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.
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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.
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
onebornfreedotblogspotdotcom: 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].
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].
Thank you, that was helpful....
Now, is my assumption that demand for these $ is related to production, simply put, correct?
Is the regualtory factor of government a hinderance to the demand of $ as it slows production?
It sounds like the ocean, smells like fresh mountain air, and tastes like the union of peanut butter and chocolate. ~Liberty Student
Lee: 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?
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?
In the price of every good and service, there are two factors that can affect the price. Supply and demand, of course. Obviously, increasing the supply of currency will increase demand of all goods and services across the board, which will tend to increase price. On the flip side, reducing the supply of all goods and services (which is what a government does when it appropriates resources) will also increase prices, given that demand remains constant. In other words, given a constant supply of money, if the government was not stealing money and thereby labor, you might have two people working to produce food. But if the government appropriates one of those people to do something else (which, as far as we know, is almost completely worthless), we now have one person producing food, which means the price of food will have to go up, since demand is constant (supply of currency is constant) and supply has been cut in half.
See, when Austrians say that the increase in the supply of currency is inflation, they are just saying an increase in demand. Demand really just represents the supply of currency.
At most, I think only 5% of the adult population would need to stop cooperating to have real change.
Spideynw: Lee: 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? In the price of every good and service, there are two factors that can affect the price. Supply and demand, of course. Obviously, increasing the supply of currency will increase demand of all goods and services across the board, which will tend to increase price. On the flip side, reducing the supply of all goods and services (which is what a government does when it appropriates resources) will also increase prices, given that demand remains constant. In other words, given a constant supply of money, if the government was not stealing money and thereby labor, you might have two people working to produce food. But if the government appropriates one of those people to do something else (which, as far as we know, is almost completely worthless), we now have one person producing food, which means the price of food will have to go up, since demand is constant (supply of currency is constant) and supply has been cut in half. See, when Austrians say that the increase in the supply of currency is inflation, they are just saying an increase in demand. Demand really just represents the supply of currency.
Okay, now it is my turn asking dumb questions, but why is it necessary to bring up demand? Increasing the supply of money, if it was, in theory, done at once in all places, would not increase demand at all - but it would increase all prices correspondingly ("more money chasing the same amount of goods"). Closer to the real world, increasing the supply of money means some people will get it first. These people can afford to demand more goods and will bid them away from their alternative uses and users; thus the new money enters the economy. But this does not mean there is a general increase in demand - other people will in turn have to change their spending habits and demand less of other goods. If we assume the evenly rotating economy (an unrealistic, but useful construct) and allow this change to propagate until all its effects are played out, there will be a general increase in prices, but still no general increase in demand. In the real world, increasing the supply of money will have tendencies to increase prices, but it does not increase demand in general either. It is not necessary to bring up demand to understand the phenomenon.
Now, while I do not really disagree about your point on government production and interference with markets, it is also not necessary to understand inflation. You could say that a big government increases the effects of inflation via the means described, but it is not its part. You can have inflation without a big government reducing production of goods.
Peter Sidor:Okay, now it is my turn asking dumb questions, but why is it necessary to bring up demand? Increasing the supply of money, if it was, in theory, done at once in all places, would not increase demand at all
Yes it would. Let us say that you are a business owner. And then let us say that the government decided to double the supply of currency, and distribute it pretty evenly (whatever that may be). So now, you as a business owner all of a sudden see your business increase dramatically. You run out of supplies really fast. What would this look like to you? It would look like "demand" for your product just jumped. So what would you do? You would raise your prices until you reached the equilibrium again. This would be the supply/demand curve.
So yes, it would increase demand. In other words, demand is directly affected by the supply of currency.
Peter Sidor:Now, while I do not really disagree about your point on government production and interference with markets, it is also not necessary to understand inflation.
As I explained it, it is. Again, prices can go up if either demand is increased across the board (which can only happen with an increase in the supply of currency) or if supply is reduced across the board (which can only happen when the government appropriates resources).
