Inflation. Yes, again.

Note: I had written a whole play-by-play analysis of this section (pages 366-373) of Basic Economics by Thomas Sowell, but it is so boring and long I’ve decided it isn’t worth being put on a blog. 

We are going to whittle this down drastically and not trouble ourselves with all the different ways Sowell errs on inflation. I’ll try to simply give an explanation of what inflation is while keeping his errors in mind. There will be coverage of this section of Basic Economics in more detail in an eventual upcoming e-book and you can join The Mean Austrian email list for updates on that.

So, let’s get down to it: (Pry those eyelids open and try to not run away. It may sound familiar, but I promise it’s – relatively -short.) 

– The Mean Austrian

 

Scarcity is one of the key features of money and an important feature to keep inflation from drastically hitting an economy. When government has control over the money supply, and that money supply is paper backed by nothing of true worth – as the U.S. currency is today – there is nothing to stop the government from printing out more money. And more money. And more money still. This inflates the money supply (i.e., inflation).

The result is that as more gold comes on the market, it is valued less. The more there is of something the less it is worth. On the flip side, generally speaking, the less there is of something the more valuable it becomes. This is true of everything from bread to baseball cards. Pretty basic stuff.

“Hold up, Mean Austrian! Might gold ever be affected by inflation?”

Yes, inflation can happen even with gold. Enter, History:

After the New World was discovered by Europeans, gold mines in America were opened and gold flowed back to the old country where this new money bid up the price of goods. But it was very minimal and happened gradually over the course of a century.

The difference between gold mines in the New World and printing presses in the U.S. is that to mine gold out of the ground and ship it across the Atlantic was a costly and risky venture. It took a lot of tangible resources to bring that gold into circulation and thus the inflation was limited by the pocketbooks of the entrepreneurs and their backers. Under the Federal Reserve, there is nothing limiting the the increase in money. It is little more than a matter of paper and ink. No risk, high “reward”.

While there can be inflation with gold-based currency, that inflation would never be runaway inflation. The only thing keeping us from experiencing the runaway inflation the Wiemar Republic went through, and that Venezuela is currently experiencing, is the relative good sense of Janet Yellen.

WHY GOVERNMENTS CAUSE INFLATION

Governments, in some sense, ultimately rest upon the acquiescence of the people. If the taxes get too high, people become unruly. The solution then is to tax as much as you can get away with, and for whatever expenditures remain unmet, simply print the money.

Yes, you guessed it: This inflates the money supply! It devalues the money already in circulation and it steals the purchasing power of every consumer in the country. This is a hidden tax and the most regressive tax. A sales tax may be at 8% of every dollar a poor man spends, but inflation takes 2% of every dollar the poor man doesn’t spend every year. This flat-out discourages saving money and if the man wishes to improve his current financial situation it makes it all the harder.

I’m pretty sure we’ll deal with other aspects of inflation as we move forward.  Deflation is right around the corner, so I’ll leave it here for now… I wouldn’t want to overexcite anyone all in one post.

I should also apologize for the delay. Blame my cows and computer. I know I do. For those of you who are still following along despite the delay, I really do appreciate you!

Technology as a Threat , And an Old Threat.

A familiar refrain has been raised a thousand times, from the dawn of the Industrial Revolution until now: more technology will throw workers out of their jobs, machines will do everything, and the common man will be left jobless with no way to provide for himself. Of course, this notion has been refuted a thousand times by economists, from Bastiat to Mises and Rothbard, even today where Tom Woods and Jason Stapleton have addressed the concern. (Their podcast episodes where they deal with this are linked here for Tom and here for Jason.)

Usually, I am critical of the economists who espouse errors, but here I have no problem with what anyone has said. I have read columns from Sowell on this, and he has it right as well.  My criticism here is for those who raise the complaint.

One of the best objections to this complaint thus far has come from the Jason Stapleton Facebook group, where a member asked about artificial intelligence rather than merely machines and technology. This is a much more challenging concept that deserves further consideration.

If for the sake of the argument we can set aside the morally repugnant nature of slavery, we might ask ourselves what was the impact of slavery on the “free” labor market in the Antebellum South?

Slaves were as close as we have gotten to artificial intelligence, and yet they had real intelligence. Importantly, slavery negatively affected the labor market for free laborers. This was the primary reason why Lincoln opposed the expansion of slavery into the western states, and not because he had a soft spot in his heart for the oppressed and downtrodden. Rather, Lincoln realized that where there were slaves it was much more difficult for free whites, who can vote, to find jobs.

So if I were sympathetic to argument, I would point to this as proof that it is possible for technology and AI to displace workers almost entirely. If it happened in the South, where slaves displaced free laborers, then why could it not happen again with technology? Slaves reproduced more slaves, and if AI reproduced more AI wouldn’t we be in the same position but even worse? If not what is the difference?

