The Economics and Ethics of Private Property, By Hans-Hermann Hoppe, page 240 and 241:

“Amazingly, Friedman, Yeager, Steel, Walters, Virkkala and Jones believe I must have overlooked the fact that all existing societies are less than fully libertarian (that slavery, the gulag, or that husbands own wifes, etc), and that this somehow invalidates my argument. Yet obviously, I would hardly have written this article if it had been my opinion that libertarianism were already prevalent. Thus, it should have been clear that it was precisely this non-libertarian character of reality which motivated me to show something quite different: why such a state of affairs cannot be justified. Citing facts like slavery as counter-example is roughly on par with refuting the proof that 1+1=2 by pointing out that someone has just come up with 3 as an answer – and about as ridiculous.”

Page 243 and 244:

“Rasmussen is different. He has fewer difficulties recognizing the nature of my argument, but then asks me in turn “So what?” Why should an a priori proof of the libertarian property theory make any difference? Why not engage in aggression anyway? Why indeed?! But then, why should the proof that 1+1=2 make any difference? One certainly can still act on the belief that it was 1+1=3. The obvious answer is “because a propositional justification exists for doing one thing, but not for doing another.” But why should we be reasonable, is the next come-back. Again the answer is obvious: For one thing, because it would be impossible to argue against it; and further, because the proponent raising this question would already affirm the use of reason in his act of questioning it. This still might not suffice and everyone knows that it does not: for even if the libertarian ethic and argumentative reasoning must be regarded as ultimately justified, this still does not preclude that people will act on the basis of unjustified beliefs either because they don’t know, they don’t care, or they prefer not to know. I fail to see why this should be surprising or make the proof somehow defective. More than this cannot be done by propositional argument.

Rasmussen seems to think that if I could get an “ought” derived from somewhere (something that Yeager claims I am trying to do, though I explicitly denied this), then things would be improved. But this is simply an illusory hope. For even if Rasmussen had proven the proposition that one “ought” to be reasonable and “ought” to act according to the libertarian property ethic this would be just another propositional argument. It could no more assure that people will do what they ought to do than my proof can guarantee that they will do what is justified. So where is the difference; and what is all the fuss about? There is and remains a difference between establishing a truth claim and installing a desire to act upon the truth – with “ought” or without it. It is great, for sure, if a proof can install this desire. But even if it does not, this can hardly be held against it. And it also does not subtract anything from its merit if in some or even many cases a few raw utilitarian assertions prove more successful in persuading of libertarianism than it can do. A proof is still a proof: and socio-psychology remains socio-psychology.”

“Amazingly, Friedman, Yeager, Steel, Walters, Virkkala and Jones believe I must have overlooked the fact that all existing societies are less than fully libertarian (that slavery, the gulag, or that husbands own wifes, etc), and that this somehow invalidates my argument.”

Björn: I wonder if Friedman also did overlook the fact that at least during the 60s, central bankers around the world did not either believe in monetarism and if this very part of reality by itself invalidated a case for monetarism? Or, for example, if Karl Marx too missed the fact that the world was not a communist or socialistic one when he wrote Das Kapital or did he hope that his “proofs” could change the world? Ludwig von Mises too might have, when he wrote his masterpiece Human Action, missed the sad fact that Austrian Economics did not prevail and that he should, therefore, have considered not writing it? This reply by Friedman, Yeager, Steel, Walters, Virkkala and Jones was surprisingly silly.

Rasmussen. “But why should we be reasonable, is the next come-back.”

Björn: This “question” could also serve as an “answer” to any argument for anything and why should we not be reasonable?

“Rasmussen seems to think that if I could get an “ought” derived from somewhere.”

Björn: If everyone or at least if most people believed that the proof is a valid proof, it would be almost impossible for governments to act against it and ignore it or should they “argue” “we know that our activity is criminal but we believe it is good for society anyway. We are criminals but so what?”

In other words, in practise an “is” can, in such a case, therefore be derived to also be an “ought.”

Björn Lundahl

“Monetary expansion does artificially increase loans”

This is true and this is also a reason why fractional reserve banking is bad. As it is true that monetary expansion through the process of fractional reserve banking does artificially increase loans, it also proves that “savings” in demand deposits are not true savings and that they are fraudulent when they are, by banks, regarded as such.

