Believe it or not: Karl Marx is making a comeback

[boneyard bill]

Says who? "Probably" is not that convincing.

since the damage to the economy would simply make that many more people poor.

Why don't you trust individuals to spend money?

How could millions more people having more disposable income hurt the economy?

Income equality is achieved by making people more productive. That requires education and/or training.

Yeah, that's what we were promised. But the ones with the money broke that deal at least 30 years ago.

Sent from my SM-G900T using Tapatalk

People have to be produce in order to get paid. You cannot pay people more than they produce and remain in business. Even the government can't do that. The more skills people have the more productive they can be and the more they can get paid. It isn't any more complicated than that. Some people are not able to produce due to age or physical condition so we have enough problems just maintaining those people. That requires income redistribution, and it is bad for the economy. I'm not claiming that it's bad for the society. Of course we need to help people such people.

But redistributing money to people who are capable of producing or are producing is bad for the economy and also unnecessary. The idle rich do not have enough money to allow any serious redistribution, and taxing the rich merely reduces savings. The reduced savings reduces investment which means there is less machinery or equipment to allow a laborer to be more productive without acquiring extra skills.

Giving more money to the poor will not accomplish anything if there is no increased productivity behind the money. It just makes the money worth less. So printing the money won't work. But if you tax the productivity, you will get less productivity and hence will have less to redistribute.

 

[boneyard bill]

Since the huge increases in education that we have enacted over the last half century have produced less educated people than in the past, that would suggest that there is something seriously wrong with public education.

What huge increases in education over the last half century?

Maybe you're not aware that education funding in the US has been declining over the past 30+ years?

Your argument is damning of the privatization movement in American education. But you probably don't see it that way.

When I was in school in the '50's, there was no state income tax and no state aid. Education was funded with a local property tax only. The was federal aid for Home Economics and Industrial Arts but that was all. The state would provide aid for classroom construction because of the baby boom, but we had to increase our local taxes to qualify for it.

Taxes for education have only gone up since that time. In Ohio, where I grew up, they now have a state income tax, the state sales tax has gone up, and they have a state lottery. The lottery is earmarked for education. Property taxes are much higher and federal aid is available for far more programs. Show me any evidence that spending for education has declined nationwide. I simply don't believe it. It don't see where that it is possible.

 

[boneyard bill]

Simple Don writes:

Our mixed market capitalism doesn't set prices by barter based transactions governed by supply and demand. For the most part prices in our economy are administered prices set by the producer based on his average costs of production plus a portion of his fixed costs plus a profit sufficient to justify his investment.

This doesn't make any sense. It requires that the investor determine both the price of the product and the sales volume before he makes the investment. Of course, he has to guess at these things and if he guesses wrong, his business fails. It fails because of the market rejected the product at that price. You are looking at the successes and claiming administered prices but they succeeded because they guessed right not because they somehow control the market.

Contrary to the free market theory investors in the real economy don't need a market set by supply and demand price to decide to invest, they are aware of the pricing levels and are able to decide if the costs of additional production can be justified at that pricing level. That the investment decision making process would be harmed by the fluctuating prices set by supply and demand because of the uncertainty of them.

Since your analysis in the preceding paragraph is flawed this claim is also flawed. They do need a market price. You even admit that they are aware of the pricing levels? How are they aware? Only if there are already successful investors in that market. They can't be aware of pricing levels for new products and yet they do invest in new products. Again, you are just looking at the successes and are ignoring the role played by failures. Of course, they don't NEED a market price to decide to invest. They just need a market price that will allow them to succeed which isn't something that they necessarily know ahead of time.

Once again, the free market enthusiasts want to change the current economy to fit their ideology. They want to remove the government from its current role of policing the economy and stabilizing the economy. They believe that the self-regulating mechanism of supply and demand setting a price arrived at by barter like transactions are capable of taking over many if not most of the function that the government now does.

What stabilizing of the economy are you talking about? We haven't had a stable economy since the Kennedy assassination. Let's start with a little ECON 101, page 1. The law of supply and demand. You are claiming that it doesn't work. So please explain to me why they haven't changed the textbooks on that point.

The fact is that the law of supply and demand does work, and the subjective theory of value explains why it works. The fact is that when the government interferes with this through wage and price controls, it always produces mis-allocation of resources which then require rationing and, if continued long enough, will give rise to black markets. Now the interest rate is the price of money. If the government is going to control the price of money rather than letting the market do it, then you are going to get mis-allocation of resources just as with any other form of wage and price controls.

 

[SimpleDon]

And yet, even though rationing was in place well into the 1950s in Britain, that decade is fondly remembered as a boom time, with full employment and mass consumption of manufactured goods such as cars and consumer white goods. If that is what happens when a country is virtually bankrupt, then virtual bankruptcy doesn't seem like a particularly bad thing.

The myth that high levels of government debt are always bad is not supported by history; and yet it remains widely accepted by ideologues on the right.

If rationing worked so well, why did Britain give it up? Yes, there was a recovery from the war, and it was a recovery because Britain wasn't at all prosperous during the war and neither was the US. Britain had the third highest GDP at the end of WW II. Now she is behind at least Germany, France, Japan, and China and probably Brazil and India and maybe even some others.

Where, in all of history, has a government incurred high levels of indebtedness that did not require a severe austerity to recover from or simply a failure to recover at all? I think your last statement is utterly unsupportable by the evidence.

In fact, the exact opposite is true. There has never been a country who paid off their national debt by imposing austerity, to provide a surplus of tax revenues to pay off their debt. Countries can pay off accumulated debt by running a trade surplus, but not by running a surplus in tax revenues

Producing a surplus of tax revenue by decreasing spending or increasing taxes will always produce a serious recession or depression, reducing the surplus into a deficit. The only way that the surplus in taxes can be paid by the tax payer is by reducing their spending, by going into debt or by reducing their savings. This has to produce a recession or a depression.

As a dedicated believer in the quantity theory of money you should be at the front of the line shouting against austerity. A government budget surplus destroys money. Excessive taxes destroys money, it reduces the amount of money in the economy. Reduced government spending prevents that amount of money from being spent into existence reducing the amount of money in the economy. If you truly believe that increased amounts of money in the economy produces more economic activity and inflation then you must believe the other side of the coin, that decreasing the amount of money in the economy produces a decrease in economic activity and deflation.

We have gone through this many times before.

All seven times that the US has run a surplus to pay off a sizable part of our accumulated debt it has resulted in a depression or a serious recession. How could it not?

1. Money is debt.
2. Debt is money.
3. Debt creates money.
4. Paying off debt destroys money.
5. Destroying money in the economy results in reduced private spending, increased private debt and decreased private savings.
6. All of those are bad for the economy.
7. Those create recessions and depressions.
8. Recessions and depressions cause more government spending and lower tax revenues, increasing, not decreasing the national debt

So unless you can convince other countries to pay off your national debt, that is by your country running a trade surplus, it is impossible for a country to pay off their national debt.

This is simple, logical stuff. Where is it that you lose the thread? Which of those statements are wrong to you? What is your logic train and evidence that leads you to believe that reducing the amount of money in the economy is good? That an occasional depression is good for the nation? That in the middle of a depression is a really good time to institute austerity?

 

[SimpleDon]

Says who? "Probably" is not that convincing.



Why don't you trust individuals to spend money?

How could millions more people having more disposable income hurt the economy?

Income equality is achieved by making people more productive. That requires education and/or training.

Yeah, that's what we were promised. But the ones with the money broke that deal at least 30 years ago.

Sent from my SM-G900T using Tapatalk

People have to be produce in order to get paid. You cannot pay people more than they produce and remain in business. Even the government can't do that. The more skills people have the more productive they can be and the more they can get paid. It isn't any more complicated than that. Some people are not able to produce due to age or physical condition so we have enough problems just maintaining those people. That requires income redistribution, and it is bad for the economy. I'm not claiming that it's bad for the society. Of course we need to help people such people.

But redistributing money to people who are capable of producing or are producing is bad for the economy and also unnecessary. The idle rich do not have enough money to allow any serious redistribution, and taxing the rich merely reduces savings. The reduced savings reduces investment which means there is less machinery or equipment to allow a laborer to be more productive without acquiring extra skills.

Giving more money to the poor will not accomplish anything if there is no increased productivity behind the money. It just makes the money worth less. So printing the money won't work. But if you tax the productivity, you will get less productivity and hence will have less to redistribute.

I agree that we should be making people more productive. And we are, productivity has increased remarkably since the end of the second world war. The problem is that for the last thirty years or so all of the gains from increases in productivity have gone to profits, to rewarding capital. In the thirty years before that the rewards from increases in productivity were split 50/50 between labor through increased wages and capital through increased profits.

The reason for the change wasn't because our schools went to sh*t but because we made a conscious decision 30 years ago to redistribute the proceeds from increases in productivity and from innovation to rewarding capital and away from the labor share, wages. We did this to increase the amount of capital available for investment and to thereby increase the number of jobs. We did increase profits and the capital share of GDP and we did decrease the labor share of GDP. What it didn't do was to increase business investment or GDP or the number of jobs.

These fiscal policies work by intentionally increasing income and wealth inequality, by intentionally suppressing wages and increasing profits. These policies are commonly called supply side economics, neoliberal economics or Reaganomics. To simultaneously defend these policies and then to claim today that the lousy income and wealth inequality that resulted from those policies was caused by structural issues like the schools are sh*t is the height of hypocrisy.

And your personal dodge of these simple facts, that supply side economic policies are no longer having any impact on the economy because income tax rates have been raised and more regulations have been written may satisfy you, but they are not very convincing. Reaganomics lowered income tax rates from 70% down briefly to 27% in the Bush I administration. This was too low even for Bush and they were subsequently raised and then lowered in Bush II administration and a slight raise in Obama's administration to where they are now, about half of what they were in 1980. In addition there have been numerous added tax deductions added that reduce effective tax rates, especially on high incomes, lead by the zero taxes on corporate dividends which go primarily to the wealthy.

The fact that there have been more regulations written by both Democratic and Republican administration is telling us that reducing regulations is nothing but empty rhetoric and that the economy needs government regulation. Witness the pathetic attempts in this forum to list the massive number of job killing regulations that would support the rhetoric.

And your reasoning that supply side policies are no longer in force doesn't even cover the wage suppression included in them. Suppressing the unions, opening our market to imports from lower wage countries, capital flight, de-industrialization, suppressing the minimum wage, etc. all had a greater impact in the redistributive effects of supply side than the tax cuts did. These efforts continue up to today.

 

[boneyard bill]

Simple Don continued:

Marginal productivity is at the very core of the free market theory. Among other things it is what determines the costs of goods and services in the market. According the theory supply and demand will force prices down until the price equals the marginal cost of the last item produced, the so-called market clearing price. This is what guarantees the maximum utilization of the production facilities that is the sole promise of free market theory, the efficiency that the proponents claim will guarantee the greatest measure of social justice.

There is a minor flaw in this in that the marginal cost of the last item produced doesn't allow for any profits in industrial production. Marginal product theory requires that the law of diminishing returns kicks in to overtake the economies of scale. That the marginal product costs of production is higher than the average costs of producing all of the products. But this not true of modern industrial production.

A company makes a profit if the average price exceeds that average cost. Marginal cost is incidental to profitability. Diminishing returns can play a part in marginal cost, but it doesn't have to. There is certainly no logical contradiction here at all.

Without diminishing returns there is not only no profit, there is nothing to set the price. It will continue to fall bankrupting the less efficient producers and transferring more of the business to the more efficient producers, concentrating more of the business in fewer hands. This conflicts with one of the basic requirements of the free market theory, that producers have to be so numerous and small enough that they can't individually effect the price. Eventually only a few producers would be left and they will be able to control the price and be able to evade market discipline, the only controlling mechanism in the free market theory.

Eliminating the inefficient competitors is a BENEFIT of the free market system, not a problem with it. Yes, if unrestrained by diminishing return, prices will fall until the market is saturated. The number of competitors will decline as inefficient producers are weeded out, but what free market economist insists that there must be many competitors? I'm not aware of any. You have the theory of "oligopoly," but that is totally unproven and is the work of neo-Keynesians, not the classical schools.

The quantity theory of money failed dramatically as a target for controlling the economy, reference Volcher and 20% interest rates. Google the following quote. “The use of quantity of money as a target has not been a success. I’m not sure I would as of today push it as hard as I once did."

First of all, the quantity theory of money and the "use of quantity of money as a target" are not the same thing.

Secondly, I fail to see how the regime of Paul Volcker refutes the quantity theory of money in any way. Volcker raised interest rates to 21% in order to reduce money creation and money velocity because inflation was at 18%. In other words, he set real interest rates at 3%. It worked remarkably well. Within a few years, inflation was in the 4% range and the economy was booming. Inflation and unemployment had both declined dramatically. It's the type of thing that Bernanke needed to do when he took office. Instead, he has given us his funny-money policies which will lead to far worse problems down the road.

