"....Imagine how hard it would be for that government to raise debt in such a world. It would have to justify its spending. We cannot have that."

Just Imagine indeed...

Damn it Andrew, I don't think I've done so much thinking on a Sunday for a long time.

This is a strong piece of writing and it captures something that’s usually buried under layers of jargon. The part that stands out to me is the distinction between two very different forces that both get labelled “deflation”.

One is the natural outcome of innovation: producing more with the same inputs. That’s the process that turns luxuries into commodities and raises living standards over time. Prices fall because capability rises. Nothing destructive about that.

The other is the unwind of a credit cycle: balance sheets under stress, forced selling, and a scramble for liquidity. Prices fall in that environment for completely different reasons. That’s not progress. That’s a system clearing out excess.

The problem is that mainstream commentary treats these as the same phenomenon. The fear of the second gets projected onto the first. The result is a policy framework that treats any sustained fall in prices as a threat, even when it’s the direct result of productivity gains.

The essay’s point — and the part I think is worth discussing — is that you can’t manage these two situations with the same tools. One reflects competence. The other reflects fragility. Blending them together leads to confused policy and confused incentives.

Happy to hear other views on whether this distinction holds up, or whether people see the boundary between the two as less clear in practice.

What a read, some lightbulb moments, gentle push back (as requested) and some new ways for me to think about inflation...

Firstly "when you hold money, you are holding what can be thought of as a claim on the future output of the economic network in which the money is used" might be the best definition of "what is money" I've ever heard. I never thought a stop on the learning to invest train would be "what even is money?". That's a banger though.

After a post read contemplation with the 2nd half of last nights bottle of red a few ideas are coalescing. I think this has helped me re-frame why I think inflation exist, and what it is. I've always struggled with the explanation that inflation is a thing because a bunch of Keynesian's believe it to be right in theory, and are too arrogant to see it not working in practice. For me that theory falls down for the same reason as the "moon landing was faked conspiracy" (as well as all the science). The moon landing was faked theory inadvertently gifts the opposing side of the argument much more competence than they deserve (yes even NASA), ie for the moon landing to be faked thousands of people would have had to have an alignment of ideology, a level of competence to ensure not one slip up, and a commitment to never waiver, not one person, not even once. Similarly I can't see every treasurer, head of the leading party, and head of government bank all maintaining an ideology across multiple parties, countries and generations. It's a level of alignment and cooperation that humanity is just not capable of. I think for it to be as pervasive as it is, it needs to be somewhat self emerging and mutually beneficial across political and economic ideologies. Maybe more on that below.

The essay's big lightbulb moment for me is that we need to change the language of inflation (or at the very least I need to think about it differently). We say inflation is a melting iceberg, that it is wealth erosion, the implication being that it's wealth destruction. It's not though, a portion of my take home pay has been taken (in real terms) and a portion of my savings has been too. But, nothing was destroyed, no-one took a car off me or shrunk my house. Every punter in the country has had wages and savings taken, but the Australian pizza has gotten bigger with time. So a smaller slice of a bigger pizza, with a net loss in real terms to wage earners and savers. Which isn't wealth destruction, it's wealth re-distribution. This will be old news to many, but inflation isn't erosion, or a melting iceberg, it's a tax on wages and a levy on savings to be taken by the Gov and re-distributed (like all taxes and levies). I think this helps me with the why. "Give or take every government in the world holding stedfast alignment on a new, unproven, potentially problematic economic theory?" I don't buy it. "Every government being seduced by a tax and a levy that gets no push back from punters, media or lobby groups?" I could see that taking off.

For the pushback. I agree, I don't think anyone can truly believe that the masses will delay consumption because they're holding out for a better deal in a year or two. Electronics shops the world over would have zero sales all year and only trade on the black Friday sale. All non perishable goods would only ever trade on sale, cars would only ever be bought in EOFY sales. It's rubbish and people don't behave that way. However... I do think that policy settings and market expectations can, and do, have a massive impact on consumer spending. I'm thinking things like seemingly minor CGT discounts and negative gearing settings having changed Australia's entire economy around real estate. So as I say, I can't see spending changing out of a strategy to wait for deflation. In Charlie Munger "invert, always invert" fashion though, if we had an increasing levy on savings, and increasingly people worked harder for less, I could see spending increasing as a result (why bother saving, let's treat ourselves). It's invisible, but it's still felt. After all why do we buy investment houses or shares? because we know that saving doesn't work, it's impacting our behaviour. If you can buy into that, then maybe the inverse is true, that were the invisible tax and levy to be reversed, spending would decrease. So maybe the hardcore Keynesian's are right, just not with the correct reasoning. I don't know that it necessarily leads to bad outcomes (argued very well in the essay), but I wouldn't be surprised if spending and investing change meaningfully in a zero inflation (or the good kind of deflation) world.

