Learn about the comparison between inflation and deflation.
Inflation brings about rising prices and redistribution of income in favour of the better-off classes. On the other hand, deflation leads to fall in output, employment and income. Of all the evils in a capitalist society, unemployment leading to poverty is the worst. We discuss below why Keynes regarded inflation as unjust and deflation inexpedient.
Inflation is unjust because it widens the gulf between the rich and the poor. It makes the rich richer at the cost of the poor. On the other hand, the poor are made poorer. The poor and low income classes suffer because their wages and salaries do not rise to the extent prices rise. It becomes difficult for them to make both ends meet with rising prices of consumer goods.
On the other hand, businessmen, traders, industrialists, real estate holders, speculators, etc. gain because their profits and incomes increase much more than the rise in prices. So they are not affected by the fall in purchasing power when prices are rising. Thus it leads to inequalities of income and wealth.
When the government resorts to deficit financing to meet its rising expenditure during inflationary pressures, it increases the demand for goods and services. This deprives the people of the use of essential goods, thereby creating shortages and hardships for the common man.
Again, inflation is unjust because persons who save are losers in the long run. When prices are rising, the value of money is falling. Since savers are mostly the low and middle income groups who save for a variety of reasons, they are the losers. Their savings lying in deposits are reduced automatically in real terms as inflationary pressures increase.
Inflation is unjust because it is socially harmful. People are lured to amass wealth by unscrupulous means. They, therefore, resort to hoarding, black-marketing, adulteration, manufacture of sub-standard commodities, speculation, etc. Corruption spreads in every walk of life. All this reduces the efficiency of the economy.
Deflation, on the other hand, is inexpedient because it reduces national income, output and employment. While inflation takes away half the bread of the poor, deflation impoverishes them by taking away the whole of it. Deflation leads to mass unemployment because fall in production, prices and profits force producers and businessmen to close down their enterprises.
Deflation is also inexpedient because falling prices lead to depression. All economic activities are stagnant. Factories are locked out. Trade and business are at a standstill. There is glut of commodities in all types of markets for goods and services. Even a bumper agricultural crop brings poverty to the peasantry. It is a situation of poverty in the midst of plenty.
Again, once the downward movement of prices begins, the economy plunges into a depression. But the downward movement of the economy is much faster as compared to the upward movement in a cycle. This makes depression of a much longer period. Consequently, people suffer a lot and the economy also remains in a state of stagnation for long.
It is on these grounds that inflation is unjust and deflation is inexpedient. Keynes pointed out that, “it is not necessary that we weigh one evil against the other. It is easier to agree that both are evils to be shunned.” Still he preferred inflation as the lesser of the two evils.
This is because inflation increases national output, employment and income, whereas deflation reduces national income and brings the economy backward to a state of depression. Again inflation is better than deflation because when it occurs the economy is already in a situation of full employment. On the other hand, there is always unemployment under deflation. And unemployment leading to poverty are the two scourges of mankind.
Again inflation is a lesser evil than deflation. It redistributes income and wealth in favour of the rich. But deflation is a greater evil. Though it redistributes income in favour of the low income groups, yet it fails to benefit them because they are unemployed and have little income during deflation. In fact, they are reduced to paupers.
It is also easier to control inflation than deflation through appropriate monetary, fiscal, and direct control measures. But to control deflation is a very difficult thing because of the presence of pessimism among producers and businessmen. So far as the increase in inequalities of income and wealth under inflation is concerned, it can be reduced by larger expenditure on social services by the government.
The government is in a better position to improve the conditions of the masses under inflation than under deflation due to its larger spending capacity. Moreover, so long as inflation is mild, it helps the economy to grow. It is only when inflation takes the shape of hyperinflation that it is dangerous. Still its effects on the economy may not be so injurious as under deflation.
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