Important economics stuff

[miko2d]

I'd hate that important information that took me time to post to be buried at the bottom of a long thread, so I am reposting it here. Please take it seriously.


Rude: You're a little too smart for me Miko....just telling me that capital invested in VIABLE ventures reaps success is far beyond me. We invest in only viable venture or we do not invest, as does everyone else I know.

 Not smart, just educated in some matters to which I am trying top attract your interest. It requires some explanation and I will try to give a brief overview.
 You are very wrong in your statement and it's a common mistake. Please read the folowing carefully, it's real science.

Thrawn: miko said, "How come all the american firms... I would like to hear it.

 Here it comes:

Some ventures always fall because all investment is in future production, thus speculative. But in general, some entrepreneurs make better decisions, some worse and economy works. The way they decide which ventures to invest in is market signals - prices, etc., including the most important - interest rate. Free market interest rate is formed by a very complex interplay of real factors. Mostly it indicates availability of real resources for creating the projects. Enterprises are not built of paper money but of real goods - labor, materials, etc. that must be available to be purchased for that money.
 If a venture is expected to bring 5% profit, you would not borrow capital at 6% to invest into it but you would borrow and invest if the interest rate dropped to 4%.
 If the interest rate drops, a lot of projects that were unprofitable will become profitable and will be initiated. A very important point is that the longer-term projects are more sensitive to interest-rate fluctuiations, just like long-term bonds. The drop in iterest rates will cause increase of investment in long-term projects like mining, heavy industry, etc. much more than into short-term ventures.

 So what happens when the real resources availability does not change but the interest rates are manipulated down by government credit expansion? All entrepreneurs are fooled into opening projects, especially long-term ones and there will not be enough resources to finish them or manipylate them profitably. As they near completion, they will compete for scarce resources, so they will borrow money to pay for them - raising interest rates, raising prices or both! No matter what happens, some of the projects will necessarily not reach profitability, go bust and the resources already invested in them will be wasted.
 The artificially-induced boom and raise in production and employment will be followed by the inevitable bust and drop in production and employment while the capital misallocations are corrected and failed businesses are liquidated.  We end up worse than if we had natural rate of growth.

 Here is an example: from the 90s  Firms fooled by low interest invest in software business, because it seems that population is consuming less and saving/investing more - say in education. They intend to build offices and hire programmers at $50K a pop. They do build offices, overpaying for the limber and steel, which can fortunately be imported, but when it comes to hiring programmers, they find out that people were not investing in programming education! So they borrow more money and drive the programmers salaries into $200! They get a lot of crappy jhalf-baked programmers and they cannot possibly be profitable with such high expenses. You see - teh dollars printed by Fed and multiplied by fractional reserve bank system were not backed by real investable stuff! So the businesses fold, not only the start-ups but the old good ones, like Sun and Lucent who lost good programers to the newcomers and had to pay triple for the remaining ones.
 They have to scramble for indian programmers and imports and once they set up outsorcing, it will be difficult to get those jobs back. They already went to all the expence to set up the subcidiaries, so thr US programmer's salary will have to drop a lot lower than it would have been without artificial boom to make them forego that investment and bring the jobs back in.
 So you end up with lots of resources inverted into offices wasted, lots of "dark" fiber cable wasted, lots of productive connections scrambled, lots of people with expensive houses bought at the peak salaries and no jobs to pay the mortgage, etc. Same happens in other industries.

 The state intervention makes all entrepreneurs make bad choices. Some will just overpay and not go bust. Most will. Some who did not intend borrow to expand will still lose because of competition for resources - they will have to borrow to afford what resources they were using before.

 That is why I do not rejoice when I hear that Fed caused a drop in rates and production increased. I know that some of that production is bound to fail. Not every growth is good - only the sustainable growth where resources are not misallocated from the start.
 Business cycle is not a feature of capitalism, but of government credit expansions. There were no general boom/bust cycles before government legalised fractional reserve monetary system and enabled credit expansion to occur in the early 1800s.

 miko

[miko2d]

One addition. A normal economy would bo boom/bust pretty quick but US economy is in a special position. The resources not saved/invested to back up the created money can - and were provided by foreighners who accepted the dollars in exchange for goods/labor.

 Remember they were saying in the 90s that business cycle is gone and recovery would never stop beause of new tecnology, computerised inventory management and foreugn competitions? All lies. Other countries not lucky to have their currencies to be world reserve currency gad several boom/bust cycles in a row while we had that uninterrupted growth, followed by very mild recession that seems to be over.

