Please define “inflation” and “deflation”. I’m not sure what definitions you are using.
So if one person enters the labor market, and is paid a wage, and decides to save a little bit of that wage, there must be a change in society’s time preference (diminished time preference)?
You state that purchasing power increases as prices fall. How come the same doesn’t apply to the one receiving the profits? You cannot quantify wealth and profits with the idea that money is static. If the purchasing power is increased we can earn less money and still have higher “Real Profits” by being able to purchase more with our profits. So your statement is in directly contridiction with the point you made earlier.
Unless operating in some sort of cartel like a union workers never have a choice at what their industry’s going rate is. They can negotiate their personal going rate but that rate will be dictated by the market rate of whatever labor he is offering. You have to realise that labor is a commodity like anything else. Depending on how much supply/demand there is per industry. Also, don’t assume that because the workers wage’s fall due to natural competition that will always equate to less Real Wages. Additionally even during deflation some industry’s going wage rate may go up depending on demand.
You see this now in the tech industry with IT/Network admins saturating the market as unemployed. Jobs that they once had and were receiving 6 digits on can at best be replaced with a signifigant reduction in wages. The market is saturated with those types of skills which reduced that skills value.
Why do you assume that all business’s must use credit to operate. Credit is just another commodity like anything else. If there is very low demand for the credit and more people are saving banks will be desperate to get business. That will shoot interest rates down. If there is a high demand for credit, in the banks best interest of staying solvent they will raise rates. This whole process is extremely simple. I’m not sure why it’s so hard to understand. I also don’t understand why everyone thinks that credit is like some sort of magical powder that acts different than any other commodity.
Now this whole process gets distorted when you have an inflationary policy as it removes the natural scarcity of currency. The same problems would happen if somehow we could magically make Banana’s fall from the sky at demand.
I don’t understand? Why would time preference’s stay the same? Price’s arn’t static. Neither is credit.
Think of it as an L curve with inflation going up but deflation going out sideways. Deflation will never render prices to 0. Inflation will never render prices to infinite. Both of those value’s would be impossible.
Maybe to you it seems as if they’ve never answerd the question because most of the responses are implied. But since Deflation increases purchasing power the same apply’s to those receiving profits. Meaning they can earn less “profits” meanwhile earning more “Real Profits”. In deflation their profits arn’t destroyed at all. I have no idea how you could come to that conclusion. Really this isn’t hard to understand and it’s basic commen sense.
Again I suppose if you lived in a static world where no one ever changes jobs and business’s never go in or out than I could see why you would get confused by this. However laborers who refuse to take pay cuts will simply be left un-employed. It’s really that simple. There wouldn’t be any massive lay-offs. I have no idea what kind of curb ball your trying to throw with that but thats a silly argument. Lay-offs don’t happen world wide at once. At most it may happen one industry at a time but usually only when there has been substantial market interference.
So to summarize your whole post. You beleive capitalism will tend towards destruction as when deflation kicks in business’s will somehow lose their profits and stop doing business. Lets not forget that you yourself stated the following:
You openly state that purchasing power and the value of money increases. Therefore you can do more with less money. So how can you be confused when less profits are earned it doesn’t equate to less “Real Profits”.
Also it’s theoretically and technically impossible to reach 0. A service or good might cost a penny, it may cost 1/100th of a penny, it may cost 1/100000th of a penny. However it will never equal 0. Depending on that economy 1/10000th of a penny might be alot!
There’s no societal time preference. There’s only individual time preferences, which adjust accordingly to the given value each one wishes to achieve.
I’m talking about rising or falling aggregate prices, or the increase/decrease in the purchasing power of money. Natural or unnatural
Yeah, although one person hardly makes a difference. But when the Fed of private banks practice FRB, they mess up the interest rate. Note: by "society’s time preference, I assume you mean the interest rate.
Rising prices don’t cause the ATBC, expansion of the money supply does (money backed by nothing). However, monetary expansion, however, can lead to higher prices.
Liburne has given you above an adequate response.
Let me just elaborate on your concern about the continuously falling interest rate. You are once again thinking in nominal terms. Interest is no more then wages earned on saved money. This is the same problem of falling wages. Interest rates in nominal terms may or may not fall (depending on whether quantity of money is fixed or gradually rising as a result of monetary inflation as I have explained above). But like regular wages, the return from falling rates of interest will be higher in real terms.
Profit consists of two strata.
One stratum (“short-run profit”) is acquired via entrepreneurship, which is basically making good business bets on uncertainty.
But even if that stratum didn’t exist; even if there were no uncertainty (a situation called the evenly rotating economy), there would still be a persistent strata of “long-run profit”. This underlying stratum is entirely based on capital investment, which depends on time preference. (Read Capital and Interest by Bohm-Bawerk.) The lower the time-preference, the higher the long-run profits. Deflation effects the valuation ratio between money and goods. It does not effect the valuation ratio between “goods sooner” and “the same goods later”, which is what time preference is all about. Therefore, deflation does not affect time preference, which means it does not effect long-run profit.