As for Weimar Republic/Zambia/hyperinflation/Oh Nooose! we have covered this many times before. There are two explanations of the causes of the hyperinflation. One is the quantity theory of money, that the governments' printed excessive amounts of money to cover their massive deficit spending. This caused hyperinflation which resulted in destruction of the currency and its eventual abandonment. Since this happened twice in the twentieth century in two of the 200+ countries of the world it is proof positive that no government can be trusted ever again with the control of the money supply.

The other explanation, the balance of payments theory, is that the while the nations involved certainly ran large budget deficits it wasn't excessive money printing that caused the hyperinflation. Certainly in the case of Germany the high deficits weren't due to profligate government spending but to a sudden drop in tax revenue. People stopped paying their taxes so that they could buy food.

That the inflation was caused by other factors, both countries were recovering from a recent war and both countries owed huge foreign debts in gold or another country's currency. That these started the inflation and it spiraled out of control when wages had to be raised to keep people fed and alive. Which has to be considered one of the most basic functions of the economy.

I'm not making much sense of this. Of course I understand the quantity theory of money but the balance of payments claim is pretty obscure. What two countries are you referring to? Weimar Germany and Zambia? What war was Zambia recovering from?

So prices went up due to a balance of payments problem and this spiraled out of control when wages had to be raised to compensate. Where did the money come from for these increased wages?

It is surprisingly easy to decide which one is correct. The quantity of money theory requires that money creation is exogenous, that is separate from the economy. It requires a direct proportionality between the money supply and inflation. It requires an economy that is at equilibrium, full employment and at a high capacity utilization, that is relatively closed to trade and has a stable velocity of money circulation. The path of causality would be first the creation of massive amounts of money, then price inflation follows and finally the currency is devalued against foreign currencies.

I don't see why any of these things must necessarily follow from the quantity theory of money as a cause of inflation.

The balance of payments explanation requires a money supply that is largely endogenous, that is that money creation is integral to the economy. There is no requirement for direct proportionality between the money supply and inflation. And it doesn't require the conditions of the economy being at equilibrium, it depends on an economy opened to trade and doesn't require a stable velocity of money, which no modern capitalistic economy has. The path of causality is the devaluing of the currency, the creation of inflation from the currency devaluation triggering wage inflation and the inflation causing the explosion of the money supply

Wow! That's really a convoluted way to put it. My first question is, "What caused the devaluation?" Clearly the currency was cheapened relative to other currencies. So money creation was needed to cause the devaluation in the first place. Devaluation will cause price inflation but it won't cause wage inflation. Wage inflation would only be "triggered" by money creation as response to the devaluation. And how on earth does wage inflation cause "an explosion of the money supply?" What economic laws or principles are you relying upon to make such an off-the-wall claim like that?

 

[boneyard bill]

Simple Don continued again:

To decide which explanation is most likely correct we only have to look at the timeline of events. In the case of the Wiemar Republic there seems to be little question that the sequence of events was kicked off by the depreciation of the German mark due to the war and the imposition of the reparations on Germany. This lead to the inflation and then to the explosion of money creation. It was the renegotiation of the reparation payments in 1922 and the series of loans, largely from the US, that allowed the stabilization of the new currency, the rentemark.

I still don't see the causal relationship here. A devaluation will lead to price inflation, but I would have to qualify that. The actual effect on the economy would be recessionary. Imagine if we had a tripling of the price of gasoline in this country. Gasoline-related products would cost more so we would have less to spend on other items. So we would go to fewer movies. We would eat out less often. We would be less likely to move to better living quarters. So actors and directors, cooks and dishwashers, and carpenters and plumbers and electricians would have less work and some of them would become unemployed. So devaluation leads to some price increases, but the overall effect on the economy is restrictive. It doesn't lead to booms of the type that you get in the early stages of monetary inflation.

To put it in neo-Keynesian terms (and I don't like doing that because I believe that is mis-leading) a devaluation leads to "cost-push" inflation but is not "demand-pull" inflation.

But now, your second point is really confusing. You're claiming that this cost-push inflation led to an "explosion" of money creation. By what mechanism? And you're claiming that the money creation is "endogenous" by which you seem to mean that it was created without any intervention by the government or a central bank. How does this happen? Money is created when banks lend. Why would banks be lending more because of cost-push inflation? Devaluation does not force an increase in wages which might make customers more credit worthy. Nor does it lead to increased savings which would expand bank reserves. In fact, the opposite is far more likely. Faced with higher expenses, bank customers would need to withdraw the savings they had. Everything about a devaluation leads to contraction, not to demand-pull inflation, new money creation, or expanded credit.

And repeated studies have shown no direct proportionality between the money supply and inflation. In fact they show no relationship between inflation in economies with a history of low inflation, say less than 10%, and the level of the money supply. In economies with high inflation the inflation outstrips the growth in the money supply. Both deal a death blow to the quantity theory of money.

Where does the quantity theory of money claim that there must be direct proportionality? Why would you even expect there to be such proportionality? When the money supply goes up, some people will raise their prices due to increased costs. Others, however, will simply not lower their prices as they had planned to and others will still lower their prices but less than they had planned to before the added costs were felt. Then you have the added issue of quality improvements or the transfer to cheaper materials. The substitution effect will enter in. I'm a furniture maker, for example. I used to make mahogany beds, but now I make them out of maple or cherry. There is no reason to expect proportionality. And that is without even getting in to the question of defining the money supply in the first place.

Also the velocity of money is required by the quantity theory of money to be stable. We know that this not the case, with the velocity decreasing in a recession and accelerating in good times. It means that inflation and deflation owe more to velocity shocks than to changes in the money supply.

Again, why is stable velocity a necessary condition of the quantity theory of money? It makes perfect sense that velocity would amplify the quantity of money. During inflationary times you would expect people to spend money due to inflationary expectations and during times of deflation people can benefit from just doing nothing with their money. A stable velocity would only be expected if you assume proportionality but there is nothing in the quantity theory that would logically require this.

Mises in other words denied that a increase in the money supply world result in a direct proportional increase in the inflation rate. Friedman, his monetarists and apparently you believe that there is a single causal explanation of inflation, that only an increase in the money supply causes a direct, immediate and proportional increase in inflation. So much so that there is no problem in your mind with simply redefining the word 'inflation' from meaning a general rise in the level of prices to any increase in the money supply.

Where did I ever claim that I was defending Friedman's view of the money supply. Indeed, your own citation of Mises who supported the "classical" quantity theory, shows that proportionality is not a requirement of the theory. I stated from the beginning that there are disputes among classical economists over these concepts and this may be one of them. My point was that these schools do not reject these concepts but they don't necessarily agree entirely on all the details.

Hayek believed that the quantity theory of money was in his words a "helpful guide" but was a critic of the theory. He criticized Friedman for concentrating on the statistical relationship between the quantity of money and inflation claiming like von Mises that things were not quite as simple. (Garrison, R., 2007, Hayek and Friedman: Head to Head, http://<br /> http://www.auburn.edu/...20friedman.pdf)

Exactly. Hayek claimed that many financial instruments could be pressed into service as money from time to time so that it was really quite impossible to say what, at any given time, could be considered money. So trying to conduct policy on the basis of the money supply statistics was quite impossible.

I understand your devotion to all things Ron Paul. But Ron Paul has an almost manic need to prove that the Federal Reserve Bank is the source of all that is evil in the economy. He and his brand of libertarians have latched on to this ridiculous idea of inflation caused by the Fed printing worthless money not because it has any support in either in empirical studies or in any coherent logical sense but because it seems to them to support their vision of the evil Fed. And it, in their mind, supports the worse thing that we could ever do to the economy, return to the gold standard.

Quite a contradiction here. You accuse me of following Milton Friedman's view of the quantity theory of money and then of being a devoted follower of Ron Paul. But Ron Paul differed greatly from Friedman. Certainly, he did not adhere to Friedman's recommendation that we should target the money supply except insofar as he might have conceded that it was better than targeting interest rates. And Ron Paul favored a gold standard which Friedman adamantly opposed.

But I am not a devotee of Ron Paul and certainly not of Murray Rothbard who is god to many Ron Paulites. I am not opposed to a bank that would serve as a lender of last resort. I do not see where Alexander Hamilton's bank caused any problems for the economy. The Fed, as originally created, would probably have been all right. It's the many powers that they have accumulated since their creation that has created most of our problems. They should not be an instrument of governmental economic policy which ultimately, in their hands, becomes an instrument of Wall Street bank policy. The Fed is a bad idea both economically and politically.

 

[boneyard bill]

Simple Don again:

Certainly Milton Friedman went over to this view not because he found compelling economics there but because he discovered the wealth and fame along with the support for research that comes from economics used to support the conservative political memes that justify making the rich richer at the expense of everyone else. His monetarism is half Keynesian, admitting that the government must intervene in the economy but maintaining that it should be done in the manner that offends the rich the least, by restricting the intervention to largely ineffective monetary policies and never, ever using the much more effective fiscal policies that might involve taxing the rich.

Your critique of Freidman might better apply to Keynes himself who was not even, after all, an economist, and certainly had celebrity in mind probably to a greater degree than any other with the possible exception of Irving Fisher. Meanwhile your criticisms seem rather poorly placed. We had a booming economy under Reagan with very high deficits and again under Clinton with several balanced budgets. Kennedy completely abandoned Ike's budget balancing efforts but Ike's robust economy continued under JFK's much larger deficits. The correlation between fiscal policy and economic performance does not seem to be very strong.

Monetary policy is quite another matter. Loose money and easy credit correspond rather well with periods of inflation or bubbles, which is simply the inflation of asset prices instead of consumer prices.

What strikes me as amazing about your posts however, is a basic rejection of economics altogether. You seem to reject all the major principles of economics up to and even including the law of supply and demand. What then is left? Only the principle of government intervention itself. Since the private economy is assumed to be unstable, the government must intervene in various ways unguided by any economic principles. The government should intervene in ways that we want to intervene for on political grounds and we will then claim that they are good for the economy even though we have no proven economic principles upon which we can rest that claim.

Since certain fundamental economic principles are inconvenient, we will simply reject them no matter how well established they are in the very essence of the discipline.

 

[SimpleDon]

Simple Don continued:

Marginal productivity is at the very core of the free market theory. Among other things it is what determines the costs of goods and services in the market. According the theory supply and demand will force prices down until the price equals the marginal cost of the last item produced, the so-called market clearing price. This is what guarantees the maximum utilization of the production facilities that is the sole promise of free market theory, the efficiency that the proponents claim will guarantee the greatest measure of social justice.

There is a minor flaw in this in that the marginal cost of the last item produced doesn't allow for any profits in industrial production. Marginal product theory requires that the law of diminishing returns kicks in to overtake the economies of scale. That the marginal product costs of production is higher than the average costs of producing all of the products. But this not true of modern industrial production.

A company makes a profit if the average price exceeds that average cost. Marginal cost is incidental to profitability. Diminishing returns can play a part in marginal cost, but it doesn't have to. There is certainly no logical contradiction here at all.

You don't seem to understand what we are doing here. You are the one who claims that marginal productivity is valid. I don't believe that it is.

You are suppose to defend marginal productivity, not to make my argument that is not valid.

Because if marginal productivity is not valid, then the entire theory of the free market isn't valid. There is no way that the free market can self-regulate. If it can't self-regulate then you can't eliminate government regulation. You are pretty much stuck with the current economy as being pretty close to closest to the free market as we can get, which is true.

Let's be clear, the proponents of the so-called free market are making a extra ordinary claim, that the that the market can self-regulate if it is freed from most if not all government interventions, especially government regulations. That the mechanism of supply and demand setting prices is strong enough to take over the role of government in policing the economy, in preventing and punishing bad behavior.

The proponents of the self-regulating free market can't get away with just stating that this true, they have to come up with an explanation of how this is would work, a theory. Absolutely central to this theory of how the free market would work without the control of government and government's regulations is marginal productivity and supply and demand driving prices down to the cost of the last product made, the marginal price.

And yes, you are correct, the theory of marginal productivity doesn't have anything to do with making a profit. In fact, one of the many massive problems with marginal productivity is that in the industrialized world that we live in marginal productivity theory would not only eliminate profits, it would guarantee that sales would be at a loss. This is why marginal productivity theory is bullsh*t. This is one of many reasons why the theory of the self-regulating free market is complete bullsh*t.

So while I appreciate your helping me make my arguments it will be confusing to any third party reading this. You are suppose to be defending the theory of marginal productivity. You claimed the theory was not doubted, along with the theory of the quantity of money. So I am giving you an opportunity to defend it that statement.

Without diminishing returns there is not only no profit, there is nothing to set the price. It will continue to fall bankrupting the less efficient producers and transferring more of the business to the more efficient producers, concentrating more of the business in fewer hands. This conflicts with one of the basic requirements of the free market theory, that producers have to be so numerous and small enough that they can't individually effect the price. Eventually only a few producers would be left and they will be able to control the price and be able to evade market discipline, the only controlling mechanism in the free market theory.

