I am looking for a good, compact, definition of inflation. Ignoring the mainstream 'increase in general level of prices' with all its weaknesses, I came upon three definitions in the Austrian tradition that seemed suitable:
- a general increase in money supply (Shostak) - very clear, but any increase in the supply of money will have a tendency to raise money prices, which is not unnatural in itself; the evils of inflation as we know it come from a more specific phenomenon
- increasing the money supply by violating the property rights of others (Hulsmann) - a beautiful, idealistic definition with a strong appeal, but it immediately begs for more details of which property rights are violated and in what manner. Not short in the end.
- the process of issuing money beyond any increase in the stock of specie (Rothbard) - this is a pretty good one, if you understand what it says. I find this probably the most useful, but it could handle some rewording.
I bumped into other definitions, but many refer to backing by precious metals, which unfortunately does not apply to the current situation. A more general definition is needed.
If you know of a good definition and can point me to the book or article it comes from, it would be a great help. Creative rewording of other definitions is also welcome.
Mises Wiki | Economic Resources and Books (search engine)
Inflation is an increase in the supply of money or credi. Nothing more, nothing less. Deflation is a decrease in the supply of money or credit. Nothing more and nothing less.
In an imaginary world of a fixed stock of goods (assume consumibles replaced at precisely the rate of consumption), and no changes in the preference of holding cash, the aggregrate price level can not change. Specific goods could go up, but the money spent on them would be not spent on other goods, forcing their prices down.
In the real world, even on a 100% reserve gold standard, there is inflation. More gold is mined than is consumed. Thus the amount of gold in the marketplace increases with every increment of time. However, the rate of increase is slow and stable (at least as demonstrated in history, and in aggregate). The rate of increase of goods and services far exceeds the rate of increase of the money supply, so prices fall over time (more goods available for the given stock of money, prices of goods must go down as they compete for the money).
In a period of destruction of goods or uncertainty, shortages happen. Prices for goods go up (less goods available, same money stock, competition for goods drives prices up). This is not inflation or deflation. Inflation and deflation are changes in the supply of money or credit. This is a change in prices due to a shortage of goods.
In our current real world, we do not operate on a 100% reserve gold standard. We operate on a fractional reserve fiat standard, which is about as far from a 100% reserve gold standard as one can get. The supply of money and credit can be changed in myriad ways - issue of new notes, changing the bank reserve requirements, issue of fictitious bank credit, or what have you. When the rampant inflation that inevitably results from political control of the supply of money and credit causes unsustainable investment in production or consumption, the seeds of the inevitable bust have been sown. The stock of productive capital is depleted over time, and the malinvestments caused by inflation consume more of the productive structure. The longer malivestments happen, the more damaging and painful the reallocation of capital back to productive purposes becomes.
Our collective problem is that we are currently at the end of an extremely long inflationary boom. There have been previous corrections since the advent of the boom in 1913. But the simple truth is that the tendancy to boom has never really been eliminated, because as Hulsmann points out society is incredibly unwilling to eliminate the mechanism that creates the inflation (government control of the supply of money and credit). Perhaps this bust will not end in Mises "destruction of the monetary system involved," but hope for the best and prepare for the worst. All of the monetary systems that I am aware of are fighting each other to be the first to destroy themselves, and they are all interrelated.
I don't believe any definition other than "inflation - an increase in the supply of money or credit" and "deflation - a decrease in the supply of money or credit" is necessary. I also believe that to use any other definition is misleading and plays into the hands of the apologists for statism. Take back the correct definition!!
One hundred trillion Zimbabwe dollar note
Read Henry Hazlitt's definition.
Juan:Yes, an amount of donuts is exchanged for money periodically at certain price. There are producers of donuts who supply the stuff and consumers who 'demand' it. If the producers of donuts produce more donuts than their customers want, they won't be able to sell them - so 'demand for donuts' is more or less quantifiable.
It seems you're giving me demand for donuts, then. So, the demand for donuts can be given as a sequence of points - at each money price x, we have quantity demanded y. Graph this as a series of discrete points. Now, reflect it over the line y=x. Isn't the result the demand sequence for money in donuts? At each price, it tells how much money is demanded for a given unit of donuts.
