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Scarcity is Real (But it’s not What You Should Be Afraid of)

April 29, 2014 7 comments

[Note: for some reason, when I post this it always takes out the spaces between paragraphs.  I can’t seem to find a way to fix this and wordpress refuses to respond to my help request….]

I recently came across a WSJ article entitled “The Scarcity Fallacy.”  Since one of my biggest beefs is with people (typically on the left) denying scarcity, it immediately got my dander up.  However, the article ended up being nothing like what I was expecting.  As it turns out, it was a critique of the perpetual doomsday predictions made by environmentalists which I completely agree with.  But I still don’t like the way he frames it as a question of whether “scarcity” is or is not real, with environmentalists on the pro-scarcity side and economists on the anti-scarcity side.  After all, scarcity is the entire foundation of economics.  It’s just that we mean something different by the word that what most people think of.

This is how dictionary.com defines scarcity:

scar·ci·ty: noun, plural scar·ci·ties.

1. insufficiency or shortness of supply; dearth.
2. rarity; infrequency.
This seems to be what most people have in mind.  Alternatively, this is what my intro text has to say about it.

The term scarce means that there are not enough of the items humans find desirable to satisfy everyone’s wants.  If goods were handed out free to all who wanted them in unrestricted quantities, there would simply not be enough to go around. . .
Economics is concerned with this central issue.  Economics is the study of how scarce resources, that have alternative uses, are allocated amongst competing ends. . .
. . . it is impossible to enact laws that eliminate the underlying scarcity of goods and resources.  The horrible truth is that scarcity is a pervasive empirical fact about the world.  It is caused by the demands on the world’s resources by consumers of those resources–mainly humans–in amounts greater than the earth would produce on its own.  We cannot legislate scarcity out of existence any more than we can abolish the law of gravity.
Got that?  So if you are an economist, scarcity is the starting point of any analysis.  If a good weren’t scarce in an economic sense, there would be no reason for concern about running out.  But scarcity doesn’t occur when the quantity available falls below some arbitrary level that causes it to be deemed “rare” or of “insufficient supply.”  From the moment people figured out that you could use oil to make kerosene and burn it to light your house at night, oil was a scarce resource, even when it was basically bubbling up from the ground “Beverly-Hillbilly style.”
The real debate has two components.  On the surface, the question is: is the scarce nature of a good going to become an acute and sever problem on a societal level?  So your peak-oil types would have you believe that at some point we sill suddenly “run out” of oil and then all sorts of catastrophes will follow.  The other side, which Ridley calls “economists” say it’s no big deal because we will think of something else.  But this is really not the fundamental issue either.
The real debate underlying all of this is about the best way of dealing with scarcity.  There are essentially two sides.  One side I will call “marketeers.”  This side thinks that the allocation of scarce resources is generally best left to markets.  This is the side I am on but, sadly, I think it is incorrect to suggest that most economists are on this side.  On the other side are “central planners” who think that if people are left alone, they will collectively wander carelessly into some catastrophe and that the government needs to step in at every turn to make sure they don’t do this.
The really sad thing though is that I don’t think the environmentalist types (ecologists, climatologists, and so on) really understand markets.  They get that we are using resources and that it is possible to use them up and they look at current rates of usage and trends over time and try to extrapolate these into the future in some empirical way and if that leads to the conclusion that we will use everything up by a certain time, they freak out and go all Chicken-Little on us.  In short, they imagine that resources are allocated in an arbitrary way.  And if the way they are being allocated (which they assume is arbitrary) doesn’t seem like the ideal way to them, they naturally want the government to intervene and arbitrarily reallocate them in the way that they think is best.  (And of course, this will require the government to maintain a staff of ecologists, climatologists, etc. to perpetually determine the right allocations.)
