The Fateful Wish for Price Stability (Thorsten Polleit)

  For economists of the Austrian school, the monetary policy objective of price stability is a recipe for bringing about disastrous results, namely recurrent economic crises, which in turn ultimately lead to a destruction of economic and political freedom.
 

  By Thorsten Polleit -- Mises Institute

  Feb. 21, 2007 -- It is hard to think of a slogan that nurtures anti–free market sentiment as strongly as the term "stabilization policy." To Ludwig von Mises, stabilization policy was a direct consequence of the failure of government's interventionism in the field of monetary affairs:

Shortcomings in the governments' handling of monetary matters and the disastrous consequences of policies aimed at lowering the rate of interest and at encouraging business activities through credit expansion gave birth to the ideas which finally generated the slogan "stabilization."[1]

However, stabilizing the purchasing power of money is exactly what today's central banks, the agencies of government-held money supply monopolies, are trying to deliver. Following Irving Fisher's index regime,[2] monetary policies around the world have been assigned the mandate of preserving "price stability." The latter is usually defined as a (consumer) price index to be held constant over time, e.g., allowed to increase only at a small and pre-determined percentage over time.

To Mises, a monetary policy aiming at preserving price stability did not stem from attempts to improve economic calculation but to fight the concept of the free market:

The idea of rendering purchasing power stable did not originate from endeavors to make economic calculation more correct. Its source is the wish to create a sphere withdrawn from the ceaseless flux of human affairs, a realm which the historical process does not affect.[3]

For economists of the Austrian school, the monetary policy objective of price stability is a recipe for bringing about disastrous results, namely recurrent economic crises, which in turn ultimately lead to a destruction of economic and political freedom. With price stability having become so widely favored, it is important to outline the Austrian School's thinking in some more detail.

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