Tuesday, December 10, 2013

Administered Prices Discredit the Austrian Economic Theories of Mises

Why? The reason is that Austrian economics – via the work of Mises – is fundamentally dependent on the idea of flexible prices and wages moving at least towards their market clearing values in a way that allegedly coordinates markets. Although Austrians do not think that economies ever actually reach an equilibrium state (such as Mises’s final state of rest) because of constant changes in the data, nevertheless the fundamental equilibrating mechanism in Misesian economics is the flexible price system:
“Mises conceives the market process as coordinative, ‘the essence of coordination of all elements of supply and demand.’ This means that the structure of realized (disequilibrium) prices, which continually emerges in the course of the market process and whose elements are employed for monetary calculation, performs the indispensable function of clearing all markets and, in the process, coordinating the productive employments and combinations of all resources with one another and with the anticipated preferences of consumers.” (Salerno 1993: 124).
But if the majority of real world prices are relatively inflexible, not properly set by supply and demand dynamics, nor set to converge to market-clearing levels, Misesian economic theory encounters insuperable difficulties, for the following reasons:
(1) there is no strong tendency to Misesian “economic coordination” by which full use of resources is achieved as product markets and labour markets are cleared, so that unused resources offered for sale are eliminated.

(2) the idea of rapid and smooth recovery from recessions/depressions will not work, if there are widespread price and wage rigidities, and firms adjust their output to demand changes.

(3) the whole Misesian argument against price controls collapses (at least in administered price markets) if a price control simply mimics an administered price already set by a private firm, allowing it a sufficient profit and allowing it continue to adjust its output to demand.

If a firm’s total average costs change, government price controls can always be reviewed and changed, when necessary.

There is no clear theoretical reason why such price controls could not work and be effective in those markets already subject to private capitalist administered prices, especially when production of the goods under price control is highly elastic (which, its turns out, many goods actually are in modern capitalist economies outside of primary sectors producing raw materials and agricultural products [Nell 1996: 108]).

(4) Mises’s argument against socialist economic calculation is also rendered highly questionable if many firms already shun his flexible price mechanism.

Even if all consumer prices and prices for factor inputs were set by costs of production plus profit mark-up by a planning board, profit and loss could still be calculated by means of administered prices. If the production system had state-owned firms with unused excess capacity and stocks and inventories, they would simply adjust output quantity to the quantity demanded by production decisions, as modern capitalist firms do.

Supply shocks in primary commodities and other crucial factor inputs could be dealt with government buffer stocks – just as in fact Western capitalist nations did in the Golden Age of Capitalism and, to some degree, even to this day (e. g., think of the US Strategic Petroleum Reserve). (Admittedly, another point is that, unless such a planned economy had persistent trade surpluses, it would probably need to retain its financial and real asset markets to attract foreign exchange to pay for trade deficits, which would require that (1) bonds or stocks and shares for some state-owned companies are still sold in a way that allows minority ownership by the private sector, (2) some private property in real assets such as real estate is allowed, and (3) the government can sell bonds to foreigners.)

Why do we have good reasons to think that such a planned economy would work, at least in an advanced industrial nation? Because so many of the elements of such a system are already used and practised in modern capitalist nations by the private sector.

So many “free markets” have long since been abolished by private businesses themselves, because they do not like the consequences of such free markets, such destructive price wars, cut throat competition, and a chaotic price system that makes profit and loss difficult to calculate or estimate.

All this is not an argument for actually adopting a planned economy, of course, but merely an exercise in showing theoretically why Mises’s socialist calculation critique is flawed and how a hypothetical system could function.
BIBLIOGRAPHY
Nell, Edward J. 1996. Making Sense of a Changing Economy: Technology, Markets, and Morals. Routledge, London and New York.

Salerno, Joseph T. 1993. “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6.2: 113–146.

37 comments:

  1. "If a firm’s total average costs change, government price controls can always be reviewed and changed, when necessary."
    Whom would review the prices?
    Why would the government be interested in setting prices when business already do?