“The lower interest rates stimulate both consumption expenditure (reduce saving) and investment spending on capital goods”

This sounds like some mixture of Monetarism/Keynesianism explanation. What lower interest rates “stimulates” (through artificially lowering of the rate of interest), are malinvestments and business cycles.

“The increased profitability of production in consumer goods and capital goods industries increases the demand for labor, which raises nominal and real wage rates, and reduces unemployment below its natural rate. The increase in spending and the increase in wage rates raise the price level. (This is the boom period.)”

Usually real wages will be decreased as there is a time lag between increases of the money supply and inflationary adjusted wages, but labour will be fooled in the short run to believe that their wages have risen in real terms as they are only increased nominally. Workers looking for jobs will accept bad offers and unemployment will only seem to have decreased. As the numbers of “jobs” are increased through the realization of malinvestments they are not any real jobs. Only unproductive wasteful illusory jobs are the ones that have been created. This will, though, keep some politicians happy.

Only through real savings can production increase.

If production would in empirical observations seem to have increased because of the process of monetary expansion the actual fact is that living standards have been reduced. This artificial increase of production could be, to some extent, be accomplished through longer working hours (higher utilization of land, labour and capital) but that only to the extent that people are deceived. When they realize that their real wages and profits have not risen because of inflation (the purchasing power of money has been reduced) this process is halted. Living standards have decreased since something which is not measured has been diminished and that is a consumption good called “leisure”.

The “natural rate” of unemployment is not a praxeological fact and can, therefore, change overnight.

In a pure free market there would not be any involuntarily unemployment as wages are set by the market and also because of the fact that the business cycle would be eliminated.

We would not either in a free market need to worry about “aggregate demand” not being adequate as entrepreneurs are trained specialists who sets prices in accordance with expectations and also with regard to their special markets and its circumstances. This would also be an easier task than today as the markets are not deluded and disturbed by monetary expansion. Just observe the stock quotes from the world’s stock exchanges these days and how instable they are and how “nervous” speculators are. They should (and I to a small extent too) be nervous as all those tremendous increases of the supply of money are deceiving them all the time. The markets are really amazing as they can function at all in environments such as the stock exchanges which are very unstable as they are highly influenced by the enormous increases of the supply of money.

If politicians and bureaucrats are that good in forecasting they could in a free market profit by earning a living as speculators. Their services could then be beneficial, a gain for society and also privatized. I would guess, though and on the average, that they would immediately go bankrupt and that their services would be harmful for society.

As I have already written in my comments above is that the essence of the business cycle is that bank credit expansion are concentrated actions which will give businessmen the wrong signals that the pool of capital is larger than it really is and will in a illusory manner effect their calculations in such a way that it will seem profitable to invest in certain capital goods and thereby distort the economic structure to not respond to consumers voluntarily saving ratios and that those errors are later corrected by consumers.

Björn

My email address is:

foranewliberty-bjorn@yahoo.se

” However, the argument that when someone borrows money on demand the borrower should (in some moral or legal sense) be required to hold gold (or some other commodity acceptable to the lender) exactly equal to the amount of the demand loan is still perplexing to me.”

Economics by itself can not give us any guidance of ethical norms. It is not, either, supposed to.

Advocates of utilitarianism might think that fraud and fractional reserve banking are something great. The problem is, though, that utilitarianism is an ethic that is really bad and destructive.

Utilitarianism means that all action should be directed toward achieving the greatest happiness for the greatest number of people. Intellectually the principle lets the door stand wide open for the use of physical violence and theft against people which happens to belong to the lesser number. If we grasp a state of things where the greatest happiness for the greatest number of people exists in using physical violence and theft everywhere and in all human situations and places (i.e. in the classroom, shop, street, airport, forest etc) against all those people that happened to belong to the lesser numbers, the human race would quickly perish.

As we have seen, the principle of utilitarianism if followed by all groups of people in all places would lead to human destruction and this, therefore, proves that the principle is destructive. Any crime could be done in the name of utilitarianism such as murder, theft, rape, slavery etc. The lesser number of people would always be at the mercy of the greatest number.

Private groups of people in society are therefore, naturally, not allowed to commit crimes in the name of utilitarianism.

