Topic: Growth, Interest and Wage Inequality - To the austrian economists here - page 2. (Read 6013 times)

You've mentioned very different commodities. Gold is still money, so you can lend it at interest too.
Oil contains energy, which is not a form of capital but an spendable resource.
I'm not sure is very accurate to say that commodities have yield, but let's concentrate in steel as a form of capital.
For example, when you have a machine made of steel, you could say that is real capital that you will recycle later.
In that case, the reason why its yield cannot drop below the liquidity premium is again because of its competition against money.
If the "yield" you're talking about is the one produced by its changes in price, I would say it's not yield but profit, and drop to zero when an equilibrium is reached.

It doesn't matter that they're traded on contracts and they're scarce because of nature, not because their users have decided so.

They produce things of value when used as capital: a steel made robot arm produces, for example, cars.

They have the potential to stop capital accumulation. But the hoarders think that they will be more valuable in the future, they're putting an incentive on recycling and mining in some sense.
Investors in commodities are providing a service of arbitrage.
Being scarce, natural resources limit us naturally and not artificially.
In a free monetary market, the money users accept the properties of the money, and new moneys can be created to correct their deficiencies. Money can be made of paper and bits without the intervention of a state.

Good for us that they can last forever, that will allow us to mine the dumps in the future.
But is not good for us that most moneys last forever and at the same time are scarce because that's what produces the liquidity premium.

Pretty much everything you said there is equally applicable to any kind of scarce resource, like oil, steel, or gold. They are all:

• traded on contracts
• are all scarce
• all "don't produce anything of value" (they can be used as ingredients in production, but are not productions of value in themselves)
• Their yields can not drop to zero by competition (way more demand than supply)
• All have the potential stop accumulation of other types of capital when opportunities to invest in these commodities exists

And like money, many of these commodities can last almost for ever, too.

Is not immoral to charge interest on money lending, is just the way money works as it is today.
But money is not a product, is more like a contract between all its users. And that contract can be flawed and lead to undesirable effects.


Exactly. And the same could happen with happen with capital yields. Only when some lack of a certain capital good is in place can that capital produce yield.
If the demand for that capital was fully satisfied, the capital yield would tend to zero.
By competition between the capitals of the same type, the yield would drop to zero, but capital not only has to compete with the capitals of its same type, but with all the capital.
Money is artificially scarce and is the only capital whose yields cannot drop to zero by competition. Ironically is also the only capital that doesn't produce anything of value.


Freicoin would start with no value at all, just like bitcoin did. I don't believe you can expect inflation from there.
You believe that no one would accept it, but if some people did; How would it produce poverty?
Why demurrage is not producing poverty in the communities that operate with it? 


Ehm...It's a system that monetizes mostly debt, but everyone can do it to the extend their partners trust them, not only banks.
I hope I can contribute with the implementation soon.


Fair enough, but there's examples of free money operating right now, look at how many times "Liquidity Tax", "Circulation Incentive", "Demurrage" or "circulation-protection fee" appears in this list.


You're judging freicoin without having even started so I guess that we can.


The difference is that profits disappear by competition and capital yields are artificially maintained "high" by the current design of money.


Simply by competing "dishonestly" with other capitals. The accumulation of every type of capital stops when that type of capital yields less than money itself (which as said doesn't produce any good or service on its own).

You have not answered why you think its ok to earn a profit by renouncing to use a car (f.e.) for some time but its not ok if its money.


They dont drop to cero naturally. They tend to zero because of competition, but then new products or improvements on previous products appear which allow someone to charge more for a while... and again and again.


But I though interest rates were bad? Anyway, freicoin would not have low interest rates. While it lasted the lack of demand for the money would push price inflation up thus interest rates up. Then freicoin would disappear as people choosed another currency.

Ripple is fine. Its a system that monetizes real goods. I have not followed the project and I dont know why it has not developed more but its a shame that it hasnt.


