So, about feminism:
Women in the west still don\’t have equal pay – in Britain we\’re getting 75p in the pound,
More women than men work part time. Thus, not unnaturally, the portion of wages paid to men is higher than that paid to women.
And as the ONS repeatedly tries to point out, when you adjust for education, years in the workforce etc, there doesn\’t actually seem to be much of a gender pay gap at all. And when you don\’t adjust for all of that, when you look purely at age groups, younger women get more than younger men, part time women get more than part time men.
Then there\’s this from Jenni Murray:
And now, as the cost of childcare rockets – rising above the rate of inflation – \”having it all\” gets even harder.
Yes, childcare will rise faster than inflation. Because, rare years aside, wages rise faster than inflation and the costs of childcare are largely wages.
And there\’s not really a cure for this problem either. Unless you reduce the amount of labour being used to care for children of course.
Yes yes yes to the first bit, usual stuff, but what’s this…?
How can wages rise faster than inflation? Inflation measures the increase in the (liquid) money supply. All you have available to pay wages is that same liquid money supply. Where the feck does this extra money to pay consistently above-inflation wage increases come from?
Look, go back to basics. Suppose there were no inflation; no creation of new bank reserves, so the money supply stays static. What must happen to the national income in that situation? It has to stay static too. Increases in wealth don’t come from higher income. They come from lower prices for unit goods.
The cost of everything is entirely wages. Where else does money go? To cows? To the Moon? Into an alternative dimension? Oh sure, you can call those wages by other fancy names. You can call them profits, or rents, or dividends, or perks. But it’s all wages. It’s all income.
MV=PQ. Your PQ is rising faster than your MV. I would love to hear an explanation for this. Especially as V is lower than it used to be (monthly wages rather than weekly paypackets, etc).
Come on Tim. The national income can’t rise faster than inflation. You can do better than this.
Tim adds: “The national income can’t rise faster than inflation”
What? So all this economic growth we’ve had over the past few centuries is illusory? We’re not living better than our grandparents did? Real wages haven’t risen?
Oh, but, yes, real wages have risen. We all get more stuff for an hour of labour now than people did 20, 200 years ago. So I really don’t know where your point comes from but it’s nonsense.
Nominal wages, in general and over time, rise faster than the general inflation rate. Thus we get rises in real wages.
And there’s not really a cure for this problem either. Unless you reduce the amount of labour being used to care for children of course.
Maybe there is a market for human looking robots apart from sex and the Japanese (but I repeat myself). A soulless uncaring automation can’t do a worse job than Britain’s underclass.
Tim, first off, sorry for the aggressive tone of that comment. It really did come out more bolshie than I thought.
Secondly,
Aren’t we talking money wages? If childcare costs are rising (your point), and that is due to rising wages, that’s money wages, not more spending-power-per-groat which I presume you mean by “real” wages.
Of course we can buy more crap than our grandparents. But that’s not because wages have risen. It’s because the price of a unit of crap has fallen. Different thing.
You’ve not heard of Ed Balls, then?
Wages have not been rising faster than inflation over the last few years. “in 2011 real wages are likely to be no higher than they were in 2005” – http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech471.pdf
We could of course allow immigrants to come here and look after our kids instead…
Ah, sophistry par excellence. No, the use of “inflation” here means “the increase in the price level”. MV goes up faster than P because Q increases. That is all. This generally happens because of productivity improvements.
JAT-
Tim appears to be claiming that the national wage bill constantly rises, which forces prices to rise (Keynesian cost-push bollocks) but apparently only in “wage heavy” industries, since there are other industries where the money isn’t paying people apparently. Where it’s going instead is not explained.
Imagine M is static; now when Q rises, P has to be less than 1. But Tim’s claiming that economic growth is an increase in the general wage level; and this forces P to be greater than 1. This is simply irrational.
You describe there “demand-pull” inflation (c.f. unions in the 1970s). “Cost-push” inflation is what happens when VAT rises, for example.
You still seem to be in denial about changes in productivity, that there are no input costs other than wages and no possible change in output for given input costs.
