Economics Dictionary of ArgumentsHome
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| Deflation: In economics, deflation refers to a decline in the general price level for goods and services. This can lead to a decline in consumer spending, higher debt burdens, and economic stagnation. Deflation is often associated with economic recessions and is a problem for central banks seeking to maintain price stability. See also Inflation._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Deflation - Dictionary of Arguments
Rothbard II 205 Deflation/Rothbard: (…) any inflationary boom, especially that of a lengthy and major war, will collapse at war's end into depression and deflation. Much of the deflation [at the beginning of the 19th century] was the result of the postwar depression and bankruptcies, for the initial postwar deflation occurred years before the actual return to gold or even the passage of the Resumption Act. The postwar depression was the market's way of readjusting the economy to the enormous distortions of production and investment brought about by the skewed demands of wartime and the inflationary credit boom. In Short, the postwar depression was the painful but necessary process of liquidating the distortions of the wartime inflation and of returning to a healthy peacetime economy effciently serving the consumers. Another cause of the deflation was industrial and economic progress. The end of the war liberated England to launch one of the greatest periods of economic growth in its history. The Industrial Revolution could at last develop freely and raise the standard of living of the mass of Englishmen -something it could not do when the industrial engine had been diverted to the unproductive waste of war. As a result of the great increase ofproduction, prices kept falling in Britain throughout the 1820s - long past the time when this welcome drop in the cost of living, this 'deflation', could plausibly be blamed on the return to gold in 1821. The anti-deflation hysteria and the desire to keep inflating delayed the return to gold for five years after 1816. When it became clear that there would be no immediate resumption, the pound began to depreciate again, the price of silver bullion rising from 2 per cent above par in 1816 to 12 per cent premium on 1818. Similarly, the foreign exchange rate at Hamburg rose from par to 5 per cent above. And domestic prices rose from 135 in 1816 to 150 two years later. The weakening of the pound by disappointed expectations ofimmediate resumption was also greatly compounded by an expansion of bank advances and note issues. >Deflation/Copleston. - - - Rothbard III 1005 Deflation/Rothbard: (…) when deflation takes place first on the Ioan market, i.e., as credit contraction by the banks - and this is almost always the case - this will have the beneficial effect of speeding up the depression-adjustment process. Credit contraction/rate of interest: For credit contraction creates higher price differentials. And the essence of the required adjustment is to return to higher price differentials, i.e., a higher "natural" rate of interest. Gains and losses/calculation: Furthermore, deflation will hasten adjustment in yet another way: for the accounting error of inflation is here reversed, and businessmen will think their losses are more, and profits less, than they really are. Hence, they will save more than they would have With correct accounting, and the increased saving will speed adjustment by supplying some of the needed deficiency of savings. Equilibrium: It may well be true that the deflationary process will overshoot the free-market equilibrium point and raise price differentials and the interest rate above it. But if so, no harm will be done, since a credit contraction can create no malinvestments and therefore does not generate another boom-bust cycle.(1) And the market will correct the error rapidly. Income: When there is such excessive contraction, and consumption is too high in relation to savings, the money income of businessmen is reduced, and their spending on factors declines - especially in the higher orders. Factors of production: Owners of original factors, receiving Iower incomes, will spend less on consumption, price differentials and the interest rate will again be Iowered, and the free-market consumption/investment ratios will be speedily restored. Visibility/measuring: Just as inflation is generally popular for its narcotic effect, deflation is always highly unpopular for the opposite reason. The contraction of money is visible; the benefits to those whose buying prices fall first and who lose money last remain hidden. And the illusory accounting losses of deflation make businesses believe that their losses are greater, or profits smaller, than they actually are, and this will aggravate business pessimism. Rothbard III 1006 Unemployment: Some may object that deflation "causes" unemployment. RothbardVs: However (…) deflation can lead to continuing unemployment only if the government or the unions keep wage rates above the discounted marginal value products of labor. Wages: If wage rates are allowed to fall freely, no continuing unemployment will occur. >Credit expansion/Rothbard. 1. If some readers are tempted to ask why credit contraction will not lead to the opposite type of malinvestment to that of the boom - overinvestment in Iower-order capital goods and underinvestment in higher-order goods - the answer is that there is no arbitrary choice open of investing in higher-order or Iower-order goods. Increased investment must be made in the higher-order goods - in lengthening the structure of production. A decreased amount of investment simply cuts down on higher-order investment. There will thus be no excess of investment in the Iower orders, but simply a shorter structure than would otherwise be the case. Contraction, unlike expansion, does not create positive malinvestments._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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