I do not think many Austrians understand the logic of this point. To them, inflation is theft because inflation lowers the purchasing power of the currency. Thus, those savers of currency are in a sense, victims of theft for their currency is losing its value. In other words, this is a burden to people that save in currency. But to say that this is theft is a bit, well, misleading. But lets accept that this is theft.
If we accept that this is theft, then what happens when we describe deflation? Lets say I have a debt in which I sign a contract to pay back in which I signed this contract at time 1. Then deflation occurs, thus contracting the supply of currency and increasing the purchasing power of the currency, this is time 2. Then I, as the debtor, have to pay back my debt using the purchasing power of time 2 when I did not agree to it, since I signed my contract at time 1. I now, unexpectedly, have to work harder to pay back my debt. So just like in inflation when a decrease in purchasing power is considered theft because my savings is now worth less, in deflation an increase of purchasing power is considered theft because I now have to pay back my debt with the currency having a stronger purchasing power.
In other words, inflation is considered ‘theft’ because my savings has decreased in value at the expense of the debtor, who now has an easier time paying off his debt. Deflation is considered ‘theft’ because my debt has in a sense ‘increased’ in value at the expense of the saver, who is now enjoying the fact that his stock in savings has increased in purchasing power.
So what is my point? My point is that describing inflation as ‘theft’ is pointless. It is an emotional appeal in which it is trying to scare people about inflation, and to many Austrians, is a justification to why deflation should be preferred. But many Austrians fail to understand that their logic in describing inflation as ‘theft’ is also describing deflation as theft too.
This post was caused primarily because of a twitter post by John Yowman in which he states that Inflation is theft. After my brief response, “if inflation is theft, then so is deflation, right ?” he goes on to say that an increase in purchasing power is not theft, in which I respond, “sure it is. If a person has a debt and there is deflation, the person has to work harder to pay back his debt.” He then posted another tweet linking to this video on inflation and why it is bad (maybe this post was an indirect reply to me?). But the video is ignorant. Just look at the description of the video:
Why does your monthly rent today cost just as much as the down payment your grandparent’s put on their home 70 years ago? The answer is inflation. Economics Professor Robert Lawson explains how inflation is essentially the change in the purchasing power of your money (i.e. how many tacos can you buy with, say, $20 today as compared to a decade ago). When inflation occurs, you’re able to buy fewer goods and services with the same amount of money. And when inflation really picks up, it can have catastrophic economic consequences. Watch Professor Lawson to learn more! (my emphasis)
This completely ignores the fact that incomes have increased too. I mean, sure, in the 1940s, I bet that I could buy a lot more tacos with $50 than with $50 today, but $50 was A LOT harder to obtain back then than today. On average, employed people in America can earn $50 in a day’s work (and probably earns more than just $50) while in the 1940s, that average was unheard of*. In other words, this is a clear fallacy of comparing nominal with real figures.
And no one denies that ‘when inflation really picks up, it can have catastrophic economic consequences,’ or I should say the Keynesians do not deny this. Yes there is such thing as too much inflation, but that does not mean that inflation is bad. This is like me saying, “Milk is bad for you because if you chug a whole gallon, you will throw up.” Well as my mother says, “No Shit Sherlock!”
*How ironic is it to see that Austrians ignore time as a factor?
The Radical Subjectivist 
Miseseans are forgetting that value and purchasing power are subjective and not objective functions. Theft is objective and quantifiable — stealing an object, stealing property, not reproducing a unit of exchange in a way that may (or may not) reduce the subjective purchasing power of old currency. The Cantillon Effect is very real, but it’s something other than “theft”. More like institutional corruption.
I’m not sure how purchasing power is subjective, at least not in the way they are using it here. It is very true that the purchasing power of the dollar has decreased from 70 years for example, or that it takes 20+ dollars from today to equal 1 dollar of decades ago.
Purchasing power is subjective because value is subjective and a purchase is just the function of a negotiation between two subjective values. Every transaction is different, everyone consumes differently, everyone negotiates and bids differently, etc. Even if we consider generalised levels of purchasing power, it may take 20 dollars of today to equal 1 dollar of the 1970s in gold or oil or housing, but in computers 2,000 dollars of the 1970s would struggle to buy 1 dollar of today. This is why I am hesitant to call money printing theft. After all, very few of those who hold the majority of their wealth in tangibles and especially the monetary metals feel they are losing out from QE.
Mr. Marmolejo, the issue is not so much whether inflation or deflation is theft. The question is how inflation or deflation comes about.
Hypothesize a system of free banking based on gold. If someone found a large deposit of gold, and introduced that gold into the monetary system, then you would have monetary inflation, and consequent price inflation. Yet, the result would be a market result, rather than theft, because no coercion was employed. Money in the form of gold is merely changing value as any other commodity does in a market economy.