2 issues. 1) During the Great Depression there was a contraction on credit and alternative currencies help mitigate the lack of cash. Almost any alternative method of payment would have helped. 2) It did not last. Monetary events take years and decades to develop. You can not judge a currency for a few years opperating, dont you think?


Why? The same could be said from any kind of activity that produces profit.


Why? Im guessing he will say that it pushes money into a few hands thus money does not circulate and the economy does not perform good enough.

That's exactly my point. Money is not a product.


Just enough houses to meet demand. Just enough houses to drop the capital yields to zero like profits do naturally.
With freicoin, for example, you would still have interest rates and information, but they would be around zero instead of around 3, 4, 5 or whatever you consider natural.


I don't want the government to regulate the financial system. Not only the interest rates have been lowered by monetizing debt and money creation (which leads to missallocation of capital) but also the risk of lending had been suppressed by the government.
The subprime mortgages would have existed even with a high interest rates, because many borrowers weren't concerned at all by the interest or their ability to pay the loan back.
I recommend a documentary called "overdose". But I'm not talking about money creation nor a public company taking the losses of unpaid loans.


I totally agree. It should be free in that sense too. No one is forcing their users to accept the Chiemgauer, for example.



Then I should ask if you think that Ripple would lead to economic problems due to its non scarcity or not.
Again, you haven't explained why, for example, freicoin would lead to "economic discordination" and poverty.
Why was good in Worgl during the great deppression and many neighboring villages wanted to copy the system (until the central bank prohibited it)?
Why is it working well in germany and other places?
The idea of Gesell wasn't the more money circulation the more wealth. His idea was "what goes to interest and capital yields doesn't go to wages and profits" and "Interest artificially limits capital accumulation".


For a few reasons.
First, interest of money is the real source of all capital yields, which I think are the wrong thing with capitalism, and lead to inequalities that are not legitimate like profits and differences in wages are.
Second, it leads to short term financial thinking, which makes our society unsustainable. 

Yes, so? The issue is still the same, you are getting compensated by renouncing for its use for a while in both cases. Why do you think its ok in one case and not in the other.


Im ok with any voluntary system. The problem is, as stated above, that the ideas of Gessel would lead to discordination and poverty. The problem with Gessel is that he had no idea of capital structure and had this idea that the more the money circulates the richer everybody is, which is evidently false (if it is not evident to you, then comment).

Can you elaborate on this "discordination in the economy" and how it would lead to poverty?
You're ok with Ripple then?


With the example of the car, you're not only renouncing to its use for a while. The car will eventually crash after X miles/kilometers. Even a building has a limited lifetime. Money doesn't. With free money, you would still rent your money, but just at the risk premium, the basic interest would not exist.
The main difference is that more houses could be produced to lower the rental price, but "money cannot be produced". If it's produced, its production costs have nothing to do with its use as a value symbol, that's why money can be made of paper and bits. It's just a symbol, an agreement, not a commodity.
Why the costs of production of houses is not near the earns of its lifetime rentals? Because that's not enough for capital. Houses must be at least as profitable as money. Therefore we can't build that many houses because the financial market won't allow it.
Money, the highway of commerce should be free. We shouldn't pay a tribute to money with every trade we make.

Yes, the problem is that the systems you propose (money that rots f.e.) produce discordination in the economy and if imposed exclusively would lead to poverty.

There is nothing bad in interests. If you have a car and rent it, you are getting a profit because you are renouncing to its use for a while. Same with money. You rent it out and get a profit because you are renouncing to its use for a while. I fail to see the difference and why you consider one ok and the other not.

To do it, we could imagine that there's many colors and flavors for the fish and that each fish needs a different net and a different amount of time to be captured.
My point is that with money interest will never go to zero.


