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Deflation, Rothbard’s critique of Friedman

May 12, 2011

Not much original content in this post, but some thins I found to be intellectually advantageous. Deflation, as it is commonly understood, is a confusing concept. The majority of economic thinking presumes it to be universally negative and encourages government action to avert deflation at all costs. However, some economists have noted two distinct forms of deflation.

“Good” deflation, as George Selgin writes here and here, is a consequence of an expansion of supply (productivity increases), while “bad” deflation results from a shrinking demand (decreases in employment and production). The nuanced distinction cannot be ignored, as policies to prevent supply-driven deflation can spur a boom-and-bust cycle.

Indeed, a paper from the Federal Reserve Bank in Minneapolis by Atkeson and Kehoe (2004) analyze a link between deflation and depression and concludes that “no evidence of such a link” exists between the two, aside from the Great Depression, an instance of “bad” deflation and a main cause of why deflation is viewed as universally negative.

For a greater expansion on deflation, see this Cato Journal article, a blog by David Beckworth, and two blogs by Scott Sumner ( here and here ).

On an unrelated note, here is a 1970 Murray Rothbard lecture critiquing Milton Friedman on, among other things, the negative income tax and monetary policy.

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3 Comments leave one →
  1. May 13, 2011 7:41 pm

    I agree with your distinction between the two types of inflation. A fall in prices in not necessarily a bad thing as long as it is not an artificial contraction of the money supply. The same with inflation. I think competing currencies would solve this issue and provide the best stability. The market would always have the required amount of money and credit if different sources of money could compete against each other. If one got out of hand, it would be dumped and replaced with another more stable one, and the damages would be limited.

  2. May 13, 2011 7:42 pm

    Sorry I meant to say deflation* at the beginning of my comment.

  3. May 14, 2011 2:39 pm

    Thank you for a great post.

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