Abiola_Lapite's photos More of Abiola_Lapite's photos

« More Support for Sapir-Whorf | Main | Friends in the Unlikeliest Places »

November 01, 2004



Hmm the usual explanation I hear for the necesscity of moderate inflation is that it is a motivator for ppl to invest rather than hoard cash and increase weatlh via deflation.

gene berman

I see two problems with the assessment.

First is the "psychological" aspect: whether labor is more resistant or not to downward adjustment of wages (to money supply) than to upward. As a practical matter, there is little evidence of this being so, since history doesn't afford many instances of protracted deflation and especially of protracted deflation unaccompanied by wage-maintaining official policies. Keynes was frank in supporting inflationary policy because, in his view, it was a means to permit lowering of real wage rates as necessitated by recession; he apparently "misunderestimated" workers (and labor leaders and intellectuals), who very quickly learned to demand indexing adjustments to increases in money supply (or their experience of it--rising prices). Aside from the common reluctance of anyone to "take less," there is no particular reason to believe that workers and their representatives are any less flexible in the opposite direction; if anything, the experience drawn from the past is that labor is interested in maintenance (and improvement) of real, rather than nominal, incomes. We might also conclude that Keynes could fast-talk and bamboozle the political, but not the laboring class.

The other matter has to do with a comparison of the economic effect of inflation vs deflation. The characteristic of the former is that it directs production into avenues otherwise unsupportable; when a correction occurs, certain investments will prove to have been malinvestments and a certain portion of these will be inconvertible--a loss to the "social" or "macro" conception of the economy. Deflation will also rearrange investment from the course it would otherwise have taken; but the principal rearrangement will take the form of investments unmade--not consumed and wasted--and still available for use when monetary relations again appear propitious. Though a diminution in satisfaction shall have occurred during the deflation, the future is not impoverished, as is continually the case of inflation.

The last thing to be observed is that, whatever the rate of inflation, it is a geometric process. Monetary authorities, in seeking the effects they desire--the maintenance of price and wage levels--are compelled to higher rates (of inflation) to achieve the same result. The difference between a lesser and greater rate is simply that the former permits a longer time before the necessary correction must occur (whether that is in the form of recession, depression, "stagflation," devaluation, or currency collapse).

The comments to this entry are closed.

Notes for Readers