The state has a “legal right” to commit crimes and the state nearly, always does it in the name of utilitarianism.

In the name of utilitarianism Hitler could have justified all the murdering of the Jews that he made. He probably, also, thought that he by doing those crimes achieved the greatest happiness for the greatest number of Germans.

Let us not forget:

http://video.google.com/videoplay?docid=-309490343652240839&q=hitler+jews

Or, alternatively, as Rothbard wrote in his book For a New Liberty:

“Let us consider a stark example: Suppose a society which fervently considers all redheads to be agents of the Devil and therefore to be executed whenever found. Let us further assume that only a small number of redheads exist in any generation-so few as to be statistically insignificant. The utilitarian-libertarian might well reason: “While the murder of isolated redheads is deplorable, the executions are small in number; the vast majority of the public, as non-redheads, achieves enormous psychic satisfaction from the public execution of redheads. The social cost is negligible, the social, psychic benefit to the rest of society is great; therefore, it is right and proper for society to execute the redheads.” The natural-rights libertarian, overwhelmingly concerned as he is for the justice of the act, will react in horror and staunchly and unequivocally oppose the executions as totally unjustified murder and aggression upon nonaggressive persons. The consequence of stopping the murders—depriving the bulk of society of great psychic pleasure—would not influence such a libertarian, the “absolutist” libertarian, in the slightest. Dedicated to justice and to logical consistency, the natural-rights libertarian cheerfully admits to being “doctrinaire,” to being, in short, an unabashed follower of his own doctrines.”

http://mises.org/rothbard/newliberty2.asp

If anything should die, it is the principle of utilitarianism.

The right path to follow is instead:

The Ethics of Liberty:

Hesselberg continues:

“But a social order is not possible unless man is able to conceive what it is, and what its advantages are, and also conceive those norms of conduct which are necessary to its establishment and preservation, namely, respect for another’s person and for his rightful possessions, which is the substance of justice. . . . But justice is the product of reason, not the passions. And justice is the necessary support of the social order; and the social order is necessary to man’s well-being and happiness. If this is so, the norms of justice must control and regulate the passions, and not vice versa.”

http://mises.org/rothbard/ethics/two.asp

Or in other words and in a more rigid form: “that no man or group of men may aggress against the person or property of anyone else”.

I have written an essay about normative principles. Please go to:

http://normativeprinciples.blogspot.com/2006/12/normative-principles-pure-free-market_10.html

Björn

I am still trying to find time to finish the Rothbard book. However, in regard to Chapter 1, “Business Cycle Theory”, let me tell you what my view has always been of business cycles. Below is a very compact version, obviously.

Monetary expansion does artificially increase loans, which reduce real interest rates below the level they otherwise would be as determined by the rate of time preference of savers and the profitability of investment. The lower interest rates stimulate both consumption expenditure (reduce saving) and investment spending on capital goods. The increased profitability of production in consumer goods and capital goods industries increases the demand for labor, which raises nominal and real wage rates, and reduces unemployment below its natural rate. The increase in spending and the increase in wage rates raise the price level. (This is the boom period.)

The increase in the measured short run rate of increase in the price level increases inflationary expectations, thereby raising the nominal rate of interest and the real rate of interest. The increase in inflationary expectations also increases nominal and real wage rates. The higher real rate of interest begins to reduce consumption and investment. The higher real wage rate increases production costs. Reduced spending on consumption and investment goods and the higher production costs both serve to reduce production and the demand for labor. Unemployment rises back toward its natural rate and the real rate of interest rises back toward its natural level. (The recessionary adjustment period.)

Now, I’m not convinced, after a second reading, that Rothbard is saying anything more than what I have stated above, apart from his distinction between a greater boom and recession in capital goods industries than in consumer goods industries. I have to admit that I’m not sure I fully comprehend his distinction between lower order production and higher order production, other than the former means consumption goods and the latter, captial goods.

What do you think?

In a world without any property rights there wouldn’t be any property rights at all which, naturally, excludes any state or public property rights too.

That would mean that no one would have a right to anything not even to themselves.

Without any property rights the human race would quickly vanish.

This is a logical conclusion which can not, therefore, be refuted by empiricism.

