Tuesday, November 22, 2016

The Free Market Rate of Interest

In reference to my first blog, where I describe how the rate of interest derives directly from the subjective value scales of individuals, I will now describe where the market rate of interest arises from.

Within the structure of production we find various stages of the production process, starting with land and labor, and resulting in the final consumer product. During the free market process, the price spreads shrink and expand according to an array of market signals.

Buying prices can rise faster than selling prices, which will result in shrinking price spreads. This process is unknown, it is subjective and only perceived by the entrepreneur. In nominal terms it may be clear, but in real terms it is opaque.

When price spreads are high, capitalist-entrepreneurs apportion savings to this higher earning sector. On the other hand, when price spreads are low, capitalist-entrepreneurs pull their money out of this sector and advance savings to the other higher earning sectors. Rothbard calls this advancing factors to the various stages of the production process.

Be aware that within this theory, a capitalist-entrepreneur can invest in stage 5, higher order goods, mix land and labor to create a new capital good, which can then be sold in stage 3, a lower order goods sector. This process occurs over time, so stage 3 will happen at a later point in time than stage 5.

These price spreads, the difference between buying and selling prices of factors of production, are the going rate of interest in the market. The mainstream scholars would subscribe their idea of the market rate of interest as manifested in the Federal Funds Rate.

Mainstream scholars believe that the rate of interest derives from the producers loan market. It does not. Their models desire convincing us that it does by seducing us with hypostatization. Since, to them, their idea of a market rate of interest is ultimately so abstract and unknown, they feel there must be a monopolized rate of interest to dictate the amount of debt issuance.

They miscalculate and misunderstand how the private capital markets work in a competitive free society. They are ultimately forcing spreads toward the equilibrium they attempt to design. As an outcome, all expansion occurs simultaneously.

The central bank purchases assets at a certain contractual price, this in essence results in a change in yields. As a process new money enters the market. Unlike the rest of us who have to build savings, they can enter a debit and credit out of nowhere. Some coin this, money out of thin air. It causes a rise in the money stock.

For Austrians, we understand how the free market works, so there is no need for us to attempt to design a society. Our method is a priori. It is a value free science.

Referencing the description above about the price spreads of the various factors of the production process, if one were to average these spreads, one would arrive at what is termed the natural rate of interest. This is the market rate of interest.

What is most important to understand is that this theory of the natural rate of interest is simply theory. It is abstract, conceptual and unknown. Albeit subjectively we know it exists at all times. Even with numerical calculation, arriving at the exact price precludes making a mere assumption within the confines of what happened in the past; historical data.

Figuring out a method of actually averaging them out can only be done intuitively. Nobody has complete information. This is essentially a theoretical concept.

As a result of having limited information, capitalist-entrepreneurs on the free-market may only attempt to gauge this rate of interest within their proprietary framework. There would effectively be many competing benchmarks. Contractual rates of interest would be decided contractually.

The results of attempting to gauge the rate of interest with a monopolized benchmark are always disastrous. The monopolized benchmark will always be wrong, and in most cases tend to be below the natural rate constantly causing chaos. Credit expansion will ensue, and excessive malinvestments will amount.

As mentioned before, there will always be bad choices, which implies that there will always be malinvestments. Not even the capitalist-entrepreneur knows if his choices will result in monetary losses until after the choice has been made. Only free-market signals can quell excessive malinvestments, and ultimately vast amounts of monetary losses.

Conclusively, we arrive at where interest rates are born, or where they evolve from. The rate of interest is a subjective value that derives from individual human action.

Wednesday, November 16, 2016

There is No trade deficit

Keynesians get stuck in a rut when asked about how to move funds within an economy. Their first perspective is to describe the Keynesian Circular Flow model.

This model presumes that with monetary injections, that is a monopolization of the price mechanism, you can stimulate demand to have it move through the economy.

Academia, touts ideologies where stimulation somehow comes from the central bank. This includes even your contemporary Monetarists, MMT and other schools of thought that use the IS-LM curves as their basic mode of reification to delineate shifting of aggregates.

