OK, gotcha
Every change in the market data amounts to transfers of purchasing power between different market actors. An increase in demand for commodity A at the expense of commodity B transfers purchasing power from B to A. It doesn’t mean that A gains only at the expense of B, as in the case of taxes/theft. It just means that A has better served the consumers and B must realign his activity with the new demands of the consumers, perhaps begin to produce A also.
Now, any changes in the supply of money in circulation occurs through the same process of changes in relative demand between the various goods, thus purchasing power is transferred and the entire production structure is altered. If money was neutral, then no relative changes in demand would occur as a result of changes in the money supply in circulation. This is the case regardless of the cause of the change in money supply in circulation. (I simply refuse on sheer principle to use the term “velocity”).
The mistake of MET theorists is that they equivocate the two causes for changes in the money supply in circulation: voluntary changes in demand and monetary inflation that results from new fiat or fiduciary money poured into circulation. The former is not a distortion in prices, while the latter is.
When you write “money supply in circulation”, do you mean only the money which is currently being spent on things? Or are you talking about the total quantity of money? I just want to make sure we’re on the same page.
Either way, do you think it can be said that a decrease in demand for a commodity is the same as an increase in demand for money vis-à-vis that commodity?
By “MET” do you mean “Monetary Economic Theory”? Otherwise, I agree with you here.
same page.
No. it could mean an increase in another commodity.
MET - Monetary Equilibrium Theory.
No, once again, you’re simply confused. I’ll explain why in a moment.
It’s not irrelevant, you moron. If prices merely “went up,” as you assert, then wages, rent (which are also prices) and asset prices would go up too, so that there’s no change in real incomes. For example,
- Let’s say that Pc (the price of commodities) is equal to 1, and that Pw (the remuneration to the factors of production, which I have homogenized into wages for the sake of simplicity) is equal to 5.
- Now let’s assume that we double the total supply of money (in the broader sense).
- If prices simply “went up” as you assert, then Pc would equal 2 and Pw would equal 10.
What then, would be the effects of inflation under such circumstances? Well, people would have to go to the ATM more often in order to increase their cash balances and pay the higher prices (shoe-leather costs), restaurants and other firms would have to change the prices listed for their goods and services (menu costs), and banks would ask for higher rates of return on their financial capital (fisher effect). These effects are relatively inconsequential; society would not be any poorer.
But, as I’ve already explained, this is not how inflation works: there is no “general price level,” (you must disaggregate “P”) and the adjustments to alterations in the supply of money are uneven. Again, some wages during an inflationary episode may rise, some may rise even more, some may fall, the price of C1 (commodity one) may rise, the price of C2 may rise even more, and the price of C3 may remain the same.
Why can’t you understand this? Are you really this unforgivably stupid?
I specifically said,
So what the hell are you talking about?
Stop appealing to what you consider to be “common sense.” What a fool considers to be “common sense” means absolutely nothing to me. Economics exists precisely because idiots like you frequently derive incorrect conclusions from “common sense” (like, for example, “trade deficits are bad,” the oldest fallacy in all of economics).
I’m not going to respond to the rest of your post because it’s incoherent and belligerent. Furthermore, it shows a fundamental misunderstanding of basic economic doctrine, eg,
and extremely feeble reading comprehension, eg,
I just want people on this forum to understand that this,
is incorrect from an Austrian point-of-view. Again, if prices merely “adjusted up” then inflation would basically be reduced to merely a nuisance (up until the point that monetary expansion leads to a collapse in the demand for money).
Wait, which page is that? You didn’t actually answer my question, so I’m still not sure what you mean by “money supply in circulation”.
I do see your point. Then again, a lower price for a product means that people aren’t willing to pay as much money for it, which means they prefer to keep more of their money vis-a-vis that product… right?
Ah, thanks.
EDIT: double post
Since you are so rude, I do not consider you worthy of further reply.
Perhaps someone else will come forward. I find interaction with you distasteful.
You must be joking. Your reply to Esuric was rather rude and uncompromising, and now that he thorougly discredited your position you refuse to reply because he is “rude.” You implied he has a lack of common sense, and that he has no understanding of Austrian economics…
Uncompromising yes. If someone says 2+2=5, am I to compromise on 4 and a half?
Rude in reply to his previous rudeness. But it gets tiresome to deal with after a while.
Someones position has been thoroughly discredited, but it’s not mine.
All he did was acknowledge that what Mises called a meteor that wiped out the town, he’s willing to admit is a pebble.
TY for your input.
It’s far more complicated than this and I don’t fully understand it myself. But before I get into my explanation I think it’s important to go over Mises’ typology of economic goods. Mises breaks it down into three distinct categories; first, there are the consumer goods, then there are the producer goods, and finally there are “media of exchange,” i.e., money. This third and final category is a good and class in itself. The natural rate of interest is determined solely by the ratio of demand between consumer goods (consumption) and producer goods (saving), but is not affected by alterations in monetary conditions.
Okay, so let’s imagine a simple two good economy where individuals can choose between either x1 or x2. In period t1, the total supply of x1 equals 20 and the total supply of x2 equals 20 as well. As the demand, and therefore price of x1 rises (say by 50%), the demand (and therefore price) of x2 must necessarily fall (by 50%). But the process doesn’t end here. The alteration in the relative structure of prices will cause capital to “flow” from sector x2 towards sector x1 so that the supply of x1 in period t2 will equal 30, and the supply of x2 in period t2 will equal 10 (equalizing profits across both industries). Prices guide production. In the aggregate, though, there is no change in total output; the only thing that has changed is the direction of investment, and the composition total consumer goods produced.
