You see this with gasoline. Refining production is so limited that it takes weeks or months to recover from a price spike.
More targeted assistance of just affected industries during the pandemic could have prevented almost all of this.
This is one of these “Doesn’t anybody see this? I feel like I’m taking crazy pills here” moments - dropping the interest rates didn’t do why we wanted (just pumps up property and equity prices with cheap money but doesn’t actually stimulate the economy), even some countries set them negative which didn’t work either, and raising interest rates has never been really shown to reduce inflation (just that you can raise them high enough to cause a crisis, which causes far more problems, and then hopefully by the time the recovery starts inflation contributors have abated…)
Their whole monetary policy seems to be bunk.
It's mostly been under the management of a party who straight-out optimise for company profits and screw the little guy (who spent 10 years continually voting for them because Chairman Rupert said so).
What do you mean "theoretical market price"? What you're saying makes no sense in the context of standard microeconomic theory. If supply is constrained, then microeconemic theory predicts that the market clearing price will go up. Companies can always price their goods at higher than the market clearing price, but microeconomic theory would predict that doing so would result in less profits.
>But when its driven by external factors
What do you think the "external factors" are here? Companies suddenly getting more greedy?
I mean the most classic example is the theoretical barter economy that doesn't exist because you need money to lower transaction costs for a high degree of the division of labor (which isn't disputed). The reason for that is that economists came up with this theoretical model and the text books want to teach barter first and then money which gives the wrong impression that barter economies actually existed. No, people either managed the economy the way we manage it internally within families and corporations or they straight up used a commodity as their money or some hard to forge symbol like precious metals. There is not much in-between because barter is inconvenient as hell and it causes social difficulties because the fairness of trades has to be evaluated very carefully, opening up the potential for conflict.
i need an answer to
>yet another example of the gap that always exists between economic theory and economic practice
what is the practice and what is the theory?
edit:
if the person is saying food prices are sticky upwards, then they need to provide evidence for that because that's a very strong claim
"We have known about the concept and relevance of hysteresis since the 1980s. In terms of the academic work, I was one of the earliest contributors to the hysteresis literature in the world. I published several articles on the topic in the 1980s that came out of my PhD research as I was searching for solutions to the dominant view in the profession that the Phillips curve constraint prevented full employment from being sustained "
Firms don't charge a 'market price'. They put a mark up on costs and sell as much as they can at that price.
In other words marginal productivity theory is nonsense.
When you do that, and you get a supply crunch as we have now, then prices will go up as we are seeing.
It's fairly obvious. I will try to sell my stuff for the highest price I can get for it. Your only choice as a buyer is to go somewhere else, or refuse to buy.
Prices are controlled by excess capacity to supply. When that capacity vanishes, particularly amongst needed goods and services, you get price gouging.
It's similar to overstretching a spring. We have damaged the supply side and it won't go back to its prior path.
Few do this. Television tells them they want things, and they'll get angry if they can't have them. So they put it on their credit-cards and kick the can down the road.
Economic theory for at least two centuries has recognised the outsized power of fiscal policy relative to monetary.
And when it's both, as was the case in 2021-2022?
There are only 3 ways to decrease inflation:
- Interest rates
- Price controls. This tends to have a lot of harmful side effects, such as the necessity of rationing and discentivizing the production of whatever you're price controlling. You only really do this for a few goods, so this doesn't help overall inflation much, if at all.
- Effective policy and investments increasing, the quantity or quality of goods and services. This is perhaps the "best" way to decrease inflation, but it takes years, if not decades to materialize. More importantly, it requires the elected members of government to formulate and agree on, which unfortunately is becoming increasingly rare.
>all you are doing is causing misery and maybe adding fuel to the fire as people already maxed out buying essentials are in fact going to seek (require) higher salaries when you add to their cost of living.
This is moot because when interest rates were 0, inflation was outpacing wage increases. Let's say that wasn't the case and inflation was 10% and wages increase 10%. All evens out right? Not really. The problem is that not the people can take advantage of an inflation-induced wage increase. Younger people, with fewer commitments are able to job hop to a better employer or prepare to negotiate for a pay raise. Meanwhile, other people don't have the bandwidth to do so or are retired and depend of fix income, but they still need to face the costs of inflation, and these are also the people who are the most vulnerable.