    ReplyDelete
    Replies
    1. Whatever agency reviews government price controls.

      "Why would the government be interested in setting prices when business already do?

      There could be many reasons: checks on wage and price spirals, grossly inflated and unreasonable profit mark-ups by private industry, etc.

      Delete
  2. Lord Keynes

    1) Are not mark up prices a function of supply and demand in the sense that cost is a function of supply and the mark up a function of demand?

    2) Price controls are still bad because they create disincentives to enter the market? If what you’re saying is that price controls could theoretically work because we already have administered prices. Then why have the price control if you were not going to set it below the market rate?

    3) Assuming price rigidity/stickiness why is it you feel that even though the market is inefficient that the state won’t make the mistake of creating more disequilibrium than is already in the market.

    4) Even if many prices in the market are inflexible wouldn't you agree that that’s not true of stocks, and houses, energy, in comparison to maybe cereal at a grocery store? As far as gas and houses I don’t mean in the sense that they jump around all the time I mean in the sense that they have been known to rise in price.

    5) “If the production system had state-owned firms with unused excess capacity and stocks and inventories, they would simply adjust output quantity to the quantity demanded by production decisions, as modern capitalist firms do”.

    How? The feedback mechanism you envision won’t work because demand is infinite and supply is scarce it’s going to have shortages of everything unless it economizes. How can it economize without prices and or a profit loss system to determine the marginal benefit/cost of one more unit of output? Say you have widget A and Widget B in a capital industry. Why would not widget A and Widget B both constantly have shortages unless the firm constantly picks how much it will produce of either. If it has to pick arbitrary numbers it won’t be able to let people give the shortage surplus feedback as to what the optimal number should be. The idea would be that the state has to put a limit or cap on how much people could demand, and you wound't know if that cap was to high or to low. In the end it would just a form of rationing and that would slow economic growth.

    ReplyDelete
    Replies
    1. (1) “Are not mark up prices a function of supply and demand in the sense that cost is a function of supply and the mark up a function of demand?”

      Simply redefining “supply and demand” does not save Austrian economic theory, MT.

      The point is that mark-up prices are not a consequence of conventional supply and demand dynamics that are used to explain prices. Without widespread flexible prices reacting to demand changes, a great deal of Austrian theory collapses.

      (2) is too confused for me to understand, frankly.

      (3) no, MT, price rigidity isn’t necessarily a bad thing. In fact, it provides a degree of stability to market systems. The point is that the fact of relative price rigidity is a serious theoretical problem for Austrian theory, whether it is in reality a good thing or bad thing.

      (4) yes, nobody denies that flexprice markets exist – the point is that they are considerably less prevalent and less economically significant than Austrians think.

      (5) “The feedback mechanism you envision won’t work because demand is infinite and supply is scarce it’s going to have shortages of everything unless it economizes.”

      I seriously doubt you even understand the meaning of “demand” as used in economics.

      “Demand” in the sense as used above means the desire to purchase some good and money to purchase it. That is, demand = desire + ability to pay.

      Since money throughout the community is finite, it follows that you claim that “demand is infinite” is untrue, since it would require infinite money means of payment. None of my points are refuted.

      What you mean is probably that *potential* demand is infinite. That might be true, but – yet again – does not refute what I have said above.

      Delete
  3. Lord Keynes

    Forgive me, allow me to clarify my second point.

    Wouldn’t the price controls still have an incentive problem associated with it? The producer would not be incentivized to supply the good, or that new competitors would not enter the market at the below market price.

    Yes I get that firms would not want prices changing every day. My point was that even if markets prevent prices from attaining equilibrium wouldn’t government say monetary expansion, and or stimulus creates greater disequilibrium like resources being diverted away from optimal employment to an even greater extent?

