mck@ratex.UUCP (Daniel Kian Mc Kiernan) (01/19/85)
This is a re-posting; the original vanished mysteriously.
BASIC MONETARY THEORY--
M*f=nT
In other words: the quantity of money in circulation (M) multiplied by the
frequency with which money changes hands (f) equals the aggregate nominal value
of transactions (nT). If this is not immediately obvious to you, try looking
at it this way:
f=nT/M
Next,
nT=P*T
That is: the aggregate nominal value of transactions (nT) is equal to the price
level (P) multiplied by the real value of transactions (T). Therefore
M*f=P*T
(This is called the "transactions version of the quantity equation of money";
the transactions frequency is usually called "velocity", but that is a misnomer
which I choose to avoid.) From this, we derive
dM/M + df/f = dP/P + dT/T
or
dP/P = dM/M + df/f - dT/T
(This is called the "dynamic form of the quantity equation".) What is tells
us is that a change in the price level is brought about by
a) a change in the money supply,
b) a change in the frequency with which money changes hands,
or c) a change in the aggregate real value of transactions.
REAL LIFE APPLICATION--
Let's work thru that list backwards:
c) Historically, real national income has generally grown for the past
several decades, and, with it, T; ceteris paribus, this would lead to a gradual
LOWERING of the price level, but the price level has instead increased.
b) Transactions frequency increased gradually until recently. These
increases, which were not enough to offset the increases in T, were brought on
by innovation (the introduction of credit cards, etc) and by expectations of
price increases (the holder of money spends it faster than he would otherwise,
fearing that it will lose value as he holds it). Recent increases in frequency
have been more dramatic, corresponding to increased expectations of increases
in prices. Even these more recent increases in f cannot fully account for the
increases in the price level; and, more importantly, they are secondarily
causal (they were themselves brought on by prior increases in P).
Which brings us to (guess what, guys an' gals): a) the money supply which
has been ever increasing. How does this come about?
1) Much as the government loves to tax, it loves to spend even more.
2) To cover the difference, the Treasury issues securities.
3) The Federal Reserve Bank buys some or all of these securities.
4) To pay for these securities, the Fed PRINTS MORE MONEY.
5) This increase in the monetary base is then amplified by partial
reserve banking.
INFLATION IN A FREE ECONOMY?--
Let's go back to our list of the causes of price-level increases, and
again work backwards, this time for the case of a laissez-faire economy:
c) In the long run, the free economy grows faster than the command economy,
because the free economy can take advantage of an undistorted price system (In
the short-run, socialist governments, if starting with an LDC and having access
to information about prices an production in more-advanced and more market-
oriented economies, can attain high growth-rates by diverting production from
consumption and to further production. In the long-run, this doesn't last.
But take a course on the economic performance of CPEs, 'cause I don't have time
to go into the hows and wherefores.), and there is a corresponding growth of T.
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...
a) Legal tender laws would be abolished. No one could be FORCED to accept
anything as money. Instead, those attempting to buy would have to present
something which has value without the force of government behind it. We can
expect that whatever becomes the dominant form of money will also serve as
the unit of account,
the standard of deferred payment,
and the store of value.
This requires that dM/M be approximately equal to
dT/T - df/f
Some Libertarians expect that gold or silver will become the dominant monies.
While I expect that this will be true for an initial period, I, like Hayek,
expect better forms of money to evolve in the long run (but I won't go into
that).
BUT HOW DO WE MAKE THE TRANSITION?--
Easy! Take the amount of gold held by the government, divide it by the
quantity of outstanding Federal Reserve Notes, and then back each Federal
Reserve Dollar by that quantity of gold.
-------------------------------------------------------------------------------
I wrote the above in response to the mocking disbelief with which some
met the claim that there would be no inflation in a Libertarian country. These
people displayed their wholesale ignorance of economics. It is incredible that
such people pontificate about something of which they know almost nothing. And
it's incredible that they choose to be ignorant in the first place, for two
reasons. First, some understanding of economics is important for an
understanding of the world around us. Secondly, these people undoubtably vote,
which is to say, they sit in judgment of the individuals and institutions which
make up the economy. If, for example, Baba were on trial, how would he feel if
most of the jurors SLEPT thru the proceedings?