OH!!!
My turn
Peter Sidor:Okay, now it is my turn asking dumb questions, but why is it necessary to bring up demand? Increasing the supply of money, if it was, in theory, done at once in all places, would not increase demand at all - but it would increase all prices correspondingly ("more money chasing the same amount of goods").
That all depends on who gets the money first, if the people get it (consumers) than yes, but if investors get it, then not so much, as individuals that invest this money will increase production, reducing the likelihood of an inflationary effect, as increased production will move this money to pay for increases in labor, and supplies for production, leading to more employment and more purchasing, therefore the demand will increase.
On the other hand
Peter Sidor:Closer to the real world, increasing the supply of money means some people will get it first. These people can afford to demand more goods and will bid them away from their alternative uses and users; thus the new money enters the economy. But this does not mean there is a general increase in demand - other people will in turn have to change their spending habits and demand less of other goods.
If you only allow consumption with these dollars, like a small tax rebate to all people in general, without an increase of production capital, the prices will inflate.
Of course this preposes a closed economic system, the real issue is that the $ is a world reserve currency, and the baseless printing of the dollar worries nations that hold reserves of $, this is a decrease in the demand of $...
Peter Sidor:If we assume the evenly rotating economy (an unrealistic, but useful construct) and allow this change to propagate until all its effects are played out, there will be a general increase in prices, but still no general increase in demand. In the real world, increasing the supply of money will have tendencies to increase prices, but it does not increase demand in general either. It is not necessary to bring up demand to understand the phenomenon.
This is the short sightedness of the issue...
When you increase the money supply and more money is demanded, inflation does not occur, this was the idea (not really capitalism in my opinion, but as close as government would get) of supply side economics.
If you increase the money supply to people who own businesses, they increase the size of their business, increasing production, which puts more goods and services on the market, deflating prices, now when this money reaches the consumers hands there is an increased demand, inflating the prices, system stabilizes. The real issue of government is that when it handiacaps production (regulation) and hands money directly to consumers (welfare) it inflates prices, if you understand that this increases sales tax revenue, the motive becomes all too clear, it is a self sustaining system to move toward socialism. When you add the real world example of the capital gains tax increases, you see that the government has a hand in keeping money away from investing, so businesses can either stagnate (a plus for nationalization) or has to go to the government for money to stay in business (a plus for nationalization).
I play chess, we call this check mate...
Harry Felker:If you increase the money supply to people who own businesses, they increase the size of their business,
This is Keynsian fallacy at its best.
Businesses ARE consumers.
And here you said
Harry Felker:That all depends on who gets the money first, if the people get it (consumers) than yes,
So this invalidates your second claim
Harry Felker:but if investors get it, then not so much,
Your statement
Harry Felker:as individuals that invest this money will increase production,
Spideynw:"Investing" into businesses just means that businesses will consume more, which means prices go up for everything businesses want to buy. Labor will demand more money as will suppliers of raw materials. The labor of the supplier of raw materials will demand more money as well.
I think you are not figuring time delay, the firm will not incur a price increase at first, only after demand is evidently increased, by this time the products are on the market being bought to support this price increase as per volume...
You own company A that supplies widget raw materials
I own company B that makes widgets
Now money increases and you get investment, your production increases, you have more labor, you produce more raw material, the price for your raw material drops, meanwhile there are more consumers on the market for widgets, increasing demand for my widgets, therefore I produce more widgets, which requires an increase in my alottment to labor and raw material (paid for via price increase in widgets). Now when I first purchase a double order of raw material, your price will be low ( a win for me) which is good because I will have increased my labor costs (which subsequently increases my demand further). Prices stabilize, increase in production, money supplied is money demanded, no inflation in the end result....
Spideynw:This is Keynsian fallacy at its best.
