The Optimum Trend of Prices

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Traditional approaches to macroeconomics have often taken for granted as a norm some kind of stable price level, either as a state of affairs that would come about naturally if no sins were committed against the canons of sound finance and sound money, or as a goal to be pursued through various monetary and fiscal measures by reason of its presumed advantages. Probably few if any are now left who would have much confidence that such a state would be reached without deliberate intervention by appropriate agencies, but there remain many who are willing to accept a stable price level as a desideratum without adequate inquiry into the specific advantages and disadvantages of this as compared with some other regime. It is time, I think, that we broadened the field of alternatives among which we choose, and give more deliberate attention to the possibilities that are opened to us if we are willing to consider the deliberate choice of upward or downward trends in the price level as alternatives worthy of serious consideration rather than as heresies to be dismissed offhand. Traditional arguments in favor of a constant price level have included arguments that such a state, or a reasonably close approach to it, is a necessary prerequisite for general economic stability; that a stable price level favors correct economic calculation; and that it is necessary to the preservation of equity as between debtors and creditors and between differently situated economic groups generally. Upon examination, it turns out that given suitable auxiliary conditions, none of these advantages is exclusive to a stable price level, and that the decisive factors may be quite different in character. Indeed, the concept of the stable price level has itself been given different interpretations. Some have written in terms of a stable level of product prices, or of a stable level of the cost of living; others have spoken in terms of a constant level of factor prices. Given some form of technological progress, the two necessarily give different results. Sir Dennis Robertson, for example, has on occasion expressed himself in favor of the stable factor price level, in part because he conceives that this would give the rentier and pensioner a greater share in economic progress. Keynes' use of the wage-unit as a numeraire in much of his analysis is another indication in the same direction, though this would not necessarily commit him to favoring factor price constancy. Most modern economists, however, tend to express themselves in terms of product price constancy, either because of the greater conceptual precision of the cost of living index and the focussing of attention on it generally, or from a recognition that in terms of labor union pressures for ever higher money wage rates and the other political realities of the current situation this is a more readily attainable goal than that of factor price constancy. There are thus already at least two major alternatives, and it is not too much of an extension to bring under consideration the whole gamut of possible price trends.