But market allocations aren’t arbitrary.  Markets tend to allocate goods to their highest-value use.  And in the case of temporal allocation, they are a mechanism for aggregating estimates about the future.  Take oil for instance.  If we had a free market for oil (we don’t but whether what we have can be approximated by a free market is debatable), then you would have a whole bunch of people making calculations about the current and future supply and demand for oil and the market would aggregate those calculations into a price.  If you thought the market price was too high or too low, you could enter the market and put your thumb on one side of the scale or the other.  If you thought that we were heading recklessly toward “peak oil” you could buy oil, either in barrels or in the ground, or in the form of futures or options or whatever.  If you were right, you would make money.  But you would also push the current price of oil up and save some for future consumption out of current consumption.  The more people felt this way, the higher the price would go and the more would be saved.
This is how markets allocate scarce goods over time.  The difference between this and a group of bureaucrats making estimates and then forcing them on the economy is that the people who make the estimates have a financial interest in getting them right and the process of aggregation is open to anyone who wants to be involved not just an enlightened few who are hand-picked by the political elite.
Now when it comes to innovation, it is true that economists tend to have more faith in this phenomenon saving us from increased scarcity than environmentalists do.  But again, the real issue is what process is best to foster this innovation?  The central planners, again, would like the government to step in and subsidize it in a myriad of ways.  But the marketeers believe the market does this best as well.  The reasoning is fairly simple.  If you have a free market for oil and it becomes increasingly scarce, the price goes up.  When the price of oil goes up, the incentive to find alternatives increases.  This puts people to work trying to find those alternatives because there is a lot of money in it.  And the better the alternative solution, the more money you can make with it.  The better the prospects for alternatives, the less upward pressure there will be on oil prices.  So there are a lot of complicated problems involved but people have incentives to figure them out because if they do they can make money.
So it’s true that oil barons saved the whales and fertilizer and the internal combustion engine saved the rainforests.  But this didn’t just happen automatically because of some natural phenomenon called “innovation” that constantly marches forward as the calendar turns over or because some politician decreed that we need more innovation and diverted funds to it.  The incredible amount of innovation over the last 200 years happened because there were (relatively) free markets, and that meant that there was money in innovation.  There was money in innovation in a free market because goods were/are scarce (and getting “scarcer”).
So don’t be worried about running out of fresh water because of the free market.  It’s perfectly foreseeable that in the future people will demand fresh water.  If we are shaping up to be seriously short on it, you can bet that someone will come up with a way to get the salt out of it because it will become profitable to do so.  And don’t worry about running out of electricity because of the market, it’s just a matter of turning a generator.  We use oil and coal because they are the most efficient way to turn them but if supplies get short and prices go up, people will find ways to make them turn because the economic benefits of turning them are enormous.  But while the market allows nearly limitless potential for people to make improvements on all of these problems, the heavy hand of government offers nearly unlimited potential to screw up the workings of the market.  That is what you should be afraid of.  And yet, I can’t help but suspect that in spite of their constant attempts to manage innovation and the use of scarce resources, that if things ever do go wrong, it will be “the free market” that gets blamed.
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Does Tighter Monetary Policy Increase Investment?