Eliminating the inefficient competitors is a BENEFIT of the free market system, not a problem with it. Yes, if unrestrained by diminishing return, prices will fall until the market is saturated. The number of competitors will decline as inefficient producers are weeded out, but what free market economist insists that there must be many competitors? I'm not aware of any. You have the theory of "oligopoly," but that is totally unproven and is the work of neo-Keynesians, not the classical schools.

Bill, once again I appreciate the help but I really don't need it.

It is the theory of the self-regulating free market that requires many small competitors. If there are only a few competitors then they can better control the price that they get for their products. They would escape the discipline of the market, their prices would not be set by the mechanism of supply and demand. The self-regulating free market wouldn't be possible, which is the whole point, it isn't.

The claim that you made that an oligopoly can't exist, that it is totally unproven is breathtakingly wrong. I suggest that you look up the word and to think about it. The entry in Wikipedia has many examples of real world oligopolies. It is not a just a theory, it is a fact.

It is pretty much the entire basis of the success of the mixed market capitalism that we have right now, that we enjoy the benefits of having just a few highly efficient producers but we have to regulate their behavior. One of the many benefits we would lose if we could somehow change our current economy into the model of the free market.

And predictably you are wrong about the classical economists, David Ricardo, Adam Smith, John Stuart Mill, Thomas Malthus, Jean-Baptiste Say, etc. They were looking at an economy that was coming out of mercantilism, an economy made up almost entirely of real world oligopolies and monopolies. Adam Smith in his The Wealth of Nations mentioned the invisible hand one time only, 90% of the book was warnings about what he called "rent" that could be imposed on the economy by oligopolies among other "rentiers" that could manipulate the market unless they were regulated and controlled

Oh, and of course Marx is considered a classical economist. He went even further than those mentioned above. Much, much too far. But many of his observations about the problems with capitalism were valid. He was one of the first economists to see the problem of debt deflation for example.

The quantity theory of money failed dramatically as a target for controlling the economy, reference Volcher and 20% interest rates. Google the following quote. “The use of quantity of money as a target has not been a success. I’m not sure I would as of today push it as hard as I once did."

First of all, the quantity theory of money and the "use of quantity of money as a target" are not the same thing

Once again, an astounding statement to make. The quantity theory of money states that excess exogenous money production is the cause of inflation. For this to be true would mean that the way to prevent inflation is to reduce the production of money. If the production of money is only a result of inflation and not the cause of it then trying to directly reduce the quantity of money in circulation would be doomed to failure. Which it was.

Secondly, I fail to see how the regime of Paul Volcker refutes the quantity theory of money in any way. Volcker raised interest rates to 21% in order to reduce money creation and money velocity because inflation was at 18%. In other words, he set real interest rates at 3%. It worked remarkably well. Within a few years, inflation was in the 4% range and the economy was booming. Inflation and unemployment had both declined dramatically. It's the type of thing that Bernanke needed to do when he took office. Instead, he has given us his funny-money policies which will lead to far worse problems down the road.

Volcher drove interest rates so high so fast not because he was targeting real interest rates but because he was trying to reduce the amount of money in circulation. The absolute best that could be said for him would be that he blundered into doing the right thing for the wrong reasons. He was a monetarist, he believed in the quantity theory of money. He believed that reducing the amount of money in circulation would bring down inflation. He was wrong. It is treating the symptom, not the cause.

The high interest rates produced the worse recession since the Great Depression. It started the destruction of the US's manufacturing and triggered a lot of the problems with the third world's debt. It was a stupid, stupid way to control inflation. It targets a part of the economy, construction, capital investment, automobile production, appliance manufacturing, and crushes them. The best way to reduce inflation in most instances is by increasing taxes to reduce overall demand.

However, in the 1980 period we were facing both inflation and a recession, stagflation. Which was caused primarily by the sudden jump in energy prices, the OPEC oligopoly. Which I know now that you believe whose existence is unproven. Believe me, it did exist, it still does exist.

The oil price increases produced the inflation, but a big portion of the increase in prices left the country, it went to the OPEC countries. I think that it was about 40% of it. The money that left our economy largely produced the unemployment.

Note that there is nothing in that discussion about interest rates or the quantity of money increasing.

I can probably do another 3000 or so words on stagflation and what they should have done. Suffice it to say that the inflation wasn't caused by too much money, too much money is a symptom, not a cause. And it was not caused by low interest rates. Raising interest rates and causing a massive recession is about the same as treating a heart attack by amputating both legs. If the patient survives the heart will improve because it doesn't have to work to pump blood to the legs any more. But it is a stupid way to do it. It is better to treat the real problem.

As for Weimar Republic/Zambia/hyperinflation/Oh Nooose! we have covered this many times before. There are two explanations of the causes of the hyperinflation. One is the quantity theory of money, that the governments' printed excessive amounts of money to cover their massive deficit spending. This caused hyperinflation which resulted in destruction of the currency and its eventual abandonment. Since this happened twice in the twentieth century in two of the 200+ countries of the world it is proof positive that no government can be trusted ever again with the control of the money supply.

The other explanation, the balance of payments theory, is that the while the nations involved certainly ran large budget deficits it wasn't excessive money printing that caused the hyperinflation. Certainly in the case of Germany the high deficits weren't due to profligate government spending but to a sudden drop in tax revenue. People stopped paying their taxes so that they could buy food.

That the inflation was caused by other factors, both countries were recovering from a recent war and both countries owed huge foreign debts in gold or another country's currency. That these started the inflation and it spiraled out of control when wages had to be raised to keep people fed and alive. Which has to be considered one of the most basic functions of the economy.

I'm not making much sense of this. Of course I understand the quantity theory of money but the balance of payments claim is pretty obscure. What two countries are you referring to? Weimar Germany and Zambia? What war was Zambia recovering from?

It is not a surprise that you don't make any sense of this. You wouldn't believe in the quantity theory of money if you did.

I am not as familiar with Zambia as I am with the Weimar Republic. I refuse to look it up because it is not important. But I seem to remember that it was the war in the Congo, Zambia was supporting one side and it produced the foreign debt that started their problems.

Anyway it is a minor point and in neither case does it is it the main cause. Germany came out of the first world war with its production capacity relatively untouched. It was the reparations for the war that caused the Germans problems and the fact that the Imperial government paid for the war by monetizing the debt. By not raising taxes demand increased during the war causing the start of the inflation. Zambia's biggest problem was that the massive land reform that they undertook put productive farm land into the hands of people who didn't know how to farm very well, effectively taking most of the farm land in the country out of production. They then had to buy food from other countries, increasing their debt which was in other countries' currency, mainly SA rand and US dollars.

The pertinent point is that in neither case was the inflation caused by printing excessive amounts of money, the inflation was caused by demand exceeding supply. It was caused by both having excessive foreign debts which required the excessive conversion of their currency into gold or a foreign currency.

So prices went up due to a balance of payments problem and this spiraled out of control when wages had to be raised to compensate. Where did the money come from for these increased wages?

Money for increased wages usually comes from profits. Once again, this wage inflation was part of not caused by excessive money printing. It is a real inflationary cause. Follow me to the next explanation that I made. Hopefully it will help. Hopefully

It is surprisingly easy to decide which one is correct. The quantity of money theory requires that money creation is exogenous, that is separate from the economy. It requires a direct proportionality between the money supply and inflation. It requires an economy that is at equilibrium, full employment and at a high capacity utilization, that is relatively closed to trade and has a stable velocity of money circulation. The path of causality would be first the creation of massive amounts of money, then price inflation follows and finally the currency is devalued against foreign currencies.

I don't see why any of these things must necessarily follow from the quantity theory of money as a cause of inflation.

Because these are the conditions that the economy has to be for the quantity of money to determine inflation or deflation. Once again, the quantity theory of money is a load of crap.

And it is you that is saying that it is not. And in spite of this it is me that has to explain to you the theory that you are defending.

The money creation mechanism obviously has to be exogenous for excess money creation to produce inflation. If the government doesn't produce the money, if most of the money in the economy is created by the economy, spoiler alert, it is, then the excessive money creation is a result of the inflation, not a cause of it. Equally obviously if the economy is not full employment and high capacity utilization, the neoclassical economy in equilibrium, then the excessive spending will increase employment and utilization before they could cause inflation. And proportionally I can only show by using formulas. I will try to do a short version.

The classical formulation for the quantity theory of money is

MV = PT​

Where:

M is the money supply
V is the velocity of money
P is the average pricing level
T is the volume of transactions
including intermediate products and
financial transactions​

This is Irving Fischer's equation of the quantity theory of money. There are two more that you don't get in the short version. The differences are really just economists arguing about details anyway.

The quantity of money theory causing inflation resolves this to

P = MV/T​

In order for the money supply to cause inflation V and T have to be pretty constant. An increase in V or a decrease in T will cause inflation on their own. Also if V and T are constant only a change in the money supply would cause inflation and an we would see proportionally between the two, an increase in the money supply of X% would always create an inflation increase of Y%.

Look, I am not saving that the Germans didn't behave badly, they did run high budget deficits, they did monetize the deficits by printing money.

What I am saying is that these things contributed to the problems they weren't the main reasons for the hyperinflation. The deficits were actually shrinking before the hyperinflation hit. I am not even saying that it wouldn't be possible in the right conditions of full employment, etc. for the government spending the economy into inflation. What I am saying is that this is not the reason that these two economies went into hyperinflation.


If the excessive money printing caused the hyperinflation as you claim the progression would be,

• Excessive money printing.
• High inflation
• Devaluing of the currency against other currencies and gold.

If on the other hand the inflation was caused not by the government printing excessive amounts of currency but because the country had to buy excessive amounts of gold, Germany, and excessive amounts of foreign currency, Zambia, then the progression will go,

• Devaluing of the currency against other currencies and gold.
• High inflation because of the devaluation.
• Excessive money creation because of the inflation.

It is easy to check this, which progression is correct. In Germany the value of the mark dropped dramatically a full six months before the inflation switched to hyperinflation.

The balance of payments explanation requires a money supply that is largely endogenous, that is that money creation is integral to the economy. There is no requirement for direct proportionality between the money supply and inflation. And it doesn't require the conditions of the economy being at equilibrium, it depends on an economy opened to trade and doesn't require a stable velocity of money, which no modern capitalistic economy has. The path of causality is the devaluing of the currency, the creation of inflation from the currency devaluation triggering wage inflation and the inflation causing the explosion of the money supply

Wow! That's really a convoluted way to put it. My first question is, "What caused the devaluation?"

The devaluation was caused by the governments having to purchase gold and foreign currency to pay their foreign debts.

Clearly the currency was cheapened relative to other currencies.

That is what devaluation means.

So money creation was needed to cause the devaluation in the first place.

No, the need to settle the foreign debt caused the devaluation of the currency.

Wait, so now you agree that it wasn't the money printed to support the budget deficit that created the inflation? That it was the money created to buy the gold or foreign currency that caused the inflation and the hyperinflation. You should have told me this much sooner. The original proposition that I though that you were defending was that the money created by the budget deficit had created the inflation and the hyperinflation. Now we are getting somewhere.

No it wasn't the money created to service the foreign debt that was the problem. The money used to buy the foreign currency or gold obviously goes out of the country where it can't cause inflation inside the country. Besides the amount of money involved isn't that much compared to over all economies.

At least before the devaluation. But it is a large amount of money compared to the holdings of foreigners who own the gold and currency that are needed. What it does do is to force down the value of the currency against other currencies. This is what caused the inflation inside the countries, the increase in the prices of imports. Both countries had high levels of imports.

Devaluation will cause price inflation but it won't cause wage inflation. Wage inflation would only be "triggered" by money creation as response to the devaluation. And how on earth does wage inflation cause "an explosion of the money supply?" What economic laws or principles are you relying upon to make such an off-the-wall claim like that?

The wage inflation occurred because people have to eat. A demonstrable fact.

Since they have to eat and food costs more because of the inflation wages have to be increased.

Wage and price inflation spiral out of control. First prices or wages increase. Then wages or prices have increase in response. If you don't understand something like the wage and price inflation spiral just copy the words into Google and hit the search button. Let's try it. Google came up with 591,000 references on the web of my off the wall claim.Here is Investopedia's definition, the first one in my search results.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. The wage-price sprial suggests that rising wages increase disposable income, thus raising the demand for goods and causing prices to rise. Rising prices cause demand for higher wages, which leads to higher production costs and further upward pressure on prices.

Just for reference this kind of inflation is called "cost push inflation." The kind of inflation that you champion caused by evil men at the Fed producing too much cash is called "demand pull inflation."


