Regulating inflation.

Longshot,

First, thank you for the interesting discussion about barter economies. Honestly thinking about barter economies is not my focus and this discussion has made me step back and take a closer look. My answers are really intended to be a way to play devil's advocate offering you an alternative viewpoint. Discussions like these are why I come here and engage people like you. -Thanks.

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Ok, so first, let's go over the what inflation is and the two most significant types.

Inflation is when there is a rise in the general price level. That is people pay more in general to acquire the things they need.

Traditionally the causes are:

Demand-pull: This happens when the means to make purchases increase relative to supply. When people use those means suppliers experience shortages and scarcity ensues which results in rising prices.

Cost-push: A decrease in supply caused by shortages which in turn results in demand rising relative to supply which in turn results in scarcity which results in rising prices. Of course, cost-push inflation usually happens when non-discretionary items are affected. Examples are food and energy and perhaps even land.

What is a persons "currency" in a barter economy? Obviously, it's not money. It might be tempting to say that a person currency is the products they create, but I don't think that's true either. I think a person currency is their effort (time, skills etc).

A person obviously requires certain things to survive and a few other things to remain reasonably comfortable. Let's call a person's reasonable comfort (food, clothing, shelter etc) their minimum requirement.

So the question is, could everyone's effort rise? Would that not be inflation? The "price" to create goods increasing in cost relative to the goods and services they receive for that effort?

So if there were a shortage of energy, wood, coal, oil, whatever, the amount of effort spent to create your good or service increase? The result being that to acquire your other essentials requires greater effort.

If the "price" is measured in the effort it takes to provide your good or service, would the price, driven by shortages, result in higher costs measured in the effort to create a particular persons good or service in the scenario I laid out?

What about demand-pull in a barter economy?

Demand-pull is a bit harder to enumerate in this scenario....

The takeaway, one you may disagree with, is that "currency" in a barter economy is effort. If effort rises relative to what you can obtain with what you have to trade, that is the closest thing to inflation I can think of.

 

Thanks for you kind comments. I love conversations like this too.

A couple of things. It seems pointless to try to figure out what is the "currency" in a barter economy. There is no currency in a barter economy. That's what makes it a barter economy.

Also, you are redefining price. The definition of price is what is given in an exchange to acquire the desired goods from the trading partner.

So in my example, the price of an apple is two oranges (which makes the price of an orange 1/2 an apple) Also the price of an hour of labor is 10 apples (or 5 oranges). Now let's take a look at a demand pull scenario. Let's say that, say due to a drought, oranges become scarcer and hence more expensive. That would result in a change in prices. Let's say that instead of an orange costing 1/2 of an apple it now costs four apples.

So we had the original prices:
apple : orange 1:2
hour labor : apple 1:10
apple : hour labor 1: 0.1
hour labor : orange 1:20
orange : labor hour 1 : 0.05

After the shortage we have the following:
apple : orange 4:1
hour labor : apple 1:10 (unchanged)
apple : hour labor 1 : 0.1 hr
hour labor : orange 1:2.5
orange : hour labor 1:0.4

As you can see, while the price of oranges (in terms of apples and labor) went up, the price of apples and labor (in terms of oranges) went down. So again, we don't see generally rising prices. We see a market in which the prices for some goods have changed relative to other goods.

 

Hmmm....

Ok, but what if virtually everything in the economy changes relative to something like energy?

The result, since energy, affects the costs of almost everything, if you were an apple grower would mean more apples traded to maintain your supply of energy and fewer apples to trade to acquire everything else. Would it not? So you'd have to put more effort into creating apples to trade for all the other things you need.

In a fiat eceonomy, I don't think this changes. If I buy 30lb bars of copper (I use in my business) in 1990 for $100 and in 1990 my income is $100k and in 2010 they are $150 when my income is $150k, are they costing more effort to obtain? No, because my effort to obtain has remained the same, however, any long-term debt I had now costs less thanks to inflation.

It's an interesting conversation and I see where you're going.

Thanks again.

 

Yes, it would take more apples to buy a gallon of fuel. The price of fuel (in apples) would go up, and the price of apples (in fuel) would go down. Again, not a general increase, but a change in relative prices.

I'd say that the relative prices of your labor and copper has remained the same.

I don't think it's possible to have a general rise in prices in a barter economy. It will always be a situation in which relative prices change inversely.

 

Sorry that's perfectly wrong. Everyone cant raise their price unless there is more money in the economy to make it possible. If the Fed does not print more money prices cant go up.

 

The Fed does not "print" money.

 

Yes, with respect to products that's true, but not with respect to the effort to create those products, I think that's the difference. In a barter economy, your effort, not the product you create is your currency, at least imo.

Thank you for the interesting conversation.

 

If a country has two computer manufacturers and one blows up then the price of computers will go up because the demand will stay the same while the supply is decreased. This isn't inflation, inflation means that the money we use to buy things goes down in value compared to the gold or silver that backs it. If prices change because of a change in supply or demand then that has nothing to do with inflation.

Glad you agree though, most people are to colluded with political brainwashing that they fail to think rationally or even look at the statistics. The fact that taxation is bad for the economy is a concept that was discovered long before we had any statistics on the matter based on rational thought, the statistics we have now merely confirm the reasoning of people like Adam Smith way back in the 18th century.

 

Inflation is defined as a general rise in prices of goods and services. One's effort is not a good or service, so it can't really be involved with inflation. If, however, you mean labor (a service), that does indeed have a price. But again, the price of labor is relative to all other goods and services. When it's price goes up, other things go down relative to it.

So in a barter econom it's impossible for the price of all goods and services to rise simultaneously, and hence there can be no inflation.