In contrast, under current circumstances you have a federally chartered central bank, legal tender laws, banking regulations, etc. All of these measures are achieved via the coercive mechanisms of the State. Thus, when the State increases the money supply, the consequent price inflation is a result of deliberate policy. A crime requires a criminal and intent. In this scenario, the criminal is the Fed. The Fed’s policy of deliberately debasing the currency constitutes criminal intent.
In addition, since the Federally chartered banks get the debased currency before the public does, the banks can enjoy the benefits of an inflationary policy before prices as bid up. As a consequence, you have a transfer of wealth from people holding dollar denominated investments to the banking system.
Thus, under the current system, inflation is quite literally theft.
Your claims presume libertarian philosophy in that there is a market and a state, and the two are completely irrelevant to each other in theory. But this is not quite true, the market system quite actively needs a State, at least historically this tends to be the case in where the State fits best in enforcing key things that makes a market system work (enforcing property rights, contracts, etc.).
But if you think inflation is theft in our current system, then do you think the same when it comes to deflation ?
Also, I never really got the point of “banks get the money after inflation first ” argument. In part, this is quite justifiable if these banks are loaning to entrepreneurs.
Governments do not control the money supply (exogenous money is a failed concept).
The rise in the money supply does not presuppose the inflation of commodity prices (I hope you are not an adherent of the Quantity Theory of Money, because a straightforward interpretation of MV=PQ is just rubbish).
In ordinary discussion I wouldn’t fault Austrians for at least being unconcerned by a criticism of deflation as (inherently) theft. But I don’t think any but the most ignorant and cursory Austrians would deny that deflation can be theft, in just the way you describe it. Heck, I’m a cursory Austrian and even I can see it as being theft. (I even wrote a piece cautioning the GOP against advocating an immediate adoption of the gold standard for this very reason. They had made a gold commission a part of their party platform in August I believe.) You can never eradicate both inflation and deflation. The best you can hope to do is to let market forces determine both the money supply and its purchasing power. Since productivity brings down prices in a free market, deflation is the more natural of the two. It is therefore preferable. Now, there can still be natural inflation, in theory, for example, when the opposite of production occurs. If enough goods are destroyed or the population decreases or whatever, then the money supply relative to goods and workers is higher and thus the purchasing power of money can go down. This is also more natural than messing with the money supply by expanding it. So some forms of deflation are preferable to others and some forms of inflation are preferable to others. But the preferable deflation is far more common on a free market than the preferable inflation. One is an inconvenience to borrowers, the other an inconvenience to savers. But neither, in their preferable forms, is theft. Because the deflation is more natural in a free market system, if you have a free market system, you will see more incentive to save than to borrow at first. But this in turn, because the savings themselves are loaned and the more of them there are the lower the interest rate, will incentivize borrowing as well. Both of these will be determined by the market, not arbitrary manipulation or benevolent planning of the money supply. The market is much better at allocating resources and at fulfilling the subjective wants of market participants. Also, I think if you compare wages and prices, that while it is true that they have both gone up, there is a ratchet effect where other prices go up first. And since there is no uniform relation between all goods, just because it might not seem that bad in one relation (a given good produced and a given wage), does not mean it isn’t much worse in other relations or in the same relation in a different place or time. There are other deleterious effects of inflation, particularly on the world stage where the dollar is propped up by its status as a reserve currency, but would tank as soon as enough large oil producing and consuming nations decided to buy and sell with another currency. And bubbles. What, if anything, is analogous to a bubble when there is deflation? Sure, there are economic downturns, but these are not caused by deflation per se, rather they can result in it as a sort of painful correction of a bubble phase.
well I would have to disagree with you that markets are natural. At least the markets with price systems, contract enforcements, property rights etc isn’t natural. I actually get this insight by reading Carl Menger, and also looking at what his older brother Max Menger did to create a better market system in Austria by introducing a stock market.
But even if these market forces are somehow natural, what justification do you have for saying that just because it is natural, it is automatically preferred?
The automatic preference for certain things that might lead to deflation or inflation is what makes them natural. Deflation may be preferred by savers and inflation may be preferred by borrowers, but because natural deflation is a sign of increased productivity, and natural inflation is a sign of decreased productivity, a society that prefers growth should also prefer deflation. Not for what it does, per se, but because it is the result of other preferences.
When people say that a market system is natural what they mean is that it arises from the voluntary and spontaneous interaction of individuals. It is the result of their preferences. Obviously, most people don’t consciously prefer deflation or inflation or any number of other economic phenomena. All they truly care about is using means to achieve their ends, making a living, paying bills, eating, etc. But because things such as deflation or inflation inevitably occur as the result of more conscious preferences, their preferences might put them in one camp or the other.
