Much of economics is simply folk wisdom written down in fancy words. This is not because economics is simple, but because economics is about human behaviour.
We humans are pretty good observers of human behaviour -- after all, we all live among other humans -- and so most of the observations of economics are also in that folk wisdom, the things we already know.
One of those things is that a little of what you fancy does you good but an excess is dangerous.
Which is an excellent start to a discussion of inflation.
As this newspaper points out, we would like to not have inflation at the current rates of 7% and 8% a year. Wages tend not to rise that fast so prices soaring like that makes some -- especially the poor -- worse off.
Trying to make people worse off is not a useful aim of any economic policy -- therefore we'd prefer not to have so much inflation.
But we would like to have a little bit of inflation.
This is an observation from JM Keynes and while he wasn't always right, he was always interesting -- we should take note therefore.
We humans just hate to see our nominal wages go down. That is, if we were getting Tk2,000 and now we're going to get Tk1,500 then we'll oppose this really very strongly indeed.
We'll be unhappy about a fall in our real wages as long as our nominal wages do not fall.
So, inflation of 25%, which makes Tk2,000 worth Tk1,500, causes less shouting and riots even if the end result is the same -- what we can buy with our wages has fallen 25%.
It might not be sensible for us to think this way but it does seem to be true that we do.
This then interacts with another thing.
Some wages should be going down. As the economy changes, we need fewer people doing this thing, whatever it is, and more doing this other over here.
Relative wages need to change therefore, to attract people from the old to the new.
This works much better if the wages in that old thing fall as well as wages in the new rise.
We get both attraction to the new and repulsion from the old going on.
But, as we've already noted, people really hate their nominal wages going down.
So, if we have a little bit of inflation -- one or two percent is usually thought about right -- then this greases the process.
Real wages in those old things can stay the same as a number, but be worth a little bit less each year.
We get our falling real wages in the old things but without the deep resistance of people getting a smaller amount of money.
It's not necessarily true that this is absolutely correct, but it is considered the generally accepted wisdom these days.
That's why central banks like the Bank of England, the Federal Reserve, the ECB, have inflation targets of 2%, not 0%.
We certainly don’t want to have that 7% and 8% inflation because relative prices aren't changing that much. So, inflation at that level obscures what we want to know, the difference between those old and new ways.
But we probably would like to have a little bit of inflation because that just greases the social difficulties of those relative price changes.
A little bit of what we fancy does us good.
