Here’s a great little piece by Jeffrey A. Tucker, the editor of Mises.org, on the delusional and self-serving habit of politicians, journalists and dinner party guests to declare that this or that price movement is a problem, or worse, that it is “unfair”.

I’ll extract the most salient sections from the article:

What kind of theory of the world insists that houses and stocks always go up in price, whereas gas and grain prices always go down? That doesn’t really make sense. A price is not set by natural law, nor are price movements intended to follow a preset pattern like the movements of stars. Prices are nothing but exchange ratios — points of agreement between buyer and seller. They reflect many factors, none of them fixed parts of the universe.

So why do we expect some to rise and some to fall? It all depends on whether you are in the position of a producer or a consumer. As homeowners, we are in fact “producers” of our homes; that is to say, we are holding them with the expectation of someday offering them for sale. The same is true of our stocks. We already own them, so of course we want the price to go up. Then we can sell them at a profit.

On the other hand, on things we intend to buy, things like gas and grain, we want the price to be as low as possible. We want their prices to fall. That way we save resources.

So what’s at work here is self-interest. Think of the same situation from the point of view of someone who is a first-time homebuyer. Does this person want high prices or low prices? Of course the answer is obvious. This person wants the lowest price possible, so for this person this “housing bust” is not a bust at all. It is a boon. But once this person becomes a homeowner, matters change. Now he wants prices to rise.

Now think of the gas station owner. If it didn’t affect how much he sold, would this person want prices to rise or fall? Of course, he wants the highest prices possible.

[…]

It’s the same in all markets. We can see that it is perfectly absurd to attempt to fashion national policy around the interests of only one party to an exchange. To try to keep house prices high and rising cheats the first-time buyer. To keep them low cheats the current owner. To keep grain prices high helps grain producers but hurts grain consumers. Some gas companies might like high gas prices, but consumers hate them. On the other hand, gas prices forced lower by dictate might thrill consumers but producers might end up hurting so much that they shut down. That helps no one.

[…]

There is no way to observe an existing price and declare it just or unjust. As St. Bernardino — a shrewd observer of economic affairs — said,

Water is usually cheap where it is abundant. But it can happen that on a mountain or in another place, water is scarce, not abundant. It may well happen that water is more highly esteemed than gold, because gold is more abundant in this place than water.

The Late Scholastics, followers of St. Thomas Aquinas, all agreed that the just price has no fixed position. It all depends on the common estimation of traders. Luis de Molina summed up the point:

A price is considered just or unjust not because of the nature of the things themselves — this would lead us to value them according to their nobility or perfection — but due to their ability to serve human utility. But this is the way in which they are appreciated by men, they therefore command a price in the market and in exchanges.

[…]

Now, there are ways for a price to become a matter of injustice. It can mask fraud. The prices can result from or be influenced by some act of force, such as price controls or taxation or restrictions on supply and demand. Behind each of these, we find coercion, a body of people who are mandating or restricting in a way that is incompatible with free choice. Arguably, this is not just.

We can conclude, then, that to the extent we complain about unjust gasoline prices, we need to look at the restrictions on refineries or exploration or drilling, or examine the role that high gas taxes have in pushing up prices beyond what they would be under conditions of free exchange.

And as for those who believe that all prices should move in ways that benefit their own particular economic interests at the expense of everyone else, don’t confuse your agenda with a matter of justice. […]

This article makes a nice introduction for the coming week’s project: poking holes in last week’s Financial Mail cover story, Spillover: SA’s response to soaring global oil prices.

One Mike “Mish” Shedlock posted a pretty shattering take-down of Ben Bernanke’s latest blubbering about the housing market and the credit crunch. It’s hard to believe that a central banker in the US so completely fails to grasp basic economics. I’ve written before about the issue of central banking and inflationary monetary policy, and its culpability for the economic woes in the US and the world. That inflation is a deliberate policy of increasing the money supply, via low central-bank interest rates, and that a rising price level is merely an effect of inflation, which is to be expected when you increase the amount of currency in circulation, competing for the same amount of goods and services. (See here and here, for example, or spend an evening to read the Ludwig von Mises lecture notes I linked to here). But unlike Alan Greenspan, who simply worms his way out of accusations over his interest rate policy, Bernanke doesn’t even understand what inflation is, or how interest rates cause it. If he doesn’t grasp such elementary principles of central banking, why does he have the job?

