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Enough With “Greedflation”

I’m catching up on my correspondence.

Mr. K__:

Thanks for your follow-up e-mail.

About this Café Hayek post of May 21st you write: “Greed is a necessary part of the explanation for inflation. Not greed alone. But greed in tandem with the Ukraine invasion and other supply constrictions. This cannot be denied. Greed is the motive for corporations to increase prices.”

I can and do deny that any part of an explanation of inflation is “greed.” And while the unusually tight supply constraints that we’ve endured lately account for some one-time jumps in prices, they can’t account for the on-going price hikes – the inflation – that we’re now suffering. Either way, no legitimate part of the explanation of inflation is provided by “greed.”

I ask my students to imagine New York City police officers arriving on 34th Street to investigate the death of someone who fell from the Empire State Building. An officer approaches the crowd surrounding the mangled body and asks “Does anyone here know what caused this to person fall?” A young man proudly answers “I do! Gravity!”

My students rightly laugh at this explanation’s absurdity. And my students – no less rightly – remain unimpressed with the “gravity” explanation even after I note the indisputable fact that, absent gravity, the person now splattered dead on Manhattan’s pavement would still be alive. My students understand that the actual cause of this death is something that changed – say, a decision to commit suicide, or a snapped cable on window-washing scaffolding – to enable ever-present gravity to pull the person fatally to the ground.

The same logic applies to inflation. To truly explain inflation we must identify something that changed – something that changed both to incite sellers to charge higher prices and, more importantly, to enable buyers to pay these higher prices. That something clearly isn’t “greed.” Not only is greed (or, using a more measured term, self-interest) ever-present, it’s not something that consumers can spend. Therefore, the only plausible explanation of inflation is excessive growth in the money supply – which, as it happens, we’ve lately had a great deal of.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030