April 14, 2014 Leave a comment

I came across a short piece recently citing a former New York Fed economist entitled Tighter Fed Policy Will Boost Economy.  I was pretty taken aback by this and I’ve been trying to wrap my mind around it.  I couldn’t find he actual report (it may be an internal UBS document or a clients-only sort of thing) and the press release I am going on is pretty brief so I have to guess a little bit as to what Matus has in mind.  It’s also worth noting that he is not quoted in the body using the word “tightening” so it’s possible the headline writer is more confused than Matus.  But whatever his reasoning, it provides a pretext for an attempt to explain why looking at monetary policy through an interest-rate lens is potentially misleading.

There are two issues here.  One is the question: what is tightening?  The other is: do low rates cause more or less investment?  To answer the first, we have to consider the second and see that it is not really a coherent question.

On the surface, conventional wisdom tells us that low rates lead to more investment.  This is the story behind the Keynesian IS-LM model taught in intermediate macro classes.  The CB increases the money supply which causes interest rates to fall (shifting the LM curve to the right) and the lower rates increase investment which increases output (moving along the IS curve).  In the context of that model, this is what we would call monetary “easing.”  Note that whether you look at this as an increase in the money supply or a decrease in interest rates is purely semantic as I try to explain here.

Yet, here is an economist claiming that higher rates will lead to more investment.  How is that possible?  The short answer is that this is “reasoning from a price change” which is a cardinal sin of economics but which is nearly impossible to avoid if you are thinking about policy in terms of interest rates.

Interest Rates and Investment

It makes no sense to try to determine the effect of a change in the price of coffee on the quantity of coffee beans exchanged.  But we constantly talk about changes in the interest rate “causing” changes in investment or consumption etc.  This is a sort of conundrum created by the central bank saying that they are fixing the interest rate exogenously as a matter of policy.  They can do this because they can control the quantity of money and the nominal rate is the price of money (in a sense at least).  But even if you take the nominal rate to be exogenous, you still don’t know the cost of investment because the cost of investment is the real rate which is the nominal rate minus the expected rate of inflation.

If you are deciding whether to invest in a new factory, your decision depends on whether or not the (net) present value of the produce of the factory in the future will be more than the cost of building it.  The lower the nominal rate, the more these future values will have to be discounted, or to say it another way, the more interest you will have to pay on the loan (or forego on the money) that it takes to build it.  But the higher the expected rate of inflation, the higher those future values will be.  So if the nominal rate changes, the effect depends on why it changes.

The simplest way to get to the Keynesian result above, is to imagine that expected inflation is fixed and doesn’t change when the CB “lowers the interest rate.”  In this case, the real rate will also fall and investments that were not appealing before will become viable.  Alternatively, if inflation expectations suddenly increase and the CB does not allow nominal rates to increase as much, you also have the real rate decreasing which should also increase investment.

In the latter case, you would see nominal rates rising along with investment.  And if you only judged the stance of monetary policy by the nominal interest rate, you might conclude that “tightening” was causing an increase in investment.  However, this is not a good way to think about monetary policy because the higher rates would be the result of a more expansionary monetary policy.  I can’t think of a possible explanation for thinking that “tighter” monetary policy would cause increased investment unless all that one means by “tighter monetary policy” is higher nominal rates.  In which case, as Scott Sumner likes to remind us, Weimar Germany had incredibly tight monetary policy.

The most confusing thing in the article was this statement.

‘The expectation for rising rates may prove helpful,” said Matus. “Low rates not only lower the cost of delaying investment decisions but also encourage other behavior that can be detrimental to business investment.’

In periods of low rates, equity investors usually favor companies that buy back shares and pay dividends, said Matus. That encourages chief executive officers to use cash in those ways, rather than invest in new plants or machinery.

The first part about “lowering the cost of delaying investment decisions” makes no sense to me.  Low nominal rates (holding inflation expectations constant) means lower cost of investment.  There is a cost and a benefit to investment and we expect businesses to invest when they think the benefit is greater than the cost.  Are executives sitting in boardrooms saying “we want to delay some investment but we’re not sure how long to delay it, what are the costs and benefits?”  Even if they were, wouldn’t the cost of delaying it be lower with higher nominal rates?  You would make more on your “cash” reserves (which I believe is typically not technically cash) in the meantime (or pay less on loans).  This seems like pure carelessness to me but seemingly this guy is getting paid to figure this stuff out and I can’t say the same, so maybe I am missing something.

But putting that aside, is it true that investors favor companies that buy back shares and pay dividends when interest rates are low?  That doesn’t seem like what we have been observing lately.  In fact, we have seen a plethora of “growth” stocks with little to no earnings skyrocket in price relative to broader market averages over the last couple years.  It’s true that may larger-cap stocks have increased dividends and buybacks, and some others, like Apple, have been under pressure to do so from activist investors.  But is this really a sign that investors are demanding less investment?  I don’t think so.  Here is an alternative story.

Companies each have access to some set of investment opportunities and some amount of cash/credit, the cost of which is the nominal interest rate.  The nominal return on their investment opportunities is given by the real rate of return plus the expected inflation rate.  Companies invest until the marginal real rate of return on investment is equal to the real interest rate.  When the real rate is lower, it makes more investments look profitable.