As mentioned before, these ideas are abstract, and at best only subjective. Some believe hypostatization allows for better estimates. This may be true, yet this is only so for the private economy.

 Data is historical, it already happened. It makes for educated guesses. It cannot predict the future.

These aggregates for the mainstream economist are assumed averages derived from data. Econometricians make models to sell us ideas on how to manage economies. They are seducing their followers to obey government's writ upon them and the rest of the world. Government is the monopoly on coercion.

As described before, capital theory is everywhere existing, and at all times. Even at the level of the corporation or private enterprise, the theory of diminishing marginal utility still holds.

Companies use various factors in the production process. When they use too much, and take losses, they make cuts. These various factors are sold off, laid off, or moved to a different sector of the company where they can be used more efficiently.

This process is subjective. Entrepreneurs look at the price spreads, the rate of return. As mentioned before, this is the difference between buying costs and selling costs.

In the broader economy, the price spreads open and shrink. Sectors of the economy expand and shrink according to profit and loss. Profit margins expand and shrink. There is no equilibrium.

Due to having a monopoly of money, the government can coerce and attempt to stimulate it. This leads to ebbs and flows that create a business cycle at the macro level, in the broader economy.

This cycle should be quelled by allowing the free market to set prices based upon the value scales of individuals. Price spreads would compete.

Price spreads expand because there is a boom. Innovation has occurred and a new supply has been brought to the fore. Diminishing marginal utility sets in and price spreads shrink until companies fail or reinvent something new to stay in business.

When price spreads shrink, people pull out their factors and search for higher earning spreads (wider price spreads), of which to invest in. The wider the spread, the higher the rate of return. More profits are rendered.

Prices are indeed important, and if they are distorted, this causes a business cycle. The business cycle can be exacerbated by an over-issuance of credit money. Spreads are distorted, and due to a monopoly on money, can expand together and tend to shrink together.

Indeed there is a delay in the cycle's effects on the various stages of production, as the business cycle induces over-consumption at the higher order goods level first, later reaching the lower order goods level. This destroys wealth and can make some rich at the expense of others.

On the free market, those with better business acumen will seize on the translucent shrinking and expanding of the price spreads. Entrepreneurs take risks. The cycle is quelled due to competition in money. This includes competition in credit money.

The Treasury, and other government debt instruments, are dangerous. They are mechanisms that deceive investors to believe they are investing. They are in and of themselves, instruments of consumption.

I shall elaborate on this in a later post.

Tuesday, November 15, 2016

Capital Theory

Only Austrian Economics describes the structure of production in the pragmatically intricate manner that Murray Rothbard does in his book Man, Economy and State.

Eugene Bohm-Bawerk sowed this theory coined Capital Theory. Mises subscribed to it, and Hayek built upon it. The Hayekian triangle may be a bit more abstract than Rothbard's transliteration, yet ultimately it is the same concept.

Austrian Economists tend to agree that Rothbard delineates it best.

Mainstream economists describe the structure of production numerically, having an exact number of stages. These categories they describe, to them, are absolute. They term this process, the Production function.

The mainstream economists reify the production function with mathematical designs and numerical symbols. One common description is seen in the form of a parabola.

This theoretical shape is depicted as a line that is rounded upward toward a point, the apex, and a repetition of this rounded linear pattern downward.

This pattern is abstract, prices in the real world do not make these shapes. Data scientists and model builders design them using averages.

For scholars, the demand of all consumers in the market aggregated together, can be controlled with monetary injections. This in turn would stimulate Savings and Investment.

Their assumption is that everyone does the same thing at all times. Presumably we are all mechanical. Hence, the term panphysicalism.

The Austrians explain what the mainstream calls the Production function, quite straight forward.

There are many stages of production. How many stages there actually are, we are unaware. We only know that there are a plethora, and they exist over a period of time. They represent the various markets.

The structure of production is theoretically explained by tracing money income from the consumer stage, final stage, which travels through the various higher order stages, and finally arriving at land and labor. At each stage the producers yield a rate of return, a monetary income.

Reversing the process, one can trace productive effort. At each stage capital goods of that order are produced with the aid of the cooperating factors of the previous stage. Land and labor are mixed to produce a capital good.

