Inflation in One Page
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A correspondent, heading a group of “Inflation Fighters,” recently sent me a one-page typewritten summary of their case against inflation, and asked for my opinion of it. The statement was sincere and well-intentioned, but as with the great bulk of what is being written about inflation, it was confused in both its analysis and its recommendations.
I wrote approving his effort to “do something,” and approving also his idea of trying to state the cause and cure for inflation on a single page, but suggested the following substitute statement.
Cause and Cure of Inflation
1. Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices. Therefore inflation—if we misuse the term to mean the rising prices themselves—is caused solely by printing more money. For this the government’s monetary policies are entirely responsible.
2. The most frequent reason for printing more money is the existence of an unbalanced budget. Unbalanced budgets are caused by extravagant expenditures which the government is unwilling or unable to pay for by raising corresponding tax revenues. The excessive expenditures are mainly the result of government efforts to redistribute wealth and income—in short, to force the productive to support the unproductive. This erodes the working incentives of both the productive and the unproductive.
3. The causes of inflation are not, as so often said, “multiple and complex,” but simply the result of printing too much money. There is no such thing as “cost-push” inflation. If, without an increase in the stock of money, wage or other costs are forced up, and producers try to pass these costs along by raising their selling prices, most of them will merely sell fewer goods. The result will be reduced output and loss of jobs. Higher costs can only be passed along in higher selling prices when consumers have more money to pay the higher prices.
4. Price controls cannot stop or slow down inflation. They always do harm. Price controls simply squeeze or wipe out profit margins, disrupt production, and lead to bottlenecks and shortages. All government price and wage control, or even “monitoring,” is merely an attempt by the politicians to shift the blame for inflation on to producers and sellers instead of their own monetary policies.
5. Prolonged inflation never “stimulates” the economy. On the contrary, it unbalances, disrupts, and misdirects production and employment. Unemployment is mainly caused by excessive wage rates in some industries, brought about either by extortionate union demands, by minimum wage laws (which keep teenagers and the unskilled out of jobs), or by prolonged and over-generous unemployment insurance.
6. To avoid irreparable damage, the budget must be balanced at the earliest possible moment, and not in some sweet by-and-by. Balance must be brought about by slashing reckless spending, and not by increasing a tax burden that is already undermining incentives and production.
Comment by Bransby on 19 March 2009:
1. You\’re absolutely right about inflation being an excess of money creation.
2.You\’re absolutely wrong that this is the result of the government printing too much money, and spending excessively. Most money in our economy is derived from the debt created by private lending institutions. When the bank gives you a mortgage to buy your house, they don\’t go and borrow the money off the government, they create a debt themselves against their own assets. Of course we now know that they don\’t have the assets to cover the debt they create.
3. See above, it\’s not about the government printing too much money.
4. Price controls can\’t be used to stop inflation because the actual problem is a result of under-regulated banking practices.
5. Certainly wouldn\’t suggest that prolonged inflation can stimulate an economy, however, unemployment being caused by excessive wage rates is a dubious claim. Why are they excessive? Globalisation allows the same production job to be done in a country where the people live on a few dollars a day, so suddenly the product is cheaper, so your \"excessive\" wage demands are wage demands that aren\’t competetive with foreign countries with entirely different standards of living. Also after a minimum wage was adopted in the UK, employment increased.
6. A balanced budget is obviously a good thing. \"Reckless\" spending on public services and infrastructure is obviously not advisable, but spending by government in order to rescue an economy utterly devastated by 30 years of low-tax, de-regulation economics, is pretty much essential.
Comment by Wade on 19 March 2009:
In response to the 6th point of balancing the budget, responder Bransby has made an error in thinking that the government can spend us out of a recessive or depressed economy. Government spending is ALWAYS the result of confiscating private wealth (that we would be spending) and distributing it in ways they prefer (partisan projets). Government has no wealth other than what it takes from the people. Had President Obama given the American People a 6 month (or 1 year, etc.) moritorium on taxes we would have spent the money in the economy. The Democrat’s plan simply chooses to take our money and spend it on their pet projects.