So in the end, all we can do is raise interest rates.
Also, Australia doesn't really have a choice, because the US is set on raising interest rates, so any country that doesn't follow will have their currency severely devalued.
The necessity of rationing assumes that demand is outstripping supply. That's not the case when corporations are price gouging. Egg farms are not selling more eggs than ever before, nor would they if prices were exactly what they were before COVID.
Furthermore the harmful side effects of price controls are often exaggerated. Again, egg farmers are not going to suddenly just kill all of their chickens and switch to building datacenters because we only implemented price controls on necessities like food. Nixon's price controls went fine, as but one example.
Finally, your solution of raising rates does not decrease the need for basic staples like food, so it's not a solution at all. Who cares if inflation for Tesla's or SUVs are at 8% or higher, that's a rich person problem. What matters is the inflation for necessary goods and services, like food and shelter, and your suggested "solution" doesn't really solve anything. All it does is maybe put people who need the money out of work.
Funny you say that...
> Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.
https://www.pbs.org/wgbh/commandingheights/shared/minitextlo...
Hungary has more than two times the inflation of the EU average. The highest in the EU.
Price controls on flour and gas/petrol led to people buying a lot more compared to supply. This led to gas stations closing. People started baking more, but price of bread exploded because folks bought flour and bakeries were in a tight spot (I don't remember the exact chain of events).
Of course grocery shops increased the price of everything else relatively to make up for the loss on the controlled items.
Clearly, tackling inflation should be independent from providing basic necessities like food and shelter and healthcare.
It'd have the same effect as interest rate rises in removing consumer demand without the kinda icky feeling of just sending that money to the income statement of a bank as mortgage payment increases.
Obviously not a silver bullet, but perhaps another tool to make available.
Let's rip the young off so that we can prop the securities up and help the banks!
In the case of profit-driven inflation, you could tax excess profits.
The last sentence is exactly why you need to tax the big owners and corporations and not the workers, because they control most of the additional money supply in the profit-driven inflation.
(That being said, and as was noted, of course government can also run a surplus with the windfall tax, and that takes the money out of circulation entirely. However, as I explain above, inflation can be more complex, it might be money oversupply in only parts of the network, not the whole network.)
Where does the extra profit go (in the absence of windfall tax)? I doubt it goes to expanding production, because without windfall tax, you won't see demand change (and, btw, with windfall tax you don't have to estimate, you will directly see customers having more money to spend). So it will go into stock buybacks, real estate and other ways to inflate asset bubbles. These are seemingly easier ways to park money than to make actual real investment decision of expanding certain production.
whereas just removing the money would also work.
To me, there are two economies - the "real" one, which is what goods and services people produce, and what material inputs they need, and a "virtual" one, which describes savings, loans, the flow of money, and all the property relationships people have.
Normally both are mostly in sync (because trade is bidirectional, flow of goods and services one way, and flow of money and property the other way), but in the case of inflation, you have nominally less goods and services to flow than you have of money (might be caused for different reasons, money being injected, supply shock, etc.).
Now, when economists talk about decreasing grow to match money supply in the economy (through e.g. higher interest rates), what they really mean is to restricting the real economic flow of goods and services in order to match the virtual flow of financing.
The problem with the idea is, the virtual economy is the thing that should really be fixed, not the real one. Breaking the real economy implies that means of production will have to be rebuilt at some point in the future to match the demand again; for example, if you close a factory, and let everybody go, it will be additional effort in the future to start the factory again, rehire the qualified people, and re(dis)cover the institutional knowledge lost in the process.
Whereas adjusting the virtual economy means just changing people's expectations, because that's what money (and other finance assets) are, a share of goods and services obtainable in the future. I had this much money, and I expected to buy 20 eggs for what I got, but it was suddenly discovered that real economy is not able to provide everybody with the money to spend on eggs with 20 eggs, but only say 10 eggs. So my expectations of the future have to change, in order for virtual economy to be adjusted.
So I would argue, breaking the real economy to match the broken virtual economy is always worse for the society as a whole in the long-term, because that means that the real production will have to be rebuilt, instead of just adjusting everybody's expectations to a new reality.
