NetNews Usenet Archive 1993 #3/NN_1993_3.iso/spool/sci/econ/9898

Internet Message Format | 1993-01-28 | 3.9 KB

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From: [e-mail] (Frank Ferguson x3584)
Newsgroups: sci.econ
Subject: Re: Inflation
Message-ID: <[e-mail]>
Date: 27 Jan 93 16:22:23 GMT
Article-I.D.: gasco.1993Jan27.162223.29959
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In his article James F. Hranicky writes:
>
>Over all, one of the main characteristics of progress *is* saving, holding
>on to things, accumulating capital for investment and further production,
>since from productivity comes wealth. You simply want to be able to judge
>when and when not to hold on to things.
>
>Oddly enough, I believe Keynes advocated spending and discouraged saving,
>apparently not understanding simple supply and demand (greater supply ==
>more stuff == lower prices for stuff == higher standard of living for all)

Yes, saving and investment is the key to productivity and long term
growth in real wealth.  I'm sure no one questions this.  I'm also sure
that Keynes fully understood that (in a comparative static sense) more
stuff implies lower prices for stuff, and that more stuff means a higher
standard of living (ignoring, for the moment, the environmental and
spiritual implications of the statement).

What is not mentioned, here, is the process by which the production of
more stuff gets done.  Falling prices presents the producer with the
awkward situation of having produced a product which can only be sold
at a price lower than the sum of the prices of the inputs that went
into said product.  This is not good business.  It is no accident that
before the 1930's, the period from about 1870 to the turn of the century
was known as the Great Depression because ot the long term fall in
prices brought on by the rapid spread of modern industrial technology
and its attendant increase in productivity.  The upshot of this Great
Depression was the era of the "trusts" wherein cartels and giant firms
were formed with the express purpose of "rationalizing production" and
controlling prices by controlling production--I'll mention Nabisco,
US Steel, General Electric as examples.

Gradually rising prices are appreciated by business (and by economic
actors in general) because the opposite, falling prices, require the
uneconomic sale of output and the revision of earnings expectations in
a downward direction.  By and large, increases in production and wealth
have not been characterized by a decline in nominal price levels.
Indeed, declining nominal prices have typically been associated with
depressions--hardly periods of vigorous growth in output.  In fact,
while real output today is markedly higher (in absolute an per capita
terms) than it was in 1920, one could hardly argue that nominal prices
are currently lower than they were then.  Mild inflation causes
a climate of optimism and business confidence.  Mild deflation is
only achieved through the most brutal crushing of peoples hopes,
dreams and future expectations.  This is, of course, why governments
are so reluctant to impose inflation fighting policies; they have to
create a recession and all the pain that comes with it--hardly a vote
getter.

In closing, it is this compatibility beteen economic growth and
gradually rising prices and antagonism between vigorous business
activity and falling prices that argues against a commodity money
regime.  Tying the money supply to a fixed commodity (like gold) tends
to put consistant downward pressure (read recessionary pressure) on
prices.  Increased output through time can only be accomodated in
a commodity money regime through a fall in prices (or an increase in
velocity--which monetarists tend to argue cannot happen).

Francis Ferguson
Economist
[e-mail]