About homework.

From the intro to an advanced math book:

5. The book contains an abundance of homework problems. They are not
graded by level of difficulty since life does not present problems that way.

Devil’s Advocate: What’s not to like, Dave? He’s right, isn’t he? Life does not present problems that way.

SD: He’s right if we are talking about homework that prepares one for life.
But there is another kind of homework, namely,
homework that aids in mastering the material.
And new material is best mastered by going from the easier to the harder.
First we learn to crawl, etc.

DA: I’m glad you pointed this out. My one year old son had started to crawl all over the house. I was having none of that. I took the little fellow out into the street, with traffic constantly streaming by, and forced him to stand. He started crying.

“Son”, I told him, “I can’t let you crawl freely in a protected environment. Life is not like that. Get up and walk, son, and watch out for those cars.”

SD: And what happened?

DA: He failed his math course.

If you dislike the new Firefox.

There’s Palemoon, which is not bad, but it is incompatible with many great addons.

So here’s my suggestion. Get Comodo Ice Dragon Browser, portable version preferably.

Get the add on Remove It Permanently [RIP]. You won’t need the bloated Adblock if you have this one.

Other addons that I use, listed in no particular order.

Tab Mix Plus.

X-notifier to check your emails. [And mail.com for hassle free, more or less, email provider].

Grab My Books, to turn web pages into epubs.

Ghostery. Maybe with RIP you don’t need this. Dunno.

Download Them All.

Clear Fields.

BlockSite Plus. Maybe with RIP you don’t need this. Dunno.

Flash Video Downloader.

Redirect Bypasser.

Smart Video for Youtube.

Reddit Enhancement Suite.

Switch Private Browsing.

Twitter Disconnect. Maybe with Ghostery and/or RIP you don’t need this. Dunno.

Windows Programs I like:


Sumatra pdf.


Chess hero.



Quite RSS


Revo Uninstaller

Duplicate Cleaner Free

Advanced Renamer

Peer Block

All are available as portable but for Chess Hero.



On Religion.

Devil’s Advocate: Having a unique perspective on all this, as should be obvious from my very name, allow me to inject my two cents.

People come down here all the time. It gets quite crowded, and the waiting line to boiled in the fiery flames is very long. So we all have plenty of time to while away, and we talk very freely. Here are the various religious positions people tell me they have.

The Scared in a Scary World Guy: I can’t handle it anymore. I’m about to lose my mind. I can only keep on going if I can assume there is Someone more powerful than me out there to help me out. Naturally, I’ll seize on any scrap of anything to bolster my need.

The Mellow Atheist: I see no evidence for any spiritual forces, and I feel no inner need for them to be any. So let’s leave it at that.

The Varieties of Religious Experience Guy: I never gave it much thought, until one day I was dying in a hospital bed. Suddenly I looked down and saw myself. An out of body experience. Then a very warm, friendly, masculine voice told me, “God here.”
“Nice to meet You, Sir. Am I dead?”
“No, you still have a minor role to play in the world.”
“Then what am I doing here floating above my physical body?”
“It’s a way of giving you some rest. You’ll be back inside soon.”

Smiling Dave: Why was he down there with you, Devil?

DA: Nobody’s perfect. BTW, what’s your take, Dave?

SD: I’m a very, very, very, very, mild case of V. of Rel. Exp Guy. But I’ve spoken to a solid V.O.R.E.G., and, given my pre-existing mild case, I was open enough to be totally convinced by his story.

DA: But what about all the unanswered devastating questions that Science Guy and Bitter Atheist Guy keep asking?

SD: I don’t know the answers.

DA: How does God expect people to even believe He exists, given that He almost never shows Himself like He did to your friend, when all the q’s about Him remain unanswered?

SD: I can only assume that’s the way He wants it. And I think it follows that the assumption that we are all going to join you down there, Devil, unless we believe in Him, are incorrect. He seems too nice a guy to screw all humanity like that.

DA: So the default position should be agnosticism, or maybe even atheism, unless He takes us personally by the hand? Why did He set things up like that?

SD: He baffles me sometimes. In fact, most of the time.

DA: What about Jones here, who is open minded and wants to investigate? Is Jones to just twiddle his thumbs until God shows up in his living room?