The reason why (neoliberal) economists are in love with the idea of recession rather than inflation is, of course, political. They don't want expectations to be adjusted, because that means all the rich people (and other people with financial assets and other savings) will become poorer and will have to reenter the investment competition again. While people who mostly live from labor (who are often borrowers in the modern economy as well) will be hit less by inflation than the recession (possibility of unemployment and total loss of income). So reducing inflation at the expense of employment and growth is essentially curtailing the production of the economy as a whole so that the incumbent property owners could keep their power structure. It's actually very anti-competitive and anti-free market. (But nobody really wants a free market anyway.)
- It usually takes at least a year before tax changes are proposed before they take effect
- They are always accompanied by spending increases that neutralize any potential deflationary effects
- You actually can't actually increase taxes that much. For example, the US Fed has quantitatively tightened roughly $600 billion in the past 6 months. The Biden corporate tax increases are estimated to bring in $50 billion, and windfall tax proposals also tend to hover around that order of magnitude.
I’m sure someone smart can come up with many better ways to tame this, other than just turning the inflation knob.
Sure, but inflation doesn't affect everyone equally. Rent increases or mortgages increases are part of inflation, but do not affect everyone. Nor is the price of many goods if you don't buy them.
Why is this taken as a fact? You hand out money to people with money. It is a zero sum game.
The reason you need to increase rates with inflation is to make it viable to sit on the currency. Otherwise you need to sell it as fast as possible to avoid inflation.
No expression of confidence intervals, no need for error bars on this statement? As repeatable as gravity perhaps?
If we were to honestly restate the above with reference to uncertainty, we’d struggle just to get past the idea that inflation is measurable in any accurate way, never mind that it can be deliberately influenced so easily.
What does this even mean? How can buyers be willing to pay more than the market price and the sellers still make more money? If such a case were to occur, it wouldn't be correct to call the old price the "theoretical market price." Basically, what you're describing is literally inflation: the purchasing power of money has decreased, so people are willing to spend more of it to buy their goods. Sellers recognize that the demand curve has shifted, and raise their price accordingly.
I’m sure there’s developed economic theory around this phenomenon and more sophisticated language than they used, but it felt like they got the point across.
Isn’t this what economists call “elasticity”?
So yes, milk consumption is price elastic, but not at these prices. They're too low.
Same goes for eggs, bread, ...
For eggs, similar things could occur. Soy lecithin is a common emulsifier, but could be replaced by egg lecithin if eggs were cheaper than soy.
wages is the biggest one, very hard to decrease wages but very easy to increase.
consumer goods are the same, it's easy to discount your stock to sell it - but if you raise it you have to deal with "price gouging" and "profiteering" and "causing inflation".
That's kind of a simplification. Interest rates affect business investment. But many kinds of business investments are just "business" for other companies. E.g. when TSMC invests in building a new chip fab, they buy EUV systems from ASML. ASML uses that money to pay their suppliers and employees, etc. Also, interest rates affect real estate prices, which affects real estate development, which is a big source of employment. Government debt is also more expensive, so high interest rates also apply downward pressure on government spending.
I agree that there's too much market consolidation, and that isn't impacted much by interest rates.
And do you mean to say that mean interest rates should be lower than they are now?
Except that interest rates don't really affect that either [0]
Inflation is always, everywhere, a lack of competition problem.
Firms will charge what they can for their output. Inflation is causes by people paying that price because there isn't another alternative in the market, and 'no deal' isn't an option.
Inflation is always due to a lack of competition? Where on earth is the evidence for such an assertion (I didn't see anything in the linked article)?
Inflation is a monetary phenomenon, it's not a mystery at all. Governments print too much money and then it's worth less. History is full of examples.
The point of the GP post is that competition is how prices are reduced. There's buckets of economic theory that's at least as robust at the monetarist assertions that shows that prices drop when competition works properly. Every issue that underpins price rises is effectively a failure of competition. There are always winners from inflation:
https://economicsfromthetopdown.com/2021/11/24/the-truth-abo...
The example of oranges going up in price and apples down is not inflation.
Inflation is an overall erosion of buying power.
When oil prices rise that’s not inflation, although prices might rise.
