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Less Than Zero: The Case for a Falling Price Level in a Growing Economy (Hobart Papers)

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The Editorial Director of the Institute of Economic Affairs, a London based think tank, records in his forward to Professor Selgin's book that the counter-revolution in economics has resulted in a revival of classical liberal ideas. Later he notes that the central argument of the book, is a monetary policy that permitted prices to vary with changes in productivity ie a productivity norm. The author, in his research, claims that the idea was considered by 19th century thinkers but was almost lost under the tidal wave of Keynesian ideas.

This paper finds particular relevance at the moment when interest rates in the United States and Japan are close to zero.

Professor Selgin begins the book with a note on the current view of monetary policy being directed at achieving a price level at or close to zero. The idea of monetary expansion as a means of achieving full employment has been discredited. He introduces his concept of a variable price level with reference to a productivity norm and establishes basic ideas about productivity.

From here he begins to develop his concept in greater detail, looking at the case for a zero price level before moving on to consider the issue of productivity and relative prices. The argument he develops uses historial evidence as well as a little formal analysis involving 4 Aggregate Supply/Demand diagrams but the level of rigour is not too onerous for the general reader.

A brief chapter considering the effects of a productivity norm on contracts between debtors and creditors before Professor Selgin moves to the Historical Implications of a productivity norm. In this chapter he sets out a number of examples from history whereby falling price levels were considered to be signs of depression and rising ones to be a sign of excessive monetary expansion. In each case he sets out to establish whether or not these were actual depressions and in each case he discovers that the facts reveal otherwise.

In the penultimate chapter, the practical implications of a productivity norm are considered. In his concluding remarks, Professor Selgin considers why this proposal has not enjoyed more support from the professional economic community.

This book deserves serious consideration and should be on the reading list of every student of macroeconomics, public policy makers and your everyday central banker. The text, at times alittle dry, is challenging buy mainly user friendly. Well worth persisting with.