Saturday, January 28, 2017

Capital Consumption

Everything in our society is measured in nominal prices. Nominal prices are given prices, prices which are stated by all vendors.

Real prices are prices which take inflation into account. Austrians believe that inflation is a rise in the money stock. The rate at which the money stock rises would be a subjective measurement once the money starts being consumed within the free market.

Mainstream economists believe that inflation can be measured using a commonly accepted average which is a year over year measurement of the change in prices. Basic mathematics can be used to describe the change in the group of generally accepted goods from one year to the next.

The problem with using these types of averages to measure the abstract idea of a rise in prices from two different points in time, is that math theory's substrate assumptions leave the premise of subjective factors in the hands of those designing the formulas and cobbling the data.

Nobody has perfect information, and data is historical, thereupon the averages arrived to are best and most assuredly safest when used in the private sector. When in the hands of government, they become tools of artifice intended to seduce the voters to emphatically support the very coercive institutions which amplify and bring about poverty, crime and all other iniquities in our society.

Mainstream economists tend to use the consumer price index (CPI) or producer price index (PPI). Both of these averages are broad assumptions. The CPI measures prices at the final stage of production, the lower order goods, while the PPI combines all prices within a wide array of other stages aside from the consumer stage, higher ordered goods.

As the money stock rises, so will prices at a later point in time. This could either be gradually or more precipitously. In either case, inflation is in effect. Gauging this phenomenon is the daunting task of the market actors, particularly the captialist-entrepreneurs.

Consequently, we can conjecture that inflation is subjective at every stage of the structure of production.

As was previously described, the consumption-savings/investment ambit is gauged by all actors, individuals found in all sectors: families, corporations, et cetera. Humans are imperfect and make bad choices frequently, so as inflation is imparted on the market, the enshrouded effects of rising prices causes these human actors to delve into their consumption withheld.

This type of over consumption of savings can come as a surprise to people whom abruptly realize that due to a deceptive monopolized benchmark rendering cost wariness feeble, have also undertaken an unsustainable amount of debt.

Capital consumption is essentially a subjective over consumption of savings. As discussed in a prior post, a malinvestment is a poor decision endeavored. Generally, when describing the activities of the capitalist-entrepreneur, a malinvestment is a bad business investment. This poor decision can be realized in the form of a monetary loss, which is similar to capital consumption.

It is important to hearken the quite common Austrian pithy saying of "the seen and the unseen," as this will allow for enhanced chary decision-making. Theory gives us this elemental acumen, and indeed I am also referring to the so often misunderstood theory of mathematics.

Sunday, January 22, 2017


The economics profession is notorious for despising the idea of falling prices. Due to the quasi-paper-mache models erected from the coercive hands of government officials, those adulators of their concoctions entice them to render society asunder.

These amusing tools are the IS-LM curves and Cobb-Douglas function which aggregate quantities, assumptions respectively. The most virulent of the former two is the Cobb-Douglas function which agglomerates capital.

Previously, we discussed why this assumption of a large K (capital) cajoles the learner toward the seductive powers of numerical symbols. The superficial idea of agglomerating what the Austrians detail in a latticework of more realistic theory allows the reader to not be persuaded by the theory of math. In essence, the numerate is more wary of the tools which assist in making these assumptions. The innumerate does not understand that the weapon he wields is a plastic sword.

Rothbard goes on to describe the nature of falling prices as a moment in time by which capitalist-entrepreneurs withdraw their capital from the said stage of production and move it into a higher returning stage. Effectively, since price spreads are shrinking--as buying prices get closer to selling prices--the capitalist-entrepreneur is unsatisfied with a smaller rate of return, let alone real rate of return.

Money at all times is either consumed or saved-invested. Never is it the case that money is held outside of this ambit. Both concepts are subjective, as consumption takes place at the present moment. On the other hand, savings-investing is consumption withheld. Hoarding is subjective. Is it the cash held in pockets, or on green dot cards?

During the moment in time in which actors desire withholding consumption, they are contributing to the accumulation of capital elsewhere. For example, holding money in a demand deposit contributes to savings-investing, it is capital not being presently consumed.

Additionally, moving money from one class of securities to another, will make the price spreads of one sector expand, while the others being consumed shrink. For this reason, in being the first buyer, and conversely the last seller, one is able to garner the largest price spread or rate of return.

As prices fall in one market sector, one's purchasing power is enhanced in that same sector. Thus the old adage of buy low, sell high. Rothbard coined this "increasing effective cash balances."

Most importantly, falling prices from a fall in the money stock is associated with the readjustment process. At any point in time that defaults occur, money in the system diminishes. Whether it be at the banking level--where loans can disappear due to inability to pay, bankruptcies at the corporate level--which would lead to a vanishing of demand deposits, or the Federal Reserve Bank intervening (selling off reserves) or raising the monopolized benchmark (which essentially affects the Repo rate).

This readjustment process will only result in what is a weeding out of bad business practices whereon the recrudescence period after that ultimate free market trough is affected. This trough is completely natural on the free market, with freely moving prices--all prices. Prices must fall to their appropriate market level, in accordance with the time preference of human actors.

Allow me to formulate an addendum: a revival in the form of a palliative will not remove the cancer, but only catch the Tower of Babel as it falls, fomenting it's continued growth in it's partially dilapidated state. Hence, bazooka joe reinflates.