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Samizdata quote of the day It’s absolutely fine to increase the supply of money if the quantity of goods and services in your economy has increased too. Indeed, you have to do so in order to make it possible to buy and sell those extra goods and services. It all goes hideously wrong if you start increasing the money supply when the goods and services haven’t increased or even worse when they’ve actually diminished.
Sound familiar? Got it in one. In 2020, the British Government, like many other governments, enacted a whole series of measures that started reducing the availability of goods and services and then started printing money (‘quantitative easing’) to compensate for the goods and services that weren’t being made. That meant more money standing for less in the way of goods and services. And it wasn’t alone – all over the world other governments dived headfirst into the abyss. We are nowhere near 1923, but we have certainly started down that road.
– Guy de la Bédoyère
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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I don’t think there’s any need to increase the money supply. If you have an increased quantity of goods and services, you can lower the prices, and use your increased sales volume to pay for the inputs.
I agree with Stoddard. The rational for increasing the money supply in face of increased goods and services is that it would be “deflationary”, which is asserted as a bad thing and no more debate on the subject is allowed. However, inflation and deflation both have pros and cons, which are effectively the opposite of each other. Inflation encourages consumption and discourages saving (because it is cheaper to buy now before prices go up, and unspent money simply loses value) whereas deflation does the opposite, discourages consumption and encourages saving. It seems to be written in tablets of stone that more consumption is the only thing to be concerned with. But societies are built on deferring consumption to accumulate capital and invest in new ideas, projects and companies. So it is not at all obvious to me that deflation (which is to say not printing money) is a bad thing. In fact, I think there is a good argument that it is a good thing.
At the very least if they are going to increase the money supply they should do it is a fixed way, for example, 4% per year, every year, without any political input. This at least makes the money supply predictable, non political and so people can plan. FWIW, I think this would be a good way to fund the government — print 4% more dollars each year and that is what the government has to spend, no more, no less, no other taxes. It is flat, non obtrusive, easy to implement and makes everything more predictable and stable — which is what economies need more than anything. Of course, like most sensible schemes, which is to say schemes that curb the capricious power of government, it has a snowball’s hell in chance of getting enacted.
As Uncle Milton so often said, “Inflation is always and everywhere a monetary phenomenon.”
In other words, there is too much money chasing too few products.
When the government mandates the shut-down production (too few products) while simultaneously subsidising the full salaries of workers and thus pumping shed-loads of extra money into the economy (too much money), well, what does one expect to happen?
I think that Fraser Orr may have gotten to the heart of the matter with his reference to pro-consumption bias. There’s a widespread belief that more consumption will mean more employment in making consumables and therefore more wealth, and with it a fear of “underconsumption” as a source of economic catastrophe, whose prevention seems to be the central goal of Keynes’s theories. But the idea of general underconsumption (or general overproduction) was refuted two centuries ago by Jean-Baptiste Say, who showed that an economy could have overproduction in some industries but would at the same time have underproduction in others. Keynes mocked Say’s Law, but to do so he came up with an oversimplified caricature that bore no resemblance to what Say actually said (as an economist, Keynes was a brilliant rhetorician).
Kaynes’s own theories amounted to a triumphant rediscovery of the “money cranks” who thought that economic troubles came from having too little money in circulation to purchase what was produced. But what Say actually pointed out was that the point of production was ultimately not to get money, but to get goods and services, and that therefore the “demand” for one product could be equated with the “supply” of other products. If you double workers’ pay, but at the same time you double the price of everything (because twice as many dollars are chasing the same products), no one is any better off. What increases the amount of product is capital, and capital is the result of savings.
And really, the idea that employment is a function of consumption is itself oversimplified. If an economy is going to increase production, it’s going to have to create more plant, more equipment, and more raw materials; and all those productive goods also have to be produced, and that production itself provides employment.
William H. Stoddard
If you double workers’ pay, but at the same time you double the price of everything … no one is any better off.
