28.140 --> 00:34:33.140 is very difficult to see empirically in prices. 410 00:34:33.140 --> 00:34:36.440 The price of the meal in New York, again, is higher than it is here. 411 00:34:36.440 --> 00:34:40.140 And so people naturally think the purchasing power of money is lower in New York City. 412 00:34:40.140 --> 00:34:42.940 It's not. We know it's not, right, theoretically. 413 00:34:42.940 --> 00:34:45.340 And so it's very difficult to test empirically. 414 00:34:45.340 --> 00:34:53.940 What sort of empirical test would you arrange to see this, to perceive this? 415 00:34:53.940 --> 00:34:58.540 And, of course, value is always changing and so on, so it's a very difficult thing. 416 00:34:58.540 --> 00:35:05.740 Secondly, this idea of the purchasing power parity theory of money is held 417 00:35:05.740 --> 00:35:07.500 across different schools of thought. 418 00:35:07.500 --> 00:35:11.180 It's not like only Austrians hold this theory. 419 00:35:11.180 --> 00:35:13.940 And so, you know, this is held by a large group 420 00:35:13.940 --> 00:35:15.140 of the mainstream as well. 421 00:35:15.140 --> 00:35:18.060 And so it isn't, I mean, if, even if this theory 422 00:35:18.060 --> 00:35:20.540 were empirically verified somehow, 423 00:35:20.540 --> 00:35:22.460 it wouldn't be as if it shows the superiority 424 00:35:22.460 --> 00:35:23.760 of the Austrian view. 425 00:35:23.760 --> 00:35:26.860 But with those caveats, though, I did want to, 426 00:35:26.860 --> 00:35:31.860 I do want to mention this particular piece. 427 00:35:31.860 --> 00:36:01.700 piece, this is a, y'all see that? You need to be bigger? I don't want to, I mean, I don't want you to read the whole thing, but just to see, just to see, because somebody asked for a citation on this, right, so this is Kenneth Rogoff, it's JEL, it's a dated piece, June 1996, but he cites in the later part of the article, all sorts of stuff, here's the key point that he makes, he says, 428 00:36:01.700 --> 00:36:06.300 There is today an enormous and ever-growing empirical literature on PPP, 429 00:36:06.300 --> 00:36:10.200 one that has arrived at a surprising degree of consensus on a couple of basic facts. 430 00:36:10.200 --> 00:36:21.100 First, at long last, notice how he says it, at long last we have empirical evidence that purchasing power parity does in fact rule real exchange rates. 431 00:36:21.100 --> 00:36:27.900 You get the sense, right, that he too is sort of a praxeologist. 432 00:36:27.900 --> 00:36:30.800 We've mentioned this at a couple of other guys, right? 433 00:36:30.800 --> 00:36:34.400 They seem empirical evidence, but they really think that it should look a different way 434 00:36:34.400 --> 00:36:38.200 if it violates their suppositions about what theory says. 435 00:36:38.200 --> 00:36:46.200 So long last we have this, you know, evidence that, okay, persuasive evidence of real exchange rates, 436 00:36:46.200 --> 00:36:49.400 tentor purchasing power parity in the very long run. 437 00:36:49.400 --> 00:36:53.800 And then the second point he makes is that there's a tremendous amount of volatility in the short run. 438 00:36:53.800 --> 00:37:00.400 And so he's trying in this article to work out the, you know, says this is sort of a puzzle and we have to work it out. 439 00:37:00.400 --> 00:37:04.880 But anyway, I thought I'd throw that up for the one who asked about a citation. 440 00:37:04.880 --> 00:37:07.480 So he cites, in other words, he cites this empirical literature. 441 00:37:07.480 --> 00:37:08.840 You can go look at it. 442 00:37:08.840 --> 00:37:13.400 And I'm sure there are updated things that I didn't bother to try to find. 443 00:37:13.400 --> 00:37:14.880 OK, so that was one thing. 444 00:37:14.880 --> 00:37:19.240 The second is the fallacies of the equation of exchange. 445 00:37:19.240 --> 00:37:22.000 So Rothbard's got a great section on this, right? 446 00:37:22.000 --> 00:37:25.080 He uses the Fisher version of this. 447 00:37:25.080 --> 00:37:34.080 M.V. is equal to P.T., and he points out the following things. 448 00:37:34.080 --> 00:37:38.680 He says, look, this is just an identity. 