"inflation - a subjective ideological concept"... Classical vs Keynesian definitions

[dvictr]

DANIEL VICTOR Dec 15 2007

if you graduated college anytime before the year 2000 with a degree in economics you will clearly remember that the textbooks on intermediate macroeconomic analysis introduced the keynesian models side-by-side with the classical interpretation... possibly even a chapter was devoted to a discussion between the debate between both economic theories... well it may suprise you that the debate is over... the most widely used textbooks for this intermediate course have completely abandoned the discussion... now including "only the best of all ideas"....according to the author! but most importantly are leaving a generation of college students without a real introduction of the classical theory of ecomomics...

in many way the debate is ideological.. keynes belived that the markets were unable to smoothly find equilibrium..milton friedman belived that in a free-market the forces of supply and demand would force convergence. with world trade tarrifs, subsidies, the geo-political situation the world market is anything but free... but as a libertarian friedman viewed the state of a free market not only in principle but an obtainable future goal. the keynesian theory is based on the fact that the world is not a free market and people are ignorant and that governments must interfere with financial transactions. the fed is based on a congressional mandate to keep unemployement low... a basis that during the great depression seemed an essential duty of the government but at this point in an industrial economy is unessesary. the keynesian theory is based on the observations of the great depression which were later proven wrong to be incorrect by the monetarists. but the function focusing and artificially fixing employment continued to created a system of banking which contradicts the monetarist goal of increasing the real value a currency in a time of rising world industrialisation.

the definition of inflation is ideologically debated because of the idea of a "real balance effect" which keynes excluded from his model and has major ramifications to the effects of artificially lowering interest rates including the ones that the fed has direct control of..go to a library of a major research university and there are hundreds and hundreds of books interpreting the classical model also called the dynamic model and the keynes is-lm model graduate programs on economics do not teach the is-lm model but because of its simplity is used to teach income identities to begining students.

to summarize two points.. the classical model assumes the elasticity of money liquidity prefrence makes the the LM curve inheritently inelastic very steep. this is a major difference in both thoeries.. and at this point in time cannot be empirically disproven one way or another in a "long run".. the IS curve in the classical model is very elastic.... in the keynesian model these curves have opposite elasticities.

another major discrepency is the effect of a shift in the LM curve. when the money supply is increased aka shifting the LM curve to the right ... the IS curve does not shift... in the keynesian model!!!an assumption ben bernanke defended in his testimony to the congressional committe of financial services. .. in the classical model which is no longer included in the most widely distributed macroeconomic texts...the IS curve ALSO shifts to the right, with an increase in the money supply. the keynesian model treats the LM curve as exogenoues... the classical theory includes the idea of a "real money balance" an economic effect that the value of someones wealth falls when the money supply is increased because prices go up and the value of someones wealth goes down. this fundamental theory has been ommitted in newer macro texts... an outrage because the ideological implications are necessary to understand the actions of the federal reserve

the notion that wages and price expectations adjust in the medium run does not change the fact someone that has a depreciating liquid asset "cash" ...the purchasing power in the world market has been reduced two fold.. domestic inflation... and international appreciation of standard commodities. metals, energy etc. in relation to a depreciating fiat currency. this notion is in a sense ideological because some people want you to belive that only nominal values are relevant if you are a wage earner and a domestic consumer you buy your goods in the domestic market so only imports go up.. but when exports are cheap in the world market they have the effect af raising the wholesale price which results in higher prices domestically for consumers... and the CPI is not adjusted to take this into account this is very important because if it was the inflation figures would be much higher

basically the dow jones index will inevitably be priced at 100,000 points but what is 100,000 points in relation to the price of gold/oil yuan/ euro? obviously if you are an active international trader you can move into the highest yielding bonds and stay ahead of the inflation but the national account deficit ballons and the average consumer which has no savings is f---kd in terms of real world purchasing power...

DONATE TO RON PAUL TEA PART 07!!!!

[fsk]

Inflation is 100% a "money supply" phenomenon. Anyone who says otherwise is confused, lying, or a troll.

[LibertyDollarUSA-com]

Inflation is 100% a "money supply" phenomenon. Anyone who says otherwise is confused, lying, or a troll.

