# Think Tank > Austrian Economics / Economic Theory >  Austrian vs. Chicago schools of economics

## malkusm

Hey, I was discussing this in the chat earlier and really didn't have a good answer for what the differences were, since I hadn't read up on the Chicago school of thought too much. Anyone who knows a lot about this, feel free to weigh in.

On the surface they appear to support the same ideals, free market and limited government intervention. 

I've found that some in the Austrian school are borderline anarchists, and believe that government should have no involvement whatsoever in any market in which it's possible, and sometimes even when it doesn't seem possible (Rothbard, for example, seems to support the abolishment of government-run police protection).

I do know that Milton Friedman was a well-known Chicago economist, but I don't know too much about him. Judging by his wiki entry though, it seems he has a couple main differences from an Austrian, mainly the fact that the government should account for externalities (the Austrian economist would say that the free market will account for this on its own), and the need for government to control and standardize the currency of the nation (which the Austrian would say leads to boom/bust cycles and inflation, and that allowing competing currencies leads to prosperity and is a function of the free market in its own right).

Does anyone have a better understanding of these issues that can offer some clarity? I've really not read much on it....

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## CzargwaR

here's a link to a quiz on mises.org regarding differences in schools of economics. take the quiz and after that they say which choices fall under chicago, marxist, austrain schools etc.  
http://mises.org/quiz.asp

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## malkusm

> here's a link to a quiz on mises.org regarding differences in schools of economics. take the quiz and after that they say which choices fall under chicago, marxist, austrain schools etc.  
> http://mises.org/quiz.asp


Thanks!

Ironic that you're from Chicago....haha

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## Jeremy

There was a good video of Walter Block (I think that's his name) bashing Chicago Economics

I don't quite remember, but I think they aren't pro-gold-standard

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## liberteebell

While we're on the topic, does anyone know what schools teach Austrian economics?

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## Conza88

I'd imagine it allows for a Central bank and fiat currency. Milton said inflation should be about 3% permanently...  Think thats the difference between all the schools of thought. Austrian is the only one that is for real capitalism (without the central banks - PROBLEM) and for the gold standard etc. Someone PLEASE correct me if I'm wrong - still learning.

But thats essentially why, Austrian never gets mentioned by the state / in university's = because it's right.

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## Conza88

> While we're on the topic, does anyone know what schools teach Austrian economics?


0. From what I know. There is a Mises University in Auburn, Alabama though. I want to do an exchange there!

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## yaz

> While we're on the topic, does anyone know what schools teach Austrian economics?


http://mises.org/classroom/gradschool.pdf

it took me forever to find something as good as this.

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## grizzums

> While we're on the topic, does anyone know what schools teach Austrian economics?


If you are talking grad school...look up NYU.

Good Luck.

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## NightOwl

> 0. From what I know. There is a Mises University in Auburn, Alabama though. I want to do an exchange there!


There is a Mises Institute in Auburn, but it does not grant degrees.  Its Mises University program is just the name of its week-long program for students.

See Mises.org and Mises University.

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## yaz

ignore the last two posts and go here: http://mises.org/classroom/gradschool.pdf

it's everything you'd ever want to know about what college to go for austrian economics.  i decided on auburn university since it's near the mises institute and has a lot of austrian leaning economists.

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## liberteebell

Conza88, grizzums, NightOwl and Yaz: 

Thank you very much for the information!

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## yongrel

> While we're on the topic, does anyone know what schools teach Austrian economics?


Right now, the only school that still teaches Austrian economics as its focus, and not as some quirky class offered every other semester is George Mason University in Virginia (just outside of DC).

If you remember back a few months ago, a lot of folks here were calling for Walter Williams to be RP's Vice President. He is head of the econ department there, if memory serves me.

NYU also still has a strong contingent of free market thinkers, though the program is shifting increasingly towards the conventional neoclassical curriculum. Bleck.

From what I hear, you can still take some decent Austrian econ down at Auburn, which used to be a bastion of free market thought. Sadly, they too have progressed to the neoclassical/Keynesian bullocks that is so popular with pundits and professors these days.

