The Truth of Inflation

Rongqing Dai, Ph.D.

Abstract

Inflation is not only a fundamental element in the market economy, but also a key to understand many important economic phenomena that have occurred in the past. Nonetheless, there does not seem to be a consensus among the professional economic experts about the role of inflation, mainly because most studies about inflation have been either empirical analyses, or mathematical modeling based on empirical observations and statistically processed empirical data, without solid philosophizing or persuasive dynamic reasoning, although some meaningful conclusions have been drawn out of those empirical studies.

The mechanism of redistributing wealth through inflation in response to wealth increase has been widely ignored by economic professionals. Even when mentioning the wealth redistribution due to inflation, professionals have often viewed it as a negative factor in the economy without much appreciation of its positive role in the process of wealth accumulation. Unlike taxation and any other officially enforced or private philanthropic activities for wealth redistribution, inflation redistributes the increase of wealth naturally; the logical mechanism behind this will be discussed in this article, along with an in-depth analysis on the inflation-related dynamics in the market economy in general.

 

1. Introduction

The market economy is a complicated dynamic system for which people have been generally contented with empirical theories without understanding the more fundamental dynamic causes behind the scenes, which could sometimes lead to unsatisfactory or even disastrous economic consequences. The confusion about the nature of inflation is a typical example of the limit of empirical studies for grasping the in-depth logic behind the scenes. Although inflation is a fundamental factor in the market which sensitively affects the economic wellbeing of both individuals and the economy at large, it is also an issue for which no consensus has been reached among scholars.

As for whether economic growth would cause inflation, some economists point out that inflation is not the result of economic growth, but the result of the over growth beyond the capacity (Conerly 2019; Pettinger 2017), some others think that in the long run, inflation is positively related to economic growth in a bidirectional relationship (Behera and Mishra 2017), while the proponents of the quantity theory tend to deny that economic growth would cause inflation at all (Henderson 1999; Shostak 2018).

As for the impact of inflation upon the economic growth, some point out that inflation would have negative impact on the economy in the long run (De Gregorio 1991; Idalu 2015); some find that it depends on whether it is in a developed country or an undeveloped country (De Carvalho et al 2017); in the above mentioned literature of Behera and Mishra (2017), based on the data from India, the researchers find that as long as the inflation rate is under 4%, it will exerts a positive impact on the economic growth, and many others also believe that as long as the inflation rate is under certain small cutoff value, e.g. 2% (Milligan 2015), 6% (Davis 2019), etc, it would not hurt the economic growth, but the renowned economist Robert Barro (1995) finds that inflation would hurt the economic growth only if the inflation rate is higher than 40%, while some others consider “a little dose of inflation is absolutely essential” (Milligan 2015), and thus we need “to bring inflation back to target whenever it threatens to rise too high or fall too low” (Ireland 2013).

Obviously, the reason for this lack of consensus among the professional economic experts about the inflation-related dynamics (such as the cause and the impact) in the economy is mainly because all the studies have been either empirical analyses, or mathematical modeling based on empirical observations and statistically processed empirical data, without solid persuasive philosophical reasoning, even though some meaningful conclusions have been drawn out of those studies of empirical nature.

One essential common deficiency in terms of understanding the dynamics of inflation is the confusion about the mechanism of wealth redistribution through inflation. Although the redistribution of wealth through inflation has been a jargon that is familiar to many economic professionals, it has been generally viewed as a nuisance that is negative to the economy. Those who are most serious and knowledgeable about the redistribution of wealth through inflation and thus have noticed the benefit of this redistribution mechanism (Doepke and Schneider 2005, 2006; Doepke et al 2019), have been only interested in the static equilibrium patterns of the redistribution through inflation, instead of looking into it with a dynamic view of the movement. Accordingly, their studies come short of offering a general dynamic perspective of the redistribution mechanism of inflation, although they do offer the insights about certain cause-and-effect relationships between the redistribution of wealth caused by inflation and the aggregated economic results. This is because they have focused on the details of the redistribution as well as the direct economic consequences, and attempted to model the redistribution through empirical equations, instead of analyzing the dynamic mechanism effectuated by inflation for the redistribution through philosophically bent dynamic analysis. The lack of philosophizing about the dynamics behind the empirical results could cause the significance of their studies to be limited to the specific issues of interest and the specific market of interest (US) targeted in their studies, which might have been reflected from the general ignorance among the economic professionals around the world about the role of inflation to positively redistribute wealth in the economy, and also from the frequent governmental mistakes when dealing with inflation, since Doepke and Schneider first published their studies one and a half decades ago.

