Ron Paul and the Dollar.

[hmkpoker]

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I am guessing the reason things would get cheaper every year is due to more efficiency and competition? If there is no upwards artificial inflationary pressure (printing money), that would make sense. An interesting perspective that had never occurred to me. Hopefully someone with more background than I have can confirm, deny or further explain the forces at work as described in this post.

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Sounds like you have it. Things get cheaper because people get better at producing them. A few goods, maybe oil, might get more expensive because oil gets more expensive to produce, not cheaper, but generally things should go down in price as workers get more productive.

Of course, at least in a perfectly rational economic world, wages would also go down, so most people wouldn't see much effect on their purchasing power.

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Why would wage prices fall as fast as the prices of consumer goods?

[ianlippert]

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Why would wage prices fall as fast as the prices of consumer goods?


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It would be cool if someone could expand on this. From what little I've read on the austrian explanation of deflation it seems that wages drop slower than the price of consumer goods. This would mean that an individuals purchasing power increases in times of deflation, but the decrease in wages brings out all the usual suspects and makes sure that the government prevents deflationary periods from continuing.

[hmkpoker]

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Why would wage prices fall as fast as the prices of consumer goods?


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It would be cool if someone could expand on this. From what little I've read on the austrian explanation of deflation it seems that wages drop slower than the price of consumer goods. This would mean that an individuals purchasing power increases in times of deflation, but the decrease in wages brings out all the usual suspects and makes sure that the government prevents deflationary periods from continuing.

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I was going to expound on this, but I've come to realize that no one ever reads my long-winded deductive economic analyses, so someone else can do it [img]/images/graemlins/wink.gif[/img]

[bobman0330]

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I am guessing the reason things would get cheaper every year is due to more efficiency and competition? If there is no upwards artificial inflationary pressure (printing money), that would make sense. An interesting perspective that had never occurred to me. Hopefully someone with more background than I have can confirm, deny or further explain the forces at work as described in this post.

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Sounds like you have it. Things get cheaper because people get better at producing them. A few goods, maybe oil, might get more expensive because oil gets more expensive to produce, not cheaper, but generally things should go down in price as workers get more productive.

Of course, at least in a perfectly rational economic world, wages would also go down, so most people wouldn't see much effect on their purchasing power.

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Why would wage prices fall as fast as the prices of consumer goods?

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I think they actually would not, but they "should." If gold currency becomes 2% more valuable over the course of a year, why would you not lower each worker's wage by 2%, unless he's become more productive. Likewise, if fiat currency drops by 2%, your workers insist on a 2% raise.

I think it's likely that workers will resist these adjustments for irrational reasons ("I ain't taking no damn pay cut! I'm doing the same work I was before!") which will make some workers better off, but should lead to the same kind of overall badness as a price-fixing cartel or an increase in the minimum wage.

[Brainwalter]

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I am guessing the reason things would get cheaper every year is due to more efficiency and competition? If there is no upwards artificial inflationary pressure (printing money), that would make sense. An interesting perspective that had never occurred to me. Hopefully someone with more background than I have can confirm, deny or further explain the forces at work as described in this post.

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Sounds like you have it. Things get cheaper because people get better at producing them. A few goods, maybe oil, might get more expensive because oil gets more expensive to produce, not cheaper, but generally things should go down in price as workers get more productive.

Of course, at least in a perfectly rational economic world, wages would also go down, so most people wouldn't see much effect on their purchasing power.

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Why would wage prices fall as fast as the prices of consumer goods?

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I think they actually would not, but they "should." If gold currency becomes 2% more valuable over the course of a year, why would you not lower each worker's wage by 2%, unless he's become more productive.

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And how did the currency become more valuable if not through productivity gains?

[hmkpoker]

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I think they actually would not, but they "should." If gold currency becomes 2% more valuable over the course of a year, why would you not lower each worker's wage by 2%, unless he's become more productive. Likewise, if fiat currency drops by 2%, your workers insist on a 2% raise.

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There's a very big difference between the "deflation" of gold over time and the inflation of fiat dollars. The "deflation" is just reflective of market innovation. It is not causal of anything. Fiat monetary expansion, on the other hand, is.

For example, Big Widgits employs one hundred worker, and produces one hundred widgits per week (which is what the market demands). One of the engineers figures out a way to make widgits for 50% less. The owner of Big Widgits starts producing more widgits for less money and makes bigger profits. The purchasing power of the gold standard currency goes up.

At no point is it implied or necessary to pay the workers less. The business must still compete for workers, and cannot do that by paying them less rather than more.

If you think that this implies that employee pay will constitute an increasing percentage of business expenses over time, you are correct. Over a hundred years ago, most workers had their own trades, yet were less efficient and less wealthy than the business hierarchies of today. Big businesses today survive (and survive well) on profit margins that would be far too low in the nineteenth century.

[bobman0330]

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I think they actually would not, but they "should." If gold currency becomes 2% more valuable over the course of a year, why would you not lower each worker's wage by 2%, unless he's become more productive. Likewise, if fiat currency drops by 2%, your workers insist on a 2% raise.

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There's a very big difference between the "deflation" of gold over time and the inflation of fiat dollars. The "deflation" is just reflective of market innovation. It is not causal of anything. Fiat monetary expansion, on the other hand, is.

For example, Big Widgits employs one hundred worker, and produces one hundred widgits per week (which is what the market demands). One of the engineers figures out a way to make widgits for 50% less. The owner of Big Widgits starts producing more widgits for less money and makes bigger profits. The purchasing power of the gold standard currency goes up.

At no point is it implied or necessary to pay the workers less. The business must still compete for workers, and cannot do that by paying them less rather than more.

If you think that this implies that employee pay will constitute an increasing percentage of business expenses over time, you are correct. Over a hundred years ago, most workers had their own trades, yet were less efficient and less wealthy than the business hierarchies of today. Big businesses today survive (and survive well) on profit margins that would be far too low in the nineteenth century.

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Big Widgets might not decrease their wages here, because their worker productivity went up the same amount as deflation. But if General Motors will cut their wages over the same period. Their real wages stay the same, which means they have to fork over fewer dollars.

This is also the case if the value of the currency increases for reasons other than productive innovations. Say the population increases by 5% without changing the GDP/capita. Five percent more transactions will have to happen, which means that the value of gold will probably have to increase, which means wages will have to go down.

[vhawk01]

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People who devoted their lives to economics, and are a hell of a lot more intelligent than you or I made the decision to change and understand the consequences and benefits of it.

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No, politicians made the change.

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