The best quip is this:

This would be funny if it wasn’t pitiful. “A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation.” Translation: Inflation will stop once prices stop going up. Was that supposed to be a revelation? That was pathetic even for someone who thinks inflation is about prices.

That must be pretty embarrassing, if you’re the chairman of the US Federal Reserve. I entirely agree with Mish’s conclusion, too:

I have a simple solution for this madness: Want To Fix The Fed? Get Rid Of It.

That’s exactly the solution. If government price controls are a problem, causing either shortages (in the case of price caps) or surpluses (in the case of price floors), whoever thought it would be a good idea for the government to control the price of money and credit? That causes surpluses and shortages too, popularly known as “booms and busts”, or “the business cycle”. Except that business doesn’t cause it, but merely suffers the effects.

Last night, I found a neatly printed-out and stapled copy of Beware the Alchemists, by Ludwig von Mises. Detritus of good intentions some time past.

Transcribed by Bettina Bien Greaves from notes taken during a lecture tour in the 1960, the style is somewhat clunky, somewhat simplistic, somewhat imprecise, and somewhat repetitive. But though she says Mises didn’t like being quoted for that reason, I found his informal style a strength, not a weakness. Mises was the 20th century intellectual giant of the Austrian School of economics. He wrote his first major work as early as 1912, and died in 1973. Reading this, however, brings the old man alive again. You can picture speaking in somewhat clumsy English, patiently explaining the blindingly obvious, throwing up his hands with an exasperated sigh or sardonic grin as he points out the economic blunders of one government after another.

Beware the Alchemists is surprisingly accessible. It takes what appears to be a complex topic, encrusted with 100 years of Keynesian pollution and toxic government waste, and turns it into something simple and intuitive. I wish I had learned what I understand today about interest rates, monetary policy and inflation from this text. I wish I had been around in the 1960s to attend these New York lectures, so that I could have spent the four decades since going, “See? He told ya so.”

Today’s food price crisis? The oil price? The credit crisis? The weak dollar? St Alan “this was an accident waiting to happen” Greenspan? Mises explained all of these many years ago. And Greenspan, for all his claims to understand why Keynes was wrong (as a proponent of Hayek and Friedman’s Chicago School), not only waited for it to happen, but drove the bus to the scene of the accident.

Some quotations to pique your interest, perhaps:

The market is precisely the freedom of people to produce, to consume, to determine what has to be produced, in whatever quantity, in whatever quality, and to whomever these products are to go. Such a free system without a market is impossible; such a free system is the market.

We have the idea that the institutions of men are either (1) the market, exchange between individuals, or (2) the government, an institution which, in the minds of the many people, is something superior to the market and could exist in the absence of the market. The truth is that the government — that is the recourse to violence, necessarily the recourse to violence — cannot produce anything. Everything that is produced is produced by the activities of individuals and is used on the market in order to receive something in exchange for it.

It is important to remember that everything that is done, everything that man has done, everything that society does, is the result of such voluntary cooperation and agreements. Social cooperation among men — and this means the market — is what brings about civilization and it is what has brought about all the improvements in human conditions we are enjoying today.

Money is a market phenomenon. What does that mean? It means that money developed on the market, and that its development and its functioning have nothing to do with the government, the state, or with the violence exercised by governments.

The problem [that human action seeks to solve] is not to increase the quantity of money. The problem is to increase the quantity of those things which can be bought with money. And if you are increasing the quantity of money, and you are not increasing the quantity of things which can be bought with money, you are only increasing the prices which are paid for them. And in time, if the increase in money continues, the whole system becomes a system without any meaning… Prices are going up because there is an additional quantity of money, asking, searching for a not-increased quantity of commodities. And the newspapers or the theorists call the higher prices, “inflation.” But the inflation is not the higher prices; the inflation is the new money pumped into the market. It is this new money that then inflates the prices. And the government asks, “What happened? How should one man know? …” The government is very innocent. … And the governments try to find somebody who is responsible — but not the government. They consider the man who asks for higher prices responsible. But he must ask for higher prices because there are now more people wanting to buy his produce, you know. … Now we have the inflation.

Everything that is done by a government against the purchasing power of the monetary unit is, under present conditions, done against the middle classes and the working classes of the population. Only these people don’t know it. And this is the tragedy. The tragedy is that the unions and all these people are supporting a policy that makes all their savings valueless. And this is the great danger of the whole situation.

