Business becomes slack. The deadlock ceases only when prices and wage rates are by and large adjusted to the new money relation. Then the loan market too adapts itself to the new state of affairs, and the gross market rate of interest is no longer disarranged by a shortage of money offered for advances. Thus a cash-induced rise in the gross market rate of interest produces a temporary stagnation of business. Deflation and credit contraction no less than inflation and credit expansion are elements disarranging the smooth course of economic activities.
This is more or less exactly what monetary equilibrium folks have been arguing about the imperfect flexibility of prices during a monetary deflation. The bottom line is that Mises did recognize that a monetary deflation understood as a supply of money less than the demand to hold it, as he defined it in TTMOAC could drive the market rate above the natural rate and lead to a recession. I think that addresses Joe's proposition. Thanks for jumping in with a discussion of Alchian. Just to reiterate and elaborate on what you wrote.
Except in auction markets, prices do not and ought not adjust constantly to ever changing and shifting demand.
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That would be very costly to all concerned. Posted prices provide valuable information to buyers, and that information is degraded by frequent changes.
Moreover, what tells a seller to change his price? Inventory quantity changes. Sellers don't know the correct price and are constantly searching for information about it. Inventory changes are one source of information. Cost changes are another. Markets handle quantity adjustments every day. Why normal quantity adjustments morph into coordination failures requires something more than less-than-infinitely flexible prices. Leijonhufvud used Alchian to make sense of Keynes. If sticky prices were Keynes' contribution to economics, then Keynes made no contribution.
Pre-Keynesian economists knew prices did not move instantaneously with every shift in demand. To make sticky prices or wages "Keynesian" is to trivialize Keynes' work. This is what Jerry O'Driscoll was getting at earlier. Say's law doesn't really require that entrepreneurs are superhuman. It just requires that they can recognise what's in their interest reasonably quickly. As I see it, the point is: from the local perspective of each entrepreneur the adjustment he or she has to make is like the normal sort of adjustment made when a relative price that is relevant to their business changes.
The difference for macroeconomics is that there are many entrepreneurs making these changes at once. This is shows the problem with thinking of Say's law as being like Walras' law. That immediately brings up Walras' stylised picture of the economy. There are two distinct aspects to holding money. There is the question on the one hand if it is good for the person holding it. We can't doubt that it is. Since it provides the person holding it with a service then, in a free-market economy, it thereby provides society with a service.
But, by saying this we haven't proven that a changing demand for money has no negative external effects and cannot cause lost productivity. In fact, it's not the actual holding of money that's the issue, it's the excess demand as Steve said that becomes an issue if there is no market to match it with a rise or fall in supply. That's because that demand brings about the need for a great many price changes. This is very different from the Keynesian view.
To Keynesians money doesn't supply a psychic yield, or at least, holding it provides nothing to wider society. They don't understand that by providing ourselves with this psychic benefit we assist ourselves and consequently everyone else. Keynesians only see the productivity issue caused by changes in demand, Rothbardians only see the psychic yield issue, we recognise both. Rothbardians are fond of saying that any amount of money can provide the service of money.
Certainly this is true in the long run, but it doesn't mean that the economy can quickly adjust to any particular amount of money. Just like, it doesn't matter in the long run what my phone number or my friends phone numbers are. But, if the phone company changed them all every day then that certainly would start to matter. Where is the claim in Human Action that the appropriate "cure" for deflation is to increase the credit supply? Deflation could be temporarily "destructive" in a sense that it could lead to even more liquidation than the "equilibrium" would require.
Mises agrees with that obvious point. But, guess what, he says that is "unavoidable". You are trying to obfuscate the obvious point: Mises thought that the very notion of "right quantity of money" as Selgin charmingly says was a pure nonsense:. Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive, and the appetite for such gains may result in policies designed to bring about cash-induced alterations in purchasing power.
However, the services which money renders can be neither improved nor repaired by changing the supply of money. But such a condition can be remedied by increasing or decreasing consumption or investment. Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth. The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do. So let me repeat: "The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do", which is to say, the idea of increasing money supply to make it "match" demand does not make any sense for Mises.
In response to your earlier comment, I partially agree. However, to the extent that downward ridgities are caused by the money illusion, what you describe is not so. Your argument assumes that workers have overcome the money illusion to understand how real wages may fall while nominal wages remain constant. I do not think monetary policy should attempt to compensate in such a case.
In other words, my recommendation cannot neuter the misallocative impact of unions -- at best, it can reduce the distortion. But perhaps this discussion is better left for another time and place, since these comments have already digressed enough! To me, this can be paraphrased: "When there is monetary equilibrium, there can never be too much or too little money.
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In other words, everything Mises wrote that you quoted is said under the assumption of monetary equilibrium. There is nothing for Horwitz, Selgin, or any other free banker to disagree with in this instance. If Mises meant something else by that first sentence, then please explain.
At the moment, I am struggling to think of any other sensible interpretation. If you own a business, and you see the prices of the goods you produce increasing, you are going to interpret that as increased demand. Now, you may not be seeing your products flying off the shelves, but you will also logically conclude that others making the same product must be selling lots of their product, meaning they may face a shortage soon.
Good news for you, if true. That means that you will be in a position to provide the goods in question when your competitors run out. In fact, it might make sense to ramp up production in anticipation of demand. With natural inflation, this makes sense. With monetary inflation, everyone is making the same interpretation of the data -- none of their supplies may be going down, but one does have to anticipate future demand, so one has to make more. This is the boom. It can also happen with artificially low interest rates -- where money becomes cheap, and people are willing to make riskier gambles, since the money is so cheap.
When prices drop over a long period of time, people wait for the deals to get better. Lower demand causes prices to drop further. When the first producer realizes he has an oversupply of his product, he offers it for sale. The drop in price causes people to demand his goods.
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This causes others, and yet others, to drop their prices -- we now have system-wide deflation. Imagine an employer and an employee.
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Will they renegotiate price every hour, or with every perceived change in circumstances? Would it be renegotiated to zero when no customers are present, and then back to a high level that would extract the entire customer value when a queue appears?
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Alchian and Woodward then go on to a long discussion of the role of protecting composite quasi-rents from dependent resources as the decider of the timing of wage and price revisions. Alchian and Woodward explain unemployment as a side effect of the purpose of price rigidity, which is the prevention of hold-ups.
Alchian and Woodward note that unemployment cannot be understood until an adequate theory of the firm can explain the type of contracts that the members of firm contract with one another. There was a nice discussion going on here among top scholars, why do you guys always have to ruin everything? I think it is demonstrable that money supply has a great effect upon aggregate economic movements, as described by Troy Camplin.
This is a major flaw in Mises' theories. While at the same time I think the Monetarists overstate the action of money supply. Take our recent economic downturn. While I might take issue with Tarp and some of the fiscal steps taken to deal with it. I will say that the action of the FED to pump money and liquidity into the system was exactly the right thing to do at the right time. You cannot prove a negative and so we cannot know it another policy, or no policy would have worked as well, but I certainly do not think so.