Why Economists Want Inflation

Economic science was created for the benefit of businesses and is essentially a science with mercantilist roots. Only when the Great Depression happened as a result of economic thinking did people, such as John Maynard Keynes, develop the concept of macroeconomics as a counterweight to it, effectively splitting economics into microeconomics (business-oriented) and macroeconomics (government-oriented). No effort, however, has been made to create a science or system for the whole of society. Communism, for example, favors the working class and excludes the business or merchant class from soceity.

capcommboxing

 

Economics And The Mercantile Obsession With Money

The most fundamental idea that Economics inherited from the mercantilism is the view that money is wealth, a fallacy known to Adam Smith :

Money..frequently signifies wealth, and this ambiguity of expression has rendered this popular notion so familiar to us that even they who are convinced of its absurdity are very apt to forget their own principles, and in the course of their reasonings to take it for granted as a certain and undeniable truth. Some of the best English writers upon commerce set out with observing that the wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds. In the course of their reasonings, however, the lands, houses, and consumable goods seem to slip out of their memory, and the strain of their argument frequently supposes that all wealth consists in gold and silver, and that to multiply those metals is the great object of national industry and commerce. (WN IV.i.34)

Instead of gold and silver, however, currencies (US dollar, Japanese yen) are today’s money. The adoption of ‘unconventional monetary policies’ during the past decade proves the mercantilist idea that ‘increasing money increases wealth’ still dominates.

gold-money

 

Money Is Not Wealth

In reality, money has inherently very little value because it has no practical use other than as a tool for trade. Economists, financiers, and merchants, however, fail  to see this, either purposely or unknowingly, simply because their job and their existence relies on the manipulation of quantities and not on physical work. A merchant is concerned primarily with numerical prices and is not concerned with how much work or toil & trouble was put into a product or service. It does not matter for a clothes merchant whether his inventory came from child labor or from professional tailors as long as the prices are good for him.

nike-child-labor

Since economists are concerned only with numbers, they also will have a tendency to advocate bigger numbers such as higher GDP and higher prices or inflation, just like merchants always want higher sales and higher prices for their goods. From the point of view of businesses or those who live by profits, bigger numbers are always good, but for the majority of society or those who live by wages (those who actually toil for those numbers), they may not be.

Depression prices

 

The Capitalist Justification for Inflation

ukinflation

In the previous post, it was explained why zero inflation should be the goal. Economists, however, argue that a certain level of inflation, in most cases 2%, is desirable because:

  1. It shrinks the value of debt both for governments and private persons
  2. It pushes people to spend or dispose of their money, leading to economic growth

Like what Adam Smith says about mercantile policies, the first reason for inflation is partly true and partly sophistical. It is true that it shrinks the value of debt because, from the view of Smith’s labour theory of value (not Marx), it writes off a certain percentage of the real value of the debt in the same way that it causes wage earners to work for a certain hours free, since both the nominal values of yesterday’s wages and yesterday’s debt cannot be raised to match today’s prices, if prices rise overnight. However, it is because inflation renders society to work for free, that the costs of inflationary policy easily outweigh the benefits. Government debt arising from government spending only benefits certain sectors of society, but inflation affects everyone. The downside of this policy becomes worse if the government is corrupt or spends public money for the private gain of a few government officials. In such a case, it creates a double burden on society.

sophistry

The second justification, however, is entirely sophistical. Without inflation, people will purchase what they need and keep the rest of their money in the bank. It will then be the bank’s job to decide where the money should go. They will give the money to those who can use it productively, reducing the risk of it being wasted. Inflation pushes people to spend right away, increasing the risk of wasteful spending and the wasteful consumption of limited natural resources.

inflationsales

Inflation is generally good for sellers, not for buyers

 

Who Really Benefits From Inflation?

The ones to really benefit in such a case are businessmen who want to increase their sales. Recall that ‘inflation’ is really ‘demand inflation’ or the rise in people’s demand for goods and services (cause), leading to increases in price (effect). Merchants and businesses naturally love demand inflation because it increases their sales, which leads to higher prices and potentially more profits, which in turn increases their enjoyment of physical existence. Even if people switch to cheaper goods, businesses can maintain profitability by slashing their workforce and moving their production to countries where wages are lower, allowing them to provide cheap goods.

discount

 

Conclusion

Inflation is very good for business or for those who live by profits as it gives them free work and more profits. It may be good for governments or those who live by rent (or taxes) as writes off a part of their debt. But it is bad for the rest of society or those who live by wages as it makes them work more for less and pushes them to spend recklessly. Lastly, it is bad for the environment because it increases the rapid, unnatural consumption of finite resources.

The best way to fight inflation is through commodity-based valuation and barter trade. An example of commodity-based valuation applied as monetary policy is the gold standard. This is because gold is a globally tradeable commodity prized by most, if not all societies. Keynes’ bancor idea can be merged with Adam Smith’s corn-based-valuation idea to create a fair, inflation-free, intra-society trading system.


Related: Zero Inflation

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