Inflation - And the Crony Academic "Sophistocrat"

Pratap Bhanu Mehta (whom I have lambasted on an earlier occasion) chairs a State-owned "think tank" - and is best described as a "sophistocrat": like the sophists of old, he "specialises in ‘making the weaker argument the stronger,’ or, in other words, convincingly presenting lies as truth by dressing them in the misleading cloth of the arguer’s expertise." 

In his regular column, he has this time focused on inflation. This former Professor of Law & Government at JNU says inflation is "governance induced" and caused by "governance failures" - and I wonder why he does not use the word "government." The word "governance" is pure fiction - as I have explained in an earlier post. These are failures of The Government of India, Professor Mehta!

What is inflation? Older economists looked differently at this word. Ludwig von Mises (1881-1973) wrote how the very meaning of this word had changed during his lifetime:

What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation.

This is the "classical quantity theory of money" - which was NOT mechanistic and mathematical like that of Irving Fisher's MV = PT. But even Fisher knew that increases in the quantity of money cause a rise in all prices. The difference between the classical and modern quantity theories is just that the modern version says prices rise "proportionately" while the older economists knew that prices rise depending on "where the new money goes." So, if you "follow the money" all will be clear.

Today, money is NOT gold. It is just fiat paper - monopolistically produced by The State. Thus, increases in the supply of money are caused by The State. It is The State that produces inflation - deliberately, to fund its expenditures and to buy support. As Mises wrote:

The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.

Professor Mehta does not say this. Instead, he says:

When inflation is persistently high there is good reason to believe that there are significant supply bottlenecks in meeting increased demand. So the question is: what is it about the Indian economy that is making it difficult to generate supply responses to increased demand? In certain areas of agriculture there are long-term issues around productivity. There is simply no excuse why these issues should not have been addressed seven years into the UPA. But the supply of every single input cost, from energy to services, from land to credit for small businesses, seems to be alarmingly high. Each of these input costs can be directly linked to governance failures. Proper regulation is needed in many areas. But the form in which regulation is administered at so many levels of government is exacting a huge toll on the ability to create supply responses.

This is Professor Mehta's sophistry: to blame inflation on something else - like demand and supply of various goods, instead of nailing The State as the only cause. Yet, "creeping inflation" has been on for decades: when I was a little boy, a bottle of Coca-Cola cost 30 paise. When I bought my first motorcycle, petrol was 3 rupees a litre. When the first Maruti 800 rolled out, it cost 45,000 rupees. Inflation is nothing "new." As long as deficit financing continues, inflation will continue too.

Under the old International Gold Standard, if a nation "inflated" the supply of paper notes to finance The State, this would affect the foreign exchange market, and all foreign currencies would rise in value relative to the domestic currency. This would make imports expensive and exports cheaper. The public then viewed this as a "bad thing" - and condemned it. Today, however, people think this is a strategy to "boost exports" - and they cheer! This is because Keyenesian "education" has dulled and corrupted their minds. As Mises explains:

In the course of the depreciation, foreigners are in the profit-making position while domestic residents are in the losing position. Foreigners can buy more of the domestic products of the country that has inflated its currency and have to pay for their purchases by selling a smaller amount of their own products. The inflation-producing country, its is true, exports more, but it receives less for its exports. Inflation forces upon that nation a restriction on consumption. Only people completely blinded by mercantilist fallacies can view such an outcome as advantageous.

The Indian rupee has been losing value internally as well as externally - for decades. The US dollar was worth 8 rupees, the Deutsche Mark was 2.50 rupees, and the UK pound was 27 rupees in 1989, when I went to study abroad. Today, the dollar is 45 rupees, the Euro is over 60 rupees and the pound about 80 rupees. My course fee of £5000 cost me less than Rs. 1,50,000. Today, the same course would cost Rs.4,00,000 - and, yes, the exporters are laughing! When will we realise that foreign trade is about imports, about improving domestic consumption?