No, he is claiming it is an increase in real (i.e. inflation-adjusted) wages. Real wages are probably rising if MV (nominal wages) are held constant and P falls. We have many, many years of data which show exactly that situation occuring.
“show exactly that situation occuring”
Sorry – not with MV held constant. We have many years of data showing rising MV rising faster than P, that’s all. 2011 is even such a year – just.
God, the Keynesian morass. Every time I see arguments like this bursting out, I thank the Lord I’m an Austrian.
Let’s take this one part at a time. Do you believe, as Tim apparently does, that economic growth is a rise in wages?
Oh, and also, Tim is explicitly describing cost push; specifically that the price is being pushed up by the cost of labour. Demand pull occurs when demand increases but cannot be matched by supply.
I’ve not read every word Ian B has written here, but what I have read doesn’t make sense.
If the price of unit goods falls, then inflation is negative. If wages stay the same (i.e. productivity has risen but population and money supply (in the relevant measure) are static) then wage inflation (which is zero) is indeed higher than price inflation (which is negative).
I’d go with “rising real GDP per capita” as a better definition of “economic growth”; rising real wages is generally – though not always – a good proxy for real GDP.
Good grief. Keynes vs Hayek on the Worstall website. Wonderful stuff.
All this MV=PQ stuff is all very well but actually this is micro, not macro. For your average couple with small children, the cost of childcare can rise to the point at which it is no longer economic for them to pay it because it exceeds the income of the lower earner (after taxes & transport to work). At that point the lower earner in most cases will give up their job and become a child carer themselves. The same is true for single parents if the cost of childcare exceeds the amount they can get in wages and benefits. If child care costs generally are rising, that suggests that most working people with children haven’t reached that economic point yet. We are not seeing a general exodus of women (usually the lower earners because, as Tim says, a lot of them work part-time) from the workforce, are we? Clearly the market will bear higher prices (so to you Keynsian macro guys, this is demand-pull inflation, not cost-push).
All that is happening is that middle-class couples are moaning because they are having to pay higher childcare costs and therefore can’t afford their second holidays. So far they are NOT being “priced out of work” in most cases, despite what Jenni Murray may think.
“Unless you reduce the amount of labour being used to care for children”
Which could be done easily, but Ofsted won’t allow it.
I haven’t slept all night and this is doing my head in 🙂
Best way I can think of to explain what I’m trying to say is this; the price of childcare services is subject to the same inflation measure as any other goods and services. Due to specifics in the industry, it might be higher or lower than inflation in the price of eggs or motorbikes. But all those industries are subject to the same increases in labour costs (the general labour price inflation due to money supply expansion). So childcare price inflation can’t be any generally higher than for any other industry; it will average around the general price inflation measure.
There’s no justification for saying that childcare inflation will have a mean value any different to any other good or service. Tim’s trying to claim a labour cost push, but the same “general wages rise” he’s appealing to there applies to every income in the economy, and is due to money-supply inflation.
I admit to introducing some confusion here because I’m a follower of sound economics, so I’ve no time for the voodoo of pretending there is a “price level”. Inflation is always and everywhere a monetary phenomenon. Etc. The general point is that general wage inflation can’t push any particular price inflation above the imaginary average price inflation. It has to be due to something else (supply/demand, regulation, cartelisation, etc).
Frances, my last comment attempted indirectly to get us more micro. The problem is, Tim’s gone from a macro (general “wage level”/price level inflation) to a micro (“cost of childcare services”) and that’s where all the confusion is IMO.
This is false, because you are still ignoring productivity. I don’t get why you are introducing MV=PQ into this at all.
The child carer can get a wage rise and be more productive – e.g. care for more children, resulting in lower unit cost of childcare. That is what happens in general across the economy over time, and that is why we get real wages rising.
I’m ignoring it because it’s not relevant to that particular point. He’s arguing that wages inflation is pushing nanny prices up above the general price-inflation level. But every good and service in the economy bears the same wages-inflation burden. Tim’s trying to find a justification for nanny-prices rising faster than other-prices, and there just isn’t one. Any industry can have a productivity gain, but it’s simply not part of this discussion.