449 00:37:38.680 --> 00:37:42.280 If we're going to say anything causally or, you know, theoretically about this, 450 00:37:42.280 --> 00:37:45.080 we have to provide the theory. 451 00:37:45.080 --> 00:37:49.480 The theory from the Austrian view, of course, comes from the basis of human action. 452 00:37:49.480 --> 00:37:54.280 Then he points out, secondly, there's this aggregation problem, right? 453 00:37:54.280 --> 00:37:59.720 Right on the right hand side, we can aggregate P, the array of P's and the array of T's, 454 00:37:59.720 --> 00:38:04.400 we can aggregate what Joseph Salerno calls the inner product of them, right? 455 00:38:04.400 --> 00:38:09.640 We take the price of something and multiply it by the transaction or by the quantity, 456 00:38:09.640 --> 00:38:15.240 then we can add up P's, we can add up the P's times Q's, but we can't add up the arrays 457 00:38:15.240 --> 00:38:18.280 of P's or the arrays of T's. 458 00:38:18.280 --> 00:38:21.440 This is because they're denominated differently. 459 00:38:21.440 --> 00:38:29.740 So prices are ratios, right? Prices $4 per gallon of gasoline, or it's $2 per loaf of bread. 460 00:38:29.740 --> 00:38:35.640 Well, we can't add those together. We can only add monetary sums that are sums of money. 461 00:38:35.640 --> 00:38:41.340 Money itself, right? Not ratios of money to goods. So we can't even add up the P's. 462 00:38:41.340 --> 00:38:45.940 Nor could we add up the T's, since, again, they would be denominated differently. 463 00:38:45.940 --> 00:38:53.740 And then he points out that V, the concept of V from the viewpoint of individual action simply doesn't exist. 464 00:38:53.740 --> 00:38:59.420 It's just an absurdity. There's no such thing as a velocity of a single transaction, right? 465 00:38:59.420 --> 00:39:04.220 So we can't even understand this in any sense of human action whatsoever. 466 00:39:04.220 --> 00:39:10.020 So V is just defined, of course, as Pt divided by M. 467 00:39:10.020 --> 00:39:15.260 But as Rothbard points out, if you define V that way, well then you can create an innumerable 468 00:39:15.260 --> 00:39:18.060 Number of Equations of Similar Type, right? 469 00:39:18.060 --> 00:39:25.020 You can say, let's take the stock of sugar, multiply it by V, and we'll get Pt, if we 470 00:39:25.020 --> 00:39:30.220 define V as Pt divided by S, right? 471 00:39:30.220 --> 00:39:32.460 So we'd have sugar velocity, you know? 472 00:39:32.460 --> 00:39:37.540 And then the stock of sugar would be a determinant of the price level, you know? 473 00:39:37.540 --> 00:39:38.540 This is just, right? 474 00:39:38.540 --> 00:39:43.060 This is classic Rothbard, but it shows the idiocy of this. 475 00:39:43.060 --> 00:39:46.900 And then he points out, of course, finally, that this is a static condition. 476 00:39:46.900 --> 00:39:48.900 Even if it's true, it's just a static condition. 477 00:39:48.900 --> 00:39:54.300 And we're interested in, mainly, we're interested in the question of dynamics here, so to speak, 478 00:39:54.300 --> 00:39:57.300 or in, you know, what's happening to the process over time, right? 479 00:39:57.300 --> 00:39:59.500 We increase the money supply, in other words. 480 00:39:59.500 --> 00:40:02.900 We don't just sort of jump from one static position to another. 481 00:40:02.900 --> 00:40:08.140 We want to know what's the process that the economy goes by or through when M is increased 482 00:40:08.140 --> 00:40:14.140 and, you know, the right-hand side, we get changes in P and T. 483 00:40:14.140 --> 00:40:17.140 Okay, then the third thing is the fallacies. 484 00:40:17.140 --> 00:40:21.140 He has a section on the fallacies of measuring and stabilizing the PPM. 485 00:40:21.140 --> 00:40:24.140 And here are just a couple of points to make. 486 00:40:24.140 --> 00:40:32.140 He says, before economic science came along, people thought it was just sort of a natural inclination that they had 487 00:40:32.140 --> 00:40:34.140 to think that money's value was constant. 488 00:40:34.140 --> 00:40:37.140 Those are some objective fixed value for money. 489 00:40:37.140 --> 00:40:46.140 He says economic science has debunked this and showed that, right, that money's value depends upon demand and supply, or it's variable at least. 