Economics Dictionary of ArgumentsHome
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| Inflation: In economics, inflation is defined as the sustained increase in the general price level for goods and services in an economy over a certain period of time, which leads to a decline in the purchasing power of money. It is usually measured by indices such as the consumer price index (CPI) or the producer price index (PPI)._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Friedrich A. von Hayek on Inflation - Dictionary of Arguments
Boudreaux II 73 Inflation/Hayek/Boudreaux:“ Even a very moderate degree of inflation is dangerous because it ties the hands of those responsible for policy by creating a situation in which, every time a problem arises, a little more inflation seems the only easy way out.“(1) >Monetary policy/Hayek. Purchasing power: For a unit of money (say, a dollar) to lose purchasing power is for that unit of money to lose value. And when a unit of money loses value, it takes more units of that money to buy goods and services. In other words, the prices of goods and services bought with that money rise. Money supply: By far the most common cause of inflation is an increase in the supply of money. Solution: The cause of inflation, therefore, is quite simple: excessive growth in the supply of money. Problem: Stopping inflation is likewise simple: quit injecting newly created money into the economy. >Time/Hayek. Monetary policy/time/Hayek: But while stopping inflation is easy in principle (no complex theories must be mastered, and no intricate mathematical problems must be solved), it is often very diffcult to stop in practice. The reason is that control of the money supply is in the hands of government officials. Stopping inflation is made diffcult by politics, not least because it is politics that usually is to blame for starting inflation in the first place. >Monetary policy/Hayek, >Fiat Money, >Gold standard. Boudreaux II 74 Excess capacity: Trouble arises when the truth is revealed that these industries over-expanded. When this revelation occurs, investors and entrepreneurs begin to eliminate what they now see is excess capacity in these over-expanded industries. Efforts to shrink these over-expanded industries, though, inevitably cause hardships. Most notably, unemployment rises as workers are laid off from their jobs in these industries. >Production. Unemployment/politics: During the time that unemployment is unusually high - during the time that it takes for these laid-off workers to find new jobs - political pressure is intense for government to "do something" about this unemployment. Government politics: One of the easiest "somethings" that government can do is to keep the inflation going. Money supply: By continuing to inject new money into the economy, government can for a bit longer prop up prices in the industries that are among the first to get the new money. In Short, by continuing to inflate the money supply, government can postpone the discovery by entrepreneurs and investors that the industries that are among the first to get the new money are in fact over-expanded and burdened with excess production capacity. Monetary policy/politics: The benefit to politicians of continuing to inflate the money supply is that, by delaying the discovery of the need to scale back over-expanded industries, they keep the economy appearing for a while longer to be healthier than it really is. These politicians, therefore, are at less risk of losing their jobs in the next election. Boudreaux II 75 False information: for prices in the over-expanded industries to continue to be read by investors and entrepreneurs as signals that the increased investments in these industries are really not excessive, prices in these industries must rise even faster than before. Prices in these industries must rise at a pace greater than the expected rate of inflation. Central banks: To cause prices in these industries to rise faster than the economy's general rate of inflation, the central bank must quicken the pace at which it injects new money into the economy. If the central bank does so, prices in the industries that are first in line to get newly created money will remain higher than they "should" be relative to prices in other industries. Economy: Entrepreneurs and investors might then continue for the time being to believe that their increased investments in these "first-in-line" industries are justified. Efforts to scale back these industries are postponed. Boudreaux II 76 Inflation: Eventually, however, the faster rate of money injection inevitably results in a faster rate of economy-wide inflation. Prices throughout the economy are now rising at a pace to catch up with the rising prices in those industries that are among the first to receive the newly created money. Information: As a consequence, prices in these "first-in-line" industries stop sending out misinformation. These prices begin to reveal the fact that investments in these industries are indeed excessive - that productive capacity in these industries is too large. Wrong solution: And so the only way the monetary authority can prevent investors from scaling back these industries and from laying off workers is to ramp up even more the rate of monetary expansion. Monetary policy: The monetary authority soon finds itself in a diffcult spot. If it stops inflating the money supply (indeed, even if it simply fails to accelerate the rate of growth in the money supply), the industries that over-expanded because of earlier injections of new money will contract. Unemployment: The resulting rise in unemployment creates political pressures for government to "do something" to raise employment - something other than counseling the public to patiently wait while industries are restructured to be more economically sustainable. Accelerating the rate of inflation is one maneuver the government can take to keep employment high for the present. Boudreaux II 77 Time/information: (…) because monetary expansion does not cause all prices to rise in lock-step with each other, the higher the rate of inflation, the more distorted becomes the pattern of relative prices throughout the economy. >Relative prices. Information: The more out of whack individual prices become relative to each other, the less reliably do these prices guide entrepreneurs, investors, and consumers to make correct economic decisions. Higher rates of inflation, therefore, result in greater misuse (greater “misallocation”) of resources. >Allocation. Time: To cure this problem the monetary authority need only to stop injecting new money into the economy. But the cure isn't instantaneous. Not only does it take some time for people to stop expecting future inflation, but, also, it takes time for workers and resources to shift away from industries that over-expanded because of inflation and toward industries where these workers and resources will be more sustainably employed. Boudreaux II 79 Monetary policy/Problem: The bad effects of more inflation today won't materialize until sometime in the future, when many of today's officials will be out of office. So officials in office today can, by keeping the money supply growing, make the economy appear to be healthier than it really is, while the costs of creating this illusion will be borne only in the future by mostly different officials. 1. Friedrich Hayek (1960). The Constitution of Liberty. In Ronald Hamowy (ed.), The Constitution of Liberty, XVII (Liberty Fund Library, 2011): 465._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Hayek I Friedrich A. Hayek The Road to Serfdom: Text and Documents--The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2) Chicago 2007 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
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