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Source link: http://archive.mises.org/10338/you-cant-print-production-and-prosperity/

You Can’t Print Production and Prosperity

July 23, 2009 by

It’s hard to imagine that the monetary policy talk can get any nuttier, but we’ve likely only just begun. After all, despite the Federal Reserve growing its balance sheet by 140 percent and dropping rates essentially to zero, the bankruptcies just keep on coming. Ex-Fed governor Wayne Angell told Larry Kudlow’s CNBC audience, “monetary policy always works!” Although Angell does stipulate that it takes time before the tromping on the monetary gas pedal will spin the economic tires and spray the prosperity gravel. FULL ARTICLE

{ 28 comments }

Youliy Ninov July 23, 2009 at 7:36 am

The quotation:
“The liquidation of unsound businesses, the ‘idle capacity’ of the malinvested plant, and the ‘frictional’ unemployment of original factors that must suddenly and en masse shift to lower stages of production — these are the chief hallmarks of the depression stage.”
is a little bit out of the current USA context. In the past most loans were given to the higher stages of production and when the crisis erupted the resourses shifted to the lower stages of production (as stated in the article). At present it is the other way around. Most of the loans are given to the consumers therefore the lower stages expand relatively to the upper ones. In other words: more consumption than production. The non-specific resourses will move to the upper stages en masse when the current USA crisis gets out of control.
BR

Barry Loberfeld July 23, 2009 at 8:01 am

This isn’t the only policy based on the belief in state-created prosperity:

Since the proponents of the minimum wage know directly that they themselves are motivated by only the highest ideals, they conclude conversely that their opponents must be motivated by nothing but the lowest morals, e.g., “employer greed” (or an inexplicable sympathy with it). Apparently the idea here is that when the minimum wage is increased, the employer, like a leprechaun, has only to reach down a little deeper into his pot-o’-gold in order to pay his workers more. Again, the problem with this is, employers don’t pay employees – consumers do. The source for the salaries of the kids behind the counter is the money you fork over for those burgers and fries. When the price of that labor goes up, so does the price of that lunch. The extra money for the higher wages doesn’t come out of Ronald McDonald’s pockets; it comes out of yours.

As I said: evading the point. None of the cheerleaders for the minimum-wage increase even think to ask – let alone attempt to answer – the question Where does the money come from? Do they imagine that Congress can just legislate wealth into existence?

From HERE.

Youliy Ninov July 23, 2009 at 8:15 am

Barry,
According to the austrian view the wages at McDonald’s come exactly from the employers. They come from their capital funds. Imagine a fast-food shop just opened. The pay-day comes on the second day after the opening (friday for instance). Where do you think the owner of the shop gets the money from? From the burgers?

greg July 23, 2009 at 8:30 am

It is good investments that increase productivity, not savings. Savings is like a shotgun, money is thrown out into the market and few actually hits the target.

It is the people that see a demand, develop a solution and invest accordingly. This has more to do about human nature in a free society than it has to do about money supply. After all, increases or decreases in the money supply is more a function of accounting than it is about human action.

So the fact that productivity has increased 1000 times since 1910, if we would have controlled the money supply better, we would have increased 2000 times? Maybe, maybe not, but I am happy with the advances we have seen.

ganpalou July 23, 2009 at 8:34 am

Observing Bernanke testify before Congress is like watching dolphins ball up the baitfish on a nature show. It is unbeleivable how invested Congress is to the concept of a “consumer based economy.” They dont even suspect that they may suffer the same fate as the rest of us sardines.

Barry Loberfeld July 23, 2009 at 9:37 am

Dear Youliy Ninov,

You are talking about investment funds. At some point, the money for salaries has got to come from sales — or somebody is going out of business.

