Category Archives: Law of Markets

How to explain why socialism leads to poverty

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It is a common mis-perception on the right side of the political divide that they understand and can explain why socialism leads to poverty. The reality is that virtually no one can do this. I had made it part of many conversations over the years, especially after the Venezuelan economy had collapsed, to ask what exactly the problem with socialism is, but it is a much more difficult question than most people seem to understand. There is no doubt that every attempt to introduce socialism anywhere has led to economic ruin. It is as plain as day that socialism rapidly leads to a major reduction in living standards. Absolutely inevitable, but why? There is a relatively small but important literature on this question, but it is complex and is mostly for specialists who have a deeper understanding of the nature and operation of a market economy. You won’t get it unless you have studied economics already, or are prepared to put in the time. You are more than welcome to enter into the intricacies of the Socialist Calculation Debate which explains why without a free market an economy cannot determine either what to produce, and more importantly so far as the certain failure of a socialist economy is concerned, how to produce. Which is why every such economy must fall into an abyss from which they cannot even begin to emerge until their socialist institutions are removed.

I have therefore written an article, that I hope will be accessible to anyone, on why all socialist economies are doomed. I have based it on an earlier classic article published in 1958, I, Pencil which is why I have titled my own version, I, Mechanical Pencil. This is how I, Mechanical Pencil begins, which will explain what I wrote, and the connection with its earlier predecessor.

Many years ago, one of my early ancestors wrote his own life story in a wonderful autobiographical tale titled I, Pencil. He told the story of how he came to be, how he had been the result of thousands of many independent decisions made all over the world by many tens of thousands of individuals. Their collective actions explained how he came to be the pencil he was.

His aim was to explain why socialism doesn’t work. Whatever name you associate the idea of ‘socialism’ – whether it is ‘democratic’, ‘scientific’, ‘utopian’ or something else – socialism inevitably brings poverty and privation to the vast majority who are robbed of their political freedom as well. His aim had been to explain how our free market economic system brings us both freedom and prosperity; how a market economy is indispensable if we are to live our lives as we wish and in our own way, while also becoming more prosperous with each passing year.

Yet I fear his message has been lost in the modern world; in part because we live in different times with different kinds of problems, but also because many fail to separate out the political side of socialism from the economic. Socialist economies are always run from the centre and inevitably become a dictatorship with democratic constraints on the government crushed by those who take control. That is the certainty of it. Political freedom disappears when a socialist government takes over. The loss of freedom is straightforward and unmistakeable. There are no exceptions.

But hidden away beneath the political dimension are the reasons behind the economic catastrophe that follows the introduction of a socialist regime. These outcomes are visible at every turn. There is no disguising the massive reductions in income and personal wealth that are inflicted upon virtually everyone in a socialist economy, other than, of course, those who run the country. Everyone sees it, but virtually no one understands why so many things go so wrong everywhere within the economy and almost all at once.

I have therefore set out to explain why this happens, because we take the prosperity we have so much for granted. We now live in far and away the richest communities that have ever existed. Even the poor are only relatively poor, and live better than all but the royalty of earlier ages – in fact, probably even better than royalty then did as well. I won’t say things are perfect or could not be improved. But I will say that any solution to our problems that tries to make things better by introducing a socialist program of some kind is not only doomed to failure but is absolutely certain to make conditions far worse. Of this, there should be no doubt whatsoever.

I commend the article to you and feel free to pass it along as far and wide as you like.

Socialist calculation debate

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From Wikipedia: Criticism of socialism.

Distorted or absent price signals[edit]

The economic calculation problem is a criticism of central economic planning. It was first proposed in 1854 by the Prussian economist Hermann Heinrich Gossen.[8] It was subsequently expounded in 1902 by the Dutch economist Nicolaas Pierson, in 1920 by Ludwig von Mises, and later by Friedrich Hayek.[9][4][10] The problem referred to is that of how to distribute resources rationally in an economy. The free market relies on the price mechanism, wherein people individually have the ability to decide how resources should be distributed based on their willingness to give money for specific goods or services. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows—on the basis of individual consensual decisions—corrections that prevent shortages and surpluses. Mises and Hayek argued that this is the only possible solution and without the information provided by market prices socialism lacks a method to rationally allocate resources. Those who agree with this criticism argue it is a refutation of socialism and that it shows that a socialist planned economy could never work. The debate raged in the 1920s and 1930s and that specific period of the debate has come to be known by economic historians as “the Socialist Calculation Debate”.[11]

Ludwig von Mises argued in a famous 1930 [actually 1920] article “Economic Calculation in the Socialist Commonwealth” that the pricing systems in socialist economies were necessarily deficient because if government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not “objects of exchange”, unlike final goods, therefore they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.[11] This led him to declare “that rational economic activity is impossible in a socialist commonwealth“.[4] Mises developed his critique of socialism more completely in his 1922 book Socialism, an Economic and Sociological Analysis.