SD: Some people say He can be found if one looks with all ones heart and all ones soul.

DA: What does that even mean? How do you play hide and seek with an Invisible Being?

SD: Some say Jones should be alert. Be on the lookout for instances of Happy Coincidence. Others say to open mindedly think about Nature and the Universe. They claim that this whole theory of evolution thing is full of obvious gaping holes.

DA: What about the Great Teachings that have been handed down by the various religions?

SD: You think I’m here to give all the answers?

Agent Carter

Over at Grantland.com they are very excited about the new show, Agent Carter, about a woman in 1946 who is a secret agent for the US govt. What makes the show so great, they explain, is how human she is. She has to wash the dishes and everything.

In the climax of the first episode, she brings her own brand of justice to a fat white male who touches a waitress inappropriately. She puts a fork to his body, and threatens to kill him with it unless he first tips the waitress handsomely and then leaves, never to return.

The context of the show clearly intends for us to applaud Agent Carter for her derring-do.

Let’s imagine a show about a Klansman. He sees a fat black male who touches a white waitress inappropriately. The Klansman puts a fork to his body, and threatens to kill him with it unless he first tips the waitress handsomely and then leaves, never to return.

Devil’s Advocate: But Dave, that is an outrage. The Klansman should have been tasered and tossed in jail for threatening murder. Not only that, how dare he deny anyone entry to a public place of business, especially with threats of violence? What right has he to cause financial loss to the owner of the diner? And if he thinks he is helping the waitress, he has another think coming. The owner of the diner will ask around about why his oldest customer now eats next door. When he learns it’s because of the waitress’s friend, he will fire the waitress.

Not only that, such a show places violence on a pedestal. It makes the Klansman seem like a hero for using violence. It gives the viewers, some of whom are small children, the idea that threats of murder are the best way to deal with difficult problems. It encourages them to act like Klansmen, to trample all over other people’s lives and incomes to resolve a problem that clearly has a better solution. It dehumanizes fat black men.

SD: And when Agent Carter does all that?

DA: Then it’s OK.

Bitcoin’s Supposed Non Monetary Use As a Transporter of Money.

That’s the latest rationalization for bitcoin having non monetary value. Bitcoin has non monetary value as a means of transporting money. The folks at Mises.org have even fallen for this one. I’ve written about it before, but I just had a new idea.

Costello: Hey, Abbot, get this. A new Armored Truck company has opened for business. They will transport your money securely anywhere, plus there is a roulette wheel installed in the truck. As the truck speeds your money to its destination, it is automatically bet on any number you choose, from 0 to 00 to 36.

Abbot: What if I don’t want to bet on any number, just keep my money as is? All I want is for the Armored truck to deliver my money to its destination.

Costello: That’s no fun.

Abbot: No, that’s bitcoin. As a means of transporting money, it includes a gamble its price may drop and you lose big time. What kind of way is that to transport money?

Costello: Come on, Abbot, if you work fast, buy the bitcoin right away, then instantly transport it, the odds of losing anything are miniscule.

Abbot: But what about the recipient? Why should he accept payment in something that may drop in price?

Costello: He will have to unload it right away, too.

Abbot: So we are talking about a means of transporting money that involves both the sender and the recipient not holding onto the money for more than a few seconds, and this is baked into the transportation system.

Costello: Yep, and that’s how Microsoft and all them others are using bitcoin. Isn’t it wonderful?

Abbot: Of course, Microsoft pays a nice fee to some third party willing to take the bitcoins off their hands and assume the risk.

Costello: And that third party will always be there. Like the Roman Empire. I guarantee it.

Abbot: So bitcoin is a means of transportation that has baked into it a serious risk of losing big chunks of the money sent, but there are people out there willing, for a fee, to take the risk.

Costello: Sound viable to me. That’s exactly the kind of thing Mises was talking about when he said a money has to start off with intrinsic value. Risky, but someone out there is, for now, willing to insure you against the losses. Can’t get more intrinsic than that. What’s not to like? Microsoft thinks it’s OK, so why are you worried about it?

Abbot: To Microsoft, the whole thing is just another advertising expense. The companies interviewed about why they accept bitcoin all said it’s an advertising gimmick, and a cheap one at that, must cheaper than a television commercial. But Mr Average person would never agree to transporting money that way, or accepting money transported to him that way, with his money constantly gambled with whether he likes it or not.

