Famous Errors Part II

Outline:

1st Inflation - a prerequisite for economic recovery?

2nd Does wealth really make you happy?

3rd Safety by monitoring and correct behaviour?

4th Moral action always in the interest of each individual?

5th To whom God gives an office, does he also give the mind?

6th Lies have short legs?

7th Deterrence strategy prevents nuclear war?

8th Rational decision always better than intuition?

9th pictures don't lie?

10th Where there is smoke, there is fire?

11th Attack is the best defence?

12th Right to bear arms increases security?

Chapter 1: Inflation - a prerequisite for economic recovery?

Outline:

1st The problem

2nd The basic assumption

3rd The development in the individual factor prices

4th A dynamic analysis

5th A historical analysis

1st The problem

The public repeatedly assumes that a slight inflation is a prerequisite for an economy to find its way out of recession and depression. While the goal of monetary stability is affirmed insofar as high and galloping inflation is harmful, a slight inflation, limited to a few annual percentage points, would not only be not harmful, but even necessary to enable full employment and growth. It is also assumed that mild inflation was sufficient to safely achieve this goal of overcoming a cyclical downturn.

The most important example of such an attitude today is the current policy of the European Monetary Union. Thus Draghi, the president of the European Central Bank, deliberately aimed at an annual inflation of 2 to 3 percent, set a key interest rate of 0 percent for bank loans to achieve this goal and pumped billions of euros annually into the national economy.

He does this although the most important goal of the European Central Bank according to the European Treaty is the maintenance of monetary stability and although the goal of monetary stability is only achieved with an inflation rate of 0.

Of course, one cannot assume that a central bank can always succeed in keeping the overall economic price level constant; it always depends on the initial situation to what extent this goal has actually been achieved.

If in the recent past an economy had achieved a double or even triple-digit inflation rate, one can certainly speak of a great success of the central bank if it succeeded in pushing the inflation rate down to a single-digit value, say 6%.

This does not mean, however, that the central bank is allowed to deliberately aim for a two to three percent inflation rate, whereby without this policy the goal of monetary stability would almost have been achieved. And this statement remains valid even if the European Court of Justice, probably out of ignorance of economic-scientific correlations, sees no violation of the European Treaties in the inflation policy of the European Central Bank.

Above all, our democratic system has a division of labour between the monetary policy of the central bank and the fiscal policy of the state. According to this, it is the task of the central bank to ensure the stability of the internal monetary value in the sense of price level stability as well as external monetary stability in the sense of stable exchange rates. The task of the state, on the other hand, is to stabilise employment and ensure appropriate economic growth.

Furthermore, this division of labour does not only apply to neoclassical and neoliberal approaches. It was the Keynesians Mundell and Johnson who, with their call for a policy mix strategy, suggested that the central bank should limit itself to monetary policy objectives, while the state (government and parliament) should limit itself to employment and growth policy objectives.

Mundell and Johnson came to this conclusion by applying a thesis formulated by Jan Tinbergen that a political conflict of goals can only be avoided if the number of means corresponds to the number of goals, whereby one can only speak of an independent means if one means could not logically result necessarily from another means.

Mundell and Johnson now pointed out that with traditional monetary and fiscal policy, the four goals of foreign economic policy were

- The exchange rate stability,

- the DB-compensation,

- the free convertibility and

- the autonomous economic policy.

There are only three independent means of foreign economic policy and they are:

- the government expenditure,

- the exchange controls, and

- the exchange rate variations.

At first glance, the interest rate policy of the central bank could be seen as a fourth means. However, in the Keynesian policy of the past, this means was not regarded as an independent means, since the central bank was given the primary task of supporting fiscal policy. If the state initiated an expansive fiscal policy, then it was the obligation of the central bank to support this policy with an equally expansive monetary policy. In political terms, therefore, monetary policy and fiscal policy simply had to be regarded as a single instrument.

Thus, within the framework of traditional Keynesian fiscal policy, a solution to the target conflict between monetary and fiscal policy was not possible, since there were only three independent means to four independent goals. And Mundell and Johnson sought to resolve this target conflict by demanding that the central bank should only pursue the goal of stabilising the currency, while it was the sole task of parliament and government to ensure full employment and adequate growth.