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## Conza88

> ignore the last two posts and go here: http://mises.org/classroom/gradschool.pdf
> 
> it's everything you'd ever want to know about what college to go for austrian economics.  i decided on auburn university since it's near the mises institute and has a lot of austrian leaning economists.


Done. Lol, reading it now.

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## malkusm

NYU sounds great for me based on that article - highly quantitative (I'm a stat major) but with a strong Austrian presence and a weekly colloquium from Austrians...

I had no idea that Mason was so heavily influenced by Austrians as well. That would probably be closer to home and cheaper for me.....

Thanks a lot for the info, this was a huge help.

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## orafi

> While we're on the topic, does anyone know what schools teach Austrian economics?


George $#@!ing Mason University!


YEE GREEN AND GOLD WOOT

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## psalm82x3

You are comparing apples and apples.  Milton's point was having competing currencies would probably result in 3% per annum growth anyway.  My man Milton was for growing the money supply at whatever real rate the economy grew.  One measure of economic growth is GDP.  Because the GDP was calculated somewhat honestly while Milton was around, it was totally reasonable to advise a fiat currency based on 3% growth.

So, the two systems share a down to earth philosophy, that money should not be printed without relation to reality.  Either one of these systems would be immensely superior to our current one.  

If you want to research the most thorough writer on this subject, check out Doug Nolan http://www.prudentbear.com/index.php...leBulletinHome 

The term he uses to describe our current monetary regime is Global Wildcat Finance.  Hedge funds and leverage and derivatives grow money so fast that it makes a discussion of competing currencies vs @3% growth an anachronism which alludes to a more sane time.   

Buy gold. Paper money collapsing.

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## Conza88

> George $#@!ing Mason University!
> 
> YEE GREEN AND GOLD WOOT


Hahah. Is there more green than gold though?

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## JRegs85

Austrian school denies that there can be any market distortion without government interference. 

Chicago school allows for a few exceptions that can supposedly distort the free market, such as monopolies or insider trading. 

They both agree that central bank control of the interest rate distorts the market and can creates externalities. Austrian school says that the money supply should be FIXED, while Friedman proposed expanding the nominal money supply at a rate of about 2.5% - 3.5% per year.

The problem with the proposed increase in the nominal money supply is that in the past thirty years since Friedman first proposed his view of the economy, the supply of money has become much harder to define or measure. 

Both schools agree that the initial cause of the Great Depression was the Fed increase in credit during 1927. However, the Chicago school states that the Depression was protracted due to the failure of the Fed to inflate enough...I'm not sure what exactly the Austrian school blames the Depression on....

The two schools also have slightly different views on the role of inflation, but I don't understand the Chicago view of inflation enough to comment on it.

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## noxagol

The Austrian school blames it on the Fed inflating at all. The boom-bust cycle is started when the Fed pumps out easy money and encourages low interest rates. This money is then gobbled up and invested, however, since it is easily gotten through artificial non-market means it creates a lot of malinvestment. When these malinvestments get liquidated is when you have your recession. Alternatively, the Fed dumps the interest rates when people are more conerned with short-term consumption instead of long term consumption. This dump sends the wrong signals to businesses and instead of investing in production now, they invest in things for production later. 

In true Austrian economics, savings dictates the interest rates. The more savings, the more money available, the lower the interest rate and vice versa. When savings are high and thus interest rates low, this sends a signal to business that people want future consumption versus consumption now (you do after all, save your money to spend it down the road). The low interest rates allow businesses to borrow money and invest in new products and production methods to improve wealth creation down the road. When savings are low and thus interest rates are high, this send the signal that people want goods now (if you spend the money you have you won't be saving as much). This tell businesses to keep producing and not make major investments for the future as people want goods now. Businesses should focus on production and meeting the demands of its consumers, which is goods and services now and not down the road. 

That's it in a nut shell and I may have not said it entirely correctly. I'm horrible at explaining things.

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## The_Orlonater

Is there an Austrian influenced school in Chicago? 


(I'm kind of serious)

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## RPTXState

I would really like, if at all possible, a single lecture by a visiting professor or something here at Texas State.