    To your final point

    If it was a privatized firm than what you are saying would be true. However since it’s a public firm I would assume that’s its paid for by taxes and be free and or at very low cost. If that's the case then you will have a shortage problem. You would have to put in some form of arbitrary rationing with no consumer feedback.

    ReplyDelete
    Replies
    1. "Wouldn’t the price controls still have an incentive problem associated with it? The producer would not be incentivized to supply the good"

      This is untrue.

      Firms have excess capacity and buffer stocks.

      When demand rises to a sufficient level by demand signals, the firm will just draw down stocks and increase capacity utilisation: of course, it will increase supply to sell more goods and increase profits.

      The empirical evidence is in and this is how most firms function. E.g., in a survey of 654 UK businesses, the business people were asked: what do you do when there is a boom in demand which cannot be met from stocks or inventories?

      Most UK firms said they (1) simply increase overtime of workers (as reported by 62% of firms), (2) hire more workers (12%), or (3) increase capacity (8%) to produce more output, rather than increase the price of their product.

      Only 12% said they would increase the price of their product (Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’ Prices Sticky?,” Oxford Economic Papers 52.3: 425–446, at p. 442).

      Delete
  4. You mean extra goods and services they were willing to supply at the original price. Why do you assume they be so willing at the price below the rate they wanted to set? I would assume the survey was done with the firms setting the price on there own. Unless its a very temporary price fixing I don't see why firms would have an incentive to produce after the extra supply is gone.

    ReplyDelete
    Replies
    1. (1) "Why do you assume they be so willing at the price below the rate they wanted to set? "

      This is incoherent.

      (2) "Unless its a very temporary price fixing I don't see why firms would have an incentive to produce after the extra supply is gone. "

      This is simply bizarre.

      Why does a firm have an incentive to produce more goods demanded by consumers if its stocks are falling?

      A thing called the desire for profit and increasing sales volume.

      Delete
  5. Okay so your saying that firms would have just as much incentive to supply widgets at the market price at $10 as they would at $5? Why would they if their are greater profit opportunities elsewhere? Doesn't seem much like a profit incentive. The survey was done with a firms with a price control or a market price?

    ReplyDelete
    Replies
    1. (1) "Okay so your saying that firms would have just as much incentive to supply widgets at the market price at $10 as they would at $5? "

      I don't even know where you are getting this from.

      In my example above, the price of the good is the same before and after the change in demand.

      (2) "Why would they if their are greater profit opportunities elsewhere?"

      A thing called imperfect competition. In the real world, most firms do not just move in and out of different markets at will.

      They set up in one market and stay there: they are there for the long haul or go bankrupt.

      Perfect competition or even a very high degree of competition that approximates to "perfect competition" is a ludicrous idea that isn't a feature of real economies.

      (3) the survey involves private sector market prices, not price controlled prices

      Delete
  6. "A thing called the desire for profit and increasing sales volume".

    Are you saying that firms are missing an opportunity to maximize profits by increasing sales at a lower price? Even though they would have already done so if they thought that would maximize profit?

    ReplyDelete
    Replies
    1. MT,

      The whole neoclassical/Austrian/marginalist idea of the profit maximising firm as the rational form of firm behavior is nonsensical.

      Does mark-up pricing make businesses less profitable, since they could (if the demand curve for their product was well behaved) increase revenue by cutting price and equating it with marginal cost ?

      The answer for most firms is "no." For most firms, equating price with marginal cost is a recipe for bankruptcy, as even Keynes noted this in the "General Theory":

      “Indeed, it is rare for anyone but an economist to suppose that price is predominantly governed by marginal cost. Most business men are surprised by the suggestion that it is a close calculation of short-period marginal cost or of marginal revenue which should dominate their price policies. They maintain that such a policy would rapidly land in bankruptcy anyone who practised it.”

      Firms need to recover total average costs to avoid losses, so they cannot charge a price below total average unit costs. Even when price is at total average unit costs, they make no profit.