 

The feds job is to control the supply of money if they don't increase the supply of money it is impossible for prices to go up. Now do you understand?

 

If the price of energy goes up the price of everything else must go down given a fixed supply of money.

The only issue is that liberals always want easy money i.e. to increase the supply of money in the hope that they can get it into the hands of their constituents who will then feel compelled to vote for them. Such vote buying should be illegal in America.

 

With respect, if we're going to speculate why not use a more accurate number of PC makers.

Dell, HP, Toshiba, Apple, IBM (Lenevo), Acer....Big names and at least 2-3 dozen smaller names.

Now let's say Dell and HP, two HUGE names in PC's and laptops, let's say they go out of business and 50% of market share is suddenly up for grabs and the demand for PC's is exceeding supply. Will prices go up? Sure, probably, but what will happen as a result? Will prices stay high in the long run? Probably not. As the remaining companies fight to increase market share they will keep prices as low as possible it's not unheard of that one of the remaining companies keeps prices the same despite the shortages, perhaps even loses money in order to increase demand and ramp up more manufacturing in order to increase overall market share so that in the long run the compnay can grow.

It's not as simple as the Econ 101 texts say it is.

Another possibility is that one (or more) of the manufacturers has a huge inventory of excess stock, perhaps by chance, perhaps because they want to leverage economies of scale and built more than they initially needed to keep per-unit costs low. They can increase capacity while their inventories decline, perhaps without ever running short. If new capacity can be brought online before inventory runs out, then prices, in some circumstances could remain stable. It really just depends on the long-term goals of the company in question.

Inflation is when there is a rise in the CPI. The Oxford Dictionary of Business and management says that inflation is "A general increase in prices in an economy and consequent fall in the purchasing value of money."

As far as gold and silver, they don't "back" the currency. Totally false.

From the Fed BoG:

SOURCE

If inflation is an increase in the general price level (and it is), then overall demand that exceeds supply can, as you've already pointed out, cause prices to rise resulting in dollars you hold buying less.

Sure, I just hope you don't take my disagreements with you as constructive dialogue.

 

But as I have demonstrated, there cannot be a general rise in prices, due to the fact that prices can always be inverted. If currently apples and oranges exchange at 2:1 but then the price of oranges rises so that the exchange is 3:1, that just means that the price of an apple has dropped from 1/2 and orange to 1/3 of an orange. Prices are always relative and move inversly. Whenever one goes up, the other goes down.

 

Gotta love Say and his law's.

 

Except, you are talking about barter economies, I am not.

I countered your argument with the fact that labor is a commodity, you disagreed, we are at an impasse.

 

You didn't counter my argument. Labor has a price like everything else. If an hou of labor costs 20 apples and then the price of apples rises to 30 per hour of labor, then the price of labor has fallen relative to apples. When the price of one thing decreases the price of everything else increases.

Also my analysis would apply to both barter and monetary economies.

 

Roon pointed out, rightly so that this is an argument about whether Say was correct.

Say’s said, “every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product.”

To which I would reply:

Money can be saved and is therefore no longer being used for consumption and because banks don't lend customer savings to other customers, money saved isn't circulated via lending nor does it directly affect the cost of lending. Markets exist for real and financial assets. Money can flow into the purchasing of financial assets. If there are financial assets or real assets whose prices are rising, modern capitalists, producers, and even workers might decide to start speculating on asset prices. This would take money away from the purchasing of commodities and real productivity and instead tie it up in exchanges on asset markets, as money alternates between being (1) held idle before buying assets and (2) purchasing assets, and then be held idle again by the new owner of the money in preparation for further speculation.

The top 400 wealthiest people in the US have more money than the bottom 50%. Are they using their wealth to consume goods and services? Do you really believe they have unlimited wants and they spend all of their idle money pursuing those desires?

Furthermore, Say treated money as a commodity. Acquiring commodity money created productivity, but today $1 billion dollars can be created with a few keystrokes. Fiat has thrown a monkey wrench into Say's claims.

 

What you wrote has nothing to do with my post you quoted.

My post didn't mention Say. My post was that you didn't counter my argument. Labor has a price like everything else. If an hour of labor costs 20 apples and then the price of apples rises to 30 per hour of labor, then the price of labor has fallen relative to apples. When the price of one thing decreases the price of everything else increases.

Also my analysis would apply to both barter and monetary economies.

 

not at all since we have a federal reserve whose mission is no inflation or deflation- same as gold standard but better according to Bernanke.

 

even better they put it in a bank where it is multiplied by 10 and loaned up to stimulate the economy with business loans, cars loans, home loans, education loans etc etc!!

 

. The Chinese save more than we do despite 20% of income we have, as a matter of culture and survival . Americans don't save because govt saves for them and distributes some $6 trillion a year to them. You know how to make sure no one saves for retirement?? Start a Social Security welfare program. You know how to insure nobody saves for old age health care?? Medicare!!

 

Give me an example using a fiat money economy.

 

If the price of every good/service rises 10% with respect to the dollar then that means that the price of a dollar has fallen 10%. Again, no general increase in prices, but merely a decrease in the price of a dollar in relation to the prices of all other goods.

Remember, every exchange involves two things being exchanged. The ratio of the exchange is the price. If I buy a sack of potatoes for $5 today and then the price changes to $6, that simply means that the price of the dollar has dropped from 1/5 of a sack of potatoes to 1/6 of a sack of potatoes.

The decrease in the price of any particular thing results in all other things rising in price. In a fiat economy, a decrease in the price of the currency unit manifests itself as a corresponding increase in the price of all other goods.

 

People pay into SS, why shouldn't they get it? And, according to Forbes, 65% of people save for retirement.

 

Banks don't lend customer deposits to other customers.