What Are The Real Meanings of Inflation and Delaftion?

Image: Ludvig von Mises

The confusion surrounding the terms inflation, deflation, price rise, and price fall poses a significant societal risk as it fosters harmful policies. As noted by Ludvig von Mises, a founding figure in the Austrian school of economics, in his book “Human Action.”

Inflation, Deflation, Price Rise, and Price Fall

In his book “Human Action,” Ludvig von Mises, one of the pioneers of the Austrian school of economics, underscores the perilous consequences of misinterpreting the terms inflation, deflation, price rise, and price fall. Such misconceptions can lead to the endorsement and implementation of detrimental policies.

Below, we present an excerpt from Mises’s work:

The utility of money for individuals hinges on its purchasing power. People do not seek to possess a fixed amount of currency or a specific quantity of money by weight; rather, they aim to maintain a particular purchasing power, represented by a specific sum of money. The market determines the purchasing power of money, arising at the intersection of supply and demand. Consequently, there can be neither an excess nor a shortage of money in circulation.

Individuals and groups can always benefit from the exchange value of money, regardless of whether the total number of banknotes is substantial or limited.

Alterations in the purchasing power of money, however, result in shifts in wealth distribution within society

From the perspective of those favouring such changes, one may speak of an insufficient or excessive money supply. The desire for such alterations can lead to policies that influence the purchasing power of money. Simultaneously, it is crucial to acknowledge that increasing or decreasing the money supply does not alter the advantages that money offers to society.

An individual may experience a scarcity or surplus of money. However, the remedy for such situations involves adjusting consumption or increasing investments, respectively (It is essential to differentiate between the necessity-driven demand for increased money holdings and the desire for greater wealth.) In a healthy economy, there is always an adequate amount of money for all members of society to benefit from its advantages.

Money’s Purchasing Power is Never Stable

Consequently, one might argue that expenditures aimed at expanding the money supply are ultimately futile. This situation results in the use of certain goods, which would otherwise serve other essential purposes, as a form of money. This, in turn, restricts the fulfilment of people’s needs and desires. This perspective led thinkers like Adam Smith and Ricardo to advocate the introduction of printed banknotes to reduce the cost of money production.

However, for those well-versed in financial history, a different viewpoint emerges.

When observing the disastrous consequences of paper money inflation, it becomes evident that the cost of gold production is a minor concern by comparison

There is no point in asserting that these disasters result from governments abusing the power granted by credit-based and fiat money. Sensible governments would not have pursued such erratic policies.

As money can never maintain neutrality and stability in terms of purchasing power, government initiatives to modify the money supply can never be impartial or fair to all members of society. The government’s actions concerning the purchasing power of money are influenced by the personal values of its rulers. They invariably serve specific interests at the expense of others and never truly benefit the public.

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The selection of commodities as a medium of exchange and as money is a critical decision. This choice determines fluctuations in the purchasing power of money. The question at hand is whether this decision should be made by individuals engaged in buying and selling goods (money) or by the government.

Gold and Silver as Money

Gold and silver are the preferred forms of money through an extensive, selective process.

Over the past two centuries, governments have intervened in the market’s choice of monetary mediums

Even the most ardent advocates of extensive government intervention cannot claim that such interference has yielded beneficial outcomes.

Inflation and deflation are not praxeological concepts (describing human activity); they originated from public perception and political discourse, not from economists.

These terms endorse the mistaken belief in the existence of neutral, stable-purchasing-power money. Consequently, inflation has come to describe situations in which purchasing power diminishes, while deflation pertains to instances of purchasing power augmentation.

Those who employ these terms fail to grasp that purchasing power is never constant, resulting in the perpetual presence of inflation or deflation. Minor and imperceptible fluctuations are often disregarded, with these terms only gaining prominence when significant changes occur.

The significance of changes in purchasing power varies according to individual perspectives. Inflation and deflation may not offer the categorical precision required for economic and catallactic concepts; their relevance lies in history and politics.

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In catallactics, it is essential to remember that its discussions on inflation and deflation apply even when changes are slight. While smaller changes have fewer repercussions, the terms inflationism and deflationism pertain to political agendas, specifically targeting inflation and deflation stemming from substantial shifts in the money supply.

Make Sure to Not Misuse Terms

This semantic shift has altered the traditional meanings of inflation and deflation. In contemporary discourse, inflation and deflation refer to the consequences of alterations in the money supply, particularly changes in purchasing power, rather than the mere increase or decrease in the quantity of money.

This redefinition of terms carries inherent risks and fosters confusion. It undermines society’s ability to criticise policies related to money creation, as there are no longer terms that precisely describe what inflation once denoted.

Furthermore, those who resist the inevitable consequences of inflation, often mislabeled as anti-inflationists, tend to focus on the symptoms rather than addressing the root causes. Their lack of understanding regarding the causal relationship between money supply increases and price hikes exacerbates the situation.

For instance, governments in the USA, Canada, and Great Britain resorted to subsidising their farmers to combat price rises, caused by artificially low price ceilings. However, these subsidies were funded by printing more money. Had consumers faced higher prices for the affected products, the subsequent inflationary effects could have been averted, as they would have paid the increased costs with pre-existing money. Misconceptions about inflation and its consequences can inadvertently lead to further inflation.

Clearly, the redefinition of inflation and deflation creates considerable confusion and misdirection. Such a redefinition should be firmly rejected.