Understanding the Roots of Inflation

With the recent high rates of inflation, Americans can hardly ignore the devastating effects of their lost purchasing power. Prices of food, gas, and housing are up, and retirement accounts are down. Meanwhile, as Ayn Rand said under similar circumstances fifty years ago, our leaders are “chanting that they want to help” while “pouring paper refuse on the flames.” Her lecture, delivered at the Ford Hall Forum in 1974 (when the inflation rate was 11 percent), was titled “Egalitarianism and Inflation.” She later described it as presenting “a metaphysical approach to economics: the cause, the mechanism, and the moral meaning of inflation.”

Rand’s profound analysis of inflation is as relevant today as it was then. Rand wants us to understand why mankind never seems to learn its lesson: economics alone, without philosophy, is insufficient. In this article she draws a philosophical lesson with epistemological and moral dimensions.

Her bold epistemological claim is that inflation is made possible by a widespread short-range and anti-conceptual mentality — the kind that takes goods as a given and treats money and credit like magic. When people ignore the importance of money as a store of value, they fool themselves into thinking they can engineer prosperity through government handouts funded by newly printed money. What they overlook is the fact that they are sabotaging the ability of rational, productive individuals to think, save, and plan long range. And without production, money is worthless.

Providing a long-range perspective, Rand shows how key economic concepts are derived from the facts of reality. She explains in simple terms the true causes of inflation, the real source of money’s value, the role of savings in production, the nature of a market, and why production, not consumption, is the real motor of the economy.

The next layer of Rand’s analysis is the moral one. The egalitarianism of the lecture’s title is the moral-political view that economic inequalities should be eradicated by government force. You can find in the lecture a novel argument about how egalitarian policies contribute to a “brain drain” of skilled workers and further undermine a country’s ability to produce, thereby contributing to more inflation.

You can listen to Rand’s lecture here:

An edited version of the talk is available in Philosophy: Who Needs It, a book of essays by Rand.

For more discussion of Rand’s “Egalitarianism and Inflation,” check out this interview with Rob Tarr, an expert on economics.