Sunday, March 18, 2012

An Austrian School Contradiction: Revisited

In my previous blog post about Austrian School beliefs regarding price fixing and the gold standard, I described how fixing the rate of change in price is essentially the same as setting simultaneous floor and ceiling prices. This is technically untrue, since a rate of change implies the involvement of a time variable, however my floor and ceiling price limits have nothing to do with time. In other words, the price of a good can fluctuate between those price limits as quickly or as slowly as it may. All the price limits accomplish are a minimum and maximum absolute value difference between a good's starting price and its ending price, whichever point in time that may be.

Price limits aside, I was reading through a blog post on ("Is Inflation about General Increases in Prices?") and realized that I may have misinterpreted some Austrian School beliefs, as I suspected I might have at the end of the last blog post.

The key difference that I failed to distinguish previously was that inflation is dilution of the money supply, not an increase in size of the money supply. For example, if gold is the medium of exchange in an economy and someone mines more gold, he is participating in the market's demand for gold. If he decides to cheat and dilute the money supply by melting down gold coins and reproducing them with less gold content, or by printing extra gold recipts (paper money), this person would be using the new "money" to buy something for nothing. In other words, he did not exchange wealth for wealth, he exchanged nothing for welath, which leads to a misallocation of resources in the economy.

This one paragraph doesn't do the concept justice, so I suggest you read through the original article. In conclusion, Austrian School advocates of a gold standard aren't trying to regulate the size of the money supply; they are trying to control dilution of the money supply. Having real gold as the medium of exchange makes it much more difficult (although not impossible) to dilute the money supply than if the medium of exchange were a fiat currency (as we have today).

1 comment:

  1. Just remember, no true Austrian will advocate for a "standard" of money (for whatever reason) through a government monopoly. Yes, many of us see gold as the most viable commodity to be used as money, but we feel this would come naturally through a free market in money. Legalize competing currencies, just as laptops or cell phones compete, and the Austrian argument is that--since gold or silver fit all of the Misean criteria for money--most currency would be based on a "gold standard" whereas the bills would be backed by gold or gold coins would be directly exchanged.