Maybe someday I'll explain why the only unemployment in a free economy
would be the frictional component.
Filled with disgust,
Daniel Kian Mc Kiernan
9120 Hawthorn Pt
Westerville, OH 43081-9605baba@spar.UUCP (Baba ROM DOS) (01/22/85)
I don't know why, but I'm reminded of E.E. "Doc" Smith. Baba
orb@whuxl.UUCP (SEVENER) (01/22/85)
> From the magician economist: > > I wrote the above in response to the mocking disbelief with which some > met the claim that there would be no inflation in a Libertarian country. These > people displayed their wholesale ignorance of economics. It is incredible that > such people pontificate about something of which they know almost nothing. And > it's incredible that they choose to be ignorant in the first place, for two > reasons. First, some understanding of economics is important for an > understanding of the world around us. Secondly, these people undoubtably vote, > which is to say, they sit in judgment of the individuals and institutions which > make up the economy. > > Daniel Kian Mc Kiernan It is hardly new to claim that in the theoretically perfect conditions of a totally free market, that all would be wonderful. So the question is 1)how come it's not? 2)how does Mr. Mc Kiernan intend to achieve a totally free market economy, one with no distortions of industrial monopoly power, local monopoly power, etc.? 3)is such a condition consistent with the current large concentrations of wealth in the hands of a few? For example, earlier I pointed out that economists who study development have concluded that a successful agricultural system is more likely with many small independent farmers. This of course promotes the underlying conditions which are necessary for free market efficiency (many small producers, no one of which can greatly affect either price or supply) But then how does one bring this condition about in a country like Nicaragua under Somoza in which one family owns 70% of the land? Does one hold property rights absolutely inviolate or does one redistribute such economic control? Could persistent inflation and unemployment have anything to do with the fact that our current economy is dominated by relatively few oligopolistic corporations? Under conditions of oligopoly the assumption that prices are related to "true" value (whatever that is anyway?????) is no longer valid. The government did nothing to make sure that there were only 4 major auto companies in the US. They accomplish such market control all by themselves. How did that happen? And why? Such conditions in which 3 or 4 firms control a majority of the market is true in many industries in the US. And the number controlled in this way grows every day. I praise Mr. Mc Kiernan's lucid exposition of monetarism and laissez faire. However, this is the real world in which oligopoly power grows daily.... tim sevener whuxl!orb
cliff@unmvax.UUCP (01/25/85)
> It is hardly new to claim that in the theoretically perfect conditions of > a totally free market, that all would be wonderful. So the question is > 1)how come it's not? Let's stick to one thing at a time, inflation. Find someone with a Federal Reserve Note (i.e. One Dollar Bill, Fiver, etc.). Examine it closely. Notice the words "This note is legal tender for all debts, public and private", examine the bill closely for the promise that the bill can be redeemed for some portion of the reserve on which it is based. Unless your bill is a collector's item you will not find such a promise. It is still a "Federal Reserve Note", but there is no reserve of gold or silver with which to back it up. Isn't it curious that all our significant battles with inflation have taken place in the short time since we got off the gold standard? > 2)how does Mr. Mc Kiernan intend to achieve a totally free market economy, > one with no distortions of industrial monopoly power, local monopoly > power, etc.? "Industrial monopoly power" does not affect inflation. Please name one time in the U.S.'s history that a industrial monopoly power induced inflation. Could it be when Alcoa Aluminum was prosecuted under the Sherman Anti-Trust act because it was "unfairly" using the latest technology to keep its costs and hence prices below those that the smaller companies were used to? > 3)is such a condition consistent with the current large concentrations of > wealth in the hands of a few? For example, earlier I pointed out that > economists who study development have concluded that a successful > agricultural system is more likely with many small independent farmers. I guess that blows Socialists away...when the state owns your farm you are no longer independent. Of course it is consistent with the current large concentration of wealth in the hands of the few... you explain it reasonably beloow > This of course promotes the underlying conditions which are necessary for > free market efficiency (many small producers, no one of which can > greatly affect either price or supply) > But then how does one bring this condition about in a country like > Nicaragua under Somoza in which one family owns 70% of the land? > Does one hold property rights absolutely inviolate or does one > redistribute such economic control? It depends on how the family came to own 70% of the land. If it was through the auspices of a non libertarian