But why is inflation and especially a creeping inflation of a few percentage points of an annual depreciation of money so bad? Can we not accept an annual increase in general prices for the sake of the higher goal of full employment?

The goal of monetary stability is first of all one of the goals of economic and monetary policy which have no intrinsic value, i.e. which are not pursued for their own sake. They are pursued because other goals of economic policy are endangered by inflation.

But why then do we generally still speak of a goal and not simply of a means of economic policy? The reason is simply that in a free market economy, individual prices result from the markets, so that neither government, parliament nor the central bank can set the general price level. If the price level rises in a year, this is simply the result of thousands and thousands of price determinations for the individual goods.

The central bank, which in our constitution has been assigned the task of ensuring monetary stability, can thus not simply change the desired price level; rather, it can only formulate the goal of preventing certain inflationary processes and then use the monetary policy instruments at its disposal, such as the key interest rate, to realise this goal in such a way that the desired goal of monetary stability is achieved in the best possible way.

So let us return to the question of why inflation is generally regarded as something negative. The reason is that, firstly, inflation jeopardises the basic objective of any market economy, namely to align the production of goods as closely as possible to the needs of the population.

Generally speaking, this goal can only be achieved if the price ratios correspond to the respective scarcity ratios of the individual goods. A higher scarcity therefore also implies a higher price. At first glance, it seems as if it is not important to keep the price level, i.e. the average of all goods prices, constant with regard to this allocation policy goal.

The difficulty lies only in the fact that in a free market economy it is not possible at all to allow the general price level to be changed and yet at the same time the price ratios to remain unaffected.

Precisely because in a free market economy the individual prices are formed on the markets, it is not possible in any other way than that in the case of general inflation the individual prices prevail at different times and also to different extents, and this means that if inflation processes are allowed to take place, there will be shifts in the price ratios, partly temporarily, but also partly permanently. The extent to which price increases become possible on the individual markets depends on the respective market situation, and this varies from market to market.

In a free market economy, inflation continues when individuals have more money at their disposal and use this money to buy more goods. The production of these goods is expanded, this leads to an increase in demand for the factors of production that are needed to produce these goods, scarcity occurs in these markets with the result that prices also rise there. In this way, inflation gradually spreads to the entire economy.

This thus means that for those goods whose price has not yet adjusted to the higher price level, the consumers wrongly assume that these goods are now cheaper compared to the other goods for which the higher price has already been realised and therefore buy more of these goods than corresponds to their own interest.

But income distribution is also negatively affected by inflation in an undesirable direction. Generally speaking, those whose income is largely fixed, i.e. not always adjusted automatically to general price increases, lose out in the event of inflation.

In this context, it must also be assumed that the incomes of the non-self-employed are adjusted to price increases much slower than the incomes of the self-employed. For example, collectively agreed wages are only adjusted to price increases after the expiry of the notice period of the current collective agreements.

Furthermore, inflation favours debtors and disadvantages creditors. If general prices rise every year, the purchasing power of the debt sum that has to be repaid in the future has decreased due to inflation and to the extent of the price increases. Thus, calculated in real terms, the debtor has less to repay in the case of inflation and the creditor is therefore reimbursed less than he had borrowed in real terms.

Thirdly, the neo-classics and neo-liberals assume that inflations also curb economic growth. Inflationary periods are characterised by excess demand on the markets, the pressure of competition decreases, and therefore producers can remain on the market who would not be competitive at all under normal conditions due to high costs.

And this means that scarce resources are wasted on projects that are not sustainable in the long term; there is no competitive pressure, which, in a situation of monetary stability, encourages entrepreneurs to constantly look for cost reductions and quality improvements in order to avoid the danger that customers will migrate to other providers.

Keynesians, on the other hand, generally assume that more money is available for investment in the case of inflation precisely because of the profit increases associated with the price increases. Firstly, they overlook the fact that in this case it is mainly investments in expansion that are made, while the increase in prosperity can in essence only be expected in the case of investments in rationalisation. Secondly, this argument tacitly assumes that price increases always lead to profit increases, an assumption which - as will be shown in this article below - does not correspond to reality.

