baba@spar.UUCP (Baba ROM DOS) (02/25/85)
> >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? You felt it unnecessary to complete your second sentence. As a part of anything dressed as a formal proof, I had to ignore it, but what you *seem* to imply 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. 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). You have not demonstrated how these inflationary pressures will be resisted by a free economy in a real world. > 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. 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. Maybe it's just that we have different standards of proof in our respective disciplines. ;-) Baba