So what? Don't know, might have another glass of red.

I love it @Lewis. It is exactly what I was hoping for.

It is definitely dangerous when you start blindly cheerleading for a given team or ideology instead of relying on sound arguments. You always have to ask yourself why a theory or philosophy might be considered fringe. There is usually a good reason for that, and at the very least you have to question how the majority could be so wrong.

So it really does give me pause for thought.

At the same time, it is just as important not to blindly accept the consensus. The best and brightest doctors bled George Washington to death in an effort to save his life. Most surgeons did not see fit to wash their hands before surgery when germ theory was first proposed, and Galileo was persecuted for saying the earth orbited the sun. Even in more modern times, most geneticists thought more than 90% of DNA was non-functional junk DNA in the late 1990s. There are loads of examples. This is not a reason to reject all consensus views, as most of the time they are correct, but it pays to question things and demand supporting facts.

Extraordinary claims require extraordinary evidence, as they say. So when people argue for the ability or even the necessity to print money, run structural deficits, and manually set the rate of interest, you would hope that is very well supported!

In terms of the Keynesian world view, why is it so dominant? It was not always this way. Those studying economics 80 years ago were non-controversially exposed to the ideas of Mises, Hayek, and the other Austrians. But it lost favor because it was a bit of a wet blanket for banks and politicians. Which school of thought are you going to support: the one that says you have to show restraint in a world of limited resources and hard choices, or the one that is an enabler for unfunded spending and legalised money creation..?

I do not mean this in a conspiratorial fashion, but rather a follow the incentives one. Two politicians are up for election. One says we can only fund additional services by taxing you more. The other says we can increase services and lower taxes while stimulating the economy at the same time. It is also this playbook that drives asset price inflation, which is nice if you have assets and extra nice if you have access to debt that will inflate away in real terms over time.

I also think there is an academic seduction with neo-classical Keynesianism because it invokes fancy math and models. These are somewhat sophisticated models which have a certain elegance to them. It is far more intellectually satisfying than shrugging your shoulders and saying all value is subjective and that messy, irrational human action is the core driver of economic happenings. Indeed, that school of thought is so incredibly uncertain that it does not even pretend to be able to make specific economic forecasts.

It is a little bit like how very few professional investors genuinely embrace the investing philosophy of Buffett and Munger. It is too simple and not nearly as compelling as a detailed CAPM model and a regression analysis.

Anyhoo, that is how I explain it, because it sure does not seem to be supported by a great track record, which is always the best evidence for a good theory.

What I also struggle with is the underlying, first-principles theoretical underpinning of Keynesianism. The axioms on which the theory is built treat human beings as unemotional, Vulcan-like, hyper-rational economic actors that always seek to maximize utility. I have yet to meet someone who fits that description. If the foundations are shaky, what does it say about what is built on top of them?

If it is so good, why do economists have such a poor record of prediction? Why do they struggle to find consensus on economic prescription? Show me 10 mainstream economists and I will show you 10 different opinions on the state of the economy and its near-term direction. I agree with you that their prescriptions are impactful, but perhaps not in the manner they expect, or without regard to a bucket load of unintended consequences.

It is also the unevenness of things that accounts for why it is seen as successful. If you have assets and easy access to credit, or if your remuneration is tied directly or indirectly to the public teat, then Keynesianism has been a wonderful thing and has certainly made your life better. Everyone in your circle no doubt agrees, so there is a lot of consensus. But if you are a "working class" type who is not in such a position, you have seen your real wage fall and essentials like housing, food, healthcare, and fuel become increasingly more expensive. And people wonder why populism is on the rise :)

It is never this clean because, even in the face of flawed economic thinking, life has on average gotten a lot better for the average person over time. If Keynesianism is so terrible, why do we enjoy a standard of living that would be the envy of kings in centuries past? To me, this success is not because of the ability to print money and set its price, but in spite of it. The power of mostly free market enterprise is so incredible as to push us forward even with distortion, at least if the distortion is not too extreme. That's why Australia and Argentina can have the same financial and monetary institutions, but very different outcomes.

A small amount for cocaine won't kill you, and plenty of people manage to remain functional while supporting a habit. But it's probably not really helping. And too much will ruin you.

China did not rise because the communists finally got the settings right, but because after Mao they learned to embrace much freer markets in most parts of the economy. They call it a "Socialist Market Economy with Chinese Characteristics" but it is the market part that has done the heavy lifting.

It is like undergoing chemo while also employing a crystal healer. You might get better, but it is probably not the crystals that did it.