Failing that, I'll do some research and teach it myself one afternoon in a few months...

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## JosephTheLibertarian

> There was a good video of Walter Block (I think that's his name) bashing Chicago Economics
> 
> I don't quite remember, but I think they aren't pro-gold-standard


Yes? Good for the Chicago School. Why do we need any standard? Gold standard is nutty, I favor competing currencies and no national currency. Even if we don't get rid of the Fed, just legalizing competing currencies in the US would make the Fed issue so trivial that it wouldn't even matter anymore that it even exists.

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## qaxn

friendly reminder that austrian school denies the utility of observation, instead using the hardened a priori (read: bull$#@!) school of praxeology, which seeks to define how individuals rationally act.
not that i'm saying chicago's any better, modern orthodox economics is fad based insanity.

man will not be free until the last dictator is stranged with the entrails of the last economist, etc.

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## Paul.Bearer.of.Injustice

> Capitalism has within it a culture industry that manufactures false preferences. People might think that modern consumer culture satisfies them best, but this is not true. Businesses gain through wasteful competition among consumers for social status and the creation of preferences for goods that no one really needs. Capitalism alienates consumers from their true selves while businesses exploit them for profit. Proper consumer products regulation requires revolutionary changes in society.


What school of thought is this question, #11, from the quiz?
I agree 100% with it

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## qaxn

> What school of thought is this question, #11, from the quiz?
> I agree 100% with it


TRAP SPRUNG
It's Marxist.  Alienation and the waste of value through competition ultimately enriching the bourgeoisie blah blah blah.  Austrian-schoolers attempting to mimick Marxists produces a really idiosyncretic style.

e: That quiz is unintentionally a blast.

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## weslinder

> here's a link to a quiz on mises.org regarding differences in schools of economics. take the quiz and after that they say which choices fall under chicago, marxist, austrain schools etc.  
> http://mises.org/quiz.asp


Great quiz.  Thanks for linking.  Having not read enough of the distinctions to really know, I thought I was more Chicago school than Austrian school.  As it turns out, I support Austrian-school monetary policy and Chicago-school market intervention.

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## krazy kaju

The main difference is the methodology. The Chicago School is actually a byword for monetarism. Monetarism is based in the neoclassical school which is based in the marginalist line of thought that overthrew the labor theory of value. The Austrian school is also rooted deeply in marginalism.

The biggest difference between the Austrian school and monetarism is methodology. Whereas monetarists approach economics from a historical/positivist approach, Austrians approach economics from a theoretical perspective.

The second biggest difference is the theory of capital and interest. No other economic school of thought has a real understanding of capital intensity and the production structure, which is really one of the defining aspects of the Austrian school and the basis of the Austrian theory of the business cycle.

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## Paul.Bearer.of.Injustice

q12:

"Wages are the basis for capitalist exploitation. All value derives from labor. But capitalists pay workers less than the value of their work so as to collect profits. Common ownership of the means of production will eliminate wage exploitation by eliminating private profits"


I don't get this quiz. I agree with the analysis but don't favor common ownership. Is the stock market Marxist because ownership is shared if a company is public? Unless public means government and hence law and therefore force.

Negative human traits and inequality will always exist no matter the economic system.

All these questions can be paraphrased:
"Capitalism sucks, more government is needed to make it not suck so much or convert to socialism" or
"Capitalism is the answer to everything, please no government"

There are aspects of Capitalism that suck, but it's because people are free to abuse it like any tool.

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## krazy kaju

Paul, the quiz tests you based on which school you agree with most, i.e. Marxist, neoclassical, monetarist, Keynesian, Austrian, etc.

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## Paul.Bearer.of.Injustice

71/100 for a solid B.

I like this Austrian School. 71% is a B! lol

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## Fox McCloud

the biggest issue I had with Milton Friedman was his views on the money supply and how it should be grown/shrunk based on a mathematical model of the economy.

