Economics Questions

Re: Deflation

Autolykos — Fri, 21 Jan 2011 00:11:27 GMT

Kaz, I'd also like you to respond to my last post.

Re: Deflation

Graham Wright — Thu, 20 Jan 2011 20:44:15 GMT

Bump. Kaz, you may have missed my post above. I would be very interested to hear what kinds of price deflation (according to Salerno's taxonomy) you consider to be BAD and why you disagree with Salerno. Thanks.

Re: Deflation

Autolykos — Thu, 06 Jan 2011 17:01:33 GMT

Kaz:
That's a pretty authoritarian assumption, on your part.

First off, I'd say it's a conclusion, not an assumption.

Second, what's your point? Calling it "pretty authoritarian" magically renders it incorrect?

Kaz:
What I think someone should do has nothing to do with imposing my preferences.

The most important form of liberty is the freedom to be foolish, unhealthy, or wrong.

"Foolish, unhealthy, or wrong" according to whom?

See my point?

Kaz:
Anyway, in a large free market, the overall trend will be people doing what's best. Only if you distort it by coercion, for example by imposing a government-fiat gold dollar that causes deflation, will people harmfully underinvest (or overinvest, with an inflated fiat paper dollar).

"What's best" according to whom?

Kaz:
I think we're only talking about the latter, in this case...obviously, it is imperative to talk about the best level of investment economy-wide, since that's what determines how much food is grown, how many shoes made, et cetera. Pricing represents the level of investment, in effect.

Saving can be considered a form of investment -- in oneself. It depends on the definition one uses for "investment". Either way, I think you were implying, with your $1000 example, that the money-holder should give it to someone else instead of keeping it for himself. But why should he do that if he prefers otherwise?

Kaz:
A more precise way of describing that would be:

With overinvestment, people are investing based on an overstated sense of demand, and ending up with too much

With underinvestment, people are investing based on an understated sense of demand, and ending up with too little

You seem to be trying to make this into an is/ought fallacy sort of argument, where you ignore the actual, inversely identical outcome of both kinds of distortion, and focus instead on a single individual, and your imagining that he is somehow stealing in one case, but just exercising his choice in the other.

That's hardly value-free.

It seems to me that we're simply using different definitions for "over-investment" and "under-investment". That's fine. Hopefully my comments in the rest of this post will make my position clearer to you.

If people's demand for money increases, that means their demand for the things they can get with money necessarily decreases -- ceteris paribus, of course. So in that kind of deflation, there is no understated sense of demand.

Besides, people invest with overstated and understated senses of demand all the time. No one knows exactly how many people are willing to pay $X for Y at any given time.

Kaz:
With inflation, nobody is investing things they don't have. They are investing exactly what they do have, but they have had the demand it represents distorted by said inflation. With deflation the exact inverse is happening. They are deceived into thinking there's less demand than there really is.

In both cases, if they knew they truth they'd invest N, but are being deceived into investing more or less than that amount.

Interest rates send signals to entrepreneurs about the availability (i.e. supply) of loanable funds. When the interest-rate equivalent of price floors or price ceilings are set up -- which can only be done if interest rates are centrally controlled -- signals can be sent indicating that the supply of loanable funds is lower or higher than it actually is.

On the other hand, when people's demand for money changes, the supply of loanable funds actually does change.

From what I understand, centrally-controlled changes in the money supply, either inflationary or deflationary, don't cause business cycles the way centrally-controlled changes in interest rates do. With the former, the supply of loanable funds also actually does change. However, since the changes are centrally-controlled, they hit a (relative) few people before they hit many people and thus cause systemic distortions in economic activity.

Re: Deflation

Graham Wright — Wed, 05 Jan 2011 02:51:48 GMT

Kaz:
His analysis contains the usual Rothbardian errors, for example confusing industry and item-specific price changes with "deflation", when that actually contradicts his own previous definition.

Where does Salerno do that?

Where does Rothbard do that?