The Main Interest of the Current Study

The main interest of the current study for this writing is to acquire a general philosophical comprehension of the nature of inflation, which could benefit economic professionals in any part of the world for their understanding about how economic development and inflation interact with each other, especially the mechanism of redistributing the wealth through inflation. For this reason, the current study focuses on analyzing the dynamic cause-and-effect logic instead of empirical data patterns. Accordingly, the hypothetical examples used in the analyses are all for facilitating the comprehension of the relevant concepts and the logic behind, instead of offering the patterns and magnitudes of data as empirical economic studies usually do.

In terms of the redistribution mechanism of inflation, there are two main types of wealth redistribution through inflation, the first is the redistribution of wealth in response to the wealth increase created by a certain economic group, and the second is the wealth redistribution in response to the price shock as the result of the general cash injection into the market. Although both scenarios are important for the inflation-related wealth redistribution movement in the market economy, the dynamics involved is quite different: the former is instigated by the economic units in the market while the latter usually moves in a cascade flow from the government to the ordinary units. Therefore, the former is more closely related to the natural mechanics of the economic development than the latter, while the latter is more vulnerably subject to artificial monetary operations than the former. The current study would mainly focus on the former and discuss the latter only in a broad background for the impact of cash injection to the market.

2. A Natural Mechanism for Redistributing Wealth

As a matter of fact, in an economic system, inflation is a mechanism that would naturally redistribute the wealth (increase) created by a specific group of people to the rest of the society.

One typical example of how this redistribution mechanism functions is the role of inflation in the economic growth through exportation of goods and services, which actually offers a very convenient angle of view for understanding the economic booming of some previous economically backward countries such as South Korea, China, India, and so on. We might acquire a general understanding of how inflation could help to move wealth between different social groups within a country and between different countries through a conceptual analysis with a hypothetical example.

A Hypothetical Example

Assume country A is an exportation-oriented country, and country B is an importation-oriented country, and at the beginning, the wealth of an average citizen of country A is much less than the wealth of an average citizen of country B, and thus an average citizen of country A would normally not consider to consume goods or services from country B, while an average citizen of country B would take the consumption of goods or services from country A, or a trip to country A, as a trivial matter.

Now assume manufacturers of type T products in country A make a huge amount of profit through their exportations to country B, and thus they start to spend a large amount of money in their own country A to buy goods and services, which would cause a sudden imbalance between the demand and supply of the relevant goods and services (in a general sense, including unmovable property). Accordingly, those who provide the goods and services in country A to those profitable manufacturers of type T products would increase their prices for the goods and services, hire more local people, and order more raw materials to produce the relevant goods and services, which would further boost the prices in the market for many other types of goods and services. During this process, the need for relevant skills, experiences, or simply handy labor, would increase in the market; the improved business performances of those involved companies would enhance the ability of the employers to compensate the employees, or promote their will to reward the employees for their good work; and then the increased general living cost would push the government and the employees in all social sectors to demand the increase of working compensation. All these factors would cause the income of workers to increase in the market.

If the abovementioned process could last for a long period, the overall market price of domestic supply of goods and services in country A would steadily increase, and by definition, inflation would have occurred in country A because of the huge profit of the manufacturers of type T products from their exportations to country B.

Assume that through a period of time, the manufacturers of type T products in country A made 1 billion dollars from country B, and it would be equivalent to 10 billion units of their own currency; however, because of the inflation, when many of those people need to spend most of the money, the buying power of that amount of 10 billion units of their own currency might have become only half of its original worth. Obviously, because of the inflation, the actual domestic wealth accumulation of the manufacturers of type T products in country A could be much less than what they might have thought of when they originally gained the profit through their exportations (e.g. A person initially expected to purchase 100 acres of land, and but then found that he could only afford for 50 acres in the end).

However, from the stand point of view of the buyers in country B, those people from country A did gain 1 billion dollars from them. Then where did the rest of the wealth that was moved from country B to country A go? The answer is simple: it is redistributed to other people within country A, and the mechanism of fulfilling this redistribution is the (infamous) inflation. As the result of the inflation, the general price of goods and services of country A might become closer to those of country B (or even supersede the prices in country B for some items), and the general income level of the ordinary citizens in country A might also grow rapidly.

