Reviewing Richard Parker’s biography of John Kenneth Galbraith, Robert Skidelsky says the following about the price controls that Galbraith was instrumental in implementing during World War II:
Price controls were a success, the consumer price index barely budging in the war years [p. 147].
(Skidelsky’s review appears in the March 2006 issue of the Journal of Economic Literature.)
Skidelsky is correct only if one defines inflation as a change in the price level, and only if one measures the effectiveness of price controls by how well they prevent the price level from changing.
I hold no special affection for returning to (what I believe to have been) the older definition of inflation as being an increase in the money supply. Despite seeing a great deal of merit in this older definition, I wouldn’t go to the mat in opposition to defining inflation as an increase in the price level. But there is a problem with this way of defining inflation — namely, it allows people to suppose that price controls really control inflation.
Inflation might better be defined as a loss of purchasing power of the currency unit, "usually expressed as a general rise in the prices of goods and services" (see here).
Clearly, price controls do not prevent the value of the currency unit from falling. Yet when someone reads such a statement as the one quoted above from Skidelsky, one might carelessly conclude that price controls are indeed a useful tool for controlling inflation.
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' I hold no special affection for returning to (what I believe to have been) the older definition of inflation as being an increase in the money supply.'
The word itself is synonomous with 'expansion', which fits better, 'the money supply', than 'rise' in an index.
Wouldn't a rise in the money supply at a rate that is above normal compared to year ago levels cause inflation?
If you can't buy rubber tires with a dollar, then isn't it worth less than at a point when you can?
Similarly – if you can only buy gasoline on an odd/even day…
Wartime simultaneously demonstrates humans at their most social and anti-social … there's not much point comparing the power of money during peace time with the command economy of wartime.
Furthermore, once there are price controls then it is simply illogical to talk about inflation .. it has been abolished, and so (effectively) has money.
To say that price controls succeeded because prices didn't rise is to misunderstand the purpose of the price system. Shortages were rampant; rationing coupons were needed because rationing by price was outlawed. What's worse, wage and price controls reduced labor supply. A study done in the early 1980s (don't have reference at hand) showed that wages were low in terms of possible consumption, resulting in lower labor supply than if wage and price controls had not existed. So if you wanted maximum supply during the war, wage and price controls were a failure.
"prices that don't emerge from voluntary exchange of property rights aren't really prices" – Don, your very own words from the previous but one article.
If you abolish inflation then its pointless to talk about inflation.
I like the definition you give here, Don. The "general price increase" and "increase in the money supply" definitions each capture one side of the same coin.
I define inflation as "a general rise in prices caused by the money supply increasing faster than the goods and services available."
Speaking of rising prices, wages have been shotting up of late: http://news.ft.com/cms/s/334ba9cc-dc34-11da-890d-0000779e2340.html
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