Comment by Wade on 19 March 2009:
One further point mischaracterized by Bransby…”an economy utterly devastated by 30 years of low-tax, de-regulation economics” is absurd. The lowering of tax rates has proven to increae the tax revenues, not lessen them (that would come from raising tax rates beyond reasonable limits). And the claim of deregulation is false, as well. The meddling of congress and federal agencies led to the banking fiasco and housing debacle. Private companies and market forces contributed to the downfall but were primed by the “good intentions” of the liberal politicians.
Comment by Don MacLennan on 19 March 2009:
Hazlitt is correct, assuming that the Federal Reserve (FR) is a creature of government, which I submit it is. Even though it is considered “private” it was created by congress and is ultimately responsible to congress. Yes, money creation arises from debt as the FR does it, but that is no different than the printing press in its action even though most money is an electronic creation. In essence, the government is “printing too much money.”
Even though Hazlitt doensn’t explicitly say it, to cure the business cycle and abolish inflation, the national bank, or FR, should be abolished and honest money should be handled by the private sector and not by a quasi-private entity. One means would be to use gold and or silver (not tied to each other as in bimetalism) and only regulated to the extent that the government enforces honest contracts.
Don
Comment by Lynn on 19 March 2009:
As a solo healthcare practitioner and small businessperson, I am always furious when anyone says, as Bransby does, that the past 30 years have been de-regulated and low-tax. I have seen government regulation: choke off innovative healthcare business models; drive up the cost and decrease the availability of cheap, easy-to-use technology; and plow healthcare grant money into big corporations run by politician’s cronies while making it prohibitive for small practices like mine to participate. At the same time, taxes and licensure have increased on my business and professional licenses, property, payroll, equipment, and income by one to three percentage points over inflation year upon year. And when someone says that the government needs to “save” us from the high cost of healthcare…well, I just have to walk out of the room in disgust.
Comment by Bill on 19 March 2009:
Just for a little sanity. Inflation is defined as a continuous rise in the overall price level. It’s cause is, and has been, of much debate in the field of economics.
One theory, the one expoused in the article, is that inflation is always demand pull and initiated by an exogenous increase in the money supply, engineered by the FR. This theory (I should emphasize THEORY) is known as the quantity theory of money. Milton Friedman revived it in the ’50’s and 60’s, however it has been around at least since the Salamancan Monks writing in the 16th century.
The other theory is that inflation is always cost push and the money supply endogenously expands to accommodate the rising costs.
To date, as far as I know, neither theory has been proven or disproven.
Such is economics; nothing is provable.
bye
BB
Comment by Jason on 20 March 2009:
As to point number 5 concerning minimum wage in the first response: I woke up this morning and the sun rose. Meaning correlation does not equal casuation. Employment generally rises with expansion and falls with contraction, it follows it does NOT lead. The UK was expanding at the time the law was initiated so employment increased. It would have almost certianly been the case that employment would have increased further without the artificial wage controls at the low end of the labor market.
Comment by Bransby on 20 March 2009:
Well to be fair I wasn’t expecting people here to agree with me! In response to Wade and government spending not being adequate to take us out of a recession: how can lower taxes help the 8% of people currently unemployed in the US? I know the claim is that lower taxes are a panacea to an ailing economy, but taxes, particularly on the very wealthy, have been lowered by successive conservative govts in the US and the UK and I just see no evidence for it being a great boon to the economy. What you’re talking about is trickle down economics, and whilst that kind of thinking has dominated economics for, as I’ve said, the last 30 years since Thatcher and Regan, what’s actually happened is a widening of the gap between rich and poor, so I can’t se much evidence for “trickle down” actually working. As for governments only spending on partisan projets of their own interest: I’m sorry you have such a dim view of democracy. Government is supposed to represent the people, you get what you vote for.
