“Prices Must Be Free To Tell The Truth”

July 31, 2009

by Mario Rizzo

I am not sure who first said this but I believe it was the economist Benjamin Anderson (although Arthur Marget has been credited). In any event, Henry Hazlitt promoted the statement.

I think the very interesting opinion piece by our regular guest-blogger, Jerry O’Driscoll, in today’s Wall Street Journal is in the tradition exemplified by this post’s title. But there is something more. The article shows that falling prices (both absolutely and relatively) in particular markets are not a bad thing for the recovery process. Naive Keynesians get upset anytime an important price goes down. Oy gevalt! What will happen to aggregate demand? There will be a cumulative decline, and so forth.

Recovery doesn’t mean maintaining or going back to unsustainably high prices. (I offered my two cents in the Freeman.) It must involve readjustment of relative prices as a result of the credit-boom and bubble generated distortion of relative prices. Jerry’s article reminds of us all of some basic truths.

2 Responses to ““Prices Must Be Free To Tell The Truth””

  1. Lee Kelly Says:

    But prices can also tell such sweet lies when caressed by the right policies. It’s so tempting to succumb to the delusion they offer, if only for a short time, say, until the next election.


  2. There’s goes that price deflationphobia again, the oh so persistent medievalist, Keynesian superstition.

    Dr. Hulsmann writes that Keynesians oppose price deflation, especially expected price deflation because it encourages people to hoard instead of dishoard money in anticipation of greater purchasing power, thereby postponing increases in aggregate demand. But this of course is contingent upon the (false) idea that increasing aggregate demand is necessary to cope with a recession.


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