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"If one-half of the commodities in the market rise in exchange value, the very terms imply a fall of the other half; and reciprocally, the fall implies a rise." – John Stuart Mill, Principles of Political Economy, p. 419

Inflation is all the rage at the moment. That it’s the economic story du jour is a likely sign that most commenters don’t really know what inflation is.

Take Neil Irwin, an economics writer for the New York Times. As he put it in a recent column, “The central fact of the American economy in mid-2021 is that demand for all sorts of goods and services has surged. But supplies are coming back slowly, with the economy acting like a creaky machine that was turned off for a year and has some rusty parts. The result, as underlined in new government data this week, is shortages and price inflation across many parts of the economy.” 

The problem is that what Irwin writes about is not inflation. Reducing his analysis to the absurd, imagine if tomorrow it were announced that consumption of three Honeycrisp apples per day would protect consumers from the most deadly forms of cancer in short order.

If so, it’s no mere speculation that demand for Honeycrisps would surge on the way to soaring prices for the apple. Inflation? Nothing of the sort. If suddenly we’re paying exponentially more for apples, logic dictates that we would have reduced capacity to demand other goods and services; thus softening pricing pressures in other parts of the economy.

On the other hand, Uber and all manner of other transportation concepts are feverishly investing in driverless technology. If they succeed, transportation costs will plummet. The $50 ride to the airport will soon enough be $10, or less. Deflation? Once again, nothing of the sort. Reduced transportation costs will free up demand for other goods and services previously out of reach.

Still, investment and its impact on prices rates mention. Indeed, contrary to the Irwin-esque definition of inflation as being a consequence of too much demand born of too much growth, the reality is quite different. In truth, economic growth (think productivity) is the surest sign of falling prices. Think about it. Investors put wealth to work in order to create more goods and services at lower costs.

Investment in new ideas is what turned a rather primitive $3,995 brick-sized mobile phone with limited calling-range in 1983 into a supercomputer communications device that fits into our pockets nearly 40 years later. Crucial about these modern “phones” on which we can call anywhere, conduct our work, and summon the world’s plenty with a tap is that we can own them for next to nothing when we pair their purchase with a contract with a wireless carrier.

Growth is what happens when we increase productivity, productivity increases result from investment, and the end result is cheaper everything. What used to be costly think (computers, phones, and long distance) no longer is. Of course, this once again is not evidence of deflation precisely because lower prices in one part of the price system introduce new demands for other goods and services.

Which leads us to government spending. Members of the left believe that the surge in the past year could be inflationary because they truly believe government consumption powers growth. See above. And then just try to think logically for a minute. Or two. Governments can only spend what they’ve taken from us first. 

There’s no increase in consumption from government spending, and there's certainly no growth from it. Governments can only spend insofar as growth already occurred. More realistically, the government spending that has lefties fearful of too much prosperity is a certain economic depressant precisely because it shrinks the amount of investment that is the source of all economic progress.

Members of the right believe that deficits cause inflation. No, not necessarily. England had debt that was 260 percent of GDP in 1815, but since the country tied its pound to gold, there was no inflation to speak of. U.S. debt soared during World War II, but the dollar’s definition as 1/35th of an ounce of gold kept the greenback sound. It’s a reminder that inflation is a policy choice of currency devaluation, not a consequence of some other policy. To focus on rising prices when divining inflation is like blaming rain on wet sidewalks. It reverses causation.

With inflation, a shrinkage of the unit of money raises the amount of money required to exchange for goods and services. Which is the why behind gold as the historical standard for money. Per John Stuart Mill, gold has long been the commodity "least influenced by any of the causes which produce fluctuations of value.” In other words, gold’s value doesn’t move as much as the value of the currencies in which it’s historically been priced move. Gold is a great definer of money, and has been used for thousands of years as a definer, precisely because gold is yet again the commodity "least influenced by any of the causes which produce fluctuations of value.”

Which brings us to the 21st century. When it began a dollar bought roughly 1/270th of an ounce of gold. By 2010 it purchased roughly 1/1250th. Doesn’t anyone remember soaring commodity prices across the board in the 2000s that resembled what happened in the 1970s when gold last soared? Doesn’t anyone remember the rush into hard assets like housing that once again mirrored the 1970s?

That’s what’s so interesting about a rather sudden dour countenance on the part of conservatives about inflation. They point to the very commodity-price surges that they ignored during the 2000s. Either they don’t know what inflation is, or some are quite simply dishonest. As for members of the left, we know they don’t know what inflation is given their belief that economic growth is the driver of it.

Yes, the excitement about inflation now is the surest sign neither left nor right understands what it is. Inflation is a devaluation of the unit. Presently a dollar that purchased 1/270th of a gold ounce buys 1/1800th of an ounce. Inflation? You decide. The individuals you’re watching and reading don't know. 


John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is titled When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason. Other books by Tamny include They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers, The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

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