Reading Bastiat's What Is Money?, I have a question:
Although I'm philosophically against intrusion in the free market by government, I was curious to see your responses to this inquiry as I am new to economic theory.
The trouble with printing money, so it seems, is that the more that is produced, the less value it holds. As I see it, this is specifically due to inflation. The entire idea behind QE3 is that people will spend more money, and in doing so, the economy will be stimulated. I understand Bastiat's approach to this via the Broken Window Fallacy, but considering the option that the government could require prices to stay the same, what exactly would happen? Would printing money actually increase wealth so long as inflation was capped and controlled?
1. Spending more money does not stimulate the economy. Just the opposite.
2. If the govt requires prices to stay the same, either producers will shut down production, because it's not worth it to them, or they will find some way to get round the law and raise prices some way, legally or illegally.
3. Printing money does not increase wealth. Why should it?
Of course, I'm just making assertions, because these are all well known basics os Austrian Economics. All the info is on the site.
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It's easy to refute an argument if you first misrepresent it. William Keizer
So take the idea of a completely totalitarian state. This state is pure socialism: all facets of the economy are government controlled, and there is role prescription from birth. If someone tries to quit his job, he's killed. So everybody is forced to do a certain job and keep prices at a certain level. In this society, the government decides to print a ton of money. If, in this scenario, the government were successful in keeping all workers at their specific job, and if all prices happened to stay the same, would this increase people's wealth?
No. It would create shortages. We would all run to the store with our newly printed "wealth" to find that all the products were already purchased by someone else. Printing money does not solve the problem of scarcity.
Plus. socialist economies are doomed because of the calculation problem.
So if wages and prices were successfully controlled, and money were injected into the economy to stimulate wealth, actual wealth could not be stimulated since nobody would be able to use the newly obtained extra "money" since production would need to increase (which would be a compensation for not allowing inflation, i.e. price control), right?
As a followup question, if so, what would prevent the totalitarian state from requiring even more production out of its workers?
thetabularasa: As a followup question, if so, what would prevent the totalitarian state from requiring even more production out of its workers?
You can force people to do things, but you can't force them to think or be creative or proactive. Ultimately people are most creative and productive when working for their own benefit, not for that of others. When gov goes to the point of commanding every action, the workers then often protest by taking such commands literally and doing nothing but those actions, which drastically increases intellectual overheard on the guy giving orders, and results in a lot of inefficiency as well.
thetabularasa: So if wages and prices were successfully controlled,
So if wages and prices were successfully controlled,
They cannot be successfully controlled ever. The only successful price is a free market price. Anything else introduces distortions into the economy which have negative consequences by comparison.
thetabularasa:and money were injected into the economy to stimulate wealth,
The government counterfeiting their own currency doesn't stimulate wealth, it steals a tiny percentage of the value of every piece of currency and imbues that theft into the newly minted currency. How can it be stimulating wealth if the actual effect is theft? Thus, "injecting money" is code for theft. It amounts to the gov stealing value from everyone and deciding what to spend that value on rather than allowing ordinary people to spend that value according to their own desires. That decreases real wealth.
thetabularasa:actual wealth could not be stimulated since nobody would be able to use the newly obtained extra "money" since production would need to increase (which would be a compensation for not allowing inflation, i.e. price control), right?
Wealth and production are essentially the same thing. That is, wealth is what you produce. Money is not wealth, money can only be used to buy things that have been made, which are wealth. A dollar is not wealth, it is a medium of exchange. Wealth increases on average only when there are more real things to exchange that satisfy wants, not when there's more medium of exchange.
First you need to seperate money and wealth. They are not the same thing. Money is a medium of exchange and an indicator of wealth, but not wealth in itself.
Think of wealth as your ability to supply goods and services of value to the market. The better you are at meeting the demands of the market and the more time you spend doing that, then the more money you will accumulate. The money itself however is simply an indicator of your ability and your time dedicated to a productive activity.
Government really can't control prices and even if they could they have no idea what the price of any good or service should be. It is not possible for prices to stay the same. There is a domino effect in the market. Goods are not isolated. If weather or disease wipe out the corn or cotton crop then we will see a ripple effect on prices throught out the market. Government has no way to accurately calculate this change.
Controling prices is really nothing more than creating a price ceiling or floor which will always lead to a shortage or a surplus.
So to answer your question:
1. Creating more money does not increase wealth because money is not wealth. How new money is injected into the economy is very important it determining the effects of the new money. The people who have access to it first benifit the most (Banks in the case of QE3). People on the bottom of the economic ladder are actually harmed by an increase in the money supply through programs like QE3.
2. Government can't control prices over the long run without causing more problems than they solve. It is not possible for prices to stay the same. What if the government had frozen the price of computer memory in 1957? At $400,000,000 per MB (1957 prices) how much would you have paid for the computer you are using right now? Phone? Camera? Free markets drive down prices.
So a Soviet-style totalitarian system will really just bring production to a halt. Even if government forced the best and brightest to produce more while eliminating the weakest workers, it might be beneficial for the short term but not for the long term in the sense that it would be rare to find a genius in every necessary industry (which itself is subjective) that is able to be scared enough to produce on command. I see innovation in this society coming to a stand still, but I wanted to understand the economic reason for it versus a philosophical tenet that people should be free.
If I am not mistaken, this is what happened during the 60s and what made Hazlitt write man vs. the Welfare State.
It won’t come to a halt so much as it will result in a near total misallocation of resources. If memory is correct the Soviets had a price book with over 2.7 million items in it. Do you know how hard it is to accurately control pricing for 2.7 million different goods? How much man-power and time is spent. No single good exists in a vacuum. If you try to control the price of a single good you will quickly see that you have caused the price/supply/demand for both competing and complementary goods to change. Soon you are forced to try to control all of these goods as well and eventually you end up trying to control every good in the market.
The Soviets cheated and based their pricing off of the free markets of Europe, so even they were trying to use the free market to control prices. The Soviets never could answer the question of how they would price goods if they did not have the free-markets of Europe to use as a gauge. With 2.7 million different goods to control, it often took months or years for prices to be adjusted and by the time they were adjusted they were typically already out of date again.
A scared population will be very unproductive. They will lack creativity and the confidence necessary for innovation and production. It would be a very stagnate society. Just look at the Soviet Union. If you want to “understand the economic reason for it” then I would start with economic incentives. Price controls basically change the economic incentives of people. I assume you are a student. Think of it as grade control. If grades are fixed by the professor so that everyone in the class will get a passing grade of a “C”, how much effort will you put into studying the material for the test? What incentive do you have to study at all? You get a “C” not matter what you do.
Worse than that, the Soviet economy was successful only to the degree that it was corrupt. Where free market prices weren't allowed to exist, the only thing greasing the wheels of trade and keeping things moving was black markets and bribes. Which in that case were a good thing, as they righted what was artificially limited.
I don't think it was even successful to that degree. The Soviet Union burned massive amounts of resources and capital in an effort to appear successful to the rest of the world. It's not until the fall that we really come to understand just how impoverished the USSR was.
Personally I think Argentina and France are going to be fun to watch over the next few years. The more they try to control their economies the more out of control they spin.