I really take issue with the suggestion that our current economic problems have been created by government, it’s simply not true. Free marketeers want it to be true but the fact is that this is entirely a problem created by the de-regulated free market. The private sector, and particularly the finance sector has been left to its own devices (I make no comment about small healthcare businesses and their regulation, because frankly, they’re not the problem, the finance sector is far bigger and is the cause of these problems), now that in itself IS a problem caused by government, but not in the way that you suggest. You think we have excessive government interference? Look at the post-war period in the US and UK: that was real government intervention. I’m not making any comment about how effective it was, but compared to that what we have now is an extremely hands-off approach to govt intervention, a very de-regulated market, so let’s not pretend it’s anything else. And like I say, the problems we face are blatantly the result of the private finance sector, the only fault of government is not recognising sooner just how reckless with our money they were being.
I’d also take issue with the old “government stealing private money” kind of thing too. Your money’s going to go somewhere; invest it in your home through your mortgage, and until its paid off you’re giving it to the private finance sector, and we now know that they use it to go gambling, as they do with your pensions and all your other financial investments. Perhaps government isn’t responsible, perhaps they are inefficient and wasteful, but one can hardly look at the finance industry as we know it today and say that they are any better. In fact they are considerably worse.
Oh, and just quickly, I wasn’t suggesting the minimum wage in the UK was a cause of increased employment, I was just pointing out that it was most certainly NOT a cause of unemployment, as is suggested in the article.
Comment by Paul on 22 March 2009:
By and large, I agree with the article. Printing more money cause inflation. Inflation will also happen on its own.
I have to disagree with Bransby on the free market being the sole cause of our current condition of the economy. The government is the lead culprit. E.I…………………………………..
Congress\’ Financial Mess
Walter E. Williams
Wednesday, January 14, 2009
News media people, often plagued with little understanding, fail miserably in their duty to inform the public. This is particularly evident in their reporting on the current financial meltdown, suggesting it was caused by deregulation and free markets.
Professor David Henderson, research fellow at Stanford\’s Hoover Institution, writes about regulation in \"Are We Ailing From Too Much Deregulation?\" in Cato Policy Report (November/December 2008). The Federal Register, which lists new regulations, annually averaged 72,844 pages between 1977 and 1980. During the Reagan years, the average fell to 54,335. During the Bush I years, they rose to 59,527, to 71,590 during the Clinton years and rose to a record of 75,526 during the Bush II years. Employees in government regulatory agencies grew from 146,139 in 1980 to 238,351 in 2007, a 63 percent increase. In the banking and finance industries, regulatory spending between 1980 and 2007 almost tripled, rising from $725 million to $2.07 billion. So here\’s my question: What are we to make of congressmen, talking heads and news media people who tell us the financial meltdown is a result of deregulation and free markets? Are they ignorant, stupid or venal?
A New York Times article, \"Fannie Mae Eases Credit To Aid Mortgage Lending\" (9/30/99), reported, \"Fannie Mae, the nation\’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people …\" The pressure was the 1977 Community Reinvestment Act that was beefed up during the Clinton Administration. It required banks to make high-risk loans they would not have otherwise made. Failure to comply meant fines and difficulty in getting approval for mergers and branch expansion.
When questions began to arise about government policy that intimidated lenders into making high-risk loans, we received congressional assurances. At hearings investigating the solvency of Fannie Mae and Freddie Mac, Rep. Barney Frank said, \’\'The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.\’\’ In a speech to the Mortgage Bankers Association, Frank advised, \"People tend to pay their mortgages. I don\’t think we are in any remote danger here. This focus on receivership, I think, is intended to create fears that aren\’t there.\" Protesting against greater controls against lax mortgage lending, Sen. Harry Reid said, \"While I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process.\"
One-third of the $15 trillion of mortgages in existence in 2008 are owned, or securitized by Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing and the Veterans Administration. Wall Street buyers of repackaged loans didn\’t mind buying risky paper because they assumed that they would be guaranteed by the federal government: read bailout from the taxpayers. Today\’s housing mess can be laid directly at the feet of Congress and the White House.
………………………………..
So, it seems that regulation went up. So much that government agencies could not keep up. It was well known in 2005/2006 the housing market was going to blow up and the dominos would fall. I told my broker this and he now tells me I was so right in getting out (he of course is trying to get me back in).
I can\’t say that minimum wage cost jobs, but I can say my breakfast sausage burrito has gone up from .99 cents to over a $1.40 since it went up.