Friedrich Hayek argued in 1977 that “prices are an instrument of communication and guidance which embody more information than we directly have” and therefore “the whole idea that you can bring about the same order based on the division of labor by simple direction falls to the ground”. He further argued that “if you need prices, including the prices of labor, to direct people to go where they are needed, you cannot have another distribution except the one from the market principle”.[12]

Ludwig von Mises argued that a socialist system based upon a planned economy would not be able to allocate resources effectively due to the lack of price signals. Because the means of production would be controlled by a single entity, approximating prices for capital goods in a planned economy would be impossible. His argument was that socialism must fail economically because of the economic calculation problem—the impossibility of a socialist government being able to make the economic calculations required to organize a complex economy. Mises projected that without a market economy there would be no functional price system, which he held essential for achieving rational and efficient allocation of capital goods to their most productive uses. According to Mises, socialism would fail as demand cannot be known without prices.

The socialist planner, therefore, is left trying to steer the collectivist economy blindfolded. He cannot know what products to produce, the relative quantities to produce, and the most economically appropriate way to produce them with the resources and labor at his central command. This leads to “planned chaos” or to the “planned anarchy” to which Pravda referred…. Even if we ignore the fact that the rulers of socialist countries have cared very little for the welfare of their own subjects; even if we discount the lack of personal incentives in socialist economies; and even if we disregard the total lack of concern for the consumer under socialism; the basic problem remains the same: the most well-intentioned socialist planner just does not know what to do.

The heart of Mises’ argument against socialism is that central planning by the government destroys the essential tool – competitively formed market prices – by which people in a society make rational economic decisions.[13]

These arguments were elaborated by subsequent Austrian economists such as Friedrich Hayek[14] and students such as Hans Sennholz.

The anarcho-capitalist economist Hans-Hermann Hoppe argues that in the absence of prices for the means of production, there is no cost-accounting which would direct labor and resources to the most valuable uses.[15] Hungarian economist Janos Kornai has written that “the attempt to realize market socialism […] produces an incoherent system, in which there are elements that repel each other: the dominance of public ownership and the operation of the market are not compatible”.[16]

Proponents of laissez-faire capitalism argue that although private monopolies do not have any actual competition, there are many potential competitors watching them and if they were delivering inadequate service, or charging an excessive amount for a good or service, investors would start a competing enterprise.[17][18]

In her book How We Survived Communism and Even Laughed,[19] Slavenka Drakulić claims that a major contributor to the fall of socialist planned economies in the former Soviet bloc was the failure to produce the basic consumer goods that its people desired. She argues that because of the makeup of the leadership of these regimes, the concerns of women got particularly short shrift. She illustrates this in particular by the system’s failure to produce washing machines. If a state-owned industry is able to keep operating with losses, it may continue operating indefinitely producing things that are not in high consumer demand. If consumer demand is too low to sustain the industry with voluntary payments by consumers, then it is tax-subsidized. This prevents resources (capital and labor) from being applied to satisfying more urgent consumer demands. According to economist Milton Friedman: “The loss part is just as important as the profit part. What distinguishes the private system from a government socialist system is the loss part. If an entrepreneur’s project doesn’t work, he closes it down. If it had been a government project, it would have been expanded, because there is not the discipline of the profit and loss element”.[20]

Proponents of chaos theory argue that it is impossible to make accurate long-term predictions for highly complex systems such as an economy.[21]

Pierre-Joseph Proudhon raises similar calculational issues in his General Idea of the Revolution in the 19th Century, but also proposes certain voluntary arrangements, which would also require economic calculation.[22]

