I. Causes of inflation

Hayek believes that to find out the real cause of inflation, we must first define the concept of inflation and distinguish what is inflation and what is not. Hayek thought: "The original intention and true meaning of the word inflation refers to the excessive growth of money, which will lead to the rise of prices according to the law." He believes that whether the price increase is inflation depends on the reasons. If it is caused by an excessive increase in the amount of money

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Rising prices are inflation; If there is not too much money, but other reasons, it is not inflation. In Hayek's view, there is no inflation caused by supply factors such as "cost push". As long as the amount of money does not increase, neither higher wages nor higher oil prices or higher prices of general imports can raise the overall price level of goods.

So Hayek's conclusion is that only the general rise in prices caused by too much money is the real inflation. Starting from this definition, Hayek believes that the only reason for inflation is the excessive amount of money.

Too much money is the only cause of inflation, so why too much money? Hayek believes that mainly lies in the following points:

First, the rulers regard issuing money as a symbol of strength and a guarantee to realize the will of the government. Issuing additional currency can not only bring rich benefits to the government, as an important source of fiscal revenue, but also be the guarantee and symbol of the ruler's pursuit of personal fame and wealth. Therefore, the rulers themselves have an inherent impulse to issue more money.

Second, the government's monopoly on currency issuance provides conditions for rulers to issue more money at will. Hayek believes that the will of the government will only be realized when the rulers have the impulse to issue money, but it will not be realized when the government monopolizes the right to issue money, and it will be easily realized under the condition of government monopoly.

Thirdly, Keynes's "insufficient effective demand theory" provides a wrong theoretical basis for the government's currency issuance. Hayek believes that the government has an inherent impulse to issue money, and the monopoly issue of money provides conditions for this impulse to become a reality. However, if there is no theoretical basis to encourage it, the government's behavior will be constrained. On this issue, Keynes just put forward the theory of insufficient effective demand, which provided an excuse for the government to realize its will and made it "justified" to continue to implement expansionary fiscal and monetary policies. In analyzing this problem, Hayek sharply criticized Keynes.

Two. The main harm of inflation

Hayek believes that inflation brings serious harm to society, which is generally summarized as rising prices, social unrest and people's unrest. But in fact, Hayek believes that the most serious consequence of inflation is the destruction of the market mechanism. This kind of destruction first leads to the wrong guidance of resources; Secondly, it leads to the wrong guidance of labor.

1. On the misleading of inflation to resources

Hayek believes that money plays an important role in complex social and economic life, because all prices are expressed in money and all transactions are exchanged in money. The market transmits all kinds of information to relevant parties through money, so that producers and consumers can act according to the instructions of the market. In this process, the neutrality or stability of the currency is the premise of the real and smooth transmission of market signals. As long as the currency interference is eliminated, everyone can get real information and make choices in a free exchange economy. Under the action of the price mechanism, the market will adjust the supply and demand relationship of different products and services, and resources will be guided to the departments most in need of society. The effective allocation of resources improves economic efficiency and promotes economic growth and normal development. Once inflation occurs, the price system will be disordered due to the destructive power of money, disrupting all effective orders of the market mechanism, interfering with the transmission of market signals and distorting them, resulting in the imbalance of resource allocation, reducing economic efficiency and making the economy in an unstable state.

2. About the misleading of labor caused by inflation

Hayek believes that in the long run, inflation cannot save large-scale unemployment. He believes that unemployment is due to the contradiction between the distribution of demand for various goods and services and the distribution of labor and other resources that produce those products. This contradiction is inevitable in the process of economic operation. Without the interference and destruction of human factors, under the action of market mechanism, the contradiction can be alleviated by adjusting the relative price and wage system. Of course, new contradictions may reappear, but as long as the market mechanism is fully exerted, such contradictions can always be solved. The magical function of market mechanism to adjust the balance between supply and demand cannot be calculated and replaced by a simple-minded person or a clever scientist. Hayek thought: "People can never know all the factors that determine such a market order, so it is impossible to know what kind of special price and wage structure are needed to make supply and demand equal everywhere." Therefore, any artificial efforts to regulate market supply and demand will destroy the market mechanism, which will not only help solve the contradiction, but will make things worse. He believes that unemployment shows that the structure of relative prices and wages has been chaotic (usually caused by monopoly or government pricing). To restore the consistency of labor supply and demand in various departments, it is necessary to change relative prices and wages and transfer some workers. In this adjustment process, the stability of the currency plays a vital role. If the currency is stable, it can timely, smoothly and truly transmit all kinds of market information, adjust the relative price and wage system, correctly guide the transfer of the labor sector and restore the balance of the labor market. But if there is inflation, the situation will be reversed.

