money: Eamonn Butler on Hayek & Inflation

Eamonn Butler of the Adam Smith Institute explains how inflation — the manufacturing of money and credit — changes the shape of the economy into a form that will collapse when the surge of new money and credit comes to an end:

Inflation brings many evils, of course. As the Nobel economist F A Hayek explained, it is not just about rising prices. It has real effects too. It distorts economic activity, and it’s a painful job to put things back to where they should be.

Economists often think of inflation as “money dropped from helicopters”. They mean that, with everyone suddenly having more cash in their pockets, they will be prepared to spend more, and prices will rise. Only then do they discover that they’re actually no better off.

Hayek was more subtle, explaining that money or credit never enters the economy evenly, it always goes in at some point. Since it is created by government, it’s often government industries that enjoy the first boost.

Then it slowly spreads out to other industries, like honey being poured onto a table. End the flow of money and the mound of honey-money in the middle collapses – but not before the higher prices in that sector have attracted in resources and human effort.

When it collapses, that investment is shown to be a failure, and something real has been lost, and has to be rebuilt.

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The tragedy of collectivist thought is that, which it starts out to make reason supreme, it ends by destroying reason because it misconceives the process on which the growth of reason depends. — F. A. Hayek

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