The Austrian or monetarist viewpoints are harsh and full of trade-offs with no free lunches. They can come across in an uncaring and somewhat Darwinian manner. It can be interpreted as an attitude that "poor people just need to work harder", which is not what the theory says, but is how it is easily interpreted and how some idiots espouse it.

But it's just treating the world and humans as they are, not how we wish they were. It doesn't seem to glorify the theory as a cure-all and road to nirvana, and say it will fix everything. It just acknowledges the reality of things, and remove the well meaning but counterproductive influence of policy makers.

Anyway, sorry for the long ramble. I think some of this explains why we have the system that we have. It is all just a matter of incentives and selective viewpoints. But it really is a remarkable feat to convince people that they should want prices to increase forever.

There’s an immense amount of bad economics in that article. The title says, “from first principles” but the author either doesn’t understand, doesn’t know or is intentionally misrepresenting basic principles of mainstream economics.

To be clear: there are genuine, serious concerns to be had for current monetary policy. The problems however, do not stem from basic economic theory like the post, or Austrians, suggests.

I want to park the discussion of policy, and instead focus on the underlying theory. Given how much long the post is, it’s hard to do a complete play-by-play of everything it gets wrong, but the biggest issue is that he claims heterodox economics does not factor in time.

This is patently false as dynamic models do exist in macroeconomics and expectations are a huge part of macroeconomics. It is assumed that economic agents are forward-looking, and act according to their expectations under conditions of uncertainty. Inflation itself is the measure of changes in prices which happens over time, so I’m not really sure how he came to that conclusion.

At a micro level, heterodox economics does state that firms maximise their profits over time, contrary to his claims. Equilibrium is a steady-state at a point in time, not an economic nirvana where we all ascend to the free-market heavens.

Also, models do exist where you can factor in the time value of money and profits over time. In addition, he seems to interchangeably use market-level models (demand vs supply) with firm-level models (production curve vs costs). Nor does he understand that we can model supply or demand shocks into the models.

I could probably spend all day on this, but ultimately his conclusion is built on a foundation more shakey than heterodox economics itself.

Nodding along in furious agreement @Strawman, Show me the incentives and I'll show you the outcome (I'll happily embrace Charlie and Warren any chance I get) . Is there a b-test out there somewhere, a democracy that hasn't embraced inflation? It seems weird that there isn't. Which is why I'm trying to understand the "why", it's so prevalent it feels it must be emergent, self correcting or self serving somehow. Directionally, countries with lower inflation (Nordics, Sweden and Japan) seem better that ones with high inflation, so follow that trend and it suggest we should be aiming for as low as possible (including zero and deflation). But everyone seems set on a number a Kiwi plucked out of thin air. Understanding money, economy's and inflation is like holding sand, every time I think I've got a good grasp of it, it starts slipping away.

The bifurcation of the economy is well underway and quietly terrifying. Land owner or renter is becoming an inherited trait and takes us back to medieval times, add wage earners/savers being on an ever increasing treadmill, whilst asset owners get the tailwind of compound inflation. Increasing wage gaps does not bode well for society's and ours is beginning to run away. Hrmm, much to ponder.

I took it differently @Keyboardcat999 (but maybe I shouldn't have). Although definitely worth separating policy and theory.

its not so much that time isnt in any equation, or that modelling has zero value, but that the sterility of a entirely math based focus doesn't account for the nature of the process, and the myriad messy and imperfect decisions that ultimately direct things over time.

A lot of economic things can be modelled. But as tye saying goes, all models are wrong, some a just less wrong than others. And its dangerous to assume you can extrapolate forward from incomplete and messy data, without regard for unknown, unknowable or yet to be known factors.

If we could do that reliably, why are the experts so often wrong and in disagreement?

And if the only use case is to retroactively explain things, then it is limited as a tool for planning.

It's not that we need better models or better data, but that we need to stop pretending it is even possible to model them at all. At least, in a way that has worthwhile practical implications for important policy decisions. Beyond a highly generalised level anyway.

We all see the issue more clearly when we start comparing our valuation models for stocks. Most of us are using the same general framework, but we all come up with different answers.

It's not so much that we are wasting our time, but it is dangerous to mistake our guesses for the true nature of reality. Which is what plagues modern economics imo. Not to mention sell side analysts!

I guess his main pushback is that when you try to "manage" the economy with these models you end up breaking the signals people use to plan for the future in the first place. basically even if a model is dynamic if its based on a centrally planned interest rate or an inflation target plucked out of thin air its still detached from reality.

ultimately i think its just a fundamental disagreement on whether you can ever actually model human creativity and effort and the passage of time accurately enough to try and control it.

