How Much Money Does an Economy Need?

Email Print


How Much Money Does an Economy Need? Solving the Central Economic Puzzle of Money, Prices, and Jobs. By Hunter Lewis. Axios Press. Vi + 185 pages.

In Are the Rich Necessary? Hunter Lewis showed himself to be a master of dialectics; and he here applies the same method to monetary theory. Not content to expound his own views, Lewis carefully explains conflicting standpoints as well. Lewis does not disguise his own strong commitment to Austrian economics, but the reader of this book will understand not only this position, but its chief competitors as well.

Lewis begins by asking, what kind of prices do we want? At first, we might think that stable prices are the order of the day. If the price level fluctuates, does this not make economic calculation much more difficult? If the price level is rising, for example, businessmen may think they are making profits when they are in fact losing money. They may neglect to discount their paper profits by the rate of inflation. This position at times won the allegiance of the great monetary economist Irving Fisher, though sometimes, as Lewis notes, Fisher adopted a more inflationist view.

Against the policy of stable prices, though, there are insurmountable objections. In a free-market economy, as production expands, many prices tend to fall. Formerly expensive goods now can be produced in large quantities. This is all to the good, as it makes possible rising standards of living. As Mises long ago noted, capitalism is a system of "mass production for the masses." If these prices fall, then attempts to maintain a stable price level require that other prices be artificially boosted. Will doing this not introduce shortages and discoordination into the economy? Far better to leave things as they are.

The whole point of free markets is to keep reducing prices, so that more and more people can afford to buy. Why, then, should we want overall prices in our economy to remain stable? If most prices fall, as we should hope they will, stable prices overall can only mean that some prices are steeply rising. These rising prices make everyone poorer, but especially retired and poor people… (p. 5)

But, supporters of inflation refuse to accept this conclusion. Even if boosting prices does result in some discoordination, they maintain, the advantages of increasing prices outweigh the disadvantages. This is particularly so in times of depression and unemployment. Those who favor deflation and price coordination through the market will say that if unemployment exists, wages need to be adjusted downwards. Is not such a draconian policy too hard on workers? Far better to deal with unemployment through an expansion of spending. So, at any rate, Lord Keynes contended.

Read the rest of this article

August 6, 2008

David Gordon [send him mail] is a senior fellow at the Ludwig von Mises Institute and editor of its Mises Review. He is also the author of The Essential Rothbard. See also his Books on Liberty.

David Gordon Archives

Email Print