Read the difference between exogenous and endogenous money creation. The vast majority of money creation in the economy is endogenous, it is created by the economy itself. The explosion of the money supply is caused by the inflation, not the other way around

I have provided you with many different detailed explanations of my positions and my understanding of the theories that you are defending. All that I can see that you have gone is to read through my discussion and to put in one or sentences, few of which have any meaning or add much to the discussion. Meanwhile I am forced to explain to you the very theories that you claim to understand. But obviously you don't. How many times do I have to explain these theories to you, theories that you claim to understand and that form so much of the support for your political positions.

Quick questions,

If there is no reason for the central bank like the Fed to create money, money that will only create inflation why would they do it?

Do you believe that the Fed intentionally creates inflation?

The people who run the Fed are bankers and bankers are creditors and creditors lose to inflation and debtors win, why would bankers intentionally increase inflation?

The Fed made trillions of dollars out thin air in 2008 and 2009 and monetarist economists have predicted hyperinflation every since. If increasing money supply mechanically increases inflation why aren't we awash in inflation now?

How many times, how many years do they get to be wrong before we can finally ignore them?

 

[SimpleDon]

Sorry Bill, as hard as it is to believe I failed to answer one point. In order to produce inflation from deficit spending, the only way that government can both create money and to get it into the economy, the quantity theory of money says that the economy must be insular in that it must be closed to most trade. The reason is once again pretty obvious, if the economy is open to trade prices will be suppressed because of the imports coming in from other countries.

Ironically there were economies that met most of these requirements for being able to control inflation using controls over the money supply. Those requirements are an exogenous form of money creation, full employment and utilization, and near constant velocity of money and nearly constant number of transactions in the economy.

The economies that most fit this bill of preconditions are the old centrally controlled Soviet Communist countries.

I don't what if anything this tells us about your beloved quantity theory of money. Certainly it lets you or anyone else say that under the right circumstances the quantity of money theory can be used to predict and maybe even control inflation.

Just not circumstances that happen to capitalist economies.

 

[boneyard bill]

Simple Don writes:

Let's be clear, the proponents of the so-called free market are making a extra ordinary claim, that the that the market can self-regulate if it is freed from most if not all government interventions, especially government regulations. That the mechanism of supply and demand setting prices is strong enough to take over the role of government in policing the economy, in preventing and punishing bad behavior.

You have got this backward, as you seem to have with just about everything. The free market position is that large areas of economic activity CANNOT be regulated by government and still retain an efficient economy. First and foremost among those areas is supply and demand.

Now, I'm not aware of even Keynesians arguing that you can dispense with the law of supply and demand. You seem to we very far out of the mainstream in making that claim here. Indeed, you seem to be arguing that all of economics is nonsense in that you appear to be claiming that ALL major economic principles are in dispute, not simply as a matter of nuance, but in their very most fundamental claims.

The law of supply and demand rests, on the principle of the subjective theory of value. Again, this is thoroughly mainstream. The entrepreneur will lower his price, in order to compete, until the marginal revenue equals the marginal cost. He may or may not be constrained in this by the law of diminishing return. If economies of scale allow very low marginal costs he will continue to produce and sell and will continue to add to his revenue. If he estimates his sales incorrectly, he may have to unload excess inventory at below cost. But this is simply the normal risk of operating a business. What you aim for and what you get are not always the same.

There is nothing here that compels him to lose money. Your attack on the marginal cost theory is simply unsupported logically.

Moreover, the self-regulating claim does not rest on marginal cost. It rests on supply and demand. After all, Adam Smith and the physiocrats wrote a century before the marginalist revolution.

Also, the law of supply and demand wasn't about "punishing bad behavior." It was about maximizing supply relative to demand. The point was that if you intervene in the price, you will get less supply and more demand and therefore will ultimately end up with higher prices, even though those might be black market prices.

And yes, you are correct, the theory of marginal productivity doesn't have anything to do with making a profit. In fact, one of the many massive problems with marginal productivity is that in the industrialized world that we live in marginal productivity theory would not only eliminate profits, it would guarantee that sales would be at a loss. This is why marginal productivity theory is bullsh*t. This is one of many reasons why the theory of the self-regulating free market is complete bullsh*t.

I haven't any idea what you are talking about here. You haven't shown at all how the marginal price leads to a loss. Again, marginal theory is thoroughly mainstream. It is accepted by virtually all schools that I know of and is a common part of economic textbooks.

It is the theory of the self-regulating free market that requires many small competitors. If there are only a few competitors then they can better control the price that they get for their products. They would escape the discipline of the market, their prices would not be set by the mechanism of supply and demand. The self-regulating free market wouldn't be possible, which is the whole point, it isn't.

And predictably you are wrong about the classical economists, David Ricardo, Adam Smith, John Stuart Mill, Thomas Malthus, Jean-Baptiste Say, etc. They were looking at an economy that was coming out of mercantilism, an economy made up almost entirely of real world oligopolies and monopolies. Adam Smith in his The Wealth of Nations mentioned the invisible hand one time only, 90% of the book was warnings about what he called "rent" that could be imposed on the economy by oligopolies among other "rentiers" that could manipulate the market unless they were regulated and controlled

Oh, and of course Marx is considered a classical economist. He went even further than those mentioned above. Much, much too far. But many of his observations about the problems with capitalism were valid. He was one of the first economists to see the problem of debt deflation for example.

Now you're really going off the deep end in citing Marx as your authority for free market economics. That is, after all, what we are talking about free market economics, not classical economics. I assure you that there are a great many modern free market economists who disagree with classical economists like Marx, Malthus, Ricardo, and the like. It's like you're trying to say that free market economics is wrong because Marx was a classical economist, and he believed in the labor theory of value.

The modern Austrian School rejects virtually everything that Adam Smith had to say except the parts that he cribbed from the physiocrats. I am not aware of any modern free market schools that accept the theory of oligopoly.

"First of all, the quantity theory of money and the "use of quantity of money as a target" are not the same thing"

Once again, an astounding statement to make. The quantity theory of money states that excess exogenous money production is the cause of inflation. For this to be true would mean that the way to prevent inflation is to reduce the production of money. If the production of money is only a result of inflation and not the cause of it then trying to directly reduce the quantity of money in circulation would be doomed to failure. Which it was.

I don't see what's so astounding about it. One is a theory. The other is a policy recommendation.

The claim that exogenous money growth causes inflation does not mean that you should target money growth as a matter of policy. That is the policy recommended by Milton Friedman but rejected by Hayek for reasons that I already explained in my previous post.

Volcher drove interest rates so high so fast not because he was targeting real interest rates but because he was trying to reduce the amount of money in circulation. The absolute best that could be said for him would be that he blundered into doing the right thing for the wrong reasons. He was a monetarist, he believed in the quantity theory of money. He believed that reducing the amount of money in circulation would bring down inflation. He was wrong. It is treating the symptom, not the cause.

I didn't mean to suggest that Volcker was targeting real interest rates as the goal of his policy. It was the means. But I don't think he was as concerned about money supply at that time as he was about money velocity. The primary goal was to break inflationary expectations which would reduce velocity. Had he followed Friedman's recommendations, he would have reduced monetary growth gradually. I think he did the right thing for the right reasons.

The high interest rates produced the worse recession since the Great Depression. It started the destruction of the US's manufacturing and triggered a lot of the problems with the third world's debt. It was a stupid, stupid way to control inflation. It targets a part of the economy, construction, capital investment, automobile production, appliance manufacturing, and crushes them. The best way to reduce inflation in most instances is by increasing taxes to reduce overall demand.

Volcker had no power over taxes. If Carter had proposed a tax increase and gotten it through Congress (doubtful in an election year), it would have made Volcker's job easier provided the tax increase went to deficit reduction.

The oil price increases produced the inflation, but a big portion of the increase in prices left the country, it went to the OPEC countries. I think that it was about 40% of it. The money that left our economy largely produced the unemployment.

An oil price increase in which 40% of the money left the country would be contractionary, not inflationary. This is one of those problems with the modern mis-use of the term inflation. When the price of oil goes up it forces up prices elsewhere in the country. But where does the money come from to pay the higher price? It has to come from the same sources which then spend LESS on other items (such as housing) and force the price of those items down. If 40% of the oil money left the country, you should expect, on balance that the total price level would have gone down. We should have had a severe recession. That was not the case, real estate, for example skyrocketed in the 70's even though it is not a petroleum-related expense. Prices rose across the board and so did wages.

In 1971, after raising the price of gold twice without stemming the run on gold, Nixon took us off the gold standard and allowed the dollar to float with the intent of returning to the gold standard when the price leveled off. It never did so in 1973 he cut his deal with the Saudis offering them security guarantees if they would only accept dollars for their oil. The Saudis agreed and the petro-dollar was born. But Nixon also wanted to avoid a recession so his Fed Chairman, and close personal friend, Arthur Burns, loosened credit and sought to deal with the contractionary oil price increases through looser credit. This led to inflation near double digits and by the time Ford took office he was launching his WIN (Whip Inflation Now) campaign. Burns tightened policy and by the time Ford faced Carter for re-election, inflation had fallen to 4.8% and the economy was booming. It almost worked. Ford came from 33% behind Carter in the summer of '76 to lose the popular vote by only .5%. It probably the biggest comeback in electoral history, but it's gotten no attention because it fell short.

Carter's Fed Chairman, William Miller, quickly changed policy and inflation was on the up-tick again. Meanwhile, of course, OPEC continued to raise prices to keep up with the US policy of cheapening the dollar. But this was expensive for Saudi Arabia because to raise prices OPEC had to cut production and most of the cuts fell on the Saudis. By 1979 inflation had hit 18% and the King of Saudi Arabia informed Carter that if the US didn't quit cheapening the dollar Saudi Arabia would have to demand gold for its oil. Carter fired William Miller and appointed Paul Volcker.

There never was an oil crisis. It was all a response to loose US monetary policy brought on, initially, by the Vietnam War.

I can probably do another 3000 or so words on stagflation and what they should have done. Suffice it to say that the inflation wasn't caused by too much money, too much money is a symptom, not a cause. And it was not caused by low interest rates.

I can only re-iterate my challenge in the last post. Show me the mechanism by with the money supply gets increased as a result of inflation? What is it about inflation that leads to an increase in the supply of money? Where does the demand come from that forces prices up and gets the inflation going in the first place? An increase in price does not increase aggregate demand. In fact, it lowers demand for products that haven't gone up in price.

It was the reparations for the war that caused the Germans problems and the fact that the Imperial government paid for the war by monetizing the debt. By not raising taxes demand increased during the war causing the start of the inflation.

So you admit it was money creation! You admit that monetizing the debt during the war caused inflation. Monetizing the debt IS exogenous money creation.

The pertinent point is that in neither case was the inflation caused by printing excessive amounts of money, the inflation was caused by demand exceeding supply. It was caused by both having excessive foreign debts which required the excessive conversion of their currency into gold or a foreign currency.

Oh boy. You seem to think that when I'm talking about "money printing" that it is to be taken literally. I don't think you understand money and banking very well. I've mentioned this before. I suggest you read Hayek's Theory of the Trade Cycle. He explains money creation there and his explanation is completely orthodox. You'd get the same thing from Samuelson.

The reparations were taking too much of German production. By the time they paid the reparations, they had nothing left to finance local needs, so they created the money. Probably by monetizing debt just as they had done during WW I only a lot more of it.

I don't see where your explanation explains anything about prices rising. Demand exceeded supply? Where did the demand come from if Germany's money was all going overseas for reparations?

If the excessive money printing caused the hyperinflation as you claim the progression would be,

•Excessive money printing.
•High inflation
•Devaluing of the currency against other currencies and gold.



If on the other hand the inflation was caused not by the government printing excessive amounts of currency but because the country had to buy excessive amounts of gold, Germany, and excessive amounts of foreign currency, Zambia, then the progression will go,

•Devaluing of the currency against other currencies and gold.
•High inflation because of the devaluation.
•Excessive money creation because of the inflation.


It is easy to check this, which progression is correct. In Germany the value of the mark dropped dramatically a full six months before the inflation switched to hyperinflation.

This is a large section. I'm only going to deal with this part of it. The first scenario that you drew is, in fact, quite common. I would argue that it is the most common in countries faced with inflationary problems. We saw it is Argentina, Brazil, and other Latin American countries and even in Britain. These countries experienced high inflation but they never quite got to hyper-inflation.

The problem with your second scenario is that you continue to classify devaluation as "inflationary." No! Devaluation is contractionary.

When you devalue, import prices go up. This means people have less money for non-imports so demand for those products and service go down. You get deflation in things like rents, auto repairs, and domestic manufactures. This leads to unemployment and recession or depression. THEN the government responds to this by increasing the money supply to increase demand for the domestic products and hopefully boost employment.

Here's one clear test of the difference between the "cost-push" of a devaluation and the "demand pull" of monetary inflation. With a devaluation, price go up, but WAGES do not. It is all loss. It results in a lower standard of living of people right away. With money creation, however, both prices and wages rise. That is because there is more demand in the economy and that demand includes an increased demand for labor.