Now assume that the low real rates are accompanied by an influx of cash into the economy.  But because different companies have access to different investment opportunities, the ones who accumulate this cash may not be the ones with the optimal investment opportunities.  For instance, imagine that one company, let’s call it “Tesla,” happens to have the ability to invest a large amount of money and return 2% in real terms, while the real interest rate is 0%.  And let’s say that there is another company, call it “Apple,” that is accumulating a lot of cash on its balance sheet but is already investing in all the projects available to it with a positive real rate of return.

Now if you are an investor sitting on a big pile of cash, and just to make things a little cleaner, let’s assume that you have access to a secondary offering of each company at book value, which one do you want to invest in?  The answer should be clear, you want the one which will earn a higher return on the money you invest.  This means that the companies with the best investment opportunities will attract more capital.  Conversely, if you own Apple, and they are sitting on a pile of “cash” which is earning no interest and which they have no productive use for, you will want them to give you that cash so that you can divert it to a company with better investment opportunities.

Another way of coming at the same idea is to say that, if both companies are trading at the same premium to book value, people will want to “rotate” into the high-growth companies which will cause them to trade at a higher premium.  The companies with a lot of cash, in the face of this rotation away from them, may start throwing off that cash in the form of dividends and buybacks to increase their dividend yields and prop up their stock prices.

The same logic can be applied to mergers and acquisitions.  If Apple has a lot of cash and no good investments and Tesla has good investments but not cash, instead of returning cash to shareholders and letting them invest it in Tesla, Apple can just cut out the middle man and buy Tesla itself.  But none of this is evidence that low interest rates are causing companies to invest less in aggregate.  It is just evidence that cash has to move around to find the best investments.  That, after all, is basically the whole point of equity markets.

Interest Rates and the Stance of Monetary Policy

Hopefully we can agree that the lower nominal rates, all other things (including inflation) equal, the more incentive to invest there is.  Similarly, the higher expected inflation is, all other things (including nominal rates) equal, the more incentive to invest there is.

This is not that difficult to understand, but the problem comes in when you insist on seeing rising interest rates as “tightening” (or for that matter, on seeing “tightening” as rising interest rates).  But when you step outside of that mindset, things get a little complicated.  This is because, nominal rates and inflation are both components of monetary policy and they are not independent.  In order to generate more inflation, the CB has to increase the money supply.  And if you see monetary policy as just setting an interest rate, the only way to increase the money supply is by lowering the rate.  So you find yourself having to say that they are trying to raise interest rates by lowering interest rates.  Is that easing or tightening?

The simplest way around this is to think in terms of the quantity of money instead.  Then you can just say that “easing” means expanding the money supply which lowers nominal rates (and increases investment) in the short run but increases inflation and has an ambiguous effect on long-term nominal rates.  Of course, if we all did that, then we would dramatically reduce the demand for confused debates about the effect of interest rates on stock prices and investment.  And nobody wants that.

 

 

 

 

Peter Schiff on Deflation

April 9, 2014 3 comments

A while back I sort of blasted Selgin for his position that deflation is not necessarily bad.  That was a bit unfair of me since he actually has a fairly nuanced and not totally unreasonable point.  If we had a monetary policy regime which caused deflation to not be bad (in other words, if we had one entirely different than the one we have) then it wouldn’t be bad.  But my reaction was sort of a knee-jerk response to a point of view that I run across often in libertarian circles that drives me nuts.

Here is the guy I was really arguing with.  So let me take out my frustration on him.  There is a lot that is wrong with this so I will try to knock off the really obvious but less important points first and work my way up to the big important stuff.  First of all, Schiff discusses an article on Bloomberg which he provides no link to.  IMO this represents a breach of blogging etiquette (there’s not a single link in the piece, it’s almost like he doesn’t expect the reader to question any of the bold empirical claims he is making).  Here is the link.

Postponing Consumption

Here is the argument.

