Inflation and deflation at the same time, page-56

Nothing new there, but first lets talk about an aspect that some posters here do not know.

"What Is the Austrian School of Economics? If you carry the popular impression that data-hungry economists are always busy with complex formulas and not with outside-the-box thinking, then you should take a look at the Austrian school. Just like monks living in their monasteries, the economists of this school strive to solve complex issues—economic ones—by conducting "thought experiments."

The Austrian school believes it is possible to discover the truth simply by thinking aloud. Interestingly, this group does have unique insights into some of the most important economic issues of our times.

A central Austrian insight is capital goods aren't homogeneous.3 In other words, hammers and nails and lumber and bricks and machines are all different and can't be substituted for one another perfectly. This seems obvious, but it has real implications in aggregated economic models. Capital is heterogeneous.The Keynesian treatment of capital ignores this. The output is an important mathematical function in both micro and macro formulas, but it is derived by multiplying labor and capital. Thus, in a Keynesian model, producing $10,000 in nails is exactly the same as producing a $10,000 tractor. The Austrian school argues that creating the wrong capital goods leads to real economic waste and requires (sometimes painful) re-adjustments. "

Have you get it? Low interest rates lead to people building houses when what they really want are cars, and to transform a break layer into a car mechanic it requires sacrifices including that of the break layer's barber loosing his job. And what Keynesians want? They want to keep the barber and the break layer with a job by having government building infrastructure, a policy that in Austrian speak is known as "kicking the can down the road".


"Menger explained in his book that the economic values of goods and services are subjective in nature, so what is valuable to you may not be valuable to your neighbor. Menger further explained that with an increase in the number of goods their subjective value for an individual diminishes. This valuable insight lies behind the concept of what is called diminishing marginal utility.Later on, Ludwig von Mises, another great thinker of the Austrian school, applied the theory of marginal utility to money in his book, Theory of Money and Credit (1912).1 The theory of diminishing marginal utility of money may, in fact, help us in finding an answer to one of the most basic questions of economics: How much money is too much.

Did you get it?

An extra dollar in the hands of any individual including an employed will have a lower value because of the law of diminishing marginal utility and the same must apply to the whole community, the sum of all individuals. If you thought that inflation could be described by the theory quantitative of money, you are wrong.


Finally, there are people here that do not care about theories and models, because they like only like the monks living in monasteries to discuss issues. Curiously. these are the people that think that due to persistent low interest rates having caused malinvestment, our economy is going to the dogs come July or August. However these people take exception if somebody points out that like Keynes said they seem to be slaves of some defunct economists like, for instance, Carl Menger.