Demand Inflation DeflationAugust 10, 2022
Neoclassical Economics shallowly defines ‘inflation’ as a rise in prices, and ‘deflation’ as its decline.
This definition obviously does not hold because Japan has been in deflation for a long time and yet its prices, such as rent and consumer prices, remain high.
What really ‘deflated’ was economic activity, arising from Japan’s declining population. Activity is based on the desire, will, or demand to act. This is why Superphysics defines:
- inflation as demand inflation *
- deflation as demand deflation
*From the viewpoint of Economics, the Superphysics definition is Demand-Pull Inflation. Cost-push inflation is merely demand-pull inflation from the viewpoint of the suppliers and producers.
With this new definition, we can derive the following concepts intuitively:
This means that the demand of society is satsified as quickly as possible so as to not have leftover unanswered demand. It also implies that the amount of money circulating is just enough to circulate the supply to the demand.
If a society were one huge family, then it would be a family where all the children are fed and satisfied.
This is a situation where rich people can still demand even if production stagnates or even declines. The demand of the rich allows money to overcirculate.
An analogy is a family wherein some children have much more than others.
Real-world examples are:
- the Stagflation of the 1970s and 2022
- the third world debt which circulated among the cronies of corrupt dictators
Recession or Depression
This is a situation where even the rich cannot demand (or merely withholding their demand in the hopes of higher future profits).
In this case, there is an undercirculation of money. This is similar to a family in poverty wherein the children go hungry.
This is a situation where production declines relative to demand. Unlike stagflation which is largely caused by the private sector, hyperinflation is caused by the government reacting to an earlier round of inflation. This prompts it to oversupply money.
Anciently, this happened when a king debased his currency, causing it to overcirculate. An example is a family where the father demands all the resources.
Modern examples are:
- the Weimar republic
- Zimbabwe under Mugabe
- Venezuela under Maduro
This is a situation where demand declines nationwide. It would be like a family wherein some of the children moved out or died out.
- modern Japan
- the Babylonian exile of the Jews
- the Roman Plague of Justinian
- Update Dec 2020: A recent example is the demand deflation during the first months of the pandemic
Under Classical Economics, any oversupply of money will cause a rise in demand which will then eat all the supplies, leading to a crash. For example:
- a Roman emperor who debases his currency will cause inflation which will cause the citizens to support a usurper using the old currency
- A bank that oversupplies bank notes would create a bank run, allowing other banks to take its place in the economy.
This natural competition between emperors and banks creates a reliable balance and predictable outcomes.
All kinds of inflation and deflation, therefore, are signs that the natural balance of an economy has been disrupted.
Balance is essential to make systems last long. This applies to material bodies, living organisms, political systems, social relationships, business organizatios, economics, etc. This principle will be explained in Part 4 as part of the Fourth Law of Value
How Balance Is Disrupted
According to the Four Social Cycles, the Worker, Warrior, Philosopher, and Merchant have to work together to move their society forward. Most often, one of them gains a natural dominance depending on the current cycle.
However, sometimes the dominant class wants to stay in power. In the economy, this is done in the following ways:
|1 Worker||Communism, Populism|
|2 Warrior||Tyranny, Dictatorship|
|3 Philosopher||Tithes, Dogma|
|4 Merchant||Mercantilism, Profit Maximization Doctrine|
As the most pressing and obvious disruption was caused by Neoclassical Economics, we shall explain it in Part 4.