Should Japan fight deflation? / Interess. Artikel, engl.

verfasst von JÜKÜ, 20.02.2002, 15:44

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http://www.mises.org/fullstory.asp?control=896</font>


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<font size="2"><font face="Verdana" color="#002864" size="5"><strong>Should
Japan Fight Deflation?</strong></font>
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<font size="4">by Frank Shostak</font>




[Posted February 20, 2002]




<img align="right" alt="Frank Shostak" border="0" src="http://www.mises.org/images/shostak.jpg" width="156" height="203"></font><font size="3">In
commenting on the ongoing Japanese slump, President Bush made the worst gaffe
of his presidency. Bush relayed to a news conference that he and Prime
Minister Junichiro Koizumi had discussed the"devaluation issue" in
their talks. As the yen sank, the White House quickly clarified that Bush had
meant the"deflation issue."</font>




<font size="3">It’s true that declining prices--typical of a recession--are
a feature of the Japanese economy. Year-on-year machine tool orders fell by 42.8
percent in January after a fall of 42.8 percent in the previous month.
Year-on-year bank lending fell by 4.6 percent in January after a fall of 4.3
percent in December--the forty-ninth consecutive monthly decline. The consumer
price index fell by 0.7 percent in 2001, the third consecutive year of decline.
Also, the average price index of land in six big cities fell to 33.1 in the
first half of 2001 from 105.10 in the second half of 1990--a fall of 68.5
percent.</font>




<font size="3">Many economists hold that declining prices, labeled as
deflation, are the main factor causing the economic slump. To fight the menace
of deflation, Japanese government officials are planning to intensify the pace
of monetary pumping.</font>


<p align="center"><font size="3"><img border="0" src="http://www.mises.org/images/japanesemoney.gif" width="384" height="330"></font>




<font size="3">Most experts, among them Milton Friedman and Paul Krugman, are
of the view that the only way out of the economic slump is for the central Bank
of Japan (BOJ) to aggressively boost the money supply. This, it is held, will
raise inflationary expectations and lift people's willingness to spend, which in
turn will set the economic recovery in motion. In short, the key to economic
recovery is to lift the demand for goods and services by arresting the fall in
prices. </font>


<font size="2">
<h1>Is the fall in prices bad news?</h1>
</font>


<font size="3">Contrary to conventional wisdom, there is nothing wrong with
declining prices. In fact, it is the essential characteristic of a free-market
economy to select as money those commodities the purchasing power of which
is growing over time.[1] What
signifies industrial market economy under a commodity money such as gold is that
prices of goods follow a declining trend. According to Salerno,</font>



<font size="3">In fact, historically, the natural tendency in the industrial
market economy under a commodity money such as gold has been for general
prices to persistently decline as ongoing capital accumulation and advances in
industrial techniques led to a continual expansion in the supplies of goods.
Thus throughout the nineteenth century and up until the First World War, a
mild deflationary trend prevailed in the industrialized nations as rapid
growth in the supplies of goods outpaced the gradual growth in the money
supply that occurred under the classical gold standard. For example, in the US
from 1880 to 1896, the wholesale price level fell by about 30 percent, or by
1.75 percent per year, while real income rose by about 85 percent, or around 5
percent per year.[2]</font>



<font size="3">In a free market, the rising purchasing power of money, i.e.,
declining prices, is the mechanism that makes the great variety of goods
produced accessible to many people. It does not make much sense to be concerned
about falling prices.</font>




<font size="3">On this, Murray Rothbard wrote,</font>



<font size="3">Improved standards of living come to the public from the fruits
of capital investment. Increased productivity tends to lower prices (and costs)
and thereby distribute the fruits of free enterprise to all the public,
raising the standard of living of all consumers. Forcible propping up of the
price level prevents this spread of higher living standards.[3]</font>



<font size="3">It is argued by most experts, however, that a general fall in
prices is always"bad news," for it slows down people's propensity to
spend, which in turn undermines investment in plant and machinery. All this sets
in motion an economic slump. Moreover, as the slump further depresses the prices
of goods, this intensifies the pace of economic decline. But does it all make
sense? According to Salerno,</font>



