Towards a Universal Exchange: Zero Inflation
Jun 25, 2014

The SORAnomic Definition of Inflation and Deflation

Since the time of Keynes, governments have stimulated their economies either through government spending (borrowing through bonds) or through monetary expansion (printing money, debasing the currency) or both. These increase the amount of money circulating in an economy which then increases the amount of people working since money is the command of work:

The value of any commodity..is equal to the quantity of labour which it enables him to purchase or command

Wealth of Nations Book 1, Chapter 5

A person who wants to work and start a business must find money in order to command the work of suppliers which he will then process to create goods or services for his customers who will give him money as an additional command of work to compensate the work that he has done.

Unfortunately, too much money in circulation will lead to too much command of work. This excess command manifests as an increase in demand for goods and services. Those who have the excess money will demand more work to be done (Adam Smith calls this effectual demand). If this work demanded is beyond the natural productive ability of the producers in an economy, then this leads to a sort of oppression as overwork.

The problem is that human desires for goods and services (called absolute demand) can increase much faster than human productivity or the ability of people to satisfy them. This discrepancy naturally causes prices to increase which then reduces the effectual demand to those who can actually pay those higher prices. This is easily seen in the animal kingdom where only the fittest and strongest (those animals who can do the maximum work) get access to scarce resources. From here we can make two inferences:

  1. Inflation is immoral because it leads to the survival of the fittest.
  2. 'Inflation' is really demand inflation , and 'deflation' is really demand deflation.
    • The price fluctuation is the effect, and desire or demand is the cause

Japan's shrinking population reduces demand, leading to demand deflation, making its extraordinary monetary policies such as QE ineffective

This new definition of inflation can be applied to all 'inflation' problems, examples of which are:

The Persistent Problem of Inflation

Inflation is immoral as it oppresses the lower strata of society just as an alpha-male in a group of lions oppresses others in order to maintain its dominance. Therefore, a SORAnomic system must target zero inflation since moral sentiments, or fellow-feeling, are our base. In our science, inflation represents an imbalanced 'societal balance sheet' and has the effect of making the working class insensibly work for free in proportion to the currency still owned.

For example, if I work one hour today and earn $10, I expect to be able to buy $10 worth of goods tomorrow. However, if prices rise by 10% overnight, then my $10 can only buy what yesterday was really $9.09. In effect, the inflation has caused me to work around 5 minutes for free. Multiply this 5 minutes by the population of a city affected by that inflation and you will see potentially millions of minutes of free work done for the benefit of the employers or profit-owners. This is why people nowadays to wonder why they seem unable to make ends meet even if they work hard and even work two or more jobs. This is because in reality, inflation and the commercial system are causing them to work for a certain hours for free.

Business owners (who Adam Smith calls those who live by profits) do not have this problem since their profits is percentage-based and they can raise their prices at will. Their problem, on the other hand, is the risk inherent in business, which they counteract by asking for government incentives and even the absurd idea of guaranteed profits, as in the case of privatizations. If businesses are given sure profits, then workers must also be given lifetime employment regardless of their performance. The absurdity of one makes the other absurd as well.

Why there is a 2% inflation target and why revenue is bigger than growth

inflationrestaurant

Economics was created by businessmen who wrote as economists, such as Ricardo, JB Say, and the marginalists. Thus, they naturally view the success of businessmen as leading to the success of any economy, which is a plain fallacy. This is why they generally want inflation and even advocate a 2% annual inflation rate. The reasoning is that by increasing money supply, there will be more money to create employment.

But the problem was never money supply, but the profit maximization doctrine of businesses. It is because they want a high return for their money that they refuse to employ people who will not bring in more profits. This is what happened during the Great Depression, and why employment recovered only when the government stepped in to employ the people directly -- because goverments do not have a profit maximization doctrine.

A 2% inflation target merely gives more money for banks and corporations to arbitrage and gamble with, without increasing employment. This business-first policy of Economics is most evident in Piketty's R > G model. R stands for Return which is based on percentages while G stands for Growth which is based on integers.


The increase in money supply caused by the fiat-ization of money has led to Gen X and millennials working for free bit by bit

The increase in money supply has also caused private profits to increase more than the real income of the people

Let us assume the following:

When the next year comes, instead of being able to buy $8 billion worth of additional goods, they will only be able to buy $7.84 billion. They would have collectively forgone $160 million worth of work or around 16 hours working hours per person. In other words, the inflation rate of 2% made every wage-earner work two days for free.

Where did the $160 million worth of work go? Since all trade by money is measured objectively in numbers, the work that was lost by the wage-earners simply went to the profit-earners through the higher nominal prices of the succeeding year. This explains the rising gap between the rich and the poor in all capitalist countries. The poor wage-earners unknowingly give their work for free to the rich profit-earners via inflation as time passes. This oppression is insensible because it is spread over the entire population, similar to a tiny tax that no one will think worth to complain against.

Preventing Inflation by Eliminating the Dual Purpose of Money

Adam Smith pinpoints the creation of money and other nominal value instruments in the 18th century as the source of not only inflation, but also of inequality:  

That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce and as the measure of value..In consequence of these popular notions, all the different nations of Europe have studied, though to little purpose, every possible means of accumulating gold and silver in their respective countries.

When in fact, real wealth should be measured in commodities:

Among the Tartars, as among all other nations of shepherds, who are generally ignorant of the use of money, cattle are the instruments of commerce and the measures of value. Wealth, therefore, according to them, consisted in cattle, as according to the Spaniards it consisted in gold and silver. Of the two, the Tartar notion, perhaps, was the nearest to the truth.

In the succeeding posts, we shall examine how a universal system of exchange using the barter of commodities can reduce or even eliminate the problem of inflation, reducing or preventing social inequality or the gap between rich and the poor.  


Edit Oct 2017: Added Piketty's R>G and stagflation and hyperinflation