I thought inflation was when the money supply is increased to a point where too many dollars are chasing too few goods thus increasing the price of goods?
wait, so you are saying because the mainstream of economic thought is infected with Keynesianism and Keynes popularised the notion that ‘inflation is general price inflation’ over the then prevailing ‘inflation is money supply inflation’ notion that was the original; then good economists (i.e. non-keynsians) should necessarily adopt the language of the mainstream dullards? how do you motivate this ?
yes , a stable moneysupply and a drop in the supply of goods and services would cause a general price increase; but that is not inflation, its the destruction of a capitalist society, its poverty.
And that is exactly the claim I am making. And this is exactly what happens when the government spends money, because the government employs people.
For example, let’s say we have a population of 100 people. Let us also assume that there are 1,000 dollars in this economy. Now, let us assume this is a free economy, and all 100 people are engaged in producing goods and services for the private market, which happens to be food, clothing, homes, etc.. For arguments sake, let us assume that the next day, 50 of them become employed in government. So before, we had 100 people producing valuable goods and services, now we only have 50 people producing them, and the other 50 are sitting around doing nothing of value. Now, the amount of money has not changed in the economy. There is still 1,000 dollars. What has changed is that there are half as many people being productive. So now, what do you think will happen to the price of goods and services produced in the private sector? Now, multiply this scenario three million times and include all goods and services. If half of the population is employed by the government to do worthless government jobs, only have the population can be employed in producing valuable goods and services, which means the price for those goods and services will be much higher than they would be.
But in both cases, we see a general increase in the prices of goods and services. And it is a lot easier to say “inflation”, than to say “a general increase in the price of goods and services”, wouldn’t you say?
I would say ‘price inflation’ so that clowns dont confuse it with ‘balloon inflation’
- Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency (Random house)
A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services. (Am heritage)
Undue expansion or increase, from overissue; – said of currency. (webster)
It looks like ordinary dictionaries are not that bad..
So Juan, what would you call a general increase in the price of goods and services resulting from a decrease in the supply of goods and services?
I do get your point re: government not producing but consuming (parasites) means that there are less available goods, so goods must be more expensive. Yet I don’t think there’s a specific word for that, though ‘poverty’ as Nir suggested, is not far fetched.
Dunno. If we say “government causes inflation” we are likely to be misunderstood, so maybe we should explain the whole thing instead of expecting that one word would clearly convey what we mean…
He’d call it a rise in the price level, but deny that it’s inflation, and he’d be correct. Likewise, you’d be correct if you insisted that it was inflation. You’re simply using different definitions, and there’s no point arguing about it. It’s like going up to a Keynesian and saying “what’s the definition of equilibrium”, you can sit there and quibble about it as much as you like, and you’ll insist on the Marshallian meaning of equilibrium and he’ll insist on the Keynesian, at the end of the day, you’re both correct. You just need to understand in what sense one is using the word in question.
Defining inflation as a general rise in money prices of goods is misleading in another way. A central bank could continually increase the money supply at a rate just keeping pace with increases in productivity, keeping money price levels within the economy relatively unchanged. Purchasing power of the monetary unit is steadily diminished, while no general rise in prices has occurred. Yet the quantity of money is being increased - the supply is being inflated. Of course anyone versed in Austrian economics could tell you the serious negative effects of that situation, but it is obscured out of the public consciousness by the loss of the word that once encompassed it, replaced by misguided fixation on nominal price levels. I think I remember reading something by Mises in which he lamented the loss of the more precise definition of inflation for similar reasons.
Notwithstanding that, it seems rather silly to use the same term to describe the superficially similar effects of very different causes, an increasing money supply vs. a generally decreasing stock of goods.
There is nothing necessarily inherintely bad about increasing the money supply. What is inherintely bad is government waste.
depends on whether its natural, and increased by ‘libertarian’ means. or unnatural, by government or by fraudsters.
That’s not precisely true. Inflating the supply of money creates malinvestment of resources, which is certainly a form of waste. However, it isn’t necessarily the government doing the wasting, and it’s still destructive if the waste occurs in the private sector. Granted, inflation on a large scale for a prolonged duration requires the complicity of government, but that’s not quite the same thing.
As Rothbard noted, there’s no economic reason why the supply of money needs to change. Any change necessarily means a distortion in the economy. The change in the money supply, and the resulting distortion, are simply of much lesser magnitude and significance when the increase must come about by extracting very scarce commodities from the earth than if they can be conjured out of thin air in effectively unlimited quantity and with virtually no expenditure of effort. Also per Rothbard, an increase in the supply of a commodity which is used as money can still be of social benefit because the commodity also has non-monetary uses. There can be no such benefit from increasing the supply of fiat money, which has no other use.
In any case, I’m pretty sure I did specifically refer to central bank inflation of the currency and not the relatively very slow inflation of the stock of a money commodity such as gold or silver. I think it’s pretty unlikely that the latter would be able to match the rate of increase in production in a healthy economy for any sustained period of time.
It punishes the people who have been accumulators of dollars because their assets now get devalued, usually just because of some government pet project.
Read through de Soto’s Money, Bank Credit, and Economic Cycles and then come back and tell us there is nothing inherently bad about increasing the money supply.
Increasing the money supply is what sets in motion the business cycle, malinvestment, and the eventual bust (which usually leads to gov’t stepping in and screwing things up even more).
Also, you’re right that prices can rise because of a drop in supply (or an increase in the demand for money in crises) - but ask yourself this: Do price increases continue almost endlessly based on supply?
The answer is clear, they do not. The only reason there is persistent increases in the general level of prices is because of increases in the money supply. Most people and even some economists believe that there can be continual cost-push or cost-pull inflation, inflation that is caused by the increase in the price of labor, or oil, or some other good.
This idea of inflation is nonsense, and if inflation was defined as the increase in the money supply very few people would fall this kind of thinking. The general level of prices only continually increases with an increase of the money supply. Do you deny that?
Yup, and it changes who has access to the resources, labor, land, and capital in the economy - shifiting it from the people who have money to those who borrow the newly created money.
Well, austrians disagree on that. If that is true, what is the optimal money supply then?
There is no optimal money supply - any amount of money works - the optimal annual growth rate is 0%, but since you can’t trust money with any gov’t, the optimal money is a valuable commodity that doesn’t increase very much in supply from year to year, which historically has been gold.
It seems a bunch of you need to do some more reading, as nirgrahamUK has obviously done. Inflation would probably occur even if the currency was provided in the private sector, since it is pretty much impossible to keep everything under control. Let’s say gold became the currency of choice. Well, there would probably be more companies that rose up to supply gold. This would mean the supply of gold would increase, and hence deflate the value of the currency, resulting in inflation.
The major problem of inflation comes when the government uses law to force people to use a particular currency, however those laws are written, whether it makes a law that some such currency is legal tender or whether it grants a banking monopoly to some entity called the Federal Reserve, or whatever other stupid laws it makes.