Two Ideal Scenarios

In order to better understand the dynamics in this example, let’s examine two ideal scenarios. First, in an extremely ideal situation, assume that the surface value of every single unit of the currency of country A magically doubles instantly everywhere in the system, including all the prices and all the numbers on every balance sheet (no matter in banks or in private households or any social entities or any single person’s financial records), then we won’t see any effect of inflation, as long as the exchange rates on the international market also adjust proportionally at the same time. This means that it is not the change of the surface value of the total amount of banknotes in the market, but the uneven change of the purchasing power within the economic system, that would cause the noticeable problem of inflation.

Second, if those who pump up the total buying power of the society by generating their own increase of wealth would voluntarily share their increase of wealth with the rest of the society, then the increased total buying power would not be reduced because of this voluntary sharing (suppose people would always quickly get into contractual cooperation whenever there is the need of more capital than they could offer by individuals); but on the other hand, a more rationally distribution of the total national wealth among business owners and skilled workers of versatile backgrounds could facilitate a more balanced nationwide economic development, which could not only help to bring forth a quick nationwide economic growth, but also boost the wealth of average citizens in comparison to other countries, as long as their currency does not over devaluate in the international market (i.e. the exchange rate does not change too much).

Accordingly, if the market could be fine-tuned in such a way that the wealth increase in a specific group of the society would be quickly and rationally redistributed to the whole society, while that profitable group of people could still enjoy a meaningful wealth increase for the needs of their personal life and the expansion of their businesses, then inflation might be a very useful tool for the economy; accordingly, as the result of the inflation in the above hypothetical example, not only could country A as a nation accumulate an immense amount of wealth in total, but also could its general price of goods and services become almost the same as in country B, and thus a bit of saving would make its citizens not only able to consume goods and services from country B, but also able to travel to country B as tourists.

Typical real life examples that the above conceptual analysis might apply to could be the exportation of IT services from India to US, the exportation of toys, garments, and goods for convenience stores from China to US, and the exportation of electronic appliances from South Korea to US.

The Negative Side of Lacking Inflation

On the other hand, if there would be no inflation allowed in country A, which means the prices of domestic supplies of goods and services would be all fixed, then the wealth increase of those manufacturers of type T products from their exportations would not depreciate as it would with inflation; but the increase of the income of most ordinary citizens from the economic growth would be much slower. Although the market would still be boosted to certain extent because of the spending of those profitable manufacturers, a large amount of the increase of the total national wealth would remain in the hands of those manufacturers without being shared with other citizens in the nation. Consequently, this would exacerbate the social polarization.

Even if the polarization effect could be offset through a special taxation policy to restrict the wealth accumulation by individual people, we would not be able to solve another even more serious problem caused by the fixed-price policy as the means to avoid inflation, which is the crippled demand and supply mechanism in the domestic market, let alone the worsened imbalance of the domestic economic development, since pricing is a very important determinant for the consumption of goods and services. When the total buying power increases, if the domestic prices are all fixed, then the increased total buying power might cause severe shortage of certain goods and services (as well as the possible abuse of certain natural resources), and the unnatural redistribution of the buying power among ordinary citizens by taking heavy taxes from the wealthy people would make this situation even worse.

Besides, as long as country A would stay in a market economy (instead of a planned economy), a forced redistribution of wealth through taxation from the wealthy to the poor could help the economy only if it is limited to certain extent, for otherwise it would hurt the reproduction capacity of manufacturers; therefore, even after the heavy taxation, a large amount of the wealth increase from the exportations would still be retained by those wealthy people, and the social polarization would still get worsened.

Of course, the market economy is a complicated open dynamic system, and sometimes some previously hidden factors might come into play and thus smooth things out. But in general, as a natural wealth mover, inflation could serve to redistribute the wealth in a relatively more smooth way without risking ruining the economy due to the possible negative effects of fixing the prices as mentioned above.

The Change of Wealth Balance between Countries

In general, simply put, importation could help to bring in the needed goods and service for the basic livelihood of the citizens, as well as the needed supplies for the companies in need, at the cost of the buying power of the country, while exportation could help the country to gain the buying power, to enhance the market liquidity and to boost production, at the cost of the natural or human resources of the country.