Capitalists are those whom advance factors of production to the various stages of the production process. All of this exists over a period of time, and this period of time is subjective.

To perform this task, capitalists use the savings that was withheld from being consumed. Capitalists are, in essence, entrepreneurs.

With more savings, the structure of production grows, more stages are added. When miscalculation occurs, and companies fail, some stages disappear. The market readjusts.

When certain sectors of the economy are distorted, meaning that certain prices are monopolized, the various stages that arise are built upon false price spreads. Nobody can see this, it is obscure. This is called inflation.

Clearly the market must be free of intervention so captialist-entrepreneurs can make better decisions, and less malinvestments take place.

Conclusively, one might understand why government monopolies are so dangerous in using hypostatization to guide human action.

Monday, November 14, 2016


Entrepreneurs fill niches in the market. They provide a good or service to help raise standards of living.

Marx, and the going mainstream economic scholars (the Keynesian ilk-including Monetarists, MMT and the like) all believe in some sort of class struggle. Hogwash.

The idea of class struggle is further promoted with positivism, or the use of statistics. Math is fun indeed, but it's theoretical framework must be understood to it's core to aid in understanding the world better.

When someone is less knowledgeable on something, the skill or knowledge of it is scarce. This incites a high demand to learn it, or credulous admiration for those that have more exposure to it.

The gullibility is deleterious to those who are more skilled in other aspects. Math can indeed be seductive to those not wary of it's complexities. Scientism is quite similar, it's theory incites hubris that makes people negate their own capabilities, or moreover, humility.

There is another side of the coin, if one who is knowledgeable or skilled in something scarce or uncommon uses their abilities to produce wealth or advance their own lives, the ramifications would ultimately be a boon to the rest of society. A snowball effect would arise.

Entrepreneurs are these people. They endeavor reeking profits.

They use their scarce skill to produce a new idea, either a physical product, or service that results in mental or monetary profit. The profit is a subjective satisfaction.

Everyone who comes upon this idea or product, must learn it. The entrepreneur has taught something new.

In our world there are no classes of people, neither demographics. These groupings are what arrogant scholars have tried conditioning all of us to believe. Statistics is their legerdemain.

Data is history, it already happened. This historical occurrence is categorized and assigned a number. Nobody has perfect information.

These occurrences happen at a certain point in time, within a certain interval. It is mere subjectivity modeled with the philosophy of numbers. Reification.

The class system, in accordance with historical data, creates the effect on people's world view as aforementioned. Austrians understand it is all theoretical, and null.

Anybody can be a landowner, laborer or capitalist-entrepreneur at the same time.

Capitalists withhold consumption, saving money. That savings filters into the economy in the form of investment. Savings=Investment.

All money in a bank leads to loans, this is investing. Investing is the advancing of capital to the various stages of the production process. Other savings mechanisms also exist.

Laborers sell their labor to businesses. Their price, wage, is decided by contractual agreement.

Land owners own land.

There is no class struggle, only statistical measures that divide us abstractly.

Profit is subjective. Jobs are competed for. Everyone desires land, labor or capital subjectively.

Saturday, November 12, 2016

Rate of Interest

All price spreads are rates of interest.

If I buy a good at 10 dollars, and sell it for 11 dollars, the spread between buying and selling prices is 1 dollar. The rate of return is 1/10 or 10%.

Due to this basic truism, we can surmise that the rate of interest derives from individual preferences of time.

Time Preference denotes the value of something ordinally allocated on one's subjective value scale. High time preference, higher. Low time preference, lower. 

If a human actor has a low preference of time, they allocate more money to savings. An individual will withhold consumption at a high rate.

If a human actor withholds consumption at a low rate, one will allocate less money to savings and more to consumption.

Austrians understand that high savings=low rate of interest, and low savings=high rate of interest.

In basic economics we are given the theoretical formula of savings=investment.

Austrians can suggest that due to value being subjective, savings and investment might not be equal. This difference is decided by time preference. The mainstream may call this hoarding.

Taking the idea of price spreads from above, we can demonstrate that the rate of interest is the rate of return, which ultimately are the price spreads.