There's absolutely no need to grow the money supply over a period of time--if you do, it's going to cause inflation in some way, somewhere along the road (and as always those on poor and fixed incomes suffer the most...not to mention it wipes out savings). Granted, if the model was followed to a "T" it wouldn't be as devastating as what we currently have, but it still has inherent flaws in it.

with a fixed money supply savings and certain brackets of income earners will be safe and when innovations arise in the market-place, it will merely push the price of that good down, thus making your money go further---as a good economist friend of mine put it to me once (He's an Austrian by the by and more or less told me to beware certain aspects of the monetarist view) loosely: "Coke used to cost 5-10 cents a bottle, and it had "X" ounces--things have improved drastically in production, yet today, Coke is now "Y" ounces per can (less) and it costs around 25 cents per can".

that said, I like Friedman's "Free to Choose" series--it's excellent for convincing a few people that the Free Market is the 'way to go'....his views are not perfect and don't fully fall in line with Ron's economic views, but they're a lot closer than most other views of the day....and besides, if you can convince someone to switch their views over to what Friedman is talking about, it's a relatively safe bet they could make the jump to Austrian later.

What's that one comic book that takes place in pre-historic times where the islanders use fish as currency? That's a really great little explanation of Capitalism, in general...even if it does have a slight monetarist bent to it.

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## Zippyjuan

A growing economy does require a growing money supply.  If the supply of money does not grow with the economy then you get deflation and a company will be less willing to sell a good for a lower price in the future than he can get for it now unless his costs go down by that amount.  

Take four people, four apples, and four dollars.  Let's double our economy. Eight people, eight apples, but still four dollars.  In the first case, the apple producer was able to sell his apples for a dollar each and each person got one.  So he plants more trees and grows twice as many apples- he gets eight of them.   There are only four dollars in the market so if the market is free and competitive but there are only apples to spend money on, the apple grower will only be able to get 50 cents for each apple if he wants to sell them.  If his costs of growing one apple did not change, he is getting half as much for his expenses and loses his incentive to produce more apples since he is making less off each one. If the money supply doubles along with our economy, he can still sell his apples at $1 each and make the same amount per apple.  In the example where the money supply did not increase, the grower increased his production and costs but did not receive any more money for his effort. If he is not rewarded for the effort, he has no reason to make the effort.  Slow to no economic growth will result from zero growth in the money supply. 

If the money supply is growing faster than the economy, then you do have problems with inflation.

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## Paulitician

One is based deductive economics (Austrian school), and the other is "empirical"/"positivist" economics (Chicago school).  I put the two words in scare quotes because it really isn't either, I would contend.  The Chicago school is also mathematical economics, like most mainstream economics.  That is the main difference.  Another is the type of assumptions they make.  Here are some audio lectures at Mises University 2007 that discuss their differences:

Friedman vs. Mises on Method
Vienna vs. Chicago on Monetary Issues

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## krazy kaju

RE: Fox & Zippy

Fox, a growing monetary supply is not a bad thing necessarily. Under a gold standard, we also have a growing monetary supply, just that it comes via the mines, not banks. That is the key - when monetary supply increases outside of the banking system its effects are not likely to be harmful, but when monetary growth is achieved by artificially lowering interest rates, you see business cycles forming. Credit expansion outside of the banking system can only be harmful if it is a very high growth rate, which will force lenders to raise rates as an inflation hedge.

Friedman's monetary supply equation basically states that if the rate of expansion exceeds the rate of (normal goods) supply growth you'll have inflation. The basic equation is generally speaking correct.

Zippy, monetary expansion is not needed for a growing economy. This is a common myth that has been disproven thoroughly. We had high growth rates and continuous price deflation in the 19th century. You might want to see this.

