22 2009

Questions for Economists

(First of the series “Getting rid of all these draft posts”)

Should we really go back to the Gold Standard?

I gather only Austrian school (Mises, Hayek, et al.) economists really think a return to “sound” money would be possible or beneficial to the economy, and most prominent economists think it would be disastrous. Has anyone even written a practical implementation plan of how this could occur, (and what might go wrong)?

The Mises followers also seem to be infatuated with the harms of inflation inherent with fiat currency. Sean Malone produced a graphic of the rise and fall of the value of the U.S. dollar, which included this nice piece of trickery:

Now try to imagine what your life might be like if every dollar had bought you 20 times as much stuff… This is the cost of inflation.

This does not demonstrate the “cost of inflation”. To imagine a dollar buying 20 times as much stuff, you also have to imagine wages being 1/20th of what they are now. My guess is this was an honest mistake on Sean’s part, but the Mises folks seem to find it immoral to not tie consumer prices to some arbitrary dollar amount over time.

Who does slow, gradual inflation harm in the modern world? I’d guess the primary victims would be people who save large amounts of cash over many years earning no interest. Does anyone do this? So, yes, if you earned all your income before 1915 and stashed it all under your bed, then, yes, inflation has cost  you 95% of your wealth, but if you did nearly anything else with it, much of that value would remain and might have even multiplied. Actually the rarity of your currency might even make up for the loss.

The arguments for slow, steady inflation I find pretty compelling, particularly the stickiness of wages. Since employers and employees generally despise even tiny wage reductions, creeping inflation allows us to lower real wages when they really need to be; if the real value of a worker’s output goes down, not offering a raise is much more palatable for everyone than cutting his wage (even slightly) or, at some point having to fire him. Regular cost-of-living “raises” become required to keep real wages flat, but I don’t see big harm in that; it might even boost morale and real productivity.

Is a systemic collapse due to Fractional Reserve Banking possible?

Rothbard rightly points out that a massive run on the banks could lead to disastrous hyperinflation, but is this occurrence likely? My guess is that, in any scenario including a nationwide bank run, value of the dollar is likely to be the least of our worries.

Wouldn’t economic growth be stifled under full reserve banking?

Maybe I’ll find some of these answers in The Making of Modern Economics, which appears to cover all the major players including Hayek and Mises.

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