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I agree with the general sentiment in this article. Price as a mechanism to coordinate supply and demand is underappreciated by the general public. You can use

by kqr 5y ago

I agree with the general sentiment in this article. Price as a mechanism to coordinate supply and demand is underappreciated by the general public. You can use it to control the level company-internal resources are used so it stays within reasonable bounds and doesn't grow a huge backlog. You can even use a price to make distributed, globally optimal decisions on product decision. If e.g. time to market is a scarce resource in your project, you can tell everyone that if they can reduce time to market without costing the project budget more than $x/week saved, they need no permission to adjust the requirements -- they should just go ahead and do it. (Boeing used this except for a weight problem with one of their models.) I have but one quibble: the first point starts out true but then does a correlation-is-causation error right after that. > 1) Broad money supply and price inflation are rather correlated. > The most precise way to phrase it is that rapid money supply growth is necessary but not sufficient to cause widespread price inflation. The alternative perspective here is that obviously money supply and inflation is correlated, but for exactly the opposite reason: when prices go up without real values changing, people are still going to need the same real stuff, so banks and governments will print more money so people can afford the things they need. In other words, money supply could be a symptom of inflation as much as a cause.

jrexilius 5y ago
Except that the timing of those don't line up. Money supply increasing leads inflation, there are almost no instances of CPI increase leading inflation. [edit to add:] (except one very small blip at the beginning of recovery from the great depression)
- dragonwriter 5y ago
  > there are almost no instances of CPI increase leading inflation CPI increase defines inflation, I think you mean monetary expansion, not inflation.
  - jrexilius 5y ago
    Yeah, typoed that. Thanks for pointing it out.
Proven 5y ago
JohnJamesRambo 5y ago
We play Monopoly. Suddenly the bank gives everyone 40% more money. What happens to the prices for owned properties and houses? We play Monopoly. Suddenly everyone wants 40% more money for their owned properties and houses. No one has any more money to pay for these items. Which of these two scenarios seem more likely to cause inflation? For more info about which we are seeing, this is a great summary from Bridgewater. https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-supply-shock-and-its-everywhere https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-...
- kqr 5y ago
  If you play monopoly with house rules that make it more similar to a real mix of sovereign economies, surely the latter. (Source: I have played with such house rules. Yes, it gets more interesting than vanilla monopoly. Yes, that's how inflation happens in those games. One bank has never, so far, suddenly decided to give people money they don't need (that sounds like financial suicide). External events, however, have caused changes in demand for one bank currency which forces that bank to lend more money.)
  - wallacoloo 5y ago
    so… what are these house rules?
    - kqr 5y ago
      The core of it is free banking: anyone who wants to can produce their own currency and manage it however they want. The exchange rate to the standard monopoly currency is determined by the market. Another major element (though more common in house rules) is that arbitrary agreements between players are allowed, enforced only by one's honour. (These rules probably only work when sort of the same group of people play multiple sessions.)
- steelstraw 5y ago
  Also don't we know in this case that the bank increased the supply by 40% first? Inflation followed, as you would expect when there are drastically more money units competing for goods and services (combined with fewer goods/services as a result of shut downs). I don't get all the mental gymnastics around this.
hirundo 5y ago
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” ― Milton Friedman If you can accept this, inflation becomes a lot less mysterious.
- nabla9 5y ago
  Friedman's model is now considered false, or at least only very conditional. It fits only certain economies. Is Inflation Always and Everywhere a Monetary Phenomenon? https://www.jstor.org/stable/3441104 https://www.jstor.org/stable/3441104 >The relation between long-run inflation and the money growth rate is not proportional. The strong link between inflation and money growth is almost wholly due to the presence of high- (or hyper-) inflation countries in the sample. The relationship between inflation and money growth for low-inflation countries (on average less than 10% per annum over the last 30 years) is weak.
  - __blockcipher__ 5y ago
    The part you quoted doesn’t seem to address the output half of Friedman’s statement, repeated here for convenience: > can be produced only by a more rapid increase in the quantity of money than in output
- DasIch 5y ago
  If Milton Friedman were right with this statement, then the increasing money supply since 2008 due to the actions of the Fed, ECB and BoE would imply that since then we've seen either a massive increase in economic output or inflation. Neither of those things happened and as a consequence we can conclude that Friedman was wrong about this.
  - G3rn0ti 5y ago
    > then we've seen either a massive increase in economic output or inflation. No, there wasn't a massive increase in economic output nor a hyperinflation. But there was an asset price inflation. World wide we saw a surge of housing prices (in US, China and Europe -- where money supply grew phenomenally over the years), booming financial markets and a massive price increase of cryptographic money. So much of the growing monetary supply was being absorbed by those markets. But now the time has come where the all the additional money starts having an effect on the price of everyday items. So contrary to what you _want_ to believe, Milton Friedman turns out to be right ... again.
BurningFrog 5y ago
> when prices go up without real values changing So in your model, why does this happen? In the classic Friedman model it's because the money supply has increased. In your model, it just happens for no reason?
- kqr 5y ago
  There are so many different reasons prices can change. Changes in availability of natural resources, changes in consumer demand, changes in the means of production, changes in technology. We know the market is complex and with cyclical components and resonances at various frequencies. We know of the feedback loops caused by expectations driving self-fulfilling prophecies. We know of its fractal and stochastic nature. We know it's almost never a simple cause-and-effect relationship -- rarely is a market participant strong enough to wrestle on even terms with everyone else.
  - BurningFrog 5y ago
    Individual prices change all the time for a zillion reasons. The aggregate price level depends on the amount of circulating money. When gas prices go up, we have less to spend on other items, which then fall in price. Milton Friedman figured this out in the 50s, which led to his Nobel prize.
    - kqr 5y ago
      To be clear, in case I have made myself misunderstood: I agree money supply affects prices. In fact, whenever someone purchases or sells something, there are two objects being exchanged. One is a currency and the other being the object of sale. Supply and demand for the currency affects the price just as much as supply and demand for the thing being sold. That's all I'm saying. It's very hard to convincingly put a direction on quantities so tightly intertwined.
      - BurningFrog 5y ago
        I agree that it's a hard problem, but economists figured out most of it 60+ years ago! I don't mean to pick on you personally, but I don't know any other field where educated people are so happy to believe their hunches over the established science...
Geee 5y ago
> The alternative perspective here is that obviously money supply and inflation is correlated, but for exactly the opposite reason: when prices go up without real values changing, people are still going to need the same real stuff, so banks and governments will print more money so people can afford the things they need. Clearly untrue. It can be reasoned from first principles that expanding money supply leads to rising prices. Furthermore, if governments answered price inflation by expanding money supply even more, it would lead to hyperinflation.
- kqr 5y ago
  Similarly, it can be reasoned from first principles that any other cause of a decreased demand for a currency leads to rising prices. I'm not disregarding one explanation in favour of others, I'm just saying that what I've seen in terms of evidence for the default explanation is far from conclusive as far as I can tell. More lending in response to inflation does sometimes lead to hyperinflation! That's how little Weimar and his printing press got into such a pickle. But in the presence of other corrective feedback loops, it doesn't have to.
d0gsg0w00f 5y ago
> You can use it to control the level company-internal resources are used so it stays within reasonable bounds and doesn't grow a huge backlog I've been trying to sell this concept to the centralized IT org I work in. Right now they're charging some fuzzy flat fee to all departments but demand for services is not equal across units and prioritization is basically a graft and pull system. I'd love to democratize this with price signals but it's difficult to justify when you're also a monopoly that won't allow competition.