I actually think this is the Biden unwitting economic plan. He wants to have that win of saying “yes I enforced a $15 minimum wage”, while at the same time that $15 buys the same amount of goods and services as the old $7.50 minimum wage. What is the difference? Well it is a great campaign slogan even if nobody actually benefited.
And FWIW, I have begun, already, to hear demands that the $15 minimum wage is too low. There is a big surprise.
Opinions vary, but I would say the main takeaway is not that at all but rather:
That is the real problem.
Perry de Havilland (London)
That is the real problem.
Right but I think you can go one level deeper — it is not that they increase the money supply in face of decreasing goods and services, but that they get to decide when to increase the supply — it is the discretion that is the problem. Giving the government power to inflate the currency is truly like giving whisky and car keys to a teenager.
Fraser Orr,
I’m a former Californian (my wife and I fled just as the Covid lockdowns were starting!). California was eager to raise minimum wage to $15 an hour. But that’s $2500 a month, which isn’t remotely enough to live on in California; you’d spend at least 2/3 of it for a one bedroom apartment in a cheap neighborhood and city.
When I read Keynes’s General Theory for the first time, I was startled to see his first chapter saying that workers’ pay was higher than businesses could afford, and it was impossible to lower their wage rates, but if you inflated the currency you could lower their real wages without their catching on. I found myself thinking, first, that every labor union had economists on call who could figure the cost of living so they could make that their minimum demand for wage hikes; and second, that I didn’t see how a man who was so ready to deceive the working class came to be a hero of the left wing.
In Robert Heinlein’s novel Beyond This Horizon, the money supply is expanded each quarter to match the growth in production. (One character is the bureaucrat in charge of calculating the amount.) The new money more than covers the entire expenses of the government, and the surplus is distributed to the population.
Oh I agree, that is undeniably the root of the problem. But as fiat currencies & central banking are likely here to stay, how they use that discretion is rather important.
Rich Rostrom: Heinlein wrote Beyond This Horizon back in the days when he believed in Social Credit, a political movement now largely forgotten. He gave a fuller presentation in his draft of For Us, the Living, an early attempt at writing fiction that wasn’t published until well after his death; it presented ideas ancestral both to Beyond This Horizon and to parts of the Future History. As part of the story, his protagonist invented a card game to teach himself how economics worked. As a gamer, I got out some cards and played a few rounds of the game—and discovered that it assumed that any money that was saved rather than immediately spent disappeared from the economy and was not available to purchase goods and services. But this is really out of touch with reality. People hardly ever put money in their mattresses or bury it in the woods; they put it into savings accounts, or time deposits, or mutual funds, or stocks and bonds, all of which are turned into investments—and money that’s invested in a business is largely spent on the expenses of the business. A lot of it goes to hire labor, and the workers take their paychecks and spend them on consumer goods.
Heinlein, like Pohl and Kornbluth (in “The Midas Plague”) and like Huxley (in Brave New World), thought the central economic problem was too much production, and the central solution was to encourage consumption. But “underconsumption” (or “overproduction”) was refuted long before Keynes made it a theme of his General Theory.
Inflation of the money supply (not an increase in aggregate prices) is a (not so) hidden tax. Inflating the money supply at a time of real gdp growth just hides the impact of the tax.
Any amount of money is sufficient for an economy, as long as you can divide it in to smaller units. If more goods chase fixed money goods become cheaper. If other people want access to this money well they can offer a higher interest payment. The real problem is, who has the money and the Government says well we don’t have enough, nor do our favourite interests so we’ll tax it off you with inflation.
No one says we need x more kilometres of motorways so let’s now say there are only 90 cm in a metre and voilà we expanded the motorway network by 1/9th.
The argument that a bit of inflation here or there has certain benefits is because people respond to incentives, and that incentive is cheap money benefits the favoured and costs everyone else. Just because people try to reduce the negative impact of inflation does not mean their actions signal agreement. In a fixed money economy (private credit is another matter) many of the so called concerns about too much savings would be resolved through interest rates.