Now let’s take a look at what would happen to country B. Let’s first assume that the currency of country B is not a hard currency to be accepted by other countries for international transactions, and thus people of country B need to use a currency of another country (e.g. US dollar) to buy goods and services from country A, then the importation from country A itself would reduce the national buying power of country B since it will reduce their total possession of the hard currency. In case the currency of country B itself is an internationally recognized hard currency, then importations would increase the debt of country B to country A.

Therefore, in this hypothetical example, by helping the economic growth in country A, inflation also helps to change the worldwide wealth balance among countries.

On the other hand, if the domestic production capacity of country A is weak, then in order to satisfy the increased domestic purchasing power as the result of exportation, some other people would import goods and services from some other countries (including country B), which would cause a reversed wealth movement out of country A. Therefore, a balanced economic growth in various areas of all sectors would be an important assurance to keep the wealth within a country.

The Generality of the Redistribution Mechanism

Although the above analysis on the domestic wealth increase redistribution is conducted with a hypothetic example of exportation, the conclusion about the wealth redistribution mechanism of inflation applies to the redistribution of the increase of wealth created in any other ways.

Besides, unlike taxation and any other officially enforced or private philanthropic activities to redistribute the social wealth, the redistribution of wealth increase by inflation as discussed in the above hypothetic example happens naturally. Here I do not mean to promote inflation. We all know that inflation does hurt people and could have negative (or even disastrous) impact upon the economy if not being properly tamed, as I will discuss shortly. However, without the knowledge of the redistribution mechanism as discussed here, people would not fully understand how inflation operates in the economy, which could logically entail that whatever measures taken to handle inflation might be quite haphazard.

3. The Impact of Excessive Amount of Currency

For most countries, the foreign hard currency usually needs to be exchanged back to the domestic currency for people to purchase in the domestic market. Therefore, in the above hypothetical example, the increase of the domestic buying power through the profit from exportation would most probably come with an increase of the total amount of the domestic currency in the market, after the exporters make the exchange of the hard currency (that they made from country B) for the local currency of country A. Although this increase of currency would be the direct trigger of the inflation in the market, as analyzed above, it also meaningfully plays the role of redistributing the wealth increase. This wealth redistribution would most probably benefit the economy in general, unless the domestic consumption demand of those exporters much exceed the domestic production capacity of country A and there is no importation restriction for people to satisfy their needs by large scale importation.

However, not all the increase of currency in the market would come naturally during the economic growth as in the above example. The supply of currency is often increased through the operation of various monetary policies, which is the most familiar cause of inflation to the world. An important difference between the inflation caused by the injection of cash and the inflation as the direct response to the natural increase of wealth (as in the above hypothetical example) is that, the former would have a bigger chance to create a real wealth increase for those who are in the upstream of the injected cash cascade than to cause a redistribution of wealth increase, as would naturally happen in the latter case. Consequently, the former might cause more wealth polarization than the latter.

The Demand for More Cash When the Productivity Increases

Even without international trading being involved, a rapid economic growth might also make an increase of the total amount of cash desirable. Here we might conceptually borrow the famous equation of the quantity theory MV = PQ (M is total amount of cash, V is the conceptual velocity of cash circulation, P is the average price, and Q is the total amount of products), which claims that the nominal total cost of products in the market would tend to match the nominal total buying power of the market. Although this equation has oversimplified the real market circulation, it conceptually reveals one aspect of the market circulation: if the general purchasing power stays low, it would force the total nominal market value of products to stay low. In case there is a sudden jump of PQ because of a sudden increase of the products Q, it will require a much faster V if the total amount of cash M stays the same. However, it is much easier to inject more cash than to increase V because V reflects the structural quality of the economic system; therefore, the easier way to have a higher MV in response to the sudden increase of PQ would be to increase M.

On the other hand, if the MV cannot match the incremented PQ (because of the stationary M and the slow increase of V), it will hinder the sales in the market and could stop the economy from a quick growth; when this gets serious, the manufacturers would have to lower down the prices because of their incapability of selling products, and the market would incur a deflation, and the economy might enter a recession. Therefore, a rapid economic growth could possibly create a natural demand of an increase of the total amount of cash in the market.

The Impact of the Injection of Cash

The cash injection through the operation of monetary policy would always come in an uneven manner (Dai 2018). Since the market response to the increase of the total amount of cash is not even, the initial boost of the injected cash to the economy would be more effective than what come after because those who are in the upstream of the cascade of the injection could spend the money at the old low prices. They could hire more people and purchase more supplies before the market prices are puffed up by the injected cash. Obviously, their spending would help to mobilize the market in two direct ways: 1) invest in their own businesses and thus help to boost the economy by producing new goods and services; 2) create new demand of the goods and services with their spending for all kinds of purposes (including their business expenses).

