Note: I am not an economist. This is not about why inflation happens but what I have written here is going to anger the “fiat currency is a conspiracy of the international bankers” sect and will be challenged by them and others because of certain assumptions I have made. See the bottom of this article for those assumptions.
Inflation is a constant reality of living in a human society which uses paper currency. So why does it bother so many people?
When I was a little kid, I could buy a Mars bar for 30 or 40 cents, if my mom had let me buy candy with my meagre allowance. It now costs $1.29 at the grocery where I live (more at the convenience store) and, moreover, it sure looks smaller. If I google it, I learn that the Mars bar has indeed shrunk since the 1990s, by nearly 30%, though it was the same size throughout most of my childhood. This is inherently unfair. How can something cost more now than it did when I was a child?
Costs go up because of inflation. I am not an economist and not the person to tell you why inflation exists, but it is indeed a fact of life over the long term. Deflation – the opposite – happens from time to time but, over time, the overall trend in industrialized economies – and even many pre-industrialized economies – is near-constant, essentially eternal inflation. My salary today would have made me very, very, very rich if I earned this amount in 1919.
Inflation in and of itself doesn’t really matter. (Though many might tell you otherwise.) What really matters is relative purchasing power. If the cost of my food and rent has gone up through normal inflation but my purchasing power has gone up the same as inflation or even more, there is no problem for me.
But if you listen to a lot of amateur economists, inflation is a huge, awful problem regardless of relative purchasing power. The money you have on your card – or, if you’re like me, in your wallet – is worth much less than it used to be. Inflation is proof that paper money doesn’t have inherent value and is essentially worthless. If you don’t have gold, you don’t have money.
Inflation can be problematic, but there’s nothing inherently problematic about the kind of slight inflation we normally experience provided purchasing power inflates along with it. (Context matters of course. The degree of inflation is more problematic or less problematic depending upon other conditions in an economy.) There is something inherently unappealing about inflation which bothers a lot of people. It particularly seems to bother people who are not interested in nuance. So that’s what I want to talk about here. Not why inflation happens or how we could (theoretically) prevent it or lessen it, but why the existence of inflation – a fact of life in an industrialized economy, as far as I can tell – bothers so many people.
Why Do We Hate Inflation?
When I think about how much a Mars Bar costs, and then think about what it used to cost there’s something clearly unfair about that. It’s far more obvious with something that has a bigger impact on my quality of life, such as housing costs. When my parents bought their first house – a very large, nice one I should point out – it cost CAD$100,000 dollars. If we ignore the interest on the mortgage but also eliminate my mom’s salary (because she soon stopped working due to getting pregnant), the house cost 2.5 times my father’s annual salary. Now, if I were to attempt to buy a smaller house in the same neighbourhood – which would have to be in need of repair for me to afford it – it would cost close to a million dollars. That’s just under 20 times my annual salary, again not including the interest and excluding my girlfriend’s salary. As you might imagine, I cannot afford that. However, if I was getting paid the 2019 equivalent of what my father made in 1980, I wouldn’t have a problem affording a house in Toronto. The problem here is not merely that the cost of housing in Toronto has inflated, but that my relative purchasing power to buy that inflated house, has not increased enough to buy it. (Note that housing prices in Toronto have inflated at a much higher rate than inflation since my parents bought their house.) Rather, relative purchasing power has actually decreased in this (overly simplistic) case.
We all deeply want to believe the world is fair. When the world’s inherent unfairness confronts us, we react with anger rather than with reason. Prices in our youth seem inherently fair, because they are the prices of our youth. Everything in our childhood seems closer to the ideal world than what we experience as an adult. This effect is exaggerated with the prices we paid in the past, which act as symbols of our lost childhood when I could go to the store with some coins I saved up or even found on the street and buy something. Now, to buy most things, I need bills (or a bank card or credit card). Now, to buy a house, I need to pay low seven figures instead of the low six figures my parents paid (or the high five figures my friend’s parents, who bought a smaller house, paid around the same time). If we think about these changes strictly in terms of the numbers, without regard to context, it seems outrageous. If we think only about absolute amounts of money, it’s shocking. (My mom refuses to order a glass of wine in most restaurants in our city because she cannot fathom paying CAD$14 for a glass of wine, even if that is the price of wine in many restaurants these days.)
