A lot of people are unclear on the concept of "malinvestment."
I'd like to start with an expanded version of a response I posted earlier in order to try and clarify the concept. Intelligent comments and constructive criticism appreciated.
Begin by considering two concepts:
The value of a prices, no pun intended, is that they provide signals to market participants: when, where, in what quantity, and towards what ends should investments be directed. These signals are valuable information that market participants use in directing the resources at their disposal, whether they be cash, credit, finished products, works-in-progress, etc. Any interference with prices, therefore sends inaccurate signals to investors, entrepreneurs, consumers, borrowers, and lenders.
When money is injected into the system, it causes prices to change without a corresponding change in time preference which would be necessary to meet the "demand" contrived by the inflation. The takeaway here is that if time preferences haven't changed, fiat injections cause a disconnect between prices and time preference.
New money, especially fiat money, typically manifests itself as demand for consumption goods. Keeping in mind that "consumption" is just a polite and roundabout way of saying that you're destroying something valuable, since this consumption wasn't matched with a previous investment in productivity, it's likely to be a net value destroyer.
What happens when new money is introduced, is that demand appears to have increased, manifested by higher prices. These prices tell people "make more stuff", this is how it works: People see a higher price being paid for certain goods, and this appears to indicate that there is perhaps profit to be made in that market. Responding to the apparent signal, they begin now to overwork their assets, or perhaps to invest in assets that will enable them to be more productive tomorrow.
What has not changed is the present productive capacity.
Prices rose, however, because of the money; the higher prices being merely reflections of the increased money supply, and not of any fundamental change in consumer preferences. This money eventually works its way through the system, and people discover that they over-utilized their productive assets yesterday (and therefore can't produce as much today) or that they invested in assets in an attempt to match increase capacity to accommodate a phantom increase in demand. When this fact is eventually revealed, many investments are revealed as unprofitable and must be liquidated, and in either case we are worse off.
It requires previously accumulated capital (higher order goods) to facilitate the production of more consumer products (lower order goods) without depleting the existing capital stock. In order to have more today, it is imperative to have invested in productivity, made some sacrifice towards that end, yesterday.
This process does not work in reverse.
Without that previously accumulated capital, a boom/bust phase is inevitable.
============================
David Z
"The issue is always the same, the government or the market. There is no third solution."
Prashanth Perumal: What about this actually makes it an unsustainable boom? Or am I failing to find something obvious here?
What about this actually makes it an unsustainable boom? Or am I failing to find something obvious here?
Prices need to convey meaningful information about the relative availability of goods & services. By increasing the money supply (whether in the hands of a single individual or many), the resultant prices convey less-accurate information.
How do others in the economy respond?
etc.
Ixtellor:1) Name dropping is useless, particularly when their hand picked. Example:I am correct, check out Keynes, Krugman, Hicks, and Maede.
I'm not "name dropping", I'm referring you to authors who did the research first hand and wrote about the subject at length. If you are asking an honest question, and not merely trolling, you shouldn't take such offense to my response.
Ixtellor:Hayek was a social safety netter, so can I assume you with those portions of his analysis as well?
Straw man. Just because I think kindly of Hayek in some regards does not mean that I accept everything he did as gospel. Likewise Friedman: I agree with a great deal of his work, just not all of it.
Ixtellor:2) You made a blanket statement. I asked if it was true in all instances. Well here is an instance: The $168 Billion+ Bush Tax rebates. Are you stating, that the $168billion + doled out in amounts of $300/person had an impact on producer inflation prior to consumer inflation?
The "blanket statement" concerns malinvestment as it occurs due to the effect of credit expansion. If I said that "the only cause of malinvestment is credit expansion" (and I don't believe I said this) then, if one demonstrates that other things cause malinvestment, as well, I'm not "wrong" per se, I'm just advocating an incomplete theory, in which case I may be able to revise said theory and incorporate those other elements.