Costello: Unless he’s buying drugs or something, which is a transaction involving other risks. So he figures the risk of losing on the roulette wheel is less than that of being arrested if he uses real money.

Abbot: Bottom line, bitcoin is not transporting money. It is transporting a lottery ticket with an unknown expiration date.

Costello: So it’s like a delivery truck that can only deliver rotten eggs.

Abbot: Exactly.

Deep Stuff About Time Preference.

Gentle reader, this post assumes a little background knowledge of basic AE.

I finally understood the concepts presented here after listening to part of Jeffrey Herbener’s excellent lecture. Link is here: https://mises.org/library/time-preference-theory-interest-and-its-critics-2013.

Devil’s Advocate: You know Dave, I can disprove the whole originary interest thing, the whole time preference thing.

SD: Oh?

DA: Easy. You claim people prefer things today rather than tomorrow? And will pay less if they have to wait to get the thing tomorrow?

SD: Yep.

DA: How about this scenario. My daughter is getting married next month. I call up the bakery and ask about prices. They tell me the price, and then add that they have a special one day only sale, and if I get the cake today, right now this minute, they will give me a 10% discount. You think I’ll take the cake today? Ha!

SD: Anything else?

DA: Yes, the whole ice in the summer, ice in the winter thing. I don’t agree that they are two different things. Ice is ice.

SD: You’re certainly on a roll today, Devil.

DA: And I have one more, directed at Human Action itself. I’m going for the jugular now. Mises writes:

The very act of gratifying a desire implies that gratification at the present
instant is preferred to that at a later instant. He who consumes a nonperish-
able good instead of postponing consumption for an indefinite later moment
thereby reveals a higher valuation of present satisfaction as compared with
later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.

SD: Sounds OK to me. What do you find wrong there?

DA: Are you kidding me? Mises is saying the only reason people eat is because they would rather eat now than later. Time preference. Well I think that is absurd. Use your common sense, Dave. Let’s say we have some kind of person born with a certain kind of brain damage. He has no concept of time, no time preference ingrained in him, nothing. Are you saying he will never eat? That’s ridiculous. He will get hungry, grab a sandwich, and eat it.

SD: Yeah, Herbener had some struggle with that one, too.

DA: Well, then. I’m calling up my good buddy, Lord Keynes the blogger, and tell him about this. Boy, are you Austrians gonna have egg on your faces. Three solid refutations of the very heart of Austrian theory. So there!

SD: Actually, they are three versions of the same misunderstanding of Austrian theory.

To understand the wedding cake story, let’s look at two neighbors, Smith and Jones. Smith’s daughter is getting married today. Jones doesn’t have a daughter. Smith wants a wedding cake today, Jones doesn’t. How do you explain that?

DA: What even needs explaining? They are in different situations, and thus their needs are different.

SD: How about this one? We have identical twins, exactly the same in every way, except that one is at the cold, cold, North Pole and the other is in sunny Florida. The one at the North Pole is sick of ice, the one in Florida craves ice. How do you explain that?

DA: Same thing. Their needs are different because they are in different situations.

SD: How about this one. Smith hasn’t eaten for days, Jones has just finished a huge meal. Offered a sandwich, Smith takes it hungrily, Jones declines.

DA: Again, different situations, different needs. I’m surprised you don’t grasp this simple idea, Dave. People value things differently depending on their situations.

Why, even the same person will value things differently in different situations. Today, his daughter is not getting married, so he has no need for wedding cake. Next month is her wedding day, and then he will need cake. Today in the summer, he wants ice. In the winter, he is in a different situation and does not want ice. Today he is not hungry, and tomorrow he will be famished. Different situations.

SD: So when Austrians talk about time preference, how people would rather have something today than tomorrow, are they talking about the same situation today as tomorrow, or about today and tomorrow being different situations?

DA: Obviously the concept of time preference assumes all other things unchanged. That other than the passage of time, the situations today and tomorrow are identical. We can compare ice today and ice in the future only if the future is the same situation as today, both hot days or both cold days. Same with the wedding cake. And that quote from HA was not talking about eating, because with the passage of time, ones body changes, and thus he is in a different situation. First he is not hungry, then he is.

