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THE Global Justice Movement Website
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Wednesday, May 17, 2023

What is “Inflation”?

’Way back in the Stone Age, someone once asked a politician or a judge . . . or it could have been the person ahead of them in line at the supermarket . . . to define pornography.  The answer was something along the lines of the individual couldn’t define it, but he knew it when he saw it.


Unfortunately, we can’t say the same of another obscenity that many people [also] assume is a positive good, inflation.  Not only can’t the experts define inflation, but they also don’t know it when they see it.  A large measure of this is due to the hegemony that the paradoxical and contradictory economics of John Maynard Keynes has established over virtually the whole world.

The fact that the three mainstream schools of economics — Keynesian, Monetarist/Chicago, and Austrian — take for granted a bad and demonstrably false assumption.  That is that it is impossible to finance new capital formation without first cutting consumption and accumulating the surplus production as money savings.  This assumption is an integral part of what is called “the Currency Principle,” and it has long shackled economic growth to what Louis O. Kelso and Mortimer J. Adler called “the slavery of [past] savings.

Financial Aristotelianism


To explain, the Currency Principle is that the quantity of money determines the level of economic activity.  Money and credit are a commodity and exist independently, what we can call economic and financial Platonism in which the idea precedes the thing itself.  Production derives from money, and all money consists of past savings.  Past savings are essential to pay for consumption and to finance investment for future production.

The Currency Principle embodies a very weird paradox.  If savings are essential to finance production (a true statement), and if saving is defined as Keynes did as consuming less than is produced (a partly true statement), where did the initial production come from out of which the initial savings were generated?  This is the “chicken or the egg” with a vengeance.

In contrast, the Banking Principle is that the level of economic activity determines the quantity of money.  Money and credit are abstractions with no existence independent of the human minds that create them, what we can think of as economic and financial Aristotelianism in which reality precedes the abstraction.

In the Banking Principle, and resolving the Currency Principle paradox, money derives from existing and future production and consists of both past and future savings.  Saving is defined as both past decreases in consumption and future increases in production.


Under the Banking Principle, then, past savings, being based on the value of existing production, should be used exclusively to finance consumption.  Future savings, being based on the present value of future production, should be used exclusively to finance future production.  The “real bills” doctrine — that all financial instruments must be backed by existing wealth, or the present value of future wealth, owned by the issuer — is an application of the Banking Principle.

And that brings us to inflation.  Under the Banking Principle, there are two types of inflation and three primary causes.  The two types of inflation are “cost-push” and “demand-pull.”  Cost-push inflation is the first cause of inflation, when the cost of something goes up, and therefore the prices charged to consumers of that thing go up.  This can be due to such things as a wheat crop failure raising the price of bread, to increasing wage and benefit demands raising the cost of manufactured goods.


Demand-pull inflation results when consumer tastes change and more of something is demanded then can be met by the existing supply at the current price.  To reduce demand, the price level rises, knocking some consumers out of the running . . . and raising the prices for substitute products as the demand for them increases.  That’s the second cause of inflation.

The third cause of inflation is when money is created but no correlative goods and services have been or are produced.  This can happen when existing goods that back part of the money supply are destroyed by, e.g., fire or shipwreck, or a business that has been capitalized with newly created money fails and does not produce the correlative goods and services.  This leaves unbacked money in circulation, increasing upward price pressure on remaining goods and services.


All that is under the Banking Principle, in which no money is created until and unless there is something of value already existing to back it, whether the value of existing goods and services in the possession of the issuer of the money, or the present value of future goods and services to come into the possession of the issuer.

Inflation is not defined the same under the Currency Principle as under the Banking Principle, and thus under the three mainstream schools of economics.  First and foremost, money — because it is viewed as an independent commodity in the Currency Principle — has no necessary direct private property link with anything of value owned by the issuer of the money.  Governments (or anybody else who can get away with issuing money) simply make a guess as to how much money is going to be needed and fasten their seatbelts for a very bumpy ride.

John Maynard Keynes


A fourth cause of inflation occurs under the Currency Principle: too much money is created, generating artificial demand for existing goods and services, increasing the price level, and shifting purchasing power from consumers and holders of currency to issuers of currency and producers who charge more for less.  There is also the danger of deflation, in which insufficient money is created and the price level drops . . . forcing anyone in debt to take less money for their goods and services, making debt repayment difficult.

Then there is the problem of how the three mainstream schools of economics define inflation.  This causes endless confusion, because the experts often change and combine definitions almost at will or with every change in the wind to justify whatever they want to do:


·      Keynesian inflation is defined as a rise in the price level after reaching full employment.  Increases in the price level prior to reaching full employment are due to other factors.

·      Monetarist/Chicago inflation is defined as a rise in the price level due to too much money “chasing” too few goods and services.

·      Austrian inflation is defined as any increase in the money supply.

There are problems with each of these definitions:

Henry Calvert Simons


·      Keynesian inflation begs the question.  First, inflation is defined in all cases as a rise in the price level.  Keynes’s insertion of “after reaching full employment” is a meaningless stipulation, particularly since he also waffled on the definition of “full employment.”

·      Monetarist/Chicago inflation fails to link the quantity of money to goods and services in the marketplace through private property, making the amount of money put into circulation a hit or miss affair.

·      Austrian inflation also fails to link the quantity of money to goods and services in the marketplace, although also insisting that money is a commodity that is privately owned or created out of a commodity purchased by the government or other money creator.

:udwig von Mises


By assuming that money and credit are themselves a commodity with independent value, all three mainstream schools of economics fail to define inflation accurately.  All three fail to consider Louis Kelso’s definition of money as an abstraction derived from production, not the other way around:

Money is not a part of the visible sector of the economy.  People do not consume money.  Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world.  Money provides a method of measuring obligations, rights, powers and privileges.  It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies.  It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector.  (Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54-55.)

Now you know why you get so confused by the experts.