Topic: Very nice story about John Law (Read 10211 times)

I don't think that liquidity is a problem with gold/silver. It's same as bitcoin, you can always use a fraction of gold/silver to present its previous value

People usually want to regard official money as an unit of count and that unit itself should be constant in value from convenience point of view. In that case the only way to increase money supply under a gold standard is to dig out more gold, like California gold rush

But to utilize people's impression about fiat money's constant value and create lots of fiat money for the banking class without causing inflation, that is another thing. If everyone can own the FED through buying their shares, then any extra profit they made from printing money will go into everyone's pocket, that will be a much better system

I used to believe this kind of talk in school, but now I have worked in 2 multinational enterprises over 10 years, I can say that the business ethics has been very low due to today's financial system. It is how you can grab more money decide your position, not your performance/achievements. To get more money you must have good contact with governments/banks and do many unethical things to satisfy those sponsors. And since these things require no special skills but just a low level of ethic to do, finally only villains occupy the higher management position

This isn't the case for Keynes.

Keynes's economic theories are exactly intended to create the kinds of social and economic relationships that he believed would make a moral society.
i.e. he made economics fit his ethics.

If the quote is true, then there are no other options but to allow Laissez-faire markets.

An overwhelming Keynesian view I find disturbing, is the concept of the Economy as a thing to be managed, where in fact an Economy is merely just the result of economic relationships within a defined group. 

As we don't seek to manage the laws of physics, we seek to understand them to make more effective use of them, and so it should be with the science of economics.  As with the science of meteorology there are fundamental laws governing the direction of air flow from a high to a low pressure, so too has economics such laws like price governed by are the laws of supply and demand.   It is just the effects of human wants, happens to be the divergent point that takes the science of economics into the realm of social science of managing the wants of humans.

I would agree that if one saw Economics as the study of an economy, then justice is not addressed through the discipline, however I would argue that if you see the economy as something to be managed then a normative position that some types of wealth transfers are just and others are unjust, is a choice made at the will of the managers and then subject to the concept of justice.   

While I hold the utmost admiration for Keynes after understanding his motives, he marginalises the science of economics in favor of understanding it through the lens of social science. Only to have all his prescribed benefits eroded in favor of a Monetarists (Chicago school) approach to managing the economy. 

On review of on Mises's writings, it seems evident to me that fee markets are the most efficient way to address human needs, and given human nature, as he distinctly puts it macroeconomics models can be nothing but floored.   

I think I see you point and agree with the Austrians being Libertarian, and I believe your inevitable implication is easily seen in the presence of week state control, where power tends to favour the oppressors at the expense of the greater good and as such should be managed and offset by the checks and balances proposed by Keynesians.   

 On praxeology not having studied it but with my rudimentary understandings, I can imagine it to be an attempt at making a social science a more predictive model to allow for the use of scientific modeling to prove an economic theory. Your correction would be welcomed?

John Law's scheme failed due to a combination of hyperinflation and suspension of specie payments, not because people apriori trust precious metals more than fiat. Typically, liquidity is the main factor determining the choice of a medium of exchange, not whether it is fiat. This is recognised by all the economic schools that I know. We can see that even empirically, in recent historical examples in Kurdistan or Somalia, where after the legal tender laws become ineffective, people do not switch primarily to gold and silver, but to more liquid fiat (i.e. US dollar), and often even keep using the old paper fiat. A monetary reform requires a lot of logistics, otherwise people stick with what already exists. The concept of a unit of account is, in my opinion, even more difficult to migrate. I've lived through several monetary reforms and I noticed other people still occasionally use the pre-Euro fiat as a unit of account years after it has been discontinued.

In countries where large parts of the money supply are digital, the logistics of a reform are simpler (because a reform occurs at banks in a hierarchical fashion). This however makes it even more difficult for traditional commodity monies such as precious metals to compete.

While I agree that economics is not science, it is not because of lack of predictability of empirical data, but because ends are subjective. Economics, from the Austrian perspective, is not about the analysis of ends (what people want), but the connection between ends and means.

Efficiency is a normative concept.

The question of economics must logically precede the question of ethics, similarly as the question of logic must logically precede the question of ethics. Just like you cannot create an argument about ethics without a logical connection between assumptions and conclusions, you cannot form one without a logical connection between ends and means either.