 The world just got rid of communism in teh 90s, a lot of economies became open to the dollar - chinese, russians, etc. they went full-bore to accumulate dollar reserves in echange for resources they kept sending us, the fools - as if they can afford to throw away resources in exchange for waults full of paper. Our trade deficit was quite big and getting bigger while blind bats in Fed explained how the economic rules no longer apply in the "new economy".

 Maybe not to US. For a while. We are still beneficiary of the foreign real funding fueling our growth, howerer fiercely Bush is trying to commit suicide by cutting it off with tariffs and drop the value of dollar, making it less attractive to outsiders.

 He may succeede one day...

 miko

[Ripsnort]

Miko, do you realize that the asian countries  have artificially lessened the value of their currency to stimulate economies?  A big bank in Japan just slammed the hammar down on this recently.

[miko2d]

Sure. I even mentioned it a few times here.

Keynes said collecting taxes or printing money (which is basically the same) and paying people to dig out the holes and filling them in would stimulate the economy. Neo-keinsians say that paying welfare to people for doing nothing so that people can spend money stimulates the economy.

 That's a common economic fallacy sucessfully refuted even by David Ricardo two hundred years ago. Would your family benefitted if your wife was working for a neighbour few hours a day in return for nothing but thanks instead of apllying herself at home? Same with a country.

 Asian governments confiscate value from their population through taxes/inflation to pay their workers to produce stuff for US in exhange for paper they stuff into vaults. At least they mainain skills and work ethics while ours deteriorate.

 If they stopped doing that, the workers would have lost jobs, driven salaries down, made it profitable to hire them in areas where there is domestic demand - whether consumption or production of capital, which would caused the prices of products to drop more than the salaries so everybody's real wages would have increased. Temporaty pain due to reallocation of previous distortions in capital distribution would have yielded much greater wealth once the transition was complete.

 Which is no surprise from the common sense standpont. When 10% of your popuation produce stuff to give away to foreigners, you have that much less to invest/consume. When all 100% are working for the internal market, you have increase of investment/consumption with the same level of people consuming. The level of live must raise accordingly or growth or both.

 It only makes sense to import what you cannot produce as cheap and ot only makes sense to export enough to pay for the imports.

 Of course you have the obsolete mercanilist theories of pre-classical 17th century economists that claimed that export of goods and import of gold is beneftting the country... somehow.

 And you have labor/industry interest groups that pressure government to subcidise exports with taxes inflation, but any such and other subcidies help a small group while hurting the rest more. Nothing new, just politics.

 miko

[Thrawn]

The thing that I have seen answered satisfactorial is why other countries put up with this system of tribute.  Are there no economists in other countries that see this flaw in "the obsolete mercanilist theories of pre-classical 17th century"?

Although there seem to be some signals that not every country is happy with it, such as Russia and the members of OPEC.

[miko2d]

Thrawn: The thing that I have seen answered satisfactorial is why other countries put up with this system of tribute.  Are there no economists in other countries that see this flaw in "the obsolete mercanilist theories of pre-classical 17th century"?

 It's a bit more complex than that. The mercantilist theories were largely dispelled by the early-mid 19th century and the free market prospered in few countries that liberalised trade and production - mostly UK and US.

 One of the most complex issues though was the role of money and it was not solved satisfactory untill late 19th century. So while everybody believed in the free market, there was no great opposition of the government intervention into the monetary system and great underappreciation of the ruin it will bring to the free market.

 Then in the 19th century the new schools of socialist economists arose - Marx, etc. who espused nonsense but did not affect anyone since the real-world entrepreneurs in free economies could notc are less and did not rely on what economists thought. That's the beauty of the free market - it's operation does not rely on the actors' knowlege of the right theory, only on them having freedom of action to serve their customers!

 So when in the beginning of 20th century the government monetary interventions resulted in a really bad worldwide crisis, it was attibuted by most not to the real cause - government monetary interventions - but to some inherent flaw of the free market. Also the socialist Germany, Italy and communist Russia seemed to be making great economic progress...
 A schools of socialist economics popped up like mushrooms after the rain, especially Keynsians, who espoused government intervention and sympathysed with the european dictatorships, at least where economics was concerned.

 Those who were more firmly based on the classical economy - austrian school, supply-siders, monetarists - were laughed at as relics of the past, protrayed hearless mouthpieces of teh exploiter class, etc. They stayed alive but did not have much popularity. Especially the austrian school which kills the chances of it's own employment by claiming that economic advice of policy and improvement on teh free market is not possible at all.

