by Mr. William Bissell, Entrepreneur
Bad inflation happens when rules block innovation. Policymakers would not tell you this
Of the many politically incorrect things to say in our hypersensitive times, praising inflation tops the list especially on a day the central bank RBI announced its monetary policy review.
But inflation has many dimensions.We need to see it through real stories. I have had the opportunity to spend time in a village over a span of 20 years.In the early part of the last decade, I began to see strange things happening.
The plumber who had returned from Mumbai for family reasons used to bemoan the lack of demand for sophisticated toilets that he had learned to install.
His wages were much lower but, then, so were his costs. However, in early 2002, an awful thing happened : with growing demand for his services, he began to raise his daily wage by nearly 20 % a year.
His personal decision to inflate his wages upped the quality of his life. Also, as his wages during the golden years of the NDA & UPA - I regimes kept growing faster than inflation, he and many others like him who suddenly were no longer living at subsistence wages began to invest their surplus in land.
This, in turn, led to a 15 year period when land values began to rise. The rising land values began to affect the behaviour of the subsistence economy as peasants realised that their net worth made them much wealthier than they thought they were.
But the party ended around 2010. Economic growth slowed down and the plumber couldnt demand the wages he was used to. Then, other goods and services he had gotten used to became more expensive and he had the awful sinking feeling of getting poorer.
Good Inflation Vs Bad Inflation..!
So, is inflation good or bad Well, it depends on the kind of inflation you are talking about.
The first type of inflation, what I call good inflation, is when wages fuelled by rising demand and increasing productivity grow faster than the cost of goods and services. This process creates wealth and surplus in the hands of the workers.
The most important thing to remember about this kind of inflation is that it is the result of innovation & capital mixing together in a positively reinforcing spiral that increases the productivity of the worker.
This is the kind of inflation that Britain had in the latter half of the 19th century and America had from the end of the Second World War to the late 1960s and China continues to have from the 1980s till today.
In each case,for Britain, for America and now for China, this realwage inflation has created immense wealth, catapulting the worker and the peasant into the ranks of the middle classes. In doing so, it has made each of these countries rich and powerful.
The second type of inflation of goods & services, or / bad inflation,happens when politicians and bureaucrats make too many complicated rules & obstruct the natural flow of human ingenuity.
This complexification imposes huge costs on businesses and entrepreneurs who pass these on to the consumer.Throughout the world,politicians and bureaucrats have a strong set of incentives to over-regulate.
The only thing that keeps them in check is the rapid growth of bad inflation and the prospect of an upcoming election.
The current spring that we are experiencing is directly related to the politicians understanding that an election is fast approaching and that it is time to loosen some of the restrictions so that inflation might drop.
Saving Their Skins..!
Politicians and bureaucrats know what to do but they also know that simplifying things will put many of them out of work.
Economists like to fool us all by saying that a fast-growing economy will have some inflation as rising incomes push up demand for goods and services.This is their idea of conventional inflation.
However, this economic principle hides that truth that human ingenuity in the past century has allowed us to vastly increase our productivity, rendering conventional inflation obsolete.
Regulate to Inflate..!
The first European flight I paid for from my wages in 1996 was from Venice to Geneva and cost $ 700 at a time when the aviation market in Europe was heavily regulated.Today,17 year later,the same flight costs $ 200 to 300. Its amazing to see that with all the increases in costs and inflation,the cost of a ticket has actually declined.This simple removal of obstructive regulations revolutionised air travel.
The truth is that bad inflation is the most accurate indicator of bad governance. As I write this,I walk past the cabin of our head of logistics and notice that the paperwork for every little movement of goods is growing.
One day, as he joked, we will need one truck for the goods & another for the paperwork to accompany the goods.
Now, thats inflation.
The writer William Bissell is an entrepreneur
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