Why the Austrian view of money and inflation is more important than ever

One commenter on ChrisLBecker.com writes:

“Inflation is always and everywhere a monetary phenomenon” – Milton Friedman.

Anyone who has been near a first-year economics course must have heard this famous quip. Many people beyond that as well. Honestly, the continued Austrian sense of exceptionalism on this issue is pretty bewildering to me.

In other words: “why do we harp on about monetary matters and price inflation?  Everyone knows money printing causes price inflation, no great insights here, move on.”

Well, of course, this commenter is more than welcome to stop reading our blog if it is so boring, obvious and unexceptional.

But ask 999 out of 1000 Zimbabweans why they suffered a hyperinflation and they’ll tell you it was because of food shortages!  Food shortages there were (especially after Bob and Co. started price fixing and the farms ceased to produce much), but (most) economists know that, facing a foreign currency crisis due to decimated production, Gideon Gono printed money until confidence in the medium of exchange was shot to pieces and the whole thing blew up.  Instead of trying to buy foreign currency with real production (exports) Zim decided to buy it by printing moola.  Didn’t work out so well, and destructive inflation was the result.  Monetary corruption.  Flagrant debasement.

Our blog is for ordinary people out there, many of whom don’t know why inflation occurs.  That printed money causes inflation IS NOT common knowledge.  Hopefully it will become common knowledge.  Some may find it unexceptional information, but there was a time in their life when they didn’t know it, and there’s lot’s of people who don’t know it and need to know it.  The sooner they know it, the sooner they can start to shield themselves using more intelligent and informed wealth-protection strategies.

So it is worth telling people about since inflation is, after all, theft.  I suggest people should know they are being stolen from by the government and its central banking, fractional banking system.

On monetary theory, Milton Friedman was a late-comer who never fully developed a coherent monetary theory, notwithstanding the fact that he wrote a history of US money and banking.  100 years before Friedman’s now famous quote, the Austrians were breaking ground in monetary theory, illuminating issues previously un-illuminated.

Mises’ Theory of Money and Credit was massively ground-breaking.  It was exceptional.  Friedman of course was mostly, as far as economic theory was concerned, unexceptional.

As far as modern, applied economics is concerned, most economic practitioners ignore money supply issues when discussing inflation, or at least discuss money only as a secondary consideration.  Read most analyst’s reports on CPI inflation and monetary considerations are usually lacking.

I engaged with a central bank official who refused to admit that rising money supply causes rising prices.

Meanwhile, most economists think inflation is a good thing, or at least not harmful.  Some think it is necessary for economic development.  Austrians point out that it is indeed very harmful.  Since money printing causes price inflation, and since price inflation is harmful, the Austrians go to great lengths to inform people of this relationship, so that people will come to know the source of the problem and so that civic institutions and public opinion can be directed towards ending the fractional fiat money system.

A particularly exceptional contribution of the Austrians, and one that almost all modern schools still have not properly grasped, is the non-neutrality of money.  Money does not enter an economy in a uniform way.  It distorts REAL price relationships and hurts those furthest from the printing press (the late receivers).

The derivative exceptional Austrian contribution to money and price theory was Business Cycle Theory, in which money supply injections not only raise general prices but distort relative price relationships (non-neutrality) and set in motion a destructive series of entrepreneurial errors and intertemporal discoordination that leads to booms and busts.

So, the lack of understanding of money supply and inflation amongst the ‘man on the street’, the poor acknowledgement of money’s impact on prices by many professional economists, the persistence of the post-Bretton Woods un-hinged fiat money mess, recurring and painful business cycles, the lack of understanding of the non-neutrality of money and distortive effects that money printing has on relative real price relationships and in exacerbating income inequality, the huge build up of global trade and capital imbalances and the unfair exporting of US inflation to the rest of the world, all make Austrian’s attention to money and inflation theory not only exceptional, but vital knowledge if one wants to navigate a world of legalised, insidious theft.


About Russell Lamberti

Russell Lamberti is a regular contributor to Mises SA. He is Chief Strategist at ETM Analytics, an Austrian-influenced economic research firm based in Johannesburg. Although he wrties about many topics, you'll most often find him slaying patent and copyright law and exposing the biggest bubble in history: fractional reserve banking.
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  • Nic

    Great summary! I particularly appreciate the mention of the non-neutrality of money.