The obvious, easy to see changes in prices reminds us that the world is not fair. Inflation is shoved down our throats whenever we go to buy something. When I buy my old cheddar and I see it is both more expensive than when I first shopped as an adult, but also significantly smaller in size, this strikes me like a crooked business practice. When my “pint” of beer is now 16 oz instead of 20 oz, and a couple of dollars more than when I started drinking, this strikes me like a crooked business practice. If I am unable or unwilling to think about anything but the price increase, the world very much appears unfair.
I secretly believe that the world was fair because, once upon a time, I could buy a piece of candy at the convenience store for a nickel. Something has made the world unfair. That something, for most opponents of “fiat” (paper) currency, is the independent central bank (The Fed, The Bank of Canada, etc.). The most obvious problem with the theory of blaming central banks for inflation is that inflation exists in countries without these types of banks too. So it doesn’t work as the or even a cause of inflation. But that doesn’t matter – fiat currency opponents write 500 page books about how awful these banks are because inflation is the bank stealing our money. There are, of course, other boogeymen too. It really doesn’t matter which one you pick, every single one of these “single cause” arguments about why inflation happens – and why it is evil – are stupid because they ignore the complexity of the world. But the real issue is that they are motivated not by a true picture of the world and how it should be, but by a fallacious belief that, once upon a time, the world was fair and now it’s not. That’s why people hate inflation.
Now, if you have a concrete objection to a specific government policy which you believe is causing more inflation than is normal, that is an entirely different story and probably an argument worth listening to. The fallacious argument is that inflation is not normal, that it is caused by central banks (or other boogeymen) and that, without boogeyman X, we’d all be richer and I could afford a house.
Currency is something that human beings value and use for trade, regardless of what that currency is or is made of. Naturally occurring resources – such as gold, silver and oil – do not have inherent value. They have value if they are useful to animals. Items made by humans – such as paper money or bitcoin – are the same, their value is in their utility to animals. Saying naturally occurring things have inherent value and things made by humans do not have value is a bit like saying naturally occurring elements are good for you but “chemicals” are poison. The difference between the two isn’t that one type has inherent value and the other doesn’t but rather that one is finite and the other is theoretically infinite, which affects the value of the currency, not whether or not it has any value in the first place. (Of course humans can lose faith in “fiat” currencies but they could also theoretically lose faith in a naturally occurring mineral. There’s nothing inherent in the nature of a mineral, except perhaps its finite quantity, which should automatically cause human beings to have faith in it as some kind of eternal currency. There is an additional advantage of gold in that it is easily stored compared to many other minerals. Again, that doesn’t necessarily give it inherent value as currency.)
Human beings are not Rational Utility Maximizers but, rather, animals who combine rational thinking with irrational or arational heuristics developed through thousands of millennia of evolution, which may or may not help make good economic decisions.
The discipline of economics is not a science but pretends to be. In pretending to be scientific, many scientifically flawed theories are passed off by economists and the media as scientifically valid when they are not – they are not falsifiable or their results are not replicable or what have you. The discipline of economics lacks a theory of the person (or at least it did prior to behavioural economics) and regularly relies upon models based upon cherry-picked evidence. (The latter is as a matter of course – it’s impossible to capture an entire economy in a theoretical model; the world is too complex.)
Applying personal accounting to entire economies misses the way it captures when trying to explain how economies work.
The nuclear family is not and can never be a metaphor for society, and the financial health of a nuclear family cannot be a metaphor for a society’s economic health.
I’ve likely made others that I haven’t identified here.