All incomes- be they wages, profits or rents are subject to the same general money supply induced upwards pressure. Nothing special about nannies.
As I said, apologies for above confusing actual inflation (monetary expansion) with the price-level thing. All we can say about that pseudo-inflation figure is that it already incorporates the “general wages rise”, so deviations from it by particular industries cannot be explained by that, as Tim posited.
Tim adds: as in the next comment, Baumol’s Cost Disease.
“He’s arguing that wages inflation is pushing nanny prices up above the general price-inflation level. But every good and service in the economy bears the same wages-inflation burden.”
We are denying that specific proposition you make there.
Do we all agree that labour productivity improves over time? We get more output from the input of an hour of labour, yes?
Now, empirically over the centuries, we’ve seen that this productivity of labour rises faster in manufacturing (and before that, in agriculture) than in services.
Now, you’re right that there’#s a general rate of wage inflation. There’s also a general rate of productivity improvement, But, crucially, over time, as productivity of labour improves then we find that the labour includewd in our saervices is falling in volume more slowly than the labour encapsulated in our manufactures. Thus, for any given wage rise or inflation across the economy, we wqill find that the labour in services is increasing in cost at a higher rate than the labour in manufacturing.
Thus services will rise in price in relation to manufacturing over time.
However, our general inflation rate is the average (a weighted average) of both services and manufactures. So, services price inflation will be higher than manufactures price inflation. The more sercivey a service is the higher this relative inflation rate will be.
So, back to Jenni Murray’s point. Childcare rises faster than inflation. Well, yes, because childcare is really just labour, a near pure service, and we always expect such to rise in price more than therise in hte general price level
Ian B, have you ever heard of Baumol’s cost disease?
IanB said (#20) “But every good and service in the economy bears the same wages-inflation burden”
Possibly the same wage inflation, but surely not the same burden.
Productivity means that next year one unit of labour will produce more units of goods. The labour cost per unit produced would therefore drop.
And if that decrease in labour time per unit is more dramatic for (say) a radio compared to an hour’s childcare (this Baumol thingy that Timmy keeps mentioning), then the relative cost of childcare will increase.
Ah, hmmm. If you were making a specific point about the current situation, I’d agree: Baumol is not relevant right now, general UK wage inflation below price inflation. So you need a micro answer (supply/demand for nannies) not a macro answer. Is that the argument? If so, sorry – I agree.
But Tim’s point was a general one, and Baumol presumably applies to nannies, in most years.
JustAnotherTaxpayer (#23), the micro answer is probably Ofsted, mandating maximum kiddie-per-staff ratios and insisiting on qualifications for the staff.
Ian B is right. But those of you disagreeing with him wouldn’t disagree with him if you understood him. We’re all on the same side, and don’t really disagree.
The reason for the confusion is differing definitions of “inflation”. Example: “If the price of unit goods falls, then inflation is negative.”
Inflation can mean either an increase in the money supply or an increase in the price level. If you, as Paul B does, use “inflation” to mean an increase in the price level, then “If the price of unit goods falls, then inflation is negative” is a tautology.
If the money supply is constant, and productivity increases, then prices will fall. This is what Ian B means when he says that we become richer because prices fall, not because wages rise. Ian B is correct: nominal wage increases do not make us richer.
Tim’s response, that real wages have increased, is irrelevant because Ian B isn’t denying that. It’s missing the point. His point is that *nominal* wage increases don’t make us richer. Rising real wages (us becoming richer) are because of falling prices, not rising nominal wages.
Tim: “Nominal wages, in general and over time, rise faster than the general inflation rate. Thus we get rises in real wages.”
This is using the “price level” definition of inflation. Since wages are prices, if the govt prints money, both wages and prices will rise. No one has gotten richer. If productivity then increases, prices will fall, making everyone richer. That is how nominal wages can rise faster than the price-level excluding non-wages.
