Deflation, Rothbard’s critique of Friedman

Not much original content in this post, but some thins I found to be intellectually advantageous. Deflation, as it is commonly understood, is a confusing concept. The majority of economic thinking presumes it to be universally negative and encourages government action to avert deflation at all costs. However, some economists have noted two distinct forms of deflation.

“Good” deflation, as George Selgin writes¬†here and here, is a consequence of an expansion of supply (productivity increases), while “bad” deflation results from a shrinking demand (decreases in employment and production). The nuanced distinction cannot be ignored, as policies to prevent supply-driven deflation can spur a boom-and-bust cycle.

Indeed, a paper from the Federal Reserve Bank in Minneapolis by Atkeson and Kehoe (2004) analyze a link between deflation and depression and concludes that “no evidence of such a link” exists between the two, aside from the Great Depression, an instance of “bad” deflation and a main cause of why deflation is viewed as universally negative.

For a greater expansion on deflation, see this Cato Journal article, a blog by David Beckworth, and two blogs by Scott Sumner ( here and here ).

On an unrelated note, here is a 1970 Murray Rothbard lecture critiquing Milton Friedman on, among other things, the negative income tax and monetary policy.