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## danberkeley

> RE: Fox & Zippy
> 
> Fox, a growing monetary supply is not a bad thing necessarily. Under a gold standard, we also have a growing monetary supply, just that it comes via the mines, not banks. That is the key - when monetary supply increases outside of the banking system its effects are not likely to be harmful, but when monetary growth is achieved by artificially lowering interest rates, you see business cycles forming. Credit expansion outside of the banking system can only be harmful if it is a very high growth rate, which will force lenders to raise rates as an inflation hedge.
> 
> Friedman's monetary supply equation basically states that if the rate of expansion exceeds the rate of (normal goods) supply growth you'll have inflation. The basic equation is generally speaking correct.
> 
> Zippy, monetary expansion is not needed for a growing economy. This is a common myth that has been disproven thoroughly. We had high growth rates and continuous price deflation in the 19th century. You might want to see this.


another difference is that gold takes time, effort, and capital to produce, while fiat currency can be produced at will. okay, let's all leave before Kade shows up. go go go!

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## Kade

> another difference is that gold takes time, effort, and capital to produce, while fiat currency can be produced at will. okay, let's all leave before Kade shows up. go go go!


I don't disagree with that...

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## krazy kaju

^ At least you admit that your irrationality and ignorance drives away all rational and cultural debate.

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## Kade

> ^ At least you admit that your irrationality and ignorance drives away all rational and cultural debate.


I meant that I agree with the point. My tolerance is wearing thin, as it is easy to insult and follow me around the boards when I am not on the offensive. Keep pushing.

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## krazy kaju

I'll keep pushing until you start acting in a respectful manner. I have respect for many people who debate with me, but you've done nothing to be one of them.

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## Paulitician

> A growing economy does require a growing money supply.  If the supply of money does not grow with the economy then you get deflation and a company will be less willing to sell a good for a lower price in the future than he can get for it now unless his costs go down by that amount.  
> 
> Take four people, four apples, and four dollars.  Let's double our economy. Eight people, eight apples, but still four dollars.  In the first case, the apple producer was able to sell his apples for a dollar each and each person got one.  So he plants more trees and grows twice as many apples- he gets eight of them.   There are only four dollars in the market so if the market is free and competitive but there are only apples to spend money on, the apple grower will only be able to get 50 cents for each apple if he wants to sell them.  If his costs of growing one apple did not change, he is getting half as much for his expenses and loses his incentive to produce more apples since he is making less off each one. If the money supply doubles along with our economy, he can still sell his apples at $1 each and make the same amount per apple.  In the example where the money supply did not increase, the grower increased his production and costs but did not receive any more money for his effort. If he is not rewarded for the effort, he has no reason to make the effort.  Slow to no economic growth will result from zero growth in the money supply. 
> 
> If the money supply is growing faster than the economy, then you do have problems with inflation.


Sorry to say but, your example is crap and unrealistic.  First, parity pricing is stupid, and all inflation does is lessen the value of money (as well as redistribute wealth).  Second, you act like the apple producer doesn't get a proportional amount of extra purchasing power as well with the extra goods that were created.  (By the way, is the apple producer 1 of the 4 persons, or is he independent of them or something?)  Also, if having the same cost is an disincentive to produce and increase productivity, well then that just creates an incentive to cut costs and thus become more efficient.

History is against you on this one.  In the 19th century price levels were fairly steady (with a little downward bias) and goods became cheaper.  Yet great growth still occured.  Read the paper krazy kaju posted, it gives specific dates.  Not to mention electronics currently.  They're constantly getting cheaper and yet there is still productivity and growth in this area.  An inflationist policy is not needed nor is it perferable.  There certain types of "deflations" we should try to avoid, such as a collapsing/contracting money supply, but lower prices for goods is not one (since only a general decrease in price levels is indicative of true deflation).

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## Zippyjuan

> RE: Fox & Zippy
> 
> Fox, a growing monetary supply is not a bad thing necessarily. Under a gold standard, we also have a growing monetary supply, just that it comes via the mines, not banks. That is the key - when monetary supply increases outside of the banking system its effects are not likely to be harmful, but when monetary growth is achieved by artificially lowering interest rates, you see business cycles forming. Credit expansion outside of the banking system can only be harmful if it is a very high growth rate, which will force lenders to raise rates as an inflation hedge.
> 
> Friedman's monetary supply equation basically states that if the rate of expansion exceeds the rate of (normal goods) supply growth you'll have inflation. The basic equation is generally speaking correct.
> 
> Zippy, monetary expansion is not needed for a growing economy. This is a common myth that has been disproven thoroughly. We had high growth rates and continuous price deflation in the 19th century. You might want to see this.