—
One thing to note from this is that if we didn’t have inflation, then nominal GDP wouldn’t change, no matter how productive we became: all rising productivity would be expressed as falling prices, not increased GDP or nominal wages. ***So NGDP targeting is a load of guff.*** The only thing that will change nominal GDP (ignoring short-term fluctuations) is printing money.
Is not the existence of a huge supply of cheap labour in the Far East not relevant?
If the UK were a closed economy, I think IanB would be correct – motorbike makers would suffer the same (or similar) cost problems to children’s nurseries. Everything would cost more. But we use the cheap labour overseas to make our motorbikes in Malaysia (or wherever), which keeps the cost down. Looking after children can’t be exported to Malaysia so as wages rise the cost tends to rise too.
Here’s the disagreement in a nutshell:
Ian B: “The national income can’t rise faster than inflation.”
Tim: “real wages have risen.”
Ian B is referring to the nominal national income, i.e. nominal wages. Tim refers to real wages. Both are correct.
But Ian B’s original point is an important one, which has become obscured:
If we lived in a world without governments printing money, then the numbers on people’s payslips wouldn’t change much. Relative wages would change, some would go up, some would go down. But “real wage” increases would only be expressed as falling prices, not by changes to the numbers on your payslip.
Austrians are so fond of discovering irony. In the last three years, where the evil government has “printed money” like it was going out of fashion, we’ve seen the lowest rate of nominal wage growth since the 1930s.
The ONS AWE series has gone up just 4% between Dec ’08 and Dec’11 – that is the absolute change; a compound annual growth rate of 1.2% over three years.
Or is the problem that the hyperinflation just around the corner, or maybe the government is fiddling the statistics?
Jim
” Looking after children can’t be exported to Malaysia so as wages rise the cost tends to rise too.”
It is more difficult to automate as well
Richard,
Yes, both of those apply in this case, so there aren’t too many opportunities for productivity increase in this industry. But I don’t agree that this is cost-push inflation. Parents are largely a captive audience. If they want to work, they have to pay for childcare at some rate, and that rate will be whatever the market will bear. Providers can add value through activities, facilities, staff training etc., and some parents may be willing to pay a premium for those extras. But the bottom line is that up to the economic limit that I described before, providers can pretty much charge what they like. Costs do have a bearing on this, of course, but the major driver is parental demand.
Pick a specific definition of “inflation” and “national income” for which that is true, please. If “national income” is nominal GDP, then it is false if inflation is any of:
– growth rate of broad money supply
– growth rate of monetary base
– growth rate of prices
– growth rate of wages
Thanks for the clarification James. It seems to me that Ian B is wrong to assume that when we use ‘inflation’ with its common meaning we actually mean something else altogether.
Returning to the topic of childcare: is there any evidence that childcare inflation has been higher than general price inflation over the last few years?
JAT-
Not contradictory. The BoE has been “printing” base money to try to raise broad money, but broad money supply is dependent on specifics of the banking industry. So, the base money can rise while the broad money falls due to a fall in the frac multiplier etc. If lending levels returned to prior levels (Mervyn quoted ratios greater than 50:1 for some banks in his Bagehot lecture) there’d be a massive pulse of price-level inflation.
Thanks to others for clarifying my confused argumentation.
Frances, it may be regional, but down here there has been pretty strong competition between provders in the last few years.
My local nursery was struggling to attract enough customers a couple of years ago, and in response has cut its costs to the minimum allowed by Ofsted (staffing ratios) and HMRC (minimum wage), and has cut its fees to cover that minimum cost.
One of the trustees was telling me about it in the pub the other day. If they could have got their costs lower, they would have lowered their fees to get all the places filled.
On Baumol’s Cost Disease; it appears to be a fallacy.
Baumol is complaining that real wages should not increase if productivity does not increase, and should only increase if productivity gains have been achieved. From Wiki-
First, a lesser point. How do you measure productivity of musicians? It isn’t “the number of musicians required in an orchestra”. They can increase their productivity by playing larger venues, playing more performances, releasing recordings, etc. But, let’s suppose they’ve done none of that and their productivity is flatlined.
