If the U.S. were ever so foolish as to want to shrink inequality, doing so would be easy: abolish usage of cars, planes, computers, smartphones and the internet. Presto, inequality shrunk substantially. And a nation immiserated.
Which is the point. Inequality isn’t a pejorative, it’s a sign of individuals having the freedom to do what they do best all the while improving the lives of others in the process. The freer the people, the more the inequality.
Austrian School eminence Ludwig von Mises knew this well. In his 1922 classic, Liberalism, Mises rhapsodized about soaring wealth as an effect of the innovative “providing their fellow men with what they themselves think they need.” If alive today, Mises would properly see wealth inequality as a beautiful signal of rapidly shrinking lifestyle inequality as wondrous business minds democratize access to the luxuries of the past. Mises put it so well that “the conception of luxury is historical.”
Which is why it’s so sad to see Mises’s genius so thoroughly perverted at the Mises Institute named for him.
Johns Hopkins professor Steve Hanke recently gave a talk at the Institute in which he blamed the Fed and increases in so-called “money supply” for the rise of inequality. The Fed is an obsession of Mises’s disciples who think nearly all presumed economic maladies are an effect of the central bank.
Without defending the Fed’s superfluous existence for even a second, Hanke mis-characterizes money and inequality to the shame of the Institute carrying Mises’s great name. Let’s start with so-called “money supply.”
Contrary to what Hanke imagines, no central bank, monetary authority or mint can increase money in circulation. Only production can increase the latter simply because money has no purpose absent production. Money is solely an agreement about value among producers that enables their exchange.
Hanke imagines the Fed increasing so-called “money supply,” and the latter signaling inflation that he alleges is great for the rich. Which on its face is absurd. Ignoring again that rising production is the only path to increases in circulation, Hanke ignores the simple truth that the rich measure their wealth in dollars. Which means that if the Fed were doing what Hanke imagines, as in “gunning” the so-called “supply” of dollars on the way to the currency’s debasement, as a rule the Fed would exist as the enemy of the rich exactly because its actions would be shrinking the exchangeable value of the dollars mostly held by them.
From there, let’s never forget that the rich, by virtue of being rich, have no choice but to invest their excess of dollars. Keep this in mind with alleged dollar devaluation in mind. The latter would exist as a tax on investment precisely because investors put dollars to work with a goal of achieving much more in the way of dollar returns.
That’s why periods of actual dollar devaluation (the 1970s most notably) don’t correlate with more wealth and wealth creation, but the exact opposite. Since inflation is a tax on investment, wealth goes into hiding (think hard assets representing existing wealth) instead of into stock and bond income streams representing the creation of new wealth.
It’s just a reminder that Hanke isn’t just confused about what constitutes inflation and who it benefits, it’s most troubling that he can’t see that wealth is created, always and everywhere, and that currency devaluation is a tax on wealth creation.
Money’s worth is not in how much there is (see Zimbabwe if you’re confused), but in its exchangeable value. Nowadays Hanke speaks as though money is wealth. How sad for him, and how sad that he talks such nonsense at the Mises Institute.