After the initial spending by those upstream receivers, the market prices would start to be puffed up, which could lead to a tangible inflation. The inflation created in this way would first dilute the income of labors instead of the capital owners, and for this reason it is believed by many that inflation due to the increase of total cash in the market would only redistribute wealth between the poor or even from the poor to the rich; obviously, this opinion lacks the awareness of the redistribution mechanism that I discussed earlier. Besides, in addition to the above two ways, there is still the chance for some hidden hindrance to economic circulation to be removed by the extra cash.

On the other hand, ideally, if after an extra amount of cash is injected into the market, the production of the nation is proportionally boosted, then the market price increase due to the injection of the extra amount of cash might be cancelled out; when this happens, the injection of the extra amount of cash would bring forth a nationwide real wealth increase without causing long term inflation. This ideal scenario is actually of realistic potential, or at least it is possible for a result that is close to this scenario to happen under certain idiosyncratic conditions, because of the previously mentioned potential benefits of injecting cash into the market.

However, in most cases, it would be much more difficult to increase productivity than to increase the amount of the total cash in the market, and thus the injection of the extra cash would boost more percentage of total price than total productivity, which means that the inflation would happen as the result of the injection of cash by the central bank. Let’s borrow the quantity theory equation again: MV = PQ, which conceptually tells that if there is too much cash in the market and the transactions for purchasing are active, then the price in general would increase if the total production stays the same.

Of course, even if it would not follow the ideal inflation-free scenario, the injection of the extra cash might still possibly boost the economy, and thus both the nationwide wealth and the average household wealth would all increase in the end. As mentioned in the Introduction section, it has been found by many that maintaining a limited amount of inflation rate could actually be good for the economic growth, which might imply that we need to inject a greater amount of cash than what is directly needed for the increased circulation as the result of the economic increase, if the observed the inflation rate cannot be accounted for by the exportation-related inflation alone. Although there has not been any mathematical model to satisfactorily account for the rationale behind the said phenomena, conceptually we could reason that the mechanisms behind this type of observations should be related to the unevenness of the capital distribution in the market and some kind of conceptual circulation frictions, which need to be overcome by certain percent of oversaturated cash in the market. On the other hand, when the increase of the amount of cash in the market greatly outpaces the increase of the total productivity, it is also possible to severely hurt the economy and the overall social wellbeing.

The Inflation Caused by Production Reduction

The worst case of inflation might be caused by a severe reduction of the overall production in the market. From the quantity theory equation MV = PQ we could see that once the production (including the importation of goods) Q in the market decreases severely, if P and V stay the same, then the amount of cash M in the market would be more than healthily needed, which would in turn to puff the price P up in order to maintain a conceptual balance between the MV and PQ, which means inflation would occur. When this happens, if not handled properly, social panic could occur over the shortage of some essential life necessities, which could psychologically drive the overall price P to rise drastically and get out of proportion to the real value of the products, and thus lead the PQ suddenly jump to a great value so that the amount of cash M appear to be insufficient instead of over excessive, and the whole economy would be at stake.

4. The Negative Effects of Inflation

The unevenness in the wealth increase (created by either the endogenous growth in the economic system or the injection of cash from outside) determines that both the benefit of the natural redistribution of wealth and the benefit of cascade cash flow would be neither seamless nor perfectly fluent, in the sense that not everyone in the society might get the redistributed wealth or the exogenously injected benefit at the same time in the process, and some people might never get the redistributed wealth or the injected benefit, or get it very late. Therefore, even when the inflation is in the so-called safe range, it could still be harmful to many people in the economic system. Accordingly, how to counteract against the non-seamless and non-fluent nature of the potential benefit of inflation should be something that the economic policy makers or economic scholars or philosophers need to be seriously concerned with. Furthermore, the unevenness in the inflation-related wealth increase could lead to a much more serious negative consequence if the injection-induced inflation surpasses the boosted total production tremendously, which could cause a severe shortage of goods and services in the market, and when the situation goes out of control, it could crash the whole economic system as occasionally happened in the past.