SD: If you mix your situations, you are like a physicist measuring gravity on Earth, and assuming it will be the same in outer space.

DA: So all my refutations are as naught.

SD: Not only yours, Piero Sraffa’s as well. He takes different situations and conflates them indiscriminately, as explained in my humble article here.

DA: Where’s that wedding cake?

Austrian Economics on Marxism. Part One, In Which the Very Basis of All Marxism is Shown to be Absurd.

Marx had first, a long, complicated explanation of why the free market is doomed, and second, a proposed solution to the problems he thought he found, Socialism.

Here at the blog, we have written at length about his proposed solution, Socialism, and why it is inherently flawed from an economic point of view, meaning that the laws of economics guarantee misery and death to any country that institutes Socialism, just like in North Korea, for example. Just do a search for Calculation Problem on this humble site.

Many have shown that politically as well Socialism is a guaranteed nightmare, but that’s not our thing. Politics makes Dave feel sick, so he avoids talking about it.

This article is not about Marx’s solution, Socialism, but about his complicated theoretical edifice, as laid out in his book Das Kapital, which he claims proves that the free market is evil and doomed. The content here is based on this excellent lecture by Richard Ebeling, and on various excellent works by the Austrian School . So let’s start right in.

We have a special guest with us tonight, Karl Marx himself, who has kindly agreed to rise from the grave to chat with us.

1. First mistake, the concept of Exchange Value.

Karl Marx: You’re off on the wrong foot right away, Dave. The great Adam Smith himself invented the concept of Exchange Value. Why are you picking on poor me when I have such a giant on my side?

Smiling Dave: That’s why I’m an Austrian, and not a follower of Adam Smith. The Austrians do not believe in the whole Exchange Value thing. To them the value of anything to anyone is subjective, meaning varies with the individual.

KM: I agree with that. I called it Use Value, you call it Subjective Value, same thing. But I went one step further. I claimed that Use Value is not what counts. What decides prices is something I discovered, called Exchange Value.

SD: Not what counts where?

KM: Go to the store. You see that five dollars can get you, say, a hammer, a sickle, a used math book, a pound of beef. They all have something in common, namely, the price tag. They are all worth five dollars. But they all have completely different uses. So what is it about them that they all have in common, that makes them all worth five bucks?

SD: You are going to say their exchange value.

KM: Exactly. We are forced to posit the existence of something abstract in each of them, some mystical entity that they all have in common, which manifests itself in the market as a price of five dollars. That five dollar price tag reveals to us that the hammer, the sickle, the math book, the beef, all have the same amount of mysterious something in the exact same quantity, that makes them all worth five dollars. I call that mysterious something Exchange Value, and I will later show that there is nothing mystical about it. I will show exactly what is it and where it comes from.

SD: OK, here we are. We have arrived at your first mistake. Exchange value is a flawed concept, and it also is an unnecessary one. The Subjective Value, or what you call the Use Value, is enough to explain everything.

KM: Well, it’s pretty boring down there in the grave. I like being up here. Amuse me with your explanation of how Use Value makes all those things equal, all worth five dollars.

SD: It’s very simple. Five dollars is what the owner of the hammer etc. thinks he can get for his hammer. He thinks he can find a customer who will pay five dollars, so he sets the price at five dollars.

KM: But why will the customer pay five dollars exactly?

SD: There is no such thing as “the customer”. Every customer is different. Some want hammers, some want sickles, some want nothing and stay at home and don’t come to the store.

KM: I knew that.

SD: So you also knew that the five dollar price tag is not meant for every customer. Those who don’t need hammers that much, or at all, will not pay five dollars for the hammer. The seller was not even talking to them when he puts a five dollar price tag on the hammer. To them, the hammer may be worth a dollar, or even zero.

KM: So you are saying that it is absurd to say that the hammer, sickle, book, and beef are all worth five dollars, when there is not a single person in the store or in the city who will pay five dollars for all of them. Smith will pay five for the hammer, but zero for the other stuff, Jones will pay five for the book, but nothing for the other stuff, and so on. And to everyone who stayed home and did not go the store, all of the objects are worth zero. Nobody equates them, nobody considers them of equal value. Certainly they are not worth five dollars to the seller, who is trying to get rid of them.