 So you ended up with academic elite in US/UK being filled with socialist and marxist economists that did not even know or would not admit they were really a throwback to the mercantilists.
 When international economic institutions were formed, those people ended up advising and staffing them - IMF, WTO, World Bank, etc.

 The remaints of free-market economy were still so productive in US that the entrepreuneurs contunued bringing growth, development and wealth to the western economies - not because of but despite the prevailing economics teachings. UK of course was afflicted with socialism much worse, suffered a prolonged decline and did not recover from it untill the Thatcher's government.

 Now is the tricky part. When the undeveloped countries and the countries US defeated in WWII desided to use our example and develop the market economy, they did not have any entrepreuneurs or free-market experience, not economists. Japain, India, african and asian countries, etc.

 So they sent their students to learn economy from US universities and listened to the US-controlled institutions which were staffed by people teaching and acting contrary to what the businesses in US were actually doing!

 The dogma they learned was the following: raise taxes, raise tariffs, promote ineficcien local indstries instead of becoming a part in the world division of labor, use government money to open investment projects, inflate, establish wage and price controls - all things detrimental to the development and contrary to what we were actually doing.
 What they needed was establishing strict property rights, enforcing the contracts and getting the heck out of the way of wealth explosion.

 Some peoples were lucky - Pinochet got a Chicago school monetarist as an adviser and now Chilie is the most prosperous economy on in South America. Ludwig Ernhart in Germany scrapped US-advised controls of the economy in 47 and overningth the german economy turned from death and devastation and using cigarettes and vodka for money to the "german miracle". Others were not so happy.

 That is why you see the countries under the advice of US-trained economists conducting policies directly opposite to what US is doing or especially was doing when it developing at it's best pace. Those poor suckers really do not know any better.
 And of course they have special interest groups of exporters and labor that do not fail to point out how many jobs would be lost if export was curtailed, forgetting to explain that more jobs are lost/not created because of the measures required to keep them exporting.

 If you go to most colleges and listen to their economics and sociology professors, you would think that marxism and socialism are the best things since sliced bread and that capitalism is totally evil. In fact after the downfall of the USSR and conversion of china, amercan academia is the last stronghold of marxism left in the world. Unfortunataly it is growing and gaining influence.

 miko

[Thrawn]

Thank you miko.

I've been rethinking this statement, "Of course you have the obsolete mercanilist theories of pre-classical 17th century economists that claimed that export of goods and import of gold is beneftting the country... somehow.".

I don't thnk I'm understand you because I think that export of goods and import of gold specifically does benefit a country.

An example.  Canada has alot of trees and can harvest much more than it can use for domestic consumption, at relatively low cost.  So Canadians invest resources into harvesting these trees.  It sells these trees to Britian in exchange for gold.  Now the gold itself has little practical uses, it's soft so you can shape jewelary out of it, but you can't build a house out of it or eat it.  But it has value as a purchasing medium, because everyone recognises it's purchasing power.  The Canadians that invested in lumbar harvesting have gotten a return on thier investment which was greater than thier investment.  Doesn't that benefit the country?

[Stringer]

Cut and paste from an service I subscribe to that delivers daily emails....

Dynamic Market Theory

The Daily Reckoning

Paris, France

Thursday, October 16, 2003

                ---------------------

*** America on the Third World 'Watch List'... ruble rises
against dollar...

*** America's peso policy... Dow ends down after bullish
trading day... earnings surprises...

*** Dumb money in the driver's seat... insiders getting
out... insulting potatodom... and more!

"It feels strange to be quoting [NY Times economist] Paul
Krugman," said colleague Dan Denning last night. "But his
analysis is pretty good, even if his solutions are
foolish."

"There one thing I can't help noticing," wrote the foolish
economist earlier this week. "A Third World country with
America's recent numbers - its huge budget and trade
deficits, its growing reliance on short-term borrowing from
the rest of the world - would definitely be on the watch
list."

Normally on the 'watch list' are Third World countries with
big financial troubles. Argentina, Brazil, Indonesia,
Malaysia - all have made the watch list. All have
subsequently suffered banking and currency crises, or
hyperinflation, or depression or some hellish combination
of economic fire and brimstone.

But now, "the U.S. budget deficit is bigger relative to the
economy than Argentina's in 2000," says Krugman, "and the
U.S. trade deficit is bigger relative to the economy than
Indonesia's in 1996.

