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.
onebornfree: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] ?
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."
JAlanKatz: 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.
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.
There can be demand for money without implying that there's a demand for newly produced money.
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: onebornfree: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] ? That question is rather broad. I agree that supply and demand ultimately determine the price of all goods in terms of money...or the price of money in terms of goods if you will. But that principle doesn't tell you what the 'correct' definition of inflation is.
But you believe that there can be no demand for money, correct?
As for a satisfactory definition of money, see my new thread:"Inflation - A Better Definition?"
For more information about onebornfree, please see profile.[ i.e. click on forum name "onebornfree"].
Juan:But you believe that there can be no demand for money, correct? I believe the term is ill defined and especially confusing in the context I quoted.
I agree, it is hard to come up with good definitions - however, one of my points has been that putting a lot of thought into trying to define what the demand for money actually is is irrelevant in the end [despite the fact that LVM gives 2 definitions- both narrow and broad, in The Theory of Money and Credit], simply because the real world value[price] of money fluctuates, so obviously money , like anything else, is subject to the law of supply and demand, therefor it is logically consistent to conclude that a demand for money [however defined] is a reality, regardless of lack of ability to accurately define it. All we need to know is that it is there, and it is an important factor in determining the outcome of the market price of money- no less important than supply.
Which means that the price [value] of money is _not_ determined by supply alone , as many here appear to believe, but that the final price[value] of money in the market place [ ie whether it is worth more, or less than it was worth previously] is always, and as with anything else, the final outcome of the interaction between the two factors of supply and demand [however defined], or lack thereof. Not just one factor [supply]
Money changes relative value all the time, _therefor_ a demand for money must exist- to make up the other necessary half of the price equation, regardless of our failure to accurately define it.
What is the demand for coffee? Why cannot the demand for money defines similarly?
Juan:what you mean. Potatoes don't need to be produced ? They can just be created ex-nihilo ? =P
Ok, I didn't phrase that well. What I meant was that the plain fact that I enter the market demanding potatoes doesn't mean that potatoes have to be produced at present to meet my demand. My demand can be met out of already existing potato stocks. We can pass around the (hot) potatoes. Similarly, my entering the market demanding money (that is, offering goods and services) doesn't imply that money has to be produced, my demand can be met out of other people's stocks of money.
Juan:'Real' growth occurs when there's more production than consumption - it's almost a truism. I'm not sure how demand for money enters the picture tho. I'm not sure we're using a consistent definition for demand for money either...
See Garrison's slide show which presents it in terms of money. By demand for money, I mean the desire to hold money, as opposed to spending it (Since leisure is a good, if a person spends time not earning money, I consider this spending money on leisure.)
JAlanKatz:Similarly, my entering the market demanding money (that is, offering goods and services) doesn't imply that money has to be produced, my demand can be met out of other people's stocks of money.
See Garrison's slide show which presents it in terms of money.
By demand for money, I mean the desire to hold money, as opposed to spending it.
Since leisure is a good, if a person spends time not earning money, I consider this spending money on leisure.
Juan:Has the link been posted in this thread ? I can't seem to find it.
No.
Juan:I suppose that's one of the reasons to want to acquire money. The other reason being, to use money as medium of exchange.
I'm not sure what you mean. Here's what I mean: I have a certain income potential - that is, the amount I can make if I worked all the time. I subtract from that my "spending" on leisure - that is, the money I could be making if I didn't have leisure time. What's left is my actual income. Of that, some is spent, and some is kept. My demand for money, in my terminology, is the proportion that I save out of what I earn.
Juan:Well, I wouldn't say that not-earning is the same thing as spending, if that's what you mean ?
Leisure is a good, and has a cost. That cost is the money I didn't earn during that leisure time. It simplifies analysis to treat this as spending.
its oppportunity cost, or rather an imagined cost. it is not a real cost. it may be psychologically real. but has not reality in terms of accounting.
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
nirgrahamUK:its oppportunity cost, or rather an imagined cost. it is not a real cost. it may be psychologically real. but has not reality in terms of accounting.
Agreed, it is not an accounting cost. It is, though, an economic cost. Opportunity cost is not imagined cost - it is the definition of cost in economics.
well, the neoclassicals routinely use opportunity cost incorrectly and in an accounting sense, but so long as you are being subjective etc keep on keeping on.