"Proximate cause"

 

Some people argue that printing money is not the cause of inflation. I think it's a waste of time to make that argument. Even if we avoid getting caught in a trap about the meaning of the word "printing", and even if we avoid getting caught in a trap about the meaning of the word "money", it is still a waste of time to make that argument.

The "proximate cause" and the "real reason" are two different things. I give Milton Friedman his proximate cause, because I don't see any way around it. The level of prices is linked to spending; and the level of spending is linked to money.

Whether the money must increase before prices go up, or whether money can increase after the fact, is a boring, petty, and irrelevant concern. The level of prices, and changes in the level of prices, are tied to money. I don't see any way around it.

In a normal economy, printing money is the proximate cause, the immediate cause of inflation. But this does not mean that printing money is the real reason the inflation occurs.

From the Wikipedia article:

In sociology

Sociologists use the related pair of terms "proximal causation" and "distal causation."

Proximal causation: explanation of human social behaviour by considering the immediate factors...

Distal causation: explanation of human social behaviour by considering the larger context in which individuals carry out their actions.

A Hypothesis:

If the cost of finance increases from one or two cents per dollar, to three to five cents or more, those who pay this cost have greater incentive to raise their prices to cover the additional cost.

It may be that a cost increase of one or two percent is less than the increase of normal economic growth, so that the normal annual increase of money is sufficient to cover the rising cost of finance, at least for a few years. The rising cost may still lead to rising prices, but if the price increases occur every three or four years, say, they will be scarcely noticed, at least in the short run.

But if the increased cost of finance amounts to three or five percent or more, at or beyond the limits of normal economic growth, the normal increase of money is not enough to support this rising cost. The rise of prices, to cover the cost, will become more frequent and ultimately annual. At this point, the inflation can scarcely be missed.

Inflation that arises due to rising cost is cost-push inflation. The proximate cause of this inflation may be an increase in the quantity of money. But the ultimate or distal cause and the real reason for this inflation is the increasing cost of finance. It doesn't take long, though, for the reason to change. When the price of everything is rising, the rising cost of everything is the reason inflation continues.

At that point, Milton Friedman says the proximate cause is relevant, and the only way to stop the inflation is to limit the quantity of money. I can live with that.

But it doesn't solve the problem, because the inflation is not the original problem. The inflation is a consequence. The problem is the initial rising cost: the rising cost of finance. Until this problem is solved, either the inflation will continue, or the restriction of money will reduce economic growth, or both. The problem cannot be ended until the initiating cost problem is solved.