International Trade and Monetary Theory: My New Vice
Although the standard Austrian tools are capable of handling these types of issues, I have been ill-prepared in dealing with things like a falling dollar when inflation is moderate. As I said, the way I used to think about these things wasn't actually wrong, but there are a lot of subtleties I have only recently realized.
I may have to suck it up and read Mundell's textbook. And I thought I was done with matrix algebra.
I may have to suck it up and read Mundell's textbook. And I thought I was done with matrix algebra.
Although the standard Austrian tools are capable of handling these types of issues...I may have to suck it up and read Mundell's textbook. And I thought I was done with matrix algebra.
ReplyDeleteIf the standard Austrian tools are capable of handlng the issues, what, again, is the point of bringing in a decidedly nonAustrian tool, i.e., matrix algebra.
I have been ill-prepared in dealing with things like a falling dollar when inflation is moderate.
Bob, these things just aren't so cut and dried that you can make exact fixed relationships. That's the entire point of Austrian economics!!
Matrix algebra is the last place you are going to find answers to this stuff.
Mr. Wegenr [sic],
ReplyDeleteThanks for the advice. I'm not talking about "exact fixed relationships." I'm talking about things like, "If the dollar falls by 50% against other currencies, does that mean we will have price inflation in the US?"
Of course there are always things that can change the answer. But I'm saying I'm not even comfortable with how it all fits together.
And talking with/reading works by the vast majority of other economists (both Austrian and other), I don't think they know either.
The difference is that I admit it.
"If the dollar falls by 50% against other currencies, does that mean we will have price inflation in the US?"
ReplyDeleteI'm sorry, Bob, but this sounds like an exact fixed relationship proposition to me, dollar down inflation up. Altough I would say the overwhelming majority of times it will hold, it is pretty simple to see that increasing productivity for one could sometimes counter a deprecating currency. See Rothbard on the period leading up to the Great Depression and the massive Fed money pumping throughout the 1920's without accompanying consumer price inflation.
He writes:
The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the great depression caught them completely unaware.
Actually, bank credit expansion creates its mischievous effects by distorting price relations and by raising and altering prices compared to what they would have been without the expansion... We can only approximate explanations of complex price movements by engaging in a comprehensive economic history of an era—a task which is beyond the scope of this study. Suffice it to say here that the stability of wholesale prices in the 1920s was the result of monetary inflation offset by increased productivity, which lowered costs of production and increased the supply of goods. But this "offset" was only statistical; it did not eliminate the boom-bust cycle, it only obscured it.
Bob, there just isn't anything near a fixed relationship between any two economic factors. Only the Austrians seem to get this. It is very dangerous to think there are, for policy reasons and investing reasons. You can start pulling apart the complex factors to get a better sense for the influences on a paticular period, but matrix algebra, which is all about fixed relationships, is not going to get you there.
Robert, mathematics is capable of showing you what happens in an ideal situation in which qll "other factors" are held constant. The Austrian truth here is that they never are constant. But that does not make the mathematical tools useless! You just have to remember their limitations, which mainstream economists often forget.
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