This is just me thinking out loud, but could we think of money, per se, as limited, but the potential wealth it can buy as unlimited, with “wealth” proper being necessarily the result of innovation? It is industrialization–mechanization and specialization of labor–that has brought us such an increase in our standard of living. Through inflation, clearly, the cost of a ham sandwich has gone from, say, a nickel 80 years ago to $2.50 or more (depending on where you eat). We say that wealth has been created in that period, but have we really done anything but revalue our money? Would we not be just as wealthy paying a nickel for that sandwich and feeling rich on $20,000 a year? Is our real wealth not due to more efficient allocation of labor and resources made possible by better technologies?
The truest measure of economic growth–and this is the point made by Henry Hazlitt, in his book “Economics in one lesson”–is how much we can buy with our money, not how much money we can make. We see Unions whining that wages are stagnant. This is a stupid complaint, since it is not wages but purchasing power that matters; and clearly, cheap labor in China and Mexico and elsewhere has enabled us to own much more than we otherwise would have been able to. They enable cheap TV’s, computers, digital appliances, and many other things. My cordless drill was made in China. Had it been made here, it would have likely cost twice as much. That money, once spent, would not then have been available for me to have several nice meals, and Home Depot would not have realized any profit had I not bought it at all.
On this reading Capitalism, per se, is not an engine for wealth creation, per se, but of innovation. Having innovated, it is merely the most efficient system for the translation of an idea into reality. It does not lay down unnecessary barriers, whereas all other systems do.
Actually, I looked up Gross Domestic Product, and it is just an aggregate of the prices charged for everything. Likewise, inflation is measured by the Consumer Price Index, which is just a list of items, where they look at changes in pricing.
How, I wonder, would you measure the rate of increase in CAPABILITIES? For example, there would be no way for the CPI to show that for the price of one type of old TV, you can now buy a flat screen TV. For the cost of one type of car, you can now get On-Star, or backing up cameras, and other features.
And how do you measure things that are NOT commodities? For example, cordless drills? What if one day you couldn’t afford it, and now you can? Prices on those sorts of things are constantly dropping, but we don’t see negative inflation.
I have my morning routine to take care of, but the larger point I am working towards is a more general examination of the Federal Reserve. Does it serve primarily as an agent of inflation? This is pretty out there speculation, and I may well back off that statement, but more research is needed on my part.