There has been a debate on the economics blogosphere about semantics (the most productive kind of debates). This one is specifically about “inflation”.
A lot of tension and pointless arguments are caused by differing definitions in economics. This is dangerous and confusing when trying to build a dialogue. So let’s try to delineate the differing definitions here.
The most common definition of inflation is of course price inflation:
“Inflation is a rise in the general level of prices of goods and services”
When mainstream economists say inflation or you hear about it on the news, what they mean is price inflation.
Then the second most popular definition is that which comes from the later Austrian (Misearian) school which is called either, monetary or base inflation. Here defined by Henry Hazlitt as:
“A general increase in the money supply.”
Now it appears to me that there is a circular definition here, when Misearian economist say staements like: “QE will cause a rise in inflation” all they are really saying is “A rise in the money supply will cause a rise in the money supply”. So it is somewhat understandable when Nick Rowe calls it calls it “a bit daft” or Gene Callahan says it “won’t do”.
Jonathan Catalan here goes so far to say that ‘there really is no “Austrian” definition of inflation. The Austrian definition is the Monetarist definition.’
We then get a riposte from the opposite camp by Robert P. Murphy. He says that they are not the redefiners, and price inflation definition came later, he substantiates this with a quote from Mises’ Human Action:
“The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.”
So here we stand with both sides saying the other has changed the definition for ideological purposes and we should go back to their, respective definition.
Is this really just a boring semantics debate; is there nothing under the surface here? Let’s confuse things a bit more shall we.
As Robert P. Murphy is sometimes describes as an anarcho-capitalist I’m surprised he didn’t bring this up. There exists a third definition of inflation from the Rothbardian camp. Let call this commodity inflation (? If there’s a real name please tell me?):
Any increase in the money supply not backed by commodity money as inflation.
(The commodity mentioned here is normally gold.)
This can be shown in:
Murray Rothbard in Man, Economy, and State: A Treatise on Economic Principles (1962) “The process of issuing pseudo warehouse receipts or, more exactly, the process of issuing money beyond any increase in the stock of specie, may be called inflation. A contraction in the money supply outstanding over any period (aside from a possible net decrease in specie) may be called deflation. Clearly, inflation is the primary event and the primary purpose of monetary intervention. There can be no deflation without an inflation having occurred in some previous period of time. A priori, almost all intervention will be inflationary. For not only must all monetary intervention begin with inflation; the great gain to be derived from inflation comes from the issuer’s putting new money into circulation.” (Rothbard 2004 : 990).
So there is not even a consistency within the Austrian school (If you consider Anarcho-capitalists part of the Austrian school). So there may be some actual substance to this debate rather than each side just deriding each other and being pedantic over semantics. So the important differences in the schools it highlights is that, some people believe in Friedman’s quote “Inflation is always and everywhere a monetary phenomenon” and hence and quantity theory of money and some don’t.
Let me make this very clear, that the Austrian school is not necessarily a Quantity theory of money school. Menger, Eugen Böhm-Bawerk, Rothbart and many others were not. In fact Mises is one of very few Austrian economists to believe in Quantity theory of money.
This confusion may be why this definition war seems so pointless to everyone. There are many other terms, like this example which cause just as much confusion and ambiguity between the schools of thought. Economics would progress much quicker and more effectively if we were to have a common vernacular in which to discuss, which is why I think that we should just accept that if someone just says inflation they mean “price inflation”, if you want to say “price inflation” every time that is fine. But do not correct and try to purposely obfuscate so that you can claim intellectual depth.