TheCostsofInationRevisited-GeorgeMason.pdfVIP

The Review of Austrian Economics, 16:1, 77–95, 2003.
c 2003 Kluwer Academic Publishers. Manufactured in The Netherlands. The Costs of In?ation Revisited STEVEN HORWITZ sghorwitz@ Department of Economics, St. Lawrence University, Canton, NY 13617 Abstract. Neoclassical treatments of in?ation understate the costs associated with in?ation, even at very low levels. A comparative institutions perspective that recognizes the epistemological properties of prices and the institutional process by which in?ation takes place, reveals the costs of in?ation to be both larger and more widespread than standard treatments suggest. This paper makes use of insights from Austrian economics, public choice theory, and the new institutional economics to argue that in?ation imposes costs by undermining the coordinative properties of the price system. Not only are there the direct costs of increased economic error, but actors also divert resources away from direct want-satisfaction into attempts to either prevent or cope with the increased degree of uncertainty in?ation imposes. These resource costs are best understood from a comparative institutions perspective, as traditional measures of economic well-being, such as GDP, cannot distinguish between exchanges that directly satisfy wants, and exchanges that are attempts to correct or prevent utility-diminishing activities. The analogy between these coping costs and rent-seeking behavior is explored. In addition, in?ation imposes costs by undermining the coordinative properties of markets and inducing actors to, on the margin, prefer to seek wealth or allocate resources through the political process. Key Words: in?ation, Austrian school of economics, economic growth JEL classi?cation: B53, E31. Introduction As in?ation rates have continued to fall both in the US and world-wide