Which of the two is better : Inflation or deflation? Inflation is a phenomenon of rising prices without causing change in the levels of employment and output. Deflation, on the other hand, is a phenomenon of falling prices accompanied by a fall in the levels of employment and output. Both inflation and deflation are harmful for society and have undesirable economic consequences. But 1 When the question of a choice between the two evils of inflation and deflation arises, the lesser evil is to be selected. An inflation is the lesser evil. Thus, inflation is preferred to deflation because the former is lesser of the two evils. In the works of Keynes, "Inflation is unjust and deflation is inexpedient is inexpedient. Of the two deflation is worse."
Inflation Is Unjust :-
Inflation is considered unjust in the
following grounds :-
(i) Inflation redistributes incomes in favor of the rich
(profit earners) at the cost of the poor (wage earners and consumers).
(ii) Inflation increases economic
inequalities through its re distributive effect. It transfers purchasing power
from poorer to the richer sections of the society and thus widens the gap
between the rich and the poor.
(iii) Inflation is regressive in its
effect. It adversely affects those who are already weak and cannot protect
themselves. It specially hits the middle classes who suffer most during
inflation.
(iv) Inflation affects different people
differently and in different degrees and thus alters the economic and social
relationship in the country. It takes away wealth from some groups of the
society and transfers it to others arbitrary, ignoring the maxim of equity.
(v) It is socially demoralizing. It encourages the spirit
of gambling. It promotes speculative activities and diverts business skill and
efficiency from productivity to speculative activities.
(vi) It creates money illusion and
results in artificial prosperity which is short-lived.
(vii) It reduces the value of money and
thus erodes real saving of the people.
(viii) When the government adopts the
inflationary method of deficit financing to cover up the deficit in its budget,
the prices go up and this inflationary rise in prices diverts the goods and
services meant for public consumption to the government which is totally unjust
and inequitable.
Deflation Is Inexpedient :-
Deflation,
is considered inexpedient because of the following reasons :
(i) Deflation , by reducing prices and output, leads to a
sharp decline in the national income and thus reverses the process of economic
growth.
(ii) Deflation results in mass
unemployment. Reduction in prices and profits forces the businessman to close
down their establishment or reduces their production, thus giving rise to
large-scale unemployment.
(iii) Deflation leads to depression in the
economy. Downward trend of prices and production gives rise to pessimistic
conditions in the economy; economic activity contracts; scale of production is
reduced, volume of investment falls; and no new investment is forthcoming due
to depressed profit expectations.
(iv) Deflation, once starts, becomes
cumulative. It goes an gathering momentum and the economic crisis becomes
deeper and deeper with the passage of time.
(v) Deflation is undesirable from all sides. It
adversely affects the social, economic, political and moral life of the
economy. It curtails economic activity, causes mass unemployment, generates
poverty and ultimately results in the complete ruin of the economy.
Inflation Is Better Than Deflation :-
Through
both inflation and deflation have undesirable effects, but inflation is
considered better than deflation. The following arguments justify the
preference for inflation.
(i) Inflation, though it redistribute income and wealth
in favor of the rich and causes economic inequalities, does not reduce
national income. Deflation, on the other hand, has the undesirable effect of
reducing national income.
(ii) Inflation is a post-full employment,
phenomenon, while deflation is an under employment phenomenon. In other words,
during inflationary phase all facts of production are employed in some way or
the other, whereas, during deflation, the problem of unemployment becomes more
and more acute.
(iii) It is easy to control inflation by
adopting various monetary and fiscal measures, but it is very difficult to
recover the economy from deflation. Once deflation starts, it gathers momentum
and the cumulative downward process ultimately takes the economy into severe
depression, the marginal efficiency of capital declines and the businessmen
become pessimistic about the future of their investments. Under such
conditions, monetary and fiscal policies become ineffective; they cannot
restores the confidence of the entrepreneurs and compel them to increase
investment.
(iv) Mid inflation is better than
deflation from the point of view of economic development. Moderate monetary
expansion by raising the price level and increasing the expenditure, can
stimulate economic development in a depressed economy.
(v) Inflation Is Lesser Evil :-
a.
Inflation is a single evil because it redistributes wealth in favor of the
rich people arbitrarily. Deflation is a double evil because it not only
redistributes wealth in the same arbitrary manner, though in favor of the poor
people, but also, reduces output and causes unemployment.
b.
Inflation makes it increasingly difficult for the people to earn a good
livelihood, while deflation deprives the people of their livelihood by
rendering them unemployment; in other words, in inflation, people do not get
enough, in deflation, they do not get anything at all.
In
the end, it is true that Keynes prefers inflation to deflation. But, this does
not mean that he is an inflationist. His preference for inflation over
deflation is only a matter of choosing the lesser evil. In fact, nowhere has he
preferred inflation over the objective of full employment. He fully realizes
the dangers of inflation, particularly when it gets out of control and turns
into hyper inflation.
Post by:- Akshay Shivankar
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