So your scenario is correct. But the it is still the government that causes the post-devaluation increase in the money supply. There is no mechanism by which devaluation automatically leads to money creation. Again, show me what that mechanism is.

"Clearly the currency was cheapened relative to other currencies."

That is what devaluation means.

That is the formal act of devaluation. Devaluation is the recognition of a cheapening that has already occurred through money creation.

Wait, so now you agree that it wasn't the money printed to support the budget deficit that created the inflation? That it was the money created to buy the gold or foreign currency that caused the inflation and the hyperinflation. You should have told me this much sooner. The original proposition that I though that you were defending was that the money created by the budget deficit had created the inflation and the hyperinflation. Now we are getting somewhere.

No it wasn't the money created to service the foreign debt that was the problem. The money used to buy the foreign currency or gold obviously goes out of the country where it can't cause inflation inside the country. Besides the amount of money involved isn't that much compared to over all economies.

At least before the devaluation. But it is a large amount of money compared to the holdings of foreigners who own the gold and currency that are needed. What it does do is to force down the value of the currency against other currencies. This is what caused the inflation inside the countries, the increase in the prices of imports. Both countries had high levels of imports.

We're not on the same page on this, but I think I've already pretty much explained my position. Devaluation is NOT inflation. It merely produces higher import prices.

The wage inflation occurred because people have to eat. A demonstrable fact.

Since they have to eat and food costs more because of the inflation wages have to be increased.

If the cost of food went up because of a devaluation, where does the money come from to pay the higher wages? In the absence of government intervention, the increased cost of food would have to come from reduced purchases of something else. There would be no across the board price increases. There would higher food prices and lower prices for other items. That's why a devaluation is contractionary.

Just for reference this kind of inflation is called "cost push inflation." The kind of inflation that you champion caused by evil men at the Fed producing too much cash is called "demand pull inflation."

Yes. I've already addressed this although I consider this to be a foolish and misleading dichotomy. "Cost push inflation" is a nonsense expression. What is a cost? It is a price. So the whole thing reduces to "price increases cause price increases."

Read the difference between exogenous and endogenous money creation. The vast majority of money creation in the economy is endogenous, it is created by the economy itself. The explosion of the money supply is caused by the inflation, not the other way around

You keep saying this but you have not shown how this is possible. How does inflation get started in the first place? And how does it lead to endogenous money creation?

If there is no reason for the central bank like the Fed to create money, money that will only create inflation why would they do it?

There can be a variety of reasons. Economic stimulus is one. To help finance the deficit is another. To keep interest low and asset prices high is another (the justification for the current QE policy).

Do you believe that the Fed intentionally creates inflation?

That's what they claim they're doing.

The people who run the Fed are bankers and bankers are creditors and creditors lose to inflation and debtors win, why would bankers intentionally increase inflation?

When the Fed buys Treasuries it does so only from half a dozen Wall Street banks. These banks get the money first and it is basically for free. So they get the full value of the money up front and can purchase assets. The price increases do not hit until later. Other lenders and consumers get the money after the prices have gone up. Regional bank presidents tend to be more hawkish on the Open-market committee perhaps for this reason but they are out-voted by the full board and the New York president.

The Fed made trillions of dollars out thin air in 2008 and 2009 and monetarist economists have predicted hyperinflation every since. If increasing money supply mechanically increases inflation why aren't we awash in inflation now?

The Fed increased the monetary base by about $3 trillion. But they began paying interest on excess reserves at the same time. About halt the increase, perhaps more, remains in excess reserves. Also, some of this money, we don't know how much, went to overseas banks.

We have experienced inflation. Using the same measurements as we used in the '70's inflation under Obama has been about 7%. Clinton changed the formula in the '90's so us retirees would get less in social security. But that is consumer price inflation. To that you can add asset price inflation. (bubbles). We currently have a bubble in the stock market, the bond market, and the high-end real estate markets.

The US also exports inflation due to our huge foreign exchange deficits. This has been a real big issue with the developing countries like Brazil, India, and Turkey where they have been beset by inflation due to trade imbalances and have had to tighten their own policies to counteract it thus creating unemployment in their own countries. Obama has not been well received at g-20 meetings and seriously considered skipping the last one.

Money velocity has been low because consumers are too deep in debt so companies that have money to invest are buying back their shares instead.

I don't know of any free market economists who have predicted "hyper" inflation. Most have predicted that the current inflation will get worse. A few are predicting deflation. I lean toward the deflation camp but, of course, it all depends on what policy makers decide.

 

[boneyard bill]

Simple Don writes:

In order to produce inflation from deficit spending, the only way that government can both create money and to get it into the economy, the quantity theory of money says that the economy must be insular in that it must be closed to most trade. The reason is once again pretty obvious, if the economy is open to trade prices will be suppressed because of the imports coming in from other countries.

I don't know where you get this from, but it doesn't make any sense. There's no reason why importers to the US wouldn't raise the prices in response to increased demand just the way domestic producers do. But there's also no reason to assume that money creation doesn't affect other countries. Especially with the US, where the dollar is still king, we can easily export inflation. But even if foreign competition held down the price of imports, that wouldn't stop money creation from raising the prices of domestic items like rents, repairs, sporting events, fast food, etc.

The empirical record is clear. We don't need to look at money supply numbers. In fact, we shouldn't. As Hayek noted, we can never be sure what actually qualifies as money at any given time. We need to look at policies. Loose monetary policies such as low interest rates and easy lending standards lead to inflationary economies. Initially, this inflation usually has a positive effect, but it doesn't last long and then countless problems arise including, and in particular, the destruction of capital.

But high interest rates aren't necessarily the answer either. The government simply shouldn't be setting the interest rate at all any more than it should set the price of corn or tractors. The market should set interest rates. 300 million Americans know more about their needs for borrowing money than do a eleven men and a woman in Washington, D.C.

Often, the initial purpose of these loose policies is to finance budget deficits. Large deficits, if financed by borrowing, would produce very high interest rates and that would tend to slow the economy. Still, large budget deficits do not automatically lead to inflation. It is a policy decision.

 

[SimpleDon]

Simple Don writes:

Let's be clear, the proponents of the so-called free market are making a extra ordinary claim, that the that the market can self-regulate if it is freed from most if not all government interventions, especially government regulations. That the mechanism of supply and demand setting prices is strong enough to take over the role of government in policing the economy, in preventing and punishing bad behavior.

I think that what we have here is a failure of reading comprehension. You are suppose to do the same thing that I do, read my points and address what I said, not what you assume that I meant, what you wish that I had said because you have a memorized argument for it. A largely incoherent one usually. Less take some examples, complete and in the order that you wrote them.

You have got this backward, as you seem to have with just about everything. The free market position is that large areas of economic activity CANNOT be regulated by government and still retain an efficient economy.

Yes, this is the free market position. And as I said the free market position is that as a result of this we should be eliminating the vast majority of government regulations. And that the free market operating without this vast majority of government regulations can not only have a more efficient economy, that the operation of supply and demand setting prices is capable of making the economy self-regulating, that is that the free market is capable of preventing all of the problems in the economy that the government regulations were suppose to prevent. These include the formation of oligopolies, cabals and monopolies to enable those to fix prices and to control their markets. These include the formation of financial Ponzi schemes to defraud the stupid. These include false advertising. These include the sales of dangerous and ineffective products and drugs. These include the building of poorly designed and dangerous buildings. And hundreds of others.

And the only mechanism that the free market has to prevent these bad behaviors is the simple one of supply and demand setting prices that are equal to the cost of the marginal product.

First and foremost among those areas is supply and demand.

Now, I'm not aware of even Keynesians arguing that you can dispense with the law of supply and demand. You seem to we very far out of the mainstream in making that claim here.

No, I am not. This is a strawman that you are trying to fit me into because you don't understand or want to address my points.

What I am arguing is that supply and demand setting prices is not a strong enough mechanism to replace government regulation. This is not far out of the mainstream, it is the prevailing attitude of hundreds of experience with the economy. Government regulations didn't spring from the evil of governments that wanted to control and destroy the economy, they were written to address abuses in the economy by bad actors. We have anti-monopoly laws because monopolies set prices, which bypass the market. We have pure food and drug laws because people were selling dangerous drugs and food. We regulate banks because they cause economic instability otherwise. Also there is no other way to impose externalities on the immediate buyer seller transaction than through taxes and regulations. These include anti-pollution measures for example, costs that the transaction imposes on all of us, costs that aren't included in the transaction without government intervention.

The free market position is that the economy that we have right now should be changed. That we should get rid of the vast majority of government regulations.

Any time we make a change we should be convinced that there are good reasons to make the change.

The only reasons that the free market position can give for making this radical change is it will get the government out of the economy. What do they have to support this claim? The theory that supply and demand can force the market to self-regulate.

Also we are told that the free market economy would be more efficient. What do they have to support this claim? The theory that supply and demand will force the producers to use 100% of their capacity because their price will be forced to the cost of the marginal product.

The only support to make this radical change are these theories.

Indeed, you seem to be arguing that all of economics is nonsense in that you appear to be claiming that ALL major economic principles are in dispute, not simply as a matter of nuance, but in their very most fundamental claims.

I am arguing that the economic theories supporting the radical idea that the economy can self-regulate don't actually support it.

Once again, it is you who are claiming that the free market can self-regulate. And you don't have any examples of this happening anywhere in the world so these theories are the whole case for the self-regulating free market that you have.

And I have explained in detail the weakness of marginal productivity as an integral part of this self-regulating mechanism. Points you still haven't addressed.

The law of supply and demand rests, on the principle of the subjective theory of value. Again, this is thoroughly mainstream. The entrepreneur will lower his price, in order to compete, until the marginal revenue equals the marginal cost. He may or may not be constrained in this by the law of diminishing return.

This correct, in fact in our industrial economy we won't generally be limited by diminishing returns.

Unfortunately, as I showed that means that the will be no profits either if we go to the self-regulating free market according to the free market theory.

If economies of scale allow very low marginal costs he will continue to produce and sell and will continue to add to his revenue.

Until he goes bankrupt. Yes, economies of scale means that each unit of added production has a lower marginal cost. Since the mechanism of supply and demand that your theory depends on drives the price down to the marginal cost of the last item produced it guarantees loses, not profits.

Make no mistake, this minor flaw in your free market theory, no profits is why the majority of prices in our economy aren't set by supply and demand.

The aim of your free market theory of supply and demand setting prices is to optimize the utilization of resources including production facilities. The aim of businesses in the real capitalist economy that we have here today is to make profits.

If he estimates his sales incorrectly, he may have to unload excess inventory at below cost. But this is simply the normal risk of operating a business. What you aim for and what you get are not always the same.

There is nothing here that compels him to lose money.

Quite right in the economy that we have today. But if we change this economy into the self-regulating free market for supply and demand setting prices to impose market discipline on producers your theory says that the price has to be driven down to the marginal cost of the last item produced. I am explaining your theory to you. It is not my theory, it is yours.

Your attack on the marginal cost theory is simply unsupported logically.

Once again, it is not my attack, I am explaining your free market theory to you. This is what the economists say has to be true for the market to self-regulate. I am only pointing out one of the problems with the theory, the lack of profits.

The idea of marginal productivity has its place in economics, especially in microeconomics of production. But it is straining it beyond the breaking point to apply it as it is in the free market theory, to hang on it the justification for making the economy self-regulating.

You say that the way that the free market theory treats marginal productivity is my attack on marginal productivity. No, I am attacking the way that the free market theory uses marginal productivity.

Then why do you avoid telling me what your understanding of the place of marginal productivity has in the self-regulating free market?

Moreover, the self-regulating claim does not rest on marginal cost. It rests on supply and demand. After all, Adam Smith and the physiocrats wrote a century before the marginalist revolution.

That is true, but neither did Adam Smith believe that prices are set by supply and demand. He realized that prices in the economy are administered prices, set by the producer to repay his investment. That was the case then and it is the case today in the real economy. The theory of supply and demand setting prices is attributed to Marshall and as is the whole point here dependent on marginal productivity.

The whole point of my argument is that the only way to expand supply and demand to set prices in the whole economy is if marginal productivity sets the price. If supply and demand don't drive the price down to the marginal product cost and force the producer to use his entire production capability it would give the producer control over the price. He can determine how much to produce. He can advertise to justify a higher price. Only if he is forced to accept whatever price supply and demand determine will the market be able to self-regulate. I know that this sounds silly but it is not me who is being silly, it is free market theory that is silly.

The problem that you are having is that this idea of the evil government causing all of our economic problems is an attractive one to you. The idea that the free market can exist is an attractive idea to you because it would allow us to get rid of the government in the economy.

