Comments (8)

• Nathan Mayer

  there's an article on Hayek over at Bloomberg today:

  http://bloomberg.com/apps/news?pid=20601039&sid=aOp8Vr9G13z4

  Published: November 10, 2009 8:45 AM

• Jacob Steelman

  Mises is the master of precision in economic thought and no better evidence exists then this description of inflation and deflation. That he is so obviously ignored by the ruling elites such as the Council on Foreign Relations is testament to Mises potential influence in the world. Thanks to LvMI Mises is available for all the world to read and understand.

  Published: November 10, 2009 2:17 PM

• Lysander

  Mises says:
  The notions of inflation and deflation .. were not created by economists, but by the mundane speech of the public and of politicians. Inflation was applied to signify cash-induced changes resulting in a drop in purchasing power.
  ...
  What many people today call inflation .. is no longer the great increase .. in the supply of money, but its inexorable consequences, the general tendency toward a rise .. in commodity prices and wage rates.
  ...
  this newfangled connotation of the terms inflation and deflation is .. misleading.

  Does the historical record bear out Mises's claim that the meaning of "inflation" has changed?

  According to the OED, the word "inflate", from the the Latin "in-flare", meaning to enlarge or distend with air, has been in use at least since the 14th century. Typically a balloon may be inflated, bowels (causing flatulence), a herbivore's stomach, a toad's vocal sac.

  It is also used metaphorically - inflated by pride (1502), inflated with self-conceit, (1784), inflated pretensions (1818).

  In that sense the term "price inflation" is quite legitimate. The price of sugar may be inflated by a bad harvest, wage levels may be inflated by union activism. We may have asset price inflation or retail price inflation. The OED cites an example from 1887:
  "the inflation of prices brought with it a speculative mania".

  The term "monetary inflation" is equally legitimate. The oldest OED examples are:
  1838 "inflation of the currency"
  1864 Webster: Undue expansion or increase, from over-issue; said of currency
  1878 despite the illegal inflation authorized by President Grant"

  Conclusion:
  The unqualified term "inflation" is certainly misleading, whether you are referring to prices or to the money stock.

  Use an unambiguous term like "price inflation" or "monetary inflation" instead.
  

  Published: November 10, 2009 7:35 PM

• Paul Krugman

  Inflation is good because it discourages hoarding. This boosts aggregate demand. The boost in aggregate demand causes even more inflation and further discourages hoarding, boosting aggregate demand further. The result is a permanent quasi-boom. And through all this, GDP constantly rises, indicating an increase in prosperity.

  Deflation is bad becauses it encourages hoarding. This causes the permanent quasi-boom to collapse, causing the free market to fail. The government must protect the free market from deflation.

  Published: November 10, 2009 10:14 PM

• Paul Krugman II

  Saving is bad. Squandering is good. Thanks for the Nobel!

  Published: November 11, 2009 7:20 AM

• Dick Fox

  I certainly hope that those monetarist Austrians like Frank Shostak read this over and over until they understand, especially this passage.

  It was the market that, in a selective process going on for ages, finally assigned to the precious metals gold and silver the character of money. For two hundred years the governments have interfered with the market's choice of the money medium.

  Frank, stop trying to define money. The government is faster than you are at creating new media to distort the market's choice of the money medium. Even today the market is still assigns gold the character of money. All the government creations are just distortions but all are reflected in gold.

  Published: November 12, 2009 9:22 AM

• Gernot Hassenpflug

  @Lysander: prices adjusting for a bad harvest is not inflation, that is the operation of money to provide prices under conditions of scarcity---that is the whole purpose of prices!

  And here my opinion:
  Inflation does not discourage hoarding: it makes the currency worth less and encourages people to do exactly "hoarding": investing in non-currency holdings (hedges) as soon as possible (before the value of the currency drops further) and refusing to use it in investments that require converting back to currency or requiring maintenance payments in currency. This makes precious metals ideal for hedges.
  In essence, inflation is like a bucket with a hole in it: except that instead of water running out of the hole, the currency becomes worth less. Currency is printed, and first users buy stuff but the currency loses value as it passes through the economy. Finally, it has less value to everyone, only the new money possesses power for a limited time.

  Published: November 13, 2009 1:11 AM

• aihumnoi

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  Published: November 16, 2009 2:52 AM