Please forgive me if this question is addressed in the basic Austrian literature like Human Action or Man, Economy, State. Do most Austrian economists deny that there is a short run trade-off between inflation and unemployment? Obviously, in the long run, it isn’t possible to increase employment by increasing inflation, but what about in the short run? (Perhaps one or two years)
Isn’t that the gist of it? That in the short run, inflation can do all sorts of things? Like create the perception of increased prosperity (before pricing adjusts), and allow for larger capital purchases, and longer capital projects?
I’m not a pro at this, but it doesn’t seem to me that acknowledging short run inflationary effects on employment would be contradictory to basic Austrian principles and positions.
Is there any real reason to assume that those people wouldn’t have been employed in the absence of inflation anyway?
Inflation has to be one of the most inefficient and distortive ways to go about it, I’d think.
-Jon
It depends what kind of economy you have. If you have a heavily regulated economy with high minimum wages and union monopolies, inflation will create more employment. On the other hand, in an unregulated economy, inflation will create inflation and nothing else since the economy will be running at full employment anyways. Think about it like this: unions set artificially high wages. When there is an economic downturn, these wages cannot be changed, and since demand falls, prices fall, which means companies need to cut cost. So instead of lowering wages, they need to fire people (create unemployment). In a free market, however, when prices fall during an economic downturn, employers will simply reduce wages. So in a real free market, there isn’t a large inflation/employment trade-off. There still is one and it has to do with capital depth, but that is an entirely different subject.
In graphs:
Kenyesians view the economy like this:
As you can see, wages are clearly sticky, so when demand falls, it creates unemployment and deflation.
On the other hand, new classical economists view the economy like this:
In this model, wages are flexible so price changes do not affect the economy to a great degree. You also have to remember that neoclassicists and Keynesians differ in their definition of “short run” vs. “long run,” although both agree that the economy doesn’t clear immediately in the short run. For new classicists, “short run” is a few months at most, while for Keynesians “short run” can be years. The Keynesians are actually right in our situation because government regulation of the labor market creates severe wage rigidity. For example, I live in Michigan, one of the most unionized states. When car sales began to slouch, a lot of autoworkers were laid off because the so-called “Big Three” automakers can’t lower wages adequately.
Also, you have to remember that ABC still applies but it is a rather different lesson that goes more in depth about the use of capital and credit in the economy, something that doesn’t have to be explained in this thread.