So..I'm back at the policy level again.. but it's because of that that this debate is such high stakes.it rationalises very important decisions, so it's worth understanding the limitations.

Thanks @Strawman for the article that pushed back on my understandings, here is my push back in good faith on the ideas and arguments where I saw them (note for brevity it’s just the key points)

I reject the core premise of the essay because it is built on the assumption that deflation from productivity/efficiency/innovation is a good thing so deflation is a good thing. It is obviously better than deflation from value destruction, but it does not show that deflation caused the innovation (ie It is guilty of the same argument it says proponents of the need for inflation are).

That is it conflates the result (disinflation) with the cause (productivity). Yet fails to acknowledge that this “good deflation” has been created during long periods of inflation!

Other points:

There is no evidence that running an economy for an extended period in deflation produces any of the results of “good deflation”. The essay simply implies that any inflation is bad based on evidence that high inflation is bad as we have seen real examples of and everyone agrees high inflation is bad, then concludes disinflation will be good because it’s not inflation.

I agree the targets set by central banks are generally arbitrary, but there is clear evidence that that economies function well at levels “around” the low single digit level – it’s not exact, but you have to pick a number so everyone is on the same page (expectations & communication reasons). Economics isn’t physics as noted, so there is no universal good inflation constant!

In arguing for disinflation, it conflates high inflation and low inflation as the same thing – the level and the rate of change of the level are very important which is not addressed. It simply argues that deflation is good and inflation bad due to wealth transfer issues, implying deflation would reverse or not have these effects, with a hard money system ensuring deflation.

It criticises economic theory with a selective comparison of basis of static models to address time series issues of inflation, which as @Keyboardcat999 covers is disingenuous and misleading selective for the argument. It attempts to justify with an excessive number theoretical scenarios of questionable logic in an attempt to achieve with quantity what quality does not.

It focuses a lot on the Paradox of Thrift which I agree is a tenuous theory around consumption but innovation comes from investment (supply) rather than consumption (demand) as it notes. However, by having savings (in hard money) as an asset creates the issue it’s arguing against – it does change the time preference of consumption and investment but becomes an alternative to consumption and investment as an asset unto itself. 

The greatest purpose of money is to facilitate economic activity, it is a store of value, but it creates no economic activity while it is a store of value unless it is available for lending out. Our modern miracle is driven by banking (the good parts) as those with wealth and no way to use it could lend it to those without wealth but a way to create it.

It points to the inflationary impacts of money printing (which I agree where excessive), but ignores the investment and innovation created from a fractional reserves system allowing greater credit creation. Preferring to focus on the potential unwinding of that credit creation which comes from assumed poor allocation, which may well put you back to where you were without the factional credit (ie hard money) – which is worse? I am not sure but have sympathy to the argument that government can’t be trusted with being able to print money seemingly without consequences.

I agree with massive issue around how interest rates are used and money printing to stimulate the economy. However, I think it’s our own stupidity (the electorate) that is to blame more than anything else, it’s not going to change any time soon, but I am equally concerned at an alternative extreme that it’s totally hands off (to @Lewis point that our current system must have some legitimate merit, not just a grand conspiracy) ! Let the debate continue.

Stopping here before it’s as long at the essay… it’s a big big topic and I need to learn more.

Ah thanks @Tom73. Very much appreciate the other side of the argument and all the various perspectives. Although as with a lot of these things I think the two sides often talk past each other.

My pushback on the pushback is that I think he just takes it as a self-evident thing that we should like things to be cheaper. Or more accurately, have more purchasing power.

​I don't think he tries to say that innovation happens because of deflation; more the other way around. And I'm not sure we can say that innovation and productivity only come from previous periods of inflation.

​People always innovate because innovation offers an advantage and markets are competitive. That's true with mild inflation or modest deflation, right? And I don't think people only innovate because fractional banking allows them to. If not, I'd like to see evidence for that.

​And I also don't side with the view that money that is saved is not doing anything. It is savings; not using it (yet) is the point. And if someone has a great investment opportunity, why wouldn't I lend it to them (even if that were intermediated by a bank or similar)?

​I guess we all assume certain "truths" as self-evident and incontrovertible, and from there we reason to different conclusions.

​I just find some of the foundational principles of much of contemporary economics as lacking. Not entirely useless, but fuzzy enough to at least treat cautiously.

​If this were physics, we could just run some clean experiments and test it all out. But economics doesn't give us that luxury. However, what historical experience does provide sides more with an approach that doesn't try and orchestrate specific outcomes by granting exceptional privileges to the politically connected, but instead just provides the conditions for creativity and trade to emerge, and then largely (but not entirely) gets out of the way.

