A Beginner’s Guide to Austrian Economics

Example 3: Inflation

Keynesians changed the classical definition of inflation. According to Keynesians, inflation is an increase in prices, and a steady rate of inflation is necessary for economic growth.

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” — J.M. Keynes

“Continued inflation inevitably leads to catastrophe.” — Mises

Austrians correctly define inflation as the artificial expansion of the money supply. Rising prices are merely symptoms of the inflation of the money supply and artificially low interest rates. Austrians understand that falling prices are natural, as technology and production capabilities improve, and that falling prices benefit the general population (think the falling prices in the U.S. throughout the 19th century). Austrians recognize that inflation fosters capital consumption, discourages saving, acts as a tax which destroys the purchasing power of money, and falsifies economic calculation.

“The advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters… Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.” – Mises