This is only the curve in donuts, though. There's a demand curve for money in each commodity, of course. Salerno explains the concept of demand for money as a reflection of uncertainty - because we are uncertain about the future (not in an ERE) we decide to hold a certain quantity of money - or more correctly, a certain purchasing ability in money. For instance, we might decide to hold our spending over a 3-month period - which for me might be, say, $10,000. If you inflate the money supply, cutting the purchasing power in half, then a 3-month supply for me becomes $20,000. Why isn't this a perfectly reasonable idea of demand for money?
JAlanKatz:It seems you're giving me demand for donuts, then. So, the demand for donuts can be given as a sequence of points - at each money price x, we have quantity demanded y.
Graph this as a series of discrete points.
Isn't the result the demand sequence for money in donuts? At each price, it tells how much money is demanded for a given unit of donuts.
This is only the curve in donuts, though. There's a demand curve for money in each commodity, of course.
Salerno explains the concept of demand for money as a reflection of uncertainty - because we are uncertain about the future (not in an ERE) we decide to hold a certain quantity of money
For instance, we might decide to hold our spending over a 3-month period - which for me might be, say, $10,000. If you inflate the money supply, cutting the purchasing power in half, then a 3-month supply for me becomes $20,000. Why isn't this a perfectly reasonable idea of demand for money?
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Juan:No it can't. This is not physics. You can't vary price to build your curve - that's just neoclassical nonsense.
So you mean to tell me that there's no such thing as a downward-sloping demand curve? If Rothbard were alive, would you be willing to tell him to his face that Man, Economy, and State is simply an exercise in neoclassical nonsense?
JAlanKatz:So you mean to tell me that there's no such thing as a downward-sloping demand curve? If Rothbard were alive, would you be willing to tell him to his face that Man, Economy, and State is simply an exercise in neoclassical nonsense?
http://www.garynorth.com/public/4123.cfm
Someone linked that today or yesterday ^^, and I think it is relevant to the conversation.
Why not? If the argument is sound (I'm going to read the article LS provided in a few mins...) against use of curves in economics, we should not exempt Rothbard simply because he is a perceived authority; it would be not better than socialists being informed by other socialists to ignore libertarians when they bring up something about "marginal utility" in youtube comment wars. Argument doesn't stop at authority, it begins with authority, imo. I don't think anyone would argue, however, that MES was a waste of time, though; maybe not completely right in light of arguments challenging it, but not a waste of time at all, methinks.
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JAlanKatz:So you mean to tell me that there's no such thing as a downward-sloping demand curve?
liberty student:http://www.garynorth.com/public/4123.cfm
Juan:If the producers of donuts produce more donuts than their customers want, they won't be able to sell them
The same is true for token money.
liberty student: JAlanKatz:So you mean to tell me that there's no such thing as a downward-sloping demand curve? If Rothbard were alive, would you be willing to tell him to his face that Man, Economy, and State is simply an exercise in neoclassical nonsense? http://www.garynorth.com/public/4123.cfm Someone linked that today or yesterday ^^, and I think it is relevant to the conversation.
I love the ending....
Very good article, that was quite enlightening...
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Peter Sidor: I didn't have the time to engage in the discussion, but it was instructive. :) In the end, it was jason4liberty's extensive answer that persuaded me to take the "increase in supply of money" as the most useful definition (well for me), big thanks to him. Also, richie2044's article link was extremely useful (was aware of the book, but the summary came in handy). I have marked both as verified answers. Thanks to all of you!
I didn't have the time to engage in the discussion, but it was instructive. :)
In the end, it was jason4liberty's extensive answer that persuaded me to take the "increase in supply of money" as the most useful definition (well for me), big thanks to him. Also, richie2044's article link was extremely useful (was aware of the book, but the summary came in handy). I have marked both as verified answers.
Thanks to all of you!
"In the end, it was jason4liberty's extensive answer that persuaded me to take the "increase in supply of money" as the most useful definition "
That's a pity.
Confusing Cause and Effect
It seems to me, the definition you picked to use is erroneous, because you are confusing cause and effect, although looking at many of the replies here, your confusion has good company.
Effect
The effect , or economic condition commonly called "inflation" is a phenomena whose main characteristic is the lowering[devaluation per unit] of the currency in use.
For example, in the US each $ would be worth less , and have a lower purchasing power [ able to buy less goods and services in general, as a result], than it could last week, last month or last year. To put it another way, each $ has a lower "price".
In extreme cases this devaluation can be experienced on a day to day, or even an hour to hour basis.