Hayek believes that the impact of inflation on increasing employment is temporary. Once inflation ends, or when it no longer grows at a sufficient rate, these jobs will disappear and new unemployment will be caused. Therefore, in the long run, it is wrong to increase total demand to ensure full employment. In Hayek's view, on the one hand, inflation has changed the distribution of money among various production departments and stages of the production process, on the other hand, it has caused the expectation of further price increase. In this way, in the process of inflation, "the extra money supply will inevitably lead to changes in the relative intensity of demand for various goods and services, and these changes in demand will inevitably lead to further changes in relative prices, as well as the subsequent changes in the direction of production and the distribution of various production factors (including labor)." In the process of this change, inflation has caused some false demands, disturbed the relative price and wage system, given workers a lot of wrong information, and temporarily attracted them to do some work.

Whether these misguided workers can continue to find jobs depends on whether inflation continues. The longer inflation lasts, the more workers' jobs depend on sustained and accelerated inflation. This is not because they can't find jobs without inflation, but because they are misled by inflation into temporarily attractive jobs, which will disappear again after inflation slows down or stops. Because, "continuous injection of extra money in some aspects of the economic system can create temporary demand there. When the growth of money volume stops or slows down, coupled with the expectation that prices will not continue to rise or the growth will slow down, this demand will definitely end. The continuous injection of extra money will put labor and other resources into employment, which can only be maintained if the amount of money continues to grow at the same rate or accelerate. However, the employment brought by this policy cannot be maintained indefinitely. After a period of time, it can only be maintained by an inflation rate that will lead to complete chaos in the entire economic activity. "

Hayek believes that the accelerated inflation has brought the economy to a dangerous situation, and there is no other way. After this situation is reached, no matter which road you choose, there will inevitably be a large number of unemployment, which is a deeply regrettable but inevitable consequence brought about by social wrong policies. In this way, on the one hand, inflation leads to imbalance between supply and demand by destroying the market mechanism, which leads to improper allocation of resources in a large range and makes large-scale unemployment inevitable; On the other hand, it disturbs the relative price and wage system, produces a lot of false information, leads workers to sectors that are not really important in society, wrongly transfers workers between sectors, and actually intensifies the contradiction in the labor market. Therefore, Hayek believes that inflation is the cause of the increase in unemployment, not the prescription to control unemployment. "The current unemployment is the direct and inevitable consequence of the so-called full employment policy in the past 25 years. Many people still mistakenly believe that the increase in aggregate demand will eliminate temporary unemployment. They don't realize that although this method works temporarily, it will bring more unemployment in the future. " On the other hand, a large increase in unemployment will in turn aggravate inflation, and people will put pressure on the government, which may trigger political turmoil at any time. Therefore, when the government promises to assume the responsibility of full employment, in order to maintain a low unemployment rate, it can only continue to issue more money and continuously raise monetary wages. In this case, every wage increase that exceeds the productivity growth will definitely increase the total demand. Therefore, the frequent injection of money has become a continuous process, which has caused the intensification of inflation.

As a result, persistent inflation has brought greater unemployment, and the sharp increase in unemployment has prompted more serious inflation. Inflation in the 1970s was the result of this vicious circle. Hayek thought, "We have no essence between inflation and unemployment, just as we don't have much essence between over-saturation and indigestion. Although it may be pleasant to have a full meal while eating, indigestion will also follow.