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.
Harry Felker:Can you help me out, am I right or wrong? When I business needs more of something, for what ever reason it is demand, in this case, when they need money, would it not be a demand for money?
You're correct. That is the premise of George Selgin's work on coinage.
Harry:Can you help me out, am I right or wrong? When I business needs more of something, for what ever reason it is demand, in this case, when they need money, would it not be a demand for money ?
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."
That is the premise of George Selgin's work on coinage.
Juan: Harry:Can you help me out, am I right or wrong? When I business needs more of something, for what ever reason it is demand, in this case, when they need money, would it not be a demand for money ? If you want to call it so...I guess that in a narrow sense you'd be correct. But on the other hand... If you buy a pound of potatoes for $1, you can say that you are 'demanding' 1 pound of potatoes and the grocery owner is demanding 1 dollar. You could sum all the sales of potatoes in a day and say : the demand for potatoes today was 1000 pounds and the demand for dollars to pay for those potatoes was $1000. Does that means there's an abstract demand for money of $1000 and that $1000 need to be produced the same way the potatoes were produced ? Of course not. So, what do you think is the meaning of the 'demand-for-money' concept ? What purpose does it serve in economic analysis ?
Basically, since the shopkeeper may not need a commodity at the moment, what he will desire, is a stable medium of exchange, if he sells 1000 lbs of potatoes for 1000 bushels of wheat, what happens when his supplier of potatoe does not want wheat, with a medium of exchange that is not a commodity itself, though it can represent an amount of one or not, offers an additional benefit of utility.
I am not saying that the money needs to be produced on the spot for the example, what this draws back to and I appologize for the sidetrack, is that when money is injected into a system, when it hits the business first it balances the inflationary effect faster, that the initial price deflation from the increase of production reaches equilibrium when the increased medium of exchange finally reaches the store in the demand for more potatoes...
A owns a potato farm, B owns a store, C is an unemployed worker
Giving the money to C (US Stimulus or welfare), inflates the price because the increase in the demand for potatoes, C has no incentive to work, so inflation does not become deflated to equilibrium
Giving the money to B, inflates the price from A to B, which in turn inflates it to any consumer, A expands and employs C, increasing production, and deflating the price to equilibrium
Giving the money to A, deflates the price of the raw material potato as A expands, hiring C, the deflated price is benefitting B which benefits all consumers, when C comes around to buy potatoes, the demand is increased, the price inflates back to equilibrium
This is not saying adding more medium of exchange (money) into the system is ever good, but the logic that if it were to happen it should happen to benefit production (raw materials) and therefore lead to equilibrium faster....
It sounds like the ocean, smells like fresh mountain air, and tastes like the union of peanut butter and chocolate. ~Liberty Student
liberty student: Harry Felker:Can you help me out, am I right or wrong? When I business needs more of something, for what ever reason it is demand, in this case, when they need money, would it not be a demand for money? You're correct. That is the premise of George Selgin's work on coinage.
Can you give me a link, or a title?
http://mises.org/media.aspx?action=author&ID=144
Private Supply of Money I believe gives you a taste of his work.
Harry:Basically, since the shopkeeper may not need a commodity at the moment, what he will desire, is a stable medium of exchange,
he sells 1000 lbs of potatoes for 1000 bushels of wheat,
I am not saying that the money needs to be produced on the spot for the example,
A owns a potato farm, B owns a store, C is an unemployed worker Giving the money to C (US Stimulus or welfare), inflates the price because the increase in the demand for potatoes, C has no incentive to work, so inflation does not become deflated to equilibrium. Giving the money to B, inflates the price from A to B, which in turn inflates it to any consumer, A expands and employs C, increasing production, and deflating the price to equilibrium. Giving the money to A, deflates the price of the raw material potato as A expands, hiring C, the deflated price is benefitting B which benefits all consumers, when C comes around to buy potatoes, the demand is increased, the price inflates back to equilibrium. This is not saying adding more medium of exchange (money) into the system is ever good, but the logic that if it were to happen it should happen to benefit production (raw materials) and therefore lead to equilibrium faster....
Harry Felker: Juan:I know my reply sounded rather silly, but the point is that if the amount of money available for all transactions was somehow fixed there wouldn't be any real problem. There's no demand for 'new' money to pay employees or any other thing. Prices would simply change to reflect new conditions. Ok, that is fine, regardless of injection of new money into the system, what is it called when the firm has an increased demand for capital... What is the term used for this, I called it demand for money, was this wrong, if so, what do we call this?
Juan:I know my reply sounded rather silly, but the point is that if the amount of money available for all transactions was somehow fixed there wouldn't be any real problem. There's no demand for 'new' money to pay employees or any other thing. Prices would simply change to reflect new conditions.
Ok, that is fine, regardless of injection of new money into the system, what is it called when the firm has an increased demand for capital...
What is the term used for this, I called it demand for money, was this wrong, if so, what do we call this?
As I have hinted before, you both really need to take a close hard look at LVM's "Theory of Money and Credit", particularly chapter 8: "The Determinants of the Objective Exchange Value, or Purchasing Power, of Money",
subsection 6: "Fluctuations in the Objective Exchange Value of Money Evoked by Changes in the Ratio Between the Supply of Money and the Demand for It" [emphasis added] .
A quote from chapter 8: "The demand for money and its relations to the stock of money form the starting point for an explanation of fluctuations in the objective exchange value of money. Not to understand the nature of the demand for money is to fail at the very outset of any attempt to grapple with the problem of variations in the value of money."[taken from sub-section 7 "The Stock of Money and the Demand for Money"]
See also: chapter 17 "Fiduciary Media and the Demand for Money"
For more information about onebornfree, please see profile.[ i.e. click on forum name "onebornfree"].
Has anyone run into a Keynesian who defines inflation merely as the increase in nomial prices...?
'Men do not change, they unmask themselves' - Germaine de Stael
Juan:You could sum all the sales of potatoes in a day and say : the demand for potatoes today was 1000 pounds and the demand for dollars to pay for those potatoes was $1000. Does that means there's an abstract demand for money of $1000 and that $1000 need to be produced the same way the potatoes were produced ? Of course not.
But there's no requirement that the potatoes be produced either. Consider 1968 Ford Mustangs, or something similar - similar in that it cannot be produced. Is it meaningless to talk about demand for it? Over time, supply will decrease as the cars wear out, yet the price will not uniformly increase. Various other events, availability of complementary and substitute goods, and so on, will affect how many people desire to have a 1968 Ford Mustang, and furthermore what portion of those people have an effective demand - that is, are willing to go out and spend money on it. That latter factor will determine the quantity demanded. So why would you limit the use of the "demand" concept to cases where we produce the item? There can be demand for money without implying that there's a demand for newly produced money.
Juan:So, what do you think is the meaning of the 'demand-for-money' concept ? What purpose does it serve in economic analysis ?
It would seem to explain certain parts of the business cycle. For instance, in the ABCT, what do we mean when we talk about real growth being increased by people saving more and spending less? Don't we just mean more demand for money, which becomes more supply of investment capital?
Juan: In this case he's being paid in token money. He could also be paid in commodity money - both are media of exchange - token money is not very 'stable' tho...
I understand this...
Juan:But we were not discussing barter/direct exchange ?
I am stating why he would rather use a media of exchange not barter...
Juan:Wasn't "Theory of Money and Credit" superseded by Human Action ? Maybe you can make your points yourself - or at least quote HA ?
Is it your contention that money [currency, fiduciary media] and its production are somehow not subject to the economic law that governs final price [value] ?
scineram:inflation : Increasing the supply of money beyond demand. Horwitz, Garrison and others.