I actually don’t know the answer. Some others are far more well read on that subject. And in generally many others here are just a better Austrian then I. There are two two points I’d raise.
How do we know? As I asserted earlier there is no real way of forumalting a metric for measurements of economies. We can only arbitrarily create random algorithms of the sort. We have no real method of assertaining whether there was or was not economic growth, furthermoer we definately could not measure how much it grew and in what increments.
Even if it were true it doesn’t follow that we need 1% or 2% inflation. Not to say that 1 or 2% is extremely damaging to the economy either. As I said there is no real method of measurement. Measuring Human action is arbitrary.
In an Austrian world there will be steady price deflation (per your statement above). But what about limitations of our accounting and valuation systems (as in Net Present Value analysis of projects). Lets take an example. I am trying to decide whether to invest in building a new BMW manufacturing plant. Lets say that I need 10,000 ounces of gold money to construct it. Let say that today’s contribution (gross profit per vehicle is 1 ounce of gold). It will take 10,000 units (cars) to payback the initial 10,000 ounces of gold. But now assume that the price of a BMW will go down every year (due steady price deflation). My costs should go down too (which means I will pay my workers fewer ounces of gold per hour as time goes on, I see a problem here already). Assume that I get back 1 ounce of gold gross profit per car in the future (with projected price reductions, due to corresponding projected cost reductions). Why should I take a risk with my 10,000 ounces of gold? I would rather keep it in a vault and I know it will be worth a lot more in the future.
It seems to me that the “hurdle” to make me risk my “gold” will be much higher. Are we not almost “hardwired” to think “more is better” when it comes to money. Won’t returns in percentage terms be much lower for projects? If price of everything (in ounces of gold) goes down as the future unfolds won’t it be better to keep your money in the vault except for very high return projects? Will there not be more hoarding of money (the metal)? In short. Does deflation not lead to false price signals like inflation does?
presumably you should do it if you think you can sell lots more cars, and you shouldn’t if you don’t.
well, thats an interesting fact about what you prefer to do with your imaginary money. where is this ‘analysis’ going?
higher than if paper money that is being printed day after day? you need the incentive of there being increasing number of items of decreasing purchasing power to motivate you to engage in activity that would allow you to acquire a definite purchasing power ?
very high ?
you are asking if people will hold commodity money? that’s the point of it!
i’m ard pressed to think of people atomizing their gold out of existence, and thereby decreasing the supply of gold money… but really the issue is not between ‘deflation’ and ‘inflation’ but between free-market money, and socialist/monopoly money.
I have read Murry Rothbard’s “Mystery of Banking”. Here is my take on it:
I do see the boom and busts and erosion of purchasing power created by credit money creation. Debasing money in this way is nothing more than “stealing” real value from the public.
I do see how too much base money creation leads to loss of purchasing power as well.
I do agree that central bank attempts to distort the price signal of interest rates is a disaster and leads to mal-investments.
A choice of 100% reserve banking for the public makes a lot of sense.
I am not convinced, however, that money NEEDS to be backed by a commodity. I do see one big benefit of commodity money that is it cannot be debased.
Mansoor, with this post, it was like a “light” came on. You are now on the right path. Before, it was like you were wondering around in the dark without a flashlight. Now, you have a flashlight. I’m sure you will soon start receiving answers to your question #5. I think you now have the beginning of a foundation in free market economics that you can build upon from here. Keep going!
Money doesn’t have to be a commodity, it isn’t now. Repeal legal tender laws, and we will soon see what is preferred as money. That would kill most of the tax code though, pretty large hurdle.
Do legal tender laws prohibit a citizen from engaging in a contract which specifies payment in terms of ounces of gold or silver? Does payment have to be specified in dollars?
I have a hard time believing that? Can you give me a link to such a law? Is it a federal law? state law?
I know it is legal to barter. If I produce milk and you produce bread. We can trade without dollars. But we do have to report the market value of the transaction in dollar terms to the IRS at year end when filing taxes and pay any taxes on implied dollar profit.
Search it yourself, you can find all the laws easily with google. Believe what you will, open a business in the US and don’t accept dollars. Good luck.
I said you were partly wrong because it seemed to me you were inferring that a stable supply was superior to monetary inflation because price deflation was a net good.
Austrians don’t advocate a stable supply of money. Austrians advocate the market handling any necessary changes in money in order to complete exchanges.
It’s a minor quibble, but since the OP is learning AE on the fly, I thought it was necessary to point out that we’re not for any particular monetary agenda except market money. If the market wants stable supply, decreasing or increasing supply, that is ok with us. One of the most powerful insights of free market and Austrian economics, is an acceptance of dynamism present in every exchange. Any fiddling or intervention, even to accommodate an agreeable status quo, is a subversion of the market process and should be rejected.
I’m reminded of a great line in Frank Herbert’s Chapterhouse Dune. When asked about the over bureaucratization of a particular department, the lead analyst comments, “Real boats rock”. And so it is with the market. Real markets have changing supplies of money, and they have changing prices (up and down).