 . . . there is now a nearly universal belief that deflation is an economic poison that works its mischief by convincing consumers to delay purchases. For example, in a scenario of 1% deflation, a consumer who wants a $1,000 refrigerator will postpone her purchase if she expects it will cost only $990 in a year. Presumably she will just make do with her old fridge, or simply refrain from buying perishable items for a year to lock in that $10 savings. If she expects the cost of the refrigerator to decline another 1% in the following year, the purchase will be again put off. If deflation persists indefinitely they argue that she will put off the purchase indefinitely, perhaps living exclusively on dried foods while waiting for refrigerator prices to hit zero.

That is a perfectly good debunking of a position that I don’t think anybody actually holds.  I dug out my intermediate macro text and I think I have identified what he is arguing with.  Here is Blanchard on the subject.

When inflation decreases in response to low output, there are two effects: (1) The real money stock increases, leading the LM curve to shift down, and (2) expected inflation decreases, leading the IS curve to shift to the left.  The result may be a further decrease in output.

We have just looked at what happens at the start of the adjustment process.  It is easy to describe a scenario in which things go from bad to worse over time.  The decrease in output from Y to Y” leads to a further decrease in inflation and, so, to a further decrease in expected inflation.  This leads to a further increase in the real interest rate, which further decreases output, and so on.  In other words, the initial recession can turn into a full-fledged depression, with output continuing to decline rather than returning to the natural level of output.  The stabilizing mechanism we described in earlier chapters simply breaks down.

Now I actually have a lot of issues with this theory.  For instance, it assumes irrational inflation expectations.  Also it assumes an exogenous change in output which causes inflation to fall.  I am actually inspired to explore these issues in a later post (this is not to say that economists are unaware of them).  But nowhere is it assumed that people, expecting prices to fall slightly, will decide to not consume at all.  There is a much more complex argument underlying this.  It involves a feedback loop between prices, inflation expectations and consumer demand which is certainly questionable.  But Schiff is not even scratching the surface of the actually questionable parts.  He is just seeing a result that he thinks is questionable (and is) and he is imagining that it is the result of a ridiculous formulation of the underlying consumer demand function (which it is not) and he is pointing out how ridiculous that demand function would be.  If this were what any economist had in mind, then he would have an excellent point.  However, I don’t think that is the case.

Sticky Wages (and “a change in demand is different from a change in quantity demanded”)

This is an area where I sort of agree with him.  The role of sticky wages tends to be exaggerated with a conspicuous lack of attention put on artificial (government) sources of stickiness like unions and minimum wage and price controls.  But he is going too far by claiming that these are the only source of price stickiness.  Certainly, at the very least, we can acknowledge that long-term contracts exist.  Plus there’s the whole debt thing that I’m always talking about (more on that later).  But what really betrays a failure to comprehend the sticky-wage argument is this.

However, inflation allows employers to do an end run around these obstacles. In an inflationary environment, rising prices compensate for falling sales. The added revenue allows employers to hold nominal wage costs steady, even when the raw amount of goods or services they sell declines.

This misses the point entirely.  He seems to be taking a decrease in the quantity sold for granted (reasoning from a quantity change?) and then treats the inflation as a completely independent phenomenon that just puts extra money in sellers’ pockets in spite of this decrease in order to allow them to keep wages high.

The actual argument behind sticky wages is not that the monetary authority has to cause inflation when the quantity of goods produced falls in order to keep wages from falling.  It is that they have to prevent prices from falling because wages can’t fall and that would cause the quantity of goods produced to fall.  This being due to the fact that employers could not continue to employ the efficient number of workers at the new, higher real wage.

So if we don’t start our reckoning by assuming that the thing we are trying to avoid happens exogenously (for no apparent reason), and instead we imagine that aggregate demand drops, perhaps due to unexpectedly tight monetary policy, we can make better sense of things.  In this case, demand for all goods would decrease.  This means that sellers would have to either reduce their prices or sell less or do both.  If all prices (including wages) were not sticky at all, they would simply lower their prices and wages until they were at the same quantity of sales and employment but at lower prices and wages.  But if they can’t lower wages, it will not be optimal for them to keep producing the same quantity at a lower price and the same wage.  This will cause them to cut back production (by laying off some workers) and lower prices until they are maximizing profits given the new lower demand and inefficiently high, sticky wages.

