Jul 31, 2025

Does Growth Require Inflation?

The belief that economic growth demands ever-increasing money supply—and thus perpetual inflation—is a fiat-era myth, not an economic necessity. History and the insights of thinkers like Mises and Hayek show that as productivity rises under hard-capped money, prices naturally fall, benefiting savers and rewarding innovation without undermining economic calculation or spending. Falling prices in this context are a dividend of progress, not a crisis. Economic actors still spend, invest, and coordinate using stable money as a reliable unit of account. In contrast, inflation engineered to keep prices stable erodes purchasing power and distorts true price signals. Sound money aligns prosperity with value accrual for all. Few monies chasing more goods is not economic death—it is the honest reflection of abundant growth shared across society.

Challenging a Core Fiat Assumption — with Mises and Hayek in Perspective

A conventional view in mainstream economics and among tail-emission advocates (like Monero proponents) is that as an economy grows, the money supply must expand in lockstep to keep prices “stable.” If not, falling prices—deflation—will supposedly choke off spending and disrupt economic coordination. But is this really necessary, or even desirable? Austrian economists Ludwig von Mises and Friedrich Hayek offer some of the sharpest refutations to this logic.

Mises: Sound Money, Calculation, and Price Signals

Mises argued powerfully for the principle of sound money, noting its vital role in economic calculation and civil liberty. In The Theory of Money and Credit, he wrote:

“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments.”[4][1]

Economic calculation, for Mises, requires stable and credible money—not ever-expanding supply. In his critique of socialism, he warned that abandoning sound money ends the possibility of rational economic calculation in complex economies, since prices lose their role as an accurate tool for decision-making[2][5]. Mises was emphatic that—

“Under sound monetary conditions [market] calculations suffice for practical purposes. If we abandon them, economic calculation becomes absolutely impossible.”[5]

Further, Mises dismissed the notion that we must always manipulate the money supply to fit real economic growth. He held that inflationary or deflationary policies do not promote the welfare of society as a whole, but simply shift value between groups, create misallocation, and risk currency collapse over the long run[7].

Hayek: Prices, Competition, and the Myth of Central Coordination

Friedrich Hayek built on this tradition by emphasizing the function of price signals as information carriers in markets. He argued that free-market prices allow decentralized actors to coordinate their plans without central direction[6][14][18]. Hayek described the “marvel” of the price system—its ability to distill knowledge dispersed throughout society, allowing efficient allocation of resources and innovation[18]:

“Individuals, acting in their own self-interest, respond to price signals. Prices, in turn, reflect the information available in society. Price signals allow the transmission of previously unknown information in the most synthetic and relevant way for the purpose of economic calculus... Now, prices—impersonal signals that provide for an extensive social division of labour—are expressed in terms of money.”[14]

For Hayek, efforts to “stabilize” prices through perpetual inflation, or to match monetary expansion to growth, are both misguided and dangerous. He warned that manipulating money for policy aims erodes market signals and leads to recurring cycles of boom, malinvestment, and inevitable busts[8][10]. Instead, Hayek advocated allowing stable or even appreciating currencies, letting the benefits of productivity accrue through falling prices—a clear sign of progress, not a cause for alarm.

Productivity, Deflation, and Honest Economic Signals

Historical periods of hard money and gentle deflation (such as the late 19th century gold standard) saw robust economic growth, rising real wages, and falling consumer prices. People continued to spend and invest—often with more deliberation, not less—because the unit of account retained value across time.

The claim that economic growth “requires” inflation is a fiat-era myth. As Hayek and Mises both show, it’s not the expansion of money that makes markets work, but the trust and neutrality of money as a measuring stick for value. Efforts to engineer price stability via inflation simply tax savers and distort the flow of progress, whereas a hard-cap model distributes the fruits of innovation to anyone holding the currency.

Conclusion: Real Growth, Real Money

Insisting that inflation must keep pace with growth is not an economic necessity, but a doctrine used to justify the silent expropriation of savers. Sound money, as Mises and Hayek demonstrated, aligns economic progress with expanding well-being. Under hard money, growth means prices fall gently and value accrues to producers, traders, and savers alike. Calculation is not broken. It is clarified.

Few monies chasing more goods is not the death of markets. It’s their fulfillment.

Sound money doesn’t suppress the economy. It lets abundance shine through prices.

References to Key Works

  • Ludwig von Mises, The Theory of Money and Credit (1912)[4][1]
  • Ludwig von Mises, Human Action (1949)[7][11]
  • Ludwig von Mises, Economic Calculation in the Socialist Commonwealth (1920)[2][5][9]
  • Friedrich A. Hayek, Prices and Production (1931)[10]
  • Friedrich A. Hayek, Denationalisation of Money and related monetary writings[8][14]
  • Friedrich A. Hayek, “The Use of Knowledge in Society” (1945)[6][18]
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