stagflation and increased money supply

 The Effects of Excessive Money Supply in the Long Run under Free Market Laissez-Faire Capitalism, or in other words: stagflation = inflation + stagnant economy simultaneously

In a context where irrelevant factors are equal and unchanging, certain economic principles of causality emerge and can be established by the process if reason and the method of logic. Under the principles of free market laissez-faire capitalism, excessive increases in the money supply over an extended period can have profound long-term effects on the economy. When the money supply expands excessively, it initially leads to an increase in aggregate demand. This uptick in demand results in higher aggregate sales revenues for businesses.

However, this increase in sales revenues and the expectation of continued monetary expansion tend to alter the time preferences of productive individuals. They shift their focus from future savings and investments to present consumption. As a result, there is a notable increase in current aggregate consumption, which simultaneously leads to a reduction in aggregate savings by these productive individuals.

A reduction in savings translates to lower available capital for productive expenditures by businesses. Businesses, facing a shortage of investment funds, reduce their spending on productive activities. Consequently, there is a decline in the aggregate demand for business labor. This reduction in labor demand causes both a decrease in aggregate wages paid and a decrease in the supply of labor employed. The economy then experiences a dual issue of lower wages and higher unemployment rates.

Furthermore, the reduced productive expenditure by businesses leads to a decline in aggregate production. This reduction in production capacity diminishes the overall total productive ability of the economy, causing a decrease in aggregate supply. As a result, economic progress slows down, leading to a reduction in aggregate wealth and reduction in overall prosperity.

The simultaneous decrease in aggregate supply and increase in aggregate demand exerts upward pressure on the average price level. This price level increase, coupled with lower wages, results in a decline in real wage rates.

In conclusion, the long-term effects of an excessive increase in the money supply in a free market laissez-faire capitalist system culminate in stagflation. The characteristics of stagflation include a rising average price level, higher unemployment rates, lower real wages, reduced economic progress, and diminished overall wealth and prosperity. These outcomes illustrate the detrimental impact of excessive monetary expansion on the economy [1][2].

By understanding these dynamics, one can appreciate the importance of maintaining a stable money supply to ensure sustainable economic growth and stability within a free market framework.

Sources

1 Capitalism by George Reisman

2 Human Action, Third Revised Edition by Ludwig Von Mises

Here is an alternate formulation of these principles:

                                 Stagflation

In a context where everything else is equal, an excessive increase in the money supply over a long period of time leads to an increase in aggregate demand, which leads to an increase in aggregate sales revenues.

This increase in aggregate sales revenues and the expectation of continued monetary expansion (and higher prices caused by monetary expansion and increased aggregate demand) leads to a change in time preference in productive people from future to present. This leads to more aggregate consumption in the present, which leads to less aggregate savings by productive people.

Less saving by productive people leads to lower aggregate productive expenditure by business. 

Lower productive expenditure by business leads to a decrease in aggregate demand for business labor, which leads to  both a decrease in aggregate wages paid and a decrease in supply of labor employed. So, now you have lower wages and higher unemployment.

Lower productive expenditure by business also leads to a decrease in aggregate production, which leads to a decrease in total productive ability, which leads to a decrease in aggregate supply, and to a decrease in economic progress, which leads to a decrease in aggregate wealth and a decrease in overall prosperity.

The decrease in aggregate supply and the decrease in aggregate demand (mentioned above) both lead to higher average price level.

Lower aggregate wages combined with higher prices lead to lower average real wage rates, which leads to lower standard of living of the average worker.

So, the long run effects of an excessive increase in the money supply over a long period of time is stagflation.

The characteristics of stagflation are:

increases average price level

higher unemployment

lower aggregate real wages

lower average real wage rates

lower standard of living of the average worker

lower economic progress

lower aggregate wealth and overall prosperity

or in the form of causality chains where:

A = increased money supply

B = unchanged velocity

C = increased aggregate demand

D = increased aggregate sales revenues

E = change in time preference

F = decreased time preference for future

G = increased time preference for present

H = increased aggregate consumption

I =  decreased aggregate savings

J = decreased aggregate productive expenditure

K = decreased aggregate demand for business labor

L = decreased aggregate wages paid by business

M = decreased supply of labor hired by business

N = decreased aggregate  production

O = decreased total productive ability

P = decreased aggregate supply

Q = decreased economic progress

R = decreased aggregate wealth

S = decreased overall prosperity 

T = increased average price level

U = decreased average wage rate for workers

V = decreased standard of living of the average worker

A and B --> C --> D

A --> E --> F --> G --> H --> I --> J --> K --> L and K --> M

J --> N --> O --> P --> Q --> R --> S

C and I --> T

L and T --> W --> V