How did the rate of growth in the years of negative CPI growth compare with years of positive CPI growth?  Was the money supply shrinking in those years?   I did say that you can have growth during deflation but it will be slower or even negative if the money supply growth does not keep up with economic growth.  

In the article you link to, Salermo points out that economic growth occured AFTER the periods of deflation.  
Looking at historical CPI data since 1914 http://www.inflationdata.com/Inflati...Inflation.aspx I find the following years with price deflation:
1921
1922
1927
1928
1929 (actually zero % change in CPI)
1930
1931
1932
1933
1938
1939
1949
1955
The article only claims growth in GNP for four of those if you read carefully- 1922, 1928 , 1939, and 1955. Less than one third of the time.  It is possible but not the norm for an economy to expand under deflation.  The economy started to grow better AFTER the deflation ended. Note that most years of deflation occured during the Great Depression. Not periods of strong economic growth. Between 1927 and 1933 GDP fell about 22%.  http://faculty.tcu.edu/jlovett/econ_data/Depression.pdf The gains of 1928 were more than offset by the decline the following year. In fact it would not reach that level again until 1937.  1939 GNP was actually lower than it was in 1937- even though it was up from 1938. http://www.aliveness.com/kangaroo/GDPreal.htm 

Inflation is also undesirable.

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## krazy kaju

> How did the rate of growth in the years of negative CPI growth compare with years of positive CPI growth?  Was the money supply shrinking in those years?   I did say that you can have growth during deflation but it will be slower or even negative if the money supply growth does not keep up with economic growth.  
> 
> In the article you link to, Salermo points out that economic growth occured AFTER the periods of deflation.  
> Looking at historical CPI data since 1914 http://www.inflationdata.com/Inflati...Inflation.aspx I find the following years with price deflation:
> 1921
> 1922
> 1927
> 1928
> 1929 (actually zero % change in CPI)
> ...


Actually, we've had continuous economic growth and price deflation in the late 19th century, as noted by Milton Friedman and Anna J. Schwartz in their book _A Monetary History of the United States_. Prices about halved between 1867 and 1875, IIRC. Using deflation under a fiat currency system as an example of deflation always being bad is somewhat of a misnomer.

These were probably times when time preferences decreased and therefore saving increased - which leads to temporary reallocations of labor and capital from less profitable consumer goods to more profitable capital goods. These years allow higher rates of growth to be achieved in later years due to a more capital intensive economy. The reason you can only pull a handful of years of deflation and economic growth is because inflation has become a norm since the Fed began gathering data. Many of these years - had we had a real gold standard - we would have had simultaneous deflation and economic growth.

A major reason why we had skyrocketing rising real wages in the 50s and 60s was because the Fed could not inflate as much as they could now under their gold exchange standard.

Lastly, I'd like to point out that traditional GNP and GDP figures do not accurately measure the investment, and more importantly the _re_investment made in capital goods. This is a major factor that can result in seemingly negative growth rates during times of increased saving and investment (and therefore actual growth).

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## Danke

> Many of these years - had we had a real gold standard - we would have had simultaneous deflation and economic growth.
> 
> A major reason why we had skyrocketing rising real wages in the 50s and 60s was because the Fed could not inflate as much as they could now under their gold exchange standard.
> 
> Lastly, I'd like to point out that traditional GNP and GDP figures do not accurately measure the investment, and more importantly the _re_investment made in capital goods. This is a major factor that can result in seemingly negative growth rates during times of increased saving and investment (and therefore actual growth).


A man used to be a wage earner able to support himself digging a ditch with a shovel.

Later he had a back hoe.  Then a loader bucket.  And even in extreme cases, the big brown coal diggers.

But has his earnings increased relative to his increase in productivity?  Can he afford the house and land of his forefathers could purchase from such labor?

Stolen wealth.   The bankers have known this inflation trick for centuries.

Deflation should have made every common man and his heirs more wealthy. But that has not been the case.