Also the further argument of the proponents of a deliberately induced slight inflation, that the damage of general price increases would be limited, since only annual price increases of 2 to 3 % percent are recommended, is not very convincing, since - as experience shows - a creeping inflation usually turns into an increasingly growing, i.e. galloping inflation.

The reason for this development lies in the logic of this argumentation itself. Whether the hoped-for stimulating effects actually occur in the case of price depends less on the absolute level of the inflation rate than on the fact that the present inflation rate is somewhat higher than the inflation rate of the past period.

And this circumstance is related to the fact that the activities of entrepreneurs are determined by expectations about future profit increases. No matter how much the expectations about future development may refer to positive profits, if the actual development falls short of the expected development, prices on the stock exchanges fall despite positive, perhaps even increased profit prospects compared to the past period.

Prices fall because previous expectations were too high and have to be corrected by lowering prices. For these reasons, an inflationary monetary policy will only remain successful if the expected price increases rise year after year.

It does not remain a creeping inflation, but rather, due to the inner logic of this proposal, it necessarily turns into a galloping inflation, and all scientific schools agree that this is harmful for the entire national economy.

2nd The basic assumption

There is no direct correlation between the economic activity of entrepreneurs and the inflation rate. Rather, the economic activity of entrepreneurs depends primarily on their profit expectations.

If the profit expectations of entrepreneurs are stable, i.e. neither increase nor decrease, there is no reason for the enterprises as a whole to change anything in their economic activity; the total production of an economy will neither grow nor shrink to any great extent.

However, if the total profit expectations of entrepreneurs increase, there will almost always be entrepreneurs who will expand their economic activity for this reason and therefore produce more.

Conversely applies, if profit expectations decline sharply, the total production of a national economy will follow this trend.

Now how are profits defined? The profit total (G) of an individual entrepreneur as well as of an entire national economy is always understood as the difference between the received revenues (E) and the costs (K) of production.

The revenues themselves are in turn defined as the product of price (p) and quantity (x), whereby then, if we do not only ask about the profit of a single enterprise, the total profit of an economy can be seen as the sum of the individual profits of all entrepreneurs. Instead of speaking of a sum, however, we can also view the total profit of an economy as the product of average price (P) and average production quantity (X).

Similarly, the sum of the costs (K) of an economy incurred in production can be understood as the product of the average price of the cost factors (k) multiplied by the total quantity of material resources (Km) (production factors).

Therefore, the formula applies:

G = E - K = (P * X) - (k * A).

And if we ask about the increase in profits in time (t), we get information about the change in the profit sum if we relate the revenue to the costs, thus the formula applies:

Slightly reformulated, we can also measure the change in profits by the product of the ratio between goods prices and factor prices and the ratio of the quantity of production factors used and quantities of goods produced, whereby this ratio corresponds to the reciprocal value of factor productivity:

We thus come to the conclusion that the question on which factors it depends how the profit sum develops essentially depends on two factors. Profits will change if either the prices of goods increase more than factor prices or if labour productivity increases without the factor prices being adjusted.

The most important consequence of these conclusions is that price increases can indeed increase the profit total in an indirect way. However, this effect only occurs if factor prices do not rise at the same time or rise to a lesser extent than the prices of goods.

And this means that price increases are not a sufficient condition for an economic revival. In order for the desired effect to occur, another condition is necessary, it depends on the behaviour of factor prices whether price increases actually lead to a revival of the economic activity of entrepreneurs.

Moreover, this formula shows secondly that price increases are also not the only instrument to bring about a revival of the economy. Our formula shows that in the same way an increase in the productivity of the factors of production also leads to the same positive result. Price increases are therefore also not necessary to bring about the desired economic revival.

We can even go one step further. According to our formula, it is not primarily a question of how prices change in absolute terms, e.g. whether they rise in general; what is decisive is only the quotient of goods and factor prices, and this quotient could also rise if the prices of goods fall, they just must not fall as much as the prices of the factors of production. The general fear of deflation is therefore unjustified.

We thus come to the conclusion that a price increase is neither necessary nor sufficient to stimulate the economy. The relationship between price development and economic activity is therefore conceivably weak. In general, we measure the strength of a correlation between two economic variables by whether this correlation is necessary and whether it is sufficient.

