http://www.youtube.com/watch?v=Ei_B5MTJofI&feature=player_embedded
And what about the argument that increasing the money rate doesn’t cause inflation so long as the productive capacity increases?
If society had spare capacity there obviously wouldn’t just be a bunch of unemployed, everyone would just work shorter hours.
And the argument that increasing the money supply does not increase inflation so long as productivity remains high?
He is using inflation in the Keynesian definition, where it means price increases. He’s saying that an increase in the money supply will not be noticeable in the form of nominal price increases if economic productivity increases by the same amount. I.e. gains in productivity hide inflation. Which is true, but whether the numbers on price tags don’t go up is irrelevant. What matters is that the purchasing power of our money has decreased. An increase in the money supply always transfers purchasing power from the population to the state.
Yes the old free lunch theory.
What a mish mash of clashing ideas:
psuedo capitalism, socialism, statism and Keynesianism.
"This is the essential role of the government in a capitalist society, without the government supplementing demand the system breaks down"
Clearly not a capitalist plan. If there is no demand for something the market has spoken! The money goes elsewhere and innovation creates new demands. If the government creates demand it will also create those booms and busts he is talking about. Free enterprise expects the government to stay out and just respect private property and private enterprise.
In his little analogy the fact that teachers and policemen are classified as some kind of “essential government employees” as opposed to entrepeneurs, is proof of his belief in statism. If you believe that the state HAS to employ certain people then you have to come up with these convoluted ideas how to pay them. Why would we need to print money and influence the economy if government only took up a miniscule amount of employees /
" It is not possible for the government to go bankrupt"
Sure, if you believe the government has the right to just pay off their debt with monopoly money they keep printing, ad infinitum, you would come to this conclusion.
“It won’t cause inflation” what you mean is that the serfs won’t realize that it is causing inflation until they have to go buy something outside the borders and then find out their dollar is worth less than a Zimbabwe Trillion dollar bill.
That makes no sense. If purchasing power of the money decreased, then, ceteris paribus, the prices of goods in terms of that currency would have to go up. How has the purchasing power decreased if prices haven’t changed (i.e. you can buy the same amount of stuff with the same amount of money)?
I would suggest viewing this video.
Because the economy got more productive at the same time, so our devalued currency buys the same amount of stuff.
If something buys the same amount of stuff, how has it lost value?
Because something ought to be able to buy more stuff if production costs etc have gone down due to technological advacements?
Yes. Your money ought to buy more because of technological advancements, but it only buys the same because of inflation. So inflation decreased the purchasing power of your money.
The same good could have been a lower price instead of the same price. Greater productivity is meant to bring prices down, not have them stay the same. There is no reason to have greater productivity unless you need to cut costs to compete. It seems greater productivity delivering the same thing is brought about by inflation itself. It is an arbitrary conditional to have to raise productivity just to meet a greater supply of money. As if more money caused greater productivity or that greater productivity is no sweat.
For instance, if the Amazon Kindle was still 500 dollars today instead of 99 dollars as it has now lowered to. And we just compared prices 2008 (or whenever they came out) vs. now. And said that inflation never happened because the price is the same. Because the 2008 and 2011 price are the same.
That would probably mean a pretty big inflation. Much more than we’ll probably ever see, but a lot nonetheless. But it would be insane to say that no inflation took place simply by judging the two prices. What if it went down to 99 dollars temporarily and then went back to 500 dollars? Would people be expected to believe, then, that their money hasn’t lost purchasing power between 2008 and 2011?
Then there is a innovation. Imagine if we still paid 1000-5000 bucks for a piece of junk computer from the early or even late nineties (which you can now find for about 20 bucks at a thrift store). While new and faster computers stayed at about 300,000 dollars or something insane – which “ultra powerful” computers (now readily available) were at that time.
So let me get this straight. I have 1 coin. I can buy 5 widgets, or 9 wutsits with that 1 coin. Some time passes. Now, I can still buy 5 widgets or 9 wutsits with that 1 coin. In fact, I can still buy virtually everything I could with that same coin. But somehow, that coin is less valuable. Am I reading you correctly?
No, what I’m saying is just that one factor (inflation) has had the effect of making the coin less valuable. Not that the coin necessarily is less valuable. Because there are other factors influencing the value of the coin.
Consider this scenario: Your son goes to Africa as a missionary. He is gone for a few years and in that time he grows an inch. But he also stepped on a landmine which made him one inch shorter. So when he comes home he’s the same height as before. Is it not accurate to say that the landmine “made him shorter”?
That’s not what you said. You said “the purchasing power of our money has decreased”. You literally said it doesn’t matter if the money buys the exact same amount of stuff, the purchasing power has decreased. I understand “purchasing power” to be a term for “the amount of stuff you can buy.”
Do you understand it differently than I do?
It’s true, but it depends on what price index you happen to be using. The CPI may show no change in prices, but what if the PPI, GDP deflator, and stock market all go up? This also ignores relative price changes that take place. It’s extremely unlikely that the introduction of new money won’t shift the structure of production towards the industries where the new money is spent first. This is the basic idea behind the ABCT. Relative price distortions are just as, if not more important than changes in the general price level.
No it doesn’t mean that prices have to go up. A decrease in overall demand will cause prices to drop (below what they would be, because remember there are factors of price inflation but not necessarily things that cause price inflation.) And as was said before, productivity increases have a downward effect on prices. Just think about computers. Why do they cost so much less even though they are of much higher quality?
I stopped watching the video about 2 minutes in. It was clear that nothing of value could be derived from his completely ridiculous scenario (the 14 workers and one entrepreneur), and that assumption was quickly borne out. Are there certain points you think should be addressed, beside the inflation question?
Austrians would stress that increasing the money supply causes distortions in the capital structure. Investment is no longer coordinated with the level of savings, leading to malinvestment. Why not avoid artificial money creation and allow prices to gently fall in accordance with rising productivity?
Do you not know what “ceteris paribus” means?
Yes, and yes you did say that so “If purchasing power of the money decreased, then, ceteris paribus, the prices of goods in terms of that currency would have to go up.” is a correct statement. But what EmperorNero is saying is that money supply increases will always have an upward effect on prices, but not necessarily lead to price inflation. He’s not implying all other things are equal because he’s using productivity as another factor, having a downward effect. It’s like adding vectors. Or tug-of-war might be a good example. One guy is pulling the rope in his direction but it doesn’t necessarily go in that direction.
^ Yes, precisely.
We are talking past each others, John James, because we are referring to different levels of analysis. My comment “that the numbers on price tags don’t go up is irrelevant, what matters is that the purchasing power of our money has decreased” was specifically about the effects of inflation. You thought that I was talking about the value of money in general. That sentence has to be taken in context with what went before it. I was saying “inflation doesn’t just cause a change in nominal prices, it causes a decrease in purchasing power”. It was a response to the claim that inflation doesn’t exist as long as there is no change in nominal prices.