Kaz:
Deflation is an OVERALL price drop that results from a change in the supply/demand balance of money.

Salerno:
Defined as a general fall in consumer prices, deflation implies an increase in the value or purchasing power of the monetary unit—in the U.S., an increase in the amount of consumer goods that can be purchased for a dollar.

Your definition is identical to the one Salerno is using in that article. Good.

Faz:
On the other hand, I'm glad he does go on to specify that there are BAD forms of deflation, something too many modern Rothbardians fail to do.

Only (4) "confiscatory deflation" - is BAD according to Salerno. I expect you agree with this.

But you are apparently arguing also, contra Salerno, that (1) "growth deflation", (2) "cash-building deflation" and (3) "bank credit deflation" are BAD. Is this what you are arguing?

As an aside...

Kaz:
He did this because, despite claiming to be anarcho-capitalist, he was advocating a return to a gold dollar, thereby using the authority of government to force it on the economy

My understanding is that Rothbard argued for a gold dollar not as a final solution, but merely as a transition to a free market.

Rothbard:
Hayek is surely correct that a free market economy and a devotion to the right of private property requires that everyone be permitted to issue whatever proposed currency names and tickets they wish.

Rothbard was not objecting to Hayek's free market proposal of competing currencies, but he was very pessimistic about whether just getting rid of legal tender laws would be enough to bring this about (because of the implications of Mises' regression theorem). Overly pessimistic in my view. I think his whole plan to redefine the dollar as a weight of gold is wishful-thinking and unnecessary, because I do think just getting rid of legal tender laws (and other relevant government interventions) would be enough to bring about a free market in money; government paper money would likely lose out in competition with private commodity-backed currencies.

But the point is, Rothbard is clearly not contradicting himself by being an anarcho-capitalist and supporting a transitional plan that involves re-linking the dollar to gold. He just couldn't see any other way to transition.

Re: Deflation

liberty student — Wed, 05 Jan 2011 01:21:53 GMT

Kaz:

No. that is not what you said. You said that shortages result from malinvestment, particularly what you termed as "underinvestment". It matters not what the causal element is. Shortages (or surpluses) are not the end results of malivestments.

You disagree with Rothbard and Mises on this?

I mean, you disagree with all of economics, but you may not realize you're in disagreement with those two icons.

Appeals to authority are a logical fallacy and not a substantive point in argument.

Re: Deflation

DD5 — Tue, 04 Jan 2011 22:52:45 GMT

Kaz:
When government coercion causes malinvestment, the inevitable result is shortage or surplus.

No shortage or surplus results. Investing in lines of production that are later discovered to be at odds with consumer preference does not create a surplus or shortage for anything. And no. I don't disagree with Mises and Rothbard on this.

Re: Deflation

Kaz — Tue, 04 Jan 2011 22:30:59 GMT

In your earlier deflation example, you seemed to imply that the person with $1000 should invest that money instead of simply saving it, despite the premise that he prefers doing the latter. However, Austrian Economics is, strictly speaking, value-free. It would seem that you're attempting to impose your own preferences over those of your hypothetical money-holder.

That's a pretty authoritarian assumption, on your part.

What I think someone should do has nothing to do with imposing my preferences.

The most important form of liberty is the freedom to be foolish, unhealthy, or wrong.

Anyway, in a large free market, the overall trend will be people doing what's best. Only if you distort it by coercion, for example by imposing a government-fiat gold dollar that causes deflation, will people harmfully underinvest (or overinvest, with an inflated fiat paper dollar).

1) for whom a given level of investment would work best and 2) whether it even makes sense to talk about "level of investment" in an economy-wide sense (as I presume you mean).

I think we're only talking about the latter, in this case...obviously, it is imperative to talk about the best level of investment economy-wide, since that's what determines how much food is grown, how many shoes made, et cetera. Pricing represents the level of investment, in effect.