The strongest relationship between two variables is when one variable is both necessary and sufficient to change another variable. Thus, if we want to achieve the result, we need this variable and this variable is sufficient without additional measures to ensure success.

A lower efficiency already exists if a prerequisite is either necessary for success but not sufficient or sufficient but not necessary, i.e. could also be achieved by other measures.

A particularly weak relationship between two variables exists where a precondition is neither necessary nor sufficient. And precisely this weakest relationship imaginable exists between price increases and the economic revival of a national economy.

But could one not be satisfied with the fact that a price increase can lead to an economic revival, provided that it could be shown that the additional condition (the prices of the factors of production must not rise as much as the prices of goods) was in fact fulfilled?

This question about possible alternative measures is therefore indispensable and of great importance because political measures almost always not only have an influence on the size that one wants to influence, but at the same time mostly entail undesirable effects on other goals of economic and social policy.

Irrespective of whether the desired economic revival can be brought about in this way or not, we have already shown that inflationary processes can even have very strong undesirable effects on other goals of economic policy. The adjustment of production to the needs of the population is now less efficient than with monetary stability, undesirable shifts in income distribution occur and some economists even assume that the long-term growth of the domestic product is reduced in this way.

In this case, it must therefore be examined very carefully whether the economic benefit from an economic revival is actually greater on balance if one takes the path of deliberately bringing about inflation than if one tries to achieve this goal through productivity increases.

The further investigation must now focus on the question of what development can be expected in the price relations between goods and factors of production. We have seen that an inflationary policy is in any case an inefficient method of stimulating the economy if it is not possible to prevent the complete adjustment of factor prices.

This question can only be answered if in a next step we turn to a structural analysis, i.e. if we examine the price increases to be expected for the individual factors of production separately.

At first glance, however, it seems unlikely that it will be possible to disconnect the prices of the factors of production from the price development of goods. After all, the prices of goods result precisely from the fact that entrepreneurs strive to recoup at least the costs incurred in the price.

Either an entrepreneur who uses additional credit to expand production will first demand raw materials and equipment, i.e. factors of production, and it is this additional demand that initially leads to an increase in factor prices, and the prices of goods rise here primarily because these cost increases are passed on to the price of goods.

Alternatively, the additional money leads to an increase in the prices of goods on the end-product markets by the increase in demand, with the consequence that entrepreneurs demand more production factors, which in turn triggers an increase in the prices of the production factors.

In other words, there is a close connection between all prices. And at first glance it seems unlikely that inflationary processes triggered by an increase in money can be expected to prevent factor prices from rising to about the same extent as goods prices. But only an analysis of the individual developments in factor prices will provide clarity about how probable a cyclical success of an inflationary monetary policy is.

3rd The development in the individual factor prices

We now want to take into account that in the production process different factors of production are used and that the prices of these individual factors of production can behave differently in an inflation process. Here we want to distinguish between four types of costs: First, the block of labour costs should be mentioned. This takes up the largest part and amounts to about 60% of the total production costs.

The second factor is the cost of materials, especially the prices of raw materials, which are likely to account for another 10 to 20 percent.

In third place are taxes, whereby not only indirect taxes but also income taxes should be mentioned here. It is true that only in the case of indirect taxes does the legislator assume that these are passed on to the price of the goods, whereas with regard to income taxes the legislator does not envisage any passing on. Nevertheless, we must assume that wage taxes in particular represent costs for entrepreneurs, which they always try to pass on to the price of goods.

Finally, in fourth place, we have to consider the costs of capital, i.e. above all the interest costs and depreciation.

Let us start with the analysis of labour costs. Here we have to consider that ceteris paribus price increases mean initially a reduction in the purchasing power of wages of the same size and that at the same time the share of wage income in the domestic product decreases.

Both of these facts call the trade unions into action. They strive to adjust wages to the increased price level in the periodic collective bargaining and thus to ensure that the wage ratio, the share of wage income in the domestic product, rises again to its previous level.

Since the legislator has given trade unions the right to combine their demands, if necessary, with threats of strike action, trade unions generally also have the possibility to enforce these goals.