<font size="3">Thus, for example, a mainframe computer sold for $4.7 million
in 1970, while today one can purchase a PC that is 20 times faster for less
than $1,000. Note that the substantial price deflation in the high-tech
industries did not impair and, in fact, facilitated the enormous expansion of
profits, productivity and outputs in these industries. This reflected in the
fact that in 1980 computer firms shipped a total of 490,000 PCs while in 1999
their shipments exceeded 43 million units despite that fact that
quality-adjusted prices had declined by over 90 percent in the meantime.[4]</font>



<font size="3">Moreover, it does not make any sense to argue that a fall in
prices as a result of real wealth expansion causes consumers to postpone
purchases of goods and services. If this were the case, then why would producers
produce so many goods and services in the first place? Furthermore, to suggest
that consumers postpone their buying of goods because prices are expected to
fall would mean that people have abandoned any desire to live in the present. Without
the maintenance of life in the present, however, no future life is conceivable.</font>




<font size="3">On this, Menger wrote,</font>



<font size="3">An imperfect satisfaction of needs leads to the stunting of our
nature. Failure to satisfy them brings about our destruction. But to satisfy
our needs is to live and prosper. Thus the attempt to provide for the
satisfaction of our needs is synonymous with the attempt to provide for our
lives and well-being. It is the most important of all human endeavors, since
it is the prerequisite and foundation of all others.[5]</font>

<font size="2">
<h1>Are rising prices prerequisite for profits?</h1>
</font>


<font size="3">The popular view that price deflation is the root of economic
slumps seems to overlook the essential role of prices in a free-market economy
and the conduct of businessmen. Whenever a businessman sets a price for his
product, it is in his interest to secure a price where the quantity that is
produced can be sold at a profit. In setting this price, the producer/entrepreneur
will have to consider how much money consumers are likely to spend on the
product, the prices of various competitive products, and the cost of production.</font>




<font size="3">Producers set the price, but consumers, by buying or
abstaining >from buying, are the final decision makers as to whether the
price set will lead to a profit. If, at a set price, a producer cannot make a
positive return on his investment because not enough people are willing to buy
his product, the producer will be forced to lower the price to boost the
turnover. Obviously, by adjusting the price of the good, the entrepreneur must
also adjust his costs in order to make a profit.</font>




<font size="3">Every individual in his given circumstances decides how much
of his income he will save and how much he will use on consumption. The income
used for consumption, in turn, is allocated in accordance with individuals'
priorities regarding various goods and services.</font>




<font size="3">Consequently, a producer will secure a profit when, at the
price of a good set, consumer buying will generate revenue that will exceed
the cost plus interest. Profit is an indication that both producers and
consumers have improved their well-being.</font>




<font size="3">In short, by investing a given amount of money, producers have
secured a greater amount of money. This, in turn, enables them to secure a
greater amount of goods and services, which in turn promotes their lives and
well-being. Likewise, consumers, by exchanging their money for goods that are on
their highest-priority lists, have raised their living standards.</font>




<font size="3">Consumers value goods and services according to how
useful those goods and services are in promoting their lives and well-being. The
importance people attach to various goods and services varies over time. Thus,
if a great majority of people decide that lowering the consumption of red meat
will benefit their health, then people will allocate a smaller proportion of
their income toward red meat and more money toward other goods. As a result of
new ideas, some goods may become obsolete in attaining particular goals, and
demand for them either falls sharply or disappears altogether. As Mises said,</font>



<font size="3">The business of the entrepreneur is not merely to experiment
with new technological methods, but to select from the multitude of
technologically feasible methods those which are best fit to supply the public
in the cheapest way with the things they are asking for most urgently. Whether
a new technological procedure is or is not fit for this purpose is to be
provisionally decided by the entrepreneur and will be finally decided by the
conduct of the buying public. The question is not whether a new method is to
be considered as a more"elegant" solution of a technological
problem. It is whether, under the given state of economic data, it is the best
possible method of supplying the consumers in the cheapest way.[6]</font>



<font size="3">In a free-market economy, price fluctuations are part and
parcel of individuals striving to improve their lives and well-being. When a
good makes a profit at a particular price, then it is a signal to entrepreneurs
that consumers are willing to support the product, at the set price. Prices,
therefore, are an important factor in establishing how producers/entrepreneurs
employ their resources. The prices of goods dictate the quantity and the quality
of the goods produced. On this, Mises wrote,</font>



<font size="3">The consumers patronize those shops in which they can buy what
they want at the cheapest price. Their buying and their abstention from buying
decides who should own and run the plants and the farms. They determine
precisely what should be produced, in what quality, and in what quantities.[7]</font>