Yes @Strawman we lack a lot of understanding of how our economies really work with many economic theories and norms unable to provide good enough guidance or understanding of current or future outcomes. As you have said many a time, it is ridiculous to think we can encapsulate the complexities of millions of people and the billions of transactions that occur in our economy with theories and policies. To the extent that markets can be free and those in it uncontrolled the better the outcomes generally and the government focus on addressing market failings rather than overriding preferences the market reveals.

Note I did not intend to suggest that innovation and productivity only comes from periods of inflation – I have no idea, I only noted that it has come and we have been in inflation throughout those times in general. I did get the impression (probably wrongly) that the essay was suggesting through it’s may examples/cases that prices going down created a virtuous cycle that drives more innovation and real wealth. I think we don’t have the data or knowledge to understand how inflation or deflation impacts innovation, maybe it’s irrelevant…

We want innovation and improved purchasing power – that is we want real improvements in wealth and wellbeing of people as you often mention on the podcast and this is what I am interested in. Does a 2%, 0% or -2% (or some other number) inflation rate do a better job of delivering that over the long term? Maybe “it depends”!

I agree we probably need a real-life experiment in some country to find out more but we will never have a “correct” answer.  I also agree we shouldn’t just assume some inflation is necessary for human progress to occur or occur at optimal rates.

I just felt the article generally misrepresented economic theories as a strawman counter argument to support hard money as a disinflationary obvious solution – which probably reflects my bias’s in reading it.

Thanks for putting up with yet more undereducated doubt from hard money novices @Strawman, I genuinely want to understand what is critical for us and our children!

There's also a famous lecture on economics from Charlie Munger in 2003 worth a read (though speaking personally I usually defer to the wisdom of Peter Lynch, "If you spend 13 minutes a year on economics, you've wasted 10 minutes", or Warren Buffett, "Any company that has an economist has one employee too many."') :)

https://fs.blog/great-talks/academic-economics-charlie-munger/

@Strawman thanks for posting this article, I agree it's in a class of its own. It appears 'handwritten' by a gifted expert rather than AI-assisted.

He lays out the tendency of businesses towards deflation really well, and clearly delineates good and bad deflation. There are many parts of the article you could pick out. For example, the section about why businesses don't get to choose price and output in advance, they have to discover it. Spreadsheets make it seem controllable in hindsight.

This is a weird segue but bare with me. I watched a Gary's Economics podcast today (I know, I know) where he said that in his experience the top economics graduates go to work in trading, where they live or die by their forecasts. He further implied only posh kids who've presumably not worked in a business go on to become academic economists and as a result they lack the insights of experience to challenge dogma. They just want to enjoy their academic career.

So putting these together I can see that the government can now happily inflate away all the hard won deflation from innovators by planning and spending inefficiently, with the excuse that it's kind of on purpose because 'a bit' of inflation is important and necessary...

Are there any strong counter-arguements?

How have I not come across this before @RogueTrader ?

What a banger. As usual, when it comes to the late great Charlie Munger.

I loved the Franklin line too:

"If you would persuade, appeal to interest and not to reason."

My God, how true is that!

And this:

"You can never make any explanation, which can be made in a more fundamental way, in any other way than the most fundamental way. And you always take with full attribution to the most fundamental ideas that you are required to use."

And,

"I always figured that, while there were always a lot of people much smarter than I was, I didn’t have to hang back totally in the thinking game."

And,

"opportunity cost is a superpower, to be used by all people who have any hope of getting the right answer. Also, incentives are superpowers."

Ok, I'll stop now. Just read the transcript.

@RogueTraderIf only Labor understood incentives and second order effects before creating the NDIS...

I think a lot of this comes down to the philosophy and spirit of economics, and whether it should be a science at all (I firmly believe it should be, and is).

Economics has a very difficult position, more so than most other scientific disciplines. It is a messy ‘soft science’ like psychology, but the theories are much more quantitative than psychology.

There is absolutely an over-reliance on models and maths. This is somewhat of an unfortunate necessity as the maths gives economic models rigour, allowing them to be measured for effectiveness and models give us an understanding of cause and effect.

History is not a science, yet historians use the weight of evidence to come to a conclusion on facts. In economics, if one model has better explanatory power and predictive power, than it is the better theory.

There is not a single science or field of study that is “complete”. Astrophysics can’t explain shit about the universe. Astronomers need to create a placeholder “dark matter” and “dark energy” that makes up to 70% of our universe otherwise their models break completely! What a joke! Einstein and Niels Bohr famously fought over quantum entanglement and it took decades to resolve after they were both dead.

