here are what i perceive to be some flaws in the mainstream definition and use of the word inflation i am no expert and have only studied economics in school and with regards to inflation we have been taught that inflation is the general level of increase in prices the 4 causes are demand-pull, imported inflation, cost-push and the last cause is an increase in the money supply.
Interestingly, the last cause is also given the least amount of attention, however this baffles me.
Using the textbooks’ definition of inflation, if the price of laptops skyrocketed due to an increased demand, this would be classified as inflation, however, they are contradicting themselves because they define inflation as being a general increase in price level
In no way is an increase in price of laptops a ‘general increase’ in the price level. Whatever a ‘general price’ actually means.
Now we all know that inflation is solely due to an increase in the money supply, making people feel wealthier.
The word ‘inflation’ connotes a kind of illusion, an exaggerated increase that does not reflect a true value
Now an increase in demand for computers is a real value people value computers but the supply has not changed hence higher prices, in no way is this inflation, it is due to a real demand.
please discuss and point out any errors in my argument, i am keen to learn
Welcome to the site! Inflation is an increase in the supply of money. A consequence of inflation can be a rise in the price level if there is more money being offered for the same (or a reduced) amount of goods and services. Also, if output increases hand-in-hand with the supply of money the price level may remain flat even though it should be falling (such as the 1920s).
The problem with inflation being defined as a rise in the price level is that it leads people to mistakenly believe that inflation only occurs because most prices go up, and they come up with excuses for why that happens. The reality is that all prices can only go up if something happens to money; namely that the supply of money increases. Also, rising prices are only one consequence of inflation. As more money is created, this creates a short-term downward pressure on interest rates below their natural rate (where the demand for loan capital meets the supply of real savings as defined by Hayek). This causes people to make malinvestments; they invest in projects that will cease to be profitable once the interest rate reflects actual conditions in credit markets again. Hence inflation distorts the entire process of production and that is why it must be defined as an increase in the supply of money with a rise in the price level merely being a potential consequence of inflation, but not inflation itself.
If you are specifically interested in inflation, check out What You Should Know About Inflation by Henry Hazlitt. It’sa very short but informative and basic book.
Well, having to pay 3x for gas for instance doesn’t make people feel wealthier, I think. Inflation of the MS transfers resources to the people who use the new money first, so those people indeed get wealthier…until the system breaks down of course.
That’s true, of course, but even then those who get the new money first are likely to be those with large amounts of real assets. So when the “flight into real values” occurs and hyperinflation ensues, they’ll be better off than the rest anyway.
As for costs of inflation, the mainstream lists the superficial views: menu costs, uncertainty, false reporting of profits and transfer of wealth. However, due to their lack of capital structure the most pernicious effect (the business cycle) is simply ignored.
In this context, analyzing one good is not productive. An increase of the price of laptops may or may not be accompanied by a decrease of the price of other goods. If the average price per non-laptop decreases at a rate proportional to the increase of the average price per laptop, there is clearly no inflation.
The only way for a general price increase to occur, general meaning aggregate or total, is for the supply of money to increase.
If the supply of money is constant, or even relatively constant to the increase in production, then aggregate (total) prices would stay fairly stable.
But when the price of EVERYTHING continues to rise, from wages, to homes, petrol to pizza, this can only be accomplished by increasing the monetary base.
Think of it like a bucket. You fill the bucket up. This is the aggregate of all prices in the economy. In order for the water level to rise, you need a bigger bucket. It is IMPOSSIBLE for the water to rise if the bucket doesn’t also grow to contain it.
Whenever aggregate prices are rising, it is monetary inflation.
Market/sector/product specific price changes are normal, natural occurances in an open marketplace.
Individuals use the same words in different ways and with different meanings- and even attach different values to those meanings- this is one of the important things that the Austrian economic methodology shows us [i.e individually subjective valuation].
Given human nature it is therefor “normal” for this [the use of multiple interchangeable definitions] to occur in everyday common use of the word “inflation”.
So part of the problem here is that there are at least three common definitions of the term “inflation” [maybe more], and they are often used loosely and interchangeably, both to suit a persons subjective valuation of what the term means to him/her, and even to suit his/her political agenda.
The three definitions I’m most aware of are:
1] “inflation” = an observation, that is, the price of a particular product or service is said to be"inflated" or has been “inflated” [i.e. it costs “too much”]. This is usually expressed as a complaint, more than anything else.
2] “inflation” = An action, that is ,an increase in the supply of money: e.g. “the money supply { i.e. the monetary base [mb] } is being inflated” [i.e. is being increased or is increasing.]
3] “inflation”= An economic condition- that is ,the phenomenon of a steadily occurring increase in the general price level [i.e. the cost of most goods and services in a economy, as measure by units of the state issued legal tender in use], so that in general more units of the state currency are now required to buy the same goods and services than were required 6 months, or a year ago.
Does Action [2] - Always Lead To Condition [3]?
Also, to further complicate matters ; regarding definition [2], this action is often seen as automatically leading to the condition described by [3] - that is, it is almost invariably assumed that the action of increasing [inflating] the money supply will produce an increase in the general level of prices for most goods and services [ i.e the action of increasing/inflating the money supply always causes the condition [3] called “inflation”].
For example : " the fed has inflated/increased the monetary base [mb] by such and such percent for the last 2 quarters,[i.e definition [2] ], therefor a condition of general price inflation [i.e. condition/definition [3] ] must follow".
Unfortunately, although this might sometimes be the case and action [2] does indeed lead to result [3], in truth it cannot be relied upon to happen every time- and the theory of subjective, changing, individual human valuation and action, as outlined in basic Austrian economic theory , explains why, in my opinion ,at least.
That is, because of the reality of and unpredictable consequences of the sum total of unknown and unknowable future individual subjective valuations and actions at any time, it is impossible to predict with certainty that condition [3] will occur as a result of action [2] , every time - life [and economics] is [simply!] not that simple.