In another thread, the thread starter asked for the "most useful" "good, compact" , definition of the word "inflation" . Various definitions were suggested, and the thread starter finally picked one which states:
" Inflation is an increase in the supply of money or credit. ....Deflation is a decrease in the supply of money or credit. "I maintain that this definition [actually two] is woefully wrongheaded, for the simple reason that it describes an action, not an economic condition or state of affairs, which is what inflation actually is. Although it may be narrowly, grammatically and technically correct , because one can say, for example: " they are "inflating" [i.e. increasing] the money supply " - and that is OK as far as it goes, and may even be all well and good if you are satisfied merely with a play on words [i.e "inflating" for "increasing"] - but that is all that the phrase "Inflation is an increase in the supply of money or credit. " amounts to, in my opinion- it is nothing more than a misleading play on words that is actually counterproductive.Here is what I believe is a more truthful [and therefor much more useful] definition of the term "inflation" : "Inflation": is an economic condition characterized by an "across the board" [i.e. general] rise in prices for most goods and services , due to the erosion of value [purchasing power] of each unit of the currency unit in use.Deflation?And since the chosen definition in the other thread went on to make just as wrongheaded a statement regarding deflation [i.e. "Deflation is a decrease in the supply of money or credit"], a definition I assume the thread starter also must agree with, I will offer what I believe is a correct, and therefor much more useful, definition of the term "deflation" here as well: Deflation : is an economic condition characterized by falling prices of most goods and services "across the board" [i.e. general] due to the rise in value [purchasing power] of each unit of currency in general use.
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Using your definitions here. How does inflation happen? What is that event called? Same for deflation. What is the name of the event causing deflation?
wilderness: Using your definitions here. How does inflation happen? What is that event called? Same for deflation. What is the name of the event causing deflation?
Neither definition are an attempt to explain why I might think either circumstance occurs - such theoretical explanations are irrelevant for the purposes of defining what something is, or is not. What you or I or anyone else might subjectively believe causes the effects being defined, should have no bearing on defining those effects, and must be excluded, if those definitions are to remain unbiased and be of any practical value.
The only thing that the definition should do is accurately describe the state of affairs that exist that the word is supposed to convey.
Never the less,to broadly answer your question.
Neither inflation or deflation are the result of any single event. They are the net result of millions upon millions of subjective valuations [i.e. events] by individuals regarding the current and future value of the medium of exchange in general use at that time, when measured against other "real" goods by those individuals.
Human Action - XVII. - 6. Cash-Induced and Goods-Induced Changes in Purchasing Power : Inflation and Deflation; Inflationism and Deflationism The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power. [p. 423] However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power. Since the question at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorial precision required for praxeological, economic, and catallactic concepts. Their application is appropriate for history and politics.
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."
Juan:well... Human Action - XVII. - 6. Cash-Induced and Goods-Induced Changes in Purchasing Power : Inflation and Deflation; Inflationism and Deflationism The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power. [p. 423] However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power. Since the question at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorial precision required for praxeological, economic, and catallactic concepts. Their application is appropriate for history and politics.
I agree, but what is your point?
onebornfreedotblogspotdotcom: Neither inflation or deflation are the result of any single event. They are the net result of millions upon millions of subjective valuations [i.e. events] by individuals regarding the current and future value of the medium of exchange in general use at that time, when measured against other "real" goods by those individuals.
In the short run, sure, inflation or deflation is determined mainly by subjective valuations of individuals and the demand and supply of all goods (including money, however the demand for it is defined). But what about in the long run?
The only way for prices to continually rise is with increases in the money supply.
Defining inflation as the symptom of rising prices ignores the cause, and the only possible cause of prices continually rising by large amounts over long periods of time is inflating the money supply. It confuses the causes of long term high inflation of prices with short term causes.
The reason to define inflation as an increase in the money supply is precisely to make it clear to as many people as possible that the only way any money can lose 98% of its value ($20 used to buy an ounce of gold, now it takes almost $1000) is through continual increases in the money supply. If you define inflation as increases in prices, it becomes much less clear that it is the federal reserve that has destroyed the value of the dollar over the past century.
WisR: onebornfreedotblogspotdotcom: Neither inflation or deflation are the result of any single event. They are the net result of millions upon millions of subjective valuations [i.e. events] by individuals regarding the current and future value of the medium of exchange in general use at that time, when measured against other "real" goods by those individuals. In the short run, sure, inflation or deflation is determined mainly by subjective valuations of individuals and the demand and supply of all goods (including money, however the demand for it is defined). But what about in the long run? The only way for prices to continually rise is with increases in the money supply. Defining inflation as the symptom of rising prices ignores the cause, and the only possible cause of prices continually rising by large amounts over long periods of time is inflating the money supply. It confuses the causes of long term high inflation of prices with short term causes. The reason to define inflation as an increase in the money supply is precisely to make it clear to as many people as possible that the only way any money can lose 98% of its value ($20 used to buy an ounce of gold, now it takes almost $1000) is through continual increases in the money supply. If you define inflation as increases in prices, it becomes much less clear that it is the federal reserve that has destroyed the value of the dollar over the past century.