Thank you for your interest,

Barry

Youliy Ninov July 23, 2009 at 10:55 am

Dear Barry,
I disagree with your opinion. At least this is not what is
written in the Austrian economics books. What they state is that ” The demand for A is the demand for A”, that is to say the demand for hamburgers is not a demand for labour (check “Capitalism:A treatise on economics”, by George Reisman).
It has to do with the time structure of production. In this particular case the businessan has some capital funds which have been obtained through saving (his or someone else’s).During the first week he pays the salaries out of his funds and the funds shrink. At some time later he adds money from the sales revenues to his funds. What is important is that the payment is out of money from a previous time period.
In my humble opinion your view exactly explaines how Keynesians think economy functions. If you were right then it would be OK to stimulate the economy through buying more hamburgers (with or without money out of thin air).
BR

Shay July 23, 2009 at 10:57 am

“It is good investments that increase productivity, not savings. Savings is like a shotgun, money is thrown out into the market and few actually hits the target.”

Savings go into banks, which loan it out. Banks want to loan it to those most likely to pay it back, so they choose those it would be a good investment in. Well, except banks who can externalize their risks (i.e. get bailed out).

“So the fact that productivity has increased 1000 times since 1910, if we would have controlled the money supply better, we would have increased 2000 times? Maybe, maybe not, but I am happy with the advances we have seen.”

Correction: if we had stopped controlling the money supply. But what about the fact that a huge portion of even this ~1000x advance has been eaten up by the government? It’s absolutely disgusting.

Emil Suric July 23, 2009 at 11:03 am

Youliy Ninov,

Giving uncovered credits directly to producers, consumers, or both, has the same effect in the long run. It must lead to a consolidated structure of production brought about by an end/reduction in money growth, and/or increased demand for current goods relative to future goods.

Barry Loberfeld July 23, 2009 at 11:52 am

“Dear Barry, I disagree with your opinion.”

Indeed?

“In this particular case the businessan [sic] has some capital funds which have been obtained through saving (his or someone else’s). During the first week he pays the salaries out of his funds and the funds shrink. At some time later he adds money from the sales revenues to his funds.”

I agree!

“What is important is that the payment is out of money from a previous time period.”

The initial payment is “out of money from a previous time period.” But those funds have shrunk, as you note, so he “adds” — i.e., now uses, substitutes — “money from the sales revenues.”

My point exactly.

Youliy Ninov July 23, 2009 at 11:54 am

Dear Emil,
If by “the same effect” you mean that it will lead to a crisis if money out of thin air is used then it is OK. However the case when the money is given to the producers (current China) is better than when the money is given to the consumers (current US)
(money out of thin air).
After the crisis has started and ended China will still have a (diminished) manufacturing base but US will not (it has been consumed-out, almost non-existing).

Youliy Ninov July 23, 2009 at 11:59 am

Dear Barry,
In short that I want to say is that the businessman pays salaries with HIS OWN MONEY, not with the money obtained by selling hamburgers.
BR

Barry Loberfeld July 23, 2009 at 12:07 pm

Dear Youliy,

“In short that I want to say is that the businessman pays salaries with HIS OWN MONEY, not with the money obtained by selling hamburgers.”

On your own showing, the businessman pays initial salaries with his own money and future salaries “with the money obtained by selling hamburgers.”

And there, you are absolutely correct.

billwald July 23, 2009 at 12:10 pm

Are not the Japanese still the saving champs of the world? Why, then, does Japan have an economic problem?

And exactly what is wrong with eliminating cash? Less than 2% of the US money in circulation is cash and half of that 2% is out of the country. Cash only helps tax cheats, dopers, gamblers, and politician bribers.

