Tue, 19 Jun 2007

Deflation 2

I tried to explain my lack of understanding of people's dislike of deflation earlier, but with little success. Two people wrote saying, roughly, "huh??" So, I try again. We are used to prices constantly rising in America. That's because the Federal Government metaphorically prints up new dollar bills. With more money chasing the same goods, prices rise. That's inflation. If the Feds were to destroy old bills and not print replacements, you'd have less money chasing the same goods, prices would fall, and that would be deflation. Everybody's clear on that, right?

Now, stop printing up new dollars. Keep the amount of currency constant.

Note that we don't actually have the same goods. In a free market society, with people constantly trading for things that make them more content, value is constantly being created. With every trade, people value the new thing they have more than the thing they traded it for. They won't be willing to immediately trade again except for a higher price.

So if you have a fixed amount of money chasing higher priced goods, the price of money has to rise to match. That's deflation. Exact same situation as inflation, only mirrored. Excepting, of course, that the price of money can't go up; "price" is what we call the amount of money you need to trade for something.

The natural course of money is to become more valuable over time because there are more and better things you can spend it on. That points the way towards private currencies which could seek price stability by purposefully printing enough new currency to match the increase in total value in the economy. After printing the new currency, they pay for the printing and earn a profit by spending this new currency. They created the value that that currency represents by keeping away forgers and by recruiting new entrants into the marketplace for that money.

In this manner we could return to a system of private currency.

Posted [16:51] [Filed in: ] [permalink] [Google for the title] economics [digg this]

Wed, 13 Jun 2007

The Free Market cannot solve all the world's problems

I don't know where the idea came from that anybody thinks that the free market can solve all the world's problems. Apparently somebody does, because this Slashdot poster felt that he had to deny that it does. I think this is a strawman, however. I don't know anybody who thinks that the free market can solve all the world's problems. I'm quite sure that opponents of free markets think that proponents of free markets think that they can solve all the world's problems.

Some problems are simply hard to solve. There is no magic wand. A free market can't solve them. Neither can a market constrained by the violence of the state -- although it will arrive at a different solution. Constraining markets isn't free of cost, so while it may appear that constrained markets work better, you also have to count the cost of the constraint. Also, the constraint serves to eliminate creativity, so that a free market solution which might arrive over time, will never appear.

Nobody can solve all the world's problems, because as soon as you solve the worst problem, things which weren't perceived as problems before, are now problems.

Posted [12:57] [Filed in: ] [permalink] [Google for the title] [digg this]