Without money the nets must be profitable compared with producing other goods, but with money that is not enough. Let me try with an example.
Without money:
If Robinson can capture 10 fish a day without a net, 20 with net, it takes 4 days to make the net and it breaks after two days of use.
The net just need to save a little time or produce just one more fish to be profitable.
With money:
The network has to pay the interest to be profitable. The money owner will never lend it at zero interest because money lasts forever. Also, the fishermen must sell their fish for money before  the fish rots. The money owner can exploit that situation and profit from it.
Everybody needs money to trade and invest and the money owner rents the tool for commerce just like the constructor rents the highway to drivers.
But the constructor needs to maintain the highway while money lasts forever. Every investment needs to pay interest. And you pay interest with every good you purchase, because every business have to pay its financing costs. Even if the entrepreneur uses its own money, he should get the interest from his money, besides the business profit.    


Then why there's interest within depressions?
Why would the money owner ignore his power and rent it for free?
If you can ruin someone else by doing nothing, that person has an incentive to convince you to do something.
It doesn't matter how much cost you to obtain the money, all that matters is how much the other person needs it.
Basic interest is the profits derived from the scarce and everlasting money we have.
It's not about morality, it's about profiting for the privilege you have as money owner. That's why religions have failed when trying to just prohibit interest.
If you want to avoid interest you either need free money (money that rots) or non scarce money (mutual credit money like LETS or Ripple).


I agree. The profits of the entrepreneur are a legitimate source of inequality, just like the bigger wage of a more skilled worker.
The state is a great source of inequality and comes from the monopoly of violence.
Basic interest (which I claim won't disappear with zero or negative growth) is another source of inequality.
Money is kind of agreement or contract within the whole society and its terms can be changed.

0 interest, 0 growth?
Sounds like Japan done did it even before you thought it up
Maybe you should check out their historic GINI's.

We could easily introduce money in the story, there is just no need because there is only two goods at a time.


Exactly! In a developed economy where nets are invented, the return of producing nets must be higher than the return of money. This however means it has to be sufficently profitable compared to producing OTHER goods. So you can always break down the whole time preference thing to production and goods. Money is just the medium of exchange. Prices reflect barter rates, interest reflects growth.


Yes, thats the point. In my fishexample interest in fact goes to zero, because there are no other goods than fish and massages and no more options to grow.
If you imagine the - highly hypothetical - situation when there is no economic growth (on average) in the whole world, what is going to happen?
Let there be a few companies that still make profits while the rest of the economy stagnates. All companies which are not growing will pay back (or already have paid back) there debts because paying back means say 4% profit (avoidance of loss) compared to 0%. So there is almost noone borrowing money so interest will be very low.
The last few companies growing can now very quickly and cheaply get money at the market and max out their growth potential. De facto, the stock prices will go up almost infinitely to take the low interest into account, and the companies can easily issue stocks for high prices. After this short phase, the whole economy would on average stagnate. Of course there are wages, depriciation etc BUT there is no need for a money market. You still need money for trading and stuff but you dont need loans and savings at bank so there would be no interest. 
In this admittedly hypothetical situation, I can't see how "at least little interest" can remain. In reality we would, if at all, come close to zero, because there alway is some fluctuation (population growth and demographic changes, changes in education, nature and of course bernanke and the chinese.

On the other hand, if one accepts the hypothetical situation, he could also accept a few meaningful statements like:

- A certain amount of economic unequality is temporary (this somehow is a constant situation, but the inequality of industralisation was the reduction of poverty today and the inequality of the internet age is tomorrows reduction of poverty)
- This part of inequality is somehow "fair" and does not harm anyone (except the coachman who can easily switch to driving a car within some weeks)
- Every attempt to intervene at that part of inequality (regulations, intellectual property rights, minimum wages) prolongs the process that the current inequality wave(s) benefit to fight tomorrows poverty

I even want to try a really provocative statement:
Besides this cause of inequality, most inequality is caused by the state (or other mafia-like institutions like the mafia or warlords)

Nice story, cartman. Simple examples help.
Note a few things:
 