Economics is often wrong, but so is everyone else and that’s part of the scientific process. Science is the process of building a wall, brick by brick. The only difference is that economics is front and centre in our lives literally every day and so we expect more from it than other sciences. Admittedly, economists take the crown for being the most stubborn and arrogant when it comes to their theories. The saying “science progresses one funeral at a time” applies hard for economics.

We need explanatory and predictive models because the global economy is complex. Just giving up on our models doesn’t change the fact the world is complex, it just leaves you further in the dark.

ultimately i think its just a fundamental disagreement on whether you can ever actually model human creativity and effort and the passage of time accurately enough to try and control it.

This is a limitation of economics, but I do not think it should be a concern for economics. Economics should explain how people maximise their utility given the incentives, but not why something provides that level of utility. This should be left for psychologists and neuroscientists and left as an exogenous factor in economics. Otherwise economists will then need to become psychologists… and you probably don’t want them giving people therapy.  

When it comes to monetary policy, the reason we follow a rules-based approach (targets, Taylor Rule etc) is because it doesn’t “break the signal”. Economic agents know that CBs will act a certain way, and are able to factor that into expectations.

To expand upon the paradox of thrift: if a firm expects future prices to be lower, then what is the optimal strategy? It is to sell everything today, and sell nothing in the future to maximise profits. How does deflation encourage further innovation if the incentive is to reduce production in the future? Everyone wants things for cheaper, even economists because that’s how we maximise our real purchasing power. The issue is that firm investment (‘I’ in the GDP equation) would go to zero, and since firm investment is economic capacity, this shrinks the overall economy.

 This has gotten very long, but I hope this rambling makes sense.

That's a brilliant piece of writing @Keyboardcat999. Some great points in there.

Nicely said @Keyboardcat999. I actually agree with a lot of that.

I originally trained as a scientist (about a million years ago) and have always found great appeal in the scientific method as a process for understanding the world. Honestly, i'm not sure how else you could do it.

So it's not that I dont think economics isn't, or shoudlnt be, a science. I'd just prefer it if more of the current orthodoxly actually embraced the empiricism required to substantiate some of the claims. And that practitioners better understood what can and cant be modelled and managed, at least in a way that is practically viable.

Case in point, if central planning of interest rates and base money supply was effective in driving prosperity, by means of targeting a modest amount of inflation, you'd still expect a growth in real wages. Instead, in the last 20 years in Australia, its been essentially flat (and for people at the lower end it's gotten significantly worse). So at best it's a red queen effect. Maybe the argument is that if they didnt manipulate rates and print a bucket load of money it would have been even worse, but that's an unmeasurable counterfactual that is far from scientific.

What we have seen is a housing and affordability crisis and an ever increasing wealth divide. Exactly what an Austrian viewpoint would predict, and pretty much the outcome you see whenever these policies have been substantially enacted in history.

For me, the ultimate goal of economic policy is simple: to improve our shared prosperity. If our collective labour doesnt ultimately deliver us more and/or better goods or services per unit of input, then what's the point? And not in some consumptive, hedonistic manner. Maybe that prosperity is realised in increasing free time and choice. But if all we do is drive GDP higher while still working just as hard to provide for life's essentials, what's the point?

Anyway, that's why i'm so scepitcal of much (but not all) of the claims made by so many prominent economists. The expected outcomes for so much of our economic "management" just arn't that evident. Any serious scientific approach would at the very least encourage us to be less certain, less dogmatic, of things that have very weak supporting evidence.

As for the paradox of thrift, I cant refute it better than the authors do in the essay. I thought they dismantled it brilliantly, which to address your specific point, essentially says deflation (the good kind, driven by productivity) is what allows you to capture market share without losing margins -- even though you're selling at a lower price.

EG. Let's say i invest some time and resources to develop a process that allows me to make and deliver gourmet pizza at half the price of a dominos pizza. Because I can still make a positive net margin on a lower price, and because a lower price will let me capture market share, i will quickly dominate the market -- after all, who is going to buy a shitty dominoes pizza for $15 when they can have a gourmet one home delieverd for $8? I'm still making (say) $2 margin on each pizza sold, and will likely see my volume and profits explode. All because i offered a combination of better quality and lower price. Even if the quality were the same, i'd still win on price (and so would the consumer). THAT's the incentive to invest and innovate in a deflationary regime. Because if i dont, someone else will and steal my profits.