This is an interesting point. Though I still don’t see how it wouldn’t affect long run profits if workers continuously see increases in real wages, that is, if they don’t take the nominal cuts (keeping their wages the same).
You haven’t given any plausible argument as to why this would be the case, any more than workers would receive continuous increases in real wages in an inflationary environment (beyond what employers are willing and able to pay them). As people adjust to deflationary expectations, if workers wouldn’t accept nominal wage cuts when real wages are rising, then employers will find people who will.
Why, in your deflationary scenario, are workers not accepting lower wages, but all other sellers are accepting lower prices?
As I stated in my OP, as production increases, so too will the purchasing power of money; prices will fall across the board. This is the nature of an exchange economy; but if workers don’t take nominal wage cuts, and instead, decide to take an increase in real salaries, costs will increase. Why won’t workers take pay cuts? Ask them, traditionally, laborers don’t accept lower wages, even nominally, and entrepreneurs don’t like lowering wages because it lowers productivity. It seems that layoffs would be the most probable solution.
One more question: I believe that capital per worker increases their productivity and therefore should increase their wages, but according to you guys, workers will accept nominal wage cuts and be satisfied with a steady real salary. When production expands, how come workers won’t see their real wages rise?
Who says real wages won’t rise? In a growing economy, they will. But if steady nominal wage rates mean an increase in real wages that is above what employers are able and willing to pay them, then nominal wages will have to fall.
Your reason is that traditionally workers don’t accept lower wages? Well that’s because it would mean a fall in real wages in an inflationary environment. You’re telling me resistance to nominal wage cuts and layoffs would be a permanent phenomenon in face of deflation? It just doesn’t make sense.
Well I don’t know what a deflationary scenario looks like, and I can’t find it in any of the Austrian books I’ve read. We’ve never seen sustained free market activity. I know the currency school failed, and Mises provides an explanation; but how do we know that Mises tied up all of the loose ends?
Anyways, I’ve read Monetary theory and the trade cycle, Theory of money and credit, and the Austrian theory of trade cycles; should I get into Prices and production? Or venture into capital theory, namely the works of Bohm-Bawerk.
my advice. read Reisman.
http://www.csupomona.edu/~jkirkpatrick/Papers/AJESNetCons.pdf
Marx,
Are you going to actually respond to people’s rebuttels which is normal in most discussions or continue to attempt at changing the subject. If you continue to change the subject I have to quesiton why you posted here in the first place?
If the quantity of money were to decrease, then prices would fall across the board. However, if productivity increases, then only the goods that were more efficiently produced, and the lower order goods for which they were capital, would have falling prices.
Let’s take a hypothetical example of increased productivity. Let’s isolate variables by considering an increase in one industry. Let’s say that capitalists who own a tractor company, for some reason develop a lower time preference. They reduce consumption, and increase investment into their industry. With the increased investment, they are able to develop more roundabout and more productive processes for creating tractors. They are then able to produce the same number of tractors for less outlay. They will then be able to underprice their competition, out-compete them, and thereby make greater profits. Eventually the competition is forced to also become more productive, or perish. Those that do, will via competition continue to bid tractor prices down. In this deflationary situation, product prices and revenue may have gone down, but so did costs, because that is what made the firms more productive in the first place. Therefore, even if revenue went down, profit margins wouldn’t, ceteris paribum. Did the greater productivity of the tractor industry lead to lower or higher wages? It depends on the nature of the more roundabout process: that is how labor-intensive it happened to be. But there is nothing about greater productivity as such that would automatically lead to a necessary change in the wage rates. Did the tractor firms need to have the wages they paid go down in order for their profit to not be destroyed by the deflationary process? No, because the deflationary effect was caused by greater efficiency in the first place, which means again, that the lower prices and revenue are offset by the more cost-effective means of production.
Productive capital investment will lead to lower demand for labor only if the new processes call for less labor. If that were the case, and you are saying that the lower demand would NOT have a lowering effect on wages, then you are denying the law of supply and demand.
Read the responses you got so far. I have nothing to add to them.
Any greater productivity came from greater capital investment. Greater capital investment came from the increased sacrifice (deferral of consumption) of the saver. Why should the worker take proceeds that were the direct result of the sacrifice of the saver? Why would the saver save in the first place if she knew that was going to be the result? There are a number of ways an individual laborer can garner higher wages. But simply being part of a more productive process by virtue of someone else’s investment is not one of them.
Under your system, a construction company who equips a worker with a more powerful, but equally easy to use, power drill would thereby need to pay him higher wages!