Björn Lundahl

Life and self-ownership

Mark Humphrey “I don’t want to precipitate trench warfare with devoted Rothbardians, but I strongly suspect that Rothbard owed his insight about “life as the standard of moral value” to Ayn Rand. I can’t prove this, of course. Sadly, in “The Ethics of Liberty”, (published in the early Eighties) Rothbard chose to, in a sense, blacklist Rand by claiming that NO ONE, other than himself, in the libertarian movement was working to develope a system of rationally defensible ethics. (Maybe Rothbard meant “at the moment I am writing this statement”.)”

Björn That life is an axiomatic value and functions “as the standard of moral value” in an ethical system, Rothbard could, alternatively for example, have gotten this insight from Mises himself through analyzing his statement in his book, “Human Action”, page 11:

“We may say that action is the manifestation of a man’s will.”

http://mises.org/humanaction/chap1sec1.asp

I am not saying that Rothbard did get his insight from Mises; I am only saying that it was possible. Surely, many other possibilities exist which we do not know anything about.

Mark Humphrey “It has been awhile since I’ve read Hoppe, and Rothbard; but I suspect Hoppe’s reasoning goes: either we all own ourselves, or everyone owns everyone else. Since the first proposition is clearly more defensible than the latter absurd proposition, one can affirm self ownership as valid. But if this is the argument, it fails. For that argument assumes that which it sets out to prove, namely that an ethical concept, “ownership”, exists. But on this basis, ownership remains unproven, so that one could just as well assert: “no one owns anything, and anything goes.””

Björn Self-ownership is a natural fact, since a man in his very nature controls his own mind and body (natural disposition), that is, he is a natural self-owner of his own will and person (having a free will) and if this was not true, neither could he effectively control any property and, therefore, not own it. In other words; “nothing could control and own something”.

Naturally, praxeology the science of human action, by itself logically confirms the natural fact of self-ownership, since praxeology is based upon “the acting man consciously intending to improve his own satisfaction” and I quote from answers.com:

“From praxeology Mises derived the idea that every conscious action is intended to improve a person’s satisfaction. He was careful to stress that praxeology is not concerned with the individual’s definition of end satisfaction, just the way he sought that satisfaction. The way in which a person will increase his satisfaction is by removing a source of dissatisfaction. As the future is uncertain so every action is speculative.

An acting man is defined as one capable of logical thought — to be otherwise would be to make one a mere creature who simply reacts to stimuli by instinct. Similarly an acting man must have a source of dissatisfaction which he believes capable of removing, otherwise he cannot act.
Another conclusion that Mises reached was that decisions are made on an ordinal basis. That is, it is impossible to carry out more than one action at once, the conscious mind being only capable of one decision at a time — even if those decisions can be made in rapid order. Thus man will act to remove the most pressing source of dissatisfaction first and then move to the next most pressing source of dissatisfaction.

As a person satisfies his first most important goal and after that his second most important goal then his second most important goal is always less important than his first most important goal. Thus, for every further goal reached, his satisfaction, or utility, is lessened from the preceding goal. This is the rule of diminishing marginal utility.

In human society many actions will be trading activities where one person regards a possession of another person as more desirable than one of his own possessions, and the other person has a similar higher regard for his colleague’s possession than he does for his own. This subject of praxeology is known as catallactics, and is the more commonly accepted realm of economics.”

http://www.answers.com/Praxeology?gwp=11&ver=2.0.1.458&method=3
Further:

The Ethics of Liberty, page 45:

Footnote:

“[1]Professor George Mavrodes, of the department of philosophy of the University of Michigan, objects that there is another logical alternative: namely, “that no one owns anybody, either himself or anyone else, nor any share of anybody.” However, since ownership signifies range of control, this would mean that no one would be able to do anything, and the human race would quickly vanish.”

http://mises.org/rothbard/ethics/eight.asp

Or in my own words:

Why must anybody own anything?

In accordance with our objective test to find out if something is a condition for something else, we grasp a state of things where the following principle is none existent anywhere and at all:

“The existence of property rights”:

In a world without any property rights nobody would be able to do anything, since nobody has the right to control anything. Not even themselves (see below about property rights in your own person).