I also can say that the government taking more of my money does not allow me to spend it on what I chose, including charity causes.
Bransby is right if he is trying to make the point of \"It\’s a global economy stupid.\" Unions are bad today. They are not needed any more to inflate income and benefits that are not competitive globally. I also don\’t believe in minimum wage btw.
As far as tax cuts, they work. Employment goes up, the money to the government goes up. Been done 3 times and worked. What does not work is the government spending more than it gets. And not by printing more money to cover cost it already owes. What retards our personal life is too much government and taxes.
Comment by natschultz on 26 March 2009:
In reference to Bransby’s following comment:
“I’d also take issue with the old “government stealing private money” kind of thing too. Your money’s going to go somewhere; invest it in your home through your mortgage, and until its paid off you’re giving it to the private finance sector, and we now know that they use it to go gambling, as they do with your pensions and all your other financial investments.”
First, you are obviously a Brit; therefore you are not coming from the same frame of mind as we Americans are. It is unconstitutional in the USA for the government to tax any person without representing that person. Taking from one person and giving to another is NOT representative. We are not, as you state, a “Democracy”; the USA is a democratic REPUBLIC.
Regarding your example: It is, simply put, absurd. Are you implying that we should not invest in our own homes? That we should not respect private property? Again, you do not understand the USA. Private Property is a FUNDAMENTAL RIGHT on this side of the Pond.
When we Americans refer to the Government “stealing private money” we are not thinking that the government is preventing us from buying a house. No, we are referring to an insidious concept invented by you Brits: “Robin Hood” philosophy. What we disapprove of is the “redistribution” of wealth from the productive “drivers” of the economy to the non-producers. Worse, the Government distributes our money to “Special Interest” groups who finance their political campaigns/ careers.
A perfect example is our public education system (“public schools” in the US are the government-run schools, as opposed to in the UK where “public” means private, as in Eton). Our public education system is an abject failure and the government keeps on increasing taxes to pump more and more money into them, and all for naught. Private schools receive no tax dollars and even with operating budgets half the size or less consistently out-perform the Government-Union-run boondoggles.
I live on Long Island, NY, with the highest property taxes in the country. My school district spends $21,000 per pupil. That is NOT a misprint: Twenty-One-THOUSAND Dollars a YEAR on each student! The district ratings are average in the nation. Average property taxes per household here are $10,000 a year; property taxes are in ADDITION to Federal and State income taxes and State and local sales taxes. 66-75% of our property taxes go to fund the schools; the remaining 25% is all that is left to pay for everything else including police and road repairs and fixing systems to conform to new environmental regulations.
Why does so much money go to the public school system? Because of the UNIONS who spend HUNDREDS of MILLIONS of dollars every year campaigning for the Democrats who guarantee that their jobs will be protected even if they can’t teach a rat how to run on a wheel. Back when I was in school in the 1990’s the average cost per pupil was $4,000. Ironically, that was before the “new” standards were instituted, so I actually learned how to read and write proper English; now they teach children to “express themselves in gibberish.” In order to graduate in the college track I had to pass difficult Regents exams, which at the time were optional; today the government has decided that everyone must pass the test to graduate and that “tracking” is “unfair”, so they dumbed-down the tests to the point that they are meaningless; even so, teachers now only teach to the test at best, and at worst they have been busted giving students the actual answers.
Why have the costs skyrocketed? Because after a few years teachers make over $100,000 a year, and many make well over $150,000. In fact, many districts gave teachers massive salary increases just this summer, after the Governor warned them that we were facing a budget shortfall. Oh yeah, and we spend a few million dollars on “Administration costs” including salaries, and a brand new building built just for them that features meticulous brick-work and marble floors.
When I was in school almost everyone I knew spent at least some time in Catholic school. Back then the taxes going to the public school were not so high; today most parents cannot afford to send their kids to Catholic or private schools, even though they provide a much better education, because after paying all their taxes the parents are almost broke. People have been fleeing this area for years because the taxes are so high. Within 20 years the only people who will be left will be the highly-paid teachers and police officers, and they will all be laid off because there won’t be any more children to teach or people to protect.