I think the word "socialist" encompasses all three. I've had a lot of very long discussions with someone who has a masters in economics... me, who has not even taken a college economics course, I would beat him every time, work him into a corner, and then he'd change the parameters, move the goalposts and change the topic, and when I pointed it out to him, he couldn't see it.... its an ideology that they are taught, not a science. ITs frustrating trying to reach them (even libertarians who got trained in "economics" in college often have these wacked out ideas- like on a gold standard there would not be enough money supply to clear transactions, etc.)

So, they're at least confused, and I think the fact that economics education is mostly propaganda these days is a good chunk of the reason why.

[dvictr]

the "economy" is very very very complicated and even people with PHds dont really understand how its working........ NO ONE DOES

the debate is kinda like evolution vs intelligent design... both of the THEORIES... and THEORY is a BIG BIG word... are very valid but in the case of economics... the idea of inflation that the FED uses and has become mainsteam... for a number of reasons.. some of which i explained..

creationism: the feds definition of inflation, is based on "convictions" about the welfare state

evolution: is more science like the classical theory of economics... is under attack by "religious fanatics" who in this case is the fed....

you cant disprove either theory and further more ALOT of very smart and powerfull people that have become very rich....etc... 100% believe in the austrian theory so its not just crazy people yelling the fed is bad... there REALLY is a political reason that the federal reserve which is as "federal" as fedex... has so much control ... Ron Paul IMO is absolutely right..

another point... and i dont want to be a party pooper but i do understand this stuff...

YES it is very true that $100 today is going to be worth alot less in 20 years... but thats assuming you keep it under a matresss...its very simple to invest in bonds and reinvest year after year and the idea of componding intrest is very powerfull so $100 today at 12% interest DOUBLES every 6 years.... so in 20 years... you have over $800... wheater or not that keeps up with inflation and whats the value of the dollar in terms of commodities is the ron paul question

the problem is that the welfare state we have and promulgated by the fed is based on the consumer not saving and spending everything... thats the whole idea of the fed is to keep a HUGE base of poor people that keep making the rich richer because only the people on "wall street" are using the nominal rates to there advantage... poor people get F--KD and people that only save also lose...

[jon_perez]

"Inflation is the rise in nominal prices" is of course the definition that makes much more sense to the average person. If you keep your money under a mattress, that is the definition that would make sense to you as well.

"Inflation is the rise in money supply" looks to me to be the more ideologically-driven definition of the two, in fact.

Some people seem to be working under the fantasy assumption that if gold became money again, then economic woes related to money supply (whether too much or too little) would suddenly be righted by so-called market forces. Actually what would happen is that the money supply would now be at the mercy of gold miners and gold mining technology.

[Bradley in DC]

"Inflation is the rise in money supply" looks to me to be the more ideologically-driven definition of the two, in fact.

Some people seem to be working under the fantasy assumption that if gold became money again, then economic woes related to money supply (whether too much or too little) would suddenly be righted by so-called market forces.

One thing Friedman got right is that "Inflation is always and everywhere a monetary phenomenon." Price rises are a RESULT of the inflation (the loss of purchasing power).

The whole point of the gold standard that you fail to realize is that it was determined by the competition of the market as the best money. Start with the basic fundamentals (which seem to escape you, no offense): what do you consider the characteristics of the best money?

[dvictr]

Some people seem to be working under the fantasy assumption that if gold became money again, then economic woes related to money supply (whether too much or too little) would suddenly be righted by so-called market forces. Actually what would happen is that the money supply would now be at the mercy of gold miners and gold mining technology.

the idea of competing currencies is the ron paul advice and i can explain and it makes real clear sense its very practical too..

imagine if paypal was a "currency" within the united states that was tied to the value of something with real value...for example... a commodity "corn" or "oil" or "silver"... so when the price of silver in relation to the dollar went up... your paypal money would actually be worth more??? this is illegal as the law stands...see [ron paul liberty dollar had same idea] in more simple terms imagine if you funded a paypal account with euros and could buy US goods but your account was worth more each month when the euro appreciated... this is all very logical and practical but undermines the trust in the dollar so is illegal...