government then when that government topples and a libertarian one is put in place it would be quite consistent to redistribute the land. > Could persistent inflation and unemployment have anything to do with > the fact that our current economy is dominated by relatively few > oligopolistic corporations? No. Inflation is caused by the Federal Reserve system. Unemployment is caused by minimum wage laws. Please tell me why we need welfare and minimum wage laws. So we can prevent people who have been failed by public education from getting their feet in the door to a way out of poverty? > Under conditions of oligopoly the assumption > that prices are related to "true" value (whatever that is anyway?????) > is no longer valid. Unless there are laws preventing new corporations from joining the field the "true" prices will continue. As soon as the ooligopoly uses its might to skim off an unreasonable profit another company will rise up to undercut the first. > The government did nothing to make sure that there > were only 4 major auto companies in the US. Bullshit! The U.S. government has said quite explicitly by its actions that it will make sure that these 4 companies receive special privileges including but not limited to special loans not available to startup companies and pro- tection from foreign competitors. One of the easiest ways to make cars cheaper is to build them in Japan where common sense still prevails. The government then forces import quotas on them. You sure picked a poor example. By the way, did you ever think that there are other things that compete with cars for the transportation money? Do you know what the U.S. gov did to the people who prefer to motorcycles. They made every company except Harley Davidson pay a tariff. > They accomplish such > market control all by themselves. How did that happen? And why? > Such conditions in which 3 or 4 firms control a majority of the market is > true in many industries in the US. And the number controlled in this > way grows every day. Another way in which the government sees that startup companies will be at a severe disadvantage is through all the regulation that it requires. The companies that are in place have sufficient funds to lobby a sufficiently powerful set of regulators so that new rules and regs will impact the big four less significantly then they would a start up company. > I praise Mr. Mc Kiernan's lucid exposition of monetarism and laissez faire. > However, this is the real world in which oligopoly power grows daily.... Horrors! Oligopoly power. I bet nobody would even consider starting up a company that might compete with IBM. Let's see a list of the areas where oligopoly power controls the market. Try to be general, like transportation, rather than specific like, cars that are made in the U.S.A. I think you will be pretty hard presssed to come up with one much less a number requiring two hands to count it on. > tim sevener whuxl!orb --Cliff [Matthews] {purdue, cmcl2, ihnp4}!lanl!unmvax!cliff {csu-cs, pur-ee, convex, gatech, ucbvax}!unmvax!cliff 4744 Trumbull S.E. - Albuquerque NM 87108 - (505) 265-9143
rohn@randvax.UUCP (Laurinda Rohn) (01/26/85)
> from tim sevener whuxl!orb > Could persistent inflation and unemployment have anything to do with > the fact that our current economy is dominated by relatively few > oligopolistic corporations? Perhaps. But it could also have to do with the fact that there are other oligopolies out there called labor unions. Labor unions interfere by setting an artificially high wage rate which is usually far above the equilibrium wage rate that would exist without unions. This raises the price of labor to the goods producers, thus raising the price of the goods to the consumer. It also means that the producers can't hire as many workers as they might otherwise. Thus you have a few workers who are employed making a lot of money, while a lot more workers are unemployed making nothing. Sounds like an unfair distribution of wealth to me! > The government did nothing to make sure that there > were only 4 major auto companies in the US. They accomplish such > market control all by themselves. How did that happen? And why? One of the reasons is called increasing returns to scale. In the case of the auto companies, there are large fixed costs involved in setting up an auto producing plant. Once you have it set up, it's just as easy to make a million cars as a hundred. The only extra cost you incur is the cost of materials and labor required to make the car. This isn't the case in, say, a home knitting operation, where there are very low fixed costs and making the hundredth sweater isn't any easier than making the first, and may in fact be harder (decreasing returns to scale). > Such conditions in which 3 or 4 firms control a majority of the market is > true in many industries in the US. And the number controlled in this > way grows every day. This is because, as technology advances, more and more industries can have increasing returns to scale. > I praise Mr. Mc Kiernan's lucid exposition of monetarism and laissez faire. > However, this is the real world in which oligopoly power grows daily.... Yep. Big, bad oligopolistic corporations *and* big, bad oligopolistic labor unions, too.... Lauri rohn@rand-unix.ARPA ..decvax!randvax!rohn