I see. So the basic value is stability in determining whether government intervention in a market is desirable.

However what I am trying to find out, is the criterion for government intervention. ‘Stable’ by itself is an arbitrary term, but when I ask what it is, your answer only takes me further back to needing to know what you mean by:
‘Internal’/’external’
‘Large scale’/’small scale’
‘Predictable’/’unpredictable’.

Let’s take the market for potatoes. Is super-phosphate an internal or external factor? Water in a drought? How about fuel? Truck tyres?

How would I, in advance of planting my potatoes, know whether you consider which variable affecting the market to be large as opposed to small scale? What if someone else thought differently? How could this be anything other than depending entirely on arbitrary subjective opinion, and therefore inimical to science?

As for predictability, all schools of economics - but one - have failed abysmally to predict the economic crisis. The Fed was saying as recently as a year ago that everything is fine. The Keynesians, the monetarists, institutionalists, the neo-classicals: they were the cheerleaders for this debacle: what credibility do they have?

The Austrian school is the one exception. It predicted this particular crisis *years* in advance, as well as the Great Depression years in advance: http://mises.org/story/3128 . Predicting the past is easy: did George Cooper predict this crisis five years in advance? In fact Ludwig von Mises predicted exactly this consequence from exactly this cause 97 years ago.

Earlier you said that not central bank policies of easy money but
“the internal operation of credit markets … has caused the entire bubble and economic crisis.”

So according to this theory, the supply of money is a factor external to the operation of credit markets? Surely not?

The only difference between your proposal, and the cheap-money policies behind Freddie Mac and Fannie Mae, is that they only aspired to *lower* the rate of interest: you aspire to abolish it for loans unbacked by money in specie for ‘public’ ie governmental purposes

To quote Mises: ‘Stability… is an empty and contradictory notion. The urge toward action, i.e. improvement of the conditions of life, is inborn in man. Man himself changes from moment to moment and his valuations, volitions, and acts change with him. In the realm of action there is nothing perpetual but change. There is no fixed point in this ceaseless fluctuation… It is vain to sever valuation and action from man’s unsteadiness and the changeability of his conduct and to argue as if there were in the universe eternal values independent of human value judgments and suitable to serve as a yardstick for the appraisal of real action.’

Even where the same prices are paid for the same quantity of potatoes, still each price datum stands for a different quality of potatoes, and a different valuation and value scale of the specific parties. “It would be manifestly wrong to let the prices of various commodities enter into the computation without taking into account the different roles they play in the total system of the individuals’ households. But the establishment of such proper weighting is again arbitrary.” The computation of averages would again yield different results, depending on the statistical method chosen. This in turn must be arbitrary.

Again, suppose we lived in a world that was unchangeable, everyone repeated the same actions, and one individual or group change here always had an equal and opposite individual or group change there, and so we lived in a world of stability. Then ‘the idea that in such a world money’s purchasing power could change is contradictory’.

‘In the actual world of change there are no fixed points, dimensions, or relations which could serve as a standard…. Where there is action, there is change.’

No measurement of purchasing power, and therefore of prices is or can be stable.

And there are more reasons I can give why the notion of stability of prices as a criterion for government intervention is neither morally nor intellectually defensible.

Wing Ah Ling

I did not say "So the basic value is stability in determining whether government intervention in a market is desirable" nor many of the other things you claim I say.

Let us say we have a market in potatoes where when we increase the price the supply decreases and when we decrease the price the supply increases. Let us not worry why this might happen - just assume it does.

The price of potatoes is at x. For some external reason the supply decreases by a small amount. A small decrease in supply in this market causes the price to increase. This in turn causes the supply to decrease. This in turn causes ..... How far the price will go up is unpredictable. Probably until an external event causes the supply to go up a little instead of going down. The same process is now repeated and we do not know how far it goes down. The market does not find a stable state because its internal mechanisms work to create instability. Small external events cause large changes from internal positive feedback.

We know when we have such markets by observing market behaviour. If we find that the market prices vary randomly and cannot be explained by external events then the market is unstable. We then look for the positive feedback within the market. We have two choices. We can try to control it by some from of regulator or we can eliminate the cause of the feedback. For money markets the method used by central banks is regulation but as the Austrians observe that makes it worse.

I make the claim that the cause of instability in the money market is the way we create money by creating debt that requires interest before the money represents an asset.
I claim we can fix this problem by creating zero interest money that must create a productive asset before it earns interest.

Contact me off line on skype at cscoxk or by email at cscoxk at gmail dot com.