Then help me understand better, you have to realize that unless my financial situation changes I am relying on what I can get my hands on for nothing....
I know SSE is not capitalism, it is Keynesian market tampering, but I am not talking about the government supplied money at this point (I should have clarified, my error)
Spideynw: Peter Sidor:Okay, now it is my turn asking dumb questions, but why is it necessary to bring up demand? Increasing the supply of money, if it was, in theory, done at once in all places, would not increase demand at all Yes it would. Let us say that you are a business owner. And then let us say that the government decided to double the supply of currency, and distribute it pretty evenly (whatever that may be). So now, you as a business owner all of a sudden see your business increase dramatically. You run out of supplies really fast. What would this look like to you? It would look like "demand" for your product just jumped. So what would you do? You would raise your prices until you reached the equilibrium again. This would be the supply/demand curve. So yes, it would increase demand. In other words, demand is directly affected by the supply of currency.
Okay, let's run with the sudden multiplication of money everywhere, unrealistic as it may be. It is hard to imagine that the business owner would overlook, that everybody has twice as much money at their hands. If he understands what it means, he will probably raise his prices, because very soon, all of his costs will also rise correspondingly. (There might be some profit opportunities due to the ongoing change, but that is enterpreneurship proper.)
However, if he doesn't notice the increase in supply of money, or doesn't realize what it means ("People have more money, so they will buy more stuff! $$$!"), or speculates wrongly, he might indeed see 'more demand', because his wares are suddenly very cheap compared to the competitors that are raising them.. He'll be happy to sell his stuff until he realizes that he is losing money on the deal. That makes it a self-correcting issue, not a general increase in demand.
But this is one specific example of what a person might do. There is no accounting of what all users of money might do, in their roles as businessmen and consumers. They might as well refuse to pay anyone higher prices, pay their debts, invest the extra money somewhere or put it under their pillow to prepare for an uncertain future, throw a big party, give it to charity, etc, etc, etc. I guess many will do this or that - but how can anyone say what will be the final effect in advance? It might as well be even less demand.
Spideynw: Peter Sidor:Now, while I do not really disagree about your point on government production and interference with markets, it is also not necessary to understand inflation. As I explained it, it is. Again, prices can go up if either demand is increased across the board (which can only happen with an increase in the supply of currency) or if supply is reduced across the board (which can only happen when the government appropriates resources).
Have to disagree here. Demand (for goods, I presume) can rise due to many reasons. Supply of goods can also be reduced due to many reasons.
Peter Sidor:Okay, let's run with the sudden multiplication of money everywhere, unrealistic as it may be.
I guess you were not around last year when the U.S. government gave just about every adult citizen $600...
Peter Sidor:It is hard to imagine that the business owner would overlook, that everybody has twice as much money at their hands.
Business owners do not see that everyone has more money in their hands. They just see that their stock is all of a sudden gone and that they can obviously demand more money for it, whatever the reason may be.
Peter Sidor:If he understands what it means, he will probably raise his prices, because very soon, all of his costs will also rise correspondingly.
Yes, all prices go up, because there is more currency.
Peter Sidor:However, if he doesn't notice the increase in supply of money, or doesn't realize what it means ("People have more money, so they will buy more stuff! $$!"), or speculates wrongly, he might indeed see 'more demand', because his wares are suddenly very cheap compared to the competitors that are raising them.
It has nothing to do with the prices of competition. In a free market, businesses actually try to sell their wares at lower prices than their competition, to get more business. In a free market, the only real way to sell your product at a lower price than your competitors is to be more efficient. So in reality, if your competitors are raising prices for the same product, a business owner would think that it was because they were becoming less efficient.
Again, a business owner would raise his or her prices because their supplies are all of a sudden gone, but demand is still there for more.
Peter Sidor:But this is one specific example of what a person might do. There is no accounting of what all users of money might do, in their roles as businessmen and consumers.
When the supply of money is increased, yes there is. It is called a general increase in the price of all goods and services, or inflation.