SD: Yep. The seller is putting a five dollar price tag on each because he thinks he will find one person out there who will want a hammer so badly he will pay five bucks for it, and so on.

KM: I still think I’m onto something, Dave. There must be a reason that the seller assumes there exists at least one person put there willing to pay five for the hammer, another to pay five for the sickle, etc. The fact that for each commodity in the list there exists at least one person willing to pay five bucks means there is something “five-dollary” about them all.

SD: Nah, it’s a coincidence, and I’ll prove it. See that bottled water? It’s going for twenty five cents now. But should the city water supply get infected with Ebola, that same bottle will go for five dollars.

KM: You’re saying that it’s absurd to think there is something inherently five-dollary about a particular item when each person has his own estimation of the worth of the thing, each day, sometimes each minute, these estimations change, outside events unrelated to the object change its price, the whole price system is so personal, and so fluid, and so influenced by events that do not change the composition of the object, that it is foolish to think there is some abstract quality in the object that determines its price.

SD: Yeppers. The whole Exchange Value thing was created to solve a theoretical problem that didn’t exist in the first place. And the concept itself is fatally flawed.

KM: OK. So the very basis of my whole book has now been destroyed. But don’t send me back to the grave. I hate it there. Let’s talk about other flaws in my book.

SD: Maybe next time.

That MIT Paper That Supposedly Knows the Future of Bitcoin.

The paper is right here: http://arxiv-web3.library.cornell.edu/pdf/1410.1231v1.pdf

The quotes are from here: http://newsoffice.mit.edu/2014/mit-computer-scientists-can-predict-price-bitcoin

Devil’s Advocate: So MIT Guy. I bet you are a billionaire now. I mean, knowing the future and everything. You must have sold your house and borrowed every last penny you could get your hands on, the better to invest it in bitcoins using your fool proof algorithm.

MIT Guy: Give me your money and I’d be happy to invest it for you.

DA: Did any Austrian Economics go into making up your computerized predictor? You know, trying to actually understand the humans who are buying and selling, and what makes them tick?

MIT Guy: Can we explain the price variation in terms of factors related to the human world? We have not spent a lot of time doing that.

DA: One thing AE says about all these computer predictions is that they work perfectly until they don’t. So I’m sure you tested your gizmo in all kinds of situations, bitcoin going up and down, over a long, long time period, to make sure you weren’t being stupid and cherry picking one tiny interval, say two months,  where bitcoin was going in one direction only.

MIT Guy: Let me show you a summary in graph form:

See? The blue line is the price of bitcoins, and the black line is how much money we made. So 50 days

DA: Oh, I see. 50 whole days. And I notice the ups were huge and the downs were slight.

MIT Guy: Hey, it’s not my fault we picked the one time this whole year bitcoin was going up. And I resent you calling that cherry picking. Give me your money and I’d be happy to invest it for you.

Smiling Dave: What’s worrisome is not that the guy doesn’t know how to do statistics. Plenty of statisticians don’t know their job. What’s worrisome is that he thinks statistics is where to look in the first place.

DA: Take your articles, for instance, Dave. With zero statistical data, using sheer logical reasoning from first principles, Mises and Timothy Terrel and Peter Schiff and others have predicted that bitcoin is going to die, and explained why it was doomed from the get go. And you summarized their work right here at https://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/

SD: Yes, the current state of mainstream Economics is sad indeed. But hey, it always has been. I mean, the whole idea of having universities teach economics in the first place was to make sure the students learned govt propaganda. Read up on what happened to Say and Bastiat.

Bitcoin and the Damped Sin Wave.

Devil’s Advocate: Dave, let’s see some real scientific analysis of bitcoin for a change.

SD: I present to you the Damped Sin Wave:

Bitcoins little brother

Wikipedia explains:

A damped sine wave is a sinusoidal function whose amplitude approaches zero as time increases.

Damped sine waves are commonly seen in science and engineering, wherever a harmonic oscillator is losing energy faster than it is being supplied.

DA: What are you saying, Dave?

SD: Bitcoin is losing energy faster than it is being supplied. Yes, there are many suckers left, but people are wising up faster than new suckers can be found.

