mck@ratex.UUCP (Daniel Kian Mc Kiernan) (02/28/85)
>>>Well, to summarize, you (DKMcK) broke inflation down into three factors: >>>changes in the value of the goods that money represents, in the "velocity" >>>with which money changes hands, and in the money supply itself. You then >>>stated that, in a Free Economy [...] >>>that increases in the velocity of money don't matter, >> >> I didn't say that >>increases in frequency (PLEASE don't call it 'velocity') don't matter; I >>said that there would be not inflation-expectations component in frequency. >If I might excerpt your original article: > "b) Transactions frequency would rise only as a result of financial > innovation. Without prior increases in the price level to trigger > expectations of further increases, the frequency would have an > expectations component of zero; and there would be no increases > because..." >There are two statements here. The first is that transaction frequency >will rise only as a result of "financial innovation". Since it was already >given that transaction frequency is a component of inflation, and that your >statement was ostensibly part of a proof if the impossibility of inflation >in a free economy, I interpreted your first statement to have *implied* that >those variations in transaction frequency that are attributable to financial >innovation have no effect on inflation. In short, that they don't matter. >Otherwise why would you have made the statement? What I said was dP/P = dM/M + df/df - dT/T Obviously, if dM/M + df/f is less-than or equal-to dT/T then dP/P will be less than or equal to 0. As I said in referrence to the Real Life situation 'b) Transactions frequency increased gradually until recently. These increases, which were not enough to offset the increases in T, were brought on by innovation [...] and by expectations of price increases[.] Recent increases have been more dramatic, corresponding to increased expectations of increases in prices.' Obviously, if dT/T > df/f given the growth-rate of a regulated economy, then expectations of price increases must come from dM/M. Thereafter, expectations may make df/f > dT/T Obviously, if dT/T > df/f in a regulated economy without a rate of monetary growth to spark price- increases (and thus expectations of further price-increase), then dT/T > df/f in the more dynamic un-regulated economy without a rate of monetary growth to spark price-increases (and thus expectations of further price- increases). NONE OF WHAT I SAID IN 'Inflation in a Free Economy?' CAN REASONABLY AND HONESTLY BE CONSTRUED AS AN ASSERTION THAT FREQUENCY DOESN'T MATTER. If I held that frequency doesn't matter, I would have argued for a money where dM/M is approx equal to dT/T What I actually argued for is a money where dM/M is approx equal to dT/T - df/f (do feel free to check my original article). >You felt it unnecessary to complete your second sentence. Amazing what you can come up with when you quote people out of context! Here's the second sentence with the relevant context re-supplied: 'Without prior increases in the price level to trigger expectations of further increases, the frequency would have an expectations component of zero; and there would be no increases because... a) Legal tender laws would be abolished.' > As a part of >anything dressed as a formal proof, I had to ignore it, As part of an argument for something which you had ridiculed, you CHOSE to ignore it. > but what you >*seem* to imply Or, to put it more honestly: what I actually said > is a point worth contesting. I assume it is related to your >assertion that "inflationary expectations are not uncaused, and therefore do >not arise without cause". If you have a model that is stable assuming >it *starts* from a stable state, then you are in fact arguing that there >will be no inflation in a free economy *provided* that the economy is >"freed" at a time when there are no inflationary expectations. Actually, there have been repeated demonstrations that frequency-boost increases in the price level are not self-perpetuating. For example, the Weimar hyper-inflation was brought to a halt by introducing (and declaring) a monetary-growth ceiling (later rescinded by Hitler). > Secondly, >variations in transaction frequency can and do occur based on fundamental >shifts in the balance of supply and demand (crop failure, war, OPEC-like >cartels). Don't confuse supply-shocks with frequency-boosts. > You have not demonstrated how these inflationary pressures >will be resisted by a free economy in a real world. The kind of pressures that you name, which are supply-shock pressures, could hypothetically, I will admit, bring-on one-shot increases in the price-level. None have actually been sufficient to do so since the Civil War; but, say, another asteroid COULD hit. >> That the money-supply >>would be denationalized follows from Libertarian principle (another non- >>vacuous tautology). That, given a choice, people will choose money which >>is most servicable is obvious, and money which holds a fixed value is the >>most servicable (which is why I have argued elsewhere that a gold standard >>would not persist in a Free Economy). > >The likelyhood (though hardly tautological) that people will choose the >least inflating (or better still, fastest deflating!) currency to transact >in does not of itself imply that they will always have a good choice >available to them. First, I didn't claim that THAT was tautological. Second, a money which declines in value presents problems, and would be bargained away given an alternative. Third, the absence of legal tender laws DOES imply that there will be a good choice of monies available (this has, in part, already been achieved by indexing!). >I'm sure that your model has far less inflation (and a bit more deflation) >inherent in it than in a regulated economy, but you have not given me any >reason to believe it will be immune to cycles of inflation and deflation. In the beginning, it's possible (but not certain, and perhaps not even likely) that hard money would be used, and this period could be one of general declines in prices. What would evolve (in the absence of legal tender laws) would be monies which had a growth-rate such that dM/M would be approximately equal to dT/T - df/f. Recurring major supply-shocks (from where?) could bring on recurring episodes of price-increases, but there would be no mechanism for recurring episodes of price-decreases (even assuming that a good faerie repeatedly came and increased the GNP, the issuers of monies would be able to off-set the effects on the price-level by expanding the money-supply in accordance with a constant price-level). >Maybe it's just that we have different standards of proof in our respective >disciplines. ;-) Maybe it's just that you have a faculty for evasion. :-) Back later, DKMcK