Underlying all these videos is the idea is that, if only prices and wages were perfectly or near perfectly flexible, then economic problems would be resolved.
The glaring hole in this argument is the inability to consider the macroeconomic effects of debt deflation: if debts are nominally fixed, cutting wages and prices will simply exacerbate the real burden of debt, putting pressures on debtors, and eventually driving up the level of bankruptcies which in turn is liable to cause losses and even bankruptcies to creditors.
Another problem is that the only significant period that Austrians can point to as a time of “good” deflation, the 1873 to 1896 era, turns out to have had serious economic problems related to the price deflation and (most likely) debt deflationary dynamics of that era:
“Alfred Marshall’s Judgement on the “Depression” of 1873–1896,” June 13, 2013.
“The Profit Deflation of the 1890s,” June 13, 2013.
“S. B. Saul on the Profit Deflation of the 1873–1896 Period,” June 14, 2013.
“Rothbard on the US Economy in the 1870s: A Critique,” September 24, 2012.
“US Unemployment in the 1890s,” January 24, 2012.
“US Unemployment, 1869–1899,” January 26, 2012.
“Per Capita GDP Growth Rates During the Gold Standard Era,” September 11, 2012.
"The glaring hole in this argument is the inability to consider the macroeconomic effects of debt deflation: if debts are nominally fixed, cutting wages and prices will simply exacerbate the real burden of debt"
ReplyDeleteI thinking you are missing the point of Monetary Disequilibrium Theory. Assuming that prices and wages did fall and this did cause debtors to reduce spending more than everyone else increases spending (which seems a dubious assumption) then supporters of Monetary Disequilibrium Theory believe that the money supply should expand at this point to bring its value back to equilibrium. This will have the effect of increasing AD back to the optimum level and addressing any (or at least most) of the harm done by "debt/deflation",
Yeah. They're just monetarists with all the focus on "entrepreneurship" and all that thrown in.
DeleteHorwitz seems to mix up real and nominal prices. In the first video he starts by saying that over the last 100 years prices have fallen a lot in real terms, and as such a few hours work can now buy far more than in the past. Whilst claiming that this demonstrates the wonders of deflation he completely forgets to mention that in nominal terms there was inflation over most of that period.
ReplyDeleteHe then goes on to confuse real and nominal deflation by arguing that falling nominal prices are good, in the same way that falling real prices can be good.
"Whilst claiming that this demonstrates the wonders of deflation he completely forgets to mention that in nominal terms there was inflation over most of that period."
DeleteWhat does it matter anyway? If we price goods in labour hours, we can buy more goods today then 100 years ago, hence we had deflation. If we price goods in dollars, we have inflation, so what? It's irrelevant and it does not make his point about 'good deflation' any less valid. I guess you are falsely suggesting that if it wasn't for nominal inflation (loss of purchasing power of money) the benefit of real deflation would not have happened.
What do you think of Robert Shiller's proposal to price long term debt contracts in CPI linked "basekts"? The plan seems to have worked successfully in Chile for decades.
ReplyDeletehttp://www.policyexchange.org.uk/images/publications/the%20case%20for%20a%20basket%20-%20may%2009.pdf