But you also have a lot of experience with the economy directly. Maybe you understand how your company set pricing, which probably was by calculating an average price of production and adding a mark up for profit and to cover fixed overheads, all based on the projected sales. And you probably even know that your company keeps track of competing prices and factors that information in. You can't reconcile your experience and knowledge of the economy with the free market theory. It is because the theory is so crazy, not because I am. But you can't admit it because you need the evil government out of the economy. So you have built up this idea of what you think that the theory is.

Also, the law of supply and demand wasn't about "punishing bad behavior."

You are right, supply and demand isn't about punishing bad behavior in the economy, that is why we need the government to do it. Supply and demand, the discipline of the market has never been about regulating bad behavior, in fact it quite easy for bad behavior to be quite profitable without government to enforce the economy's limits of good behavior.

It was about maximizing supply relative to demand.

No, the free market theory is about supply and demand balancing to an equilibrium price. Demand is not a constant. And it is not about maximizing supply, it about the most efficient use of resources, forcing producers to fully utilize their production facilities, for example, bankrupting the least efficient until the most efficient are producing as much as possible and earning as little or no profit.

The point was that if you intervene in the price, you will get less supply and more demand and therefore will ultimately end up with higher prices, even though those might be black market prices.

It would depend on whether you intervened to force a higher price or a lower price. But governments in democratic, capitalistic countries don't intervene in the economy to manipulate prices generally, food production being an exception. They intervene in the economy to police bad behavior for example, to establish the minimum standards, to impose externalities, to stabilize the economy and many other reasons besides controlling prices. As I have repeatedly said.

And yes, you are correct, the theory of marginal productivity doesn't have anything to do with making a profit. In fact, one of the many massive problems with marginal productivity is that in the industrialized world that we live in marginal productivity theory would not only eliminate profits, it would guarantee that sales would be at a loss. This is why marginal productivity theory is bullsh*t. This is one of many reasons why the theory of the self-regulating free market is complete bullsh*t.

I haven't any idea what you are talking about here. You haven't shown at all how the marginal price leads to a loss. Again, marginal theory is thoroughly mainstream. It is accepted by virtually all schools that I know of and is a common part of economic textbooks.

This entire discussion is about marginal productivity, not marginal price, whatever that is. At least it is mainstream. I assume that that is a misspeak and you meant to say that I hadn't proven that marginal productivity leads to a loss. For the, what, twentieth time, supply and demand have to drive the price down to equal the marginal cost of the last item produced. This termed the marginal product. If you don't have diminishing returns then the cost to produce the marginal product will be the lowest cost product. This means that you have to lose money on all of the previous products and you will break even on the last one.

Yes, marginal theory is accepted by all schools of economics. Why does that counter my explanation of the weakness of marginal productivity providing support for free market theory? Am I to blindly accept it because it includes the word "marginal" just because you apparently do? Is there nothing better in your mental toolbox than "everyone else believes it?" Can you in this furry of words that you throw out, I know, I am one to talk, that might be a real argument?

It is the theory of the self-regulating free market that requires many small competitors. If there are only a few competitors then they can better control the price that they get for their products. They would escape the discipline of the market, their prices would not be set by the mechanism of supply and demand. The self-regulating free market wouldn't be possible, which is the whole point, it isn't.

And predictably you are wrong about the classical economists, David Ricardo, Adam Smith, John Stuart Mill, Thomas Malthus, Jean-Baptiste Say, etc. They were looking at an economy that was coming out of mercantilism, an economy made up almost entirely of real world oligopolies and monopolies. Adam Smith in his The Wealth of Nations mentioned the invisible hand one time only, 90% of the book was warnings about what he called "rent" that could be imposed on the economy by oligopolies among other "rentiers" that could manipulate the market unless they were regulated and controlled

Oh, and of course Marx is considered a classical economist. He went even further than those mentioned above. Much, much too far. But many of his observations about the problems with capitalism were valid. He was one of the first economists to see the problem of debt deflation for example.

Now you're really going off the deep end in citing Marx as your authority for free market economics. That is, after all, what we are talking about free market economics, not classical economics. I assure you that there are a great many modern free market economists who disagree with classical economists like Marx, Malthus, Ricardo, and the like. It's like you're trying to say that free market economics is wrong because Marx was a classical economist, and he believed in the labor theory of value.

The modern Austrian School rejects virtually everything that Adam Smith had to say except the parts that he cribbed from the physiocrats. I am not aware of any modern free market schools that accept the theory of oligopoly?

Your obsession with authority has lead you to believe that I am using Marx as example to support my case. Clean your glasses, reread. I only said that Marx is considered a classical economist. Smith was an anti-physicocrat for the most part, his book title was a challenge to them, the Wealth of Nations. His book was a warning against high rents paid to non-producers in the economy like landowners. But it doesn't matter. I am not using Smith or any of the classical economists. I was trying to save you from some of your wider excursions into fantasy land.

So you are an Austrian. That is what you mean by modern free market economist. I don't remember any great defense of marginal productivity in Austrian economic theory. The existence of the self-regulating free market is a given in Austrian economics, ground zero, the one piece of absolute truth presumably handed to us by God. The one* thing that you have accept on faith to be called an Austrian. I have never read an explanation from an Austrian providing a proof of the existence of the free market or how the free market would operate to replace government. The free market is the 100% all natural form of the market for Austrians. I always thought that you would be drummed out of corp if you dared to question about the existence of the self-regulating free market.

* Well, two, there is God's perfect money, the gold standard.

But it does explain your debating style which pretty much is the same as a two year old stamping his feet screaming that he is right, juuust beeecause he is.

You do realize that most Austrian's at least in my experience are so far gone that they drift back and forth between talking about the free market as explaining the economy that we have now and as the economy that we should aspire to, not really even seeing that there could be a difference.

I read Murray Rothbard's Man, Economy, and State: A Treatise on Economic Principles recently. I marked up a lot of passages in it on pricing. I will try to find it and roll out some of the more ridiculous ones. It should show my point. And I did give you examples of Austrians that trashed your beloved Quantity Theory of Money.

Here is one that just fell into my lap by a student of von Mises.

Persons with goods or services they hope to sell must continually experiment to discover the 'market price' of any particular item. As the students will have learned from the classroom auctions, it is possible to determine, by continued bargaining, the price at which an item will 'clear the market' at any particular moment. At that price, determined by the relative eagerness and subjective values of owners or potential sellers and would-be buyers, the number of units of a good or service wanted and the number offered will be the same. But no one can know in advance what this price will be.

Obviously this lady, Bettina Bien Greaves, is reading the pulse of modern business practices.

I assume that you agree with her. Is it a description of the economy that we have or the one that Murray Rothbard says that we need?

The Austrian school, that explains a lot.

Continued below.

 

[SimpleDon]

-----------------

Continued from above.

"First of all, the quantity theory of money and the "use of quantity of money as a target" are not the same thing"

Once again, an astounding statement to make. The quantity theory of money states that excess exogenous money production is the cause of inflation. For this to be true would mean that the way to prevent inflation is to reduce the production of money. If the production of money is only a result of inflation and not the cause of it then trying to directly reduce the quantity of money in circulation would be doomed to failure. Which it was.

I don't see what's so astounding about it. One is a theory. The other is a policy recommendation.

If you accept that the theory is of no practical use.

The claim that exogenous money growth causes inflation does not mean that you should target money growth as a matter of policy. That is the policy recommended by Milton Friedman but rejected by Hayek for reasons that I already explained in my previous post.

Hayek the Austrian economist that I provided a quote questioning the QToM? That guy?

Volcher drove interest rates so high so fast not because he was targeting real interest rates but because he was trying to reduce the amount of money in circulation. The absolute best that could be said for him would be that he blundered into doing the right thing for the wrong reasons. He was a monetarist, he believed in the quantity theory of money. He believed that reducing the amount of money in circulation would bring down inflation. He was wrong. It is treating the symptom, not the cause.

I didn't mean to suggest that Volcker was targeting real interest rates as the goal of his policy. It was the means. But I don't think he was as concerned about money supply at that time as he was about money velocity. The primary goal was to break inflationary expectations which would reduce velocity. Had he followed Friedman's recommendations, he would have reduced monetary growth gradually. I think he did the right thing for the right reasons.

Volcher targeted the money supply. As I explained to you the very basis of the QToM is a constant velocity of money. Perhaps you could explain how to target the velocity of money. Your first problem is how do you measure it.

Is Friedman right about QToM? Or is he wrong. It is his claim to fame and he disavowed it later, about twenty years after the rest of the economics world did including a lot of your Austrians.

Or was he only wrong about the theory having any use at all, any predictable worth. Is it a great theory that is of no use to us?

I am beginning to think that you are just throwing out things that you have heard at random hoping that something sticks. Prove me wrong, tell me how the velocity of money is measured? Then tell me what causes the velocity of money to change. Then tell me how the velocity of money is related to liquidity preference.

I have wasted an entire night on this crap. Prove to me that you can think your way through any of the arguments here, that you can present something without contradicting it two paragraphs further on.

The high interest rates produced the worse recession since the Great Depression. It started the destruction of the US's manufacturing and triggered a lot of the problems with the third world's debt. It was a stupid, stupid way to control inflation. It targets a part of the economy, construction, capital investment, automobile production, appliance manufacturing, and crushes them. The best way to reduce inflation in most instances is by increasing taxes to reduce overall demand.

Volcker had no power over taxes. If Carter had proposed a tax increase and gotten it through Congress (doubtful in an election year), it would have made Volcker's job easier provided the tax increase went to deficit reduction.

So you agree with me. And I was beginning to think that you would disagree with me if I told you that the sun comes up in the east.

The oil price increases produced the inflation, but a big portion of the increase in prices left the country, it went to the OPEC countries. I think that it was about 40% of it. The money that left our economy largely produced the unemployment.

An oil price increase in which 40% of the money left the country would be contractionary, not inflationary. This is one of those problems with the modern mis-use of the term inflation. When the price of oil goes up it forces up prices elsewhere in the country.

You have lost the thread again. You are arguing that the inflation is caused by increases in the money supply. I am arguing that inflation is increases in prices that cause an increase in the money supply side. Cart/horse or horse/cart. If the money leaves the country it can't be cause the inflation. The increase in the price of oil did drive up the cost of everything else. It was was the increase in price of oil that rippled through the economy, not an increase in the money supply.

But where does the money come from to pay the higher price? It has to come from the same sources which then spend LESS on other items (such as housing) and force the price of those items down. If 40% of the oil money left the country, you should expect, on balance that the total price level would have gone down. We should have had a severe recession. That was not the case, real estate, for example skyrocketed in the 70's even though it is not a petroleum-related expense. Prices rose across the board and so did wages.

Once again you have lost the thread. You are arguing that the cause of inflation is too much money created by the Fed. I am arguing that are many causes of inflation. That increase in the money supply is a result of the inflation, not the sole cause.

Besides the oil shocks could have only been caused by an oligopoly which you don't accept the existence of as we learned. They must not have occurred then.

Also look up the dates of the oil shocks. Prices going up across the board is the definition of inflation.

In 1971, after raising the price of gold twice without stemming the run on gold, Nixon took us off the gold standard and allowed the dollar to float with the intent of returning to the gold standard when the price leveled off. It never did so in 1973 he cut his deal with the Saudis offering them security guarantees if they would only accept dollars for their oil. The Saudis agreed and the petro-dollar was born. But Nixon also wanted to avoid a recession so his Fed Chairman, and close personal friend, Arthur Burns, loosened credit and sought to deal with the contractionary oil price increases through looser credit. This led to inflation near double digits and by the time Ford took office he was launching his WIN (Whip Inflation Now) campaign. Burns tightened policy and by the time Ford faced Carter for re-election, inflation had fallen to 4.8% and the economy was booming. It almost worked. Ford came from 33% behind Carter in the summer of '76 to lose the popular vote by only .5%. It probably the biggest comeback in electoral history, but it's gotten no attention because it fell short.

Carter's Fed Chairman, William Miller, quickly changed policy and inflation was on the up-tick again. Meanwhile, of course, OPEC continued to raise prices to keep up with the US policy of cheapening the dollar. But this was expensive for Saudi Arabia because to raise prices OPEC had to cut production and most of the cuts fell on the Saudis. By 1979 inflation had hit 18% and the King of Saudi Arabia informed Carter that if the US didn't quit cheapening the dollar Saudi Arabia would have to demand gold for its oil. Carter fired William Miller and appointed Paul Volcker.

There never was an oil crisis. It was all a response to loose US monetary policy brought on, initially, by the Vietnam War.

There is that Austrian flag flying proud and free, the gold standard, confusion about dates, the evil Fed, the poor Saudis having to stomach becoming filthy rich to teach use not to cheapen the dollar, no oil crisis, deflationary oil price increases that didn't cause a crisis, the manic, conspiracy driven lot of it.

I can probably do another 3000 or so words on stagflation and what they should have done. Suffice it to say that the inflation wasn't caused by too much money, too much money is a symptom, not a cause. And it was not caused by low interest rates.

