Not that the good people of the Federal Reserve like inflation. Their stated mission is to "maintain stable prices", stable being defined by Webster's as "not changing or fluctuating."[14] But why would anyone want to create an economic world where prices stay stable? As Benjamin Anderson wrote, "prices have a job to do." Prices are like the road signs we follow when driving in unfamiliar territory. They tell us where to go in terms of production. They come about naturally, they are what they are, and no grandstanding, moralizing, or wailing will change them. Experience has shown us, repeatedly, that to set a price by decree will do no more than cause a scarcity or glut.
Arbitrarily decreeing a price for money and credit is as foolish and destructive as decreeing the price of any product. Playing with prices, especially on such a massive scale as the central planning of short term interest rates entails, is tantamount to tampering with the safety valve on a boiler. Prices and safety valves are there for a reason — we disrespect them at our peril.
Even measuring a "price level" to keep "stable" has proven an impossible task. The inputs are far too numerous to track, and you must subtract all market goods which have joined the dodo bird, then add those which have blossomed anew, while making sure that you properly weight the basket to take into account every human being's ever changing valuations, and then and only then can you go to the econometrician's ball.
That hasn't prevented armies of statisticians from trying, God bless their hearts, but no human being has yet been able to climb that statistical Everest. And due to the endless, ever changing variables, accurately measuring a general level of prices using mathematics is about as likely to come about as measuring how insane a man is by mathematically tracking his various body movements. We are not that smart.[15]
I freely admit I got this belief from a man of far greater reputation than I, John Maynard Keynes. In his opus General Theory he writes of "the well known, but unavoidable, element of vagueness which admittedly attends the concept of the general price level"[16] and therefore any attempt to compare price levels from one period to the next is "unsuitable for differential calculus."[17]
Furthermore, if we would like a stable price level, why then do we cheer and clap over rising productivity numbers? More goods produced by the same amount of input causes a fall in prices. In addition, it frees up capital and labor to produce other useful, heretofore unavailable things for the consumer.[18] It makes your dollar buy more stuff. So everyone is right to cheer for rising productivity. Yet at the same time the same people who are cheering rising productivity are explicitly calling for a monetary policy to "maintain a stable price level" — a policy that, should it succeed to perfection, would destroy the very gains that rising productivity gives to the working masses.
Why on earth would we want to deliberately squander a rising standard of living? No man refuses a raise at his job, yet we cheer on the very men who are deliberately stripping from us the benefits of productivity, God's pay-raise for us mortals. Why do we do this?
The great historian Robert Conquest once wrote, "Reliance on reason alone is irrational. It neglects the instinctual or deep-set elements of the real human being".
So there you have it. We do it because, deep down in our genetics, we're all crazy as loons.
Oh! And:
We should not want a stable price level, but a stable currency.[21] Prices will take care of themselves. The cry that a currency needs to be "elastic" in order to stimulate aggregate demand is based on the fallacy of "overproduction," this theory being commonly ascribed to Karl Marx. Like most of Marxist dogma, Karl Marx never agreed with the theory, writing in his Theory of Surplus Value "the excess of commodities is always relative, that is, it is an excess at certain prices."[22] Allowing prices to freely adjust is what clears the market, not counterfeiting dollars.
Or credit.
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