Deflation, i

The topic which brought me here to blog is “deflation”.  So in Paul Erdős fashion, allow me to jump right in.

1) Neither inflation nor deflation are inherently bad.  They are the means by which a market returns to equilibrium when there has been some change in the “ability to purchase” side of the equation against the “number of goods available” side of the equation.  In most cases it is the effects of the drivers of the change that makes inflation/deflation good or bad.  In a perfectly frictionless market neither inflation nor deflation would have any negative consequences.  (Frictionless = land, labor and capital are all perfectly mobile and instantaneously so, all contracts are continuously and instantaneously updated by parties with perfect information, etc.)  In the real world there is friction, lots of it.  It is the friction that hurts (some) people (and helps others).


2) Inflation/deflation is not just one thing, there are kinds.  The lists of how many kinds are legion, i’ll use four kinds here.  Monetary, Credential, Velocity and Productivity.  Each of these kinds affects the ratio of “ability to buy” versus “available to buy” in some way.

Monetary:  The actual amount of money in circulation changes

Credential:  The ability to purchase goods without the direct use of maney changes

Velocity:  The speed at which a given amount of money changes hands changes

Productivity:  The ability to make more (or less) product with the same amount of inputs changes

This list is certainly not authoritative, but it should get the point across … and it has the elements required to talk about all this in relation to our current economic woes, eventually.


3) I’m going to move, now, to talk about cases where each of these categories is either good or bad, generally conceived.  I’ll start with an example of good deflation, productivity inflation.  If some change in technology allows for me to suddenly produce twice as many widgets with the same amount of land, labor and capital inputs, then in the widget market there is going to be a sudden change in the ability to purchase widgets versus the number of widgets available for purchase.  Deflation, here, would be this widget market returning to equilibrium … widgets get much cheaper.  In the real world this is like the consumer electronics market, things getting better and cheaper and we don’t call it deflation, we call it good.

3b) The term “the economy” does not pick anything out in my economic ontology.  There are many markets, some large, some small, some isolated, some integrated, one good may be part of many markets.  The number of markets may be uncountable.  The lines dividing them are usually intrinsically blurry (none are natural kinds?).

3c) Note the potential spill-over effects from even this simple case.  Perhaps i do not make more widgets with the new technology, but make the same amount as before with half the inputs.  In that case i am affecting all non-widget markets rather than the widget market.  Or even when i do affect the widget market, the widget buyers now save money and that increases their buying power in non widget markets.  In the real world, productivity deflation can cause real inflationary pressures in other markets … will do so, unless the purchasing of widgets exactly offsets the technology induced price change.


4) The three-body problem shows up everywhere, and usually quickly, in macro analysis.  Macro is complicated and convoluted.


Some initial things to think about …

[to be continued]