Now let’s include another good into our simple economy, call it x3, and it will represent money. What happens when the demand for x3 rises? Individuals will limit their consumption and increase sales in order to satiate their demand for money. The demand, and therefore price, of either good x1 and x2 must fall; in fact, the demand and price of both x1 and x2 may, and probably will fall until the price of money adjusts (when the price of x1 and x2 fall enough). But now the marginal producers in industries x1 and x2 will no longer be profitable and this will yield disinvestment.
Now let’s consider what actually happens when the demand for money rises. Individuals, as I’ve mentioned, will cut consumption and they will withdraw money from the bank, from their savings. They will also sell off their securities (bonds and stocks) for liquidity. This will lower (a) the total supply of loanable funds and (b) the demand for securities, which forces financial intermediaries to charge higher rates of return in order to increase QD. In other words, the market rate(s) of interest will rise, but the natural rate of interest will remain unaltered (because the only thing that has changed is monetary conditions). I’m assuming that the demand for consumer goods (consumption) and the demand for producer goods (savings) fall in a proportionate manner for the sake of simplicity. It could very well be the case that they change unevenly which would alter the natural rate of interest.
My model, though, assumes an economy consisting of a single phase of production. With such an assumption, an elevated rate of savings would produce a similar type of effect except for the fact that interest rates would fall, saving the profitability of a few marginal producers. But when we lax this assumption, and consider an economy consisting of multiple phases of production, than an elevated savings rate actually increases total profit in the aggregate (the stock of profits, so to speak) and total output.
Let’s now consider the effects of saving in an economy consisting of multiple phases of production:
The demand for producer goods will rise relative to the demand for consumer goods. People will place their savings in commercial banks and there will be higher demand for securities, which will reduce the market rate(s) of interest. But because the ratio of exchange between consumer and producer goods has changed in favor of the latter, the natural rate of interest will fall as well. There will be a further division of labor and capital across the entire economy; in other words, labor will be spread more thinly as the structure of production expands, which lowers marginal costs (firms, at the margin, employ less laborers). The price of other inputs will fall at each successive stage, further reducing marginal costs, and finally the interest rate will fall, also reducing marginal costs.
Arbitrage will restore a single rate of profit (interest) amongst the various stages of production, but in the aggregate total profits should rise (as the economy produces more). Additionally, the total supply of producer goods (capital) will increase relative to the total supply of consumer goods (I’m merely saying that the structure of production is expanding) which will increase the marginal productivity of labor and therefore real wages. There is no actual deflation here because the price of producer goods is rising at the expense of consumer goods (but consumer price indices will record general price deflation because they only measure the prices of final goods and services).
This is not the case when there’s an elevated demand for money, even in an economy consisting of multiple phases of production. A higher demand for money, again even in an economy consisting of multiple phases of production, will elevate the market rate of interest above the natural rate, constricting general economic activity. This will yield a condition which resembles inadequate effective demand until prices adjust (which will take time and the adjustments will be uneven).
I believe this is why MET support “keeping MV stable,” i.e., satiating the demand for money as money when it rises. And you can basically find this argument in Hayek’s Prices and Production. In other words, Warlas’ law, and a crude version of Say’s law, only holds when there is monetary equilibrium (savings will not equal investment when there’s monetary disequilibrium).
The old “looking at only half the picture” fallacy. Not only will prices of x1 andx2 fall, so will the cost of producing them. In fact, since the price has gone down, more people will buy both x1 and x2, increasing the real profits of both firms.
The old “they’ll hide it under the mattress” fallacy. When people get their hands on the cash they want, where do you think they will put it? Right in the bank, where else? Historically this has always been the case, I understand.
The old “attributing noble motives to statists” fallacy. It’s all an elaborate rationalization for Obama to print money to buy Michelle a new dress.
Perhaps I’m missing something but what is the unit of “price” above when money (x3) has not yet entered the picture?
Z.
Monetary disequilibrium theorists did not support the Federal Reserve’s policy. The old strawman fallacy.
You have pulled the old straw man fallacy, Zach. Who said they support “the Fed’s policy”? They support printing money. Read the OP, read Esuric’s cheerleading for “fighting deflation” which he claims"distorts" something or other.
By definition, a Monetary DE guy is all about printing money. Who is going to get that money? You? Esuric? Nope, it goes to Obama and his buddies.
MET’s don’t support the government printing money. They oppose central banks, i.e., monetary central planning, and favor a free-banking system (a free market in banking). The Rothbardians, on the other hand, demand extreme banking regulations.
It does to the people who have a higher demand for money. And no, it’s not ‘all’ about printing money. Straw-man fallacy.
I wasn’t a defender of MET, by the way. But Esuric’s post actually made some sense. Will read it again soon.
Wouldn’t scarcity imply that this would be all people? Who doesn’t demand more money than they presently have?
Z.
You can make this claim for any type of disturbance from general static equilibrium, or the ERE.
The market doesn’t work any longer. For Keynes it was changes in aggregate demand, and for MET it’s changes in aggregate demand for money.
Good question.