by kqr 5y ago

jrexilius 5y ago

Except that the timing of those don't line up. Money supply increasing leads inflation, there are almost no instances of CPI increase leading inflation. [edit to add:] (except one very small blip at the beginning of recovery from the great depression)

dragonwriter 5y ago
> there are almost no instances of CPI increase leading inflation CPI increase defines inflation, I think you mean monetary expansion, not inflation.
- jrexilius 5y ago
  Yeah, typoed that. Thanks for pointing it out.

Proven 5y ago

JohnJamesRambo 5y ago

We play Monopoly. Suddenly the bank gives everyone 40% more money. What happens to the prices for owned properties and houses? We play Monopoly. Suddenly everyone wants 40% more money for their owned properties and houses. No one has any more money to pay for these items. Which of these two scenarios seem more likely to cause inflation? For more info about which we are seeing, this is a great summary from Bridgewater. https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-supply-shock-and-its-everywhere https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-...

kqr 5y ago
If you play monopoly with house rules that make it more similar to a real mix of sovereign economies, surely the latter. (Source: I have played with such house rules. Yes, it gets more interesting than vanilla monopoly. Yes, that's how inflation happens in those games. One bank has never, so far, suddenly decided to give people money they don't need (that sounds like financial suicide). External events, however, have caused changes in demand for one bank currency which forces that bank to lend more money.)
- wallacoloo 5y ago
  so… what are these house rules?
  - kqr 5y ago
    The core of it is free banking: anyone who wants to can produce their own currency and manage it however they want. The exchange rate to the standard monopoly currency is determined by the market. Another major element (though more common in house rules) is that arbitrary agreements between players are allowed, enforced only by one's honour. (These rules probably only work when sort of the same group of people play multiple sessions.)
steelstraw 5y ago
Also don't we know in this case that the bank increased the supply by 40% first? Inflation followed, as you would expect when there are drastically more money units competing for goods and services (combined with fewer goods/services as a result of shut downs). I don't get all the mental gymnastics around this.