This, of course, can be avoided if the monetary authority avoids tightening, or in the case of aggregate demand (which is not the same as quantity) dropping for some other reason, by adopting a more accommodative policy to push it back up.  Is this a compelling argument for having a monetary authority manipulate the price level in the first place?  Maybe not, you decide.  But it is not a nonsensical argument and arguing with a distorted, straw-man version of it doesn’t get us anywhere.

And while we’re on the topic of Peter Schiff not really understanding what “demand” means, let’s deal with this:

Economists extrapolate this to conclude that deflation will destroy aggregate demand and force the economy into recession. Despite the absurdity of this argument (people actually tend to buy more when prices fall), . . .

There are two problems here.  One is that deflation doesn’t destroy aggregate demand, falling aggregate demand causes deflation.  I can forgive him for this because the textbook argument I cited above does actually give the impression that the causation goes both ways.  I think this is a problem with that exposition.  So I would be inclined to agree with his criticism if he didn’t blow it with the parenthetical statement.

This is econ 101 stuff.  The quantity demanded by a given consumer (or all consumers) is larger when price is lower and other things are constant.  This is different from a fall in demand!  Market prices are determined by supply and demand.  When demand falls, both price and quantity fall.  Aggregate supply and demand mean something a little different but the basic intuition is the same.  If your argument against the deflationary spiral is that “people buy more when prices fall” you are several layers of reasoning short of understanding the thing you are arguing with.

Debtors and Creditors

This is where it starts to get near and dear to my heart.  Schiff points out that inflation helps debtors but hurts creditors, giving the impression that it is simply a sterile transfer from one group to another with the implication that it goes on because the beneficiaries are more politically connected than those on the other side.

While it is true that inflation (by which I mean more than expected inflation) helps debtors and hurts creditors, this does not make the net effect neutral.  This is because people in aggregate are net debtors vis-à-vis the banking system.  So it is possible for us to all go broke together.  This is where my crackpot theories diverge from both the Schiff/Rothbard crackpot theories and from the “mainstream” (crackpot) theories.  So going into that in detail here would take us far afield but if you’re interested click here, here and here.

The Zero Inflation Boundary

Schiff gives the impression that, until this Bloomberg article, economists were only worried about negative inflation and that they only advocated low, positive levels of inflation because this provides a buffer against accidentally falling into deflation but that so long as this is avoided, there is no problem.  I don’t think this is an accurate characterization of the stance of most mainstream economists.

There are two separate issues here.  One is the question of the appropriate long-run policy regime.  This is where Schiff probably got this idea.  Most macro models have some version of money neutrality in the long run.  Often, this takes the form of superneutrality which means that the monetary authority can grow the money supply (and therefore the price level) at any rate they want without affecting the real economy in the long run. 

This leaves policy-makers (assuming they control the money supply) with the issue of selecting a long-run growth path for money and prices.  A natural argument, if you believe in sticky prices/wages, is then to say that a positive but moderate inflation target might be best because it allows for some cyclical fluctuation around the target without triggering the sticky-wage problem.  This, admittedly, is a lot like Schiff’s characterization of the mainstream position.  But this is not really the issue that most economists are concerned about when they warn about inflation being too low.

It is one thing to argue that the monetary authority could follow a zero-inflation long-run policy path and it would be no better or worse than a 2% inflation or 10% or -2% inflation path.  It is something else entirely when the monetary authority sets a 2% inflation target and then produces 1/2%.  It’s not that there is something magic about crossing the zero-lower-bound on inflation.  The problem is when inflation runs below expectations.

