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Mises: Inflation and Deflation Are Meaningless Concepts

It is true that in his popular writings during the 1950s, Mises occasionally acquiesced in using a version of the conventional pre-Keynesian definition of inflation as an increase in the quantity of money that was not offset by an increase in the demand for money resulting in a rise in overall prices or decline in the purchasing power of money. Mises used this definition in order to counteract the Keynesian explanations of inflation in terms of excessive spending (“demand pull”) or excessive increases in wages or monopolistic pricing practices (“cost push”) which were increasingly prevalent in textbooks and the media at the time. His purpose in these articles was to emphasize the point that a general and continuing increase in prices could only be caused by increases in the money supply. He was not interested in instructing his readers in the finer points of monetary theory.

By the time Human Action was published in 1949 (actually, by 1940 when the German-language forerunner to Human Action, Nationalökonomie, was published) Mises had come to recognize that the concept of inflation was completely empty and useless for the purposes of technical monetary theory. For the later Mises, it was impossible to separate the effects on market prices of monetary influences from the effects of “real” influences emanating from the markets for goods. The supply of and demand for money were intertwined with the supply of and demand for every good, because goods and money were ranked together and compared on individuals’ value scales. Any change in the demand for money inevitably affected the relative demands for the various goods, and vice versa. This meant that in a real-world economy where prices, and therefore the purchasing power of money, fluctuated constantly, there never could exist a state of monetary equilibrium. In such a mythical state: there would be no “inflation” or “deflation”: the “price level” would be absolutely stable (or fluctuate only as a result of changes of the overall supply of goods); and money would therefore never influence entrpreneurial calculations or resource allocation decisions, which would be driven purely by changes in supply and demand conditions for real goods. Mises rejected the concept of monetary equilibrium or what was then called “neutral money” precisely because money was a dynamic element, an agent of change that had a “driving force” of its own. Money could not and did not affect the height of prices without necessarily and simultaneously altering the supply and demand conditions in every market and, therefore, the entire structure of prices. Since all changes in the supply of money had precisely the same qualitative effects regardless of the relation they bore to changes in the demand for money, the concepts of inflation and deflation were meaningless and must be rejected

Mises made these points clearly and emphatically in Human Action (pp. 422-23):

The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.

However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power. Since the question at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorial precision required for praxeological, economic, and catallactic concepts.

Given this and other similar statements in Human Action, it continues to mystify me that this debate about how Mises defined inflation goes on and on and on. Why is it so difficult to accept that Mises’s views on monetary theory, including his analysis of the phenomena of inflation and deflation, developed and advanced between 1912 when he published Theory of Money and Credit and the 1930s when he was working on the manuscript that was to become Human Action? In fact Mises himself tells us that this is precisely what happened, writing in his Notes and Recollections in 1944:

My Nationalökonomie finally afforded me the opportunity to present the problems of economic calculation in their full significance. . . . Only in the explanations offered in the third part of my Nationalökonomie did my theory of money achieve completion. Thus I accomplished the project that had presented itself to me thirty-five years earlier. I had merged the theory of indirect exchange with that of direct exchange into a coherent system of human action.

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Contact Joseph T. Salerno

Joseph Salerno is academic vice president of the Mises Institute, professor emeritus of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

 

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