He continues: "The brokerage firm Lehman Brothers has a
mathematical model known as Damocles that it calls 'an
early warning system to identify the likelihood of
countries entering into financial crises.' Developing
nations are looking pretty safe these days. But applying
the same model to some advanced countries 'would set
Damocles' alarm bells ringing... most conspicuous of these
threats is the United States.'"

Welcome to the pampas, dear reader.

George W. Bush may not feel like the president of a
backward, Third World nation when he visits Asia this
weekend. Americans do not go around barefoot, nor do they
live in horrible scrap-cardboard shanties. Instead, they
live in $200,000 suburban shebangs and borrow against them
in order to buy $100 Nikes imported from Asia.

But selling Nikes to Americans has left the Orientals with
$1.7 trillion in U.S. dollar-denominated Treasury bonds. It
also leaves them with a strong desire to keep their
currencies low compared to the dollar in order to keep the
cash flowing their way. To this end, the Chinese are
unlikely to revalue their yuan upwards in the near
term... and the Japanese, with no further rates to cut, have
taken to printing money (the money supply in Japan is now
growing at a 21% annual rate).

The U.S. Treasury has not admitted it, but the strong
dollar policy of the Clinton Administration has been
replaced by a third-worldish peso policy. And Fed governors
have announced their intention to drop dollar bills from
helicopters if that is what it takes to weaken it.

The sluggish chocolate-making countries, too, are eager to
keep their currency from rising. Close to recession, Europe
can ill afford a rising currency.

And yesterday's news brought word that Russia's ruble had
risen to a 22-month high against the dollar after Moody's
upgraded Russian bonds to investment status. The
authorities were not happy, blaming the rise of the ruble
on 'speculators.'

How all this will end up, we don't know.

Consumer prices may rise... or they may not. China can
produce new widgets and gee-gaws almost as fast as the rest
of the world can print and circulate paper currency.
Besides, demand for widgets and gee-gaws could decline
sharply when times get tough.

But while America, the Far East and Russia can print all
the paper currency they want, the supply of gold is limited
to what miners can pull out of the ground. It takes years
to bring a new mine into operation; during the 20-year bear
market in gold, few new ones were put into service. And
even now, after the price of gold has risen from a low of
$253 a few years ago to $373 today, miners are still
reluctant to invest in new production.

And while there may be only 370 dollars ready and willing
to purchase an ounce of gold today... .there will almost
certainly be more next year.

Our old friend Chris Wood guesses that the price of an
ounce of gold will reach $3,400 before this bull market is
over. That price would equal the peak at the last bull
market, adjusted for nominal increases in personal income.

[miko2d]

Thrawn, when I said "that claimed that export of goods and import of gold" where "gold" equivalent to "money" - that was exactly what I ment. Not money that they immediately used to buy needed goods. Just gold/money to hoard.

 Uneducated people and pre-classical economists did not understand the difference between money and wealth. That is understandable because for an individual the wealth is embodied in his money - but only inasmuch as the money represents claims for real goods - has purchasing power.

 People do not consume money. People consume real products and services. Also people specialise in production of only certain products or services based on their skills and beneficial local conditions. That is called division of labor which is true on any level - from a person to a family to a company to a country. People produce what they can produce most efficiently and trade for something that they cannot produce as efficiently, if at all. It started as barter and then money arose from the most marketable commodity, which usually happened to be gold or silver.

 Money is just a medium which facilitates exchange of goods. Trade is always in goods or claims for goods.
 You need real goods but some goods you cannot possibly produce due to natural conditions or can produce very inefficiently (oranges in Canada), so you would produce something else and trade for what you need. You benefit from imports - Florida oranges which you can get at almost the same price as people in Florida, jumbo airplanes that americans build and Canada does not. Many other things. So you would want to sell just enough of your product (lumber, etc) to cover your expenses. Why would you want to sell more?

 Countries, just like families benefit from imports. From getting stuff they need. Exports is just a way to afford imports. Why would you want to keep working if you did not need stuff?

 A country may sell stuff in exchange for some small reserve of foreign currency. A country may sell goods in exchange for money that is used to purchase wealth-producing capital or bonds of other countries. That gives you claim to revenue, expressed as money, of course.

 But selling goods in exchange for money that is taken out of circulation (by the state) is only good for maintaining employment in certain industries at the expence of other indistries and consumers which are taxed extra.

 And that is exactly what we are talking about. About dollars/gold that Canada receives for it's resources but does not use to purchase anything.