Ixtellor:Are you stating, that the $168billion + doled out in amounts of $300/person had an impact on producer inflation prior to consumer inflation? Just glancing at 3 tables, money supply, PPI, and CPI, for the relevant time period it would seem the best you could say is that inflation occured simultaneously in both sectors,
Inflation is an increase in MS. It isn't an increase in PPI or CPI (although rising indices may be evidence of the underlying growth of the monetary base).
Ixtellor:Which would seem to validate my whole point/wager.
It seems you're jumping to conclusions.
Ixtellor: 1) Name dropping is useless, particularly when their hand picked. Example:I am correct, check out Keynes, Krugman, Hicks, and Maede. (Hayek was a social safety netter, so can I assume you with those portions of his analysis as well?)
1) Name dropping is useless, particularly when their hand picked. Example:I am correct, check out Keynes, Krugman, Hicks, and Maede. (Hayek was a social safety netter, so can I assume you with those portions of his analysis as well?)
Here is a link to a working paper on the empirical evidence (the tables are at the end): http://blog.mises.org/archives/001941.asp
david_z: I'm not "name dropping", I'm referring you to authors who did the research first hand and wrote about the subject at length. If you are asking an honest question, and not merely trolling, you shouldn't take such offense to my response.
I had poor word choice. I should have said 'Data Dump'. Instead of debating or proving a point, you just refer to thousands of pages of economic research. In academic circles I think is is acceptable, because there are commonly understood variables and data. However, being on an anonymous internet forum, the burden of proof is/should be on the one making the claim. Rather than refute my claim with a link/specific reference/chart/specific data or theory, you just "Data Dumped'.
david_z:Straw man. Just because I think kindly of Hayek in some regards does not mean that I accept everything he did as gospel. Likewise Friedman: I agree with a great deal of his work, just not all of it.
That was a poor attempt at humor on my part. I assume you don't agree with Hayek on everything. I was just trying to illustrate that your blanket response of 'read hayek' is a flawed strategy, particularly since you are 'Picking and Choosing' specific parts of his work, rather than reference those specific parts.
david_z:Inflation is an increase in MS.
I will hold off responding. And perhaps you explain how you reach that conclusion. For example: If Inflation = MS, is it possible to get inflation without an increase in MS? (I assume you know the answer, and will refine your definition, at which point I will comment further)
Since wikipedia is an accepted source here: Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] The term "inflation" once referred to increases in the money supply (monetary inflation); however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflation.
Ixtellor
Ixtellor:Rather than refute my claim with a link/specific reference/chart/specific data or theory, you just "Data Dumped'.
OK. Here's a few that I might recommend. Some of them are available for free here on Mises.org
Hayek, F.A.: Prices and Production
Skousen, Mark: Structure of Production
Rothbard, Murray N.: America's Great Depression
Anderson, Benjamin M.: Economics and the Public Welfare
Ixtellor: david_z:Inflation is an increase in MS. I will hold off responding. And perhaps you explain how you reach that conclusion.
I will hold off responding. And perhaps you explain how you reach that conclusion.
Well, the Wiki article that you cite references the definition that I use. It appears that we are using the same word to describe different things, which may be the source of our confusion. I hate equivocations, and the impediments they cause to communication. Friedman's work, I believe gives us the following: Inflation is always and everywhere a monetary phenomenon.
Further, ithe entry under monetary inflation says the following: "Monetary inflation is the term used by some economists to differentiate direct inflation in the money supply (or debasement of the means of exchange) from price inflation which they view as a result or necessary outcome of the former."
Ixtellor:If Inflation = MS, is it possible to get inflation without an increase in MS?
Are you asking me whether MS can increase without an increase in MS? Or are you asking me whether the price level (however defined) can increase without a corresponding increase in MS?
How does a word such as "inflation" apply to a ratio, which is what prices are, pray tell? There is absolutely no precision whatsoever in defining it as an increase in prices, which can come from a multitude of causes. A general increase in the price level can only come from changes in the money supply. Otherwise some prices will fall to allow for others to rise, given a fixed money supply.