Love the discussion, and always enjoy talking through these ideas. It's always very much with a view to test my thinking and get closer to the truth. And NOT to start a stupid forum fight over pet ideologies -- so hopefully it's taken in that spirit :)

To boil it down, am I right to infer that:

1. innovation causes deflation (the same good or service tends to gets cheaper over time - e.g. Amazon logistics).
2. Despite this, people still buy stuff today because they need it today. For example, I might buy a computer even though a better/cheaper one will be available in 12 months, because my old one is under-powered for today's requirements.
3. government spending causes inflation (for reasons which are probably not the focus of this thread).
4. Governments and academics have agreed that a bit of inflation is good, no necessary! because it's convenient and tips the scales in their favour, and because in recent history technological innovation has innovated away outbreaks of higher inflation anyway so why me worry?

I don't want to be too simplistic but I'm trying to get to the incentive that government-adjacent academics have to stick with a target range for inflation without solid evidence that it's ideal.

My view @lastever :

1. Definitely. That's essentially the entire point of innovating (why try and makes things more difficult and expensive?)
2. I wouldnt go that far. Of course, deficit spending, especially when enabled by central bank activity in bond markets (money printing), and especially where that spending has a return that is lower than the cost of capital, is definitely inflationary. In theory though, deficit spending in and of itself is ok, so long as it's not structural (ie you also have surpluses throughout the cycle to allow you to pay back the debt) and so long as the borrowed money is put to good use. But an empiricist would (rightly imo) point out that you very rarely see (and never for long) balanced spending throughout a cycle, and that the history of Government ROIC is rather poor. Not that that's the only measure of success, and you also need to account for indirect, non-economic benefits.
3. This is the one that I struggle with. I dont put too much stock in any grand conspiracy, and like you chalk it up to good old fashioned incentives. But it's not clear to me exactly what they are, other than perhaps self-interest and the lure of being close to power? I think you're right to suggest there's a lot of societal improvements that are falsely attributed to fiscal and monetary policy. Like, scientists, engineers and entrepreneurs wouldnt have discovered, created and innovated without the threat of gradual debasement? Seems like a stretch me, but would be interested in any evidence that showed otherwise. Although, logically, if it were true, i guess we should expect to see the most innovation in the countries that have the most pernicious inflation -- at least to a point.

Um. Rant alert - Regarding non-financial incentives in bureaucracy, TLDR: I think it's a system that selects and/or cultivates certain personality traits and priorities. I was trying to work out my own thoughts and this turned into one of those posts. I may have gone off the reservation at certain points.

As someone who worked in government for a few years, and also in a few start-ups for comparison, I have some theories about incentives. These might not be original but I have seen it with my own eyes. It might address some of what you're wondering about @Strawman. I'm proposing it partially applies to academics too, but acknowledge that universities have been forced to financially innovate in the last few decades.

Disclaimers: Firstly, I'm not clear about all of the sources of inflation. Hopefully I'm not conflating government spending with inflation. Also, it might appear that I'm blaming left-wing priorities for inflation. I'm not trying to do that specifically, it's more that there are several threads of psychology and incentives that I'm trying to get my head around.

Anyway, about government spending:

In the bureaucracy, as long as you have your job, your pay comes 'out of the sky'. So do your regular, union-negotiated, inflation-matched pay-rises (not so much for poor academics these days). You just don't have to think much about the enterprise and margin and innovation that regenerates the sky-money, compared with in a private business.

I imagine if you haven't worked in government and academia it's easy to miss what this does to the work culture. For the majority of employees, money is just something to spend and get yourself assigned to, that the forces of capitalism and empire and coal prices conspire to giveth and taketh away. Work culture is about staying safe and slowly building a career.

Everyone knows they should be frugal, and you might assume that because they are 'servants of the public' they would be. Well, provided no one gives them a lot of money, they generally are.

The problem around inflationary government spending comes mostly from a) mission creep and b) big fucking projects that come along every now and then due to some policy dream and suddenly you have a lot to spend. Hello, NDIS. You don't loose your job or your business if the money runs out. The money came from the sky after all. And so will your pay next week. By mission creep I mean: if you want to add an extra webpage about some special interest group, go ahead. It sounds like a nice idea and we're all about being nice here with our sky-money and inclusivity. 10 years later it's a multi-million dollar project with its own team who travel country-wide to consult said special interest group and bless them with sky-money.

Regarding day-to-day efficiency, which might not be that much worse than at a big corporation: If there is hustle it's because the minister really needs something for parliament this week. Otherwise, report late? Oh that's unfortunate. I'll make a few phone calls and we'll have some meetings with our counterparts, buy some time and have some coffee. It's all very understandable and a human tendency to want to enjoy life.

