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)and posted on a previous thread by David Brewer.

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