Leon Trotsky, a fierce proponent of decentralized economic planning, argued that centralized economic planning would be “insoluble without the daily experience of millions, without their critical review of their own collective experience, without their expression of their needs and demands and could not be carried out within the confines of the official sanctums” and “[e]ven if the Politburo consisted of seven universal geniuses, of seven Marxes, or seven Lenins, it will still be unable, all on its own, with all its creative imagination, to assert command over the economy of 170 million people”.[23]

Mises argued that real-world implementation of free market and socialist principles provided empirical evidence for which economic system leads to greatest success:

The only certain fact about Russian affairs under the Soviet regime with regard to which all people agree is: that the standard of living of the Russian masses is much lower than that of the masses in the country which is universally considered as the paragon of capitalism, the United States of America. If we were to regard the Soviet regime as an experiment, we would have to say that the experiment has clearly demonstrated the superiority of capitalism and the inferiority of socialism.[24]

According to Tibor R. Machan: “Without a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals”.[25]

The level of employment is unrelated to the level of aggregate demand

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Mill’s Fourth Proposition on Capital is the element of classical economic theory most foreign to the modern mind. In seven words, Mill stated a truth that has stood the test of time and has never been refuted by any event in history.

Demand for commodities is not demand for labour.

Or in modern words, the level of employment is unrelated to the level of aggregate demand. It is refuted every time public spending is raised to lower unemployment, which has never succeeded on even a single occasion. It was refuted when Peter Costello cut public spending in 1996 and 1997 eventually eliminating not just the deficit but the actual existence of public debt while unemployment disappeared and personal incomes grew at record rates.

And now here from John Hinderaker at Powerline is another instance showing the validity of classical theory over modern macroeconomic junk science: AMAZINGLY, ECONOMY DIDN’T CARE ABOUT “SHUTDOWN”.

I never did notice the extremely-partial government “shutdown,” but some people thought it was a big deal. Not private employers, apparently:

Private payrolls grew in January at a much faster pace than expected as the labor market shrugged off the longest U.S. government shutdown in history, according to data released Wednesday by ADP and Moody’s Analytics.

“Shrugged off”? I don’t know, maybe they welcomed it.

Companies added 213,000 jobs this month, the data show. Economists polled by Refinitiv expected payrolls to grow by 178,000.

The strong jobs growth comes even as the U.S. government was shut down for 35 days in a standoff between President Donald Trump and congressional Democrats over his demand for a wall along the U.S.-Mexico border.

“Even as.”

“The job market weathered the government shutdown well. Despite the severe disruptions, businesses continued to add aggressively to their payrolls,” said Mark Zandi, chief economist at Moody’s Analytics.

“Weathered.” “Despite the severe disruptions.” Really? What disruptions were those? Did they consider that a brief respite from a small portion of government heavy-handedness may have been irrelevant to job growth, or even a positive factor? Evidently not.

There is more good sense in Mill’s 1848 Principles of Political Economy than in any Keynesian text written since 1936. The evidence is overwhelming, but when has evidence ever counted for anything when ideology said something else?

The Dunning-Kruger Effect and the ignorance of experts

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Sent to me from an old friend. That I can still have friends who find this video appealing says more about them than about myself. The intent is to prove what a self-confident dunce the American president is. For myself, listening to the text leaves me colder than cold. Not to distinguish between immigrants and illegal immigrants is one of those slither-past issues that the video makes hay with. Or to think the issue over the EPA is anything other than the utter idiocy of global warming, and even quotes the 97% statistic! Having been put together in 2017, it was made before the overwhelming evidence that the American economy is booming and manufacturing jobs are returning, so on yet another score it misses the point. And what’s the latest opinion on bringing home troops from Syria? My friend writes in his accompanying email:

‘The tag line is “The enemy of knowledge is not ignorance, it is the illusion of knowledge”‘

which is the essence of the Dunning-Kruger effect, adding:

‘which may have direct implications for your continuing battles with orthodox academia.’

And so it might. But if I find any particular statement fits my mood in dealing with economic theory, it is from Richard Feynman:

Science is the belief in the ignorance of experts.

Which applies as much to modern macro as it does to the modern Administrative State. As for the illusion of knowledge, what I find more incredible is the absence of knowledge. The media’s main role has been to ensure that only one side of the case is ever freely available. If news reporting were ever to become unbiased and honest – which it won’t – the parties of the left would never win another election until they too became parties of the right.