Peter Sidor:Have to disagree here. Demand (for goods, I presume) can rise due to many reasons. Supply of goods can also be reduced due to many reasons.
Of course demand can rise due to many reasons. But there is only one reason demand can increase across the board for all goods and services, and that is an increase in the supply of money.
Also, supply of goods and services can fall due to many reasons. But there is only one reason that supply for valuable goods and services can fall across the board, and that is appropriation of goods and services from the private sector by the government. Now granted, individuals can steal as well, but they cannot steal nearly as much wealth as the government can. Their impact is minimal comparitively speaking.
Harry Felker: onebornfreedotblogspotdotcom: 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]. Thank you, that was helpful.... Now, is my assumption that demand for these $ is related to production, simply put, correct? Is the regualtory factor of government a hinderance to the demand of $ as it slows production?
"now, is my assumption that demand for these $ is related to production, simply put, correct?"It may be related, although personally I do not see how. The truth of the matter is that nobody really does, or can, know. Demand for money[to hold, hoard, save, not spend] is just a physical manifestation of the psychological need/demand for security [i.e. the elimination of uncertainty]. For better or worse, the general psychological urge for security exists , to a greater or lesser extent, for all [or most] individuals, at all levels of all societies, whether tribal, nomadic, feudal or industrial, and no matter how regulated, or unregulated they are perceived to be. It is a psychological state that is apparently generally sought after by most humans. As each individual ultimately acts on his/her personal perception of what they regard their level of safety and security to be or not to be at any point in time, it is impossible to know why any one person, or even large groups may act to demand to hold/save more of a particular medium of exchange, or not. Furthermore,, speculation as to what comprised/ comprises "demand" , [or the level of psychological security sought] at any point in time is pretty much a waste of time because the truth can never be decisively established and it will almost invariably involve making sweeping , unprovable generalizations about supposed actual individual psychological preferences at certain points in time. All we need to remind ourselves of is that whenever a real world price is involved [in this case the real world "price", or value, of money], and that price has changed,[or even if it has stayed the same] then that final price is always set, at any point in time, by the final outcome of the interaction of the two factors of supply and demand.Beyond that basic unchangeable fact, [ie the inevitability of final price of money being decided by the interactions of supply and demand] it is impossible, presumptuous, and entirely unrealistic to claim to know any more about why the price change actually occurred in any one particular instance.In this case, the absolute broadest, most sweeping generalization actually turns out to be the most honest and the most true : "the price [ie real world value] of the medium of exchange, changed as a direct result of the interactions of supply, and the demand for that supply."
For more information about onebornfree, please see profile.[ i.e. click on forum name "onebornfree"].
onebornfreedotblogspotdotcom:Demand for money[to hold, hoard, save, not spend] is just a physical manifestation of the psychological need/demand for security [i.e. the elimination of uncertainty].
And what do you call the demand for money to exchange goods and services?
Harry Felker:but I am not talking about the government supplied money at this point (I should have clarified, my error)
That is what I am talking about. It appears we are talking about two different things.
oneborn:Demand for money[to hold, hoard, save, not spend] is just a physical manifestation of the psychological need/demand for security [i.e. the elimination of uncertainty].
Harry Felker: onebornfreedotblogspotdotcom:Demand for money[to hold, hoard, save, not spend] is just a physical manifestation of the psychological need/demand for security [i.e. the elimination of uncertainty]. And what do you call the demand for money to exchange goods and services?
You are free to label it however you wish- even to give it some fancy sounding esoteric "economic" name, I suppose, if that's what floats your boat.
The important thing however, is to recognise that there is a marked difference between money that is deliberately held [saved ] and not spent, in order to make the holder feel more secure under whatever economic circumstances cause them to feel less certain and less secure about the present and the immediate future, and money that continues to circulate through the economy as it is exchanged for goods and services the spender feels he needs.