Let’s keep this between you and me, but until yesterday I’ve never read Keynes’ Essays in Persuasion.
As we discussed before, fewer businesses are opening in this recession (and previous recessions) and they are more likely to fail:
I was talking about this, the concept of “business confidence” and inflation with my friend JW Mason, who pointed out to me that entrepreneurs benefit from inflation and suffer from de/disinflation, as they are net debtors. Established companies, sitting on cash reserves, as well as financial firms, sitting on worthless mortgage debt, have a vested interest in fighting inflation; new businesses, the kind that drive innovation and employment, have the opposite incentives.
You wouldn’t necessarily want to take out a loan to open a business in a field where prices are falling – now would you want to do that in an economy where prices are falling or not increasing as fast or as steady as they used to be?
I was like “Woah did you just think of that right now?” and he said no, Keynes wrote that like 80 years ago. Oh.
Keynes, “The Social Consequences of Changes in the Value of Money” (1923), Essays in Persuasion:
Now it follows from this, not merely that the actual occurrence of price changes profits some classes and injures others…but that a general fear of falling prices may inhibit the productive process altogether. For if prices are expected to fall, not enough risk-takers can be found who are willing to carry a speculative “bull” position, and this means that entrepreneurs will be reluctant to embark on lengthy productive processes involving a money outlay long in advance of money recoupment,-whence unemployment. The fact of falling prices injures entrepreneurs; consequently the fear of falling prices causes them to protect themselves by curtailing their operations; yet it is upon the aggregate of their individual estimations of the risk, and their willingness to run the risk, that the activity of production and of employment mainly depends.
The Deflation which causes falling prices means Impoverishment to labour and to enterprise by leading entrepreneurs to restrict production, in their endeavour to avoid loss to themselves; and is therefore disastrous to employment…These results are not so marked as those emphasised above, because borrowers are in a better position to protect themselves from the worst effects of Deflation than lenders are to protect themselves from those of Inflation, and because labour is in a better position to protect itself from overexertion in good times than from underemployment in bad times.
Thus Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier.
So efforts to actual get a functional inflation target are going to do more for business interests than putting a thousand JP Morgan executives into the Obama administration. But that’s only if we define business interests as new businesses creating jobs, innovation and opportunity, not businesses trying to safeguard cash reserves.
Where is the research on this linkage between new businesses, entrepreneurs, and inflation?