President Trump is applying Say’s Law in managing the American economy

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For almost everyone, Say’s Law is something they know nothing about, and especially among economists who are taught that Say’s Law is unambiguously wrong, who themselves not only do not know what Say’s Law is, but would not even know where to look to find out. But as the success of the American economy most clearly shows, Say’s Law is the most important single element in understanding how an economy can be made to grow. And as we find out, the American economy is being managed based on the application of Say’s Law.

The passage below begins at 13:13 of the video, and it is Donald Trump’s economic advisor, Larry Ludlow, specifically stating that the economic policies of the United States at the present time are based on the application of Say’s Law to the American economy. The greatest disaster in the history of economic theory was the Keynesian Revolution and the forced disappearance of Say’s Law. If you would like to see some of this, there is my article on Keynesian economics and Say’s Law that I published in February 2009 just as the stimulus was beginning across the world: The Dangerous Return to Keynesian Economics. It is not just about how damaging modern macroeconomics is, but how disastrous economic theory has become with the disappearance of Say’s Law. This is exactly what Donald Trump believes as is made clear in this discussion from Larry Kudlow.

I just want to note that we are in a boom. We had this blockbuster jobs number today. There is no inflation. There is no inflation. More growth, more people working does not cause inflation.

These old Federal Reserve models are outdated and have proven to be incorrect. Right now the inflation rate is probably less than one and a half percent even while unemployment is low and jobs are soaring and we are growing at three per cent. Why do I say that?

Because that is a point of view which the President holds and I think the President is exactly right.

This is supply side revolution. We’re creating more goods and services. We’re increasing the capital stock and business investment and that’s what creates incomes and jobs.

I’m sure you remember Jean-Baptiste Say. He wrote in the early part of the nineteenth century. He was a French economic philosopher. I met him awhile back, you perhaps did also.

Say’s Law: supply creates its own demand. This is not government spending from the demand side, this is lower tax rates from the supply side, and it is businesses that ultimately drive the economy.

I would like Jay Powell to hear that argument from President Trump who knows the argument very well. Now Jay I think does too – he’s a very smart guy. So I’m just saying that they can benefit from an exchange of views.

Let’s understand that more people working and solid percentage growth is not – IS NOT – causing higher inflation, and therefore Fed policies should take that into account.

Say’s Law. He may have to go and commune with him to fully understand it.

Everyone will need to commune with Say’s Law if they are going to understand how an economy works. If these sorts of things interest you, the third edition of my text, Free Market Economics, sets it all out in fine detail. And let me add this, the endorsement of the book found on the back cover from Art Laffer of Laffer curve fame, who drove the economic policies of the Reagan administration back in the 1980s.

‘This book presents the very embodiment of supply-side economics. At its very core is the entrepreneur trying to work out what to do in a world of deep uncertainty in which the future cannot be known. Crucially, the book is entirely un-Keynesian, restoring Say’s Law to the centre of economic theory, with its focus on value-adding production as the source of demand. If you would like to understand how an economy actually works, this is one of the few places I know of where you can find out.’

A restoration of Say’s Law is an essential if we are ever going to get our economies to thrive and grow.

An economic mystery

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JOBS UP BIG!
+312,000
RECORD NUMBER WORKING
MANUFACTURING BEST IN 20 YEARS
HISPANIC UNEMPLOYMENT LOWEST EVER
DOW +747

 

There is not a modern textbook in macroeconomic theory that will explain what is happening in the American economy. The transformation from the Obama years, and of course from the previous Bush years, is astounding. Even the dreaded increases in rates have helped push things along although hardly anyone would appreciate their role.

SAY’S LAW ADDITION!!!!!! From Confused Old Misfit in the comments: “It’s no mystery to Larry Kudlow who, just in passing, mentions (at 14:14) Say’s Law with obvious relish!” This is the video and with endless thanks to COM.

National Economic Council Director Larry Kudlow discusses the December jobs report, U.S. economy, China trade, and the prospect of a meeting between President Donald Trump and Federal Reserve Chairman Jerome Powell. He speaks with Bloomberg’s Jonathan Ferro on “Bloomberg Markets.

