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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Milton Friedman on Inflation - Dictionary of Arguments
Landsburg I 16 Inflation/Friedman/Landsburg: Inflation is always caused by people trying to get rid of money, not all at once, but steadily over a substantial period of time. This is the analysis that led to Milton Friedman's famous declaration that "inflation is always and everywhere a monetary phenomenon." Tradition: Prior to Friedman, this was controversial. In those dark days, one frequently heard talk of "cost-push inflation," in which, say, increasing wage demands from workers lead to rising prices for consumer goods, leading to increasing wage demands from workers, and so on around the vicious circle. FriedmanVsTradition: Friedman insisted - and successfully convinced most economists - that this superficially plausible story makes no sense. One way or another, the quantity of money demanded has to equal the quantity of money supplied. Equilibrium/solution/Friedman: Prices must adjust until that equilibrium is reached. This leaves no room for anything else to affect the price level. The next obvious question is: Why should we care about the price level and inflation in the first place, and what outcomes should the monetary authorities be aiming for?* >Price level, >Equilibrium, >Price. Landsburg I 20 If Bob knows he lives in a world where prices sometimes jump, he can always insist on Ioan contracts with automatic adjustment clauses, so that Alice is always required to repay enough dollars to buy two hamburgers, whatever that number of dollars might be. Price level: And even if Bob's foresight fails him, so that he fails to include that clause and takes a big loss when the price level doubles, it's not the kind of loss economists usually worry too much about. That's because Bob's loss is Alice's gain, so that overall the populace (which includes both Alice and Bob) is no better or worse off than before. So a one-time jump in the price level is, at least to a very good approximation, nothing to worry about. Inflation: You might be tempted to conclude that inflation is nothing to worry about either. After all, inflation is just an ongoing series ofjumps in the price level, right? Not so! >Inflation/Rothbard, >Inflation/Mises. Let's think this through from the beginning again. On Monday morning, Alice the average citizen is holding 10 weeks' income in her purse and her checking account. a) On Monday at noon, the money supply doubles, and now Alice holds 20 weeks' income. But she only wants to hold 10 weeks' income, and therefore tries to get rid of money by buying things. Eventually prices are bid up to twice this morning's level, and Alice now happily holds her share ofthe new money, which is equal to 10 weeks' income - her goal all along. b) Now tweak the story: On Monday at noon, the government doubles the money supply and announces plans to double it again every day at noon. As a result, Alice decides that, going forward, she wants to hold only 8 weeks' income, not 10. Why? Because she now expects an ongo- ing inflation - which means she expects the money in her pocket and her checking account to lose value overnight. That prospect makes holding money less attractive. So on Monday afternoon, Alice (along with many others) tries to get rid of money by buying things. Eventually, prices get bid up to twice this morning's level, leaving Alice holding 10 weeks' income, which is still more than she wants. Therefore she continues trying to buy things, driving prices up still further. Landsburg I 21 Money supply: if the money supply doubles on Monday, with further increases expected to follow on Tuesday, Wednesday, Thursday and Friday, then the price level must more than double on Monday. Price level/inflation: At some point during the onset ofan inflation, the price level must risefaster than the money supply. Friedman called this phenomenon overshooting, which might have been an unfortunate vocabulary choice because it seems to suggest that someone has made a mistake or missed a target. Problem: Nothing of the sort is true; Alice wants to reduce the real value of her money holdings - the number of hamburgers her pocket change can buy and the number of home repairs her checking account balance can cover - and by the end of the day she's done exactly that. *SolowVsFriedman: Robert Solow's remark contrasting Milton Friedman's obsessions with his own appears in his contribution to a book of essays called Guidelines, Informal Controls, and the Marketplace, edited by George Shultz and Robert Aliber, and published by the University of Chicago Press in 1966. (1) Demand for Money/Money supply/Friedman: Friedman's analysis of the demand and supply for money, together with the conclusion that "inflation is always and everywhere a monetary phenomenon" and the implications for monetary policy, is spread out over many of Friedman's articles and essays, many of which are collected in a volume called The Optimum Quantity of Money and Other Essays, published in 1969 by Aldine(2). Many of these essays are fairly technical, but Friedman provided a good and largely non-technical overview in a 14-page essay titled The Counter-Revolution in Monetary Theory, published in 1970 by the Institute for Economic Affairs.(2) 1. Solow, R. (1966). In: Guidelines, Informal Controls, and the Marketplace. George Shultz and Robert Aliber (eds). University of Chicago Press. 2. Friedman, M. (1969). The Optimum Quantity of Money and Other Essays. Aldine. 3. Friedman, M. (1970). The Counter-Revolution in Monetary Theory. Institute for Economic Affairs._____________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. |
Econ Fried I Milton Friedman The role of monetary policy 1968 Landsburg I Steven E. Landsburg The Essential Milton Friedman Vancouver: Fraser Institute 2019 |
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