Monday, 30 March 2015

An Austrian Take on Inflation

By Alasdair Macleod

We know that today’s macroeconomists are very confused about inflation, if only because despite all experience they think they can print money and increase bank credit with a view to generating price inflation at a controlled 2% rate.

Admittedly, most of them will acknowledge there is more hope than reality about the controlled bit. Economic policy should be based on more than just hope.
It is timely therefore to see what the Austrian School had to say on the matter, but first we should define inflation: to the Austrians it is an increase in the quantity of money and credit. Inflation is not defined as rising prices; this is the long-run result of inflation in the quantity of money and bank credit. Common jargon confuses the effect for the cause.

The economist who best defined the inflation relationship was Ludwig Von Mises. Von Mises lived in Vienna during the Austrian hyperinflation of 1921-23, so he saw the problem at first hand both as a resident and as a practising economist. The Austrian government eventually succeeded in taming its hyperinflation beast, approximately ten months before the Germanpapiermark finally collapsed. What is interesting and rarely commented on is that German economists saw the collapse of their currency being played out in advance in Austria, and therefore knew with high certainty what was ahead of them, yet they were still powerless to stop German’s currency collapse.