Wednesday, May 6, 2009

Fishing with Fisher

I ran across an interesting item while perusing the comic strips today. And I love it when the comic strips get me thinking economically – even if I’m wrong. (Click on the strip to see the final panel.)


(The image wasn't functioning the last time I checked. Here's a link. - 2/15/10)

My response is, “if one accepts the assumption that clams are money and then applies that assumption to the situation, I'd have to say no inflation in the short run."

Irving Fisher developed the equation M x V = Q x P (money times velocity equals the transactions times the price level). I've always found it helpful when thinking about the economy (see title of this blog).

I think the equation indicates no threat of inflation. If clams are M and worms are Q, there would seem to be no reason for P to change, barring a shock to the worm supply.

Although one could make an argument that new clams from the river constitute an exogenous monetary increase similar to finding a new supply of gold or silver in a specie-backed monetary system. The long-term impact might be inflationary, as long as the clams hold out. But what if "peak-worm" has been already been reached? If that's the case, inflationary pressures could develop sooner.

I welcome your thoughts.

This post relates to the following Keystone Economic Principles:
8. Quantity and quality of available resources impact living standards.
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

1 comment:

Winton Bates said...

It seems to me that the money supply (clams) is increasing while the supply of goods (worms) is declining. So, if the activities we are observing constitute the whole economy we must have too much money chasing too few goods i.e. inflation.

The fact that prices haven't risen is probably attributable to variable lags.