It seems to me that there's a qualitative difference between "over-investing" and "under-investing". With "over-investing", one is making investments using things he doesn't actually have (but believes he does have). This cannot happen with "under-investing", which I think is more accurately described as simply withholding investment.

A more precise way of describing that would be:

With overinvestment, people are investing based on an overstated sense of demand, and ending up with too much
With underinvestment, people are investing based on an understated sense of demand, and ending up with too little

You seem to be trying to make this into an is/ought fallacy sort of argument, where you ignore the actual, inversely identical outcome of both kinds of distortion, and focus instead on a single individual, and your imagining that he is somehow stealing in one case, but just exercising his choice in the other.

That's hardly value-free.

With inflation, nobody is investing things they don't have. They are investing exactly what they do have, but they have had the demand it represents distorted by said inflation. With deflation the exact inverse is happening. They are deceived into thinking there's less demand than there really is.

In both cases, if they knew they truth they'd invest N, but are being deceived into investing more or less than that amount.

Re: Deflation

AdrianHealey — Tue, 04 Jan 2011 22:21:35 GMT

Kaz:

You disagree with Rothbard and Mises on this?

I mean, you disagree with all of economics, but you may not realize you're in disagreement with those two icons.

When government coercion causes malinvestment, the inevitable result is shortage or surplus. That's almost by definition. I don't even know what foundation you would have for asserting otherwise. The whole Austrian business cycle theory, whether the real one or Rothbardian one, centers around this premise.

I'm sorry Kaz, but I also think you are wrong. Or not necessary wrong, just not using the correct words. Let me try to clarify. The word 'shortage' is usually used to describe the consequences of a price control. Maximum prices cause shortages.

You do accept, I believe, that the shortage caused by a price control is different than the 'shortage' caused by a ABCT, right?

In any case. i've never encoutered the term 'shortage' to describe the consequences. Malinvestment is bad, but it's usually not described as a 'shortage'. One could - somethings are produced into big of a quantity, other in too little - but it's not the same as a shortage in the sense as caused by a price control. Usually the term shortage is reserved for this kind of consequence.

Re: Deflation

Kaz — Tue, 04 Jan 2011 22:16:28 GMT

No. that is not what you said. You said that shortages result from malinvestment, particularly what you termed as "underinvestment". It matters not what the causal element is. Shortages (or surpluses) are not the end results of malivestments.

You disagree with Rothbard and Mises on this?

I mean, you disagree with all of economics, but you may not realize you're in disagreement with those two icons.

When government coercion causes malinvestment, the inevitable result is shortage or surplus. That's almost by definition. I don't even know what foundation you would have for asserting otherwise. The whole Austrian business cycle theory, whether the real one or Rothbardian one, centers around this premise.

Re: Deflation

DD5 — Tue, 04 Jan 2011 20:34:05 GMT

Kaz:

If you look more closely at what I wrote, that is precisely what I said:

No. that is not what you said. You said that shortages result from malinvestment, particularly what you termed as "underinvestment". It matters not what the causal element is. Shortages (or surpluses) are not the end results of malivestments.

Re: Deflation

jmorris84 — Tue, 04 Jan 2011 20:33:34 GMT

Kaz:

You are failing to understand the difference between price and value.

The value of your house will remain the same...declining marginally as it ages...but the PRICE will plunge, making it a horrible investment compared to simply holding that same money in the bank and renting.

If you paid $100K for a pre-owned house, and in five years it's worth $50K because of deflation (the house's real value having only declined slightly), you'd have been better off renting for five years, but keeping the $100K. You would probably have about $60K in cash left over, even after rent.

First of all, we need to know why, in your hypothetical scenario, in 5 years, the price of the home is dropping that quickly and significantly. To continue with your hypothetical, though, maybe it would make more sense to rent in this situation but maybe not, as well. Maybe I am moving in the house with the intent of living there for the remainder of my life and I am only 30 years old. I would argue it is better for someone like me to buy, instead of renting for the remainder of my life.