      Delete
    2. http://socialdemocracy21stcentury.blogspot.com/2013/11/price-average-total-cost-average.html

      Delete
  7. "In my example above, the price of the good is the same before and after the change in demand".

    You mean the market rate. Then you agree price controls are bad policy?

    “A thing called imperfect competition. In the real world, most firms do not just move in and out of different markets at will”.

    I would imagine many if not most markets are imperfect but putting a price control just creates more dis incentive to enter the market and make it less imperfect. Its harder to compete if you raise the barriers to entry. I agree that most firms don’t instantaneously enter and leave markets. If however you have a structural price control then you have a structural dis incentive.

    “Perfect competition or even a very high degree of competition that approximates to "perfect competition" is a ludicrous idea that isn't a feature of real economies”.

    I concur but if the state does not have perfect information either than the lesser of the evils is the market.

    ReplyDelete
    Replies
    1. (1) The price charged by the private business (not subject to government price control) is the same before and after the change in demand in my example, yes.

      "Then you agree price controls are bad policy? "

      No, price controls are not necessarily a bad policy at all. They might or might not be -- but it depends on the circumstances. The point is that the *general* Austrian/marginalist argument against them is unsound.

      (2) "I would imagine many if not most markets are imperfect but putting a price control just creates more dis incentive to enter the market and make it less imperfect. "

      In the real world, perfect competition is an utterly unrealistic and irrelevant state, and most markets just do not behave as you think they do. Therefore this sort of argument is also just irrelevant.

      You are complaining that the world is being forced away from an absurd and unrealistic state, which just is not the standard or model for how it should behave anyway.

      (3) I concur but if the state does not have perfect information either than the lesser of the evils is the market.

      See (2).

      Delete
  8. "Does mark-up pricing make businesses less profitable, since they could (if the demand curve for their product was well behaved)".

    If its a market price the you are correct, if its a price control then i don't think the demand will be well behaved, and that would make it less profitable.

    Ill read your link.

    ReplyDelete
  9. “No, price controls are not necessarily a bad policy at all. They might or might not be -- but it depends on the circumstances”.

    Maybe if you’re talking about a monopoly, but most markets are not monopolies.

    In the real world, perfect competition is an utterly unrealistic and irrelevant state, and most markets just do not behave as you think they do. Therefore this sort of argument is also just irrelevant.

    I don’t know why you keep referring to perfect competition. Yes I agree a one day price control won’t do anything. As for monopolistic competition do you agree that if you put in a price control squeezing profit that it would raise barriers to entry? What examples do you have of price controls working?

    ReplyDelete
    Replies
    1. Price controls were used extensively throughout the Allied world in WWII.

      Most of them worked and worked well, precisely because many private sector prices are already "administered" by private businesses and based on costs:
      http://socialdemocracy21stcentury.blogspot.com/2013/12/john-kenneth-galbraith-on-price-controls.html

      Delete
  10. Why world war 2? I don’t doubt its really easy to put a price control on an administered price, especially when you know demand is going to go up. That would be the problem if the price needed to go up because of demand and the price control would create less incentive to supply. Why do you think we had rationing and low standards of living?

    I know that during the Great Depression the NRA had price controls and we had tremendous unemployment. Maybe you’d argue it was a failure of stimulus. Even if that’s the case the obvious thing to do would have been to eliminate the NRA and lower unemployment with or without stimulus.

    ReplyDelete
    Replies
    1. (1) first of all, before we go any further: do you self-identify as a supporter of Austrian economics?

      (2) "That would be the problem if the price needed to go up because of demand and the price control would create less incentive to supply. "

      No, it wouldn't: an administered price business will often leave ts price unchanged when demand goes up, and simply supply more of the good: you already have some of the empirical evidence above on this.

      (3) Regarding the New Deal, it was a mixed bag, but its failures were not for the reason you think.