When people make long-term financial decisions, they do so with some expectation about future prices.  For instance, if you invest in producing a good, you have to predict the price of that good in the future.  If the price turns out to be lower than you thought, your calculations will be wrong.  There is not some eternal magic number that the price must be and the central bank has to make it hit that price or else cause a lot of problems.  It’s just that they have to not screw up peoples’ calculations by causing them to expect a certain price level and then causing a different level to occur.

This is particularly problematic when it goes on for an extended period of time without any attempt at filling in the gap.  The bigger that gap gets the bigger the difference between the actual price level and the level people were expecting when they initiated long-term financial positions in the past.  Plus if they go on like this for a while without changing their target, it starts to become unclear what to expect from them in the future.

This is mostly important for decisions involving nominal debt because, as I like to go on and on about, debt contracts are long-lived and nominally denominated so your obligation in nominal terms does not fluctuate with the nominal value of other things like your labor or your house or the output of your business.  And remember, aggregately, we are net debtors so when the price level grows more slowly than we were expecting, this causes a systematic weakening of the financial position of the economy as a whole.

This is my special way of characterizing the issue at the heart of the inflation question.  There are different ways of characterizing these issues and different models for trying to understand them but almost all of them rely in an essential way on the role of inflation expectations.  Peter Schiff is not even scratching the surface of these issues.

 

P.S. This is the most unimportant point and I originally put it at the beginning but it is probably also the most inflammatory and I figured some people might not make it past it to the more important stuff so I cut it out and stuck it here at the end.

 

Definition of “Inflation.”

This is a common sticking point for Rothbardians (which is what I am now using to refer to a particular popular sect often known as “Austrians” on the advice of commenter John S).  Economists almost universally use this word to refer to the change in the aggregate price level.  Rothbardians commonly assert that this is the “wrong” definition in the sense that it was not the original definition.  This is a completely pointless debate.

Usually this argument is brought up for one of two reasons.  One is to generally discredit mainstream economists and imply that they don’t know what they are talking about because they don’t even use the “right” definitions of words.  The other is to weasel out of hyperinflation predictions by saying “well, okay, prices haven’t really risen that much but that’s not the actual definition of inflation…”

I am no expert on the evolution of this term and I don’t care about it enough to research it but just for fun here is my educated guess of how things went down.  Originally inflation meant what the Rothbardians say it means because at that time, that was the most useful definition for thinking about the economy.  Eventually the state of economics evolved in such a way that someone had to give a name to the rate of change in the aggregate price level and they called it the “inflation rate” because they figured prices tended to be positively correlated (perhaps proportional) to the size of the money supply, other things being equal.  As the science continued to evolve, economists found themselves being very interested in the rate of change of prices and not so much in the money supply, except to the extent that it affected prices.

To see why this is reasonable consider the following thought experiment.  You need to make some investment/consumption decisions.  Maybe this is buying a house, or investing in the stock market or taking a new job or whatever, it doesn’t matter what it is.  An angel comes down from heaven and offers to do you one of two favors.  He will either tell you what the size of the money base will be in ten years (and not the price level) or he will tell you what the price level (somehow defined) will be and not the size of the money base.  Which would you prefer?

Before 2008, you probably could have at least argued that the choice was trivial because you could extrapolate pretty easily from one to the other but that notion should be dead now.  Of course, Rothbardians realize that what really matters is prices, their arguments are always actually about the price level.  They never say “we’re going to have hyperinflation of the money supply and you should be really worried about that even though prices will never rise more than 2% per year.”  When they make their inflation arguments, they are always talking about the price level.  It is only when those predictions don’t come true that they step into their time machine and act like the original argument that took place two years ago was really a hundred years ago and “inflation” didn’t really mean what you thought it meant.  And by the way, they weren’t really making a prediction because Austrians don’t make predictions so if you thought they were, you must have been confused.

When economists say “inflation” they are talking about changes in the price level.  All economists realize that this is what other economists mean.  If you want to use it in a different way, and be clear that this is what you are doing, because it allows you to say something interesting, I have no problem with that but if you are just ridiculing someone for using a word to mean what most people commonly accept it to mean, you are wasting everyone’s time.