“Thus, Schumpeter’s conclusion that the rate of interest on production credit is ZERO under equilibrium conditions.

“Hence my own conclusion that interest on production credit and/or entrepreneurial profit is the product of what I have termed Final Demand Inflation.

“That is, the flow of nominal demand into the market for final output in excess of the nominal factor cost thereof.”
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Which is the really trivial and easily demonstrable cash flow fallacy. Pushing the fallacy is not the mark of very deep thinking. Even in steady state, where the firms sector’s disbursements exactly equal the firms sector’s receipts there is profit, because disbursements in payment of dividends are never expensed, and disbursements for the purchase of land are never expensed.

Brock Moore
brock_moore@accountant.com

Brock.

Which is the really trivial and easily demonstrable cash flow fallacy. Pushing the fallacy is not the mark of very deep thinking. Even in steady state, where the firms sector’s disbursements exactly equal the firms sector’s receipts there is profit, because disbursements in payment of dividends are never expensed, and disbursements for the purchase of land are never expensed.

Comment.

It’s a pleasure to encounter a deep thinker among Major Douglas’s admirers.

Joe S,

Comments for those who cannot spot the trees for the forest:

< "1. Nowhere in his interview does Gunnar Tomasson claim to be an Austrian economist. In fact, in introducing his interview I specifically noted that "he does not identify himself as an Austrian." His repeated insistence that economics is a branch of logic certainly marks him as a close ally of Austrians as against the positivists.">

You lauded his comments. He’s anti free market. You presumably identify with the Austrians. Therefore I was wondering if the Austrian position is essentially anti-free market.

<2. Both practitioners and students of Austrian economics can learn a great deal from the writings of economists who do not wholly, or even partially, share the Austrian perspective. No one knew this better than Murray Rothbard, who cited and drew upon the contributions and works of scores of non-Austrian economists in his magnum opus, Man, Economy and State. It would be laughable to suggest, by the way, that since many of these economists also advocated government intervention into the market economy, Rothbard "was not a free marketeer and hence not an Austrian either.">

Yes. But is the Austrian position free market or not? You guys obfuscate too much, which makes me suspicious.

<3. Tomasson's view that Schumpeter and Keynes were the two greatest economists of the 20th century does not disqualify him from offering us profound insights into the causes underlying the current collapse of the global monetary and financial system These insights, and their compatibility with Austrian economics, stand or fall on their own merits. To argue otherwise is to fall into the naive fallacy that the truth of a paricular proposition depends on the veracity of other independent beliefs held by the person who states it.>

Keynes was an important but disastrous economist. And it is not a fallacy to be influenced by other views held by the person in question. If he were to append his interview by saying he believed aliens were amongst us, wearing human skin, I would be less inclined to listen to other things he had to say.

<4. Tomasson's view that newly created money is necessary to generate an interest return in production was not simply plucked out of the air. It was the position originated by the eminent economist Joseph Schumpter who argued that in the circular flow of equilibrium interest would be zero and that interest was a dynamic income that depended upon the expansion of bank credit to finance innovations in the economy. Schumpeter's position was carefully scrutinized and refuted by Austran economists such as Ludwig von Mises, Lionel Robbins and Murray Rothbard. The fact that most Austrians reject this position today, of course, is completely irrelevant to the value of Tomasson's interpretation of the current financial crisis.>

Yes it is. Printing money, creating it or whatever is an insane solution to anything. Evidence, logic, everything points to it’s insanity. Dressing it up in bullshit abstruse models does not alter this fact.

<5. "Friedman never said that money is a factor of production, therefore it is entitled to a share of the production. He simply never said that."
Milton Friedman ("The Optimum Quantity of Money," in his book of essays book of the same name, p. 24): "As a first step, let us relax condition (9), on page 2, to permit lending and borrowing, while retaining all other conditions. These other conditions mean that borrowing will be of only two kinds, (a) to finance extra consumption, or (b) to finance the holding of cash balances as a productive resource.">

Is that a refutation? Sorry, I don’t see it.

<6. The Bretton Woods System had only a very tenuous link to gold and was indeed a "phony gold standard" and a price-fixing scheme. However, it did provide an incentive for governments to restrain money creation because "currency devaluation," unlike continual depreciation under the current sustem, was a discrete "headline" event that created business uncertainty and popular resentment against the government in power. Thus the inflation performance under Friedman and the monetarist's dream of monopoly national fiat currencies floating against one another led to a substantially more inflationary international monetary regime-The Great Inflation of the 1970s-- which neither prevented the global dissemination of business cycles nor suppressed demands for protectionism as the Friedmanites had so glibly promised.>

An incentive to restraint? A price-fixing system? I’m afraid not.
The inflation was caused by government printing money, not by Friedman.
And Friedman spent a lot of time denouncing fiat currencies. He co-wrote a tract investigating whether there needed to be a government monopoly of money. The conclusion was: No.

<7. The Austrians and Friedman are not "mostly in agreement" on monetary theory or policy. On the former, Friedman embraces the Quantity Theory of Irving Fisher as the centerpiece of his analytical apparatus. This, and not Income-expenditure equation, is the foundational equation of modern macroeconomics and perpetuates the "spending illusion" that total spending drives something called the price level. For Mises, Hayek and Rothbard, of course, the interaction of subjective value scales and the various stocks of goods and money in existence determine the stucture of prices and quantities exchanged (and withheld) on the market. Spending is an ex post concept devoid of any causal significance in the price determination process (in fact it would be more nearly correct to say that prices determine spending rather than the reverse). On monetary policy, except for a few, weak and obscure statements to the contrary near the end of his life, Friedman vigorously upheld the political monopoly of the money supply throughout his career; the Austrians favor a money based on a marlket-chosen commodity.>

No, he did not. That is incorrect, as I stated earlier.

<8. It is inane to argue that Austrians are "jealous" (envious?) of the attention garnered by a macroeconomist like Friedman, just because they criticize him. Krugman and Bernanke, for example, command a great deal of popular and academic attention and Austrians are certainly critical of them. Is that prima facie evidence that Austrians are jealous of them, too.>

Maybe…

<9. So I reiterate that there is much truth and good sense in Tomasson's interview.>

It’s pretty dull, and wrong too.