We can therefore assume that, at least in the longer term (at the next collective bargaining), wages will be almost completely adjusted to price increases and that the price-wage ratio will therefore not have increased significantly despite increases in the prices of goods. And since, as shown, wage costs account for the lion's share of total production costs, this result already means that the profits of entrepreneurs cannot be decisively increased by way of a general increase in the prices of goods.

Before making a final judgement, however, let us first examine the expected development in the other cost categories.

Secondly, let us take the costs of materials. We have already pointed out that it must be firmly expected that the prices of material costs will also rise sharply if the prices of goods rise. According to the proponents of creeping inflation, the increase in the prices of goods should lead to more production, which in turn inevitably leads to more demand for raw materials.

Now, especially raw materials belong to the material resources that have become increasingly scarce in the last decades due to the increase in the world population, and scarcity is expressed in a market economy by an increase in the prices of the goods that have become scarce.

It must therefore be firmly expected that the cost of materials will increase at least as much as the prices of the final products, probably even more. Thus, the prices of raw materials do not contribute to increasing the difference between the prices of goods and the prices of material costs. However, as shown, this is a prerequisite for price increases to contribute to an increase in profits and thus to a sustained economic revival.

Thirdly, let us turn to the development of tax revenues. We have already seen that the enterprises regard tax payments as a cost that is passed on by 100% to the price of goods, if possible.

How these costs will develop in relation to the prices of the final product depends crucially on whether they are indirect or direct taxes. Indirect taxes, such as sales and excise taxes, rise ex definitione to the same extent as the final product prices, whereas direct taxes, i.e. income taxes, even rise disproportionately due to the tax progression.

Overall, this means again: The same conclusion applies to tax costs as to raw materials. Presumably, tax costs increase even more than final product prices, so again they cannot explain why the profit total should increase due to price increases.

Finally, we come to a fourth cost item: the cost of capital, i.e. interest costs and depreciation. Here, at least at first glance, it seems as if these costs would decrease, since the inflation process is assumed to be initiated by expanding the money supply and lowering the key interest rate of the central bank.

It is true that depreciation is also increasing, since the amount of depreciation depends on the level of the costs for the facilities. But at least these increases occur with a strong delay and the interest costs even decrease.

However, since the cost of capital is absolutely low in relation to total costs, this fourth cost factor leads at best to a very slight increase in profits. The scepticism that price increases will lead to an increase in profits and thus also to an economic upswing remains therefore.

There is another fact that calls the success of an inflationary monetary policy into question. The success of such a policy depends not only on the level of economic activity, but is also determined in particular by qualitative characteristics.

There are entrepreneurs who, through their efforts, essentially determine the increase in material prosperity and Schumpeter only speaks of entrepreneurs in this context, while there are always (only)-producers who, in normal times, would not be able to assert themselves against the competition, who were only able to stay in the market in the beginning because we achieve an excess demand on the goods markets precisely because of the inflationary monetary policy, in which almost every entrepreneur remains profitable because every cost increase can be passed on to the price of goods. Schumpeter called this type of producer hosts.

However, as soon as the surplus demand has been reduced due to the price increases and the supply is again adjusted to the increased demand, this type of producer goes bankrupt because they cannot withstand the competition in the long run.

By enabling the emergence of these hosts, inflationary monetary policy has simultaneously hammered in the first coffin nail to the economic activity and thus set the prerequisite for the next economic downturn itself.

This inflationary policy is therefore incapable of bringing about a sustained economic upswing. Not to mention that such a policy leads to a great waste of scarce resources and thus reduces the growth rate of the domestic product.

4th A dynamic analysis

For the question of which success of an inflationary monetary policy can be expected with regard to the economic revival, it depends not only on the relationship between prices of goods and factor prices on balance, it also depends on how prices change over time.

Supporters of an inflationary monetary policy often develop the notion that monetary policy should merely provide a kind of initiation, that once the economy gets going, the market will be able to continue the upward movement in economic activity on its own.

This line of thought was already developed in connection with the Great Depression at the end of the 1920s under the name 'pump priming'. However, if one takes the employment theory developed by Keynes himself as a basis, there are few arguments in favour of this thesis.