Re: Deflation

Autolykos — Tue, 04 Jan 2011 20:32:33 GMT

Kaz:
1) Obviously, there is some level of investment that would work best. An Austrian expects this level to be best determined by the free market; if people are left free, they will be able to determine what is the ideal level of investment. For example, it takes a certain amount of money to create enough shoes, of the correct kinds, for the economy. Optimal investment produces the right amount and type of shoes, while malinvestment produces too many shoes, too few, (or both at once), the wrong kinds, et cetera.

In your earlier deflation example, you seemed to imply that the person with $1000 should invest that money instead of simply saving it, despite the premise that he prefers doing the latter. However, Austrian Economics is, strictly speaking, value-free. It would seem that you're attempting to impose your own preferences over those of your hypothetical money-holder.

There are also the questions of 1) for whom a given level of investment would work best and 2) whether it even makes sense to talk about "level of investment" in an economy-wide sense (as I presume you mean).

Kaz:
2) I guess I already answered this with (1): malinvestment produces too much, too little, or the wrong kind. Investing under the optimal level, obviously, creates too little wealth (shoes, for example) in the society. It not only means a shoe shortage, but a resulting shortage in comfort, shoe-related employment, et cetera. Underinvestment across the economy generates a shortage of new wealth, of resources, of jobs, et cetera.

Like we are suffering now.

It seems to me that there's a qualitative difference between "over-investing" and "under-investing". With "over-investing", one is making investments using things he doesn't actually have (but believes he does have). This cannot happen with "under-investing", which I think is more accurately described as simply withholding investment.

Re: Deflation

Kaz — Tue, 04 Jan 2011 20:28:08 GMT

Almost everything that you will buy, in your life time, is bought outright and on top of that, declines in value the minute it is taken out of the store, driven off of the lot, or what have you. Homes should be no different and the reason that they are is because of government intervention. Assuming you drive, do you rent your car from Enterprise Rental Car instead of owning one? If you don't, why not? By your logic, it makes no sense to ever buy a car. Are you renting the clothes you are currently wearing? If not, how come? Don't you know that they are declining in value? And so on and so forth...

You are failing to understand the difference between price and value.

The value of your house will remain the same...declining marginally as it ages...but the PRICE will plunge, making it a horrible investment compared to simply holding that same money in the bank and renting.

If you paid $100K for a pre-owned house, and in five years it's worth $50K because of deflation (the house's real value having only declined slightly), you'd have been better off renting for five years, but keeping the $100K. You would probably have about $60K in cash left over, even after rent.

Re: Deflation

Kaz — Tue, 04 Jan 2011 20:23:46 GMT

Even if the claim of producing "too little" can be substantiated by some objective method relative to some optimal point, it doesn't follow that shortages will result unless the government enacts price controls. But the very concept of some "optimal investment point" is nonsensical, unless one defines the optimal point to be whatever the current state is of the free market .

If you look more closely at what I wrote, that is precisely what I said:

The free market can best determine what is optimal.

But if you distort it, for example through inflation or deflation, you change investment levels, creating malinvestment.

Re: Deflation

jmorris84 — Tue, 04 Jan 2011 20:19:40 GMT

kaz:

So only people who could afford to nearly pay cash for a house, and are willing to throw that cash away on something that will plunge in price, could own a home.

So when everyone realizes they should not bother buying homes, or anything else in the world that could possibly be rented, who are the fools who WILL buy those things, and rent them out to everyone else while their investment's price flies out the window?

Almost everything that you will buy, in your life time, is bought outright and on top of that, declines in value the minute it is taken out of the store, driven off of the lot, or what have you. Homes should be no different and the reason that they are is because of government intervention. Assuming you drive, do you rent your car from Enterprise Rental Car instead of owning one? If you don't, why not? By your logic, it makes no sense to ever buy a car. Are you renting the clothes you are currently wearing? If not, how come? Don't you know that they are declining in value? And so on and so forth...