490 00:40:46.140 --> 00:40:56.140 But what he points out is that only this sort of Misesian line that he's adopted and developed, only this Rothbardian theory of money, 491 00:40:56.140 --> 00:41:05.140 has fully demonstrated the sort of underpinnings of the causal factors involved in this relationship. 492 00:41:05.140 --> 00:41:18.140 So the other position, sort of a quantity theory position, is simply left with this unacceptable dichotomy between, again, the barter exchange ratios on the one hand and the price level on the other. 493 00:41:18.140 --> 00:41:30.140 The price level is just somehow, you know, it is variable, but it's determined over here by these mechanical factors and isn't part of the process of the market itself. 494 00:41:30.140 --> 00:41:34.140 So we have this dichotomy that he considers unacceptable. 495 00:41:34.140 --> 00:41:50.140 And here he says, well, the correct view again is to simply reiterate, as the analysis has shown, that the money relation, the total demand and total stock of money, is constituted in the demands and the supplies of goods. 496 00:41:50.140 --> 00:41:56.140 In other words, these things are all entirely intermixed, right? They're interrelated. 497 00:41:56.140 --> 00:42:01.140 And the reason for this is because the preference rank is unitary. 498 00:42:01.140 --> 00:42:09.140 So you have a bag of apples ranked against $5. So you get the integration right here, right? 499 00:42:09.140 --> 00:42:19.140 And so the demand for apples implies the supply of money. These are just completely integrated aspects of your action. 500 00:42:19.140 --> 00:42:27.140 They cannot be separated, right? So you can't say, oh, the price of apples is determined by the demands and supplies of apples, 501 00:42:27.140 --> 00:42:34.940 Then money is determined over here by the quantity of money and the velocity and transactions and so on. 502 00:42:34.940 --> 00:42:40.940 So he makes this very important argument that he makes. 503 00:42:40.940 --> 00:42:48.640 Then he also mentions that some of the things that you also would find in Mises about price indices. 504 00:42:48.640 --> 00:42:52.140 You know, price indices are an attempt to say, 505 00:42:52.140 --> 00:42:59.140 Let's find a set of goods for which we presume that the value of this set of goods is unchanged. 506 00:42:59.140 --> 00:43:08.140 And so that any change that we do see in the prices of these goods would have to be due to changes in the money, right? 507 00:43:08.140 --> 00:43:10.140 Would have to be a money phenomena. 508 00:43:10.140 --> 00:43:13.140 But, as Rothbard points out, this doesn't work. 509 00:43:13.140 --> 00:43:17.140 If you set up a market basket of goods and you say, okay, we keep the market basket fixed, 510 00:43:17.140 --> 00:43:47.140 and then we see over time like a consumer price index you know what happens to the amount of money necessary to purchase the market basket of goods and we and we say that the difference in the amount of money that's necessary to purchase the basket of goods over time is by our calculation the change in the PPM the sort of change in the PPM driven by the money relation then we've made a basic fundamental error in thinking right because there isn't any way for us to disentangle 511 00:43:47.140 --> 00:43:52.140 In the empirical evidence of the change in the price and the money paid for these goods, 512 00:43:52.140 --> 00:43:56.840 the sort of good side effect from the money side effect, right? 513 00:43:56.840 --> 00:44:01.640 Let's say again we have a bag of apples ranked against five dollars. 514 00:44:01.640 --> 00:44:05.140 So it's like this. 515 00:44:08.840 --> 00:44:13.340 One bag ranked against five dollars. 516 00:44:13.340 --> 00:44:15.740 And then, so this is yesterday. 517 00:44:15.740 --> 00:44:23.460 And then today, suppose the ranking is $5 against one bag of apples, so it reverses. 518 00:44:23.460 --> 00:44:25.820 Now, do we know why it reversed? 