its that simple

[dvictr]

what do you consider the characteristics of the best money?

the laws of supply and demand apply to money.. so when there is equal amount of money as the demand for money the price is constant... the actual equation is MV=PY ...when you add more money with the same demand the price or value goes down... friedman suggested increasing the supply of money at a constant rate each year as the economy grew at a natural rate... say 3%.. ron paul suggest competing currencies


the best money is that has a constrained supply and increasing demand.... oil could be money but its hard to carry in your poket... but if you could issue a "currency" that was based on the price of oil or a currency that was based on the price of silver/gold... any COMMODITY... they all compete with each other and the price is stable or the value increases because it is a finite resource.. this currency that is very logical and could EASILY be implemented is illegal...

the idea of a commodity currency is that a private business purchases a large amount of the actual commodity and issues ceritificates that relate to an actual receit.. so your currency is the ownership right to one bushel of wheat or one barrel of oil.. or one gram of gold... etc

imagine buying OIL with your dollars and then every time you wanted to buy a beer at the bar you swiped a card that was tied to your oil account thats a currency... do you understand?

[jon_perez]

imagine buying OIL with your dollars and then every time you wanted to buy a beer at the bar you swiped a card that was tied to your oil account thats a currency... do you understand?

Sounds a lot like barter to me.

[Bradley in DC]

the laws of supply and demand apply to money..

the best money is that has a constrained supply and increasing demand....

Supply and demand affect price not the characteristics of good money. Again, take a step back and explain what are such characteristics?

[dvictr]

Supply and demand affect price not the characteristics of good money. Again, take a step back and explain what are such characteristics?

answer: doesnt inherently lose value... primarily metals

keep a $100 bill under the mattress and in 20 years it will have a lower purchasing power...

keep a traded commodity under the matress and in 20 years it will have a trading power alot more valuable because as the world polulation grows the resource becomes more scarce... fiat money has no intrinsic value

i dont understand your point?

[Bradley in DC]

doesnt inherently lose value... keep a 100 bill under the mattress and in 20 years it will have a lowe purchasing power... keep a traded commodity under the matress and in 20 years will be worth alot more... cause in the world commodities are a finite resourse... fiat money has no intrinsic value

Good start. Anything else?

[dvictr]

theoretical economics can blow your mind if you start thinking about it to much...

but "good money" also has the characteristic of having a high value of exchange but not so much a value of us.

http://en.wikipedia.org/wiki/Paradox_of_value

[Bradley in DC]

i dont understand your point?

Yes, of course, intrinsic value is one characteristic. Along with easily identifiable, divisible, portable, durable, and homogeneity. Reasons why people choose some money over other things.

[dvictr]

Yes, of course, intrinsic value is one characteristic. Along with easily identifiable, divisible, portable, durable, and homogeneity. Reasons why people choose some money over other things.

bradley, ive read friedman, hayek, mises...and i am a libertarian

my original post was to say that these brilliant people not only economists but also philosophers are falling off the face of academic study which is very sad and the reason in my opinion is that current professors at "liberal arts" colleges have a "neo-liberal" aka democratic party agenda..

the exciting thing about ron paul is that the REVOLUTION is about bringing back liberalism.. and it is the first time ever since mises and hayek wrote there classical books that influenced friedman that a person on the national level actually has a chance to enact these ideas... WONDERFULL

[dvictr]

bump :P

[murrayrothbard]

Yes, of course, intrinsic value is one characteristic. Along with easily identifiable, divisible, portable, durable, and homogeneity. Reasons why people choose some money over other things.

What is "intrinsic value"? NOTHING has value unless there is someone doing the valuing. ALL economic value is subjective.

[dvictr]

What is "intrinsic value"? NOTHING has value unless there is someone doing the valuing. ALL economic value is subjective.

the value of something is subjective... but all goods and services have a utility to individuals that are given a "value" by supply and demand... whats the value of water if youre a deserted billionare on an island with no fresh water? whats the value of diamonds if you have nothing to eat?...

economics is about food first, shelter second, and then freedom of choice...


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happiness is objective in that order