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