Explain the basics of the Austrian theory of the business cycle. What is the difference, in terms of consequences, between lower interest rates that result from the saving choices of individuals, and lower interest rates that are achieved artificially, by a government-established central bank?
Business Cycles go up and down and back up again and back down again. This cycle is repetitive. The Austrian theory of a Business Cycle includes interest rates, consumption, production and savings from the latter two. This theory was created by Ludwig von Mises.
The first state of the Business Cycle is that the Central Bank gets money by purchasing government securities, and Business starts to rise. The second state is that consumer prices and interest rates start rising. The third state is that capital goods starts to fall more than consumer goods and recession begins. The fourth state is that recession ends and business returns to normal. This is what happens when the central banks i.e. the government is involved.
If we had no central bank or government involvement, then the cycles would be free. There would be no inflation of prices. Then there will be stable interest rates, high savings rates, and economic growth. Therefore the free market is not responsible for how businesses tend to rise and fall. The government and it’s policies are responsible for this.
There is a difference between saving choices and lowered interest rates. The first example I will include will be for the saving choices. Imagine if you are in the wilderness. You live far away from the city and you have no stores near you. You need to eat in order to survive. Lets say you eat berries. If you were to eat all of the berries from a bush, you won’t be hungry anymore. But that means you had eaten all the berries and there might not be anymore berries. What you should do is to eat less but save more, while planning to increase your production of berries. That way you will have more in the future to eat or trade. You need to consume less and save more or grow more, in order to sustain a free cycle of consumption and production. This example can also include animals, but I will not write on that topic.
If you were to sell the berries on the market, you would have to first have to find out “How much do berries cost?” Say that the berries for a seller cost $2.00. Now you would open a business that sold berries. This time you would lower the price to either $1.50, $1.00. Many more variables such as production costs, savings and future production are needed to establish a free market price for berries.
This is different when it comes to government involvement. It’s different because people keep spending more money than they make. And if that happens the people will go bankrupt and will have to shut down their businesses. Not only that, but people can raise prices for no reason. You should not raise prices unless there is a good reason. Since that happens people are consuming more, not focusing on the future, and not paying attention. People might spend money on things they don’t really need at the moment. Wait until you get the income and wait for the right time. You need to have a plan for the future or else you will have a failed business. If you really need to improve your business, you have to stick to a plan taking into account that businesses must remain flexible to market fluctuations. Then you have to consume less and save more or produce more depending on your business.
The consequences that result from saving choices of individuals would be lower inflation, interest rates, and price stability, resulting in sustainable economic growth. When the government is involved the consequences are the opposite, inflation and economic recession.
What have been some of the problems with the federal prohibition on certain drugs?
Today you can obviously know about drugs, and know that there are laws in certain countries or states about them. Many drugs can be legal but some may be illegal. I have not taken drugs, yet. There is a problem when the Government is involved with illegal drugs. They try prohibiting drugs or banning them. Even when they do that the people still will use them or sell them. No matter what you do you can’t stop these people, because they won’t care. They get addicted or rich depending on what you do with drugs. Question is why prohibit drugs? Because it’s dangerous, people get addicted and over due it. They can have medical problems, or worse. Not only that but people around my age, high school teens who are not home schooled take illegal drugs. You can get arrested and your own house taken away from you.
This was my essay for Government 1B Lesson 40 I hope you enjoyed it.