So I was thinking about Steven Landsburg’s argument (from Chapter 7 of the Armchair Economist) that Burning a dollar bill decreases the price level and helps everyone who holds money except the one who’s bill was burned. I’m not sure I agree.
A) I first wanted to claim that when the value of all other non-burned dollars become more valuable the relative usable value to dollar holders doesn’t increase as much as the $1 decrease the burner experienced. Allow me to explain. There are plenty of dollars that still have value but that no-one holds. These are the “lost” dollars of the world. Waiting to be found, similar to the dollar that Landsburg says “would be as good as burned” if he let it blow away. In all reality it isn’t burned. It still holds $1 worth of value to the lucky soul who finds it. If you imagine that scattered throughout this orb we inhabit there are thousands if not millions of dollars “lost” to potential dollar holders. Every-time a dollar is burned, the relative value of these dollars all increase, and the relative value of usable held dollars in the world has decreased. Thus the value to SOCIETY has actually decreased not remained the same.
B) Second why would everyone else’s value increase really? To the world this dollar has just been saved byLandsburg, to be spent another day. The world expects it to still have value, the same as the world has expectations of a probable expected future use for all the “lost” bills I mentioned in part A). Thus the price level will not decrease to the extent Landsburg claims. Thus the world is “worse” off by the burning of a dollar. Unless of course it is broadcast to the world so that everyone would know that it had really been destroyed. But in that case we have to think if the opportunity cost of broadcasting to the world the burning of a dollar bill outweighs the value to the world of watching.