DA: And its future is?

SD: Amplitude approaches zero as time increases. In fact it’s even worse than a damped sin wave. The damped sin wave has an axis of symmetry which is the x axis. Bitcoin is a damped sin wave, only its axis is tilted from upper right to lower left, like someone dumping a tray of refuse into the trash bin.

DA: Show me.

One day:

Two days:

Five days:

Ten days:

All time:

DA: Wow, it’s like one of those fractal things. Over all image is a damped sin wave, and every little piece is a damped sin wave.

SD: Champions of bitcoin, speak up, defend liberty and freedom and the wave [excuse the pun] of the future.

DA: They’ve lost too much energy.

SD: Those graphs just show bitcoin is dying, but do not explain why it was doomed from the get go. For that, mosey on over to https://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/

Saving Austrian Economics from Piero Sraffa.

1. How Piero Sraffa destroyed Austrian Economics, supposedly.

Bob Murphy wrote this article, which lays out Sraffa’s case quite nicely.

Piero Sraffa supposedly demolished the whole Austrian business cycle theory in 1932 by pointing out that a key concept of Austrian Economics, the natural rate of interest, is flawed. There are several rates of interest, Sraffa claimed, one for each commodity. And Bob Murphy helps us understand with the following example. [As usual, all actual quotes are in italics, all others are imaginary, there to make things understandable in simple language]:

In the faraway land Oz, which has a barter economy, one apple trades for one orange. Then a prophet comes and tells everyone that there will be a huge frost next year that will kill off most of next years crop of oranges. Armed with this knowledge, Smiling Dave goes to market with an apple, to see what he can trade it for.

Turns out he can trade his apple for an orange, and just eat the orange.

Or he can find a Wimpy who will gladly pay him 2 apples next year for an apple today.

More Wimpys show up, all promising all kinds of things in the future for his apple today. One of them will give him half an orange next year for that apple today. Why only half an orange? Because oranges will be mighty scarce then, and half an orange will be very expensive.

Of course, since apples now have the same price as oranges, and this Wimpy will eat anything, he will also, if Dave has an orange, gladly trade half an orange next year for an orange today.

Bottom line, there are Wimpys out there who will  gladly take your apple or orange today, and give you either two apples or half an orange next year.

So right here we see how Austrian Economics is all wrong, says Bob. The interest rate for trading apples is 100%, two apples next year for an apple today. The interest on oranges is negative. You get only half an orange next year for an orange today.

So there, Austrian Economics, said Sraffa, I’ve just shown you two interest rates, both perfectly legit. How can you possibly say there is some magic number, called the natural rate? Which one of those two interest rates is the one unique magic number, Austrians? QED that AE is flawed from the get go.

To quote Bob Murphy:

Now, in such a barter economy as depicted in Table 1, what is “the” natural rate of interest? There is no such thing. The own-rate of interest on apples is 100 percent (one present apple in period 1 exchanges for two apples in period 2). But the own-rate of interest on oranges is minus 50 percent (because one present orange only trades for ½ future oranges). Consequently, if we were to introduce a money commodity and a central bank, and someone such as Hayek recommended that the bank set the money rate of interest equal to “the” natural rate, we would be unable to follow his advice.

Devil’s Advocate; Gotcha at last, Smiling Dave. AE is dead. Long live Sraffa! Long live Keynes, who also wrote about this stuff in chapter 17 of his masterpiece. What a buffoon Henry Hazlitt was, who mocked that chapter of Keynes.

2. Sraffa’s First Mistake. Banks Cannot Print Apples.

SD: Now you know why the smart money follows Mises, not Hayek. Hayek did not see through that apples and oranges story, but Mises did.

DA: Oh really? What did Mises say?

Mises: I’ll take over from here, Dave. Let’s look at that last sentence. If “someone such as Hayek recommended that the bank set the money rate of interest equal to “the” natural rate…

Sraffa: I think that’s hot stuff, that sentence. What’s wrong with it?

Mises: The central bank does not “set” an interest rate. The bank prints money. I call on my good friend, Joe Salerno, to explain. Joe?