      As for unemployment, it fell sharpy during the New Deal until the disastrous austerity of 1937:

      Year | Unemployment Rate
      1929 | 3.2%
      1930 | 8.7%
      1931 | 15.3%
      1932 | 22.5%
      1933 | 20.6%
      1934 | 16.0%
      1935 | 14.2%
      1936 | 9.9%
      1937 | 9.1%
      1938 | 12.5%
      1939 | 11.3%
      1940 | 9.5%
      1941 | 6.0%
      1942 | 3.1%
      1943 | 1.8%
      (Darby 1976: 8).

      http://socialdemocracy21stcentury.blogspot.com/2013/07/us-unemployment-in-1930s.html

      Delete
  11. Yes in the broad sense, probably more moderate than many your used to. I’m not a Rothbardian if that’s what you’re wondering.

    “No, it wouldn't: an administered price business will often leave ts price unchanged when demand goes up, and simply supply more of the good: you already have some of the empirical evidence above on this”.

    Lord Keynes obviously if it’s profitable for them to do it they won’t raise the price and you don’t need a price control. The example you first gave did not include a price control. That being said why did they put in price controls during world war 2 unless they knew they needed to because demand would be so excessive. The result was obviously less supply and rationing.

    I’m not surprised, if you stop paying people to do public works projects they are unemployed. If you still have dis incentives put in place not to hire them, than obviously the private sector won’t pick up the slack. The solution would have been tax cuts, and eliminating the New Deal programs.

    My understanding is that during 1930 unemployment rose and then fell to 6% prior to the passage of the smoot and hawltley tariff.

    Thomas Sowell makes this point here

    https://www.youtube.com/watch?v=AQQon4tjlSA

    Hans F. Sennholz makes a similar point here .

    https://mises.org/daily/3515

    Farmers depended on exports, when exports fell from the smoot Hawley tariff demand and revenue fell. The farmers became broke and the rural banks fell. Then the financial system followed hence the great depression.






    ReplyDelete
    Replies
    1. (1) on WWII price controls, it is not even clear what your point is.

      Yes, the government needed to control inflation -- even cost-based pricing inflation -- and implemented price controls: that system was highly successful.

      Yes, rationing was implemented too: it was a rational way to reduce consumption and ensure a fairer system of distribution.

      The US command economy was highly success and allowed the US to win the war.

      If the Austrian idea that price controls can never work and would only result in chaos were true, the US would not have even won WWII.

      (2) The original point above is about unemployment during the New Deal from 1933 onwards -- not 1930.

      Also, there was also a great deal of private sector job growth during the New Deal -- standard BLS stats I quote in the post above show you that.

      Delete
    2. "My understanding is that during 1930 unemployment rose and then fell to 6% prior to the passage of the smoot and hawltley tariff. "

      Just reading that makes me think you do not even know when Roosevelt's New Deal even began -- or even have a basic knowledge of the Great Depression chronology.

      And don't give me the nonsense that Hoover was some kind of big spending Keynesian, because he was not:

      http://socialdemocracy21stcentury.blogspot.com/2011/05/herbert-hoovers-budget-deficits-drop-in.html

      http://socialdemocracy21stcentury.blogspot.com/2012/01/what-hoover-should-have-done-in-1931.html

      http://socialdemocracy21stcentury.blogspot.com/2012/02/steven-horwitz-on-herbert-hoover-mostly.html

      http://socialdemocracy21stcentury.blogspot.com/2013/04/herbert-hoover-rejected-keynesianism.html

      Delete
  12. From the Mises link

    "The stock market break signaled the beginning of a readjustment long overdue. It should have been an orderly liquidation and adjustment followed by a normal revival. After all, the financial structure of business was very strong. Fixed costs were low as business had refunded a good many bond issues and had reduced debts to banks with the proceeds of the sale of stock. In the following months, most business earnings made a reasonable showing. Unemployment in 1930 averaged under 4 million, or 7.8 percent of labor force".

    ReplyDelete
    Replies
    1. And what, pray, has this to do with the **New Deal (1933 onwards)** unemployment stats?

