What Is Inflation? Clarifying and Justifying Rothbard's Definition

Abstract

Austrian economists have debated issues of monetary theory and inflation extensively, but there is still no agreement on the definition of inflation. Mises (1953, 240) defined inflation as an increase in the supply of money not offset by an increase in the demand for money, leading to a fall in the purchasing power of money (PPM). Rothbard (2009, 990) defined it as an increase of fiduciary media, explicitly excluding increases in the stock of specie. This article will argue that Rothbard’s definition is the most suitable for economic discourse and analysis and can be generalized to any market-selected money. By consistently applying the method of counterfactual reasoning (Hülsmann 2003), it is shown that the processes of money creation lead to very different outcomes depending on the conditions of money production. The term “inflation” is therefore best reserved for money production in the form of bank credit expansion or fiat money creation. These phenomena are external to the market, and the process of redistribution they bring about runs counter to the structure of income and wealth that would have emerged in their absence.