[Possible] Cause
Assuming that by "supply of money" you mean the original, bank- system created supply and are not using some other definition, then "increasing the supply of money", or to put it another way, "inflating" the supply of money, is only a possible cause, which _may_ result in "inflation" under certain conditions , but ultimately , as with any other price, the value [or price] of each dollar at any point in time must always be determined in the end by the final outcome of the interplay of the two factors, supply and demand, not supply alone.
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onebornfreedotblogspotdotcom:Assuming that by "supply of money" you mean the original, bank- system created supply and are not using some other definition, then "increasing the supply of money", or to put it another way, "inflating" the supply of money, is only a possible cause, which _may_ result in "inflation" under certain conditions , but ultimately , as with any other price, the value [or price] of each dollar at any point in time must always be determined in the end by the final outcome of the interplay of the two factors, supply and demand, not supply alone.
I am trying to understand this point, so bear with me...
If Blarg, a nation with a monetary system, irrelevant what kind, increases the supply of currency, but does not increase production, you have an inflationary effect, but if production, therefore demand of these dollars increase inflation does not happen?
So if Blarg has stringent controls on production, like a cap and trade propsed in US, production will undoubtedly decrease and inflation will occur, but if Blarg has a free market policy and does not hinder business, it should not be an issue?
scineram: Juan: If the producers of donuts produce more donuts than their customers want, they won't be able to sell them The same is true for token money.
Juan: If the producers of donuts produce more donuts than their customers want, they won't be able to sell them
onebornfreedotblogspotdotcom:It seems to me, the definition you picked to use is erroneous, because you are confusing cause and effect, although looking at many of the replies here, your confusion has good company.
you are confusing cause and effect.
money supply inflation or in short inflation is a common explanation for (common cause of ) general price level inflation, which is not inflation. since inflation is shorthand for money supplyinflation
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Harry Felker: onebornfreedotblogspotdotcom:Assuming that by "supply of money" you mean the original, bank- system created supply and are not using some other definition, then "increasing the supply of money", or to put it another way, "inflating" the supply of money, is only a possible cause, which _may_ result in "inflation" under certain conditions , but ultimately , as with any other price, the value [or price] of each dollar at any point in time must always be determined in the end by the final outcome of the interplay of the two factors, supply and demand, not supply alone. I am trying to understand this point, so bear with me... If Blarg, a nation with a monetary system, irrelevant what kind, increases the supply of currency, but does not increase production, you have an inflationary effect, but if production, therefore demand of these dollars increase inflation does not happen? So if Blarg has stringent controls on production, like a cap and trade propsed in US, production will undoubtedly decrease and inflation will occur, but if Blarg has a free market policy and does not hinder business, it should not be an issue?
For simplicities sake, forget about the production of anything and everything; _except_ the production of $'s , or "Blargs" or whatever the unit is called.As LVM has observed*, all final market prices [ie real world valuations] of all goods, including money, are determined by the interaction of the two factors of supply and demand, and nothing else. [final price = supply/demand]. "Inflation" is a term broadly used to describe a general economic condition where the value, or price of each unit of currency is falling as a result of the particular interaction between the money supply and the demand for that supply that has occurred, for whatever reason. [final price of money unit = supply/demand].Although referring to increasing the money supply [i.e. inflating it ] may satisfy some narrow grammatical definition because "increasing" can also mean "inflating" , it [inflating the money supply] is _not_ the same as the economic condition generally described as "inflation" , which is as I said before, a state of affairs when a decrease in the value, price, or purchasing power [take your pick] of each single unit of the currency in circulation is constantly occurring.
And of course, the real kicker is that increasing ["ie "inflating"] the money supply, does not necessarily cause the economic condition called "inflation", simply because the final price of that money in the marketplace , as LVM pointed out, can only be a result of the interaction of 2 factors[ supply and demand], not one [supply].
To illustrate my last point , here are 2 interesting example scenarios:
1] Money supply increasing, but demand for that supply is increasing even faster - demand outruns supply- the result = an increase in per unit value [resultant economic condition: price deflation] .
2] money supply is falling, but demand for that supply is falling even faster- the result = a decrease in per unit value [resultant economic condition: price inflation].
*[This concept was first outlined/explored in LVM's "The Theory of Money and Credit".]
I feel dumb asking this and it might of been answered already (i didnt read thru all the posts) but when I read Henry Hazlitt's book on inflation I thought he referred to it as an increase in the supply of money and credit and not a general increase in prices? Can someone maybe clear this up some more for me? I thought higher prices was just a effect of an increase in the stock of money?