Although it is true that the increase in national income caused by an increase in the deficit of the national budget lasts for several periods according to the multiplier theory, this process slows down quickly. And according to this theory, national income has again fallen to the previous level after a few periods.

Economic development can be assessed somewhat more favourably if, with Samuelson, the multiplier theory is combined with the acceleration principle. According to this principle, an increase in national income itself will in turn also lead to an increase in the amount of investment, since the higher production of goods also required a higher production capacity.

However, if one combines the effects of the income multiplier with those of the acceleration principle, income increases can indeed be triggered for a large number of periods, and this then indeed means that an initial spark from the state could trigger a longer-lasting income increase.

However, whether these periodically occurring fluctuations in income can actually fully explain the business cycle movements is disputed in the literature. And it has not yet been proven that these long-lasting effects were actually triggered by an initial ignition caused by the state.

Thus, regardless of whether such an initial spark is sufficient, this can only be expected if an inflationary monetary policy leads to the prices of goods rising in the first periods and if the then induced price increases in the factors of production occur only with a delay.

Behind these theses of pump priming is the idea that entrepreneurs first experience profit increases due to interest rate cuts and that these profit increases are then sufficient to induce entrepreneurs to expand production capacity, even if profits fall back to their previous level after a few periods.

However, the most important prerequisite for entrepreneurs to initially experience profit increases in the first periods due to an inflationary monetary policy is that the increases first take place in the prices of goods and occur in factor prices only with a delay. So let us ask whether such a development is actually to be expected.

Let us start with the expected changes in wage rates. In fact, at first it seems that wages always adjust with a delay to increases in the prices of goods. This is because collectively agreed wages can only be adjusted to price developments with a delay, since current collective agreements can only be terminated after several months due to existing notice periods. In this context, one spoke of a wage lag.

However, this thesis could not be confirmed empirically. If this thesis would be valid, the wage share would have to be lower in countries with an above-average inflation rate due to the delayed wage adjustment, but this could not be proven.

This lack of evidence of a wage lag can now be explained by the fact that the trade unions have learned from the development. A wage lag is only to be expected when price increases come as a surprise.

However, if the central bank announces that it intends to pursue an inflationary monetary policy for a longer period of time, the trade unions will adapt to this policy and include these expected price increases in the wage demands in collective bargaining.

Instead of a wage lag, a wage lead is then to be expected and this means that the price increases of goods lag behind the wage increases. In this case, there occurs not an initial increase but even an initial decrease in entrepreneurial profits.

Even if one were to assume a wage lag, however, this profit-increasing effect would only come into play to a limited extent at the beginning of an inflationary policy. This is because the notice period only applies to collectively agreed wages. Even before the end of this period, the non-tariff wage rates can be adjusted to the development of the price of goods, and they will also do so if the demand of entrepreneurs for labour increases due to the expansion of production.

We had already pointed out that with regard to the cost of materials, it is to be expected that here, too, a shortage on the raw material markets will occur initially and only then, due to these cost increases, will the prices of goods also be raised.

The hoped-for initial spark can only be expected to a lesser extent because not only the trade unions but also the employers will react to changes in policy.

Even when new orders are in sight, entrepreneurs will only be willing to increase employment if they can count on the new orders being more than one-off orders. Because whenever entrepreneurs have hired additional workers and, due to the lack of orders in the future, want to lay off the workers which they then will not need anymore, they encounter difficulties because of the existing legislation on dismissal.

Thus, we want to record that the chances of success of an inflationary monetary policy are extremely questionable and that the theories which have assumed a success of this policy suffer above all from the fact that they have not sufficiently considered the reactions of private individuals to the measures of the state and the central bank. At best, one-off and unanticipated policy measures lead to the desired stimulating effects on the economy.

5th A historical analysis

Let us conclude this article by asking how such an obviously false theory (that inflation is a necessary and sufficient condition for economic recovery) could have persisted for so long. In fact, we encounter these ideas as early as the end of the 18th century in the context of mercantilism.

Mercantilism was the economic doctrine of the absolutist rulers. The absolutist rulers, as is well known, were concerned to break their dependence on the parliaments of the estates, which had long fought for the right to approve tax increases.

