A silver or gold dollar is a standard amount by weight and fineness of a material good. The unit is constant over time unless government interferes and changes the unit. But even this new unit will be stable until it is changed again. And even if the weight or fineness were to change, the old dollars will exchange at a certain ratio to the new. It would also take great effort and substantial cost to re-mint all the money which works to keep the unit stable over time. Economic calculation is possible and accurate because the monetary unit is essentially a constant.
The fiat dollar is in no way constant. As the bank inflates the PP of the unit falls. In order to make economic calculation one must now factor in inflation. This is where the real problem begins. If one uses the CPI as the “inflation premium” he is asking for trouble. The CPI only reflects the price change of a small number of goods. If these goods do not happen to be factors in his production the entrepreneur is essentially flying blind.
If one is going to use the CAPM to make a decision on undertaking a project and figures the inflation premium is 2% and reaches the conclusion that this project is going to be profitable, but in reality inflation is 10% he is doomed to fail. He runs out of bricks in the middle of the project.
The difficulty in determining a proper inflation premium is caused by the injections of new fiat money into the economy. At the very minimum fiat money drastically increases the difficulty of economic calculation. This is easy to see.
What may not be so obvious is whether fiat money makes economic calculation impossible. I have been pondering this for some time now and have been wondering if it goes even farther than just making things difficult.
Is it possible that fiat money makes economic calculation impossible?