It's simple like this:

If the money supply is fixed, if somebody work more and created more products, he would still be able to sell at roughly the same price for some time -- "Cantillon effect", so his income increased, while people will realize later that same money chase more goods, thus they will reduce their purchase price next time, but they have already paid some extra money to that guy that worked more first. Such a system always reward the people that work more. Although there is a general trend of deflation, those who work more will benefit from his work,the earlier he sell this products, the more money he can make

If the money is created by central banks, then central banks get all the newly created money and they will become the biggest buyer of everything: Government bonds, bank assets, etc... then governments and commercial banks will start to make money and then some other business will start to make money, etc... Such a system always reward the central bank with all the newly created money and their closest supplier will be the first one to enjoy the new order from central bank

First system encourage honest work, second system encourage people climbing the social ladder towards central bank, thus we will see more politicians and bankers in the society

Economics can not answer the question whether specific means would result in specific effects, especially long term wise, those are all best guesses, just sounds right, never really worked, otherwise there will never be any crisis. Economy is not science, it is politics and psychology

So, instead of finding a scientific answer for most efficient means, we'd better start with eliminating corruption at the first place, since corruption usually cause the biggest inefficiency in the system

BTW, efficiency is no longer a big concern in today's society, but justice is always a concern

Thanks Adrian-x, I found out the story of Cantillon to be closely related to John Law, and it is even more exciting  

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While details regarding Richard Cantillon's life are scarce, it is thought that he was born sometime during the 1680s in County Kerry, Ireland. He was son to land-owner Richard Cantillon of Ballyheigue. Sometime in the middle of the first decade of the 18th century Cantillon moved to France, where he attained French citizenship. By 1711, Cantillon found himself in the employment of British Paymaster General James Brydges, in Spain, where he organised payments to British prisoners of war during the War of Spanish Succession. Cantillon remained in Spain until 1714, cultivating a number of business and political connections, before returning to Paris. Cantillon then became involved in the banking industry working for a cousin, who at that time was lead-correspondent of the Parisian branch of a family bank. Two years later, thanks in large part to financial backing by James Brydges, Cantillon bought his cousin out and attained ownership of the bank. Given the financial and political connections Cantillon was able to attain both through his family and through James Brydges, Cantillon proved a fairly successful banker, specializing in money transfers between Paris and London.

At this time, Cantillon became involved with British mercantilist John Law through the Mississippi Company. Based on the monetary theory proposed by William Potter in his 1650 tract The Key of Wealth, John Law posited that increases in the money supply would lead to the employment of unused land and labor, leading to higher productivity. In 1716, the French government granted him both permission to found the Banque Générale and virtual monopoly over the right to develop French territories in North America, named the Mississippi Company. In return, Law promised the French government to finance their debt at low rates of interest. Law began a financial speculative bubble by selling shares of the Mississippi Company, using the Banque Générale's virtual monopoly on the issue of bank notes to finance his investors.

Richard Cantillon amassed a great fortune from his speculation, buying Mississippi Company shares early and selling them at inflated prices. Cantillon's financial success and growing influence caused friction in his relationship with John Law, and sometime thereafter Law threatened to imprison Cantillon if the latter did not leave France within twenty-four hours. Cantillon replied: "I shall not go away; but I will make your system succeed." To that end, in 1718 Law, Cantillon, and wealthy speculator Joseph Gage formed a private company centered on financing further speculation in North American real estate.

In 1719, Cantillon left Paris for Amsterdam, returning briefly in early 1720. Lending in Paris, Cantillon had outlying debt repaid to him in London and Amsterdam. With the collapse of the "Mississippi bubble", Cantillon was able to collect on debt accruing high rates of interest. Most of his debtors had suffered financial damage in the bubble collapse and blamed Cantillon—until his death, Cantillon was involved in countless lawsuits filed by his debtors, leading to a number of murder plots and criminal accusations.

On 16 February 1722, Cantillon married Mary Mahony, daughter of Count Daniel O'Mahony—a wealthy merchant and former Irish general—spending much of the remainder of the 1720s traveling throughout Europe with his wife. Cantillon and Mary had two children, a son who died at an early age and a daughter, Henrietta, who would go on to marry William Howard Earl of Stafford in 1743. Although he frequently returned to Paris between 1729 and 1733, his permanent residence was in London. In May 1734, his residence in London was burned to the ground, and it is generally assumed that Cantillon died in the fire. While the fire's causes are unclear, the most widely accepted theory is that Cantillon was murdered. One of Cantillon's biographers, Antoine Murphy, has advanced the alternative theory that Cantillon staged his own death to escape the harassment of his debtors, appearing in Suriname under the name Chevalier de Louvigny.