Freedom of markets is positively correlated with the degree of evolution in any society...
david_z: Well, the Wiki article that you cite references the definition that I use. It appears that we are using the same word to describe different things, which may be the source of our confusion. I hate equivocations, and the impediments they cause to communication. Friedman's work, I believe gives us the following: Inflation is always and everywhere a monetary phenomenon.
I believe we are discussing different things. I am essentially attacking your definiton of inflation.
You cited that Inflation = Increase MS.
I am refuting that. I believe, and to my knowledge all the Keynesians believe: Inflation = general increase in prices.
Because you CAN have inflation without an increase in money supply. Keynes big argument was the underutilization of resources. This is a GIANT debate in the economic community, and I don't think you can make a bold statement. Particularly in light of the fact that the vast majority of economists are Keynesians. (Are they all leftist/statists bent on socialism or is it possible the Keynesian models, predictions, and formula are MORE convincing?)
Jon Irenicus:How does a word such as "inflation" apply to a ratio, which is what prices are, pray tell?
Are you talking about nominal prices or real prices? Your answer makes me think you don't believe in calculating real numbers?
Jon Irenicus:A general increase in the price level can only come from changes in the money supply.
Again, why do you state this as fact? Particularly when confronted with decades worth of research indicating it isn't true?
I am not even arguing that I am 100% correct. Only that the Keynesians in this debate have a lot of data, so much in fact, that their position is more widely excepted in the peer reviewed community.
P.S. There seems to be a BIG commitment to absolutism on these boards. Which seems very odd when you factor in the belief in that many posters here argue economics can't even meet the criteria of the scientific processes. (example: Economics can not be tested, but X holds true in all cases - seems hypocritical to me)
Ixtellor: I believe we are discussing different things. I am essentially attacking your definiton of inflation. You cited that Inflation = Increase MS. I am refuting that. I believe, and to my knowledge all the Keynesians believe: Inflation = general increase in prices. Because you CAN have inflation without an increase in money supply. Keynes big argument was the underutilization of resources. This is a GIANT debate in the economic community, and I don't think you can make a bold statement. Particularly in light of the fact that the vast majority of economists are Keynesians. (Are they all leftist/statists bent on socialism or is it possible the Keynesian models, predictions, and formula are MORE convincing?)
The definition of inflation changed over the past 100 years from "an expansion of the money supply" to "a general increase in prices". The reason for this being that the powers that be want to confuse the cause and effect. Prices across the board cannot keep going up without an increase in the means of payment. It's just not possible.
Also, from a linguistic point of view, prices cannot "inflate". As Jon mentioned they are ratios between goods and other goods, and hence prices can only rise or fall.
Sorry for stealing your thunder Jon.
Ixtellor: Jon Irenicus:How does a word such as "inflation" apply to a ratio, which is what prices are, pray tell? Are you talking about nominal prices or real prices? Your answer makes me think you don't believe in calculating real numbers? Jon Irenicus:A general increase in the price level can only come from changes in the money supply. Again, why do you state this as fact? Particularly when confronted with decades worth of research indicating it isn't true? I am not even arguing that I am 100% correct. Only that the Keynesians in this debate have a lot of data, so much in fact, that their position is more widely excepted in the peer reviewed community.
It is derived logically. Assume MS is fixed for a moment. How can you have a "general rise" in prices over time when more goods and services are being produced over time.
Ixtellor:P.S. There seems to be a BIG commitment to absolutism on these boards. Which seems very odd when you factor in the belief in that many posters here argue economics can't even meet the criteria of the scientific processes. (example: Economics can not be tested, but X holds true in all cases - seems hypocritical to me)
How is this hypocrisy? We have derived our conclusions via logical reasoning and statements that are apodictically true. This isn't chemistry my friend.
Irish Liberty Forum
MatthewWilliam: It is derived logically. Assume MS is fixed for a moment. How can you have a "general rise" in prices over time when more goods and services are being produced over time.