The individual human actor wields the subjective fortitude to profess his investment-consumption ratios similar in respects to the theory aforementioned.

If his income is 100 dollars, he may decide to consume 10 of that 100. In a similar fashion as the above example, the resulting ratio would be 1/9, 10 dollars would be allocated to consumption, and 90 dollars would be withheld from consumption which is allocated to savings.

The ratio delineated is a rate of return, which is 11%. Continuing the basic rubric, one can see that this would be a rate of interest.

Conclusively we arrive at where interest rates begin, or where they evolve from. The rate of interest is a subjective value that derives from individual human action.


In the field of economics there are various euphemisms that have arisen to describe goods in general.

A good is an object of value, but all value is subjective. No value is inherent. A major difference between Austrians and their obverse, is the theory of value. 

The common euphemisms we hear are: Capital Good, Consumer Good, Veblen Good, Giffen Good, Producer Good, etc. They're all objects of value that are consumed at some stage of the production process.

Now this brings me to my next, more important point. Why so many names? The answer is that economists are using artifice to build their scholarly reputation.

No need to understand the different definitions given to these names, with the exception of two of them. These two are Capital Good and Consumer Good. The others are discursive hodgepodge.

The others aside from the latter two, are attempting to describe the uniqueness according to supply and demand, and their associated prices. Of course this is subjective, as some goods are simply more scarce than others.

A Capital Good is a good that uses labor to convert raw materials into a new capital good. In Austrian terms, you mix land and labor to produce a capital good.

Land is raw materials, labor is human effort.

At every stage of the production process, given that there are many of them--an unspecified quantity, capital goods are used and produced. This process of mixing land and labor to produce a capital good occurs at all stages.

A Consumer Good is what is consumed by someone. At this point, the good is no longer producing anything but human satisfaction. It cannot be mixed with land and labor any further to produce another good.

I must assert that each permutation of a good is subjective. Both goods are essentially consumed over time. Albeit our perspectives coalesce toward one central idea, we can decidedly say that a person can use either good in different ways.

Friday, November 11, 2016


Subjective Value Theory sets the Austrian School of Economics apart from all other mainstream schools of economic thought. Austrians would refer to all other schools of economic thought as Keynesian (Monetarists, MMT, even Marxists).

All value is subjective, meaning it derives from the human mind. There is no fixed cost or inherent value, because value has evolved from the value scales of human minds, or the subjective value of human actors in general.

This being said, one might wonder what money is.

In a society with no money, there is direct exchange. Goods being exchanged directly for one another.

I have apples, Tom has oranges. At some subjective point, we discuss amongst ourselves a relative amount to exchange for each good we desire. We are thus bartering.

As societies grow, this rudimentary form of exchange might not function. It may take a long time to arrive at a price.

Like all things, everyone economizes. This economization is also applied to time, as time is scarce. All goods are scarce.

People want to facilitate processes, and thus new technologies and ideas arise. Technologies economize time by facilitating life processes.

In the case of exchanges, one might desire a good the other does not possess. For this reason a medium arises, naturally. It is universally accepted by many as a means to facilitate the transaction. This is money.

Money leads to interpersonal exchange. This is exchange which includes a medium.

Money, like all things, is subjectively valued. A commonly accepted idea is subjectively accepted, such as mathematics, physics and many other theories. Like the law of gravity, Money is an applied theory. Theory describes what is, or what could be. Experience applies the theory.

Many times experience can create new theories, which someone later transliterates. As mentioned, this would be called scholarly work.

Mises found that precious metals were most used as this commonly used medium. People valued this shiny metal. No force was needed for people to value this element.

A large misconception is that money, like many other things, is a theory that must be enforced by some entity. This entity they believe, must be a monopoly.

Little do people realize that theories are not enforced, they are created with access to further ideas built from experiences. It is all voluntary.

Wednesday, November 9, 2016

Money & Banking

Referring back to yesterday's post, I mentioned the banking tautology of Loans=Deposits. Loans are obligations by a borrower to be paid over time, until the contract is completed at a certain point in the future.