The key difference is costs. The slave costs less per labor hour than the free man, though the output was less. Mises famously argued in Human Action that slavery was inefficient and that the producer who used free labor would have higher profit margins than the producer who relied on slave labor. (chapter 9 of Human Action)

Really, it is all about costs. What is the cost of employing a machine versus a worker? The machine is at a disadvantage here. While it takes X dollars to purchase and maintain a machine, the human has the ability to compete and to cut his price (i.e. the cost of hiring him), barring any interference by the State. So where a fast food restaurant may consider installing kiosks to take orders from customers, men can respond to that by simply working for a little less (or in the real world just be contented with the wages they are getting for the work they are doing.)

Technology and AI are implemented to make existing labor more productive, and inadvertently make labor less intensive, and more valuable. Just consider the man digging a sewer line with a backhoe in 3o minutes compared to 2 men digging it out with shovels and spending all day at it. If there were enough men willing to work for $1.00 an hour, the backhoe would not have been bought and would not be in use. It is at least to some degree the workers who determine what new technologies come into the market. The fact that there are not enough men willing to dig with picks and shovels for $1.00 an hour suggests that no one will be long out of work with the introduction of the backhoe.

If it ever gets so easy to produce machines that can produce machines, and do everything for us, then the cost of these machines will necessarily not be very expensive at all, and perhaps each of us would have a dozen bots that we are able to employ to provide us with all our wants and needs. If not they would be restricted only to the industries with the highest return per input. In either case, it is something that really makes me think, but does not make me worry that much at all.

Even if it were a real threat, it is a real threat of the same sort as the Sun burning out and leaving us in the dark. It will happen millions of years from now, and either something else will get us in the meantime, or we will figure out a work around between now and then. I am much more concerned about government interference in our ability to provide for ourselves and their constant proclivity to make war.

When Do People Not Want Money?

When do people not want money? The question arises from a passage of Basic Economics found in chapter 17, pages 365-366, that reads, “Usually everyone seems to want money, but there have been particular times in particular countries when no one wanted money because they considered it worthless. In reality, it was the fact that no one would accept money that made it worthless […]”

If we are referring to natural and unmolested money that hasn’t been debased, the answer is never. However, there is another kind of money we haven’t covered yet: What about fiat money?

Fiat money isn’t the sort of money that develops naturally and spontaneously between market participants like anything Tom Sawyer and his cohorts might have considered money amongst themselves.

Fiat money is, and can only ever be, backed by law. Our money, which started out as bits of gold with inherent value, is nothing today but government issued paper.*

Just suppose gold was money and people decided they didn’t want to use gold anymore. They could still melt down their gold and reform it into jewelry. Your options with dollar bills, should they become unwanted on the market, is limited to either birdcage lining or tiny pieces of origami. Fiat currencies are pretty good at being divisible and fungible, but scarcity is another matter.

With something along the lines of gold (or silver, salt, cattle, et cetera) as money, anyone may enter into the “production of money”. The idea is, if you can bring in more precious metal (or salt or meat) for society, then you’ve earned your reward and good for you. Of course, there are some risks in this. Cattle can catch plague and be wiped out, and the expenses of mining might exceed the amount of gold or salt that you can obtain. When we have a fiat currency, not just anyone can produce money. Because it is far too easy a production, there are no risks and with virtually no costs or limits of paper and ink, one could invest a miniscule amount in paper and ink, and print out a million fiat dollars.

Thus, it becomes necessary for one entity to have the power to produce money, and thereby control the supply. They can print out new notes faster than old notes wear out and flood the money supply with them. This is the essence of inflation. Alternatively, they can stop printing notes altogether. As notes wear out, and they fail to replace them, this will cause the money supply to deflate. It is no longer a market operation, but a command and control operation. This is the same sort of thing the Kremlin did with bread and coats. Sowell seems to be critical of this inefficiency, yet the Central Banks continue to do the same thing with money today and all we seem to get are a few protests from Sowell saying  that the power they hold isn’t the problem – it’s their failure to wield this power wisely.

Sometimes the entity in control of the money makes really poor decisions, doubling and tripling the money supply by the day. As this new money enters into circulation, the value of the money plunges (i.e., inflation at work). There has never been a time in history when the economy was fine and the money was stable, and the next day the money is worthless. There is always some lead time where the money is still accepted, but at a discount. The value of money will always follow the laws of supply and demand. When money is first discounted, and then later not accepted at all, it is because the quantity of money has been drastically increased and is expected to increase significantly more in the near future.

In summation:

  1. Sowell is saying people not accepting money is what causes it to be worthless.
  2.  We of the Austrian school say that the money is being made worthless by inflation, followed by hyperinflation, and this is what causes people to not accept it.
  3. It isn’t a disastrous error in and of itself, but this is a proposition that rests on fundamentals and it’s important to have clarity as we move forward.

We’ll continue exploring inflation and deflation in the next few pages of Basic Economics. For more on this topic, help yourself to a free download of  The Ethics of Money Production by Hulsman head over to amazon.com for a hardcopy.

*5/1/16 ETA: In the comments, Dan Bonin brought up a good point that neither gold, nor anything else for that matter, has inherent value. Though gold does have inherent qualities which are almost universally considered valuable.