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Inflation and von Mises

from Peter Radford

Yesterday I speculated that the decline in the cost of basic goods like gasoline was a contributory cause of the uptick in retail sales in October. Today’s consumer price report supports that notion.

The headline rate of inflation, the consumer price index, declined 0.1% last month bringing the rate for the last twelve months down to 3.5%. That’s a large decline in the annual rate – in September it had been 3.9%. In contrast, the more important “core” rate, which strips out volatile items such as gasoline and food, rose 0.1% and has risen 2.1% over the last year. The biggest factor behind the decline in the headline rate was a 2.0% drop in energy prices, while food prices rose, but only a slim 0.1%.

The decline in the CPI, coupled with a very slight increase in hourly wages, meant that inflation adjusted earnings rose 0.3% for the month. This modest improvement in incomes appears to be the basic reason retail sales were slightly stronger than expected.

The importance of this report is simply that it debunks, or helps to at any rate, the notion that expansionary monetary policy deployed to get the economy going will inevitably feed into inflation. This is a view held by many right wing analysts, and has no substance or foundation, but exerts a tenacious hold on their thinking. It has it modern roots in the writings of von Mises, and still occupies a leading role in right wing economic policy thinking even though such right leaning luminaries as Milton Friedman considered the idea daft. If you recall we were treated to an outburst of terrifying warnings of imminent hyperinflation this summer when commodity prices drove the CPI up temporarily. The cause of those warnings was the right winger’s view that recent Fed actions such as QE1 and QE2 could only create inflation and not help the economy. In von Mises words:

“Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crisis and depression”

There’s not much wiggle room in those words. The analysis is definitive: tinkering with the money supply necessarily leads to crisis and depression.

That it hasn’t, ought, in a scientific world, permanently disprove von Mises’ view. It won’t. It will linger on because of its ideological purity. But it isn’t science.

But we could say that about a lot of economics.

 

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  1. November 18, 2011 at 12:49 am

    I think it pretty well meaningless to speak of “inflation” in a generalized generic way.
    Price inflation and deflations happens all the time for goods and services offered in the market place. You can pretty well create any number you like by picking and choosing commodities/services and timelines.
    And on top of that you have floating currencies.
    It’s like “global warming”. You can put the thermometer in warming or cooling water to prove whatever you want. And in addition, the mercury inside the thermometer keeps changing its factor of expansion.

  2. Matthew Swaringen
    November 19, 2011 at 4:14 am

    Helge Nome, when Mises is referring to inflation he’s talking about the money supply rather than prices.

    “There’s not much wiggle room in those words. The analysis is definitive: tinkering with the money supply necessarily leads to crisis and depression.”

    What the analysis doesn’t attempt to say, because Mises did not think this was predictable, was when it would occur. Notice that he doesn’t combat that inflation can amount to artificial stimulation? This is what your policy seeks to produce after all. You just happen to believe that there is no need for their to be a correction later.

    Mises also said elsewhere that such “crises” aren’t necessarily detectable, as if the economy is otherwise sound inflation won’t distort the economy enough that it would cause misallocations great enough to halt growth. The only thing that can be said regarding such inflation is that it can’t produce real wealth.

  3. Dave Taylor
    November 19, 2011 at 11:32 pm

    “Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crisis and depression”. {Von Mises].

    So what causes “an expansion of the circulation”? And Matthew, when you are talking about [unspecified] growth, isn’t the only thing necessarily specified MONETARY growth? Peter, Helge and Matthew: this isn’t about “tinkering with the money supply”, “meaningless”-ness and “misallocations great enough to halt growth”.

    It is about SYSTEMATICALLY expanding the money supply by the “leverage” of reserve banking, i.e. lending out at interest more than has yet been saved, so that overall, repayment of the surplus necessarily involves repayment by further borrowings of money “created out of thin air”, with interest systematically increasing the proportion of it held by banks and savers, and law offering debtors Hobson’s Choice between exchanging the assets and labour for money or bankruptcy and destitution.

    This is far from “meaningless”: it is purposeful. It is CAPITALISM premised on the hope that investment in mass production will create enough growth in supply, and hence in trading profits, to repay borrowed money, money “created out of thin air” and percentage interest on both. There being more to repay than is available in savings, however, the difference has to be repaid by further systematic borrowing and a systematic shift of investment and labour to where monetary profits can still be made.

    This positive feedback forces debtors to produce objects where money can be made, whether or not the product is good, bad or glittering tinsel. Like positive feedback in sound amplification, it thus systematically narrows the choice of goods, expands the range of vice and rubbish, and ultimately halts production of goods in the deadly squeal of war. If that is not MISALLOCATION, I don’t know what is.

    The way to eliminate howling sound systems is to turn the volume down and apply NEGATIVE feedback.

  4. November 20, 2011 at 5:27 pm

    Gentlemen, let’s get our facts right. Both liberal and conservative economists believe expansion of the Money Supply will induce inflation, because of adherence to Supply and Demand models as Paul Samuelson noted in 1984 in textbook Economics: “Limitation in the supply of money is the necessary condition if it is to have value. If currency is so unlimited in amount as to be practically a free good, people would have so much of it as to bid up all prices, wages and income sky high.”

    A better statement of fact is all economic schools except N Theory adhere to the basic concepts of Supply and Demand theory. Supply and Demand theory predicts an increase in the quantity of money will cause a decrease in the value of money. All conventional economists adhere to this concept, although each economic school has a theory of who to blame. Von Mises, Keynes, Smith, Fisher, or Samuelson could make the statement ascribed to von Mises.

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