It should not the purpose of definitions to infer reasons as to what caused the condition described, as far as I can see.
As i said before:
"Neither definition are an attempt to explain why I might think either circumstance occurs - such theoretical explanations are irrelevant for the purposes of defining what something is, or is not. What you or I or anyone else might subjectively believe causes the effects being defined, should have no bearing on defining those effects, and must be excluded, if those definitions are to remain unbiased and be of any practical value
The only thing that the definition should do is accurately describe the state of affairs that exist that the word is supposed to convey."
Although I understand what you are trying to say, using the current vs old price of gold as an illustration is overly simplistic , very misleading, and leads to dangerous assumptions if savings/investment decisions are involved .
Finally, the price[value] of money in the marketplace, as with anything else, is always " determined mainly by subjective valuations of individuals" , i.e the demand [or none-demand, for the supply of money, at _any_ point in time, short to long term. That is a fundamental principle of austrian economic theory as I understand it.
So yes, increasing the money supply _can_ devalue the unit of exchange under certain circumstances, but , no, it is not an automatic "given", ultimately, final price/value of money must depend on the interactions of both supply _and_ demand factors.
Inflation is a general increase in the price of all goods and services. Period. If Austrians cannot get this through their heads, they are going to have a very difficult time communicating with 99% of the population.
At most, I think only 5% of the adult population would need to stop cooperating to have real change.
Spidey, im afraid if you cant get it in your head that perfectly good words are mistreated and abused for the befowlment of clear thinking for the benefit of court economists, hack politicians and third rate journalists, then ..... something bad.....
Im going with Hazlitt on this.
Henry Hazlitt: What Inflation IsNo subject is so much discussed today—or so little understood—as inflation. The politicians in Washington talk ofit as if it were some horrible visitation from without, overwhich they had no control—like a flood, a foreign invasion,or a plague. It is something they are always promising to"fight"—if Congress or the people will only give them the"weapons" or "a strong law" to do the job.Yet the plain truth is that our political leaders havebrought on inflation by their own money and fiscal policies.They are promising to fight with their right hand the conditionsbrought on with their left.Inflation, always and everywhere, is primarily caused byan increase in the supply of money and credit. In fact,inflation is the increase in the supply of money and credit.If you turn to the American College Dictionary, for example,you will find the first definition of inflation given as follows:"Undue expansion or increase of the currency of a country,esp. by the issuing of paper money not redeemable in specie."In recent years, however, the term has come to be usedin a radically different sense. This is recognized in thesecond definition given by the American College Dictionary:"A substantial rise of prices caused by an undue expansionin paper money or bank credit." Now obviously a rise ofprices caused by an expansion of the money supply is notthe same thing as the expansion of the money supply itself.A cause or condition is clearly not identical with one ofits consequences. The use of the word "inflation" with thesetwo quite different meanings leads to endless confusion.The word "inflation" originally applied solely to thequantity of money. It meant that the volume of money wasinflated, blown up, overextended. It is not mere pedantryto insist that the word should be used only in its originalmeaning. To use it to mean "a rise in prices" is to deflectattention away from the real cause of inflation and the realcure for it.
What Inflation IsNo subject is so much discussed today—or so little understood—as inflation. The politicians in Washington talk ofit as if it were some horrible visitation from without, overwhich they had no control—like a flood, a foreign invasion,or a plague. It is something they are always promising to"fight"—if Congress or the people will only give them the"weapons" or "a strong law" to do the job.Yet the plain truth is that our political leaders havebrought on inflation by their own money and fiscal policies.They are promising to fight with their right hand the conditionsbrought on with their left.Inflation, always and everywhere, is primarily caused byan increase in the supply of money and credit. In fact,inflation is the increase in the supply of money and credit.If you turn to the American College Dictionary, for example,you will find the first definition of inflation given as follows:"Undue expansion or increase of the currency of a country,esp. by the issuing of paper money not redeemable in specie."In recent years, however, the term has come to be usedin a radically different sense. This is recognized in thesecond definition given by the American College Dictionary:"A substantial rise of prices caused by an undue expansionin paper money or bank credit." Now obviously a rise ofprices caused by an expansion of the money supply is notthe same thing as the expansion of the money supply itself.A cause or condition is clearly not identical with one ofits consequences. The use of the word "inflation" with thesetwo quite different meanings leads to endless confusion.The word "inflation" originally applied solely to thequantity of money. It meant that the volume of money wasinflated, blown up, overextended. It is not mere pedantryto insist that the word should be used only in its originalmeaning. To use it to mean "a rise in prices" is to deflectattention away from the real cause of inflation and the realcure for it.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Actually, the original definition of the term is the ones the Austrians use. If the "mainstream" cannot get this through its head, it's going to have a very hard time comprehending economics...