They should still get (real) wage increases. We are back to the fundamental of free market economics; we don’t get wealthier because wages rise, but because prices fall. Thus, the “real” wage should continually increase for everyone, because goods and services are all getting cheaper. A loaf of bread is more efficeintly made than a century ago. Our violinist can afford more bread. His real wage has risen though his nominal wage has remained (without monetary inflation) static.
So, if there is monetary inflation, the violinist needs constant pay rises to keep his real wage static.
And, the negative space of that: you don’t get a pay rise for being more productive. You get to make more for the same money, due to competition forcing you to put productivity gains into lower prices, not higher wages. The tech industries over the past few decades illustrate this perfectly; enormous price falls, not increasing wages and profit margins.
We get wealthier because our nominal incomes (sans monetary inflation) stay the same, but everyone else’s unit prices for goods fall, so our real wages rise.
So, I am entirely unconvinced that any such disease exists. Violinists need pay rises to offset monetary inflation, as does everyone. It also, interestingly enough, reminds us that those pay rises ought to be higher than the measured inflation statistic (which incorporates productivity gains); if monetary inflation is 5% and productivity improves by 2%, the inflation statistic will be approximately 3% (if honestly calculated) whereas the violinist needs a pay rise of 5% to maintain his proportion of nominal income and afford the extra cheaper loaves of bread that the more efficient bakers are now producing at lower real prices. If your income is index linked, you’re losing out by the value of productivity gains i.e. economic growth.
Tim adds: GAAAAAGH!
“First, a lesser point. How do you measure productivity of musicians? It isn’t “the number of musicians required in an orchestra”. They can increase their productivity by playing larger venues, playing more performances, releasing recordings, etc. But, let’s suppose they’ve done none of that and their productivity is flatlined.”
That’s the fucking point of his example! Yes, sure, we can improve the labour productivity in serveices through tecnological change. It’s just that this improvement is more difficult/ takes longer in services than it does in manufactures.
You’re using as your refutation tha standard example of the proof!
“Baumol is complaining that real wages should not increase if productivity does not increase, and should only increase if productivity gains have been achieved.”
No, that’s shit. It’s not “should” it’s “will”.
Unless we create more wealth by using our available resources more efficiently then there os no more wealth to enjoy. And yes, rising productivity, increasing efficiency, these are synonyms, as are having more wealth to share and getting richer.
Richard,
Jenni Murray claims that childcare costs are rising. If she is correct she is presumably talking about the average cost of childcare over the country as a whole. You claim that your local providers are cutting their prices. Either that is a regional effect or Murray is simply wrong and this whole debate is on a false premise because there is in fact deflation not inflation in childcare.
The Daycare Trust found that childcare costs rose by nearly 6% in a year, which is an above-inflation rise. http://www.guardian.co.uk/money/2012/feb/27/childcare-costs-rise
Here’s the problem; are people choosing higher quality childcare in the marketplace? “Childcare” isn’t fungible.
“If lending levels returned to prior levels (Mervyn quoted ratios greater than 50:1 for some banks in his Bagehot lecture) there’d be a massive pulse of price-level inflation.”
Well, no, because that would not happen overnight; if NGDP growth picked up too high, the Bank would reverse QE and/or raise rates to hold it down.
But the fantasy Austrian view of “monetary inflation” is bizarre:
In 2005-2007, we had broad money growing at a 8-10% annually, average wages growing at only 4% ish. If wages are not keeping up with the “monetary inflation”, we have falling real wages! It was the inflow of cheap Chinese goods causing deflation across the high street which was the illusion. Silly me.
In 2011, we had broad money rising below 2% most year, and yet nominal wages were going up 2%. So this was a period of rising real wages? It was the rise in VAT and petrol prices that was an illusion. Silly me.
So, you’re arguing that inflation isn’t caused by expanding the money supply. Okay. Best of luck with that.
Prior the Grand Crash, most of the new money was inflating sectors like, particularly, housing costs. We did indeed have falling real wages.
