Yesterday I heard Rep. Ron Paul of the House Banking Committee questioning Fed Chairman Ben Bernanke about inflation and the value of the dollar. It was at best a confused exchange, because, clearly, Ron Paul's definition of "inflation" differs from Ben Bernanke's definition of that same exact word. (Ron Paul is using an old definition, according to the two definitions compared on this web page.)
It would seem important that our public servants in charge of "controlling inflation" should agree on the definition of "inflation" before debating what to do about it—wouldn't it? Shouldn't the House Banking Committee, along with their counterparts in the Senate, eliminate the prevailing confusion by choosing one of the two (very different) definitions of the word "inflation"?
Ron Paul defines inflation as any increase in the "money supply" (which, by itself, begs several questions; see the end notes). Ben Bernanke defines inflation as an increase in the price level. To Ron Paul, zero inflation happens when zero "new money" is created. To Ben Bernanke, zero inflation is the scenario in which the prices we pay for goods and services do not increase in the aggregate.
Let's temporarily make the dubious assumption that we are able to measure and control the "money supply"—in spite of Milton Friedman's admission that that's nearly impossible. In a growing economy, there's a growing amount of goods and services, by definition. It takes money to make and buy those goods and services. How much money? That's the question, and there are at least two possible answers:
• In Ron Paul's zero-inflation scenario, the "money supply" stays unchanged, which implies that, in a growing economy, wages and prices must decrease. In simplified terms, the same amount of money paid out for producing and purchasing more goods and services translates to lower wages and prices in the aggregate. Ron Paul's definition of zero-inflation, in a growing economy, equates to what many others think of as "deflation." [Would you feel comfortable with a pay cut, just because Congressman X said "don't worry, prices are dropping too, and there's no inflation"?]
• In Ben Bernanke's zero-inflation scenario, the "money supply" grows at the same rate as goods and services. In simplified terms, x% more money paid out for producing and purchasing x% more goods and services translates to unchanged wages and prices in the aggregate. [Wouldn't you feel more comfortable with constant wages and constant prices?]
Most of us, I think, implicitly agree with the "inflation" definition Ben Bernanke is using: rising prices = inflation; falling prices = deflation. I also think most of us would be averse to wage cuts—even if prices were falling at the same rate—just to hold (Congressman X's definition of) the "money supply" constant. [Can you picture a future economy, after decades of holding the money supply constant, in which a large pizza costs ten cents and the average wage is fifteen cents an hour? I can't. Apparently, Ron Paul can, however.]
But I've been wrong before. If Ron Paul's definition of "inflation" is the one our public servants can agree on, I'll start trying to think of ways to convince my friends that falling wages are not a bad thing. Either that, or I'll give up on the hope that growth can accelerate, because when wages and prices fall, people typically want to hoard money, instead of using it for economic transactions.
In any case, wouldn't it be a good thing for the House Banking Committee to pick one definition or the other, to clarify the debate for us?
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End notes:
Ron Paul's position supposedly comes from the "Austrian" school of thought. I'll have to reread Mises' writings on this subject, because I'm not sure he was as explicit about the money supply as the position Ron Paul is taking.
Some additional questions for supporters of Ron Paul's constant-money-supply idea:
• Milton Friedman admitted in this interview that the "money supply" is almost impossible to measure. If we can't measure it, we can't manage it. How would we hold something constant if we can't measure it?
• Even if we could measure the "money supply," there are several possible definitions of that term: base money, M1, M2, and a revived M3. Which one should be held constant, and why, and how?
Contrary to social-science wisdom, almost no discovery, no technologies of note, came from design and planning—they were just Black Swans. The strategy for the discoverers and entrepreneurs is to rely less on top-down planning and focus on maximum tinkering and recognizing opportunities when they present themselves. So I disagree with the followers of Marx and those of Adam Smith: the reason free markets work is because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or "incentives" for skill.
I am in the middle of the second of two books by N. N. Taleb that have been tough for me to put down: 
Do not waste your time trying to fight forecasters, stock analysts, economists, and social scientists, except to play pranks on them... If you hear a “prominent” economist using the word equilibrium or normal distribution, do not argue with him; just ignore him, or try to put a rat down his shirt.
Yesterday I caught Lou Dobbs on CNN for the first time in months. Every time he worked his opinion about jobs into the conversation, he had the same look of contemptuous disgust on his face as he's had for a long time now. His unsurprising message, communicated in no uncertain terms via words and body language: Those evil old US corporations (full of "idiots") are still exporting high-paying jobs from America to the Asian communists. 