Indeed, Professor BR Shenoy's "Note of Dissent" to Nehru's Second Five-Year Plan was on precisely this point: inflationism. As Lord Bauer wrote in his tribute to this honest Indian economist:

They [the majority of economists] envisaged large-scale money creation for the financing of the highly ambitious Second Five Year Plan, maintenance and expansion of a wide range of economic controls, and extensive nationalization. In his Note of Dissent, Shenoy rejected the general spirit of the Majority Report as endangering personal freedom and a democratic political system. He also disagreed with several major proposals, including the scale of money creation, the maintenance and extension of state economic controls, and the scope of nationalization. He argued specifically that money creation on the scale envisaged by the Majority Report and under the Second Five Year Plan would result in inflation or a balance of payments crisis or both—a prediction that was fulfilled barely a year after the inception of the plan.

The difference between now and then is just this: then, they printed money to build steel plants under their ownership; today, they want to fund "welfare." And our chacha (and his guru Amartya Sen) were on the inflationary side then, just as they are now. Interestingly, both are from Cambridge, and both were taught their craft by Keynes' greatest disciple, Joan Robinson. In Sen's case, he was also a member of the secret Cambridge group called "The Apostles" - a group to which Keynes himself belonged, and who called themselves "amoralists." (See the wiki on Amartya Sen.)

Let us return to Professor Mehta's piece and his critique of chacha manmohan's claim that "there is a trade-off between inflation and unemployment." This is typical Keynesian bull - the notion that the more the government spends, the better the fate of the economy, "because there is more money floating around." 

In reality, this is but a means of cheating the working class - by agreeing to the trade unions' demand for higher wages, while at the same time engaging in inflationary finance. By inflation of the currency, The State "consumes capital." This is bad for the nation - though a handful of people gain, including crony exporters. The working classes lose because there is less Capital to invest, less jobs on offer, and wages cannot rise because productivity does not. Consumption falls - including consumption of imports (like oil). As Mises wrote:

Keynes did not teach us how to perform the miracle of turning a stone into bread, but the not at all miraculous procedure of eating the seed corn.

It is time we realised that the lesser a State spends, the better-off we all are: that is, the more of our income we ourselves retain, to save and invest; the less we pay in taxes; and that the same applies to government borrowings as well as money creation. I have an earlier post explaining this in full.

The only real solution is a return to the International Gold Standard - which will place "golden handcuffs" upon the wrists of every finance minister.

But there is still more sophistry in Professor Mehta: this time, he also talks about the high price of land - that is, urban land. Mehta writes, in support of a new Land Acquisition Act:

The bill will, if well drafted, help create fairness and transparency in compensation. But it will not solve all the principle land issues. It will solve the fairness issue. But whether it will solve the shortage or zoning issues is still an open question. Some land acquisition is location-specific. Land-acquisition problems are a product of the fact that the entire ecosystem for land planning is mismanaged. 

Actually, urban land is expensive only because of one reason: The State (of course!) which is a monopolist of urban land (the "urban development authorities") as well as a monopolist of roads. Around all our metropolitan cities there is abundant land - that is, "unowned land" that is not linked to the city by roads. 

Thus, the dual monopolist exploits us for his own, selfish gains. He makes urban land prohibitively expensive - deliberately; by "policy." Ditto for inflation, which is also "deliberate policy." 

All the urban development authorities must be abolished. And the road monopoly must go too. City mayors must be constitutionally installed - with the specific constitutional duty of providing roads to any real estate development coming up in the periphery of the city; further, roads must also be built to connect all the satellite towns to the primary city. 

Here again, all we have from Professor Mehta is blather and sophistry. Below are words that Mises' himself might have directed at Professor Mehta had he been alive now. But these words were targeted at people like him and his boss, chacha manmohan:

The pretended solicitude for the nations welfare, for the public in general, and for the poor ignorant masses in particular was a mere blind. The governments wanted inflation and credit expansion, they wanted booms and easy money.

Mises said "it is not the duty of the economist to be fashionable and popular; he has to be right. Those timid souls who fear challenging spurious doctrines and superstitions because they have the support of influential circles will never improve conditions. Let them call us "orthodox"; it is better to be an intransigent orthodox than an opportunist time-server."