This is what we are complaining about when we refer to “Government stealing private money.” The fact that they are not representing us, and that they are deliberately making it IMPOSSIBLE for us to CHOOSE how to live our lives and spend our money. They have jacked up the taxes that go to public schools because the public schools do not “educate” children to think for themselves, but they BRAINWASH children to be slaves to the government. Students are taught that they must rely on the government to support them, and that the government supports them by “taxing the mean rich people.” The Democrats do not support School Choice for ordinary citizens even though they themselves send their own children to the most elite private schools on OUR tax dollars! We pay their salaries through our taxes, and they tell us “NO! You may NOT choose where to send your children!” Then they turn around and spend their salaries to keep their own children out of the very schools most Americans cannot afford to escape from.
This will only last so long. Soon enough the money will run out and there will be no more “mean rich people” to tax because all successful businesses will have fled overseas, and there will be no smart, driven young people to replace them. America was the greatest nation on earth BEFORE the IRS was invented. Back then charities and churches and philanthropists educated our children and took care of our sick. If Obama has his way all charities will go bankrupt and he will be crowned Emperor.
BTW: I know this is off-topic, but I couldn’t resist correcting Bransby’s Socialist viewpoint.
Comment by natschultz on 26 March 2009:
The article on inflation is correct.
Cost-push?!? Economics cannot be proven?!? Obama’s plan (Socialism, Command and Control) is actually skewing the Productivity Function, so it’s much worse than simple Supply and Demand. But the “Inflation is caused by cost-push” makes no sense; that theory relies on Fiat (paper) currency as an authentic currency, which in itself is an economically unsound premise to begin with. You cannot create a legitimate model without a sound currency as the basis; therefore you must think in terms of Gold or Silver in order to prove your theory.
“Inflation” cannot exist if the only currencies in use are pegged to an actual existing commodity that has a true value in the real world. If the Dollar was still pegged to Gold then when you hand someone a dollar bill they would envision it as a certificate that can be turned in for the Gold it represents; therefore whatever you are purchasing for that dollar is actually worth that amount in Gold. Because the Dollar is no longer pegged to Gold, it is vulnerable to being rendered worthless by flooding the market with a whole bunch of green paper. It is only worth what someone is willing to pay for it in the form of T-Bills etc. Therefore it’s value relies on what people are willing to pay to purchase T-Bills, and based on supply and demand, each individual dollar is worth more if there are less dollars in the market, and each dollar is worth less when the market is saturated. This is extremely important for global-trading, whereas it would be of no concern in a secluded enclave of people who do not trade outside their own community. That is why China’s threatening to dump the Dollar (not purchase our debt in the form of T-Bills) is so important; they don’t want anymore dollars because the market is over-saturated.
So, since no one with whom we trade wants to buy our T-Bills, the Treasury Department is instead just printing more dollars. Therefore when go to Walmart to buy something (made in China) the cost will be inflated because each dollar will be worth less in the global market. The Federal Government is trying to trick us into thinking everything is OK, since they will just provide us consumers with more dollars to compensate that increase in price; the real problem is that we are not actually creating more “wealth” or value, just more green paper. This cannot go on forever; eventually interest rates must go up, and we are back to Stagflation, just like under Carter.
The cost-push theory is simple to disprove: Let’s use Silver and spices in the Middle Ages. Let’s say Constantinople, the heart of the Byzantine Empire, is a major trading post between the Far East and Europe. Spices come from the East and are traded with the Greeks and Romans for Silver. Let’s say that one pound of spices costs one Silver coin after the Fall of Rome. A hundred years later the Goths and Franks decide they too like spices (under Roman influence), so they go to Constantinople with Silver to buy some spices, but the Arabs didn’t bring enough spices back for all these new consumers, so they negotiate, and the cost per pound of spices goes up to two Silver coins. Fast forward a few hundred years and the Norwegian Vikings sack the British Isles, stealing their spices, so now there is even more demand at Constantinople as the British Monks have come to replenish their store of spices, so the price per pound of spices goes up to 3 Silver coins, because the Orient can only grow so many spices, and the Arabs can only transport so much at a time and they often get sacked along their trade-route by Mongols. And to top it all off, the Swedish Vikings (Varangians) settle in Eastern Europe, creating the Kievan Rus Empire, and they decide to control trade between Constantinople and Northern Europe, so they want to purchase lots of spices to sell at their trading post at Staraya Ladoga (Northern Russia), so the cost of spices goes up to 5 Silver coins per pound.