Joe SalernoBut the Fed does not directly set interest rates. This is the great modern myth, which was designed to conceal the Fed’s true modus operandi. The Fed influences interest rates by creating and injecting dollar reserves into the banking system. The additional reserves increase the supply of loanable funds relative to the economy’s demand and thus induce banks to offer loans at lower interest rates in order to attract borrowers for the additional funds. So causation runs from the increase in Fed–created base money to reduced interest rates. Lower interest rates are just one of the distortions caused by the Fed’s unrestrained power to create money ex nihilo.

Sraffa: I knew that.

Mises: And in a barter economy, can the central bank set the interest rate by printing apples? You can’t print apples, Piero.

Srafffa: I knew that. But I guess it slipped my mind at the time.

Mises: And even in a money economy, the question is not, “What interest rate should the Central Bank set?”, but instead…

Sraffa:…How much money should the Central Bank print?

Mises: And the answer is?

Sraffa: None, not a penny, zilch.

Mises: And the interest rate will then be….

Sraffa: The natural rate, meaning the one that happens when the central bank gets out of the way and doesn’t print money.

Mises: And your apples and oranges story is…

Sraffa: Irrelevant. It’s comparing apples and oranges, heh heh.

DA: I bet Mises never said such a thing, or at best wrote it in some obscure German pamphlet.

Mises: No, I wrote it in Human Action, Chapter 31, section 5:

If a bank does not expand circulation credit by issuing additional fiduciary media (either in the form of banknotes or in the form of deposit currency), it cannot generate a boom even if it lowers the amount of interest charged below the rate of the unhampered market. It merely makes a gift to debtors. The inference to be drawn from the monetary cycle theory by those who want to prevent the recurrence of booms and of the subsequent depressions is not that the banks should not lower the rate of interest, but that they should abstain from credit expansion. Of course, credit expansion necessarily entails a temporary downward movement of market interest rates.

Sraffa: Now you mention it, I see you wrote in that footnote that even if the Central bank lowers the rates below the natural rate, no harm is done:

If a bank does not expand circulation credit by issuing additional fiduciary media (either in the form of banknotes or in the form of deposit currency), it cannot generate a boom even if it lowers the amount of interest charged below the rate of the unhampered market.

DA: So if they give away apples or something, as long as they do not print apples, there is no problem.

SD: By the way, Guillermo Sanchez wrote about that Mises quote long ago, and in much more detail.

3. His Second Mistake. Hayek’s Final Response Is Right on the Money.

SD: But there are more reasons Bob’s story, which is really Sraffa’s critique, is flawed from the get go. When you go into a bank, what do you see?

DA: Huge baskets of apples and oranges, because people go to a bank to borrow apples and oranges. Just kidding, banks lend money.

Sraffa: I knew that.

SD: So even if we accept the whole many-rates-of-interest thing, which rate of interest is the one relevant to banks that lend, you know, money? The apples one?

Sraffa: But Dave, I made it clear I was talking about a barter economy. In that barter economy, there are indeed big baskets full of apples and oranges in their vault.

SD: And if someone comes in to borrow apples and repay in apples, what interest rate should they use?

Sraffa: The apples one. And if he wants to repay in oranges, the oranges one. Oh. I see where you are going with this. So that’s what Hayek meant when he said there would be many natural rates in a barter economy. And to think I mocked him for that. Makes me want to roll around in my grave.

4. Third Mistake. The Concept of Originary Interest Clears Up All Confusion, Guys.

SD: Now there is an even deeper mistake in that whole apples and oranges story, namely going with Hayek and then saying that all Austrians are thus disproven. Hayek is not all of Austrian Economics. Piero, you know Mises had a whole different take on interest.

Sraffa: Yes, he introduced the concept of originary interest.

DA: What’s that, Dave?

SD: Mises explained that there is something called the rate of Originary Interest. Basically, it’s how much people want to be paid if they have to defer their enjoyment. Thus, if Mr Moneybags has $100, and Smith wants to borrow it for a year, that means Moneybags won’t be able to spend it today, obviously. Why will he agree to wait, then? If Smith pays him enough interest, say $5, then that $5 will convince Moneybags that it’s worth the wait, and he will give $100 to Smith today in order to have $105 tomorrow.

DA: Exactly the opposite of Popeye’s friend, Wimpy the hamburger guy. Wimpy is willing to pay more next week in order to enjoy his hamburger today. Moneybags is willing to defer eating his hamburger today to have a bigger one next week.