This question is not only a contradiction it is also silly. You ask a question which means that you control yourselves (natural disposition), that is owning yourself (see below the excellent writing of Hans-Hermann Hoppe). The other contradiction is that if nobody would own anything, nobody would be able to hinder anyone to own anything either since they would otherwise have an invalid control (having the disposition to) of everyone else, that is having an invalid ownership to everybody else (see below about valid property rights in your own person).

Ownership itself is, therefore, an objective condition for the preservation of human life.

http://normativeprinciples.blogspot.com/2006/12/normative-principles-pure-free-market_10.html

Please read some of Hans-Hermann Hoppe´s excellent writing from the book “The Ethics and Economics of Private Property”:

http://mises.org/etexts/hoppe5.pdf

And to:

ON THE ULTIMATE JUSTIFICATION OF THE ETHICS OF PRIVATE PROPERTY:

http://www.hanshoppe.com/publications/econ-ethics-10.pdf

Björn Lundahl

“I see how, in a 100% fiat money reserve banking system, an increase in actual dollar bills handed out to people would be similar in effect to an increase in the supply of gold as far as lack of business cycle effects are concerned (at least, within the framework of Rothbard). Of course, there would be different distributional effects from an increase in currency versus an increase in gold.”

That is what I call progress.

In contrast to the printing of dollar bills and handing them over in cash to each citizen, the central bank could increase bank reserves which will multiply the money supply and initially lower the rate of interest. This is a concentrated action which will give businessmen the wrong signals that the pool of capital is larger than it really is and will in a illusory manner effect their calculations in such a way that it will seem profitable to invest in certain capital goods and thereby distort the economic structure to not respond to consumers voluntarily saving ratios. This is a phase when the economy “booms” and prices rise (relatively to what they otherwise would be without injections of bank credit) as the economy is initiating the realization of malinvestments. Prices of capital goods such as stocks, real estate etc will rise further and relatively to consumer goods. In phase II when the money supply decreases or decelerates a contraction in output and an economic bust will dominate the economy and illusory made malinvestments will be liquidated. Prices of capital goods will fall and proportionately to consumer goods. The economy is now back to health again and economic structures have a tendency to reflects consumers voluntarily saving ratios.

The recipe for avoiding this anti social phenomenon, the dreadful business cycle, is to hinder any political manipulations of a nation’s monetary system through the transformation of the present monetary system to a true 100% gold reserve money standard (or silver standard) and thereby cut the link, all together, between government and money.

If mentioned necessary monetary reforms were undertaken, for example, in the USA with its enormous economic, cultural and psychological influence on the rest of the world, many other nations might follow suit.

Björn Lundahl

That was a totally meaningless statement. Anyone selling anything is “demanding money.” What sellers are not demanding, nor any private entitity for that matter, is to have the value of dollars diluted, which is exactly what the Fed does as it gradually accumulates guvmint debt. (Then it is debt that can “sit there” forever, or simply be written off by congressional decree.) In a marginal sense, it would be better to be at the point of injection. A demander of dollars would favor it, all other things aside. But that is really beside the point.

We might all print dollars if there were demand for them. Someone ]]> http://archive.mises.org/6319/do-central-banks-really-inflate-no-say-the-post-keynesians/comment-page-3/#comment-114392 Alex MacMillan Mon, 12 Mar 2007 11:30:29 +0000 http://blog.mises.org/archives/006319.asp#comment-114392 Bjorn,

Thanks for your remarks. I see how, in a 100% fiat money reserve banking system, an increase in actual dollar bills handed out to people would be similar in effect to an increase in the supply of gold as far as lack of business cycle effects are concerned (at least, within the framework of Rothbard). Of course, there would be different distributional effects from an increase in currency versus an increase in gold. P.S. Still working my way through Rothbard’s book.

Apart from fraud and other distortions, the printing of dollar bills would be similar with respect to the business cycle as a newly arrived inflow of gold would be “in a 100% gold reserve money standard.”

Björn

Well, I am back again! It did not take me long (laugh)!

I still would like to mention this as it might help you to receive some insight and you do not need to reply.