When defining inflation or deflation just as phenomena and not including their causes in their definitions, I can definitely see why some would automatically demonize one, the other, or both. But if you do include their causes in their definition, I think it makes more sense to demonize the inflation. Where there is manipulation of the money supply both inflation and deflation could occur. Where there is no manipulation of the money supply, only deflation would tend to occur. If you see manipulation as something that is neither natural nor preferred (it could be for reasons other than just inflation or deflation), then the monetary phenomena that would seem natural and preferable would b the one that results from no manipulation of the money supply.
I’m more familiar with Anton Menger than Max Menger. I’d be interested in learning more about them.
First off,
I give you props for knowing who Anton Menger is. He was the socialistic brother of the three. Max (the eldest brother) was a liberal like Carl, their views were quite similar actually. I can send an unfinished post that I did on Max Menger months ago. Unfortunately I deleted my source by accident and I got frustrated and stopped writing this post, now I cant remember my source though I did write down the page numbers in my post. I can send you my unfinished post if you want, is your email that you listed for the comment section a valid email?
On to the main point though, I disagree with your assertion that a market is of purely voluntary actions (at least a market in a capitalistic sense). Nor is it the way Carl Menger viewed how a market worked. Which is why he supported progressive taxation, state regulation on coinage, etc. etc. in which he thought was necessary to preserve the market system.
Also deflation is not automatically a sign of increase productivity, one can only prove this by appealing to neoclassical economics. To expand, this is to dismiss the subjective expectations especially involved in the financial markets. This of course leads to a discussion of the loanable funds theory which I would advise you look at the debate between Greg Hill and Steve Horwitz in the Critical Review journal. Overall, there is no good reason to believe that saving generates growth. If you cant access the Critical Review articles, I would read this bloggers summary: http://austrianomnibus.blogspot.com/2011/03/horwitz-and-hill-debate-or-why.html
Yes, send me what you’ve got. This is interesting stuff to me, so I hope you one day stumble across your source and finish your piece and post it. I know how frustrating that can be. I spent maybe three hours yesterday and about the same amount of time so far today looking for this article that I first came across several months ago:
http://socialdemocracy21stcentury.blogspot.com/2010/12/different-types-of-austrian-economics.html
I’ll take a look at that link as well.
Back to our debate. I do see what you are getting at, how even deflation that occurs apart from a contraction of the money supply might be the result of something other than real economic growth. But when speaking of real economic growth one is making an objective valuation, no? What if there was no growth, but what there was was a subjective reevaluation of the already existing wealth in a way that affected prices? How would this make either inflation or deflation necessarily a bad thing? Or make either one any more or less natural than if it had occurred as the result of voluntary interaction. I am quite sure that a lot of this radical subjectivism is way above my head, which is why I am currently looking into it.
As to whether a market is voluntary, I think you are too strongly stating “my side”, i.e., inadvertently straw-manning (I mean no offense by this, read on). I think you can have interventions in the marketplace (making no judgement as to whether they make sense or are moral) and still have the basic working of the market be voluntary. I don’t think that is a good idea, but it is still possible. I think many Misesian minarchists and a few Rothbardian anarchists would agree with me here. There are some on “my side” (in terms of the “proper” approach to economics) that might disagree with me and these other Misesians and Rothbardians (such as some of the less tolerant market anarchists and more idiosyncratic anarcho-capitalists) on this particular (that intervention in the marketplace does not make the marketplace non voluntary). So, I suppose you might not be straw-manning for them.
” But when speaking of real economic growth one is making an objective valuation, no? What if there was no growth, but what there was was a subjective reevaluation of the already existing wealth in a way that affected prices”
What do you mean by ‘no growth’. Like are we assuming time as static and thus no human action to at least have some kind of ‘growth’? Or are you talking about a depression or recession state?
But inflation and deflation are not bad on their own. I mean they are both ‘bad’ in the sense that there will be winners and loser in either case but there are cases where in both cases, economies have experienced some kind of growth. This is non-controversial. For example, Lord Keynes expresses the same view (http://socialdemocracy21stcentury.blogspot.com/2009/08/deflation-and-business-cycle-is-their.html:
“It is correct that deflation is not generally the initial cause of recessions. It could even be said that, under certain circumstances, deflation itself is not problematic. ”
Though LK is correct in saying that if the ‘certain circumstances’ are a capitalistic economy in a recession or depression state, deflation is far worse. Mainly for the reason that this will cause higher private debt (and there is also a case to be made using expectations which both Keynes and Lachmann use too), which is horrible for a capitalistic economy. This is of course assuming some key neoclassical concepts out like the loanable funds theory.