Post on 05-Jul-2015
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Money, Monopoly & Market Intervention
Robert P. MurphyMises Academy
November 23, 2011
Lecture 8: 3rd Third of Chapter 12 of Man, Economy, and State
3rd Third ofChapter 12 of MES
1. Inflation2. Inflation by Banks
3. Austrian Biz Cycle
IV. Capital Consumption
V. Government Debt
VI. Externalities
I. Inflation
Rothbard defines as “the process of issuing money, beyond any increase in the stock of specie.”
●Means business cycle on free market (with 100% reserves) impossible.
●Not quite Mises’ definition in TOMC: Increase in quantity of money that outstrips increase in demand to hold money.
II. Inflation by Banks
Commercial banks, not merely central bank, that cause inflation and hence biz cycle.
� Banks create money in act of lending (with less than 100% reserves), and earn interest on this new money.
� Central banks break down market’s natural barriers to low-reserve banking.
III. Austrian Business Cycle
Savings-Supported Economic Growth
“Before we can even ask how things might go wrong, we must first explain how they could ever go
right.” – F.A. Hayek
For Austrians,Prices Act as Signals
Interest Rates Are Special PricesThat Coordinate Through Time
Interest Rate = 10%
Interest Rate = 10%
SUPPOSEFAMILY SAVES MORE
Interest Rate =
INTEREST RATE FALLS
Interest Rate =
FACTORY BORROWS
MORE
Not Just About Dollars—Physical Resources Rearranged
Year 1:
Not Just About Dollars—Physical Resources Rearranged
Year 1:
Year 2:
Not Just About Dollars—Physical Resources Rearranged
Year 1:
Year 2:
Year 3:
Interest Rates Are Special PricesThat Coordinate Through Time
But what if factory borrows more because of
FRACTIONAL RESERVE BANKING…?
IV. Capital Consumption
●Exacerbated by inflation.●Makes boom seem truly
prosperous.●Explains why bust inevitable.
V. Government Debt
●Inflationary? Yes and no.● If from public, then “crowding out.”●Repudiation only sensible answer.
VI. Externalities