Murray rothbard said the only way that general prices could rise in an economy is by
a) a decrease in supply across the board (a decrease in supply we all know makes something more expensive)
b) monetary expansion
I disagree with him on a).
I think even if there was a decrease in supply across the board, some prices will go up and some down. I don’t see all prices going up even if the supply of everything was decreasing.
What are your thoughts?
I think it’s helpful to think of inflation as “too much money chasing too few goods” even if that’s not exactly precise
In this case, if what changes is overall fewer goods – presumably some sort of massive destructive event – with the same amount of money “chasing” them, then you’ll get higher prices.
Rothbard defined inflation as expansion of the money supply, most modern economists define it as an increase in P, Keynes defined it as an increase in P beyond what was necessary to secure full employment (although, not entirely consistently), monetary equilibrium economists (amongst others) define it as an excess supply of money at the current price level.
So depending on what definition you choose, you’ll get a different answer. For Rothbard inflation solely occurs as a result of an increase in the money supply. For everybody else it’s a bit more complicated. If we use the identity MV = PQ then a number of things can cause an increase in the price level. If V or M increase, then all things being equal, so should P. If Q decreases, ceteris paribus, P increases. This is true for Keynes unless an increase in P also causes an increase in Q, in which case it’s not considered inflationary.
For everybody else, everything is more complicated. Especially when you have an equation where V cannot be properly defined, nor measured, P is nothing but an abstract concept, and Q is an invalid mathematical summation.
This equation basically says it all about modern mainstream economics.
Supply and demand does not need the equation of exchange.
’
If it did, you would have business people using exchange equations to adjust their supply to optimal levels. You could replace the entrepreneurs with planners. The exchange equation is Socialism!
I don’t know what some contemporary Austrians such as Horowitz or White have been smoking when they reference it as a potential meaningful analysis tool.
Therefore your point was BS, because per se the equation of exchange has nothing to do with the difficulty of identifying causes of inflation.
Something about including velocity in the equation always sat wrong with me, though I could never pin down a reason or rationalize it. I mean, if there’s 40 sausages in the economy and they get passed around real quick for some reason, there’s still 40 sausages. The supply hasn’t changed. Likewise just because money changes hands faster doesn’t seem like it should count as an increase in supply, just an increase in the rate of exchange for a given supply. In fact if you look at savings as a continuum of sorts then all money units are eventually spent, some sooner and more often than others is all. Anyone who doesn’t blow their paycheck the seond they get it is, in some way, demonstrating thrift of a sort.
I have no idea if there are actual implications to that or not, it’s just something that’s always been gnawing at me to look at more closely for some reason.
Which is why no one does that. It is counted in relation to the demand for money. Quickly passed around sausages have lower price.
Rothbard on The Fallacy of the Equation of Exchange , From Man, Economy & State
Really? Why not?
Demand decreasing too?
Actually, it would be increased demand would tend to increase prices. However, I am not sure how demand could be increased across the board.
I think the confusion is one of not seperating real demand from nominal moentary demand. Supply creates its own demand, so obviously, real demand must fall when the supply of goods fall. Yet the if the supply of money remains fixed, monetary demand per output is increased. Prices must rise.
I don’t think you know what you’re talking about (for one thing, it’s Horwitz not Horowitz and Selgin, White, Garrison, Hutt and Yeager all use it). The fact that the values can’t be measured doesn’t matter in the slightest, the fact of the matter is that the identity is a useful conceptual tool and none of the Austrians that you ridicule have said anything other than that (although, here’s an outlandish idea, try reading them before you make such silly claims). In fact, Horwitz states, numerous times, that the identity serves as nothing more than an analytical tool that the economist can use, and that the identity makes no claims about causation.
By the way, as regards Q, see Hutt on the point. If you feel uncomfortable with V, then I don’t know what to say since V = 1/ money demand, and the demand for money is used by Austrians just as much as it is anybody else.
Rothbard says it is an identity which is true by definition and therefore uninteresting. Well maybe so but it would have prevented the OP’s confusion in that if something on the right hand side of the equation changes (i.e. quantity decrease), then either something on the left hand side has to change, or else P has to balance the equation (in this case a price level increase). If demand for money changes (and therefore velocity) at the same time for some reason, then that is not necessarily true.
Now Rothbard rightly points out some of the theoretical difficulties in measuring an overall price level, but don’t you think a significant trend in the CPI for example is telling you something despite its flaws?
If you create more money, then prices go up. It’s as simple as that.
If there’s genuine economic growth, that’s deflationary as there’s the same amount of money chasing more goods and services. In reality, the economy is shrinking at an alarming rate.
Money supply inflation does not lead to uniform price inflation, which allows State insiders to mask inflation.
What is the demand for money equal to?
If they can’t be measured, the whole equation is mystical. Do you have a problem with calling an equation that cannot be scientifically tested mystical?
But it’s worst then that, it is mathematically invalid!
Then you can’t really use it in any meaningful way!
It is an accounting identity.
Why exactly?