Question on inflation cause and effect(s)

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John James replied on Thu, Jan 12 2012 4:15 PM

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Welcome to the Mises forum!

Yes, you're basically looking at it correctly.  There are a few things that can effect the price of something.  Dave outlines them below, but it may be helpful to remember that money is just a commodity itself.  So the supply and demand of the money itself works just like the supply and demand of anything else.  The only difference is, anytime someone is trying to determine the price of something, he is usually measuring in terms of the money.

In other words, everything has a value...but that value can only be measured in terms of it's relative value to something else.  This is part of the reason money came about in the first place.  It makes this calculation of value and profit and loss much more easy, and therefore makes the economy more efficient.  Check out these videos.  They might not make everything clear as crystal at first, but they will help.  You may have to watch them a few times, and have things explained a few different ways before it becomes fully comprehensive.  Despite being quite basic, it can be a tough thing to wrap your head around, depending on how long you've been living in a modern monetary society...

For more from ShaneDK, see:

Economics Made Easy (with ShaneDK)

Politics Made Simple (with ShaneDK)

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Smiling Dave replied on Thu, Jan 12 2012 9:24 PM

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3 things can cause an increase in the price of something.

1. Decreased supply. Like after Katrina there was shortage of water so prices went up.

2. Increased demand. Like when a local sports team goes from being terrible to having a young hustling winning team that's fun to watch. More people want to see them, and the price of tickets goes up.

3. Increase in the money supply. Like in the Weimar Republic, when they printed so much money that prices went up hourly for that reason alone.

Each of these factors is enough on its own to raise a price. When Austrians talk about increase in the money supply more than other factors, it's usually when discussing why the price of everything in an economy goes up at the same time. After all, if the price of good A goes up, and the money supply stays constant, then there is less money left to buy good B. So the demand [=desire plus ability to buy] for good B has, by definition, gone down, and its price should go down. Only an increase in the money supply can make all prices go up.

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Jargon replied on Thu, Jan 12 2012 11:01 PM

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Or decrease of demand to hold money!

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Smiling Dave replied on Fri, Jan 13 2012 12:04 AM

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yes, forgot that one, cause I'm not too familiar with it.

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explore1966 replied on Fri, Jan 13 2012 5:09 AM

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>>Each of these factors is enough on its own to raise a price. When Austrians talk about increase in the money supply more than other >>factors, it's usually when discussing why the price of everything in an economy goes up at the same time.

Thanks much for the reply. I knew there was more to this than meets the eye. 

So...in the aforementioned example - the Berlin Blockage - you have roughly half of a city completely (physically) isolated. There's a finite amount of food, medical supplies, gasoline, etc., and the amount of each is being used up each day (for the sake of simplicity, we'll eliminate the perverting effects of rationing for now). Prices did, in fact, rise across the board for all goods and services shortly after the Blockage began.

If the supply of money were to have remained fixed, that would be attributable purely to demand? But if prices rose across the board amid an issuance of scrip, that would be attributable purely to the increase in the quantity of money/money surrogates? Or is it that the Austrian School would hold that prices rising unilaterally across all products/services is always, and only, a money supply effect?

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John James replied on Fri, Jan 13 2012 5:28 AM

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explore1966:

If the supply of money were to have remained fixed, that would be attributable purely to demand? But if prices rose across the board amid an issuance of scrip, that would be attributable purely to the increase in the quantity of money/money surrogates? Or is it that the Austrian School would hold that prices rising unilaterally across all products/services is always, and only, a money supply effect?

Again, prices are merely a measurement of supply and demand factors involving the two things you're comparing: the supply and demand of whatever commodity you're looking at, and the supply and demand of the money itself.

The laws of supply and demand are basic microeconomic laws that virtually no school of thought denies.  There is nothing really "Austrian" about it.

In the example you give, you're talking about a finite supply of goods, and a fixed supply of money.  So one of the variables won't change, and another will only decrease.  Now you've just got the demand for money and the demand for goods.  Those could both increase or decrease.  Any change in price could be a reflection of any or all of those 3 pieces.

For example, if prices rise, and the money supply is fixed, yes, this is usually attributable to a decrease in supply of goods.  But it could also be a reflection of a decrease in the demand for money.

I highly recommend checking out this beginner post.

As for Dave, here's a few articles if you'd want to get a little more familiar:

Demand for Money and Supply of Money

The Austrian Theory of Money

Hyperinflation, Money Demand, and the Crack-up Boom

Also, Bob Murphy got into a back and forth with David Beckworth on the subject...

Is There a Conservative Case for QE?

Taking Seriously the Excess Money Demand Problem: A Reply to Robert Murphy