<font size="3">Observe that what matters here is not the general direction
of prices but whether businessmen are making a profit on their specific goods
and services. Once producers/entrepreneurs have discovered the
"right" price, they adjust their costs in accordance with this fact of
reality. Entrepreneurs, in the pursuit of the price that will yield profits, set
in motion an allocation of real funding toward the improvement of people's lives
and well-being. A monetary policy that aims at stabilizing price fluctuations
will make it more difficult for entrepreneurs to discover the correct price.
This will undermine the formation of real wealth.</font>


<font size="2">
<h1>Should"bad" price deflation be fought against?</h1>
</font>


<font size="3">Even if we were to accept that declines in prices in response
to an increase in the production of goods promotes the well-being of individuals,
what about the case when a fall in prices is associated with a decline in
economic activity? Surely this type of deflation is bad news and must be fought
against.</font>




<font size="3">Whenever a central bank pumps money into the economy, this
benefits various individuals engaged in activities that sprang up on the back of
loose monetary policy, and it occurs at the expense of wealth generators.
Through loose monetary policy, the central bank gives rise to a class of people
who unwittingly become consumers without the prerequisite of making any
contribution to the real pool of funding. Their consumption is made possible
through the diversion of real funding from wealth producers.</font>




<font size="3">Observe that both consumption and production are equally
important in the fulfilment of people’s ultimate goal, which is the
maintenance of life and well-being. In other words, consumption is dependent on
production, while production is dependent on consumption. The loose monetary
policy of the central bank breaks this unity through creating an environment
where it appears that it is possible to consume without production.</font>




<font size="3">Not only does the easy monetary policy push prices of existing
goods higher, but the monetary pumping also gives rise to the production of
goods which are only demanded by non-wealth producers. Now, goods that are
consumed by wealth producers are never wasted, for these goods sustain wealth
generators in the production of goods and services. This is not so, however,
with regard to non-wealth producers who only consume and produce nothing in
return.</font>




<font size="3">As long as the real pool of funding is growing, various goods
and services that are patronized by non-wealth producers appear to be
profitable. However, once the central bank reverses its loose monetary stance,
the diversion of real income from wealth producers to non-wealth producers is
arrested. This in turn undermines the demand of non-wealth producers for various
goods and services, thereby exerting downward pressure on their prices. The fall
in the prices of various goods and services signifies that there was never a
genuine demand for these goods.</font>




<font size="3">The tighter monetary stance that undermines various activities
which sprang up on the back of previous loose monetary policy arrests the
bleeding of wealth generators. The fall in prices of various goods and services
comes simply in response to the arrest of the impoverishment of wealth producers
and hence signifies the beginning of economic healing. To reverse the monetary
stance in order to prevent a fall in prices amounts to the renewal of
impoverishment of wealth generators. As Mises said,</font>



<font size="3">Prices of the factors of production--both material and
human--have reached an excessive height in the boom period. They must come
down before business can become profitable again....  Thus any attempt
of the government or the labor unions to prevent or delay this adjustment
merely prolongs the stagnation.[8]</font>



<font size="3">As a rule, what the central bank tries to stabilize is the
so-called price index. The"success" of this policy, however, hinges
on the state of the real pool of funding. As long as the real pool of funding is
expanding, the reversal of the tighter stance creates the illusion that the
loose monetary policy is the right remedy. This is because the loose monetary
stance, which renews the flow of real funding to non-wealth producers, props up
their demand for goods and services, thereby arresting or even reversing price
deflation.</font>




<font size="3">Furthermore, since the pool of funding is still growing, the
pace of economic growth stays positive--hence, the mistaken belief that a loose
monetary stance that reverses a fall in prices is the key in reviving economic
activity.</font>




<font size="3">The illusion that, through monetary pumping, it is possible to
keep the economy going is shattered once the pool of funding begins to decline.
Once this happens, the economy begins its downward plunge. The most aggressive
loosening of monetary policy will not reverse the plunge. Any attempt to
boost the demand for goods cannot be effective. The means to support this demand
are not there.</font>




<font size="3">Moreover, the reversal of the tight monetary stance will eat
further into the real pool of funding, thereby deepening the economic slump.
Even if loose monetary policies were to succeed in lifting prices and
inflationary expectations, they cannot revive the economy while the pool of real
funding is declining.</font>




