The SORAnomic Definition of Inflation and Deflation
Since the time of Keynes, governments have stimulated their economies through government spending (borrowing) or through monetary expansion (printing money, debasing the currency) or both. These increase the amount of money circulating in an economy which then mobilizes people to work since money is the command of work:
The value of any commodity..is equal to the quantity of labour which it enables him to purchase or command (Wealth of Nations 1.v.2)
A person who wants to work and start a business must find money in order to command the work of suppliers which he will then process to create goods or services for his customers who will give him money as an additional command of work to compensate the work that he has done.
Unfortunately, too much money in circulation will lead to too much command of work. This excess command manifests as an increase in demand for goods and services. Those who have the excess money will demand more work to be done (Adam Smith calls this effectual demand). If this work demanded is beyond the natural productive ability of the producers in an economy, then this leads to a sort of oppression as overwork. The problem is that human desires for goods and services (absolute demand) can increase much faster than human productivity or the ability of people to satisfy them, this naturally causes prices to increase. Therefore, what is normally called 'inflation' is actually demand inflation and 'deflation' is actually demand deflation.
Japan's shrinking population reduces demand, leading to demand deflation
This new definition of inflation can be applied to all 'inflation' problems such as stagflation (where production decreases or stagnates while rich people can still demand, as in the 1970's) and hyperinflation (where production suddenly drops while demand stays high, as in the Weimar republic and in current Zimbabwe -- in this case the overprinting of currency hides the real cause which is the sudden drop in production)
The Persistent Problem of Inflation
As inflation leads to oppression for the lower strata of society (which runs against the mission of SORAnomics to create happy societies), zero inflation must be one of the main goals of our system. In our science, inflation represents an imbalanced 'societal balance sheet' and has the effect of making the working class insensibly work for free in proportion to the currency still owned.
For example, if I work one hour today and earn $10, I expect to be able to buy $10 worth of goods tomorrow. However, if prices rise by 10% overnight, then my $10 can only buy what yesterday was really $9.09. In effect, the inflation has caused me to work around 5 minutes for free. Multiply this 5 minutes by the population of a city affected by that inflation and you will see potentially millions of minutes of free work done for the benefit of the employers or profit-owners. This is why people nowadays to wonder why they seem unable to make ends meet even if they work hard and even work two or more jobs. This is because in reality, inflation and the commercial system are causing them to work for a certain hours for free. Business owners (who Adam Smith calls those who live by profits) do not have this problem since their profits is percentage-based and they can raise their prices at will.
Why there is a 2% inflation target and why revenue is bigger than growth
Economics was created by businessmen who wrote as economists, such as Ricardo, JB Say, and the marginalists. Thus, they naturally view the success of businessmen as leading to the success of any economy, which is a plain fallacy. This is why they generally want inflation and even advocate a 2% annual inflation rate.
This business-first policy of Economics is most evident in Piketty's R > G model. R stands for Return which is based on percentages while G stands for Growth which is based on integers. Let us assume the following:
A society has 1,000,000 wage-earners working for 1,600 hours per year at $10/hour or $16 billion collective work-value
They agree to a 2% inflation for the next year
Each person saves half of his wages or collectively $8 billion to spend for the next year
When the next year comes, instead of being able to buy $8 billion worth of additional goods, they will only be able to buy $7.84 billion. They would have collectively forgone $160 million worth of work or around 16 hours working hours per person. In other words, the inflation rate of 2% made every wage-earner work two days for free. Where did the $160 million worth of work go? Since all trade by money is measured objectively in numbers, the work that was lost by the wage-earners simply went to the profit-earners through the higher nominal prices of the succeeding year. This explains the rising gap between the rich and the poor in all capitalist countries. The poor wage-earners unknowingly give their work for free to the rich profit-earners via inflation as time passes.
Preventing Inflation by Eliminating the Dual Purpose of Money
Adam Smith pinpoints the creation of money and other nominal value instruments in the 18th century as the source of not only inflation, but also of inequality:
That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce and as the measure of value..In consequence of these popular notions, all the different nations of Europe have studied, though to little purpose, every possible means of accumulating gold and silver in their respective countries.
When in fact, real wealth ought to be measured in commodities:
Among the Tartars, as among all other nations of shepherds, who are generally ignorant of the use of money, cattle are the instruments of commerce and the measures of value. Wealth, therefore, according to them, consisted in cattle, as according to the Spaniards it consisted in gold and silver. Of the two, the Tartar notion, perhaps, was the nearest to the truth.
In the succeeding posts, we shall examine how a universal system of exchange using the barter of commodities can reduce or even eliminate the problem of inflation, reducing or preventing social inequality or the gap between rich and the poor.
Edit Oct 2017: Added Piketty's R>G and stagflation and hyperinflation