When Money Dies… Everywhere
Economic Calculation in the Hyperinflated Commonwealth
One of Ludwig von Mises’s greatest contributions to economics was his theory of economic calculation. It first arose in the context of his demonstration that central planners under total socialism cannot rationally allocate factors of production.
Without private property in the means of production, there can be no exchange in the means of production. Without such exchange, there are no money prices for the means of production. Without such prices, income and outlay are incommensurable, and so there is no way to calculate profit or loss. Without profit and loss, those who dispose of the means of production have no way of using consumer preferences to guide their allocations of goods of various orders of production to the innumerable possible lines of production. Since all production is for the sake of consumption, this means that rational production is impossible.
This “calculation problem” also applies to any society, socialist or not, devoid of money. Without money, there can be no money prices, which, again, leads to the impossibility of economic calculation.
The chief way in which states murder money is by inflating the money supply to the extent that runaway hyperinflation occurs. Happily, historical hyperinflations have been limited to particular countries and regions, and in some cases, in situations in which there was still widespread ownership of precious metals. In such cases, foreign currencies and commodity moneys can be used to salvage economic calculation to some degree. And after the hyperinflation ends, prices for goods quoted in foreign currencies and commodity moneys can be used as reference points for entrepreneurs to reconstruct the domestic money price system.
However, a universal, global hyperinflation, in which hardly anybody owned precious metals, would look very different. In such a scenario, there would be no recourse for economic calculation: no non-hyperinflated foreign currencies, and no pricing in terms of precious metals. Furthermore, there would be no reference points to use to reconstruct the price system.
Murray Rothbard describes such a chaos as follows:
“The chaotic events of the German hyperinflation and other accelerated booms, however, are only a pale shadow of what would happen under a World State inflation. For Germany was able to recover and return to a full monetary market economy quickly, since it could institute a new currency based on exchanges with other pre-existing moneys (gold or foreign paper). (…) If a World State outlaws gold and silver and establishes a unitary fiat money, which it proceeds to inflate until a runaway boom destroys it, there will be no pre-existing money on the market. The task of reconstruction will then be enormously more difficult.”
In such a universal hyperinflation, there would be no money, and therefore no economic calculation. Without economic calculation, there can be no economic coordination: no rational, integrated economic system. The market economy would be disintegrated. Production, and therefore living standards, would plummet catastrophically.
Even if a new, non-hyperinflated money were to arise, resource owners would have to start from scratch in building a new price structure based on the new money through fresh bids and asks that are totally uninformed by external money prices.
As Rothbard has written, bidding and asking prices that are far too low or high, which he calls a
“…preliminary ‘testing of the market’ will tend to be more prolonged in a “new” market, where conditions are unfamiliar, while it will tend to be less prolonged in an “old” market, where the participants are relatively familiar with the results of the price-formation process in the past and can estimate more closely what the results will be.”
After a universal hyperinflation, the entire world would be a “new” market. Not only would it have no recourse to external money prices, but reference to past money prices would be useless, because the data of the market (resource availability and preference scales) will have gone through a complete upheaval thanks to the previous dissolution of the market economy. And so the new price-formation process will be extremely clumsy, error-ridden, and slow.
This dire picture prompts the serious question: are we at risk of a global hyperinflation? It is true that there is technically no unitary world currency: no Keynesian “bancor” as of yet. But with the U.S.’s aggressive dollar imperialism, with other governments pegging their currencies to the dollar, and with the recent rise of “beggar thy neighbor” currency wars, it is not impossible to imagine all the world’s currencies hyperinflating in tandem. This is especially worrisome given the unprecedented quantitative easing that the US Federal Reserve and other central banks have been engaging in, and the fact that, since big banks have been mostly sitting on the new money resulting from QE, the full inflationary impact has yet to be felt.
It is true that there have been moves toward “de-dollarization” by major powers like Russia and China. But is there any way that entrepreneurs could preemptively protect the global economy against hyperinflation? It certainly would help if they were allowed to accept precious metals as payment for their goods of all orders. This would create a structure of gold or silver prices that could preserve economic calculation even in the event of a universal fiat hyperinflation. Unfortunately, at present, they can’t do that without being shut down by the government and thrown in jail.
They can, however, at least at present, accept cryptocurrencies as payment. It wouldn’t help much if, for example, there were only market Bitcoin prices for consumers’ goods and online contractor services. But if entrepreneurs all up and down the structure of production, from mine owners, to steel dealers, to component manufacturers, to vending machine companies, were to start accepting, for example, Bitcoin for their wares and services, this would create a parallel price system that could weather a hyperinflationary storm and preserve economic calculation and the worldwide division of labor.
