This question may seem to be ridiculous. What does it mean, why inflation is harmful? Are there any other ways it can be? Inflation means the increase in prices – how it can be good or simply neutral? But not everything is that simple. Let us look closer.
Inflation is the increase of prices. But the problem is not in this, but in the fact that they don’t grow stably and that they increase differently in different spheres. Some commodities rise in price faster, some slower. If everything grew in price with one and the same tempo, nothing would have been changing. The cost of any commodity would always be the same when related to any other commodity.
It has been more than two hundred years since the publication of the Wealth of Nations by Adam Smith, but there was hardly said anything more comprehensive and correct in what concerns the principles along which the world’s economy, markets and simply people function.
One of the most important concepts introduced by Adam Smith is the so-called “invisible hand”. In a society existing along the rules of free market and competition, every individual works for only and exclusively his own good, without cooperating with all the rest directly to achieve any other goals. Not a single one of them thinks about the greater good, the benefit of the state, of other people and organizations except for the ones he has something to do with.
Nobody can doubt that we live in times of constant and radical changes. In human history there have been only a handful of events that changed the lifestyle of people and the picture of the world entirely, and the more humankind progresses, the closer the new events of such kind become. We live in the period when one of them is changing the world just before our eyes. And, of course, economics cannot neglect these happenings, for such changes never pass it and often interact with it directly. From the invention of the wheel to the introduction of the production line these world-changing events were always related to the economical development. This time is no different.
The Sherman Act of 1890 finished the era of truly free market in the United States of America, although, ironically, it has been directed at protecting the freedom of competition. It may seem obvious that the law that limits the competitors cannot be protecting the competition, but, nevertheless, this law became the foundation of what we know today as the American antitrust legislature.
The Sherman Act prohibits all kinds of all contracts, combinations and conspiracies in restraint of trade, and monopoly in interstate and foreign trade. On paper it seemed to be perfect for protecting smaller participants of the market from being eliminated by the larger ones; in reality everything turned out much worse.
Every now and then we can hear about the necessity for the introduction of this taxation policy as the one that is used in the majority of developed countries in Europe and which ensures the just redistribution of wealth between the citizens. Progressive taxation scale means that every person is supposed to pay taxes according to his income – the more the income is, the larger the percentage of it to be taken by the state becomes.
Some economic principles (in fact, most of them) are not limited by the sphere of economics and have great influence over the other lines of human activity. The idea of opportunity cost is one of them. It means that the value of any action should be judged according to how profitable would it be to do something else? The opportunity cost of doing any action is all the other actions that could have been done instead of it but weren’t. If the action brings more profit than any of its alternative, then the decision is economically correct. If some of the alternatives can bring better results, then the decision is economically wrong.
Although the history clearly shows the inconsistency of the methods used in planned economy with real life and catastrophic long- and short-term results they have when applied, not only the ignorant masses, but also the people who are in charge of governments seem to be more and more inclined to it in the latter years. It is natural for government officials to be willing to increase their control over the business, but not less frightening all the same.
There are many ideas concerning the purpose of the state: why it appears, what its functions are and so on. The economical science has a simple answer to this question that is limited to one phrase: the free-rider problem.
The free-rider problem is an economical problem that is based on the fact that certain members of the society consume the resources they haven’t paid for. For example we can use the law enforcement and road maintenance. It is next to impossible to determine to what extent every particular person uses them.
One of the basic principles of economics is the so-called comparative advantage. That is, every person has certain abilities, some of which are greater and other less prominent. Some of these abilities allow him to do more well-paid work, others – less well-paid. The level of payment is determined by the law of supply and demand – the more there is supply of workforce having this particular ability, the less money one can expect to be paid for it. However, what choice of work is the best for every particular person is determined by his comparative advantage
Every now and then we can hear hysterical voices, threatening that the humankind will exhaust all the natural resources of our Earth in 10, 20, 100 years (the exact figure varies according to the level of anxiety of every particular doomsayer). But how much credit should we pay to such predictions?
The history itself suggests that all the predictions of the end of the world in any of its senses have been false. No matter whether it is atypical pneumonia, the Large Hadron Collider launch or the exhaustion of fossil fuels, there is, in fact, nothing any single human being can do about them but panicking. Even if we believe that the natural resources will come to an end, how this knowledge may help us?