It might be a surprise to you, but Economics 101 supply/demand models for a single good actually don't capture all the complexity of actual market behavior.
Where you say 'you increase the number of dollars but leave cheeseburger production the same' - how exactly do you do that?
I mean, there certainly are institutions that can increase the number of dollars. But those institutions can't constrain cheeseburger production to make sure it stays the same, can they? Cheeseburger makers are free to adjust their production.
So nobody's doing what you suggested - increasing dollars while holding cheeseburger production steady. Instead, they're expecting cheeseburger production to change (maybe it's changing all on its own, as people develop new cheeseburger recipes and tastes in cheeseburgers change), and they are adjusting the number of dollars to compensate.
Which, yes, suggests you are committing the lump of cheeseburger fallacy.
This isn't relevant in the case of broad increases in the macroeconomic supply of dollars, since they affect the supply/demand curves of everything in the economy simultaneously (albeit more at the source of injection as described by the article, e.g. stocks).
For example, you can't really "ramp up" production of burgers in response to higher dollar supply without ramping down the production of salads, unless there were people doing nothing to start with (which is why inflation is related to unemployment, to a degree). But by the same token, those dollars used to incentivize higher production can at best drive a short-term boost in production, as the costs to produce the burgers quickly rise as inflation propagates throughout the rest of their supply chain and the real value returns to where it was. Meanwhile, the expenses for everyone have increased and people who save money or don't want to hop jobs to get an inflation raise have been punished.
What’s “not relevant” in the case of macroeconomic money supply changes are models that try to imagine the whole economic system as if it’s a barter economy containing just dollars and cheeseburgers.
As you rightly point out, you have to have other goods, like salads; a labor force; and concepts like supply chains from which cheeseburger suppliers get their resources, before you can even begin to think about what will happen in an economy when you add more dollars.
And then you need a better way to measure the effects than just using dollars. They’re one of your variables.
I’m not remotely denying that adding dollars to the economy is inflationary, by the way! I’m just unimpressed by simple models that have little explanatory value and lead to bad thinking.
> you can't really "ramp up" production of burgers in response to higher dollar supply without ramping down the production of salads, unless there were people doing nothing to start with (which is why inflation is related to unemployment, to a degree)
Yes I agree inflation can be related to unemployment, and I generally agree with your whole point but I just want to clarify you’re missing one big variable in the formula: Automation.
Cheeseburger Supply = Labor*Automation
As such (like we have today with accelerating automation) we don’t really need more labor to make both Cheeseburgers and Salad.
> those dollars used to incentivize higher production can at best drive a short-term boost in production, as the costs to produce the burgers quickly rise as inflation propagates throughout the rest of their supply chain
Additionally, I want to point out Wage Inflation incentivizes Automation. As such even the production cost increase is a short/mid term concern as long as we can Automate more of the process (e.g. lab grown meat, Beyond Burger, farming automation, online ordering vs in-person ordering, etc).
I don’t think any of this is insightful or will change your mind on anything, but do factor Automation and Accelerating Automation into your equations about the economy.
There's a difference between supply and quantity supplied. The OG is referring to "cheeseburger production" as supply and you're reading it as quantity supplied.
Yes, a cheeseburger becomes more expensive will attract new producers and the aggregate amount of cheeseburgers sold will be higher. But the marginal cheeseburger being sold is at a higher cost to produce (otherwise it would have been produced to fulfill the original demand).
I think the supply/demand model is useful. I think when people claim "its more complicated", they are trying to get around inconvenient truths and basic axioms. You print more money out of thin air, the price of goods is going to go up since its more money chasing the same goods. Creating wealth by printing money is kind of a perpetual motion machine. You need a lot of mental gymnastics to deny the fact that printing money doesn't cause prices to go up. Everyone knows this. Keynes knew this, as did Lenin. Keynes wrote the following:
> Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. … Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
> But the marginal cheeseburger being sold is at a higher cost to produce (otherwise it would have been produced to fulfill the original demand).
This may have been true at the time of Keynes but this statement of your hasn’t been true for a very long time. Because of Accelerating Automation “Economies of Scale” (i.e. the marginal cost of a cheeseburger goes down as more are made).
The reality today is that the extra cheeseburgers are made because of a risk calculation on upfront capital investment and opportunity costs. I.e. a low inflation environment makes individuals more likely to save (play it safe) but also makes companies more likely to play it safe and not over allocate capital for supply.
With higher inflation it also incentivizes companies to play less safe and buy more supply chain. Best example, as wage inflation occurs it incentivizes companies to invest and buy robots to make more parts of their burgers. But this is true for all input costs to making burgers. If tomatoes go up, buy tomato farms to reduce their costs.
I don’t think this alleviates all of your concerns (and I’m not trying to, I agree with a bunch of them) but just do take into account Accelerating Automation in your calculations about the economy.
> I think when people claim "its more complicated", they are trying to get around inconvenient truths and basic axioms.
Absolutely.
Many people appear to habitually deny the existence of zero-sum-games, when in reality they are pervasive.
They're just complex and can't easily be be recognized in the chaos of endless interconnections of society.
I think if your model of the economy assumes it amounts to a zero sum game you have definitely missed something.
As time passes, human beings capture energy and use it to do work, and - against all thermodynamic probability - in doing so they locally reverse the inexorable entropy gradient of the universe and create value, by arranging atoms in useful structures, constructing useful or amusing arrangements of information, or transporting matter or information from one place to another where they might be more useful.
