Saturday, 29 January 2011

A defining moment

"The essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services."
Frank Shostak

Communication requires words to have agreed definitions. Certainly the meaning of words changes over time, but an evolutionary drift is one thing, a purposeful and deceitful manipulation is another. Rhetoric and political discourse being what they are, we must take careful note of any such movements in meaning - if we wish to express ourselves clearly, communicate with and learn from one another. If these latter are not important, if we are just playing rhetorical games, or using language to deceive, then I guess it doesn't matter, we can just sink back into ignorance and let those that aspire to rule us carry on.

One such word that has had its meaning scooped out and replaced by something else is: INFLATION. Now, there will be those that disagree, and may claim common usage validates the new meaning and may even dispute that the new meaning is new and that it ever meant what I uphold it to mean. Whatever the case may be, and you can pick the rhetorical bones out of my proudly partisan position, surely it is still necessary that different concepts have different nomenclature. The meaning of inflation is as stated above. If someone means 'price rises', why the hell can't they say 'price rises'? The problem that arises from this sloppy use of language, which takes an effect and calls it a cause, is that the underlying mechanisms are ignored and whatever calculations are being made are bound to miscarry. Not only that, strange cognitative dissonances arise, seen clearly in those who celebrated the meteoric rise in house prices, all the while taking a sober line on price fluctuations elsewhere in the economy.

To further stress the correct definition, here is Ludwig von Mises in 'Planning for Freedom':
"What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation."
And this from the glossary found in volume 4 of Human Action:

"Inflation. In popular nonscientific usage, a large increase in the quantity of money in the broader sense (q.v.) which results in a drop in the purchasing power of the monetary unit, falsifies economic calculation and impairs the value of accounting as a means of appraising profits and losses. Inflation affects the various prices, wage rates and interest rates at different times and to different degrees. It thus disarranges consumption, investment, the course of production and the structure of business and industry while increasing the wealth and income of some and decreasing that of others. Inflation does not increase the available consumable wealth. It merely rearranges purchasing power by granting some to those who first receive some of the new quantities of money.

This popular definition, a large increase in the quantity of money, is satisfactory for history and politics but it lacks the precision of a scientific term since the distinction between a small increase and a large increase in quantity of money is indefinite and the differences in their effects are merely a matter of degree.

A more precise concept for use in theoretical analysis is any increase in the quantity of money in the broader sense which is not offset by a corresponding increase in the need for money in the broader sense, so that a fall in the objective exchange-value (purchasing power) of money must ensue.

Note: The currently popular fashion of defining inflation by one of its effects, higher prices, tends to conceal from the public the other effects of an increase in the quantity of money whenever the resulting rise in prices is offset by a corresponding drop in prices due to an increase in production. The use of this definition thus weakens the opposition to further increases in the quantity of money by political fiat or manipulation and permits a still greater distortion of the economic structure before the inevitable readjustment period, popularly known as a recession or depression."
Whether or not its a losing battle to fight over this definition (and many others worn smooth from over- and misuse), we are still constrained to make ourselves understood, but it is indeed tiresome to have to preface every speech with clarifications of meaning of words we wish to use, due to their dishonest and lazy deployment by the leading (and misleading) sophists of the hour.

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