<font size="3">Since the key to an economic recovery in Japan is the pool of
real funding, how can we ascertain its status? How does one know whether it is
growing, stagnating, or declining? If the pool of funding had been growing, then
the underlying growth trend of economic activity would have been following suit.
This, in turn, would have made loose monetary and fiscal policies appear to be
successful.</font>




<font size="3">From the level of 8.22 percent in March 1991, the BOJ has
lowered the interbank call interest rate to almost nil. Furthermore, various
Japanese governments during this period have introduced countless fiscal
packages to stimulate the economy.[9]
Moreover, despite the accusation that the BOJ was not aggressive enough, on
average during the past ten years, the pace of monetary pumping by the central
bank stood at 18.5 percent.</font>




<font size="3">Notwithstanding all these stimulatory policies, economic
activity continued to deteriorate. This therefore raises the likelihood that the
real pool of funding is either stagnant, or, worse, declining. Consequently, the
only way left to revive the economy--

which is also the only way authorities are reluctant to pursue--is to allow
wealth producers to take over. However, this means that various activities that
cannot support themselves must be allowed to disappear. The worst thing that the
central Bank of Japan could do is to further intensify monetary injections.</font>


<font size="2">
<h1>Conclusion</h1>
</font>


<font size="3">The prolonged Japanese economic slump is not due to price
deflation but is the product of aggressive fiscal and monetary policies aimed at
arresting the general fall in prices of goods and services. Contrary to the
popular view, price deflation as a rule is always good news for the economy.
Thus, when prices are falling in response to the expansion of real wealth, this
means that people's living standards are rising.</font>




<font size="3">When prices are falling as a result of the burst of the
financial bubble, it is also good news for the economy, for it indicates that
the impoverishment of wealth producers was arrested. The latest proposed
Japanese policy to raise the pace of the monetary pumping amounts to furthering
the economic impoverishment of wealth producers, thereby delaying any meaningful
economic recovery from taking place. It can only end in devaluing the yen, thus
making Bush’s gaffe a reality.</font>


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Frank Shostak, Ph.D., is an adjunct scholar of the Mises Institute and a
frequent contributor to Mises.org. Send him <font color="#000080" size="2">MAIL</font>
and see his outstanding Mises.org <font color="#3571ca" size="2">Articles
Archive</font><font size="2">. Dr. Shostak expresses gratitude to Michael
Ryan for helpful comments during the writing of this article.</font>


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<font size="2">[1]</font><font size="2">
Frank Shostak"</font><font size="2">How
Much Money Should There Be</font><font size="2">?" Daily Articles
October 10, 2001 Mises Institute.</font>


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<font size="2">[2]</font><font size="2"> Joseph
T. Salerno </font><font size="2">"An
Austrian Taxonomy of Deflation</font><font size="2">" presented at
"Boom, Bust, and the Future," January 19,2002, The Mises
Institute, Auburn, Alabama p 8.</font>


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<font size="2">[3]</font><font size="2"> Murray
N. Rothbard What Has Government
Done to Our Money?  p 17.</font>


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<font size="2">[4]</font><font size="2"> Joseph
T. Salerno An Austrian Taxonomy of Deflation presented at"Boom, Bust,
and the Future," January 19,2002, p 8.</font>


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<font size="2">[5]</font><font size="2"> Carl
Menger Principles of Economics (New York University Press) p 77.</font>


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<font size="2">[6]</font><font size="2"> Ludwig
von Mises Planning For Freedom, </font><font size="2">Profit
and Loss</font><font size="2">,  Libertarian Press p
110-111.</font>


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<font size="2">[7]</font><font size="2"> Ludwig
von Mises </font><font size="2">Human
Action, p 270</font><font size="2">.</font>


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<font size="2">[8]</font><font size="2"> Ludwig
von Mises </font><font size="2">Human
Action p 568-569</font><font size="2">.</font>


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<font size="2">[9]</font><font size="2"> Hans
F. Sennholz  </font><font size="2">A
Japanese Lesson </font><font size="2"> Daily Articles Mises
Institute February 12 2002.</font>


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• Should Japan fight deflation? / Interess. Artikel, engl. - JÃœKÃœ, 20.02.2002, 15:44
  • Re: Die Schlußfolgerung ist allemal lesenswert, sogar für Freigeldfreunde! (owT) - André, 20.02.2002, 17:12