From the mises.org recent article: America’s Economic Myths
My question is this: if inflation IS the increase in the money supply (not just a rise in prices), then why on earth do the neoclasicall economists try to “reduce” inflation by other means than reducing the money supply?
It seems pretty elementary:
“Ummm, we have a bad case of worthless paper flying around in the market, what should we do to get rid of it?”
“Uh, I know: let’s print more paper, so people will actually create something with THIS batch that will cover the surplus there was the last time!”
It seems to me like someone’s not telling the whole story: either neoclassical economists are RETARDED as in “Down Syndrome”-dumb, or austrians are guilty of the equivocation fallacy.
Which neoclassical economists? I am sure most of them recognize that increases in money-substitutes over and above the money base and in excess of demand for money realize this will cause price rises (which they dub “inflation”.) The question is, do those in control of central banks see inflation as evil or as a tool?
Well it’s not just a matter of semantics. It’s a matter of how to explain the phenomenon. And dubbing the effect “inflation” definitely does not help things. If the price of a good goes up, consumption must be reduced on some other good. There will be no general rise in the prices of goods, absent an increase in the supply of money or a fall in demand for it - the latter being unlikely in the extreme in the case of rising prices.
Austrians never created their own definition of inflation, they used the one that was there for hundreds of years. It is just that dictionary definition of “inflation” began to change somewhere in the late 70s. It was first changed to ‘general price rise caused by increased amount of currency in circulation’, and now some dictionaries just dropped the second half of definition, resulting in ‘general price rise’. Here you can find comparison of some of inflation definitions as given by different dictionaries.
Austrians say that general rise of prices can only be caused by inflation (undue expansion of money supply). Neocons say there can be other reasons, and they give many different ones, blaming high oil prices, speculators, new China consumers, and whatever else that suits their political agenda, but never their money policy.
No, they have no point. Assume the money supply is fixed - any increase in the price of oil will necessitate a rise in the price of certain goods and a fall in others as consumption spending shifts towards goods that are now more expensive (assuming no change in quantity demanded and no available substitutes) and away from goods that are no longer desired. The prices of those latter goods will fall, the price of the former will rise. This is simple demand and supply, not “inflation”. The consequence of inflation, i.e. a general rise in the prices of goods, can only come with an increase in the money supply over and above the money base.