Youliy Ninov July 23, 2009 at 1:49 pm

Dear Barry,
My claim is that the businessman pays not only the initial salaries but also the future ones with his own money. Picture the following situation:
A businessman does not make profit at all, that is its expenses equal exactly his sales revenues. He pays salaries out of his capital funds and they diminish. Later he replenishes his capital funds with exactly the same amount. Assume this situation goes indefinitely. This is a possible, although highly unlikely situation (the businessman makes not money for himself). A question: whose money pay the salaries? His own money or the ones from the hamburgers?
Another situation: A businessman makes a gross error by opening a gem shop in a getto. He finds out that the people in the neighbourhood do not buy dimonds because do not have enough money and the wealthy customers do not come because of high crime rate in the district. He spend some time there (several weeks for instance) and closes the shop.
Nevertheless he has to pay salaries and since he has not sold anything he definitely has to pay them from his own funds. A loosing business is still business, it happens all the time.
What confuses you is that the businessnan’s own money (saved before) are mixed with money from the sales. Why do you claim that it is the money from the sales that pay salaries?
When you buy a car do you pay for its production? No, somebody has paid for the car before. You buy it after its production has been paid for.

BR

Youliy Ninov July 23, 2009 at 2:00 pm

Dear Bilwald,
A good answer to your first question is the following one.
Japan created a bubble (housing,etc.) similar to the one in the US now. The bubble creates a distorted economy ( an economic situation which can not sustain itself after the money out of thin air stops flowing). They refused to accept this fact (as goes on currently in the US) and tried to artificially prop-up the economy. They failed but not entirely beause of their high savings rate. To put it otherwise they are able to keep their economy away from functioning well.
BR

Barry Loberfeld July 23, 2009 at 3:14 pm

“A businessman does not make profit at all, that is its expenses equal exactly his sales revenues. He pays salaries out of his capital funds and they diminish. Later he replenishes his capital funds with exactly the same amount. Assume this situation goes indefinitely. This is a possible, although highly unlikely situation (the businessman makes not money for himself). A question: whose money pay the salaries? His own money or the ones from the hamburgers?”

Later he replenishes his capital funds with — what? You yourself answered this earlier: “At some time later he adds” — i.e., now uses, substitutes — “money from the sales revenues to his funds.” So, “[h]is own money” — the original capital fund — paid the initial salaries and “the ones from the hamburgers” now pay the current salaries.

“What confuses you is that the businessnan’s [sic] own money (saved before) are mixed with money from the sales.” I can very clearly see that you are conflating (1) “the businessnan’s own money (saved before)” — the initial but now exhausted source of funds — and (2) “money from the sales” — the current source of funds. If the businessman wants to stay in business, the second must not only replenish the first but exceed it, i.e., generate profit.

“Why do you claim that it is the money from the sales that pay salaries?”

Asked and answered. Why do you continue to not distinguish between initial and later salaries?

“When you buy a car do you pay for its production? No, somebody has paid for the car before. You buy it after its production has been paid for.”

Youliy, I have indeed heard of the “time preference” theory, which is what you evidently imagine you’re defending. And it refers to what I have been discussing throughout this thread: the initial investment of funds. At some point the investor expects sales to pay back the original funds and then — his goal from the beginning — generate profits.

Now, it is sales dollars, not his recouped investment dollars, that are paying his employees.

Youliy Ninov July 23, 2009 at 4:27 pm

Dear Barry,
It really gets interesting here. So we agree on the “initial salaries”. I think we will reach nowhere but let it be.My point here goes like this. The businessman has some capital (hamburgers :-) ). He exchanges his capital for anther capital (money) but I believe it is still his capital. Do you suggest that while the businessman conducts his business he loses his capital and some other “sales capital” creeps in?

orfeu July 23, 2009 at 11:59 pm

Dear Barry,

The businessman sells a good that he already paid for it. The cost of production is already paid when the product is sold and it includes the cost of the laborer. The money that the businessman receives for the product are his and his alone.

PS: What the laborer receives is money ahead of the sale and it comes from savings. The savings can be the money received throw loans, or from prior sales, but the customer DOES NOT pay the laborer. The customer pays the businessman, and the businessman pays the laborer.

