Inflation

[selfishgene]

Imagine you are on an aircraft carrier with 4000 sailors on board. Each sailor gets issued 3 ration tickets every day by the paymaster. The sailor can then get a meal in one of the ship messhalls. The paymaster realizes he can issue an extra ticket to himself every day and get 4 meals. Nobody will notice. After a while the other officers begin to

Comments

[boffo]

It seems like a pretty good introduction to me.

Then again, this is one of those subjects that seems so obvious to me that I don't understand why other people don't understand it.

[ernunnos]

I like it.

[other]

There are two things going on. One is that an extra ticket is being printed and being distributed to everyone equally, the value of each ticket has gone down to compensate such there is no change in their real wage. It's a change without a difference. Well, people think they got a raise. The second is where the paymaster prints off money for himself and that does decrease the purchasing power of money.

[selfishgene]

If inflation was automagically extended to everyone instantaneously there would be no problem. Of course there would be no incentive either, so it would never happen.

[other]

Oh ya, the story reminds me a little bit of Krugman's babysitting storya.

[selfishgene]

Why could those couples not simply extend credit to each other? If you are worried that you won't have a reserve of scrip you will simply offer to babysit for 3 hours in exchange for 2 hours of scrip. The market will fix itself. There is no reason for a central management system at all. A central management system may have theoretical advantages as long as they are perfectly honest but who will verify that honesty? If even one member of the community is dishonest that person will have a much stronger incentive than most to bear the 'burden' of management.

[other]

They could extend credit to each other in this example, effectively issuing their own vouchers. It works here because they have a double incidence of wants in this simplified story.

The price could adjust to "the recession" and the price could adjust such that there are fluctuating seasonal prices. The real world problem with this is that prices are sticky, that is, they tend to take a while to adjust in the short term. If prices are flexible, you're right, they wouldn't need to increase the money supply.

[perich]

Good intro!

(1) I might add a line or two about how the decrease in ration size is gradual enough that nobody notices at first. But it's not a necessary addition; this stands as is.

(2) I might change it from "The Captain orders the paymaster to give everyone 4 tickets a day ..." to "As more and more sailors get in on the secret, the paymaster has to start issuing more bonus tickets, until everyone has 4 tickets a day ..." That forgoes the obvious question of, "Why doesn't the Captain just confiscate the extra tickets?" Inflation may be an intrusion into the market cycle, but it spreads through traditional market incentives: wealth (being "in on the secret") trickling out from the source.

[selfishgene]

I like point 2.