      As for Austrian liquidationism as a solution to recession, it is both unnecessary and deeply misguided.

      The ABCT -- from which liquidationism as a policy is derived -- is fundamentally flawed, and does not describe real world business cycles.

      For one, the Wicksellian natural rate of interest -- common to nearly all forms of ABCT -- can’t even be defined or identified outside a world with one commodity (e.g., the so-called “corn economy” model). This point alone damns the classical Austrian business cycle theory.

      http://socialdemocracy21stcentury.blogspot.com/2013/12/daniel-kuehn-on-austrian-business-cycle.html

      http://socialdemocracy21stcentury.blogspot.com/2013/08/why-austrian-business-cycle-theory-is.html

      Delete
  13. Lord Keynes we are talking in a pure economic sense. If your objective is to win a war, then i can see the use of price controls. If however we are talking about using scarce resources to raise the standard of living for people then no WW2 was a failure in strictly those terms. That point being i still fail to see any evidence of price controls helping the economy (nazi's aside).

    As for the private sector growth I don't doubt that increased barriers to entryprotected big business and certain industries from competition and helped them out, that hardly is a recipe for economic growth. I could however see why relaxing on anti trust legislation could. However the results show unemployment going down mostly if not only because of the stimulus which was unnecessary and wasteful as Thomas Sowell explained.

    The 1930 unemployment rate was to touch on a much broader point. That is that markets while not "perfect" and more capable of self correction than given credit for.

    ReplyDelete
    Replies
    1. (1) "If your objective is to win a war, then i can see the use of price controls."

      Then you concede my argument.

      (2) "If however we are talking about using scarce resources to raise the standard of living for people then no WW2 was a failure in strictly those terms. That point being i still fail to see any evidence of price controls helping the economy (nazi's aside). "

      The argument is not that price controls were done to raise people's living standards: but to needed to control inflation -- even cost-based pricing inflation -- and create price stability so that the US command economy could produce both war materiel to win the war and resources for the home front.

      But as we see above you concede this.

      (3) as for price controls outside of wartime: some may well be useful to control inflation (especially cost-push inflation) with buffer stocks and incomes policy, given that so many prices are mark-up prices.

      Delete
  14. "The 1930 unemployment rate was to touch on a much broader point. That is that markets while not "perfect" and more capable of self correction than given credit for. "

    The early 1930s data does not support any such claim.

    ReplyDelete
  15. "as for price controls outside of wartime: some may well be useful to control inflation (especially cost-push inflation) with buffer stocks and incomes policy, given that so many prices are mark-up prices".

    There we go. That's what I was looking for.

    Lord Keynes why would you want do that? If you put in price control it reduces the incentive for firms to supply more and or enter the market. The nixon price controls are perfect examples of this.

    As for 1930 you'll have to show me the data otherwise my money's on Sowell.

    ReplyDelete
    Replies
    1. "Lord Keynes why would you want do that?"

      Because it follows quite clearly from the way most prices are set.

      Both buffer stocks and incomes polices, with some price controls, would be an effective way to stop wage-price spirals and cost-push inflation, certainly of the 1970s type:

      http://socialdemocracy21stcentury.blogspot.com/2014/04/bob-murphy-on-1970s-inflation.html

      http://socialdemocracy21stcentury.blogspot.com/2011/06/stagflation-in-1970s-post-keynesian.html

      http://socialdemocracy21stcentury.blogspot.com/2013/03/us-inflation-rates-19461987.html

      Delete
    2. "If you put in price control it reduces the incentive for firms to supply more and or enter the market."

      No, MT, we have already been through this: most firms simply do not behave as in the marginalist theory of the firm.

      The fact that you cannot and will not understand this, nor make a good faith attempt understand the point rapidly makes me think you understand very little of Post Keynesian theory.