 Do Canadians have all their needs totally satisfied? Why not drop taxes and use all those dollars that canadian government stores in it's vaults every month to buy some good stuff in US. We have plenty to sell if you have dollars that burn your pocket. Of course if you do that - sell dollar in exchange for goods - the dollar exchange rate will drop and your wood will become more expensive to us and we will buy less of your wood and more domestic one. So you cannot use those dollars. Never ever. Because if you ever do and the dollar drops, the whole world will come to our doorstep with 35 trillion greenbacks to buy whatever they can. Do you think we have goods of value to back that money?

 The mercantilists believed that hoards of gold make their country wealthier, not understanding that if they tried to buy stuf with all that gold, there would not be stuff to buy and it would become worthless. Sounds absurd but it is really what they believed and what many people believe now.

 Spain imported a lot of gold from South America in a short period. The result was inflation and total destruction of the Spanish economy/society because of the fall in real production, transfer of wealth from some people to other, etc.

 When England killed mercantilist policies and allowed massive import of food/grain that could be produced cheaper in other countries, the numbers, productivity and output of it's population exploded. They were the most advanced society technologically and were selling mechinerly and advanced manufacture. Once they stopped bringing useless (above certain quantity needed for trade) gold and brought raw materials, food, etc., their population got freed from unproductive farming and switched to high-tech (for them) industries where they could earn much higher wages. With cheap food and cloth, they could lower nominal salaries of the workers without reducing their consumption, which made their goods even cheaper and more attractive to outsiders, etc. You have virtual circle here - trading goods for goods with gold/money as a lubricant, not a final goal.

 The wealth of the country is in its productive capital - physical and intellectual, in it's ability to produce a lot of goods for the consumption of its people.

 miko

[Thrawn]

I believe I understand what you are saying and am in agreement.  I think the fault lay in my assumtion that the country exchanging goods for money would then use the money to purchase foriegn goods that they can't produce effiiciently, instead of hoarding it.

I wonder then, why you think it would be better to have gold as the backer of a currency as apposed to, well nothing.  Lets take Canada as an example.

If I understand correctly, the Canadian dollar is back by our reserves of US dollars.  No we can't spend them because if we do the US dollar loses value.  Wouldn't the same thing happen with gold.  If we backed our Canadian dollar with gold, then spent the gold, wouldn't the value of gold drop as well?  

Perhaps the value of gold wouldn't drop as much if we sold some off as apposed to the drop in value of the US dollar.  Actually I think I just answered my own question.  It's not the imediate drop in value at the selling of in reserve that's the problem.  It's the continuous drop in value of the US dollar, as compared to the continuous stability of gold, if I understand correctly.

[miko2d]

Thrawn: I wonder then, why you think it would be better to have gold as the backer of a currency as apposed to, well nothing.

 Because gold cannot be produced at will while american dollar can. With gold or fixed amount of dollars, as dollars would leave US for Canada, the amount of dollars in US would fall and price of goods in dollars and wages inside US would drop, thus making US goods more attractive and inducing Canadians to spend those dollars rather than hoard them. At the same time canadian goods would become more expensive for americans (since a dollar would buy much more at home) and imports would drop. So imports would quickly come into balance with exports. Every country would buy what it needs and pay for it in full.

 As it is now, you accept the dollars, but we keep printing them and you keep storing them - thus the dollar does not rise and Canadian products do not become more expensive and imports do not decrese and come into balance with exports. Our businesses go out of business and you work for us. Of course US gets net benefit of free goods but it causes a lot of other non-economic problems for us. And it can stop and we are not in control of it. If the foreign countries suddenly decide to stop supporting dollars, we will lose a lot of our consumption goods and valuable materials on which the remains of our industry depend for operation - like oil, steel, lumber, etc. So we will have a huge crisis.
 Of course there is a question of outstanding foreign debt and dollar balances but we can always default on those - nobody is going to reposess US.

 US economists may teach other countries that exports are good but we are importing, not exporting and temporarely prospering.

If I understand correctly, the Canadian dollar is back by our reserves of US dollars.

 The other way around. US dollar is as high as it is because you keep buying it at fixed price in Canadian dollars and the Canadian dollars are backed by real stuff that can be and is bought - like lumber.

If we backed our Canadian dollar with gold, then spent the gold, wouldn't the value of gold drop as well?

 I am ot sure it's a good queston. You would back canadian dollar with gold in what way? If you spend gold, your dollar would lose value too but the purchasing power of gold and your dollar inside canada would increase - or rather prices would drop.