There are highly skilled 'lifers' who work steadily because they are the salt of the earth and pathologically cannot lie, cheat or steal. Honestly, these people are the duct tape that holds the government together, and have my eternal respect. But they are used and sometimes abused by less-technically-skilled 'managers', and also tend not to rock the boat, by self-selection. They would (and sometimes do) burn out and leave if they can't handle the culture. People who aspire to true innovation or to earn more money tend to leave to become a consultant at twice the pay, or for private enterprise.

Consider Canberra culture. Life is relatively easy for bureaucrats in Canberra. It's a low-crime spacious bubble of peaceful conformity, that runs on sky money. I wonder if this is true of most administrative centres globally? Maintaining a cushy life is in itself an incentive not to challenge the concensus. Maybe that's part of it.

Management culture obviously and almost everywhere tends left of centre (Canberra is like 80% labour/green). It's mostly not revolutionary marxism, but it is subconsciously assumed that you agree with emerging progressive ideas and the spending of as much money as we can get on them. Also your promotion is adjudicated by a committee of such people and I have witnessed a direct sounding out for completely undefined 'cultural fit'. Sidenote - it's not that right-wing policy doesn't ever influence bureaucracy (e.g. RoboDebt), it just seems more periodic and it gets stamped out by the preferences of the bulk of the public workforce and the forces of 'fairness'.

So what does management culture become - the default becomes the redistribution of the nation's wealth, the taking care of the blind-spots of capitalism, etc etc. Give away money, because it's fair and just and necessary. It's not a conspiracy, it's just a tendency towards the redistribution side of the money-pot equation - without regard for inflation until it threatens the entire government budget.

As for academic economists views on inflation, I imagine they also have little incentive to rock the boat by questioning long-standing policy for the intellectual thrill of it, and a lot of incentive to keep their career safe. Also academics are government-adjacent, in that they come and go from government posts and get money from grants. And governments want the experts' green light to spend, thank you very much.

So I'm proposing that the system selects for common personality traits that do not favour either a) fiscal restraint or b) questioning the orthodoxy

A reinforcing trend has been the modern administration-heavy side of academia and government. This is populated by people who for whatever reason didn't build an expertise-focused career. Instead, the admin-bloat presented them with the opportunity to style themselves as 'managers'. They have zero incentive to challenge the evidence behind a long-standing policy and they get confused by nuance and deep debate. They probably also measure their own success by the size of their sky-money budget. Not by the size of their savings.

I hope I'm being fair and not entirely missing some point.

Looking forward to your $8 gourmet pizza, Strawman, but I might suggest you're being overly optimistic about taking Domino's market overnight.

Pricing and quality assume full knowledge, which the marketplace just doesn't have.

Let me throw in a real-life example from my business career. I created a business self-help product way back in the mid-1980's that sold for $165. Did okay. Then a guy convinced me it wasn't selling as well because it was too cheap. He was right: it sold better at $365 than at $165 (exactly the same product), then even better again at $685, with just a monthly newsletter thrown in.

That's when I learned to fully appreciate and exploit PERCEPTION and EXCLUSIVITY, just as Rolex does when competing with Swatch or other mass-produced timepieces.

When I sold the business, the price of that product (expanded to 5 manuals) was priced at $3,500. Today, that product is worthless & doesn't exist because information, which was the currency of the 20th century, is now given away free.

Anyway, that's the end of this Baby Boomers rant - one who is still mulling over the intergenerational wealth transfer whilst considering who is who in the following story:

Hard times create strong people - strong people create good times - good times create weak people - weak people create hard times

Rinse and repeat

Love that story @PortfolioPlus. Sounds like you had a "Veblen good" type effect. When price is seen as a marker of quality, normal assumptions about price and demand don't always hold true! Wine is a good example of that too. Still, as a generalsation, i guess the relationship is usually true.

And "sky money" had my chuckling away as I read your post @lastever. A lot of what you say makes sense. I'd add that a lot of what you describe is not just a public sector phenomenon either -- I've seen very similar dynamics inside very big private organisations too (eg CBA). I suppose it's something more common anywhere where the organisations incumbency isn't too threatened.

On the same theme of democratic government and human behaviour David Friedberg talks about the financial mess in the state of California. Starts at I hour & minute 36. 

Everything You Know Is About to Collapse - David Friedberg

Late last year there were doomsday media stories everywhere about inflation, the growing US federal deficit and impending loss of the US dollar as the worlds reserve currency.  This coupled with a rising gold price, (for multiple reasons) and you had panicked population lining up outside the ABC Bullion store in Sydney like a Boxing day sale to buy gold and silver. 

Presently gold and silver prices are off previous highs and all the prior talk has been overshadowed by the Iran war. But none of the western government fiscal irresponsibility helping drive up precious metal prices has gone away. As a theme, I think precious metals and Aussie gold stocks have a bright future.