Sent: Sunday, December 11, 2016 6:02 PM
To: Walter Block
Subject: Questions regarding an Article on Inflation
Dear Mr. Block, I have been an avid fan of yours for many years, and through reading your books and articles as well as the many other authors pieces on either Mises or LRC, I feel that I have a pretty firm grasp of the fundamentals in Economic thought. You and your colleagues are my heroes and inspiration – thank you! So, I came across this article in USA Today online (http://www.usatoday.com/story/money/2016/12/11/inflation-q-what-you-need-know-rising-prices/95213710/) and it totally confused me because I couldn’t believe it was so full logical inaccuracies and followed some sort of alternate reality of how I understand the way things work. My main question to you is: Am I completely missing something in my economic reasoning? The only way I can conceptualize such a widespread, accepted, but false, view of a simple subject is that there has to be some sort of grand conspiracy behind it, and in general, I tend to shy away from conspiracy theories, they are less believable as their claim size increases.
For you to be able to deduce an answer, you will require some samples of my thoughts. I have provided them below in relation to the article in question:
from beginning of article towards the end-
“weak inflation, which can hurt the economy by prompting consumers to put off purchases because they know prices will stay low”
I understand how falling prices could delay purchases, but since all prices will eventually reach a somewhat stable level, it is at this point the those delayed purchases will occur – there cannot be a perpetual delay of purchases. Even so, it seems to me that a steady inflation or deflation will NOT promote purchase decision changes due to the steady rate of change. For instance, if there were a constant 5% rate of inflation affecting price increases, this would be taken into account already, only when the inflation rate dramatically changes will purchase decisions be delayed(or promoted) until a perceived stability is again determined by the consumer. Even on the extreme of hyper-inflation, it is not so much that a higher inflation rate causes people to demand money less (my demand for money will remain at a constant level respective to the rate of inflation) but rather that an increasing RATE of inflation will alter my demand for money. I think there is a difference between the inflation rate, and the rate of change of the inflation rate.
“Q. What is inflation? A. Inflation is the increase in the price of goods and services.”
boggles my mind that is this accepted as the main stream view….
“Q. What causes it? A. Inflation can accelerate if demand for a product is high and prices are low.”
This is where the problem of accepting the previous answer starts to take one down the rabbit hole. By defining inflation as a price increase in general leads to making the jump of assuming that all influences on price creation (demand, supply, costs, monetary base changes, etc) are the same as to ‘causing’ inflation. This particular question/answer even goes as far to remove the ‘general price level’ from the definition of ‘inflation’ as it is specifically talking about ONE product… “if demand for A product is high”. This insinuates that EVERY price increase, no matter what the reasoning behind it, is ‘inflation’. (ie: “The store caused inflation because it increased its prices” instead of “The store raised its prices due to the cost of labor increased (or whatever)”). Something is very upside down with this picture and can easily mislead the unwary into all sorts of illogical and wrong deductions.
Here is my basic model in understanding the connections between inflation, prices, demand, etc:
Given: (1) a static supply of a ‘good’ used as money, (2) a static population, and (3) a static variety of goods/services
– The prices determined by the market will be relative to the value determinations between goods/services, AND all those prices will be relative to the quantity of money.
– If the quantity of money increases, prices will tend to rise.
– If the price of a particular good/service rises, this will decrease the demand for it, as well as increase the ‘relative’ demand for all other goods/services in the market, providing downward force upon all their respective prices.
Dear ML: Thanks for your kind words. I’m sorry to say that the press of other obligations prevents me from responding substantively, as fully as I would like. I think for the most part you are correct. However, you do state this: “all prices will eventually reach a somewhat stable level.” This is indeed true in the Evenly Rotating Economy, or in equilibrium, but in the real world, they will continue to fluctuate, forever, or, at least, for as long as there is any economic freedom.5:14 pm on December 12, 2016 Email Walter E. Block