so inflation can cause prices to rise thereby circumventing the effect of wage floors and thereby maintaining the status quo but if that is true, why does inflation redistribute wealth also if it is ultimately found to be neutral to the status quo? How are these two contradictory effects harmonized? Also, assuming that inflation does circumvent wage floors, how can one be so sure that the minimum wages of say, doctors, are causing characteristic shortages?
I don’t understand what you’re asking.
Inflation causes prices to rise unevenly, hence it redistributes wealth from late receivers of the new money to early receivers of it.
Minimum wage laws have the same effect as any other minimum price control: over-supply. In other words, unemployment.
Inflation is only neutral over the long term and only after it is stopped.
Monetarists claim that money is neutral in the long run, not Austrians. Money is no more neutral in the long run than it is in the short run, to say so is simply a repudiation of microeconomics.
Now, it is true that in the short-run, new money creation will, in most cases, raise prices in certain sectors (stocks, bonds, capital equipment, etc.) to the detriment of some. In the long-run, the new money will circulate throughout the entire economy, presumably causing price increases equally through all sectors of the economy.
A minimum wage is a minimum wage. If I set a price floor for apples at $10, obviously many people won’t purchase apples. Now, if there is 100% inflation and those apples’ real price falls to $5, then obviously demand will rise. This, however, does not change the fact that there still is a price floor that prevents the equilibrium price from being reached.
I thought that when prices rise equally in the economy that sort of proves the neutrality of money? But more to the point, assuming I’m wrong about the neutrality of money your scenario is basically what I meant anyways. So if prices all rise equally in the long run, minimum wages are cancelled out. I suppose that in the long run then, price ceilings keep a rise in all prices from occuring but, given a free market in everything except for money; can the central bank inflate still such that other prices (in foreign countries) increase? I think so but what of your ideas? And if so, isn’t the equality of price going to be destabilized here too antecedent to foreign price rises?
This isn’t strictly true, in his Time and Money Garrison claims that Keynesians describe the long run, monetarist describe the long run and Austrians describe the “medium run”. Essentially he says that both Keynesians and monetarists are correct in their description of the short and long run respectively but their picture is incomplete.
To the OP, Keynes essentially argued like a lawyer when it came to real wages, arguing that:
- Real wages can’t fall causing a recession,
- Real wages shouldn’t fall,
- Real wages don’t fall in reality.
Nonetheless, when it came to the actions of unions or otherwise sticky wages, Keynes thought that the money illusion was essential to push wages below the equilibrium level. Austrians wouldn’t necessarily disagree with this, it’s true that the central bank can cause some sort of coordination by inflating the currency and pushing real wages below the equilibrium level. But as Hutt pointed out, this is only a very crude sort of coordination that inevitably upsets the intricate structure of relative prices that is so essential to the functioning of the market economy.
There is no such thing as the “neutrality” of money. Money is always not neutral, since whatever you purchase with your money will change prices within an economy. I’m not sure how to describe it, but long run monetary “neutrality” must be some kind of fallacy of composition or division.
Nope. The effect of minimum wages is lessened, minimum wages themselves are not “cancelled out.” So again, if the minimum wage is $10 but there is inflation, the minimum wage isn’t cancelled out. It still exists, it is simply lessened in its impact to the economy because it is lower in real (inflation-corrected) terms.
Explain your statement. You cannot have price ceilings and a free market in everything except for money.
To answer your question, inflation would spill over to other countries in such a way that the dollar value of goods in other countries increased. This would happen because the exchange rate would change.
Again, explain your statement.
If a country prints massive amounts of currency, then that currency will become weaker compared to other currencies. This will raise the purchasing power of those who hold other currencies, while reducing the purchasing power of those who hold the inflated currency. This causes a trade surplus. However, there are other complications. If currency is created by manipulation of interest rates, then massive monetary creation could create a trade deficit, as it would disincentivize saving while it would create incentives for borrowing. All that excess money would bid up prices at home first, thus making it cheaper to purchase products abroad, creating a trade deficit.
The USA experienced the latter.
That was a pretty good answer so I’m not going to further elaborate.
That was bad sentence structure on my part.