You see, the price went from one Silver coin to 5 Silver coins per pound of spices, not because of inflation, but because of increased demand for a commodity in limited supply (spices, a natural resource). The Silver itself is worth the same.
The value of Silver itself only fluctuates by the actual amount of silver discovered and mined. If a mountain of silver was discovered, then the silver would be worth less and gold would replace it (because it would be cumbersome to carry that much silver). If no more silver ore could be located then the silver would be worth more as more people start trading (and there would be lots of bloodshed to capture the remaining supply of silver). In the case of an abundance of silver, that technically would be inflation, but unlike green paper, silver still has an actual use, such as making jewelry and statues; and another commodity becomes the standard for trade (Gold), so the actual price would still be based on the demand for and supply of the commodity itself (spices).
The price of the spices is not actually based on the value of silver, but on the increase or decrease in persons trading and demand for spices. For example, after the Black Plague there were half as many people living in Europe, therefore the survivors were automatically more wealthy, not because Silver or Gold increased in value, but because there was twice as much land and other natural resources available to the survivors (more food, housing, etc). In addition, when those survivors traded with the East for spices, they could buy one pound for two Silver coins because there was so little demand that the Arabs had no choice but to sell it for less.
If there were 100 people and one hundred Silver coins before the Plague, but only 50 people and still 100 Silver coins after the Plague, does that mean the Silver was deflated? No. Why? Because there was always a FINITE amount of Silver and Gold. Before the Plague that finite amount of currency had to provide for a lot of people, therefore Europe was fairly impoverished. After the Plague the survivors were able to purchase adequate provisions, often enough to become “wealthy” in their own right. They benefited on two fronts: Silver held its value, and lower demand meant lower prices so they could buy twice as much (and sell half of it to others at a profit, thereby creating a flourishing Merchant Class). Obviously, if they didn’t invest and create a flourishing Merchant Class, but instead just shacked up in their hovels and over-procreated, then although Silver would have retained its value, the increased demand would have meant that it could purchase less. (Read Malthus for population economics.)
You must differentiate between Price and Value. Commodity-based currencies hold value (based on a limited supply); commodities that are bought and sold (consumer goods) have a fluctuating price based on supply and demand.
Fiat (paper) currencies do NOT hold their value because the supply can be manipulated. Therefore, if the market is flooded with green paper dollars, a pound of spices can skyrocket to thousands of dollars. It would be like discovering a mountain made of solid Silver; in that case our ancestors would have switched to Gold because carrying cart-loads of silver would have been cumbersome. (Read about Germany in the 1920’s – the Weimar Republic for a real-life example of cart-loads of Reichsmarks needed to buy bread).
Why does this affect us? Because if the Treasury starts printing green paper non-stop, and you want to buy some spices to cook with, you will be paying a fortune because spices are imported from Asia and they do not want our dollars anymore because they are worthless. That is why China and Russia want to switch to a “Global Currency” (China’s Yuan is pegged to the US Dollar). If we were a closed community like the Amish it wouldn’t matter all that much because we would grow and raise most of what we need and trade amongst ourselves.
This lengthy explanation was in response to Bill’s comment:
“The other theory is that inflation is always cost push and the money supply endogenously expands to accommodate the rising costs.
To date, as far as I know, neither theory has been proven or disproven.
Such is economics; nothing is provable.”