The book isn’t long. It’s an evening’s read. It’s an excellent way to spend the May Day holiday weekend, and is a lot easier than reading Mises’s magnum opus, Human Action (though the latter also comes highly recommended, for the philosophical grounding it gives economics).

An accessible introduction to elementary economics, as Mises offers in Beware the Alchemists, should be required reading for anyone hoping to serve in, vote for, or write about government. Sadly, those are the three occupations for which no qualification or experience is required at all.

Jim Fedako wrote an interesting article over at the Mises blog musing about the nature of accounting in public services. It neatly captures the problem that the public provision of a public good is not meant to be done for profit, so how do you really account for government’s performance? An extract:

Government accounting is a true oxymoron. We can determine the cost of government, but what about the value produced? What is the product? What is its value? What is the bottom line? Of course, these unanswered questions do not stop government from playing business, pretending to create value and profit for society.

[…]

[W]henever government officials speak of fiscal accountability, they are only considering approved budget versus actual spending. They are not referring to worthiness of expenditures, only whether or not they spent revenue according to the budget, with no outright theft of money. Oh, sure, the officials will claim that fiscal accountability means that money was spent on productive activities since, as expected, it is assumed by the governmental entity that only productive activities were approved in the budget. Circular reasoning.

[…]

The implication is that a governmental entity that increases its tax revenue faster than its expenditures is performing a service for its constituents; the entity is achieving a profit for the taxpayers. Conversely, a governmental entity in a deficit cycle is creating a loss for its taxpayers. So, the more a government confiscates, the better off the taxpayers. Does that make sense? Down is up, and up is down. Somewhere, somehow, we ventured down the rabbit hole.

I’m not convinced this is the final word on the subject, but it certainly is food for thought.

This is tragic, in a side-splitting sort of way:

Zimbabwe’s latest inflation figures had been delayed because there were not enough goods in the shops to measure price increases, the state statistical department said yesterday.

It’s instructive for various reasons. The most obvious is that price controls, which Zimbabwe imposed to curb consumer price inflation, cause shortages. Eventually, those shortages become critical, as they have done now. Pity it’s the Zimbabwean people who pay the price for their government’s failure to grasp Economics 101, but it’s hardly surprising.

The other point to make is that the consumer price index that is usually held up as a measure of inflation is, in fact, nothing of the sort. It measures a possible effect of inflation, perhaps, but it does not measure inflation itself. Inflation is not a general increase in price levels. Inflation is an increase in money supply.

For an illustration, consider this chart, which measures US money supply against the value of the US dollar:

As the value of a dollar decreases, consumer prices will, of course, tend to increase too, but that increase is not in itself inflation. An Austrian School monetarist, Frank Shostak, has this to say by way of defining inflation:

The subject matter of inflation is the debasement of money. For instance, historically inflation originated when a ruler would force the citizens to give him all the gold coins under the pretext that a new gold coin was going to replace the old one. In the process, the king would falsify the content of the gold coins by mixing it with some other metal and return to the citizens diluted gold coins. On account of the dilution of the gold coins, the ruler could now mint a greater amount of coins for his own use. (He could now divert real resources to himself). In short, what was now passing as a pure gold coin was in fact a diluted gold coin. The expansion in the diluted coins that masquerade as pure gold coins is what inflation is all about. As a result of inflation, the ruler could engage in an exchange of nothing for something.

Under the gold standard, the technique of abusing the medium of the exchange became much more advanced through the issuance of paper money unbacked by gold. Inflation therefore means here an increase in the amount of paper receipts that are not backed by gold yet masquerade as true representatives of money proper, gold. Again the holder of unbacked money can now engage in an exchange of nothing for something.

In the modern world the money proper is no longer gold but rather paper money hence inflation in this case is purely the increase in the stock of paper money. Please note we don’t say as monetarists are saying (sic) that the increase in the money supply causes inflation. What we are saying is that inflation is the increase in the money supply.

Note that inflationary monetary policy remains, today, a way for governments to “inflate away debt”. But more pertinently for Zimbabwe, this shows that inflation can be measured simply by checking the records of the central bank: how much money did it print last month, as an annualised percentage of money in circulation? That’s inflation.

Measuring inflation does not require shelves full of consumer goods of which prices can be determined. Why would such a measurement be meaningful if prices are capped by government anyway? More pertinently, why would such a measure be meaningful if the shelves are empty in the first place?