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Why such kind of story is much more believable than today's economic books? Because things are much easy to understand and they all showed many kinds of human nature lively

Today's economic books are full of charts and formulas, ignoring the most important fact (human) behind all the economy events (gaming theory getting a bit close to human factors, but still far away from how to limit central bank's power)

Even the best theory does not work if the central bank is operated by human, if human have that amount of power in controlling the whole society through creating money out of nothing, there will be heavy corruption in favor of their own good, they would promote any kind of theory that benefit them, at least you can not find a valid reason to rule out that possibility

John Law's scheme failed because people do not trust his fiat money, they still want gold and silver coin, even those coins contains less and less gold/silver. This is very natural reaction for any kind of human. But today all the people in the society trust fiat money by default, since they were born into such a system, it took some generations to change people's behavior

Economics is supposed to be value free and Austrians often emphasise this point. However, it is often very rare that even scholarly work manages to avoid all kinds of biases, even though it might not be intentional. You can find some sort of bias almost anywhere. The point is to identify it and separate purely positive statements from normative ones.

Austrian methodology of praxeology in particular is supposed to be a pure system of axioms and deductive reasoning, but it is very difficult to avoid any normative statement whatsoever. Also, implicit assumptions often manage to creep in.

One of the examples is the injustice in the monetary system. The concept of justice is not something that economics can address. However, economics can explain the Cantillon effect which you just mentioned. One might take the normative position that some types of wealth transfers are just and others are unjust, and thus favour a particular monetary system, but economics can only answer the question whether specific means would result in specific effects.

The Austrians tend to be libertarian. We might speculate why, but one plausible explanation is that the Austrian economic analysis leads to the conclusion that many effects commonly ascribed to the actions of the state do not follow from the premises. This creates a consistency between the belief system (that the state should not be performing these actions) and the economic analysis (the actions do not lead to the popularly believed effects).

Yes I was agreeing with your statement. Thanks for the definition of propaganda, I often find myself redefining or restating my understanding based on more precise definition.

Propaganda as defined suggests we are constantly bombarded with propaganda even the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobe (Nobel Prize in Economic) is propaganda.

Not to defend the Austrian propaganda generally, but if taken critically I don't believe Austrian  economic theory presents a one sided argument, let alone any falsehoods. Moreover there are omissions, but that said, navigating the economic dogmas out there, it seems it is all omission based to propaganda.

On the point of agreement it is the Free Banking types and the Monetarists in the Austrian camp that are in my view the hypocrites, and could be guilty of speeding propaganda, but in general Hayek, presents a coherent argument for the theories in the absence of Free Banking and the Monetarists. (Although he is never critical - as it is their efforts that brought him to fame, he just advocates for freedom of choice thinking the free market will choose a viable system in the end.)

In defence of johnyj's position I have seen him, just short of, being ridiculed of being a victim of Austrian misinformation and dogma, while what I see is:  johnyj's  has identified an injustice in our monetary system, and is trying to identify or prove it within an the existing framework we have. This is in fact imposable as the system allows this practice propagate.

Distinctly put by :
I'll add - so long as that is the case, he who controls it can ignore both.


Proving him wrong does not undo the injustice and the effect of usury or make the practice of FRB beneficial for the present or the future, it just serves to illustrate on which side of the fence you sit when it comes to economic rebirth.

All of johnyj's concerns are fully justified, (although as explained and outlined by his opponents they are perfectly permissible and accepted within our existing system. Provided you overlook the effect of usury the practice has, such as inflation.) The result is akin to slavery to all those who work to earn Fiat.

 The process of FRB while immeasurable will by default inflate the money supply and in so doing it will eventually cause price inflation. The net result of which is the movement of wealth from the last to earn the money to the first to have access the new money through the Cantillon Effect.

To illustrate producing a can of soda and providing it cold and at a location I would be willing to pay for is more efficient today than it has ever been in history. In my lifetime, that efficiency is not reflected in the price or the profit of the primary producers/service provider, but as the hidden tax of inflation in an increase from 10c to over a $1.00 today. 