I actually agree that price rises like oil are not really inflation - what Keynes would call semi inflation. Regardless, oil price rises were not due to money supply and the subsequent monetary shenanigans are just economic theatre (and even that is being questioned at the inner sanctum: https://www.federalreserve.gov/econres/feds/files/2021062pap... )
Honestly the 70s inflation and the 20s inflation were both caused by the same thing, supply side price shocks in oil prices.
Like inflation this time started before the Ukraine War and run up in oil prices.
Same in the 70’s, inflation had already doubled by 1970 but the oil shock didnt happen until 1973.
You could argue it makes inflation worse, but it wasnt the cause.
Oil and boomers leaving the workforce and covid derailing shipping and monetary policy and 1000 other things can all be pushing up prices at the same time.
“Inflation is a general increase in prices and fall in the purchasing value of money.”
The key is general. Increases in prices of select items due to supply or demand is not inflation.
If there are several structural issues (eg greatest workforce change in 3 generations, war in Europe, worldwide pandemic, etc) they can all contribute to a general inflationary (or deflationary) trend.
It’s a very particular economic school that says only monetary policy causes inflation. And we have years and years of loose policy that didn’t put inflation on the front burner for economists to argue about.
It doesn't. Inflation is an erosion of value of the currency.
General means "across the board" because the currency is worth less.
Sure, if there is a glut of apples and the price drops you may not notice the inflation baked into the price, but it's there.
And if there is a shortage of oranges the price may jump higher than inflation, but that doesn't mean inflation is higher.
People seem to be confusing general prices changes due to other factors with inflation. It's not inflation unless the currency is worth less.
If a central committee increased the price on everything without changing the monetary supply that would still be inflation. Similarly if the invisible hand does it or if there is broad collusion amongst producers.
If gas prices rise the purchasing power of my dollar remains the same for most items.
If inflation goes up, my dollar buys less of everything.
Economics is a science as good as any other. It's just that a lot of people with a lot of money want it to say something so it does. No science is insulated from its practitioners being bought out and the few with principles being silenced.
I'm missing the context here — could you expand on what's happened to biology?
The worst of these decisions by far was deciding that covid was spread by aerosols and not airborne: https://www.nature.com/articles/d41586-022-00925-7
This was nothing short of Lysenkoism in the 21st century.
Somehow this doesn't seem to matter though, we still teach the theory.
If we assume the economy is already in perfect equilibrium then raising the minimum wage will cause inflation but the wages will adjust upwards with the same coefficient vs the minimum wage.
Another factor is that if you give money to people who haven't met their basic needs yet is that they will spend their money faster which means it circulates faster which will generate another employment opportunity. This is effectively a scheduling problem akin to starvation in process/thread scheduling in the kernel. If you ignore a specific thread too much then it can block other threads and result in underutilization of resources.
The latter tells you that you shouldn't prioritize the needs of the wealthy so that "wealth trickles down".
As long as you're clear about what tradeoffs you're making, and as a society we still want no employment effect, if it works at $100, what's the problem?
You only have something to discuss if it's clear that unemployment will rise, and even so you need to decide how much is tolerable in exchange for whatever you get out of raising the minimum wage.
If we don't use evidence we choose blindly.
You can run economic experiments. That isn't the problem. The bigger problem is the unstated assumption of a perfectly liquid economy even in the absence of money and the fact that the mathematical models are supposed to drive reality and not the other way around. Homo sapiens is supposed to mimic homo economics.
This analysis is not accounting for the risk that businesses face in the current environment. Australia has recently put a lot of pressure on small businesses. I still see empty store fronts every day. It is likely competition is slow because all the people who could compete are weighing up the odds of their business being shut down and not liking their chances.
In fact, the idea that inflation is being 'driven' by profits is foolish. Profits are a result of market conditions - inflation was caused by mass disruption of the economy combined with money printing. The people who benefited the most from that were big businesses but they weren't in the driver's seat for what was going on.
Most of it goes to the lie that is the premise that interest rates are really the optimal way to control inflation, regardless of the source. When inflation is actually driven by consumers having too much money, fine, go for it. But when its driven by external factors all you are doing is causing misery and maybe adding fuel to the fire as people already maxed out buying essentials are in fact going to seek (require) higher salaries when you add to their cost of living.