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Some more economics.

It is usual nowadays to characterize classical economists as antiquated halfwits whose “teaching is misleading and disastrous if we apply it to the facts of experience.”[1] This characterization could perhaps be applied more justly to Keynes’s own theory. It is certainly not just when applied to the classical economists, who were familiar with the effects of manipulations that increase the supply of money.

They were well aware that booms can be provoked and prolonged by inflation. Their vehement protests were founded on very extensive experience and acquaintance with the monetary depreciation, debasement of coins, and bank-note experiments of the Mercantilist and post-Mercantilist periods.

No classical economist denies that, in the first stage of an inflation, prosperity spreads as if by magic. Yet this prosperity is unreal; nowhere is it depicted more brilliantly than in the second part of Goethe’s Faust.

Prices rise faster than costs and profit margins are widened, rendering new enterprises profitable. For the following reasons, however, the stimulus soon loses its force:

On the one hand, prices break after a certain time unless new doses of the inflation poison are injected (and if they are, the experiment ends with the destruction of the currency).

A rise in prices leads entrepreneurs to expect further rises. Consequently, they make new investments and build inventories, which in turn operate to boost prices further.

The moment the stimulus of rising prices is exhausted, the cumulative boom spiral reverses its direction. Since there is no new stratum of buyers on whom the bulls can unload, the downward movement gains momentum.

The English economist, A.C. Pigou, gives a penetrating description of the process in his Industrial Fluctuations (London, 1927). In an economy dependent largely upon exports, prices collapse even earlier: under the impact of the rising domestic price level, the balance of payments deteriorates, and the outflowing gold causes a deflationary process within the country, as David Ricardo described clearly in his 1810 pamphlet, The High Price of Bullion.

This rebuttal originated in 1947 disclaiming against Lord Keynes. I’m certainly not defending Lord Keynes, rather, the reasons and conclusions drawn by the author.

Prices rise faster than costs and profit margins are widened, rendering new enterprises profitable. For the following reasons, however, the stimulus soon loses its force:

To this point, essentially I agree. It is the incorrect analysis however in the structure and function of the profit margin that I take exception to.

On the one hand, prices break after a certain time unless new doses of the inflation poison are injected (and if they are, the experiment ends with the destruction of the currency).

A rise in prices leads entrepreneurs to expect further rises. Consequently, they make new investments and build inventories, which in turn operate to boost prices further.

Not stated is which stage of production are [in an inflation] profit margins are rising? Actually, the answer is not vitally important as eventually they will move to consumer goods, irrespective of where the increased profit margins due to an inflation started.

Thus the first question must be: are the increasing profit margins real? If your costs, in stages of production furthest from consumption are incurred first, which by definition they are, as time is a factor in moving from the furthest stages of production to consumption, the money profits, or accounting profits will be false.

Second. Whichever stage of production enjoys the increased accounting profit margin, will attract economic agents. Thus, capital will be removed from prior stages of production. Classically, inflation effects the margins at the stage of consumer goods – due to the lack of real savings.

Real savings mandate that consumption in present goods are sacrificed to increase production in earlier stages. Inflation, via an expansion in fiduciary media, allows consumption to progress unhindered, thus increasing the accounting profits.

This profit, that draws capital from earlier stages, prevents the expansion of produced goods, and in point-of-fact actually reduces the production of goods as capital is removed.

It is this contraction in supply of newly produced goods, with no inhibition of demand, that drives the increase in prices.