Before tackling inflation directly, it’s important to truly understand the nature of economic growth, because once again, mainstream misconceptions exist. In a healthy and stable growth economy, the vast majority of individuals are experiencing levels of PTB greater than PTC and feel that over time this will continue.
Give & Take Economics Theory is once again at odds with mainstream theory when it comes to explaining growth. The dominant mainstream growth theory is still the Solow-Swan style neoclassical growth model, which for the most part explains growth through exogenous (externally assumed) levels of capital and labour. This is quite unbelievable in a time where ideas are at least as critical as capital and labour. In contrast, Give & Take Economics provides that growth is endogenously (within the model) generated by the interpretations, decisions and actions of individuals with respect to a full range of inputs, including technology, natural resources, capital, population, ideas and even cultural attitude.
Within this context, intermediaries can either bolster or inhibit growth. To the extent that they provide clarity around fair rules of engagement for participants they can bolster growth. To the extent that they direct attention and resources toward their own benefit through significant intermediary taxes, they will divert some share of potential growth their way, generally resulting in some reduction to economic efficiency.
Growth for the individual can be depicted as follows:
In the short-term growth involves prospects that push upward and rightward. In the long-term it also involves the vertical movement of the psychological trade-off curve to meet these increasing prospects. In essence, individuals’ expectations or ‘standards’ of PTB vs. PTC trade-off rise over time with growth. This can be clearly seen by comparing the typical acceptable level of PTB vs. PTC trade-off in developed economies versus developing economies. As living standards increase, so do expectations, which pushes everything onward.
In the previous diagram, the magnitude of the upward shift exceeds that of the horizontal rightward shift, reflecting an increase in PTB larger than the associated increase in PTC. In an aggregate market context, growth is as shown below:
Healthy economic growth is reflected in a balanced increase in both supply and demand in line with population growth, increasing economies of scale and new technologies. Over time, a larger number of individuals and their associated demand is met with a larger supply willing to meet that demand through larger quantities produced at lower average total cost. These factors result in increased quantities over time at gradually decreasing prices.
Most markets today move quickly and involve innovation and obsolescence. In these markets two additional factors impact price and quantity over time. As new products and services are brought to market through innovation, new higher value-add markets are usually created, while old, relatively lower value markets decline. Technological innovation typically produces shorter-term upward surges in quantity and price in new areas of demand and then drives prices and quantities down in markets for ‘older’ offerings.
Growth does not produce persistent increases in economy-wide average price levels. Inflation is fully the result of continuous expansion of the money supply. Mainstream macroeconomic theory typically asserts that the quantity of money should grow at the same rate as economic output/income, to in essence ‘lubricate’ activity. Give & Take Economics Theory shows us that this in fact just institutionalizes a constant inflation rate and serves as wealth redistribution from those without assets to those with assets, from those without debt to those with debt, and from citizens at large to the government. The creation of money by fiat benefits the government, central bank and financial institutions at the expense of others in society. The power to print money is one of the purest examples of the dangers of decoupling PTC from PTB across society at large.
In a world of electronic ‘book-entry’ funds there is no need to create currency, whether physical or electronic, to ensure that the currency doesn’t face a costly physical constraint on its velocity of circulation. The current monetary model employed in most modern economies in fact decouples the personal total cost and personal total benefit of those involved. Intermediaries involved in the process of creating money experience more personal total benefit than personal total cost. Bankers, and large, leveraged asset holders gain at the expense of the larger middle and lower classes of society, via the effect commonly known as the ‘inflation tax’.
Not surprisingly, we see consistent printing of money and inflation year after year in developed economies, driven by governments and central bankers. A healthy capitalist economy with electronic means of payment should in fact exhibit gradually decreasing prices over time as productivity increases, primarily the result of improved technology. Population growth should increase both supply and demand (give and take) in approximate tandem, netting out to a zero impact on prices. Continuous creation of fiat money is an example of governments and key related financial institutions managing the system as intermediaries to create personal total benefit in excess of associated personal total cost.