From: nelson_p@apollo.hp.com (Peter Nelson)
Subject: Re: Inflation (Was: Re: GM Plant Closures...)
Date: Wed, 16 Dec 1992 23:17:24 GMT
Organization: Hewlett-Packard Corporation, Chelmsford, MA

In article <BzD7q5.HCy@usenet.ucs.indiana.edu> mkohlhaa@silver.ucs.indiana.edu (mike) writes:

>>  I don't know why it would lead to "run away" inflation.
>>  Inflation is an increase in the money supply above and beyond
>>  the increase in productivity, i.e., "too much money chasing 
>>  after too few goods and services".
>
>"too much money chasing too few goods and services".  Exactly my point. This
>is what would be happening if, as you said in your original argument,
>workers are always in high demand.

  Only if their productivity did not increase.  In reality the
  productivity of US workers has increased very dramatically
  in the last few decades.  


>>  The simple, empirical refutation to your argument is even
>>  easier:  In the computer industry there hasn't been inflation,
>>  there's been DISinflation:  the prices for computer products
>>  have been *plummetting* for decades!
>
>You talk about the tight link between *printing money* and inflation.

  I do?   Where?  You perhaps have me confused with another poster.
 
  It's true that in a simplistic, ivory-tower model "printing money"
  cause inflation, but in reality the *failure* to print money causes
  DISinflation if the output of goods and services continues to rise.

  The money supply has to keep pace with the rest of the economy or 
  you end up with strangled capital markets, and ultimately a strangled
  economy.   There is an optimum rate of growth (or contraction) of
  the money supply.  (or maybe multiple optima depending on your goals).


>You further state that if no more money were printed, there would be no more
>inflation.

  This is trivially true only if output or supply of goods and services
  doesn't decline, but again *I* didn't make that claim.   


>Using this logic, how has there been DISinflation in the computer industry
>without having a *shrinking* money supply?

  Simple: Vastly higher productivity!   When you can take, say, a
  graphics subsystem that used to fit on 3 circuit boards a couple
  of decades ago, and put it on one board, and then on a smaller
  board, and then a daughter board, and then a chip -- you greatly
  reduce the labor, parts and materials, storage space, paperwork,
  energy, etc, etc, required to provide that.  This allows you to 
  sell the same functionality for a lot less.


>to work (becuase they're 0% unemployment, remember).  We would continue to
>bid up wages until we reached an equilibrium, which could not likely occur
>until unemploy existed.

  And that's exactly what would happen . . . 

>I would like to reiterate that inflation occured without any increase in the
>supply of money.

  . . . your product becomes more expensive so you sell fewer of them
  and have to lay off people.  Now you've got some workers making 
  $6.00 an hour and some workers not making anything.   So average
  wages haven't necessarily increased.   Also demand is not inelastic --
  just because the boss has agreed to increase everyone's pay by $1
  an hour doesn't mean he can HONOR that agreement.   The feistiest
  union in the world can't change the laws of arithmetic -- if there's 
  only so much money in the economy they can't get more of it just by 
  demanding it.  

  I can give you an easier model to have inflation without a change
  in the money supply:  Reduce output.   Now you have the same amount
  of money chasing after fewer widgets.  This will increase the price
  of the widgets.   But just as in your example, it's not stable:
  some competitor will sell cheaper widgets.

  None of this is relevant to my original claim:  happy, contented 
  workers in high demand are not necessarily inflationary -- as long
  as their wages don't increase faster than their productivity.


---peter