How Keynesian economics came to dominate told by Keynesians

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The papers from the History of Economics section at the US Conference of Economists during the session on “Keynesianism: Its Rise, Fall, and Transformation in Europe and North America”. So long as Y=C+I+G is central to how macro is taught at all levels of study, the notion that there has been any kind of a fall is ludicrous. No economists taught Keynesian macro ever finds their way to understanding how an economy actually works. These were the papers presented.

Keynesianism in France

Goulven Rubin

University Paris 1 Panthéon-Sorbonne

Abstract

According to Pierre Rosanvallon (1987), Keynesianism arrived very late in France but its triumph was complete. It offered a common language to a very large group of senior officers and engineers working in public administration and nationalized firms. It reconciled the French tradition of Colbertism with the necessity of a modern State. Richard Arena (2000) insists also on the fact that Keynesian ideas spread in a hostile context and initially outside universities and academia where typically French economic traditions dominated. The situation in universities started to change in the 1970s and 1980s when curricula in French universities began to incorporate macroeconomic courses based on IS-LM and with the development of disequilibrium economics. The paper retraces the unfolding of this historical process and insists on the variety of heterodox interpretations of Keynes that flourished in the French context like the works of Bernard Schmitt and the circuitists.

Keynesianism in Germany

Harald Hagemann
University of Hohenheim

Abstract

Keynes had been a central point of reference in debates on economic theory and policy in Germany ever since his Economic Consequences of the Peace (1919), as, e.g., in the controversial debates on the wage-employment relationship at the end of the Weimar Republic. No wonder that the first foreign-language translation of the General Theory was published in German. With the great resonance Keynes had in Germany in the interwar period it is no surprise that from the early 1950s onwards neoclassical synthesis Keynesianism became the dominant approach at West German universities. More astonishing is the fact that with Erich Schneider at Kiel, a former student of Schumpeter played a key role in this process. In economic policy, however, Keynesianism gained a rather late entry in the recession of 1967 and only lasted until 1974-75.

Keynesianism in Canada

Robert W. Dimand
Brock University

Abstract

Canada was one of the first countries to commit to a Keynesian goal of maintaining high and steady levels of employment after World War II with the 1945 White Paper. Keynes’s former students A. F. Wynne Plumptre and Robert Bryce were prominent in the Federal Government, notably the Department of Finance, in the quarter century after the war, but others, notably Mabel Timlin, author of Keynesian Economics (1942), also helped spread Keynesian ideas among Canadian economists. William A. Mackintosh, both as an academic and a wartime temporary civil servant, was a central figure, drafting the 1945 White Paper and seconding Keynes’s motion to accept the final act of the Bretton Woods conference. Bank of Canada Governor Gerald Bouey’s 1975 embrace of monetary aggregate targeting signaled the decline of Keynesian influence on Canadian public policy.

Keynesianism in the United States

Mathew Forstater
University of Missouri-Kansas City

Abstract

Two issues are at the heart of Keynesian economics in the United States, one theoretical and the other practical. The theoretical issue regards whether Keynes’s demonstration in the General Theory of Employment, Interest and Money that there can be involuntary unemployment in macroeconomic equilibrium requires an assumption that wages, prices and/or interest rates are “sticky” (inflexible) downward, or some other market imperfection. The practical issue is related to the theoretical one. Keynesians have tended to be pragmatic when it comes to economic policy, preferring to use fiscal and monetary policies to pursue macro goals of full employment, price stability, and stable economic growth rather than focusing on efforts to remove the imperfections, which would permit market forces to work out the short-term Keynesian troubles. The most recent mainstream incarnation, so-called “New Keynesian” economics, has all but abandoned the important remaining economic and political legacies of the tradition.

How to steal so that those who are robbed actually believe they are being made better off!

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Santa-Unicorn

Keynesian economics defined and explained: an economic theory whereby the rich steal from the poor who are made to feel grateful because they are led to believe they are benefitting from the money taken from them and parcelled out by governments to be spent by their friends.

It may create misery, but it is a stable sort of misery in its own way.

Carbon taxes may be a new means of achieving the same end but through a different form of deceit.

The political class is the new aristocracy.

It’s more difficult to understand than you think

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The reasons are explicable but they are very difficult to understand without a thorough knowledge of how economies work.

From Instapundit

GLORIA ALVAREZ ON REASON TV: Socialism Fails Every Time (Video):

It certainly has a lot of bad luck associated with it, for some inexplicable reason.

