Defining Inflation into Existence
Jonathan Catalan tries to defend the Misesian approach of defining inflation as a rapid increase in the money supply. His tactic is to say it really is no different than the monetarist approach, which sees inflation as always a monetary phenomena, but that Mises simply emphasized the cause while price indices focus on the effect.
This won't do. Once we adopt Mises' definition, we're going to have to say that we can have inflation even in a period when all prices are falling. No monetarist is going to call that inflation!
The fact is, while most or perhaps all periods of price inflation can traced to increases in the money supply, not all increases in the money supply lead to periods of price inflation. And the fact is, what people are interested in is "Why are prices going up?" and not "Is there more money around then there used to be?" Or, they are interested in the latter only in that it causes the former. It is analogous to our interest in germs: most of us have no interest in them at all, unless they are making people sick.
To extend the analogy, there is a very significant difference between saying exposure to germs causes the flu (analogous to the monetarist position) and saying that exposure to germs is the flu (analogous to the position of some Austrians). The first variant allows that if, say, the person has been vaccinated against the flu, they might not come down with it. (Or, analogously, if we are in a demand-riven slump, printing money may not cause is inflation.) But in the second view, the vaccination is irrelevant: if you were exposed, then you have the flu, period, even if you are entirely asymptomatic.
Now, no definitions are wrong, but the first one appears more useful to me, besides being common usage.
This won't do. Once we adopt Mises' definition, we're going to have to say that we can have inflation even in a period when all prices are falling. No monetarist is going to call that inflation!
The fact is, while most or perhaps all periods of price inflation can traced to increases in the money supply, not all increases in the money supply lead to periods of price inflation. And the fact is, what people are interested in is "Why are prices going up?" and not "Is there more money around then there used to be?" Or, they are interested in the latter only in that it causes the former. It is analogous to our interest in germs: most of us have no interest in them at all, unless they are making people sick.
To extend the analogy, there is a very significant difference between saying exposure to germs causes the flu (analogous to the monetarist position) and saying that exposure to germs is the flu (analogous to the position of some Austrians). The first variant allows that if, say, the person has been vaccinated against the flu, they might not come down with it. (Or, analogously, if we are in a demand-riven slump, printing money may not cause is inflation.) But in the second view, the vaccination is irrelevant: if you were exposed, then you have the flu, period, even if you are entirely asymptomatic.
Now, no definitions are wrong, but the first one appears more useful to me, besides being common usage.
But Mises always defined it as price inflation, no?
ReplyDeleteGood analogy otherwise, although they will deny price changes are a disease.
Mises certainly understood what he was saying. I just thinkk this tide has gone out, and when Austrians call "an increase in the money supply" "inflation," they just get themselves misunderstood. Say "increase in the money supply," and add "price" to "inflation" if you want to be clear about that.
DeleteThe habit of redefining words should be a big red flag for an ideological movement.
ReplyDeleteIn Mises defense, he claims his was the original definition. I still do not think it is efficacious to continue its use when saying "increase in the money supply" avoids misunderstanding.
DeleteHere's a useful collection of earlier definitions http://blogs.wsj.com/economics/2011/05/13/inflation-definitions-through-the-ages/
DeleteBut Gene's point is right. 'Condescending' used to be a compliment; words change over time.
I usually say "price inflation" or "monetary inflation" so that there is no mistaking what I am talking about.
ReplyDeleteIt sure is interesting that the definition of inflation as increase in the money supply is more useful in explaining price rise than defining it as the increase in prices itself. It is all the more so if you consider the point that from the point of view of economic theorising, what matters is not historical movements in prices but comparison of prices with what they would have been in the absence of inflation (defined as money supply).
ReplyDeleteAdd to this the point that the original definition of inflation was as an increase in money supply and you get the understanding that it is people like you, Gene, who are defining inflation as being price rise into existence. What you are doing is not different from creating the term recession to define depressions out of existence.
Bala, my guess is you are just a troll who will never return, but, as it's your first time here, I will give you the benefit of the doubt:
Delete"It sure is interesting that the definition of inflation as increase in the money supply is more useful in explaining price rise than defining it as the increase in prices itself."
Why is it more useful? Do you have some evidence to back this claim? Do you think Milton Friedman, when he wrote "Inflation is always and everywhere a monetary phenomenon," did not REALLY understand this point since he did not define inflation as an increase in the money supply?
"It is all the more so if you consider the point that from the point of view of economic theorising, what matters is not historical movements in prices but comparison of prices with what they would have been in the absence of inflation..."
How the hell do you know what prices "would have been" in the absence of an increase in the money supply? Why is this what theory is really concerned with?
"Add to this the point that the original definition of inflation was as an increase in money supply"
And the original definition of planet included the sun. So what? Definitions improve over time.
"Gene, who are defining inflation as being price rise into existence."
Had you fallen into a coma at this point? I can't even imagine what that means.
"What you are doing is not different from creating the term recession to define depressions out of existence."
Right: and since no one created the term recession to define depressions out of existence, you have just crushed your own argument, such as it was.
Has anyone done an historical study of the evolution of the term "inflation" in economic contexts?
ReplyDeleteThe Oxford English Dictionary lumps the economics definitions together under definition 6: "Great or undue expansion or enlargement; increase beyond proper limits; esp. of prices, the issue of paper money, etc. spec. An undue increase in the quantity of money in relation to the goods available for purchase; (in lay use) an inordinate rise in prices."
There is little attempt here to sort out the various nuances, perhaps because the dictionary-makers did not want to wade into technical waters. (That is understandable enough. It is odd, though, that the now-standard definition of "a rise in the general price level" is not even listed.)
The OED's examples are a little more helpful. The earliest reads: "the property pledge can have no tendency whatever to prevent an inflation of the currency" (1838). Interestingly, W. S. Jevons—in his Serious Fall in Value of Gold—refers variously to "inflation of credit," "inflation of prices due to credit," and "inflation of currency" (1863).
The genitive construction complicates things, but it is interesting to see that the use of the term "inflation" in relation to prices is clearly not a twentieth-century invention.
If the vaccine is sure to be effective and comes at zero cost then we can say that exposure to the germs is no problem. Otherwise we would likely want to avoid the germs and where they lurk. Same thing for inflation of the money supply.
ReplyDeleteHow are we supposed to know if "price inflation" ever exists? The prices of what? There would always be some prices that aren't "going up".
ReplyDeleteThe "common usage" of the term "inflation" in my neighbourhood has to do with floatable beach toys and not economics.