Great Hayek Quote on Expanding Money and Changing Networks of Relative Prices & Structures of Production

“It seems obvious as soon as one once begins to think about it that almost any change in the amount of money, whether it does influence the price level or not, must always influence relative prices. And, as there can be no doubt that it is relative prices which determine the amount and the direction of production, almost any change in the amount of money must necessarily also influence production.”

Prices and Production, p. 144

3 comments to Great Hayek Quote on Expanding Money and Changing Networks of Relative Prices & Structures of Production

  • Hayek understood that new gold dug out of the ground will affect the price of groceries. He did not understand that as a bank issues new paper money, that bank’s assets rise in step with its issuance of paper money, thus leaving the value of the paper money (and the price of groceries) unaffected.

  • Lio

    @ Mike Sproul

    1 / If the amount of all goods produced is the same as the quantity of money increases, how can you say that the value of the currency is not affected? Do not you think that the purchasing power of a currency unit will be lower in this case?

    2 / Hayek said rather that monetary expansion may alter the relative prices of goods and assets and the structure of production. The prices of goods and assets increase, but not all and not all at the same rate. Therefore, for some people, the value of money (purchasing power) decreases, for others, it stagnates or increases. An additional injection of money is not spread uniformly and instantly to the economy.

  • Lio

    @ Mike Sproul

    In short, your analysis is good if and only if an additional injection of money instantly and uniformly affects all goods, services and assets which of course is not the case in real life.

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Our task [as economists] is to show how only a market and a competition-determined price system can enable us from day to day to adjust a worldwide division of labor to ever-changing circumstances and to maintain that degree of productivity which we need in order to keep the population of the world alive. — F. A. Hayek

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