Common Sense Economics by L. Albert Hahn

Author:L. Albert Hahn [Hahn, L. Albert]
Language: eng
Format: epub, pdf
Publisher: Ludwig von Mises institute

Should Increased Productivity he Met by Inflationary Credit Expansion?

We have already touched this question (see: Wage and Price Level and Increase in Productivity—pp. 95 and 96) and would add here the following:

If productivity increases—following technical progress or increased capital investments—within the framework of a totally inelastic money circulation, as presupposed in Part II, prices will of course sink because an increased production meets an unchanged monetary demand. Wages remain stable. In this case the advantages of increased productivity are shared by all sections of the population, including recipients of rents and fixed salaries, and owners of monetary claims.

This method of coping with the problem of increased productivity has the disadvantage, as already mentioned, of inflicting losses on those who hold inventories and durable capital goods. The consequences of such losses on the anticipations of entrepreneurs should not be overrated, however. Entrepreneurs are influenced in their decisions less by losses in the past than by anticipation of profits in the future. As prices have not fallen more than costs they won't curtail production, except if they assume that productivity increase—and thus falling prices—are a permanently repeating phenomenon.

A much more important difficulty follows from the fact that labor leaders prefer to fight for a raising of money wages in accordance with increased productivity rather than for a lowering of consumer prices. This is quite understandable, first, because when money wages are raised the increased productivity benefits only labor; second, because the success of unions appears much more impressive if wages are raised in monetary rather than in real terms.

If entrepreneurs are induced to pay higher wages in accordance with increased productivity, the prices of the increased products have to be prevented from sinking, for if wages are pushed up in the face of sinking prices, unemployment must ensue.

The only way of supporting the price level is by increasing monetary demand through inflationary credit expansion. This inflationary credit expansion, while supporting the price level, will, however, not raise it because the increased money circulation meets a supply of goods that has been increased through the higher productivity.

Such an “inflation without inflation”—which, incidentally, should not be confused with the “volume prosperity” which develops in the first phase of a business cycle, as described later (pp. 177–178)—is in general considered harmless in every respect. The question whether this is correct is of the highest importance at present.2

Those who consider an “inflation without inflation” to be harmless overlook the fact that productivity increases mean profit increases for the entrepreneurs as long as costs—for labor as well as for capital—are not fully raised accordingly. It does not make any difference whether profits rise because prices rise or because costs decline by increase of productivity. The result is, or can be, in both cases the beginning of a cumulative process. Cumulative processes to the upside break down sooner or later and are followed by depressions—as we shall see later when the business cycle is described—if only because every stimulus finally exhausts itself. Through an energetic raising of discount rates such cumulative processes can be prevented.

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