519 00:44:25.820 --> 00:44:32.100 If we see a guy who goes into a store and he buys a bag of apples at $5 this day and he doesn't the next, 520 00:44:32.100 --> 00:44:39.220 do we know that he's not buying the bag of apples the second day because the value of the bag of apples fell? 521 00:44:39.220 --> 00:44:42.860 Or that the value of the money went up? 522 00:44:42.860 --> 00:44:48.460 Can we disentangle which one it was that reversed his rank order? 523 00:44:48.460 --> 00:44:50.500 The answer is clearly no, we can't, right? 524 00:44:50.500 --> 00:44:52.140 We simply don't know. 525 00:44:52.140 --> 00:44:57.420 And so no assumption about a market basket of goods can do this for us 526 00:44:57.420 --> 00:44:59.500 and disentangle these two effects. 527 00:44:59.500 --> 00:45:03.860 So this is totally useless enterprise to engage in. 528 00:45:03.860 --> 00:45:08.180 And then finally, the last thing are business fluctuations. 529 00:45:08.180 --> 00:45:12.820 And here again, I just want to mention the kind of basic introductory 530 00:45:12.820 --> 00:45:27.700 The basic distinction, at least in the overall sense, is between what he calls business fluctuations 531 00:45:27.700 --> 00:45:29.700 and then the business cycle. 532 00:45:29.700 --> 00:45:31.460 And here he's just introducing this distinction. 533 00:45:31.460 --> 00:45:39.620 He says, look, business fluctuations occur when there are changes in specific demands 534 00:45:39.620 --> 00:45:40.620 that exist. 535 00:45:40.620 --> 00:45:47.020 Not a change in the money relation, but just changes in specific demands for goods and factors of production and so on. 536 00:45:47.020 --> 00:45:54.620 We can increase in demand for apples and, of course, this involves a change in the rank order of apples against money, 537 00:45:54.620 --> 00:45:56.320 but not a change in the money relation. 538 00:45:56.320 --> 00:45:59.820 Theoretically, we can make this distinction, right? Just empirically, we can't. 539 00:45:59.820 --> 00:46:02.020 So he says, okay, so what would happen? 540 00:46:02.020 --> 00:46:04.020 We've analyzed this already. 541 00:46:04.020 --> 00:46:07.220 We get the change in the price of apples and then we get production changes. 542 00:46:07.220 --> 00:46:10.920 If this is unabated, we would get the final state of rest and so on and so forth. 543 00:46:10.920 --> 00:46:12.420 That's a business fluctuation. 544 00:46:12.420 --> 00:46:13.920 This occurs all the time in the economy. 545 00:46:13.920 --> 00:46:20.820 This is the way that entrepreneurs adjust to better satisfy consumer preferences when they're changing. 546 00:46:20.820 --> 00:46:23.520 Separate from this would be a change in the money relation. 547 00:46:23.520 --> 00:46:25.320 What happens if there's a change in the money relation? 548 00:46:25.320 --> 00:46:29.620 What demand for money goes up or the stock of money increases or something like this? 549 00:46:29.620 --> 00:46:33.620 Then the changes that occur in the economy occur throughout the economy. 550 00:46:33.620 --> 00:46:36.520 They occur in every direction throughout the economy. 551 00:46:36.520 --> 00:46:46.120 So if the demand for money falls, then the increased spending and increased demands for goods would be throughout the economy. 552 00:46:46.120 --> 00:46:53.120 So he says, since the business cycle is affecting the economy as a whole, it would only be through the changes in the money relation. 553 00:46:53.120 --> 00:46:59.120 So it can't be that a business cycle is some like a business fluctuation on steroids. 554 00:46:59.120 --> 00:47:02.620 It's sort of a Keynesian kind of claim, right? 555 00:47:02.620 --> 00:47:11.620 the multiplier process and we get this, you know, it's a little teeny tiny 98 pound weakling change and then it turns into a Arnold Schwarzenegger change. 556 00:47:11.620 --> 00:47:17.620 No, it can't happen like that. It's got to be a change in the money relation to change everything throughout the economy all at once, right? 557 00:47:17.620 --> 00:47:24.620 And then he says, well, what other restrictions theoretically would have to be placed on it to count as a cycle? 