The Negative Impact of Corruption, Dereliction of Duty, and Common Errors

Although inflation is an inevitable natural consequence of wealth increase or positive maneuvers in a free market economy, it could also be created by unnatural and negative artificial practices. Corruption is one of the most deleterious practices that could artificially create the unwanted inflation with the worst impact on the economy. Suppose the wealth of country C is worth $100 billion, and the existing total amount of cash M in country C is a favorable amount in the sense that it could help to maintain a conceptually healthy relationship of MV=PQ. Now if some powerful man in the governing body of that country decides to print another amount M of cash to put into his own account, and spend it for his own expenditure or his family’s business, then the total amount of cash of country C would become 2M while the total worth of the wealth stays the same, and thus half of the $100 billion wealth would go to the pocket of that ruling person instantly. As a result, according to conceptual relationship of the quantity theory MV=PQ, the average price P would be jumped to double to match the increased total nominal buying power since V and Q basically stay unchanged, and thus the real buying power of the rest of the country is cut to half while the paper value of their wealth looks the same. This would cause tremendous negative impact on the economic wellbeing of all other people, as well as the total economy at large.

Even without an immorally greedy purpose, negative inflation could still be easily created through the artificial injection of cash into the market. As mentioned above, the injection of cash could often be desired to smooth the market circulation, or simply in response to the economic growth; however, due to the difficulty to precisely determine how much extra cash would be proper for the injection, it would be very easy to over inject cash into the market, which would result in a certain degree of inflation. The difficulty of precisely estimating the needed extra cash could further induce a more serious problem – the dereliction of duty of government officials and scholastic data providers when handling inflation related sensitive issues, which would make the consequence of the inevitable over injection of cash much worse, and thus become the best accomplice of corruption in ruining the economy through negative inflation.

5. The Philosophy of Taming Inflation

The touchiest topic about inflation, of course, is how to avoid the hyperinflation that might be triggered by unexpected political or economic incidences (e.g. a sudden shortage of necessities due to malicious hoarding or other reasons). When that kind of situations occur, special measures, such as the express importation of needed goods using government emergency fund, crashing down malicious hoarding, implementing mandatory price control, or financial solutions through monetary operations, would be required in order to get an equilibrium MV = PQ relationship.

However, economics is not solely for dealing with extreme market crises, and thus we must also be concerned with how to deal with inflation in general to benefit economic growth and prevent detrimental situations from occurring. In this respect, the mechanism of inflation as discussed above would logically demand treating inflation based on detailed information about the economic growth (in addition to the pure numbers of the inflation rate as commonly used so far), which should be the fundamental philosophy of taming inflation.

As mentioned at the beginning of this writing, even without the knowledge of the mechanism of how inflation functions, economists have already noticed that a certain amount of inflation could benefit economic growth, and the impact of inflation upon the economy might differ from country to country. Now with a better understanding of the mechanism of inflation as discussed in this writing, we would not only understand why a certain amount of inflation could help to boost the economic growth or reduce the chance of economic slowdown, but also become better informed of how inflation could help the overall economy to benefit from the growth in specific sectors or the growth of specific enterprises, and thus we could improve the inflation-monitoring system in the time of economic growth to avoid the detrimental effect of overcautiously curbing inflation. Accordingly, it would also help us to better monitor the unhealthy increase of inflation after ruling out all the healthy inflation portions, and thus we might better control the inflation with more fine-tuned approaches. Besides, with this more advanced knowledge about the mechanism of inflation, we are also able to build a better social safe net to help those who might be negatively affected by any type of inflation (including the inflation that could help boosting economy) and thus reduce the negative impact of inflation upon the wellbeing of common citizens.

6. The Philosophical Background of the Current Study

The current study is part of the fairness-analysis-based economic analysis (FABEA), which is part of the philosophical framework of fairness analysis (Dai 2014, 2017). FABEA views the market economy as a dynamically circulating system which functions to mobilize the social potentials of creation and alteration to meet the (economic, political, cultural, psychological, physical, spiritual, and other) needs of the world through fair trading. In general, unless the judgment of fairness could be unarguably certain, the fairness analysis way of thinking would be more interested in studying how individual fairness judgments might impact the communal (social) status, than judging “what is fair and what is unfair” in those individual cases. For example, it will not unconditionally judge that the redistribution of the wealth through inflation is unfair like many people tend to claim, but is more interested in how the locally fair deals (e.g. the customers accept the reasonable increase of price when the demand exceeds the supply) would dynamically impact the global results; but on the other hand, it will also judge things like maliciously stealing money through inflation to be unfair.