If the government printed dollar bills and gave them in cash to each citizen, that wouldn’t either cause a business cycle as it would not distort the market in the same way as bank credit expansion. Bank credit expansion initially lowers the rate of interest, or alternatively, makes it lower than it otherwise would be which induces businessmen to act in a manner as if savings have increased. By printing of dollar bills and handing them over in cash to each citizen, does not produce such a result as consumers voluntarily use this monies in the way they want, and the economy responds to their preferences accordingly. The economy need not, therefore, at a later date be exposed of consumer retribution, or at least not in a 100% fiat money reserve standard. Such a standard would also be, logically, the only one that could be acceptable to analyze in an example like this, as we wouldn’t want any influence of fractional reserve banking. What we instead want to analyze is only the impact of printing of dollar bills in regard to the business cycle.

Apart from fraud and other distortions, the printing of dollar bills would be similar with respect to the business cycle as a newly arrived inflow of gold would be.

I would also like to additionally mention why expectations of “zero inflation” or unchanged purchasing power of money does not at least prevent the occurrence of the business cycle, as increases of bank credit gives the borrowers (businessmen) a command over economic recourses and thereby influence the production of capital goods.

Alternatively, if you would have a printing press and printed dollar bills, it surely would give you a command over economic recourses and this regardless of what people expects.

Björn

Yes, we will probably “meet again”.

Regards

Björn

Have downloaded Rothbard’s book and am going through it. I shall digest it and summarize the arguments for myself. I’m sure I’ll get a chance to let you know what I think later.

Alex

“Since it clearly takes very little time for the new money to filter down from business to factors of production, why don’t all booms come quickly to an end? The reason is that the banks come to the rescue. Seeing factors bid away from them by consumer goods industries, finding their costs rising and themselves short of funds, the borrowing firms turn once again to the banks. If the banks expand credit further, they can again keep the borrowers afloat. The new money again pours into business, and they can again bid factors away from the consumer goods industries. In short, continually expanded bank credit can keep the borrowers one step ahead of consumer retribution.”

http://mises.org/rothbard/agd/chapter1.asp#boom_and_depression

Björn Lundahl
Göteborg, Sweden

http://www.answers.com/new+zeeland?gwp=11&ver=2.0.1.458&method=3

Björn Lundahl

I do believe that the origin of these policies can be derived from the influence of Milton Friedman during the 70s and 80s. The means and objectives of the central banks are not exactly what Friedman once proposed as he wanted zero inflations and monetary rules, but they are similar.

It is probably true that central banks can meet those objectives.

Sveriges Riksbank (The Swedish Central Bank):

“The objective of monetary policy
According to the Sveriges Riksbank Act, the objective of monetary policy is to “maintain price stability”. The Riksbank has interpreted this objective to mean a low, stable rate of inflation.
More precisely, the Riksbank’s objective is to keep inflation around 2 per cent per year, as measured by the annual change in the consumer price index (CPI). There is a tolerance range of plus/minus 1 percentage point around this target. At the same time, the range is an expression of the Riksbank’s ambition to limit such deviations. In order to keep inflation around 2 per cent the Riksbank adjusts its key interest rate, the repo rate.”

http://www.riksbank.com/templates/SectionStart.aspx?id=10602

ECB (European Central Bank)

“Objectives

The primary objective of the ECB, and the wider ESCB, is “to maintain price stability” within the euro area, i.e., to keep inflation low. The present target is to keep inflation below, but close to, 2%.”

http://www.answers.com/topic/european-central-bank

Reserve Bank of New Zeeland:

“The Reserve Bank’s primary function, as defined by the Reserve Bank of New Zealand Act 1989 is to provide “stability in the general level of prices.””

“The Reserve Bank Act requires that price stability be defined in a specific and public contract, negotiated between the Government and the Reserve Bank. This is called the Policy Targets Agreement (PTA). The current PTA signed in September 2002, defines price stability as annual increases in the Consumers Price Index (CPI) of between 1 and 3 per cent on average over the medium term. Previously, price stability was deemed to be 0 to 3 per cent inflation over 12 months.”

http://www.rbnz.govt.nz/monpol/pta/index.html

Reserve Bank of Australia:

“In practice the Reserve Bank concentrates on the first objective, that is to control inflation through monetary policy. (See also open market operation.) The current objective is a policy of inflation targeting aimed at maintaining the annual inflation rate at between “2-3 per cent, on average, over the cycle”. This target was first set in 1993 by the then Reserve Bank Governor Bernie Fraser and was then formalised in 1996 by the Treasurer Peter Costello and incoming Reserve Bank Governor Ian Mcfarlane.”

http://www.answers.com/topic/reserve-bank-of-australia

The Swiss National Bank (SNB):

“The National Bank equates price stability with a rise in the national consumer price index (CPI) of less than 2% per annum.”

http://www.snb.ch/e/geldpolitik/geldpol.html

As mentioned those policies do not end the business cycle once and for all and I do not believe that anyone expects that, not even central bankers.