Freedom of markets is positively correlated with the degree of evolution in any society...
http://www.google.com/search?hl=en&client=firefox-a&rls=org.mozilla:en-US:official&hs=Cp8&defl=en&q=define:inflation&ei=fToxSqb6Ko6xtwfL_sj1BQ&sa=X&oi=glossary_definition&ct=title
"a general and progressive increase in prices; "in inflation everything gets more valuable except money""
http://www.investorwords.com/2452/inflation.html
"The overall general upward price movement of goods and services in an economy"
http://en.wikipedia.org/wiki/Inflation
"In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time."
http://useconomy.about.com/od/pricing/f/Inflation.htm
"Inflation is when prices continue to creep upward"
This was just the first four results from Google.com searching for "inflation definition".
I am pretty secure in saying that this is what 99% of the population thinks "inflation" is defined as. Now, if you want to talk about the causes, great. But expansion of the supply of money is not the only way to cause inflation, as I have already explained, as such, that cannot be the definition of inflation.
Prices can go up if demand increases or if supply decreases. Expansion of the money supply only explains the demand side of things, not the supply side.
Jon Irenicus:Actually, the original definition of the term is the ones the Austrians use. If the "mainstream" cannot get this through its head, it's going to have a very hard time comprehending economics...
And expansion of the supply of money is not the only way to cause an increase in the general price of all goods and services. So the Austrians are wrong if this is what they think.
Spidey, you have noticed that the everday term thrown around by the lay differ in meaning than the jargon and correct useage of those with specialist knowledge in the field.
are you surprised that Misesian 'action' is spelt the same as 'action' in the common sense, and yet the two are distinct?
google gives 6million hits for 'food price inflation' so does that mean 'food price increase in the general price of all goods and services' ? the sentance doesnt even parse.
or rather; is it just used as a colloquial synonym for 'increase'. so hardly a term of economics when these people use it as they do...
so forgive us Austrians for using economic speech to talk about economic matters in economics forums.......
nirgrahamUK: Spidey, you have noticed that the everday term thrown around by the lay differ in meaning than the jargon and correct useage of those with specialist knowledge in the field. are you surprised that Misesian 'action' is spelt the same as 'action' in the common sense, and yet the two are distinct?
I am sorry, I have no idea what you are trying to get at here.
No, it isn't, a fall in demand for money I assume can also cause it, still meaning that the supply is inflated relative to demand... What's this got to do with inflation being the actual rise in prices? I don't care if the "mainstream" chooses to define it as the effect rather than the cause of the phenomenon. It would do well to learn some economics. Nothing other than a change in the value of the monetary unit could cause general price increases...
Jon Irenicus:Nothing other than a change in the value of the monetary unit could cause general price increases...
Wrong. A drop in the supply of goods and services would also cause a general price increase.
nirgrahamUK:so forgive us Austrians for using economic speech to talk about economic matters in economics forums.......
You are using Austrian speech to talk about economic matters on an economics forum. It does not mean it is correct.
Spideynw: Jon Irenicus:Nothing other than a change in the value of the monetary unit could cause general price increases... Wrong. A drop in the supply of goods and services would also cause a general price increase.
I think what Jon means is all prices everywhere, not of a specific good....
Unless you are making the claim that all goods and services could simultaneously drop...
It sounds like the ocean, smells like fresh mountain air, and tastes like the union of peanut butter and chocolate. ~Liberty Student
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?
Spideynw: nirgrahamUK:so forgive us Austrians for using economic speech to talk about economic matters in economics forums....... You are using Austrian speech to talk about economic matters on an economics forum. It does not mean it is correct.
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 ?
Spideynw:Wrong. A drop in the supply of goods and services would also cause a general price increase.
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.
Harry Felker: I think what Jon means is all prices everywhere, not of a specific good.... Unless you are making the claim that all goods and services could simultaneously drop...
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.
nirgrahamUK: Spideynw:Wrong. A drop in the supply of goods and services would also cause a general price increase. 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.
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'
Juan:dictionary.com. 1. 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?
Spideynw: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?
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.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
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.
waywardwayfarer:Of course anyone versed in Austrian economics could tell you the serious negative effects of that situation,
There is nothing necessarily inherintely bad about increasing the money supply. What is inherintely bad is government waste.
Spideynw:There is nothing necessarily inherintely bad about increasing the money supply.
depends on whether its natural, and increased by 'libertarian' means. or unnatural, by government or by fraudsters.
Spideynw: waywardwayfarer:Of course anyone versed in Austrian economics could tell you the serious negative effects of that situation, There is nothing necessarily inherintely bad about increasing the money supply. What is inherintely bad is government waste.
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.
Spideynw: There is nothing necessarily inherintely bad about increasing the money supply. What is inherintely bad is government waste.
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?
Jacob Bloom: Spideynw: There is nothing necessarily inherintely bad about increasing the money supply. What is inherintely bad is government waste. It punishes the people who have been accumulators of dollars because their assets now get devalued, usually just because of some government pet project.
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.
WisR: 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).
Well, austrians disagree on that. If that is true, what is the optimal money supply then?
scineram: WisR: 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). 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.