This is the problem with the Keynesian style of arithmetical economics and econometrics. You can choose whatever statistics you like to support whatever you want to believe, while ignoring the underlying principles on a whim. It’s as scientific as seeing Jesus on a taco.
Ian B
I think it’s not so much that people are choosing higher quality child care as that the overall standard of child care provision is improving, partly because of the involvement of Ofsted, and that is raising the prices generally.
Having said that, as I pointed out earlier, many providers add value through activities, facilities and things like Montessori nursery education, and parents may choose to pay higher prices for these. Childcare is not fungible, as you say.
Tim adds: “Childcare is not fungible, as you say.”
Jeebus.
WTF?
That people are hiring it out, that natural mothers are not doing the entirety of all child care, the existence of creches, child care centres, the whole damn thing about Mummies using yet to be Mummies to care for their kiddies, Au Pairs, Nannies : these are all proof perfect that child care is fungible.
It can be sourced from a number of different places, those different sources are reasonable substitutes for each other: this is what fungible means.
FFS, if childcare really isn’t fungible thens there’s not even the possibility of the dinner and the movie (and the creation of child two) after the first one. For there is no acceptable substitute for that Mother’s undivided attention.
That there are many second children disproves that then….
Frances, that’s probably true. Regulation and “professionalisation” of childcare is almost certainly price-inflationary. When I was a child, I went to a local playgroup, run by a local woman whose only qualification was being a housewife and mother; which was more than ample for a job that basically required commonsense and preventing us eating the crayons.
As it all professionalises and cartelises and is dragged into The System (you need a University Degree(!) to run a nursery now), that is 0bviously going to push prices up for well understood economic reasons.
This all clearly feeds off the current middle class idea that raising children is something incredibly difficult requiring years of training, rather than it being something rather straightforward that mums and dads have been doing since the year dot, with general success.
Tim, two points. Firstly, this thing you do of replying-in-comments makes threads difficult to follow and it’s easy to miss that you’ve replied.
Secondly-
What you appear to be thus saying is this-
” real wages will not increase if productivity does not increase, and will only increase if productivity gains have been achieved.”
Okay, let’s not confuse the two contexts here, macro and micro. The wages here are the musicians’ wages, and the productivity is the muscians’ productivity. But as discussed above, real wages increase because other people in the economy are more productive.
This is initially counterintuitive, but to somebody who does as much economics as you do, it ought to be clear. The violinist’s wage does not rise. The price of bread falls.
So, the complaint by Baumol and apparently yourself; that the musician should not get a real wage increase unless he improves his own productivity is entirely false. He gets the real wage increase due to everyone else’s efforts, the same as we all do.
Additionally, the claim that he should or will get a nominal wage increase if he improves his own productivity is also false. His own productivity increase does not translate into a higher wage, either nominal or real. It translates into cheaper prices for his customers, thus allowing their real wages to increase.
This is the fundamental basis of how free market growth works, Tim! I keep trying to not be bolshie in this thread and apologised before, but seriously, you don’t think that if your employees improve their productivity you’re supposed to give them a pay rise, do you? That’s not how it works!
“choose whatever statistics you like to support whatever you want to believe”
You couldn’t make this stuff up. In one breath you claim that consumer prices don’t reflect the True Monetary Inflation because house prices do, and in the next breath you accuse me of picking statistics to support my argument? Uh huh.
I’m very happy with claiming that broad money growth and price inflation are not strongly correlated because we tried monetary policy based on that claim in the 1980’s and it didn’t work very well: it’s hard to measure “broad money” and velocity is not stable. Empirically this is still true through the last decade; the Bank of England had to change their definition of M4 in 2008 because it was sending poor signals.
The “market monetarists” tell us to look at MV (NGDP) not just M for exactly these reasons.
What’s the Austrian view of 2011 – did we have falling or rising real wages? Broad money flat, nominal wages up 2%, house prices flatlining. What’s not to like? I should ignore consumer prices going up 4/5%, right?