Youliy July 24, 2009 at 1:22 am

Dear Barry,
I figured out how to prove my point.
Theorem:
Sales revenues are part of the businessman’s own capital.
Proof:
I will break it in several parts.
First, that the money from the sales are his.
Second, that the money from the sales represent capital to the businessman.
Third, that it is only part of the capital he posesses.
First:
The businessman exchanges a hamburger for 1 dollar. Whom does this one dollar belong to? The laws in my country (not a socialist one) state that this money belongs to him (that it is HIS money). Most of the people around me share this opinion.
Second:
Since the money from the sales revenues belongs to the businessman he is entitled to do whatever he wishes with it. Basically, he has two options: to spend it (consumption; e.g. go to see a movie) or to add it to the company’s capital. It is his decision which makes this money his capital. At the point that he decides to pay salaries (or some other expense) with it it becomes capital.
Third:
The businessman posesses hamburgers, the hamburger stand and money in the bank. Therefore the money from the sales revenues are not the only ones he has.

Therefore the money from the sales revenues are part of HIS CAPITAL.
Q.E.D.

Note that I do not claim that the money from the sales revenues are some other type of capital or that it belongs to somebody else. If you think otherwise, please let me know.
There is not way to destinguish between sales revenues and other money as such. All of them represents the company’s own capital.
And since the businessman decides to pay salaries he pays them from his OWN CAPITAL ( which is what I claim).
BR

Shay July 24, 2009 at 5:58 am

billwald wrote, “Cash only helps tax cheats, dopers, gamblers, and politician bribers.”

I use cash regularly for buying groceries. If I carry a debit card, I risk losing the card and thus all the money in my account, rather than just the cash on hand. I had a credit card, using that would cost the co-op I shop at money on every transaction, and give more to the credit card companies. Cash also makes me much more aware of how much I’m spending. I pay sales tax on every purchase, and am not into drugs, gambling, or political bribery.

Barry Loberfeld July 24, 2009 at 7:47 am

“[B]ut the customer DOES NOT pay the laborer. The customer pays the businessman, and the businessman pays the laborer.”

Context: We are talking about a business that has been in business for a while already. Yes, “the businessman pays the laborer” — i.e., physically hands over a paycheck — with money that is now from “sales dollars, not his recouped investment dollars,” the point I have made several times over.

Youliy July 24, 2009 at 7:59 am

Dear Barry,
It seems that “orfeu ” has expalined what I want to stress better than I could.
Let us settle this dispute once and for all.
Here is the suggestion:
Please, go to your boss and ask him:”Whose is the money you pay my salary with?” If he says it is not his, then I will concede that you are right. But make sure to remind him that paying anything with money which is not his is a crime.
If you are a businessman yourself, please, do not ask yourself the same question because I believe you are being biased. Go out in the street stop the first person you meet and ask him: ” It the money I pay to myself my money?”. If the answer is negative then I will again admit that you are right.
BR

Barry Loberfeld July 24, 2009 at 8:08 am

Of course the money is his legally. The question is, what is its source? Answer: sales revenue.

Youliy July 24, 2009 at 8:22 am

Dear Barry,
Is it correct for me to say that you picture the following process:
The businessman has 10 dollars (Businessman’s Dollars or BD ) and he sells 1 hamburger for 1 dollar (Sales Dollar or SD). At first the businessman pays the salary with 1 BD and later his fund is replenished with 1 SD. This process (BD->out SD Or may be you mean that after the initial transaction (1BD out 1SD in) the next 1 SD drives the previous SD out, so that the businessman stays with 9 BD and 1SD forever?
BR

Youliy July 24, 2009 at 8:26 am

Barry,
Sorry but part of my explanation did not print (my fault).
“This process (BD->out SD BR

Youliy July 24, 2009 at 8:29 am

It does not print again.
What I mean is that the one SD goes in and another BD goes out until only SDs are left.

Orfeu July 24, 2009 at 12:47 pm

“Answer: sales revenue”
No. Correct answer: prior sales revenue.

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