|
|
|
CAPITALISM: |
|
The Clearest and
Most Comprehensive Contemporary Defense of the Capitalist
Economic System Available |
Literature and Lectures by Edith Packer, George Reisman, and Others |
|
|
|
|
|
From Chapter 17: Implications for the Doctrine of Price Premiums in the Rate of Interest (pp. 825-826)This excerpt is taken from George Reisman, Capitalism: A Treatise on Economics. Ottawa, Illinois: Jameson Books, 1996. Copyright © 1996 by George Reisman. All rights reserved. May not be reproduced in any form without written permission of the author. The following limited exception is granted: Namely, provided they are reproduced in full and include this copyright notice and are made for noncommercial use, i.e., for use other than for sale, including use as part of any publication that is sold, copies of this excerpt may be downloaded into personal computers and distributed electronically or on paper printouts from a personal computer; reproduction on the internet is permitted provided the copy of the excerpt is accompanied by the following link to the Jefferson School's home page (which may, and hopefully will, be displayed elsewhere and more prominently): The Jefferson School of Philosophy, Economics, and Psychology. This limited right of reproduction expires on December 31, 1999. This page has been visited Recognition of the fact that falling prices caused by increased production do not reduce the rate of profit necessitates a major modification in the important economic doctrine of "purchasing-power-price premiums" in the loan-market rate of interest. According to this doctrine, the anticipation of rising prices adds a corresponding positive component to the loan market rate of interest, while the anticipation of falling prices adds a corresponding negative component to the loan market rate of interest.32 When stated in this form, the doctrine leads to the conclusion that rapid increases in production are potentially capable of wiping out the rate of interest altogether. This is because if the rate of interest were initially 4 percent, say, and production increased by more than 4 percent a year--say, by 5 or 6 percent, with the result that prices fell by approximately 5 or 6 percent--then the doctrine would imply the existence of a negative rate of interest and thus the disappearance of any incentive to lend money rather than hold it. This, in turn, would imply the sudden emergence of a major inducement to hold money that was not present before, and thus the onset of a depression. In other words, rapid increases in production are implied to be capable of causing depressions. On the basis of the preceding discussion, however, it should be clear that there is no basis for the anticipation of falling prices caused by increased production to result in a reduction in the rate of interest.33 For I have shown that in the context of an invariable money, where falling prices are caused by increases in production and supply, absolutely no fall whatsoever takes place in the rate of profit as the result of the increase in production and fall in prices. Inasmuch as such falling prices do not reduce the rate of profit, they do not reduce the demand for loanable funds; nor, for the same reason, do they serve as an inducement to the shifting of funds from direct investment to the loan market, and thus they do not increase the supply of loanable funds. Since they neither decrease the demand for loanable funds nor increase the supply of loanable funds, they do not result in a lower rate of interest. As I have shown, it is not falling prices per se that should be associated with a reduction in the rate of profit and interest, but falling prices caused by a reduction in the quantity of money and volume of spending.34 Even this formulation somewhat misses the mark, because the price changes are altogether nonessential. This is because a reduction in the quantity of money and volume of spending reduces the rate of profit and interest even if at the same time prices stay the same, or actually rise. (Prices would stay the same or rise if production and supply fell to the same extent or a greater extent as the quantity of money and volume of spending.) Deflationary reductions in the rate of profit and interest are thus not a matter of price changes at all, but strictly of changes in the quantity of money and volume of spending. Exactly the same principles apply to the rise in the rate of profit and interest associated with rising prices: they are due strictly to the increase in the quantity of money and volume of spending and not at all to the rise in prices per se. Indeed, I have shown that a rising quantity of money and volume of spending act to raise the rate of profit and interest even when the increase in money and spending is relatively modest and is outstripped by the increase in production and supply, with the result that prices fall. By the same token, a falling quantity of money and volume of spending act to reduce the rate of profit and interest even if accompanied by rising prices caused by a fall in production and supply to an extent greater than the fall in the quantity of money and volume of spending. Just as more production and supply do not lower the rate of profit and interest, irrespective of any fall in prices, so less production and supply do not raise the rate of profit or interest, irrespective of any rise in prices. As I have shown, changes in the price level are related to changes in the rate of profit and interest merely by a process of association. What underlies the association and actually explains the changes in both the price level and the rate of profit and interest is changes in the quantity of money and volume of spending. As the quantity of money and volume of spending increase, prices and the rate of profit and interest tend to increase together. As the quantity of money and volume of spending decrease, prices and the rate of profit and interest tend to decrease together. The essential underlying causal element that creates the association is the change in the quantity of money and volume of spending. Now insofar as there are changes in the supply of goods produced and sold that take place in the same direction as the changes in the quantity of money and volume of spending, the changes in the price level that would otherwise be caused by the changes in the quantity of money and volume of spending are offset and may, indeed, actually be overcome. But the changes in the nominal rate of profit and interest caused by the changes in the quantity of money and volume of spending remain. Thus, as I demonstrated earlier in this chapter, falling prices caused by increases in production and supply are actually capable of being accompanied by an increase in the rate of profit and interest.35 All that is necessary for prices to fall while the rate of profit and interest is increased is that at the same time that production and supply increase, there is an increase in the quantity of money and volume of spending that is less than the rise in production and supply. In this way, the increase in the quantity of money and volume of spending adds to the rate of profit and interest, but the still greater increase in production and supply overcomes its price-raising effects and succeeds in reducing the price level. In exactly the same way, rising prices caused by a decrease in production and supply are capable of being accompanied by a decrease in the rate of profit and interest. All that is necessary is that at the same time that the fall in production and supply raises prices, there is a decrease in the quantity of money and volume of spending that is less than the fall in production and supply. In this case, the price-reducing effects of the fall in the quantity of money and volume of spending are more than overcome, with the result that prices rise. But the negative effect of the fall in the quantity of money and volume of spending on the rate of profit and interest remains. Thus, prices rise while the rate of profit and interest is reduced. The doctrine of the purchasing-power-price premiums is thus substantially
mistaken. One should speak instead, of a positive or negative monetary component in
the rate of profit and interest, reflecting the change in the quantity of money and volume
of spending in the economic system. This would permit recognition of the fact that falling
prices caused by increased production not only do not reduce the rate of profit and
interest but, under a commodity money, are actually almost always accompanied by a
positive addition to the rate of profit and interest resulting from the increased
production and supply of the monetary commodity or commodities that takes place as a
by-product of the general increase in the ability to produce. It would also greatly
encourage recognition of the fact that depressions and all their negative consequences are
a strictly monetary phenomenon, proceeding from a monetary system of a kind which
makes possible sudden, large-scale decreases in the quantity of money and sudden,
large-scale increases in the demand for money for holding.36 Notes 32. See Ludwig von Mises, Human Action, 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 541545. 33. It should be recalled that it was also previously established that the anticipation of falling prices caused by increased production does not bring about an increase in the demand for money for holding in order to take advantage of lower prices in the future. Thus it is also not deflationary by that route. See above, pp. 574576. 34. See above, pp. 813818 and 574. 35. See above, pp. 817818. 36. On the implications of these facts for the case for a 100-percent-reserve gold standard or gold-and-silver standard, see below, pp. 954959. |
||