 US backed dollar with gold and then printed too many dollars. Gold got undervalued and started leaving the country, so Nixon defaulted and brike gold-dollar link in 1971. Dollar fell compared to gold.

 miko

[NUKE]

Not long after WWII the US became the richest country in the history of man and had more than 20% of ALL the gold EVER pulled from the earth in a storage 8000 feet below Manhattan. How does this help or hurt the dollar?

[miko2d]

NUKE: Not long after WWII the US became the richest country in the history of man and had more than 20% of ALL the gold EVER pulled from the earth in a storage 8000 feet below Manhattan. How does this help or hurt the dollar?

 The maximum gold reserve was 22,000 tonns. Recently it was about 8,500 tonns or about $100 billion at today's prices. It would be a kind of real marketable reserve to buy stuff for in case dollar goes into the crapper.
 Otherwise it has no direct bearing on dollar because dollar is not linked to gold or backed by gold - or anything else for that matter.

 There are reasons to believe that the reserve is not there anymore or not as great or not owned by US but stored for foreign central banks to create appearence of full vaults. The drop in gold price in 1997-2000 was caused by gold bullion banks borrowing gold from central banks at 1%, selling it and earning much more interest on money. Unfortunately the interest rates dropped while price of gold went up, so those banks cannot possibly buy the gold back and repay it. So some of that reserve may be not real gold but just IOUs that are constantly rolled over because if they ever submitted for payment they banks will ahve to default.
 In this respect the state may be in the position of the citizens that realised in 1914 and 1931 that currency backed by gold is not the same as actually owning that gold...

 Apparently 1,700 tonnes of U.S. Gold Reserves stored at West Point, N.Y., were reclassified in September 2000 from "Gold Bullion Reserve" to "Custodial Gold." Later all 7,700 tonnes of the U.S. gold reserves in Treasury Department depositories were reclassified as "Deep Storage Gold." If that means anything, I am not sure if that is a good development. "Custodial" is what you hold for others. "Storage" is now way as reassuring as US Reserve.


GScholz: Norway naturally get a lot of Dollars, in exchange for oil. However we don't just horde it like you say, we use most of it to invest in foreign industry...
So Miko, are we helping you here, or hurting you?

 If you are not accumulating currency reserves but balance your trade, good for you. Of course that also includes US treasury obligations. They are the same as dollars.

 If you were sending us free stuff, we would have been benefitting short term but creating unsustainable situation long term. Living without with 75% of consumption is not a problem. Losing 25% of consumption/raw materials all of a sudden and not having infrastructure to replace them would cause enormous problems for any country.

 Investing into wealth-producing resources is the only right way to save, short of accumulating ans storing commodities for future use - which is impractical.
 On the other hand, the world economy is distorted so much, you may still be screwed. Let's say you are invested into the Japanese auto industry which is only operating at current capacity because of Japain's government support of the dollar. If they stop that policy or if the dollar drops anyway, many of those car factories will have go bust.
 Once they go bust, the electricity demand may drop and revenue from japanese nuclear power plants may drop considerably, at least for a while.

 miko

[MrCoffee]

So how does the keynesian frame of thought view the idea of luxuries and extravagances? Heres is a tidbit from something I  found on that subject. Wonder what miko might have to say to further enlighten on the subject.

Mill takes it for granted that individuals act rationally in their pursuit of wealth and luxury and avoidance of labor, rather than in a disjointed or erratic way, but since he does not have a theory of consumption, he develops no explicit theory of rational economic choice. Such theories were developed only in the wake of the so-called neoclassical revolution, which linked choice (and price) of some object of consumption not to its total utility but to its marginal utility. For example, nothing could be more useful than water. But in much of the world water is plentiful enough that another glass more or less matters little to an agent. So water is cheap. Early “neoclassical" economists such as Jevons held that agents make consumption choices so as to maximize their own happiness (1871). This implies that they distribute their expenditures so that a dollar's worth of water or porridge or upholstery makes the same contribution to their happiness. The “marginal utility” of a dollar's worth of each good is the same.

[AKIron]

Originally posted by Ripsnort
Miko, do you realize that the asian countries  have artificially lessened the value of their currency to stimulate economies?  A big bank in Japan just slammed the hammar down on this recently.

This is what Reagan did in '86. He artifically devalued the dollar against the Yen in an attempt to reduce the trade imbalance. Went from around 250:1 to 100:1 in a matter of months.

I may be a little off on that. It may not have dropped below 140 or so in that quick fall.