To this end, they introduced indirect taxes and customs duties, which did not have to be approved by parliament, but for this it was necessary that the economy prospered. And at that time, it was believed that this goal could only be achieved if the country had sufficient gold reserves.

This was based on the likewise erroneous opinion that money would only be accepted if it had an independent commodity value, such as gold or silver. And if the amount of gold in stock would remain largely constant (France under Louis XVI was the most important country with an absolutist ruler), then one could also not expect an economy to expand.

It was not until much later, within the framework of the quantity theory, that it was realised that even paper money could retain its value, that the value of money was determined solely by the ratio of the money in circulation to the quantity of goods. The only prerequisite for monetary stability was that the state guaranteed that a debt was considered settled when it was paid with this money.

And since France had no gold mines of its own at the time, the only way to obtain the money necessary for a prospering economy was to generate export surpluses and have foreign countries pay for their import surpluses with gold.

At that time, the thesis that an increase in trade could be brought about through an increase in money was therefore very much in line with reality.

Thus, especially at the time of absolutism, there were no trade unions strong enough to force an adjustment of wage rates to price increases if the purchasing power of their wages deteriorated. The power of the producers was so strong that even if prices generally rose, they still did not have to adjust wages.

Thus, at those times, it was quite possible to assume that slight inflation could improve the ratio of goods prices to wage rates and that this was the most important prerequisite for entrepreneurs' profits to actually increase when prices rose, thus providing producers with an incentive to intensify their economic activity.

The conditions with regard to raw material deposits were also different from those of today. The medieval economy was essentially characterised by production remaining largely at its previous level, the population also remained largely constant and there were few inventions that significantly increased the demand for raw materials.

At that time, raw materials were not yet in particularly short supply, and for this very reason it was still possible to assume that the price of raw materials would not rise sharply in spite of an increase in demand for them. Therefore, the commodity market at that time also contributed to the fact that the ratio of commodity prices to material costs did not yet deteriorate due to an increase in material costs.

In the meantime, conditions have also changed decisively with regard to capital costs. While today's industrial production is characterised by an enormously high capital intensity and production in these areas is characterised by very high fixed costs, production at that time was predominantly labour-intensive compared to today.

Therefore, at that time, there was no need to fear that an expansion of production would lead to a sharp increase in the costs of capital due to the depreciation of the production facilities. Thus, also with regard to the costs of capital, price increases and the associated increase in production did not yet lead to an increase in the costs of capital.

Finally, with regard to tax costs, there was also a more favourable starting situation for an expansion of production. Although mercantilism was characterised by the introduction of new taxes to finance its expenditures, but these were almost exclusively indirect taxes. And even when general income taxes were introduced, tax rates existed which did not yet know any tax progression and which therefore did not cause the tax burdens of enterprises to rise disproportionately with an expansion of production.

All in all, the conditions were indeed in place at the time that general price increases for goods did not lead to simultaneous and equally large increases in factor prices and that therefore price increases triggered profit increases.

An inflationary monetary policy had thus actually proven itself in the past. And it was a general practice that policy instruments which had proven themselves in the past were retained for the future for these very reasons. Without realising that, due to a changed initial situation, proving oneself in the past says nothing about whether these instruments will also prove themselves in the future. Falling back on proven measures of the past is only justified as long as the national economies are largely stationary.

Our society today is characterised by the fact that it firstly is dynamic, which means that production techniques in particular are changing permanently and this in turn has the consequence that the existing deficiencies must be traced back again to other causes each time.

Secondly, our society is highly complex, which means that the individual units are interconnected and this in turn means that interventions at certain points in our national economy partly also cause undesirable secondary effects at completely different points in our national economy.

And this in turn means that in combating undesirable conditions, it is not enough to identify these deficiencies and ban them by law, nor can one fall back on proven measures of the past.

The success in the past does not guarantee the success of today. It is always necessary to ask for the causes of the existing evil as a first step; only when one knows the causes one can determine the appropriate instruments. Furthermore, the individual possible and efficient instruments must always be examined to see to what extent they interfere with other goals of economic and social policy.