JAT, one of the problems with being an Austrian is this; we tend to be well read in everybody else’s theories (Ricardo, Marx, Smith, Keynes, Chicago) etc, but none of you people ever bother to try to understand ours before dismissing it, resulting in you making cartoonish arguments and us having to explain what a wheel is in every discussion.
One basic tenet of the Austrian approach is that ecnometrics is bunk, for fundamental reasons. None of the statistics can be measured accurately, if at all, they are all arbitrary, and a “macro” view entirely misses the internal dynamics of the economy.
So this is why we use a sensible approach of analysing the basic system while openly recognising that you cannot make specific preductions; particulalry, you cannot do arithmetic with economic aggregates. Nonetheless, to try and explain things to the wilfully ignorant, we engage with this stuff in the hope of communicating those general principles. Taking a specific example; the general principle is that monetary inflation will lead to price inflation. But you cannot predict any particular price, because every change in the value of the currency unit changes everyones subjective preferences and behaviours in inherently unpredictable ways. This analysis goes all the way back to Cantillon. It is simply true. But arithmetists ignore it, because they dream they can “run” the economy and need these fanciful equations to justify that delusion.
You can’t actually measure any of these things; real wages, the money supply, any of them. Your arithmetic is bollocks. It’s impressive bollocks full of interesting looking equations, but it is still bollocks.
So, for instance, I used the MV=PQ equation as an explanatory tool. It is useless for making real statements about the economy. It has some utility as a mental model. You cannot actually calculate any of the variables in it, but it shows the general principle; on that basis it is fine, but can do no more than that. Likewise, we can cautiously observe that inflating broad money goes strongly into the housing market, but again cannot calculate the magnitude, even post hoc.
Now please go and read some Von Mises, Rothbard, or Bastiat or even Cantillon. You don’t understand the theory you’re ridiculing, and there isn’t room in a comment box to explain it all to you.
The Austrian approach does clarify some areas of potential confusion, but it’s pretty well useless for practical purposes because the things it assumes to be constant are in practice highly variable.
I’m not saying the Austrians don’t know this…
In economics there are no models that are both useful and right. But some are less useless and wrong than others.
PaulB, I don’t know what things you think the Austrian model presumes to be constant. The whole basis of it is that the economy is unfathomably dynamic. The only actual prescription it recommends is to leave the economy alone, since any dickering with it just creates instability. For instance, we recommend not dickering with the money supply.
The basic problem with the macro schools is that they think they can do better by dickering, and use fanciful arithmetic to “prove” it to themselves, whereas they’re really just seeing pictures in the flames. Like astrology, macroeconomics provides imaginary answers to satisfy those unwilling to accept the limits of human knowledge. You will meet a tall dark stranger, and the bank rate should be cut by a half percentage point leading to growth of 1.5% in the coming year.
In other words, all economics is useless. The Austrian School is unique in facing that reality, while the others cast bones and read goose entrails in search of answers that cannot be had.
Ian B: when you “recommend not dickering with the money supply” you are assuming that if the government holds constant those parts of the money supply it controls, everything else will magically stay fixed so that the measures of money supply that actually matter will stay constant too. As JAT points out, that’s a complete fiction.
Quite why you’d want a fixed money supply I’ve never understood anyway. It’s a bit like saying that human physiology is complex, therefore we shouldn’t eat anything.
Paul, if the money supply is held constant, the money supply is constant. That’s just a tautology. Debt levels can rise and fall, but around a mean, rather than escalating eternally.
The reason for this is simple. Any change in the money supply forces the entire marketplace to adjust to the new value of the currency unit; higher or lower, doesn’t matter. It causes unnecessary adjustments, which lead to exacerbated boom and bust, non-creative destruction, the need for constant renegotiation of wages, and so on and so on.
There is no advantage to monetary expansion, and a diverse range of disadvantages.
Tim,
Childcare is not fungible. People generally don’t leave their children with any Tom, Dick or Harry. They choose childcare providers that they trust to provide the best replacement for their own care. If childcare were fully fungible then there would be no point in providers training staff or providing extra facilities, activities or educational programmes, because parents would always send their children to the lowest-cost provider. The evidence does not support that.