Unlike its precedent empirical theories, the Newtonian Mechanics bases its theories on analyzing the status of the most basic microscopic units in a system, instead of the overall or average behavior of the whole system, which grants it the unprecedented capability of obtaining the dynamic information of each part of the system as well as of the whole system; similarly, the basis of the fairness analysis philosophy is the investigation of the fairness demand during the interaction between individual persons, which are the most basic microscopic units in any social system. Accordingly, unlike empirical studies (e.g. Barro 1995; Doepke et al 2005, 2006, 2019) of equilibrium states in the economy, with FABEA, we would not be satisfied with the fairness claims that only focus on the aggregate status without the knowledge of the dynamics at the most basic layer of the society; rather, we would always have in our mind the more fundamental dynamic factor that will cause some people to suffer from inflation even when the inflation rate is in the so-called safe range. Philosophically speaking, only with this dissatisfaction about the macroscopic aggregate knowledge, we might be not only able to better understand the dynamics of inflation but also determined to strive for the best solution to offset the negative impact of inflation for the sake of the public.

7. Remarks on Philosophical Analysis versus Empirical Study

A naïve or even harmful idea in this high tech era is that philosophy should be only the business of the academic philosophers, and the business of the academic philosophers should be only about the answers to the confusing big questions, or the categorization and introduction of the existing philosophical works of famous figures in the past.

It is true that mathematical formulation, lab experiments and field data collection, plus powerful calculation means could be very useful for acquiring philosophical comprehension about the issues in the world, but that does not mean we could replace philosophical contemplation about practical issues with mathematical formulation plus data collection and processing. Although the statistical approach is very handy and powerful for studying complicated systems, it also comes with a major defect in general that it highly depends on the size and the contents of sampling itself, and thus could easily miss some hidden behavior of the system.

In general, complicatedness could create a new phenomenal layer for which we might apply statistical analysis without heeding the dynamic causes behind; besides, at the surface level, complicated systems with very different backgrounds (e.g. a mechanical system vs an economic system) might exhibit very similar behaviors, and thus we might apply similar logical thinking to deal with them. But on the other hand, the study of superficial patterns of a complicated system without knowing the detailed dynamic causes could also easily overlook some meaningful factors, as in the case of inflation. Therefore, when it gets very complicated, it would be desirable to handle the system with much more fine-tuned philosophical thinking instead of basing our actions solely upon statistically averaged data.

In addition to discovering some details that would be missing in the empirical studies, logical philosophizing could also help to offer explanations to some results found in the empirical (or empirically modeled) studies, while we cannot do the opposite. For example, the knowledge of the wealth redistribution mechanism of inflation could be comfortably used to explain why a rapid economic growth in a developing country could cause high inflation, but we cannot discover the redistribution mechanism from the empirical data of the rapid economic growth without philosophical reasoning.

8. Conclusion

Inflation is not only a fundamental element in the market economy, but also a key to understand many important economic phenomena that have been occurring for decades or even centuries around the world. Nonetheless, there does not seem to be a consensus so far among the economic experts about the role of inflation due to the lack of a thorough understanding of the dynamic logic behind its dazzling market behavior. An important reason for this to happen is that most studies about inflation have been empirical in nature, without solid philosophizing or persuasive dynamic reasoning, although many meaningful conclusions have been drawn out of those empirical studies.

In general, inflation is a double-edged sword, which could hurt or benefit the economy; hence, any haphazard handling of inflation with either over restrictive policy to curb it or over relaxing policy to slacken it could be injurious to the economy. On the other hand, due to the unevenness in market activities, even in the so-called safe range of inflation rate, some people could be hurt when the cost of living increases. Therefore, fine-tuned social maneuvers with social safety net to offset the negative impact of inflation would be warranted for a healthy economic system. In the meantime, anticorruption measures and reducing the imbalance in the economic constellation could be also of critical importance to avoid the negative impact of inflation.

9. Postlude

For the past months I have tried extremely hard to let the world to know the truth of inflation elaborated in this writing. Unfortunately, the mainstream academia has been blocking this writing from publishing all the time, although professional economists have so far surprisingly lack the knowledge of the mechanism of inflation. After being declined by all the academic journals that I have submitted, I am calling on the support from the general public to bring this knowledge to the classroom of economics all over the world, so that the populace around the world would have a better chance to avoid getting into financial difficulty because of inflation.

 

REFERENCES

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