Economics, at its core is a mathematically provable hard science. Unfortunately our Higher Education system classifies it as a “Social Science” along with Sociology, Psychology and History. While Sociology, Psycholgy and Philosophy are indeed highly theoretical, Economics and most periods of History can indeed be proven or disproven. In both cases all that is required is a truly open mind; one must be willing to be open to obvious truths even when they counter all that we have been “taught” to believe. Humans are social creatures easily coerced into believing the most compatible reason for understanding our status in life. For example, if you are poor, then it is the “rich” person’s fault. This is why the fields of Sociology and Psychology exist. The Sociologist aims to explain why humans interact as they do, and ultimately all interactions are economic interactions. The Psychologist aims to convince you that you are a victim of society, and therefore an unfair economic system. These Social Scientists have expanded into the field of Economics in order to skew it with theories that cannot be proven mathematically in order to further their own initiatives. Why? Because their very fields of study are necessarily DEPENDENT ON Economics. Without economics (transactions between people) there would be no complex social and psychological complexes. This is continuously proven by Archeologists and Anthropologists; economics is necessarily the most efficient means by which even the earliest cultures survived and thrived or died.
Is economics affected by social interactions? Not really. Economics CREATE social interactions; the only way an economic transaction is affected by a socio-psychological impulse would be in a family where a parent gives up or rations a good for the sake of his / her children. But that is solely within a closed-community, it does not affect the outside economic forces. In fact, it is the exogenous economic forces that dictate such a reaction within a familial or community setting. Social theories and models do not effectively or truthfully explain economics; on the contrary, economics necessarily determines social interactions. Even cross-culturally this is most effectively studied through the study of pre-modern societies throughout history. All the way back to Ancient Mesopotamia and the Egyptians, Kassites and Hittites it is well known that these were all different people from completely different cultures, linguistic and religious backgrounds who merged and assimilated or conquered each other for no reason other than economic power. The Mesopotamians used clay balls as currency; later Silver became the standard; a desire to investigate a unique Diety was not the driving force – exchanging commodities was. And of course, once you get a taste of something you like (Silver, spices, Lapis Lazuli) you form social networks to conquer those who have what you want. But at the heart, plain and simple, economics was the initial driving force. Power corrupts, but without pure and simple economics, power is absolutely meaningless. In fact, in Ancient Mesopotamia the clay ball currency that was used within the community to ration goods was considered so important that the High Priests kept them in special jars hidden inside their sacred temples.
To summarize, inflation is NOT cost-push, and the money supply is NOT endogenous. This can in fact be proven, but ONLY if a true currency that has a FINITE value is used as the basis for any model. An endogenous money supply relies on an irrational currency that can be artificially manipulated. Even the Ancient Mesopotamian Priests knew this; clay balls may not actually have any intrinsic value, but before the discovery of Gold and Silver they relied on these balls (restricting their availability) to distribute a limited amount of resources among the population. When other cultures entered the scene with other goods and Silver as a means of exchange, hard economics was pretty much set in stone.
To put the final nail in this theory’s coffin, we must go back to Silver and spices. Pretend humans need only spices and nothing else to survive, and the only form of currency that exists is Silver (there is no such thing as Gold, clay balls or green paper). Say there are one million people on the planet and half the planet is planted in spices and half the Silver is mined. So, spices cost one Silver coin per pound. Now the population doubles to two million and 3/4 of the planet is planted in spices, 1/4 is used for housing and since there are twice as many people they are able to mine all the remaining Silver. Now there are 2 million people and 2 million Silver coins (total available, no reserves left), but only enough spices for 1.5 million people (since half the planet provided for 1 million people). So, what happens? Either the spices are rationed and everyone suffers equally, or spices are still pegged to Silver and it costs 1.5 Silver coins per pound of spices and half a million people die.
There is NO INFLATION, BECAUSE the monetary supply cannot be increased (it’s all in the system already). Ultimately, it is the SUPPLY of the desired goods (spices necessary for life) that dictates the price. So, say the spices are rationed, but then the population increases to 3 million; what happens now? At that point it is a sure bet that the strongest will overpower the weakest, take as much Silver as they can get, and start all over again, this time in a feudal-type society. This is where Sociology and Psychology kick in!