I can only re-iterate my challenge in the last post. Show me the mechanism by with the money supply gets increased as a result of inflation? What is it about inflation that leads to an increase in the supply of money? Where does the demand come from that forces prices up and gets the inflation going in the first place? An increase in price does not increase aggregate demand. In fact, it lowers demand for products that haven't gone up in price,

Prices go up for a lot of reasons. The oil price increases for example, driven up by the non-existing OPEC oligopoly, which you claim are deflationary. Supply can decrease for example, destroyed in a war. Population growth. Wage increases. The majority of money creation in the economy is endogenous. Prices go up and what is the first thing that happens. People and businesses have to borrow more money to pay for things. Banks create money when they make loans.

You have hand waved this away by claiming that price increases are deflationary and by insisting that the only acceptable definition for inflation is an excessive amount of money so that the obvious cause of inflation is an excessive amount of money.

It was the reparations for the war that caused the Germans problems and the fact that the Imperial government paid for the war by monetizing the debt. By not raising taxes demand increased during the war causing the start of the inflation.

So you admit it was money creation! You admit that monetizing the debt during the war caused inflation. Monetizing the debt IS exogenous money creation.

Yes, monetizing the debt is exogenous money creation and it can cause inflation. But it is not the only cause of inflation and it is not the cause of the hyperinflation five years after the end of the war. In fact inflation and the budget deficits dropped right after the war. It was not until the government had to buy gold from foreigners that the inflation kicked in to hyperinflation.

By the way, deficit spending creates inflation only when the economy is at full employment and full capacity utilization. If they are not at full employment and full capacity deficit spending will increase both before it creates inflation in spite of the fact that it is exogenous money creation.

The pertinent point is that in neither case was the inflation caused by printing excessive amounts of money, the inflation was caused by demand exceeding supply. It was caused by both having excessive foreign debts which required the excessive conversion of their currency into gold or a foreign currency.

Oh boy. You seem to think that when I'm talking about "money printing" that it is to be taken literally.

No, I don't think that you mean money printing literally.

I don't think you understand money and banking very well.

You believe that inflation is always caused by the evil Fed trying to sabotage the economy and I am the one who doesn't understand money? Oil price increases are deflationary according to you and I don't understand money? Inflation can't create money because debt doesn't create money according to you and I don't understand money?

I've mentioned this before. I suggest you read Hayek's Theory of the Trade Cycle. He explains money creation there and his explanation is completely orthodox. You'd get the same thing from Samuelson.

I don't know Hayek's ideas on the subject but I do know Samuelson, I don't have any real problem with his explanations. Are you saying that you believe that Samuelson would say that the only cause of inflation is exogenous money creation and that debt and the banks don't create about 95% of the money in the economy? I believe that you told me one time that when businesses and people default on loans that the default amount of money is destroyed in the economy. Is that a nugget of knowledge that you gained from Samuelson? Or Hayek? Do you think that Samuelson would endorse your calls to return to the gold standard? Is this is an example of the superior knowledge of money that you have, that we should return to the gold standard? Possibly your belief that two examples of hyperinflation in the 20th century is a rock solid case against anything but a gold standard?

The reparations were taking too much of German production. By the time they paid the reparations, they had nothing left to finance local needs, so they created the money. Probably by monetizing debt just as they had done during WW I only a lot more of it.

Yes, you have it. The devaluation of the currency came first, then the inflation in the form of price increases and then the growth in the money supply.

I don't see where your explanation explains anything about prices rising. Demand exceeded supply? Where did the demand come from if Germany's money was all going overseas for reparations?

You seem to forget that money is only one part of demand. The Germans still needed to eat. And of course, I forgot your handwaving. Since you define inflation as excessive amounts of money in the economy so that inflation must be caused by excessive amounts of money in the economy. But the economics definition as well as the dictionary definition of the word is a general, widespread increase in prices.

If the excessive money printing caused the hyperinflation as you claim the progression would be,

•Excessive money printing.
•High inflation
•Devaluing of the currency against other currencies and gold.



If on the other hand the inflation was caused not by the government printing excessive amounts of currency but because the country had to buy excessive amounts of gold, Germany, and excessive amounts of foreign currency, Zambia, then the progression will go,

•Devaluing of the currency against other currencies and gold.
•High inflation because of the devaluation.
•Excessive money creation because of the inflation.


It is easy to check this, which progression is correct. In Germany the value of the mark dropped dramatically a full six months before the inflation switched to hyperinflation.

This is a large section. I'm only going to deal with this part of it. The first scenario that you drew is, in fact, quite common. I would argue that it is the most common in countries faced with inflationary problems. We saw it is Argentina, Brazil, and other Latin American countries and even in Britain. These countries experienced high inflation but they never quite got to hyper-inflation.

The problem with your second scenario is that you continue to classify devaluation as "inflationary." No! Devaluation is contractionary.

This again, no Bill, it doesn't make inflationary the same as deflationary just because you stomp your feet and yell it! Not even if it is inflationary in quotes. You can't tell me in one sentence that that devaluation of the currency isn't inflationary and then later claim that inflation devalues the currency!

Think about it. Inflation is when prices go up, when the dollar doesn't buy as much. The dollar is worth less today than it was yesterday. Inflation debases the money. And you say that I don't understand what money is.

And if you keep telling me that

When you devalue, import prices go up. This means people have less money for non-imports so demand for those products and service go down. You get deflation in things like rents, auto repairs, and domestic manufactures. This leads to unemployment and recession or depression. THEN the government responds to this by increasing the money supply to increase demand for the domestic products and hopefully boost employment.

Inflation is a general increase in prices. They wouldn't be importing goods if they made cheaper domestic substitutes. They not raise the prices of the imported goods. Domestic goods increase in cost too. They might contain foreign content. They might have just been relieved of competition from cheaper imports.

Here's one clear test of the difference between the "cost-push" of a devaluation and the "demand pull" of monetary inflation. With a devaluation, price go up, but WAGES do not. It is all loss. It results in a lower standard of living of people right away. With money creation, however, both prices and wages rise. That is because there is more demand in the economy and that demand includes an increased demand for labor.

Devaluation of the money is the same as inflation.

Cost push inflation is when aggregate supply drops.

Demand pull inflation is when aggregate demand increases.

So your scenario is correct. But the it is still the government that causes the post-devaluation increase in the money supply. There is no mechanism by which devaluation automatically leads to money creation. Again, show me what that mechanism is.

Asked and answered.

"Clearly the currency was cheapened relative to other currencies."

That is what devaluation means.

That is the formal act of devaluation. Devaluation is the recognition of a cheapening that has already occurred through money creation.

Handwaving to avoid the obvious.

Wait, so now you agree that it wasn't the money printed to support the budget deficit that created the inflation? That it was the money created to buy the gold or foreign currency that caused the inflation and the hyperinflation. You should have told me this much sooner. The original proposition that I though that you were defending was that the money created by the budget deficit had created the inflation and the hyperinflation. Now we are getting somewhere.

No it wasn't the money created to service the foreign debt that was the problem. The money used to buy the foreign currency or gold obviously goes out of the country where it can't cause inflation inside the country. Besides the amount of money involved isn't that much compared to over all economies.

At least before the devaluation. But it is a large amount of money compared to the holdings of foreigners who own the gold and currency that are needed. What it does do is to force down the value of the currency against other currencies. This is what caused the inflation inside the countries, the increase in the prices of imports. Both countries had high levels of imports.

We're not on the same page on this, but I think I've already pretty much explained my position. Devaluation is NOT inflation. It merely produces higher import prices.

You are not on anyone's page on this. Inflation and devaluation are the same. " ...Devaluation is NOT inflation. It merely produces higher import prices." Funny, higher prices aren't inflation.

The wage inflation occurred because people have to eat. A demonstrable fact.

Since they have to eat and food costs more because of the inflation wages have to be increased.

If the cost of food went up because of a devaluation, where does the money come from to pay the higher wages? In the absence of government intervention, the increased cost of food would have to come from reduced purchases of something else. There would be no across the board price increases. There would higher food prices and lower prices for other items. That's why a devaluation is contractionary.

If demand drops to cover the higher costs of the imports then there is no inflation. If the costs can't be traded off there is inflation.

Just for reference this kind of inflation is called "cost push inflation." The kind of inflation that you champion caused by evil men at the Fed producing too much cash is called "demand pull inflation."

Yes. I've already addressed this although I consider this to be a foolish and misleading dichotomy. "Cost push inflation" is a nonsense expression. What is a cost? It is a price. So the whole thing reduces to "price increases cause price increases."

It was a joke. I don't see much difference between two. That is why I assigned a joke definition to them.

Read the difference between exogenous and endogenous money creation. The vast majority of money creation in the economy is endogenous, it is created by the economy itself. The explosion of the money supply is caused by the inflation, not the other way around

You keep saying this but you have not shown how this is possible. How does inflation get started in the first place? And how does it lead to endogenous money creation?

Inflation = higher prices -> more debt = money creation.

If there is no reason for the central bank like the Fed to create money, money that will only create inflation why would they do it?

There can be a variety of reasons. Economic stimulus is one. To help finance the deficit is another. To keep interest low and asset prices high is another (the justification for the current QE policy). But the QToM agrees that exogenous money creation can only create inflation when we are at full employment. Why would you stimulate the economy when you are at full employment?

Do you believe that the Fed intentionally creates inflation?

That's what they claim they're doing.

Yes, right now they are trying to boost the inflation rate. But they are not succeeding. Except in the stock market.

The people who run the Fed are bankers and bankers are creditors and creditors lose to inflation and debtors win, why would bankers intentionally increase inflation?

When the Fed buys Treasuries it does so only from half a dozen Wall Street banks. These banks get the money first and it is basically for free. So they get the full value of the money up front and can purchase assets. The price increases do not hit until later. Other lenders and consumers get the money after the prices have gone up. Regional bank presidents tend to be more hawkish on the Open-market committee perhaps for this reason but they are out-voted by the full board and the New York president.

The Fed is buy Treasury bills that a few banks have in their reserve accounts at the Fed. The money that the Banks receive for the bonds goes into the bank’s reserve accounts at the Fed. Tomato, Tomoto.

The Fed made trillions of dollars out thin air in 2008 and 2009 and monetarist economists have predicted hyperinflation every since. If increasing money supply mechanically increases inflation why aren't we awash in inflation now?

The Fed increased the monetary base by about $3 trillion. But they began paying interest on excess reserves at the same time.

½% interest prevented inflation?

About halt the increase, perhaps more, remains in excess reserves. Also, some of this money, we don't know how much, went to overseas banks.

So the people who predicted inflation because the huge amount of money creation were wrong? People like you?

We have experienced inflation. Using the same measurements as we used in the '70's inflation under Obama has been about 7%. Clinton changed the formula in the '90's so us retirees would get less in social security. But that is consumer price inflation.

Ah, yes, the famous hidden inflation. The kind of inflation that doesn't have anything to do with prices increasing. What I call George Will inflation. The kind of inflation that only exists in his imagination.

And of course, Clinton found a formula that hides the hidden inflation. In spite of the fact that no one can tell us the changes that he made, they are hidden too. In spite of the fact that the formulas used don't seem to matter much because what you are measuring is year to year change, not absolute value. You can substitute cheaper pork for beef but next year they are going to increase in price about the same amount.

To that you can add asset price inflation. (bubbles). We currently have a bubble in the stock market, the bond market, and the high-end real estate markets.

You are a God damned economics heretic. This is not inflation. It doesn't devalue the currency. It is nearly the sole goal of the economy, its mother's milk, if you ever want that Nobel or even a chance at another research grant you must use the proper terminology here, these are capital gains.

The next thing you know you will saying more crazy stuff like that profits increase the costs of goods and services. That 99% of the efforts in the stock market are a burden to the real economy of producing things that people need and want, that it is little more than zero sum gambling casino where one man's loss is another man's gain, where stockholders aren't the owners of the company they only have a poorly defined claim on the portion of the companies profits that the C suite decides to dole out.

The US also exports inflation due to our huge foreign exchange deficits. This has been a real big issue with the developing countries like Brazil, India, and Turkey where they have been beset by inflation due to trade imbalances and have had to tighten their own policies to counteract it thus creating unemployment in their own countries. Obama has not been well received at g-20 meetings and seriously considered skipping the last one.

Yes, our trade deficit exports inflation to other countries. It lessens our inflation possibilities in a couple of other ways. Competition from cheaper imports keeps prices and wages down in the domestic markets. Lower wages keeps down domestic demand and the inflation pressures that would bring. These are not really desirable. Any sane economist would prefer that we were constantly having to deal with the problems of low unemployment and full capacity utilization Threatening inflation rather than having to recover from what we do now 12% unemployment and underemployment. And disinflation.

Money velocity has been low because consumers are too deep in debt so companies that have money to invest are buying back their shares instead.