What has actually happened, is the soda company has had to borrow money and constantly invest to become more profitable (and so have his suppliers the primary producers) as this has happened, the money supply has steadily increased, the net result of which is those businesses that took advantage of the newly created money had an advantage of investing pre inflation and profiting post inflation. Only those who grow survive those what don't become uncompetitive and are acquired. (A result of monetary driven growth and not market driven demand, all competitive behaviors and my consumption habits being equal.)  How this affects the average man on the street is he has to earn pre inflation and spend post inflation, over the decades this has had an impoverishing effect on the 99%, and a steroidal growth effect of corporations who have leveraged this phenomenon, to the point of the political / industry revolving door.   

Looking through the history books in the US one can see with an income of $0.05 per day one could afford to live a meager life but still be privy to the comforts of the day, pay 10% of one's income to tax and another 10% to charity and still remain debt free. By contrast, the practice of FRB and an all powerful lender of last resort has eroded the wealth from the people through the Cantillon Effect to the benefit of a few corporations and bankers and virtually eliminated the competition you would expect in a free market.

On a side note.
While the paradox of thrift is alive, well and thriving when it comes to the adoption of Bitcoin, and how it affects the Bitcoin Economy,  its repercussions may go on for decades or even prevent Bitcoins growth altogether. The paradox of thrift as a catalyst to the boom bust of the business cycle, is a Keynesian misnomer, in contrast to you assumption proving "Austrian econ is flawed" it is actually the elasticity in the money supply that is out of sync with the auto correcting of the economy that is the cause of the dreaded "deflation" and concurrent economic downturn.   

TL;DR:
The FRB system backed by the FED, is robbing the productive workers in society via the Cantillon Effect.
As Austrians Economic theory as presented to me is the only sound theory bar a few dogmas it is inaccurate to call it Propaganda.
I concur Austrians advocating for FRB independent of the FED could be seen to be seen to be speeding Propaganda.  (no need to fear them as the light will cure one of their ills.)

Oh I see, I'm the failure .... quite the contrary. I examined you words closely but did not see any rigorous definition for sustainable. You use it like it means something, in fact your whole model seems based on this ill-defined term. The wikipedia definition (rigorous?) is loose and pivots on the ill-defined way it uses "resources".

You probably shouldn't throw around your weight like you know what you are talking about if your house is built on sand. "Sustainable" and "resources", as you are using them, are ill-defined and your theories have no basis in any objective, quantifiable, reality. Fatally, they completely ignore the well-defined and experientially observed Law of Substitution, the failure appears to be on your part not mine.

http://theoryofeconomics.com/market-economy/law-of-substitution/

Demurrage and inflation have same effect: Increase the money circulation. But people are adaptive, under such a system, people will try to take loan and purchase capitals like real-estate or gold/silver as a medium of saving, the saving money were pushed to somewhere else. Comparing to holding the money at hand, it created some more circulation around those saving medium.

Again, everything is relative, as soon as the society reached a newer money circulation speed, boom and bust would still happen. The only effect is the society is accelerating faster and faster like that spanish high speed train, lost the ability to maneuver when some dangers are ahead

All those talk about increased money circulation is good for society, it is just a view from the banks, since this will increase their profit potential. If a reduced money flow is good for economy, they will never promote it. In an investment conference 2004 I met a banker who was very interested in china just because this country has very high saving ratio for average household, for him that is a gold mine

Seriously did that all just go over your head?  Sustainable per Wikipedia "Sustainable development refers to a mode of human development in which resource use aims to meet human needs while ensuring the sustainability of natural systems and the environment, so that these needs can be met not only in the present, but also for generations to come."  (emphasis mine)

If you can't see how demurrage changes to net present value which makes a perpetual income stream more valuable then short term income is encouraging sustainability then the failure is on your part not mine.

So no rigorous definition for "sustainable" then?

Overfishing through most of history as well as now has been a tragedy of the commons issue because fish are so mobile and the oceans are difficult to fence.  Demurrage isn't able to prevent this but it at least dose not add to the problem.  A better scenario is that of a forest or farm in which private ownership is clear.  The owner can harvest sustainably for a perpetual yearly yield, or rapidly for a high one time yield that destroys the potential for a future yield.  It is like the classic tale of the goose that laid the golden egg, keep the goose alive for a small yearly revenue stream, or kill it for a large one time lumpsum, how big of a lumpsum would make killing the goose the economically rational thing to do?