Quick reply due to time:
If MS is fixed and companies produce less goods due to underproductivity/utillization you have the same amount of dollars chasing less goods. I said this already. Its seems your assuming that companies never underproduce. For example do you believe that if MS was constant in todays economy, but companies perceived a slow down, that they might underproduce to not get caught with inventories?
Ixtellor: I believe we are discussing different things. I am essentially attacking your definiton of inflation. You cited that Inflation = Increase MS. I am refuting that. I believe, and to my knowledge all the Keynesians believe: Inflation = general increase in prices.
The definition of inflation as it pertains to the ABCT is the neoclassical definition, not the Keynesian definition. You are equivocating, and with that in mind, there is no use in continuing the discussion.
Ixtellor: Because you CAN have inflation without an increase in money supply.
Because you CAN have inflation without an increase in money supply.
Only if you define inflation differently, sure you can. But that's equivocation, see above.
The Austrian definition is: inflation = increased MS.
Can prices rise without increasing the money supply? Sure they can, two immediate examples would be supply shock and technology shock.
david_z: The definition of inflation as it pertains to the ABCT is the neoclassical definition, not the Keynesian definition. You are equivocating, and with that in mind, there is no use in continuing the discussion.
Provided you mean that there can be a general increase in prices wihtout an increase in money supply we are in total agreement. As you seem to say.
It seems less useful to me to use the classical definition of inflation because the modern world of economic theory isn't using that terminology anymore. And since ABCT is on the outside looking in, trying to gain acceptance, to get the ear of those in power... It would seem more useful to adapt to the modern usage.
I realize this is "your" forum and your remarks were directed at the converted, so I apologize. As an outsider, even though I am in the vast majority, your statements were misleading, but this was clearly my ignorance. As to your overarching thesis, now that this is cleared up, I am still digesting and considering it.
Ixtellor: It would seem more useful to adapt to the modern usage.
But the modern usage is so radically different than the neoclassical definition, that what you're asking me to do is not merely tweak an existing theory, but to develop an entirely new one, based alien methodology and terminology.
Seems like it would be easier for anyone deisring to criticize the ABCT to merely accept as given the neoclassical definition. You don't need to change your definition of inflation, you need only recognize that in Austrian business cycle literature, "inflation" and "credit expansion" and "increasing the money supply" are basically interchangeable terms.
It's also important to note that the ABCT in during its formulation under Eugen Bohm-Bawer, Ludwig von Mises and Friedrich Hayek, the neoclassical definition was widely accepted as the definition of inflation.
I don't ask Marxists to "adapt" the Exploitation Theory to my definition of Capital, instead, I try to understand the argument in its own proper context.
Ixtellor:As an outsider, even though I am in the vast majority, your statements were misleading, but this was clearly my ignorance. As to your overarching thesis, now that this is cleared up, I am still digesting and considering it.
No worries - it's always refreshing to have a discussion that doesn't devolve into a flame war. Thanks for keeping civil!
Cheers.
ANY price. All prices are ratios.
Um, what "research" would that be? How would a general (economy-wide) rise in the price level take place then, without increasing the Ms?
Look, if you're just going to regurgitate silly litte slogans on here, then why even bother? If you want to learn, ask for works elaborating on the Austrian position, rather than just taking this pointlessly confrontational style...
david_z:Consumers are trying to satisfay immediate needs, while businesses are investing in projects that will only pay off in the longer-term. Both of these groups are playing tug-of-war with the same scarce resources.
Tug-of-war is a good image. Can you expand on it?
Production is the application of reason to the problem of survival. AYN RAND
Stephen Grossman:Tug-of-war is a good image. Can you expand on it?
Check here.
The key consideration is that printing money into existence doesn't change the quantity of real goods and services available for consumption. However, artificially depressing the interest rate spurs more consumption (by individuals, on consumer goods) than would otherwise occur, while the resulting increased demand for consumption goods, combined with the nominally lower interest rates, encourages businesses to invest in long term projects to increase their future productivity.