Ludwig von Mises on the Economics of Human Action

Ludwig von Mises

Ludwig von Mises (Photo credit:

Let’s see if Ludwig von Mises can help us clarify some common issues that confuse people who are not very literate in matters of economic and finance:

English: Cover of the scholar's edition of Hum...

English: Cover of the scholar’s edition of Human Action by Ludwig von Mises (Photo credit: Wikipedia)

“In the book Human Action, I present a new approach to understanding
economic activity in terms of actual action. Selling and buying, production
and extortion and war, borrowing and lending- these are all just human
actions.”

“When most people use terms like speculation, inflation, and deflation,
they speak of these matters like they speak of the weather- something that
just happens to them. That is absolutely inaccurate. Speculating is
something that people do. The inflating and deflating of credit markets
involves many instances of human action.”
“These action are measurable in terms of things like prices. Do we say that
the temperature reading on a thermometer has caused the weather to become
hot or cold? No, we recognize that the thermometer simply measures existing
developments. Likewise, there are many measures, such as prices, which can
be used to measure the human actions of inflating or deflating a credit
market.”

“When people borrow, that is inflationary. If someone starts a business on
borrowed money (or with any other borrowed assets such as borrowed land or
borrowed equipment), then the entrepeneur owes interest on the amount they
borrowed. Of course, that promise of future transaction does not increase
the amount of currency in circulation, but that legal promise to pay a debt
in the future does increase the total amount of outstanding credit (as in
A/R or Accounts Receivable). That is inflationary.”

English: Cover of 2010 print An Introduction t...

English: Cover of 2010 print An Introduction to Austrian Economics by Thomas C. Taylor (Photo credit: Wikipedia)

“Likewise, when a government borrows money, they also promise future payments of interest. Governments sometimes fail to make the payments they promise, but governments are typically considered better credit risks than most private businesses because governments have the power to impose taxes or even invade other territories in order to obtain the assets to cover their past promises. Government promises for future action typically do correspond to actual increases in the amount of currency in circulation, but not always. Further, when governments approve a budget of future spending, that is not a promise to pay (as in the case of an actual government bond), but just the authorization of a possible future activity.”

“So what actions correspond to deflation? The deflating of a credit market (a speculative bubble of credit) can happen in a few ways. When the US Confederacy ceased to function, what happened to all of the promises of future activity that they had made? Sensible people simply recognized that the promises of a defunct government are quite worthless.

Deflation is a correction of the accounting of the valuation of the financial claim (the asset) so as to reflect a revised expectation of a lower repayment amount (or none at all). Consider that when a debtor dies insolvent, there is no recourse for the creditors. They know that they will never be repaid the debts they claim. They revise their accounting to reflect a contraction in their Accounts Receivable. They deflate or reduce their own credit accountings.

A credit bubble is contracted when the accountants record the junk debt as being junk debt. This revision in the accounting is certainly not what makes the debt in to junk, but is just the re-assessment or re-appraisal of a newly estimated realistic market value of the old debt (the Accounts Receivable). So, the human actions that correspond to the deflating of credit markets include foreclosures and bankruptcies as well as the discounted settlements on debt, such as the case in Chapter 13 bankruptcies.”

English: Jean-Paul Rodrigue's stages (or phase...

“Speculative bubbles always deflate eventually. Many speculators do not know they are basically gambling. The mere mention of possible risk inherent in their speculating may result in hysterical ridicule of the basic ideas of Austrian Economics. Their speculation tends to be irrational, panicked, and greedy (based on something other than personal productivity, but just based on the idea of future resale of their so-called store of value).”
“A business owner who RATIONALLY speculates about possible future profit by forging silver in to silverware (to sell rather than for their own use) knows in advance that there is risk in their enterprise (and may even
calculate specific risk factors). We could still call their activity speculation, but it is not pure speculation. It is productivity (forming the silver in to silverware) along with speculation. In contrast, if a retailer simply buys some existing silverware from a manufacturer or wholesaler for later possible resale, that is closer to pure speculation.”
That is from Chapter 9: “Why All Libertarians are silly, naive, terrified geniuses”

(Unless I just made all of that up).
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Mises' Human Action

 

 

English: Cover of the scholar's edition of Hum...

English: Cover of the scholar’s edition of Human Action by Ludwig von Mises (Photo credit: Wikipedia)

 

 

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