For an explanation, you need to go to what is known as the Socialist Calculation Debate, and then be prepared to spend a long time thinking it through. You can easily see that all such experiments have failed in the past, but that is empirical, and never convinces since it is always different next time, at least when it all begins. The end point is always The Soviet Union, Cuba, North Korea and Venezuela, but why?

Getting Say’s Law right is hard

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This is an article on the great economist, Leland Yeager, who has just passed away. And in this article in memoriam, Market Grandmaster by James A. Dorn, there is a discussion on Say’s Law which is dangerously off centre as has been virtually every discussion since the publication of The General Theory in 1936. Here is what is right taken directly from the article: “there can be no problem of deficiency of aggregate demand”. That is precisely what Say’s Law means. To this principle there are no exceptions. But what is said is that “fundamentally” there can be no deficiency of demand, but that it does occur on some occasions. To accept an exception, especially this, you might as well be a Keynesian.

Say’s Law did not rule out recessions. The idea that classical economists had some principle that made recessions impossible is so loony it’s hard to understand how such an idea could ever have established itself, yet that is what Keynes did. Therefore, to refute Keynes, one must begin by showing how untrue this was. Say’s Law rules out only one thing. It rules out, and rules out absolutely, demand deficiency as a cause of recession but nothing else, and most especially recessions due to monetary disturbances which were recognised by classical economists as frequent and often devastating. The classical theory of the cycle, stretching back to the start of the nineteenth century, discussed monetary breakdown and their effects. Monetary disturbances are not a deficiency of demand but a structural deformation. The GFC was not caused by a deficiency of demand but a monetary disturbance. Nor did a public sector stimulus in any economy lead to recovery, which might have occurred had demand deficiency been the problem. The contour and causes of the GFC were not just consistent with the classical theory of recession, but so too was the failure of any recovery to gather momentum anywhere in the world. This description mis-states the conclusions reached by classical economists, which we now bundle together under the heading of Say’s Law.

When the supply of and demand for money do not mesh, monetary disequilibrium can upset the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

To describe this as a qualification to Say’s Law is simply wrong, but worse, concedes almost all the ground that Keynesians need to drive public spending upwards, and not just during recessions but in every phase of the cycle.

Here is Dorn’s text on Say’s Law.

Say’s Law Is Fundamentally Right

According to Yeager (1979), “There has been too much aggregation in macroeconomics, theoretical and applied—too much of the notion of aggregate demand confronting aggregate supply. Fundamentally, Say’s Law is right: supply of some goods and services constitutes demand for other goods and services; fundamentally there can be no problem of deficiency of aggregate demand.” However, “the exchange of goods and services against goods and services takes place through money.” When the supply of and demand for money do not mesh, monetary disequilibrium can upset
the smooth operation of the market mechanism and Say’s Law must be qualified. This is especially true when price and resource adjustments are sluggish.

Consequently, Yeager emphasized that students need “to understand the tremendous importance of money in facilitating exchange and thus in facilitating the division of labor in producing
the goods to be exchanged.” In particular, they need to recognize that “money facilitates economic calculation and the comparison of costs and benefits and the signaling function of price and
profit” (ibid.).

Yeager: Market Grandmaster

Yeager goes on to argue that it is “precisely because money is so important to the working of the economic system [that] monetary disorders can have fateful consequences.” Thus, there is a “hitch in Say’s Law: Although ‘fundamentally’ goods and services exchange against goods and services, money is the intermediary in this process; and if the demand for and supply of money get out of balance, these fundamental exchanges are impeded” (ibid.).

Yeager elaborated on this idea elsewhere, explaining that an

imbalance between the actual quantity of money and the total of desired cash balances cannot readily be forestalled or corrected through adjustment of the price of money on the market for money because money, in contrast with all other things, does not have a single price and single market of its own. Monetary imbalance has to be corrected through the roundabout and sluggish process of adjusting the prices of a great many individual goods and services (and securities). Because prices do not immediately absorb the full impact of the supply and demand imbalances for individual goods and services that are the counterpart of an overall monetary imbalance, quantities traded and produced are affected also. Thus, the deflationary process associated with an excess demand for money, in particular, can be painful [Yeager 1983: 307].