“Any change in the money supply forces the entire marketplace to adjust to the new value of the currency unit”
Seriously? Just no. Monetary economics moved on from this 20 years ago. We tried Friedmanite k% rules and they did not work. They didn’t provide a stable nominal anchor because velocity is not a constant, and it is hard to measure “the money supply” in a useful way. In the UK, which would you pick, M4 or “M4 ex OFCs”? And this ignores the problem of population growth – why does a fixed money supply divided between a ever-growing population provide stable “debt” levels? It doesn’t. It’s entirely arbitrary.
Have you read Selgin on stabilising MV? He makes much more sense than this.
JAT, Friedmanism doesn’t feature a fixed base money supply, it targets inflation targets. That is entirely different. It tries to dicker the bank rate to keep a constant inflation measure. Since we’ve explored the fallacy of the measured inflation level above, I don’t need to go into it again, surely.
Once you’ve fixed the base money supply, abolished government debt, and made it illegal to print more base money, you don’t need to measure the money supply. You have your M0, and that’s fixed. How much debt is based on that will be set by the market. Sometimes they’ll get it wrong and banks will be destroyed. God bless the market, it tried to destroy the bastards a couple of years back, but we printed shitloads more money and gave it to them instead, which is about as useful as giving an alcoholic a barrowload of Oddbins gift vouchers. But anyway, the various statistics (Mx…) are all useless anyway, but you won’t need to measure them since you’re not “running” the economy any more. Just letting it run. Nobody needs to know these useless figures; the delusion that they mean something exacerbates market instability all on its own. Neither do you need to care about the “V” term which combines a selection of factors, most of them inscrutable.
So once your base money is fixed, debt levels cannot escalate uncontrollably, causing all the ills of the current fiat era. Lending will be drastically reduced by the constraint of bank failures; something we desperately need as debt is, as we’ve seen, at unsustainable levels. Let the market sort it out.
Population growth is not excessive. It would cause a slow wage deflation, but that would be easily handled by the job churn in a free market. It would certainly be less disruptive than forcing every company in the land to renegotiate every year due to deliberate money supply inflation, as currently happens.
Anyway, can you justify why the money supply should be expanded indefinitely? What good does inflation do? I’d be interested to hear your reason.
“How much debt is based on that will be set by the market”
You are making my head hurt now. I thought credit expansion (broad money) was the True Monetary Inflation which you want to avoid, a la 2005-07? Fixing the monetary base doesn’t tell us anything about credit expansion in a free market.
“Anyway, can you justify why the money supply should be expanded indefinitely”
Broad money? For the nth time, I think we should mostly just ignore it, as it doesn’t tell us much.
Sigh. You can only expand broad money consistently if base money is expanding too. Otherwise, the market reins in the broad money expansion due to excessive leverage that manifests usually as a liquidity crisis (bank run).
So the debt supply (broad money) is going to be some multiplier of base money that will expand and contract due to supply and demand. Like any other commodity. That’s the point; we want a system in which banks work within the economy, instead of above it, as currently happens due to the bank/central bank/government merry-go-round.
So holding base money steady is part of a general widespread reform. It’s not keeping things as they are, and holding base money steady, and nothing else. It’s far more fundamental than that.
Anyway, why do you keep ignoring base money? That’s the interesting one in this regard. It’s the generation of new reserves that fuels the inflationary system. You do realise that?
Surely the point is that capital accumulation results in an increase in labour efficiency economy-wide, but that childcare is not amenable to such capital investment to improve labour efficiency, so childcare becomes, relative to the economy as a whole, less labour efficient.
Since it operates in a single labour market, childcare still has to pay wages equivalent to those in other industries where efficiencies are improving, so childcare costs rise with wages. Assuming that wages form the same fraction of the economy over time, wages will outpace inflation by the rate of improvement of efficiency economy-wide. And so will childcare costs.