This means that the world tomorrow is a little bit better, in some ways, than today. It contains a bit more utility.
And we keep making more people and finding more useful ways for them to spend their time and our collective efforts make it look like that trend of arranging matter and data into ever more useful forms will continue into the future.
(Of course, we do need to consider that this growth trajectory does rather depend on us not screwing up and breaking the systems that sustain us and enable us to continue surviving and thriving, so please don’t take this as a naive assumption that infinite growth without consequences is just inevitable)
But basically, if there’s always more work to do, and more value to create, and more benefits to distribute, every day…
… surely any model that is based on a static pie that can only be cut up so many ways is in flat denial of reality, and falls at the first hurdle.
Take land for instance. There's a finite amount of land on earth. If 8 billion today own all of the land there is on earth, and in 2060 there's now 13 billion people, how are these 5 billion new people going to own land (when all of it is already owned by the other 8 billion)? For the 5 billion new born people to acquire land, means some previous owners must lose ownership of some of their land. Put it another way, if we divided land equally amongst all human beings, with every birth, the amount of land per person will decrease, which means the sheer birth of humans makes us poorer when it comes to the amount of land we each individually own.
Heck you can apply this to most anything. Take iron. If all the iron on earth has been mined and been used to construct steel buildings and cars, and I want to make a new car made of steel, then I would have to dismantle an existing car or building in order to acquire the material to do so. Only reason this doesn't happen today, is because there's still more iron that we can mine out of the ground; I'm not yet forced to "mine" it out of my neighbor's car.
> I think if your model of the economy assumes it amounts to a zero sum game you have definitely missed something.
What I wrote hardly supports your guess about my model of the economy. I merely claim that zero-sum-games appear more pervasive to me than most people are willing/able to admit/recognize.
So no, I don't think "the economy amounts to a zero sum game" is all there is to my model of the economy. But maybe you correctly infer more about my mental model than I myself know about it, who knows.
> ... thermodynamic probability ...
Since you appear to be familiar with thermodynamics, you'll be able to follow my reasoning easily:
Every aspect of society/economy that can be expressed by an equation in a useful way, can be thought of as a zero-sum-phenomenon. Why? Because every ordinary equation can be restructured as a zero-sum equation.
Example:
Y = a * X + b^2 * Z
... can be written as:
0 = a * X + b^2 * Z - Y
> ... so please don’t take this as a naive assumption that infinite growth without consequences ...
To my mind, the mere combination of "infinite growth" and "without consequences" sounds naive, to be honest.
> ... surely any model that is based on a static pie that can only be cut up so many ways is in flat denial of reality, and falls at the first hurdle.
Well, I never claimed that the pie that gets cut up - and this methaphor for the economy is ironically equivalent to the term "zero-sum-game" - be static.
How the size of the pie develops over time (grow, shrink, remain the same) is completely separate from the question of how the pie gets cut up.
The pie always gets cut up, thus there's always at least this very basic zero-sum-game.
I agree basic supply/demand models are almost hilariously simplistic, but I don't think you can really invalidate his point about what happens if money supply goes up but product supply doesn't just by saying "well product supply does go up".
Interestingly actually, Bitcoin is one of the few asset classes that is de-coupled from its supply/demand.
Unlike say, gold and oil - if that increases in demand, more mines are opened, more sites are evaluated looking for it etc. Whereas bitcoin, the higher (or lower) demand doesn't affect the fact that on average a block is only mined once every 10mins adding 6.25 BTC to the supply... And that throwing more resources into mining it just increases your odds of getting that block reward, but not increasing supply as would happen with the above commodities, or in the example - cheeseburgers.
--To the point - when we have increasing amounts of something like dollars, there certainly are things that can't and wont 'rise with the tide' of those dollars increasing in supply.
Bold comment after 2 years of mailing out money to mass population of people who weren't working or running their businesses, resulting in 7% inflation.
Neither Kenyes nor Hayek were idiots. Yes giving money (even more than a govt actually has on hand -- printing) can stimulate labor by market-making to enable barter across space and time. And yes printing more money doesn't magically create more productivity forever.
Nonfarm business sector labor productivity increased 6.6 percent in the fourth quarter of 2021, the U.S. Bureau of Labor Statistics reported today (March 3, 2022), as output increased 9.1 percent and hours worked increased 2.4 percent.
I wonder if inflation=7% and the absolute productivity through automation at 7% (9.2% - 2.1%) is a coincidence, just correlated or causal.
My guess based on a lot of armchair speculation is that inflation pegged to absolute productivity would result in the best possible economy. Maybe with a bit of a buffer just to be safe.
That’s a good idea. I think it still misses a needed link between productivity increases and increases to the lowest wages. Maybe loosely tying minimum wage to productivity?
Could also be modeled in law as “$15 in 2022 and inflation adjusted for every year after”, where inflation as we said is pegged to absolute productivity.
Where you say 'you increase the number of dollars but leave cheeseburger production the same' - how exactly do you do that?
I mean, there certainly are institutions that can increase the number of dollars. But those institutions can't constrain cheeseburger production to make sure it stays the same, can they? Cheeseburger makers are free to adjust their production.
So nobody's doing what you suggested - increasing dollars while holding cheeseburger production steady. Instead, they're expecting cheeseburger production to change (maybe it's changing all on its own, as people develop new cheeseburger recipes and tastes in cheeseburgers change), and they are adjusting the number of dollars to compensate.
Which, yes, suggests you are committing the lump of cheeseburger fallacy.