hirundo 5y ago

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” ― Milton Friedman If you can accept this, inflation becomes a lot less mysterious.

nabla9 5y ago
Friedman's model is now considered false, or at least only very conditional. It fits only certain economies. Is Inflation Always and Everywhere a Monetary Phenomenon? https://www.jstor.org/stable/3441104 https://www.jstor.org/stable/3441104 >The relation between long-run inflation and the money growth rate is not proportional. The strong link between inflation and money growth is almost wholly due to the presence of high- (or hyper-) inflation countries in the sample. The relationship between inflation and money growth for low-inflation countries (on average less than 10% per annum over the last 30 years) is weak.
- __blockcipher__ 5y ago
  The part you quoted doesn’t seem to address the output half of Friedman’s statement, repeated here for convenience: > can be produced only by a more rapid increase in the quantity of money than in output
DasIch 5y ago
If Milton Friedman were right with this statement, then the increasing money supply since 2008 due to the actions of the Fed, ECB and BoE would imply that since then we've seen either a massive increase in economic output or inflation. Neither of those things happened and as a consequence we can conclude that Friedman was wrong about this.
- G3rn0ti 5y ago
  > then we've seen either a massive increase in economic output or inflation. No, there wasn't a massive increase in economic output nor a hyperinflation. But there was an asset price inflation. World wide we saw a surge of housing prices (in US, China and Europe -- where money supply grew phenomenally over the years), booming financial markets and a massive price increase of cryptographic money. So much of the growing monetary supply was being absorbed by those markets. But now the time has come where the all the additional money starts having an effect on the price of everyday items. So contrary to what you _want_ to believe, Milton Friedman turns out to be right ... again.

BurningFrog 5y ago

> when prices go up without real values changing So in your model, why does this happen? In the classic Friedman model it's because the money supply has increased. In your model, it just happens for no reason?

kqr 5y ago
There are so many different reasons prices can change. Changes in availability of natural resources, changes in consumer demand, changes in the means of production, changes in technology. We know the market is complex and with cyclical components and resonances at various frequencies. We know of the feedback loops caused by expectations driving self-fulfilling prophecies. We know of its fractal and stochastic nature. We know it's almost never a simple cause-and-effect relationship -- rarely is a market participant strong enough to wrestle on even terms with everyone else.
- BurningFrog 5y ago
  Individual prices change all the time for a zillion reasons. The aggregate price level depends on the amount of circulating money. When gas prices go up, we have less to spend on other items, which then fall in price. Milton Friedman figured this out in the 50s, which led to his Nobel prize.
  - kqr 5y ago
    To be clear, in case I have made myself misunderstood: I agree money supply affects prices. In fact, whenever someone purchases or sells something, there are two objects being exchanged. One is a currency and the other being the object of sale. Supply and demand for the currency affects the price just as much as supply and demand for the thing being sold. That's all I'm saying. It's very hard to convincingly put a direction on quantities so tightly intertwined.
    - BurningFrog 5y ago
      I agree that it's a hard problem, but economists figured out most of it 60+ years ago! I don't mean to pick on you personally, but I don't know any other field where educated people are so happy to believe their hunches over the established science...

Geee 5y ago

> The alternative perspective here is that obviously money supply and inflation is correlated, but for exactly the opposite reason: when prices go up without real values changing, people are still going to need the same real stuff, so banks and governments will print more money so people can afford the things they need. Clearly untrue. It can be reasoned from first principles that expanding money supply leads to rising prices. Furthermore, if governments answered price inflation by expanding money supply even more, it would lead to hyperinflation.

kqr 5y ago
Similarly, it can be reasoned from first principles that any other cause of a decreased demand for a currency leads to rising prices. I'm not disregarding one explanation in favour of others, I'm just saying that what I've seen in terms of evidence for the default explanation is far from conclusive as far as I can tell. More lending in response to inflation does sometimes lead to hyperinflation! That's how little Weimar and his printing press got into such a pickle. But in the presence of other corrective feedback loops, it doesn't have to.

d0gsg0w00f 5y ago

> You can use it to control the level company-internal resources are used so it stays within reasonable bounds and doesn't grow a huge backlog I've been trying to sell this concept to the centralized IT org I work in. Right now they're charging some fuzzy flat fee to all departments but demand for services is not equal across units and prioritization is basically a graft and pull system. I'd love to democratize this with price signals but it's difficult to justify when you're also a monopoly that won't allow competition.