Inflation and its consequences

As you read this, remember that “inflation” in pre-Keynesian times did not mean a rise in the price level but an increase in credit and money. Sometimes prices also rise but sometimes they do not which is why Mises describes a rise in prices as the consequence of inflation. With the advent of Keynesian economics, the very fact that a Keynesian policy was by definition inflationary had to be discarded, so inflation just turned into a rise in the price level, with the mechanism no longer mentioned. This is from, Ludwig Von Mises: The Theory Of Money And Credit. And while it’s about money and credit, the argument is really about Keynesian macro which I have attempted to highlight by bolding certain passages.

…the advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters. The undesirable but inevitable consequence of inflation, the rise in prices, provides them with a welcome pretext…The illusory profits which the inflationary falsification of economic calculation makes appear are dealt with as if they were real profits; in taxing them away under the misleading label of excess profits, parts of the capital invested are confiscated. In spreading discontent and social unrest, inflation generates favourable conditions for the subversive propaganda of the self-styled champions of welfare and progress. The spectacle that the political scene of the last two decades has offered has been really amazing. Governments without any hesitation have embarked upon vast inflation and government economists have proclaimed deficit spending and ‘expansionist’ monetary and credit management as the surest way towards prosperity, steady progress, and economic improvement. But the same governments and their henchmen have indicted business for the inevitable consequences of inflation…they blamed private enterprise for charging outrageous prices and profiteering…And millions of voters have swallowed all this.

There is need to realize that the economic policies of self-styled progressives cannot do without inflation….Monetary policy is considered – wrongly, of course – as an instrument for keeping wage rates above the height they would have reached on an unhampered labour market…for many years there has been little opposition to credit expansion for the sake of ‘creating jobs’, i.e. for providing business with the money needed for the payment of the wage rates which the unions, strongly aided by the government, force business to grant….

Inflation and credit expansion are the means to obfuscate the fact that there prevails a nature-given scarcity of the material things on which the satisfaction of human wants depends…One of the foremost concerns of all parties hostile to economic freedom is to withhold this knowledge from the voters. The various brands of socialism and interventionism could not retain their popularity if people were to discover that the measures whose adoption is hailed as social progress curtail production and tend to bring about capital decumulation. To conceal these facts from the public is one of the services inflation renders to the so-called progressive policies. Inflation is the true opium of the people administered to them by anti-capitalist governments and parties.

Excerpt from Ludwig Von Mises. “The Theory Of Money And Credit” (1953) posted on a previous thread by David Brewer.

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9 Responses to Inflation and its consequences

  1. stackja

    Never ending OPM to spend?

  2. Bruce of Newcastle

    Little is being said about ScoMo’s surplus paying down debt.
    Every billion he uses to do that saves about $20-40 million a year in interest.
    Debt eats nations, as Argentina could tell you.
    But if you are a MMT luvvie all ScoMo has to do is print a $1 trillion bill and hand it to the bond holders. Sure to work.

  3. Mother Lode

    It sometimes amuses me, while sitting on the bus, to reflect on how much people want to be spared the rigours of change and of the shedding of existing things and ways even as they immerse themselves in the fruits of innovation.

    How many people would be content if some previous generation saw fit to prevent the proliferation of computers, of television, of cars, or even the internet, because it would have meant disruption of their lives.

    Every recent generation sees each previous one as the necessary process of setting the world up for them, and the next generation as irresponsible, heedless and reckless for viewing them the way they themselves viewed their forbears.

    Earlier ones saw themselves in a sort of relay race, grateful for those before them who have passed them the baton and determined to be worthy of that gift by passing it on to the next.

    Now they are glad not to hear there is nothing to impede their slaughtering the whole herd and feasting non-stop – it doesn’t hurt anyone.

  4. Chris

    Now they are glad not to hear there is nothing to impede their slaughtering the whole herd and feasting non-stop – it doesn’t hurt anyone.

    “I had a farm in Aaafrica…”

    Where they chop down a fruit tree for firewood, because if they don’t the next person will.

  5. John A

    Bruce of Newcastle #3264189, posted on December 17, 2019 at 11:05 am

    Little is being said about ScoMo’s surplus paying down debt.
    Every billion he uses to do that saves about $20-40 million a year in interest.

    That will be a good outcome, and it will be achieved ONLY IF Josh Frydenburg doesn’t spend it all on other stuff!

  6. sfw

    I think that economists have deliberately confused increases in prices with increases in credit and money supply, you never hear one making a distinction between the two. What is the incentive for this? Blurry thinking and definitions always make for bad outcomes.

  7. David Brewer

    Isn’t it amazing how Lu’s comments on economic policy in New Deal and Fair Deal America (1933-53) can be applied almost in their totality to the current Australian scene? Steve’s highlighted portions are all relevant today, and so are…

    The illusory profits which the inflationary falsification of economic calculation makes appear are dealt with as if they were real profits; in taxing them away under the misleading label of excess profits, parts of the capital invested are confiscated.

    …unindexed capital gains tax, anyone?

    they blamed private enterprise for charging outrageous prices and profiteering

    …e.g., recent bank bashing?

    Inflation and credit expansion are the means to obfuscate the fact that there prevails a nature-given scarcity of the material things on which the satisfaction of human wants depends…

    …and they sure have obfuscated this fact from the socialist economic commentariat in Australia, and especially the MMT enthusiasts.

  8. max

    As you read this, remember that “inflation” in pre-Keynesian times did not mean a rise in the price level but an increase in credit and money.

    correct.

    St. Louis Adjusted Monetary Base
    https://fred.stlouisfed.org/series/BASE/

    M1 Money Stock
    https://fred.stlouisfed.org/series/M1

  9. Actually, the argument was not about Keynesian macro as it was published in German in 1912, many years before Keynes misdirected economics: The Theory of Money and Credit.

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