558 00:47:24.620 --> 00:47:34.620 And he says, for example, we could imagine that their external events could occur in the economy, which might create a single, a one-time boom and bust. 559 00:47:34.620 --> 00:47:41.620 So, you know, it kind of looks like a boom bust, right? So one time we get something and, okay, the economy expands because of this and then it falls back. 560 00:47:41.620 --> 00:47:47.620 He says, but that can't explain an ongoing cycle. That just explains a one-time event, right? 561 00:47:47.620 --> 00:47:52.660 right so if that's the way the world was we would just have you know regular 562 00:47:52.660 --> 00:47:58.420 economic progress punctuated by these one-time events right so there we would 563 00:47:58.420 --> 00:48:01.500 have here we have a little crisis or whatever and then we go along for a 564 00:48:01.500 --> 00:48:06.020 couple decades nothing bad then there would be another boom and and so on so 565 00:48:06.020 --> 00:48:09.820 he says that that's not what the cycles like the cycles perpetual it's ongoing 566 00:48:09.820 --> 00:48:17.600 every every year we're in the boom or crisis or bust or recovery and then he 567 00:48:17.600 --> 00:48:21.960 And he says the next step that economists take in their thinking about this is, well, maybe 568 00:48:21.960 --> 00:48:26.800 it's a flaw internally in the market, maybe there's just something sort of, maybe the 569 00:48:26.800 --> 00:48:31.080 market's just subject to this through some sort of institutional or internal flaw. 570 00:48:31.080 --> 00:48:38.240 And he says this cannot be the case, because as he points out, this is the crucial point 571 00:48:38.240 --> 00:48:43.040 that he makes about the business cycle, the business cycle is characterized as a cluster 572 00:48:43.040 --> 00:48:45.480 Cluster of Entrepreneurial Error 573 00:48:45.480 --> 00:48:50.120 And a cluster of entrepreneurial error cannot be explained on the normal functioning of 574 00:48:50.120 --> 00:48:51.120 the market economy. 575 00:48:51.120 --> 00:48:53.760 There just is no such thing, right? 576 00:48:53.760 --> 00:48:58.600 The normal functioning of the market economy, some entrepreneurs are precisely doing better 577 00:48:58.600 --> 00:49:03.640 than others by better anticipating consumer demands. 578 00:49:03.640 --> 00:49:06.080 And so entrepreneurial errors don't cluster, right? 579 00:49:06.080 --> 00:49:15.280 These entrepreneurs who are less adept at anticipating are being overcome by those that are better. 580 00:49:15.280 --> 00:49:18.880 And so we don't see clustering of entrepreneurial error. 581 00:49:18.880 --> 00:49:23.280 And furthermore, even if it were true that you could get sort of by fluke, you could get 582 00:49:23.280 --> 00:49:27.360 a cluster of entrepreneurial error on the market, this would not explain the cycle. 583 00:49:27.360 --> 00:49:29.560 The cycle is boom and bust, right? 584 00:49:29.560 --> 00:49:34.120 What would a cluster of entrepreneurial error do but just give us a bust? 585 00:49:34.120 --> 00:49:36.760 Or maybe something else, right? 586 00:49:36.760 --> 00:49:40.600 In other words, it wouldn't move in the opposite direction. 587 00:49:40.600 --> 00:49:43.920 It wouldn't sort of reverse itself and then become something else. 588 00:49:43.920 --> 00:49:47.880 We would think if the cluster of entrepreneurial error were some inefficiency that all entrepreneurs 589 00:49:47.880 --> 00:49:51.120 engaged in together, we would just get a collapse. 590 00:49:51.120 --> 00:49:52.600 But that's not the boom-bust cycle, right? 591 00:49:52.600 --> 00:49:56.060 The boom-bust cycle is first up and then down. 592 00:49:56.060 --> 00:50:00.000 And then he says, finally, what this led economists to, of course, is a psychological explanation. 593 00:50:00.000 --> 00:50:11.000 This is the only thing left. It must be a psychological mood swings, it must be optimism followed by pessimism that leads us to the cycle. 594 00:50:11.000 --> 00:50:15.000 It must be this animal spirit's explanation of Keynes or something like this. 595 00:50:15.000 --> 00:50:25.000 It must be driven by over-optimism and then an orgy of investment and then pessimism and pulling back. 596 00:50:25.000 --> 00:50:34.000 And again, I want to go into the further arguments about this, but he nicely lays out this, what's to be covered.