For an example: New Zeeland which has adopted this policy of targeting inflation since 1989 has experienced recessions:

“In recent years, New Zealand has been perceived as a vigorous economy and attracted international attention. After the economic restructuring of the 1980s, the New Zealand economy sank into a recession starting with the sharemarket crash in October 1987. The recession deepened in the early 1990s when unemployment topped 10%. However in 1993 the economy rebounded smartly and apart from a smaller recession in the late 1990s, New Zealand enjoyed a substantial economic boom up until 2005. New Zealand’s unemployment rate is now the second lowest of the 27 OECD nations with comparable data.”

Björn Lundahl
Göteborg, Sweden

Certainly, if the capital goods lose their value, then the money they back will lose its value too. That’s why it’s not common. But of course a bank could issue $40,000, use it to buy a tractor, use the tractor to earn (say) $80,000 over 10 years, and have more than enough assets to back the $40,000, even if the tractor depreciated to zero.

“How would business cycles ensue in a world of perfectly understood zero inflation, according to Rothbard?”

During the 20s the purchasing power of money was relatively unchanged, but the money supply was still increased and brought about a depression.

http://mises.org/rothbard/agd/chapter4.asp#inflation

What bring about the business cycle are not changes in the purchasing power of money but the expansion of bank credit (increases of the money supply).

Expansion of the money supply through bank credit does not reflect “consumer’s willingness to invest and save”, but, still, this expansion of bank credit initially lowers the rate of interest as if consumers have saved more. This process brings about a business cycle.

Always remember that the greatest proportions of bank credit are loans that are borrowed to businesses and do not reflect consumers saving ratios. Consumers spend a much greater proportion of their incomes on consumer goods.

Please read my above comment “Recessions and The Great Depression were caused by Government Interventions!”

Please read also “Bank Credit and the Business Cycle”, (chapter from the book “For a New Liberty”, by Murray Rothbard):

http://mises.org/rothbard/newliberty9.asp

Björn Lundahl
Göteborg, Sweden

I’ve read the Rothbard article. It was most useful in defining such jargon as “long and short orders of production”, with which I have been somewhat confused when I have read such terms at this site. I have a personal distaste for any jargon when simpler English will do the trick.

I immediately agreed with a great deal of the argument presented in the article, but I need to go over it again and write it down in my simple English. When I do, I’ll perhaps ask you some further questions.

However, the argument that when someone borrows money on demand the borrower should (in some moral or legal sense) be required to hold gold (or some other commodity acceptable to the lender) exactly equal to the amount of the demand loan is still perplexing to me. Of course, I see that the result of such requirement would mean that such demand loans would not exist because there would be no incentive to the borrower. The borrower has to pay demand loan interest but cannot earn a rate of return with the funds acquired.

The theory that expansions in the money supply cause business cycles while expansions in gold (under a 100% reserve-gold standard) would not, I must seriously think about.

Anyway, what if there were a legal requirement for the central bank to adopt a zero inflation target, with a relatively tight short run + or – operating zone around zero? (I realize that you don’t want a central bank at all, but leave that aside for the moment.) Whether there is “fradulent” fractional reserve banking or not is irrelevant to the ability of the central bank to achieve this target. In Canada, for example, there is fractional reserve banking with no reserve requirements at all, and the Bank of Canada has a 2% inflation target with a short run range of 1% to 3%, which the Bank always achieves. As a consequence, no one is fooled about inflation. There is also discussion underway to perhaps make the inflation target 0%. This means that, at all times, people understand the real wage rate and the real rate of interest. It strikes me that Rothbard’s argument for injections of money to cause business cycles requires inflation fooling with regard to interest rates and wage rates. How would business cycles ensue in a world of perfectly understood zero inflation, according to Rothbard?