      How most firms behave:

      http://socialdemocracy21stcentury.blogspot.com/2013/11/price-average-total-cost-average.html

      http://socialdemocracy21stcentury.blogspot.com/2013/03/kaldor-on-economics-without-equilibrium.html

      Delete
  16. The ABCT -- from which liquidationism as a policy is derived -- is fundamentally flawed, and does not describe real world business cycles.

    If Thomas Sowell is correct about the unemployment rate then you are incorrect because it obviously self-corrected.

    “For one, the Wicksellian natural rate of interest -- common to nearly all forms of ABCT -- can’t even be defined or identified outside a world with one commodity (e.g., the so-called “corn economy” model). This point alone damns the classical Austrian business cycle theory”.

    I don’t think the ABCT relies on a wicksellian interest rate. Word on the street is you think it can withstand sraffa’s critique assuming multiple interest rates is that correct? Ill have to read Sraffa’s critique and Murphy’s paper. That being said I didn't see you refute the economic calculation problem a few posts back if that still stands, and economic calculation is a problem for the state, then that would be a factor pointing to the ABCT.

    ReplyDelete
    Replies
    1. (1) "I don’t think the ABCT relies on a wicksellian interest rate.

      Yes, it does: and Wicksellian loanable funds theory and the untenable notion that the interest rate is determined pure time preference theory.

      (2) " Word on the street is you think it can withstand sraffa’s critique assuming multiple interest rates is that correct?"

      That is utterly wrong.

      (3) "That being said I didn't see you refute the economic calculation problem a few posts back if that still stands,"

      The economic calculation issue? That consists in the need for money prices for capital goods and other factor inputs and for finished goods so that profits and losses can be calculated.

      Most modern economies with Keynesian policies are capable of economic calculation to a high degree of efficiency, as I have already shown:

      http://socialdemocracy21stcentury.blogspot.com/2013/05/misesian-economic-calculation-and.html

      Delete
  17. Ill read the first and third one, the second one i have read so ill comment. Lord Keynes how can cost push factors cause price inflation if assuming a set amount of money in the economy, a higher price of widget A would mean less money i could spend on Widget B. Even if widget A pushed up Widget B's price then i would just have less money for widget C. Widget C's price would go down. The average price would not go up. The only way inflation could occur was through a monetary expansion.

    ReplyDelete
    Replies
    1. "Lord Keynes how can cost push factors cause price inflation if assuming a set amount of money in the economy, a higher price of widget A would mean less money i could spend on Widget B"

      The answer is: your abstract thought experiment has virtually zero relevance to the real world.

      Why? Because any normal capitalist economy does not have a "set amount of money in the economy": it has an *expanding endogenous* money supply.

      Even in the 19th century, endogenous money supply was the norm:

      http://socialdemocracy21stcentury.blogspot.com/2013/03/the-classical-gold-standard-era-was-myth.html

      Most money is in the form of demand deposits and is created with loans, and even base money can expand in a system with no central bank as private banks come to treat the banknotes of the largest and most trusted private banks as a substitute for gold.

      An expanding money supply is a necessary but not sufficient condition for general price inflation. As many prices are set on costs of production, primary commodity price and wage rises -- if large enough -- can set off general inflation in an endogenous money world.

      Delete
  18. (1) "Yes I understand that, but your only dispute is empirical not logical? "

    Haven't I already said that expanding money supply is a necessary but not sufficient condition for general price inflation?

    If an economy for some reason has a totally fixed amount of money, then deflationary pressures will build. That does not mean that the primary cause of a general price inflation is merely money supply increase.

    Money supply increase is necessary, intermediate factor in general price inflation, but in our world the primary causal factors are often how mark-up pricing firms set their prices.

    (2) Paul Volcker's disastrous monetarist experiment caused economic activity to collapse as interest rates soared: that caused a recession and disinflationary forces in flexprice and mark-up pricing markets, wage growth restraint; the fall in oil prices is also what cured inflation back then.

    ReplyDelete