Deposits coincide with the loans issued. Deposits are stored monetary units in a banking institution.

As the money stock rises, that is, as more warehouse receipts are issued, the value of money falls. More money chasing a good makes the price rise, while making the value of the unit fall.

In number theory one could use the abstract fraction of 1/N. All prices are stated in fractions.

Example: Fridge/1 Receipt

The Fridge is priced at 1 receipt.

Rise in money stock by 1 receipt = Fridge/2 Receipts

As N increases, the price of the Fridge rises. It is now priced at 2 receipts.

Additionally, if 2 people are each holding 1 receipt, the Fridge is more expensive for both of them. Their money is now worth less.

This type of rise in prices is indeed subjective, as the supply of Fridges in the economy could rise as well, keeping inflation quelled. Meaning that the price of the Fridge will not rise.      

As demand and supply are also theoretical concepts, this basic ideology holds in all transactions.

Banks are storage centers for money. Some banks can offer a variety of services, and amongst these are loan services.

A Loan is priced in a specific monetary unit, in this example it is warehouse receipts. The specific method of banking, moreover, can allow for further creation of loans, which will result in more warehouse receipts.

Continuing this paradigm, new receipts are continuously created as new Loans are also created. 

Harkening back to the idea of a loan, a contract fulfilled in the future, one can now imagine a monetary system controlled by voluntary contractual agreements. Examples are as follows:

Banking Methods                                                            Loan Types
100% Reserve Banking                                                  Fully Represented by Deposits
Fractional Reserve Banking                                           Partially Represented by Deposits

Law and protocol are essential facets to execute the method proposed by the unique banking strategy. 

Mises points to Gold being the money universally used by everyone traced back to the beginning of time. Corresponding with the idea of history (knowledge acquired by investigation), one can conclude that evincing a notion is merely theoretical.

Early forms of history are manifested in previously written documents, which were observed accounts by another.

This suggests that his regression theorem bares lots of strength in the face of theoretical scholars from academia. Tomorrow I will describe to you money.

Tuesday, November 8, 2016


Inflation seems to be all the rave in the discourse of economists. As discussed before, all concepts are theoretical. Inflation, in essence, is theoretical.

This being said, allow me to elaborate on the definition of such a term.

The mainstream (Keynesians, Monetarists, MMT, etc.) connote this term as a rise in the price level, typically calculated as a year over year percentage.

This is simply one metric that can be reviewed to find a correlation of some sort. Averages are the basic principle that statisticians use to describe trends.

Thus, the measure would be a rise in the average price level of a basket of goods, compared to the next year's average rise in the price level of the same basket. This is expressed in percentage terms, which can also be a fraction.

The basket, in their reified measure, is an average, randomly chosen from average usage of a sample size. Lots of averages!

Austrians define inflation as a rise in the money stock.

Now in order to understand what the money stock is, one must choose the best descriptor of estimates out there which can be converted to warehouse receipts over a short-term period. Indeed much of these descriptions are labeled through conflated ideas.

Loans = Deposits, this basic banking tautology can lead to a higher money stock, which in turn cause a precipitous rise in prices--the notion of consumer prices described above. This, for Austrians, not only assumes consumer prices, but overlooks capital goods prices. (More on this issue tomorrow)

Consequently, the mainstream descriptor of inflation is only a theoretical average of consumer prices affected by a rise in the money stock.

Monday, November 7, 2016

Teach Yourself

Everyone can teach themselves anything.

Everyone has the potential.

In the following list, I have concocted an array of foundational principles that will help sow the seeds for further knowledge building.

To help in the quest of building upon the basics, I highly recommend Googling.

To become more of an expert, learn more theory and apply it. In essence, the process of discovery is essentially being a scientist.

Trade                                              What to Learn
Robotics                                         Electrician
Coding                                           Computer Languages
Doctor                                            Diagnosing Illnesses
Investing                                        Series Licensing
Scientist                                         Experiments
Surgeon                                         Anatomy

I'm certain after reading this post, one could find many other jobs, degrees or fields of interest that can be learned on one's own by just going back to the basics. Let's all be scientists.