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Prices and unemployment

by on 31/03/2018

Prices ceased to be long time ago connected to unemployment level or to limitations or aboundance of labour force. Prices are driven by scarcity or aboundance of product or one of its components, without alternative. In modern economy labour seems to have always alternative, lately even in the highest professional level of economic activity. It is truth in micro level of individual product, as well as at aggregate macro level.

If the 1973 stagflation didn’t give enough empirical evidence that Philips curve doesn’t work, the 2018 economic situation should. There is no correlation in the technology based economy between prices and unemployment. Prices in technology driven economy, with automatization and free information, available to the suppliers as well as to the consumers, have the propensity to reach marginal cost, which by itself have tendency to become zero or close to zero, after the initial investment was done, and the technology became available to all.

In an economy with full automatization, mobility and information, with relatively abundant capital for investments, only new inventions and innovations, that produce temporary state of monopoly, can hold prices, that still generate profit, before the new invention will become a general public knowledge, and allow price well above marginal cost of the product that as said is becoming close to zero. This temporary state could exist for some time, even decades in the pre-information economy, but not anymore. In information based economy, price increase well above the average production cost, can happen only if scarcity prevails in products or in inputs needed to produce it. Other way to increase price above average cost is by creating legal obstacle for usage of new technologies, or of unique brand. By the way, the legal protection of knowledge or copyright is becoming less and less obvious and maintainable. Viz. the situation in pharmaceutical industry or entertainment industry.

The monetary reasoning for inflation, in technologically driven, global economy doesn’t work on ordinary consumption products, unless there is scarcity of capital capacity or substantial raw material or component needed to produce it. Since all the products are energy driven, the cost of energy is crucial in price creation. At 1973 oil had no alternative, so its scarcity caused huge inflation and also unemployment. If the scarcity is of final product, its price will increase and it will become a local event, but if the scarcity is of raw material, so basic as energy producing raw material, it causes bottleneck in production and as result of it, in one hand it will cause scarcity and price increase in large range of products and on other hand unemployment. There are very few raw material items in contemporary information and technology driven market and capital economy, without technological alternatives. Even in energy industry, the non conventional solutions, have only capital limitations, and no resource limitations.

The result of all this is low inflation in the ordinary consumption products, except those, dependent on scarce components, like land, weather, water, environment. The next major price increase will be caused by one of these items. Just to make it clear, agriculture, even if land dependent, has still long way to utilize technologies in the food production processes, and there are many alternatives to classical land dependent agricultural products.

Does it mean that monetary easing has no influence on prices? Definitely not. Money, in one of its aspects is a raw material, essential to manage economy. As such, if in scarcity its price increases and if abundant it’s price decreases. And there is other issue with money, very uncommon for other form of commodities. Money has unlimited demand because of its value holding property. Yet money as value holding item has alternatives, like investments in real estate or any other income generating assets. Here the price of money plays an important function. If the price of money, the interest, is low, what means from money holders point of view a relatively high price for money holding, the alternative investments in value holding assets seems to be more attractive. But since all the alternative value holding assets, be it real estate or company shares are limited and final at the certain time period, their prices are wildly escalating at times of low interest rate and plummeting at times of high interest rate.

  1. As prices disconnect from production, as you point out, it costs ever less to maintain the Plebs… As was the case in Rome, 2,000 years ago… Hence the interest, even necessity of a guaranteed income… Also invention is not THAT capital intensive (doesn’t compare with the Suez Canal). In its bottom line, it depends only upon universities… Thus the core of the economy is PUBLIC. Private capital is more of a vampire, even if it is an intelligent vampire, SpaceX style…

    Looks like China has understood all this very well… And Europe, with its “austerity”, not at all. Trump, though is catching up fast. It was hilarious to see the pseudo-left press in the USA contradicting Trump about Amazon…

    New York Times and Washington Post (owned by Amazon’s boss) insisted that Amazon paid SOME taxes, contrarily to what Trump claimed… Right, some taxes, some local taxes, but NO US Federal Income Tax in 2017 for Amazon….

    Liked by 1 person

    • As result of price decrease, the nominal GDP is growing less than the real GDP measured in total value of production. Maybe better measure than GDP to represent the change of economic activity is energy consumption change, or even more so the total volume of information exchange among people. But the nominal GDP stagnation is not only about statistical data, but about less taxation and less profitability of the tangible products production. Not so the services supplies. Its enough to follow the soaring prices of restaurants, accommodation facilities, etc. as compared to merchandise goods.


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