SD: Which is what Mises meant when he said that $5 was the rate of originary interest as far as Moneybags is concerned.

Sraffa: And this is relevant to my apples and oranges story how?

SD: Let’s have a closer look at those interest rates in your story. One apple today gets you two apples next year. So the rate of originary interest is 100%.

Sraffa: With you so far.

SD: Now if one orange today gets you a half an orange next year, does that mean originary interest is minus 50%?

Sraffa: Of course not. That would be saying that a person is only willing to defer his enjoyment if he will get even less enjoyment in the future. Nobody is that crazy.

DA: Then where did that minus 50% number come from, if not from originary interest?

SD: Obviously, minus 50% is not a rate of interest. It has nothing to do with interest. It’s an adjustment for “inflation”. Since the price of oranges is known to be four times that of an apple in the future, and the payment will be in the future, when that orange is worth four apples, then a 100% interest fee will be half an orange, which is exactly two apples. The rate of originary interest is 100% for both apples and for oranges.

Bob: But Dave, when a bank anticipates inflation, and they charge you more because of that, they call that extra charge interest. So an adjustment for inflation is interest, too.

SD: Let us not confuse things with mere semantics. The bank calls the adjustment for inflation by the name of interest. So what? Is it originary interest? What has that to do with what we are talking about? How does what the bank calls something refute Austrian Economics?

5. Huge Fourth Mistake. Adjustment for Inflation is Not Interest.

Sraffa: You know, once we realize that in Mises’s definition of originary interest, that minus 50% is not originary interest at all, then why not go all the way? Why not say that no matter how you define interest, an adjustment for inflation is a stupid thing to include in the definition of interest? And that if a bank introduces an adjustment for inflation, that does not refute Austrian Economics. So that my whole story is pointless.

DA: People are used to thinking that whatever money you collect in the future for handing over a good today is principal plus interest. So if next year all you get is half an orange for your original orange, that must be a negative interest rate. What you’re saying, Dave is that it’s not interest at all, it’s adjusting for inflation.

Hazlitt pointed out that Keynes mistakenly thought [in chapter 17] that whatever extra you have to pay because there is risk involved is also interest. Again, it’s not interest, it’s a risk premium.
Mises’s basic insight is that interest is what you have to pay because the other guy will have to wait, and only that is interest. Everything else is, well, everything else. He first published his insight in 1949, and it has still not sunk in yet in some circles.

SD: I knew that.

6. Reisman in His Classic Work “Capitalism” Explains Why the Futures Market has Nothing to do With Interest.

It’s in Chapter2, Section 7.

What have you to say, Prof George Reisman?

GR: The principle of time preference is not contradicted
by the fact that the prices of commodity futures are usually
higher than the prices of the corresponding “cash” commodities
available for immediate delivery. For example, in the month of
September, the price of corn for delivery in December is always
higher than the price of corn for immediate delivery,
while the price of corn for delivery in the following March is still higher

than that for delivery in December. Such a price structure does
not mean that, other things being equal, people prefer
commodities in the future to commodities in the present.

DA: Why not?

GR: On the contrary, month by month they are consuming the stocks
of commodities, demonstrating that they prefer present
consumption to future consumption. 

DA: So why are futures more expensive?

GR: The ascending price
structure of commodity futures is the reflection of the
prospectively increasing scarcity of commodities between
harvests, and/or of the need to compensate those who store
supplies of commodities for future sale for the costs they incur
in so doing and for tying up their capital in such investments.
In the absence of such an ascending price structure, time
preference would result in the unduly rapid consumption of
stocks of commodities.

SD: In other words you’re paying a storage fee, which I hope even Sraffa understands is not interest, or you’re paying more because the supply is dwindling and prices are going up, exactly what happened to the oranges in the fable.
And the good professor is making it clear that paying more because of those things has nothing to do with time preference, obviously. And paying because of time preference is what interest is all about, as Mises explained in section 4 above, where we talked about originary interest.

For more deep stuff about time preference that is related to this article, see https://smilingdavesblog.wordpress.com/2014/12/25/deep-stuff-about-time-preference/.


Get every new post delivered to your Inbox.

Join 33 other followers