I thought that I gave you the two or three formulas of the quantity theory of money. They included either V the velocity of money or k_d the money demand divided by the money unit. k_d was Milton Friedman's favorite. Both V and k_d are attempts to put the human factor into consideration, how optimistic or how pessimistic consumers, owners and investors are. are they holding their money tight or are they spending like there is no tomorrow.

I don't know of any free market economists who have predicted "hyper" inflation. Most have predicted that the current inflation will get worse. A few are predicting deflation. I lean toward the deflation camp but, of course, it all depends on what policy makers decide.

Yes.

 

[Emily Lake]

Well... I was trying to read this thread, but an unsupported Wall of Text fell on me and I died

My two cents (which aren't worth quite that much): Marx didn't understand how humans think and act. And free markets don't work if there are middlemen involved. So basically, everybody's wrong, and we'll probably just keep toggling together new and creative bandages to keep our rube-goldberg-ian economies hobbling along until something explodes.

 

[boneyard bill]

To Simple Don:

Wow. Two super-long posts that just repeated the same old stuff. If you're so fond of writing, why don't you publish a book? I'm not going to try to respond point-by-point. I will focus on just two points. One is market prices, and the other is money and banking. I will begin with the latter because that is an area where you seem to be utterly confused.

Let's begin with money and banking and specifically with what you refer to as endogenous money creation. A man goes to the bank and deposits $1000. The bank holds some of that in reserve, let's say 10%, and it lends out the rest. So it has $100 in cash and $900 in loans. Let's say it's a mortgage. So it has $1000 in assets and $1000 in liabilities which is what it owes to the depositor. The banker will tell you that he has not created any money.

However, the bank lent out $900, and the borrower now takes that to another bank (or even the same bank) which now sets aside $90 as a reserve and lends out $810. And that gets deposited in another bank, etc. So this process goes on until, theoretically, the $1000 original deposit becomes $10,000. So, while no bank created any money, the banking system as a whole does.

But this is endogenous money creation which means it comes from within the economy itself. And what is most important here is the source of the original deposit. Because the original deposit represented productivity. Something was produced to enable that deposit to occur. It was the product of land, labor, or capital.

Exogenous money creation occurs when the central bank purchases a security from the bank but does not give the bank any money. Instead it credits the banks reserve account. So if the central bank purchases a $1000 security, the banks reserve account is now $1000 higher and it can lend out $9000 if the reserve requirement is 10%. Note that there is no real-world productivity here. The money was created, but it does not represent any increase in land, labor or capital.

Now OPEC raising oil prices and all oil-related prices go up in accordance with that. Our borrower, who was an entrepreneur, finds that he can no longer compete in his business because his production methods were more oil intensive than this competitors. He declares bankruptcy. He still owes $800. The bank gets $100 in settlement from the bankruptcy court. It loses $700. The money supply declines by $700. OPEC's price increase has a deflationary effect on the economy.

Of course, other things are happening as will. Consumers are hit with higher gasoline prices so they withdraw savings to meet expenses, for example. But these effects are all deflationary where deflation is understood as a reduction in the money supply. This is why the conflation of the terms inflation and deflation to mean either changes in the money supply OR increases or decreases in the price level can create a great deal of confusion.

Thus, an oil price shock, as well as a devaluation, is a contractionary event. The reason we do not experience it that way is because the central bank, seeing the rising unemployment and other signs of economic slowdown, acts to reverse the effect. This can take a number of forms. The can lower interest rates. They can loosen lending standards. They can lower the reserve requirement, etc. All of these measures will tend to increase the money supply i.e. they are inflationary measures.

So, where the initial event would produce, what neo-Keynesians claim causes cost-push inflation, actually leads to stagflation. But this stagflation wouldn't produce an overall increase in the price level. You would have selective price increases and selective price decreases. The decrease in wages, however, typically takes the form of higher unemployment. Since, according to Keynesians wages are a "sticky price" actual wages do not respond to deflation quickly. So the statistics do not show wage declines even though the actual money spent on labor has declined. The difference occurs in the form of unemployment.

Now , if this is properly understood, it should be clear that there is no basis for any endogenous increase in the money supply due to price increases. Even if we do see an increase in the CPI due to this "cost-push" inflation, the CPI does not capture the decline in aggregate wages that takes the form of unemployment.

There is nothing in this scenario that would lead to an increase in productivity and therefore to an increase bank deposits. On the contrary, the aggregate effect is heavily biased toward reduced productivity and reduced bank deposits.

Instead, at least in the post-depression world, the money supply grows due to exogenous money creation due to central bank policies although other government agencies can play a part.

This is why I asked you to specify the mechanism by which price increases can lead to an increase in the money supply. You simply responded that it produces endogenous money creation. The above analysis shows that such a scenario is extremely unlikely.

In Milton Friedman's point of view, the Fed should deliberately increase the money supply to smooth these things out. I don't agree with that, bit that is off-topic. Generally, the Fed members, regardless of any previous ideology wind up doing that anyway, but their approach is more seat-of-the pants than it is systematic.

Nevertheless, the end result is exogenous money creation. Price shocks cannot produce endogenous money creation except in the most unusual circumstances if it were possible at all.

 

[boneyard bill]

Well... I was trying to read this thread, but an unsupported Wall of Text fell on me and I died

My two cents (which aren't worth quite that much): Marx didn't understand how humans think and act. And free markets don't work if there are middlemen involved. So basically, everybody's wrong, and we'll probably just keep toggling together new and creative bandages to keep our rube-goldberg-ian economies hobbling along until something explodes.

It's good to know that someone is reading this stuff besides the two of us. So please keep reading even if it is a bit confusing. It takes a long time for things to sink in and we're just a bunch of amateurs. The professionals get even more esoteric and much more complicated. But they're mostly arguing over details so even us amateurs are able to present some approximation of the big picture that these theories try to paint.

 

[boneyard bill]

To Simple Don, continued:

The law of supply and demand is fundamental to the study of market economics. If you do not accept that, I don't know what basis we have for discussing market economics at all. The subjective theory of value explains why the law of supply and demand works. It was formulated in the 1870's and, along with the principle of marginal utility made up the "marginalist revolution" that transformed economic thought. It underlies what we call "neo-classical" thought, and is accepted by every school of economics that I know of with the possible exception of the Marxists.

Fundamentally, the subjective theory of value says that a product is worth what someone is willing to pay for it. There is no objective factor, such as labor, that sets the value of a product or service. Since value is subjective, the only way that we can know the value of a product is through the market price. If we attempt to set prices through some agency we will get inefficient production and distribution. This phenomenon is well-known. We know that when the government imposes wage and price controls that we get shortages of some items and surpluses of others. The government then resorts to allocations or rationing and then black markets develop. So even neo-Keynesians are reluctant to propose wage and price controls.

But the interest rate is simply the price of money, and yet modern economists seem perfectly happy with the government manipulating the interest rate. There is no reason why we should expect that we will not get distortions in a government manipulated interest rate anymore than we would get economic distortions from the government manipulating the price of any other product or service. So we get bubbles, and we get busts, and we get bail-outs, and then new bubbles and maybe even lost decades like the Japanese have invented.

We now have zero interest rates, and we have bubbles in the stock market and the bond market and those bubbles are about to burst and we'll have yet another melt-down that may be so large that even the Fed won't be able to bail out the banks. But I have said all this before.

The point is that the government shouldn't interfere in the markets. When it does that, it creates dislocations which cause a misallocation of resources. Projects are begun which cannot be completed or are unprofitable when the are completed. That is what "free market economics" is all about.

Does that mean that the government is incapable of drafting regulations regarding airline inspections that must necessarily be inferior to the regulations the airline companies themselves would draw up? No. There is nothing in the free market analysis that would support that claim. It simply isn't an issue that free market economics addresses. Personally, I think the point is well taken regarding the US as I can think of at least 3,000 who could be alive today if the government had not prohibited airline pilots from being armed and cockpits from being secure. And I believe that the lifting of that prohibition would do more to protect airline passengers than all those arrogant TSA agents combined. But that is only to argue that some government regulations are flawed. It is not an argument that all such regulations must be flawed and, in any case, it is not an economic argument.

If someone is selling jars of cyanide, I think a government regulation requiring that they be labeled as such is perfectly reasonable.

But the important point here is that including such issues in an economic argument is out of place. While such regulations may have incidental economic effects, their efficacy is not a matter that can be determined by economic argument. Such is not the case, of course, where the economic effects of regulations are more than just incidental as is the case, for example, with many environmental regulations. In that case, the trade-offs need to be addressed specifically. Still other regulations, while technically not economic, have been enacted primarily because of the economic effect. This is called crony capitalism.

Libertarians may argue against non-economic regulations, but they are generalizing beyond what any economic theory would require. Libertarianism is a political and ethical theory, not an economic theory.

 

[boneyard bill]

To Simple Don:

Re-reading your massive posts I noticed a very important item that I had missed:

"You keep saying this but you have not shown how this is possible. How does inflation get started in the first place? And how does it lead to endogenous money creation?"


Inflation = higher prices -> more debt = money creation.

You overlook one very important point. ENDOGENOUS MONEY CREATION REQUIRES SAVINGS!

You need to study the money creation process that I have already described to you. For a bank to lend it need reserves. It lends against those reserves. Those reserves come from savings. If they don't come from savings, then the money creation is not endogenous.

So, price shocks lead to higher prices which leads to more borrowing and LESS savings. The result of this is higher interest rates since banks have less money and the demand for money soars. Higher interest rates lead to an economic slow-down. As I have said, price shocks are contractionary. They do not, and cannot, lead to a general increase in the price level. Instead, they produce high interest rates and unemployment.

In the real world, the Fed sees these higher interest rates as a bad thing and so it buys government bonds from the banks, but it doesn't give them any money. It adds the bonds to their reserves. This gives the banks the necessary reserves to be able to lend. This is exogenous money creation.

We see then, that price shocks to not lead to economy-wide inflation, whether you define it as money creation or price increases. It leads to recession. The money supply declines as companies go bankrupt and savers save less while other consumers tighten their belts to get out of debt. For neo-Keynesians and monetarists this is the problem. The decline in the money supply needs to be replaced. So they advocate exogenous money creation and MORE debt including more government debt.

From the Austrian perspective, the recession simply IS the correction for the price shocks. You need to let it play out. The only effective government response is to reduce its own spending to help reduce interest rates without exogenous money creation or even to run a surplus to add savings to the private economy and alleviate the credit crunch. (This is what Warren Harding did in the recession of 1920, and it ended in a year and a half).

Note then, that if you understand that price shocks are contractionary then you can see that the private market is self-correcting. It doesn't produce a perfect economy. If there is a drought and food prices go up, people are going to suffer. There is no economic policy that can prevent that. The economy needs to adjust, and the inevitably requires some pain. But nothing is gained by trying to prevent that pain. Intervention in the markets merely prolongs the adjustment and creates other problems elsewhere in the economy that then need to be "corrected" by yet more government interventions.

At any rate, let me re-iterate, endogenous money creation requires savings; and as a result we can see that price shocks will not, and cannot, cause endogenous money creation. A general increase in the price level does not lead to endogenous money creation. That must arise from exogenous money creation spear-headed, in the US, by the Federal Reserve Open Market Committee.

 

[boneyard bill]

Simple Don writes:

Yes, this is the free market position. And as I said the free market position is that as a result of this we should be eliminating the vast majority of government regulations. And that the free market operating without this vast majority of government regulations can not only have a more efficient economy, that the operation of supply and demand setting prices is capable of making the economy self-regulating, that is that the free market is capable of preventing all of the problems in the economy that the government regulations were suppose to prevent. These include the formation of oligopolies, cabals and monopolies to enable those to fix prices and to control their markets. These include the formation of financial Ponzi schemes to defraud the stupid. These include false advertising. These include the sales of dangerous and ineffective products and drugs. These include the building of poorly designed and dangerous buildings. And hundreds of others.

And the only mechanism that the free market has to prevent these bad behaviors is the simple one of supply and demand setting prices that are equal to the cost of the marginal product.

A drastic overstatement to the point of absurdity. Again, you are confusing libertarian philosophy with free market economics. Free market economics presupposes certain levels of government regulation. It assumes private property law. It assumes a commercial code. It assumes the existence of a government that enforces contracts. It assumes bankruptcy law. It assumes safe streets and protected transportation lines. When Attila the Hun ravaged France, he was not engaging in free market activities. He was disrupting the free markets of the Roman Empire. Laws against fraud or false advertising are completely consistent with enforcing contracts and determining property rights.

Fraud and false advertising may fall within the realm of someone's abstract idea of free speech, but free market economics is not based on abstractions. But all of these laws and "regulations" as you call them constitute the ground rules upon which the economy functions. This is quite different from the government intervening here and then there and then someplace else in some effort to "fine-tune" the economy. The information needed to fine-tune the economy comes from market prices and the people who need that information are consumers and producers not governmental economic commissars.