-There's no money in our example and that's why "interest" can go to zero. In fact, one could say that there's no such interest but a sharing of profits.
The basic interest of money doesn't ever goes to zero, no matter how little the growth is. Interest stays there even within a recession.
-For some reason, cleverguy prefers to pay 100% "interest" instead of saving the fish himself.
-Since there's no surplus, lenders must hunger and that may be a reason why they reclaim interest. If there were surplus of production, people could lend fish at no interest because their fish would rot otherwise.
-Within capitalism, the nets would need to yield at least as much as "money does", taking it first from profits and then from wages. The production of nets would have stop when that yield is compromised (until some nets break or the tribe gets bigger) instead of when the demand is met. In your example, there's free market but there's no capitalism.

But in general, yes, it seems that the liquidity premium gets higher when there's very profitable investments to make.
On the other hand, after the initial profits move to wages, people can save more, decreasing the basic interest.

Um... yes. Which isn't the same as each worker now making 5/4th as much, as you stated earlier. Though I may have misunderstood (lack of sleep here. sorry)

A currency that its not monetarely inflationary is considered price deflationary because of the increase in production due to raise in productivity. If there is not an incrase in productivity prices dont change. So the wages of the workers do not go down becuase the lower prices come from increase productivity (each worker now produces more stuff).

I was thinking of it as being within an inflationary or deflationary money system. People get raises, cost of capital goes up, price of products goes up, people demand higher wages, people get raises, etc. Reverse in deflation: price of products goes down, revenues go down, cost of capital is reduced to follow revenue, meaning wages go down, consumption decreases due to lower wages, price of goods follows. (Depending on how efficient the adjustments are, it may or may not be a deflationary spiral. Could just be a steady-state, slowly deflating system. So I'm not using this as an argument against deflation).

If economy grows, and money doesn't grow in time with it, it's just the fewer dollars chasing the same goods thing, where goods are both product prices and human capital. So if economy expands by 25% but the money remains the same, cost of capital goes up 25%, revenues decrease, wages decrease, and prices follow. That "same money" that the employee earns has to come from somewhere, and since the entire economic cycle is locked in a... cycle...

Hm. I dont think so. If he would get 750 this would mean, that he has the same purchase power after the growth of the economy and all benefit goes to the employer. In my example, everyone participates in the growth with the same percentage. Joe can buy 25% more goods. The employer earns the same money (5/4 goods * 4/5 price) and pays the same wages, so nominal company profit is the same but has 25% more worth.
A change in the wage implies, that the profit is suddenly differntly distributed between employer and employee. This seems a bit strange because usually we think in the context of inflation or stable prices and not a constant deflation rate. You could also take money out of the equation and just think in goods. First 100 goods are produced, only wage costs, 10% profit: 90 for the workers 10 for the employer, then 120 goods are produced, the 9:1 quota held constant its 108 for the workers, 12 for the employer. Anything else requires changes in the bargaining powers of the two parties.

don't forget that with a drop in revenue from goods, you'll have a drop in earnings as well. So after that economic growth, Joe will also only be earning $750

thanks! I read some reviews and it partly sounds like what I need. Indeed I need academic texts.

Exactly. I think its helpful to assume a fix amount of money in the system. So when more goods have been produced, your money is worth more. imho the additional money value should equal the growth of production (velocity of money assumed constant and demand-price-curves for all goods have equal slopes; else, the additional purchase power depends on the composition of your consumer basket).
The bonus on purchase power can now be distributed to additional savings and spendings. So you could maintain your former consumption and save the left over money. or you could partly or fully consume the additional purchase power. However, lets say, 10% more produced goods in the long run somehow implies, that 10% more goods are being bought. As an aggregate, this leaves the savings/spendings quota unaffected.
Example: You earn 1000$, save 200, consume 8 goods for 100 each. Now production grows 25% -> money stays the same -> prices are p0*0.75
On average, Joe now buys 10 goods for 75 each = 750 and saves 250 (=200*(1+growth))

This assumes of course an average rate of stock-holding or at least this holds longterm.