The economic formula used to deside this kind of question is called a "Net present value" calculation and it tells you what the value of future money is in the present allowing a apples-2-apples comparison.  The key piece of information needed to make the calculation is the "discount rate" the rate at which we discount the future.  The higher the discount rate the less we care about the future (both in receiving a future  benefit or suffering future losses).  Interest rates on money act as a discount rate as we can take a lumpsum of money and earn interest sufficient to replace the lost revenue stream.  Because demurrage acts to reduce and eliminate interest on money it lowers the discount rate, ideally to zero.

Perpetual income streams "perpetuity" are surprisingly easy to calculate, you merely divide the yearly payment by the discount rate.  So $20 a year at 5% discount rate has a present value of $400.  At 1% discount rate it would be $2000, and at zero it would be effectively infinite.  So for our golden goose analogy if the discount rate on money is 5% then it's rational to kill the goose if it has 20 or more eggs, if the discount rate is 1% it needs to have 100 eggs, and if the discount rate is zero then it would need to have an infinite number of eggs to be rational.  The morale of the story is of course that is is BAD to destroy perpetuity for a one time lump-sum, and demurrage encourage us to preserve them.

Now as for practical applications in today's world we can directly see the effect of discount rates in the renewable energy markets.  Most renewable energy takes a large upfront cost and then produces a reliable revenue stream for a long time (fossil fuels tend to be the opposite with higher ongoing costs).  The total value of that revenue stream is reduced by the discount rate and often this makes the investment non-viable (conversely the ongoing costs of fossil fuel get discounted so they cost less).  Reduced discount rates would immediately make this kind of investment more attractive.  Naturally this same economic logic applies to any kind of business activity even ones not related to 'green' stuff, if you can make an investment that reduces future costs such as getting a new piece of equipment to do a job you used to have outsourced, or investing money now to train employees for higher future productivity.

Care to give us rigorous definition of "sustainable" as applied to the theory of economics?

You fail to provide any coherent argument, you're just whining.

This is a little too inflected with economic assumptions from the last 100 years. It assumes that there is always some optimum amount of economic activity that should be taking place, and so your constants really matter here. Having a constant rate of of demurrage forces a base level of economic transfer on those using it, and could easily become a perverse incentive with people attempting to trade for it's own sake, hoping their hot money will eventually uncover some worthwhile investment. Using expressions like "full employment economy" implies the worst of this, as  even under present-day fiat, not everyone needs to be in constant 40+ hours a week employment in order to do what they are best at in the most efficient way. I'm picturing artists feverishly toiling away, making as much work as they can in the hope that they can sell work on a trial and error basis. They can't even take a holiday if 4.8% annual demurrage compels them not to.


This incentive exists just as powerfully under the fiat structured economy too, and yet fisherman still fish ocean stocks to near extinction, loggers still decimate wild rainforests, electricity consumption is a factor of desire/ability to pay instead of necessity. I don't think there's a good argument to say that demurrage would significantly alter sustainability practices.

I still like the system despite my misgivings, and it's fair to say that the only evidence of the realities of such a system exist too long ago in history (and in a very different world) that any projections about how it would actually manifest as an economy are pretty speculative. I will be watching Freicoin with more interest than most other alt-coins, it brings to the table something the others do not: a different economic model, instead of a different technical design.

I can certainly agree that human nature remains unchanged, and I don't harbor any illusion that a utopian society will emerge from a demurrage currency, I think it just fulfills the promises of what an economic and monetary system is clearly capable of doing and which they have all promised but failed to deliver, a sustainable stable full employment economy that is free of gross wealth disparity. 

We don't see holding physical goods as much of a problem, such activity become self limiting, goods have a cost to maintain and if too much is stored that maintenance cost will erode value faster then it can be added, also the glut of supply will likely cause the price to drop.  Storing goods is more an activity we see as economically harmless for thouse who wish to engage in it (and this desire to save is a perfectly natural one), so long as the medium of exchange is not hoarded no damage is done to the circulation of goods.

The activity that is even better then stockpiling is investing in something with longer term revenue generating potential (a business, an education, etc etc), as under demurrage owning source of revenue is more valuable then holding a lump sum, the opposite is true under interest bearing money (that's why people always take the lump-sum payment when they win the lottery).  This is also why it's sustainable, or at least incentivizes sustainable practices (assuming tragedy of the commons is avoided) as a source of renewable natural productivity is far more valuable if maintained then if harvested to depletion for a windfall.