The Guilt of the Economists

A ten-million pengo inflation note of Hungary.

Another outrage associated with inflation is the endorsement of the process by most economists. It’s bad enough to see the beneficiaries promote wealth transfer through inflation, but to have the majority of 20th-century economists do so as well is tragic. Some do so because they realize that their power and prestige depends on their giving an intellectual rationale to the acts of the inflation elite. But many do not benefit directly, and their motives may be good. But whether they promote inflation to help the poor, to help the rich, or just believe it is in everyone’s interest, the results are horrendous.

The interventionist economists who endorse inflation fail to accept the subjective theory of value, as formulated by the freemarket economists. This theory, without which it is impossible to dispel old economic myths, holds that the value of an economic good exists only in the minds of individuals, and that it can change with circumstances and over time. Prices, and the production decisions which they determine, cannot come from mathematical models in computers.

Even the monetarists endorse sustained inflation, albeit at a lesser rate than is presently the case. The best-known monetarist, Dr. Milton Friedman, says the Fed should expand the money supply at three to five percent a year, the actual figure being less important than the absence of fluctuations.

But even this amount of inflation inevitably introduces malinvestment as those getting the new money put it to uses that only later recessions show to have been unproductive. The Friedman approach may produce milder booms and recessions, and less human suffering, than present policy, but it nevertheless is inflationary and a product of the old, discredited idea that government, rather than the market, should be planning the economy. Worst of all, it establishes the principle of government control of the money supply and would allow an increase in the inflation percentage if “needed.”

The politicians and many bankers, union leaders, businessmen, and bureaucrats who profit from inflation are glad, of course, to have the intellectuals justify their fraud.

It’s unfortunate that economists who promote inflation are today called liberals, since a more illiberal and reactionary policy could hardly be imagined. They are also inaccurately called progressives, since inflation is an archaic device. Although today’s coin clippers and debasers use sophisticated monetary arrangements to legitimatize their acts, this makes no difference. Political, economic, and monetary turmoil still result.

To promote inflation, the well-intended economist must blind himself to the economic dislocations and distortions that occur. Economic calculation becomes increasingly difficult every day, yet the promoters of inflation will not accept their responsibility.

Inflation often leads to price and wage controls, which destroy the pricing system, the planning mechanism of the free economy. If these economists understood this, the only reason they could promote inflation would be to destroy freedom.

Nobel prize-winner Friedrich von Hayek wrote in 1959 that “It is no accident that inflationary policies are generally advocated by those who want more government control…. The increased dependence of the individual upon government which inflation produces and the demand for more government action to which this leads may for the socialist be an argument in its favor.… All who wish to stop the drift toward increasing control should concentrate their efforts on monetary policies.”