I will try a story and formalize a little bit: ATTENTION!!! took me an hour to write

t0: The tribe, 10 people, produces 100 fish by fishing with a fishing rod, everybody catches and eats 10 fish, no inequality, interest is 0.

One guy is very clever and claims he can build a fishingnet to catch 40 fish but needs one fishingperiod time to knot it, so he proposes: Everybode give me one fish, so we all have 9 and after that I can catch 40 fish every period. The others agree, but they want some profit from sparing their fish: two additional fish in t1. everybody hungers with his 9 fish, the net is built. Interest is 100%.

t1: The tribe, 10 people, produce 90+40=130 fish with 9 fishing rods and 1 fishing net. "cleverguy" catches 40 but has to give 9*2=18 Fishes and is left over with 22, the rest has 12 fishes each. There was 30% growth, there is some interest and now there is inequality.

t2: cleverguy has 40 fish for himself (debt paid), he can eat 20 of his 40 fishes and give 20 to another tribemember "workerguy" to allow him to stop fishing and build another net. He will happily agree because of the 10 bonus fish. Now there is more inequality because workerguy earns double. Also there is some interest.

t3: Production is 120 fish (economy shrunk for the investment), cleverguy hat 40 fish and a net to sell, since he can only use one net at once. 8 Members have 10 fish each, workerguy has 20 fishes and might buy cleverguys net or build his own net (by the way this assumes, fish is still eatable after one period of time). Lets say workerguy buys the net for a bit more than 10 fish. Cleverguy now has a bit more than 50 fish and pays two workers to knot a net. More inequality, some interest.

t4: Production is around 140 fish, workerguy now also has 40 fish and cleverguy hast 2 nets. now cleverguy and workerguy compete for workers. btw there is more fish than the tribe can eat, so cleverguy and workerguy can pay some tribemembers to massage their feet.

t5: There are several nets, prices for nets fall, no need to produce 400 fish

t6: there are 4 fishers with nets, everybody eats 16 fish and gets fat and healthy, the other 6 dont need to fish but serve the tribes needs (foot massages). notice: at the end of this process, everybody will have the same purchase power for fish and massages, because its pretty easy to enter the fishingindustry with another net in case fish gets to expensive for the benefit of the fishers. So "wages" of fishers and massagers converge!! -> Equality is back.

Now to sum that up. In the beginning there was no inequality. At the time, where the new technology arrived, inequality started to rise, it started to fall again when the growth rate maxed and at the point of maximum exploitation of the new technology equality came back. (This assumes however that there are no other goods like weapons and mercenaries to buy for cleverguy...)

Now back to your statement:


I think it is not "at the same time" but FIRST it increases demand for money. AFTER the highest growth-rate within that "kontrdiev-cycle" is passed, the newly available ressources/money (supply) outweigh the demand (=your "offer" if I got it right). At the end of the cycle there is even a lot of supply, so interest falls (in my extreme case above it falls to zero) and wages converge.

Ok, sounds a bit artificial but consider this on a larger scale with 100 or 1000 people, where it is a lot easier that due to some entrepreneur, a "money/fish-market" emerges.
In reality there are of course other factors like regulation, central bank/inflation and there always is some rate of innovation unequal to zero so it is hard to see a clean reverse u-shape curve my theory describes. But: The other factors do not interfer with my causal relationship but all the effects sum up. So other factors held constant, it should be possible to make this empirical relation visible.

The difference is the trend. By lowered prices I mean prices that has become low, but won't keep on going down.
By falling prices a mean a predictable price deflation.
Of course, nobody knows what will happen in the future for sure.


I think I've get it. The increase in saving doesn't comes from a reduction in consumption but from a reduction in spending (while maintaining consumption). That makes sense.
I'm still confused about the relation between growth and interest rates. Doesn't seem obvious because there's a few factors.
At the same time growth increases the offer and the demand for money.