Libertarian’s Corner:

A Lesson in Economics

 

Joseph S. Fulda

Joseph Fulda is a freelance writer living in New York City. He is the author of Eight Steps Towards Libertarianism.

Now that inflation is once again on the rise, it might be helpful if the concept were better defined. Inflation at first meant monetary inflation, inflation of the money supply, more money being printed. Then it took on the additional meaning of price inflation, a rise in the general level of prices and wages in the economy. Monetary inflation necessarily entails price inflation. To see this, consider a 25-person market where everyone has five dollars to spend and where sellers are free to raise prices based on their perception of the demand for their products. Now suppose everyone in this 25-person market suddenly had six dollars. What would one expect? Clearly, prices would be bid up by 20 percent. That is exactly what happens when the government prints more money. Prices throughout the economy are bid up. But not all price increases reflect general price inflation; prices rise and fall all the time, even when the money supply is stable. Prices rise when supply of goods decreases or demand increases; prices fall when supply increases or demand decreases. That is, perhaps, the most fundamental law of economics. We illustrate this generality with a New York example.

When I was a child and the fare on city buses was as low as 15¢, if one wanted to take a trip on two buses one paid two fares. Period. The fare rose to 20¢ then 35¢, and by the time I was seventeen it was 50¢ with half-fare on weekends. But at that time, Add-A-Ride tickets were introduced which allowed one to transfer between intersecting city bus routes for 25¢ (10¢ when half-fare was in effect). The price of a two-leg trip was now relatively inexpensive. A few months later, the Add-A-Rides became valid on intersecting routes between city buses and private bus lines in Queens and Brooklyn. Five years later the fare rose to 60¢ and just a year later in 1981, when the fare rose again to 75¢, the Add-A-Rides were renamed transfers and became free. A two-bus trip that previously cost 85¢ (60¢ for the fare and 25¢ for the Add-A-Ride) would thus now only cost 75¢.

In July 1997, the transfers were extended for Metrocard holders to include transfers between buses and the subway for the very first time. Also for the first time, transfers were no longer restricted to intersecting routes.

Transfers are a form of money issued by the government and in New York they became progressively cheaper and more extensive as a way to counteract fare increases. Although overall prices increased, the price of two-leg trips decreased. Moreover, since bus transfers are a form of money, giving them out at half-price and subsequently without charge increased the total money supply, and therefore bid up prices generally, if ever so slightly. We can learn from this example that it is possible for the money supply to increase very slightly, while a particular form of money greatly increases in circulation, with the result that prices generally will go up, while specific prices will go down. Something to keep in mind when watching prices move up and down on the market.     *

“Money with [Congress] is nothing but trash when it is to come out of the people. But it is the one great thing for which most of them are striving, and many of them sacrifice honor, integrity, and justice to obtain it.” --Davy Crockett

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