"If the American People EVER allow the banks to issue the currency, their children will wake up homeless on the continent their forefathers established." - Thomas Jefferson

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## Zippyjuan

> Lastly, I'd like to point out that traditional GNP and GDP figures do not accurately measure the investment, and more importantly the reinvestment made in capital goods. This is a major factor that can result in seemingly negative growth rates during times of increased saving and investment (and therefore actual growth).


Perhaps you could provide us with some figures looking at savings and investment in the deflationary years and compare that with rates in non-deflationary years.  This would help support the claim that investment does not go down during deflationary periods.  I would be interesting to see how that matches up.  I thinik it will be difficult to come up with such numbers so I use the more available GNP/ GDP figures as a measure of economic output. 


I did not look at pre-1914 years since I was unable to find date from then.  

How about another look at the same data I linked to before.  What years did the economy shrink (GDP or GNP went down)?
1921
1930
1931
1932
1933
1938
1942
1943
1954

Note how closely these corelate with the years of price deflation.  Price deflation is strongly linked to poor or negative economic growth.
Other factors can contribute to negative or slow economic growth.  We also had shrinking economies in 1974, 1975, 1980, and 1982. 

An individual business can grow under deflation of their prices if they can lower their costs of production by more than the amount their prices go down.   Labor is a major cost of production in many industries.  Many manufacturing firms have been able to reduce their costs by moving production to countries with lower labor costs.

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## Paulitician

We all know that the economy goes through boom/bust cycle, where inflation is the boom (expands) and deflation is the bust (contracts).  Inflation is caused in part because of fractional reserve lending, but sooner or later the market will correct this, which, as I said before, is characterized by deflation, lower prices and low economic growth (what you mentioned) as well.  That's fine, I see the causal relationship.  But Zippyjuan, do we know that in a situation where inflation is discouraged, say under a full reserve gold standard, that lower prices due to an increase in productivity will make growth lower?  Because to me it seems you're accepting the fallacy that lower prices cause recessions--when it could be that the opposite is true (recessions cause lower prices), or lower prices could just be a symptom of recessions.  You're equivocating one situation with another but fail to differentiate the causalities of those respective situations.

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## Zippyjuan

No, I am not confusing the two.  I have said that if you can lower your costs of production that you can have lower prices and still experience growth.  I also say that not all industries can increase production and lower their costs enough to be able to lower prices and still grow.  The point of discussion was if a fixed money supply could still allow deflation and growth over the long term.  I provided an example where the economy doubled along with the population but the money supply did not change.  In this case, the producer of apples would have had to cut his costs of production by more than half to make the additional production in his interests. 

To refresh, 



> Take four people, four apples, and four dollars. Let's double our economy. Eight people, eight apples, but still four dollars. In the first case, the apple producer was able to sell his apples for a dollar each and each person got one. So he plants more trees and grows twice as many apples- he gets eight of them. There are only four dollars in the market so if the market is free and competitive but there are only apples to spend money on, the apple grower will only be able to get 50 cents for each apple if he wants to sell them. If his costs of growing one apple did not change, he is getting half as much for his expenses and loses his incentive to produce more apples since he is making less off each one. If the money supply doubles along with our economy, he can still sell his apples at $1 each and make the same amount per apple. In the example where the money supply did not increase, the grower increased his production and costs but did not receive any more money for his effort. If he is not rewarded for the effort, he has no reason to make the effort. Slow to no economic growth will result from zero growth in the money supply.


The apple producer is growing twice as many apples to try to meet demand but his income does not increase since consumers do not have any more money to pay for the apples so why should he produce additional apples?  Apples represent the economy as a whole- not one individual business.  

If prices are deflating, incomes (wages are a big component of production costs) are probably also falling. 

The money supply needs to grow with the economy to be able to maintain growth. Too much money supply growth has the other adverse impact of more inflation.  You are correct that a bad economy can lead to deflation- that happens because people have less money to spend- whether that is due to a reduced supply of money in the system or people losing their jobs.  Producers are no longer able to sell their products for the same price they were before. If the price falls to their cost they will cease to to produce since they are not making enough money to stay in business.

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