Comment by Stephen Grossman on 9 April 2009:
Bransby: de-regulated free market
This intellectual fraud is an evasion between partial and total deregulation and between short- and long-term deregulation. Eg, Smith killed 100 people last week and only one person today. Therefore Smith “demurdered.” Money, banking and, perhaps, housing have been essentially socialist in America for many decades. Partial, temporary, decreases in govt control don’t change this.
Bill: Inflation is defined as a continuous rise in the overall price level.
This intellectual fraud is (1) an evasion of the evidence needed for a definition and (2) an appeal to authority and popularity.
Comment by Stephen Grossman on 9 April 2009:
Bransby: trickle down economics [but a] widening of the gap between rich and poor
This is Marxist intellectual fraud. Its possible for rich and poor to both benefit despite a widening gap. Marxism is a demand to sacrifice prosperity to equality. Marxists would condemn giving a low wage job to an unemployed person if the employer’s increased profit is MORE than the low wage job. There is no fact, not even Marxist mass murder, that will stop current Marxists from dishonesty.
Comment by PAUL W.. HORN on 26 May 2009:
NEVER SPEND MORE THAN YOU HAVE, HAS HISTORICALLY BEEN TRUE. WHY VIOLATE THAT NOW?
EVERY “THEORIST” SHOULD REALIZE THAT NOT ALL PEOPLE EQUALLY WANT TO
WORK. THERE WILL ALWAYS BE A SMALL PERCENTAGE (LESS THAN 10%) WHO AVOID WORK. IF WE SUPPORT THE DISINCLINED, OR NON-WORKERS, THEY WILL CONTINUE TO LIVE ON THE “GRAVY TRAIN”. THUS, THE WORKERS WILL CONTINUE TO SUPPORT THE NON-WORKERS. SOMETHING WRONG HERE.
Comment by PAUL W.. HORN on 26 May 2009:
THERE WILL ALWAYS BE NON-WORKERS.
A BALANCED BUDGET WORKS BETTER THAN DEFICIT SPENDING.
Comment by John on 26 May 2009:
The person who thinks inflation is not caused by too much government spending does not understand fractional reserve banking.
Comment by Rob on 28 May 2009:
I agree government and only government is the cause of inflation. The current crisis we are in has nothing to do with capitalism, unregulated markets, greed or speculation. It has everything to do with the FED printing money to fuel the fractional reserve banking nightmare and unbalanced budgets. Capitalism left alone will correct itself. None of this could have been possible without free and cheap money handed to unethical firms feeding at the trough of greed created by the FED. Free market capitalism really has never been given a chance in our country due to political interests interfering in the market place.
Comment by Steve on 6 July 2009:
Face it, we are screwed! It is only a matter of if we go over the cliff now or a few more turns down the mountain road.
Comment by Michael Holman on 7 July 2009:
It is amazing that an article 31 years old can sound like it was written for today. I guess Hayek was right when he said that there should be two prerequisites for being an elected politician: 1. You take a course in economics; and 2. you pass it.
Comment by Travis on 31 August 2009:
The ignorance as to what a free market is or is not is appalling.
To start with, markets are a setting where individuals exchange goods and services. The setting, i.e., the so-called market, is not capable of purposeful action. Only individuals act.
We do not have a free market setting. If we did, there would be no Federal Reserve. There would be no individuals, i.e., legislators, bureaucrats, & Etc., hiding behind the skirt of the Mother-state (with her claimed monopoly of legalized violence) intervening in the civilized, voluntary actions of individuals in a free market setting.
A true free market setting, with the requisite division of labor and private property rights, requires numerous acts of cooperation to succeed. As no business can force any individual to buy its product or service, cooperation and persuasion are a must. Competing for government favor is the dog-eat-dog setting.
What we have is crony capitalism or corporatism, a system in which
rent-seeking businesses jockey for government favor to suppress its competitors. There is nothing free about it.
Travis
Comment by Robert Villegas on 31 August 2009:
Hazlitt would be proud. You nailed it. I\’m amazed at how people think that government can fix a problem that it causes.
Comment by Donald M. Coder on 1 September 2009:
Inflation in one sentence: Our national leaders are children, they have their hands in the cookie jar, and they are killing the goose that laid the golden egg. Donald M. Coder, MD, PhD